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Third, and instead, what matters more – not just for inflation itself but the cost of government debt as well – is the prevailing regime for monetary policy. The two can clearly interact: the monetary regime was abandoned in those wars partly because of the pressures from higher spending, and it was that de-linking from gold that allowed prices to rise in the first place. Equally, it was precisely because of the visibility and prominence of that measure, and the belief that it was likely to be temporary, that both the subsequent inflation and the rise in the cost of new government borrowing were contained to the degree they were. Conclusion Aggressive monetary easing by central banks, occurring as it has alongside very large government deficits, has raised fears in some quarters about “monetary finance”. These are misplaced. Certainly there’s nothing about the coincidence of the two in time that, in and of itself, constitutes monetary finance. If the rise in government debt is caused by a weak economy, something that would otherwise depress inflation, easing policy is exactly what an independent, inflation-targeting monetary authority should be doing. Theory tells you that, to stabilise inflation, policy needs to lean against swings in demand and UK history bears that out. It’s true that, if only for a while, easier money policy reduces the real cost of borrowing, for public and private sectors alike. That’s how it’s meant to work. The reduction in the cost of borrowing for the private sector stimulates demand and inflation. | Consequently, it would convert the tendency of the region to be negatively contaminated from global developments into an opportunity, a positive impact, in order to achieve high and stable economy growth in the long run. Thank you! BIS central bankers’ speeches 3 | 0 |
By 1873 Bagehot had seen enough to declare that the correct policy for the Bank to pursue in order to head off an incipient panic would be to lend “freely and vigorously…on all good banking securities”, but to do so only “at a very high rate of interest...that no one may borrow out of idle precaution.” 1 Bagehot had two other pieces of advice for the Bank that are relevant today. First, he advised that there should be a “clear understanding between the Bank and the Public that, since the Bank holds [the] ultimate banking reserve [it] will recognise and act on its obligations”. Second he advised that the Deputy Governor must be “a man of fair position” who “must not have to say ‘Sir’ to the Governor”. This is a slightly old-fashioned way of saying that the Deputy Governor should be independent minded, that the Bank should empower its staff and must always remain credible with the public. (Even though Bagehot foresaw many things, even his liberal mind hadn’t foreseen the day when the Bank would have more than one Deputy Governor, and among them a woman!) 3. A balance sheet that has evolved to meet the needs of monetary policy From a £ million loan to the government in 1694, the Bank’s balance sheet has grown a long way to its current size of £ billion. | The key point is that even though interest rates had been the marginal tool of monetary policy for several decades, monetary policymakers never forgot that this was only one manifestation of the central bank’s unique ability to create narrow money. And when the effective lower bound was reached, stimulus could continue to be provided by expanding central banks’ balance sheets in new ways. Someone recently said to me that Quantitative Easing (QE) is “like magic,” as if central bankers are sorcerers with the capacity to conjure up economic miracles. I wish. In fact QE works through the more prosaic channels of reducing longer-term interest rates in the 1 2 Bagehot (1873). BIS central bankers’ speeches economy, and encouraging private sector investment in riskier assets by reducing the supply of long-duration government bonds, a phenomenon we call portfolio rebalancing. But the underlying point that the effect of this new monetary policy tool is less intuitively understood is well taken. That makes effective communication and accountability important to monetary policy and indeed all central bank policies. These points were made very clear by Kevin Warsh’s recent review of transparency and the MPC. As a result, this August the MPC will begin publishing the minutes of its policy meetings and the Inflation Report at the same time as its policy decisions, giving markets and the public a clearer understanding of what underlies the judgements we make. | 1 |
In short, this abundant liquidity, induced by an expansionary monetary policy and an increase in savings among emerging economies, particularly in Asia, has boosted a housing bubble. However, although it was a component of the imbalances which had built up before the outbreak of the crisis, it certainly was not the main cause; rather, such main cause is more related to the functioning of the financial system. That is, with the same path of monetary policy and global balances of savings and investment, an adequate risk assessment system could have averted the crisis or, at least, reduced its very large current scope. Evolution of inflation During most of 2008, concerns about the global economic scenario were split between how to tackle the first effects of the housing bubble burst, mainly affecting the developed world, and, how to deal with the significant increase in inflation. Since the beginning of this process, in the first half of 2007, we argued that its origin was related to factors which had nothing to do with the domestic business cycle, such as prices of food and fuels at international markets and adverse climatic conditions which favored major rises in the cost of electric power. During said year, prices of non perishable foods rose by 15% and prices of fruits and vegetables rose by over 30%, as compared to annual 2% average increases and 2% average decreases for both categories in the 2000-2006 period, respectively. Fuel prices rose by 15% in 2007. | In this view, the Bank of Albania, as the supervisory and promoter institution of the Albanian banking system, in addition to the immediate response to the difficulties created by COVID-19, through a complete package of monetary, supervisory, macro-prudential and operational measures, finds also important the drafting and organisation of educational initiatives, like Global Money Week. Through these educational and awareness-raising activities, we aim at approaching the young generation to the complicated world of finance and banking; to introduce and pass through knowledge on possibilities; the risks that both financial and banking products have; as well as introduce the young public to the necessary information on borrowing and savings. This communication and awareness of young people, in turn help both financial and banking markets become more resilient, comprehensive and efficient. 1/2 BIS central bankers' speeches The Bank of Albania, has not limited its educational activities only with the Global Money Week. Financial literacy of public is an important part of our daily work. Thus, through virtual educational tools available at our webpage, students and teachers may learn throughout the year on financial issues, by watching videos and reading the literature dedicated to both the pre-university education and students. Our webpage contains simplified information on themes of everyday life, as: the opening of a bank account; personal budget management, drafting a saving plan; applying for a bank credit, etc. | 0 |
But the fluctuations need not be larger than many other and larger countries appear able to tolerate. Finally, it is appropriate to emphasise that independent monetary policy under a flexible exchange rate regime can take many forms, including different types of price stability target and taking into consideration the role of money and credit in policy formation. It can therefore change from one period to another without necessitating major decisions concerning the currency as such. 1.7 Capital controls and exchange rate regime options Lifting the capital controls is one of the most important yet most complex challenges facing Iceland at present. The controls have proven an important means of achieving stability in the wake of the financial crisis. Because of this, they were approved by signatories of the EEA Agreement even though they are contrary to the spirit of the Agreement. In the long run, however, it is critical that they be abolished. There are at least two main reasons for this. First, the costs associated with the capital controls grow over time and will ultimately exceed the benefits. Second, they are in contravention of Iceland’s international obligations. For the long term, it will be impossible to retain universal restrictions on capital outflows and remain in the EEA. Iceland must therefore make a genuine attempt to lift the controls. It may prove complicated and time-consuming, but there is no other option. This gives rise to the question of how capital account liberalisation is related to the choice of currency and exchange rate policy. | Starting from here, we can say that society is demanding safer and fairer financial systems. The view that financial markets were big casinos, where the betting was done with other people’s money and gamblers walked away unpunished, is quite common around the world. Public opinion has been dominated by that sentiment, which has also affected policymaking. On financial development Let me start by stressing that financial intermediation is good, and with the backlash from the crisis it should be repeated that a well functioning financial system is key to prosperity. It promotes economic growth by channeling investment funds from savers to borrowers (Levine, 2006). It is central to promoting entrepreneurship and to facilitating investment, including human capital accumulation. It provides financing to households in order to smooth consumption, and provides insurance. It provides safe and cheap means of payment. The difficulties faced by households and firms in many emerging market economies due to underdeveloped financial institutions and markets should be a clear reminder of this positive role. But financial depth may also be a source of great problems. As in many situations, more is not always better. There is plenty of research concluding that economies with deep financial systems grow more. However, studying this issue in Latin America many years ago I came to the conclusion that in Latin America growth during the eighties was lower in countries with more developed financial systems, since the collapse of their economies during the debt crisis was larger (De Gregorio and Guidotti, 1995). | 0 |
On the other hand, I have pointed out the importance of inflation and inflation expectations coming down to around 2 per cent ahead of the next round of collective bargaining in 2010. I have been more concerned about the effects of increases in food and energy prices spreading to other prices in the economy. For example, I have pointed out that food prices have increased more rapidly in Sweden than in the euro area and that the business tendency survey has indicated that the retail sector still planned to increase prices. This indicates that price increases in the world market could spread to other goods. The risk of such a development has now declined in that energy and food prices have fallen on the world markets and the plans to increase prices in the food retail sector are no longer so definite. The decline in demand in Sweden and abroad is further reducing the risk of these contagion effects. 6 BIS Review 154/2008 The Riksbank has analysed what is referred to as the persistency of inflation, that is how long the effects of a sudden increase or decrease in inflation endure. We identify two main results for Sweden, which are similar to the results of studies of the euro area. First, there is a degree of persistency in inflation, but it can be regarded as moderate. This result means, in simple terms, that half of the effect of a sudden increase in inflation remains in the next quarter. | In the Industrial Agreement, the social partners have agreed on a process in which negotiations are conducted under the obligation to refrain from industrial action and in good time before the old agreements expire, as well as on specific processes for handling conflicts, a joint basis for negotiations and so on. I therefore conclude that the manufacturing industry, with a possible expansion to include other parts of the Swedish economy that are exposed to international competition, should also set the norm for the development of wages in the round of collective bargaining that will be held in 2010. A broad consensus that this is an appropriate process would facilitate the negotiations and contribute to effective wage formation. At the same time, I would like to conclude by emphasising that the Riksbank is not a party in the collective bargaining process. It is the social partners that conduct collective bargaining. But the development of wages affects inflation and inflation affects the development of wages. Our job is to maintain a low and stable level of inflation. This job is made easier if wage formation works well. Thank you! 8 BIS Review 154/2008 Figure 1. | 1 |
In this context, prudential supervisors, working with those responsible for setting accounting standards and capital market regulations, need to systematically examine the interaction among capital, accounting, tax and disclosure requirements to assess their effects on the overall levels of leverage and risk across the financial system. As we change the framework of regulation and oversight, we need to find ways to strengthen market discipline over financial institutions, and to limit the moral hazard that is present in a range of different forms in any regulated financial system. The liquidity tools of central banks and the emergency powers of other public authorities were created in recognition of the fact that individual institutions, including those central to payments and funding mechanisms, cannot protect themselves fully from an abrupt evaporation of access to liquidity or ability to liquidate assets. The existence of these tools and their use in crises, however appropriate, creates moral hazard by encouraging market participants to engage in riskier behavior than they would have in the absence of the central bank’s backstop. To mitigate this effect on risk-taking, strong supervisory authority is required over the consolidated financial entities that are critical to a well-functioning financial system. A more resilient financial system will also require a framework for dealing with the failure of financial institutions. For entities that take deposits, we have a formal resolution framework in place. | Given the changes in the structure of the financial system, maintaining financial stability requires us to look beyond just the stability of individual banks. It requires us to look at market developments more broadly, at the infrastructure that is critical to market functioning, and at the role played by other leveraged financial institutions. Over the past four years, the Federal Reserve has led a number of initiatives with our supervisory colleagues in the United States and in the other major financial centers to improve the OTC derivatives infrastructure, to strengthen the systemically important payment and settlement systems, to improve counterparty risk-management practices with respect to hedge funds, and to place greater emphasis on ensuring robustness to low probability, high severity instances of stress. This forward-looking, cross-institution approach, integrating prudential supervision with market oversight and payment system expertise, offers the best model of broad financial oversight focused on systemic risk. I want to emphasize in conclusion that we are working now, in close cooperation with the SEC, other U.S. bank supervisors, our international counterparts and market participants to improve the capacity of the financial system to withstand stress. These initiatives include joint efforts with the SEC to bolster consolidated oversight of the investment banks, formalized in our recent Memorandum of Understanding. These institutions have made substantial changes over the past several months to bring down overall leverage and risk-weighted assets and to reduce liquidity risk. | 1 |
Fraziali Ismail: Non-performing loans in East Asia and the Pacific practices and lessons in times of COVID-19 Opening remarks by Mr Fraziali Ismail, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the webinar and the launch of World Bank’s Report on non-performing loans (NPL) in East Asia and the Pacific, 27 October 2021. * * * A very good morning to everyone! It gives me great pleasure to welcome you to this webinar in conjunction with the launch of the World Bank Report on “Non-Performing Loans in East Asia and the Pacific: Practices and Lessons in Times of COVID-19”. This event comes at a time where many of us in the region are still navigating through uncertainties with the pandemic. Recovery in many regional economies including Malaysia has begun to gather pace in recent periods in tandem with the recovery in global economic activity. However, the outlook remains subject to large downside risks as the potential for new variants of COVID-19 remains high. These developments are also happening amid the gradual expiry of policy support extended to households and businesses affected by the pandemic. The unprecedented level of support extended has so far helped to keep loan impairments at bay. But, as these measures are gradually unwound as the economy recovers, we would expect to have much greater visibility on the true asset quality of banks. | Indeed, in many countries, it is envisaged to make the central bank the “systemic supervisor” or, at least, a central pillar in the macro-supervisory architecture. 3. A key question, however, is how this new financial stability function would interact with monetary policy. In theory, things are simple. Central banks would have several tools available for different objectives. One set of tools (interest rates, international 2 BIS Review 147/2009 reserves) would, as now, be used to fulfil the price stability mandate. On the other hand, macro-prudential tools would support and foster financial stability. In such an ideal “Tinberghen” world, each instrument would be precisely assigned to a single objective. Things may be more complex in the real world because these instruments are not independent. For instance, changes in capital requirements will affect credit growth and the transmission channel of monetary policy. Conversely, as I said, levels of or movements in monetary policy rates may increase or decrease the level of risk inside the financial system, hence its vulnerability to shocks. Finally, there may be circumstances in which the objectives of price and financial stability may not be fully compatible. 4. When instruments overlap and the objectives possibly conflict with each other, the potential for confusion is real and significant. To avoid any damage to central banks' credibility and ability to fulfil their mandate, it is essential that a clear and transparent framework should be in place. | 0 |
It is natural, therefore, as we leave the EU, to have another look at the next-smallest set of UK deposit-takers – small UK banks and building societies (hereafter “firms”) – and ask whether we could do something similar for them. This question may also of course be relevant for insurers, but my focus today will be deposit-takers – in part because the government’s Solvency II review is already underway and can explore these issues on the insurance side. 4 Our habit, within the EU, of applying broadly the full weight of regulation to firms of all sizes is not motivated solely by prudential considerations. Rather, it is driven by the understandable desire to harmonise practice across the different countries within the EU, and by the difficulties of agreeing a definition of “small” which works for everyone given the widely varying sizes of national economies within the EU. This approach gives rise to the “proportionality” problem. The costs of understanding, interpreting and operationalising prudential requirements, which have become more complex since the 2007-08 crisis, may exceed the associated social benefit for small firms (but not large ones). On the cost side, a fixed element of these costs may mean that average costs will be higher for small firms. | Since then, we have motored ahead and put in place that new regime for credit unions. But we have not forgotten about banks. In fact, despite the huge pressures of the Covid crisis we have taken care to preserve one vital part of our work programme: our plans to bring in a simpler prudential regime for small banks and building societies. A new style of regulation The reason we have kept up work on this topic is that our exit from the EU provides us with the first opportunity we have had in a long time to make real progress on it. 1 But before coming to that, let me make a few brief points about the broader regulatory scene as we exit the EU. I should say first that, despite the fears sometimes articulated by politicians in the EU, we have absolutely no intention of weakening prudential regulation in the UK. It would be mad for us to do any such thing only a decade or so on from a crisis in which the British taxpayer footed the bill for one of the biggest banking disasters in history, with a financial sector around ten times the size of our economy, and with clear evidence in front of us that the post-2008 reforms have allowed the banking system to support the economy through the Covid crisis so far. You only have to ask yourself the question “How would the financial system have fared if Covid had hit in 2007?” to appreciate this point. | 1 |
Public demand has also stimulated the economy. Chart: Relative labour costs The Norwegian krone has depreciated markedly in the wake of the fall in oil prices and is now approximately 15 percent weaker than two years ago. The depreciation has led to a marked improvement in Norwegian firms’ cost competitiveness. The main responsibility for developments in relative wages lies with the social partners. If the improvement in competitiveness is to be sustained, Norwegian labour costs must develop more in line with the labour costs of our trading partners. This will make it easier to build up a larger non-oil tradable sector. The krone depreciation has helped start the restructuring process in the Norwegian economy. After a decade of higher growth in imports than mainland exports, export growth has recently outpaced import growth. The tourism industry is one of a number of industries experiencing an upswing. Many export firms have announced plans to increase investments in 2016, which will provide opportunities for an increase in production and market shares. Chart: Unemployment Employment in Norway has been high for many years. Compared with other countries, unemployment has been low. In the competition for labour resources, oil production and oil service companies have drawn the longest straw. The situation has now changed. Unemployment has increased over the past year. Regions with close links to the oil industry, 2 BIS central bankers’ speeches which have benefitted from the oil boom for many years, are being hit hard. Although employment continued to rise last year, employment growth has slowed. | One solution is to make the data reporting process better tailored to the needs of supervisors. Digital regulatory reporting (DRR) is the automation of regulatory data collection, and could potentially lead to significant improvements in both the cost and timeliness of data. The idea is based on machine readable reporting requirements that firms’ systems could automatically interpret and satisfy via a secure regulator-firm digital link. This would allow regulators to collect data on an ad hoc basis from firms as required, in close to real time without any manual intervention at either end. That would enable 6 Amadxarif, Z, Brookes, J., Garbarino, N., Patel, R., and Walczak, E (n.d) [forthcoming] 4 All speeches are available online at www.bankofengland.co.uk/speeches 4 supervisors to specify the data they needed to solve a particular puzzle – exposures to a particular country, for example – and transmit that data request to firms in a machine readable form. The data would then be ‘grabbed’ directly from firms’ systems and sent back to supervisors automatically. The FCA and Bank of England are currently undertaking a DRR pilot with participants from a number of regulated firms. It is too early to say what the outcome of this early pilot will be, but initial findings suggest it is feasible. There remain significant technical challenges to be overcome. And regulators would need to guard against the moral hazard that could arise if firms perceived that responsibility for the accuracy and congruence of data had transferred from regulated entities to regulators. | 0 |
4 BIS Review 100/2010 would, to the extent they continued to hold the loans that they make, be more like unit trusts with an origination arm rather than banks. So many – in fact almost all – of the proposals to make banks less fragile will mean they would come to hold more equity capital. I think this is right. And I believe it is the most fundamental response to banking fragility because it directly deals with solvency problems – risks that people who have lent money don’t get it back. I believe that those risks – real or perceived – have been the fundamental drivers of the financial disasters of the past few years. Other problems, which are sometimes described as funding or liquidity problems, often arise because of fears about solvency. I do not want to imply that other measures to make the financial sector more stable – including liquidity requirements and changes to the way asset values are assessed and reported – are not important. But I want to consider whether changes in capital are a powerful tool to make the banking sector robust and whether it is right to see them, rather than monetary policy, as a more natural means to that end. Some are sceptical that higher capital requirements can work because banks may be able to avoid (or evade) them. | Replenishing their inventories, companies substantially increased their demand for commodities worldwide. Russia is a major producer of key commodities. High demand for Russian exports spurs economic growth this year. As companies complete their inventories, the effect of this factor will be tapering off gradually. The growth of oil export quantities will also be supported by the easing of the OPEC+ oil production cuts in response to the recovery of demand. Taking this into consideration, we have raised the oil price path in our forecast by 5 US dollars per barrel in the next three years. According to our preliminary estimates, the expansion of oil output under the new OPEC+ agreements will add about 0.1 pp to GDP growth this year and 0.2–0.3 pp next year. Another important growth driver is domestic demand, including both consumer and investment demand. Considering these trends, we have revised our economic growth forecast for this year upwards from 3–4% to 4–4.5%. After the recovery, the economy will expand at a pace close to its potential. We forecast that GDP will equal 2–3% in the next two years. The possibility to achieve higher economic growth rates will depend both on the expansion of production and logistics capacities and on labour resources, their expertise and performance. T hird. Monetary conditions have been progressively adjusting to the earlier increases in the key rate, but are still accommodative. | 0 |
Nevertheless, the nature of the price shocks were such that, in my view, there was little that monetary policy should or even could have done to offset them. Rather, given that changes in Bank Rate (or asset purchases) take a long time to have their full effect on the economy, monetary policy needs to be forward looking, focusing on the medium-term outlook for inflation yet to come. Trying to respond to every short-term movement in prices would probably be futile and would certainly involve a lot of unnecessary volatility. The Remit we have from the Government allows for these circumstances: “The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output”.1 To meet our remit we should ideally try to look through one-off price level shocks, in either direction, only responding if there are risks to the rate of inflation expected to prevail in the medium term. That theory is all well and good: but the one thing we know about the future is just how little we know for sure. 1 2 The Remit for 2011 is available at http://www.bankofengland.co.uk/monetarypolicy/pdf/chancellorletter110323.pdf BIS central bankers’ speeches Since I joined the Committee in March 2009 – the very week we announced the “quantitative easing” programme, buying gilts in large scale – I have voted with the majority at every meeting. | In this regard it is reassuring that the recently concluded IMF/World Bank FSAP exercise found Malta’s financial system to be healthy and well supervised, with a comprehensive legal framework and strong adherence to most international standards and codes. An issue of special significance for central bankers is the need to preserve the integrity of their institutions. Although the experience of current euro area Member States already provides useful insights into the appropriate exchange rate strategies to be pursued prior to, and during ERM II, the acceding countries will have to arrive at this judgment on the basis of expectations of the future path of the economy. Expectations, however, are just that. This means having to stand ready to give satisfactory accounts of the rationale for the policy choices made, to explain deviations from targets and to ensure that governments introduce corrective measures without undue delay. Unfortunately, however, the information reaching economic operators, and financial markets in particular, is not always accurate. And yet, with only a few months to go to EU accession, the markets will be looking out for indications regarding the strategies we intend to pursue with respect to ERM II and entry in the euro area. It will be important, therefore, to be constantly on guard against any imprecise information which could provoke untoward market reactions. This highlights the importance of an effective communications strategy and of appropriate coordination between central banks and governments. In Malta the joint working committee established to elaborate the strategy for adopting the euro fulfils this role. | 0 |
This leads to the limiting case of proposals such as Professor Kotlikoff’s idea to introduce what he calls “limited purpose banking” (Kotlikoff, 2010). That would ensure that each pool of investments made by a bank is turned into a mutual fund with no maturity mismatch. There is no possibility of alchemy. It is an idea worthy of further study. Another avenue of reform is some form of functional separation. The Volcker Rule is one example. Another, more fundamental, example would be to divorce the payment system from risky lending activity – that is to prevent fractional reserve banking (for example, as proposed by Fisher, 1936, Friedman, 1960, Tobin, 1987 and more recently by Kay, 2009). In essence these proposals recognise that if banks undertake risky activities then it is highly dangerous to allow such “gambling” to take place on the same balance sheet as is used to support the payments system, and other crucial parts of the financial infrastructure. And eliminating fractional reserve banking explicitly recognises that the pretence that risk-free deposits can be supported by risky assets is alchemy. If there is a need for genuinely safe 8 BIS Review 140/2010 deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not coexist with risky assets. The advantage of these types of more fundamental proposals is that no tax or capital requirement needs to be calibrated. And if successfully enforced then they certainly would be robust measures. | But a key challenge is to ensure that maturity transformation does not simply migrate outside of the regulated perimeter, and end up benefiting from an implicit public subsidy (Tucker, 2010b). That is difficult because it is the nature of the services – not the institutions – that is the concern. Ultimately, we need a system whereby the suppliers of funds to risky activities, whether intermediated via banks or any other entity, must understand that they will not be protected from loss by taxpayer bailouts. Creditors should know that they will bear losses in the event of failure. We certainly cannot rely on being able to expand the scope of regulation without limit to prevent the migration of maturity mismatch. Regulators will never be able to keep up with the pace and scale of financial innovation. Nor should we want to restrict innovation. But it should be undertaken by investors using their own money not by intermediaries who also provide crucial services to the economy, allowing them to reap an implicit public subsidy. It will not be possible to regulate all parts of the financial system as if they were banks. As Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, has argued, “merely expanding the scope of regulation to chase those firms that extract implicit guarantees by engaging in maturity transformation would be an interminable journey with yet more financial instability in its wake” (Lacker, 2010). | 1 |
Lively discussions after publication of the interest rate path There have been lively discussions on both occasions when the Riksbank has published an interest rate path. It is good that our forecasts and assessments are discussed. The fact that the Riksbank gives its view of the interest rate over a longer time span encourages this – the longer the time perspective, the greater the scope for differences in assessments. But the discussion that has arisen has often not taken this direction; instead it has focussed on market agents having been taken by surprise by the Riksbank. This is, of course, not the desired effect. The Riksbank aims to be predictable and from this aspect the experiences so far of publishing our own interest rate forecast have been not only positive. My view is that we are at the beginning of a joint learning process. It is unusual for the Riksbank to communicate its own interest rate path and it is unusual for market agents to relate to it. This is something that both parties will become better at as our experience in this field increases. We can also make some comparisons with when the Riksbank began to publish its inflation forecast. When the forecast was changed this sometimes led to a debate. BIS Review 111/2007 3 But after a time, everyone became used to the idea that the inflation path would be revised, and it will probably be the same case with the interest rate path. | The FSDP is a comprehensive strategy that is aimed at achieving a financial system that is sound, stable and market-based, that would support efficient resource mobilization necessary for economic diversification and sustainable growth. The weaknesses noted in the financial sector are addressed through a public and private sector partnership. A number of activities have already been undertaken under the FSDP such as the establishment of a Credit Reference Bureau. Similarly policies and the legal and regulatory frameworks have been developed to take into account the fast changing financial environment. These developments have resulted in a considerable increase in the number of banks and other financial service providers in the country. Ladies and Gentlemen, this workshop is therefore timely as it tries to bring together Zambian financial sector players and international financial players who have an interest to see that Zambia takes its rightful place in the world economy. Apart from being a sensitisation platform to the general public, this workshop should diligently explore ways on how entrepreneurs can access venture capital funds in Zambia. Although venture capital organizations in Zambia are not many and evident to the general populace, our expectation is that after this workshop, we shall see the emergence of an interactive and symbiotic alliance between International and Zambia financial institutions. This alliance is expected to provide venture capital funds and financial services that should uplift the well-being of the Zambian people at large. | 0 |
