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Since the financial crisis, the Federal Reserve has made significant changes to the substance and process of supervision. As a result, the financial system is unquestionably much stronger and much more stable now than it was five years ago. II. Substantive changes Since the financial crisis, the Federal Reserve has redoubled its attention to bank capital. Capital is the financial cushion that banks hold to absorb loss.1 It provides an economic firebreak that helps prevent systemic stress from turning into a full-blown crisis. Before the crisis, capital requirements were too low and inconsistent across jurisdictions. Moreover, too much of the capital held by banks was of poor quality, and their internal capital assessments were not forward-looking.2 Since the crisis, new regulation and heightened supervision have increased both the quantity and the quality of equity capital at the largest financial institutions that we regulate and supervise. The Federal Reserve and other federal banking regulators implemented so-called “Basel III” international capital standards in July 2013, which raised the minimum ratio of common equity Tier 1 capital to risk-weighted assets. Federal regulation also now requires stricter criteria for instruments to qualify as 1 I use the terms “bank” and “financial institution” interchangeably, but note that the two terms are not synonymous in federal regulation. 2 See Joint Notice of Proposed Rulemaking, “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action,” June 12, 2012, at 32.

I take this opportunity to point out that the Bank of Albania’s efforts to keep inflation in check and anchor inflationary expectations, as well as its regulatory and supervisory measures to guarantee financial system stability managed to reduce shock-buffering costs and prevented undesirable consequences. Second, as regards the economy’s expected performance in the medium and long run, the conclusion reached after the two-week long consultations was that the Albanian economy is expected to remain in positive territory of economic growth. However, growth rates will clearly depend on the resurgence of the domestic demand, which is suffering from insecurity related to national and international developments. Consumption and investments continue to suffer from added prudence by economic agents, while financial conditions and banking system capacity to credit the economy are improved. Furthermore, higher inflation rates, noted during the first months of 2011, are expected to drop in the upcoming period. This reveals the foreign origin of shocks that have led to increased prices and reflects internal economic and financial conditions as well as our monetary policy. The joint examination of the Albanian economy found that the fiscal and external sectors are the two main ones that would require our attention and our work in the future. The Bank of Albania has long held that public finances’ long-term stability is a precondition for sustainable economic growth. The daily world press illustrates channels through which indicators such as budget deficit and public debt affect financial markets and in turn the real economy.

Aggregate cumulative UK impairment charges over the five years of the (a) stress Impairments in the stress (left-hand scale) Impairment rates in the stress (right-hand scale) Per cent 25 £ billions 20 20 15 15 10 10 5 5 0 0 UK mortgages Sources: PRA regulatory returns, published accounts and Bank calculations. (a) Major UK banks’ core Tier 1 capital as a percentage of their risk-weighted assets. Major UK banks are Banco Santander, Bank of Ireland, Barclays, Co-operative Banking Group, HSBC, Lloyds Banking Group, National Australia Bank, Nationwide, RBS and Virgin Money. Data exclude Northern Rock/Virgin Money from 2008. (b) Between 2008 and 2011, the chart shows core Tier 1 ratios as published by banks, excluding hybrid capital instruments and making deductions from capital based on FSA definitions. Prior to 2008 that measure was not typically disclosed; the chart shows Bank calculations approximating it as previously published in the Report. (c) Weighted by risk-weighted assets. (d) From 2012, the ‘Basel III common equity Tier 1 capital ratio’ is calculated as common equity Tier 1 capital over riskweighted assets, according to the CRD IV definition as implemented in the United Kingdom. The Basel III peer group includes Barclays, Co-operative Banking Group, HSBC, Lloyds Banking Group, Nationwide, RBS and Santander UK. (e) CET1 ratio less the aggregate percentage point fall projected under the Bank of England’s 2016 annual cyclical stress scenario for the six largest UK banks.

And the rising level of consumer debt means it would be reasonable to expect greater losses on it in our future stress tests. That might mean the system has a bit more difficulty passing future tests. If that were the case, a further strengthening of the defence line would be needed. We have already, in recent months, taken steps to strengthen banks’ defences against losses by raising the capital buffers they are required to hold on all their lending. 12 12 That was achieved by increasing the ‘Countercyclical capital buffer’ that banks must hold against their UK-related lending, from 0% to 0.5% of risk-weighted assets, and expect to raise it further, to 1%, in November. 14 All speeches are available online at www.bankofengland.co.uk/speeches 14 And to make sure this defence line is kept robust in the face of rapid consumer credit growth, we are accelerating this year’s test of banks’ consumer credit loans. By September we will have assessed whether the rapid growth has created any small gap in the line. If it has, we’ll plug it. The third of our three defence lines is direct restrictions on high loan to income mortgage lending. Lenders should not extend more than 15% of their new loans at or above 4.5 times the borrower’s income. And borrowers are subject to an affordability test that effectively varies that loan to income limit for their 13 individual circumstances.

I would like to speak about the role institutions can play in the economic advancement of a nation and use the central bank as an example.1 My co-speakers will view the issue from different perspectives and the ensuing debate will bring forth yet further aspects.2 Good institutions provide sound frameworks that increase confidence and promote economic progress. This is so in relation to minor, everyday situations as well as to major life choices. At the fishmonger’s, the Norwegian Metrology Service ensures that you pay for the actual weight of your cod fillet. When you buy a home, clarity about ownership and encumbrances is ensured by the land register.3 The Norwegian Industrial Property Office grants patents so that entrepreneurs can make profits on their innovations. In the absence of such institutions, each of us would have had to spend more time on taking precautions and fewer investments would have been profitable.4 1 Among the many who have shed light on the role of institutions from this perspective is Douglass C. North, a 1993 Nobel laureate in economics together with Robert W. Vogel. In his work, he refers to institutions as: “Institutions are the rules of the game of a society and in consequence provide the framework of incentives that shape economic, political, and social organization. Institutions are composed of formal rules (laws, constitutions, rules), informal constraints (conventions, codes of conduct, norms of behaviour), and the effectiveness of their enforcement.

The ECB is no fortune teller or oracle, but no doubt you already know what 2017 will look like? As we see it, 2017 will be a year when activity accelerates. We are very confident about the recovery in Europe. But aren’t there risks? There are political risks just about everywhere, both within the euro area and outside it. But it isn’t the ECB’s task to manage political risks. That’s for politicians to deal with. It’s up to us to draw the economic conclusions. The euro area will still require some sort of financial protection to navigate what will be a risk-filled 2017. But when you talk about political risks, that means you see people going to the polls in the Netherlands, France, Germany and, probably, Italy, as a risk. That’s not a risk, that’s democracy. So more precisely, what would you describe as a risk? For us, the risk is that Europe comes under increasing strain and pressure from nationalists, protectionists and sovereignists, who... So you are worried about the rise of extremism and nationalism in Europe, and in all countries, maybe even including France. It’s a concern for us in all countries, because it reduces our ability act jointly. Europe is strong when its countries can act jointly.

In spite of this, lessons should be learnt from the effects of the crisis in other regions and, going forward as a single monetary zone, policies are being designed and implemented to prepare us to cope better with any threats to our financial systems. We must also recognize that there are peculiar risks to our zonal financial sector which are being addressed through new initiatives. Since the signing of a joint memorandum on cross border supervision, as I informed you in my speech last year, Governors’ of the West African Monetary Zone have signed an additional memorandum for the establishment of a College of Banking Supervisors in July 2010. In 2010, Liberia attained full membership of the West African Monetary Zone (WAMZ), increasing the membership from five countries to six, and has now been integrated into a number of projects including the Payments System, Financial Sector Integration, and Trade Policies. Developments on the domestic front Economic developments in 2010 Your Excellency, distinguished guests, on the domestic economic front, projected real GDP growth in 2010 was higher at 4.5 percent, compared to 3.2 percent in 2009, a reflection of government’s effort to stimulate economic activities through investments in agriculture, energy and infrastructure. There was also an increased global demand for agricultural commodities and mineral exports which also improved the country’s balance of payments position. Furthermore, new mining lease agreements have been signed with foreign companies which would increase returns in this sector in the medium term.

Exchange rate policies are expected to be designed to support rebalancing of global demand, while structural reforms to enhance access to finance by small and medium scale enterprises (SMEs), should help boost growth and reduce unemployment. Finally, better policy coordination among all stakeholders should help alleviate liquidity constraints and rebuild confidence. Regional financial trends Your Excellency, distinguished guests, Africa has been reasonably unaffected by the crisis due to the low level of exposure of its economies to international trade and financial flows. The continent experienced encouraging growth in 2010 not only on account of a recovery in exports and commodity prices, but also due to implementation of prudent policies by some of our economies prior to the global down turn. In addition, the effect of reduced foreign inflows from aid, foreign direct investments and remittances was far less than originally anticipated. The increase in global demand and hike in oil prices benefitted oil-producing African countries with Nigeria and Angola, the two largest oil producers experiencing strong growth of around 6 percent. In spite of the encouraging trends, risks to Africa’s economic prospects remain, particularly given the faltering global economy. It was recognized that the crisis originated from the financial systems and this has underscored the need for a more robust and effective financial sector supervision framework in African countries that can withstand potential future shocks.

Each time, we gave visibility over the next twelve months; and we stuck to the provisional indicative timetable that we set without extending the time limits. I turn now to flexibility. Our sequence is clear but the details of implementation are flexible and state-dependent. We have included several options, such as the precise timing of the first increase in interest rates and the path of policy rates thereafter, or the pace of our reinvestments. There is much speculation for instance on the future trajectory of our interest rates; but at this stage, I don’t see any value in trading off our flexibility tomorrow against more clarity today. Beyond that, as Mario Draghi mentioned today, the question of TLTROs will need to be considered. In the face of uncertainty, one often hears reference to the celebrated Brainard 1 ‘conservatism principle’ (as reinterpreted by Alan Blinder 2. This is not, as the impression is sometimes given, a general warning to move cautiously when the world is uncertain. The Brainard ‘conservatism principle’ says only that you should move cautiously if you are uncertain about the effect of your policy instrument on your objective. But we should go beyond a static view of Brainard’s principle (which focuses on one single small step): a dynamic view would include the time dimension and consider how to manage and communicate a sequence of incremental steps. 2. How can we collectively respond to global tensions? There are increasing tensions in the global environment, starting with protectionism.

We will achieve the closest to a co-operative solution if we avoid large surprises between policy makers. While trade multilateralism is at risk, monetary and financial multilateralism stands fast, fortunately. This means continuing to favor dialogue and exchange of information among central banks, and to be very clear about our monetary policy regime choice. We should cherish the “great convergence” of policy objectives of the last fifteen years. Among major advanced economies, we now have domestic inflation targeting around a 2% medium-term objective. We are ruling out any currency war, as clearly stated in the unanimous communiqué of our Bali meeting earlier this month: “We will not target our exchange rates for competitive purposes”. On capital flow management (CFM) measures, we should support the ongoing reflections undertaken within the relevant international bodies and give priority to practical and pragmatic solutions – IMF type – rather than dogmatic purity. Last, as the G20 Eminent Persons Group (EPG), led by Tharman Shanmugaratnam, rightly stressed in its recent report, we need to put in place a reliable Global Financial Safety Net before the next crisis and co-ordinate its different layers. This should include an “IMF standing liquidity facility”. The global financial safety net is the best insurance we can get against the risks created by economic divergence and it comes at a limited cost.

So, the only way to ensure debt sustainability is to raise productivity, invest and increase the employment rate, and this implies structural reforms. Q: None of these factors are present. There is hardly any growth, investment or jobs. A: I am aware that the situation is still very difficult in Spain and that the Spanish people have suffered a lot in the process of reducing imbalances and implementing reforms. However, they can rest assured that Spain has turned the corner, and that the outlook is once again improving. This will encourage firms to invest and to start recruiting again, not only Spanish firms but also foreign ones. In a way, Spain can stand as an example not only for other countries that have been hit by the crisis, but for other large countries at Europe’s core, that have not been so active in reforming their economies. Spain is an example of how, through reforms, it is possible to redress imbalances and get out of the doldrums. Q: Which reforms are urgent? A: It depends on the country. The European Commission has already issued so-called “country specific recommendations”. The worrying thing, as the Commission acknowledges, is that these recommendations are too rarely followed. It would be preferable if countries took them seriously and felt collectively committed. In the case of Spain, my personal view is that much remains to be done to support the young people and help find jobs. They are the future.

3 See, for example, Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack, “Large-Scale Asset Purchases by the Federal Reserve: Did They Work?” Federal Reserve Bank of New York Staff Report no. 441, March 2010. Several private-sector firms have estimated yield effects of similar magnitude. In addition, a working paper by James Hamilton and Jing Wu, “The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment,” finds that changes in the Federal Reserve’s asset holdings produce considerable yield effects. 2 BIS Review 128/2010 Under this view, the FOMC’s influence on financial conditions is associated with the size and composition of its securities portfolio. This perspective provides a clear rationale for the reinvestment decision made at the August FOMC meeting. The decline in the size of the Federal Reserve’s portfolio that would have occurred in the absence of the reinvestment program would have amounted to a passive tightening in the stance of monetary policy, as the portfolio balance effect would have gradually reversed. Moreover, the extent of this tightening was increasing in response to the weakening of the economy, as lower longerterm yields were leading to more rapid repayment of MBS. This perverse effect was seen by the FOMC as working against its efforts to reach its dual mandate. In effect, the policy approach that was implemented before the August meeting acted to mute the amplitude of movements in longer-term interest rates.

Unless we deliver effective resolution regimes, public finances will be under more pressure. So, summing up why the resolution reforms are so important: if you believe in solving Too Big To Fail, in an international financial system that is not only free but also safe, in shielding taxpayers from the risks in banking, and in shielding banking from politics, you will be committed to making a success of resolution. Thankfully, the extent of progress since the 2008/09 bailouts, while still incomplete and needing continuous political impetus, is good. It has involved agreement on a global model for resolution regimes capable of handling the largest and most complicated firms; legislation in some, but not yet enough, jurisdictions to embed that regime; the development of high-level resolution strategies that can be applied to different types of global group; concrete steps towards agreement between countries on how to apply those strategies across borders to specific institutions; and plans for top-level reviews of the adequacy of the resolution plans for each Global SIFI. If that progress has not been faster, which is an understandable concern, it is for the good reason that the required reforms involve an agency of the State, the resolution authority, having powers that affect property rights.

Let me offer four suggestions. First, we must help corporates understand the value of green financing. Singapore financial institutions have been partnering local authorities in Chongqing to build capabilities in green finance through workshops and online seminars. Second, we must ensure common understanding of what constitutes green or transition activities. In Singapore, an industry taskforce is developing a taxonomy that encompass green and transition activities. We are keen to collaborate with partners in China to identify commonalities in our taxonomies to unlock more cross-border sustainable financing flows. Third, we must enable corporates which want to improve their sustainability performance obtain cheaper financing in the form of sustainability-linked bonds and loans. 2/3 BIS central bankers' speeches Sustainability loans can provide discounts on the lending rate if predefined sustainability performance targets are met. MAS’ grant schemes can help to defray the costs that borrowers incur to certify the fulfilment of sustainability targets. Fourth, we must explore innovative policy measures to facilitate qualified Chinese enterprises to issue green bonds overseas. For example, corporates from Chongqing or the broader Western Region could be allowed expedited approval for green bond issuances in Singapore. This could be done within specified limits and perhaps something akin to a dedicated green foreign debt quota for Chongqing. A growing number of Chongqing and Western Region companies are tapping Singapore to obtain green financing. Just last month, Chongqing Three Waters Conservancy and Power Co. signed an MOU with Chongqing Rural Commercial Bank to explore a potential RMB 1 billion green bond issuance in Singapore.

Encik Abu Hassan Alshari Yahaya: Results of the National Risk Assessment on money laundering and terrorist financing Speech by Mr Encik Abu Hassan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia, at the International Conference on Financial Crime and Terrorism Financing (IFCTF) 2014, Kuala Lumpur, 8 October 2014. * * * It is my great pleasure to be here today to discuss with all of you the results of the National Risk Assessment on money laundering and terrorist financing (or the NRA). First, allow me to thank the Compliance Officers Networking Group (CONG) and the Asian Institute of Finance (AIF) for organising this conference and inviting me to this morning session. I also would like to extend my special appreciation to Mr. Roger Wilkins, the President of the Financial Action Task Force (or FATF) for delivering his keynote address and to the delegates from FATF namely Mr. Rick McDonell, the Executive Secretary of FATF, Mr Liu Zhengming and Mr Young-Han Byun, members of the Steering Committee of FATF for attending this morning session. It is an honour to have with us Mr Wilkins and delegates from FATF, and to get an update on the latest development on AML/CFT directly from the FATF President.

A threat is anything, be it people, object or activity with the potential to cause harm to the country, society, or the economy. In the money laundering and terrorist financing context this includes criminals, their criminal activities, terrorist groups and their facilitators, their funds, as well as past, present and future money laundering or terrorist financing activities. Identifying the threat is an essential starting point in assessing money laundering and terrorist financing risks. It provides an understanding of the nature, size and volume of the predicate offences and proceeds of crimes and an understanding of the environment in which these offences are committed and the proceeds are generated. The concept of vulnerabilities used in risk assessment comprises those factors that can be exploited by threat or that may support or facilitate its activities. In the money laundering and terrorist financing risks assessment context, vulnerability is distinct from threat because vulnerabilities are the factors that represent weaknesses in certain features of a country, or in the AML/CFT systems or controls. They may also include the features of a particular sector, a financial product or type of service that make them attractive for money laundering and terrorist financing purposes. By assessing the country’s threats and vulnerabilities, we are actually putting the risks assessment in the context of our country’s situation in terms of materiality of these threats and vulnerabilities in our country’s structural elements, and other factors that form important features of our country.

Second, globalisation has contributed to higher imbalances of income and wealth in many countries.24 Amongst economists, a belief in free trade is totemic, but while trade makes countries better off, it does not raise all boats within them. 23 For example, two-thirds of official foreign currency reserves are in US dollars, over 60% of countries use the US dollar as their anchor currency, and around half of international trade is invoiced in US dollars - far greater than the US’s 10% share of world trade. 24 The IMF finds that technological progress during the 3rd Industrial Revolution has been the biggest contributor to these increasing imbalances. See IMF (2017), Understanding the Downward Trend in Labour Income Shares, April World Economic Outlook, Chapter 3. 15 All speeches are available online at www.bankofengland.co.uk/speeches 15 Rather, the benefits from trade are unequally spread across individuals and time. Consumers get lower prices and new products, and further benefits from higher productivity over time. Some workers, however, lose their jobs and the dignity of work, or see their “factor prices equalised.” In plain English, their wages fall. Such dynamics are being felt by those at either end of the great convergence. Survey evidence shows that 70% of Chinese workers believe that trade creates jobs and increases wages, US households think the opposite, and UK public opinion is equivocal.25 The nascent fourth industrial revolution may (for a time) harden such concerns.

Firstly, the role of maintaining economic stability that I described earlier in this talk, as stability is a prerequisite to structural changes that lift productivity. Secondly, the developmental role, a form of supply-side policies, to enhance financial sector efficiency and create a favorable financial environment for investment that would lead to higher productivity growth. The importance of financial markets has long been realized by the Bank of Thailand as being the crucial part of growth potential. Indeed, our annual economic symposium this year, “Rethinking Finance for Sustainable Growth”, will discuss the links in detail. A healthy financial market can distribute funds to the parties that can bring most value out of them. For example, investors in the stock market closely monitor businesses, and will withdraw funds from those that have low prospects of future growth, moving them to those with better prospects. The growth prospects will be realized, and in aggregate will improve the whole economy’s growth potential. A well-developed financial market also lowers the cost of raising funds, as the increased competition broadens the variety of financial products offered. An SME for example, whose credit-worthiness is difficult to assess compared to a corporation, might be limited to self-funding in a less-developed market. But in a well-developed financial market, corporations can turn to other channels, leaving commercial banks more incentive to serve SMEs. In 2004, Financial Sector Master Plan Phase 1 was adopted and, to continue improving the financial sector, Financial Sector Master Plan Phase 2, the current phase, was launched in 2010.

In addition, the severe supply-chain bottlenecks that initially affected this category began to improve last year, which likely contributed to the easing of prices for some durable goods in recent months. However, there are factors that may throw sand in this gear going forward. The economic resiliency of Europe and a rebound in growth in China following the end of COVID restrictions will likely increase global demand for goods. And further improvement in global supply-chain disruptions has stalled over the past few months. For example, the New York Fed's Global Supply Chain Pressure Index remains elevated relative to pre-pandemic levels. The slowest gear to turn is the one that represents non-energy services. It's influenced by the balance of overall supply and demand, and it will take the longest to rotate at the right pace for low and stable inflation. One area where we are seeing signs of this gear turning is in shelter costs. After a sharp rise, we have seen a steep decline in the rate of increase in new lease rents. Assuming this trend continues, we should see a slowing of overall rent inflation during this year. That said, we have yet to see the gears turn for inflation of non-energy services excluding housing, which is still quite elevated, averaging 3-3/4 percent over the most recent six months. Tightening Monetary Policy Taking into account the different speeds the gears are moving, it is clear that overall demand remains well in excess of supply, and inflation is running far above our 2 percent target.

For microprudential supervision, the proposal is based on the so-called Twin Peaks model which separates prudential supervision (one peak, to be in the PRA) from conduct of business and consumer and investor protection (the other peak, to be in the Consumer and Markets Authority). One of the very important features of this approach is that it doesn’t mean one peak is less important than the other, that is not a consequence of financial stability being a necessary condition for good conduct of business. Rather, it should enable each regulatory body to be focussed on its own objective, because it requires different skills and experience to undertake the two peaks. Of course, great attention needs to be given to ensuring the boundary between the two peaks is robustly defined, and there is effective and efficient cooperation between the two authorities. But, my view is that done properly it will improve the system of regulation. As far as microprudential supervision is concerned, we are clear that it should not be a regime in which firms cannot fail. A successful industry of any sort needs to have means by which unsuccessful firms can fail without an unacceptable cost to the public, and where appropriate means by which firms can recover from serious problems without having recourse to a formal resolution process. Banking still suffers from the too big, too complicated, too interconnected to fail problems. This has meant that public money has had to be used to prevent disorderly failures.

Both FIDE Forum and ICLIF are uniquely positioned to advance corporate governance in the financial sector. After all, they bring together those who represent the ultimate governing body of financial institutions, with great responsibilities and accountability. Such an opportunity must be capitalised and not wasted. FIDE Forum and ICLIF should therefore complement each other and avoid duplication. There are significant benefits to be gained from an effective partnership where resources can be channelled to increase the collective impact of programmes and initiatives by the two organisations. In my own engagements with the industry, over the years, coordination and cooperation among financial institutions can become game changers for the industry. In this respect, we should fully appreciate the distinctive purpose of ICLIF and the FIDE Forum and how they coordinate with each other within the space of directors’ development. With close coordination and cooperation we can avoid the redundancies and wastage and realise the synergistic benefits from the alliance between the two organisation. Being a director of a financial institution will demand a lot from the individual. It is a position of trust where integrity is the norm. It should be, given the critical role of financial institutions in any economy. 2 BIS central bankers’ speeches As a network of financial institution directors, FIDE Forum provides a valuable resource for directors as they navigate the heavy responsibilities that come with the position.

FIDE Forum should continuously raise the bar on director performance by advocating best practices and providing support to its members in helping solve real problems confronting boards today. It should be a respected voice on important issues of corporate governance, an epitome of best practices of corporate Malaysia. Most importantly, it should build an enduring legacy for future leaders of financial institutions by representing within its collective membership the highest standards of integrity, professional conduct and intellectual integrity. Indeed, FIDE Forum’s success must surely be measured not only by how well it serves its current membership, but also by how it expands its reach and influence to attract new leaders of the highest calibre to the financial industry. In short, being a director of a financial institution signifies the embodiment of a person’s self-evident integrity and professionalism. In this endeavour, FIDE Forum and ICLIF need to work collaboratively and exploit the synergies between them. FIDE Forum should leverage on the expertise that has been built within ICLIF in the design and delivery of high quality leadership programs. Similarly, ICLIF should continuously seek to understand the current and future concerns of directors through FIDE Forum, and reflect on how its role in education can help address those concerns. These are mutually reinforcing perspectives. The Directors Register is a good example of this.

It is certainly the case that the recent crisis has been a key factor behind the increase in government indebtedness. In the aftermath of the crisis, governments in the crisis affected economies had to use public funds to rescue troubled banks. For example, Ireland had a government debt to GDP ratio of just 24% in 2007, but due to its banking crisis and its impact on the Irish economy, that number jumped to 111% by 2011 3. In fact, even for countries that were not at the centre of the financial crisis, fiscal spending to stimulate domestic demand was increased to offset the negative real sector shock created by the crisis. The low growth environment also reduced the tax revenues of governments, further eroding public finances. So, the crisis certainly played a role in the worsening of public finances. But that is not the complete story. In many countries, public finances were already stretched even before the crisis. This surely says something about the state of financial governance in the public sector of these economies. In the advanced economies, ageing populations and over-generous health and pension benefits were a major source of strained fiscal positions. Although the threat of demographics to fiscal sustainability is at this juncture most imminent for countries such as Japan, Spain, Italy and Greece, where the old age populations are rising most sharply amid already high levels of debt, it is only a matter of time before many emerging market economies will also face similar issues. That includes countries in ASEAN.

Sukhdave Singh: Financial governance and economic growth Keynote address by Dr Sukhdave Singh, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Malaysian Economic Convention “Financial Governance and Economic Growth”, Kuala Lumpur, 28 September 2015. * * * It is indeed an honour to be speaking to such a distinguished audience. It is also a great pleasure for me to be here this morning and join my colleagues in the Economics fraternity at this 2015 Malaysian Economic Convention. To begin, let me share with you a story. Twenty years ago, on 28 January 1986, the NASA space shuttle Challenger was launched. Seventy-three seconds into its flight, spectators were horrified as the space shuttle broke apart in a fiery display and disintegrated over the Atlantic Ocean. Seven astronauts died. The catastrophe was traced to the failure of a single O-ring – a simple seal at a joint on one of the rocket boosters. The O-ring failed due to the unusually cold temperatures on the morning of the launch. Relative to the highly sophisticated technologies involved in building and launching the shuttle, the O-ring was considered established technology, one with a patent history of 90 years by the time the Challenger was launched. It was as ironic as it was instructive that such a complex machine, incorporating the most advanced aerospace technology of its time, failed and combusted due to a component as trivial and basic as an O-ring.

