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Valuations lead lending by around a year, with a correlation coefficient of around 0.75. 2 BIS central bankers’ speeches One way of slowing that pro-cyclical spiral would be to base lending decisions not on spot, but on medium-term or sustainable valuations. Any ramping-up of property prices above their sustainable value would not then automatically give the appearance of safety and thereby encourage looser credit conditions. That, in a nutshell, is the aim of the recommendation in the “Vision” document. Needless to say, there is further work to be done by the industry to make these proposals operational. The very first minutes of the Forum highlighted property statistics and valuations as two areas where greatest improvement was needed. Twenty years on, that remains the case today. A continued effort will be needed by the industry to complete the job. Next, regulators. For much of the period prior to the financial crisis, credit and asset price cycles were only of interest to policymakers to the extent they posed a direct risk to inflation targets or to the solvency of individual firms. Were a bubble to blow, then the most likely response was a combination of benign neglect on the upswing and lower interest rates in the downswing. The role of policy was to “mop” after the flood. That orthodoxy has been sunk by the crisis. After perhaps the largest credit boom in human history, central banks globally are still frantically mopping with unprecedented degrees of monetary stimulus.

Cycles of the past Let me start with the bad news. The Forum has assuredly not solved the problem of boom and bust in the commercial property market. Indeed, the environment today – slow recovery from a jarring commercial property bust – is eerily reminiscent of the situation twenty years ago when the Forum began. As Yogi Berra reportedly said, it is a case of déjà vu all over again. The Forum was born out of the commercial property crash of the early 1990s. Between 1989 and 1993, UK commercial property prices fell by 27%. This followed a long period of rising prices, high liquidity, expansive lending and weakening credit standards. These ingredients combined to create a classic pro-cyclical spiral. Higher valuations supported ever-larger BIS central bankers’ speeches 1 loans on ever-finer terms, boosting valuations still further. When that pro-cyclical spiral went into reverse, it left banks, developers and investors all licking their wounds. Today, the situation is much the same. Commercial property prices are 37% below their peak. For secondary properties, they are more like 50% below their peak. This fall-to-earth came after a long wave of rising commercial property prices, deeper liquidity and rapid and, in many cases, imprudent lending practices. The subsequent crash has left banks, developers and investors not just licking their wounds but in some cases requiring life support. The commercial property bust has contributed to several UK banks departing the high street and the economy suffering its most painful contraction since at least the 1930s.

Muhammad bin Ibrahim: Payment card acceptance Keynote address by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Payment System Forum and Exhibition 2014, Kuala Lumpur, 27 November 2014. * * * I am glad to be here today in welcoming you to the Payment System Forum and Exhibition 2014, organised by Bank Negara Malaysia in collaboration with the National Cards Group (or NCG in short). This year’s forum and exhibition will centre on ‘Payment Card Acceptance’, an area in which Malaysia needs to make significant improvement, to reduce our dependency on cash and cheque usage and accelerate the country’s adoption of electronic payments (or e-payments). My remarks today will focus on 3 broad areas: • Firstly, I will provide the context of where our position is in comparison with advanced economies in the use of debit cards, and the potential benefits that we could gain in migrating from cash to debit cards; • Secondly, I will highlight the reform measures that we are taking, which include enhancement to the existing infrastructure to facilitate greater adoption of e-payments; and • Lastly, I will address the key priorities in the area of security and risk management with the aim, to further strengthen consumer confidence in the use of online banking and e-payments. Malaysia should keep pace with the global shift in the adoption of debit cards Malaysia’s cash usage remains high.

One example is the interest rate fluctuations, which have shown up in the own homes item in the CPI. During 1996-97 in particular, the CPI was relatively far below not just the targeted rate but also the lower tolerance limit. To a fairly large extent, this was because the Riksbank lowered the interest rate markedly with a view to ensuring that the target would be met a little later on. In the period 1993-98 the Riksbank tried to explain how effects of this kind would be handled. But not everyone considered the policy was sufficiently clear. The Riksdag (Sweden’s parliament), for BIS Review 98/2000 2 example, assessed the Riksbank’s performance solely in terms of the CPI outcome even though there had been long periods when monetary policy had focused on other indicators that exclude transitory effects. In the best of all possible worlds one would prefer to use an indicator of inflation that excludes all those effects one wants to disregard. Unfortunately, there is no such indicator that suits every situation. For example, a tax increase may, under certain circumstances, need to be excluded as a transitory effect. In other cases, however, tax increases should be taken into account when formulating policy because they are a part of the inflation process. Against this background, in 1999 the Riksbank declared that in connection with every monetary policy decision, any grounds that existed for modifying the policy’s target variable would be clarified.

It is worth noting that the Board of the Central Bank of Chile believes that the risk of an even weaker performance of the world economy is still latent and is more likely to occur than is a more optimistic scenario. A lasting recuperation of the developed world calls for a reduction in the current-account deficits accumulated before the crisis. Some advanced economies like the U.S. must reduce their trade imbalances, but their possibility of basing growth on their external sectors is limited. In the Eurozone, the rigidities associated to the common currency slow the exchange rate adjustment inside the region. In China, high savings and exchange rate interventions lock the parities’ adjustments. At the national level, third-quarter figures for output and demand continued to show strong dynamism, although with some deceleration compared with the first half (figure 5). In that quarter, GDP rose 7% annually, with a velocity of 8.1%. In aggregate, third-quarter output was in line with the baseline scenario we had foreseen in September, but with a different composition both on the output side and on the expenditures side. From the expenditures standpoint, it is worth mentioning the moderation of the durable components of demand – i.e., purchases of durable goods and investment in machinery & equipment – with respect to indicators for the first half. Investment, although at a slower pace than forecast in September, continued to expand during the third quarter, driven by imports of machinery & equipment. Meanwhile, non-durable private consumption outperformed expectations again.

Still, this is an important risk for inflation, particularly because of the potential propagation effects it might cause, and it calls for close monitoring and follow-up. The CPI will end this year with a variation of 2.8% (table 3). Going forward, the absorption of output gaps and increased food prices suggest that annual inflation will stay near the target until the end of the projection horizon, this time the fourth quarter of 2012. The path of normalization of the CPIX and the CPIX1 will be slower. They are forecast to converge to the target only towards the end of next year, to stay there for the remaining part of the projection horizon. Market inflation expectations, in line with this scenario, remain at 3% in the medium term. However, for the near future reduced inflation figures are foreseen (figure 9). In addition to the already mentioned assumptions about output gaps and higher prices of foods and commodities, imported inflationary pressures are assumed to be well contained. Also, nominal wages are expected to be adjusted in accordance with the economy’s stage of the business cycle and inflation dynamics. As I said last Tuesday in my visit to the full Senate, the Chilean peso has been gaining value against the dollar since our latest IPoM, although not as strongly as it did between June and BIS central bankers’ speeches 3 September.

Another factor promoting enhanced cross-border flows relates to the issue of recognising Shariah interpretations in the offerings of cross-border products. The current efforts have already resulted in greater harmonisation amongst jurisdictions on the specific Shariah practices relating to Islamic finance. In our pursuit to promote understanding, greater engagements and intellectual discourse among the Shariah scholars in the region have been fostered through regional Shariah Dialogues. These dialogues have been highly constructive. In this Conference, the deliberations on Shariah during the Specialised Workshops and the engagements between Shariah advisors, would continue this process to enhance greater appreciation and understanding of our respective Shariah practices. 2 BIS central bankers’ speeches The development of human capital in Islamic finance is another key thrust in our efforts to develop capacity in supporting cross-border Islamic finance business. The collaboration between Malaysia and Indonesia in promoting partnerships in Islamic finance education are already taking place to expand the pool of talent and technical expertise in Islamic finance. Strategic partnerships between the International Centre for Education in Islamic Finance (INCEIF) and 7 Indonesian universities have allowed for the exchange of academic resources for the offering of specialised programmes in Islamic finance. These crossfertilisation efforts are encouraging future collaboration between specialised training institutions from both countries which would certainly enrich the Islamic finance industry. Conclusion Izinkan saya untuk mengakhiri ucapan saya. Kewangan Islam kini telah berkembang pesat di serata dunia dan menjadi komponen yang semakin penting dalam sistem kewangan antarabangsa dan merupakan pengantaraan penting bagi transaksi rentas sempadan.

Bagi Malaysia dan Indonesia, kewangan Islam menyediakan peluang strategik untuk meningkatkan perkongsian bagi memperkembangkan lagi kewangan Islam dan seterusnya merangsang potensi pertumbuhan kita bersama. Berdasarkan hubungan yang kukuh antara Malaysia dan Indonesia, kerjasama dalam kewangan Islam juga mempunyai potensi untuk memacu integrasi ekonomi dan kewangan masing-masing dengan negara-negara membangun yang lain. Kewangan Islam akan menggalakkan jalinan padu untuk mengukuhkan lagi kepentingan bersama bagi mencapai kemajuan, kesejahteraan dan kemakmuran yang diingini. Let us take this opportunity to share the many possibilities that are before us. Sekian, terima kasih. BIS central bankers’ speeches 3

That estimate becomes very substantially smaller if we make less conservative assumptions and allow for several offsetting impacts from banks holding more capital. Specifically: 1. Allowing for a partial offset because as a bank holds more equity capital, its equity becomes less risky, and therefore requires a lower return. (A Modigliani-Miller effect – which I will assume is not zero but only 30% as big as it would be under perfect markets) 2. Allowing for the value to the government of the extra tax revenue received as a result of banks having more equity capital which is less tax sheltered than is debt. 10 BIS Review 133/2010 3. Allowing for a somewhat lower use of bank funding for investment than in the baseline. 4. Allowing for a lower sensitivity of investment and the capital stock to a rise in the cost of funds to non-financial firms. Table 2 shows how rapidly the estimated long-run economic cost of requiring higher bank capital falls as we sequentially allow for each of these offsets. I conclude from this that the long-run costs of having banks hold more capital is likely to be small – plausibly it is negligible. If that is so then the benefits of having much more robust banks would far exceed its costs. If it is right that the benefits of raising capital requirements to much higher levels far outweigh their economic cost, how we did we get into a situation that bank capital was so low relative to total assets?

Thus, a weakening of Western exports to the emerging markets is being accompanied by a gradual increase in Western imports from these countries. For overall growth in the OECD area, however, the aggregate real economic effects are probably not all that large. So what about the effects transmitted by financial markets in the West? A falling stock exchange reduces the value of households’ share portfolios, which may influence the propensity to consume. It also increases the cost of capital procurement, which may likewise affect demand via a weaker propensity to invest. The recent global fall in share prices - more or less wiping out the increase in the past two years or so - should be seen in the light of the strong upward trend that share prices have followed in the 1990s. In Sweden the OMX Index is still around 300 per cent above the low in the autumn of 1992. In the United States the Dow Jones Index is about 200 per cent higher than at the beginning of 1991. This provides a perspective for the impact of falling share prices on international growth. It should also be borne in mind that the US economy is more sensitive than Europe to a falling stock exchange. When it comes to confidence, it is more difficult both to quantify and to arrive at more definite conclusions about consequences of the crisis.

An interesting – and delicate – question is whether it is possible to expand the coordination monetary and fiscal policies during deep downturns. Under the present fiscal policy framework, the budget regulations for fiscal policy are one possible obstacle. The regulations were set up to ensure a responsible fiscal policy and avoid a constantly increasing national debt. But perhaps we should have a discussion on how these rules should be applied in a deep 14 There has also been an academic discussion of a more fundamental interaction between fiscal and monetary policy, known as the fiscal theory of the price level; see Leeper (1991) and Sims (2017). 15 See Ubide (2020) for a discussion of the interaction between fiscal policy and monetary policy. 16 [25] downturn and consider whether the scope for discretionary fiscal policy could be linked to the limitations of monetary policy. A mild form of coordination could take place in the form of the Riksbank publishing alternative scenarios in its Monetary Policy Report stating that monetary policy is limited and that, if fiscal policy were to become more expansionary, this would not lead to higher interest rates but only to inflation closer to the target. A stronger form could involve the Riksbank informing the Ministry of Finance that monetary policy needs the assistance of a more expansionary fiscal policy if the inflation target is to be met.

The update of our Market Intelligence Charter and the UK Money Markets Code, published today, will embed diverse outreach into our working practices and help make diversity within financial markets a core standard of best practice. The Charter sets out our aims and ambitions of talking to a diverse range of contacts and affirms our commitment to open engagement, with an emphasis on challenge and diversity of thought.9 The updated Code, which the FCA have recently again recognised as an industry standard, puts the expectation to promote and develop a diverse team upfront, alongside other core principles of best practice, highlighting the benefits of accessing a wider range of skills and thinking. 10 This approach is also being in embedded in our outward-facing markets committees. We currently have two main committees: the Money Markets Committee and the FX Joint Standing Committee. We have been working with members from both committees to diversify their membership for some time now: including working to ensure women in senior roles are represented; and that the committees see a wider range of presenters at different stages of the career. This is yielding results: specifically, female representation – which is one aspect of diversity that has been historically lacking on many senior-level committees – is now approaching half on the UK Money Markets Committee, and has climbed to around a third for the FX Joint Standing Committee in the past 18 months. These changes were driven by the Bank but importantly with the full support of the external members.

Notwithstanding this wider reach, life insurance coverage has remained relatively low compared with the more developed markets in the region such as the Republic of Korea, Singapore and Japan which reported penetration rates of more than 80%. Given the vast untapped market potential and the increased product innovation and new distribution channels, the life insurance penetration in Malaysia is expected to strengthen. Demographic changes leading to a growing ageing population has been a growing concern in many countries. Given the trends in rising life expectancy and falling birth rates, responding to the increased challenges of retirement financing has been high on the nation's socio-economic development agenda. Going forward, there will be greater interest in private pension schemes representing an are of significant growth opportunities for life insurers. The financial performance of the Malaysian insurance industry has also continued to be impressive during the 2000 and 2005 despite the challenging underwriting and investment conditions, with growth primarily driven by the life sector. Total insurance fund assets of the industry grew at an average BIS Review 55/2006 3 annual rate of 13.8%. The insurance industry also increased in importance as a component of the economy and financial system. The ratio of total industry assets to nominal GNP rose from 16.1% in 2000 to 20.4% in 2005, while the ratio to total assets of the financial system continued on an upward trend from 4.0% in 2000 to 5.1% in 2005.

Benefits of foreign direct investment are manifold ranging from efficiency gains brought about by new technologies to the introduction of innovative products and management techniques. Further, more advanced research and development facilities and adoption of best practices from more matured financial markets will contribute to the transfer of skills and knowledge, adoption of sound risk management culture, technology and ideas in the domestic financial system. Another consideration in the liberalisation process is that of promoting financial inclusion, where all segments of society will have access to adequate financial services. The wide branch network of domestic banking institutions has ensured that non-urban areas have access to banking services, thereby eliminating the use of informal financial services. Domestic banking institutions with large presence in the non-urban areas, some as high as 20% of total branches, have succeeded in achieving sustainable performance while meeting this objective. Locally incorporated foreign banks are however located mainly in major cities and serve only certain segments of the banking public. A wider dispersion of branches of locally-incorporated foreign banks across the country would contribute towards achieving greater financial inclusion. For further expansion outside major cities to be a commercially viable proposition, it is recognised that the attainment of critical mass is essential. In this 6 BIS Review 55/2006 regard, in addition to the flexibility accorded to establish up to four new branches, consideration will be given to allow for greater presence in the non-urban areas and to serve the segments of the economy which are currently underserved.

The debt ratio has almost doubled in twenty years and this is not a sustainable development. There is a risk that overly optimistic expectations of low interest rates for a long time to come have contributed to increased indebtedness. And a rapid growth in debt, together with optimistic expectations, is a pattern that has often preceded financial crises. Even without a crisis, a large debt overhang will hamper economic developments when conditions change. If one wants to influence the incentives for households to take on debt, how effective might the potential measures be? And how do measures in the new field of macroprudential policy compare with other possible measures? Here we are still to a large extent on uncharted ground. But even if we cannot base our decisions on extensive theoretical and empirical research, we can at least gain a rough idea of the potential effects to be expected, by using some simple calculations. I would like to emphasise that the figures I will mention refer to partial and statistical calculations that are based on a number of simplifying assumptions and that they must therefore be taken with a pinch of salt. At the same time, the calculations illustrate the conditions for taking practical decisions. Ordinary households in Luleå, Upplands Väsby and central Stockholm Let us look at some “typical households”, ordinary Swedish households consisting of two adults and two children. Let us say that one of them comes from the municipality of Upplands Väsby outside Stockholm and one from the city of Luleå in Norrbotten.

I The Changing Policy Landscape, Federal Reserve Bank of Kansas City Jackson Hole Symposium, 2012. Dynan, Karen (2012), Is a Household Debt Overhang Holding Back Consumption? Brookings Papers on Economic Activity, Spring 2012. 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.S. Shin, A. Velasco, B. Weder di Mauro and Y. Yu (2011), Rethinking Central Banking, Brookings Institution. ESRB (2014), The ESRB Handbook on Operationalising Macro-prudential Policy in the Banking Sector . European Systemic Risk Board. Geanakoplos, John (2009), The Leverage Cycle. Cowles Foundation Discussion Paper No. 1715. Gungor, Sermin and Jesus Sierra (2014), Search-for-Yield in Canadian Fixed-Income Mutual Funds and Monetary Policy. Bank of Canada Working Paper 2014-3. Haldane, Andrew (2010), The $ Billion Question, speech on 30 March 2010, Bank of England. H M Treasury (2013), Review of the monetary policy framework. March 2013. Ingves, Stefan (2010), Monetary policy and financial stability – some future challenges. Speech at the Swedish Economics Association, Stockholm, 17 May. Jauch, Sebastian and Watzka, Sebastian (2013), The Effect of Household Debt Deleveraging on Unemployment Evidence from Spanish Provinces. Conference paper, Beiträge zur Jahrestagung des Vereins für Socialpolitik 2013: Wettbewerbspolitik und Regulierung in einer globalen Wirtschaftsordnung. 16 BIS central bankers’ speeches Kamin, Steven B. (2010), Financial Globalization and Monetary Policy, International Finance Discussion Papers Number 1002, Board of Governors of the Federal Reserve System. Klein, Michael W. (2012), Capital Controls: Gates vs Walls. Brookings papers on Economic Activity, Fall 2012, 317–355.

2 [9] that there have not been excessive monopoly gains and inefficiencies on the payment market, which otherwise tends to gravitate towards monopoly. 5 The e-krona can fulfil the same function as cash has traditionally held An e-krona would mean that the functions of cash would remain, even in a digital future. On the other hand, if the Riksbank does not offer a new, modern, viable alternative, this means that we will be giving up a tradition and functionality that has worked well for 350 years. Over the years, it has been the state’s role to standardise and guarantee all money in society. The basic condition for the ekrona is that it, like cash, will be broadly available to all members of society. It must work with the existing systems and be exchangeable one-to-one for cash or money in private bank accounts. At present, many private solutions on the market function so that services are offered that at the same time tie up customers into specific systems or to specific suppliers. Ultimately, this can lead to poorer competition and innovation. The advantage of central bank money is that there is no commercial enterprise behind it and it is therefore always fungible (freely exchangeable). It is not only the Riksbank that considers it worth analysing the possibility of issuing central bank money in a new form to continue fulfilling their traditional role in a digital future; there are similar projects in several other countries.

Improvements to risk management and to capital cushions are likely to have made the financial system more stable and more resilient. And macroeconomic policy has improved around the world. The increase in monetary policy credibility in a broad range of countries has produced lower rates of inflation and more stability in inflation expectations. Greater public confidence in monetary policy was critical to laying the foundation for the improvements in real economic performance, by providing a stable foundation for long-term investment decisions. In emerging markets, better monetary policy has been accompanied by more disciplined and conservative fiscal policy and a range of other policies that have reduced, though not eliminated, vulnerability to changes in confidence, capital flows and exchange rate movements. These factors are each fundamentally important, and they are, of course, interrelated. The policies that delivered better inflation outcomes, more openness and competition and stronger financial systems were critical to fostering an environment in which improvements in productivity and growth could occur. This expansion has also been notable for the financial conditions that have prevailed over the past several years. Long-term interest rates have remained relatively low in nominal and real terms. Equity and other asset prices have moved higher. Credit spreads have declined to quite low levels. Market participants report exceptionally high levels of liquidity. And volatility, both realized and expected, has remained low across many different types of financial assets, market and economies.

16 BIS Review 143/2009 Figure 35: Inflation and Output Gap Forecasts* (Percent) Output Çık tı A çGap ığı Forecast Tahm in A Range* ralığı* End-year Inflation Targets Uncertainty Band for 2009 2009 iç in B elirs iz lik A ralığı Y ıl S onu E nflas y on Hedefleri 13 11 Control Horizon Kontrol Uf ku 9 7 Yüzde 5 3 1 -1 -3 -5 -7 -9 2 3 2009 4 1 2 3 2010 4 1 2 2011 3 4 1 2 3 2012 * Indicates a confidence interval of 70 percent While better than expected outcomes in food prices necessitated a downward revision in food inflation for end-2009, this effect was offset for the medium term by the upward revision of the assumptions for global economic activity and oil prices, and therefore, there has not been a major change in our forecasts for 2010 and 2011. The revised forecasts indicate that the output gap will not close soon, supporting disinflation even when policy rates are kept at low levels for an extended period. It is worthy to note that the sharp fall in inflation in the first half of 2009 created significant base effects. This would, ceteris paribus, lead to volatility and some mild increases in annual inflation rates until mid2010 (Figure 35).

John C Williams: Healthy workforce, healthy economy Remarks (via videoconference) by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at Combating Food Insecurity: What’s Working – and What’s Scalable?, 30 November 2021. * * * As prepared for delivery Good morning, and welcome. We are pleased that so many of you have joined us today for this important discussion about food insecurity. It is not lost on me that we are holding this event just five days after Thanksgiving, a holiday that is largely centered around food—the turkey, the stuffing, the mashed potatoes, the pumpkin pie. For some of us, the big concern coming out of the weekend was whether we had eaten too much. But for far too many, the much bigger concern is that they and their families did not—and still do not—have enough to eat. That’s what brings us here today. Our mission at the New York Fed is to make the economy stronger and the financial system more stable for all. But we can’t have a healthy economy without a healthy workforce. And that is why health—along with household financial well-being and climate change—is a focal point for our Community Development team. Before I continue, I must give the standard Fed disclaimer that the views I express are my own and do not necessarily reflect those of the Federal Open Market Committee or anyone else in the Federal Reserve System. Food insecurity has long been a systemic problem.

And, fourth, the dollar started to appreciate only once expectations about asset purchases in the euro area gained a strong tailwind during the second half of 2014. Here the temporal coincidence is striking. The moment the ECB announced its credit easing programme in June 2014, which many observers considered to be a harbinger of sovereign bond purchases, and moved rates into negative territory, the dollar started to appreciate significantly against the euro. In less than two and a half months, the euro lost nearly 10% in value. Net euro short positions jumped to close to record highs in the space of a few weeks. In other words, only the prospect of sovereign bond purchases by the ECB seems to have led to a reappraisal by market participants of future domestic and foreign demand for US Treasuries.10 Empirical analysis on the direction of international spillovers in bond markets corroborates this view. On slide 4 you can see that ECB researchers, using the Diebold-Yilmaz methodology, find that spillovers from the euro area to the United States spiked sharply in mid-2014.11 According to 5 / 11 BIS central bankers' speeches this methodology, euro area spillovers accounted for more than half of the variance in US Treasuries in the second half of 2014. Put differently, in the presence of asset purchase programmes, the portfolio rebalancing channel, rather than the signalling channel, might ultimately rise to become the dominant driver of exchange rates, at least temporarily.

This should have caused the US dollar to appreciate, at least on the basis of past behaviour. The dollar defied upward pressure, however. It continued to depreciate persistently, despite the marked widening in future expected interest rates. One reason why this might have been the case is that the signalling and the portfolio rebalancing channels of asset purchases might have worked in opposite directions. In imperfect markets, investors may give different weights to conflicting information. What I mean by this is that, despite expectations of a significant increase in policy rates, the Federal Reserve’s very gradual slowdown of its pace of Treasury and mortgage-backed securities purchases – which caught many investors on the wrong foot after the “taper tantrum” – possibly fuelled expectations that long-term rates, and hence also foreign demand for USdenominated interest-bearing assets, would remain contained for a considerable period. This interpretation is consistent with at least four observations: first, term premia on US bonds fell notably after the Federal Reserve started tapering in December 2013, pointing to a correction of the sharp uptick in term premia after the “taper tantrum”.9 Second, investors did not expect the US dollar to appreciate. CFTC data show that they continued to hold net short speculative positions in the US dollar well into 2014. Third, capital inflows into the US Treasury market did indeed decelerate somewhat during the first half of 2014, validating earlier expectations.

Turning to the first issue, clear communication about objectives and intent is an important element of effective monetary policy. For example, communicating clearly our intention to return inflation to more normal levels can help keep inflation expectations well anchored around levels consistent with our inflation goals. As the central bank, we and we alone can control inflation – if not precisely in the short run, then over the medium term. By clarifying our intentions, we can reduce the risk of further disinflation – or even an outright debtdeflation spiral that would make it still more difficult to accomplish the necessary balancesheet adjustments. Clear communication on the part of a central bank is important at all times, but it is even more critical when the federal funds rate is at or near its effective lower bound. In this environment, a decline in inflation expectations that drives up the real interest rate and thereby increases the real cost of credit cannot be offset by simply lowering the federal funds rate. Thus, in a very direct sense, a fall in inflation expectations when the target interest rate is at the zero bound represents a de facto tightening of monetary policy and of financial conditions. Such a tightening would clearly be highly undesirable at a moment when unemployment is too high, inflation is too low and the economy has only moderate forward momentum. In this situation, the FOMC must be clear and resolute in its commitment to its price stability objective.