“Is Price Stability Enough?” BIS Working Paper no. 205. Woodford, Michael. 2005. “Central Bank Communication and Policy Effectiveness.” In The Greenspan Era: Lessons for the Future. Federal Reserve Bank of Kansas City. ww.kansascityfed.org. Woodford, Michael. 2007. “The Case for Forecast Targeting as a Monetary Policy Strategy.” Journal of Economic Perspectives 21, pp. 3–24. Woodford, Michael. 2011. “Inflation Targeting and Financial Stability.” Sveriges Riksbank Economic Review, forthcoming. Yellen, Janet L. 2011. “The Federal Reserve's Asset Purchase Program.” Speech at the Allied Social Science Associations Annual Meeting, Denver. www.federalreserve.gov. 10 BIS central bankers’ speeches | Regulations of Anti Money Laundering (AML) and Know Your Customer (KYC) should be enhanced to prevent such risks. Finally, use of digital services requires better telecommunication infrastructure and internet access in some areas. Central Bank Digital Currencies Central Bank Digital Currencies (CBDC) represent an even more ambitious project that could be developed with a Blockchain/DLT infrastructure. A CBDC could imply several advantages for its users: (i) lower costs and higher speed for the interbank market; (ii) the possibility to implement central bank open market operations in a calendar of 24h/7days and reduce the current overnight transaction risk; (iii) an easier framework to pay interests on central bank currency and avoid restrictions coming from a zero-lower-bound (ZLB), and (iv) separate the current joint roles of credit and money creation by commercial banks, creating a more narrow banking system in which banks and financial institutions work with a 100% equity and no leverage. 12 Central Bank of Chile 29 June, 2017 Allowing a massive access, the balance sheet of the central bank creates almost unsurmountable challenges and risks, though. The main challenge is to move from a few dozens of wholesale partners to thousands or even millions of retail account holders, many of which could massively join as a part of a run on commercial banks. | 0 |
The negative return reduced the value of the Fund by nearly USD 100 billion. At the same time, new capital of close to USD 60 billion was transferred to the Fund during the year, the largest annual inflow in the Fund’s history. Furthermore, a weaker krone in relation to the currencies in which the Fund is invested increased the Fund’s value by some USD 80 billion. Consequently, in spite of the negative return, the Fund’s market value increased by nearly USD 40 billion during the year. The market value of the Pension Fund was around USD 350 billion (NOK 2 275 billion) at the end of 2008. The financial crisis is having a broad impact, and most forms of investment are falling in value. Other government assets, such as shareholdings in domestic industries and subsea resources in the North Sea have also fallen sharply in value, at market prices. For large investors, there have been few places to hide from the panic that has gripped financial markets. Prices for government bonds, particularly German and US bonds, rose last year, but yields are now very low and will provide little protection when inflation eventually picks up again. For households, housing wealth has also declined since summer of 2007 to the end of 2008. The same probably applies to the value of infrastructure investments. After a little more than 10 years of experience, the Norwegian Fund has not reaped a risk premium in equity market as we had expected. | The annual return on the actual portfolio was ½ percentage point lower than the return on the benchmark portfolio. The results were not due to investment in high-risk fixed income instruments. At the end of 2008, as much as 64 per cent of the bonds in the Fund’s fixed income portfolio had the best BIS Review 58/2009 5 credit rating, AAA, 20 per cent had the second best, AA, while ten per cent were rated A. Five per cent of bonds were rated BBB. Only one per cent of the fixed income portfolio has a lower credit rating. Realised losses as a result of bankruptcies have been low. How then can an excess return become negative from one year to the next? The Fund’s fixed income portfolio is well diversified across different types of bonds and different regions and the active strategies had low correlation in normal markets. However, the financial crisis revealed that these strategies were exposed to more underlying, systematic risk. Correlation was not expected to be high between investments in, for example, Japanese inflation-indexed government bonds, bonds issued by international organisations such as the European Investment Bank, European covered bonds and US mortgage-backed bonds. These experiences and the abrupt turnaround in market liquidity suggest that active management of the fixed income portfolio should be limited and measured on the basis of a number of criteria, as laid down by Norges Bank’s Executive Board. The Fund currently has extensive holdings of bonds that are difficult to trade in today’s market. | 1 |
And, according to Congressional Budget Office projections, even if remittances drop sharply in future years, cumulative remittances would still likely be higher compared to the counterfactual regime in which the Fed had not expanded its balance sheet (Exhibit 14). In addition, because Fed purchases put downward pressure on long-term interest rates, this 12 Asset Bubbles and the Implications for Central Bank Policy, Economic Club of New York, April 7, 2010. 13 If the Fed’s net income fell below zero in a year it would record a deferred asset that it would redeem with future net income. Paid in capital and surplus would remain positive in a very wide range of scenarios. See The Federal Reserve’s Balance Sheet and Earnings: A primer and projections , Seth B. Carpenter, Jane E. Ihrig, Elizabeth C. Klee, Daniel W. Quinn, and Alexander H. Boote, Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System, 2013-01. See also SOMA annual report (forthcoming). 6 BIS central bankers’ speeches generates interest savings for the Treasury, and this benefit should be included in the fiscal cost calculations. Finally, and most importantly, to the extent that asset purchases are effective in pushing the trajectory of economic growth above what would otherwise have been the case, this will lead to higher federal government tax revenue and lower safety net spending outlays during the recovery period. | Of course, it is for Congress to judge what combination of tax increases and spending cuts should be undertaken to achieve this. Nevertheless, the aging of our population and simple math suggest that entitlement reform would need to be part of such a plan. Also, in an ideal world, fiscal policy would have broad-based bipartisan support. That would reduce uncertainty and reassure households and businesses that the U.S. was on a sustainable long-term path. Instead, we have nearly the opposite: significant retrenchment in the near-term, but no credible action over the long-term, with partisan divisions and significant uncertainty about what will happen next. Will the sequester, for example, be sustained or not? Economic outlook Looking at the outlook for 2013, I believe that growth in the first half will be sluggish as the fiscal contraction blunts the economy’s forward advance. While first quarter GDP growth will likely rebound to a 2 to 3 percent annualized rate following the dip in the fourth quarter, this will be due in large part to temporary factors.3 2 Before taking into account fiscal multipliers. 3 This includes a modest boost from inventory investment following the substantial drag of the prior quarter, a recovery in farm output following last year’s drought, and less drag from defense outlays following the steep plunge of the fourth quarter. Rebuilding following the devastation from Superstorm Sandy may also provide some temporary lift this quarter. 2 BIS central bankers’ speeches I’d also emphasize that there remains considerable uncertainty about the outlook. | 1 |
We can choose to store our savings in the form of cash or in a current account. The price we pay is the return other alternatives would have provided. Bank deposits and bonds are examples of investments that provide a reliable return – interest income. If we choose to store money, we lose this income. But in contrast to bonds, money can be used directly to purchase goods and services. Interest is therefore also the price we pay in order to have liquid holdings. The interest rate is also used as an instrument in economic policy. Setting the interest rate to achieve a monetary policy objective, often price stability or low and stable inflation, is usually the responsibility of the central bank. The central bank sets a very short-term nominal interest rate. In Norway, this is the interest rate on banks’ overnight deposits in Norges Bank, the sight deposit rate. This rate determines the very short interest rates in the money market with maturities from one day upwards, normally up to Norges Bank’s next monetary policy meeting. Longer-term rates are determined by expectations concerning Norges Bank’s use of instruments in the future and by the degree of confidence in monetary policy. The real interest rate, that is the nominal interest rate minus expected inflation, is the rate that influences decisions concerning saving and investment. BIS Review 46/2003 1 The interest rate influences inflation indirectly via domestic demand for goods and services and via its effect on the exchange rate. | Various monetary policy regimes As long as capital markets have been in existence, the interest rate has had the key role of creating equilibrium within and between the various markets. The interest rate’s role as a monetary policy instrument used to influence inflation, however, is a more recent phenomenon. The gold standard was introduced in Norway as the basis of the Norwegian monetary system by the Act of 4 July 1873 relating to the Monetary System. Norway’s monetary system was largely based on the gold standard until its international collapse in 1929, when the Norwegian krone was pegged to the pound sterling. Up to the mid-1980s, the focus of monetary policy was, first, to stabilise the exchange rate by means of interventions and regulation of international capital movements. Second, credit developments were governed by regulations on borrowing. The interest rate was primarily used to provide cheap credit for some sectors. Many other countries have followed a similar path of development. Many of the changes in international monetary policy over the past 25 år can be viewed as a response to the problems of stagflation in the 1970s and to financial innovations and deregulation of financial markets in the 1980s. In many countries, the authorities have increasingly focused on price stability as the long-term objective of monetary policy, with the interest rate as the most important policy instrument. | 1 |
It is well known that such systems can exhibit the following features: non linearity and discontinuities (a good example being liquidity freezes); path dependency; sensitivity to initial conditions. All this accounts for truly unpredictable behaviour. It creates uncertainty in the Knigthian sense: even with full knowledge of the "fundamentals" it may be impossible to associate a probability distribution to future states of nature. However, complexity creates the possibility of extreme events. It does not make them happen necessarily. Other factors may also contribute: one of them is human behaviour. 2. Financial systems are "human" systems. Their dynamic is shaped by the way human beings react to changes in their environment. Those reactions can help and amplify initial shocks to a point that a real "catastrophe" may occur. Herd behaviour has long been known as an essential feature of financial markets. More subtly, individual reactions, by themselves rational, can, by the virtue of their mutual interaction, produce strong amplification effects. This has been luminously shown by Danielsson and Shin in their seminal article on "endogenous risk", based on the now famous parable of the Millennium Bridge. Extreme events and modern finance With slight exaggeration, a case can be made that modern finance has been built, in practice, if not in theory, on implicit tolerance and widespread ignorance of extreme events. BIS Review 151/2008 1 The use of models Models are extensively used to assess risks and price assets. Nearly all models are based on the prevalence of "normal" (Gaussian) distribution as the basic tool. | The formation of the VBI Community of Practitioners manifests the leadership by Islamic banks in this area with some of its members also being part of the Joint Committee on Climate Change (JCC) that was recently formed in September and chaired by the Bank and Securities Commission. The JCC aims to look at and create greater synergy in development of climate-related solutioning for the capital and financial markets. It should be noted that many VBI offerings of Islamic banks are already meeting contemporary sustainability themes but more will be forthcoming. Those already on offer include green and specialised financial products and services for retail and SME markets, financial solutions for lower income households, custom products for women entrepreneur and SMEs, green solutions that promote environmental sustainability and innovative solutions that promote physical and mental well-being. Takaful operators are also taking steps to explore value-based protection for their customers. A dedicated task force has been formed by the takaful industry to formulate a strategic roadmap to advance VBI in their business offerings and practices. VBI also encourages Islamic financial institutions to play a greater nurturing role in advocating sustainable practices among clients, such as adoption of Malaysian Sustainable Palm Oil Certification, as well as providing necessary funding and technical advisory services. Part of the progress in advancing VBI as a driver for positive change in the Islamic financial services industry has been the Bank’s role in working collaboratively with the VBI Community of Practitioners. | 0 |
The FSA has also been able to lower micro prudential liquidity requirements because of the extra liquidity backstop being provided by the Bank of England – in particular the ECTR and the Funding for Lending Scheme. This example may be important in a wider sense. One of the challenges facing macroprudential policy is that the instruments may not be symmetric in their impact. Put crudely, we can make firms hold more capital and liquidity when the going is good. We can’t force them to use those buffers when the going is bad, even if the rules are relaxed. Taking away the stick isn’t the same as offering a carrot. Vegetable metaphors are not always welcomed but I think it’s acceptable to suggest that the FLS may be seen as a carrot! And the FPC recommendations are perhaps a first example of macro prudential policy being used in a co-ordinated way (with central bank actions) to support the resilience of the UK financial system, by being counter-cyclical in approach. This ability to co-ordinate may also demonstrate the benefits of some shared membership across the FPC and MPC. 6 BIS central bankers’ speeches I want to turn now to the Funding for Lending Scheme in the context of our announcements this morning of the first banks and building societies to have signed up and their stock of sterling lending to UK firms and households at end-June 2012 (Table 1) that will be used as a reference point. | 2 BIS central bankers’ speeches Chart 3 Market functioning “heat map” based on issuance and spreads data(a)(b) Corporate bonds P R I M A R Y S E C O N D A R Y US UK Euro area Bank bonds, unsecured US UK Euro area RMBS US UK Euro area CMBS US UK Euro area Corporate bonds US UK Euro area Bank bonds, unsecured US UK Euro area RMBS US UK Euro area CMBS (b) US Euro area N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N NN NN NN N N N N N N N N N N N N N N N N N N N N N N N N N N NNNNNNN 07 08 09 10 11 12 Funding conditions compared with historical averages Very loose Lack of spreads data Loose Normal Tight Very tight No issuance Sources: Bloomberg, Dealogic, JP Morgan Chase & Co., Bank of America Merrill Lynch and Bank calculations. (a) Shading is based on a score that reflects gross issuance (relative to GDP) and spreads in primary markets, and spreads in secondary markets, expressed as a number of deviations from historical averages, using as much data as available from January 1998. | 1 |
This working group will draw up proposals and the associated legal adjustments for implementing the recommendations in the Federal Council’s ‘too big to fail’ evaluation report. Alongside these regulatory initiatives, the SNB still considers it necessary that the big banks increase transparency with regard to RWA. FINMA has now called on these banks to disclose the differences between calculations using the model-based and standardised approaches. Such enhanced transparency is necessary to restore the credibility of modelbased RWA and to strengthen market discipline. The SNB continues to hold the view that risk-weighted capital requirements – including a floor for model-based RWA – and leverage ratio requirements should complement each other. Risk-weighted requirements should guide economic decisions at the margin, while the leverage ratio should serve as a backstop. Yet, until the measures to resolve the RWA problem take effect, it is prudent to give a greater weighting to the leverage ratio when assessing the big banks’ resilience. Indeed, analysts increasingly pay attention to the leverage ratio when assessing and comparing banks. Domestically focused commercial banks Increased mortgage exposure, capital situation stable I would now like to turn to the domestically focused commercial banks. In 2014, these banks further increased their exposure to the Swiss mortgage and residential real estate markets. While the share of new loans with high loan-to-income ratios – a measure of affordability risk – remained persistently high, mortgage lending growth and the share of new mortgage loans with a high loan-to-value ratio decreased. Hence, the increase in exposure was lower than in previous years. | Resilience needs to be further improved for three reasons: First, the big banks’ loss potential relative to their capitalisation continues to be substantial. Second, while the Swiss big banks’ risk-weighted capital ratios are above the average for large globally active banks, the same cannot yet be said for their leverage ratios. Third, it can be expected that regulatory developments at both international and national level will result in increased capital requirements. 1 The Swiss big banks should prepare for these developments. RWA problem identified, but not yet resolved In the capital regulation of banks, risk-weighted assets (RWA) play a key role. As mentioned in previous Financial Stability Reports, both markets’ and authorities’ confidence in RWA calculated using banks’ internal models has steadily declined. A number of studies have shown that, in some instances, model-based RWA do not properly reflect a bank’s economic risks.2 As a consequence, capital ratios calculated using model-based RWA may overstate the true level of resilience. 1 Based on the review of the Swiss “too big to fail” regulations by the group of experts on the further development of the financial market strategy (Brunetti group of experts), the Federal Council has instructed the Federal Department of Finance to prepare legal adjustments, which primarily concern more stringent capital requirements. Cf. media release of the Federal Council, 18 February 2015. 2 For instance, international studies have revealed significant differences in RWA between banks using the model-based approach. | 1 |
There has been a clear endeavour to counter the upward price tendency. In my opinion, however, it would have been an advantage if management of the exchange rate had been clearly assigned to the central bank, instead of the leaving the responsibility to so many. As regards fiscal policy, experience has not been entirely positive. As I mentioned earlier, in Stage Three of EMU the Stability Pact is monitored with annual stability programmes. This process has worked fairly well in exerting peer pressure on countries with large deficits: no country has yet exceeded the Pact’s lower limit. But assessments of individual countries have tended to differ without there always being factual grounds for this. Neither has particularly good use been made of the golden opportunity that Europe’s present economic upswing provides for faster budget consolidation. Countries should now be making the most of the chance of quickly turning a deficit into a surplus but that is not happening. This may prove to be unfortunate further ahead and it runs counter to the spirit of the Pact. Peer pressure has evidently not been strong enough. Examples of short-run considerations gaining the upper hand in this respect were evident when the dramatic oil price rise led several countries to cut petroleum taxes or subsidise oil-intensive industries, which is hardly sustainable in the longer run for either the economy or the environment. Before concluding I should also like to say something about financial stability in the EU area. | The Rt Hon Sir Edward George GBE: Overview of recent financial and economic developments in Iran Speech by The Rt Hon Sir Edward George GBE, Governor of the Bank of England, at the Iran Invest 2000 Conference, held in London, on 28 September 2000. * * * I am delighted to be able to take part in this conference, and particularly pleased to be sharing the platform this morning with Governor Mohsen Nourbakhsh of the Central Bank of Iran, Bank Markazi. I first met Governor Nourbakhsh soon after he became Governor in 1994 - which was not an easy time for Iran. I was immediately impressed not only by his command of the issues confronting him - which was perhaps not surprising: it was his second period in office as Governor, having in the meantime taken a vacation as Minister of Economic Affairs and Finance, and as Deputy to the President, with responsibility for Economic Affairs. But I was immediately impressed too by his calm and always reasoned approach and by his reliability. He has played an important role in steering his country through a difficult period to the more promising prospect that Iran faces today. Since our first meeting, I have very much enjoyed the opportunity of seeing the Governor periodically at a whole series of international meetings, and it is a very great pleasure, Mohsen, to be able to join in welcoming you here to London this morning. | 0 |
The economic distress and the extraordinary uncertainty about the future course of the pandemic have set off a tidal wave of flows of money away from riskier investments to the safety of cash. This sudden shift led to an evaporation of liquidity and breakdowns in the functioning of key 1/4 BIS central bankers' speeches financial markets. This includes the market for U.S. Treasury securities, the cornerstone of the global financial system. These developments, if left unchecked, threaten to starve our economy of the credit that it badly needs during this difficult time. The Response Last month, as the risks posed by the coronavirus became increasingly apparent, the Federal Reserve took swift and decisive action to support the economy and stabilize financial markets. In two unscheduled meetings in the first half of March, the Federal Open Market Committee (FOMC) quickly brought the target range for the federal funds rate to near zero.1 The FOMC also signaled that it expects to keep interest rates at this level until it is confident that the economy has weathered recent events and is on track to achieve the Fed’s maximum employment and price stability goals.2 These monetary policy actions serve two purposes. First, low interest rates make it easier for households and businesses to meet their borrowing needs during this time of economic stress. Second, they foster broader financial conditions that will help promote the rebound in spending and investment needed to return the economy to full strength. | The significant increase in the share of OIC member states in our exports might be, at first sight, attributed only to the economic slowdown in the European Union. However, related figures indicate that the share of OIC members in Turkey’s exports had already increased from 13% to 19% between 2000 and 2007 before the start of the global financial crisis. Besides, visa exemptions probably played an important role in the recent improvement in Turkey’s trade with the region’s countries. Distinguished Guests, Regional collaborations have made a significant contribution to the increase in the volume of intra-emerging markets trade. Although tradable products can be transported to markets of any distance owing to advancements in transportation infrastructure and technology worldwide, distance is no less important than it was previously. Due to increased competition among countries, factors such as distance and transportation costs continued to be among the leading determinants of competitiveness. Various academic studies also confirm that the distance elasticity of trade is on the rise. As it is known, complementary value added chains have been formed particularly among Asian countries, and having benefited from the proximity of neighbor countries and their individual advantages in different fields, these countries have experienced a high-speed development process through regional cooperation, where low-costs-for-all have boosted the competitiveness of all economies in the region. | 0 |
Asset quality also began to show initial signs of deterioration as would be expected given the fall in property prices and the increased strain put upon the cash flow of the affected companies and their employees. BIS Review 32/2003 1 From mid-May however the operating environment of the banks improved as SARS was brought under control. It would be premature to say that the SARS effect has dissipated entirely. In particular, the full effects on asset quality may take some time to show through. But most of the banks that we have talked to are now saying that the impact of the specific factor of SARS on their results for 2003 is expected to be relatively mild. However, the underlying problems in the economy, which SARS helped to magnify, are still with us. Thus, while the balance sheets of the banks remain strong, the earnings outlook for 2003 remains uncertain; and the banks continue to face a number of challenges. One of these is the state of the property market. The heavy reliance of the banks on property lending is well known: residential mortgage lending, in particular, accounts for 35% of the total domestic loans of the retail banks. Property prices have fallen sharply since the Asian Crisis, and the effect of SARS was to produce a further downward spiral. In the three months from March to May, property prices are estimated to have fallen by 8%. | While they were able to cope with the impact of SARS without major disruption, a certain amount of improvisation had to take place, and lessons were learned that should be incorporated into business continuity plans for the future. But the main point is that the banks did meet the immediate test posed by SARS, and for that management and staff deserve our congratulations. The banks have now been able to wind down their emergency arrangements, but the effects of SARS on their financial performance in 2003 will linger for a bit longer, albeit the impact is now much more muted than at the height of the outbreak. Despite the underlying economic difficulties, the banks actually managed to turn in quite a good performance in the first quarter of the year. Profits of the retail banks in aggregate rose compared with the same period of 2002, helped by increased fee income, higher treasury profits, reduced operating costs and a lower bad debt charge. Towards the end of the quarter, and going into April, SARS began to have an impact of increasing intensity. The demand for bank loans, which was already not very buoyant, slumped even further; credit card spending plummeted as consumers cut back on shopping and entertainment and tourists disappeared; and branch traffic dried up, hampering the efforts of the banks to market their products. | 1 |
On this note, it is my pleasure to congratulate the Commerce Group on the official launch of Commerce Takaful Berhad. Significant potential exists for Commerce Takaful Berhad to achieve a quantum leap by leveraging on the integrated financial services and extensive operating infrastructure of the Commerce Group. I wish the Board of Director and the management of Commerce Takaful Berhad every success in this endeavour and I look forward to its contribution towards further development of the Islamic financial services industry in Malaysia. Dengan lafaz Bismillahirrahmanirrahim, "Commerce Takaful Berhad". saya dengan sukacitanya merasmikan pelancaran Terima kasih. BIS Review 31/2006 3 | In Malaysia, this has been addressed through the establishment of an effective rate of return framework, which provides a standard methodology for deriving the rate of return on deposits. The Profit Equalisation Reserve has been provided in the rate of return framework for Islamic financial institutions, which serves as a mechanism to mitigate the impact of the fluctuations in the rates of return. The reserve is appropriated from the gross income and is shared by both the depositors and the banking institution. Given the dual banking environment, as the one in Malaysia, the ability to maximize risk-adjusted returns on investment and sustain stable and competitive returns is an important element in ensuring the competitiveness of the Islamic banking system. From the regulatory perspective, the rate of return framework provides a means of assessing the efficiency of Islamic banking institutions, its profitability, management competency and fairness. To further protect Islamic depositors, the Malaysia Deposit Insurance Corporation has established a separate deposit insurance scheme based on Islamic principles. Disclosure of the true and fair value of the Islamic banking operations in the financial statements is also essential for depositors to undertake a true and fair assessment of the bank's performance. The enhanced financial disclosures need to be complemented with customer education and awareness programs to elevate the level of financial literacy among the consumers and businesses. | 0 |
The LIFI area is currently is responsible for roughly the top 23 foreign firms based here in New York with the largest U.S. presence (outside of the four firms that are covered in our Complex Financial Institutions portfolio); and, the RCFI unit is responsible for the remaining large group of smaller foreign firms. Our rationale for making this change was three-fold: First, we wanted to better tailor our supervisory approaches to the firms in each of these portfolios. • In this regard, the LIFI portfolio approach will use a combination of on-site and offsite monitoring over the course of the year, as well as examinations – but the program will evolve over time as the rules are finalized for applying enhanced prudential standards for FBOs. • The RCFI approach will largely be point-in-time examinations, using, where possible, a more streamlined process, more off-site analysis, and continued coordination with our colleagues at the other supervisory agencies. Second, we wanted to leverage the portfolio approach to ensure better dialogue with supervised firms, as well as to develop better cross-firm metrics and benchmarks that we can use to evaluate firms and to provide more robust feedback on key issues. 6 BIS central bankers’ speeches And, third, it provides an opportunity to realize efficiencies across our supervisory activities, with similarly sized (and similar complexity) organizations examined by a common core of examiners; this also gives us more targeted training and development for our staff. | An appropriate balance must be found between a sound production process with adequate controls and safeguards on the one hand, and cost-efficiency for contributing banks on the other hand. Also it is important that regulation is uniformly applied and enforced within the EU to avoid risks of further fragmentation in the money markets, and that international coordination is sought. In the longer term, a broader overhaul can be conceived, involving changes in the calculation methodology and possibly other changes to reflect the structural changes that have taken place in terms of the functioning of the money market since the onset of the crisis, such as the shift towards secured transactions. However, this process should be primarily driven by the market, based on the needs of end-users, while being supported by the public sector. In light of the fundamental importance of money market reference rates, we are closely following the developments taking place as regards the shrinking number of panel members for establishing EURIBOR and EONIA rates. Given the authorities’ commitment to addressing the shortcomings revealed in the rate-setting process, it is in the interest of markets that banks remain in the panel while the regulatory framework is being amended and behave as responsible market participants, thus preventing potential disruption in the functioning of an important financial market segment. Related to the shift of money market transactions to the secured segment is the use of central counterparties (CCPs). 8 In 2012, CCP repo transactions accounted for 55% of all repo transactions (up from 50% in 2010). | 0 |