Hopefully, the weaker trend during the period that began in the early 1970s has been reversed in the past few years. However, this cannot be taken for granted. One explanation for the recent stronger growth is that the deep recession left a reserve of unutilised resources that could gradually be taken into use. Nevertheless, potential GDP growth is now often said to be between 2% and 2.5%, since most analysts consider that the productivity trend has improved slightly in recent years. 1 BIS Review 137/1999 Figure 1. GDP growth during the 20th century 1. GDP-growth during the 20th century Annual average per decade 6 5 4 Average 3% 3 2 1 0 -1 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990- 19941993 1999 Figure 2. The Swedish population 2. The Swedish population 10 8,9 Million inhabitants 8 7,0 5,4 6 4,2 4 2,6 2 0 1820 1870 1910 1950 2000 In both the 19th and the 20th century the Swedish population has roughly doubled. In 1820 it totalled 2.6 million; at the beginning of the 20th century, it was almost 5 million, and the figure today is almost 9 million. BIS Review 137/1999 2 These figures mean an average annual population growth rate of around 0.7%. That is not the case today; the current figure is closer to approximately half of this level.

The basic banking account has no minimum balance requirement and offers free ATMs and debit cards to those who qualify. The scheme is expected to roll out by October this year. The Bank of Thailand is also undergoing regulatory reform to review outdated rules and regulations, to facilitate ease of doing business and ensure that our regulations do not impede competition and innovation and contribute to high costs of financial services. We started with foreign exchange regulations last year and are now reviewing banking regulations to improve digital banking environment and SME financing. In addition, the current backdrop of high household debt in Thailand and the need to improve individual’s financial safety net necessitate an overall improvement in financial literacy as well as financial planning skill. We have also tightened our market conduct regulations to ensure that misselling is minimized and financial institutions provide fair and transparent products and services. Given the growing importance of digital technology for financial services, we must also make sure that those with lower skills can reap the benefits that technology brings, to avoid digital divide. Last but not least, creating a financial ecosystem that values sustainability is critical to ensure that the Thai financial system of the future can continue to develop in such a way that would benefit all segments of the society and create minimal negative externalities. Later this month, the Bank of Thailand will host the first Bangkok Sustainable Banking Forum.

In the event of conflicting objectives, it achieves a reasonable compromise between the stability of inflation and the stability of resource BIS Review 112/2009 1 utilization. 1 Different central banks express this in slightly different words. The Riksbank has often used the term “well-balanced” monetary policy. 2 The forecasts of inflation and the real economy are then conditional on the central bank’s view of the transmission mechanism, an estimate of the current state of the economy and a forecast of important exogenous variables. The central bank uses all relevant information that has an impact on the forecast of inflation and the real economy. In this framework, the central bank takes financial conditions such as credit growth, asset prices, imbalances, potential bubbles and so on into account only to the extent that they have an impact on the forecast of inflation and resource utilization. Inflation and resource utilization are target variables here, that is, variables that are arguments of the central bank’s loss function. Hence, financial conditions are not target variables. Instead, they are only indicators, as they provide information about the state of the economy, the transmission mechanism and exogenous shocks to the central bank. Financial conditions then affect policy rates only to the extent that they have an impact on the forecast of inflation and resource utilization. 3 3. Financial stability as a rarely binding constraint – a pre-crisis view What is the role of financial stability in a pre-crisis view of flexible inflation targeting?

And the pace of policy reform – in the UK, but also in the EU and globally through the International Association of Insurance Supervisors (IAIS) – is likely to be on a longer timetable due to Covid-19 being a shared and pressing priority. We recognise that there are certain aspects of the design and implementation of the Solvency II regime that do not fit so well to UK specificities. Our views on these areas are well known, and I believe shared by industry. We understand that the first priority for the industry is the Risk Margin. The current design is too sensitive to long term interest rates and this has the unintended and perverse consequence of driving a high proportion of longevity risk on new business offshore. We are committed to reform of the risk margin. The timing and nature of reform depend, like many questions of regulatory reform, on the final relationship between the UK and the EU. There is a wide range of options that could be pursued and it is encouraging that EIOPA intends to look at the design of the risk margin in the final stages of the 2020 review. Second is the matching adjustment. The PRA supports the concept of the matching adjustment. It provides the right incentives for insurers to invest in assets that are suitable for their business models. This in turn also reinforces a macroeconomic role of insurers, who provide stable, long-term investment.

While it would be ideal to have much broader coverage at this time (as at today, around one-third of global banking assets are officially subject to the Basel III requirements), the delays should not be interpreted as any lack of commitment by global regulators to implement the agreed reforms. At recent international gatherings, all members have been asked to reaffirm their commitment to implementing the agreed reforms as soon as possible. And they have given that commitment (subject, of course, to the vagaries of domestic rule-making processes that each must follow). Nevertheless, let me be clear: the question being discussed is when the reforms will be implemented, not if. Any setback to implementation is undesirable, since Basel III is a key platform on which to rebuild a stronger global banking system. But the delays are not critical at this point, for two reasons. First, the Basel III capital rules contain a lengthy phase-in period, meaning that in 2013 the new requirements should not be particularly burdensome for banks (eg none of the new deductions from capital are applied this year). Second, many regulators who have been unable to implement the new standards by the beginning of this year are still measuring and monitoring their banks’ capacity to meet the new requirements. And, of course, markets are applying similar pressure. In other words, the “force” of the new capital regime is much broader than just those countries that have implemented their domestic regulations.

One also has to bear in mind that favourable terms from central banks have helped to improve bank funding. Central banks serve as lenders of last resort and, as economic conditions improve, banks will need to become more self-reliant. However, the timetable for the gradual introduction of the ratio ensures that the new liquidity standard will in no way hinder the ability of the global banking system to finance a recovery. It has taken a lot of time and effort to reach agreement on the LCR. It is, as I said, a deceptively simple idea, but its implications are big and far-reaching. Unsurprisingly, there is much in the detail that required a lot of careful analysis and thought, not to mention a willingness to find a way through differing national perspectives. It is, however, critical that the new ideas such as the LCR (and the other new features of Basel III such as the capital conservation buffer, countercyclical buffer, leverage ratio and NSFR) are implemented if their benefits are to be realised. Against that background, let me now turn to the work we have started to ensure that the Basel III framework is implemented as intended. BIS central bankers’ speeches 3 …. to implementation Steady progress is being made. As of January 2013, 11 out of 19 Basel Committee jurisdictions have final Basel III rules in place, including our hosts today, South Africa. A number of non-member countries also implemented Basel III at the beginning of the year, further expanding its coverage.

These externalities led to the emergence of a twin crisis, where private sector debt (often by financial intermediaries) was rapidly converted into public liabilities, resulting into the self-reinforcing negative feedback loop between sovereigns and banks I alluded to before. A single mechanism for banking supervision and a common authority with strong tools for bank resolution could have mitigated the emergence of these negative externalities. The crisis clearly highlighted that financial stability is a common good and as such requires shared responsibility for its preservation. We have learned the hard way that high financial integration without a commensurate deeper integration of financial stability policies is intrinsically unstable. Second, sustained divergences in competitiveness and macroeconomic imbalances were largely ignored. Persistent current account imbalances within the euro area, signalling vulnerabilities of some Member States, were long considered as irrelevant in a monetary union. Besides fiscal surveillance, the working assumption was that there is no need to closely monitor macroeconomic imbalances. Disequilibria originating from the private sector were supposed to be only short-lived and eliminated by market forces. The crisis has taught us that imbalances in individual countries may have powerful negative externalities on other countries within a monetary union. This recognition led to the belief that the governance of economic policies at the EU level has to be reformed: more effective macroeconomic policy coordination at euro area level is an essential building block of a monetary union. Third, the euro area availed of a fiscal policy coordination and surveillance framework.

Philipp Hildebrand: The virtues of flexible financial markets - a central banking perspective Summary of a speech by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the CFA Institute Annual Conference, Zurich, 22 May 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch) * * * Summary Rapid technological change and market liberalization have been the driving forces behind the remarkable evolution of global financial markets over the past three decades. The consequences of this development include a geographic rearrangement of global capital markets, a fast pace of product innovation and changes in the nature and composition of financial market participants. The benefits associated with today’s flexible financial markets are manifold. Financial markets have become much more efficient in allocating capital. New products enable a better distribution of risks and the liquefaction of previously illiquid assets. They have also increased market transparency. As a result, modern financial markets facilitated innovation and likely enhanced economic growth. Moreover, they have contributed to make economies more resilient to shocks. These extensive benefits notwithstanding, modern financial market also entails new risks. These risks tend to elicit calls for increasingly far-reaching regulation. While some regulation may indeed be required to guarantee the integrity of financial markets, the threshold for such regulation should be set high.

The sharp reduction in the ratio of employment to population highlights our challenge – achieving a full recovery will require creating jobs for those currently unemployed and actively seeking work, those entering the labor force as the population grows, and those likely to return to the labor force once jobs become more available. Employing all these workers within a reasonable period of time will require very strong economic growth. The question is, how likely is that? Figure 4 shows the growth rate in each of the first three years of the last three recoveries, as well as the average rates for all three recoveries. The most recent two recoveries were quite slow to get started, but picked up steam over time. This is the pattern projected in most forecasts for this recovery. Over the past three quarters, GDP has increased 3.7 per cent. 3 However, some of the growth resulted from temporary rebalancing of inventories by businesses, as suggested by Figure 5, which shows that the per cent change in real final sales was quite a bit smaller than the per cent change in GDP. The gap between them would be inventory rebuilding. Most private forecasts expect growth in the next four quarters to be fast enough to begin to make more improvement in the labor market. My own expectation is consistent with this. As financial headwinds subside, and consumers and businesses gain more confidence in the recovery, expenditures that have been deferred will be made – and we should begin to see stronger economic growth.

If I plug a destination into my new GPS device, it asks whether I want the quickest route, or the geographically shortest route, or a route that meets some other criteria. The quickest route is likely to involve highways, but may cover more miles. The shortest route may take side roads that reduce distance and save gas, but take substantially more time. And, of course, you may run into traffic or construction that forces you to adapt your route. When setting monetary policy there may be a variety of paths you can take to reach the destination. For instance, aggressive pursuit of accommodative monetary policy by the Fed and stimulative fiscal policy by Congress and the Administration might get us more quickly to our desired destination – but could enlarge the deficit or risk igniting inflation expectations. Alternatively, aggressive pursuit of less accommodative policies – that is, removing monetary and fiscal stimulus sooner rather than later – could result in a more extended period of 1 Of course, the views I express today are my own, not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee (the FOMC). BIS Review 62/2010 1 underutilized resources; or worse, significantly increase the length of the journey to our ultimate destination. Right now, we are far from our destination, and the rest of my remarks will focus on selecting among the alternate routes to our objective.

by opposing techno‐utopians and techno‐pessimists, or proponents of “degrowth” to proponents of “green growth”) is not constructive Lastly, given the well‐known limitations of GDP as a measure of well‐being, it is also important to bear in mind that the definition of growth itself is bound to evolve in the future. For instance, as recently stressed by Professor Nicholas Stern and co‐authors in an IMF working paper,17 we should move from a “flow‐ 16 See Keyßer, L.T., Lenzen, M. (2021). 1.5 °C degrowth scenarios suggest the need for new mitigation pathways. Nature Communications 12, 2676. https://doi.org/10.1038/s41467‐021‐22884‐9 17 Bhattacharya, A., Ivanyna, M., Oman, W., Stern, N. (2021). Climate Action to Unlock the Inclusive Growth Story of the 21st Century. IMF Working Paper 21/147. 7 centred focus on GDP” to a “stock‐centred focus on a broad definition of capital”; “the conceptual framework used by policymakers must treat planetary boundaries – notably climate overshoot – as a hard constraint”. They also propose to establish an annual carbon budget at the national level which would be binding. In short, if we are to hold a serious discussion about what an ecological transition means for central banks, including the impact it will have on output and other key macroeconomic variables, we need to be able to engage in a responsible and scientific manner on these difficult questions, rather than sweeping them under the rug.

* At the end of the summer 2020, when we began ‐ at our modest deputy level – to launch this conference, we were convinced that the message of the Green Swan was worth spreading, but we were far from sure that it would attract such a prestigious set of speakers. This was before the new momentum we are experiencing thanks to the political shift in the United States, following the ambitious Italian G20 and UK G7 presidencies. Now, only a few months later, the context is quite different. Governments are more aware than ever before, that they need to act, to anticipate; there is more appetite for multilateral cooperation. The private sector is making many commitments to net‐zero emissions. However, a number of questions arise that we cannot answer easily. Three of them seem particularly important: 3 International Energy Agency – IEA (2021). Net Zero by 2050. A Roadmap for the Global Energy Sector. Accessible at: https://www.iea.org/reports/net‐zero‐by‐2050 2 Should we focus on climate change or broaden the scope? How can we make sure that public policies are consistent? How to thrive within limits? Allow me to develop these points. * I. BEYOND CLIMATE? The Charter of the NGFS,4 adopted in December 2017, states that the network aims, in particular, to “contribute to the development of environment and climate risk management”. It is key to consider how ecological crises are in fact multiple and interconnected.

In addition to deterring errant behaviour, this move will reinforce our preventive supervisory approach, and draw financial institutions’ attention to more severe instances of deficiencies and breaches. Financial institutions can then pre-emptively strengthen their own controls to prevent similar failures. b. Second, the NRA highlighted ML/TF risks inherent in cash-intensive industries and large value cash transactions. In May, the Ministry of Home Affairs, the Ministry of Finance and MAS consulted publicly on a cash transaction reporting regime for precious stones and metals dealers. In a similar vein, given the risks associated with 4 BIS central bankers’ speeches large value cash transactions and high face-value notes, MAS will be discontinuing the issuance of the $ note, starting from 1 October 2014. The development of more advanced and secured electronic payment systems has reduced the need for large value cash-based transactions. Therefore, we do not expect the discontinuation of the note’s issuance to create any major inconvenience. Existing $ notes in circulation will remain legal tender, including all notes under the Currency Inter-changeability Agreement with Brunei. However, we expect the stock of such notes to dwindle over time, as worn notes are returned to us and not replaced. Conclusion 24 Let me sum up. 25 Singapore is fully committed to the global efforts against financial crime. The evolving risk environment requires proactive and collective actions in all jurisdictions. MAS has, and will continue to take steps to further enhance our AML/CFT regime, along with other government agencies for the non-financial sectors.

Rapid advancements in information, communication and payment technologies have led to great conveniences around speed, ease, and often anonymity; so these developments also open up more potential loopholes and avenues for perpetrators to escape detection; hence the momentum on AML/CFT efforts must be maintained. 3 Indeed, the international community has not sat still. As many of you know, the Financial Action Task Force (FATF) was set up in 1989, and has been the key policy-making body that meets regularly to identify emerging risks and typology, provide guidance, as well as to strengthen or refine international standards. In 2012, a revised set of international standards to combat ML/TF risks was issued, and the FATF has since commenced a new round of mutual evaluations to ensure that countries put in place the necessary controls. Fundamental to this is the importance for countries to understand their ML/TF risks, and adopt appropriate measures to mitigate those risks effectively. A national effort 4 Singapore has and will continue to play our part in this important global effort. As an international financial centre and business hub, our openness exposes us to cross-border financial crimes. Protecting our reputation as a well-regulated and clean financial centre is not negotiable. This is a fundamental tenet upon which our financial centre has developed, and the continued confidence in the integrity of our financial system is a necessary condition for sustaining growth of the sector.

How could the US car manufacturers expect to compete in the motor car market in Hong Kong if the US cars were oversized and, more importantly, had virtually no post-sale service in Hong Kong, which is so crucial in the motor car market? Of course, since then the US manufacturers have gone a long way in improving the product types and quality, and have now become much more competitive than they used to be. BIS Review 116/1997 -3- 7. For Hong Kong to remain competitive under the linked exchange rate system, prices, including land costs and wages, will need to adjust. This adjustment process is already taking place, as we have seen in the correction in property prices and, in due course, rentals. With the slowdown in consumer spending and easing of the demand for labour, the pressure on wage increases for next year should also reduce. I am confident that the flexibility of Hong Kong’s economy will enable us to cope with external shocks effectively and to regain competitiveness. In the last 13 years, Hong Kong’s manufacturers have managed to keep the unit value rise of Hong Kong’s exports to 3% per annum, which is marginally much lower than the inflation rate of 3.5% in industrial countries, and well below the domestic inflation rate in terms of CPI of 8%.

The expertise has proven rather useful for many of our staff and, at times, was provided as on- BIS central bankers’ speeches 1 the-job training, for example, FSVC experts joined the Bank of Albania’s Supervision Department inspectors in their on-site examinations. I am confident that these qualities of FSVC’s assistance will be maintained in the future. A result of this fruitful cooperation is our shared commitment to extend it to the medium run. The parties have been in constant contact to identify the fields for future cooperation and I reckon that this process is being finalized in terms of project design and relevant details on development methodology and expected results. A preliminary assessment reveals that the scope of our future cooperation has expanded. Projects will continue to serve the objective for ongoing supervision capacity building in the fields of improvement of contingency plans, implementation of latest amendments to international banking supervision standards, risk assessment and improvement of regulatory requirements for responsible management by banking and financial institutions. The assistance may be expanded to include underlying standards for payment systems and use of e-money, thus laying the grounds for the adoption of relevant requirements arising from EU directives. The cooperation of the FSVC with ADIA will focus on the implementation of the Strategic Development Plan 2012–14 and will address, more concretely, the modernization of the IT infrastructure and reporting system as well as other ancillary processes.

At this point, let us make it clear that this work is not intended as a declaration of the SNB’s intent to issue wholesale CBDC, or indeed to offer another settlement model. Rather, the point is to act prudently and proactively so that we can continue to fulfil our mandate in the future. Integration of token money and book money Let me now turn to the integration of token money and book money. We do not yet know what role DLT and tokenisation will play in the financial system of the future (cf. slide 14). There are three possible scenarios. In the first scenario, both remain niche products. A second, hybrid scenario, in which assets can be transferred and paid for in both tokenised and traditional form, is also conceivable. In the third scenario, infrastructures would be based primarily on DLT, and assets would only be available in tokenised form. For the second and third scenarios, a seamless integration of different forms of money as well as a high degree of interoperability between existing and new payment and settlement systems are essential. A lack of interoperability may lead to segmentation of the financial market infrastructure. A lack of integration may lead to fragmentation of the monetary system and threaten the singleness of the Swiss franc. The SNB will pay particular attention to this issue. Conclusion This evening we have looked at how we can harness the potential of digitalisation and new technologies while at the same time maintaining security and confidence in the payment system.

The real interest rate is expected to be very negative throughout the forecast period. This entails a powerful stimulus of the Swedish economy. The discussion is currently dominated by the question of how we should manage monetary policy in the prevailing recession. As monetary policy is forward-looking, it is important not to overlook the potential inflationary impulses now being built in for the future. Price impulses from a weak krona and from high unit labour costs are two such factors. If the global economy recovers more quickly than we are predicting, this will also contribute to making monetary policy less expansionary. Before further measures are taken, there are thus many reasons to evaluate the effects of all of the measures taken so far, and to evaluate the new information on economic activity and the financial market situation that is received.

Indeed, it was Carlos Diaz-Alejandro, by the mideighties, who eloquently said “good-bye financial repression, hello financial crash” (DiazAlejandro, 1985). Some recent research also points in the same direction, as reviewed in Dr. Reddy’s lecture – beyond a certain level, financial depth has marginal contributions to growth (Arcand et al., 2012; Cecchetti and Kharroubi, 2012). In Chile we had a great financial crisis in the early eighties which led to an overhaul of financial regulation. The country followed the prudent route, allowing only activities that could be handled appropriately by financial intermediaries, but above all that could be understood 1 and monitored well by market participants and financial regulators. Since the country was emerging from a deep financial crisis, the macro view of the financial system and its regulation were a central part of the design. But this seems not to have been the case in advanced economies. The global financial crisis has revealed the perils of financial deepening. It has shown that advanced economies are not different. This is not new in emerging markets, but is something less common and more dramatic in advanced economies. Long ago we learned that when an economic downturn comes with a financial crisis the costs are extremely high. What went wrong? It is important to recall that the crisis had its origins in a noble cause: providing housing to low-income families.

Consumer protection also has a high risk of being captured by the political cycle. This could be specially damaging in the financial system – and therefore every effort should be made to make the institutions safeguarding financial consumers autonomous and technical. For macroeconomists and financial economists, today it is difficult to focus on something other than the European crisis. The health of the global economy depends on a good resolution to this crisis. However, we cannot forget the duty of building a safer and fairer financial system. Today we have the opportunity to tackle this task, but we also have to avoid shortcuts that may end up rebuilding a weaker financial system. 3 References Arcand, Jean-Louis, Enrico Berkes and Ugo Panizza (2012), “Too Much Finance?,” International Monetary Fund Working Paper, WP/12/161. Cecchetti, Stephen and Enisse Kharroubi (2012), “Reassessing the Impact of Finance on Growth,” mimeo, BIS. De Gregorio, José and Pablo Guidotti (1995), “Financial Development and Economic Growth,” World Development, Vol. 23, No. 3, pp. 433–448. Diaz-Alejandro, Carlos (1985), “Good-bye Financial Repression, Hello Financial Crash,” Journal of Development Economics, Vol. 19, Issues 1–2, pp. 1–24. Dooley, Michael P. and Michael M. Hutchison (2009), “Transmission of the U.S. Subprime Crisis to Emerging Markets: Evidence on the Decoupling-Recoupling Hypothesis,” NBER Working Paper 15120. Korinek, Anton, Agustin Roitman and Carlos A. Vegh (2010), “Decoupling and Recoupling,” American Economic Review, Papers and Proceedings, pp. 393–397. Levine, Ross (2006), “Finance and Growth: Theory and Evidence,” in Philippe Aghion and Steven Durlauf (eds.) Handbook of Economic Growth, pp.

To illustrate this point: Lowering the policy rate is not the only thing a central bank can do to ensure financial stability in the short run; a central bank has other efficient instruments at hand, which, depending on the situation, may be equally or even better suited to safeguarding financial stability. Also, these instruments do not affect the stance of monetary policy and thus the economic stability and price stability objective, or only do so to a lesser degree. The difference between liquidity management operations and changes in the stance of monetary policy has been poorly understood by many observers. Liquidity injections, as large as they may have appeared, have in general not resulted in significantly higher levels of reserve money, because they were only of a temporary nature. The liquidity management operations have thus not resulted, as is sometimes claimed by analysts, in huge amounts of excess liquidity, nor can they necessarily be equated with a more expansionary monetary policy stance. Many of the recent central bank liquidity management operations have not affected the monetary policy stance. However, there have of course been changes in the monetary policy stance during the financial market crisis: the Federal Reserve has significantly lowered interest rates, and in some other countries, the path of the (partly realised, partly expected) monetary policy rate is lower now than last August, which is equivalent to an expansion in the monetary policy stance.

So, we should gradually pay back our debt, but when an old debt falls due it is common to take a new loan to repay the old one, and if it can be reduced, it will be even better. What will we do when in 2015 an installment of 500 million euros falls due? The amount that will fall due in the public sector is around Euro 380 million. The rest is in the private sector. We have in mind those payments maturing in the next period. We have the potential, in both the foreign reserves and the economy, and certainly we expect that there will be new loans from abroad, which will repay part of the liabilities that will mature. 4 BIS central bankers’ speeches

These were the factors behind the MPC’s decision at the last meeting to raise rates: but it may well be that there is now an opportunity to wait and see for a period how the economy develops; and this need not damage our prospects of meeting the inflation target; and it might improve the chances of continued sustainable growth in output and employment, and, perhaps, of a return of sterling to a more realistic level. I would like to finish by thanking the Cardiff Business Club and Sue Camper for providing me with the opportunity to speak to you tonight. I believe most of you know Sue and the work she does as the Bank’s Agent in Wales. The Agents play a vital role as a channel of communication not only for the BIS Review 19/2000 4 Bank to explain more widely the monetary policy framework and the reasoning behind MPC decisions; but also to hear the views of others on the economic conditions they are facing. And I am grateful, on behalf of the MPC, for the support you give her. 5 BIS Review 19/2000

Once inflation has been brought under control, and once this control has been confirmed, monetary policy can guide short-term interest rates to a level which contributes to balanced growth. Quite a number of EU countries are in such a situation already, with short-term interest rates at around 3%. In others, where inflation has been brought under control more recently, rates have not yet reached this level but are approaching it gradually. The confirmation that inflation has been brought under control does, unfortunately, take time. Finally, in one major country which has seen rapid growth for several years now and in which unemployment has fallen remarkably, short-term interest rates have been raised - applying the principle of preventive medicine. 3. Now, what can we say about long-term interest rates, which also have an important role to play in stimulating growth - perhaps an even more important one than short-term rates? Monetary policy does have an influence on the level of these rates, but its influence is not exclusive and we cannot even predict the direction of its influence with certainty. At this particular point in time, in the first group of countries to which I referred a moment ago, nominal long-term interest rates are at a historically low level - they are well below 6% - but real long-term interest rates can be regarded, perhaps, as still being too high to put continental Europe on the road to more vigorous growth.

Less than 150 thousand private dwellings, on average, were built in the UK between 2005 and 2014 – compared to estimates that 200-250 thousand that would be needed to keep up with growing demand (Barker 2004). 7 The FCA carried out its Mortgage Market Review over 2011 to 2012. The recommendations were implemented in early 2014 and required lenders to test the affordability of new loans. The test was not prescribed by the FCA but rather for each lender to implement their own. 8 In 2017 the FPC clarified that the 3pp stress should apply to the reversion rate at the moment of origination. 5 5 All speeches are available online at www.bankofengland.co.uk/news/speeches 5 The stress test on the major banks then in train indicated that they had sufficient capital to absorb very major losses from their mortgage portfolios.9 The risks did not seem to lie primarily on the lender side. And the experience in the UK, with full recourse mortgages was that households would do everything possible to pay their mortgages, cutting consumption to do so.10 But even though, as a result, mortgage defaults were relatively low in the crisis, high mortgage debt did appear to have had an impact more generally. Evidence from the crisis supported the view that more debt is associated with deeper downturns.

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We are analysing such 4 See Federal Reserve Board announces the results from the review of the supervision and regulation of Silicon Valley Bank, led by Vice Chair for Supervision Barr, FRB press release, 28 April 2023. 5 Basel Committee to review recent market developments, advances work on climate-related financial risks, and reviews Basel Core Principles, BIS press release, 23 March 2023. 6 7 Valuations are based on the MSCI European Quarterly Property Index. See Recommendation of the European Systemic Risk Board of 1 December 2022 on vulnerabilities in the commercial real estate sector in the European Economic Area (ESRB/2022/9). episodes with great care because vulnerabilities in non-bank financial intermediaries can result in procyclical selling behaviour that would amplify asset price falls. In this context, non-bank financial institutions need to ensure that their risk management practices adequately reflect the risks they might face. For example, investment funds need to monitor and address possible excessive liquidity mismatches or leverage. Insurers need to pay close attention to market risk. They also need to consider that margin calls on derivative positions or lapses of contracts can expose them to liquidity risk. Central counterparties (CCPs), clearing members and their clients need to be mindful that the reduction in counterparty credit risk brought about through regular margining can result in liquidity risk being transmitted through the financial system. They need to monitor derivative exposures, and address concentration risk and procyclicality in margining practices along the chain of CCPs, clearing members and their clients.