The crisis showed few weakness in the model of growth adopted by the emerging economies of South East Europe, but is also true that, to some extent this behaviour was also encouraged by the development strategies of financial groups in the region, as it is also true that there was also some weakness in the coordination and collaboration between different European Union institutions, such as monetary policies (ECB), fiscal policies (of member countries) and the inexistence of specific mechanisms (such as bailout funds) to safeguard the European Union during difficult economic times. This conference pays homage to these lessons, while acknowledging the importance of coordination, by mutually collaborating in multidimensional institutional levels, within the region and with our common partner countries. We in the region hope that our foreign partners share this same view. BIS central bankers’ speeches 1 The Albanian economy and its financial market share similar characteristics with the other economies of the region. Our main trade and financial partners come from the EU economy. Therefore, developments in the EU are directly and indirectly transmitted and play an important role in economic developments in Albania. Our reliance on EU affected not only our economic development but also constrained the effect of policy measures. Several European banking groups operate in the Albanian financial sector. These entities brought into the Albanian market a lot of valuable know-how and experience, playing, thus, a crucial role in the financial integration of the Albanian economy to the European Union.

Economic Policy Group Report 2012, SNS Förlag, draw the conclusion that there is not sufficiently strong argument to supplement the Riksbank’s inflation target with an explicit target for unemployment, or for raising the inflation target. BIS central bankers’ speeches 7 , where π is the forecast for inflation, π* is the inflation target and y-y* is the forecast for resource utilisation in the economy. The parameter λ represents the importance the central bank gives to stabilising the real economy in relation to stabilising inflation.14 It is thus a question of finding the interest rate that minimises the squared forecast deviations between actual inflation and the inflation target during the forecast period and the squared forecasts for resource utilisation.15 This theoretical description has been very useful in developing the policy of inflation targeting. It captures in an intuitive and relatively simple way the essence of inflation targeting and it has helped to structure our thinking.16 However, the step from theory to practice is far from as simple and straightforward as one might think. One often gets the impression from the current debate that “clarity” in monetary policy means that the central bank should follow this theoretical description very closely. Accordingly, monetary policy decisions should be justified on the basis of a detailed quantified path for both resource utilisation and the deviation of inflation from the target.

But even 150,000 job gains per month would be consistent with gradually using up any remaining slack present in the U.S. labor market. Although I expect business fixed investment to begin to grow again in the second half, it will likely remain soft as profits have stagnated and election year uncertainty could act as an additional depressant. All else equal, investment tends to be weaker when uncertainty rises because this creates an incentive for businesses to delay decisions until the uncertainty is resolved. Also, trade seems likely to exert a net drag on growth. There are two factors at play here: the sluggish growth rate of aggregate demand abroad and the continuing impact of earlier dollar appreciation on U.S. export competitiveness. With respect to downside risks to the growth outlook, one that is hard to gauge is the potential fallout from the result of the recent U.K. referendum. It is widely anticipated that U.K. growth will slow as a consequence. Although the direct impact of slower U.K. growth on U.S. trade will almost certainly be very small – total U.S. exports to the U.K. are only about 0.7 percent of U.S. GDP – there are a number of other channels that could amplify the impact of the Brexit decision on U.S. economic activity. These include the potential adverse effects on European economic activity, on the perceived health of the global banking system, and on broader financial market conditions.

Further, since the start of 2013 liquidity conditions at Spanish banks have improved, and there has been a re-balancing of their funding sources. This is the outcome of the diminished tensions on the sovereign debt markets and of improved confidence, along with the lesser fragmentation of euro area money and capital markets. In this respect, retail deposits, which fell, especially in the summer months of 2012, have since been faring better. Since early 2013, they have been posting positive rates of change. The pick-up in deposits has seen the retail funding gap – i.e. the percentage of credit that banks cannot cover with deposits – narrow. That allows them to reduce the need to resort to less stable funding sources, such as the wholesale markets. Against this backdrop, the resort to Eurosystem funding, though holding at still-high levels, has diminished most significantly from its peak last summer, registering a decline of 31% in the first eight months of 2013. In terms of profitability, the exceptional drive by banks in 2012 to comply with provisioning requirements exerted a significant impact on their profit and loss accounts. Indeed, for the year as a whole, losses of over € billion were recorded. The first half of 2013 has marked a change in this tendency. Banks' consolidated profit rose to somewhat more than € billion, despite the fact that provisions continue to adversely affect profit and loss accounts in a period in which the proportion of non-performing assets remained high.

That has contributed to easing the pressure on the risk premium and smoothed the way for agreements in Europe, under the Stability and Growth Pact and the Excessive Deficit Procedure. The European authorities agreed last July to allow a milder fiscal adjustment path for Spain, in particular for 2013 and 2014, which is more consistent with the current macroeconomic conditions and those that will prevail in the coming years. For this improved credibility to take root, the deficit targets must be met. Information on the budget outturn in 2013 is still limited. In the first half of the year, the deficit improved relative to the same period a year earlier (without considering the impact of the assistance to the financial sector which, as is known, does not count for these purposes). The budget outturn in the second half of the year must, therefore, be very strict at all levels of government if slippage is to be avoided at the end of the year. While there are risks, I trust we can meet the target this year of cutting the deficit to 6.5%. The headway in budgetary consolidation should not mask the fact that the effort needed to ensure Spanish public finances are redressed is still most considerable. Let us not forget the distance still existing between the present situation and the requirement set in the Stability Pact and in the new Budgetary Stability Law for the medium term, which is to have a structural balance in equilibrium.

But it is unlikely that disclosure can be the sole response, and, thus, this initiative will have to be flanked by other measures targeted specifically at practice-based deviations.  Our latest policy proposals stemming from the fundamental review of the trading book were released at end-October, and incorporate a number of proposals that flow directly from the findings on practice-based variation in the trading book. For example, certain modelling choices with respect to the choice of stressed periods and the scaling of short-horizon estimates to longer horizons have been constrained in the latest proposals, along with more gudiance on expected supervisory practices.  More generally, within the policy framework, we are looking at how far greater constraints on the modelling practices of banks are needed. This could involve enhancing the data requirements on which models are built, limiting certain modelling assumptions or techniques, and/or strengthening validation requirements.  To make a more direct impact, we are also examining the role of floors and benchmarks within the regulatory framework. Floors are not a new phenomenom in the capital framework, but we need to look at whether existing floors are effective, and whether there is a case for their greater use, particularly for products and markets where data are limited, or other characteristics that make them hard to model reliably. BIS central bankers’ speeches 5  Finally, as I mentioned earlier, we also intend to ensure that the leverage ratio fulfils its intended role as a backstop to the risk-based regime.

But given the importance of the issue, we have to move ahead because the consensus is building that the status quo cannot be maintained, as it helps neither banks nor supervisors. Hence the title of my speech today: Strengthening bank capital: Basel III and beyond. The Basel III reforms themselves deliver two of the four characteristics that I said were essential – higher quantity and quality of capital. They are important, but not enough on their own. It is the Committee’s current and future work programme on implementation and consistency that will ensure that the full benefits of the regulatory reforms of bank capital can be achieved. 6 BIS central bankers’ speeches

The need to strengthen market infrastructures for credit default swaps (CDS) stems from the importance of CDS markets for overall financial stability, for three reasons. First, the systemic importance of CDS markets comes from the high degree of interconnectivity between CDS markets and credit and cash securities markets, the embedded financial leverage of CDS, and the significant level of CDS exposures in relation to the total assets and capital cushions of the banks involved. Second, the associated financial risks, for example when compared to interest rate and foreign exchange derivatives, are more difficult to manage. This stems from the greater underlying complexity and the correlations between different CDS exposures when market-wide strains occur. Third, specific risks to financial stability stem from the high degree of market concentration where very sizable financial risks are held by a small group of major market players. Therefore – as we have seen not only with the default of Lehman Brothers, but also the earlier near-defaults of Bear Stearns and AIG – the default of one major CDS counterparty can put these markets under very severe strain. A natural inference from our experiences during the current turmoil is, therefore, to improve the resilience of OTC derivatives markets through a more widespread adoption of central counterparty clearing or exchange trading.

Central counterparties (CCPs), by concentrating all outstanding derivatives positions of the participating buyers and sellers in one place, enable a significant reduction in counterparty risk: firstly, through the diversification and netting of risk exposures; secondly, through the application of stringent risk-based margining procedures to ensure adequate management; thirdly, through collateralisation of outstanding exposures on at least a daily or even intra-day basis. In addition, CCPs also contribute significantly to market transparency and integrity and bring significant operational efficiency gains, e.g. through the standardisation of risk management processes as well as via multilateral netting and collateral management. 1 Financial Stability Forum, “Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience”, April 2008. BIS Review 74/2009 3 As a result, public authorities and industry bodies worldwide have embraced the establishment of CCPs for CDS markets as a top priority and we expect a number of solutions in both the EU and the United States to be up and running by the end of July 2009. In view of the role of the euro for the derivatives market, I would welcome a CCP in the euro area. The effective and timely implementation of the respective roadmaps and full dealer commitment to making the maximum possible use of these facilities will be essential. Looking ahead, it will also be vital to ensure close convergence between the requirements and approaches of the overseers and regulators involved so as to maintain a level playingfield between the different CCPs and pre-empt possible regulatory arbitrage.

Both the leverage ratio and the calibration of MREL are not intended to focus on the riskiness of a firm’s balance sheet. The leverage ratio is a relatively simple metric of capital over a firm’s total 3/5 BIS central bankers' speeches exposures, and in this way it acts as a guardrail against uncertainties in the measurement of risk, which – from bitter experience of the problems which can sometimes arise from risk-weighting – I consider very important. As a backstop to the system, the MREL calibration focuses heavily on the potential impact of a failure, rather than the likelihood of the failure. This is in line with the resolution authority’s objectives and mandate. It is not surprising then that when you combine the two, the resulting capital requirements may feel high to mid-tier firms that are not designated as systemic and, on the face of it, appear to engage in lower risk activities. The third link between the two reviews is that both reviews are also considering the scope of each framework. When the PRC and FPC finalised their leverage ratio framework in 2015 we decided to apply the framework to our largest and most systemic firms and return to the question of whether to include other firms in scope in the future.

Percent 8 80 6 60 4 40 2 20 0 0 2020Q1 2021Q1 2022Q1 2023Q1 2024Q1 Imported goods Domestically produced goods and services Energy products (rhs) 2025Q1 Sources: Statistics Norway and Norges Bank And even if Norges Bank cannot influence global prices in foreign currency terms, we can influence the exchange rate. A higher interest rate normally leads to a stronger krone exchange rate and weaker imported price inflation. Inflation does not come down on its own. The chart shows our forecasts from December (Chart 8). We expect energy prices to fall further out and imported inflation to ease, thereby curbing consumer price inflation ahead. Domestic inflation is likely to remain elevated for longer. The labour market is still tight, and business costs have increased. The effects of this will persist for a while and will contribute to propping up inflation. Had we not raised the policy rate, we would have run the risk that households and firms had started planning for high inflation in price and wage setting. In that case, it could have been necessary to tighten even more at a later stage to bring down inflation, which we want to avoid. The policy rate is being set with the aim of bringing inflation down towards the target of 2 percent. We could have raised the policy rate higher and faster than we have so far. Inflation might then have come down faster.

Again, there is an important underlying principle here. If we are to take risk with our collective public money, then government funds must be used. And the decision to do so must be taken by a democratically elected body. Third, both the scale and duration of support measures targeting financial markets should be limited. Large-scale and protracted support schemes can impair normal market mechanisms. In keeping with the third principle, the extraordinary measures that Norges Bank introduced to support the smooth functioning of financial markets during the pandemic have now been unwound. THE PRIMARY OBJECTIVE OF MONETARY POLICY IS LOW AND STABLE INFLATION Low and stable inflation is a main objective for Norges Bank. Persistently high inflation is costly for society. It leads to uncertainty about the value of money and is an obstacle to planning. At the same time, some inflation is beneficial because it provides economic flexibility. During Nicolai Rygg’s time the krone was pegged to gold, the anchor. Today, we aim to keep annual consumer price inflation at close to 2 percent over time (Chart 3). But our eye is not focused on the inflation target alone. As long as there is confidence that inflation will remain low and stable over time, variations around the inflation target entail limited economic and social costs. 3 Norges Bank (2021) “Norges Bank’s liquidity policy: principles and design”. Norges Bank Papers 2/2021. 4 NORGES BANK Chart 3 Low and stable inflation is a primary objective ECONOMIC PERSPECTIVES 17 FEBRUARY 2022 Consumer price index.

Dimitar Bogov: A new normal? The global economic expansion, inflation dynamics, financial stability and its meaning for asset management Speech by Mr Dimitar Bogov, Governor of the National Bank of the Republic of Macedonia, at the High Level International Conference on Monetary Policy and Asset Management, Skopje, 16 February 2018. * * * Distinguished guests, Ladies and gentlemen, It is my great honor and pleasure to welcome you to the High-Level International Conference on Monetary Policy and Asset Management. The conference has been organized as a joint effort of the National bank of the Republic of Macedonia and Reinventing Bretton Woods Committee. We are delighted for this partnership whose results have been built into the conference program that is both rich in the topics to be covered and in many prominent speakers to lead the discussions. The title of the conference is “A New Normal? The Global Economic Expansion, Inflation Dynamics, Financial Stability and its Meaning for Asset Management” that comes as a timely event to draw upon the lessons learned of the GFC, to assess the current state of the global economy and its future prospects and advice on the challenges facing central banks and asset managers. This decade has been a truly challenging time for policymaking and asset management. The world has gone through financial, economic and debt crises. We have witnessed major central banks using unconventional policies and ultra-accommodative monetary policy stance.

What I think is what’s new is we have to do a better job in terms of retraining people, getting people the mobility they need so they can actually feel that they have a place in the new economy. I was thinking about this question about technology and you think about the U.S. farm sector. You think about how many people in the United States worked on farms in 1900 and how few people work on farms today. Same kind of tech, same science and process of technological transition, but the good news is we were able to find things for those people to do. 4 / 13 BIS central bankers' speeches People always have for many, many years, talked about how technology is going to put everyone out of work, and everyone’s just going to have a lot of leisure. That has not panned out up to now at all, and so I’m just a little bit skeptical that now we’re at that critical turning point. I could be wrong. This time could be different. But if you think about how long we’ve had these conversations about technology obsoleting everyone’s skills and leading to massive unemployment, this has been a conversation that we’ve been having for hundreds of years, literally. Maureen O’Hara: It’s tricky now, though, isn’t it? I mean in the past, I think you used to think about technology as taking away some of the lower-skilled jobs, and yet now we’re seeing it kind of marching its way up.

The evolution of the Eurosystem’s monetary policy operations in response to the crisis featured all these activities. Our risk management framework has evolved accordingly, guided by our stable principles. First, the “gusty winds”: during the early stages of the financial crisis, we increased the amount of liquidity we provided to the banking system without tightening the risk control framework, despite the onset of stress in the system. In this respect, our risk management framework followed a through-the-cycle approach – thereby avoiding further distress to the banking system. It also stood in stark contrast to the more pro-cyclical nature of the commercial banking sector’s risk management approach – and was thus part of the central bank’s duty to lean against such potentially self-reinforcing winds. It was possible to avoid tightening the framework without exposing the Eurosystem to undue risks because the pre-crisis framework had been calibrated in a sufficiently prudent manner. In fact, the framework proved to be robust enough to protect the Eurosystem from losses resulting from counterparties defaulting, such as Lehman Brothers or the Icelandic banks – although the complexity of the collateral in some of these cases led to lengthy liquidation processes. This experience certainly merited a careful review of the collateral rules for complex securities and financial innovations. More broadly, it justified taking steps towards reducing the reliance on external credit ratings, in line with the G20 agenda.

Enlightened immigration policies can play a role – making sure that U.S. companies doing business here in the United States can augment the skill sets of workers here with those attracted from abroad. Tax reform, energy policy, and housing policy also have crucial roles to play – as does financial reform, a subject to which I will return later in the speech. Leveraging the comparative advantage that the United States has in higher education also makes sense. This should include encouraging foreign students to come here to study. Also, closer partnerships between universities and business could leverage the technological discoveries and advances that occur in university research so that the benefits accrue to a greater degree to U.S. firms and workers. These are fundamentally structural issues – not cyclical issues. They cannot be tackled primarily through monetary policy. Instead, monetary policy is mainly a tool for stabilizing the macroeconomy and keeping inflation expectations well-anchored. Nevertheless, monetary policy has an important role in supporting the transitions that need to take place, consistent with our dual mandate of full employment and price stability. As we do so, we must take international developments fully into account. The integration of the EMEs into the global economy has been associated with some major shifts in relative prices. For a number of years, the United States and other industrialized nations benefited from disinflation in manufactured goods produced in EMEs. This shift in relative prices – a positive terms of trade gain – helped contain inflation.

Moreover, we must recognize that the rest of the world is closely monitoring our ability as a nation to come to grips with our long-term fiscal challenges, and to pay our debts when they come due. This is an important litmus test of our credibility and ability to exercise global economic leadership. But the challenges extend far beyond fiscal policy. We, as a nation, have to take steps that facilitate the needed structural adjustment of U.S. economic activity that will position us to thrive in the next chapter of global economic transformation. We need to make sure the next business cycle will be more sustainable than the last, which was built on an unstable foundation of asset price gains, easy credit and outsized financial-sector profits. This will require a shift in orientation from consumption to export and investment-led growth. As EMEs have shown us, comparative advantage and global competitiveness are not inevitable consequences of factor endowments – they are the result of the choices we make as nations. There are no easy answers or quick-fix solutions. But in this regard, ensuring broad access to educational opportunity and improving opportunities for people to retool their skills mid-career so they can compete in a rapidly evolving global economy are important. So too is ensuring that regulation is calibrated such that it achieves public policy goals in the most efficient manner possible, with the least compliance costs and unnecessary delays. A continued commitment to open markets and free trade is essential.

Takaful companies will also be given the flexibility to enter into strategic tie-ups with foreign partners through higher foreign equity limit of up to 70%, to further strengthen resilience and competitiveness. In addition, international Islamic financial institutions can be established to offer the full range of Islamic financial services to residents and non-residents in international currencies. Another further measure announced is the liberalization of legal profession to allow up to five top international law firms with expertise in international Islamic finance to offer legal services in international Islamic finance in Malaysia. Internationalisation of Islamic finance Several factors are important in sustaining the internationalisation of Islamic finance. Firstly, is the development of international Islamic financial markets to enhance the liquidity of the instruments and the risk management capacity of the players. This is important to promoting the efficient functioning of the markets and thus facilitate cross border capital flows thereby strengthening global financial integration. However, it can be observed that in most jurisdictions that have Islamic financial institutions, Islamic money and capital markets remain relatively less developed. Consequently, Islamic banking institutions face the challenge in their day to day management of cash, arising from the lack of a comprehensive Islamic interbank market with highly rated short-term tradable instruments. Without access to such a market, it is difficult for these institutions to manage their short-term liquidity needs in an efficient and effective manner. This would in turn require them to maintain a larger amount of liquidity compared to their conventional counterparts.

In Malaysia , such markets exist and have been key to facilitating liquidity management. Coordinated initiatives across jurisdictions can be taken to foster the development of an efficient and vibrant international Islamic financial market. The IFSB Task Force on Liquidity Management reflects a concerted effort to explore measures needed to develop the liquidity management infrastructure and framework for the Islamic financial institutions. Notwithstanding the effort by the Task Force to look into the pertinent issues, Islamic financial institutions are encouraged to promote innovation in the development of a broader range of Islamic financial market instruments. These include instruments with equity ownership features, Islamic asset-backed securities, the inclusion of permissible forms of credit enhancements as well as Shariah-compliant risk mitigating instruments. It is also essential that there should be sufficient availability of liquidity to support the intermediation of funds in the Islamic financial system. Central banks must therefore have sufficient Islamic financial instruments at their disposal to manage the liquidity conditions in the Islamic financial system. Secondly, is the international cooperation to ensure financial stability of the international Islamic financial system. This will also involve partnerships between international financial centres in promoting financial stability. A robust and effective regulation and supervision of Islamic financial institutions is key to preserving financial stability. The current ongoing 2 BIS Review 86/2009 global financial and economic crisis has highlighted the structural weaknesses in the global financial regulatory and supervisory framework.

However, there have been a lot of challenges and lessons have been learnt from the experiences we have undergone through as a country. These lessons must be turned into a platform to design and implement more effective medium and long-term policies. It is also important to note that one of the challenges confronting developing countries such as Zambia is the need to reduce inflation and ensure affordable credit through low lending interest rates. In this regard, I wish to appeal to professional bodies, like yours, to come up with options or ideas on how the issue could be tackled within the existing liberal financial environment. Although significant steps and progress have been made in improving the performance of the foreign exchange market, a number of challenges still remain. The main challenges in this area remain that of maintaining a stable and competitive exchange rate as well as diversification of the export base in order to tap into alternative sources of foreign exchange. Zambia’s continued reliance on the mining sector as a major source of foreign exchange has contributed to volatility in the exchange rate. Hence, there is an urgent need to explore all possibilities of diversifying the export base. To this effect, the different exchange rate regimes implemented since independence have provided us with good lessons upon which we can build our foreign exchange market and contribute to the buoyancy of our external sector.

The commercial banks should also respond to changing macroeconomic indicators consistent with low interest rates, while borrowers need to improve their credit culture. As for the Bank of Zambia, we continue monitoring financial conditions and take appropriate actions to contribute to lowering of interest rates. (iii) A relatively stable and competitive exchange rate has a positive impact not only on inflation, but also on the performance of the external sector. In this regard, policies for stabilising the exchange rate must aim at increasing the export earning capacity of the country through stimulation and maintenance of strong export sector by, among other things: • Developing a diversified and competitive export base; and • Ensuring food self-sufficiency to reduce food imports. In addition, continued implementation of appropriate monetary and fiscal policies, particularly the reduction in the fiscal deficits, is critical to maintaining stability in the exchange rate. BIS Review 5/2005 3 (iv) External debt should be contracted to finance the productive sector so as to lessen the burden of debt service. Otherwise, it will result, as we have seen in the last 40 years, in huge outflows at the expense of expenditures on social and economic infrastructure development, which are pre-requisites to sustainable poverty reduction efforts. (v) The need to diversify the economy, including the external sector, cannot be overemphasised. Diversification is a sure way of preventing external shocks to the economy and will contribute to maintenance of macroeconomic stability.

[45]Article 28 of the SSM Regulation requires the ECB to provide the necessary financial resources for its supervisory tasks, and Article 30 of the SSM Regulation empowers the ECB to levy fees on credit institutions to cover its expenditure on supervision. [46]Under the ESM Treaty, the ECB’s role is, generally speaking, as follows: (i) to assess together with the Commission the urgency of requests for stability support (Article 4(4)); (ii) to participate as an observer in the meetings of the Board of Governors and the Board of Directors (Articles 5(3) and 6(2)); (iii) the Commission, in liaison with the ECB, assesses requests for stability support (Article 13(1)); (iv) the Commission, in liaison with the ECB, negotiates an MoU detailing the conditionality attached to the financial assistance facility (Article 13(3)); and (v) the Commission, in liaison with the ECB, monitors compliance with the conditionality attached to the financial assistance (Article 13(7)). [47]Case C-370/12, Pringle v Ireland, ECLI:EU:C:2012:756, paras. 155-65. [48]Joined Cases C-8/15 P to C-10/15 P, Ledra Advertising Ltd and Others v Commission and ECB, ECLI:EU:C:2016:701. [49] See, in particular, Regulation (EU) No 472/2013 of the European Parliament and of the Council of 21 May 2013 on the http://www.ecb.europa.eu/press/key/date/2017/html/sp170330.en.html[03.04.2017 15:53:14] Central bank independence revisited strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability (OJ L 140, 27.5.2013, p. 1). [50]Article 5 (1) and (2) of the Treaty. [51]Article 5 (1) and (2) of the Treaty.

Such private industry interference is less pronounced in the area of monetary policy. In addition, only “undue” political influence is prohibited. Recital 75 also explicitly refers to the notion of the “operational independence” of supervisors. In addition, Article 19 of the SSM Regulation does not contain an explicit prohibition on the ECB and the national competent authorities (NCAs) accepting instructions, unlike Article 130 of the Treaty with respect to the ECB and the NCBs. In the SSM context, Article 19 of the SSM Regulation only imposes such a prohibition on the members of the Supervisory Board and its steering committee. The drafting of Article 19 of the SSM Regulation reflects the legal situation in some Member States, where the NCAs are bound by the instructions of the respective ministries. [40] Article 19 of the SSM Regulation requires only that the ECB and the NCAs “act independently” while carrying out their supervisory tasks under the SSM Regulation. [41] Third, the principle of personal independence does not apply to the members of the ECB’s Supervisory Board (apart from the specific rules applicable to the Chair[42] , Vice Chair[43] and the ECB representatives[44] ). There is neither a legislatively protected minimum term of office for them, nor a limitation of the grounds for dismissal by the appointing authority.

Christine Lagarde: ECB press conference - introductory statement Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 15 June 2023. *** Good afternoon, the Vice-President and I welcome you to our press conference. Inflation has been coming down but is projected to remain too high for too long. We are determined to ensure that inflation returns to our two per cent medium-term target in a timely manner. The Governing Council therefore today decided to raise the three key ECB interest rates by 25 basis points. The rate increase today reflects our updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. According to the June macroeconomic projections, Eurosystem staff expect headline inflation to average 5.4 per cent in 2023, 3.0 per cent in 2024 and 2.2 per cent in 2025. Indicators of underlying price pressures remain strong, although some show tentative signs of softening. Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation. They now see it reaching 5.1 per cent in 2023, before it declines to 3.0 per cent in 2024 and 2.3 per cent in 2025. Staff have slightly lowered their economic growth projections for this year and next year.

