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Another perspective on the risks around debt is pricing – whether investors have taken all risks into account, and priced them prudently or whether there’s a degree of optimism that is reflected in the pricing (just as optimism can be a factor in rising debt levels). Pricing for much of the stock of global debt is not easily visible, but for debt traded in markets – typically corporate bonds – we can observe the following. Spreads – the amount charged for risk, be that credit risk or liquidity risk – are low by historical standards at the moment. The relatively low compensation demanded for risk can also be seen in the small difference between the price of investment grade and high yield bonds. We can observe some of these trends in non-traded debt. Spreads on leveraged loans are roughly 100bps lower than they were in 2015 for the US, which comprises most of the global market, and 70 bps lower in the UK. Alongside this low pricing for risk, volatility is low. The VIX ended April at about 13 – well below its 21st century average of about 20. And US equities are similarly priced – implying investors are demanding a low equity risk premium. Moreover, risk-free rates are low in many jurisdictions, and yield curves are broadly flat in all major jurisdictions. This suggests there is little market expectation of any pickup in growth or, perhaps more notably, inflation. Similar conditions have persisted for much of the last few years.

4 For example, the Capital Requirements Regulation for banks, and the Solvency 2 Delegated Act for insurers and the European Market Infrastructure Regulation for CCPs. 5 See for example, “The evolution of the financial services regulation in a post-Brexit Europe" - Speech by Robert Ophèle, Chairman of the Autorité des marches financiers – 13 November 2017 “This has led to a hypertrophy or swelling of regulations that - probably to avoid national drifts - has entered a stage of extreme luxury of details… and has led to a rigidifying of regulation of a very damaging sort.” 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 Debt, its level, its growth, its composition and its sustainability lies at the centre of the financial stability mandate. Modern societies and economies are built around the claims we hold on each other. A very large proportion of those claims are expressed as financial claims to be honoured in the future. The future, of course, does not always turn out to be what we expect and the value of our claims has sometimes to be adjusted downwards. Some financial claims, like equity, adjust the value of the return relatively smoothly. Debt liabilities, however, are fixed and amplify the impact of any negative shock to the income or assets of the debtor. And if the impact cannot be accommodated, the result can be a painful write-down or deleveraging of the economy.

If we can build and nurture people within an organisation to be always attuned to risks that may affect the organisation, whatever their nature or origins, then there is a good chance that any system, process and framework constraints will be more easily overcome and less likely to inflict major losses on the organisation. When faced with challenging business and financial conditions and a highly dynamic environment, it is always more important to have excellent people than excellent models. BCM as part of enterprise risk management This brings me to the more specific area of business continuity management, or BCM. A paper published in 2008 by the Chartered Management Institute of the United Kingdom found that 76 percent of the survey respondents reported that business continuity management is seen as important in their organisations but only less than half revealed that they have specific business continuity plans. There are several reasons for this which I will not get into here, but a major one is the lack of metrics to measure success in the absence of a major institutional crisis. One commentator put it this way – the return on investment is simply that business stays open. Two contrasting examples of BCM help to underscore this point. Investigations by the Japanese Government into the Fukushima tsunami disaster revealed material inadequacies in the handling of complex risks associated with managing a nuclear power plant. This was demonstrated in poorly executed emergency procedures in evacuating residents during the incident. Consequently, the operations of the power plant were suspended.

Durmuş Yılmaz: Green shoots – how vigorous and how sustainable? Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the Conference on “Green shoots – how vigorous and how sustainable”, IMF-World Bank Annual Meetings 2009, Istanbul, 5 October 2009. * * * Ladies and gentlemen, First of all, I would like to welcome everyone to Istanbul. It is a great pleasure for me to be here addressing such a distinguished audience as we convene for the 2009 Annual Meetings. “Green shoots” has been a popular metaphor to describe the recovery process. And today, I will try to elaborate on our path to build a career as a prudent gardener. I want to begin with discussing the path that brought us to this crisis. Then, I will talk about the recovery signals in both global and Turkish economy. I will conclude my speech with my thoughts on the solidity and sustainability of these signals. As is well known, financial strains originated in advanced economies abruptly mutated into a full-blown crisis and had a devastating effect on international capital markets. As the crisis intensified, measures of perceived risk escalated to record levels and major financial institutions suffered massive losses. At the same time, liquidity shortages, tighter credit conditions, and heightened uncertainty were associated with a sharp decline in both private consumption and investment spending. In fact, many economies fell into recession or have seen their growth rates decline sharply.