Similarly, the Circular will determine the circumstances in which bank foundations will be compelled to diversify their investments and, if appropriate, to relinquish control of the credit institutions which they own through the corresponding divestment. I trust that the period for public consultation of the Circular will open shortly. Second, the new European framework of resolution is already prompting, in most national jurisdictions, reflection on the institutional architecture of bank resolution. In the past, resolution agreements have required close collaboration between the various authorities involved in the process; namely, the supervisor, the resolution authority, if any, and the governments concerned insofar as the resolution has habitually required the use of substantial public funds. The experience in our country has been no exception. The current distribution of functions between the Banco de España and the FROB – whose Governing Committee includes representatives of the Ministry of Economic Affairs and Competitiveness, the Ministry of Financial Affairs and Public Administration, and the Banco de España – has required that the two institutions were intensely involved in the resolution processes. Thus, while the supervisor is responsible for initiating the resolution process of an institution and approving the resolution plans, the FROB must prepare these plans, put them into practice and, in sum, manage the State’s ownership interest in those institutions that received financial aid, including any future divestment. Consequently, the coordination between the Banco de España and the FROB has been pivotal in ensuring effective management of the crisis.

This would mean that their income would for some time to come be used for amortisation rather than consumption and investment – we would experience a fall in demand in the economy.6 One important reason for the recovery from the crisis being so slow in a number of countries is probably that households have a large ”debt overhang” they are trying to get rid of.7 If one were to have this type of development, it would most probably mean that unemployment rose sharply and it would probably also be difficult to attain the inflation target for quite a long time to come. In the countries where housing prices have fallen in connection with the crisis, unemployment has increased quite substantially (see Figure 6). Excessive debt thus constitutes a threat to macroeconomic stability and price stability, and counteracting risks in this area is therefore entirely in line with the Riksbank's mandate and objectives.8 The idea behind the Riksbank's policy The idea behind the Riksbank's policy can be illustrated with the aid of two stylised scenarios (see Figure 7). Either one conducts a more expansionary monetary policy, as represented by the blue line, which endeavours to bring inflation up to the target within a relatively short time and to quickly reduce unemployment. However, this policy means that lending to households will increase and prices in the housing market will rise, ultimately to untenable levels.

Jeremy Stein at the Federal Reserve's Board of Governors has expressed it as the advantage of monetary policy being that it "gets in all of the cracks”.27 It is also worth pointing out that in countries such as Norway and Canada they are fairly explicit in saying that the policy rate has a role to play in this context – and this is despite the fact that they have come further in the macroprudential field than we have.28 It remains to be seen where we eventually will end up when it comes to this issue. My own opinion is that we will probably not be able to have a completely strict division of labour between monetary policy and macroprudential policy and that the policy rate cannot be ruled out as a tool for counteracting financial imbalances. There will probably always be situations where macroprudential policy needs the support of a monetary policy that at least to some extent “leans against the wind”. But we still do not have any certain answers and I believe it is wise to keep all doors open. A formative stage Let me round off. There is no doubt that we are internationally in what one might call a formative stage with regard to macroeconomic policy in general and monetary policy in particular.

12 We are working to build up the skills and competencies in needed in the new world of finance, starting with the curriculum in our tertiary educational institutions, work placement programmes, and extending through to mid-career retraining and life-long learning. 13 First, getting our students to be ready for FinTech. 14 MAS is working with the five local polytechnics to review and enhance their curricula, for example to develop skillsets in agile software development, mobile application development, cloud application deployment, and data analytics. 15 We are also working with the polytechnics to increase the number of FinTech internships and joint projects with the FinTech community so that students can apply their skills and gain hands-on experience. In October, we embarked on the “PolyFinTech 100” initiative to secure 100 FinTech mentors and 100 FinTech internships for 2017. I am pleased to announce that we have secured these targets in the short span of a month. More than 2,500 students in the banking and IT-related courses in the polytechnics each year are expected to benefit from these initiatives. 16 MAS is also partnering with the universities and polytechnics to expose students to perspectives from industry practitioners 2/4 BIS central bankers' speeches Next year, we will launch the MAS Tech Talks, a series of talks by FinTech professionals to share about their experiences in the industry. This will give students to better understand job opportunities available in FinTech and define their career aspirations.

Today, he is a UX designer at the Decision Science Agency and is also developing an app to help youths discover their talents and passions by picking up new skills through their peers. As Vernon puts it: “Always be open to learning something new. You never know where it might take you.” Conclusion 22 I would like to offer once again my heartfelt congratulations to tonight’s winners, and my best wishes to all participants of both the Awards and the Hackcelerator. Let’s continue our journey together. 1 CSAT provides co-funding to organisations who wish to send their staff for specialised cyber security training in areas such as threat intelligence analysis and digital forensics investigation. 4/4 BIS central bankers' speeches

4/7 BIS central bankers' speeches The second occasion came later in 2012 when we had to prevent a self-fulfilling bad outcome that threatened to occur as a result of the sovereign debt crisis. Investors had begun pricing redenomination risk into sovereign debt and interbank markets, as they worried about the possible break-up of the euro area. However, as I said earlier, the pricing of such risk led to a breakdown of money markets, a fragmentation of banking systems along national lines and threatened the unity of monetary policy transmission across the euro area. Moreover, expectations fuelled a vicious cycle. Tightening monetary conditions in countries affected by perceptions of redenomination risk put downward pressure on economic activity, exacerbating the perceived risk. Such moves are a classic example of expectations leading towards an outcome that is non-optimal for social welfare. This is why we announced Outright Monetary Transactions (OMTs) as an instrument that can support our monetary policy. The idea was for the ECB to purchase the sovereign bonds of countries affected by panic-based redenomination risk. By breaking the link between perceptions and downward pressure on economic activity, OMTs would aid in restoring the proper transmission of monetary policy across the whole euro area and support the recovery. OMTs were not used. That the ECB had the tool at its disposal was sufficient to anchor expectations at the “good” outcome. Once unwarranted fears of redenomination were removed, sovereign spreads fell and banks were once again able to raise debt and equity funding.

As we embrace mobile banking, the primary objective of Zambia’s mobile banking framework should be to empower the millions of citizens who do not have access to conventional banking. The essential spirit of mobile banking should be financial inclusion. In this regard, facilitating mobile banking will contribute to the distribution of resources to productive activities such as farming as well as directing resources to areas where there are most needed. In addition the policy framework should be flexible enough to allow the industry players to explore various business models. To this end the National Payment Systems Act of 2007 has provided a platform for businesses involved in mobile banking and money transmission to be designated. The need for effective regulation to ensure a stable financial sector and protection of consumers is vital. Nevertheless, regulation should facilitate and not impede development and must create an optimal, dynamic and agile banking environment. As Regulators we must therefore be open minded to new market solutions while the developers need to constantly engage the regulator in their product development. In stressing the need for effective regulation, I must emphasise the need for providers to observe the mandate and requirements of their licences. Mobile services providers must not perform banking services as this is the domain of licensed banks. Finally, I also wish to stress that mobile service providers and mobile banking solutions developers need to have in place robust business continuity plans that will ensure minimum disruption to services in the event of disasters.

Slower growth of world activity is bound to prolong the restraining external effect on growth and inflation in the UK, even though the exchange rate has now started to weaken. At the same time there are also now clearer signs of overall slowdown in our own economy. The evidence for this is less obvious in the backwards-looking economic and monetary data than it is in the forward-looking surveys, but even so the data suggest that we are beginning to see an easing of pressure, including an easing of pressure in the labour market. And the surveys themselves now point to a slowdown in service sector growth, including retail distribution, as well as a sharper decline in manufacturing output. This prospect is consistent with the reports which we receive directly from the Bank’s network of regional agents and their 7000-odd industrial and commercial contacts around the country. Of course we pay very careful attention to this forward-looking evidence of developments in the economy alongside the data, and, like others, we have revised down our forecasts for output growth and inflation. And we have eased monetary policy quite sharply in the past two months, in the light of that evidence. Our current best guess - published in last week’s Inflation Report is that, after the interest rate cuts, the growth of overall output next year will be around 1%, picking up through the Millennium to around trend in the second half of the year 2000.

The facts are that for the past 6½ years the British economy as a whole has grown at an average annual rate of over 3% - which is well above its long term trend rate of some 2% - or, if you are optimistic, some 2½%. And we were still growing, at an annual rate of some 2% in each of the last two quarters, on the latest published data. At the time these headlines were written a month or so ago not one of the 28 independent professional forecasting organisations surveyed by Consensus Forecasts was expecting output to fall in 1999; and their average expectation was for 1% growth next year. That is broadly in line with our own latest best guess in the MPC. Your own most recent IOD forecast in September suggested slightly stronger growth next year. It is true that Consensus Forecasts have since revised down their mean expectation - to just over ¾% growth; but even now only one of the 28 contributors expects output to fall. On unemployment in the UK the headlines read: * Jobs gloom deepens as layoffs soar. * More jobs go as recession looms. * Jobless up as world pain hits Britain. BIS Review 98/1998 -2- And the facts? At the time these headlines were written, the unemployment rate, both nationally and in virtually every region of the UK, apart from the South East and East Anglia, was the lowest it has been since at least the early 1980s. I could go on.

But before I go on, let me remind you that the views I express are my own and may not reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. The topic of this conference may not appear particularly glamorous. It is natural to view monetary policy implementation as a technical and humble exercise next to the flashiness of policy formulation, which has policymakers determining the appropriate level of interest rates. However, for those of us charged with carrying out policymakers’ decisions, there is keen interest in the mechanics. We have the task of designing and executing operations that ensure that policymakers’ instructions are implemented effectively and efficiently, so that their intentions can affect inflation and the real economy. But while monetary policy implementation is just a means to an end, there is no obvious single “right” way to do it, and every central bank’s operating framework reflects history, unique institutional constraints and the market environment, which may change over time. So even though the topic of today’s conference may seem to lack glamour, it is significant, particularly now, since monetary policy implementation and the market landscape have undergone profound changes in recent years. Many advanced economy central banks have adopted a number of new tools to implement monetary policy or used traditional tools in new ways or in unprecedented size, in part because economic conditions have necessitated historically low interest rates that have bumped up against the zero bound for almost seven years.

William C Dudley: Improving culture and conduct in the financial services industry Opening remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at “Reforming Culture and Behavior in the Financial Services Industry: Workshop on Progress and Challenges”, Federal Reserve Bank of New York, New York City, 5 November 2015. * * * Welcome to the New York Fed and to a discussion of how culture and conduct might be improved within the financial services industry. I am pleased to see all of you here today – there is tremendous breadth of experience and responsibility within this room. We need to take full advantage of this opportunity. I encourage all participants to be candid and on-point, because the task of reforming culture is formidable. 1 Untrustworthy behavior on the scale that we have witnessed in financial services does not arise in a vacuum. Social science research makes it clear that context largely drives conduct. 2 This is not a new insight. Adam Smith observed centuries ago that, independent of personal sentiment, we often behave according to what we “[see are] the established rules of behavior.” 3 We observe the activity around us, assess the norms of conduct and generally adapt to those norms in our own behaviors. Banking is not exempt from this universal propensity.

Source: Bank of England 2017 Q2 Credit Conditions Survey (CCS). (a) A positive balance indicates that the changes in the factors described have served to increase credit availability. (b) Question: ‘How have the following factors affected overall secured credit availability to households over the latest three months relative to the previous three months?’ The chart shows responses to the option 'market share objectives'. (c) Net percentage balances are calculated by weighting together the responses of those lenders who answered the question by their market shares. Chart 17. Proportion of new mortgages with (a) no fees Chart 18. Loan to income distribution of new (a) mortgage lending Per cent Proportion of £ fee new mortgages 50 45 40 35 30 25 20 15 10 5 0 2011 12 13 14 15 16 17 Sources: Moneyfacts and Bank calculations. (a) The proportion of £ fee products in each year is calculated relative to the total number of new mortgages offered during the year. The proportion in 2017 is calculated based on data from January to April 2017. Sources: FCA Product Sales Database and Bank calculations. (a) The Product Sales Database includes regulated mortgages only. 21 All speeches are available online at www.bankofengland.co.uk/speeches 21 Chart 19. Major UK banks’ capital ratios Chart 20.

These are all good reasons to continue our dialogue in the coming months and to meet with you, for example next year, to take stock of all these issues! Thank you for your attention. 4/4 BIS central bankers' speeches

Prices rose by around 3 per cent annually for a long period, but since 1995 they have been falling by about 6 per cent annually. This kink point coincides with the dismantling of the restrictions on textile trade and it coincides with a period of rationalisation in retail trade in Norway. China’s membership of the WTO has subsequently pushed down prices further. The Internet facilitates price comparison, and price margins in all sectors are under pressure. World financial markets are also in flux. Technological advances, increased trade and liberalisation have increased cross-border capital flows. Foreign ownership of businesses has increased considerably. At the same time, savings are increasingly being invested in foreign countries. The home bias for investment has diminished. In recent years, long-term interest rates have declined. Low and stable inflation in many countries has made a contribution. Investors have less of a need to hedge against high inflation. There is a strong tendency to save among Asian and oil-exporting countries, while the willingness to invest is limited in many industrialised countries. This is pushing down interest rates. Low long-term rates probably also reflect low short-term interest rates and ample liquidity. Interest rate developments and buoyant growth have led to a sharp rise in equity prices in the past few years. At the same time, property prices are rising sharply in many countries. Low interest rates, sharply rising equity and property prices, high commodity prices and high energy prices are probably linked to cyclical developments and may therefore be transitory.

Low interest rates contributed at the beginning of the upturn to high growth in private consumption and housing investment. Last year, exports and corporate investment also showed solid growth. There is now a broad upswing in demand for goods and services. It has taken time for employment to pick up, but this is occurring now. Inflation has increased somewhat, but is still very low, even 2½ years after the cyclical change. Inflation is still being restrained by the fall in prices for imported consumer goods, increased competition in a number of markets and the current period of lower nominal pay increases. The trend in prices for consumer goods over the past two or three years is a result of favourable developments in the Norwegian and global economies. Low inflation is being accompanied by real income growth and a rise in production. In other words, low inflation is not the result of declining demand, activity or employment. The labour supply and production equipment set a limit in the short term on the level of production in Norwegian enterprises. When production approaches this limit, wage and price inflation will pick up. For an open economy like Norway’s, this limit can vary. We buy an increasingly wide range of goods and services abroad. The production of goods for the domestic market can be moved abroad. Services can also be provided by producers in other countries. Norwegian companies are no longer looking to the domestic labour market only. Other Nordic countries are an important source of labour.

Third, traditional financial institutions in Asia have embarked on a digitalisation journey, enabled by core technologies such as cloud computing. Almost every major financial institution has an active innovation agenda to strengthen its business by harnessing technology. In just the last three years, more than 30 global financial institutions have set up innovation labs in Singapore, testing new technologies and collaborating with FinTech start-ups to develop solutions. Let me give some examples of collaboration from the Singapore FinTech ecosystem: 2/4 BIS central bankers' speeches Hedge fund managers are using a solution deployed by SQREEM to provide them behavioural insights related to equities, foreign exchange markets or political events like Brexit. Relationship managers are using a solution by AIDA, to predict whether their clients are likely to increase their assets under management or make a withdrawal. FINQUEST is using big data analytics to connect small to mid-sized companies globally to growth capital and potential acquirers. APVERA is helping enterprises detect anomalies in the behaviour of their employees and flag data leakage risks. These three driving forces – FinTech start-ups, e-commerce platforms, and financial institutions harnessing technology in a big way – are creating the synergies that power Asia’s digital transformation. Initiatives to Foster the FinTech Ecosystem MAS has an active and wide-ranging FinTech agenda. In the interest of time, let me highlight three key initiatives we have taken in recent years to nurture the FinTech ecosystem in Singapore and integrate it across ASEAN. First, the ASEAN Financial Innovation Network, or AFIN for short.

In short: to maintain its position as one of the top financial centres in the world, Singapore must embrace FinTech – harnessing its benefits, managing its risks. Thus began Singapore’s FinTech journey. And by FinTech, I mean two things: encourage and support financial institutions to experiment and harness technology; and promote non-financial FinTech players to provide competition and inject innovation so that the ecosystem as a whole benefits. MAS takes an even-handed approach, allowing competition between financial institutions and non-financial FinTech players as well as facilitating collaboration among them. And of course, doing all this with a keen eye on managing the risks associated with technology – safeguarding financial stability and maintaining public confidence. MAS and the financial industry are not doing this in a vacuum, but within the larger context of Singapore’s Smart Nation agenda – to build a digital economy and society for higher productivity and more gracious living. Asia’s Digital Transformation 1/4 BIS central bankers' speeches Singapore’s Smart Nation drive is itself playing out against the backdrop of a dynamic Asia on the cusp of a digital revolution. Asia remains the fastest growing region in the world, with the ASEAN-4 economies 1 expected to grow at 4.7% p.a. over the next 10 years, China at 5.7%, and India at 6.5%. Growing affluence, rapid urbanisation, and expanding education, are propelling strong demand for modern services like travel, shopping, and financial services. Yet large segments of Asia’s population have no access to banking and payments services, insurance cover, or investment opportunities.

The floating krone exchange rate has been able to act as a shock absorber for downturns in the Norwegian economy. In periods where oil prices have fallen and the economy has moved into recession, the krone exchange rate has depreciated and contributed to strengthening competitiveness and preventing inflation from moving too low. Nevertheless, interest rate setting is not decoupled from interest rate developments in other countries. A rise in foreign interest rates normally pulls in the direction of a weaker krone. A weaker krone pushes up prices for imported goods. When inflation is already high, as now, this increases the risk of inflation becoming entrenched, which we must take into consideration when setting the policy rate. If the FX market loses confidence in our commitment to tighten monetary policy when inflation rises, the krone may depreciate further. Confidence in the inflation target is a precondition for monetary policy's ability to dampen fluctuations in the economy and to support high employment. 3/5 BIS - Central bankers' speeches In the long term, there is no conflict between the objective of price stability and high and stable employment. Ensuring that inflation remains low and stable is the most important contribution monetary policy can make to promoting high employment over time. We cannot keep employment permanently above potential by keeping the policy rate low. The level of employment over time is determined by structural conditions such as labour force composition, the tax and social welfare system and wage formation.

Caleb M Fundanga: How the Bank of Zambia’s policies are impacting Eastern Province developments Remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Eastern Province Chamber of Commerce and Industry Open Meeting, Chipata, 17 January 2008. * * * • The Chairman – Eastern Province Chamber of Commerce and Industry (EPCCI) • Members of the Executive Committee – EPCCI • EPCCI Members • Invited Guests • Ladies and Gentlemen First and foremost, I must state that I am pleased to have finally made the trip to Eastern Province under the invitation of the EPCCI. The visit was planned for last year but due to other commitments I could not make it. In this regard, I made it a point to make sure that I visit the province before the end of the first quarter. I am happy that we have actualized our plans during the first month. It is our hope that we will also be able to visit other provincial towns off the line of rail during the course of the year. Mr. Chairman, one may question what is the purpose of the Bank of Zambia to visit these outlying areas? The answer is simple and is drawn from our mission statement – which is “to formulate and implement monetary and supervisory policies that will ensure price and financial system stability”. Our visit is therefore, to enable us assess the extent to which our policies are impacting development in the Eastern Province.

Page | 1 This assessment can be broadly confirmed at the current juncture. GDP growth in the first half of 2018 averaged 5.4%, which is in line with the latest projections that the Central Bank published over the summer. The unemployment rate fell to a new record low of 3.8% in the second quarter of this year. Labour market participation, previously on the low side, now slightly exceeds the euro area average. In the area of public finances, the general government balance remains in surplus, the debt-to-GDP ratio extended its downward path, and contingent liabilities, while still elevated, are now within the range observed in other countries. The external balance remains in surplus and inflationary pressures remain contained. When compared with the information available a year ago, the economic record is even more impressive. Then, GDP growth in 2017 was recorded at 5.6%, now the latest vintage of data puts last year’s growth rate at 6.7%. Growth in 2018 is also expected to be higher than previously expected. The European Commission’s latest projections foresee growth this year at 5.4%, the second highest rate the European Union after that of Ireland. This compares with a projection of 4.9% in November 2017. According to the European Commission, fast growth rates are expected to prevail through 2020, although as one might expect, the pace of expansion is set to moderate from recent highs, with annual growth reckoned to stand at 4.4% in 2020. All this is positive news, but there is also some not so good news.

The Government’s efforts need to be complemented with a better utilisation of savings accumulated by the private sector. The Malta Development Bank can help in this regard, by identifying gaps in the financing of viable projects and partnering with financial intermediaries and other stakeholders to develop financial instruments that can finance them. Apart from infrastructure bottlenecks, international institutions that monitor the business environment flag other areas that warrant immediate attention. While we have significant reservations on a number of methodological aspects underlying such surveys, we also share the view that in some areas we do need to step up our efforts very considerably. This is notably the case as regards the efficiency of court proceedings. Although the time it takes to resolve court cases has more or less halved since 2010, it is still among the longest in the European Union. Other challenges we need to address concern the length of procedures to set up a business, the low educational attainment level relative to our peers and a limited capacity to innovate. These are essential elements that support investment and productivity. The development of an intelligent online business portal which ties all Government business-related services into a one solid platform should put businesses in a better position to do business. The new legislation in the area of digital innovation provides the legal framework for business to embrace disruptive technologies.

Accordingly, the strategy followed aimed at a simultaneous implementation of the package of interrelated measures in order to secure sufficient impact on the behaviour of economic agents. Given the above general consensus, there were, however, widely differentiated stances as regards the contents of the respective “minimum packages”, their sequencing and the speed of their implementation. In previous discussions two alternative options - “fast” and “slow” movers - used to be identified as a shock therapy approach against a step-by-step, gradualistic or evolutionary type of approach. BIS Review 25/1997 -3- The Czechoslovak scenario opted for a transition path which was implemented as quickly as feasible, implying some parallel features with the shock therapy approach, in particular with reference to one stroke, simultaneous liberalisation of domestic prices, foreign trade and foreign exchange, and the introduction of limited currency convertibility (on current account for registered domestic businesses) at the very beginning of the transition process. The shock therapy approach was developed for the stabilisation programmes and followed in some countries of Latin America as well as in Poland and former Yugoslavia, where the dominant target of the economic policy was to cope with hyperinflation, to stabilise the economy as much and as fast as possible. The initial conditions in the CSFR differed, however, from those of the countries mentioned. Strategy of systemic and structural reforms The programme of political and economic transformation was formed during 1990, started in January 1991, and continued in the Czech Republic after the split of Czechoslovakia.

This led to the displacement of more than 25,000 people, loss of lives and significant economic damage. Last year, 53 weather disasters across the world racked up more than USD1 billion in economic losses 1. In fact, it is estimated that altogether, economic losses from natural disasters were more than a quarter of a trillion US dollars in 2020 2. These events are prompting a renewed determination around the world to achieve a new balance of economic, social and environmental progress. Indeed, the pandemic presents a once-in-ageneration opportunity to place sustainable development firmly at the core of recovery plans. To date, Governments of more than 120 countries have committed to “Net Zero” by mid-century or earlier. Among the countries are some of Malaysia’s major trading partners such as the EU, South Korea, Japan and China. Similarly, more and more companies are also adopting net zero targets. It is noteworthy that in 2020 – during the pandemic - such commitments by regions increased by ninefold, and threefold by corporates. This is significant. A fast growing number of countries have also introduced climate change legislation and carbon management programs. Global climate change laws are reported to have increased twenty-fold since 1997 across 164 countries, up from 99 countries just 6 years ago 3. Climate-related laws and frameworks are also being strengthened in many countries, in ways that could significantly alter the course of economic development going forward.

The evidence presented is largely based on ongoing research within the Bank and it naturally supplements some of the main topics discussed in our 2017 Trend Growth Report. It also attests to the generosity of multiple institutions that, through covenants, have cooperated by sharing this information, including the INE, the Internal Revenue Service, the Civil Registry, the Labor Directorate and the Ministry of Education. Final remarks Before I conclude this presentation, I would like to mention the materialization of an initiative that we anticipated when we presented the September Monetary Policy Report before the Senate’s plenary. On that occasion we announced that the Bank will seek an external evaluation of its performance in complying with its Organic Law’s double mandate, that is, to safeguard price stability and financial stability. For this purpose, a panel of renowned world experts in central banking will be convened. I want to take this opportunity to inform you that we have appointed the five foreign economists that will make up the aforesaid panel of experts: Dr Karnit Flug (Chair), former governor of the Central Bank of Israel, and professors Dr Petra Geraats, from the University of Cambridge, UK; Guillermo Calvo, from Columbia University, US; Enrique Mendoza, from the University of Pennsylvania, US; and Donald Kohn, Senior Researcher at the Brookings Institution and who formerly served as ViceGovernor of the US Federal Reserve Board. We selected the panel on the basis of these experts’ vast professional experience and knowledge of central banking, all renowned economists at the world level.

the ratio of persons over the age of 67 to persons aged 20 to 66, will rise sharply in the years ahead. The National Insurance Scheme’s spending on old age and disability pensions, based on current social security rules, is increasing. The return on the Petroleum Fund can only cover a small portion of higher pension expenditure. The chart shows how pension expenditure and the real return on the Petroleum Fund will develop in the years to 2060. The calculations were carried out by the Ministry of Finance and based on a long-term oil price of 180 2004-kroner (around USD 27). Even with a long-term oil price of 230 2004-kroner (around USD 35), a funding requirement equivalent to 6 per cent of GDP will still not be covered in 2060. Oil futures six to seven years ahead are now higher than this. If oil prices remain as high in the future, the funding requirement will be somewhat lower. To base decisions on this, however, would be a very risky strategy. The economic outlook The size of the return on our savings, at the national or the personal level, will depend on how well we have invested, but also on economic developments. For our pensions, it is important that wealth creation is substantial in the years ahead. It is natural for me to focus on how monetary policy can contribute to high wealth creation. Monetary policy in Norway is oriented towards low and stable inflation.