On the contrary, the establishment of the NordicBaltic Cross-Border Stability Group has been an ongoing process for quite some time now. It started already in 2007 when we carried out a Nordic-Baltic crisis management exercise. By trying to manage an imaginary crisis using actual banks and applying the institutional and regulatory structures of the different countries, we learnt from one another and realised the importance of working together. Cooperation does not come by itself. It requires initiatives and continuous backing. And it takes time. Still, as far as I can see it is currently the only viable way forward in trying to deal with problems arising from cross-border banking in a way that does not lead to a backlash in European financial integration. What I have said today is fairly uncontroversial both in terms of the analysis of the challenges arising from cross-border banking and the need for joint action. However, despite the fact 22 BIS Review 82/2010 that opting for national solutions has proved to be a costly strategy in this crisis, some countries still seem to prefer going along this path. I think that is a mistake. I think that at the end of that path awaits financial disintegration with strongly negative consequences for future growth prospects. Concluding remarks Let me briefly summarize my main points. The structure of the financial services industry has gone through major changes over the past decades. | The moral hazard problems generated by banks being “too big to fail” are of course very important and we need to find ways to deal with them. But the nature of these problems is different from the one created by banks’ cross-border operations. Just because the biggest banks conduct foreign operations, it is not necessarily the foreign 17 The disagreement between Iceland, on the one hand, and the UK and the Netherlands, on the other, began in October 2008 when Landsbanki failed and was placed into receivership by the Icelandic Financial Supervisory Authority and the Icelandic government made clear that it would not compensate depositors in the UK and the Netherlands with Icesave accounts. The British and Dutch governments unilaterally decided to refund savers in their respective countries. Thereafter they entered into negotiations with the Icelandic government demanding repayment of the refunds corresponding to the EU guarantee. Still today no agreement has been reached. 18 It is a general phenomenon that firms with foreign operations tend to be relatively big and this phenomenon can be explained as the outcome of a selection process where only the most productive firms find it profitable to pay the sunk fixed costs associated with entering new markets through foreign affiliates (see e.g. Helpman, Melitz and Yeaple, (2004)). 20 BIS Review 82/2010 operations that are the problem. | 1 |
There is a reasonable debate about what is culture, but that is not a debate about whether it is important. In my view, culture is a product of a wide range of contributory forces: the stance and effectiveness of management and governance, including that well used phrase “the tone from the top”; the structure of remuneration and the incentives it creates; the quality and effectiveness of risk management; and as important as tone from the top, the willingness of people throughout the organisation to enthusiastically adopt and adhere to that tone. Out of this comes an overall culture. It is not something that has a tangible form. As supervisors, we cannot go into a firm and say “show us your culture”. But we can, and do, tackle firms on all the elements that contribute to defining culture, and from that we build a picture of the culture and its determinants. Culture has a major influence on the outcomes that matter to us as regulators. My assessment of recent history is that there has not been a case of a major prudential or conduct failing in a firm which did not have among its root causes a failure of culture as manifested in governance, remuneration, risk management or tone from the top. Culture has thus laid the ground for bad outcomes, for instance where management are so convinced of their rightness that they hurtle for the cliff without questioning the direction of travel. | In short, the banking sector will have to live with a structure of higher financial costs, which will squeeze the net interest margin and, therefore, the capacity to generate revenues. This situation, common to all financial institutions at the international level, may be partly relieved in Spain, insofar as a high percentage of the financing of Spanish institutions is granted at a variable rate, which allows them to adjust interest rates more rapidly to the general market risk premium, helping to keep their interest rate spreads more stable. The second challenge is lower demand for credit both from households and businesses. The lower demand for credit is a natural response to a weaker economic climate than in previous years. However, this response will be larger in the case of those economic agents who, after years of very notable growth in their indebtedness, have begun a process of financial deleverage. For banks, this will mean a smaller volume of activity, that is to say, slower growth or even contraction of their business. In the past, banks responded to narrowing margins (income less financial costs) by increasing their volume of lending. However, this lever will not be available in the coming years, or at least not with the same strength, since lending can be expected to continue to decelerate, and to grow at below the economy’s nominal growth rate. Also, a smaller volume of activity puts further pressure on results, since overheads cannot be spread across a larger volume of activity. | 0 |
It was considered that, despite vulnerabilities focused on some sectors and a more complex international environment, the systemic risk analysis shows that banks have sufficient buffers to withstand severe stress scenarios. The insurance sector plays a key role in the financial sector in Chile. Mature insurance industry, with a relatively high size in relation to other economies and active participation in the domestic market. It also plays a key role in the pension system through Life Annuities. However gaps remain. International 4 experience shows a clear trend towards "risk-based supervision" (RBS) in the insurance sector. Reference jurisdictions such as Australia, Canada, and the EU adopted this model long ago. Full adoption of an RBS framework requires an amendment of the insurance legal framework, and a bill introduced in 2011 to Congress establishes such a model, considering among others new risk-based capital requirement, a new solvency assessment system for insurers, a more flexible investment regime among other changes. Both the BCCh and the CEF have noted the relevance of this bill, labeling it as a high priority from a systemic risk point of view, considering insurers' relevance and interconnectedness, their significant participation in financial conglomerates, and the fiscal contingency embedded in life annuities and disability and survival insurance contracts. Despite the progress made by the CMF, and the evolution of the industry in terms of risk management and corporate governance enhancements, moving towards a robust legal framework of Risk Based Supervision in the insurance industry is essential for the preservation of financial stability. Let me conclude. | Pablo García Silva: Changing landscape - the role of the insurance sector in meeting emerging economic and social challenges Welcome remarks by Mr Pablo García Silva, Deputy Governor of the Central Bank of Chile, at the Annual Conference of the International Association of Insurance Supervisors (IAIS), organised by the Financial Market Commission (FMC), Santiago, 10 November 2022. *** This year´s conference is on the role of the insurance sector in meeting emerging and economic and social challenges. This is quite appropriate, as past are the days when longevity risk, low interest rates, anemic growth and secular stagnation seemed to be the main concerns of the insurance industry. Recent years have put significant stress on global capital markets and on the insurance industry, through high inflation and disruptions in financial markets. Looking ahead, supervisory and regulatory authorities need to be on top of these developments to adapt accordingly. The external macroeconomic scenario has evolved negatively in recent months, and risks for global financial stability remain high. A sharp rise in inflation -to which the Russia-Ukraine conflict has certainly contributed- has required a decisive response from central banks, which have had to raise their monetary policy rates considerably. Global growth outlook has weakened, with increasing risks of a global recession in 2023. Thus, financial conditions and liquidity have tightened. The Fed's toughening tone and decisions -and the uncertain future trajectory of its policy- have propitiated a cycle of global strengthening of the dollar and increased the sensitivity of the financial markets to new developments. | 1 |
Svein Gjedrem: The economic situation, global uncertainty and monetary policy Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at a conference of the Norwegian Public Service Pension Fund 2008, Sandefjord, 16 April 2008. The text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 13 March and in Monetary Policy Report 1/08 and NBIM Annual Report 2007. * * * There has been turbulence in global financial markets since last summer. What began as isolated losses in a small segment of the US housing market has gradually had substantial spillover effects in the global financial system. Uncertainty and the fear of further losses are still reflected in the markets. It has also become increasingly evident that the turbulence will result in weaker global growth. Only a week ago, the IMF presented forecasts for global growth that were clearly weaker than those presented just a few months earlier. So far, the direct consequences of the turbulence have been limited in Norway. However, continued turmoil and weaker global growth will affect the Norwegian economy. I will return to this later. Let me begin with some brief remarks about the current situation in the Norwegian economy. | There is little risk that its owners will make substantial withdrawals from the Fund over short periods. Other funds or individual investors may for various reasons have to reduce their holdings or pull out of capital markets at an unfavourable time. This may be because the investments are leveraged or that a fund is subject to regulatory constraints or simply that a long-term strategy is influenced by short-term assessments. In addition to its large size and long future life, the Fund is not earmarked for particular obligations unlike traditional pension funds. As a result, the Fund has a higher risk-bearing 4 BIS Review 45/2008 capacity than other comparable funds. The Pension Fund can thus a larger extent invest in financial instruments that may vary more in value, but provide a higher expected return, which in practice means investing in equities. The allocation to equities will now increase from 40 to 60 per cent. If returns vary across different markets and market segments, spreading investments can improve the trade-off between risk and return. This is why the Fund is expanding its portfolio, not only in terms of its geographic exposure, but also the depth of its investments in individual markets. The Fund’s strategy results in a very broad market exposure. This limits the Fund’s exposure to large losses on individual investments or group of investments that are influenced by the same or closely related risk factors. Losses on individual investments or main groups of investments will offset each other in a well diversified portfolio. | 1 |
I am therefore delighted that we were able to organise this colloquium with such a set of distinguished speakers, all of which have their exceptional professional standing deeply associated with the financial crisis, either as policy-makers, crisis managers, academics or proponents of regulatory initiatives. My introductory remarks this afternoon are organised around the title of this colloquium. My aim is to review policies in the last few years and draw some policy conclusions. I will first touch upon some of the lessons for financial stability, where Lucas’s contribution was especially important, as responsible for the financial stability function, and then turn to the experience with monetary policy. Lessons for financial stability The financial crisis erupted in August 2007, when off-balance sheet vehicles that had been set up by banks to manage portfolios of complex structured credit securities ran into funding liquidity problems. Although initially a liquidity squeeze, concerns about counterparty credit risks quickly spread as uncertainties intensified about the nature and extent of exposures of banks to what we now call “toxic assets”. And, as we know, these escalating tensions culminated in the bankruptcy of Lehman Brothers in September 2008, an event which triggered an unprecedented surge of volatility across mature-economy financial markets and a broad-based decline of asset prices. With this, an adverse feedback between the condition of the financial system and real economic performance was unleashed, contributing to a sharp economic slowdown across the developed economies. | Further development of this framework promises to support financial and macroeconomic stability, within an overall strategy focused on achievement of our primary objective: price stability. Such considerations, in concert with the development of a new framework for macroprudential oversight, should permit to reduce the frequency, duration and economic impact of financial crises. These are themes that will be discussed in depth in the course of today’s colloquium. We have to make sure that the global financial system, as well as continental and national ones, are made much more resilient. Yet, it would be unrealistic to believe that financial crises can be eliminated. Recent experience has also demonstrated the need for central banks to be timely and agile in managing financial crises without ever – in any circumstances – losing their sense of the medium to long-term orientation to price stability. As regards the ECB, in the face of financial crisis, monetary policy was eased significantly through conventional means in late 2008 and early 2009, with key interest rates being reduced significantly. Moreover, non-standard measures, in the form of the ECB’s enhanced credit support were introduced. These aimed at maintaining an efficient transmission of monetary policy by supporting market functioning. Such measures were instrumental in the maintenance of price stability, since, in the face of downside risks to price stability, they ensured that the easing of the monetary policy stance was transmitted into a broader easing of financing conditions. | 1 |
The authors focus only on the United States. Thus, it is difficult to know whether the value of financial conditions indexes are specific to the United States or should be applied more broadly. Fifth, I thought the paper could have gone further in exploring the implications of its results. The focus of the paper is on how to construct a financial conditions index that does a good job of forecasting economic activity. The paper does not tackle the implications for monetary policy stemming from developments in financial conditions as measured by the new FCI. If financial conditions evolve in an unanticipated way, how should this influence the conduct of monetary policy? In particular, the authors note that during the 2003–06 period, financial conditions tightened less than expected given the rise in the fed funds rate and, during the 2007–08 period tightened even as the Federal Reserve slashed its fed funds rate target. These results raise a number of interesting questions. In particular, does the behavior of the new FCI imply that the Federal Reserve should have tightened more aggressively during the 2003–06 period or eased more aggressively during the 2007–09 period? The paper’s results seem to imply this, but it would be interesting to see whether this is the case or not. It also would be useful to know how qualitatively important these differences are. | William C Dudley: Financial conditions indexes – a new look after the financial crisis Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the annual US Monetary Policy Forum, University of Chicago Booth School of Business, New York, 26 February 2010. * * * Thank you for having me to speak as a panelist today. As always my views are my own and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. I am glad that Narayana Kocherlakota is here as well as I don’t think I qualify as the most “objective” person to be a panelist on this particular topic. After all, I have long been a proponent of using a financial conditions framework to think about the economic outlook and monetary policy. When I was working as the chief U.S. economist at Goldman Sachs, we built one of the earliest financial conditions indexes, the Goldman Sachs Financial Conditions Index (GSFCI). I am going to divide my remarks today into two parts. First, I will discuss why a financial conditions framework is useful when thinking about the economic outlook and monetary policy. Second, I will discuss the paper, “Financial Conditions Indexes: A New Look after the Financial Crisis,” by Jan Hatzius, Peter Hooper, Frederic Mishkin, Kermit L. Schoenholtz and Mark W. Watson, in some detail – evaluating its considerable strengths and pointing out some areas where additional work would be useful. | 1 |
The merits of such interventions need to be judged on a case-by-case basis. For tonight’s discussion I just want to argue that such decisions should be undertaken with the support of the democratic political system and should be implemented as a fiscal operation. Indeed, during this crisis, the UK Government has made a number of such interventions – such as the Enterprise Finance Guarantee Scheme and the Vehicle Discount or “Scrappage” Scheme. The Special Liquidity Scheme Now, as an aside, some keen watchers of central banks may want to argue that the Bank of England’s Special Liquidity Scheme (SLS) appears to have provided £ funding for the UK banking sector. The SLS, supported by a Government indemnity, was probably the single most generous liquidity support scheme introduced by a central bank during the crisis. 4 Its 2 In the past, when financial markets were less well developed, the Bank of England has played a part in selected industrial or financial market interventions (see Sayers, 1976), but that is not a role we have now. 3 The Bank of England issues banknotes of course, but these are monetary liabilities or “central bank money” which impact on the monetary stance. They are backed only by the highest quality assets, in order to maintain confidence in the integrity of the currency. 4 This was required given the relatively small capital base of the Bank of England – around £ ½ bn at end-Feb 2009. | It would be dangerous to financial stability if we gave so large a capital carrot to banks to use the internal ratings based approach that many of the world's most important financial institutions, which account for the vast bulk of global and G10 domestic banking activity, saw a significant reduction of their regulatory capital requirement. It is the need to balance incentives with the maintenance of overall capital levels which makes this issue a difficult one. This, along with a large number of other questions about the impact of the proposals, will be further examined by the Committee in the course of a quantitative impact study to be carried out before finalising the proposals. The Bank of England has been asked to co-ordinate this work calibrating the impact of the new Accord on individual institutions and on the system as a whole. I recognise that the time allowed for this exercise is short, but I hope very much that we can count on the contribution and co-operation of the banking community. 2 BIS Review 29/2001 Turning to the second possible consequence of maintaining a risk insensitive alternative approach, we may find that the combination of having some banks on the IRB approach and some on the standard approach will, perversely, introduce a financial stability risk that is not present with all banks on the standard approach. This is that the more sophisticated institutions would have to hold more regulatory capital against weak loans than banks that remain on the standard approach. | 0 |
To the contrary – the competition in the market should develop on the foundation of a common, efficient infrastructure. In the long run, this is of common interest to all the parties concerned, whether they are public institutions, private companies, banks or our nation. This should provide a good basis for finding sound and future-oriented solutions. Thank you for your attention. 4 BIS central bankers’ speeches | We will see later that these areas find a strong echo in Islamic finance, which has also to deal with issues linked to lack of transparency, of a level playing field and harmonised regulation. Thus, the overhaul of regulation in conventional finance should be an opportunity for Islamic finance to tackle these issues, and to better integrate into financial globalisation. In France, in particular, Islamic finance has a role to play, which could be beneficial both to Islamic investors and to the French economy. Indeed, the French economy offers major and diversified investment opportunities for Islamic investors in the financing of a wide network of often innovative firms and projects, or in real estate. These sovereign funds, corporates or wealthy individuals should have the opportunity to invest, either directly in individual assets or projects, or indirectly through funds or BIS Review 118/2009 1 collective vehicles. It is up to banks to offer to these investors the type of Shariah compliant products and investment or financing tools they might wish to have. Let me make a brief point on sovereign wealth funds (SWFs) and their link with Islamic finance. SWFs have attracted much attention recently but the oldest ones were set up back in the 1970s. Their expansion accelerated about a decade ago, when many emerging countries started to accumulate sizeable foreign exchange reserves, due to high oil and gas prices and to the conjunction of macroeconomic factors and foreign exchange policies. | 0 |
In the construction industry, it has declined slightly, but remains at a very high level. Narrow profit margins and mounting concerns over the international outlook held companies’ demand for labour in check. The introduction of the minimum exchange rate has corrected the massive overvaluation of the Swiss franc and has given companies a sounder basis for their investment planning. This notwithstanding, the situation for a big part of the economy remains difficult. Waning global demand will continue to hold back export growth. Economic uncertainty, coupled with a difficult earnings situation for many companies, will curb corporate investment. Moreover, since October, the seasonally adjusted unemployment figure has risen again slightly. The deterioration in the labour market should constrain both consumer spending and investment in residential construction. It is likely that the Swiss economy will stagnate in the fourth quarter. For 2011 as a whole, real GDP growth of 1.5–2.0% can be expected. This is only because of the favourable economic development in the first half of the year. For 2012, the SNB is expecting economic growth in the order of 0.5%. Monetary and financial conditions In October and November, inflation turned negative, a development largely driven by the strong appreciation of the Swiss franc during the summer. Prices for a large number of tradable goods fell markedly. Following the introduction of the minimum exchange rate, the SNB is expecting temporarily negative inflation rates, but not a sustained decline in the general price level. Moreover, surveys also show that medium-term inflation expectations are still positive. | Philipp Hildebrand: Global and Swiss economic outlook – overview for 2011/12 Introductory remarks by Mr Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank, at the end-of-year media news conference, Berne, 15 December 2011. * * * The Swiss National Bank (SNB) reaffirms its commitment to the minimum exchange rate of CHF 1.20 per euro. It will continue to enforce this minimum rate with the utmost determination. It is prepared to buy foreign currency in unlimited quantities. The target range for the Libor remains at 0.0–0.25%, and the SNB continues to aim for a three-month Libor close to zero. Even at the current rate, the Swiss franc is still high and should continue to weaken over time. The SNB stands ready to take further measures at any time if the economic outlook and the risk of deflation so require. In the third quarter, the global economy picked up again slightly, thanks to positive stimuli from Japan, the US and China. Growth in Europe, however, remained weak and the economic outlook for the euro area deteriorated. In Switzerland, the pace of growth slowed considerably in the third quarter. The substantial appreciation of the Swiss franc over the summer is weighing heavily on the Swiss economy. For 2011 as a whole, real GDP growth of 1.5–2.0% can be expected. This is only because of the favourable economic development in the first half of the year. For 2012, the SNB is expecting economic growth in the order of 0.5%. | 1 |
Now the IMF is assuming that it will only amount to just over 3 per cent. 1 The speed of the global economic downturn is unparalleled in modern times and has come as a surprise to the Riksbank and many other forecasters. At the beginning of September we were expecting world growth to amount to almost 4 per cent in 2009. In the Monetary Policy Report we published in February we are instead forecasting almost zero growth this year. Developments in the world economy are thus expected to be the weakest since the beginning of the 1980s. Inflation has fallen significantly in recent months. It rose rapidly in 2007 and up to summer 2008, primarily as a result of rising energy and commodity prices. Since then the price of oil has more than halved. This has led to a rapid changeover from high to low inflation. In July inflation in the OECD countries was close to 5 per cent. In January it had fallen to zero per cent in the United States and to around 1 per cent in the euro area. Over the coming six months we will probably see very low or negative inflation in some industrial nations. Inflation excluding energy and food prices has been more stable in recent years. In the United States, core inflation has fallen slightly, but only from 2.5 per cent during the first half of 2008 to 1.7 per cent in January 2009. In the euro area, core inflation is just below 2 per cent. | Svensson also took up the possibility, as a last resort and in a hypothetical situation with a zero interest rate and very low inflation expectations, of introducing a temporary exchange rate target to bring up inflation expectations. This method would involve first introducing a price level target and then depreciating the currency to attain this price level target. It would in theory make inflation expectations rise and inflation accelerate. The real interest rate would therefore be lower, which would stimulate production and employment. My own opinion is that the Riksbank should not even temporarily hold the krona exchange rate at an artificially low level. When the repo rate is cut, this normally means that the krona weakens. But the current weakening of the krona began back in August last year before the repo rate cuts were made and ought mainly to be due to the financial crisis. There are primarily three reasons against temporary interventions to keep the krona at a low level. The first is that there is no reason to do this, as underlying inflation and inflation expectations are close to 2 per cent. The second reason is that the current problem is that this is a global crisis and all countries cannot depreciate their currencies at the same time to stimulate production and push up inflation. The third is that our experiences of trying to solve problems by depreciating the currency are not positive. | 1 |
Public-Private Partnerships 21 Moving on, I would like to touch on public-private partnerships – the other equally important arm of our alternative risk transfer strategy. 22 Continued industrialisation, expanding cross-border trade, and infrastructure development are at the heart of Asia’s growth. These create vast investment opportunities in the region, and will also drive demand for insurance solutions to mitigate a variety of business risks. 23 One such initiative is China’s One Belt One Road (OBOR) initiative, the most ambitious infrastructure project of its kind to-date. OBOR seeks to connect China and countries across Asia, the Middle East and Europe through a series of land and sea trade routes. Vital public infrastructure, such as roads and railways, gas pipelines, power plants and ports will be built in over 60 countries, with total estimated infrastructure investment to exceed USD 1 trillion. 24 However, modern risks lie along these ancient routes. There are a myriad of geopolitical, legal, credit and environmental risks in many countries along the corridor. Political instability, rioting, terrorism and conflict can lead to contractual issues and financial losses. Unfamiliarity with legal frameworks and regulations can lead to expensive delays. Non-payment risks can be exacerbated by emerging markets’ vulnerability to external shocks, such as currency and commodity price volatility. 25 The MAS is thus seeking to co-create new risk solutions with regional governments and the industry, and utilise these solutions on a pre-emptive basis to help governments and investors safeguard against key risks like natural catastrophes, construction risks and political risks. | 31 The two strategies of ILS and public-private partnerships that I have highlighted earlier mark the metamorphosis of Singapore’s reinsurance industry as we transform from a mainstream traditional reinsurance hub, to a sophisticated full-fledged global capital for Asian risk transfer. 32 I invite you to be a part of this metamorphosis, as we chart new paths together in this journey that Singapore is embarking on. 33 Thank you very much. 4/4 BIS central bankers' speeches | 1 |
There was a marked expansion in the issuance of asset-backed securities: bundles of residential and commercial 1 2 Most notably Nouriel Roubini, Bob Shiller and Bill White and others at the BIS. BIS Review 101/2009 mortgages, other consumer credit, and of loans to businesses that were sold on by the loan originator, thus shifting the associated risks. And a new class of asset in the shape of Collateralised Debt Obligations (CDOs) was created, which facilitated a further layer of restructuring and redistribution of the risks in an asset-backed security. The extent to which loans were moved off balance sheet through these means is shown in Fig. 2 (left-hand panel). Finally, we saw a veritable explosion in the issuance of Credit Default Swaps (CDSs), which allowed investors to hedge themselves against a wider range of default risks (righthand panel). The picture that emerges from this is one of a more complex process of financial intermediation, but one in which the innovation in contracts apparently allowed specific types of risks to be split out, traded and redistributed towards those in a better position to bear them. We thus seemed to be moving ever closer to an idealised Arrow-Debreu world of a full set of state-contingent securities. | Source: Bloomberg. 14 Figure 13 Share prices of U.S. regional banks and S&P 500 Stock of bank credit to enterprises (index, 1.Mar.23=100) (index, Dec.2019=100) Regional banks index 120 S&P 500 110 130 100 120 90 110 80 100 70 90 60 Jan.23 Eurozone United States 140 80 Feb.23 Mar.23 Apr.23 May.23 20 Jun.23 21 22 23 Sources: Bloomberg and respective central banks. Figure 14 Two-year inflation expectations (1) Inflation expectations of enterprises (EDEP) (2) (annual change, percent) (annual change, percent) 6 12 Financial Traders Survey Economic Expectations Survey Breakeven inflation 5 in two years in one year 10 8 4 6 3 4 2 Nov.21 Mar.22 2 17 18 19 20 21 22 23 Jul.22 Nov.22 Mar.23 (1) For details,, see note to Figure I.18 in June 2023 MP Report. (2) EDEP: Price Determinants and Expectations Survey. Source: Central Bank of Chile. 15 Figure 15 Economic uncertainty (DEPUC) (*) (index) 500 400 300 200 100 0 21 20 22 23 (*) Dashed horizontal line corresponds to 2020-2023 average DEPUC. Source: Central Bank of Chile. | 0 |
Companies have been unable or unwilling to invest as a result of earlier investment mistakes and poorer prospects for the future. The banks have suffered severe credit losses, which has further intensified the recession, as their capacity to provide new credit has been limited. The situation becomes particularly serious when losses have led to acute bank crises, which has often been due to the banks being greatly exposed to a particular sector. For instance, it was an overheated property market with banks strongly exposed to this sector that was one of the main reasons behind the bank crises afflicting several countries – including Sweden – at the beginning of the 1990s. Adaptations to large financial imbalances have also put a burden on central government finances and increased uncertainty. This has in itself prolonged and intensified the crisis. Japan is a well-known example of what can follow in the tracks of a serious financial crisis if confidence cannot be recreated in economic policy and future growth potential. The consequences of financial imbalances have proved particularly serious in countries with a fixed exchange rate, partly because interest rates need to be kept high when confidence in the fixed exchange rate policy declines, and partly because there has often been a large foreign currency debt. When the fixed exchange rate has to be abandoned and the country's own currency is weakened, the burden of debt increases. Should the central bank then concern itself with asset prices? | Improved from Basel I, Basel II provides guidelines for maintaining capital for more comprehensive types of risks. Under Pillar 1, as you know, banks are required to maintain minimum capital for operational risk in addition to market and credit risks as previously required. And on top of the minimum capital, additional capital may be recommended by national supervisors under Pillar 2 for risks not covered by Pillar 1. Because Basel II will be imposed on a wide range of financial institutions with different sophistications, the framework offers several approaches to calculate minimum capital, ranging from a simple factor multiplication approach to model-based methodology. Obviously, we as supervisors, expect complex financial institutions to adopt the model-based methodology for a better measurement and assessment of risk. One important point I would like to stress here is that Basel II should not be viewed as merely a capital calculation methodology. Rather, it should be seen as a principle-based guideline for sound risk management. This is because Basel II’s advanced approaches are derived from the best banking practice. It is, therefore, a vehicle for better risk management. Banks in emerging markets, including here in Thailand, should, therefore, take advantage of this opportunity to improve their operations. From the perspective of financial information, it is also necessary for banks to produce good quality financial statements so that stakeholders will be well-informed, and a sound judgment on their financial status can be made by the market. | 0 |