Then, and provided that precedence is respected, the ECB can support the economic policies of the EU on a broader scale. The legal formulation of the Treaty is an abstract determination of priorities. To define the objective precisely and establish a relationship between the objective and the policy – consistently conducted and communicated – a strategy is needed. 1 I wish to thank Tobias Linzert, Stefano Nardelli, Massimo Rostagno and Arthur Saint-Guilhem for their contribution to this speech. I remain solely responsible for the opinions contained herein. 2 Michel Aglietta: “Money: a matter of credit and trust”, Journées internationales d’économie monétaire et bancaire, Lyon, 6–7 juin 2002. BIS central bankers’ speeches 1 The strategy of the ECB makes the Treaty mandate more precise in three respects. First, it provides a quantitative definition of “price stability” by indicating a range for year-on-year changes in the harmonised index of consumer prices which the ECB considers consistent with conditions of stable prices. That does not necessarily mean zero inflation. The price stability range that the ECB considers equivalent to “stable prices” covers positive inflation rates lower than 2%. Second, the strategy identifies, within that range, inflation levels which the Governing Council of the ECB aims for, in its monthly policy decision. We aim at inflation rates that are below, but close to, 2%.

Benoît Cœuré: Restoring trust in the Economic and Monetary Union Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the Forum Eco Libération ESCP “Reprendre confiance en (l’)Europe”, panel discussion: “L’Euro méfiance, c’est fini?”, Paris, 1 December 2012. * * * It is a great pleasure to participate in this panel that touches on a topic very close to our hearts at the ECB: trust in our common currency, the euro. 1 In any society, the monetary contract fundamentally rests on trust, and I will borrow the explanation from my co-panellist, Michel Aglietta: “Money involves trust because it is a debt between society as a whole and each of its members.” 2 Remember that credit comes from credere and fiduciary comes from fidere, both verbs meaning to trust in Latin. As for trust in a central bank, well, that is secured and reaffirmed by permanent assessment of the central bank’s performance against its mandate and strategy. Such an assessment has become very complicated as a result of the global financial crisis. Communication about the intentions and policy actions of a central bank has long been focused on its decisions on the level of the short-term interest rate and, in the case of some central banks, on the likely direction of that rate. But in a deep financial crisis this channel of policy interventions and communication becomes less significant.

This lending incentive will reduce bank funding costs by several billions of € each year. The Italian banking sector – and through it, Italian businesses and Page 4 sur 10 households – is the main beneficiary of ECB refinancing operations with almost 30% of total credit operations outstanding. This even leads some in other countries to argue that our monetary policy is being conducted for the benefit of Italy: they are wrong. Monetary policy is not conducted for any one country, be it Germany, France or Italy. The Governing Council takes its decisions collectively and independently, taking into consideration the euro area as a whole. That being said, let us simply acknowledge that belonging to the Monetary Union has provided Italy with substantial financial relief in this crisis. The ECB has worked well for Europe and for Italy. Our Governing Council took note last week of the judgement by the German Federal Constitutional Court. Let me be crystal-clear: we remain undeterred, as President Lagarde said; furthermore, we are definitely dedicated to and determined to deliver on our mandate as conferred by the Treaty. As the Page 5 sur 10 European Court of Justice has said, our past actions are indeed proportionate to that mandate. More broadly, I hear debates in our two countries shedding doubt on (i) the independence of the central bank – that should be brought “under political control” – and on (ii) its mandate – which should go beyond price stability, to include employment or the fight against the health crisis.