Jean-Pierre Roth: No frontiers in monetary policy – from the fight to avoid internationalisation of the currency to the internationalisation of monetary policy Speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the Swiss Institute of International Studies, Zurich, 6 May 2009. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * In view of the challenges with which it has been faced, the Swiss National Bank (SNB) demonstrated its adaptability time and again. Over the past thirty years, for instance, it abandoned its endeavours to prevent the use of the Swiss franc as an international currency. Moreover, it has gradually incorporated international elements into its monetary policy strategy and its monetary policy instruments. The goal when making these adjustments was always to improve the effectiveness of monetary policy in order to protect the country from any inflationary trend. In managing the current crisis, both the internationalised monetary policy strategy and the internationalised policy instruments have served the SNB well thus far. BIS Review 552009 1

At present, it can take anything from three hours to three days to transfer money between two banks in Sweden. How long the payment takes depends on the time and day that it is initiated. A payment made on a Tuesday afternoon, for instance, will reach its destination around three hours later, while a payment made on a Friday afternoon will not go through until Monday morning. With interbank payments to a country outside of the EU it gets even more complicated. This type of payment currently takes 2-7 days to go through. They can be made more quickly, but this can be expensive. There is thus a major difference between what a consumer expects, given the technology available, and how the systems actually work and I believe that the two must converge soon. Within Sweden there are already instant payments available for individuals through the Swish mobile app. But this system cannot cover all Swedish payments. As the demand for instant payments will increase in the future, the systems must be adapted to manage them better. The Riksbank currently runs the central payment system for large-value payments between the Swedish banks and other major agents. The system has been constructed to manage large-value payments in a secure manner. Individuals’ payments are lumped together into larger amounts before they pass through the system. The Riksbank also has regular contact with all of the participants.

The new rules contain sufficient flexibility to deal with exceptional situations where public money may be required to ensure financial stability. Second, public risk sharing. A certain level of public risk sharing is necessary to create confidence in the overall financial system. Even wellcapitalised banks can fall victim to runs and contagion. This is why central banks act as lender of last resort and fiscal backstops should be in place to ensure trust in the stability of the financial sector. In the Banking Union, both supervisory responsibility and the fiscal backstop need to be at European level, to underpin durably confidence in the area-wide financial system. Just as necessary is the establishment of a European Deposit Insurance System (EDIS). The current situation, where supervision is common, but the consequences of potential bank failures are still predominantly national, should not last. In such an incomplete framework, national considerations inevitably continue to affect supervisory decisions. This is not without consequences for the incentives for banks to become more European. Concrete examples include a lack of fungibility of liquidity or capital. The fact that the euro area is not considered as a single jurisdiction may result in applying higher capital buffers to euro area G-SIBs. While the institutional underpinnings of the Banking Union do not yet meet the requirements of a genuine single financial market, the creation of the SSM has been a leap forward in the establishment of a coherent regulatory framework.

During the 19th century, the published accounts of Spanish banks became less frequent during episodes of crisis. Mussolini’s Italian government of 1931 went one step further, suspending publication of accounts by the banks to forestall panic. 14 It is unlikely Goethe and Mussolini would have agreed on the merits of double-entry. While less extreme, there is compelling evidence of British banks having massaged balance sheets from the late 19th century right up until the early 1970s, especially during crisis. Typically, this involved the systematic under-valuation of assets to allow hidden reserves to be carried on the balance sheet. The experience of UK banks in 1952 was typical. As the prices of government securities fell sharply, the basis for valuation by banks was shifted from “at or below market value” to “at or under cost”. This mirrored the Roosevelt and Bush forbearance announcements of 1938 and 1990. The motives for hidden reserves among UK banks were purportedly prudential, as protection against the “excessive dividend expectations” of shareholders and as a cushion against losses in crisis. 15 Although the Companies Act of 1947 prohibited the use of hidden reserves, the banks were exempt from its provisions. But the writing was on the wall. Non-disclosure by banks came under repeated fire during the 1960s. Sensing the inevitable, British banks “voluntarily” decided to pursue full disclosure in 1969, in the interests of shareholder transparency and protection, though there is evidence of hidden reserves persisting right up to the 1980s. 14 James (1992). 15 Billings and Capie (2009).

The Bankruptcy Act of 1831 gave accountants a role in winding-up enterprises and the Companies Acts of 1844 and 1862 established a legal requirement for companies to register and file accounts. By the end of the century, audit practices were becoming established. The accountant’s role was to provide a true and fair view of a company’s assets and income, as protection for the state (to whom it paid taxes) and investors (to whom it paid dividends). It was these concerns that led to the gradual emergence during the second half of the 19th century of fair-value based accounting conventions in the US. From the late 19th century, banks’ securities were carried at market values and their fixed assets at “appraised values”. In other words, by the early 20th century fair value principles were widely applied to companies in general and to banks in particular. In many respects, this period may have been the high-water mark for fair value principles. In the US, this first wave of the fair value debate ended in 1938. 4 The backdrop was inauspicious. The first phase of the Great Depression, between 1929 and 1933, saw the failure of a large number of US banks. Between 1933 and 1937, the US economy recovered somewhat. But by 1938 there were fears of a double dip. At the Fed’s prompting, Franklin D Roosevelt called a convention comprising the US Treasury, the Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC).

It is important that knowledge among practitioners of this art of bank resolution does not fade with time and is not dulled by the comfort of the relative stability and financial resilience we have been fortunate enough to enjoy over the past decade and more. I want to reflect tonight on the changes in the structure of the U.S. financial system of the last 20 years or so, and what implications these have for the nature of systemic risk. For those of us who are responsible for thinking about the overall stability of the financial system, the questions we face are, of course, broader than the potential insolvency of a large bank and the most appropriate resolution methodology. They include not just how to make the system better able to withstand the failure of a major bank or financial enterprise built around a bank, but also how to better withstand the failure of a major non-bank financial intermediary or a systemic liquidity crisis that may or may not arise from a solvency problem at a large supervised financial institution. The central bank of the United States was legislated into existence in the wake of the banking crises of the early 20th century. And the framework that evolved in the decades that followed was directed specifically at dealing with the special risks posed to banks and by banks to the economy as a whole.

Institutions and markets seem better positioned to handle a substantial degree of stress. Shocks may be less likely to result in the type of trend amplifying, self-reinforcing dynamic for sustained periods of time that can threaten the stability of the financial system. But it is important to recognize that that we do not know a lot about the underlying dynamics of financial crises in the context of the evolving financial system I have described. It is also worth reflecting on the fact that the favorable judgment of U.S. financial resilience at present is rooted in a BIS Review 55/2004 3 period of lower overall volatility in macroeconomic outcomes, with lower inflation and less variability in inflation, and shorter and shallower recessions. Financial innovation has brought about a dramatic increase in the opportunities for diversification and risk transfer and in the sophistication of risk management, but it is unlikely to have brought an end to the periodic tendency of markets to experience waves of mania and panic. The systemically significant financial institutions are larger and stronger than in the past, but they are not invulnerable, and the impact of a failure would be greater. And it would be imprudent to expect that the lower overall magnitude of recent macroeconomic shocks that has contributed to lower volatility in growth and inflation outcomes will be with us indefinitely. What are the implications of these changes for how we think about managing systemic risk in the United States?

The lessons learned from the financial crisis point to the fact that systemic risk can arise from any part of the financial system. That is why we also need more data to monitor the other financial institutions, supervised and regulated, and unregulated, as well. In this context, Macedonia started collecting detailed data from the other financial institutions (OFIs) since 2012. Later on, the regulators expressed interest in data sharing of these data with the National Bank. Our experience, as worldwide, confirmed that this is where the cooperation between the central bank and other regulatory bodies becomes a necessity, but even more so, good statistics and inter-agency exchange of information and data sharing becomes a priority. Let me point out that Macedonia did not experience significant damage in the crisis period, since the structure of the financial system is very traditional (the MFI subsector holds almost 90% of total assets), as well as conservative in terms of the financial instruments employed (mainly deposits and credits). Nevertheless, the financial stability analysis scrutinizes the risks in all financial institutions, and conveys inter-sectoral contagion analysis to assess possible spillover effects in case of a shock. The central bank cooperates very closely with other regulatory bodies through the Financial Stability Committee, and the cooperation has intensified in the last couple of years, spreading to statistical data collection as well.

2 Holthausen, C. and T. Ronde (2004): “Cooperation in international banking supervision”, ECB Working Paper 245. 3 On financial stability as a public good, see for instance Beck et al (2010): Bailing out the Banks: Reconciling Stability and Competition An analysis of state-supported schemes for financial institutions. 4 Banking union and the future of banking, speech by Vítor Constâncio, Vice-President of the ECB, at the IIEA Conference on “The Future of Banking in Europe”, Dublin, 2 December 2013; Towards the Banking Union, speech by Vítor Constâncio, Vice-President of the ECB, at the 2nd FIN-FSA Conference on EU Regulation and Supervision “Banking and Supervision under Transformation” organised by the Financial Supervisory BIS central bankers’ speeches 1 developed before the crisis. Without unified supervision, it was impossible to contain the build-up of such imbalances in the pre-crisis period. National supervisors had to respect the single market rules and lacked the macro-prudential tools to offset the effects of large capital inflows. As I have often underlined, private debt intermediated by the banks, more than public indebtedness, was at the heart of developments in peripheral countries.5 By introducing supervision at the European level, the Banking Union now offers a possibility to better pre-empt such developments in the future – and therefore to better protect the real economy and financial stability in the whole area. A third objective of the Banking Union is the contribution it can provide to financial integration, by separating banks’ robustness from sovereigns and consequently reduce markets’ fragmentation.

However, a key challenge observed was that workers became siloed in their various specialties, thus impeding collective innovation goals. Michael Tushman, a Harvard Business School professor known for his work on organisation design, was an early researcher into efforts to overcome this challenge. From there, he coined the term 'boundary spanners' 3 – individual connectors with the ability to bridge information from different verticals of an organisation to unlock innovation value. Since 1958, the boundary spanning role has been popular throughout academic research into innovation systems. With hindsight, we know that period ended up as the golden age of capitalism, marked by greater organisational efficiency, specialised production and trade expansion. It is intriguing to find insurance at a similar crossroad today. Consumer activity is becoming entrenched in digital ecosystems. Critical sources of information which were previously unconnected are becoming more connected. This has the potential to not only deepen protection, but also mitigate long-held issues in insurance like moral hazard and adverse selection. 1/6 BIS - Central bankers' speeches While the pandemic presented numerous challenges, it underscored the value of financial security in times of stress. This has generated greater consumer and business appreciation for protection solutions. Like the past, there are immense opportunities emerging across ecosystem verticals, merely awaiting a connecting agent to unlock them. I believe the insurance and takaful industry is uniquely positioned to act as boundary spanners that can pave the direction for innovation, break down traditional barriers, and influence positive consumer behaviours.

Revisions to our outsourcing and risk management in technology policies in recent years encourage various forms of digital partnerships to be explored, with a focus on understanding the nature of risks, having in place effective controls and being facilitative of the innovation. We continue to review the relevance and applicability of these policies to ensure they remain fit for purpose. For the industry, it is important for traditional players to continuously explore partnerships with various institutions such as startups, corporates and behavioural research centres, to create innovative products that incentivise prevention, healthier living and greater quality of life. At the same time, traditional intermediaries will also have to consider how the evolving nature of partnerships would affect their business practices and pivot accordingly to remain competitive. Closing So, let me now conclude. Much like how boundary spanning individuals became a focal point for innovation shaping the post-WWII era, the insurance and takaful industry is well positioned and empowered to lead today's innovation forward. In fact, the impact of boundary spanning individuals expands beyond just innovation benefits. An entry in the Stanford Science Social Innovation Review last year highlighted how boundary spanning individuals are also powerful change makers in engendering trust and promoting equity, particularly among underserved communities, given the expertise and understanding of the communities they serve. In the same way, I believe that all here today will carry the role of innovators not just with commercial interest in mind but also in pursuit to benefit the communities we serve.

Switzerland is directly affected by the EU’s intention to introduce a system of automatic exchange of information between banks and tax authorities in order to enhance tax revenues on savings income within the European Union. One can of course fear that such a plan might trigger capital transfers to non-EU financial centres for purely fiscal reasons. Our position is known: we do not want the Swiss financial centre to become a privileged haven for funds seeking to avoid EU regulations. We are thus ready to consider a reform of our withholding tax regime along the line of the EU directive. We even consider the possibility of handing over to the EU part of the tax on interest earnings of EU residents. We have already 50 years of positive experiences with a withholding tax: it is a convenient and efficient way to collect resources without income declaration. We have never considered introducing any system of automatic exchange of fiscal information for our own citizens, and we are not ready to consider such a scheme for foreign depositors. We feel that our current system secures an appropriate balance between protection of the private sphere and safeguarding the interest of the State. There are many misunderstandings between Switzerland and the UK about this fiscal issue. Let me recall a few points: – First, it is wrong to say that foreigners can invest their funds tax-free in Swiss banks. We have a 35% withholding tax imposed on all interest and dividend payments made in favour of residents and non-residents.

With market globalisation and the free flow of capital, there is a real risk that a financial centre will become involved in illegal transactions against its will. I consider reputational risk as the major challenge facing financial centres at the beginning of this century. In Switzerland this has long become conventional wisdom. Know your customer rules have effectively been implemented and constantly adapted to the evolving requirements of the market realities for many years. Swiss anti money laundering rules and regulations are widely recognised as expressions of the state of the art. I shall come back to this thorny topic in a moment. Challenges ahead What are the challenges ahead? a) Market globalisation As I mentioned at the outset, the banking sector has gone through a period of heavy restructuring during the past decade or so. Banking no longer amounts to simply accepting savings and granting loans. Business has become increasingly complex and is dominated by a dwindling number of everlarger financial conglomerates. The trend toward concentration and the tendency toward onshore international banking can be observed in your country as in mine. The internationalisation of the banking business has led the large banks to establish major business units outside their home country. Our banks create now more jobs outside the country than in Switzerland. Obviously, global business is the first challenge to be faced by the financial centres as well as by the authorities. A close co-operation between supervisors is essential.

To simplify, I believe that the logic underlying the current regulatory system consists in ensuring the financial stability of market segments, but without adopting an overall approach. However, the crisis has forced us to acknowledge that this fragmented approach to regulation does not necessarily ensure the stability of the entire financial system. During this crisis, the fact that financial institutions had considerably increased their use of leverage and that risk was concentrated among a relatively small number of banks was neither well assessed, nor well captured, nor prevented by regulation. In view of this failure and in order to mitigate the impact in terms of financial instability, government interventions were designed, not to stabilize the situation of any particular institution, but to prevent systemic risk from materialising. As a result, we now require macro-prudential regulation. This naturally leads us to address the issue of the scope of financial regulation. Who should be regulated? The problem is not new; it is also complex. Like me, you will have noticed that, at their last summit meeting, the G20 Heads of State and Government laid down a clear principle on the matter. They have indeed committed themselves to ensuring that “all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances”. The crisis shows quite clearly that the markets and institutions that have a systemic role must be regulated. This criterion implies re-examining the functioning of certain OTC markets, such as the interbank money market or the credit derivatives market.

The Role of Sentiment Other than perception, the ringgit is also driven by sentiments, mostly adverse. These are commonly cited through the various sentiment indices, for example as measured by MasterCard or the Financial Times. Sentiments are shaped over time by analysts and interestingly, there are three factors that consistently drive market sentiment. One of these is the high level of external debt, frequently cited by international rating 3/7 BIS central bankers' speeches agencies and analysts alike. The discussion on external debt has driven market sentiment negatively as it is being touted as a source of vulnerability. The fact is that some of these analysis ignore the evidence of more granular data and worse, only skim the surface without the discipline to deep dive into the available data; Market sentiments also play out based on the government financial position and the issue of governance. Sentiments can be easily affected if new issues or indicators are published on the Government’s financial position. This is further exacerbated by the perceived governance challenges that give rise to further negativity; Market sentiment is also affected by a string of negative news headlines. While there were a number of news headlines on ringgit this year, about 30% of the articles by foreign and local media were written in a negative light or perspective. This make it difficult to ensure a realistic view of the country and hence on the ringgit. Realities and Facts Let’s examine these perceptions, or rather misperceptions.

The policy rate has been raised markedly over a short period, and monetary policy is beginning to have a tightening effect on the economy. This may suggest a more gradual approach to policy rate setting. The future policy rate path will depend on how the economy evolves. The outlook is more uncertain than normal, but we will most likely raise the policy rate again in December, when we will also present this year's fourth Monetary Policy Report with new forecasts for the Norwegian economy. 2/3 BIS - Central bankers' speeches 3/3 BIS - Central bankers' speeches

When operational, such distributions should help guide judgements on how overall financial system vulnerability is changing. But the approach should also provide considerable additional information on pressure points within the system and on the channels of transmission and potential contagion. 14 I believe that this broad approach offers an important step forwards in the development of an analytically and empirically robust framework for financial stability work. Of course it is analytically hugely challenging – modelling non-linear tail events with endogenous strategic interactions is always going to be tough! The results will inevitably be subject to major uncertainty. But the approach does start to provide a consistent and coherent framework which should substantially improve the value of top-down stress tests and of risk assessment work. 15 A particular “operational” aim is to use the results to help improve the focus of risk reduction work and crisis management planning, for example through the identification of BIS Review 81/2007 7 “weak points” in the financial system and through improved assessment of the impact of policy interventions. An important element of risk reduction work is to influence the behaviour of financial firms. “Bottom-up” or firm-level stress-testing practices have developed rapidly in recent years. But one challenge is that, as for the authorities, it is hard for individual firms to gauge the likely “systemic impact” of particular shocks, which takes into account macro and financial system interactions and feedback effects.

Page 2 of 9 Furthermore, the nature of inflation changed: it became more domestic, affecting services and manufactured goods, and it is precisely on this "underlying" component that monetary policy had to act, and acted strongly. But it must be reiterated, the rise in interest rates generally benefits French and European banks, thanks to their diversified business model, broad deposit base and large loan portfolio. The 'SVB model' in the United States, penalised by the rise in interest rates, was an exception rather than the rule. French banks have demonstrated their robustness: their net banking income and their interest margin increased by 5.3% and 4.5% respectively in 2022. I hear that French banks' margins would be penalised, compared to their European counterparts, on the liabilities side due to regulated savings, and on the assets side due to fixed-rate housing loans. With regard to the first subject, the interest rate on the Livret A accounts must strike, and continue to strike a balance between the effective financing of social housing and, more broadly, of the French economy, and the fair return on savings: in this regard, I am pleased to note that the Livret d'épargne populaire (LEP), which pays 6.1% interest, is finally ‘taking off’ with 9.6 million passbooks at the end of March; I encourage banks to pursue this progress with their customers.

Looking ahead, on the basis of current oil futures prices, inflation rates are likely to remain low over the next few months before starting to pick up towards the end of 2016, in large part owing to base effects in the annual rate of change of energy prices. Supported by our monetary policy measures and the expected economic recovery, inflation rates should increase further in 2017 and 2018. This pattern is also reflected in the September 2016 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 0.2% in 2016, 1.2% in 2017 and 1.6% in 2018. In comparison with the June 2016 Eurosystem staff macroeconomic projections, the outlook for HICP inflation is broadly unchanged. Turning to the monetary analysis, broad money (M3) continued to increase at a robust pace in July 2016, with its annual rate of growth standing at 4.8%, after 5.0% in June. As in previous months, annual growth in M3 was mainly supported by its most liquid components, with the narrow monetary aggregate M1 expanding at an annual rate of 8.4% in July, after 8.7% in June. Loan dynamics followed the path of gradual recovery observed since the beginning of 2014. The annual rate of change of loans to non-financial corporations increased to 1.9% in July 2016, compared with 1.7% in June. The annual growth rate of loans to households remained stable at 1.8% in July.

Real GDP percent 10 percentage change 8 -2 6 -4 4 -6 2 -8 0 -10 –2 –4 -12 –6 -14 –8 -16 *) including reinvested profit 2011* 2010* 2009* 2008 2007 Source: National Institute of Statistics, National Commission of Prognosis 4. Real exchange rate 3. Inflation rate (Dec./Dec.) percent 2006 *) forecast **) forecast Source: National Bank of Romania, National Institute of Statistics, National Commission of Prognosis 12 2005 2004 2011** 2010** 2009** 2008 2007 2006 2005 2004 – 10 lei/EUR; real percentage change, percent 25 based on CPI *) forecast Source: National Bank of Romania, National Institute of Statistics 16 2009* 2008 -5 2007 0 2006 0 2005 2 based on PPI 2004 5 2010* 4 2009* 10 2008 6 2007 15 2006 8 2005 20 2004 10 *) forecast (-) appreciation / (+) depreciation Source: National Bank of Romania, National Institute of Statistics, National Commission of Prognosis BIS Review 5/2010 References Backé, Peter, Égert, Balasz, and Zumer, Tina: “Credit Growth in Central an Eastern Europe: New Overshooting Stars?”, ECB Working Papers, No. 687, 2006.

Therefore, the measures set forth in the said arrangements secured the financing of Romania’s economy. This financing had a favourable impact in several areas: relatively larger investment compared to the case such arrangements would not have been concluded; slower depreciation and stabilisation of the leu against the euro and other currencies; the signing of the Vienna agreement based on which banks committed themselves to roll over the credit lines and to maintain capital adequacy ratios at safety levels. As for the future developments in the real effective exchange rate of the domestic currency, it is desirable that it stabilise around a level consistent with a current account deficit that may be safely covered via foreign direct investment. BIS Review 5/2010 15 Lower depreciation pressures on the leu and, implicitly, lower inflationary pressures ceteris paribus that emerge via the exchange rate channel, along with the fiscal consolidation efforts allowed the central bank to adopt a cautious easing of the monetary policy stance, which will make the descending slope of the GDP less sharp, without fuelling further inflationary pressures. The expected developments in GDP, inflation and the current account deficit presented in Figure III are similar to the profiles of the trajectories illustrated in Figure I. Figure III 1. Current account deficit* (% of GDP) 0 2.

Erik Thedéen: My view of monetary policy Speech by Mr Erik Thedéen, Governor of the Sveriges Riksbank, at Nordea, Stockholm, 23 March 2023. *** Accompanying slides of the speech Good afternoon! Thank you for inviting me. I have now been Governor of the Riksbank for almost three months. It has been an intense period in which the most burning issue has of course been the far too high inflation that has not yet shown any clear sign of falling back. The past two weeks have also been marked by unease on the financial markets, which has made economic prospects more uncertain. The background to the concern is that a couple of US niche banks had problems with their liquidity and collapsed. This was followed by problems in the Swiss bank Credit Suisse – a different type of bank, but one that has wrestled with poor profitability and whose credibility has been eroded. These problems led to the bank being quickly taken over by its competitor UBS. The authorities in the United States and Switzerland have been working actively to resolve the problems. This weekend, the major central banks also launched a joint effort to make it easier for banks to obtain financing in dollars in general. Although the situation has become a little calmer, there is underlying concern that the problems will spread to other banks and further into the financial system. I think it is necessary to have a sensible but also sensitive attitude towards that risk.

They are prepared to take bitter medicine prescribed by the government. If our people resist change like they do in France and Germany, our economy would be sluggish and unemployment high. Investors and international analysts have noted the way Singapore has reinvented itself. Many foreign leaders have also studied Singapore to discover the secret of our success. The Foreign Editor of a German newspaper I met earlier this week said that he was struck by Singapore’s development. So he could not understand why many Singaporeans he had interacted with talked about Singapore’s survival in the same breath. This was his first visit to Singapore. He was not fully familiar with our history, geography and geopolitics. I confirmed that indeed we worried constantly about our future. I explained that as a small country with only a short history, we have an acute sense of vulnerability. I likened Singapore to a small boat crossing the vast ocean, fully exposed to the elements. So we have to be alert to changes in the wind and current directions, and any signs of danger. No matter how well we have done up to now, being vigilant and prepared will continue to be our approach to life in a changing environment. Ten years ago, before the Asian Financial Crisis, ASEAN was a preferred investment destination for global investors. Today, it is not the only choice. Moreover, competition for high-value investments will grow keener. China will move from low-cost manufacturing into higher-value industries.

A more restrained approach would be to use countercyclical policy not so much to lean against the cycle but to increase the resilience of the system further by putting in more protection as risks build up in exuberant times. Others remain unconvinced that there is much of a role for time-varying macroprudential policy at all and argue that it is better to bake all the necessary resilience into a very strong standing framework of standards and rules. There is certainly no easy way to estimate where we are in the credit cycle and the impact of macroprudential tools – while there are guides there are no simple rules. Against that background, I want to highlight some of the steps the FPC has taken in this area. First, using macroprudential policy to address changing risks depends upon a clear assessment of risks and of the action necessary to address them. The institutional incentives will inevitably tend to drive macroprudential authorities to the identification of all possible – and if we are not careful, some impossible – risks. Failure to spot a risk is worse than BIS central bankers’ speeches 5 spotting one too many. The outcome of this dynamic, however, can too easily be a lack of clarity and focus: an assessment that identifies everything but actually identifies nothing. With this in mind, the FPC has changed the structure and content of its bi-annual Financial Stability Report (FSR).

However, some argue that monetary policy should react directly to asset prices, for example by including them in the Taylor rule. Cecchetti et al. (2000) are perhaps the best representatives of this position, claiming that any inflation-targeting central bank should react to asset price misalignments beyond their implications on expected inflation over the policy horizon. In my view, there are three reasons why monetary policy, in general, should not react to asset prices beyond their impact on projected inflation. First, it is not clear that an increase in interest rates will be capable of stopping an increase in asset prices. The required adjustments might be so large that they could end up unnecessarily generating high unemployment and an unwelcome drop in inflation. Second, what matters here is to safeguard the stability of the financial system. An excessive interest rate aiming at controlling asset prices could even trigger financial instability, which is precisely what it is meant to avoid, especially if the increase in asset prices is accompanied by higher financial fragility. Finally, under inflation targeting, any interest rate movements that are inconsistent with inflation converging to the target may undermine the credibility of monetary policy, and we know inflation expectations are critical in the functioning of the regime. To apply a policy that is inconsistent with the inflation target would end up weakening it as the inflation anchor. This is particularly important in the case of emerging economies with a shorter record of monetary stability.