In particular, there is no sign of a potential wage-price loop that could be at play. This imperative to anchor inflation 3/4 BIS - Central bankers' speeches expectations helps explain why the ECB raised key interest rates by 125 basis points in total over the last two policy meetings. As Christine Lagarde stated, the appropriate pace of future rate increases will be decided on a meeting-by-meeting basis. Indeed, as she has repeatedly emphasised, it will remain data-dependent in all scenarios. As the current drivers of inflation fade over time and the normalisation of monetary policy works its way through to the economy and price-setting, inflation will come down back to 2%. When will that be? Will it be necessary for the Eurosystem to significantly tighten its monetary policy? First, let me just note here that ECB projections released in September have significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 but 2.3% in 2024. Second, market participants are not for the time being pricing in a strong tightening of ECB policy rates, with central expectations for the terminal rate being slightly below 3%. To conclude this rapid overview of the current macroeconomic situation in the euro area and its monetary policy implications, let me stress first that the change of course of monetary policy underway brings with it multiple dimensions that will need to be revisited, including the TLTRO operations, the remuneration mechanisms of banks reserves, and more broadly our operational framework. | As I have already alluded to earlier, this is an area in which the Association and its members can and must do more to put in place mechanisms at the firm and industry level for handling complaints against services provided by financial advisory representatives, well before a dispute is escalated to the Ombudsman. To help consumers navigate and compare financial products more efficiently, we are looking into the establishment of an online product aggregator to provide financial consumers with the ability to gather reliable information on a wide range of insurance products and make comparisons on simple products on a single website. A number of issues will need to be addressed to support such an initiative and ensure that meaningful comparisons can be achieved. Over the coming months we will be meeting with stakeholders to obtain further views on our aggregator proposals and examine options to move this initiative forward. I have spoken at length this morning about our plans for the industry. In the years ahead, this industry will have an important strategic role in the ongoing transformation agenda that is being pursued for the insurance and takaful sectors. The Bank is committed to providing a well-balanced regulatory environment that adequately protects consumers, while encouraging advisers to realise their full potential. | 0 |
Khwaja, AI, Mian, A and Qamar, A (2011), ‘Bank Credit and Business Networks, HKS Faculty Research Working Paper Series, RWO11-017, Harvard University, John F. Kennedy School of Government. Macpherson, N (2018), ‘Pay rises will not solve Britain’s productivity problem’, Financial Times, 23 March 2018. Manyika, J, Lund, S, Bughin, J, Woetzel, J, Stamenov, K and Dhingra, D (2016), ‘Digital Globalization: The New Era of Global Flows’, McKinsey Global Institute, McKinsey & Company. Monetary Policy Committee (2014), ‘Inflation Report’, Bank of England, May 2014. Moykr, J (2014), ‘Secular stagnation? Not in your life’, VoxEU, 11 August 2014. North, D (1990), Institutions, Institutional Change and Economic Performance, Cambridge University Press. Ramsden, D (2018), ‘The UK’s productivity growth challenge’, speech available at https://www.bankofengland.co.uk/speech/2018/dave-ramsden-panel-remarks-cbi-event 26 All speeches are available online at www.bankofengland.co.uk/speeches 26 Remes, J, Manyika, J, Bughin, J, Woetzel, J, Mischke, J and Krishnan, J (2018), ‘Solving the Productivity Puzzle: The Role of Demand and the Promise of Digitization, McKinsey Global Institute, February 2018. Rhodes, C (2017), ‘Business statistics’, House of Commons Library, Briefing Paper, No. 06152. Schneider, P (2018), ‘The UK’s productivity puzzle is in the top tail of the distribution’, Bank Underground, 29 March 2018. Schumpeter, J (1942), Capitalism, Socialism and Democracy, Harper & Brothers. Swinney, P (2018), ‘The wrong tail’, Centre for Cities, 24 May 2018. Tenreyro, S (2018), ‘The fall in productivity growth: causes and implications’, speech available at https://www.bankofengland.co.uk/speech/2018/silvana-tenreyro-2018-peston-lecture Watts, D (2003), Six Degrees: The Science of a Connected Age, William Heinemann. | We can look at these churn rates on a more disaggregated basis by linking data on worker movements and 40 company performance. Chart 21 plots the evolution of churn rates for firms above and below the productivity median. Pre-crisis churn rates were systematically (around 20%) higher in high-productivity firms than in low-productivity ones. Ideas and skills recycled more quickly in the upper than in the lower tiers of the productivity distribution. This may have contributed to the long tail problem. Other things equal, one might wish to see higher rates of labour market churn among poor-performing companies as a means of injecting new ideas, experience and skills, speeding-up the process of technological diffusion to them. In practice, the opposite appears to have been the case. The lower tail of UK companies, pre-crisis, had a stickier workforce. Post-crisis, things have changed. Churn rates among high and low productivity firms have converged, with churn rates among higher productivity companies falling sharply. This matches the productivity patterns seen post-crisis, with the slowdown focussed on previously high-performing companies. Slower churn among these companies, and the accompanying slower diffusion, may have contributed to their slowing productivity and them becoming part of that lower tail. A different way of slicing these granular data is to look at where workers are moving to. Again in an ideal world, we might wish to see high rates of worker transition to different points in the productivity distribution, to different sectors and different regions. | 1 |
But global institutions would need local guides to venture into new markets. Here there is a role for local or regional banks to partner with global banks. BIS central bankers’ speeches 1 (3) As to who should be borrowing, given the public goods nature of the long term infrastructural projects, the government should take the lead. Options for financing include direct government borrowing, concessional borrowing from overseas development assistance, or through Public Private Partnership (PPP). (4) Beyond banking, developments in the capital market and regional cooperation initiatives provide channel to intermediate cross border savings to finance infrastructure investments. These include the ASEAN Infrastructure Fund (AIF), the Credit Guarantee Investment Facility (CGIF), and Asian Bond Market Initiative (ABMI). Going forward, the combination of the above arrangements should provide a division of task that is healthy and balanced for the region. Secondly, on the role of Thai financial intermediaries, I see the following prospects for the Subregion. In addition to our strength in core banking business, the Thai banking sector has been partnering with foreign entities to serve the broad-based demands of the economy. Thus, we can play a meaningful role in bridging between the global financial players and the smaller local intermediaries. We can also contribute in terms of expertise and experiences. • So what is Thailand’s value proposition? Thai banks can play a role and compete in the business of financing small and medium enterprises. | Today, our communication on the Swiss franc is centred around two key statements: the currency remains highly valued, and the situation on the foreign exchange market is still fragile. By communicating our knowledge of the financial markets in a clear and simple way, we bolster participants’ confidence and contribute to the credibility of our monetary policy implementation. Page 6/9 A changing money market Lastly, I’d like to take a look at another market that has seen profound change since the crisis: the money market. This market is particularly important for the SNB, especially with respect to the implementation and transmission of its monetary policy. The money market has undergone two major changes, largely driven by external factors. First, the structure of the market has evolved, with the inexorable decline of the unsecured segment and concomitant rise of the secured segment; this structural change has meant that repos now take centre stage on the money market. Second – and this change is closely bound up with the first – we observe that the framework conditions within which the money market operates have been recast following the decline of the unsecured segment. I am alluding here to the replacement of the Libor as the reference interest rate for a variety of financial products, both in Switzerland and around the world. Coming back to the first point: the drop in volume for unsecured transactions, particularly on long-dated operations (more than one month), is a global phenomenon. | 0 |
In my view, it would be surprising if there were significant effects on the real economy or inflation associated with substituting one short-term, liquid, risk-free asset (reverse repos or term deposits with the Fed) for another (reserves), except for the degree to which that substitution affects the Fed’s control of overnight interest rates. BIS Review 39/2010 5 because the FOMC has not specified the path of reserves it intends to achieve before raising interest rates. The second potential concern that some may have is whether the markets have adequately priced in the exit strategy. However, a few considerations should limit this concern. Most important, the current configuration of yields and asset prices incorporates expectations that short-term interest rates will begin to rise around the end of this year. Thus, the markets seem prepared for the risks toward tighter policy. Moreover, looking out to longer maturities, the shape of the Treasury yield curve appears to incorporate not only expectations of policy tightening, but a decent-sized term premium on longer-term securities. Indeed, the term premium is well above the levels observed over most of the past several years, even though inflation is likely to be low and upside inflation risks are limited. This should help to diminish the chances of a sizable upward shift in yields. A related issue is whether the current levels of risky asset prices will prove robust in a rising rate environment. | Here I am referring to those facilities that provided funding at maturities of up to three months to particular sets of firms, such as the primary dealers, money market mutual funds, commercial paper issuers, and depository institutions. 2 Just today, we conducted the last operation associated with those facilities, 1 The views expressed here are not necessarily shared by the Federal Open Market Committee or by other members of the staff of the Federal Reserve Bank of New York. 2 In discussing these facilities, I am not including any provision of credit intended to support specific institutions, including those associated with the Maiden Lane LLCs. I include the Term Securities Lending Facility in with short-term lending facilities, even though it provided the market with Treasury securities rather than reserves, because it was often used to find funding for positions in less liquid securities. BIS Review 39/2010 1 meaning that all of the short-term liquidity facilities that were introduced during the crisis have now effectively been retired. The only special liquidity program that remains active is the Term Asset-Backed Securities Loan Facility, which I consider to differ from the short-term liquidity programs because it provides funding for up to five years. With the wind-down of these short-term liquidity facilities, it is a good time to look back and assess their performance. The bottom line here is simple: these programs were an unquestionable success. | 1 |
We at the Riksbank has also used one such model to better understand the interplay between the two policy areas – mainly because macroprudential policy could have effects on economic activity that monetary policy may need to take into account.10 The conclusion from this exercise so far is that there are no easy answers and that the benefits of coordination may vary, depending on which shocks are driving the economy and making the authorities take action. How have the roles been allocated in reality? So how have different countries in reality chosen to organise monetary policy and macroprudential policy? As usual, it is difficult to draw straight lines between theory and reality. One country that comes fairly close to model A with regard to coordination is the United Kingdom, where the Bank of England has been given responsibility for macroprudential policy. The decisions on monetary policy and macroprudential policy are taken by two different committees in the bank, the Monetary Policy Committee and the Financial Policy Committee, which is more in line with model B, but there is nevertheless an explicit aim to coordinate, for instance, in the way the committees are composed.11 In Sweden we have chosen a solution that in institutional terms is closer to B, in the sense that Finansinspektionen has been given the main responsibility for macroprudential policy tools. Now, I do not believe that the differences in the practical solutions chosen in different countries should be exaggerated. | Let me re-iterate that sustainable economic development is not possible without adequate investment in the knowledge industry. It is precisely for this reason that the nations that have attained great economic progress are also those that have invested heavily in education. Ladies and Gentlemen; in the recent years, the Bank of Zambia has been striving to strengthen its focus on economic research in order to improve the formulation and implementation of monetary policy in this dynamic economic environment. The Bank has in this regard been publishing the BoZ Reader where members of staff and external researchers are encouraged to publish articles which have a bearing to the economy in general and monetary policy in particular. The Bank in collaboration with the Centre for the Study of African Economies at Oxford University is also in the process of publishing a book on the economic prosperity in Zambia. I wish to take this opportunity to encourage all students and academic staff at UNZA to contribute to some of the forthcoming publications of the BoZ Reader. In conclusion, I wish to re-iterate that the Bank of Zambia commits to continue supporting the Economics Department and Research programmes at UNZA and hopes that the University will live up to its obligations under the framework of cooperation to be signed today. We challenge the Economics Department at UNZA through the Vice Chancellor to scale up its research activities in issues of interest to the Bank and the Zambian economy in general. For this is what this MoU entails. | 0 |
In Chart 7, the greater the number of years spent in school, the darker the green in which the country is colored. In Asia, there are a number of dark green areas, such as Japan, Korea, Malaysia and Sri Lanka. As you would expect, Hong Kong and Singapore also belong to this group, although it is not shown clearly on this map. One may get the impression that Asia as a whole is not as green as North America or Europe, and is more or less similar to South America. This would seem to indicate that there remains significant potential for further accumulation of human capital in the region. At the same time, there are some interesting figures relating to U.S. universities, which are generally acknowledged as providing the highest standard of education, attracting talented people from all over the world. If you look at the data for U.S. university students by their country of origin, you can see that students from Asian countries dominate, as shown in Chart 8. Those students returning to their home countries will no doubt have a profound impact on the human capital there. It is well known that Bangalore, the IT hub of India, benefited from returnees from Silicon Valley. Moretti’s study shows that innovative, highly skilled workers contribute not only directly to the higher quality of human capital, but they also have a positive effect on the skills of those around them – a sort of positive externality. | Even if it is the case, we cannot entirely count on one single rising star. The growth rate of relatively high-income Asian economies needs also to be sustained at a reasonably high level if the prosperity of the regional economy as a whole is to be maintained. I believe there are three traps which we must avoid falling into if we are to sustain economic growth in Asia. Despite the heterogeneity which we have observed, these three traps are relevant to many countries in the region, albeit to varying degrees, depending on the circumstances. The first trap is the “middle-income trap.” 6 History shows that many economies have faced difficulties in advancing beyond the status of a middle-income economy once they have 4 See http://data.worldbank.org/about/country-and-lending-groups. In my presentation, I loosely follow their definitions by using thresholds of 12,000 U.S. dollars and 1,000 U.S. dollars of per capita GDP. 5 David N. Weil, Economic Growth, Third Edition, Pearson Education Limited, 2013. The darkness of North Korea is noteworthy, as is often pointed out in the literature, including Charles I. Jones, “The Facts of Economic Growth,” NBER Working Paper 21142, 2015. 6 The middle-income trap is discussed extensively in Asian Development Bank, Asia 2050: Realizing the Asian Century, 2011. 2 BIS central bankers’ speeches exploited the growth opportunities provided by imported technology and abundant labor force from rural areas. Such an inflection point is known as the Lewisian Turning Point. | 1 |
- Persons filling key roles should be expected to have the necessary skills and experience to carry out their tasks appropriately. The supervisor has a role in assessing the qualifications and integrity of these key personnel through fit and proper tests. 2 BIS Review 38/2005 - Depending on the size and complexity of the bank, appropriate structures and control mechanisms such as strong internal audit, external audit and the oversight function of the board (directly or through supporting committees such as audit committees, risk committees, compensation committees etc) support the effective operation of a supervised bank. - Other elements, such as the appointment of independent board members who can exercise objective judgement, are usually recognised as good practice. Basel II and corporate governance Let me turn now to the Basel II capital framework. I am asked to speak about Basel II quite frequently, but while I am often requested to talk about the mechanics and the impact of the new framework, I am seldom asked about its corporate governance aspects. This is unfortunate because, in my view, Basel II is fundamentally about better risk management anchored in sound corporate governance. With that in mind, I would like to focus now on three areas where I believe Basel II will contribute to more effective corporate governance. I will refer to these as the three C’s: controls, culture and clarity. Controls The first “C” is controls. | However, I do think that we share some important broader perspectives, particularly in relation to the two issues I will address today. More rigorous risk management anchored in strong corporate governance, enhanced transparency and sound minimum capital requirements that reflect the risks that banks face are vital elements for any financial system to promote confidence and foster financial stability. On top of that, common standards in these areas can help to improve the integration of the international financial system. It is certainly true that the special features of Islamic banking may not be fully addressed by the traditionally broad international standards developed by organisations such as the one I chair – the Basel Committee on Banking Supervision. I believe that it would be neither appropriate nor possible for the Basel Committee to seek to fill such gaps. That is why I am very pleased to see organisations such as the IFSB addressing issues related to the soundness and stability of the rapidly growing market for Islamic financial services worldwide. The exposure drafts that you have issued with regard to risk management and capital adequacy for institutions offering Islamic financial services help to fill a very important niche, as will your forthcoming exposure draft on corporate governance, and your work on the supervisory review process and on transparency and market discipline. The Basel Committee is an outward-looking committee, with a key interest in relevant matters that reach beyond its own technical and geographical borders. | 1 |
As these countries have adopted the euro, weakening the currency is not a possible escape route for them, providing that they wish to remain within the monetary union. The best way for these countries to increase their competitiveness is instead to employ what is usually called internal devaluation. This means that wages and prices must increase at a slower rate than abroad for a while. Another important measure in this context is to implement reforms that increase long-term growth and productivity. There are also various political problems that have to be resolved. Difficult dilemmas arise when economic cuts lead to discontent on the part of the public, whose support is needed. In this context the politicians also have to meet a number of pedagogical challenges. They have to be able to explain the choices the country is facing and the consequences of various courses of action. There is a great difference between what you want to achieve and what you can achieve. For example, the desired standard of living is a value judgement, while the possible standard of living is a result of how well the economy works in terms of the potential for long-term growth, how sound public finances are and so on. Another problem is that interest rates rocket when there is a lack of faith in the ability of the political sphere to take action, which further aggravates the problems. So, how can one overcome these difficulties? | The Riksbank is monitoring developments closely, but our assessment is that at the moment there are no funding problems for the Swedish banks on the international capital markets. To sum up we can say that the turbulence around the world will have a dampening effect on Swedish growth in the period immediately ahead. The clearest signs of this so far are the weak stock market in Sweden and the dramatic decline in the confidence of the households and companies, which is reducing demand. How can we ourselves facilitate developments in Sweden? We have laid stable foundations – which we must build on Although we are dependent on what happens abroad, we must do what we can to keep the economy on an even keel in Sweden. We can compare the situation to our own personal finances. Various external circumstances that we have no control over can undermine our financial situation. However, if we have had a firm grip on our personal finances before this happens, we will be better prepared and have a better chance of managing the situation. But how can we relate this to the Swedish economy as a whole? If we return to Figure 7 we can see that labour costs over the last 10 years or so have increased more slowly in Sweden than in the euro area. We can also go back to Figure 9. | 1 |
Market perceptions of risk were falling at precisely the time risk in the system was building. There was also little market differentiation between the spreads of “crisis” and “no-crisis” banks: their average pre-crisis spread difference was a mere 8 basis points. The extent of risk mispricing is clear from the movements in CDS premia as the crisis broke. Average spreads rose by a factor of over 50 for “no crisis” banks. For crisis banks, they rose by a factor closer to 70. Adjustments on that scale are a decisive rejection of the debt disciplining hypothesis. Debtors were meant to act as a brake on risk-taking incentives. Instead they had served as an accelerator. Why? The answer again lies in incentives – the incentives of bank managers and policy authorities. These incentives matter most at crisis time. Then, it may no longer be in the interests of either bank management or the authorities to have debtors bear risk. Doing so may run the risk of making a bad crisis situation worse. As much as bank management and the authorities may pre-commit to debtor’s bearing risk ex-ante, they may be tempted to capitulate ex-post. Economists call this a time-consistency problem. Agents cannot credibly commit to stick to their guns in the midst of war. Private contracts for bank debt and public policies towards bank debt suffer from a severe case of this time-inconsistency problem. Having debtors assume pain is fine on paper. But crisis wars are not waged on paper. | Although they are second in the risk-bearing queue, debt-holders as well as equity-holders would be expected to shoulder, and hence price, this balance sheet risk. This could be done either by raising its cost or by restricting its quantity. Either way, debt would then serve as a restraining device on riskhungry, rent-seeking shareholders. In theory, this debtor discipline mechanism ought to work like a dream. Under the assumptions of Modigliani and Miller (1963) (MM), the pricing of risk by debt-holders ought to neutralise fully any effect of increased leverage on the value of the firm. Provided 12 Anglo-Continental Guano Works v Bell (Surveyor of Taxes) (1894) 3 TC 239. 13 Farmer (Surveyor of Taxes) v Scottish North American Trust, Ltd (1912), AC 118. 14 For example, the introduction of a separate corporate tax schedule in the UK in 1965 led for a time to the double taxation of equity. 15 These investors account for perhaps half of the US equity market and two-thirds of the UK equity market. 6 BIS central bankers’ speeches shareholders maximise firm value, and the world behaves according to MM, debtor discipline ought to defuse completely incentives to gear-up. Figure 3 illustrates the point diagrammatically, showing payoffs to debt and equity. They are a mirror-image. The downside risk avoided by equity is assumed by debt and vice-versa for upside returns. In principle, then, combining debt and equity would lead to offsetting payoffs, neutralising risk-taking incentives. | 1 |
By now all persons, goods, services and capital can move freely from one country to another. This is the case for France and Germany. Trade is a good example of this integration. The share of French imports coming from Germany is currently about 19%, while the share of German imports coming from France is about 15%. Each country is the other's first trading partner. Beyond these gross figures, it is interesting to note that this trade is largely made of complementary goods as opposed to substitutable goods, thus increasing interdependence. This interdependence is not only commercial, it is more generally macroeconomic. Econometric work has indeed shown that French and German GDPs are closely correlated. This means that national economic policies cannot deviate excessively from each other. These foundations progressively convinced France and Germany that they needed a common monetary destiny As I said earlier, the collapse of the Bretton Woods system led European Governements to organize monetary relations between each other. France and Germany were among the most prominent actors in this strategy. I personally see two main elements in this common destiny: the creation of the European monetary system (EMS) in 1979 and the emergence of a conceptual convergence between our two countries as regards monetary issues. The creation of the European Monetary System in March 1979 highlights best the cooperation between France and Germany. | This very bold construction, which has no worldwide equivalent in the world, will simultaneously permit through the decision-making process that has been decided in Dublin: - to ensure that we have a sound consolidated fiscal policy at the level of the euro area even without a federal budget, - and to ensure that each particular economy reloads the fiscal cannon in order to be able to cope with domestic or external shocks even without the automatic stabilizers of the transfers built into a federal budget. Ensuring a sound consolidated fiscal policy at the level of the Union and reloading the fiscal cannon at the level of national economies are the two major goals of the stability and growth pact monitored by the Stability Council and decided, in accordance with the Treaty, by the Council itself. As regards the costs associated with the transition towards the euro, which were the fourth major criticism, I will confine myself to two main remarks relating to the fiscal side as well as to the monetary side. From a European perspective, the strategies of fiscal retrenchment that have been decided within the European Union are to be implemented in any event, whether the Maastricht Treaty existed or not. | 1 |
[6] It’s why we narrowed the gap between capital requirements for smaller banks using the Standardised Approach and larger banks using the Internal Ratings-Based Approach – in a way that reflects the risks they take and facilitates competition and healthier markets. [7] It’s why we established a New Bank Start-up Unit that, since 2013, has authorised thirty new banks to take on incumbents. [8] It’s why we are taking steps to streamline processes for authorizing some ventures in the wholesale insurance and reinsurance sector. [9] And it’s why we, along with the government, are considering a mobilisation regime for new insurers as part of the Solvency II review. [10] In these instances, our ‘regulatory T cells’ told us that we could takes steps to boost the health of markets while maintaining strong protection against risks from disorderly failure. Responsive regulation can be a helping hand boosting competition, not a dead hand stifling innovation. International competitiveness Effective competition is already a secondary objective for the PRA. But as I mentioned earlier, we will soon have another secondary objective to facilitate (subject to alignment with international standards) the international competitiveness of the UK economy, including in particular the UK’s financial services sector. This objective will also include facilitating medium to long term growth. I’m going to turn now to how we intend to use our new powers to pursue this new objective. This is going to be a very important change for us. | In recent years, extraordinary measures by many central banks have pushed down long-term rates. Over a longer time horizon, the factors behind the decline in interest rates are more structural in nature. The savings glut in 1/5 BIS central bankers' speeches emerging economies, particularly China and oil exporting countries, has been one important factor. Savings have probably also increased in many countries as a result of demographic developments and a more uneven distribution of income. At the same time, investments in many advanced economies have been low, possibly reflecting prospects for low returns on investment in productive capital. In the wake of the financial crisis, conditions of a more cyclical nature have also contributed to the fall in interest rates. While deleveraging has pulled up savings, greater uncertainty may have dampened the willingness to invest. These developments have consequences for monetary policy. The level of the real interest rate that is consistent with balanced developments in the economy is usually referred to as the neutral interest rate. The difference between the actual real interest rate and the neutral real interest rate provides an indication of whether monetary policy is expansionary or contractionary. A real interest rate that is below the neutral rate stimulates economic growth, while a higher real interest rate dampens growth. The neutral interest rate is not directly observable. Central banks must nevertheless form a perception of how expansionary or contractionary monetary policy is. | 0 |
More often than not, there will be a number of possible interest rate paths that might be said to provide a reasonable balance, in view of the uncertainty involved. The results of this trade-off are presented in the Inflation Report in the form of a chart that presents baseline scenarios for the interest rate, the exchange rate, inflation and capacity utilisation in the economy. The formulation of a precise inflation target, our projection for the interest rate 3 – 4 years ahead in time and our desire to achieve a balance between output stability and inflation may perhaps give an impression of excessive optimism with respect to managing the economy and invite a repeat of earlier attempts to fine-tune the economy. But it is important to bear in mind the lessons drawn from the 1970s and 1980s, i.e. high stabilisation policy ambitions may lead to wide fluctuations in the economy, with high and variable inflation. In our conduct of monetary policy, we must not underestimate the uncertainty surrounding the decisions taken. Even if the Bank publishes a forecast for the interest rate, this does not mean that the interest rate will follow the forecast throughout the projection period. Forecasts of inflation, output, the interest rate and other variables are based on an assessment of the current situation and a perception of how the economy functions. Disturbances to the economy may result in changes in the forecasts. Data revisions imply that the current economic situation is not fully known. | The inflation target may be formulated as an interval, for example 1-3 per cent, as in New Zealand or, as in Norway, as inflation of close to 2.5 per cent over time. Partly owing to various disturbances to the economy, inflation cannot be expected to remain at target constantly. Central banks have somewhat varying formulations as to how rapidly inflation should be brought back to the target. Some central banks state that inflation should be brought back to target within a “reasonable time horizon” or “over the medium term”. Others have quantified that the inflation target should normally be attained within two years, as in Sweden, or as in Norway, where the interest rate is set with a view to stabilising inflation at the target within a reasonable time horizon, normally 1 – 3 years. In practice, the monetary policy conducted by most central banks is nonetheless similar. They orient monetary policy towards maintaining low and stable inflation. All central banks will reduce their policy rate when there are prospects of low inflation in the medium to long run and raise it when there are prospects of high inflation. What distinguishes Norges Bank from other central banks? Monetary policy in Norway is in line with the monetary policy conducted by a number of central banks in the OECD area. One difference, however, is that Norges Bank is conducting monetary policy in an oil economy. | 1 |