The establishment of new firms, changes in operating parameters and rationalisation in a number of industries may have contributed to this. In the first round, heightened competition affects companies’ profit margins. But enterprises will respond by reducing their costs. This will occur in part in the individual business, but subcontractors will also be required to reduce their prices and enhance efficiency. Increased competition therefore usually triggers higher productivity growth in the economy. Low inflation may thus be matched by higher productivity. In recent years, declining inflation has also been a feature in the other Nordic countries, where some of the same factors have played a role. Even though consumer prices have been low and, in some cases, falling in Norway and abroad, commodity prices in particular have shown a sharp increase. The price of coal, for example, a commodity you are well acquainted with, has shown a marked rise over the past year. Although the rise in commodity prices measured in US dollars is to some extent the result of the fall in the value of the dollar, it also reflects an increase in demand for commodities, which in turn is partly related to strong output growth in China. Prices for domestically produced goods and services are expected to rise in the period to 2005 due to higher capacity utilisation in the Norwegian economy. At the same time, domestically produced goods and services are affected by exchange rate changes, albeit with a longer lag than is the case for prices for imported consumer goods.

In the same vein, automatic rules that are imposed ex ante might also be less risky in terms of potential unintended consequences. When new rules are implemented it is always hard to gauge what the impact will be because imposition of the rule not only changes the economics of borrowing and investing in a particular sector, but also changes expectations about what might happen in the future. When the rule is viewed as likely to be binding in the future – this seems more likely in the case of the ex post measures – it will be very hard to judge how economic agents will respond to a new measure. In this regard, I think back to the Carter administration and the imposition of credit controls to restrain inflation in 1980. Even though the credit controls were not expected to bind right BIS central bankers’ speeches 3 away, the economy began to contract almost immediately as households and businesses rapidly adjusted their behavior to preserve some credit capacity. The response was a much more powerful downturn in economic activity than had been anticipated, which forced the Carter administration to scrap the credit controls because they worked too well in restraining economic activity. So I see some potential advantages of hardwired rules. But, I think this advantage needs to be set against the practical difficulty of figuring out what rules would need to be in place now to deal with all the potential financial stability excesses that could occur in the future.

In other words, Sweden is now in the sixth year of favourable economic growth. The 3% average is much the same as during the upswing in the 1980s but clearly above the annual average of 2% achieved in the 20 years from 1970 to 1990. It may be more than we can expect to sustain in the long run. An important reason why it has still been possible to keep inflation down in recent years has been the existence of unutilised capacity. This in turn has to do with the deep recession from which the recovery started and the comparatively rapid expansion of capacity since then. Medium-term inflation expectations have gradually stabilised around the 2% inflation target. At times, however, including the recent period, transitory price movements have brought the annual average change in the CPI just outside the lower limit of the target’s tolerance interval. There have even been periods when trend inflation has been lower than expected. For the decision-making of monetary policy, as the Riksbank has pointed out earlier, transitory effects on inflation are normally a secondary consideration. We are working to clarify how the target formulation is applied in order to dispel any uncertainty about how we should appraise direct effects on consumer prices that come from movements in, for example, house mortgage interest costs and indirect taxes. Altered conditions for international developments Last autumn, in the September Inflation Report, the Riksbank pointed to a growing risk of a weaker international trend on account of the crisis in Asia.

The international context The international context is a primary factor of difficulty. The latest analyses and projections show signs of weakness, which can be explained to some extent by the difficulties the European economies are facing in overcoming a sovereign debt crisis that has now lasted for more than two years. While the growth forecast for the world economy as a whole in 2012 stood at around 4% a year back, this has now dipped to around 3%. The forecast for the United States has improved, but that for the euro area as a whole has fallen from growth of 1.1% a year ago to a decline of 0.4%. And the growth forecast for the emerging economies has edged down from above 6% to around 5%. The forecasts for 2013 have also been lowered, especially for the euro area as a whole. The sluggishness of the international economy and, in particular, of the euro area is bearing down on our ability to recover. Euro area governance I would therefore find it useful to start with a comment on euro area governance and its problems. In my appearance before the Economic Affairs Committee last July, I addressed the source of the sovereign debt crisis in Europe and the main reasons for its depth and development. I believe I should reiterate that, to overcome the crisis, a new version of Monetary Union governance will be needed. There have so far been two different stages in the reform of European governance.