In 2005, while the maturities of assets of the banking sector were extended, the liabilities still had short-term maturities. This shows that the vulnerability against the interest rate risk and the maturity mismatch of the sector increased. In order to facilitate banks’ interest rate risk management, it is deemed necessary to make regulations that will also allow floating rate consumer credits along with the currently available fixed rate credits. In 2005, the ratio of liquid assets to total assets decreased as a result of the continuation of the upward trend in credits. Nevertheless, despite the short-term structure of deposits, especially the renewable nature of the major portion of term savings deposits, low condensation and the fact that the assets, which can be accepted by the Central Bank as collateral, comprise a significant part of the assets of the sector are considered risk-reducing factors with respect to liquidity management. Distinguished Guests, In a falling inflation environment, increasing fundamental banking activities along with banks’ narrowing profit margins, and the rise in net wages and commission revenues, which is a more stable source of income, make a positive contribution to the diversity of assets and income of the sector. Hence, they have a favorable effect on profitability performance, which has an important role in financial stability. The capital adequacy ratio of the banking sector is realized well above the legal limit of 8 percent.

It is planned to finalize the studies on the Financial Sector Assessment Program, which were started at the beginning of 2006 with the 4 BIS Review 68/2006 coordination of the Undersecretariat of the Treasury in order to contribute to the ongoing reform process of the Turkish financial sector, by the end of the year. The Financial Sector Assessment Program process in Turkey is expected to contribute to the development of the financial sector in terms of institutional infrastructure. Furthermore, the resistance of the sector will be analyzed on an international platform via stress tests to be applied to banks within the framework of the Program. Distinguished Guests, Proper and effective implementation of macroeconomic policies, in other words, the achievement of macroeconomic stability, is the sine qua non of financial stability. It is very important for the banking sector, which should be able to cope with the Basel II process in the near future, that the improvement of the infrastructure of the financial system continues and that efficient control and supervision is carried out. As firms will contribute to stable growth with the funds that they obtain from banks, the compatibility of the corporate sector with the Basel II process is of great importance as well. In this framework, determined implementation of current economic policies, increased confidence in financial markets, the establishment of risk culture and the adjustment of economic actors’ risk perceptions according to dynamic conditions will strengthen the stability in financial markets.

Bank of England (2016), Barnett et al (2014). 11 All speeches are available online at www.bankofengland.co.uk/speeches 11 The first is based on the UK Office for National Statistics (ONS) Annual Business Survey and employment surveys. 47 The ONS combines these surveys in the form of the Annual Respondent Database (ARDx). The sample covers around 40,000 companies per year, accounting for around 80% of UK GDP. The data covers the period 2002 to 2014. This survey is stratified to match the UK population of companies and so should be broadly representative of aggregate UK trends. The second is the Bureau van Dijk (BvD) FAME database, compiled from UK company accounts. Whereas larger firms are required to submit full annual accounts, there are exemptions for smaller firms. So the sample is smaller, at around 20,000 firms per year, and is biased towards larger firms. However, it contains detailed data on firm-level characteristics which are useful when exploring the determinants of productivity. These data enable us to examine the distribution of productivity across firms. Chart 16a plots this distribution in 2014, based on the ONS data. 48 It is wide and elongated, with a long, thin upper tail of high-productivity firms and a short, fat lower tail of low-productivity firms. This shape means that modal productivity among UK companies is around 50% lower than mean productivity. 49 One interesting question is how this distribution has evolved over time.

Japan is experiencing renewed vigour. Prospects for ASEAN on the whole are good, though there are occasional hiccups. Asia is integrating through trade, tourism, people-to-people exchanges, investment flows and production chains. If there are no mishaps, by 2050, half of humanity – the more than 3 billion people in Asia – will enjoy a standard of living which their grandparents did not even dream of. Naturally, Asia's growth trajectory will not be a straight line. Asia has its share of problems too – the North Korean nuclear issue, tensions across the Taiwan Straits, Kashmir and terrorism. But these issues can be and are being managed. Many countries in the Middle East are keen to engage Asia but I have been told that their businessmen are not so familiar with doing business in China and Southeast Asia. This is where Singapore can play a role. As a key financial and commercial hub, Singapore is well-positioned as a gateway for Middle East companies to expand in Asia. Middle Eastern investors can leverage on Singapore's networks and knowledge to venture into Asian markets. There is much that Asia and the Middle East can do together, as we embark on this journey of rediscovery. Although there are significant differences between Asia and the Middle East, we also share common interests and common challenges. We both want to reconcile tradition with modernity and change, to develop without losing our core values. Both Asia and the Middle East can profit by sharing experiences.

The Maastricht Treaty, by removing national currencies and defining budgetary rules, leads to an important transfer of power from national capitals to European institutions. The French franc, the Italian lira, and the German mark were all symbols of national identity. The euro is now playing an integrating role in people’s minds. In this regard too, the new currency brings a revolutionary dimension. Remember that national currencies were almost always and everywhere brought about by fundamental political changes: the French franc was the “franc Germinal”, the Italian lira was created on the occasion of the Italian unification, and the Reichsmark appeared in 1873 at the foundation of the German empire. These are very strong political symbols indeed. For Switzerland too, the introduction of the euro was a kind of revolution. For the first time in our history, our country was completely surrounded by a single currency area. In terms of population, Switzerland, with its 7 million inhabitants, could be compared to Missouri in the middle of the United States. Just try to imagine Missouri with its own currency! It would not be very realistic. Until 1999, Switzerland had been living amidst very diverse European currencies. In fact, our country had always lamented about this situation. Indeed, given our large export sector, we could only dream of a stable monetary environment without exchange rate fluctuations, which always interfere with economic decisions and distort price comparisons. A common view should be corrected here, that of Switzerland somehow benefiting from external monetary disorders.

There are nominal and real factors that affect commodity price developments. The most important real factor is due to the low price elasticity of not only supply of but also demand for these items. Because of low elasticity, a minor change in supply has the potential to affect market prices significantly. Likewise, a minor change in future real growth prospects has the effect of shifting the demand with a potential of large market price changes. This explains the real sources of commodity price volatility which is recently observed. Regarding nominal sources of volatility, most commonly cited explanations are related to monetary policies of major central banks and the structure of financial markets in commodities. I will elaborate more on real factors that is the lack of sufficient real supply increase in order to meet booming real demand from the developing world. The high growth potential in developing countries suggests that demand pressures are likely to stay with us over the years to come. Combined with the massive financial flows fueled by the exceptionally loose monetary policies, commodity price volatility will probably remain as a major challenge in the years ahead. I believe the key solution here lies in productivity increases in agriculture and energy in the medium term. Regarding agriculture, this necessity is much more evident in emerging markets – in order to keep up with the demand growth, considering the higher share of food in the consumption basket.

But in certain cases I believe that some tax claims can be of a higher value and more liquid than in others. In other countries, doubts about the situation in the public sector may be greater and the question arises as to whether or not tax claims are actually liquid or have the capacity to absorb losses in real time. Because if you want them to be accepted as liquid assets, they must be immediately available. And call me old-fashioned, but I think that hard cash is the best form of capital. Where does Spain sit on the spectrum that you have described? The European Commission will comment on that from the perspective of public aid in its evaluation. In our Comprehensive Assessment last year we were not very enthusiastic about it (DTAs) but in the end we accepted it on legal grounds. But the most important thing for me is to have a level playing field and, as such, any legal clarification that arises as a result of the European Commission’s assessment will be welcome. The Spanish government states that this was designed in collaboration with the EU institutions, given that we were under the financial assistance programme for banks, and it appears to be rather calm. That’s what I said, we have to look at how things were done, under what circumstances and what its real liquidity is; it will depend on government liquidity, tax revenue etc… And there are very different tax arrangements involved.

Compromise solutions have been mentioned, such as issuing a parallel currency, IOUs … All these measures can be found in the non-standard toolbox that any government might consider when it runs out of other options. But they all come at a high price. Whether they are needed or not is something that only the Greek Government can decide. Would capital controls in Greece help to stabilise the situation? BIS central bankers’ speeches 1 That is one of the many measures I was referring to. The Treaty says that there is free movement of capital, but exceptional measures can be authorised. In Cyprus these measures were considered necessary, but it’s difficult to speak generally. In an extraordinary situation, each country has to call on exceptional measures as the case requires. Talking about them beforehand could have negative effects on the markets. Can Greece default within the euro area? I don’t want to theorise concerning the destiny of Greece. If you take a look at other examples, there have been defaults in the United States and other monetary unions, with no political consequences. What matters is European countries’ perception of political cohesion and their willingness to remain together. The more the euro area is seen as a mere cooperation between sovereign states, the less you can imagine it making the extra effort necessary to remain united. And the more you believe the euro is more than a single market, the more you will believe that we are willing to defend it with all possible means.

The existing criteria and selection process are undergoing a rigorous review to strengthen the current assessment process and uplift the quality of audits so that auditors are also abreast with the emerging risks and implications of the Basel III framework and the new accounting standards that are to be enforced within the next few years. With a view of facilitating risk management of emerging technologies and to encourage further digitalisation of banking operations, several policies will be introduced to define regulatory expectations on use of cloud computing and define minimum regulations on the use of relevant fintech solutions. Further, a comprehensive technology risk assessment programme would be conducted to assess and improve the technology risk resilience of banks. Over the last five years, while the banking sector has grown approximately by 15 per cent annually, the non-bank financial institutions sector has grown approximately by 20 per cent. Although the sector accounts for a comparatively small share of around 8 per cent of the total assets of the financial system, the rapid growth and broad outreach of the sector necessitate proactive supervision and regulatory guidance. While several regulations have been introduced to strengthen these institutions, some licensed finance companies have shown signs of stress, while the rapid expansion of certain others have been curtailed due to their lack of compliance with regulatory requirements. This reiterates the need for continued strengthening of the existing regulatory framework of non-bank financial institutions to ensure the soundness of the sector and contain its spillover effects on the whole system.

In fact, to break away from a potentially vicious cycle of debt, the Central Bank has made prudent debt management a bank-wide strategic priority in its mission to ensure debt sustainability. As you all know, the Central Bank is responsible for raising, managing and servicing of government debt and carries out its functions with the objective of ensuring that the government’s financing requirements are met at the lowest possible cost in a timely manner, while ensuring the sustainability of debt obtained on behalf of the government. Following what was outlined in the previous Road Map, several measures were implemented in 2017 to enhance the transparency of debt management operations. In July 2017, a new hybrid primary issuance system for Treasury bonds was introduced to enhance the efficiency and transparency of the domestic borrowings of the government. We have also published an issuance calendar for government securities in the Central Bank website on a rolling basis to improve the transparency and predictability of the primary auction process and government securities market. Looking ahead, in 2018, we will continue to work towards enhancing the security, efficiency and transparency in public debt management further. Subject to the enactment of the Liability Management Act, in early 2018, liability management measures will be executed in order to improve the underlying risk profile of the public debt stock. This would enable us to minimise the refinancing risk by altering the maturity profile of the outstanding debt stock.

The industry has therefore undertaken a number of valuable initiatives aimed at responding to financial risks in the marketplace. One key example is the Report of the Counterparty Risk Management Policy Group II, better known as the “Corrigan report.” There is no question that the global financial system has become more interlinked, which, when combined with the introduction of new and complex products, raises the question of how well market participants could absorb a potential major financial shock in the future. In response, a group of the largest players in the global financial markets developed a series of recommendations and guiding principles to strengthen the resiliency of the financial system. Given the complexity of the subject, it is not surprising that the Corrigan report is a long and complex document. We found the same challenge in developing Basel II, I might add. But I think that this is a very valuable piece of work, and that the supervisory community can very much welcome its recommendations and guiding principles. We are certainly taking it into account in our work on the issues that I have mentioned. In reflecting on the various strands of work that are underway in both the industry and in the supervisory community, I am encouraged by the fact that many of the findings of industry projects BIS Review 46/2006 3 such as the Corrigan report are consistent with the lessons we have learned from the Basel II process and from other strands of the Committee’s work.

In my view, this notion is nothing more than a financial analyst’s fantasy. In fact, over the last six months, we have seen constant confirmation of the anti-inflationary stance of monetary policy with, for example, the FED actually establishing a quantitative definition of price stability for the first time (in fact, identical to the one used by the Eurosystem). Sixth remark. Our immediate priority is therefore to construct or reconstruct the mechanisms and structures of a sound and efficient financial intermediation framework. That is why, at the euro area level, the financial union project is fundamental. At the global level, the FSB’s role is crucial in developing a robust technical, regulatory and prudential architecture, adapted to the interconnection of our economies. Seventh and last remark: fiscal policy and debt management. Here, I would say that we are all guilty of a certain degree of ambiguity, both at the market level and at the political level: • on the one hand we want public debt markets that are broad, deep and liquid, because they form the base on which our entire financial system is built. In particular, government bonds are the safest and the most liquid assets. They act as reserves of value for a large number of investors, starting with the central banks themselves which hold them as foreign currency reserves or as monetary policy collateral. • And on the other hand we want solvent States, i.e.

We now have more effective foreclosure law, a credit bureau, and accounting standards such as IAS 39 that conform to international best practices. Moreover, under the Deposit Protection Agency Act which will replace the current blanket deposit guarantee in place since 1997, the establishment of the Deposit Protection Agency should reduce banks’ moral hazard and enhance market discipline. That is by putting pressure on banks to improve financial strengths if they want to attract and retain depositors. As part of Thailand’s efforts to advance reforms, the Bank of Thailand will, under the secondphased financial master plan, focus on improving efficiency and intermediary functions of the financial sector by reducing regulatory costs, enhancing legal and information infrastructure, and increasing the level of competition through further deregulation and liberalisation. Deregulation would potentially involve expanding business scope and enhancing the role of existing players, including banks, non-banks and other niche banks. One of the key factors for deciding the optimal number and type of new players would be the value added that new financial institutions, be they universal banks or niche banks, could bring to the financial system, such as technical expertise and product innovations. Having said this, I wish to emphasize that we will also closely look at the risks from potential concentration of market power and financial instability stemming from disorderly competition and exits. Last but not least is better governance to bring about better risk management.

I am among the ones who think that the interest rate is often too blunt a tool to deal with financial stability issues, especially when they have clear sources that can be addressed more directly, since the policy rate affects every sector of the economy. Furthermore, under some circumstances the required movement in the policy rate for financial stability purposes may be in conflict with the price stability mandate. Assuming that such tradeoff is absent, that reasonable movements in the policy rate are expected to be useful to deal with financial stability concerns, and that there are no better tools at hand, it may be reasonable to rely on it as a tool for financial stability. However, in many situations at least one of these conditions would not hold and other options would prove more efficient. For instance, more often than not financial stability concerns are related to specific segments of financial intermediation. Concerns about rapid growth in credit to the housing sector can be tamed by changes in loan-to-value or debt-toincome ratios, for example. Dynamic provisions related to general or specific forms of credit may also help banks maintain a solid position through the financial cycle, and discretional changes to reserve requirements may also help rein in rapid bank credit expansion. Of course, all these measures are not cost free and their use must properly consider these costs against specific financial stability concerns.

And, households appear quite far along in the deleveraging process by a number of important measures. For example, the ratio of household debt service relative to income is back to levels last seen in the early 1990s. For these reasons, I expect that growth will gradually strengthen over the next few years. Nevertheless, significant downside risks remain, especially those related to the challenges in Europe and how the potential “fiscal cliff” in the United States will be resolved after the fall elections. Even if these risks do not materialize, I anticipate only slow progress toward full employment. BIS central bankers’ speeches 1 On the inflation side, in recent years our forecasts have been noticeably more accurate than on the growth side, and we have succeeded in delivering inflation very close to our 2 percent price stability objective. Through March, as measured by the personal consumption expenditures deflator, overall consumer prices have risen 2.1 percent over the past 12 months, and prices excluding food and energy have risen 2.0 percent. But price trends have been a bit stickier than one might have anticipated given the large amount of slack in the economy. To some degree, this likely reflects the anchoring exerted by stable inflation expectations. But some of the price pressures can be attributed to other, more temporary, factors:  Higher oil and gasoline prices and their pass-through into the costs of other goods and services.  Upward pressure on imputed homeowners rents due to increased demand for rental housing.

The root causes of job polarization appear to be technology and globalization, which have displaced many jobs, particularly those involving routine tasks. This loss of jobs has been especially pronounced for what we often think of as traditional middle-skilled workers. Its impact is perhaps most evident in the manufacturing sector, where so many jobs have been lost in recent decades. Given the strong history of manufacturing in our region, job polarization has been an important feature in our local economy. No doubt, the widening wage gap and loss of job opportunities for middle-skilled workers has contributed to a rise in economic inequality and created challenges for many workers and their families. More than ever before, jobs are requiring a greater degree of knowledge and skill. In order to adapt to these changes, it is increasingly important for workers to acquire and upgrade their skills, whether through formal education or other forms of training. In addition, it is important for employers to communicate their needs to educational institutions BIS central bankers’ speeches 3 so that they can offer the coursework and programs so that people can develop the right skills to fill the available jobs. For these reasons, we think it is particularly important to highlight these trends in today’s briefing. Conclusion In summary, recent data are consistent with the expectation of moderate growth in 2012 and stronger, but still not robust, growth in 2013. I also expect both headline and core inflation rates should moderate over the next few months.

Leveraged arbitrage activity, so some of the literature suggests, is likely to reduce volatility in normal times and increase it in times of stress, because of the greater financial constraints faced by leveraged funds relative to larger, more diversified banks and 2 BIS Review 49/2007 investment banks. Whether this matters in a systemic sense or not depends on the heterogeneity of funds and how correlated their exposures are with those of the major banks and investment banks. A third reason is the consequence of long periods of low losses and low volatility. When markets have been through a sustained period of relative stability and low credit losses, this reduces the estimates of potential losses produced by conventional risk management tools. Like gravity, this force is hard to counteract. And when we’ve had a long period of low realized losses, rapid change in markets, dramatic growth in new instruments, and larger potential leverage, this creates a greater possibility of unanticipated losses, and therefore a greater potential for the trend amplifying, positive feedback effects that have characterized the major asset price shocks of 1987 and 1998. Policymakers do not have the capacity to eliminate the risk of excess leverage or asset price misalignments, nor do we have the ability to act preemptively to diffuse them. And yet policy can play a very important role in limiting the vulnerability of financial markets to the risk that a shock will pose greater potential risks to the stability of the financial system and to economic growth.

And the characteristic reluctance of savers to invest outside their home market may be diminishing. Alongside these longer terms trends, financial markets today also show the effects of other forces. The extraordinary growth in earnings of energy and commodity exporters, the substantial rise in wealth that has come with rapid growth in China, India, and other emerging markets, together with efforts by many of those governments to stem the appreciation of their currencies, has led to a rise in capital flows, official and private, into the United States and other major economies. These flows seem large enough to have had a material effect on global interest rates and asset prices. These changes in economic conditions reinforce each other. The long period of relative economic and financial stability has reinforced expectations of future stability, reducing implied volatility and risk premia, increasing comfort with higher leverage, and encouraging flows of capital into riskier assets. BIS Review 49/2007 1 The low level of real interest rates that has prevailed in much of the world through this expansion has contributed to relatively accommodative financial conditions. The high levels of reserve accumulation by governments with heavily managed exchange rate regimes put downward pressure on forward interest rates, potentially distorting asset prices. The increase in size of sovereign wealth funds, the shift in assets to hedge fund and private equity managers, and the possible reduction in home bias among private savers have increased the amount of mobile capital in search of higher returns.

Eddie Yue: Hong Kong's positioning and prospect as an international financial centre Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at The People's Bank of China and Hong Kong Monetary Authority Joint Seminar “Hong Kong's positioning and prospect as an international financial centre”, 9 December 2021. * * * Distinguished guests and friends in Beijing, Hong Kong and overseas: Good afternoon, and a very warm welcome to you all. I begin with heartfelt thanks to Governor Yi, not only for his inspiring opening remarks, but also for the unfailing support the PBoC has given to Hong Kong over many years. My colleagues and I also extend our gratitude to international institutions such as the BIS and the IMF for your close partnership through all these years. Without your support, Hong Kong’s financial sector would be in a far less robust position than it is today. In a little over six months we will be celebrating the 25th anniversary of Hong Kong’s establishment as a Special Administrative Region. This is a good moment to pause – both to reflect on Hong Kong’s success as an international financial centre, and to consider the steps we need to take to build on that success. Tackling such a vast subject in ten minutes is a tall order. Let me make an attempt by asking two simple questions. What are the attributes of an IFC? And, how far does Hong Kong possess them? I do not have all the answers.

Our banking system is sound and safe, despite a challenging operating environment: capital and liquidity levels remain well above global standards; loan quality and profitability compare favourably with global peers. We do not take this for granted. We are keenly aware that Hong Kong as an IFC plays an outsized role not only in supporting the local economy, but also in underpinning trade and investment activities across the region. Our banking assets are 9 times our GDP; the equity market 16 times; and assets under management 13 times. Hong Kong is the largest US dollar funding centre in Asia, and is second in the world only to London and New York. In a highly interconnected global financial system, where so much depends on the stability of IFCs, we strive to be a responsible stakeholder. We seek to achieve this — by putting in place mechanisms to closely monitor market developments and behaviours; by continually improving our regulatory regimes to mitigate risks in the financial system; by building buffers and planning for contingencies on sunny days, and by swiftly implementing contingency plans when storm clouds approach; and by contributing to policy deliberation and standard setting at international regulatory forums. We also build resilience by enabling market participants to seize new opportunities to deepen and expand Hong Kong’s role as an IFC. This brings me to my third word: opportunity. Opportunity For many decades Hong Kong has been intermediating the trade, investment, and financial flows between China and the world.

In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn. Given the scale of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August Inflation Report round. Yesterday, the minutes of the July meeting of the MPC were published. Broadly consistent with my personal view, they noted: “In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expected monetary policy to be loosened in August”. So whose recovery? So far at least, this has been a recovery for the too few rather than the too many, a recovery delivering a little too little rather than far too much. Nowhere is that more evident than here in Port Talbot. Yet it is evident, too, in sectors from steel-making to shipping, in towns like Portstewart as well as Port Talbot, from Wales to West Lothian. Monetary policy cannot do everything to counter the impact of the referendum which is, after all, an economic regime shift for the UK.

Chart 15 plots real household disposable income per head across households grouped into five income categories. Because household spending differs materially depending on someone’s income – for example, poorer households spend proportionately more on food and energy – we deflate the income of each group using a price index which reflects their different spending patterns. Chart 15 paints a fairly reassuring picture. In general, lower income groups have fared somewhat better than higher income groups since the crisis: the lowest income quintile has seen disposable incomes rise by around 5% since 2007, while the highest quintile has seen income fall by around 5%. Those in the bottom half of the distribution have seen incomes rise since 2007, while those in the top half have seen them fall. This reflects the impact of the benefits and pensions system in supporting lower income households. As a result, the distribution of incomes across the UK has probably narrowed a little since 2007. Income inequality has, if anything, fallen. That means, when we look at measures of social welfare aggregated across different income groups, we find it has not performed very differently than aggregate real disposable income since the crisis (Chart 16). These patterns of gains and losses are, however, very different when we turn to wealth. Chart 17 plots the distribution of wealth gains since 2010 across income quintiles. It suggests a dramatically uneven pattern. Those in the bottom two-fifths of the income distribution have seen virtually no gains in their wealth since 2010.

According to these theories there is some scope for monetary policy to take account of the output gap without necessarily threatening price stability in the slightly longer term. An important condition for this, however, is that there is considerable confidence in the central bank’s aim to focus on long-term price stability. In the long run, monetary policy cannot determine the real interest rate but in the short term the real interest rate can be influenced and deviate from its long-term equilibrium position. An increasing number of central banks have adopted inflation targets during the 1990s. The introduction of statutory price-stability objectives, independent central banks, transparency and - not least - regulations that give long-term sustainability in the public finances have also been important means for increasing credibility for the ability of economic policy to maintain price stability. 1 2 E.g. Woodford, Claridas BIS Review 40/2004 In Sweden, the Riksbank adopted an inflation target as early as 1993. According to this target, inflation measured in terms of the change in consumer prices should be 2 per cent per year, with a tolerance for deviations of +/- 1 percentage point. As monetary policy does not have an immediate impact, interest rate decisions are normally governed by forecasts of inflation one to two years ahead. To avoid the economic costs of excessively sharp fluctuations in economic activity, the Riksbank many decide not to take account of price effects that are judged to be temporary.

Risk had been dispersed and diversified to the four winds, courtesy of an ever-more interconnected global financial system and ever-more sophisticated financial instruments.17 The Great Moderation in the economy also meant finance faced fewer shocks than in the past. 13 Haldane and Kruger (2001). Fischer (1999). 15 Evanoff et al (2015). 16 Taylor and Schularick (2012). 17 Greenspan (2002). 14 11 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 11 When it came to assessing risks to the financial system, unlike with monetary policy, there was no off-the-shelf model. In pursuit of one, I started looking to other disciplines for inspiration. From the mid-2000s, I began discussion with a set of scientists – physicists, evolutionary biologists, epidemiologists – on the models they used to understand complex, adaptive systems. I was hoping they might provide some analytical clues when it came to modelling the complex, adaptive world of finance. I was in luck. There was a well-developed field of complexity science, with applications in most of the natural sciences and some of the social sciences. Economics and finance was a notable exception. Once I had retro-fitted these models to the financial system, I wrote a note and sent it to the Governors in 2005. It was titled “Public Policy in an Era of Super-Systemic Risk”. It made some bold claims about financial system resilience, most of which jarred with the prevailing orthodoxy.18 Financial integration, it argued, was a double-edged sword. It was fantastic for risk-dispersal when the good times rolled.

This means that the more mortgage loans for residential property a bank holds on its balance sheet, the more additional capital it is obliged to hold. We regularly assess whether the required capital buffer level is appropriate. If we decide that an adjustment of the buffer is required, we make a proposal to the Federal Council after consultation with FINMA. Ladies and gentlemen, ongoing communication, targeted adjustments of the regulatory framework and the activation of the CCyB have all proved effective in recent years. I will return to this later. Such measures taken by the authorities are essential in dealing with cyclical risks, and we need to continue to review the instruments at our disposal on an ongoing basis and to adjust them to the risk situation. 9 However, let me add at this point that, although the possible applications and effects of macroprudential instruments are important, they do have their limits. Measures taken by the authorities are therefore no substitute for market participants’ own responsibility – it is ultimately up to them to manage their risks. Current assessment of the situation This takes me to our current assessment of the situation in Switzerland. Let me start by jumping to our overall evaluation. We consider the vulnerabilities on the mortgage and real estate markets to be at a high level at present. Allow me to elaborate on this, first turning to the mortgage market and then to the real estate market.