This degree of interconnectivity between the UK and the rest of the world is such that the IMF noted in 2011 that, “the stability and efficiency of the UK financial system is a global public good due to potential spillovers and thus requires the highest quality of supervision and regulation” 4. As a major host to international financial services activity, we are highly attuned to the importance of international trade and international banking to a successful world economy. Openness and trade support economic dynamism through many different channels. They promote efficient allocation of capital and risk, support greater competition, utilise comparative advantage, expand the size of the global market, and build economies of scale. 1 Why is the UK banking system so big and is that a problem? ; Bush, Knott, & Peacock; Bank of England Quarterly Bulletin 2014 Q4. 2 Prudential Regulation Authority Annual Report and Accounts 2015. 3 Foreign Banks in the US: A primer; Goulding and Nolle; November 2012. 4 Spillover Report on the United Kingdom for the 2011 Article IV Consultation; Country Report No. 11/225; IMF; July 2011. 2 BIS central bankers’ speeches International wholesale banking has a critical role in facilitating these flows, contributing to the efficient allocation of capital globally, and so developing the world economy. Trade finance is of course essential to support trade. Deep global capital markets benefit savers and borrowers from around the globe. International banking also brings benefits, such as diversification of risks, efficiency, competition, and the advantages of specialisation. | BIS central bankers’ speeches will be moveable in a stress to where it is needed rather than needing to be prepositioned in case stress arises. Resolution is also supported by additional total loss absorbing capacity (TLAC) requirements on firms to absorb losses and recapitalise as needed in the event of a resolution. The balkanisation that was the initial response of regulators to the crisis supports locally-led, uncoordinated resolution. Strong local requirements are in place to ensure multiple local resolutions of failed entities. However, this is likely to be a suboptimal outcome for all concerned. Local entities and the critical functions they provide may not in reality be able to survive resolution separated from their parent. Furthermore, uncoordinated actions by authorities increase the risk of “asset grabs” and a general need for more resources across the group as a whole. Coordinated resolution, and for highly integrated groups an SPE strategy, can better support international banking and international capital flows. With coordinated resolution, the need for regulatory balkanisation can be reduced, with host supervisors reassured by an internal TLAC requirement that transforms debt into equity and so ensures capital resources can be downstreamed from the parent group in a stress when needed, rather than pre-positioned “just in case”. Let me return now to the key lesson we took as host supervisors from the crisis – that of our greater appreciation of the connectivity between the entities we supervise and their parent groups. This is present in franchises and business models, in financial exposures and in operational support. | 1 |
The Bank announced last year it will also make an adjustment to its approach to setting Pillar 2A add-ons to banks’ capital requirements in order to ensure the regulatory framework is proportionate to all lenders, thereby supporting effective competition, whilst not compromising on safety and soundness. 25 The adjustment allows supervisors to reduce Pillar 2A add-ons for banks which use the Standardised Approach for credit risk to reflect how risk weights under this approach tend to be higher than the risk weights determined using internal models at other banks for some types of assets. This is particularly the case for UK mortgages (Chart 7). Another part of the regulatory framework to which we have made adjustments is the Senior Managers and Certification Regime. We recognised following the implementation of the regime in 2016 that not all individuals that should be were in scope of the regime. In particular, the regime did not include a specific senior management function or responsibility related to areas such as operational continuity and operational resilience, including resilience to cyber risk. This omission was inconsistent with the Bank’s growing emphasis on these areas, as highlighted earlier. In response a new function – the Chief Operations function – has been added to the regime to ensure there is clear and appropriate accountability for operational continuity and resilience. 26 Identifying dynamic adjustments We are doing two things to enable us to identify aspects of regulation that might need adjustment. | We cannot rely exclusively on controls or process to achieve desired outcomes. Not every situation can be anticipated. Not every decision can be automated. Controls can be out-maneuvered—sometimes unwittingly, but other times on purpose. For all these reasons, good processes are necessary but not sufficient. There will be situations in which your employees have to make choices. Ignoring the moral dimension of choices carries significant risk.8 If you want your organization to be well controlled with regard to its risk, you have to consider the quality of choices, not just the reliability of processes.9 An organization should therefore develop the capacity of its employees to make good choices, not just permissible choices. So, how do you practice moral reasoning? Bill Dudley has offered what I thought was a good starting point. Get rid of the notion that a separate morality applies at work than at home.10 Bankers—and, for that matter, lawyers—cannot check their morals at the door when they step onto a trading floor or into a courtroom. Here are some other ideas, courtesy of a 2016 report by the Financial Conduct Authority entitled “Behaviour and Compliance in Organizations.”11 The report argues, among other things, that ethical considerations need to remain salient in order to promote good choices. | 0 |
15 See also Blume, M. (2000), The structure of the U.S. equity markets, Rodney L. White Center for Financial Research, paper 17-00, The Warton School, University of Pennsylvania. BIS Review 5/2002 7 conclusion at present could be that certain tendencies that were evident in the United States may also have been present in Sweden. How can households’ risks be reduced? Besides calling for more knowledge about what actually happened while the IT bubble was growing, the course of events raises what is perhaps the more important question of what can be done to provide more support in the future for long-term saving by households. It is essential for society in general that stock markets function properly. At the same time, households need an adequate return on their savings and should be in a position to identify and manage different types of risk. Basically, this is a matter of education. Over the years, the Swedish Share Promotion Association and the Swedish Shareholders Association have done much to improve people’s knowledge of these matters. Information that is prompt, up-to-date, correct and relevant is likewise crucial. The new technology is inundating us with information but more does not necessarily mean better. It follows that households must be helped to interpret the information and pick out what matters most. An import role in this respect is played by independent analysts and consultants, not to mention media. These agents can see through and criticise corporate managements that are unduly optimistic or provide information selectively. | Marzunisham Omar: Transforming organisational learning in challenging times Keynote address by Mr Marzunisham Omar, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Chief Learning Officers Forum 2021 “Transforming Organisational Learning in Challenging Times”, 10 June 2021. * * * It is my great pleasure to welcome you to the inaugural Chief Learning Officers’ Forum – a gathering of minds among the learning and development community. Let me also take this opportunity to thank the teams from PETRONAS and Bank Negara Malaysia for jointly organising this Forum. We are indeed living in challenging times. The COVID-19 pandemic has significantly affected the way we live and work, forcing us to make the necessary adjustments to protect life and livelihood. While the pandemic would InsyaAllah be over, its effects on work arrangements will, I have no doubt, be long lasting. The pandemic is taking place at a time when the world is going through rapid changes. The economic and financial landscape is evolving, defined by on one hand, increasing dependencies among economies and firms, while on the other hand, heightened competition. A key factor driving the changes is the exponential speed of technological advancements in recent years. These advancements have been boosted by major breakthroughs in artificial intelligence, machine learning, big data analytics and cloud computing. Closer to our discussion today, digitisation and automation have disrupted organisations, their business models, talent management and the very nature of work itself. | 0 |
The first session will start at 1:00 pm and will host the Central Bank authorities and specialists as well as authorities from the Undersecretariat of Treasury. In this session, the related bodies of the Central Bank will present their reports on evaluations about economic developments and inflation outlook to the Monetary Policy Committee. At the same time, the authorities from the Undersecretariat of Treasury will present their evaluations on the developments in debt management and fiscal policy to the Committee. In the second session, the Committee members will make the final evaluations about the outlook and the decision will be put to a vote. After making a decision, members of the Committee will prepare a brief report explaining the rationale of the decision. The decision and its rationale will be announced by the Central Bank in a press release before 7:00 pm on the same day, and it will also be posted on the website of the Bank. A significant change in the upcoming period is that the Turkish version and the English translation of the decision will be published on the same day. Other policy statements and important dates The Central Bank will continue to publish main policy statements regularly in 2007 as well. Within this framework: • The Inflation Report will continue to be published quarterly. • The Financial Stability Report will be published twice a year on previously announced dates. | In the first year of the inflation-targeting regime, some supply-side shocks were experienced, which caused inflation to materialize above the path consistent with the target. The Central Bank explained the reasons of this deviation through open letters written to the Government, took the necessary measures to put inflation back on track consistent with the target and shared its evaluations pertaining to the timing of convergence to the target with the public in a transparent manner. These implementations not only strengthened the communication framework of monetary policy, but also played an important role in shaping the expectations. Although the inflation rate has stabilized at around 10 percent-level for a long time due to the supply-side shocks experienced in 2006, the fact that the inflation expectations for the next 24 months is around 5.5 percent as of today is a clear evidence of the success achieved in the inflation-targeting. However, being ultimately focused on price stability, the Central Bank cannot be content with what has been achieved until medium-term expectations are consistent with the target. As a result, important steps were taken in 2006 on the way to transparency, accountability and predictability, which are the main principles of the inflation-targeting regime. This press release aims to review the strategic as well as the operational framework of monetary policy in light of the first year’s experience and to lay down the principles for 2007. | 1 |
In his survey of the range of research results, Joe Gagnon finds roughly similar median results for studies focusing on programs in the United States, United Kingdom, and euro area—citing a 4 / 13 BIS central bankers' speeches median effect of about a 50-basis-point reduction in 10-year yields for a purchase equal to 10 percent of GDP.22 Regarding costs, in a recent exploration of strategies for defeating the zero lower bound, former Federal Reserve Chairman Bernanke dispels some of the common critiques of balance sheet programs (which he calls quantitative easing).23 He points to unrealized worries about an upsurge in inflation, collapse of the dollar, currency war, and rise in household leverage, and he questions the effects in promoting asset bubbles and inequality. He notes that fiscal risks associated with quantitative easing must be balanced against benefits of tools that enhance policymakers’ ability to meet their policy objectives in the face of a serious economic downturn or disinflation. Lesson 2: The Fed could control interest rates even with a large balance sheet An additional concern—that the Fed would not be able to control interest rates with a large balance sheet—proved to be surmountable. As I described earlier, the Fed successfully introduced new tools and counterparty relationships into a new operating regime that delivers interest rate control irrespective of the level of reserve balances in the banking system. | The removal of policy accommodation associated with the Fed’s securities portfolio reductions should over time be expected to put some upward pressure on longer-term interest rates.12 However, the relatively muted increase in term premiums seen so far may in part reflect the non-zero probability that market participants assign to the FOMC deploying the balance sheet again if future economic conditions were to warrant more monetary easing than could be achieved solely through reductions in the federal funds rate, consistent with the FOMC’s normalization plan guidance.13 … but where is it headed? The FOMC has started the process of normalizing the Fed’s balance sheet and has provided some general guideposts. The Policy Normalization Principles and Plans state that the Committee intends for the Federal Reserve, in the longer run, to hold no more securities than necessary to implement monetary policy “efficiently and effectively,” and that it will hold primarily Treasury securities. | 1 |
The Swiss franc temporarily appreciated immediately following the outbreak of the war in Ukraine. The trade-weighted Swiss franc exchange rate, however, was recently below its level at the beginning of the year (cf. chart 4). Adjustment of the threshold factor I would now like to discuss the lowering of the threshold factor from 30 to 28 as mentioned earlier by Thomas Jordan. With this technical adjustment, which will take effect from 1 July 2022, we will ensure that sufficient amounts of sight deposits are subject to negative interest, and that the latter is being passed on to the money market as intended. From March 2022, upward pressure built up on the short-term rates on the secured money market. This stemmed from the fact that the exemption thresholds had risen over time due to the dynamic calculation model, which meant that there were no longer sufficient amounts of sight deposits subject to negative interest. To keep the secured short-term money market rates close to the SNB policy rate, the SNB provided additional liquidity to the money market via repo transactions as a temporary measure. However, given that the increase in exemption thresholds is structural in nature, it is appropriate that we lower the threshold factor. This will result in the secured short-term money market rates being close to the SNB policy rate again without the SNB having to regularly provide larger amounts of liquidity. The SNB will continue to regularly review the basis for calculating the exemption threshold and adjust it as necessary. | Since the unprecedented sell-offs in May, there have been some recent corrections to the initial overreactions. Nevertheless, capital movements and asset prices continue to be volatile and pose headwinds to growth and financial stability. The summer period provided a brief respite and provided investors with more time to be selective, not treating all EMEs as one single asset class. Economic fundamentals became a primary consideration for assessing in which market to remain invested. We trust that Thailand will continue to receive the attention of foreign investors because of our sound fundamentals and attractive prospects. These, notwithstanding the current soft patches as the economy consolidates and work on its long term competitiveness agenda. Role of monetary and financial policies in safeguarding stability Long before the Subprime and the Eurozone crises, Thailand had our own economic crisis of 1997. We experienced a setback that took us more than half a decade to recover. Since then we learnt the virtue of moderation and prudence. Firms had to deleverage, banks recapitalized, regulatory standards, governance reforms and bank lending practices have improved markedly. The government’s fiscal framework was also strengthened following the fiscalization of the costs of financial sector restructuring. Years of hard work and reform efforts paid off and laid the foundation for a more diversified and competitive economy. The availability of policy space both in the fiscal, monetary and financial policies, helped ensure a much needed domestic source of growth when global trade collapsed in 2008. Timely government stimulus helped shore up domestic demand. | 0 |
Third, in terms of economic policy, an explanation for “the resource curse” has been that such “unearned” wealth leads to an extreme focus from various groups on acquiring as much of this extra wealth as possible. It is therefore important that the decision-making processes in the political sphere guard against this kind of “rent-seeking” behaviour. Finally, petroleum revenue spending will have a serious impact on the competitiveness of Norwegian industry if spending is too rapid and variable. It is therefore important that we succeed in maintaining an industry structure that promotes learning, innovation and development, which can give us other sources of revenue than oil. What we are trying to achieve is to transform petroleum wealth into financial wealth, to the benefit of future generations as well. Nonetheless, the discounted value of our own labour force is our main asset. Our livelihood essentially depends, and will continue to depend, on our ability to efficiently produce goods and services and to use our creativity and innovation to become ever more efficient. Economic policy guidelines During the first thirty years of the oil age, economic fluctuations, often linked to oil revenue spending, were strong. Against this backdrop and increasing demands for spending more, new economic policy guidelines were adopted in 2001. A fiscal rule was drawn up for petroleum revenue spending over the central government budget. Government petroleum revenues are transferred to the Petroleum Fund, now renamed the Government Pension Fund - Global. | Our ambition must be to reduce uncertainty with regard to our own response pattern. Financial stability and monetary policy Financial stability means that the financial system is robust to disturbances in the economy and is able to channel funding, execute payments and redistribute risk in a satisfactory manner. Experience shows that the foundation for financial instability is laid during periods of strong growth in debt and asset prices. Banks play a central part in providing credit and executing payments and are therefore important to financial stability. Monetary and financial stability are both important for economic developments. In my view, they are often mutually reinforcing. Financial stability can be seen almost as a prerequisite for price stability. First, it promotes stable developments in financial markets, which is crucial to balanced economic growth. Second, financial stability supports the transmission mechanisms of monetary policy. Conversely, price stability has a positive influence on financial stability. A successful monetary policy will support financial stability by removing distorted price signals associated with high and volatile inflation. Low and stable inflation provides households and enterprises with a clear indication of changes in relative prices, enabling them to make better informed decisions. Allocation of resources will then be more efficient. The Norwegian financial system and its soundness In Norway, responsibility for financial stability is divided between Norges Bank, Kredittilsynet (the Financial Supervisory Authority of Norway) and the Ministry of Finance. To promote efficient cooperation, the regular exchange of information between these authorities is crucial and a framework for cooperation has been established. | 1 |
Confidence in the commitment to price stability was gradually built up after parliament in 1830 decided to base the currency on the value of silver. Another important factor was probably the development of the credit system in the 19th century. Banks were established and financial know-how grew after interest controls had been abolished. This made it possible to finance industrial investment and exploit all the new inventions. An increasingly stable form of government no doubt also contributed to the transformation. The constitution was reformed by degrees and served to guarantee stability. Business enterprise benefited from the abolition of trade guilds, the freedom to trade and the introduction of joint stock companies. Another import measure was, of course, the introduction of compulsory education, which led in time to increased human capital. This is not intended to be a complete account of all the factors behind Sweden’s transformation from a poor country into a rapidly growing industrial nation. My point is that, if a number of institutional changes had not been made, the outcome would have been less favourable. These changes provided a stable framework for the process of industrialisation and ensured that our country could benefit from the ongoing globalisation. Realignment of Sweden’s economic policy It may be asked whether the good growth at present can also be attributed to a realignment of Swedish economic policy. There are no doubt those who consider the political decision-makers could have gone further in this direction, just as there are others who think they have gone too far. | To some extent there have been a number of signs of more subdued growth in the rest of the world, above all in the United States. Moreover, new statistics suggest that Swedish households are not quite as optimistic as before. Somewhat weaker car sales may be an indication of more subdued demand for durables. Asset prices also seem to be in a calmer phase. All of this may point to some slowdown in the development of demand. But is it enough? It is still a matter of forward indicators and we have not yet seen any clear outcome in the statistics. Neither does there seem to be any notable fall-off in labour demand. The number of new job vacancies continues to be comparatively high, at least to date. In the absence of a sufficient slowdown in demand, an adjustment to the long-term growth path will need to be achieved with interest rate increases by the Riksbank. It seems to me that it is deliberations of this type that the Riksbank will face at the coming monetary policy meetings. Consideration will also have to be paid, of course, to the inflation risks associated with the high price of oil and the high dollar rate. These were some of the risks we highlighted in the October Inflation Report. This type of discussion about the direction of stabilisation policy basically deals with how, after some favourable years in the late 1990s, we should act so that growth and employment in the Swedish economy can be sustainably high and stable. | 1 |
So they wanted to keep on consuming and spending beyond the levels that could be supported by the growth of their economies or income. Many people in the developed world thought, rather mistakenly, sovereign debt crisis should be the kind of mishaps that can only occur in the developing economies. At the same time, the capital market seemed to be willing to support this belief as investors were happily buying government bonds of the developed countries at very low interest rates. With what happened in the US and Europe in the last five years, we have come to realise that prosperity and good life have to be earned, through hard work and productivity growth, just like what their parents, grandparents and / great grandparents in the western world great grandparents in the western world did in the past. There is now little doubt that prosperity and good life built on the basis of rising indebtedness is unsustainable and is bound to collapse some time, just like sand castles. Trap of excessive indebtedness: Easy to get into and hard to get out 12. There is another pertinent question on why so many countries do not seem to be able or willing to get out of the trap of high indebtedness or excessive leverage. For one, it is far too tempting to spend, consume now and worry about payment later. That explains why, in addition to public debts, household debts have risen to very high levels all over the world. | However, in over two decades’ time, the ratio will deteriorate significantly to 2:1, which means that there will only be 2 persons in the age group of 15–64 supporting one elderly person. The Government has already made it clear that, while we are having budget surpluses, structural budget deficits will occur within a decade mainly due to changing demographic structure. 20. Ladies and Gentlemen, I have just made a long speech and now I would like to leave you with several key takeaways. First, it is very easy for governments to fall into the trap of going down the path of fiscal unsustainability as a result of the collective irresponsibility syndrome as well as population aging. Second, it is very, very hard and immensely painful to try to get out of a government debt crisis. Third, more likely than not, it is the next generation and the next and the next that will have to shoulder the costs and to suffer the pains for excessive spending and stock piling of debts by the current generation. If we don’t want to mortgage the future of our children and grandchildren, try not to leave with them a pile of debts as in the case of many developed countries. How can we do this : we must take great care in not demanding or condoning policies that would undermine the long-established fiscal prudence and discipline of our Government. | 1 |
This is a difficult question that requires more detailed analysis, but it is unlikely that it will be easy to reach a general policy conclusion. I am convinced, on the other hand, that many central banks will review their macroeconomic models and more precisely define the role of asset prices in the transmission mechanism. I do not believe, however, that we should exaggerate the ability of monetary policy to prevent crises from arising. Even if excessively expansionary monetary policy can contribute to the build-up of a bubble, it is less clear to what extent monetary policy can entirely prevent this from happening. It is probable that it would require fairly substantial interest rate increases, something that may not be received sympathetically when the reasons for the increases are not crystal clear. But more moderate interest rate increases could, of course, contribute somewhat. If nothing else, it 14 BIS Review 41/2009 would provide a signal from the central bank that it envisages certain development problems. I also believe that risk scenarios with a longer forecast horizon may be an option for clarifying what the risks may be in the longer term. It is conceivable that the price of housing or some other asset may be driven by factors that are difficult to explain or which may be assumed to give rise to inefficient risk allocation and large fluctuations in economic activity and inflation. | The Riksbank has also cut the repo rate to the lowest level it has been at since we introduced an inflation target. How monetary policy can be conducted under the prevailing conditions is a question that I will discuss in more detail later. The financial crisis has of course changed these conditions a great deal. But before we get into that, I would like to say a few words about how monetary policy is supposed to work under normal conditions. How monetary policy works normally Normally, monetary policy aims to keep inflation at a low and stable level and to stabilise the real economy. To achieve this, the Riksbank controls the shortest market rate, that is the overnight rate which is the interest rate on loans between the banks from one day to the next. The overnight rate in turn affects the interest rates charged to the general public, and thereby activity and prices in the economy. We have a system in which we influence the overnight rate by determining the conditions for the banks borrowing and lending with the Riksbank so that it is close to our policy rate, the so-called repo rate. The repo rate expresses the level at which the Riksbank wants the overnight rate to lie. The way in which the monetary policy conducted has an impact on, for example, the banks' lending rates, the development of the real economy and inflation is usually called, somewhat loosely, the transmission mechanism. | 1 |
According to the latest assessments of the Executive Board, the overall outlook suggests that it would be appropriate to raise the interest rate gradually to about 5 per cent in the course of this year and to a somewhat higher level in the period to summer 2008. At its meeting on 25 April, Norges Bank’s Executive Board decided to leave the key rate unchanged at 4.00 per cent. The Executive Board considered the alternative of increasing the interest rate at that meeting. There is obviously considerable uncertainty surrounding the projections. The projections are based on our assessment of today’s economic situation, the outlook for developments in other countries, the functioning of the economy and the conditions necessary for reaching the inflation target. The chart BIS Review 47/2007 11 shows that we must be prepared for developments in inflation and output that may differ from the central path. This may also imply that the interest rate may be lower or higher than our current projections. Allow me to summarise: The fall in prices for imported goods and services and the increase in export prices have provided the Norwegian economy with an appreciable income boost. The mainland economy has expanded rapidly in recent years. At the same time, inflation has remained low. Increased efficiency and an ample supply of labour have made a contribution to these developments. There are now limited idle resources. Monetary policy increasingly reflects that many Norwegian enterprises are facing capacity constraints and that inflation will pick up. | Interest rates will continue to be raised gradually ahead so that we can assess the effects of interest rate changes and other new information about economic developments. Thank you for the opportunity to present these assessments before answering questions. 12 BIS Review 47/2007 | 1 |
Spain chose to spend a large portion of the windfalls on luxury and war. More recently the expression “Dutch disease” reminds us that this issue is still relevant. It can certainly be argued that easy money is bad for a country. It is tempting to live comfortably on this income – which actually is not income but drawing on wealth – while it lasts, and forget about and be less concerned about safeguarding other revenue sources. The challenges with large income from natural resources and its negative impact on economic growth have also been pointed out by Jeffrey Sachs and Andrew Warren. 2 1 David Landes (1998): The Wealth and Poverty of Nations, W.W. Norton & Company, Inc., N.Y. 2 See e.g. J.D. Sachs and A.M. Warner (2001): ”The curse of natural resources”, European Economic Review 45, pp. 827 – 838. BIS Review 106/2006 1 Success in managing our petroleum wealth may be particularly dependent on four key factors. First, from a long-term perspective, oil and gas production will take place during a limited time period. When oil is extracted and sold, petroleum wealth is transformed into financial wealth. This wealth belongs not only to our generation, but also to future generations. We must therefore manage the wealth as an asset. Second, the size of the cash flow from petroleum activities varies considerably from year to year. If it were to be spent as it accrues, this would lead to strong cyclical fluctuations in the Norwegian economy. | The household debt burden (household debt as a percentage of disposable income) has increased to a historically high level and is expected to rise further. However, the household interest burden (interest expenses after tax as a percentage of disposable income plus interest expenses) is still low as a result of the low interest rate level. The interest burden is expected to increase to fairly high levels in pace with a normalisation of the interest rate. Still, on the whole, households’ financial position is strong. The rise in the policy rate so far has not been fully reflected in banks’ lending rates. Intensified competition, especially for mortgages, has dampened increases. Banks’ interest margin has declined during the last decade. Falling interest margins have, however, partly been compensated by high lending growth, and banks have so far succeeded in maintaining good results. Pre-tax profits as a percentage of total assets have been solid. Norwegian banks are solid. Due to high growth in lending, capital adequacy ratios for banks as a whole declined slightly in 2005. Nevertheless, capital adequacy ratios are still high. Under Basel II, capital requirements for credit risk are to be calculated using either the standardised approach or more risk-sensitive internal ratings based (IRB) approaches. The five largest Norwegian banks have applied to Kredittilsynet to use the Foundation Internal Ratings Based (FIBR) approach for credit risk. Under Basel II, the required level of capital for banks in Norway will be reduced. The main reason is that mortgages constitute a substantial part of banks’ total assets. | 1 |