Therefore, I will share with you some of the lessons from my own experience. First, I will refer to the importance of having a good fiscal and monetary policy mix. If fiscal policy is relaxing, then the natural reaction is to tighten monetary policy. But one should take BIS central bankers’ speeches 1 into account that monetary policy cannot always be a substitute to a sound fiscal policy. In other words, not always and in any circumstances can monetary policy steps compensate for fiscal policy measures. Secondly, I will touch upon the risks related to pro-cyclical fiscal policies. We have experimented this in Romania and are fully aware on the risks related to the boom-bust cycles. During booms, as budget revenues pick up there is a strong temptation to spend more and no appetite to publicly debate the issue of structural deficits. On the other hand, when bust emerges one realize how limited your toolkit is and that all measures to address the situation translates in to a prolonged recession and GDP volatility. Last but not least, I will refer to the monetary policy by underlining how essential financial stability is to help achieve our overriding goal which is price stability. As I said before, it is my belief that the two are not conflicting; they may be compatible if your measures are carefully implemented.

Norman T L Chan: Black Bear – Blue Ocean – Wanton Noodle Speech by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at the Hong Kong Management Association Fellowship Award Dinner, Hong Kong, 26 November 2013. * * * Dennis (Sun), Alfred (Chan), Victor (Lee), Ladies and Gentlemen, 1. I feel very honoured to have been invited to speak at the HKMA Fellowship Dinner tonight. This is not only because the Hong Kong Management Association has been a forerunner in enhancing the standards of management and governance in Hong Kong, but also because the Hong Kong Management Association and the Hong Kong Monetary Authority share the same initials “HKMA”! Hence, attending the Fellowship Dinner tonight has double meanings for me as the Chief Executive of the HKMA. 2. Management is crucial as it embraces knowledge, skills, culture and leadership that would guide and shape the future of an organisation, whether it is public sector or private sector body or whether it is profit-seeking or non-profit-making entity. There is no doubt that, with increased globalisation and technological innovation, markets in different geographical localities have become more interconnected. One author has described the phenomenon as the “World has Become Flat”. 3. An important outcome of the interconnectedness of markets is that competition has become much more intense and ferocious. Talking about competition, let me share with you this story. 4. One day two men went together hiking in the mountain.

Despite the case for its inclusion in the regulatory regime that I made earlier, some people have questioned the merits of a leverage ratio. But given the very high levels of leverage that could be generated under the risk-based regime, it is a sensible measure to include as a backstop in the regulatory framework. And the case for a leverage ratio will only grow further if risk-weight variability is not adequately dealt with. In sifting through these potential actions and trying to find the preferred policy mix, it is important that supervisors and the industry engage in a constructive dialogue on the best way forward. Banks have a keen interest in ensuring that their risk measurement methods are seen as robust and credible: not only does this affect confidence in the reliability of their capital ratios, but any doubts also call into question their stress-testing results and their risk management systems more generally, since these are invariably all built on the same foundations. Thus the Committee is keen to hear from banks and other interested parties what their preferred course of action is. Recent initiatives by the industry groups, such as the International Institute of Finance (IIF) and by the Global Association of Risk Professionals (GARP), to foster improved understanding of these issues, are therefore very welcome. Concluding remarks Let me sum up some of the key points I have made this morning. First, it is important that bank capital is seen to be of sufficient quantity, quality, consistency and reliability.