The policy rule shall not be applied mechanically under all circumstances. This is particularly important given that the economic reality appears to be taking on increasing complexity and becoming more difficult to define. The Inflation Report published in mid-March contained the assessment that economic growth in Sweden and abroad would remain high over the coming years. Our forecast for Sweden was a growth rate of around 3 per cent a year, which is higher than we consider to be sustainable in the long term. The new information received since then has been mixed. The oil price has been unexpectedly high, although recently it has fallen slightly. Moreover, industrial activity appears to have weakened slightly, both in Sweden and abroad. We therefore came to the conclusion in April that growth in Sweden would be somewhat weaker than was anticipated in the March Inflation Report. Since then, we have seen statistics showing that growth in Germany was slightly stronger than expected during Q1, and that the downturn noted in the United States in March appears to have been temporary. We had anticipated lower growth in Sweden’s net exports, but exports of goods appear to be increasing even less than was forecast. However, good growth in real incomes and low interest rates will contribute to favourable growth in household consumption. The labour market remains relatively weak, and our forecast is based on employment strengthening during 2005.

Tourism Apart from mining and related companies that are affected by the effects of the global recession, tourism has also been negatively impacted. The number of foreign tourists is anticipated to decline owing to financial problems and credit crunch their countries of origin are facing. Availability of credit Perhaps the most challenging effect of the global financial crisis, especially for developing countries like Zambia, is its impact on private sector investment. Between 2006 and 2008 credit to the private sector grew strongly (at an average of 45.6% per annum), largely driven by the expansion of consumer credit and the strong growth in the domestic economy. An immediate consequence of the financial and economic crisis has been a curtailment of credit lines and a slow-down in FDI flows. In 2009, domestic credit is expected to slow down as financial institutions adopt more conservative lending practices and tighten their lending standards. In addition, the deterioration in corporate and household balance sheets is now being translated into higher non-performing loans (NPLs) as a percentage of total assets in the banking sector (from 6% in mid-2008 to 10% in May, 2009 – an increase of 67%.). The deterioration in NPLs is now across all the past due loan categories. BIS Review 86/2009 3 Policy response In responding to the crisis, the Government is taking steps to maintain macroeconomic stability and continue encouraging investments that will lead to diversification of the economy and safeguard vital social services.

Further, the Government is actively engaging new investors to take over the running of the closed mining operations as well as negotiating with the owners of the bigger mines on modalities of continuing with operations at the mines to forestall further job losses. The 2009 Budget has prioritised infrastructure development with the view to opening investment opportunities for diversification, particularly in agriculture, tourism, and manufacturing sectors. Some specific measures include the following: Agricultural sector: Increased allocation of funds to the sector for livestock development and creation of at least one disease-free livestock zone, Farm Block infrastructural development and irrigation projects. Further, the value added tax on selected agricultural equipment and spares, has been zero rated as incentive to increase agricultural production and productivity. Tourism sector: In order to diversify the economy and attain broad based economic growth, Government has increased the allocation to the sector to improve access to the Northern Tourism Circuit (infrastructural development in Mbala and Kasaba Bay). Further, Government will embark on the development of a new world class tourism area in Livingstone, and step-up the development of road infrastructure in key national parks namely, Luangwa and Kafue. Manufacturing: In order to expand the manufacturing base, Government is promoting the establishment of Multi-Facility Economic Zones (MFEZ) on the Copperbelt (Chambishi), and Lusaka (Lusaka south and east) provinces by providing for fiscal incentives and quality infrastructure development in the budget. The construction of the Chambishi MFEZ has already commenced.

Global imbalances were built up If we are to understand the origins of the crisis, we cannot ignore certain factors in the macroeconomic landscape. This applies in particular to the major global imbalances that were built up over a long period of time. In the rapidly-developing economies in the oilproducing countries and Asia, particularly China, domestic saving reached a level that was higher than required to fund domestic investments. This led to substantial current account surpluses. Large amounts of capital were built up which sought an outlet on the global financial markets. These were used, for example, to buy assets in the West. At the same time, the economies in the West, especially the USA, experienced an unusually long, uninterrupted period of favourable conditions with strong growth and low inflation. Policy largely focused on maintaining these good conditions. It was possible to stimulate domestic demand at the cost of a gradually increasing current account deficit. The large capital flows on the financial markets helped to keep interest rates down. With consumer prices held in check, it was also felt that there was no real reason to conduct a stricter monetary policy. The result was that significant global imbalances arose – a lasting savings surplus in some countries and a deficit in others.

The difference was that this house would last another 100 years, while the old house would have lasted only until the next earthquake. I see the current juncture in the transition away from LIBOR to a new reference rate regime in much the same way. We have seen the development of several reference rates that may meet various needs, including creditsensitive rates.4 Separately, the ARRC just announced the indicators that it will consider in recommending a forward-looking Secured Overnight Financing Rate (SOFR) term rate, which with continued market progress, it believes can be achieved relatively soon.5 These are valuable steps in the transition to the new post-LIBOR world—but in my house metaphor, these represent the rooms of the house. They're important, but more critical is that they be built on top of a robust foundation that will withstand any storm or earthquake. And the foundation must be built to the highest standards and with the very best materials.6 The reason is clear. If you build on a foundation that is not absolutely sound, you are risking trouble at some point in the future. Unfortunately, the cracks in the LIBOR foundation ran deep. The short-term bank funding markets that LIBOR is based on have withered away since the global financial crisis. Worse, they can dry up completely under stress, as we saw last spring.7 This means we need to have a strong and deep foundation of reference rates that we are confident will be rocksolid, holding up our financial system under all contingencies, foreseen or unforeseen.

Finally, it is only the speculators that 4 BIS Review 40/2004 are fuelling the rise in prices. While they know that the price increases are exaggerated, they do not know when the situation will turn. The slightest signs of an imminent change lead to large-scale selloffs, and prices plunge. In well-developed markets, participants that judge the price increases to be excessive always have the possibility to make a profit by taking offsetting positions. Uncertainty over when the situation will turn, coupled with reward systems that encourage short-term gains, are likely to result in an insufficient number of investors taking offsetting positions. Financial accelerator effects most likely lead to a situation where rising asset prices, regardless of whether they are being driven by short-term investors, also affect the real economy and thus can contribute to overinvestment. As regards house prices, the risk of a purely speculatively driven rise ought to be lower. This is true especially of economies such as the Swedish one, where regulations make it very difficult to own and let houses and apartments for speculative purposes. Empirical studies also indicate that the risk propensity of investors and lenders appears to increase according as economic activity strengthens, while it decreases markedly during economic declines. So, when economic activity has been improving over a long period, investors appear to interpret this as meaning that growth will continue to rise at the same high rate, without taking account of the risk of a slowdown.

Thirdly, somewhat tighter monetary policy than otherwise would be able to counter an over-optimistic pricing of financial assets and properties. The second argument is therefore based on the idea that the central banks’ normal forecast horizon of two years is too short, while the third argument is based on the assumption of irrational expectations. Lengthening the forecast horizon is relatively simple in principle, but in practice it is more difficult of course. Especially if the models used have some of the shortcomings I mentioned earlier. The third argument regarding irrational expectations is more difficult to adopt a position on. If we seriously believe that it is relevant, a large part of the foundation for the analysis and recommendations on which central banks today base their policy collapses at the same time. However, “Irrational expectations” could be a result of insufficient availability of information. Therefore, it cannot be ruled out that central banks, by pointing out potential problems associated with high debt levels, can contribute to reflection among those agents that otherwise would undertake commitments that they would not be able to meet when conditions change or in banks that otherwise would take on excessive credit risks. Influencing behaviour in this way by spreading information is an important idea behind the Riksbank’s Financial Stability Reports. Those that maintain that there is too much uncertainty to dampen a price rise via interest rate adjustments are thus of the opinion that it is better to wait until asset prices start to decline.

In terms of the different agents, a deficit target, in National Accounts terms, of 3.8% of GDP is proposed for central government and the Social Security system, compared with a deficit of 4.5% of GDP projected in 2012, which would represent an improvement of 0.7 pp of GDP, similar to that projected for the regional governments, which should reduce their deficit from 1.5% in 2012 to 0.7% in 2013. The adjustment would be completed with the projected reduction of 0.3 pp in local government to reach a balanced budget in 2013. Revenue On the revenue side, this budget tightens the fiscal pressure both in terms of direct and indirect taxation, with a range of new measures. Furthermore, it should be recalled that, in 2013, the measures approved in 2012 in relation to higher personal income tax rates, the increase in the rate on income from fee-earning activities, changes to corporate income tax and the rise in VAT rates will still have a significant impact. Despite the background of recession, the tax take is projected to increase overall by 3.7%. The net effect of all the tax regulation measures with an impact in 2013 is estimated to be approximately € billion. Net of this impact, revenue would fall by 0.5%. As for the Social Security Budget, the 1 pp reduction planned last July is postponed or ruled out, and a 1.1% fall is projected in 2013 in total social security contributions compared with the initial budget for 2012.

Just as a pebble dropped into a lake disturbs the water not just at the point of impact but ripples outward far from the origin, changes in the federal funds rate influence the prices of financial assets more broadly and this, in turn, affects the broader economy. An important insight of modern monetary theory is that this transmission of monetary policy to the broader economy through its many channels works best when the central bank is transparent about its goals, policy strategy and approach to implementing its strategy. In this case, market participants and households both understand and can anticipate actions by the central bank. By doing so, the transmission channels of monetary policy are enhanced. This places considerable importance on effective central bank communication. Recognizing this, the FOMC has undertaken many initiatives over the years to improve its communications with the public. These include providing clarification in terms of the goals of monetary policy, discussions of the FOMC’s broad policy strategy, as well as FOMC participants’ ongoing explanations of their views on monetary policy. As part of this effort, I provide a comprehensive update on my outlook for the economy and monetary policy several times during the year. Once a year we publish our staff’s judgmental economic forecast. We have also provided in the Liberty Street Economics blog discussions of an internal staff modelbased economic forecast. In addition, we now regularly release our real-time forecast of “current quarter” real GDP growth.

Enhancing transparency and awareness of the risks associated with crypto-assets and their social cost are critical aspects of this approach. Public authorities will also need to address those social costs: for instance, cryptos’ ecological footprint cannot be ignored in view of environmental challenges. Additionally, the experience of FTX, which expanded massively with little oversight, underscores the importance of global crypto regulation and regulatory cooperation. The Financial Stability Board’s recommendations[39] for the regulation and oversight of crypto-asset activities and markets need to be finalised and implemented urgently, also in non-FSB jurisdictions. The Basel Committee on Banking Supervision's standard on the prudential treatment of banks' crypto-asset exposures is a positive step in this direction. It stipulates conservative capital requirements for unbacked crypto-assets with a risk weight of 1,250%, as well as an exposure limit constraining the total amount of unbacked crypto a bank can hold to generally below 1% of Tier 1 capital. It will be key for the European Union and other Basel jurisdictions to transpose the Basel standard into their legislation by the 1 January 2025 deadline[40]. However, regulation alone will not be sufficient. Innovating: digital settlement assets and central bank digital currencies Third, the public sector needs to contribute to the development of reliable digital settlement assets. Central banks are innovating to provide a stability anchor that maintains trust in all forms of money in the digital age. Central bank money for retail use is currently only available in physical form – cash.

The initiative will, as a start, place focus on four broad areas, namely: (a) legal, regulatory and supervisory framework, (b) risk management, (c) liquidity enhancement, and (d) market infrastructure for trading, clearing and settlement. The Asian Bond Market Initiative also encourages technical cooperation amongst ASEAN and the plus 3 countries of China, Japan and Korea. Profiling Asia Secondly, profiling Asia. More than 6 years have passed since the Asian financial crisis. Most Asian economies have fully recovered. Confidence has returned and growth momentum restored. Asian countries can continue to engage international investors at an individual country level. There are, however, merits to working together to profile Asia in a more concerted manner. A collective effort will have greater pulling power and generate far greater interest from investors. The region has taken large strides in stepping up the pace of reforms since the Asian crisis. It is perhaps timely for regional governments to join hands and raise the profile of the region. As a start, the ASEAN countries have agreed at the recent ASEAN Finance Ministers’ Meeting to organise efforts to profile ASEAN better. International investors can then have the opportunity to appreciate more fully the progress and reforms ASEAN economies have made since the Asian crisis. 2 BIS Review 22/2004 Exchange alliances Thirdly, extending regional collaboration to the exchanges. The region can derive greater benefits by working together. The successful launch of Asian Bond Fund I and the impending launch of Asian Bond Fund II clearly demonstrate this.

Let us assume that demand in the economy has fallen, and that a need for more expansionary policy has therefore arisen to stabilise the real economy and inflation. The central bank then wants to cut the policy rate so that it is on the red curve. 9 Capital requirement here refers to the statutory capital adequacy requirement. BIS central bankers’ speeches 11 But at this low interest rate the financial supervisory authority may worry that risks are beginning to build up and it will therefore raise the capital requirement. However, the higher capital requirement not only means that the risks decline, it also has some negative effect on demand in the economy. This has the consequence that the central bank wishes to cut the policy rate further, which in turn makes the financial supervisory authority want to raise the capital requirement, and so on, and so on. This leads to a “race”, which ultimately leads to the capital requirement reaching its upper limit at the same time as the interest rate is extremely low. It is easy to imagine that this final mix of the two policy instruments is not optimal from the perspective of the economy as a whole. The means of control for monetary policy and risk have been used much more aggressively than is beneficial for the economy and also more aggressively than either the central bank or the financial supervisory authority would wish. Of course, one can discuss how realistic this particular example is.

The mean squared gap analysis makes it easier for the central bank to explain why it chooses a particular monetary policy – what it means more specifically by a “well-balanced” policy. It can also provide support when assessing monetary policy. But however good the tool is, the step from theory to practice is not without complications. I intend to discuss some circumstances that in various ways complicate things when taking this step. Arguments in loss function less clear in practice than in theory One such circumstance is that although the variables included in the loss function – inflation and resource utilisation – are in theory unambiguous and well-specified, in practice it is far from evident how they should be measured. Resource utilisation can be regarded as a summary of developments in the real economy and shows to what extent labour and real capital are being used at a particular time. It normally states use in relation to the level sustainable in the long run, which is often regarded as a “normal” level. One complication is that it is not possible to directly observe how high the level of resource utilisation in the economy is, and nor is there any generally-accepted view of this should be calculated. Different measures can give fairly different results and it is therefore difficult to determine to any great degree of precision the level of resource utilisation at any given time.

Consistent with the Policy Normalization Principles and Plans, when this occurs in a given month, no reinvestment occurs, and the portfolio size declines by the amount of principal repayment. In the future, mortgage principal repayments, which are sensitive to various factors, especially long-term interest rates, could conceivably rise above the level of the cap, particularly if interest rates were to decline. If this were to occur, those amounts above the cap would be reinvested. It is this cap mechanism that keeps the decline in the balance sheet at a gradual and predictable pace. The New York Fed’s Open Market Trading Desk (the Desk) will conduct operational readiness exercises during periods of no reinvestment to ensure it remains prepared to reinvest if needed. 14 The FOMC’s approach to balance sheet normalization—and its transparency and clear communication about the normalization principles and plans prior to its implementation—was designed to mitigate the risk of sharp or outsized asset price reactions to the decline in the portfolio’s size over time. Desk surveys corroborate market commentary describing a relatively 13 The dollar values of securities held in the domestic SOMA portfolio refer to par values. The Desk conducts small value purchases of agency MBS on a regular basis in order to maintain operational readiness. Under these plans, the Desk may purchase up to $ million of agency MBS for monthly periods in which principal payments fall below the cap and there is no reinvestment amount.

Figure 2 Commodity prices (*) (index, 2009=100) 240 240 210 210 180 180 150 150 120 120 90 90 60 60 30 30 06 Edible oils 07 08 Sugar Meats 09 Dairy 10 11 Cereals WTI oil (*) Except for WTI oil, FAO indexes are used. Source: Bloomberg. 6 BIS central bankers’ speeches Figure 3 Inflation (annual change, percent) CPI Core CPI (4) 10 10 6 6 8 8 6 6 5 5 4 4 4 4 2 2 3 3 0 0 2 2 -2 -2 1 1 -4 -4 0 0 05 06 07 08 U.S.A. Emerging Asia (2) 09 10 11 05 06 07 Eurozone Emerging Europe (3) 08 09 10 11 Latin America (1) (1) CPI anc Core CPI include: Brazil, Colombia, Mexico and Peru. (2) CPI includes China, Indonesia, Malaysia, South Korea and Thailand. Core CPI includes South Korea and Thailand. (3) CPI includes Czech Rep., Hungary, Poland and Russia. Core CPI excludes Russia. (4) Uses definition of each country. Sources: Bloomberg, CEIC Data and statitics institutes of respective countries.

Bernanke, B., M. Gertler, and S. Gilchrist (1999), “The Financial Accelerator in a Quantitative Business Cycle Framework”, in John B. Taylor and Michael Woodford (eds.) Handbook of Macroeconomics, edition 1, volume 1, pp. 1341-1393. Elsevier: Amsterdam. Borio, C. and H. Zhu (2008), “Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?” BIS Working Paper 268. Brazier, A., R. Harrison, M. King, and A. Yates (2008), “The Danger of Inflating Expectations of Macroeconomic Stability: Heuristic Switching in an Overlapping-Generations Monetary Model”, International Journal of Central Banking, 4(2), 219-254. Broadbent, B., (2012), “Deleveraging”, speech available at www.bankofengland.co.uk/ publications/Documents/speeches/2012/speech553.pdf. Caballero, R., (2010), “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome”, MIT Department of Economics Working Paper No. 10–16. Curdia, V., and M. Woodford, “Credit Frictions and Optimal Monetary Policy,” working paper, Federal Reserve Bank of New York, August 2009. Eichengreen, B., M. El-Erian, A. Fraga, T. Ito, J. Pisani-Ferry, E. Prasad, R. Rajan, M. Ramos, C. Reinhart, H. Rey, D. Rodrik, K. Rogoff, H. Shin, A. Velasco, B, Weder di Mauro, and Y. Yu (2011), “Rethinking Central Banking,” Brookings Institution, Washington. Eggertsson, G., P. Krugman “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach”, The Quarterly Journal of Economics (2012) 127(3): 1469– 1513. Fisher, I., (1933), “The Debt-Deflation Theory of Great Depressions,” Econometrica, Vol. 1, no. 4. 18 BIS central bankers’ speeches Geanakoplos, J., (2010), “The Leverage Cycle.” In D. Acemoglu, K. Rogoff, and M. Woodford, eds., NBER Macroeconomics Annual 2009, vol. 24, 1–65. Chicago: University of Chicago Press.

2021 PARIS EUROPLACE – STUDIO GABRIEL, PARIS ROADS FOR THE FUTURE: CENTRAL BANK DIGITAL CURRENCY (CBDC) AND INNOVATIVE PAYMENTS Closing address by François Villeroy de Galhau, Governor of the Banque de France Ladies and Gentlemen, It is a pleasure to be with you today streamed live from Studio Gabriel. I would like to extend my warmest thanks to Paris Europlace for having maintained through the crisis this fruitful dialogue with all stakeholders. Before turning to my main point today, I want to stress the resilience of our French financial institutions, which have played a decisive role in helping our economy weather the crisis. It was popular a year ago to predict a financial apocalypse, and certain Europeans, prone to self-flagellation, are still doing so today, whereas the Americans are more self-confident. The reality speaks for itself: French banks’ CET1 was higher at the end of the first quarter of 2021 (15%) than it was before the crisis; their profitability, however still insufficient, has improved sharply in this Q1; in general, French banks are in no way underprovisioned. France and Europe are not facing a “tsunami of bankruptcies”, and should, on the contrary, see a strong recovery: cumulative growth of more than 10% over 2021 and 2022. So we need to remain vigilant, but let’s stop scaring ourselves. This roughly reassuring situation is in no way a call for complacency and status quo. The Covid-19 crisis is acting as an accelerator for the major structural challenges banks and insurers are facing.

In this respect, and in what, in my view, should be the third main defining principle of Spanish fiscal policy in the coming years, public resources should be geared towards those uses or initiatives that have the most capacity to increase future economic growth. Apart from certain support measures that may be necessary in the short term, it is vital that economic policy in general, and budgetary policy in particular, are geared towards achieving the structural transformation of the Spanish economy, to correct some of the shortcomings that have accompanied us in recent decades and to ensure that we are not left behind in the profound changes that are taking place worldwide, including in terms of the level of globalisation, digitalisation and ecological transformation of our economy. Lastly, it is advisable that budgetary policy, rather than promoting initiatives that involve acquiring future payment commitments that will drive up our structural deficit, instead encourages temporary increases in the deficit, concentrated on items that can boost our growth potential in the medium term. I will refer repeatedly to these basic principles later. 2 Draft State and Social Security Budget for 2021 In this section I wish to offer my assessment of the main revenue and expenditure measures included in the Draft Budget, of the general budgetary policy stance envisaged for 2021, and of expected developments in Spanish government debt.

I referred in detail to these structural reforms in my appearance before the Parliamentary Committee for the Economic and Social Reconstruction of Spain after COVID-19 last June.9 Allow me simply to recall here that low potential growth was already a problem in Spain before the crisis, characterised by low growth of factor productivity and a higher unemployment rate than in the other developed countries. Also, although it is still early to quantify its impact, this crisis will foreseeably further damage the economy’s potential 8 Also, the debt rule requires that the ratio between this variable and GDP be reduced annually by one-twentieth of the differential with respect to the reference value of 60%. Since the debt ratio could reach around 130% of GDP, this differential would amount to some 70 pp, so that, according to this European rule, it would have to be reduced by some 3.5 pp per year. 9 https://www.bde.es/bde/en/secciones/prensa/intervpub/Discursos_del_Go/comparecencia-del-gobernador-en-la-comision-para-lareconstruccion-social-y-economica--de-espana-tras-el-covid-19--del-congreso-de-los-diputados.html 29 output. The message is that structural reforms are now even more necessary; they are also needed to alleviate and accelerate fiscal consolidation. 3.3 The composition of public finances The strategy to reduce budgetary imbalances should be detailed and credible, setting out the deadlines and objectives and the measures to achieve them. It should also be long-term growth-friendly, which requires a thorough review of the various revenue and expenditure items. In addition, it should ideally be an integral part of an overall strategy that also addresses the adoption of long-term growth-friendly structural reforms.

Historically, there has been a reasonably strong and stable relationship between unemployment and wage growth – the so-called Phillips curve. As unemployment has fallen recently, this Phillips curve relationship would have led us to expect wage growth to pick up. That, plainly, has not happened. Over recent years, the 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 Phillips curve relationship has been anything but strong and stable (Chart 3). And that same flatness in the Phillips curve has been found in a number of other countries (Chart 4). 1 There are many potential causes of the weak wage puzzle over recent years. Some of these are likely to have been short-lived, such as the impact of low actual and expected levels of inflation globally. Others are likely to have been longer-lived, such as the impact of the financial crisis on slack in the labour market and workers’ willingness to move between jobs in search of a pay rise. A third set of factors are structural in nature. For example, there is evidence technology and globalisation may have weakened the bargaining power of workers, leading to a secular fall in the share of income going to workers in several countries. 2 Another set of longer-term factors arise from the changing nature of work and the shifting relationship between employers and employees. One such shift, which has operated over a number of decades, is the decreasing incidence of unionisation and collective bargaining in the workforce.

If so, that could herald the beginning of the end of the protracted post-crisis super-cycle of weak investment. At a regional level, the global recovery appears to have a broad base across the world. Most regions of the world have seen growth upgrades over the past six months. Currently, countries representing around 80% 12 All speeches are available online at www.bankofengland.co.uk/speeches 12 of global output are expected to be growing above-trend, meaning the global output gap is shrinking. The simultaneity of that uptick in regional growth should give it greater momentum, given the increased importance these days of cross-border spillovers, in trade and finance, and integrated global supply chains. A second reason for greater resilience in world growth since the start of the year is reduced political and policy uncertainty. For anyone who has lived through the UK’s political undulations of the past few weeks, or who is consuming a daily diet of world news, blogs and tweets, that may sound like an odd statement. But, viewed in the round, political and policy risks in a number of countries have eased significantly since the start of the year. At the start of the year, there was widespread media and market concern about changes to economic, trade and foreign policy in the US. By and large, the worst of these fears have failed to materialise. At the start of the year, there were fears of a populist surge through Europe.

William C Dudley: The road to recovery – Puerto Rico and the mainland Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the E-3 Summit of the Americas: Export Trade Basics Forum 101, San Juan, Puerto Rico, 1 April 2011. * * * Good morning. I am pleased to be back in Puerto Rico to speak to you and meet with various communities in the Commonwealth. Each visit gives me a chance to deepen the Bank’s relationship with the island. Last year I visited La Cantera and met with community leaders, business people, academics, bankers and government officials. This year I visited Goya Foods – the oldest Hispanic-owned plant in our country with subsidiary facilities in my home state, New Jersey, and upstate New York. I will also meet with a similar wide range of people to talk about what we do and to hear first-hand the economic and financial issues important to Puerto Ricans so that I can best represent all my constituents in my work at the Fed. Your beautiful island is unique within the Second Federal Reserve District. For me, personally, being here also recalls special memories of my childhood visit with my parents. I thank the organizers for inviting me to speak at the Export Trade Basics Forum, to help kick off the week-long summit on Education, Exports and Entrepreneurship that begins next week.

The mainland is Puerto Rico’s primary trading partner, accounting for half of the island’s imports and three-quarters of its exports. There are many reasons for this. While Puerto Rico interacts with many other economies, for generations the mainland United States and Puerto Rico have had a special multifaceted economic relationship. One of the most obvious of these ties is the free flow of goods between the mainland and the island. Another link is our common use of the dollar. This means that tourists from the mainland can visit without worrying about changing currencies. In addition, businesses can make long-term investments in Puerto Rico without worrying that currency fluctuations against the dollar will undermine their competitiveness. The island runs a surplus with the mainland that accounts for much of the island’s overall surplus. So the signs of a further pickup in economic growth on the mainland bode well for the island. Puerto Rico’s export markets also extend overseas. Aside from the U.S. mainland, the top export markets for the Island are Germany, Netherlands, Belgium and Spain. Exports to BIS central bankers’ speeches 5 these four countries combined exceeded $ billion in 2009 and have grown by more than 30 percent since 2007. The success that Puerto Rico has in selling its goods and services to industrialized countries bodes well for the island’s future. As more emerging economies narrow the gap between themselves and the more developed countries, the market for Puerto Rico’s goods could well expand accordingly.

But I think this is a somewhat misleading view as I will explain later. The SSM and the SRM, both components of the Banking Union thus contribute to reducing the negative feed-back loop between banks and sovereigns. One important objective of the SSM Regulation is to improve the quality of supervision and to ensure strong homogenous supervisory standards across the euro area. The essential contribution that European supervision can give to the separation of banks and sovereigns is the build-up of trust in the robustness of banks as stand-alone entities, so that enhanced confidence by their peers can help normalise interbank markets and overcome financial fragmentation. The establishment of the SRM also addresses the problem of breaking the bank-sovereign nexus because the orderly resolution of banks, even large ones, helps to avoid costly rescues by sovereigns that may endanger their own finances. In practice, however, the SSM and SRM may not be sufficient to completely sever the ties between sovereigns and their domestic banks. The effect of SSM and harmonised supervision on trust among banks may be more limited than expected, while the SRM, important for organising orderly resolutions, is limited in the amount of resources it can contribute to recapitalisations. The Bank Recovering and Resolution Directive (BRRD) is in my view the most crucial regulatory change in Europe in relation to breaking the bank-sovereign nexus. It represents a true paradigm change, ending the culture of bail-out and ushering in a culture of bail-in.