Growth potential and opportunities Over the last three years, the financial advisory industry saw total premiums transacted increase by an average annual growth of 21%. While this is from a low base, the industry is on a sustained growth trajectory, which suggests that financial advisers are adding value and successfully distinguishing themselves from alternative channels for the distribution of insurance offerings. We are pleased to see a further three new financial advisers added to the industry this year. The industry has only begun to scrape the surface in harnessing the potential that exists for financial advisers to make a substantial contribution in helping Malaysian households improve their financial management and prepare for income shocks. This potential is striking. Every year, more than two million life and family takaful policies are sold, 69% of this by tied agents. More than 40% of the Malaysian population still do not have any form of insurance, and a large proportion of those who do are likely to be significantly under-insured. This is supported by a recent study commissioned by Bank Negara Malaysia which found that 79% of more than 1,000 respondents surveyed did not have enough financial buffers to sustain living expenses beyond 3 months. Malaysian of retirement age and older are particularly vulnerable. Based on statistics from the Employees Provident Fund in 2011, more than 70 percent of contributors who were 54 years old at the time had savings of only RM50,000 or less accumulated for retirement. Only 30% of these contributors were still working. | One step in this direction is to harness the ample immovable property of the government which presently may not be rendering an adequate return. It appears that the setting up of special purpose vehicles may be addressing in part this issue. Perhaps, however, we should go a step further by considering the establishment of a development bank which would utilise various assets of government that are presently underutilised as well as other sources of funding, on similar lines that exist in many EU countries, particularly Germany, where development banks at the regional level undertake very successfully a role in promoting the economy and assisting the government in social and environmental projects. Let me turn now to the domestic banking system. On taking on my responsibilities as Governor of the Central Bank of Malta, I actively involved myself in financial stability issues given my concern with financial markets overseas that were characterised by volatile trading conditions and the contagion effects of the sovereign debt crisis. There is no doubt that the impact of the sovereign debt crisis highlights the importance of ensuring a stable domestic financial system. In fact the case of Ireland shows us that imprudent bank policies can have devastating effects on the economy. In contrast, the domestic banking system played a crucial role in preventing a more severe downturn in economic activity after 2008, and in averting a sharper deterioration in public finances, because of prudent behaviour on the part of the banks in both asset and liability management. | 0 |
All empirical studies confirm that much can be gained by embracing good governance and it is an essential component of crisis prevention efforts. Good governance is equally vital in both the public sector and the corporate world, and its merits are relevant in all countries. Recently, corporate governance issues have been prominent on the world economic agenda as financial markets have been recovering from scandals that came to the fore following a period of excesses in equity markets. In order to increase confidence in the markets, it is imperative that the corporate world adhere to the principles of good governance. Good governance in the public sector is also an essential tool for strengthening institutional capacity, which is fundamental BIS Review 42/2003 1 for economic and social development. The Fund has an important role to play in this field and we welcome the increased emphasis it has given to the issue of governance. Transparency and International Standards With the world economy having suffered a confidence crisis, it is important to continue to promote greater transparency and accountability. Various studies have demonstrated that transparency and adherence to international standards lead to easier market access and lower borrowing costs. There is much to gain by applying these simple principles. It is also important to continue developing international standards and codes that enhance transparency and facilitate comparison between countries and regions. | However, the multilateral route is a better channel for delivering the dynamic benefits of increased global economic integration. Bilateral agreements can fragment and complicate multilateral negotiations such as the present WTO round. Moreover, small and underdeveloped economies are more likely to be left out and their ability to participate in the global economy is therefore disadvantaged. We encourage the Fund to continue to use surveillance in promoting open world trade. 2 BIS Review 42/2003 Concluding remarks Ladies and gentlemen, improving the world economy is a task that demands the participation of every nation. We must press forward with structural reforms, promoting good governance, increasing transparency, and harmonizing standards. This task must also include efforts to integrate the lowincome countries into the global economy. The current circumstances provide good reasons for addressing these issues. The International Monetary Fund has been at the center of world economic cooperation since its establishment. The Fund should continue to play a crucial role in strengthening the areas I have emphasized through its surveillance and its lending activities. BIS Review 42/2003 3 | 1 |
1 William C Dudley, 2011: “Securing the Recovery and Building for the Future.” Remarks at United States Military Academy at West Point, New York, November 17. 2 Based on the CoreLogic index. BIS central bankers’ speeches 1 Home construction collapsed with new single family starts falling from a peak rate of 1.75 million homes per year to a low of 360,000 in early 2009. After a very slight pick-up, they have been bumping along at about a 425,000 annual rate for over a year. Although the number of mortgages becoming delinquent is off its peak, it remains very elevated and increased in the third quarter of 2011.3 According to the Mortgage Bankers Association of America, at the end of that quarter there were roughly 1.5 million first lien mortgages 90 or more days past due, and 2 million first lien mortgages in some stage of foreclosure. Over time, without an improvement in housing and the labor market, more loans will become seriously delinquent. Moreover, absent more aggressive efforts to find economically efficient alternatives to foreclosure – loans already seriously delinquent and in foreclosure will become real estate owned by the lender, or REO. My staff estimate that the flow of properties into lender REO in 2012 and 2013 could be as high as 1.8 million per year, up from around 1.1 million in 2011 and around 600,000 in 2010. The overhang of properties in the foreclosure/REO pipeline continues to exert downward pressure on house prices and housing activity. | The next steps will be determined more by the newest indicators of economic developments and prospects than they have been in the recent past. At its next meeting, the Monetary Policy Committee will probably assess whether and how the Icesave referendum results and the newly published capital account liberalisation strategy will affect monetary policy in the near future. The strategy divides liberalisation into two main phases, with Phase I dedicated to unwinding offshore króna positions by allowing owners to exit through auctions or by investing in the Icelandic economy. Only when these measures have generated acceptable results can controls on residents’ capital outflows be lifted. If conditions are right, the latter phase could proceed relatively quickly, but if not, it will be executed more gradually. It is difficult to say how long Phase I will take, as its duration will depend on a number of uncertainties, such as access to foreign credit markets. But it is important for near-term monetary policy that Phase I be designed to minimise potential negative effects on the exchange rate and the foreign exchange reserves, at least at first. It is only in Phase II that the interest rate differential with other countries begins to assume much greater importance as regards exchange rate developments. In the recent past, monetary policy has been an element in the larger economic policy formulated by the Icelandic authorities in co-operation with the International Monetary Fund. The key features of that policy have been exchange rate stability, fiscal sustainability, and financial system reconstruction. | 0 |
Rumors abounded and the shorting of the Hong Kong dollar ahead of the weekend had become a weekly affair. In the first half of August, Hong Kong’s GDP growth for the first quarter was revised down to - 2.8%. Wall Street was down sharply. The yen fell to over 147 against the US dollar. On the approach of the long weekend in the middle of August, rumors of a devaluation of the RMB and/or the abandoning of the Hong Kong dollar’s link with the US dollar intensified, risking the creation of panic and a breakdown of confidence in the currency. Fact number five: there had been much selling pressure on the Hong Kong dollar in the first half of August. In accordance with the discipline of the currency board arrangements, the HKMA would have had to sell foreign reserves and buy Hong Kong dollars passively. This would have created a serious shortage in the Hong Kong dollar monetary base, thus sending interbank interest rates sharply higher and the stock market sharply lower. Given, however, the need to fund the budget deficit for this financial year, the opportunity was taken to switch some of our accumulated fiscal reserves held in foreign currencies back into Hong Kong dollars, leaving the monetary base and therefore interbank interest rates largely unchanged. The amount of Hong Kong dollars absorbed in this manner was large, exceeding the $ billion accumulated by the hedge funds. | The purists would say no to this, but they should really come down to earth and recognize that in modern day finance the majority of transactions are conducted electronically without the use of cash. For the effective operation of currency board arrangements, the organisation responsible for running the system has to manage the electronic interbank clearing system as well. This requires that the banks operate clearing accounts with the currency board and that the aggregate of the balances in their clearing accounts forms the crucial part of the monetary base which is subject to the monetary rule of the currency board. This puts the responsibility for the provision of liquidity to the banking system squarely on the currency board. But this arrangement need not involve any significant departure from the discipline of currency board arrangements. The important issue is how liquidity for the purpose of facilitating the clearing of interbank transactions is provided. In Hong Kong this is provided through the repurchase of debt issued by the currency board and fully backed by foreign reserves. There is therefore no departure from the discipline of currency board arrangements. The fourth accusation is that we were too late in introducing our technical measures to strengthen our currency board arrangements and that had we done so earlier we could have avoided having to intervene in the stock market. Frankly, I do not think that we could have turned around the market sentiment with just part of the package of actions. | 1 |
However, the slackening in price trends is a result of many interacting factors that are partly connected with globalisation: – Increased world trade and more operators lead to greater competition – Deregulation and privatisation will also mean that competition increases – A greater degree of specialisation and utilisation of comparative advantages (what is known as global labour reallocation) lead to increased productivity and efficiency – More production in typically low-wage countries leads to lower costs All of this indicates that international price pressure should be lower during the coming years at a given point in the economic cycle. To gain a more comprehensive picture of the significance of the structural changes for prices, it may be useful to illustrate how they interact with other factors that might influence international price pressure, such as global demand and commodity prices. Over the past few years, international economic activity has been weak, which has probably contributed to the low rate of price increase. Until a year or so ago, commodity prices were also developing weakly, but since then a relatively large upturn has occurred, while manufacturing activity has improved and global demand has increased. Despite this, prices of manufactured goods have remained subdued. | A study by Catherine Mann at the Institute for International Economics shows that trade and global production accounted for 10-30 per cent of the price fall on hardware products in the United States during the 1990s. This led to growth being approximately 0.3 percentage points higher each year between 1995 and 2002 than it would otherwise have been. Today, expenditure on software is increasing at twice the rate as on hardware, and this process has scarcely begun in large areas of the economy. If prices for software also begin to fall, thanks to globalisation, the second wave of productivity gains can be even greater than the first, particularly within the services sector, which has the greatest potential. We have seen that globalisation of trade and production patterns has led to more operators, who also have lower costs, participating in the world economy. This has led to international competition becoming stiffer and prices being pushed down. Similarly, the increasing trend towards deregulation and privatisation over the past two decades has contributed to making production more efficient and raising productivity, which in turn has had a subduing effect on price trends. The question of how globalisation and structural changes may affect the future path of inflation will probably attract increasing attention in central bank circles. If, on the one hand globalisation and new BIS Review 21/2004 3 technology have led to economies having a lower inflation propensity, it may be possible to achieve a higher level of resource utilisation without inflation accelerating. | 1 |
But it is positive that their establishment on the labour market looks like it is starting to go faster. As you know, there are no guarantees in the forecasting business. It has taken a decade, but it seems as though the global economy has finally recovered enough from the after-shocks of the financial crisis to start a new chapter and that central banks in our part of the world will gradually be able to raise interest rates again. For the small Swedish economy, with its reliance on foreign trade, altogether premature or rapid rate rises would jeopardise the strong economy and development of inflation. For the Riksbank, it is a question of remaining vigilant. A prerequisite for inflation to continue to develop in line with the target is that economic activity remains strong and has an impact on price developments. Monetary policy therefore needs to remain expansionary for a while. But if everything goes as expected, the time to start normalising monetary policy will come closer. The assessment we made in February was that it is probably time to slowly start raising the repo rate during the second half of this year. But such a turnaround requires considerable caution, in my opinion. I occasionally hear somebody say that it feels wrong to have a negative policy rate when the economy is going as well as it is now. But the Riksdag has assigned the Riksbank to conduct a monetary policy that contributes to suitably low inflation. | Annual spending from the Fund is subject to a spending rule, whereby the government commits to limit spending. Over time spending should not exceed the estimated expected real return on the Fund’s investments, set at 4 per cent per year. This implies that the Fund is expected to become a permanent savings account. 4. At the outset, there was already an investment management operation in the Bank, for the foreign reserves. But when it became clear in 1997 that the Pension Fund would be growing fast, we decided to set up a separate management unit, now called Norges Bank Investment Management (NBIM). Our challenge was to build a business organisation within a traditional civil service culture. The new unit recruited investment professionals from outside the Bank as well as people from the existing reserve management operations. NBIM was explicitly defined as a business unit, which should be different from the rest of the central bank in many respects. To avoid any suspicion that NBIM would benefit from proprietary central bank information, the new unit was placed completely outside the decision-making processes in the monetary policy and financial stability area, with no access to confidential information. The fact that the Pension Fund does not invest in Norwegian markets is also important to avoid conflicts of interest: There is no direct link to our monetary policy operations. 5. | 0 |
This results in a classic coordination game with multiple equilibria. Table 4 Payoffs in a two-bank game Bank 2 Bank 1 Risky Tight Risky Tight Now suppose the regulator forces Bank 2 to set tight policies whenever it realises low returns. So if Bank 2 announces positive earnings, it must be because the macro state is good. But given this, Bank 1 does not want to signal low ability by playing {Tight} when it makes a bad loan since doing so would be taken by the market to imply low ability. If the spillover from Bank 2’s actions to the market’s assessment of the macro state is strong enough, {Tight, Tight} may no longer be an equilibrium. Instead, Bank 1 may play Risky. The resulting equilibrium is {Risky, Tight}. In this way, bank-specific intervention may have perverse consequences for risk-taking. Fourth, this co-ordination problem suggests systematic, across-the-system actions are needed to curtail effectively credit booms and busts. This is one dimension of macroprudential policy. To be effective, these policies need to increase the long-term cost of credit extension to banks during booms and, as importantly, to lower these costs during busts. These actions would help smooth out credit supply over the cycle. There are a variety of macro-prudential tools which could have this effect, including pro-cyclical capital and liquidity requirements, or remuneration packages that tie individual earnings more closely to long term performance (Bank of England (2009), Kashyap et al (2010), G30 (2010)). | It is fairly uncomplicated to observe business profitability and cost efficiency in a bank with the aid of measures such as return on equity and the C/I ratio. But a high return on equity and low C/I ratio is not necessarily a sign of an efficient banking sector, but can just as easily indicate weak competition and high margins. Similarly, from an economic point of view it is hazardous to place too much trust in the equity market’s valuation or a rating agency’s credit rating since these partly represent a different perspective. For example, for investors it is only positive if a bank – all other things being equal – operates in a market where competition is low and margins are high. Against this background, it is important to supplement the business analysis with an assessment of the quality and the price of the financial services provided by banks. I suppose the best indicator of the quality of a bank’s service range is how well the bank’s services fare in the competition from other banks and financial institutions. If the barriers to entry are high and there are few alternative suppliers, a high market share can hardly be taken as a sign that the bank’s service offering is particularly high quality or worth its price, even though that can of course be the case. | 0 |
Eddie Yue: Hong Kong Monetary Authority’s work on market development Keynote address by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority, at the 2nd Asia Treasury and Trade Summit 2016 “Treasury Re-imagined”, organized by The Asset, Hong Kong, 11 May 2016. * * * Daniel (Yu), distinguished guests, ladies and gentlemen: 1. Good morning. I would like to thank The Asset for hosting its Asia Treasury and Trade Summit in Hong Kong again. And, it is my great pleasure to welcome all of you to this event, in particular those who have travelled from overseas. As CFOs and treasurers, you are important users of Hong Kong’s financial services. Over the years, we have listened to and worked with many of you, not just to better serve your business needs, but also as partners to help develop Hong Kong as an international financial centre. Let me therefore start this morning by sharing with you a few examples of the HKMA’s work on market development. Some of you here today may have heard these facts before, so apologies for that, but we like to repeat the good news whenever we can! Development of Hong Kong as IFC 2. First, the promotion of renminbi business. And, I’m delighted to see that discussion of the renminbi “as a treasury currency” is high on your Summit agenda today! Indeed, Hong Kong is the largest global offshore renminbi business hub, with a liquidity pool of close to RMB900 billion, the largest outside Mainland China. | A key aspect to underline is that a potential CBDC could coexist perfectly well with physical cash, which serves an important role and for which -at least in the euro area- there is still strong demand.1 In other words, traditional cash and a CBDC might be natural partners, rather than potential substitutes for each other as they are often presented. However, before taking any major decision on the issue of a CBDC, several important questions need to be answered: What precise complementary roles would cash, bank accounts and digital coins play? Should central banks focus on securing a sound regulation that offers appropriate safeguards and leave the private sector to come up with viable alternatives? Or should we ensure the provision of a safe asset by issuing a CBDC? As you can see, when faced with a case of practical use, even one as apparently simple as this, embracing the opportunities that new technologies offer is not always crystal clear. What’s more, when approaching this topic in more detail, many questions and far-reaching implications arise, thus suggesting the need to tread cautiously in unknown territory. I refer to the myriads of design and operational aspects, such as whether this “new digital cash” should preserve all the features of traditional banknotes and coins (for instance, anonymity), or whether some of the key processes such as Know Your Customer or compliance with AML requirements should remain in the hands of the private sector for efficiency reasons. | 0 |
In view of this, it was decided to impose broad-based capital account restrictions and thereby create the scope for less restrictive monetary policy than would otherwise have been feasible. As is usually the case, there were probably other options available at the time. But because I prefer to focus on the current situation and the road ahead, I would prefer not to spend time rehashing the past and ruminating about hypothetical options. Such speculation cannot change the past. Generally speaking, however, it seems to me that other options would have entailed significantly higher interest rates – initially, at least – and more risk to the exchange rate. But that doesn’t change the fact that, although the capital controls provided a certain temporary shelter, they also entail significant cost and inconvenience, which probably vary directly with the length of time the controls are in place. That cost will ultimately cut into GDP growth for the short term and reduce the level of GDP in the longer term. Understandably, then, we do not wish to maintain the capital controls a minute longer than necessary. Strictly speaking, monetary policy is not based on an inflation target at present – at least, not for the short term – as the interim goal of arresting the fall of the króna and then stabilising it has taken priority. Ultimately, of course, this policy is consistent with the attainment of the inflation target. | The absence of any particular component could reduce the effectiveness and efficiency and thus affect the viability and sustainability of the system. While the Islamic banking system has an important role in mobilizing deposits and providing financing, the Islamic capital market has an equally important role in providing a stable source of long-term funds for financing large investments and development projects as well as for capital and business expansion. The development of the Islamic capital market not only allows for a more balanced allocation of financial and economic resources within an economy but more importantly, ensures greater diversification of risks within the Islamic financial system. This enhances the resilience and robustness of the Islamic financial system to withstand financial shocks and contributes to the overall stability of the Islamic financial system. BIS Review 47/2004 1 In terms of the development of our Islamic financial system, as at June 2004, the assets mobilized by the Islamic banking sector have increased to RM89.1 billion, accounting for a market share of about 10% of the banking system. At the same time, deposits have also increased to RM64 billion, constituting a market share of 10.4% while financing mobilized amounted to RM54 billion to garner 11% of the market share. Product offerings have also increased in sophistication from the deposit products to hybrid products that are able to enhance returns to depositors. A further advancement was made with the introduction of the Islamic variable rate financing mechanism that provides an alternative to the fixed-rate financing. | 0 |
The NGFS has acted quickly in looking into nature-related risks, well ahead of the financial industry. We collaborated with INSPIRE2, an independent research network, to produce reports setting out the importance of biodiversity for the macroeconomic and financial systems. These reports also made preliminary recommendations on how central banks and supervisors might align themselves with the structural transformations required to deliver a nature positive global economy. The NGFS, in the next phase of its work, will aim to equip central banks and supervisors with a common base of knowledge of nature-related risks. We will provide recommendations on how nature-related risks can be integrated into the other work programmes of the NGFS, including supervision, scenario analysis, and monetary policy. We will make nature-related risks more tractable, by focusing on nature-related risks with a nexus to financial risks. We will identify a few local case studies to work through concrete examples where the link from ecosystem degradation to climate change is clear, such as in deforestation. Finally, CAPACITY BUILDING AND TRAINING. The NGFS will provide guidance on how central banks and supervisors can build up their capabilities in climate-related and environmental risks. The importance of building capacity and expertise on climate issues within the central banking and regulatory community has been consistently espoused by the NGFS since its beginning. Our members are at different stages of progress in their ability to address climate-related and environmental risks. We want to make sure they have the support they need to make meaningful progress in addressing these risks. | in the past ten years to the level of 48% of GDP in 2017. However, despite the positive trends, the need for further increase in the total domestic savings is evident, which is a common feature of the CESEE countries. Thus the IMF analysis of May 20163 mainly indicates "insufficient" domestic savings4 in CESEE countries, i.e. the average savings rate (as a difference between gross domestic product and consumption) of about 20% of GDP, which is lower than the current investment rate, lower than the estimated optimal rate of investment (25% of GDP), as well as the rate in countries with a relatively faster process of real convergence in the past (28% of GDP). The rate of total domestic savings is particularly low in 1/3 BIS central bankers' speeches the SEE countries, where in 2017, on average, it is 17% of GDP, including in the Republic of Macedonia where it is close to the average in the region. The relatively low domestic savings are an obstacle for stronger investment support, partly explained by the fact that, even after more than 25 years from the beginning of the transition, the level of accumulated capital per capita in most CESEE5 countries is still relatively low, corresponding to about one-third of the levels in developed European economies. In RM the capital level per capita is lower than the average of the EU-28 countries, and it equals around 24%. | 0 |
Yet in spite of being the oldest, Matero has not seen any growth in modern infrastructure, let alone banking facilities. For this reason therefore, as Governor of the Central bank, it gives me tremendous pleasure to see a reputable, privately owned commercial bank taking the bold step of bringing banking services, of international standards, to the doorsteps of a community like Matero. In this regard, the opening of the Stanbic Branch today has given me enormous optimism and re-assurance that banking facilities can, indeed, be extended to ‘financially excluded’ communities, like Matero. Ladies and Gentlemen Developments, like the one we are witnessing today, must not be taken for granted nor taken lightly. I am reliably informed that this has come about as a result of the policy reforms, undertaken by the Standard Bank Group, which have culminated in Stanbic Bank Zambia being conferred with the status of a ‘Universal Bank’. By assuming this status, Stanbic Bank Zambia has been given the authority to offer banking services to all the segments of the market. For obvious reasons, this move is not only uplifting to the technological advancement and capability of the Matero community through the provision of modern banking services like the AutoBank, but also goes a long way in assisting the Bank of Zambia, as a monetary authority, to have a firm control over the implementation of monetary policy. | You would agree with me that it is quite difficult for a central bank, like ours, to implement monetary policy effectively in an environment characterised by inadequate banking facilities. It is for this reason therefore that I commend the Management of Stanbic Bank Zambia for bringing banking facilities closer to the people. In this regard, I wish to assure you that on our part we shall continue to support you in your endeavours to open more of such branches, because we firmly believe that you are making our work and that of the Government much easier. However, may I take this opportunity to advise the Management of Stanbic Zambia that if you want this branch or many of such branches you intend to open in future to be beneficial to the communities in which they operate, kindly be flexible on the requirements for opening accounts as well as lowering BIS Review 13/2005 1 the minimum account balances to be maintained by your clients. I say so because communities like Matero and the surrounding areas comprise mainly of people who are in the informal sector. Therefore, it would be unreasonable for you to ask an unemployed prospective customer to bring a letter from their employer before an account could be opened with your branch! In other words, I strongly urge you to tailor your banking services to the needs of the community you operate in. | 1 |
I would define private sector involvement (PSI), for the purpose of this discussion, as intentional efforts and contributions, formal or informal, undertaken in a context of sovereign financial distress. This support ranges from softer forms, such as preventive talks, to harder forms, such as debt rescheduling, restructurings, reprofiling or even debt write-downs.1 2 In the remainder of my talk, I will look mainly at the harder forms of PSI, often called debt restructurings. 1 2 See Enderlein, Müller, and Trebesch, 2006. Soft forms of private sector involvement include those that would not change the terms and conditions of the bonds or loans. Such forms may include voluntary roll-over agreements and preventive talks and meetings. By contrast, harder forms of private sector involvements imply changes to the terms and conditions of the bonds or loans. Under some forms, the private sector participants may face a net present value loss, in other cases they would not face such a loss. BIS central bankers’ speeches 1 The basic rationale behind involving private creditors when a debtor is in distress is straightforward and uncontroversial: creditors and investors should bear the consequences of their decisions as fully as possible and should not rely on taxpayers’ money to be bailed out.3 The underlying reason has long existed: a bailout by taxpayers today may encourage risky lending by private investors in the future. In the corporate sector, it is actually commonplace to apply such principles. | As always, what I have to say today reflects my own views and not necessarily those of the FOMC or the Federal Reserve System. 1 The economic outlook Turning first to the economic outlook, the real GDP growth rate appears to have slowed sharply during the first half of 2015. Based on the revision we received last week, firstquarter real GDP fell by 0.7 percent at an annualized rate. Although most projections anticipate a pickup in growth to around 2 percent or slightly higher in the current quarter, there is little question that economic growth has slowed significantly from last year’s secondhalf pace. What’s going on? Why has growth slowed and what does this portend for the remainder of the year? As I see it, the contraction in GDP growth in the first quarter represents a mix of factors. These include another unseasonably cold and snowy winter, a sharp contraction in oil and gas investment, a deterioration in the trade balance due – in large part – to the stronger dollar and sluggish foreign demand, and a slowdown in consumer spending growth after a very strong fourth quarter. After adjusting for weather effects, I think seasonal adjustment issues probably also played some role. For example, real defense spending has declined eight times in the past nine years in the first quarter, suggesting there is a seasonal adjustment issue. But I judge that this has had only a modest effect on measured real GDP growth. | 0 |
This has contributed to fuel a longstanding experience in addressing safety and efficiency issues and trade-offs from a public policy perspective that I would like to refer to, in order to draw a few lessons that you might be willing to consider in the course of the debates you will have today. Over the past decade, the financial sector has changed considerably with the emergence of the Internet and the use of new information technologies. This is particularly true for payment means. The introduction of chip and PIN in France in the early nineties, and then all across Europe in the past few years is a great example of how innovation can bring about efficiency but also safety benefits to the payments chain. Such introduction has indeed contributed in making card payments highly secure at the point of sale. However, innovations have also brought about new challenges in terms of risks to address. This is notably the case with the development of distant payments allowed by the Internet. As underlined in the report on card fraud published by the ECB in February 2014, fraud on “card not present” transactions, mainly via the internet, increased by nearly 21% in 2012 in the SEPA area, and accounted for 60% of all fraud losses on cards issued inside the SEPA. Fortunately, the vulnerabilities at the root of those frauds are well identified and important efforts are underway both by public authorities and the private sector to address them. | As the proposal for the revised Payment Services Directive is currently discussed in the Council of the European Union, a unique opportunity is given today to all stakeholders to tackle the different issues raised by the new regulation in the presence of representatives from all European competent authorities that are involved. Once again, thank you all for being here, and I wish you fruitful and vivid discussions on all of these aspects, hoping this conference will provide you with a comprehensive overview of the new security challenges for retail payments. Before leaving the floor to our first set of panelists I now invite you to listen to Benoît Cœuré, Member of the Executive Board of the European Central Bank, who cannot be physically with us today but who has recorded his comments for us. Thank you for your attention. 2 BIS central bankers’ speeches | 1 |