As you know, the Banco de España, in its various publications and in my own addresses, has upheld the view that the fiscal policy response to the pandemic should be decisive in the short term, to mitigate the adverse effects of the crisis on businesses, the self-employed and households, and to prevent a deterioration in our economic growth potential. At the same time, in order to rebalance public finances in the wake of the extraordinary shock caused by this crisis, an ambitious fiscal consolidation strategy for the medium term is needed; it should be defined swiftly, include rigorous and credible measures and address, among other factors, a comprehensive reform of the Spanish tax system. In my view, the economic recovery under way still shows clear signs of fragility and is subject to considerable downside risks, so that a widespread increase in the tax burden is not advisable at this time. For this reason, I believe it may have been preferable to delay the introduction of some of these measures until our economic recovery is more robust. As regards the main instruments employed to achieve this projected increase in tax revenue, I insist that in my view what is needed is a profound and comprehensive reform of our tax system. In addition, in many cases (such as, for example, the taxes on financial transactions and digital services), these changes must be approached in a coordinated manner internationally, to maximise their revenue-raising capacity and prevent competitive distortions or relocation of tax bases.

These suggest that the unprecedented fall witnessed in business turnover in recent months will have significantly raised firms’ levels of financial vulnerability. In the non-financial business sector as a whole, the percentage of firms whose net worth is less than half their net debt is estimated to have risen from less than 20% pre-pandemic to somewhat over 25%. This percentage will have increased more significantly at SMEs (by around 6 pp) than at large corporations (around 2 pp) and, by sector, most sharply in tourism and leisure (over 15 pp), motor vehicles (over 10 pp), and transport and storage (around 7 pp). 1.3 Macroeconomic projections of the Banco de España The high uncertainty over the future course of the health crisis made it advisable for the latest Banco de España projections released on 16 September to envisage several alternative scenarios. This had been the case in the two previous forecasting exercises, also influenced by the pandemic. Two scenarios were set out, the essential differences lying in how it was assumed the epidemiological situation would evolve both in the final stretch of September and in the following quarters and, consequently, in the severity of the restrictions on mobility and activity that it would be necessary to deploy to contain the pandemic. The design of scenario 1 thus considered a relatively favourable epidemiological path in the short term.

Aggregate demand would thus grow at the expense of higher inflation or an increase in imports. This policy would be appropriate if the economy were in a situation of severely depressed demand relative to its supply capabilities. In an economy operating at relatively high employment levels with a deficit in the external current account, however, a fiscally-driven expansion in aggregate demand would only produce short-lived growth. At this juncture, therefore, the best contribution that fiscal policy can make to the economy’s growth prospects lies in the further consolidation of public finances, a policy stance that has already contributed positively to Malta’s standing with credit rating agencies and the IMF. 2 BIS Review 83/2001 Some commentators think it is possible to stimulate the economy via monetary policy, that is through the lowering of interest rates. As I have often had occasion to explain, the intermediate objective of monetary policy in Malta is to maintain a stable exchange rate by pegging the lira to a basket of currencies of low inflation countries. This restrains volatility in import and export prices, thereby contributing to lower costs; mitigates domestic inflationary pressures and contributes to export price competitiveness. If we are to continue enjoying the benefits of the exchange rate peg, our interest rates will have to shadow those prevailing in the currency basket countries, especially as restrictions on international capital flows are being lifted. The alternative would be to risk outflows of funds and a possible financial crisis.

Indeed, the volume of global FDI has almost quadrupled since 1980, a much faster progression than world trade, which barely doubled. For the FDI host countries this has meant not only an increase in output and employment, but often also a transfer of technology and know-how that has considerably strengthened their economies. In this respect, the experiences of Ireland and Portugal immediately spring to mind. Thus, failing to compete in a globalized world is likely to result not merely in lower sales but, more importantly, also in less investment and, therefore, in weaker growth prospects. In sum, globalisation implies increased opportunities but also risks. The opportunities cannot be seized and the risks minimized, however, without an appropriate strategy. For this reason many countries are to-day actively engaged in improving their market positioning and their cost structures relative to their competitors in order to exploit opportunities for increasing their value added. Some of the more interesting dynamics engendered by globalisation are taking place at the regional level. Economic integration is proceeding rapidly in Europe, Asia and the Americas and, as a result, the region rather than the nation state is gaining pre-eminence as the locus for policy-making in the political sphere and for investment in the economic sphere. Regional integration is, therefore, rapidly becoming a key vehicle for gaining access to world markets and for attracting foreign investment. There is a growing realization that countries which remain outside of regional alliances are likely to become increasingly marginalized.

Mr Bäckström asks the question “Is there a new economy?” Speech given by Mr Urban Bäckström, Governor of Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, at a conference arranged by the Stockholm Chamber of Commerce and Veckans Affärer, held in Stockholm on 25 January 2000. * * * First a word of thanks for the invitation to attend this conference and discuss matters to do with the question “Is there a new economy?”. Besides considering that issue, I shall be looking at other factors that may affect economic developments in Sweden, together with their implications for the future construction of monetary policy. Monetary policy aims at promoting economic stability The Riksbank’s primary concern is, as we all know, the future path of inflation. But our deliberations about how to keep inflation at a low and stable level can equally well be described as the Riksbank’s endeavour, with the aid of the repo rate, to ensure that the economic trend in Sweden continues to be favourable. This is because in most situations the task assigned us by the Riksdag (Sweden’s parliament) - “to maintain price stability” - amounts to acting so that the development of production and employment in Sweden is as stable as possible. There have certainly been times when a tightening of Swedish monetary and fiscal policy has led to an economic downturn and increased unemployment.

The problem we face is that unemployment’s critical level cannot be identified for certain and we do not know when shortages and rapid wage increases will actually arise. Estimating these matters is difficult and the results cannot be taken for granted. It is therefore hard to tell how much scope there is for a temporary phase of economic growth above the long-term trend. The ability to look ahead and formulate monetary policy cautiously is particularly important when an economy is moving further and further along an upward phase. Otherwise there is a risk of price and wage increases accelerating so that the brakes have to be applied more abruptly later on, leading to a situation that is worse than would otherwise have been the case. Thus it is in this phase of rising activity that we can be said to influence the depth of the next slowdown. It was the overheating in the late-1960s, the mid-1970s and the end of the 1980s that set the stage for the subsequent deep troughs. And each recession was worse than its predecessor. Looking back, it is easy to see that economic policy ought to have been tightened much earlier than was the case on those occasions. At the same time, it has tended to be difficult, not least in fiscal policy, to take such measures sufficiently early, particularly as that needs to be done before the problems are clear to everyone.

Available statistics and survey indicators continue to signal further weakness in activity in the last quarter of the year, although more recently some indicators have stabilised at low levels and financial market confidence has improved further. Over the shorter term, weak activity is expected to extend into next year, reflecting the adverse impact on domestic expenditure of weak consumer and investor sentiment and subdued foreign demand. A gradual recovery should start later in 2013 as our accommodative monetary policy stance and significant improvement in financial market confidence work their way through to private domestic expenditure, and a strengthening of foreign demand should support export growth. This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between –0.6% and –0.4% for 2012, between –0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards. BIS central bankers’ speeches 1 The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.

At the same time, deposits from households and non-financial corporations also rose in October. Overall, more observations are needed to distinguish between shorter-term volatility and more lasting factors. Unlike in the case of monetary developments, there has been little change in credit growth. The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) remained at –0.4% in October, unchanged from September. But this development reflects further net redemptions in loans to non-financial corporations, which led to an annual rate of decline in these loans of –1.5%, down from –1.2% in September. The annual growth in MFI lending to households remained unchanged at 0.8% in October. To a large extent, subdued loan dynamics reflect the weak outlook for GDP, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. Furthermore, in a number of euro area countries, capital constraints, risk perception and the segmentation of financial markets restrict credit supply. In order to ensure an adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential to continue strengthening the resilience of banks where needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels. Decisive steps for establishing an integrated financial framework will help to accomplish this objective. A single supervisory mechanism (SSM) is one of the main building blocks.

The euro area is currently witnessing a process of rapid disinflation, mainly driven by the marked decline in global commodity prices since last July and associated base effects. This is likely to cause a U-shaped profile for headline annual inflation in the course of 2009. We expect headline annual inflation to fall further in the coming months, temporarily reaching negative levels in some months around mid-year. Thereafter, annual inflation rates are expected to increase again in the latter part of 2009. Against the background of these price developments, is there a reason to be concerned about deflation? In my opinion, the risk of deflation in the euro area remains very limited. What we are experiencing in the euro area is a disinflation process reflecting reduced inflationary pressure in the supply chain due to lower input costs, a moderation of wage increases and stronger competition in a context of falling demand and excess capacity. This temporary disinflation does not constitute a persistent, broad-based and self-sustaining 12 See European Commission (2009) 13 General government debt of euro area governments was 77.4% of GDP in 1997, and had reached 69.1% in 2007. BIS Review 65/2009 7 decline in the overall price level, which may be reinforced by the anticipation that prices will decline further in the future. On the contrary, expectations of inflation over the medium to long-term are solidly anchored at levels consistent with price stability.

This outcome reflects the extremely low level (0.25%) of the ECB’s deposit rate and the Bank’s management of liquidity in the interbank money market. The very low level of interest rates in the euro money market and the generous provision of funding by the ECB to the banking system have gradually resulted in a marked decline in bank lending rates, especially on short-term credit to the private sector. 8 More generally, the real average cost of financing for euro area non-financial corporations has declined by 43 basis points over the past five months to 4.47%, from its peak level reached last October. However, the cost of financing for speculative-grade-rated firms (i.e. the high-yield segment of the corporate bond market), although it has also declined somewhat, remains at unusually high levels (at about 19% in nominal terms), reflecting the continuing high degree of risk aversion of investors that has prevailed since the intensification of the crisis last fall. Despite the improved conditions in the euro money market and in the average cost of bank lending to the private sector, bank credit standards have remained tight and the annual rate of credit growth to the private sector has decelerated steadily. Indeed, in recent months the flow of credit to both firms and households became negative. These developments partly reflect the reduced demand for banks loans by both households and firms. But they are also partly a consequence of the deleveraging of banks’ balance sheets and persisting stresses in the bank wholesale bank funding markets.

And we can see this clearly when we study developments adjusted for absence due to sickness (Figure 8). Here we can see that the average working hours have shown a declining tendency even when adjusted for people who have not worked due to illness. Compared with the period 1994-1995, average working hours have declined by around 3 percentage points and the negative tendency is particularly strong after 1999. Moreover, the other curve in my diagram - for the number of employed shows that the growth in working hours last year was curbed by a lower increase in employment. This was in turn a result of the economic slowdown no longer affecting just manufacturing, but also the services sector. The decline in working hours appears to depend on three main factors, apart from increased absence due to illness. The first factor is an increase in other types of absence than illness, e.g. holidays or looking after sick children. The second is a decline in the amount of overtime worked and a reduction in the working hours agreed between employers and employees. The third factor is a shift where more people choose to move over from full-time to part-time work. The relative significance of structural and economic factors in this context is again difficult to assess. There are many indications that variations in overtime are particularly affected by economic activity. Although it is more difficult to determine how this relates to the other factors.

The assessment made by the Riksbank so far is that average working hours will show a tentative rise when economic activity improves. To summarise, there is reason for considerable concern regarding the future labour supply. If there is reason to be slightly more optimistic over productivity growth, the opposite applies to the labour supply. A number of factors, such as demographic developments, absence due to illness and the proposal for shorter working hours all indicate a decline in the labour supply over the coming decade, unless there is a change in policy. 4 BIS Review 16/2003 Future potential growth What does all this mean for the assessment of the economy's potential growth capacity right now and in the coming years? If we uncritically assume the simple model I outlined earlier, we could calculate an estimate of potential growth by simply adding together the trend values I showed in the diagram on productivity growth and the number of hours worked. I have done this in my next diagram (Figure 9). Measured in this way, potential growth was just over 1.5 per cent up to around 1992. Since then it has risen gradually to approximately 3 per cent in 2001. However, my discussion of the causes of the decline in actual growth in recent years showed that there are good reasons to believe that 3 per cent is an overestimate of the growth potential in the Swedish economy today.

I wonder whether the ECB’s behavior has been limited much more by its status than by the country in which it is headquartered. I suspect even more that Germany’s insistence on strict observance of ECB rules stems from a fear that any lenient interpretation will lead sooner rather than later to the total subordination of minority interests in the eurozone, i.e., the interests of savers, i.e., German interests. i. Anyway, I am afraid that the ability of economic-based reasoning to influence events is gradually declining. Future events will be influenced more and more by decisionmakers’ communications and gestures or by accidents unplanned by anybody. As an example of the latter, consider how Greece’s tourism income might develop this year and the next if its major electricity supplier occasionally switches off supplies due to payment problems, thereby shutting down air conditioning in hotels. j. But now I am straying away from the topic of imbalances, so I’d better pause to venture one final observation. Germany is currently under financial stress and is full of middle-class savers who are angered by the perceived failure of their state. This situation, I believe, has never been in the interests of my country or in the interests of Europe. Some of us may like to contemplate this a bit. Possible questions for the panelists (as I have already spoken enough I will reserve myself for the second round of Q+As): a. How has the financial crisis modified the world-wide pattern of creditor-debtor countries? b.

It is generally a country of small savers. The median household has more financial assets than liabilities. c. There is no significant stress in its financial sector at the moment, and none is expected by my central bank in its role of both macroprudential authority and financial market supervisor. d. We have an extremely open economy. Exports and imports are roughly equal to 80% of GDP, mostly with the EU. e. Our major trading partners are the EU and Germany, where there are still quite a few opportunities. 3. Consequently, like all of us I have no desire to see the crisis deepen. However, before I stress a few different issues than the intended speaker, let me borrow some introductory sentences for these topics from Philip Coggan’s Paper Promises: Debt, Money, and the New World Order, 2011: “Economic history is a battle between creditors and debtors, with the nature of money the territory over which they fight. Money has two core functions; as a means of exchange (paying for your daily Starbucks) and as a store of value (making sure you can still afford a Starbucks in old age).

While the Asian regional economies have common threads that prevail across the region, the economies are generally diverse in their economic activities. While there are areas of competition, there are trends towards increasing specialisation and complementarities. These structural shifts arose from new technologies, new demand patterns and new production organisation structures. In essence, there is a movement from bilateral inter-regional trade flows to a more fully developed intraregional division of labour incorporating all phases of production and markets. This has led to greater optimising of the comparative advantage of the region. Finally, there has been an intensification of regional co-operation in the aftermath of the Asian financial crisis. There has been a high level of financial co-operation among the Asian economies. Co-operation has been in the area of enhanced regional surveillance, standardisation of systems and documentation, regional capacity building programmes and regional swap facilities. This strengthened co-operation enhances the foundations for realising the potential that the region possesses. Ladies and gentlemen, In a world where uncertainty has become a permanent feature of the environment, the challenge before us is to be able to increase our tolerance level to the shocks and changes that may occur. Building tolerance levels involves enhancing our capacity, strength and resilience to cope with the changed environment. Precautionary measures can be taken to reduce the risks and vulnerabilities. Despite uncertainties and unstable conditions, initiatives can be taken to achieve sustainable performance.

This is because experience has shown that it is difficult for small economies to pursue independent monetary policy if interest rates are their only policy instrument, their currencies float freely, there are no restrictions in residents’ unhedged foreign exchange risk, and financial integration with the rest of the world disconnects the transmission of monetary policy through the interest rate channel. I would like to pause here, as this last item is of particular importance for Iceland at present. I conducted a study of this topic during my tenure with the Bank for International Settlements in 2004–2009.1 I delved into it again last summer, as can be seen in the speech I gave in Singapore last August, which can be found on the websites of the Bank for International Settlements and the Central Bank, and in my forthcoming paper, to be published in the 1 4 “Financial globalisation: key trends and implications for the transmissions mechanism of monetary policy”. BIS Papers No. 39, April 2008. http://www.bis.org/publ/bppdf/bispap39c.pdf BIS central bankers’ speeches Singapore Economic Review. These writings contain more detailed explanations, but if we consider the main points and allow the tendencies entailed in financial integration to develop to their limit, the outcome is abundantly clear. The interest rate channel of monetary policy becomes utterly clogged up in small, open, and financially integrated economies where longerterm interest rates are determined by rates in large economies. Monetary policy transmission shifts entirely to the exchange rate channel.

18 Ghosh, AR, Ostry, JD, and Qureshi, M (2016), ‘When do capital inflows surges end in tears?’, American Economic Review. Surges are defined as a net capital flow observation that lie in the top thirtieth percentile of both the country-specific and the full sample’s distribution of net capital flows, expressed in percent of GDP. 12 7 All speeches are available online at www.bankofengland.co.uk/news/speeches 7 percentage points faster, all else equal, the typical EME with higher capital flow volatility will grow 0.7 percentage points slower.19 Following their experience of successive crises, EMEs have responded to these pressures by following the conventional wisdom to “keep their houses in order.” Over the past two decades, inflation targeting has been widely adopted, fiscal policy is generally improved, and macroprudential policy is increasingly active. Bank analysis finds that, for EMEs as a whole, reforms to these domestic institutional “pull” factors have substantially increased the sustainability of capital flows, all else equal (Chart 5).20 But unfortunately for EMEs, all else is not equal. Their efforts have not been sufficient because of the consequences of the growing asymmetry between the importance of the US dollar in the global financial system and the increasingly multi-polar nature of global economic activity. Monetary policy and financial stability shocks in advanced economies have become more prevalent and more potent, increasing the importance of “push” factors in driving capital flows.

The purple bars build on the contribution of pull factors to the conditional 5th percentile of capital flows in the current quarter and two quarters ahead. Pull factors are proxied by domestic financial condition indices (DFCIs), which are mean-orthogonalised by a global financial conditions index (GFCI). The coefficient on the DFCIs is estimated by panel quantile regressions. Push factors are proxied by the Bank of England’s global financial conditions index. The chart shows PPP-weighted averages across the 13 EMEs in our panel. Chart 7: For EMEs, market-based finance accounted for all the increase in foreign lending since the crisis Structure of external liabilities for emerging market economies Sources: IMF, EPFR and Bank of England calculations 20 All speeches are available online at www.bankofengland.co.uk/news/speeches 20 Chart 8: Market-based finance flows are particularly sensitive to push shocks The sensitivity of Capital Flow-at-Risk to push factors, by source of capital flow FDI Banking Market-based finance of which: investment funds 0 -1 -2 -3 -4 Median 5th percentile -5 Capital Flows-at-Risk as a % of GDP Sources: IMF, EPFR, Bank calculations. Notes: Chart shows the sensitivity of different capital flows to a negative "push" shock. Coefficients are standardised by each component’s share of total flows e.g. the red MBF bar shows how total Capital Flows-at-Risk would respond to a one standard deviation tightening in global financial conditions if all capital flows were accounted for by MBF.

They like to ask the question: “Does the Investment Banker know the difference between right and wrong?” To which the answer is: “Of course he does, provided he’s allowed two guesses!” Having arrived at the Bank over three years ago, I am often asked what I actually do there. And the answer is that I have three main roles. First, I am one of the nine members of the MPC; secondly, I have responsibility for the Bank’s work in financial stability; and thirdly, I have day-to-day responsibility for the management of the Bank. One way or another, wearing these three hats involves me in most of what the new Bank of England does - new in the sense that the 1997 changes, incorporated in the Bank of England 1998 Act, were fundamental to the Bank’s activities. Without providing a personalised “this is how I spend my day” account we occasionally read in the newspapers, perhaps I could say a little about each of these roles. Monetary Policy Committee Being a member of the Monetary Policy Committee is a hugely rewarding experience. The process we go through has been quite well documented elsewhere so let me be brief in my description. We are required by the 1998 Bank of England Act to meet at least monthly, although we have the right to meet as often as we wish.

Perhaps I could close at this point by thanking you for coming. I have got a few points “off my chest” - and I hope for your part I have made a few points which have been of interest. 7 BIS Review 102/2000

• The statement entitled Summary of the Monetary Policy Committee Discussions will be published within 8 working days following the meeting with the title Summary of the Monetary Policy Committee Meeting, alongside its English translation. • As of July 2006 the “Price Developments” report started to be published to provide an accurate understanding of inflation data. This report will be published within 2 working days following the announcement of inflation data. BIS Review 1/2007 5 • Besides all these statements, presentations and speeches made by the Governor and the Committee members will be shared with the public from time to time. • Moreover, the research papers, booklets, and technical notes published by the Central Bank and organized conferences will continue to be a part of the communication policy. The publication calendar for the Inflation Report and the Financial Stability Report along with the Monetary Policy Committee Meeting dates are presented in the Appendix. Meeting dates have been determined by taking into account such factors as official holidays, national and religious festivals, and the data flow calendar. Exchange rate policy and foreign exchange buying auctions Along with inflation targeting, the Central Bank will continue to implement a floating exchange rate regime in the upcoming period. In the floating exchange rate regime the FX rate is neither a target, nor a policy tool. The only variable that the Central Bank sets as target is inflation and the main policy tool to achieve this target is short-term interest rates.

1 16 All speeches are available online at www.bankofengland.co.uk/speeches 16

Together, these economic forces have contributed to significant job losses in certain sectors, most notably manufacturing. The resulting decline in demand for middle- and lower-skilled workers has resulted in fewer jobs and has depressed wages for many in those industries. Other, less important factors behind the rise in inequality include the decline in private sector labor unions and the falling real value of the minimum wage. At the same time, technological change and globalization have created jobs in areas such as engineering and software development. Demand has been particularly high for knowledge workers, resulting in strong wage growth in certain sectors. All told, the forces of technological change and globalization have contributed to wage inequality by pushing up wages for those toward the top, and stifling wage growth for workers toward the middle and bottom of the wage distribution. As I have said in previous remarks, we need to do a better job of helping those hurt by globalization.2 Monetary policy can help support economic growth, but it is much less powerful in addressing the structural factors that underpin inequality in the labor market. That said, understanding the causes and consequences of economic inequality is important to the Fed. We are working hard at producing research, information, data, and analysis so that we can better understand inequality and participate in an informed debate on how to best address it. One significant initiative within the Federal Reserve System is the creation of the Opportunity and Inclusive Growth Institute at the Minneapolis Fed.

While the “rags to riches” story has been a popular theme in U.S. history, income mobility in the United States is now notably lower than in many other advanced economies. Unfortunately, substantial differences in economic mobility exist within the United States. Important research by Raj Chetty and his co-authors suggests that upward mobility strongly depends on where one grew up.4 That is, places themselves seem to have a measureable effect on economic outcomes for children as they reach adulthood. In particular, this research indicates that higher upward mobility is associated with areas that are less residentially segregated by race or income, and that have higher-quality schools, stronger social networks, greater community involvement, and stable family structures. Significantly, they find that places with greater upward economic mobility tend to have lower income inequality. This evidence suggests that there is a fundamental inequality of opportunity for advancement that is tied to where people live. Reducing inequality of opportunity is something we should all work toward. Directions for Policy So, what are some specific ways policy can address inequality and improve economic mobility? While this is a difficult and complex set of issues with no easy answers, I do have a few thoughts. First and foremost, we can improve the quality of education for our most vulnerable citizens. Children who attend better schools and attain higher levels of education have more favorable long-term outcomes, including better job prospects and higher earnings.

2 This certainly requires a strong commitment from us, placing a special emphasis on drawing conclusions based on sound research and analysis. In addition, and also importantly, it calls for our proactive engagement in a practical experimentation phase that can shed light on the nature and scale of the pain points, problems and underlying threats, and also on potential solutions. That is why while the issuance of a digital euro is not foreseen in the immediate future, the Eurosystem has a keen interest to tackle the challenges arising from possible future scenarios. As you may know, many other central banks2 are already analysing this possibility. Along these lines, you may have already heard about the tests that the People’s Bank of China is currently carrying out in a number of provinces, or the extensive work that preceded the well-publicised e-krona pilot in Sweden. You may also be aware of the Fed’s recent announcement of its intention to remain on the frontier of research and policy development regarding CBDCs.3. As ECB President Lagarde mentioned a few weeks ago,4 earlier this year the Eurosystem decided to set up a taskforce to explore the benefits, risks and operational challenges of introducing a digital euro. The results of this work will soon be shared publicly. However, this is only the first step in a more profound reflection that still has to take place.

The crisis severely eroded people’s trust in the industry, both here and abroad. Governments and regulators quickly got to work fixing the main deficiencies in the existing regulatory framework. These included requiring much stronger loss-absorbing capital to weather severe economic downturns, demanding greater liquidity cushions to withstand market and funding disruptions, and creating a robust resolution framework to protect both the economy and the taxpayer in the event of a failure of a systemically important firm. These changes were appropriate and necessary. We must not lose sight of their importance in safeguarding the soundness of the financial system and in ensuring that future generations do not have to suffer the economic trauma that we lived through this past decade. Bringing us to the present day, we are in a much, much better place, in terms of both the financial sector and the overall economy. We have a more robust regulatory regime in place, and banks are well positioned to survive future storms. Furthermore, our economy’s in great shape; we’re in the second-longest expansion in history, and economic data from both the United States and countries around the world continue to trend upwards. As a policymaker, solid growth, a strong labor market, and inflation near our target are all exactly what I want to see. Paradoxically, it’s precisely this sense that things have gotten so much better that worries me most.

The prudent, fair and realistic valuation that resolution authorities must conduct in resolution (as required in the BRRD) will likely crystallise previously unrealised losses or expected losses on the asset side of the bank’s balance sheet. This suggests that GLAC should at least be equivalent to minimum Tier 1 capital requirements. It is likely to need a capital position at least as strong as other banks in the market. And for a bank that 6 4 BRRD article 43(3). BIS central bankers’ speeches has undergone resolution to command market confidence, it is likely to need at least as much capital as other banks in the market. It would be sensible therefore for G-SIBs to maintain sufficient GLAC to be able at least to restore fully regulatory capital buffers above capital minima, in order to maintain market confidence that they would be able to absorb any further losses during the restructuring phase without re-entering resolution. One final point on quantum – the ability of stressed systemically important banks to raise their capital position by shedding assets in short order is not sufficiently reliable to warrant a lower GLAC requirement for G-SIBs. So, we can see how much loss-absorbency we might need, but how much of what, exactly? In principle, it should be possible to expose every unsecured, uninsured liability of a bank to loss in resolution, just as would happen in insolvency.