Of course, this is not to say that financial sector weaknesses are not important, or sufficiently recognised. The broad Comprehensive Assessment that we have started reflects precisely the importance of balance-sheet repair. My point is rather that while the on-going deleveraging in the banking sector certainly plays an important role in the inadequate current levels of credit supply to the real economy, factors related to the demand side may play an even more important role. The weak demand outlook combined with the slack in industrial capacity is the most important explanation for the drop in private investment since the crisis, and the most relevant limiting factor for future investment. In addition, the protracted period of low inflation and consequent low nominal growth will increase the burden of the debt overhang of households and governments, further complicating the recovery process. The separation of banks from sovereigns As I mentioned before, the goal of separating the fortune of banks from that of the sovereigns and vice-versa through direct European recapitalisation of weak banks via the European Stability Mechanism (ESM) was present in the embryo of what later became the Banking Union project. Somewhat ironically, however, this widening of the focus caused the initial objective to become obscured. The question of European direct recapitalisation – for which a framework has still not been published– ceased to be the main focus of attention. In the view of many commentators, the SRM became the expected instrument to achieve the separation between banks and sovereigns.

Withdrawals from the fund at 4 per cent can therefore finance 15 per cent of public spending in 10 years’ time. This can continue on a permanent basis without reducing the capital in the fund. The fund will therefore lead to smaller cuts in government welfare spending than would have been the case without the fund as the costs related to the ageing of the population have an impact on government budgets. The actual building up of the fund may span a short generation. A fund with investment abroad enables Norway to separate the revenues generated by oil and gas production from petroleum revenue spending. An alternative could have been to regulate the production rate, keeping our wealth under the sea bed for a longer period, as was attempted in the 1970s when the production ceiling was set at 90 million standard cubic metres per year. Oil companies currently produce 240 million standard cubic metres per year. The fund acts as a buffer between widely fluctuating oil revenues and domestic expenditure. The annual spending decision can be made independently of the size of the revenues. Thus, the fluctuations in government oil revenues do not have an automatic impact on the Norwegian economy. The fund also has a stabilising effect on the krone exchange rate as capital outflows increase when Norway’s petroleum revenues rise. As a savings plan, the fund enables petroleum revenues to be used by not only the current generation but also future generations. The fiscal rule ensures that this is the case.

We can also ask whether investment in Norway could be an alternative to our investments in international financial markets. It is important to emphasise that the oil fund does not stand in the way of corporate investment. The government can choose the composition, required rate of return and risk profile for its investments without considering the funding requirements of Norwegian enterprises. By the same token, Norwegian companies can choose their debt and equity structure independently of the government’s financial investments. There is a capital market between the government as investor and corporate capital needs. The government’s foreign savings plans do not therefore affect Norwegian companies’ access to capital and required rate of return on their investments. There are sound arguments for investing in infrastructure, better schools and state-of-the-art research. But this should be possible anyway given the increase in expenditure that is provided for by the fiscal rule. The profitability of government investments is based on a discount rate of 4 per cent. This secures about the same required rate of return as the government can expect to achieve on its oil fund investments over time. 6 A question that might be raised is whether there is a queue of sound and profitable projects that have to wait because of an excessively tight fiscal policy. It is difficult to find support for this. 7 In the National Transport Plan for 2010–2019, which can perhaps be considered representative of government spending, spending on road investments is set at around NOK 140 billion.

Source: Bank of England Chart 7: Spread of effective mortgage and personal loan rates (new business) to Bank Rate P ersonal loans 30 50 5 PNFCs 100 Chart 8: UK corporate bond spreads Per cent 6 Basis P oint s 1200 Non-invest ment grade 5 M ortgages 1000 4 800 3 600 2 400 Invest ment grade 1 200 0 2001 2002 2003 2004 2005 2006 2007 0 1998 Source: Bank of England 2000 2002 2004 2006 Source: Bloomberg, Bank of England Chart 9: Decomposition of UK noninvestment grade corporate bond spreads Chart 10: Issuance of UK residential mortgage-backed securities Basis point s Residual including liquidit y Uncert aint y about default loss Expect ed default loss £ blns 60 1000 Actu al 50 800 40 600 30 400 ` 20 200 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 -200 1998 2000 2002 2004 2006 Source: Dealogic Source: Bloomberg, Bank of England 12 BIS Review 149/2007 Chart 11: Gross corporate bond issuance by UK private non-financial companies (all currencies) Chart 12: Basis between credit spreads on bonds and credit default swaps £ billions 12 basis point s 150 10 100 Europe 8 50 6 0 4 -50 -100 2 US -150 0 2003 2004 2005 2006 -200 2007 -250 Source: Bank of England Jan. Apr.

Jean-Pierre Roth: Ten years’ experience in steering interest rates – taking stock of the Swiss National Bank’s monetary policy strategy Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the University of Fribourg, Fribourg, 20 November 2009. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). * * * The Swiss National Bank’s monetary policy strategy has proved successful over the ten years since its introduction. Throughout this period, the SNB fulfilled its mandate of ensuring price stability while taking into account economic developments. The inflation forecasts, produced quarterly on the basis of various indicators, have proved especially useful. It has always been possible to successfully manage the Libor – the operational objective of the SNB’s monetary policy – despite an international environment which, at times, has been extremely turbulent. The Libor was maintained within a range intended to provide the bestpossible conditions for a favourable development of the Swiss economy.

That twenty year period has been far from a quiet one, for the Bank or the commercial property industry. The Bank gained operational independence for monetary policy through the Monetary Policy Committee (MPC) in 1997; had its role in supervising individual firms first stripped from it in 1998 and then, earlier this year, re-instated through the Prudential Regulation Authority (PRA); and, most recently, has taken on responsibility for so-called macro-prudential regulation through the new Financial Policy Committee (FPC). The commercial property industry’s fortunes have been just as undulating. But throughout those ups and downs, the Forum has remained a key source of intelligence for the Bank and the industry and an important sign of cooperation between the Bank and the industry. Since 1997, the Forum has helped inform the deliberations of the MPC and, over the past few years, the PRA and FPC. And it was the success of the Forum that led me, three years ago, to set up a parallel Residential Property Forum, chaired by Nick Ritblat. Some of you will have heard me say that the Forum is one of the best meetings I attend at the Bank. And I know some of you, on hearing that, have been left wondering just what my other meetings must be like. Speaking on behalf of the Bank, I wanted to say how grateful we are to you all for those contributions. But what has the Forum achieved during its life? And, looking forward, what could it achieve in future?

The new bank resolution regime in the EU Let me now turn more specifically to the EU, where a legislative proposal for a directive – in line with the FSB standard – will shortly be published by the Commission. Judging by the papers and communications previously made public, the new framework has the overall objective of dealing with failing institutions in a way that safeguards the stability of the EU financial system as a whole and minimises public costs and economic disruption. A number of innovative elements can be identified in this emerging framework. First, it covers not only resolution, but rather all phases of a bank crisis, including preventive measures and early intervention powers. Accordingly, if problems were to arise in a bank, so that it became likely that it would breach the prudential requirements, a harmonised set of early intervention measures could be applied by supervisors. This area is highly important, since I strongly believe that a timely step by a supervisor to prevent things from getting worse is worth more than the best resolution efforts. The early intervention measures envisaged, such as prohibiting the payment of dividends, imposing additional reporting requirements, and requiring the replacement of managers or directors or the cessation of certain risky activities, are already in the toolkit of some Member States, but the new framework would mean that each tool would be available in each Member State, and it would be applied in a harmonised manner, based on common triggers.

Svein Gjedrem: Transatlantic economic partnership - Nordic and American perspectives Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Nordic Investment Bank Economic Colloquium, New York, 19 November 2002. Please note that the text below may differ slightly from the actual presentation. * * * The Nordic countries and the US have long historic ties. I believe, Mr. Chairman, that the number of Norwegians and their descendants living in the US today is larger than the population of Norway. I think similar numbers can be found for the other Scandinavian countries. I will attempt to show here today that even in economic terms, the ties have never been closer. I will mainly concentrate on the Nordic perspective, but I also have few specific remarks about Norway. GNI per capita 2000. PPP 40000 International dollars 35000 30000 25000 20000 15000 10000 5000 0 US Norway Iceland Denmark Finland Sweden Source: World Development Indicators database, World Bank, 7/16/01 SG 240802 The Nordic economies are small, open and mature economies. At least, Norway, Iceland and Denmark compare roughly with US income levels. In the case of Norway, the income differential against the US is mainly explained by shorter working hours. Labour productivity in the US1) and Norway2) Index.

Investments – all portfolio investments - are spread between equities and fixed income instruments, as well as across countries. Approximately 29 per cent of the fund is invested directly in the US stock market and in dollar-denominated bonds. The size of the fund has increased rapidly over the last few years, and will reach approximately 90 per cent of GDP by the end of this decade, according to estimates from the Ministry of Finance. This implies further investments of considerable amounts, also in the US market. While the US economy has always been an important trading partner, our investments abroad and the globalisation of the financial system will further increase our interest in the US economy in the years ahead. The links, already important, will expand further. 6 BIS Review 70/2002

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.

Others have vulnerabilities in some of these areas, which may have been magnified by access to inexpensive, abundant credit in international markets. Chile’s macroeconomic framework Chile has gradually developed a scheme of macroeconomic policies that permits us to deal with the natural volatilities of the business cycle of any open, commodity-exporting economy. This scheme has evolved over time to address the new challenges, such as a growing degree of financial integration to the global economy. This scheme leans on several pillars. One such pillar is our fiscal policy based on a structural balance rule. This rule dictates clear fiscal commitments that ensure that public finances are both sustainable and predictable. Our fiscal policy is no longer a factor amplifying the business cycle as it was in the past, but on the contrary, it is a buffer. More precisely, under our regime fiscal spending is neutral to the cycle. In turn, the resources accumulated in the sovereign wealth funds are an important source of external liquidity and financing to withstand periods of low fiscal income. Plus our public sector is a net creditor. Indeed, net public debt of the central government is negative, at around minus 6% of GDP. Another pillar is the autonomy of our Central Bank and its commitment with its constitutional mandate to pursue price stability and its inflation targeting regime. Since the year 2001, Chile relies on an inflation target of 3% annually, with a tolerance range between 2 and 4%, which has been met over the years.

This is more than two and a half times the joint stock market value of the four major Swedish banks at the turn of the year 2012/2013. In Sweden, we succeeded in managing the acute phase of the financial crisis in 2008 and 2009 in a way that made it possible to limit the costs to society. One contributing factor was probably that the crisis of the 1990s was fresh in the minds of the banks and they thus limited their risk-taking more than might otherwise have been the case, at least with regard to their operations in Sweden. As we know, not all countries were as lucky. The negative effects of the crisis are still in evidence in large parts of the world – not least in several countries in central and southern Europe – and will probably remain so for some time to come. In retrospect, it is easy to note that the combination of shortcomings in the regulations and the profit motives of the participants on the financial markets contributed to one of the worst financial crises of the modern era. The details regarding the build-up of risk and the course of the crisis have been described several times and I will not repeat them here. It is enough this time to note that banks with a limited amount of capital and banks with a high degree of market funding proved to be vulnerable when the storm broke.

The Swedish National Debt Office then carried out extra issues of treasury bills and provided loans through reverse repos in covered mortgage bonds. At the same time, the Riksbank expanded its list of approved forms of collateral. All in all, this meant that in principle the government assumed the risk that lay in the outstanding stock of Swedish mortgage loans. In order to convert borrowing in foreign currencies to lending in Swedish kronor without taking a currency risk, the banks usually conduct currency swaps. In simple terms, this is done like this: A Swedish bank borrows euros in Germany at a maturity of five years. However, as the bank does not really need the euros but needs kronor to fund mortgage loans to Swedish households, the bank has to exchange the euros for kronor. To protect itself against the currency risk, the bank enters into a currency swap in which the euros are exchanged for kronor today under an agreement to exchange the kronor back to euro at a predetermined rate in five years’ time. In this way the bank matches the currencies of its assets (the mortgages) and its liabilities and thereby eliminates the currency risk. The Swedish banks are thus dependent on acquiring kronor in the long-term from a counterparty in a currency swap. They can in principle do this in three ways: through a foreign bank, another Swedish bank or an insurance company. Today, it is often a foreign bank that acts as the counterparty in these swaps.

In this regard, we now recommend that banks study and incorporate those methods of interest rate risk assessment proposed by the BCBS. I recommend you to look at the results of this survey of banks published on the Bank of Russia’s website in the form of a consulting report. We are awaiting comments and suggestions from the banking community on the conclusions drawn. 6) On macroprudential stress testing And finally, coming to the end of my talk I would like to say a few words about the Bank of 5/6 BIS central bankers' speeches Russia’s plans for the development of macroprudential stress testing. The European Central Bank recently published an extensive document on this subject, and similar work has also come from the Bank of England and Bank of Japan. It is fast becoming standard analytic practice for central banks in ensuring financial stability. Why has macroprudential stress testing become so relevant? There are several reasons. As you will be aware, the Bank of Russia has long been engaged in stress testing of the banking sector. Traditionally this instrument has been used in the supervision of banks, in order to understand the risks posed to individual banks and the banking sector as a whole. However, across the globe we can see a new trend of conducting cross-sectoral stress testing, i.e.

It would also be conducive to the stability and integrity of the financial system. I would emphasise the word “international” as there is no reason to develop regional standards different from those that have already been developed by international financial institutions and professional bodies, together with supervisory agencies. 17. The fourth element concerns the strengthening of co-operative efforts in financial system development. As I have already noted, in Asia we have been making good progress in our efforts to develop the domestic and regional debt markets through various regional forums and involving the international financial institutions. In the context of developing Asian Bond Fund 2, for example, we have achieved a few firsts, including the introduction of the first exchange-traded bond index fund in Asia, arranging for two Asian markets to allow exchange-traded funds for the first time, and opening up the renminbi inter-bank bond market for the first time to foreign investors. 18. The final, and probably most difficult, step towards creating an integrated Asian financial market involves the relaxation of statutory restrictions on cross-border capital flows. It is likely to be the most difficult, in part because it depends on the ability of the financial system in individual jurisdictions to cope with the ensuing risks. 19. This last point brings me to the next issue I wish to touch upon in my remarks, namely, the need for a strong and efficient regulatory framework that is adapted to the integration of the domestic financial system with that of other jurisdictions. 20.

Volatility in other markets also increased dramatically. At that moment, the Central Bank’s main task was precisely to maintain financial stability and contain both devaluation and inflation expectations. The Bank of Russia then discontinued to reduce the key rate and made the decision to carry out proactive foreign currency sales within the fiscal rule. We believe that foreign currency sales linked to the oil price in the market were a key element that helped stabilise the foreign exchange market. At that period, there were concerns that the oil price might stay even below 25 US dollars per barrel for a long time. This algorithm made it possible to temper volatility using the resources from Russia’s foreign currency and gold reserves to a very moderate extent. This was crucial during that period since nobody was able to predict then how the pandemic situation would develop, how long-lasting and deep the crisis would be, and how high the risks to financial stability might be. In such an environment, it is essential to use the available safety cushion thoughtfully to be able to give an adequate response to challenges if they persist. 1/6 BIS central bankers' speeches The introduction of large-scale restrictions worldwide caused a deep decline in both domestic and external demand. In order to promote economic recovery, we shifted towards accommodative monetary policy as soon as the risks to financial stability abated. We resumed the cycle of the reduction in the key rate as early as April.

Owing to the amendments to laws adopted by the State Duma, the requirement for the testing of non-qualified investors wishing to purchase complex products will become effective as early as autumn, that is, six months earlier than initially scheduled and discussed. We are now authorised to establish the rules for selling financial products to ensure that market participants do not sell complex products to individuals who are unable to comprehend them, or products involving non-transparent conditions of returns, which makes it impossible to assess the risks of investment. Moreover, the new law allows us to set the rules for selling not only the investment products we discussed, but actually any financial products and services. Already this year, we will stipulate the main rules for the interaction between financial institutions’ employees and consumers and the rules for information disclosure. We will also evaluate how well they are complied with in the course of test purchases. It is no secret that financial institutions’ employees selling products often focus on their KPI, which is the basis for their personal bonuses. This KPI is the amount of products they sell and they might not care about the quality of products they sell to people. Of course, we need to alter this system. The protection of retail investors is an important but by far not the only area where we believe it essential to enhance financial consumer protection.

As a result of the tax reforms of 1992 and 2006, we are able to finance the welfare state fairly effectively. Our infrastructure is being developed. The security provided by our welfare system means that restructuring is easier than in many other countries. Like other Nordic countries, we apply labour market rules that for the most part do not impede restructuring. We learned a great deal about successful – and less successful – restructuring in the 1970s and 1980s. Two local communities that had to restructure are Kongsberg and Notodden. The cornerstone enterprises in these two communities had to cut their workforces substantially. Kongsberg fared well. When Kongsberg Våpenfabrikk declared bankruptcy in 1987, its defence business was continued while all its civilian production was split up and sold. The new companies and spin-off companies in Horten, Stjørdal and Egersund have posted solid growth and profitability. Several of the companies have become leaders in their field. An adequate supply of state-of-the-art technical expertise has been important for the companies’ restructuring success. Notodden did not fare as well. In the 1950s, Tinfoss Jernverk and Norsk Hydro employed more than 1500 manufacturing workers. Towards the end of the 1960s, they started shedding labour. The processing industry has now been closed down. Many workers are now commuting to other municipalities, including Kongsberg. The share of the population that is on disability benefits or participating in various labour market programmes is above the national average.

Coming to my second question, how should central banks react if they see the risk of an emerging asset price bubble? The options range from not reacting at all to consciously trying to prick an emerging bubble. Obviously, attempts to deflate an asset price bubbles are likely to require substantial interest rate increases which, in turn, could adversely affect economic activity and inflation. In view of the difficulties in identifying a bubble, it seems established wisdom today that central banks should be exceedingly careful in dealing with asset bubbles. There is, however, a more subtle way: to cautiously consider “leaning against the wind” when an asset price bubble is developing. Indeed, some academics have argued that, by accepting some short-term deviation from the pursuit of its stated objective of price stability, a central bank may improve the conditions for maintaining price stability over the medium to long-term. If a potentially costly bubble is firmly under way, then a somewhat tighter monetary policy stance than would otherwise be needed could be warranted. Certainly, there are also risks involved in “leaning against the wind”. First, as I mentioned already, there can never be full certainty as to whether an asset price bubble is under way. Second, by influencing market psychology, a monetary policy tightening could trigger dynamics that are difficult to foresee and may be hard to control ex post. Effective communication, as always, is crucial, especially in situations of heightened uncertainty.

On the assumption that the three-month Libor rate will remain stable at 0.75% during the next three years, inflation should average 0.7% in 2003, move up to 0.9% in 2004 and reach 1.6% in 2005. Forecast inflation will remain below 1% until the end of 2004 except in the fourth quarter of 2002. In the course of 2005, however, a marked acceleration will set in, with forecast inflation reaching the 2% mark in the fourth quarter of 2005. The new forecast is consistently below that of June 2002. It reflects the delay in the economic upswing. In the new forecast, inflation will rise more markedly at the end of the forecasting horizon due to an even more expansionary monetary policy since June. Expansionary monetary policy to be continued At our last media conference, I pointed out that the National Bank must be prepared to react quickly to changes in the economic situation. When the delay in economic recovery became discernible in summer, we acted immediately by again lowering interest rates. Since then, nothing of basic significance has changed in our assessment of the situation. We shall adhere to our expansionary monetary policy in the foreseeable future. We will thus contribute to the economic rebound and continue to keep Swiss franc investments unattractive. The low interest rate level and the relatively strong growth of monetary aggregates currently do not represent a threat to price stability. Once a sustained economic recovery becomes discernible, we shall have to review our monetary policy and adjust it to the new circumstances.

Subject to the caveat referred to above, these experts generally share our conclusion that there is no unequivocal indication of a significant misalignment in the exchange rate. If our EU counterparts in the ERM II-related decision-making process also share these views, one would, therefore, expect Malta to join ERM II with a central parity rate which broadly corresponds to the current exchange rate level. Some commentators have cautioned against what in their view is a hasty approach to euro adoption. How would you respond? A judgment as to whether the path to euro adoption is hasty or otherwise can only be made in relation to the economic principles which underlie the criteria and conditions attached to participation in EMU. This is precisely the approach taken in the Treaty, which contains indicators for measuring the degree of economic preparedness of a country, as also in our own study. The obligation to participate in ERM II for a minimum period of two years serves that purpose. The underlying premise is that once a country reaches the point at which it can derive the considerable, undeniable benefits of monetary union, it should do so. In the case of a small, open economy which must support an independent currency in a fully liberalised trade and capital environment, these benefits must also be evaluated in the light of the costs and risks - which are not negligible - of delaying participation. The report presented to Cabinet builds on that approach.

Gent Sejko: Comments on cooperation extension between Albania and Swiss State Secretariat for Economic Affairs Speech by Mr Gent Sejko, Governor of the Bank of Albania, at the ceremony of signing the Memorandum of Understanding between the Swiss Government's SECO and the Bank of Albania, Tirana, 1 March 2019. * * * Dear ladies and gentlemen, Today we start the second phase of the cooperation with the State Secretariat for Economic Affairs (SECO), which provides, on behalf of the Swiss Government, technical assistance to support, among others, central banks. I take this opportunity to extend our profound appreciation and gratitude to the Swiss Government, which has continuously provided assistance to the Bank of Albania – either directly or through other financial institutions – in the areas of payments, financial inclusion and monetary policy. Today, we are signing a new cooperation agreement with regard to perfecting our analyses and decision-making processes. The development and the continuous enrichment of scientific capacities of our talented staff, and the implementation of research and analysis methodologies to support the decision-making and policymaking processes are a priority for the Bank of Albania. In this context, it is a pleasure and honour for me, as the Governor of the Bank of Albania, to sign, together with H.E. Ambassador Maître, this agreement between our two institutions. At the Bank of Albania, we are very enthusiastic about this cooperation.

To this end, the Bank, together with Securities Commission Malaysia and various Government ministries and agencies, collaborate through the Financial Education Network to increase the level of financial literacy and access to information and resources on financial matters. The Financial Education Network also serves as a focal point to drive the implementation of Malaysia’s National Strategy for Financial Literacy. I know that over the course of these webinars, we will learn much more about the priorities, approaches and strategies to advance sustainable finance development across the region. As we absorb the many valuable lessons and experiences shared towards this common goal, I am reminded of Winston Churchill who said, ‘It is no use saying we are doing our best. We have got to succeed in doing what is necessary”. In the end this is what counts. Policymakers and the financial industry have a responsibility to do what it takes to succeed in making sure that finance works for sustainable development. Let me end here and thank you very much for this opportunity to offer some remarks today. 3/3 BIS central bankers' speeches

Further steps to digitise financial services in the EU The further development of digitisation will continue to be among the main priorities, and the following measures are expected to be taken in order to accelerate these processes and reach their full potential at European level: 4.1. Eliminate the fragmentation of the digital single market by: - Legislative changes aimed at creating opportunities for interoperable use of digital identity throughout the European Union. This will allow easy ‘onboarding’ of new customers entirely online, in full compliance with the requirements for combatting money laundering and terrorist financing; - Facilitating cross-border provision of financial services, including by introduction of a harmonised regime for new activities such as crowdfunding, credit intermediation, and cryptocurrency services; 4.2. Adaptation of EU legislation to facilitate digital innovation: - Regulation of activities with cryptocurrencies and financial instruments based on tokens by introducing a comprehensive regulatory framework by 2024, allowing the implementation in the financial service sector of distributed ledger technology (DLT) and cryptocurrencies, taking into account the related risks; 3 - Promoting cooperation and use of cloud computing infrastructure, including through the development of a legislative framework for the supervision of information and communication technology (ICT) providers for the financial sector; - Promoting the use of artificial intelligence tools in the financial services sector; - Adherence to the principle of technology neutrality of legislation, combined with the issuance of interpretative guidelines on how existing legislation on financial services should be applied to new technologies in order to reduce legal uncertainty. - 4.3.

For instance, the ratio of counterfeit notes in circulation to currency in circulation in the K50,000 is negligible at 0.000036% as at end June 2011. This has been the case for the past five years. Despite the aforementioned statistic, it still remains our responsibility to ensure that this illegal activity is curbed by sensitizing the general public about the genuine security features of the Zambian banknotes. Distinguished participants, the topics that will be addressed at this workshop will provide you with an opportunity to learn modern methods of cash processing. As you may be aware, the Bank has made attempts to automate cash operations. As a result, the Bank acquired the BIS central bankers’ speeches 1 BPS 1000 banknote sorting machines with an integrated banknote destruction system in 2008. The process of automating currency operations is one of the Bank’s key strategic objectives. This workshop provides us with a unique opportunity to share our experiences with the printers of our banknotes and suppliers of the cash processing equipment. Please use this opportunity to tap knowledge from the vast experience and expertise of our resource persons. Finally, I wish to urge workshop participants to actively participate during deliberations of this Workshop. With these few words, it is now my honour and privilege to declare this workshop officially open. I THANK YOU! 2 BIS central bankers’ speeches

This was especially true for economies dependent on trade, such as Puerto Rico’s. In fact, Puerto Rico suffered much more than most because the Puerto Rican economy was already in recession when the financial crisis struck. While Puerto Rico interacts with many other economies, one partner looms especially large for the Commonwealth. For generations, the mainland United States and Puerto Rico have had a special economic relationship in many dimensions. One of the most obvious of these ties is the free flow of people between the mainland and the island. Indeed, according to the U.S. Census, about one half of the people who identify their origin as Puerto Rican lived on the mainland in 2008. The active migration, return migration and remittances to family BIS Review 18/2010 1 members reflect and reinforce the close personal and economic ties between Puerto Rico and the mainland. Another link is our common use of the dollar. This means that tourists from the mainland can visit without worrying about changing currencies. In addition, businesses can make long-term investments in Puerto Rico without worrying that currency fluctuations against the dollar will undermine their competitiveness. It also means that when the U.S. dollar falls in value, Puerto Rico’s exports become more competitive around the world, although not, of course, in the United States. Somewhat less obvious are the consequences of the mainland’s role as Puerto Rico’s largest trading partner. The mainland accounts for half of the island’s imports and threequarters of its exports.