The benefits of the euro for individuals and businesses, its contribution to a more effective participation of Maltese enterprises in the Single Market and the possibility of using the euro as a means of competing on international markets were also important considerations. But while there were many compelling reasons for an early adoption of the euro, there was also an understanding of the need to avoid the economic costs of a premature entry. Consequently, there was some hesitation in adopting an ambitious reform programme. These concerns were well-founded. At the time Malta was preparing to join the EU, the economy was emerging from a period of stagnation, a widening output gap and a slow pace of productivity growth. In addition, while the Government planned to reduce the budget deficit from almost 10% of GDP in 2003 to below 3% by 2006, an adjustment of that magnitude clearly presented considerable political risks, not least because some fiscal tightening was already underway. The unemployment rate, meanwhile, was edging upwards in response to the ongoing restructuring process and the further liberalisation of markets as a result of EU accession, making any further retrenchment painful for most households. 1 For a fuller treatment of Malta’s case for adopting the euro, see Malta’s Strategy for Participating in Economic and Monetary Union and Adopting the Euro, Government of Malta, Central Bank of Malta, April 2005. BIS Review 77/2007 1 At the same time, many indicators suggested that Malta was well suited to participate in the EU single currency area. | … 6 BIS central bankers’ speeches I therefore consider it important that monetary policy is conducted in a clear and comprehensible manner so that it can be evaluated easily and fairly. At present, the Riksbank makes a qualitative assessment of resource utilisation based on a number of different measures. This contributes to making the justification for the monetary policy decisions unclear and it also makes it more difficult to assess the Riksbank and hold it accountable. I thus instead want to focus on stabilising unemployment around a long-run sustainable rate and not on trying to stabilise a number of other, quite shaky measures of resource utilisation in the economy, such as the output gap. Compared with other measures of resource utilisation, unemployment has a stronger link to household welfare, is better understood and more familiar to the public, is measured often and with fewer errors and is seldom revised. The fact that other measures of resource utilisation are not appropriate as targets for monetary policy of course does not prevent them from playing an important role as indicators when assessing inflationary pressures and constructing inflation forecasts. Nor do I see that there is any support for a qualitative assessment of resource utilisation instead of a quantitative, measurable target fulfilment. In economic policy it is now wellknown that targets must be measured quantitatively to obtain sufficient weight and to be fulfilled in practice. “What is measured gets done,” as they say. | 0 |
8 BIS central bankers’ speeches Figure 6 GDP growth (percent) 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 08 09 Annual change 10 11 (1) -6 Quarter-on-quarter change (2) (1) Dark blue shows growth range for GDP forecast for 2011 in Monetary Policy Report of March 2011. (2) Seasonally-adjusted series. Source: Central Bank of Chile. Table 2 Economic growth (annual change, percent) 2009 GDP Domestic demand Domestic demand ((w/o inventory change) Gross fixed capital formation Total consumption Goods and services exports Goods and services imports Current account (% GDP) -1.7 -5.9 -2.9 -15.9 1.9 -6.4 -14.6 1.6 2010 5.2 16.4 11.5 18.8 9.3 1.9 29.5 1.9 2011 (f) 5.5-6.5 7.6 8.7 13.9 7.0 6.8 9.6 1.2 (f) Forecast. Source: Central Bank of Chile. BIS central bankers’ speeches 9 Figure 7 MPR and expectations (percent) 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 07 08 09 10 EES Mar.11 11 FOS 2Q Mar.11 12 13 MPR Source: Central Bank of Chile. | The diversified portfolio has posted considerably lower falls in value in crises, and the gain increases with the duration of the crisis. Chart 7: Increasing gains from diversification over time In addition, broad diversification reduces the portfolio’s vulnerability to extreme events, which can be illustrated by examples from the history of global financial markets since 1900. We have data for equity market returns in 23 countries for this period. Two of these markets were closed down last century and the assets expropriated, ie Russia in 1917 and China in 1949. The markets did not reopen until the beginning of the 1990s. While the Chinese market was small in 1900, the Russian market accounted for six percent of a market-weighted global index.6 Chart 8: Fifty years of negative real returns in individual countries Although developments have been less dramatic in other countries, equity markets in France, Germany and Japan have all experienced periods of negative real returns of more than 50 years. The longest period of negative real returns for the global index has been just over 20 years.7 Diversification therefore provides some protection even against the most extreme outcomes, even though it will never be possible to completely shield the return on the GPFG from such extreme events. The risk associated with being a shareholder in 9000 companies Chart 9: “Diversification is the only free lunch in finance” Harry Markowitz, the founder of modern portfolio theory, is reported to have said: “Diversification is the only free lunch in finance”. | 0 |
Consumers of financial services need to have confidence: in the security of transactions, in the protection of their assets and in their freedom of choice. The players in the sector also need to have confidence: in each other, because they remain interdependent, and in the rules of the game, i.e. in the regulatory conditions under which they can carry out their activity. As financial stability authorities, central banks and supervisors have a role to play in maintaining this confidence, in all the forms I have just mentioned. In this respect, I would like to share with you three convictions: Firstly, the traditional pillars to ensure confidence including trusted third parties, central banks and supervisors, cannot be replaced by "algorithmic" confidence, i.e. by rules of the game that would be coded once and for all and for which respect would be entrusted to algorithms, even if they are encapsulated in "smart contracts"... Will the forces pushing towards tokenised and decentralised finance make unbalanced relationships disappear? As well as failing governance mechanisms, the concentration of operational risks, and cyber attacks? In my opinion, the answer is no: trusted third parties, central banks and supervisors are still needed and in my view not about to disappear... 2/3 BIS - Central bankers' speeches Secondly, and this is a corollary to my first point, confidence requires maintaining central bank money as the anchor of the financial system. Finally, confidence requires a regulatory framework that is clear, fair ("same business, same risk, same rule") and balanced, i.e. | In the UK, I don’t think we saw a major prudential failure of capital and liquidity which did not have a governance and management story at is root, and we had a system which was very poor at creating the right incentives for good outcomes. Here I want to put the emphasis on creating the right incentives. In my experience supervision is in part about creating and overseeing those incentives. The critical distinction here is that supervision is not just about doing things to firms, it is also about creating the conditions for firms to do this right thing in the first place. Let me give three examples of what we are doing. 2 BIS central bankers’ speeches First, we have been much more active in remuneration policy and practice. I have no interest in regulating the level of pay, but we are interested to ensure that remuneration is compatible with meeting capital requirements (so it can be varied to do so) and that variable remuneration is deferred and can be withdrawn, and is thus compatible with creating the right incentives by putting that remuneration at risk if the firm fails to conform with the objectives of safety, soundness and good conduct of business. I am not in favour of limiting variable pay in the way European legislation has done through the so-called bonus cap because it reduces the opportunity to create the right incentives. We then supervise firms to ensure those incentives remain in place. | 0 |
The time purchased by stimulus has been well spent fixing the fault lines which caused the global financial crisis. Derivative markets have been made simpler and safer. Fragile shadow 1 The IMF has downgraded their growth forecast for the fifth consecutive year; and now expects global growth to be around 3 ½% in 2016 and 2017. In part, this reflects a reduction in the IMF’s assessment of global potential growth to below the around 4% average growth rate in the decade prior to the crisis. At the Bank of England, our protections are slightly weaker still. We expect PPP-weighted global growth this year to be just 3.0%, a quarter of a point lower than our estimate for 2015. BIS central bankers’ speeches 1 banking activities are being transformed into stronger market-based finance. And the scourge of too-big-to-fail is ending. 2 Most notably, a more resilient global banking system is being built. The dog that hasn’t barked in recent months has been financial distress at the core. This means banks are poised to dampen rather than amplify the impact on households and businesses of recent global financial shocks. Monetary stimulus has also made room for the repair – if not yet the completion – of European Monetary Union. Over the past year, euro-area growth has broadened, though in the ECB’s judgment, it has not yet strengthened to a degree consistent with its price stability objective let alone the expectations of Europe’s citizens. | 4, part 2 (November 2000): 1007–35; Miles Kimball, “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide,” Confessions of a Supply-Side Liberal blog, September 20, 2013. BIS central bankers’ speeches privacy. If these aren’t enough however, let me suggest another, very important benefit of currency that I explored in a paper with Charles Kahn and William Roberds. 3 The anonymity afforded by currency transactions prevents a buyer from suffering from any actions taken after the transactions that could exploit the knowledge gained by the seller of the buyer’s identity. For example, identity theft, or theft of credit or debit card information, is avoided through the use of currency. This is an economic benefit that is distinct from valuing privacy from a civil liberties point of view. If currency cannot be used in transactions, buyers are at a disadvantage, and many otherwise beneficial transactions (not related to buyers seeking to engage in tax evasion or otherwise illicit activity) would not take place. It is important to consider whether the move to eliminate currency, or to alter radically how currency works, represents a degradation or an improvement in technology. Should society voluntarily abandon a widely used technology that has enormous benefits and features that are currently irreplaceable, such as the privacy that comes with an untraceable transaction? While some of those features are used by criminals to facilitate socially destructive activities, the vast majority of currency uses are legal and productive. | 0 |
In Malaysia, solutions tested in the Bank’s regulatory sandbox enabled the Bank to design regulatory safeguards that would allow the implementation of end-to-end electronic know-yourcustomer processes for the provision of remittance services. By dispensing with the need to conduct physical face-to-face verifications, this is expected to significantly expand access to remittance services for customers working and living in remote parts of Malaysia, while effectively addressing money laundering and terrorist financing risks. Bank Negara Malaysia also successfully collaborated with the World Bank and the money services business industry in Malaysia to pilot and adopt solutions that have expanded the reach and reduced the costs of formal remittances. Second, policy life cycles will need to be managed more proactively, to allow for policies to be renewed when conditions change. While much is often said about policy stability, policies that fail to keep pace with conditions that are changing far more rapidly than we have experienced before, can be counterproductive at best, and at worst, create greater risks for the system. The SDGs are undeniably one of the most comprehensive attempts to capture the most important global challenges that we face. Solutions to these challenges will invariably create new issues for policy makers to consider. This in turn will lead to shorter policy life cycles, and a need for faster policy responses to emerging issues. Third, we need better remittance data. It is encouraging that efforts are being taken to ensure the availability of official global data sources on remittance flows. | Remittances have significant potential to deliver such opportunities to millions of migrants in their home countries. Let this Forum serve as a call to action, based on an honest search for better understanding and a genuine commitment to pursue individual and collective solutions. With much at stake, we cannot afford not to. Thank you. 5/5 BIS central bankers' speeches | 1 |
Page 11 of 19 How to define “future expenditure” More broadly, it is still difficult today to formally calculate productive or "future" expenditure, i.e. spending that would have the most favourable long-term effects on economic growth and output capacity or on the climate transition. A consensus appears to be emerging in economic research literature whereby spending on public investment has a more positive effect on growth than operating expenditure. For example, according to our internal models, mediumand short-term multipliers are higher for public investment than for public sector wages. But would this also be true in respect of expenditure on any roundabout or multimedia centre? There is fierce debate around what exactly investment or productive capital actually includes: “basic” infrastructure like roads, bridges and airports generally form the common denominator, to which building construction is sometimes added. “Social” infrastructure such as education or public health Page 12 of 19 facilities constitute another potential category of productive expenditure: investment in education and skills boosts labour productivity and the economy's innovation capacity. More recently, “digital” infrastructure has sometimes been included in productive expenditure, albeit with less clearly defined boundaries, and before us the enormous challenge of artificial intelligence. This list of questions without answers may appear frustrating. But it is also, primarily, a call for more research, and Paris should be a centre of excellence here thanks to institutions that are pioneers in this area (France Stratégie, OECD in the international arena, etc.). | The outcome of these measures would appear to be useful without being decisive, and the illusion of NPM has gradually dissipated. In particular, measuring the performance and quality of certain public services sometimes runs into intrinsic measurement difficulties. v More than twenty years on from this research, twelve years after Philippe Aghion and Alexandra Roulet called for a "Rethinking of central government”, vi it is Page 9 of 19 regrettable that macroeconomic analysis is still of so little assistance to public management. Research literature focuses almost exclusively on assessing the success of fiscal adjustment strategies, omitting the fundamental aspects of the quality and effectiveness of public spending. Certain questions have barely even been tackled. I would like to mention three, beginning with measurement of the output of public services. How to measure the output of public services? The inherent lack of a selling price for non-market public service output has never really been overcome, and national accounting uses a simplistic arrangement to get around this, consisting of measuring it as the sum of production costs vii - in other words, mainly public employee remuneration. This basically means that the only way to increase public service output today is to increase costs and the number of public employees. But how can we gauge the effectiveness and quality of public spending and public services without having any visibility over their 'real' output? | 1 |
Or we could think about the possibility of establishing “safe hubs” of granular information where data from different institutions are shared with every guarantee of retaining statistical secrecy and confidentiality. By way of example, in some Nordic countries there is a consortium of public institutions which share their data not only with their own analysts but also with the scientific community. It would also be worth strengthening the possibilities of having access to administrative registers of other institutions and to allow the matching of different databases. The value of micro datasets increases exponentially when they can be combined, including the granular information of one dataset in the observations of another. The amount of research 5 possibilities here is really huge. Therefore, we should make every effort to achieve these types of dataset combinations, through the above-mentioned “safe hubs”, through a consortium or by any other means. Another related issue is the importance of providing all the observations making up a given register. A large amount of observations is by itself important, as it allows the study of specific groups of agents with sufficient accuracy. But it is also crucial when it comes to merging different datasets. If an administrative register is reduced to some sub-set of observations, then the chances of finding the same agents in a different dataset decrease dramatically. This is of particular importance in the case of surveys containing important information to be merged with some registers. Surveys usually have a much smaller sample size. | Mohamed S Fofana: Banking developments in Sierra Leone Statement by Mr Mohamed S Fofana, Deputy Governor of the Bank of Sierra Leone, at the launching ceremony of the new Guaranty Trust Bank logo, Freetown, 28 July 2006. * * * Mr Chairman, Hon Vice President, Solomon E Berewa, Hon Ministers, Board of Directors, Management and Staff of the Guaranty Trust Bank (SL) Ltd, Distinguished Ladies & Gentlemen I am pleased to be here with you this morning at the launching ceremony of the new logo of Guaranty Trust Bank (SL) Limited. We are all aware that change is inevitable in a dynamic world. And that change itself is dynamic, which is why we are all gathered here today. Distinguished Ladies and Gentlemen, a logo is a symbol or trademark designed for the clear and easy recognition of an institution by both its clients and its competitors. We in the Banking industry, as indeed the nation in general, have come to identify Guaranty Trust Bank with a particular logo in the recent past. The change from the old logo, which is two small squares flanking Guaranty Trust, to a new logo, which is a big orange square with a small white square at the top right side and GT Bank inscribed at the bottom of the orange square, is welcomed by the Bank of Sierra Leone. | 0 |
In view of the important role of boards, and the work on governance under way, today we have published for consultation a Supervisory Statement on the responsibilities of boards. We recognise that this is a hugely important issue, and so we thought it was sensible to set out our thinking for comment as a precursor to a statement of our expectations. The statement clarifies our expectations of boards and indicates some of the elements of good governance to which we expect to pay particular attention in assessing how well firms are run. It draws on our regulatory experience and the lessons of past firm failures – including building society ones – and will help boards to understand how we reach our judgments on governance. The statement is not intended to be a comprehensive statement of good practice. Boards have other sources for that, such as the Corporate Governance Code produced by the Financial Reporting Council or the Basel Corporate Governance Principles for banks. The statement underscores the collective responsibilities shared by board members. As such it complements the individual accountabilities which we are introducing through the Senior Managers and Senior Insurance Managers Regimes. Under these regimes all senior managers, including certain non-executive directors, will be held to a clear standard of behaviour. | But the primary role of all NEDs is independent oversight and challenge of the Executive and the PRA recognises that the actual responsibilities of NEDs within the scope of the regimes differ from those of executive Senior Managers and they should be clarified and limited accordingly. | 1 |
In this regard, the recent, widely different experiences of Ireland and Portugal are highly instructive. 1 Thus, whereas real per capita income in these two countries was not very different in the early 1990s, it had roughly doubled in Ireland by 2006 to 131% of the euro area average, but had only improved slightly in Portugal to 68%. How can such divergent performances be explained? Before joining the euro area Portugal pursued a pro-cyclical fiscal policy, which reinforced domestic demand, while in Ireland the fiscal stance was more disciplined. Whereas unit labour costs and inflation rose fast in Portugal, cost and price pressures were more contained in Ireland. As a result, competitiveness declined in Portugal, reflected in a growing current account deficit, whereas Ireland remained competitive and enjoyed a roughly balanced current account. These different policy approaches left their mark in the post-euro period. In Ireland, real output growth in the years 1999-2006 continued at a strong pace, 6.5% per year on average, and the fiscal balance was in slight surplus. In contrast, Portugal experienced an average growth rate of 1.7%, continued weak competitiveness and a substantial current account deficit. A major factor behind Ireland’s success was a 3% average annual increase in labour productivity growth, compared to less than 1% in Portugal. Another lesson that has emerged from the experience of these two countries, and is also widely documented in the literature, is that cost levels are not the only determinant of competitiveness. | Mohamed S Fofana: Tackling money laundering in Sierra Leone Statement by Mr Mohamed S Fofana, Deputy Governor of the Bank of Sierra Leone, at the official opening of the UNODC/GIABA/BSL training workshop on AML/CFT Strategy Development, Freetown, 10-13 July 2006. * * * Distinguished Administrative Secretary of GIABA, Fellow Stakeholders, The Board and Management of the Bank of Sierra Leone, Participants, Distinguished Ladies & Gentlemen Let me on behalf of the Governor, Management and staff of the Bank of Sierra Leone welcome you all, especially those of you coming to Sierra Leone for the first time for this very important training workshop. May I also take this opportunity to congratulate you, Mr. Administrative Secretary of GIABA, on your recent appointment. I believe that your appointment is to underscore the fact that African problems require African solution. I also want to particularly welcome the facilitators from the UNODC and GIABA and proffer our gratitude to them for facilitating this workshop and for heeding to our call for help in the establishment of a Financial Intelligence Unit (FIU). In the past, emphasis has been placed on the drugs trade as the principal source of cash that is laundered. We now know that other activities such as terrorism, tax evasion, arms trafficking, smuggling, human trafficking and advance fee fraud (aka 419) are veritable fountains of cash for money laundering. | 0 |
8 While actions that increase bank reserves do not necessarily increase bank assets, evidence suggests that for LSAPs conducted through 2012:Q3, assets were ultimately sourced primarily from non-banks – households (including hedge funds), broker-dealers, and insurance companies. All else equal, this would imply that the purchases increased bank assets. See Carpenter, Demiralp, Ihrig, and Klee (2013). Even if bank assets do not increase, an increase in reserves could create distortions that raise balance sheet costs. This could happen if banks shift the composition of their assets to accommodate the increase in reserves, and in doing so are pushed away from their optimal balance sheet composition. 9 These other tools include the Term Deposit Facility, term RRPs, and asset sales, each of which would have the effect of reducing the amount of reserves held by banks. Money market rates would rise as reserves were made scarcer through the use of these tools. See Martin, McAndrews, Palida, and Skeie (2013) for a theoretical exploration. 4 BIS central bankers’ speeches strengthening the bargaining position of non-bank lenders. Moreover, by reducing the amount of reserves held by banks, ON RRPs may directly reduce the level of bank assets and thus balance sheet costs. 10 If ON RRPs are offered at a fixed rate below the level of market rates that would be produced by IOER alone given prevailing frictions, the ON RRPs should not be an attractive investment option in normal times. As a result, their availability should have little effect on market rates. | A key question for the future is this: do notification and memo-posting suffice, so that funds actually move at discrete times in the day, as they do in the UK, or do funds need to move in near real time as well? 2 BIS central bankers’ speeches In the near term, we in the Federal Reserve continue to work to reduce the time required to complete payments and deliver payments-related information in the channels in which the Fed operates. The debate to be had by the industry is whether our existing payments mechanisms can meet the needs of the future or we need to embark upon designing a next generation payment instrument. We welcome your voice in that debate. Let’s turn our focus to end-to-end efficiency in the payments system. Innovation is occurring in closer proximity to end-users, at points between payment providers and their customers, and between merchants and consumers. Enhancing efficiency will mean moving business-tobusiness (B2B) and person-to-person (P2P) payments from paper to electronics, and bringing down the end-to-end cost of initiating and receiving payments. Efforts will continue by Internet/Web vendors to create customer-facing technologies to help users initiate payments. Here’s where mobile and handheld innovations may play a large role. In what form, and when, growth occurs will depend on when alternatives offer the speed, convenience, simplicity and other advantages that drive broad adoption. | 0 |
A fixed exchange rate means that the central bank, with the aid of currency market interventions or its policy rate, stabilises the exchange rate around a target, e.g. a price for the dollar, gold or an average of currencies, whereas under a floating exchange rate regime the exchange rate is determined by supply and demand in the currency market. With a fixed exchange rate, you avoid some of the uncertainty in world trade when countries exchange currencies with each other. There is a limit to how much a currency’s exchange rate can vary, which is good for importers and exporters when they are forecasting income and expenditure. The fixed exchange rate can also be seen as a way to achieve price stability. With a fixed exchange rate, inflation in the long term cannot be higher or lower than the inflation rates in the countries with which you have tied your exchange rate. For example, a fixed exchange rate against the dollar would ”force” us to maintain the same inflation rate in the long run as the US and the other countries whose currencies are pegged to the dollar. Were that to fail, our current account balance would deteriorate and we would have to devalue. BIS Review 84/2005 1 Sweden devalued five times between 1976 and 1982 under a fixed exchange rate (1976, twice in 1977, 1981 and 1982). That was because Sweden in the 1970s and 1980s had higher inflation than the other countries. | Gross National Product grew by 8.8 percent in real terms in the second quarter of 2006; and the growth rate decreased to 3 percent in the third quarter due to the monetary tightening and the fluctuations in the financial markets in June and July. Therefore, accumulated real growth has been 41 percent and the average growth rate has been 7.6 percent as of 2001. Looking at the possible short-term outlook of growth before moving on to the evaluation of the process of structural change in the dynamics of the growth in the Turkish economy, I wish to emphasize that the slowdown observed in the economic activities in the third quarter of 2006 does not necessarily mean that a stagnation will be experienced in the last quarter of 2006 or after that. Considering these, we foresee that the growth rate in the last quarter of 2006 may remain at a low level due to the basis effect created by high growth rate in 2005. However, the annual growth rate of 2006 may realize around 5 percent in accordance with the program. In the light of the current information, we foresee that the annual growth rates will start increasing again as of the second half of 2007. The Turkish economy has recorded remarkable improvements towards overcoming the period of fluctuating growth rates thanks to the macroeconomic stability environment established in the last five years. The determining factors in growth rates have been the private sector consumption and investments. | 0 |
The stock of British foreign investments in Albania shows low rates, whereas the impact of emigration and remittances indicators is somewhat higher, but still a non-determinant factor. On the other hand, indirect effects would depend on Brexit’s impact on the European economy and banking system. Brexit may also translate into institutional developments that will affect the rules of European economic and financial market development, as well as European integration processes. In other words, implications for Albania and the region potentially exist, but still remain difficult to identify. I would rather not dwell very long on this topic; however, I do believe that today’s discussions will help us understand these processes and assess in advance the potential political and economic implications and consequences for our countries. I would like to stress that all of us in the Western Balkans remain hopeful that Brexit will not generate centrifugal forces, which harm our European integration processes, initiate setting barriers to free trade and movement of people, and encourage further fragmentation of the European financial system. 3. Monetary policy and financial stability in the post-Brexit period The coordination of the monetary policy with the necessary measures for safeguarding financial stability remains a challenging issue for policy makers even in better days. The challenges to this coordination may only strengthen, if Brexit implications assume the negative dimensions listed above. | It is important that macroeconomic imbalances should be avoided and that a critical mass of structural reforms should support a sustainable growth path. This lesson holds particularly true for the emerging economies. Over the past several years, I have repeatedly pointed out in my speeches that convergence with the EU along with maintaining macroeconomic stability is the major challenge facing Romania. In recent years, fast-track economic growth drew on external saving. Banks became dependent on external financing and the current account deficit exceeded the sustainability limits, which caused the Romanian economy to grow vulnerable. The global crisis fostered this vulnerability which translated into a marked economic slowdown. Today it has become clear that the natural bias towards speeding up real convergence needs to be balanced by the need to ensure a sustainable convergence process. The NBR has repeatedly warned against the pro-cyclical nature of the fiscal policy, which added to excess demand. We should learn the lesson that allowing wide budget 4 BIS Review 56/2009 deficits while the economy is expanding ends in failure. It would have been much easier today for us to find the means to weather the crisis if our budget had been on a surplus over a two-year period prior to the unleashing of the crisis. 9. The adoption of the euro cannot be a substitute for the need of domestic policy adjustment. This lesson became clearer at the moment emerging economies were hit by the economic crisis. | 0 |
If anything, the importance of the Bank’s independence, which is already enshrined in Maltese law and has been duly respected by successive governments, will be even greater once the Bank becomes a member of the Eurosystem. First of all, the autonomy of national central banks is mandated by the Maastricht Treaty. Reflecting this requirement, the Central Bank of Malta Act now fully guarantees the institutional, functional, financial and personal independence of the Bank and of the members of its decision-making bodies. As for the ECB, it has adopted low inflation as its overriding objective, and its independence helps to guarantee its ability to deliver on this commitment. As I said earlier, the governors who sit on the Governing Council of the ECB do so in a personal capacity and must be guided only by euro-area wide considerations. As members of this Council, therefore, governors of national central banks must not only be persons of recognized professional competence and personal integrity, but they must also be prepared to defend their own bank’s as well as the ECB’s ability to act independently of political and other pressures. 4 BIS Review 59/2007 | The private sector should establish medium and long-term strategies, prepare more transparent balance sheets, give importance to modern risk management principles and pay attention to research and development activities in line with corporate governance. The public sector should assume a supervisory and regulatory role within the scope of the principles of good governance and work towards creating an atmosphere in which the unregistered economic activities and unfair competition are eliminated and thus the private sector can compete in international markets as equal partners. It is also worth to note that the sequence and prioritisation of reforms are also important. That is to say, one should bear in mind that achieving the best practice on governance in this dynamic economic environment requires a carefully planned long-term reform process. Finally, I would like once more to remind you that the prerequisite of reaping the benefits of good governance is to maintain macroeconomic stability. That’s why, in every step that we will take in the future, we have to be sure to avoid jeopardizing the macroeconomic stability that we have achieved so far. Distinguished guests, Good governance principles serve as a blueprint for decision makers both at the economy-wide and firm specific levels to cope with the changing economic environment and the uncertainty that comes with it. As of today, Turkey is in a position to focus on structural and micro reforms and to improve its own governance structure in line with the European Union membership perspective. | 0 |