Miroslav Singer: Sovereign debt crisis in Europe – assessing the current European instruments – addressing the challenges ahead Speech by Mr Miroslav Singer, Governor of the Czech National Bank, at the European Parliament Committee on Economic and Monetary Affairs Public Hearing, Brussels, 23 January 2012. * * * Members of the European Parliament, Thank you for inviting me to this forum and giving me this opportunity to comment on the European Financial Stability Facility (EFSF). The last few weeks have brought us three new events that are rightly or wrongly regarded as game changers and I would like to discuss the EFSF in the context of those events. They are: 1) the ECB’s long-term loans to commercial banks and the widening of the range of guarantees which the ECB accepts from commercial banks for them, 2) the fiscal pact and 3) the rating downgrades. I would like start by saying that the provision of liquidity to commercial banks in Europe by the ECB gives us time to define more precisely the mission, design and operation of the Facility as well its position among the institutions charged with resolving the debt crisis. If we want to reduce the probability that some European nations and their banking groups will face liquidity problems that they cannot solve by obtaining funds from the market, we need to eliminate the following uncertainties relating to the EFSF: 1. It is not clear what benefits we expect from the EFSF or how it is supposed to generate them.

Detailed analysis of trade exchanges confirms high concentration of Albanian exports in certain geographical regions or in certain product groups and their low value added. For stable growth of exports and sound adjustment of the trade deficit, the policy-makers’ attention should focus on increasing the competitiveness of domestic products and expanding the base of exports through accelerated structural reforms. Financial market developments have reflected the low risk premia and inflation, hence enabling better transmission of easing monetary policy signals that started at the beginning of this year. Interbank interest rates have performed in line with the key interest rate, with slight volatility. The primary market yields on government securities have dropped sharply, particularly on longer-term maturities. Over the last months, the interest rate cut was faster on deposits but lower on loans. Interest rates on loans responded more slowly than other market rates due to low lending to economy during the last months. Monetary developments highlight continuation of weak inflationary pressures in the economy. The annual money-supply growth acceleration reflected primarily the private sector’s added demand for financing over the last two months. Also, households’ and businesses’ demand for money remained weak. Private sector credit slowed down sharply, and at the end of May it was 0.2% lower than a year earlier. The weak lending performance 2 BIS central bankers’ speeches is increasingly reflecting the businesses’ lower demand for loan, alongside the tight lending standards.

Meanwhile, the past three months recorded households’ higher demand for loan, hence signalling a probable revival of this loan. Our projections for the economic outlook support the assessment that the Albanian economic activity will grow slowly over the period ahead, at levels comparable with those of the first half of the year. Foreign demand will be the driver of economic growth in the coming quarters, while the first-half fiscal stimulus is likely to lack in the second half of the year. Indirect data do not yet reveal any signals for consumption and private investment recovery. The below-potential economic growth will be associated with weak demand-side inflationary pressures and in the absence of any unforeseen supply-side shocks, consumer prices will increase at low rates. Annual inflation, as to four quarters ahead, is expected to fluctuate around the 1.1% – 3.8% range, with a 90% probability of occurrence. Against this setting, our monetary policy will keep on preserving its stimulating nature even over the quarters ahead. Also, we will continue to provide the banking system with all the liquidity needed for a smooth functioning of financial markets. Concluding, the Supervisory Council decided to lower the key interest rate by 0.25 percentage points, to 3.50%. The Supervisory Council deems that this lowering would create better monetary conditions to meet our medium-term inflation target, which will continue to guide our monetary policy. BIS central bankers’ speeches 3

Monetary policy therefore involves balancing the risks of acting too soon against those of acting too late. Acting prematurely is liable to lead to unemployment being higher than it need be. If the Riksbank acts too late, on the other hand, price and wage increases may already have got under way. In that case, the economy may ultimately land in a recession, perhaps with even higher unemployment. Fortunately, it is not a question of either/or. A monetary policy adjustment can be decided gradually, with stepwise changes in the repo rate. Consequently it is always possible to compare forecasts with outcomes, assess the policy stance continuously and make the adjustments that are considered to be necessary. If monetary policy is successful, a foundation is laid, not only for low, stable inflation in line with the target and the Riksbank’s statutory objective, but also for a stable long-term growth of output and employment. Seen from this angle, low inflation, besides being our objective, is accordingly a means of trying to achieve a stable economic development in general. That is something which should be underscored. Inflation prospects In an analysis of the situation in the run up to the next Inflation Report, due to be published on 7 December, the following can be noted: • The price trend to date is approximately in line with the forecast that was presented in the October Report. • As expected, there have been signals that international economic activity is tending to become somewhat slacker.

We would do well to remember, however, that people’s perceptions of the future are often shaped not so much by words as by actions. So, after a series of purposeful decisions by the Government, the Riksdag (Sweden’s parliament) and the Riksbank, economic policy’s general commitment to macroeconomic stability began to inspire confidence. Economic policy’s credibility gave the Riksbank greater freedom to act The growing confidence accordingly meant in turn that, without jeopardising the objective of price stability, the Riksbank was able to lower the repo rate relatively markedly, from almost 9% to just over 4%. Interest rates for longer maturities also fell. This led, as we have all seen in recent years, not just to higher GDP growth but also to a more uniform development of demand in different sectors. When the cyclical upswing began towards the end of 1993, most of the growth came from the export sector. However, lower levels of interest rates benefited Swedish households and firms by easing the heavily restrictive effect of the high level previously. This contributed to an increase in domestic demand as well and broadened the economic upswing. That can be said to have instigated the considerable reduction of unemployment we have seen in recent years. Neither the Asian crisis in 1997 nor the turbulence in international financial markets in the autumn of 1998 had much of an impact, thanks not least to a monetary policy realignment in many countries. The Swedish repo rate was also cut, to a low of 2.90%.

The nagging concern is whether this determined pursuit of macro-economic stability will be maintained - whether in fact the degree of macro-economic convergence that has been achieved is likely - in the terms of the Treaty - to be “sustainable”. A particular worry is that macro-economic stability, on its own, is not enough. It has not been enough to prevent the progressive emergence of very high, and very different, levels of unemployment in a number of the major Continental European economies. Unemployment has been for some considerable time, and it remains, much the most urgent and important economic issue confronting us in Europe. I do not suggest for a moment that the right answer would be to abandon macro-economic discipline and revert to old-fashioned demand management policies. In anything other than the very short term that would be likely to make matters worse. I share the broad consensus view that Europe’s unemployment problems originate essentially in rigidities on the supply-side of the economy. The point is that unless we are all more successful in bringing down this structural unemployment, through micro-economic policies designed to improve structural, supply-side flexibility, then some countries could find it difficult to continue to live with a common macro-economic discipline without significant tensions.

Decisions about monetary union will quite rightly be taken by elected politicians, according to their perception of its long-term political impact on the future of Europe, as well as its impact on the future prosperity of their countries, and they will have to carry their electorates with them. As a central banker I have nothing to say about the politics of monetary union. But it is also, of course, about economics, and the economics of monetary union could go either way; if it goes well, that certainly could yield political benefits, but if the economics were to go wrong, then that could blow back on the politics of Europe and give rise to tensions. I shall concentrate my remarks this morning on the economics of EMU. The economic pros and cons have in fact been exhaustively debated in the United Kingdom and the arguments are now reasonably well defined, even though different opinions inevitably attach different weights to them. On the positive side, the crucial and unique economic advantage of monetary union is exchange rate certainty within the euro area - not just the reasonable de facto stability that might result from each EU member state individually pursuing disciplined macro-economic policies in parallel - but actual exchange rate certainty. And that is a very real economic advantage as UK exporters presently suffering from the strengthening of sterling over the past eighteen months will readily tell you!

Már Guðmundsson: Iceland’s economy and monetary regime – a series of crossroads Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the 50th Annual General Meeting of the Central Bank of Iceland, Reykjavík, 7 April 2011. * * * Honourable President; Prime Minister; other Ministers; Speaker of Parliament; Chairman of the Board; Party Chairmen, Bank Directors; Directors of Public Institutions; Ladies and Gentlemen: This year’s Annual General Meeting of the Central Bank of Iceland is held on the Bank’s 50th anniversary. But it would hardly be accurate to say that the Bank is facing halcyon days at this milestone. Quite the contrary: times are turbulent. Furthermore, Iceland’s economy and monetary regime are standing at a complex series of crossroads, and the paths we choose could have a profound impact on future developments. This is reminiscent of the situation that reigned when the Bank was founded, but I will come to that later. What exactly are these crossroads, then? The first fork in the road lies in the changing economic situation. Instability and recession are giving way to better equilibrium and recovery. The current account deficit from Iceland’s overheating period has been turned around to an underlying surplus that has supported the króna, which is now over 7½% stronger than it was at the beginning of last year. At the same time, the Central Bank has bought foreign currency in the market for about 33 b.kr., as part of its plan to accumulate non-borrowed reserves.

The next steps will be determined more by the newest indicators of economic developments and prospects than they have been in the recent past. At its next meeting, the Monetary Policy Committee will probably assess whether and how the Icesave referendum results and the newly published capital account liberalisation strategy will affect monetary policy in the near future. The strategy divides liberalisation into two main phases, with Phase I dedicated to unwinding offshore króna positions by allowing owners to exit through auctions or by investing in the Icelandic economy. Only when these measures have generated acceptable results can controls on residents’ capital outflows be lifted. If conditions are right, the latter phase could proceed relatively quickly, but if not, it will be executed more gradually. It is difficult to say how long Phase I will take, as its duration will depend on a number of uncertainties, such as access to foreign credit markets. But it is important for near-term monetary policy that Phase I be designed to minimise potential negative effects on the exchange rate and the foreign exchange reserves, at least at first. It is only in Phase II that the interest rate differential with other countries begins to assume much greater importance as regards exchange rate developments. In the recent past, monetary policy has been an element in the larger economic policy formulated by the Icelandic authorities in co-operation with the International Monetary Fund. The key features of that policy have been exchange rate stability, fiscal sustainability, and financial system reconstruction.

In addition, the BoE launched an 18-month, £ billion corporate bond purchase program in September 2016. The monetary policy framework of the Bank of Japan (BoJ) now targets both the levels of interest rates across the yield curve as well as the pace of expansion of Japan’s monetary base. Its current interest rate targets include a negative deposit facility rate at –10 basis points for the short-end and a 0 percent yield target for the 10-year yield. Of note, the BoJ’s three-tier deposit system exempts the majority of its system reserves from the negative rate. As for the quantity target, the BoJ pledges to maintain an expansion of “around” ¥ trillion per year until realized inflation exceeds a 2 percent target in a sustainable manner by purchasing primarily Japanese government securities. 5 During the Bank of Japan’s Quantitative Easing Program, which lasted from 2001–06, the BoJ targeted the liability side of its balance sheet by explicitly targeting the level of bank reserves. This was accomplished via repurchase agreements and purchases of Japanese government bonds with a remaining maturity of less than 5 years. 6 In a speech on January 13, 2009, then-Federal Reserve Chairman Ben Bernanke discussed the differences between “Quantitative Easing” and “Credit Easing". 7 A prominent exception is the central bank of Chile. See Section 27 of theBasic Constitutional Act of the Central Bank of Chile.

… Beginning on March 2, 2010, the New York Fed began to use internal staff to execute MBS purchases.” See FAQs: MBS Purchase Program. 12 In a speech at Jackson Hole on August 31, 2012, Ben Bernanke discussed a cost-benefit framework for evaluating non-traditional monetary policy tools. He noted the tools’ potential impacts on market functioning, financial stability, and the Fed’s ability to exit policies when needed, as well as the risk of financial losses. 13 In the Federal Open Market Committee’s Rules and Authorizations, the “Guidelines for the Conduct of System Open Market Operations in Federal-Agency Issues” note that “open market operations in federal-agency issues are not designed to support individual sectors of the market or to channel funds into issues of particular agencies.” These guidelines were temporarily suspended in January 2009. 14 For trading volumes, visitwww.sifma.org/research/statistics.aspx. visit www.embs.com/secure/cgi-bin/asp/AnalyticsMenu.asp. For outstanding MBS, 15 There are no other non-sovereign debt markets that are of comparable depth and liquidity. 16 For more information on the TBA market, see Vickery and Wright (2013). 17 8 / 10 BIS central bankers' speeches 17 Dollar rolls can be used to address a shortage of a specific security that is expected to be transitory. This tool is used somewhat regularly for a small portion of SOMA agency MBS purchases. Coupon swaps can address shortages of a specific security that are not expected to be resolved quickly.

They provide confidence for financial institutions and customers to do business here. MAS pays close attention to the design of financial regulation to ensure that they are risk-based and not more burdensome than necessary to meet regulatory objectives. • An example is the Financial Holding Companies (FHCs) Bill that is currently before Parliament. • MAS will not regulate all FHCs. The Bill will give MAS the flexibility on whether or not to regulate a particular FHC, taking into consideration, for instance, whether the FHC’s subsidiaries are important to Singapore’s financial system. MAS consults the industry and other stakeholders when introducing significant new regulation. The exception of course is where the issue is market sensitive. We consult at an early stage on the broad policy proposals as well as in the later stages of detailed rule-making. We carefully consider all feedback on the impact of new regulation and implementation issues, and adjust the proposals where appropriate. This helps MAS to calibrate the rules in a way that is appropriate for our market. • Take for example, the recent proposed changes to the regulatory capital framework for holders of capital markets services licenses. MAS briefed the industry, consulted extensively, and conducted quantitative impact studies. • In response to feedback, MAS has decided to provide a longer transition period of two years for industry to comply with the new rules. BIS central bankers’ speeches 3 • MAS will also revise its calibration of the operational risk capital charge.

Switzerland is a good example of this: thanks to the inclusion of the major political players in government responsibilities, and to the extension of direct democracy processes even to financial matters, a deeply rooted culture of stability has developed. It is this which provides the foundation for the stabilising effect of the well designed and constitutionally anchored debt brake. This has made a decisive contribution to ensuring that federal government finances are in good shape despite the financial and economic crisis. As a general rule, any efforts to establish a sustainable fiscal policy in countries with debt problems can ultimately only bear fruit if they succeed in fostering a broad-based culture of stability. BIS central bankers’ speeches 1

Jaime Caruana: Asset price bubbles - implications for monetary, regulatory and international policies Speech by Mr Jaime Caruana, Governor of the Bank of Spain, at the Federal Reserve Bank of Chicago, Chicago, 24 April 2002. * * * One of the central topics of debate among economists has traditionally been the reasons for economic cycles, the factors that may amplify or smooth them, whether the authorities should aim to iron them out and, if so, how this can be done. More recently, the role of the financial sector in the dynamics of economic cycles has emerged as a key question in this debate. I would like to focus today on some problems posed to regulators and policy-makers by asset price bubbles and the credit cycle, and to share with you some thoughts on a regulatory device we have recently introduced in Spain to deal with some of these problems: the so-called forward-looking provisioning, also referred to as the dynamic or statistical provision. The pro-cyclical behaviour of the banking sector, which is now generally accepted in the literature, is receiving increasing attention by academics, policymakers and market participants. There is a growing feeling that the financial sector contributes to the swings in real activity and may even intensify and accelerate them. Feedback effects between credit growth and rises in asset prices are increasingly evident, although not yet well understood. Transmission channels from the financial sector to the real sector are becoming more and more flexible, rapid and complex.

However, in a slowdown, as the impaired assets rise, the specific provision requirements increase and the statistical provision becomes negative. This means that the statistical fund (accumulated in previous years) starts being used, its proceeds (the difference between the latent risk and the specific provision) being credited to the profit and loss account. Therefore, thanks to the mechanism of the statistical provision, the burden of credit risk on the profits of banking institutions is better spread over the cycle and more in accordance with the evolution of expected losses. The new scheme offers banks two options. First, to use their own internal measurements of the statistical credit risk and second, to use a standard method. The Bank of Spain expects that in the future an increasing number of institutions will be able to show robust computations, in the framework of an integrated credit risk management system. However, probably in the next year or two, most banks will use the standard method. In the standard system the supervisor sets the parameters. The portfolio is distributed in six blocks, according to the relative riskiness of the different assets, or off-balance sheet items with credit risk. A vector of coefficients (ranging from 0 to 1.5%) is applied to the exposures contained in the six blocks. The resulting figure is the estimated expected loss for the bank portfolio. The computation produces an aggregate annual gross burden (i.e.

The very first CSFI survey in 1994 highlighted the important tension between financial risk and business risk when it observed: “…that banks are being forced by the quest for new sources of business to become a different sort of financial institution – sometimes without noticing it, and probably without the necessary skills.” 5 ; As 1987 and 1998 remind us, the best laid hedges and collateral can lose much of their reliability during times of stress. When financial institutions seek to liquidate portfolios to meet margin calls or solvency requirements, their attempts to lower risk exposures can cause a high degree of correlation amongst assets that appeared uncorrelated in normal times. We saw the same phenomenon on a much smaller scale in May and June this year. In less liquid markets the price impact of any shock tends to be larger, the knock-on to balance sheets greater, and the spillover effects across market participants wider. Our contacts in financial markets continue to suggest that market liquidity remains plentiful, but that there is a trend towards tying up funds in potentially illiquid assets in markets with relatively few players. And while hedge funds have played a positive role in recent episodes of turbulence – by absorbing some of the losses – their capacity and willingness to provide liquidity in the event of a large shock to the market remains uncertain.

And the issuance of asset-backed securities in the UK, which involve parcelling up and selling different claims on pools of assets such as consumer loans and mortgages, has risen to some $ billion from $ billion in 1995. The UK now accounts for around a third of the issuance volume in European ABS markets. On the whole, such developments are positive for financial stability. Coupled with greater macroeconomic stability (Chart 3), they have made the financial system more robust by allowing market participants greater scope to distribute and diversify risk and to manage it effectively. Experience of previous rounds of financial innovation also suggests grounds for optimism. Swaps and other over-the-counter interest rate derivatives, for example, are now well understood and widely recognised as increasing economic flexibility and the productivity of capital. More recently global financial systems and the newer asset markets appear also to have withstood several recent shocks, such as September 11, the Dotcom bubble, the GM related wobbles in May 2005, Refco, and the Iraq war. The fact that some investors, such as hedge funds, are willing to take on greater risk does not necessarily give rise to system-wide concerns. Systemic risk in modern financial systems But there are limits to the amount of risk that can be hedged away. The financial system cannot reduce the amount of risk in the economy, but only repackage and transfer it.

That said, in practice, developing a well-articulated macroprudential policy framework raises some challenges. I trust the benefits of addressing them are worth the impressive hard work currently underway. Thank you for you for your attention. 4 BIS Review 35/2010

(2001), “Sectoral job creation and destruction responses to oil price changes”, Journal of Monetary Economics,48 (3), 465-512. Fornaro, L., & Wolf, M. (2023), “The scars of supply shocks: Implications for monetary policy”, Forthcoming Journal of Monetary Economics. Hamilton, J. D. (1983), “Oil and the macroeconomy since World War II”, Journal of Political Economy, 91 (2), 228–248. Hamilton, J. D. (1996), “This is what happened to the oil price-macroeconomy relationship”, Journal of Monetary Economics, 38 (2), 215–220. Hamilton, J.D. (2003), ”What is an oil shock?”, Journal of Econometrics, 113 (2), 363–398 Hamilton, J. D. (2011), “Historical oil shocks”, NBER Working Papers 16970, National Bureau of Economic Research, Inc. Kilian, L. (2009), “Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market”, American Economic Review, 99 (3). Mork, K. A. (1989), “Oil and the macroeconomy when prices go up and down: An extension of Hamilton’s results”, Journal of Political Economy, 97 (3), 740–744. Nakov, A., & Pescatori, A. (2010), “Oil and the great moderation”, The Economic Journal, 120 (543), 131–156. Footnotes [1] More volatile energy prices alone could also increase volatility in growth and domestic inflation and even increase overall uncertainty in the economy. For instance, Nakov and Pescatori (2010) find that a reduction in oil price volatility contributed considerably to reducing output and inflation volatility in the Great Moderation period. Bjørnland, Larsen and Maih (2018) find that high oil price volatility exacerbates the effects of oil shocks.

While in 2017 the non-financial sectors (energy, transport, building and agriculture) led the way, banking is now the most advanced sector in disclosing information. Chart 3: Rates of disclosure against each TCFD recommendations by industry Banking Insurance Energy Materials & Buildings Transport Agri, Food & Forest Tech & Media Consumer Goods a. Board Oversight 48% 29% 38% 37% 25% 22% 19% 29% b. Management's Role 54% 35% 32% 35% 18% 26% 17% 40% a. Risks and Opportunities 51% 39% 57% 50% 39% 40% 38% 50% b. Impact on Organisation 55% 26% 64% 65% 34% 45% 25% 52% c. Resilience of Strategy Risk Management a. Risk ID and Assessment Processes b. Risk Management Processes c. Integration into overall Risk Management Metrics and a. Climate-Related Metrics Targets 20% 12% 13% 12% 5% 4% 2% 6% 52% 30% 38% 41% 23% 24% 24% 22% 46% 33% 42% 39% 17% 26% 19% 23% 32% 16% 21% 18% 11% 9% 17% 21% 51% 27% 49% 63% 36% 45% 37% 55% b.

Scope 1,2,3 GHG Emissions 42% 22% 39% 41% 28% 26% 29% 38% c. Climate-Related Targets 50% 24% 45% 53% 32% 30% 24% 51% Recommendation Governance Recommended disclosure Strategy Through multi-sector TCFD summits and more focused TCFD industry preparer forums, companies should continue to share knowledge on how, what and where they disclose information to give the market the information it needs. Better TCFD disclosure is an opportunity. Research by the Bank of England and PwC finds a positive correlation between companies’ stock price and the number of TCFD disclosures that firms make.10 This could be because investors reward companies that are leaders in managing climate-related risks or simply 9 TCFD Status Report (2019) On average each additional TCFD disclosure correlates with a 0.18% increase in stock price. While a positive correlation between financial metric and TCFD disclosure does not indicate that TCFD disclosure caused an increase in stock price, it raises questions for further analysis about the effect of climate-related disclosures. 10 6 All speeches are available online at www.bankofengland.co.uk/news/speeches 6 because TCFD adoption identifies companies that are more naturally disposed to longer-term strategic thinking and planning.

What is a bit different about the recent UK experience, however, is the scale of the effects. Compared with the cycle of the 1990s, they appear to have been less positive during the recession – in the more recent downturn job losses weren’t as skewed towards the lower paid – but more negative during the recovery (the skew in net job creation has been bigger). Overall, taking the 2008–14 period as a whole, the compositional effects added around 3% less to average wages than in the equivalent six years in the early 1990s. If anything, Chart 3 hints at a break in the series long before the Great Recession, sometime in the late 1990s. It’s not clear why this occurred (I’ll later offer some slightly speculative suggestions). But the recent drag from compositional effects might help to explain a couple of recent puzzles in the aggregate data. One is low productivity growth. As we know, output per employee has been particularly weak in recent years. It fell steeply during the recession and its rate of growth has been pretty insipid since. Chart 5, plotting three-year growth rates for output and employment, is one way of expressing that. What this work on compositional effects suggests – somewhat tentatively, and only if you’re prepared to interpret it in this rather crude fashion – is that this may partly reflect a slower rate of improvement in the average “quality” of the employed workforce.

It is our sincere hope that this global forum will be rewarding and may the collective wisdom derived from the deliberations lead to more collective actions that will be to our increased mutual benefits. Let me once again express our appreciation to Yang Amat Berhormat Dato' Seri Abdullah Badawi for his presence here this afternoon and for accepting to deliver the keynote address at our Forum today. Thank you. 2 BIS Review 30/2007

However, I am confident that once the process is complete we will be able to look back with satisfaction on what has been achieved. There is no doubt in my mind that Basel II will produce a step-change in risk management practices 4/5 around the world, with the result that the global banking system will become both more efficient and more robust. Through all the pain of the transition, we need to keep our eyes firmly on that prize. 5/5

These changing global dynamics, interacting with market’s reactions to potential US rate hike, may cause volatile ups and downs of financial markets. BIS central bankers’ speeches 1 I will not discuss these at length. Rather, at this juncture, the key question is how to design or adjust policy frameworks to cope better with these financial spillovers while preserving monetary policy independence. Undoubtedly, there is no single recipe that fits all central banks. Thus the aim of my talk is to offer a central bank’s overall perspectives and Thailand’s experiences on policy framework in managing capital flow and exchange rate stability. I will also touch on some beneficial policy cooperation among regional countries. A brief background of Thailand’s monetary policy framework Let’s begin with a broad perspective of Thailand’s monetary policy framework. The Bank of Thailand (BOT) has been conducting monetary policy under “Flexible Inflation Targeting” framework since May 2000. As a pragmatic response to the failure of a pegged exchange rate system, transparency of the policy making process under IT was deemed appropriate for Thailand, particularly after the 1997 Asian Financial Crisis. Under this regime, price stability is the overriding and explicit objective, while economic growth and financial stability are also taken into policy deliberation. The policy interest rate is our main tool in achieving the mandate. With managed-float exchange rate regime, the Thai baht is generally allowed to be determined by the market.

If importers expect a price change to be temporary, they will no doubt be more prone to absorb the exchange rate fluctuations in their profit margins. That this may have been the case is indicated by some preliminary studies. BIS Review 75/2001 5 • Generally increased confidence in the low-inflation regime may also have tended to reduce the exchange rate’s pass-through to inflation. More stable expectations about future inflation should make prices less volatile. • During the 1990s, moreover, competition in the Swedish economy has generally increased, for instance as a consequence of EU membership, continued tariff cuts, the reduction of other barriers to trade and deregulation of the domestic economy. Increased IT trade and the advent of new low-cost producers have had a similar effect. Although such changes are of the one-off type, in the past decade they have affected a series of markets and thereby presumably had a more protracted effect on the aggregate price level. Fig 2. Exchange rate impact on consumer prices 0.20 0.20 0.15 0.15 0.10 0.10 Recursive estimations of TCW coefficients lagged 3 quarters Jan-01 Jan-00 Jan-99 Jan-98 Jan-97 Jan-96 Jan-95 Jan-94 Jan-93 Jan-92 Jan-91 Jan-90 Jan-89 Jan-88 Jan-87 0.00 Jan-86 0.00 Jan-85 0.05 Jan-84 0.05 Source: The Riksbank The conclusion from all this is that the pass-through from the exchange rate to consumer prices has probably decreased.