To improve our understanding of the Puerto Rican economy, the New York Fed has joined a group of local businesses – including some represented here – to sponsor and fund a household survey, undertaken by the Center for the New Economy, our hosts today, to benchmark Puerto Rican consumer finances. As of today, the data have been collected and Fed economists are collaborating with the CNE to provide technical assistance, to make the results of this study public and to make these data available for further research. To help businesses and government in Puerto Rico, we have also been providing technical assistance to Puerto Rico’s new Institute for Statistics. We recognize the importance of this work and applaud its efforts to improve Puerto Rico’s inflation measures, national income accounting and business activity measures, just to name a few. All of these activities, from monetary policy and financial regulation to fostering community development and economic literacy and measurement, complement and reinforce each other. Our policy actions are most effective when people understand how financial markets work. Our decisions are always better when we are well informed about the concerns of families and businesses. Thus, outreach to the region and communities we serve is an important part of my job. Thank you for your kind attention. I would be happy to take a few questions. 6 BIS Review 18/2010

Svein Gjedrem: Economic perspectives Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the meeting of the Supervisory Council of Norges Bank, Oslo, 14 Thursday 2008. Please note that the text below may differ slightly from the actual presentation. * * * Introduction Henrik Wergeland was born 200 years ago. He worked in the vicinity of the central bank in periods. His plays were performed at the Christiania Theatre, which was located at Bankplassen, and as national archivist his office was located at Akershus fortress, a stone's throw from the central bank. Wergeland lived near Grønlia below Ekeberg. He travelled to town by rowing across Bjørvika. He moored his boat near Bekkevold’s pub on Skippergata, which is today known as "Grei Kafé". That is also where he met the proprietor’s daughter, Amelia Sofie, who became his wife. 1 Wergeland wrote a poem “Follow the Call”, which includes a well known verse: “But our world must still be young, Saga of each race must be still merely its cradlesong and its childhood fairy tale. Creatures from the age of chaos […]” 2 Chaos and fear exploded with full force in the financial markets last autumn. We are again witnessing that market participants suffer from a short memory span. Crises, imbalances and bubbles House prices in the US started to fall in 2006.

The EEA and WTO agreements resulted in stronger competition and increased flows of goods and services, labour and capital. As a result of the 1992 tax reform, the welfare state could be funded with reduced impact on wealth creation. The framework conditions for the electricity market, telecom market, aviation and broadcasting were changed. Trade was liberalised. State-owned companies were listed on the stock exchange and new forms of managing public agencies were developed. Industrial policy no longer kept unprofitable enterprises afloat. And last but not least, in Norway as in other countries, normbased or rule-based monetary and fiscal policy was introduced. The shift gave a boost to the economy, but in recent years it has been accompanied by a change in the distribution of income between labour and capital. This is probably a result of structural changes in the global economy. A rising share of the global production of goods and services is moving across the Pacific. Cheap Asian labour has changed industry structures and trading patterns in many Western countries, including Norway. New producer countries are fuelling competition, but are also creating new markets and producing cheap consumer goods. There has been a sustained rise in employment and wealth creation in the West. China, India and other emerging economies have doubled the supply of labour on the global market. 5 This has helped paved the way for strong growth, but has also curbed wages in many occupations in a number of industrialised countries. Norwegian households have enjoyed lower prices and a broader range of goods.

For macroeconomic policies, there is an important 3 Claro, Sebastián. Presented at the V Chile-China Entrepreneurial Meeting, Centro Cultural de Carabineros, Santiago, 10 June 2011. For transcript, see Central Bank of Chile website: www.bcentral.cl. 4 See Ministry of Finance of Chile website: www.hacienda.gov.cl. 2 BIS central bankers’ speeches challenge in facing a period of temporarily high terms of trade, and the improved external financing conditions that become available as a result. The experience of many countries shows that the best policy mix is sound fiscal discipline, prudent financial regulation, and a monetary policy framework that combines price stability and flexible exchange rates. A sound fiscal policy not only smoothes the business cycle and helps minimize foreign exchange fluctuations, but also avoids commitments to spending on outlays that depend on uncertain future income. Fiscal policy in Chile has been moving in that direction for decades, the importance of which cannot be overemphasized. Sound banking supervision is key for several reasons, among others because the intermediation of large capital inflows – in a context of upward pressures on asset prices – may lead to excessive risk taking. The reversal of these conditions has hit particularly hard in previous financial crises, where risktaking by financial institutions prompted aggressive deleveraging, with strong implications for credit and output. For this reason, in circumstances like these it is extremely important to closely monitor the prices of key assets and risk-taking patterns in the financial system. Finally, regarding monetary policy two issues are worth noting.

What we have to do, in actually operating monetary policy is to monitor all the relevant evidence as it emerges for signs that the economy is proving to be either stronger or weaker than we expect, and modify our view of the prospect for inflation - and our monetary policy - in the light of that. And in that context I repeat the assurance, which I gave recently to the TUC in Blackpool, that we will act symmetrically. We will be - have been - just as rigorous in reducing interest rates with the overall evidence pointing to the balance of risks to inflation on the downside, as we have been - and will again be - in raising rates with the evidence pointing to a significant or sustained overshoot of the inflation target. Now there are those - perhaps even one or two of you here this evening - who regard this assurance as cold comfort. It misses the point - they say - because the present approach to monetary policy focuses too narrowly on inflation. What we want - they say - is a monetary policy which puts more emphasis on growth and employment. You hear this complaint not just in this country but increasingly these days in Continental Europe. I must say, President, that it leaves me totally bemused. What it suggests is that growth and price stability are seen as alternatives - you can have a bit more of one if you’re prepared to accept a bit less of the other.

Although an understandable response to the events of the past few years, an increased prevalence of self-insurance is not good for the efficient functioning of our economy. The scarring effects of the financial crisis and the uncertainty it brought with it, together with the fiscal consolidation and the weakness of the euro area, are likely to continue to weigh on the recovery over the next few years. Yes: our economy appears to have turned a corner. And yes: there are good reasons for optimism that the recovery will persist. But we can’t take it for granted: there’s still a long way to go. And that sense of how far there is to go underpins the policy guidance provided by the Committee earlier this year and takes us to our third and final question: what next for monetary policy? What next for monetary policy? The primary objective of monetary policy remains to hit the Government’s 2% target for CPI inflation. Despite missing the target for much of the past five years, I’ve no doubt that the credible nominal anchor it provided served our economy well during the crisis. Indeed, without that credibility it wouldn’t have been possible to loosen monetary policy as aggressively as we did in order to support output and jobs. As we have seen, the good news is that inflation has fallen sharply over the past few months and the 2% target is now in sight for the first time in over 4 years. But this isn’t a time for complacency.

To repeat, inflation has been above the 2% target for most of the past five years. There are good reasons why policy wasn’t tightened in order to bring inflation back to target more quickly. But ultimately, the MPC will be judged by the success of our actions, not the elegance of our arguments. We need to demonstrate our commitment to bring inflation back to target and to keep it there. But we have also needed to trade off the speed with which we bring inflation back to target against the support that monetary policy can provide to the recovery. The MPC’s forward guidance gives greater clarity about our view of the appropriate trade-off. More important for us today, our guidance is rooted in the recognition that it’s a long way back to the economy being fully recovered. The damage and losses associated with the financial crisis and the years of frustration and disappointment that followed won’t be reversed simply by one or two quarters of strong growth. Our guidance makes clear that we intend to maintain the current exceptionally stimulative stance of monetary policy until we’ve BIS central bankers’ speeches 5 seen a sustained period of strong growth and the margin of slack in the economy has narrowed significantly, as long as this does not pose risks to either price or financial stability. As you may know, our guidance was framed in terms of so-called thresholds and knockouts.

and Author D., Levy F., Murnane R. “The Skill Content of Recent Technological Change: An Empirical Exploration”, Quarterly Journal of Economics, 2003. 20 The literature, which shows these problems is very extensive, for example: Hanson G., Mataloni R., Slaughter M. “Expansion Abroad and the Domestic Operations of U.S. Multinational Firms”, mimeo, 2003; Landefeld, Mataloni (2004) op. cit. ; Desai M., Foley F., Hines J. “Foreign Direct Investment and Domestic Economic Activity”, NBER Working Paper 11717; Mankiw N.G., Swagel P. “The Politics and Economics of Offshore Outsourcing”, mimeo, November 2005. 21 For example, Blinder A. “The Fear of Offshoring”, Princeton University, mimeo, October 2005. 10 BIS Review 64/2006 - Does the Polish educational system provide continuing training, and in particular, are we able to offer quick and smooth re-qualification of workforce that is prone to loose jobs in companies or industries which cannot stand the global competition? - Are there sound relations between businesses and universities in Poland, which would deliver a large number of innovations? - Is the public administration in Poland stimulating the innovation process (e.g. through the use of modern communication channels, giving up paperwork for the Internet, etc.)? - Do we create and support organizations for Poles emigrating abroad, to help them maintain their relation with the country and facilitate their return to set up their own companies? - Do we conduct an active policy of developing business contacts and personal connections on the fast growing markets?

For instance, South Korea is the eleventh global economy with th the voting share of 0.77%, which makes it hold 28 position among the IMF participants; whereas as per analyses of Kelkar V. et al. ”The International Monetary Fund: entitled Integration and Democratization in the 21st Century”, presented at the meeting of G24 in Manila, 17 - 18 March 2005, the total vote of Brazil, China and India in international institutions is equal to the total of Italy, Belgium and the Netherlands, whereas the total GDP of the first group of countries based on PPP is fourfold higher, with a 29 times larger population. 2 BIS Review 64/2006 Chart 1. Global demographic trends – the world population according to UN forecasts LO – left axis (LA) PO – right axis (RA) Africa – (LA) Europe – (RA) The rest of the world – (RA) Asia – (LA) North America – (RA) Note: „LA”, „RA” mean the left and right axis, data in million persons. Source: the UNO, http://esa.un.org/unpp/ Hence the demographic developments, supported by the globalization mechanisms which have led to the establishment of the global labour market, will drive Asia and possibly some areas of Africa to become fierce competitors for Europe and the US in the forthcoming decades. There are many estimates that show the sizes of particular economies in the decades to come, based on demographic trends, assumptions concerning the long-term growth of performance, or changes in real FX rates.

21 -1.8 -10 2001- 2009- 20142008 2013 2018 2001- 2009- 20142008 2013 2018

2 The three lines of defense model creates a set of layered defenses that align responsibility for risk taking with accountability for risk control and provide effective, independent risk oversight and escalation. In the three lines model, the assignment of risk management roles is clear and comprehensive in order to prevent gaps, 1 https://www.newyorkfed.org/aboutthefed/fedpoints.html. 2 IIA Position Paper: The Three Lines of Defense in Effective Risk Management and Control, January 2013. BIS central bankers’ speeches 1 ambiguities, or overlaps in responsibility. More specifically, the business areas are the first line of defense, independent risk management units are the second line of defense, and internal audit is the third line of defense. In the Bank, the first line of defense is comprised of the business areas that execute and support the execution of the Bank’s mission. These first line units are responsible for both the operational activities that result in risk as well as control of the resulting risks. The first line “owns” its risk in the sense that it is accountable for both positive and negative outcomes and is empowered to manage the distribution of outcomes. At its core, the three lines model recognizes the strong incentives for effective risk management created by aligning accountability and responsibility. In other words, from the perspective of the first line, there is “skin in the game,” and risk management is not viewed as someone else’s problem.

Accommodative monetary policy and the Government’s subsidised lending programme caused a surge in this market. Hence, in order to maintain the high quality standards for mortgage loans, on 1 August we increase the buffers for mortgage loans with a down payment of 15% to 20% to their prepandemic levels. In addition, there is a real threat of an overheating in consumer lending. We estimate that the growth rate in this market might reach 20% this year, whereas household incomes are not recovering that fast. If we do not take any response measures, this might also provoke social and financial stability risks. Therefore, we are reintroducing macroprudential measures returning the risk-based buffers to the pre-pandemic levels. I would like to stress that we will increase the buffers further if growth in this segment does not subside. Another issue related to limiting risks for retail borrowers, for households, is how to regulate lending at floating interest rates. A floating interest rate is a common mechanism in corporate lending, whereas it might involve risks in retail lending. In contrast to businesses, people are not always able to properly assess 3/7 BIS central bankers' speeches their future risks and might agree to borrowings at interest rates that might rise. This is especially important for a mortgage loan which is the largest one taken out by people over their entire life and the most demanding one since people might lose housing if they fail to repay their mortgage loans.

Ladies and gentlemen, to some, it would not be a surprise to note that the seminar comes shortly after the first anniversary of the collapse of Lehman Brothers, one of the first banks to fail in a series of cascading defaults of major international banks, which precipitated the onset of the current global financial crisis and the resultant worldwide economic recession. The case of Lehman Brothers is just one of the many that highlights apparent weaknesses in the global regulatory and supervisory environment. To this end, market practitioners and academics are still analysing and discussing the causes, prudential supervision frameworks, problem bank resolutions and strategies to avoid future systemic challenges. As the current global financial crisis has demonstrated, critical deficiencies still remain in risk management systems. Areas in need of critical enhancements include identifying key risks both within and across borders; assessing these risks, including stress testing and macroprudential analysis to determine the impact on the financial system; monitoring, developing coordination protocols, reviewing the regulatory frameworks, adopting appropriate risk management frameworks and adopting international accounting standards. While these structural deficiencies are not new, the current crisis has brought them to the fore. The speed at which the crisis has spread across the globe indicates that the development of coherent and rigorous frameworks for maintaining financial stability came too late for several countries, leading to adhoc and inconsistent policy responses.

More recently, this suburbanization trend seems to have halted; and there are signs that cities, especially major cities, have been gaining relative to their suburbs. It’s too early to say if this is the start of a secular trend, and the implications for Fairfield County are unclear. However, Stamford and Bridgeport stand to 4 BIS central bankers’ speeches benefit from a shift in preferences toward more urban living, given their high population densities and strong transit links to New York City. Even now, while Fairfield County may have lagged in job growth, population growth has remained quite sturdy – not only across the county, but here in Bridgeport as well. In fact, Bridgeport’s population has grown by about 6 percent since 2000 – its first sustained increase since the 1940s – while Stamford’s has grown by almost 10 percent. Fairfield County can leverage its proximity to the New York City job market. While most residents of Fairfield County rely on job opportunities locally, many residents commute to jobs in Manhattan. So the strength in New York City’s economy should be of significant help to Fairfield County. Over the past year, New York City’s economy has, on average, added more than twice as many jobs each month as the total expected job losses from the relocations of GE, UBS and RBS. While a majority of these jobs may not have been in highpaying-industry sectors, some of them were – especially in technology-related industries.

Collectively, our Cornerstone Members, Global Partners and Knowledge Partner will forge a community of practice to support the green transformation of commercial banks in Asia. 18. Today we are also publishing the Alliance’s first thought leadership paper, in collaboration with the Hong Kong Institute for Monetary and Financial Research. The paper presents a curated overview of the effects of climate risk on financial institutions and financial markets, methods for measuring climate risk, the evolving practices as well as regulatory initiatives that seek to address climate risk. 19. Ladies and gentlemen, we are excited to embark on the transition path with the Alliance members and partners. We are confident that the learning and sharing among peers will encourage cross-fertilisation of ideas and the continued advancement of green finance best practices. Starting from Hong Kong, we wish to create a lasting ripple effect in emerging markets throughout Asia and beyond that will contribute meaningfully to the global effort in tacking climate change through the power of finance. 20. Thank you. 1 Source: ASIFMA https://www.asifma.org/wp-content/uploads/2020/12/asifma-fosda-esg- and-sf-data-challenges-and-opportunities-in-asia-f20201221c.pdf

We also conducted an array of awareness programmes for the general public on our clean note policy. Going forward, to improve currency operations and processes, the construction of a new secure storage facility has been initiated at the Centre for Banking Studies premises in Rajagiriya. The facility is expected to be operational from 2019. As a medium-term solution to improve operational efficiency and increase processing capacity of currency notes, we are planning 33 to redesign the current operational flow with the introduction of new machinery and equipment. We plan to issue a new note series, in 2021, with a view to enhancing the quality of currency notes. We are also planning to establish a proper mechanism to distribute coins and to introduce coin vending machines. Further, we intend to enhance contingency storage capacity for currency with selected Regional Offices, while introducing a stronger monitoring system for Cash in Transit (CIT) companies. Public Debt Management As the fiscal agent of the government, we continued to issue, service and manage public debt during 2018 with transparency and prudence and initiated several policies to ensure that the government’s financing requirements are met at the lowest possible cost with a prudent degree of risk, while ensuring debt sustainability. During 2018, we encountered several challenges in government debt management due to interest rate normalisation in the US, the skewed government financing requirement as well as uncertainties in the political sphere.

This figure, more than any other, underlines the gravity of the shock the UK economy has faced this year. The better news is that the economy began its recovery from this dramatic fall earlier, and has since recovered far-faster, than anyone expected. The speed and scale of the UK’s recovery has surprised to the upside, persistently and significantly, for at least the past four months. Back in May, the Bank expected GDP to be around 18% below its pre-Covid level on average during the third quarter. Consensus forecasts by professional economists were, at the time, weaker still. Four months on, we now expect GDP to be around 3-4% below its pre-Covid level by the end of the third quarter. In other words, the economy has already recovered just under 90% of its earlier losses. Having fallen precipitously by 20% in the second quarter, we expect UK GDP to have risen by a vertiginous 20% in the third quarter – by some margin its largest-ever rise. Put differently, since May UK GDP has been rising, on average, by around 1.5% per week. The pace of recovery has varied, starting slowly in May, picking up pace rapidly during June and July and is then expected to have slowed a little during August and September. Even if our GDP nowcasts for August and September come to pass, there remains an average recession-sized gap between output and its pre-Covid level.

Allow me to say simply that some of the more recent comments about a “come back of inflation", which would allegedly put the Governing Council under strain, seem greatly exaggerated. So, where do we stand? The slowdown in per capita growth in advanced economies can actually be traced back to the 1970s [slide 2]. It worsened in several stages, the latest starting in the mid2000s, after the ICT revolution and before the Great Recession. The issue is that this prolonged slowdown raises questions about future potential growth, largely due to uncertainty about productivity trends. To assess the risks, I would like to elaborate on the three hypotheses that form the basis for today’s conference [slide 3]: first, are we simply underestimating growth? Second, is the slowdown a demand phenomenon? Third, is it a persistent phenomenon due to a slowdown in the pace of innovation? 1. Are we underestimating growth? New technologies usually lead to a mismeasurement of output. National accounts indeed have a hard time taking into account improvements in product quality and product entry or exit. As a result, they tend to overestimate inflation and underestimate output. For instance, there is currently an issue with IT hardware, as output of these products is inadequately recognised, even in the US. But the growing share of digital computing technologies in economic activity raises new specific challenges, both on a conceptual and practical level [slide 4]. Let me take the example of travel services.

Luis de Guindos: Building the EU’s capital markets - what remains to be done Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the Association for Financial Markets in Europe Conference, Supervision and Integration Opportunities for European Banking and Capital Markets, Frankfurt am Main, 23 May 2019. * * * It is a pleasure to be here today to share my thoughts on the future of capital markets union (CMU). CMU is undoubtedly a key project for the Association for Financial Markets in Europe (AFME), but it is also important for the European Central Bank (ECB). The primary objective of CMU is to foster deep and diversified capital markets that provide a wide source of financing options to European companies and citizens and act as an engine for investment, innovation and growth. Vibrant EU equity markets and truly diversified cross-border debt markets would complement traditional bank lending by fostering risk-taking and investment.1 Indeed, capital markets can, for instance, provide different forms of funding sources that are better tailored to firms’ needs along their stage of development. A well-functioning CMU would also complement the banking union by providing channels to mobilise the large existing pool of savings towards financing the economy. It could help facing tomorrow’s challenges, such as climate change and digital innovation.

From the book, we can see a long list of CGC schemes introduced throughout the years, each reflecting the stage of development of the country then, and also consistent with the strategy of the country’s economic policies. From CGC’s earliest products such as the 1 Keluaran dalam Negeri Kasardan Pendapatan Negara Kasar pada Harga Semasa dan Harga Malar, Economic Planning Unit (EPU) statistics 2 Bank Negara Malaysia data BIS central bankers’ speeches 1 Hawkers and Petty Traders Loan Scheme, catering to financing as low as RM500, to the recent Green Technology Financing Scheme, CGC has done well in providing the needed support to the ever-progressing and expanded nature of the Malaysian economy. CGC’s achievements would not have been possible without the support of the financial institutions. The successes of CGC’s guarantee schemes were the result of the trust and collaboration between the corporation and the participating financial institutions. It is for this reason that over the years many achievements have materialised. CGC has achieved a lot of success it can be proud of, but as with life, we must move forward. Change is constant it becomes more rapid. There are a few things that we could do for the SMEs. First, we can lower the financing cost for SMEs which obtain guaranteed financing under CGC. On the average, SMEs are being charged between 10 to 12 percent. This is about BLR plus 5 to 6 percent. The rate imposed is much too high.

Within the Eurosystem, the ECB has established a high-level task force to prepare a comprehensive analysis of the possible benefits and challenges related to retail CBDC, to be discussed in coming weeks within our Governing Council. • In this journey, we must set up appropriate synergies between public and private actors. Unequivocal support should be given to the European Payment Initiative (EPI): this project is essential for the safety, the rapidity and the European sovereignty of payments. Success of EPI is determined by (i) access to a large customer base, (ii) adherence of large merchants, and ultimately interoperability should EPI have ambitions to develop outside of Europe. • Let me stress there is no contradiction, as sometimes feared by commercial banks, between considering a euro-CBDC and supporting EPI. We may probably need both, and build complementarity. My preference would be to seek a renewed public / private partnership for the dissemination of central bank money in a retail form. Possible impacts on the banking sector could be reduced with different tools: for instance, limiting the quantity of digital euro in circulation would prevent excessive shifts of commercial bank money into digital euros. For the Eurosystem, this strategy would imply to clarify the interplay we would like to put in place between EPI and the CBDC, thus validating an intermediated model while providing enough customer proximity and value added to intermediaries (like front-end solutions).

On the other, there remains the risk of a default in Greece having an impact on global financial markets and GDP growth in the Eurozone. While these are still significant risks, the ability of the larger BIS central bankers’ speeches 3 central banks to handle these situations has improved, reducing to some extent the intensity of the negative impact of such events. This is not to say that there are no associated risks or that their persistence for so long would have lesser effects. A positive note is the more consolidated growth in the Eurozone, which has helped to configure a more balanced global economic scenario. In the emerging economies, there are still significant risks. While the risk of commodity prices dropping further seems to have eased, Latin American economies have been weaker for longer than expected. This has occurred in a context where the high fiscal and current account deficits persist in many economies, making the necessary adjustments expensive and difficult to implement. The risk of slower growth in China and its implications for the copper prices remains, although the Chinese authorities have given proof of their ability and desire to avoid abrupt corrections in their economy. Domestically, the economic recovery in the second half of the year should be accompanied by a significant improvement in confidence indicators, but so far it has not happened.

To the extent that this situation continues, it is possible that domestic output and expenditure will fail to show the greater dynamism that is expected in the baseline scenario. Conversely, a scenario where expectations improve significantly would allow for a faster recovery of the economy, particularly in 2016. Regarding inflation, pressures are somewhat milder than expected in March, due to lower activity and the fact that, although with volatility, the peso has not continued to depreciate. However, in a context of persistently high inflation, with bounded margins, strong wage growth, higher fuel prices and external risk scenarios that can drive a significant further depreciation of the peso, inflationary risks remain important. As we are permanently aware of our legal mandate, this is one risk we analyze and monitor with special care. After evaluating these risks, the Board estimates that the risk balance is unbiased for both output and inflation. Summing up, inflation remains high, despite some decline in recent months. Domestic activity picked up in the first quarter, but the outlook for the second half of the year has moderated. As has been mentioned before, macroeconomic policies have played a countercyclical role. In particular, the stronger monetary impulse translated into a reduction of 200 basis points off the monetary policy rate, which helped to drive the long-term rates close to their historic lows.

Other surveys of economists and market participants of longer-run inflation expectations, such as the Blue Chip survey and the New York Desk surveys, yield similar results. 6 Another form of relevant sensitivity analysis is the response of interest rate to economic shocks or news. As discussed in Swanson and Williams (2014), responses of yields to news can be distorted when short-term interest rates are at or near the effective lower abound. 7 Armantier et al. (February 2022). 8 There is a literature that aims to extract inflation expectations from breakeven inflation rates; see Breach et al (2022) and references therein. These measures of inflation expectations tend to be even more stable than breakeven inflation rates, including during the current episode. 9 As discussed in Mertens and Williams (2021). 10By Mankiw, Reis, Wolfers (2003) and ReisTerms (2022). continuing to and use our site, you agree to our of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement. 11 Note that the five-year-ahead survey was conducted in July 2021, November 2021, and monthly starting in January 2022. The dashed lines in Figures 2 and 3 indicate periods when this survey question was not asked. 12 Armantier et al (May 2022, October 2022). 13 The University Michigan survey of inflation over the next 5-10 years also shows a rise in deflation expectations this year. 14 A similar pattern is seen in aggregate uncertainty for one-year-ahead inflation expectations. 15 Armantier et al. (October 2022). 16 Armantier et al.

Breach, Tomas, Stefania D’Amico, and Athanasios Orphanides, “The term structure and inflation uncertainty,” Journal of Financial Economics, Volume 138, Issue 2, November 2020, 388-414. Coibion, Olivier, Francesco D’Acunto, Yuriy Gorodnichenko, and Michael Weber, “The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications,” Journal of Economic Perspectives, Volume 36, Number 3, Summer 2022, 157–184. Evans, George, and Seppo Honkapohja. 2001. Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press. Levin, Andrew, and John B. Taylor, “Falling Behind the Curve: A Positive Analysis of Stop-Start Monetary Policies and the Great Inflation,” in Michael D. Bordo and Athanasios Orphanides (ed. ), The Great Inflation: The Rebirth of Modern Central Banking, Chicago: University of Chicago Press, 2013, 217-244. Malmendier, Ulrike, and Stefan Nagel, “Learning from Inflation Experiences,” The Quarterly Journal of Economics, Volume 131, Issue 1, February 2016, 53–87. Mankiw, N. Gregory, Ricardo Reis, and Justin Wolfers, “Disagreement about Inflation Expectations,” NBER Macroeconomics Annual 2003, Volume 18, NBER, Mark Gertler and Kenneth Rogoff, editors, 2004, 209-270. Mertens, Thomas M., and John C. Williams, “What to Expect from the Lower Bound on Interest Rates: Evidence from Derivatives Prices,” American Economic Review, 111 (8), August 2021, 2473-2505. Orphanides, Athanasios, and John C. Williams, “Imperfect Knowledge, Inflation Expectations, and Monetary Policy,”, in Ben S. Bernanke and Michael Woodford (ed. ), The Inflation-Targeting Debate, Chicago: University of Chicago Press, 2004, 201-234. Orphanides, Athanasios, and John C. Williams, “Inflation Scares and Monetary Policy,” Review of Economic Dynamics, 8, April 2005, 498-527.