Jean-Pierre Roth: Monetary policy and credit markets Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the University of St Gallen, St Gallen, 22 January 2004. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * The economic slump of the past two years has affected the credit markets. Corporate loans declined, and on the capital market redemptions of shares and bonds of private borrowers exceeded new issues. In this speech, a few general points concerning credit financing and monetary policy will be discussed. The financing opportunities and, concomitantly, a borrower’s expenditure behaviour depend on the value of capital assets eligible as collateral or, more generally, on the borrower’s balance sheet structure. Due to the major significance of real estate as security, the situation on the real estate market in turn has a considerable bearing on credit conditions. The Swiss National Bank thus keeps a careful eye on price development in the real estate market. Monetary policy influences the prices of investments and thus impacts on the economy via the borrowers’ balance sheets. This is not the only channel - and certainly not the most important one through which monetary policy exerts an influence; it may, however, be relevant under certain circumstances. Since corporate balance sheets differ considerably from one enterprise to another, monetary policy has distributive effects. | In Switzerland, responsibility for benchmarks lies, in principle, with the private sector and these benchmarks are not regulated. Nevertheless, the SNB is particularly interested that benchmarks for interest rates and exchange rates should be credible, since they are important for well-functioning financial markets and for the implementation of monetary policy. That is why the SNB has supported reform efforts in the area of benchmarks by taking part in various national and international working groups. I have reported here on these efforts on several occasions. The FSB has published two final reports since our last media news conference, so this provides me with a good opportunity to draw some initial conclusions. Benchmarks for interest rates As regards benchmark interest rates, the final report recommends pursuing two main approaches in the future. First, existing interest rate benchmarks should be further improved. Second, efforts should be made to develop alternative benchmark interest rates. Thus the two-pronged approach for the future envisages, alongside improved Libor interest rates which would still be based on unsecured money market transactions, the emergence of more benchmark interest rates related to repo transactions or other near risk-free transactions. The FSB’s final report states that significant progress has already been achieved with the Libor rates. However, not all of the requirements set by the securities regulators (IOSCO standards)1 have so far been met. In particular, it still remains unclear whether the markets upon which the interest rates are based are sufficiently liquid. A certain level of liquidity is needed to ensure robust benchmark rates, i.e. | 0 |
This has resulted in more independent directors being appointed to the boards in most of the financial institutions. The environment confronting financial institutions will continue to be immensely challenging, particularly in the coming years as global financial conditions remain highly volatile and uncertain, and as regulatory reforms start to take effect. In this environment, a number of areas will become more important to reinforce the effectiveness of boards and sound governance. 2 BIS central bankers’ speeches First, board-level engagements on risk issues will need to be strengthened further. This can only be achieved if boards have a sound understanding of the institution’s business model, and a strong grasp of the changing complexion of risks in which the institution is exposed. Committed resources should therefore be available to the board to support their understanding of material developments affecting the institution, and to hone their judgement on matters concerning risk strategy. This should include relevant and meaningful management of information flows and risk analysis to the board, the ability to retain talent including external expertise where required, the ability to attract individuals with relevant competencies and experience to serve on boards, and the budget for board development and education. Second, with the growing expansion of financial institutions in scale and complexity, there is a need to inject greater diversity into boards to enable the board collectively to deal with the broader range of issues across the institution’s activities. This needs to be embedded within the framework for board renewal and succession. | 8 A fuller explanation is in Tucker P M W (2006b), “Macro, asset price and financial system uncertainties”, Roy Bridge Memorial Lecture at the Annual Conference of the ACI – Financial Markets Association, London, December 2006, Bank of England Quarterly Bulletin, Spring 2007, pp 122-130. 9 The composition of the balance sheets of Large and Complex Banks is discussed at greater length in Tucker P M W (2006b), op. cit. 10 Report on “Towards Greater Financial Stability: A Private Sector Perspective” by the Counterparty Risk Management Policy Group, July 2005. BIS Review 44/2007 5 within their own firms. My sense is that that view is shared by at least some Chief Risk Officers. Greater transparency of such stress testing would not only shed light on the risks retained by the banking system, it might also have a productive effect on incentives – rather as greater transparency has enhanced monetary policy making. What happens when the music stops: ex ante preparation for stress But of course severe stress cannot be ruled out. Central banks and practitioners therefore expend effort thinking about what will happen if and when the music stops. As the Bank’s latest Financial Stability Report discusses, the official sector has stepped up its practice exercises of various kinds. The private sector analogue to crisis resolution is the “workout”, in which a company is restructured under the shadow of insolvency. In a world characterised by bank intermediation, workouts typically involved bank syndicates co-ordinated by a few lead banks. | 0 |
The HKMA therefore expects that the security aspects of the system will have been reviewed by qualified independent experts and that the risk management systems and internal controls will be reviewed and evaluated on a regular basis e.g. by external or internal auditors. We also discuss with the banks their approach to the other types of risk described earlier, with particular focus on how the risks from the internet banking service are shared between the bank and its customers. Apart from these general considerations, a number of specific issues arise in relation to internet banking. The first is how we would treat the pure internet bank, i.e. a “virtual bank” that delivers its services entirely over the internet. If such a bank wished to be authorised to take deposits in Hong Kong, it could not be allowed to exist wholly in cyberspace. It would need to have a physical establishment here, either as a locally incorporated bank or as a branch of a foreign bank. This would be necessary to provide a point of contact with the bank in Hong Kong for both customers and the HKMA. In particular, we would require books and records to be held in Hong Kong which we could inspect. Also, like any other bank, a virtual bank would have a balance sheet and would need to hold capital and liquidity against the risks in that balance sheet. | This competition can be launched across national frontiers. In the meantime, existing players are faced with the problem of what they do with the branch networks they have so painstakingly built up over the years. Unless they can give the right incentives to existing customers to migrate to the new electronic delivery channels, and scale back their branch networks accordingly, the promised cost-savings from the internet may not be realised. Moreover, one of the key distinguishing characteristics of the internet is the ability which it gives customers to access and compare the offers of many different retailers, including banks. This greatly increases the power to “shop around”. This will increasingly be done with the help of automatic shopping agents that will travel the net looking for the best deal on behalf of customers or through the use of intermediaries who will offer consolidated product information and price quotes. This will drive down margins, particularly on commodity-type products, and erode customer loyalty. As has often been said, the Internet Age is all about customer empowerment. What in this situation is a traditional bank to do? Is it simply a matter of waiting to be overtaken by a trendy new virtual bank with a catchy name? Luckily, for the existing players it is not as simple as that. Banking is not simply about cheap delivery, although that will become more and more important. | 1 |
* * * The banking system supervision function is another important aspect of central bank duties. 3. Banking supervision and financial stability Year 2010 was characterised by increases banking system activity, improved banking soundness and profitability indicators, as well as a good capitalisation of the system. On the other hand, the banking system was characterised by increase in non-performing loan portfolio, reflecting also the active policy of the Bank of Albania in terms of enhancing the transparency of bank balance sheets. Banking system development The banking sector continues to remain the main actor of financial intermediation in Albania. At end-2010, banking system assets doubled compared to a year earlier, accounting for about 81% of GDP. The banking system continued to be financed mainly by public deposits and focused on lending to the private sector. On the other hand, the economy’s below-potential growth and the depreciated exchange rate contributed to increasing non-performing loans, to 14% of total loans. However, this indicator’s growth rates decelerated in 2010. Capital adequacy ratio remained at satisfactory levels, to 15.4%, obviously higher than the 12% benchmark set forth under the regulatory framework. The system’s shareholder equity increased by 10% in 2010. Credit risk remains the main risk to the banking sector. In response to this risk, the banking sector has created adequate provisions to weather big shocks to borrowers’ solvency and market equilibria. | Banking system supervision In early 2010, the Bank of Albania changed its banking supervision organisational framework, orienting and relating it directly to risks associated with the financial activity. In parallel, the Bank of Albania re-conceptualised its supervision focus and strategy in accordance with risks posed to Albania’s banking and financial system. Transparency and publication of information on banking and financial products and services were in focus of supervision in 2010. Encouraging enhancement of private financial agents’ transparency is also reflected in amendments made to regulatory framework during the year. 4 BIS central bankers’ speeches High commission fees on banking products and services were a sensitive issue that was addressed over the past year and will constitute a priority in the upcoming period. The Bank of Albania, through its analyses, played a key role in discussions about this matter, aiming to tackle it timely and duly. Also, issues related to anti-money laundering, transparency and compliance with prudential regulations were an important part of the supervisory process in 2010. In view of strengthening the supervisory process on banking institutions, the Bank of Albania has signed a number of cooperation agreements with central banks in the region and with European ones, where parent banks have their headquarters. Strengthening the supervisory regulatory framework In 2010, the Bank of Albania finalised drafting of several new regulations and amended some other regulations on banking supervision. This process aimed at compliance with Basel Committee standards and EU Directives, taking into account international best practices and Albanian banking system developments. | 1 |
Here, both the African countries themselves and we in the industrialised world can make important contributions. Some historical reflections on globalisation and technological changes Despite all the talk of the “new” global economy, the present international economic integration is actually no new phenomenon. During the fifty years prior to the First World War, there was considerable cross-border mobility for both goods and capital. Then, as now, the increased globalisation was driven by trade liberalisation and major technological advances, thanks to the development of railways, steam engines and electricity. In some respects the integration was even more extensive at the beginning of the 20th century than it is today. For instance, foreign direct investment was a much greater percentage of GDP, labour was much more mobile across national borders and even agriculture was more liberalised. However, in other respects it can reasonably be claimed that the world economy is more interlaced now than it was a hundred years ago. The first difference is that a much larger percentage of the countries in the world now participate in the global economy, after opening up their borders to trade and investment and adopting liberal market reforms. Another aspect that should be highlighted is that although the net flows of international capital are lower than prior to the First World War, the total financial flows are much greater today. | 21.10.2020 Opening remarks XIX Germán Bernácer Prize Ceremony at the Banco de España Pablo Hernández de Cos Governor Ladies and Gentlemen, It is a great pleasure for me to welcome you all, and to introduce this Award Ceremony for the 19th Germán Bernácer Prize. I would like to start by thanking Luis de Guindos, Vice-President of the European Central Bank and Chairman of the Selection Committee of this award, for his contribution to this initiative. Luis, we are greatly honoured by your presence at this ceremony. Let me also thank The Observatory of the European Central Bank – chaired by Guillermo de la Dehesa – and the sponsors, represented here by Luis Isasi, President of Banco Santander España. As you know, the prize is named after Germán Bernácer, a prominent Spanish macroeconomist with deep knowledge of monetary theory, who became Head of the Servicio de Estudios of the Banco de España in 1930. The Bernácer prize recognises outstanding scientific research by young economists under 40 from the euro zone, and our institution has been a strong supporter of this award since its inception in 2001. On this occasion, I am glad to congratulate the winner of the 19th Prize edition, Mr. Loukas Karabarbounis. He is a Professor of Economics at the University of Minnesota, a Consultant at the Federal Reserve Bank of Minneapolis and a Research Associate at the National Bureau of Economic Research. | 0 |
Zeti Akhtar Aziz: Islamic finance and global financial stability Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Seminar on Islamic Finance: During and After the Global Financial Crisis – "Islamic finance and global financial stability", Istanbul, 5 October 2009. * * * "The unfolding events during this global financial crisis have brought to the forefront the issues concerning the stability of financial systems and the robustness and resilience of the international financial architecture. At the heart of the crisis is the breakdown of the functioning of the financial intermediation process and the loss of confidence in the financial system. As the world continues to struggle with the consequent global economic recession and the continued fragile financial system, it has intensified the search for solutions. Indeed, wide ranging reforms are now currently being discussed. The future financial landscape in the aftermath of this crisis is, therefore, likely to be significantly different from the present. In the search for the appropriate reforms, there is a general consensus that we need to return banking to its basic functions – to provide financial services that adds value to the real economy. This in fact represents the very essence of Islamic finance. These are the very elements that are espoused in the Shariah principles that underpin Islamic finance and which explains its resilience during this international financial crisis. | Firstly, as Professor Dasgupta made clear in his Review, nature and many of the ecosystem services it provides are often “mobile, silent and invisible”, and therefore incredibly complex to fully appreciate. We may understand the price of wood and some of the services provided by forests (such as climate regulation or flood prevention) but we will never understand all the interactions that exist within nature. Secondly, different social groups and individuals relate differently to nature, as the IPBES made clear in its recent report on the diverse ways of valuing nature.xxv For instance, a poor fisherman or an indigenous person may not be able to put a high price tag on the fish he catches or the forest she lives in, yet their entire livelihoods directly depend on the existence of specific ecosystems. In other words, nature does not have a fundamental value but rather means 6 Page 7 sur 12 different things to different people. Recognizing this diversity of values, at the global level, is key to enable its protection. We cannot say how much a seaside or a bird song represents. Thirdly, even if we could perfectly account for the points above (complexity and multiplicity of values), nature remains only very partially substitutable. This means that we risk underestimating the costs of losing ecosystem services. For instance, Professor Dasgupta provocatively but insightfully reminds us that if we only look at how much pollination contributes to agricultural outputs in highincome countries, we may end up with a very small percentage of GDP. | 0 |
Banking sector Under the consolidation programme, the bigger banks in the sector are permitted to benefit largely from organic growth while the mid-tier banks are expected to strengthen their financial viability and grow through consolidation. As larger banks grow, it will be difficult for smaller banks to remain competitive, and therefore, small banks are encouraged to merge with strong partners. The outcome of the consolidation in the banking sector is expected to result in a sector where at least 5 Sri Lankan banks will have assets of over Rs. 1 trillion with a stronger regional presence by 2016, while domestic banks, which hold assets less than Rs.100 billion now will have to increase their asset base above Rs.100 billion through consolidation by 2016. Further, as the Sri Lankan economy’s investment ratio is expected to be maintained at over 30 per cent of GDP, there will be an increasing demand for investments within the country. However, the 2 banks with development banking focus in Sri Lanka, namely, the National Development Bank PLC and DFCC Bank with DFCC Vardana Bank Ltd., are still not as big as the economy requires them to be to cater to the current and future needs of the economy. Therefore, these 3 banks will be merged so that the resulting entity would be large enough to comfortably raise long-term capital from domestic as well as international markets and cater to the growing demand for investments by both the private and public sectors. | TLAC and MREL are comprised of debt-instruments and equity. The key point here is that this important reform requires a very clear distinction among debt contracts between forms of subordinated debt contracts which will bear losses in resolution first and deposit and other senior funding contracts on the liabilities side of the bank balance sheet. This may seem like a very simple point, but past arrangements meant it was unclear, and the moral of the painful story is “don’t leave the providers of debt funding in any doubt about their creditor status.” The lack of clarity about the instruments on the liabilities side of bank balance sheets and the order and mechanisms by which they would absorb losses was an important issue in the crisis. Looking ahead, clear disclosure of creditor hierarchies at a legal entity level will be a critical component of the resolution regime, so that all creditors know where they stand before resolution occurs. Let’s turn now to the other side of a bank’s balance sheet, the assets side. The massive increase in balance sheet size pre-crisis accompanied what came to be known as the “search for yield”, which could be re-named the “search for risk which turns out to be unsustainable”. | 0 |
For instance, the IMF projects the aggregate euro area deficit for this year to be just over 3% of GDP, compared with around 8% in the U.S. and almost 10% in Japan. The equivalent figures for gross debt are around 90% of GDP in the euro area, compared with 106% in the U.S. and 235% in Japan. The right response to this discrepancy between fundamentals and perceptions is not defeatism. It is to fix the institutional flaws that facilitate it. Again, the European Council took an important step in this direction at the recent summit. Building on the report presented by the Presidents of the European Council, Commission, Eurogroup and ECB, it called for a specific and time-bound roadmap for the achievement of a genuine Economic and Monetary Union. This roadmap will be presented by the end of 2012. This is a very important development, for two reasons. First, it sends a clear signal of Member States’ commitment to the euro and to making EMU work. This should help remove BIS central bankers’ speeches 3 investor concerns about the future integrity of the euro area. Second, the report presented by the Four Presidents is far-reaching and comprehensive – it has been designed to address the key challenges facing EMU in all relevant policy areas. It therefore proposes work on four parallel tracks: 1. The first is a financial union, with a single framework for supervising and resolving banks and for insuring customer deposits. | This would build on the single supervisory mechanism now under development and ideally lead to a European version of the FDIC, financed by contributions from the private sector. 2. The second building block is a fiscal union, with powers at the euro area level to prevent unsustainable fiscal policies and to limit national debt issuance. With these powers in place, a path towards common debt issuance would also be possible, but only at the end of the process. 3. The third building block is an economic union, which would help euro area members to remain fit and to adjust flexibly within monetary union. This could entail, for example, moving from soft coordination of structural reforms in Member States to an enforceable framework at the euro area level. 4. And the fourth building block is a political union, which aims at strengthening democratic participation. This final building block is equally important, as the other measures cannot be effective unless they are legitimate. This requires innovative thinking as regards the involvement of the European Parliament and national parliaments in decision-making on euro area issues. 4. Conclusion The roadmap towards a stronger EMU, seen together with the decisions on the ESM and the Compact for Growth and Jobs, represents a comprehensive response to the crisis. The euro area has clearly understood that the time of partial solutions and piecemeal reform is over. In implementing this response, there are sure to be difficulties along the way. This is the reality of operating in a union of 17 democracies. | 1 |
Chart: Distribution of exports – 1835, 1950 and 2016 The oil sector has generated substantial revenues for Norway. And we have extracted large quantities of oil and gas at favourable prices. From the end of the 1990s and up to 2014, the price of North Sea oil rose from about USD 10 to more than USD 100 per barrel. In spite of the fact that oil prices have fallen by about half compared with a few years ago, sales of oil and gas still provide a third of the country’s export revenues. 3/4 BIS central bankers' speeches The substantial profits generated by the petroleum sector have been managed efficiently. Our economy is in good order. Well-functioning institutions and a high degree of trust between the various social groups provided a solid foundation. It was established at an early stage that Norway’s oil and gas reserves belong to the people. The system of taxation and framework conditions for the petroleum industry were designed so that the large profits from this sector would accrue to the state. We have been able to enhance public welfare and prosperity. Chart: From natural resources to financial wealth At the same time, Norway’s subsea petroleum wealth has to a large extent been transformed into foreign financial assets. With the oil fund, not only current but also future generations will benefit from our oil and gas reserves. The capital in the oil fund is more than two and a half times the size of mainland GDP. | But we also learned early on that fish was valuable as a form of currency. As early as in the medieval era, dried cod from Norway was a sought-after product further south in Europe. With their ships laden with dried cod, the Vikings were able to trade the fish for beautiful cloth, exotic spices and precious metals. Chart: The 200-krone banknote (The Cod) Fishing has been a key source of income and an integral part of the coastal culture in Norway for 1/4 BIS central bankers' speeches centuries. For many people, fish has been a crucial part of their diet. Some crops do not thrive in Norway’s climate of long winters and cool summers. Cod and herring, trout and salmon, on the other hand, have flourished. Sturdy boats designed to cope with the rough waves and unpredictable winds of the open sea enabled us to bring the catch to shore. And before more modern transportation routes became available, cargo ships were needed to transport the catch to customers at home and abroad. Chart: Distribution of exports 1835 The possibility of storing and transporting fish over long distances generated jobs and foreign exchange income. In 1835, 39 percent of Norway’s export revenues came from the sale of fish. Shipping provided 25 percent of Norway’s export revenues. Consequently, it has always been important for the country’s economy to ensure market access for Norwegian seafood exports, as was the case during Norway’s prohibition period in the 1920s. | 1 |
This bias is prevalent in complex and opaque situations which are surely predominant in the modern financial system. Turning to the indebtedness of sovereigns, we cannot put the blame for excessive indebtedness on financial incentives. But the overweighting of current benefits and the overdiscounting of future costs can easily be attributed to electoral considerations and the finite career of elected politicians, careers which become shorter when they cannot “seduce” their electorates. At a cognitive level, I would also put the blame on another factor that could be called a “Keynesian bias”. Here, I refer to the conviction that countercyclical policies should be activated in downturns to mitigate the social cost of output and employment losses, but that they need not be reversed in upturns. This conviction is based on the view that there is no natural, theoretical or even apparent practical limit to state indebtedness, at least for developed economies. This cognitive bias is, in my view, a major explanation for the observed structural deficits in government accounts leading to an ever-rising debt to GDP ratio. In the OECD as a whole, for instance, the public debt to GDP ratio has increased from 70% in 2000 to 103% today! While we can dispute the precise diagnosis, we cannot disagree with the fact that the present crisis should and will serve as a wake-up call. Sovereigns, like banks, need to build up a buffer ahead of potential unfavourable economic developments. | Why does financial literacy matter? It is more than clear that the absence of understanding of the basic financial concepts erodes our capability to make proper and well-informed choices in terms of savings, investment, and borrowing. The costs of these choices are not confined only to individuals, but they can have systemic implications, eroding the overall financial stability. The translation of these misinformed decisions into systemic risks is exactly one of the main reasons why financial literacy became the mainstream in the past decade. The pre-crisis credit boom was supported by irrational exuberance and overconfidence of “never ending” rise in assets prices and low financing costs. The credit boom turned into credit bust, and the consequences of the “bubble – burst” are still with us. According to the latest IMF map of weak spots, heavily indebted households are still the main source of vulnerability in many systemically important advanced and emerging economies, and potential source of next financial crisis. Apparently, being financially literate and informed, can help in preventing, or at least mitigating the occurrence of such “weak spots”. To bring the issue closer to the regional context, let me remind us of the “episode” of excessive borrowing in Swiss francs that occurred in several countries in the region (Hungary, Croatia, Serbia, Poland), amidst low interest rates and assumed stability of the exchange rate. Hence, the last crisis clearly demonstrated that many agents are not fully aware of the consequences of their financial decisions. | 0 |
Europe is particularly badly affected, as temperatures here continue to rise above the mean and, despite our efforts to reduce CO2 emissions, we lag far behind in terms of what we need to do to adapt to some of the inevitable consequences. It is time we face the facts. As citizens, as institutions, and as all actors in the economy – including of course banks. It is essential that banks share with their stakeholders detailed information on their exposures to C&E – risks. Only then can we all effectively work together to address the consequences of climate change. This is why today I would like to draw your attention to another important landmark in the ECB’s supervision of C&E risks: the publication of our second stocktake on the transparency of banks’ disclosures of their C&E risk profiles. The European and international agenda on climate Publishing this update is part of our supervisory agenda on climate. As you know, C&E risks have been one of our supervisory priorities for some years now and we have started treating them just like any other prudential risk. In this context, we have been rolling out a series of corresponding supervisory activities. In 2020 we published our guide on climate-related and environmental risks, which outlined our supervisory expectations relating to the management and disclosure of C&E risks. In 2021 we published a self-assessment benchmarking report. | And regulators and policymakers need to be appropriately responsive to the adoption of sustainable practices. Conclusion In conclusion, the Islamic finance industry today faces an important, strategic choice – to either continue on a path that largely ignores the stark social and environmental realities that confront humanity, or to thoughtfully chart a new path that fully embraces the idea and philosophy of finance beyond profits. The latter will be an unfamiliar path in many respects, but one that is far closer to the fundamental premise of Shariah on which Islamic finance is based upon. Embarking on this path will require deep conviction and visionary leadership across financial institutions, governments and policymakers. But the pay-offs will be immeasurable. For many in society, it will also make the difference between economic freedom and opportunities, and a lifetime of hardship. Thank you. See also: 1. Implementation Guide for Value-based Intermediation 2. Value-based Intermediation Financing and Investment Impact Assessment Framework (Consultative Document) 3. Value-based Intermediation Scorecard (Consultative Document) 4/4 BIS central bankers' speeches | 0 |
And since we will only purchase bonds with a remaining maturity of between one and three years, there will still be ample room for market discipline on governments at longer maturities. Second, our actions will not lead to inflation. The weak overall economic situation, combined with slow money growth, means that the risks of inflation are currently very low over the medium term. Our interventions will not change this outlook. In fact, for every euro we inject with our interventions, we will withdraw a euro. So they will not affect monetary conditions. Furthermore, we see no signs that our announcement has affected inflation expectations. They are firmly anchored because we have always delivered price stability. And citizens can trust that we will continue to do so: price stability remains our mandate and our sole objective. Third, our actions will not lead to greater risks for taxpayers in Germany. Taxpayers are protected by the fact that our interventions will take place only in countries with sound economic and fiscal policies. Their continued commitment to these policies will be ensured by the ESM programme. And the ECB will assess compliance with this programme in full independence. Moreover, by normalising conditions in financial markets, our actions will help reverse the capital flows into Germany that are creating some distortions here. This should ultimately support the savers, pension funds and insurance companies that depend on interest income. And it should reduce TARGET2 imbalances. | Financial union is essential in a single currency area where cross-border capital flows can lead to credit booms and other imbalances – and where the negative effects of a bust can spread rapidly to other members. One essential part of financial union is a single banking supervisor. As you know, the European Commission has recently proposed that the new supervisor should be based at the ECB. This is important to ensure consistency across the euro area and to prevent regulatory capture. Day-to-day tasks, however, would remain with national supervisors who have the competence and resources to implement them. But financial union does not have to imply the pooling of deposit guarantee schemes, an issue that I know is of concern in this country. Organising and funding deposit guarantee schemes can remain a national responsibility, with comparable effectiveness. In the longer term, all four pillars are equally important. They are the bedrock for the enormous potential of the single currency for Europe’s citizens. Completing economic and monetary union would give citizens greater security against any future crisis. It would create the foundations for sustainable growth and employment. For all citizens of the euro area, it is therefore essential that Europe’s leaders stay on course. Thank you for your attention. BIS central bankers’ speeches 5 | 1 |
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