In my opinion, moreover, they have had a favourable effect on the Riksbank’s internal atmosphere and efficiency. 6 BIS Review 75/2001 As regards currency market interventions, we should likewise naturally aim to be as open and distinct as possible. The arguments about credibility and legitimacy apply here as well. There is also reason to believe that interventions will be more successful if they are perceived as a monetary policy signal, with information about the central bank’s assessment of price developments and thereby the future path of the instrumental rate. When the Riksbank intervened last June we made a point of demonstrating that the measure’s context was monetary policy. The measure was announced and communicated in speeches by Urban Bäckström and myself. At the time of the first intervention, moreover, the Executive Board issued a press notice and Urban Bäckström took part in a broadcast interview in which a good deal of time was devoted to this issue. The degree of openness was also substantial in the sense that we informed our counterparties that the interventions had been made and confirmed this when questions were asked. Moreover, the size of the interventions could be calculated later from the weekly publications of the Riksbank’s balance sheet. So on this occasion we were more transparent and distinct than is customary with currency interventions, compared both with our earlier record and with most other central banks. We did, however, depart from the customary procedure in one respect.

There is a residual question about how much of that activity should go via exchanges or via other trading platforms. That’s something which I doubt will be completely resolved this year. I think it will remain part of the G20 and the FSB agenda going into next year. But it is a very important part. Another key element of changing capital markets is much greater transparency around, and much reduced reliance on, credit rating agency ratings. One of the problems in global capital markets has been that too many investors and banks have given up on reaching their own view on borrowers and on instruments, but have effectively subordinated their own judgment to the judgment of credit rating agencies. The FSB is sponsoring and leading work in order to reduce the extent to which credit rating agency ratings are inscribed into, or embedded in the regulatory fabric of our capital markets. 6. Incentives The sixth thing is incentives. The issue that gets most attention here is compensation or pay, on which the FSB issued a code. The essence of that is that more pay should be deferred. I would add that perhaps part of deferred compensation should be in the form of a debt contract, so that the managers and workers in large firms eventually become creditors of the firm and so they themselves have the same risks as other debt holders. That works only if we can develop resolution regimes leaving debt holders taking risks in our largest firms.

But that’s generally the sort of thing that has to happen: almost always, these currency substitutions occur only once the existing currency has become deeply compromised3. Even then, the thing people naturally reach for is an existing, trusted currency – often the US dollar – rather than some entirely new unit of account. So if it’s neither the “digital” nor the “currency” aspect of bitcoin that matters, what is it that has sparked so much interest? Well perhaps a better name for what we’re talking about, albeit more of a mouthful, is a “decentralised virtual clearinghouse and asset register”. As the Quarterly Bulletin articles explain, the key innovation in bitcoin is its settlement mechanism. Instead of relying on an independent third party to process and record transactions, holders of bitcoin use a decentralised computer system called the “distributed ledger”. The distributed ledger works by encouraging users to verify for themselves, and others, blocks of transactions made over time. As everyone in the system has the right to do this, and everyone can see the results, there is no need for a trusted, centralised clearer. In principle, this technology could be applied to many things, not just the exchange and registering of financial assets. A recent official report in the UK suggested that distributed ledgers might eventually be used for a wide variety of government services, including the collection of taxes, the delivery of benefits – potentially including new “smart” transfers that could target particular groups – the keeping of business registers and other things besides4.

Volatility is calculated as standard deviation of annual growth rates. 5.

Paul Tucker: Macro, asset price, and financial system uncertainties Text of the Roy Bridge Lecture delivered by Mr Paul Tucker, Executive Director Markets and Member of the Monetary Policy Committee of the Bank of England, at the Bank of England, London, 11 December 2006. * * * It is a great privilege to give this lecture, named in honour of Roy Bridge, for many years a very distinguished head of foreign exchange at the Bank of England and the first President of your association, the ACI. The world in which Bridge worked was so very different from ours that, although my responsibilities cover the same part of the Bank, I cannot really imagine what he would have made of three striking features of the current environment which I plan to review this evening. First, while monetary authorities are commonly given some of the credit for the return of macroeconomic stability, central bankers themselves devote a great deal of effort to conveying what they see as risks to the outlook. Second, while some distinguished commentators see a puzzle in lower macro volatility not having been matched by an equally large decline in asset price volatility, central bankers by contrast worry publicly that many financial asset prices imply unusually low future volatility. And third, while central bankers and others in the official sector celebrate the gains in risk transfer and efficiency brought by recent changes in the structure of the financial system, they also issue warnings about associated threats to systemic stability.

However, it is difficult to evaluate the extent of these structural changes and to gauge how quickly their impact will be felt on medium-term growth, particularly at an early stage. In addition to the specific factors resulting from the introduction of the euro, the rapid change in information and communication technology is likely to add further potential for structural changes in the economy. The possible emergence of a "New Economy" may raise the economy's productive capacity temporarily or on a more permanent basis. Much faster data transfer and the increased transparency of information in a knowledge-based society could enhance efficiency. Even if some of the euphoria surrounding the start of a new economic era has dissipated, as could be seen in stock market developments over the last few months, there remains a remarkable potential for economic change in the future. To date, however, clear evidence of positive effects on the supply side, which may lead to a temporary or even permanent higher potential output growth, is still lacking for the euro area. In addition, it should be borne in mind that the expectation of higher growth and positive wealth effects may also lead to inflationary pressures from the demand side of the economy. Therefore, the implications of the "New Economy" for monetary policy are far from clear. Monetary policy-makers, whose aim is to maintain price stability, need to exercise particular caution in such an environment of change.

However, on the basis of the information available at present, it is likely that world economic activity will remain at an acceptable level this year. In addition, it should be borne in mind that the euro area itself is also a large domestic market - it is, in fact, the second largest in the world - accounting for over 15% of world GDP. Exports of goods and services only amount to around 17% of euro area GDP: this implies that the influence of external trade on real economic growth is limited. Instead, euro area economic activity is mainly influenced by domestic factors. Economic growth in the euro area has recovered considerably since the second half of 1999. Real GDP growth is expected to have been around 3 1/2% in 2000, compared with an average real GDP growth of 2% in the 1990s. Real GDP growth in the euro area has slowed down somewhat since the second half of 2000, as demonstrated in recently published GDP data and short-term indicators, such as industrial production and, to some extent, the European Commission's industrial confidence indicator. However, at the same time, this indicator, together with the capacity utilisation rate, have remained at a high level and continue to give a relatively favourable picture. Regarding private consumption, the European Commission's consumer confidence indicator recovered on average in December and January, following a dip in the previous months. In particular, private households were more optimistic about the future economic situation as well as their own financial situation.

On a different yet related note, international cross-border payment arrangements are another compelling case study on how to bring this specific domain into the 21st century. Despite not yet being overwhelmingly disrupted by digital innovations, their flaws have recently come under the spotlight thanks to initiatives such as Libra which have clearly targeted this market segment with the promise to overcome its present weaknesses. Indeed, as attested by the recent Financial Stability Board (FSB)7 and Committee on Payments and Market Infrastructures (CPMI)8 reports to the G20, cross-border payments still suffer from a number of long-standing frictions which hamper global trade, development and economic growth. These include, in particular, legacy technology platforms, limited operating hours and onerous compliance checks, alongside other relevant aspects such as high funding costs, weak competition or an insufficient degree of standardisation. In this light it comes as no surprise that this issue is one of the top priorities on the G20 strategic agenda for 2020. Accordingly, since last December, the FSB and the CPMI, with the support of other international organisations, have been working together on defining the necessary building blocks to deliver a global roadmap that can help achieve the required structural improvements.9 Interestingly, this reform programme, a combination of practical steps and indicative time frames, does not hinge only on technological developments.

The sixteenth President of the United States of America, Abraham Lincoln, once said that the best way to predict the future was to create it. As I see it, today, digital technologies are bringing this vision one step closer to becoming a reality. Thank you for your attention. 6

I would also like to emphasise the importance of central banks’ communication in a low-inflation economy, as it is then particularly important to create stable, positive inflation expectations. 4 BIS Review 21/2004 Risks of deflation An interesting, but possibly hypothetical, question is whether there is a risk when inflation is very low of Sweden and the global economy fastening in a deflation spiral. Experiences from deflation are fortunately rather limited, but several countries suffered problems with deflation in the 1920s and 1930s. In recent times, it is primarily Japan that has experienced deflation, and there is currently a discussion underway of the causes, consequences and what would have been a better policy. The Swedish experiences from the 1930s indicate that a price stability target can contribute to slowing down a threatening deflation process. With an inflation target of 2 per cent, it could become more common in future for inflation to be negative during individual months. It is difficult to say whether or not this is a problem, as we do not have very long experience of low inflation. Of course, there is a possibility that a more lasting deflation could arise if consumers become pessimistic. In that case it would be important for the central banks of the world to take vigorous monetary policy measures in order to maintain confidence that the inflation target will be attained. Academic research in the field of economics usually highlights three costs of deflation. The first concerns the difficulty in reducing nominal wages.

As intermediaries in exchanges, stablecoins are far less effective than a settlement asset with legal tender status, insofar as (i) they are not entirely stable since their price stability depends on the value of a basket of assets, and (ii) they offer no guarantee of a refund in the event of fraud. The fact that they have no intrinsic value and that they offer no guarantee that they may be converted at par upon demand with commercial bank money or central bank money means that they cannot be used to create reliable stores of value. In addition, as pointed out in the G7 report on stablecoins issued last year, stablecoin schemes are significantly exposed to risks of various nature, including legal, financial, operational and compliance risk concerning money laundering and terrorist financing, competition law, consumer and investor protection. The risks identified must be seriously addressed if stablecoins are not to become the « weak links » undermining the safety of our payment systems. This is all the more important as some of these risks would be amplified and new risks might arise if stablecoins are adopted at a global level. Stablecoins of potentially large size and reach – so-called global stablecoins – may indeed pose additional challenges of system-wide importance both domestically and internationally, for the transmission of monetary policy, as well as for financial stability. They could also have implications for the international monetary system more generally, including currency substitution, and could therefore pose challenges to monetary sovereignty.

You will recall that in December we did not rule out that inflation might considerably exceed this level. There are several reasons for such inflation dynamics. First of all, the contribution of the VAT hike to annual inflation currently stands at approx. 0.6-0.7 pp, which is close to the lower bound of our expectations. According to our estimates, the VAT pass-through to prices has already largely materialised. This is suggested by the analysis of prices of goods and services for which the VAT was raised. These are mostly non-food goods and services. Annual price growth in most of them has accelerated only moderately. In monthly terms, it returned in February to the growth pace seen in September-December last year (seasonally adjusted); however, it still holds somewhat above 4% in annual terms. Weekly inflation estimates suggest similar developments. After a surge in the first two weeks of this year, they have dropped in recent weeks, though holding somewhat above the path that corresponds to our inflation target. Moreover, we do not rule out that the deferred effects of the VAT hike may manifest themselves in the months to come. It is also of note that in February, both monthly core inflation and most other indicators adjusted for volatile components and seasonality exceeded 4% in annual terms. There is evidence that risks that prices of certain food products may grow at an elevated pace have decreased.

They follow current changes in prices, primarily petrol and food prices, and ruble exchange rate fluctuations. The third important factor we took into account is consumer demand. Lending underpins consumption but slowing wage growth constrains a rise in demand. Consumption growth slowed down after a short-term acceleration in November, which was likely associated with preemptive purchases of non-food goods in the run-up to the VAT hike. We can see it from retail sales figures. The rise in consumer activity does not exert pressure on prices. This, among other things, is an important reason of a moderate VAT pass-through to prices. The fourth factor is external conditions. A number of changes which only started to emerge in December, intensified at the beginning of this year. The US Fed and the European Central Bank eased their rhetoric as regards the monetary policy outlook. Improvements were seen in markets’ expectations regarding the negotiations of international trade restrictions. These factors supported emerging market currencies and reduced their risk premiums. We may say that external risks declined in this part. At the same time, geopolitical risks remain in place. Oil prices in the first quarter were higher than projected in the baseline scenario. However, risks are high that oil production will exceed consumption this year. Finally, overall monetary conditions have changed little if at all since the start of the year. Deposit rates have edged higher, while loan rates have stabilised.

There is thus good reason to assume that demographical developments have contributed to an increased propensity to save in the world and thus to a lower real interest rate. 5 See Rogoff (2015). BIS central bankers’ speeches 3 The demographic effect on saving in China is worth mentioning in particular. The single-child policy contributed to a severe decline in the birth-rate. At the same time, life expectancy increased. The combination of weak social safety net and fewer children to provide for the elderly was probably an important explanation for the increase in saving in the Chinese economy. As China has become increasingly integrated into the global economy, saving in China has also been increasingly channelled to other parts of the world for investment. Increased propensity to save in many emerging markets Many other emerging markets have also increased their savings, but partly for other reasons than a change in demographics. Experiences from the Asian crisis in 1998 contributed to many emerging market countries’ central banks building up their currency reserves to be able to withstand future currency outflows. The increased demand from these countries for low-risk assets, such as government bonds, led to yields being pushed down at the end of the 1990s and until the years prior to the financial crisis. The rising demand for safe assets also contributed to an increase in the differential between the risk-free rate and the rate on higher risk investments.

This means that movements in the Libor that are not in line with the SNB’s monetary policy objectives have to be countered with a change in repo rates. Thus, over the course of the turbulence, we consistently offset changes in Libor risk premia with changes in the repo rate, as shown in chart 4. For this reason, the Libor remained in the middle of the target band during the whole episode. The Swiss franc Libor was much more stable during the turmoil than the Libor for other currencies. This simply means that we were able to protect the Swiss economy from part of the crisis-induced increase in risk premia. Libor criticised Recently, some market observers have questioned the information value of the Libor. The Libor for all major currencies is fixed daily in London by the British Bankers Association 2 BIS Review 80/2008 (BBA) on the basis of a survey of top-rated international banks. Critics argued that some banks would report unduly low Libor rates, in an effort to talk up their creditworthiness. Others claimed that the rates were too high because the panel of reporting banks was not sufficiently representative. These criticisms almost exclusively concerned the dollar Libor. The BBA has found no evidence of a systematic distortion of the Libor, and has announced that it is leaving the fixing method for the Libor unchanged. However, it will strengthen governance of the Libor fixing process, especially the monitoring of individual banks’ reports.

They make that expectation by considering the past trends and what is happening right now. If they expect that the prices on average would rise, then, they can be said to be harboring high inflation expectations. A central bank can gauge this situation by conducting periodical inflation expectation surveys. Second, a consumer price index, compiled to measure the changes in the cost of living of a given group of people, may show a continuous increase over a substantial period of time. It indicates an unstable situation in the macro economy leading to an upward movement in the general price level. The presence of either situation requires a central bank to go into action against fighting inflation. This means that, even if the consumer price index shows stability or a relatively low growth, the central bank cannot stop taking inflation fighting measures. What a central bank should do is to eradicate the cause rather than pampering with the symptoms. It is similar to a physician who does not take delight when he observes that the high fever of a patient has subsided. The physician would not stop his curative treatment, until the cause of that high fever is totally eliminated. There appears to be a general tendency for equating increases in the cost of living with inflation. An increase in the cost of living occurs when the basket of commodities consumed by a given group of people entails a higher cost. As mentioned earlier, this is measured by compiling a consumer price index.

A central bank cannot do anything about the increases in the cost of living, since it does not produce goods and services. That is why John Exter, the founder Governor of the Central Bank, remarked in his very first press interview that “…the Bank does not itself produce goods and services. It will facilitate it by creating right monetary conditions ” Implicit in these “right monetary conditions” is the need for attaining economic and price stability in its totality. Inflation is a much wider phenomenon than the cost of living. It entails the absence of stability in the macro economy leading to an increase in all the prices at the same time. A consumer price index measures the price impact on a consumption basket consisting of only consumer goods. In contrast, inflation occurs when the prices of all goods, consumption, intermediate, investment and inputs, rise at the same time. It elevates the general price level to a higher level, including those of the consumer goods. The above misunderstanding may lead to the pitfall of a central banker trying to stabilize the value of a cost of living index through artificial means. It can be attained by fixing price ceilings or granting price subsidies. But, it does not cure the malady of generally rising prices generated by rising nominal aggregate demand over the real aggregate supply. A subsidy could ease the burden on the cost of living of a given consumer or a group of consumers.

Pablo Hernández de Cos: Central banks at the frontline of the COVID-19 crisis - weathering the storm, spurring the recovery Welcome address and introductory remarks by Mr Pablo Hernández de Cos, Governor of the Bank of Spain and Chair of the Basel Committee on Banking Supervision, at session 1 of the VI Conference of Mediterranean Central Banks, jointly organised by the Central Bank of Tunisia, the Organisation for Economic Co-operation and Development (OECD), the European Institute of the Mediterranean (IEMed) and the Bank of Spain, 28 June 2021. * * * It is a great pleasure for me to welcome you all to this Conference on Central banks at the frontline of the COVID-19 crisis: weathering the storm, spurring the recovery, jointly organised by the Central Bank of Tunisia, the Organisation for Economic Co-operation and Development (OECD), the European Institute of the Mediterranean (IEMed) and the Banco de España. Let me start by thanking our colleagues from the Central Bank of Tunisia, the OECD and the IEMed and, in particular, Governor El Abassi, Ambassador Florensa and Luiz de Mello for their cooperation in organising this Conference. We could not have asked for better partners to help set up this event. Under the resolute impulse of the IEMed, this Conference is becoming a mainstay among the fora for dialogue and cooperation in economic and financial relationships in the Euro-Mediterranean region.

This initiative has seen two six-month extensions and, more importantly, it has been complemented by the introduction of a “common framework” for restructuring the sovereign debt of countries with deep-seated debt problems. Despite the limited quantitative results of the DSSI and the uncertainty surrounding the level of success of the “common framework” for debt restructuring, both initiatives represent an unquestionable improvement on the part of multilateral coordination in sovereign debt resolution. Third, the main multilateral development banks (such as the World Bank, the European 2/4 BIS central bankers' speeches Investment Bank and the African Development Bank, among others) are also playing an important role in this crisis. Throughout the pandemic, these institutions have deployed a series of emergency measures in line with their mandates and spheres of influence. For instance, their fresh financial support to the Middle East and North Africa (MENA) region since the outset of the pandemic amounts to over USD 8 billion, adding to the USD 4.3 billion of IMF emergency financing and USD 7.2 billion of IMF financing provided through regular programmes. Finally, the recent G7 agreement to back a new global minimum tax rate for multinational companies is a step in the right direction to address the tax challenges arising from globalisation and the increasing digitalisation of economies. Undoubtedly, major steps have been taken in this crisis to strengthen international cooperation, but much ground has still to be covered.

Firstly, lower productivity growth leads agents to expect lower income growth in the future, prompting them to moderate their spending in the present. The resulting increase in saving exerts downward pressure on interest rates. Secondly, the increase in life expectancy in advanced economies has led households to increase their saving so as to finance their retirement period. Thirdly, rising demand for safe saving instruments in a context of high and growing economic uncertainty, coupled with a relatively scarce supply of such instruments, has put further downward pressure on equilibrium interest rates. Whatever its source, the decline in natural rates has shrunk the space for interest rate policy owing to the existence of a lower bound on nominal interest rates, thus making it harder for central banks to achieve our inflation aims. Climate change will likely affect the natural interest rate, but it is not obvious in which direction. On the one hand, it could further depress natural rates through negative effects on productivity, such as the impact of higher temperatures on labour supply and the destruction of capital stemming from natural disasters. Moreover, increased economic uncertainty associated with the impact from climate-related risks could lead to higher precautionary saving and further pull natural interest rates down. On the other hand, the transition towards a more sustainable economy will require substantial investment in green technologies, which may push equilibrium interest rates up. And if such investment succeeds in raising trend productivity growth, it could partially undo or even reverse the decline in natural interest rates.

It is vital that the commitments made to achieving balanced budgets by 200304 be firmly followed up in the Member States concerned. A continuation along the path of fiscal consolidation is essential, as is vigilance in ensuring strict adherence to the medium-term plans and rigorous implementation of the procedures of the Stability and Growth Pact. Equally, the expected recovery should be seen as an ideal opportunity to strengthen efforts towards implementing comprehensive structural reforms – in public expenditure and revenues and product, labour and financial markets. Heads of State and Government confirmed this objective during their recent meeting in Barcelona. If implemented vigorously, such reforms could increase the growth of real GDP and employment on a sustainable basis. Past improvements in the functioning of markets, together with wage moderation, have contributed to strong employment growth and a considerable reduction in unemployment. It is therefore clearly in the interest of all countries to continue to rigorously implement the agenda agreed in Lisbon and recently confirmed in Barcelona. We are now at your disposal for questions. 2 BIS Review 22/2002

France is not unique in this respect as several European countries have already implemented macroprudential measures. Yet we should not overestimate their effectiveness. In my view, monetary policy cannot close its eyes to financial stability, as suggested by those purists who favour a strict “principle of separation”. Instead, I favour a form of intelligent coordination, and that will be one of the challenges for our next strategic review. Monetary policy must remain accommodative but it also has to be more attentive. The necessary follow-up with fiscal and structural policies The second limitation is again a humble truth. As we have seen, monetary policy has gone beyond the call of duty. But it is not – now less than ever – omnipotent, and it cannot perform miracles. Monetary policy has no influence Page 13 of 14 over the structural changes that are behind the exceptionally low level of the natural interest rate. To fix the euro area’s investment dearth – both in the private and public sector – relative to its savings surplus, structural growth policies are needed that boost innovation and productivity. It also means making more appropriate and differentiated use of fiscal policies. In this regard, the euro area is underusing its fiscal space: its public debt (84%) and deficit (0.9%) are lower than those of the United States (106% and 5.6%) or Japan (238% and 3% in 2019). Source: IMF Fiscal policy, especially in those European countries with a surplus, needs to be exploited more actively and selectively.

In the euro area and the United States, R* is estimated to have fallen by between 150 and 200 basis points over the past 15 years. Page 3 of 14 The scale of this variation can only be explained by structural factors. Slower growth in the working population and in total factor productivity have led to a slowdown in the trend rate of GDP growth, and this is estimated to account for roughly a quarter of the decline.iv Source: Bergeaud, Cette, Lecat, 2016 The other three quarters are estimated to stem from the increase in the supply of savings coupled with reduced investment demand. The global savings glut is being fuelled by increased life expectancies, rising inequality – older and wealthier individuals tend to save more – and the accumulation of foreign exchange reserves in emerging economies. Page 4 of 14 Source: IMF Conversely, the decline in investment demand can be attributed to the rise in the non-material economy, which requires more human capital than physical investment, and no doubt to lower confidence in the future. The euro area in particular has seen a rise in its saving ratio and a marked weakness in its investment ratio since the financial crisis. Source : Refinitiv Datastream These trends, which can be observed the world over and have been going on for a long time, are not, therefore, attributable to monetary policy: I shall nonetheless turn now to the role of central banks.

High settlement fees could discourage institutions and portfolio managers from taking full advantage of advances in risk management techniques. Finally, a high cost structure for securities settlements could influence competition among financial centres. The efficient processing of commercial and financial transactions, including those generated by securities trading, is a necessity in a marketplace as competitive as ours is in the United States today. In my view, we are likely to see much more competition among financial centres in the future because financial centres provide a source of high-paying jobs. Cities around the world will increasingly compete to be prime financial locations. In sum, your efforts in moving to T+1 are part of an industry-wide effort to reduce risk and thereby ensure that our payment and settlement system continues to work well under all conditions. We are supportive of your efforts and applaud your initiative because we all want our payment and settlement system to remain sound, secure and efficient as it adapts to the changing needs of our global economy. 3 BIS Review 93/2000

You gave your time freely and shared your ideas selflessly. Thank you. We are also indebted to our partners and trainers who have contributed on a pro-bono basis to IBF’s learning resources – working on impossible timelines to deliver high-quality training standards and study guide materials. There is a final group that I want to acknowledge, the unsung heroes of the IBF story – the past and present staff of IBF. • From administering the CMFAS examinations to developing new industry examinations; • from reviewing and accrediting training programmes to certifying individuals under FICS; • the management and staff of IBF have been unrelenting in their commitment to raising industry standards. As we look back at IBF’s 40 years, we can take pride in what it has achieved. • Some 200,000 participants have benefitted to-date from training courses offered or accredited by IBF. • Close to 2,000 practitioners have been certified under the FICS Standards. One of the reasons why IBF has done well is that it has renewed itself periodically, to stay relevant and effective amidst a changing environment but always focused on its core mandate of promoting competency in finance. Today, IBF embarks on the next phase of its journey to raise industry standards. Our new mission is to “empower practitioners with capabilities for a robust Asian financial industry”. To equip our finance professionals for the next phase in Singapore’s development as a financial centre, IBF will focus on two new dimensions.

Denis Beau: Stablecoins - a good or a bad solution to improve our payment systems? Opening address by Mr Denis Beau, First Deputy Governor of the Bank of France, at the Stablecoin Conference “Which ambitions for Europe?”, organized by Paris Europlace and ConsenSys, Paris, 15 January 2020. * * * I would like to thank Valérie Fasquelle and Christian Pfister for their contributions to this speech. Ladies and gentlemen, The growing number and forms of crypto-assets in our payments landscape has triggered a significant and important debate about their virtues and risks, in case the role of these cryptoassets in our payment systems were to become less marginal than it currently is. The emergence of so-called “stablecoins” has brought additional fuel to this debate as they could bring to the market new settlement assets and payment schemes, which may compete against and possibly, according to their promoters, replace those in commercial and central bank money, currently at the centre of the functioning of our payment systems. In order to share with you a few thoughts on this debate, speaking as a central banker and a supervisor mindful of the benefits of innovation but also of the risks they could bring to financial and monetary stability, I will focus my remarks on two topics: Whether stablecoins can contribute to improving our payment landscape? How to respond to the public policy challenges they raise? 1 – Are stablecoins a brand new solution or a brand new problem? From my perspective, they can be both. Let me explain.