2 BIS central bankers’ speeches running at about $ billion per month, consisting of roughly $ billion in new investments and $ billion of reinvestments. To meet this pace, the Desk has been operating in the market on nearly every available day. 9 The operations to date have gone well. Participation by the dealers has been strong, with an average offer-to-cover ratio of about 3.5, and the accepted offers have been allocated across a number of dealers and a wide range of securities. Given the robust participation in the operations, the Desk has received competitive and appropriate prices for the securities obtained. 10 Moreover, our purchases do not appear to be causing significant strains on the liquidity or functioning of the Treasury market. It is unusual for the market to have such a large, persistent, and one-sided participant, and we had to worry about how it would adjust to our presence. However, the available evidence suggests that market liquidity is decent at this time. Measures of liquidity, such as trading volumes, bid-ask spreads, or quote sizes, worsened in December, but that pattern appears to have been driven by year-end effects rather than our presence in the market. These measures have recovered since the year-end, moving back toward the levels observed before the start of the purchases. In addition, we do not see signs that the market is facing unusual scarcity of particular Treasury securities.

The policy decisions made by the FOMC in August and November were intended to influence financial conditions in a manner that would support the economic recovery and return employment and inflation, over time, to levels consistent with the FOMC’s objectives. One way that this might occur is through a portfolio balance channel. 12 Under this view, removing duration risk from the market would tend to keep longer-term real interest rates lower than they otherwise would be and would encourage investors to move into other types of assets, thereby making broader financial conditions more accommodative. These intended effects were apparent in financial markets from mid-August to early November, when investors increasingly anticipated the Federal Reserve’s decision to expand its balance sheet. Over that period, longer-term real interest rates declined, breakeven inflation rates moved up toward more normal levels, equity prices rose notably and risk spreads on many credit instruments narrowed. This configuration of asset price movements is the pattern that is typically associated with additional monetary policy easing. Since early November, one of the notable developments in financial markets has been the sharp increase in longer-term interest rates. At first glance, this change may seem at odds with the portfolio balance channel. However, it is important to understand the factors that led to the increase in interest rates in the current circumstances. The upward movement in longer-term interest rates in large part reflects the greater optimism among investors about the outlook for economic growth.

SPEECH The complexity of monetary policy Keynote speech by Fabio Panetta, Member of the Executive Board of the ECB, at the CEPR-EABCN conference on “Finding the Gap: Output Gap Measurement in the Euro Area” held at the European University Institute Florence, 14 November 2022 The output gap – the difference between actual and potential output[1] – plays an important conceptual role in central banking. In normal conditions, the output gap represents a gauge of inflationary pressure by signalling the amount of slack in the economy. [2] In turn, this provides a yardstick against which central banks calibrate monetary policy. By steering demand so that actual output matches potential central banks can stabilise inflation around their targets. From the global financial crisis until the start of the pandemic, variations in the output gap reflected prominently the role played by demand factors. The implication for monetary policy was relatively straightforward. The shocks to demand pushed output, employment and inflation in the same direction, leading to a positive correlation between output gaps and inflation. Monetary policy could aim to close the inflation gap without facing major trade-offs in terms of the output gap. Central banks ultimately faced the difficulty, not so much of diagnosing, but of delivering: once inflation fell too low, their conventional instruments were constrained as interest rates approached their lower bound. [3] Central banks had to deploy non-standard policy tools to lift demand. Today we are in a new environment.

But at this stage, they do not support the view that we are or will be facing a large positive output gap. Overall, my reading of the available evidence so far is that we cannot say – with sufficiently high confidence – that we are facing a large and permanent loss of potential. Implications for monetary policy My primary objective today is to illustrate the difficulties and the risks policymakers must contend with when assessing supply and demand dynamics in real time, as well as the implications of these dynamics for the medium-term inflation outlook. I will nonetheless offer some reflections on how the previous analysis is influencing my thinking on monetary policy in an uncertain economic environment. There is a common argument today that monetary policy faces asymmetric risks. If policy overreacts to inflation, it can always undo the damage later. But if it underreacts, and inflation gets out of control, it will have to subject the economy to a harder and more costly tightening to rein inflation back in. There are limits to this argument. Monetary policy certainly needs to adjust – even if the output gap is negative – because the risk of second-round effects has become too great. However, I also believe that given the uncertainty we are facing, the calibration of our monetary policy stance must remain evidence-based and focused on the medium-term inflation outlook. [19] And after the progress we have already done in adjusting our policy stance, an aggressive tightening is not advisable, for two main reasons.

We are mindful that for the NDF market to truly reduce in significance and adverse influences, the onshore market must become highly competitive, not just the foreign exchange market but also all aspects of the financial market. We are determined to realise the idea of having a market that possesses the breadth and depth to cater to the increasingly complex and diverse needs of the economy, and a market that is able to sustain and weather volatilities that contribute to the overall wellbeing of the economy. The early positive results of the measures speak for themselves. The onshore foreign exchange market now regularly records a healthy daily volume. In addition, the ringgit exchange rate has remained stable with volatility reducing by half since the introduction of these measures. The domestic bond market is now more resilient as speculative positions have mostly exited the market. There is a larger composition of stable and longer term investors. This fact is much more important than just looking at the percentages or size of non-resident holdings. Our experience suggests that there is a threshold where non-resident investors will become a destabilising force. The success of our measures and our continued faith in the market mechanism is now validated and restored. Ensuring trust, confidence and integrity of the financial market There are many lessons that we ought to learn. Some of the disruptions were caused from the uncompetitive market behaviors and questionable conduct by players.

To this end, I wish to mention that the Bank of Zambia with other stakeholders is in the process of putting in place a National Switch that will further enhance initiatives such as this one whose launch we are witnessing today. Ladies and Gentlemen, the Bank of Zambia will continue to support any efforts and innovations by the private sector that extend the provision of financial services to the majority of our citizens. I look forward to seeing the product being launched today live up to the expectations of providing a safe, efficient, secure and reliable service to the Zambian people. I hope that all customers will enjoy using the Airtel Money service. With these few remarks, I wish to declare Airtel Money officially launched and wish it all the success. Thank you. 2 BIS central bankers’ speeches

In 2005, while the maturities of assets of the banking sector were extended, the liabilities still had short-term maturities. This shows that the vulnerability against the interest rate risk and the maturity mismatch of the sector increased. In order to facilitate banks’ interest rate risk management, it is deemed necessary to make regulations that will also allow floating rate consumer credits along with the currently available fixed rate credits. In 2005, the ratio of liquid assets to total assets decreased as a result of the continuation of the upward trend in credits. Nevertheless, despite the short-term structure of deposits, especially the renewable nature of the major portion of term savings deposits, low condensation and the fact that the assets, which can be accepted by the Central Bank as collateral, comprise a significant part of the assets of the sector are considered risk-reducing factors with respect to liquidity management. Distinguished Guests, In a falling inflation environment, increasing fundamental banking activities along with banks’ narrowing profit margins, and the rise in net wages and commission revenues, which is a more stable source of income, make a positive contribution to the diversity of assets and income of the sector. Hence, they have a favorable effect on profitability performance, which has an important role in financial stability. The capital adequacy ratio of the banking sector is realized well above the legal limit of 8 percent.

Zamani Abdul Ghani: Malaysia – seizing the opportunity to evolve Opening remarks by Mr Zamani Abdul Ghani, Deputy Governor of the Central Bank of Malaysia, at the Seminar on Financing for Overseas Project, Kuala Lumpur, 14 January 2010. * * * I am pleased to be invited today to officiate this Seminar on Financing for Overseas Project. On behalf of Bank Negara Malaysia, I wish to thank and congratulate the EXIM Bank, the ICD and the CIDB for their efforts in organizing this important and invaluable Seminar. The continuous collaboration among Malaysian private and public related organizations with the IDB and its related organizations demonstrate the solidarity of the Muslim Ummah and the community at large towards achieving a strong and sustainable economic development. This also reflects the growing importance of cross border trade and investment among the OIC member countries. We, at Bank Negara Malaysia, are pleased to note that over 200 participants from more than 100 companies in Malaysia are participating in this Seminar. Today’s Seminar which brings together participants in the related industries, not only provide information on the business opportunities abroad, but also serves as an excellent platform to establish new networking links as well as sharing of innovative ideas and invaluable experiences. Malaysia has always accorded and will continue to accord a high priority on enhancing collaboration with the OIC member countries towards fostering intra-OIC trade and investment. Realizing the large business opportunities in the OIC countries, Malaysia entered into an MoU with the IDB in 2004.

In the wake of the controversy surrounding the intelligence community's assessment of the existence of weapons of mass destruction in Iraq, IARPA set out to enhance the accuracy, precision, and timeliness of intelligence forecasts.3 The Federal Reserve and the broader economics and financial community have, of course, had to face similarly humbling shortcomings in our failure to forecast the Great Recession, despite the numerous signals that were available to forecasters and policymakers prior to 2008. On this issue, it is useful to recall a quote from an unusual source on economic forecasting, the Queen of the United Kingdom, who in November 2008 asked, "Why did nobody notice it?" We should not treat this as a rhetorical question. What are some of the underlying reasons individuals and organizations fail to predict? What should we change about our mindsets and practices to improve the chances that we "notice it" next time, whenever that may be? At the New York Fed, we've made investments in response to these critical questions. We've created a team that is raising awareness of the challenges that make it so difficult to "notice," innovating on how we approach analysis and decision-making, and making these approaches an essential part of what it means to work at the Bank. This is much in the spirit of what IARPA sought to do by sponsoring their tournament. To compete in the IARPA tournament, Tetlock recruited participants online from outside the intelligence community.

12 An early, working paper version of this research can be found in Marcelle Chauvet and Simon Potter, Forecasting Recessions Using the Yield Curve, Federal Reserve Bank of New York Staff Reports, number 134, August 2001. 13 Brier scores measure probabilistic forecasting accuracy as a function of the distance between a probability estimate and the actual outcome. For details on origin and calculation see “Verification of Forecasts Expressed in Terms of Probability,” Monthly Weather Review 78, no. 1, 1950. 14 See Michael D. Bauer and Thomas M. Mertens, Economic Forecasts with the Yield Curve, Federal Reserve Bank of San Francisco Economic Letter, 2018–07, March 5, 2018. 15 Tetlock does discuss ambiguity aversion. Formalizing its role and that of asymmetric loss functions, seen for instance in the work of Hansen and Sargent, is a good example where formal modeling can make significant advances over less structured judgmental approaches when it comes to decision-making based on forecasts. 16 The minutes to the July 31-August 1, 2018, FOMC meeting report on a Committee discussion about monetary policy options at the zero lower bound. Although participants generally agreed that their current policy toolkit could provide significant accommodation, participants saw an apparent secular decline in neutral real interest rates as leaving less scope than in the past to reduce the federal funds rate in response to negative shocks, meaning spells at the ZLB could become more frequent and protracted than in the past.

Moreover, unit labour cost growth has been low (2.0 % in 2003, coming down to around 0.7% in the first half of 2004) and it can be expected that it will be contained in the coming quarters by moderate wage developments and labour productivity gains. Notwithstanding these encouraging developments, there are still several upside risks to the outlook for price stability. These risks are mainly associated with oil price developments, possible new increases in indirect taxes and administered prices, and potential second-round effects stemming from wage and price-setting behaviour. The rise in measures of long-term inflation expectations in the euro area in the course of this year is also a cause of some concern. In addition, our monetary analysis points to upside risks to price stability. Since mid-summer, the dynamics of M3 have strengthened again, mainly reflecting continued strong demand for transaction balances, which are included in the narrow aggregate M1, the most liquid component of M3. The acceleration of money growth is driven by the stimulative effect of the historically low level of interest rates in the euro area. The low level of interest rates is also fuelling private sector demand for credit. In particular, the growth rate of loans for house purchase continues to rise in the euro area and is now approaching double digits. This goes hand in hand with relatively fast rises in real estate prices in many euro area countries. In recent months, the annual rate of growth of loans to non-financial corporations has also picked up.

And we have, of course, tried to assess the impact of the dramatic stock market decline from the peaks in 2000 on macroeconomic conditions and financial stability. In this regard, it mattered that, partly linked to the introduction of the euro, the outstanding amount of shares substantially increased in the euro area. For non-financial corporations in the euro area, the annual net issuance of shares increased from 1.7% of GDP in 1995 to 7.3% of GDP in 2000. At the same time, during the late 1990s, the distribution of shares across the euro area population broadened significantly, implying that more households invested in shares in the late 1990s than before. Corrected for valuation effects, the amount of household’s holdings of shares and mutual fund shares increased between 1995 and 2003 by 78%. Against this background, stock prices have become more relevant to economic conditions in the euro area in recent years. And indeed, when stock prices started to fall, we could see that this had a notable dampening effect on the euro area economy in the period 2001-2003. What role do asset prices play in the ECB’s monetary policy? After this description of the current situation, the crucial question is: how do asset price developments enter into the assessment of the outlook for price stability and how they influence the policy-formulation of the ECB. Recently, much attention has been devoted to the question of which monetary policy strategies are optimal in an environment of strong asset price fluctuations.

The tale of the rivalry between Hong Kong and Shanghai is another hotly debated topic. But I have never thought of these two cities as deadly rivals. More than a year ago when Shanghai proposed the establishment of the “Free Trade Zone”, some predicted that, within 2 to 3 years, Shanghai would wrest from Hong Kong the position as Mainland’s offshore financial centre. They thought that further liberalisation of the Mainland’s capital account would enable Shanghai and other Mainland financial centres to take business away from Hong Kong. There is some truth in it. As the Mainland’s capital account liberalises, Shanghai will certainly carry out more cross-border and international financial activities and compete with Hong Kong. However, I would like to point out that the gradual liberalisation of the capital account is a two-way process, meaning a more efficient flow of funds into and out of the Mainland. It will then be much easier for Hong Kong to develop businesses targeting Mainland enterprises and residents, such as financing, debt issuance and wealth management. If we look at the size of the onshore renminbi financial market, with RMB110 trillion in total bank deposits and RMB160 trillion in total financial assets, we can imagine as the capital account continues to liberalise and create the necessary policy headroom for twoway fund flows, it would mean a huge market with enormous business opportunities for Hong Kong’s competitive banks and financial institutions. 8. So, I do not believe Shanghai and Hong Kong are rivals.

There are also those who believe that to maintain Hong Kong’s competitive edge, we must be the only conduit for foreign capital going into and out of the Mainland. It means a “single access” model, with Hong Kong as the only link and conduit between the onshore and offshore markets. The rationale for Hong Kong to continue to monopolise the access to the onshore market is understandable. It also serves practical purposes at the initial stage of the renminbi’s internationalisation. But as the renminbi internationalisation progresses, this model is not sustainable in the long run. The aim of opening up the capital account and internationalising the renminbi is to foster general acceptance of renminbi in global trade and investment and as a reserve currency. To promote the extensive use of renminbi by corporations and investors around the world, renminbi business must flourish in different parts of the world. The development of the offshore renminbi market must shift from a “single access” model to a “multiple accesses” model. We pride ourselves as the world’s most important offshore renminbi centre, still far ahead of other centres in terms of the size of the liquidity pool and various financial intermediation activities. But there is no time for complacency. Our task is to consolidate Hong Kong’s unique advantages and leverage our first-mover position by incessantly upgrading our renminbi platform, making it the ideal choice for companies and financial institutions, on the Mainland and around the world alike, to conduct various types of offshore renminbi business.

Norges Bank’s mandate reads as follows: Monetary policy shall be aimed at stability in the Norwegian krone’s internal and external value, 1 If clothing prices had risen at the same pace as other consumer prices, the overall saving for households is estimated at about NOK 10 billion in 2002. BIS Review 65/2002 3 contributing to stable expectations concerning exchange rate developments. At the same time, monetary policy shall underpin fiscal policy by contributing to stable developments in output and employment. Norges Bank’s implementation of monetary policy shall, in accordance with the first paragraph, be oriented towards low and stable inflation. The operational target of monetary policy shall be annual consumer price inflation of approximately 2.5 per cent over time. The first paragraph of the mandate sets forth its intentions. The last paragraph specifies what Norges Bank is required to do. The first sentence in the mandate refers to the value of the krone. Stability in the internal value of the krone implies that inflation must be low and stable. Low and stable inflation fosters economic growth and stability in financial and property markets. The regulation also states that monetary policy shall be aimed at stability in the external value of the krone. The krone exchange rate fluctuates from day to day, from week to week, and from month to month. We have free international trade and free capital movements. We do not have the instruments for fine-tuning the exchange rate.

On the one hand it is difficult to measure these intangible assets, but on the other hand one disregards a large part of the companies’ investments if one does not take them into account. US and European studies show that investment in intangible assets comprises around 10 per cent of GDP. 11 The most recent productivity growth and forecasts Let me now comment on the development of productivity last year and during the period to come. 7 Bloom, Sadun and Van Reenen (2007). 8 Håkanson (2007). 9 By productivity is meant total factor productivity, TFP. In the study the comparison has been made with the median company. 10 Brynjolfsson and Hitt (2003). 11 See, for instance, Corrado, Hulten and Sichel (2005), (2006), Hao, Manole and van Ark (2007), Haskel and Marrano (2007). 4 BIS Review 12/2008 Productivity growth in the business sector has been 4.4 per cent a year during the period 2002-2006. In the increasingly mature phase of the economic cycle where the economy is now, it is normal for productivity growth to slow down in connection with an increase in employment. This is also something the Riksbank has been expecting. However, the downturn in the rate of increase in productivity last year was stronger than motivated by the prevailing economic situation and the Riksbank, like many other analysts, was surprised by the strength of the downturn.

The real cost of a loan, that is, the interest cost adjusted for inflation, becomes higher if inflation is surprisingly low. Another way of describing this so-called debt deflation is that surprisingly low inflation means that the real value of debts rises. It then becomes more difficult for borrowers to pay off their debts, at least unless their real incomes also rise.8 One can expect that the problems will be particularly extensive if inflation is surprisingly low during an economic downturn that coincides with high private or public debt. This is because those who try to reduce their debt do so by reducing their expenditure, which means that demand in the economy declines.9 And this reinforces the economic downturn. We are not seeing such a scenario in Sweden right now. Although household debt is high, economic activity is beginning to pick up and household consumption has developed relatively well in recent years.10 The risk that many see with the high household indebtedness is rather that a future economic downturn would be reinforced by households rapidly reducing their consumption. A relevant question – without an obvious answer – is whether such concern should be countered with a tight monetary policy that dampens households’ propensity to increase their nominal debts or with an expansionary monetary policy that ensures inflation does not become surprisingly low. The idea behind the latter strategy is to limit growth in households’ real debts.11 The low inflation could thus worsen the situation for households with a high level of indebtedness.

This conference is focused on one important element of this: the role of financial markets in the setting and transmission of monetary policy. That is covered in the Bank’s publications on how the economy works, including the Committee’s 1999 paper on the Monetary Transmission Mechanism (MTM), and books describing the models used in forecasting. 1 But those high-level descriptions miss out an awful lot about how the real and financial parts of the economy connect. Financial variables are limited to the short-term interest rate, the exchange rate, and equities. Nothing on the role of long-maturity interest rates, or on credit spreads and risk premia – which misses out a whole universe of financial asset prices. Very little on credit more generally. Next to nothing on money. And nothing at all on the role of bank intermediation. These gaps were perhaps underlined by a degree of confusion amongst commentators about the way in which Money and Credit featured somewhat more prominently in the Committee’s discussions during the backend of 2006 and into this year (Chart 1). With both having been strong for a while, some asked whether this marked some kind of change in the reaction function, implying a greater stress on nominal variables. Given the near identity of deposits and bank lending, Money and Credit are often used almost inseparably, even interchangeably, with wider measures of non-bank credit looked at only when assessing the health of corporate and household sector balance sheets.

There are good arguments to create international instruments providing a reliable store of value. There are also conceptual and political difficulties. A choice would have to be made as to the true nature of the “super reserve currency”. Would it be a basket of existing monies such as the SDR today? Or would it be a new “fiat” currency? More fundamentally, a new reserve currency would, in fact, grant a collective guarantee against exchange risk. This guarantee would benefit surplus countries and would be given by deficit countries. When the substitution account was discussed more than 25 years ago, it became clear, at the time that it would have to be part of a package encompassing explicit, binding and symmetric rules on balance of payment adjustments. Most likely, the same questions would be raised again today and the creation of a new reserve currency would have to be part of a broader framework. That may take time, as our Chinese colleagues are fond of reminding us when we discuss those issues. 4 BIS Review 170/2010 In the meantime, financial development in emerging economies can go a long way towards expanding the range of safe and liquid financial assets available to domestic and international investors. Capital markets in local currencies have developed significantly over the last decade as fiscal positions in emerging countries have dramatically improved. There seems to be considerable scope for regional financial and monetary arrangements to prosper in the future.

Zeti Akhtar Aziz: Nurturing young talent in Malaysia Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Kijang Emas Scholarship Award Ceremony for High Achievers, Kuala Lumpur, 6 May 2014. * * * While the global economy continues to face uncertainties and significant challenges, the Malaysian economy has every potential to remain on a steady growth trajectory and move up the value chain. This is however only achievable if we can nurture the required talents. Talent development strategies and implementation is therefore one of the key priorities of the nation. We need to invest in our talent pipeline The Kijang Emas Scholarship Award is an eminent scholarship award reflecting the Bank’s commitment in creating a sustainable talent pool for the nation. The Kijang Emas scholarship is distinct from the Kijang scholarship whereby the recipients are given the freedom to pursue any field of study at top-notch universities in any country of their choice. The Bank also does not impose any bond on the recipient except that they return, contribute and take part in the progress and development of our beloved nation. To date, 42 high potential talent have been awarded the Kijang Emas scholarship. The recipients are currently pursuing their studies in diverse field of studies including Medicine, Dentistry, Genetics, Biochemistry, Dietetics, Physics, Engineering, Law, Psychology and Architecture in top universities around the world such as M.I.T., University of Pennsylvania and the University of Cambridge.

Of course it can be a good idea to pay off some of one’s mortgage, as it makes the household balance sheet less sensitive to changes in house prices, but there is no intrinsic value in a household with a mortgage amortising its loan at all costs. Amortisation is a form of saving and having amortised a whole loan, without having saved in any other form, means that one has invested the whole of one’s savings in one’s housing. 3 For a detailed survey of the financing of residential construction prior to the 1990s crisis, see Mats Rönnberg, ”Staten fick Svarte Petter - en ESO-rapport om bostadsfinansieringen 1985-1999” (report on housing finance 1985-1996), Ds 2002:9. 4 See Financial Stability Report 2006:1, page 35. According to "Tobin’s Q”, which is calculated by the Institute for Housing Research at Uppsala University, it was only marginally profitable to build new housing in Kristianstad in 2005. BIS Review 105/2006 3 The most important thing, however, is that a household has some form of saving that can be used to meet unforeseen negative income shocks, renovation requirements, or even to make a pension go further. Regarded as a whole, there is no risk that the Swedish household sector is saving too little – household saving as a percentage of disposable incomes now amounts to around 8 per cent. However, it is unclear which households account for the high level of saving.

Although the housing market may have its peculiarities, it essentially functions like any other market – a high demand and small supply mean high prices. The mortgage market The significant changes in the mortgage market have also contributed to house prices rising so sharply. These changes are based in the credit deregulation that took place during the second half of the 1980s, but it is not until the last few years that they have really made an impact. The crisis at the beginning of the 1990s delayed developments here, too. One important change in the mortgage market is that competition has stiffened and that the mortgage institutions’ margins have been pressed down, which has cut mortgage interest rates more than the general fall in interest rates. Moreover, the mortgage institutions have become more flexible with regard to the degree of borrowing and now offer a broader spectrum of products. One change that I feel deserves a little extra attention is the fact that mortgage institutions have become less strict in their amortisation requirements. One might wonder why the amortisation periods have increased as much as they have and why fewer households are choosing to amortise. For new house owners with relatively ordinary incomes, it may seem meaningless to amortise SEK 1,000 a month on a loan of, for instance, SEK 1.5 million.

Real interest rates and house prices Per cent and index, 2005=100. Note. Real interest rates refer to 10-year zero coupon rates for real (index-linked) bonds for Sweden and the United States and 10-year benchmark rates for real (index-linked) bonds for Germany and the United Kingdom. Sources: Bank of England, Bloomberg, Federal Reserve, Statistics Sweden and the Riksbank. This also points to another trend: While public debt has fallen in recent decades, the debts of private operators have increased. Those who have large debts become unavoidably more vulnerable, and if asset prices rise for too long in a way that is decoupled from developments in the rest of the economy, this can lead to financial imbalances and ultimately to a financial crisis. The Swedish financial markets have grown and look different from at the beginning of the 1990s. Today, the banking sector is bigger in relation to GDP than it was thirty years ago, and mortgage loans have become a larger and increasingly important part of banks' operations. 11 [16] Diagram 8. Banking sector and GDP over time Nominal amounts, SEK billion 12 000 10 000 8 000 6 000 4 000 2 000 0 1996 2000 2004 2008 2012 2016 2020 Balance sheet GDP Note. Total balance sheet total for the operations of Swedish banking companies, savings banks and foreign-owned bank branches in Sweden. The measure excludes subsidiaries of Swedish banks abroad. Source: Statistics Sweden.

After the reforms were introduced, the Swedish economy quickly turned upwards and prosperity increased more than expected. At the same time, it is clear that not everything has developed for the better. Vulnerabilities have been built up that can make policy tightening painful; high private debt, a housing shortage, a divided labour market and lack of investment. 8 [16] These are structural problems that make the Swedish economy vulnerable. I will talk about this in more detail soon. But when we think about our frameworks and their future, we also need to bear in mind, as I said earlier, that the Swedish and global economies have changed since the 1990s. The Swedish and global economies are different from thirty years ago The first thing I want to highlight is globalisation over the last few decades. The primary manifestation of globalisation is the entrance of China into the global economy. This has meant that the working population in the world has increased significantly, as have goods and services originating outside Europe and the United States. China's entrance has also meant an increase in the global supply, which has probably dampened consumer prices and kept inflation down.8 Diagram 5. China's share of the world economy from 1970 Percentage of global GDP Source: World Bank. During this time, global real interest rates have fallen trend-wise, partly because of globalisation and China's entry into international markets. Real interest rates are now at historically low levels.