03.06.2019 A framework for the CCyB Opening address at the Second Financial Stability Conference (Banco de España /CEMFI) Pablo Hernández de Cos Governor Ladies and gentlemen, good afternoon. It is a pleasure for me to welcome you to the Banco de España to participate in the Second Financial Stability Conference. As in the first edition, this event has been jointly organised by the Banco de España and the Centro de Estudios Monetarios y Financieros (CEMFI). So allow me to start by expressing my gratitude to the organisers, in particular Rafael Repullo, director of CEMFI, and to all the members of the scientific committee, responsible for promoting the conference and selecting the papers included in the programme. Let me also thank the keynote speakers, Agustín Carstens and Lars Peter Hansen, for their willingness to attend. And also the rest of the speakers, the discussants and, of course, the participants in the panel. It was difficult for the scientific committee to select the eleven papers that will be presented in these two days from the more than one hundred submissions received. In the end, in my view, a good balance has been reached in the programme. It combines excellent academic papers that will provide interesting insights into theoretical and empirical developments related to financial stability with policy issues on the most practical aspects of the organisation and governance structures of macroprudential policy.

(b) Assumes that 50% of bonuses are paid as CoCos and retained. Bonuses are assumed to equal 20% of total staff costs. (c) Contingent capital is assumed to be included in Tier 1 capital. (d) Assumes that 50% of dividends are paid as CoCos and retained. Chart 12: Cumulative amount of Tier 1 capital for major UK banks £ bn 300 Including dividends paid as cocos Including bonuses paid as cocos 250 Actual Tier 1 capital 200 150 100 50 2000 2001 2002 2003 2004 2005 2006 2007 Sources: Annual accounts and Bank calculations Footnotes as per chart 11 BIS central bankers’ speeches 17 Table 1: Type I and Type II errors for Basel Regulatory Ratios and market-based capital measures Type I Type II Basel Regulatory ratios 50% 43% Market capitalisation to book-value of total assets 21% 5% Market capitalisation to book-value of debt 20% 11% Market capitalisation to book-value of equity 10% 11% Sources: Capital IQ and Bank calculations (a) A Type I error occurs when a bank’s ratio falls below the trigger level (calculated according to a loss function as described in charts 5–8) and capital is not required (defined as that bank not suffering a “crisis” over the next 365 days). The number in this column is the proportion of days when a Type I error occurs.

The dynamics of complex systems, such as large banks or interconnected financial webs, are not well understood. That means uncertainty needs to be taken seriously if financial regulatory frameworks are to be robust. Timeliness would be a third criterion. Complex systems often exhibit a knife-edge property, with discontinuities and tipping points a naturally-recurring feature.5 Those same features have punctuated the present financial crisis. In physics as in finance, once over the cliff-edge there is little chance of full recovery. That underscores the importance of timely, pre-emptive regulatory intervention if financial disaster is to be averted. (a) Simplicity How do existing regulatory rules compare against these criteria – simplicity, timeliness, robustness? Take simplicity. By any standard, existing regulatory rules are far from simple. For large banks, they can be highly complex. They have become more so over time given the evolution of the Basel framework. Back in the days of Basel I, calculating a regulatory capital ratio was not especially taxing or time-consuming. It involved little more than half a dozen calculations. These calculations could be conducted on the back of a small envelope by a competent clerk. Possessing envelopes and clerks, banks, regulators and market participants were able to perform those calculations. They were transparent and verifiable. In that way, regulatory rules (Pillar I) provided a solid platform for supervisory discretion by regulators (Pillar II) and market discipline by investors (Pillar III). The Basel pillars were mutually reinforcing. Basel II changed that calculus.

For example, its efforts over the past two years to promote market functioning and minimize contagion were critical in preventing the strains in our financial markets from resulting in even more severe damage to the economy. These “lender of last resort” interventions on the part of the Fed, including facilities such as the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), as well as programs such as the foreign exchange reciprocal currency agreements, are examples of the rapid and responsive application of basic central bank tenants to the unique challenges we faced as this crisis evolved. Indeed, in many ways, the crisis has underscored why the Federal Reserve was created almost a century ago: to provide a backstop for a banking system prone to runs and financial panics. BIS Review 6/2010 1 Where it proved necessary and feasible to do so, the Fed also used its emergency lending authority to forestall the disorderly failure of systemically important institutions. These actions truly were extraordinary – well outside the scope of our normal operations, but our judgment was that not taking those actions would have risked a broader collapse of the financial system and a significantly deeper and more protracted recession. Faced with the choice between these otherwise unpalatable actions and a broader systemic collapse, the Fed, with the full support of the Treasury, invoked its emergency lending authority and prevented the collapse of certain institutions previously considered to have been outside the safety net.

As such, the focus is on material ESG issues that impact the fund’s long-term performance. These issues are captured in three responsible investment pillars. First, establishing principles: A set of international principles and standards from the UN and the OECD provides a framework for the Bank’s work with companies and other stakeholders. Priorities are based on the mandate and are characterised by formulating expectations of companies, guidelines for voting, and positions on governance issues. Documents communicate the Bank’s priorities and ensure predictability. Second, active ownership: Voting at annual general meetings is the most important tool for active ownership. Through its voting, the Bank seeks to strengthen governance, improve financial performance and promote responsible investment practices. The voting guidelines provide a principled basis for voting decisions, but also take account of company-specific factors. In the Bank’s dialogue with the largest companies, governance and sustainability topics relevant to long-term return are raised. This includes risks and opportunities associated with climate change, and the Bank expects companies to integrate material climate risks into their strategies, risk management and reporting. Third, investing sustainably: The Ministry of Finance has given us dedicated environment-related mandates. Going forward, these mandates will include investments in unlisted infrastructure for renewable energy. Next, in certain cases we divest from companies that impose substantial costs on other agents, with the aim of reducing the fund’s exposure to unacceptable risks. Finally, our political authorities provide guidelines that specifies that certain investments should be excluded from the fund due to ethical concerns.

Lawrence Williams: An evolving financial services landscape in the Caribbean Welcome remarks by Mr Lawrence Williams, Governor of the Bank of Guyana, at the 30th Annual Conference of the Caribbean Group of Banking Supervisors, hosted by the Bank of Guyana, Georgetown, 24 May 2012. * * * Chairman, Caribbean Group of Banking Supervisors, Mr. Ramnarine Lal Hon. Minister of Finance, Dr. Ashni Singh, M.P. Hon. Minister within the Ministry of Finance, Bishop Juan Edghill, M.P. Deputy Governor Bank of Guyana, Dr. Gobind Ganga Banking Manager, Mr. Leslie Glen Conference Delegates Special Invitees Members of the Media It is indeed an honour for the Bank of Guyana to host the 30th annual conference of the Caribbean Group of Banking Supervisors under the theme “Regional supervisory imperatives in an evolving financial services landscape”. I wish to welcome all of the visiting delegates to our shores. I acknowledge the presence of the delegates from thirteen of the sixteen CGBS membership. Though our region is small, we are geographically dispersed and travelling to some territories can be a bit of a challenge. I am therefore pleased at the representation and sincerely hope that your stay will be pleasant and memorable.

I am also delighted to welcome to our shores and the conference the Secretary General of ASBA, Mr. Rudy Araujo, the Chief Representative of the BIS Office of the Americas, Mr. Gregor Heinrick, the Senior International Adviser of the Comptroller of the Currency, Mr. Lester Miller and Advisor on Economic Crimes in the US Treasury Department, Mr. Thomas Noller. I have no doubt that your considerable experiences will add value to this conference. It is also fitting that I welcome the Hon. Minister of Finance, Dr. Ashni Singh and the Hon. Minister within the Ministry of Finance, Bishop Juan Edghill. The importance of this Conference is underscored by the fact that both Ministers enthusiastically agreed to adjust their work schedules to be present at this opening ceremony with Dr. Singh consenting to deliver the feature address. Delegates and invitees can expect a very insightful presentation by the Minister. Ladies and gentlemen, the theme of the Conference refers to the evolving financial landscape which is quite evident in many tangible forms though not always easily manageable. As a matter of fact, the changing financial landscape has brought challenges almost every step of the way. It is a testimony to the quality of our regional banking supervisors and the support and nurturing provided by the Caribbean Group of Banking Supervisors over the years that our region met the challenges posed by the changing landscape and has remained safe and sound.

23 Innovations are reducing computational efforts to prove a transaction, such as Litecoin and Ethereum’s proposed moves to “proof of stake” from “proof of work”. 9 All speeches are available online at www.bankofengland.co.uk/speeches 9 Authorities are rightly concerned that given their inefficiency and anonymity, one of the main reasons for their use is to shield illicit activities. 24 This cannot be condoned. Anarchy may reign on the dark web, but in the UK it’s just a song that your parents used to listen to. Moreover, structural vulnerabilities in cryptocurrencies mean that they are inherently risky compared with traditional financial assets. The risks include extreme price volatility and poor market liquidity due to fragmented markets and highly concentrated holdings, which in turn facilitate manipulation and misconduct. These vulnerabilities are compounded by operational and technological weaknesses, as evidenced by a series of major crypto-asset heists. 25 In addition, there is unease that the combination of these vulnerabilities and widening retail participation could damage the reputations of those financial intermediaries connected to crypto-asset markets. In extreme circumstances, it could even undermine confidence in the broader financial system itself, particularly if people held an unfounded belief that authorities had legitimised these activities. To isolate, regulate or integrate? Authorities need to decide whether to isolate, regulate or integrate crypto-assets and their associated activities. A few jurisdictions have banned crypto-assets outright. 26 And some regulators have sealed off crypto-assets from the core of the financial system in order to curtail risk of contagion.

Money unlocks the specialism of labour in the pin factory and “the great increase in the quantity of work that 2 results.” And only money can solve the coincidence of wants between the butcher, the brewer, the baker and the student on a Friday evening. 3 1 ‘Stabilising an unstable economy’ Hyman Minsky, 1986 This is the quote as abbreviated on the £ The full quote is “this great increase in the quantity of work which, in consequence of the division of labour, the same number of people are capable of performing”, Book 1, Chapter 1, Smith, A., (1776) ‘An inquiry into the nature and causes of the wealth of nations’. 3 “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. Book 1, Chapter 2, ibid. 2 2 All speeches are available online at www.bankofengland.co.uk/speeches 2 Many of you probably don’t see Adam Smith notes too often. Not just because you’re impoverished students. Or because you live in Scotland where you’re more likely to encounter Sir Walter Scott or Nan 4 Shepherd on a banknote when you do have cash. But because you use electronic forms of money such as debit cards and mobile phones for your everyday purchases and go online for your larger ones. A number of you may hold other forms of electronic money – crypto or virtual currencies such as Bitcoin, Ether or Scotcoin.

For resolution to have maximum effectiveness, banks not only need to be able to meet the policy standards and have sufficient loss absorbing capacity. They need also to have the capabilities to be ready to implement a resolution, the legal and operational arrangements in place to avoid disruption to customers. It needs to be possible to restructure a firm so that it can be made viable post-resolution. So the next phase of work will focus on ensuring that major banks have and are able to demonstrate that they have the systems, documentation, assurance and controls necessary to support their resolvability. We intend to consult at the end of this year on the detail of this reporting and assurance framework. We envisage that it will require major UK banks to conduct a self-assessment of their resolvability – measured against the policies and standards that have been established nationally and internationally. In line with our commitment to Parliament, we would then publish our assessment of resolvability for the major UK banks, providing greater transparency over the key judgments of the Bank as Resolution Authority. In a similar vein the Bank envisages we may require that elements of firms’ self-assessments are made public – this would enable firm-specific progress on resolvability to be made more transparent. It is important to emphasise that this is the next step in the natural evolution of the resolution regime in the UK. The Bank has been formally assessing the resolvability of UK firms since 2014.

Hamad Al-Sayari: The “Banker” program in Saudi Arabia Speech by His Excellency Hamad Al-Sayari, Governor of the Saudi Arabian Monetary Agency, in the Inauguration Ceremony of The "Banker" Program, at the Institute of Banking, Riyadh, 28 November 2006. * * * Dear Brothers, I am pleased to welcome you all on this occasion in which we celebrate reaping another fruit of the joint cooperation between the Saudi Arabian Monetary Agency and the banks operating in the Kingdom, namely, the "Banker" program. I would like to take this opportunity to thank all the participating banks and the Institute of Banking for their support and efforts for organizing and executing this ambitious program which aims at meeting the growing needs of the banking sector and qualifying job-seekers of the Saudi youth. As you know, the banking sector has witnessed over the past few years accelerated developments due to the economic growth seen by the Kingdom of Saudi Arabia. These developments have posed a great challenge to the banks and financial institutions as they had to expedite the provision and diversification of financial services to meet the increasing needs of the domestic market. The development of financial institutions must, undoubtedly, be paralleled with development in human resources. This, in turn, requires plans for training and qualifying cadres to enable financial institutions to undertake their important role in serving the national economy.

The benefits of these measures abound. For example, the fiscal deficit has been constrained to within the allowable limits of below 3% of GDP. Lower fiscal deficit coupled with prudent monetary policy have contributed to current low and stable inflation rate. As you are aware, annual inflation stood at 9.9% at end-December 2009 and further declined to close at 8.2% at end-July 2010. The growth in the economy has also been robust, 2 BIS Review 105/2010 underpinning the sustainability of policy reforms. Real economic growth has averaged above 5% for most part of the past decade. Concern has also been raised that Government borrowing competes with the private sector for scarce funds thereby pushing up interest rates and perpetuating the high cost of finance. However, in recent years, the Government has scaled down its domestic borrowing requirement in order to free resources for the private sector. On the other hand, due to banks appetite for risk free debt instruments, competition for government securities has intensified exerting a downward pressure on yield rates. Chairperson, these achievements attest to the importance Government attaches to reviving this economy and making Zambia a middle income country by the year 2030. Distinguished Ladies and Gentlemen, part of the reason financial intermediation has been limited has been because of the inadequate supporting financial and legal infrastructure. A well developed financial infrastructure is essential for fostering investor participation and expanded access to financial services.

All stakeholders stand to benefit from a rich database as credit providers will have a good basis to adequately assess the credit worthiness of their existing and potential customers with a view to providing properly priced products and services. Chairperson, the Government has also created the Citizens Economic Empowerment Commission (CEEC) in order to enable small businesses with viable investment projects have access to finance. I would personally like to see an increased flow of credit to our SMEs which, as many of you know, have been routinely found to be a major source of growth in any market economy. This is more so as the larger part of our productive population, particularly those in the informal sector, is in fact employed in one way or the other in these SMEs. It is therefore strategic for us in the financial advisory arena to support our brothers and sisters who run these SMEs. By ensuring that credit flows in that direction, we can then be assured that more and more of our people who are engaged in SMEs will certainly have access to financial services like everybody else. In the process, growth generated from the SMEs can sustainably offer the much needed respite from mineral dependency. Ladies and Gentlemen, for Government initiatives to be effective there is need to integrate them into the mainstream financial system. In this regard, financial reforms must continue to evolve and be dynamic in order to address the main challenges still facing the Zambian financial markets.

12103 6 For further details please refer to https://www.bankofengland.co.uk/speech/2017/changing-risk-and-the-search-for-yield-on-solvency-2capital 7 Financial Stability Report, December 2016, Bank of England. 5 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 insurers have used internal securitisations backed by their equity release mortgage portfolios in order to create a senior tranche with the required fixed cashflows. Let us dig a little deeper into the Matching Adjustment. In principle, the higher discount rate on liabilities is intended to reflect the component of the spread over risk-free rates that compensates other investors for risks to which the insurers are not exposed. In the case of bonds, this is the liquidity premium for the risk that they might have to sell into secondary bond markets at a time when credit spreads are wide. Annuity writers are not exposed to this risk and can therefore earn the liquidity premium provided they can bear the credit risk and hold the assets until maturity. Mechanically, however, the Matching Adjustment is not calculated by estimating directly the market premium for any risks to which insurers are not exposed. Rather it is calculated indirectly as a residual by subtracting from the yield on an asset (1) risk-free rates and (2) an estimate of the required premium for risks to which insurers are exposed. In the case of bonds, insurers are exposed to the credit risk that the issuer is unable 8 to pay interest or principal at maturity.

On data due diligence, it seems obvious to say that insurers should not enter into bulk purchase transactions without understanding in some depth the nature of the annuity liabilities they are taking on. But this is an area where we see firms taking different approaches and willing to price with different levels of risks. One particular aspect is whether insurers have a full picture of their potential obligations to pensioner spouses and dependents. Insurers need to be clear about their appetite in relation to data risks. Most of the longevity risk on new transactions is currently being reinsured, often outside of the UK. 2 Estimates of BPA market from LCP and Towers Watson market reports 2 All speeches are available online at www.bankofengland.co.uk/speeches 2 One reason is to mitigate the impact of the risk margin. As Sam Woods and I have said before, we recognise that the risk margin on long-dated insurance risks such as longevity is too sensitive to the level of interest rates and therefore too high currently. We are actively looking at further steps available to us within the constraints of Solvency II to address this issue. We expect that a more appropriate level of risk margin – similar to that envisaged when Solvency II was negotiated – would lead to a better balance between longevity risk being retained and reinsured by UK insurers on new business. While significant reinsurance continues, insurers should be paying close attention to counterparty and operational risks.

This workshop will provide an opportunity for all GCC organizations in the statistical community to share national experiences, and lead discussions to identify areas for mutual cooperation for further improvement in data production and presentation. I may emphasize here that timely availability of reliable and mutually consistent national data would be of great help to the GCC Monetary Council in its task of preparing for the achievement of the ultimate goal of GCC Monetary Union. It will also provide the basis for judicious policy formulations even after the establishment of the Monetary Union for the region. I therefore urge you all, to actively engage in workshop discussions to fully understand these matters, come to useful conclusions and make your deliberations fruitful. Dear Participants I hope that by the end of the workshop you will have achieved at least the following two objectives: 1. Sufficient statistical insight to effectively address burgeoning data-related issues and concerns, and be in a position to produce intended statistical forms and table, and; 2. Identification of some future work based on mutual cooperation. I thank you all for your attention and wish all a productive and rewarding workshop. 2 BIS Review 170/2010

The project of Borika AD for immediate payments in BGN, based on the requirements of the SEPA scheme for immediate credit transfers, is in an advanced stage of development. As an operator of the real-time gross settlement payment system (RINGS), the BNB assists in the implementation of the project. The company’s ambition is in 2021 for payment service providers in Bulgaria to start providing their customers with immediate credit transfers in BGN. In order to develop innovative, affordable, secure and convenient payment solutions both in the online environment and in physical stores, it is important to provide an interoperable infrastructure that allows the smooth execution of cross-border immediate payments within the EU, as well as the achievement of additional standardization to ensure compatibility between final payment solutions offered to payment service users (eg common standard for QR codes, provision of access to NFC chips in mobile phones, etc.). These, as well as other aspects related to technological changes in the field of payments, including the risks arising from unregulated services, especially technical ones, which are ancillary to the provision of regulated payment services, I wish interesting and fruitful work to the participants in the videoconference. 1 Opinion of the European Banking Authority on obstacles under Article 32 (3) of the RTS on SCA and CSC 2/2 BIS central bankers' speeches

This was especially so between 2000 and 2016, wherein GDP increased by a compounded annual growth rate of 10.4%, while exports grew only 4%. Page 5 of 17 Sri Lanka’s economic growth during the past decade or so has mainly been generated by the expansion of domestic demand, rather than increased exports. The tradable sector, that is Imports and Exports as a percentage of GDP, declined from nearly 80% to 45% from 2005 to 2015. As a Small Open Economy you simply cannot do that. The problems were compounded by a heavy recourse to foreign commercial borrowing for projects with low returns. That is what has led to the debt problems and many of the other difficulties we are having. When compared with regional peers and competitors, Sri Lanka’s export performance has lagged behind significantly. The Export Value Index presented by the World Bank shows the extent to which Sri Lanka’s export sector has been lagging in comparison to its regional counterparts, during the period from 2000 to 2015. Sri Lanka has only increased its exports by 1.9 times in that period 2000 to 2015, while Vietnam and Bangladesh have increased by 11.2 times and 5.1 times respectively. Even South Korea and Thailand which have a much higher base, increased their exports by 3.1 times, whereas we, as I said only recorded a 1.9.

To get them to produce output that they can sell in the domestic market and abroad. So one challenge is really how we link our SMEs into International Supply Chains, either through larger companies, or directly. We really need to think in terms of linking up our SMEs to supply chains. The Government has already taken some decisive measures to overcome the short-comings of the export sector. With some improvement in the performance in the export sector, so far, there are signs that the initiatives are favourable. Since March, we have now seen an improvement in export numbers. We’ve got numbers up to May – in March April and May the numbers have shown an up-turn in export revenue. Hopefully that will gather momentum. I think with the GSP-plus kicking in, and hopefully, a more stable macro-environment, export growth will continues. Page 16 of 17 As I said, Sri Lanka cannot attain 6-7% growth on a sustained basis without transformation of its export performance. Nor can we overcome the constraints associated with our external debt burden without significantly enhanced non-debt creating foreign exchange receipts, generated, inter alia, by increased exports. So, export transformation is crucial for both boosting growth and employment, as well as to stabilize our vulnerability stemming from our external debt. The performance of the EASL will be a key determinant of the future prosperity of all Sri Lankans. Thank you very much. Page 17 of 17

1.3 The euro project At the core of this report is a discussion of the euro project. It examines what euro area membership entails and what its strengths and weaknesses have proven to be so far. Chapters 2 and 16 focus on economic developments in the euro area since its 1 See Central Bank of Iceland (2010), Monetary policy after capital controls, Special Publication no. 4, and Central Bank of Iceland (2012), Prudential rules following capital controls, Special Publication no. 6. 2 BIS central bankers’ speeches establishment, with particular emphasis on the post-crisis period, and Chapter 17 compares the effects of the financial crisis on countries inside and outside the eurozone, with emphasis on a comparison of Iceland and Ireland. The objective is to inform the reader and report on research findings, with the aim of promoting informed discussion and policy-making on this major issue. Chapter 24 explores the changes that would be needed in Icelandic laws and regulations with respect to the currency and the Central Bank should Iceland join the EU and adopt the euro. Chapters 21-25 describe the Eurosystem and the EMU accession process. According to EU regulations, member countries are to adopt the euro once they have fulfilled the Maastricht criteria for economic convergence.

The Rt Hon Sir Edward George: Shafts of light amidst the general gloom of the global economy Speech by The Rt Hon Sir Edward George, Governor of the Bank of England, at the Bankers Club/Guild Banquet, London, 4 February 2002. * * * President, My Lord Mayor - locum tenens, Excellencies, My Lords, Aldermen, Sheriff, Ladies and Gentlemen I'm sure you've noticed that time passes more quickly as you get older. I explain it with my own pet theory of relativity based on the fact that each year that passes is a smaller proportion of what's gone before. But I must confess I'm beginning to have my doubts. It seems much more than 12 months ago that we last came together for this great annual gathering. The fact is, it's been a very long, hard, year, not just for policy-makers around the world but also for many of you in the financial services industry - particularly the international financial services industry. We've had to cope with the synchronised global economic slowdown; the extension of the fall in equity prices - with dotcoms spreading to telecoms and beyond - even now to Enron; with increasing credit risks; and then with the vicious terrorist attacks of 11th September and their aftermath, and, finally around the turn of the year with the very sad climax to Argentina's long drawn out crisis. I could easily go on. It really has been a long, hard, year.

In 2004, we issued three new licences to foreign Islamic financial institutions. In 2005, Islamic windows of the conventional banks were encouraged to be transformed into Islamic subsidiaries that allowed foreign equity participation of up to 49%. The foreign exchange administration rules were also liberalised to allow foreign corporations and agencies to issue ringgit sukuk in Malaysia. In 2006, foreign tie-ups were encouraged – in the four new licences for takaful business that were issued. Following these developments, the MIFC was launched in 2006 to develop Malaysia as an international hub for Islamic finance. Under this initiative, new international Islamic banking and takaful players could be established in Malaysia to conduct business in foreign currency. In 2007, foreign entities were permitted to issue non-ringgit sukuk from the Malaysian market. Foreign entities could also operate Islamic fund management activities here. Early this year, the announcement was made that up to two mega Islamic banking licences with up to 100% foreign ownership would be issued to conduct international business. These initiatives cumulatively have internationalised our Islamic financial system in terms of the presence of foreign players and in terms of participation in our financial system. The Commodity Murabahah House, or the CMH, that is being established today will be an important platform that will further enhance global interlinkages in the international Islamic financial system. The CMH is designed to be a multi-currency and multi-commodity exchange-traded platform to facilitate the trading and settlement of commodity which acts as the underlying transaction for liquidity management between Islamic financial centres.

Philipp Hildebrand: Principles for sound compensation practices Summary of a speech by Mr Philipp Hildebrand, Vice-Chairman of the Governing Board of the Swiss National Bank, at the Economic Outlook 2009 (Unternehmer NW-Schweiz), Basel, 23 April 2009. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * Most financial institutions viewed compensation systems as being largely unrelated to risk management and risk governance prior to the crisis. Short-term profits were rewarded with generous bonuses with little regard to the longer-term risks taken on behalf of the firm to generate those profits. With hindsight, it should therefore be no surprise that these bonuses fueled the excessive risk-taking that has ultimately undermined the global financial system. It is important for the future stability of our financial system that compensation systems be viewed as an integral part of the risk management system in financial firms, and designed and governed with this in mind. The Financial Stability Board (previously the Financial Stability Forum) has drafted a set of sound compensation principles for large financial institutions with exactly this goal in mind. The Principles were endorsed by the G20 leaders at the London summit earlier this month and aim to be widely implemented by the 2009 remuneration round. BIS Review 50/2009 1

The most recent estimate we have for Sweden puts the total cost of executing payments at just below 1 per cent of GDP per year. 17 Account-based payments require a network of intermediaries and technical systems Unlike when we use cash, using the money we have in our accounts as a means of payment requires a relatively advanced technical infrastructure. This is because the purchaser's money or credit needs to be verified, payment instructions need to be sent and so on. A transfer must also be arranged between the banks of the purchaser and the seller. At present, this usually takes time, often a day and sometimes more. This means that risks arise for the parties involved in the transaction. As consumers, however, we do not normally notice that payments take time and that risks arise. 16 See, for example, Rochet, J.-C. and J. Tirole. (2003) “Platform Competition in Two-Sided Markets” Journal of the European Economic Association 1(4). 17 The total cost includes both the private and the social cost. See Segendorf, B. L. and Jansson, T. (2012) ”The cost of consumer payments in Sweden”. Sveriges Riksbank Working Paper Series No. 262. Similar costs have been calculated for other EU countries (see Schmiedel, H, Kostova, G. and Ruttenberg, W. 2012. ”The social and private costs of retail payment instruments”. Occasional Paper Series 137. ECB. 6 [15] As I mentioned previously, positive network externalities are something that characterises the payment market. This means that there are efficiency gains to be made by using coordination.

Later on, payment instruments issued by the private banks took ever greater market shares and the use of cash has declined steadily since the 1950s as a proportion of GDP. During the 1990s, electronic alternatives such as card payments also gradually started to replace cash for purchases in shops. Money is now electronic and is created by banks When we talk about money, many people probably envisage a banknote in one currency or another. But in today’s digital society, cash forms a very small part of the total amount of money, only about 2 per cent. 11 The overwhelming majority is completely electronic. Neither is it the case that the Riksbank or other central banks are normally the ones who create new money these days. 12 Many of us have been taught that, when banks get new deposits, they can create new loans, but it actually works the other way around. At present, it is the banks that create new money when they issue new loans. If I approach my bank with a request for a new loan for a home and the bank grants me credit, I will receive a liability in my account with the bank. At the same time, the money I have borrowed is transferred to the seller of the property, who deposits the money in his or her bank account. So new loans 10 Eichengreen, B and Temin, P. (1997) ”The gold standard and the great depression”. NBER Working Paper 6060.

As over 80% of customers invested $ and below, FIDReC is the right avenue for them to pursue their claims. FIDReC normally deals with claims not exceeding $ In the case of the structured products, however, the FIs have agreed for FIDReC to hear deserving cases. We have also said that if there are breaches of our regulation, we will take action against the financial institution or individuals involved. MAS has required the independent parties to highlight these breaches and potential cases of mis-selling to MAS. They have already brought a number of possible cases to our attention and we are following up on them. Normally, as you know, MAS does not comment on our dealings with individual institutions. However given public interest in this matter, MAS confirms that we have been conducting formal inquiries into allegations of breaches of the law, inadequate internal controls by the FIs or poor sales practices by their representatives. We will make an announcement on any actions we are taking when our inquiries are completed. MAS urges any affected investor who has a genuine claim that you were mis-sold the product to make sure you lodge your complaint with your FIs. MAS requires FIs to have a BIS Review 126/2008 1 rigorous process to look into every complaint and resolve them fairly, giving due weight to the views of the independent parties. Clearly, there is a range of investors who bought these products. Some are well-educated professionals. Others are sophisticated investors.

Heng Swee Keat: The sale of structured products to retail investors Opening remarks by Mr Heng Swee Keat, Managing Director of the Monetary Authority of Singapore, at the Monetary Authority of Singapore’s Press Conference on the Sale of Structured Products to Retail Investors, Singapore, 17 October 2008. * * * Many individuals who purchased structured products linked to Lehman Brothers are worried about their investments. MAS has been actively working to ensure a fair resolution for these investors. We have also been communicating our actions to the public since the issue first came to light in the middle of September. Our first priority has always been to help affected investors. Let me touch on what we have done and how we have put in place a serious and impartial resolution process to deal with investors’ legitimate concerns. First, we are making sure that HSBC Institutional Trust Services (Singapore) Ltd, the trustee for the Lehman Minibond Programme, carefully considers all options and acts in the interests of investors. If a new swap counterparty is available, investors would have the opportunity to vote on this option. In order to assist investors make an informed decision, MAS will appoint an independent financial adviser. We expect the trustee to know whether options will be available to noteholders by the end of next week.

It is true that the economy is not overheated, so rate hikes do not have the intention of affecting that. But interest rates do affect inflation even though the current situation does not entail overheating. These effects come through a stronger currency and lower wage drift. Furthermore, it is very common that central banks begin to shift towards a neutral monetary stance by raising nominal interest rates before the slack has disappeared so as to avoid sharper increases later at the tipping point between slack and excess demand. Examples of this are the European Central Bank’s rate hike earlier this year and the Swedish Riksbank’s increases in mid-2010, when unemployment in Sweden topped 8% and the output slack measured almost 4%. Iceland’s output slack is just under 2% this year. I will conclude my remarks now. I know there are a number of questions I have not answered, and a number of aspects of this complex situation that I have not addressed. My answers to the questions you ask me now may fill in some of the gaps. On the other hand, it is important that we discuss these matters calmly and try to promote the best possible understanding of how monetary policy works, as this will make a genuine contribution to the current discussion of Iceland’s future monetary policy regime. It is well to remember, though, that no monetary policy will be successful if the tools it offers are never used to tighten the stance.

Access to foreign credit is a prerequisite for export-driven growth. Moreover, deterioration in the banks’ position would adversely affect terms in the domestic credit market. Lending rates could rise and deposit rates could decline, impeding investment and delaying economic recovery. As soon as confidence in the Treasury and the financial system erodes, Iceland’s currency will suffer as well. In that instance, we would not be able to lift the capital controls as planned, after the Third Review of the IMF programme. Furthermore, the financial system would be poorly equipped to tolerate possible instability associated with capital account liberalisation. Finally, it is appropriate to bear in mind that financial undertakings’ scope to meet the needs of other individuals and firms would be drastically reduced. All of these factors show how vital it is to the public interest that the Central Bank and the Financial Supervisory Authority set forth general guidelines so as to maintain stability while matters of legal uncertainty are being settled. Other authorities and the legislature must also assess whether further measures must be adopted in order to remove all doubt. Ensuring stability is in our hands – all of our hands. We hope and expect that all parties will work together to achieve that goal. 2 BIS Review 91/2010

On the other hand, budget revenues for this period were down by 2.9% on a year earlier, reflecting the weak performance of tax revenues. These developments are materialised in a significantly increased budget deficit, which turned out to be twice higher than a year earlier. The budget deficit dynamics was reflected in a higher public debt over this period. At the end of the first quarter, the public debt as a share of GDP accounted for 63.3%. The public debt constitutes one of the major weaknesses of the Albanian financial system. Therefore, the Bank of Albania suggests that taking immediate measures to control this debt would contribute significantly to reducing uncertainties and risk premia in the economy. Taking advantage of the opportunity, we reiterate the need for putting in place a reliable and transparent fiscal rule. This is the best way to discipline the fiscal policy and preserve the trust of financial markets about the Albanian public debt in the long run. Data on the external sector of the economy show that foreign demand contributed positively to Albania’s economic growth and to trade deficit narrowing during the first half of the year. This behaviour was due to the 17.4% annual growth in exports and the 6.3% annual decline in imports over the same period. Consequently, the trade deficit dropped 22.2% over this period. The insofar adjustment of the trade deficit is a positive development of the Albanian economy. However, this deficit reduction is heavily thanks to transient factors.

Ardian Fullani: Overview of Albania’s recent economic and financial market developments Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the Press Conference on the Monetary Policy Decision of Bank of Albania’s Supervisory Council, Tirana, 31 July 2013. * * * Today, on 31 July 2013, the Supervisory Council of the Bank of Albania reviewed and approved the Monetary Policy Statement of the Bank of Albania on the first half of 2013. Based on the latest monetary and economic developments in Albania, and following the discussions about their outlook, the Bank of Albania’s Supervisory Council decided to lower the key interest rate by 0.25% percentage points to 3.50%. Lowering the key interest rate would improve the conditions for a higher aggregate demand, hence helping inflation fall back toward the Bank’s 3.0% target. Further easing of monetary policy takes into account expectations for a contractionary fiscal policy over the second half of the year and makes room for a fast and low-cost adjustment of public finances. Let me now proceed with an overview of the economic developments and key issues discussed at today’s meeting. The first months of 2013 confirmed our assessments of Albania’s slow economic growth and weak inflationary pressures. Albania’s economic activity continues to suffer from sluggish aggregate demand reflecting economic agents’ uncertainties about the future, relatively tight lending standards, and economic weaknesses of our main trading partners. However, amid a challenging macroeconomic environment, Albania’s economic and financial stability remains stable.

Jessica Chew Cheng Lian: Empowering financial consumers in the digital age Welcoming remarks by Jessica Chew Cheng Lian, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the BNM-OECD Conference on “Financial Education and Financial Consumer Protection in Asia-Pacific”, Kuala Lumpur, 11 December 2019. * * * As I made my way in to work this morning, I glanced through my smartphone to check on my monthly bills, how much pocket money my sons had spent over the week and on what. I also browsed for money changers offering the best exchange rates for my next trip. Having all this information available to me literally at my fingertips would have been unthinkable years ago. Today, I can organise my financial matters quickly and conveniently over a 20-minute car ride to work! It is my great pleasure to extend a warm welcome to all delegates to Kuala Lumpur and to the Conference on Financial Education and Financial Consumer Protection in Asia-Pacific. We are delighted to co-host this event in collaboration with the OECD. At risk of repeating what many others have already acknowledged, let me say at the outset that financial education and financial consumer protection have never been more important, or more confounding, than in the digital age that is upon us.

Conclusion Let me now summarise what I have said and draw some conclusions. The global capital markets are here to stay. They have contributed to the good economic growth in many countries in recent decades by providing capital efficiently. At the same time it cannot be denied that the global capital markets can generate problems, as we have seen in recent years. There have been marked fluctuations and they have spread from country to 7 BIS Review 52/1999 country. Shortcomings in national economic policy have been the cause in many causes but not in all. Small countries with less liquid markets have been heavily hit when highly leveraged funds have shifted capital between markets. For some countries with a weak political and economic system, the capital movements have been sufficient to elicit political crises and considerable social costs. A part has also been played by problems in financial institutions in the industrialised countries, even in the very centre of the international financial system through the Manhattan-based fund LTCM. Last autumn the US Federal Reserve found it necessary to reduce the instrumental rate and take the initiative in solving the problem of credit. Against this background it is not surprising that an active discussion is now in progress about what is called the new international financial architecture. International meetings are being held in quick succession.

To reach that goal we have based our monetary policy on two “pillars”. As regards the first “pillar” we have set up a quantitative reference value, namely 4.5%, for the growth of the broad monetary aggregate M3; we have recently confirmed this rate of growth of 4,5 % as an important factor for stabilising expectations. It should be noted that the concept of a reference value does not imply a commitment on the part of the Eurosystem to mechanistically correct deviations in monetary growth in the short term. However, the reference value for M3 is consistent with, and helps to maintain price stability over the medium term. The second pillar of the monetary policy strategy is a very comprehensive set of indicators that are important in our eyes in signalling future price developments in the euro area. This strategy, which ensures a great deal of continuity with the monetary policies of the participating national central banks, appears to have been understood by financial markets and the public at large. In particular, the yields on long-term bonds denominated in euros indicate clearly that the Eurosystem has kept intact the legacy of credibility that it has inherited. d/ Finally, the credibility of the euro also results from the Eurosystem's constant efforts towards transparency and communication. I must stress here that the Eurosystem is one of the most transparent central banks in the world.

An incentive for further structural reforms a/ The Euro is, per se, also a strong catalyst for structural reforms in all non-financial domains in Europe : a single currency facilitates the full comparison of prices, taxes and earnings. I think that the euro could encourage "cross-fertilisation" of best practice through stronger co-ordination of Member States' structural policies in areas such as labour markets, education and training, job creation incentives, effective welfare safety nets, etc. It is the reason why the European Council, meeting in Luxembourg in December 1997, explicitly mentioned structural policies among the items selected for reinforced co-ordination. The Lisbon European Council made a further contribution to the necessary medium-term strategy for structural reform in the Union. The emphasis put on deepening the single market, the setting of indicators allowing comparisons of best practices among the Member States, the fact that the Broad Economic Policy Guidelines will examine the structural issues closely : all these developments are going in the right direction. BIS Review 11/2001 5 All European countries must resolutely carry on the structural reforms they have already initiated. It must be acknowledged that a lot has already been done, in particular with implementation of the single market. However, continental Europe is still experiencing levels of unemployment that are too high, despite the fact that the jobless rate has been declining significantly in most of its economies for three years.

In the real economy, asset prices rose and household balance sheets in particular became stretched. Fast forward to the present day and the neat separation of powers and responsibilities between policymakers has evaporated (Chart 6). Monetary policymakers are beginning to explore unconventional tools to arrest the economic decline as nominal interest rates approach the lower bound. Fiscal policy has returned as a major tool of macroeconomic management as well as an essential support to the banking sector. And the Bank and the Treasury have been drawn deeper into the financial stability realm. A substantial share of the British banking system is now owned by the UK taxpayer. Are these just temporary changes to deal with an exceptional crisis or were there some more structural flaws in the original design and the consensus that underpinned it? I would draw out seven lessons. (Chart 6) Lesson 1: The limitations of private-sector risk management One weakness in the system was the failure of banks and many other investors to appreciate, price and manage risk.3 2 http://www.bankofengland.co.uk/publications/workingpapers/wp290.pdf. 3 For a comprehensive discussion of these issues see the recent speech by Andrew Haldane, the new Director of Financial Stability at the Bank, in Why banks failed the stress test. BIS Review 21/2009 3 It was not that banks were blind to the froth in financial markets.

Which leaves us with the question: is that a price worth paying in order to avoid the fall-out when a bubble eventually bursts? And that leads us to the second judgement that underpinned the non-intervention doctrine. Prior to the latest crisis at least, many policymakers believed that the costs of allowing a bubble in financial markets to run its course were relatively small. Interest rates could always be cut after the event to “mop up” the damage. Blinder and Reis summarise the received wisdom beautifully in their review of the decision to loosen policy when the DotCom bubble burst: “If the mopping up strategy worked this well after the mega-bubble burst in 2000, shouldn’t we assume that it will also work well after other, presumably smaller, bubbles burst in the future?” The large and coordinated cut in interest rates at the start of this decade almost certainly contributed to the build-up of an ever larger bubble. So its not at all clear that the post-2000 mopping up strategy worked that well in retrospect – it just stored up more trouble for the future. And even if it did work well last time around, I hardly need to add that mopping up the fall-out from the latest crisis is stretching the world’s policymakers to the limit. It is evidently not safe to rely on being able to mop up after the crash. Lesson 6: Inflation targeting is necessary but not sufficient A more fundamental question is whether the Inflation Targeting regime itself needs to be rethought.

The path for domestic and external interest rate does not imply any considerable changes in the krone exchange rate. Moreover, the Executive Board pointed out that the objective of bringing inflation back towards the target and anchoring inflation expectations implies a continued expansionary monetary policy. It is likely that continued high growth in output and employment will result in a gradual pick-up in inflation. The interest rate will therefore be set so that monetary policy gradually becomes less expansionary. Projections are uncertain. The uncertainty surrounding the interest rate forecasts is illustrated in the fan chart and indicates that monetary policy reacts to disturbances to the economy. This contributes to increasing the uncertainty surrounding future interest rates, but at the same time contributes to stabilising economic developments. Monetary policy cannot fine-tune economic developments, but it can prevent the largest effects from occurring when the economy is exposed to disturbances. In some situations, it may be appropriate to hedge against particularly unfavourable developments. In the baseline scenario, the interest rate is gradually raised to a more normal level. Norges Bank continuously assesses the effects of interest rate changes and other new information concerning economic developments. Thank you for your attention.

Crude oil prices rose to about USD 75 per barrel over the summer, partly owing to the conflict in the Middle East and reduced production in Nigeria and the US. In recent weeks, oil prices have edged back again. Brent Blend futures prices nevertheless indicate that oil prices will remain high several years ahead. Export prices for Norwegian natural gas largely follow developments in oil prices with a lag. Since autumn 2005, prices for Norwegian gas exports have risen substantially according to the quarterly reports of the oil companies Statoil and Hydro. In the next few years, natural gas will account for a steadily larger share of total petroleum production on the Norwegian continental shelf. Petroleum investment has reached a high level after three years of strong growth. In 2005, investment was close to NOK 87 billion, and it is expected to edge up again this year. The large Ormen Lange and Snøhvit projects have contributed to high petroleum investment, and high oil prices have fuelled activity even at oil fields that have been in production for a long period. The development of the Skarv Idun fields will contribute to holding up petroleum investment from 2007. Information from our regional network suggests that petroleum investment provides considerable impulses to activity in Norway’s coastal regions. According to the network, suppliers to the petroleum sector are expecting strong growth to continue in the coming months.

This new finance demands a Bank of England that is as open to new providers as it has been to traditional players. 3 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 3 Here’s one way we are changing our hard infrastructure in response. The Bank is in the midst of an ambitious rebuild of RTGS1, which processes over £ billion of payments every day. Until recently only commercial banks had direct access to it, and alternative payment service providers (or PSPs) had to route through them. That made sense in the old financial world arranged around a series of hubs and spokes but it is increasingly anachronistic in the new, distributed finance that is emerging. So we are now making it easier for a broad set of firms to plug in and compete with more traditional providers. Responding to demands from FinTech providers, the rebuild will provide API access to read and write payment data. In July 2017, we became the first G20 central bank to open up access to our payment services to a new generation of non-bank PSPs. Since then, five have become members and there is a growing pipeline of around twenty firms exploring whether and how to join. Wider access will improve services to UK households and businesses and it will bring financial stability benefits by increasing the proportion of settlement in central bank money, diversifying the number of settlement firms, and driving innovation.

A Platform for Innovation Speech given by Mark Carney, Governor Bank of England Remarks at Innovate Finance Global Summit, London Monday 29 April 2019 I am grateful to Eleanor Connolly and Jen Nemeth for their assistance in preparing these and to John Jackson, Richard Lewis, Tom Mutton and Oliver Thew for background research and analysis. 1 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx Introduction A century ago, John Maynard Keynes resigned as a delegate to the Paris Peace Conference over his concerns about the scale of reparations in what would become the Treaty of Versailles. He returned home to write The Economic Consequences of the Peace. In that seminal work, Keynes marvelled that before the war: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth… [or] adventure his wealth in the natural resources and new enterprises of any quarter of the world that fancy or information might recommend.” Such global trade and portfolio management were made possible by new technologies ranging from the telegraph to the first transatlantic cable. Replace “telephone” with “tablet” and “tea” with “turmeric latte” and you have not the start of the Twentieth Century but of the Twenty First. The second great wave of globalisation is cresting. The Fourth Industrial Revolution is just beginning. And a new economy is emerging driven by immense changes in technology, the reordering of global economic power, and the growing pressures of climate change.

Of course, it is for Congress to judge what combination of tax increases and spending cuts should be undertaken to achieve this. Nevertheless, the aging of our population and simple math suggest that entitlement reform would need to be part of such a plan. Also, in an ideal world, fiscal policy would have broad-based bipartisan support. That would reduce uncertainty and reassure households and businesses that the U.S. was on a sustainable long-term path. Instead, we have nearly the opposite: significant retrenchment in the near-term, but no credible action over the long-term, with partisan divisions and significant uncertainty about what will happen next. Will the sequester, for example, be sustained or not? Economic outlook Looking at the outlook for 2013, I believe that growth in the first half will be sluggish as the fiscal contraction blunts the economy’s forward advance. While first quarter GDP growth will likely rebound to a 2 to 3 percent annualized rate following the dip in the fourth quarter, this will be due in large part to temporary factors.3 2 Before taking into account fiscal multipliers. 3 This includes a modest boost from inventory investment following the substantial drag of the prior quarter, a recovery in farm output following last year’s drought, and less drag from defense outlays following the steep plunge of the fourth quarter. Rebuilding following the devastation from Superstorm Sandy may also provide some temporary lift this quarter. 2 BIS central bankers’ speeches I’d also emphasize that there remains considerable uncertainty about the outlook.

5 At the time the FOMC was purchasing an additional $ billion a month of longer-dated Treasury securities while selling an equivalent amount of shorter-dated securities under the Maturity Extension Program. 6 While we specified a current monthly pace of purchases the degree of stimulus depends mainly on expectations for the ultimate size of purchases and how long we are expected to hold the assets that we have acquired. 7 This was made clear in the FOMC statement that the Committee expected to reach the unemployment rate threshold at the same time as the earlier date guidance. BIS central bankers’ speeches 3 make it clear that short-term rates will not be raised at the first sign of economic improvement, before a sustainable recovery has been secured. As a result, households and businesses should be more confident in undertaking additional spending and investment today. The shift to thresholds-based rate guidance has other benefits. Relative to calendar-based guidance, it provides more information about the economic conditions the Fed would need to see before raising rates.8 Importantly, the shift to thresholds should also make the eventual normalization of monetary policy smoother, a subject I will return to later. But this raises an obvious question. If quantitative thresholds are good for interest rate guidance, why not also have such thresholds for the asset purchase program? There are two reasons.

Rae, G (1885) The country banker: his clients, cares, and work from an experience of forty years, Jon Murray. 10 BIS central bankers’ speeches

European securitisation issuance (EUR billion) Source: European Securitisation Forum 9 See “Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience”, FSF, April 2008. 8 BIS Review 68/2008 Chart 2. Funded issuance by collateral (EUR billion; by month) Source: JP Morgan Chart 3. European ABS spreads (relative to 3-month Euribor) Source: JP Morgan BIS Review 68/2008 9 Chart 4. Evolution of collateral held with the Eurosystem by asset type Source: ECB Chart 5. European securitised products: Publicly placed or privately retained? (EUR billion) Source: Citi. European Secutitised Products. Strategy Analysis. Securitised Products. Europe 7 March 2008. Secondary Source: Bloomberg, International Insider, Informa GM, IFR, Citi. Note: Publicly-placed issuance includes only deals that have been publicly marketed. Private/Retained issuance includes deals that have been privately-placed or retained by the originator. The Private/Retained issuance figures include all such deals to Citi’s knowledge, but may not include such deals where there is no public information available. For some deals priced since August 2007 it has not been clear whether the deal has been fully placed. 10 BIS Review 68/2008

Second, on top of that, we are fully conscious that we are speaking simultaneously to twelve different cultures today, and many more when time comes. Making sure that a decision is exactly understood simultaneously by a German, an Italian or a Spanish household, by an Irish, a Portuguese and a Dutch citizen is another extraordinary challenge that no other central bank has to cope with. Third, last but not least, we are also simultaneously speaking to the global market participants who have themselves their own language and their own culture. For the ECB to be credible means being credible vis-à-vis all parties concerned. Our transparent communication must permit all parties to understand our mandate and our strategy to ensure price stability, to anchor their medium term and long term expectations and to accurately predict our future behaviour. For the European and global market participants in particular I know how predictability is important. I attach the utmost importance to our predictability which has been very good in the past, thanks to our conceptual transparency, to our own candid explanations on our diagnosis and decisions and - last but not least - to the quality and lucidity of yourself, members of the Frankfurt Economic Journalists, of ECB watchers in general, of economists and of market participants. I will continue to take care that this predictability remains as excellent as possible. BIS Review 5/2005 5

In other words, asset values should be neither a target nor a goal of monetary policy. The rate of increase in asset values alone seems to tell us very little about underlying and future inflation. Because we know so little about how to assess the appropriateness of asset values against fundamentals, because we have so little capacity to both forecast and predictably affect the future path of asset prices, and because we know relatively little about how changes in wealth affect the real economy and inflation, we cannot use monetary policy responsibly or effectively to achieve specific objectives for asset values. Monetary policy does not today and is unlikely in the future to offer us an effective tool for directly reducing the incidence of large or sustained deviations of asset values from what might turn out to be their fundamental values, what some call bubbles. That said, monetary policy still has to take into account the impact of significant movements in asset values on output and inflation. Financial asset prices, by their nature, allocate resources between the present and the future and thereby affect consumption, investment and future growth. History provides us with numerous examples in which significant movements in asset prices have had sizable effects on the path of output relative to potential and on price stability. And experience suggests that asset values can be very sensitive to movements in monetary policy or to the perceptions of future policy moves.

Various initiatives are also being undertaken at the school and university level, as well as targeted and high-impact financial education programmes catered towards teenagers and adults by AKPK. Key imperatives for businesses and consumers Nevertheless, the goal of attaining financial literacy cannot be achieved solely by the efforts of authorities alone. Consumers, too have an equally important role in shaping the quality and delivery of financial services. Indeed, it is the actions and behaviour of consumers that will be powerful determinants of how financing can be fully utilised. In this regard, I would like to suggest some key imperatives for both businesses and financial consumers. Business owners should ensure that documents and business records are accurate and complete to facilitate the ease of credit assessment. Business competency in important areas such as marketing, finance and inventory management, and e-commerce should also be continuously strengthened. This will reinforce the assessment by banks and other investors on the long-term growth prospects and competitiveness of the particular business, thus facilitating the provision of finance. It is important to emphasise that the banking industry is in the business of lending. Thus, banks will only generate profits if they continue to provide credit. This is a point worth reflecting upon, to avoid misperceptions that banks are intrinsically refusing to lend. If businesses have potential, there should not be any issues in obtaining financing. If any of these issues persist, businesses should seek advice from LINK at Bank Negara Malaysia.

It was for similar reasons that we already had to turn down a request from your industry association in 2015 to operate non-interest-bearing sight deposit accounts for the pension funds. 7 Quite fundamentally, the introduction of a ‘fourth contributor’ in the form of the SNB would seem to depart from the rationale on which the occupational pension system is founded. So how can the SNB make any contribution to the health of the pension system? By consistently and credibly pursuing a policy geared to price stability, the SNB is contributing significantly to a solid foundation. In the long term this will facilitate economic growth and prosperity in Switzerland and, in particular, also safeguard purchasing power. Ultimately, this 7 cf. Moser, Dewet (2015), Herausforderungen der aktuellen Geldpolitik [‘Monetary policy challenges currently facing the SNB’], speech at the general meeting of the Association of Swiss Pension Funds (ASIP), Zurich, 8 May. Page 6/8 is one of the decisive factors in ensuring that our country can afford a social security network that is resilient and remains fundable. Stable prices are thus very important for pension fund members. However, price stability is also of utmost importance for the socially disadvantaged and pensioners, as they are scarcely able to protect themselves against an inflation-related loss of purchasing power. Like the pension system, price stability plays a key role in the Swiss success story. It is an accomplishment that is greatly valued – and today almost taken for granted – by the general public.