Ahead of the referendum, I believed that the advantages of a single currency in Europe outweighed the loss of a monetary policy adapted to a specific level of Swedish economic activity. The debate ahead of the referendum sometimes gave the impression that the monetary policy regimes in Sweden and the euro area are different. In actual fact our monetary policies are similar, as we both have an inflation target, a floating exchange rate and an independent central bank. One difference is that monetary policy in Sweden is based on Swedish conditions, while that in the euro area is based on average developments in prices and economic activity in the area as a whole. The Nordic countries have different economic-policy situations. Sweden, Finland and Denmark are members of the EU. But Norway and Iceland, who have chosen to remain outside the EU, also enjoy the four freedoms, i.e. free movement for capital, goods, services and labour, through the EEA Treaty. Finland has taken a step further in the EU cooperation by participating fully in EMU since 1999. Consequently, Finland no longer has its own currency and does not conduct a national monetary policy. Denmark has not introduced the euro but participates in the exchange rate mechanism, ERM II. This means that the Danish krone has a fixed exchange rate with the euro and that interest rates in practice track those of the euro area. In Norway monetary policy is now similar to that in Sweden, with an explicit domestic inflation target.

As you will have gathered from my earlier summary, many comments have focused, as in the past, on the minimum requirements laid out in Pillar 1, but as we get closer to finalisation, comments about implementation are becoming more important. I would like to take a few minutes now to talk about these other aspects of the New Accord that deserve equal consideration. Let me address four specific issues: · Pillar 2 and consistency · Home / host implementation issues on a world-wide basis · Accounting Standards and Basel II · The recognition of diversification Pillar 2 and consistency On the first of these subjects, as you well know, the innovation of the New Accord does not rest solely on the refinements to the quantitative measures of risk. Another innovation, and one of the most beneficial, is the incorporation of supervisory review into the international framework. This represents a real breakthrough for all of us, since supervisors in each jurisdiction have until now found their own ways to evaluate the adequacy of a bank’s capital base. That is an unsatisfactory solution since it can lead to inconsistencies in the way that a global banking organisation’s operations are supervised at a local level. By incorporating into the New Basel Accord the requirement for supervisors to evaluate the internal processes behind a bank’s view of its need for capital, the Committee expects that bankers and supervisors will engage in a more focused discussion of risk management.

Second, the SURE programme [a European instrument for temporary Support to mitigate Unemployment Risks in an Emergency], which will provide additional lending of € billion to avoid job losses during the most acute phase of the crisis. And lastly, the European Stability Mechanism (ESM), which provides low-conditionality precautionary credit lines and already has € billion available, which can be increased up to € billion. Following the agreement the Eurogroup reached on Thursday, governments will be able to use the ESM to access the equivalent of 2% of their GDP and thus finance healthcare spending related to the pandemic. The Eurogroup has finally reached an agreement. The ESM, which was the sticking point in the negotiations, will offer loans to finance the healthcare response of up to 2% of a country’s GDP. That aside, ESM loans continue to have the same conditions attached as they did before. Do you think this will be enough? Or will recourse to this fund go beyond that? The funds the ESM is making available, of up to 2% of GDP to finance healthcare spending, have no additional conditions attached. For Spain, this means access to around € billion. In any case, the most important part of this agreement is that it represents a commitment that points in the right direction. It sends a clear signal of the willingness of the euro area countries to act together in the economic and budgetary realm.

In such a situation the EU member states have a “common interest” in discussing how confidence in economic policy can be enhanced. During the spring there has been a discussion in Sweden about the exchange rate tendency in connection with the move to Stage Three of EMU. What will happen if, for instance, companies adopt the euro as their unit of account? The Riksbank has underscored that it does not see any strong reasons for large currency outflows on account of the monetary union. And if such outflows were to occur and the krona suddenly weakened, we consider that countervailing forces would act in financial markets. The value of a currency is determined by numerous factors, of which the most important is confidence in the country’s economic policy. The general trend towards internationalisation in recent years has entailed relatively large currency outflows due to portfolio diversification among resident investors. But at the same time the krona has displayed an appreciating trend as growing confidence in economic policy generated a compensatory currency inflow. All in all, conditions for a stable exchange rate between the krona and the single currency should be good. There are many indications that the European Central Bank will define a price stability target that resembles Sweden’s. Similar inflation trends, together with confidence in economic policy as a whole, should result not only in stable nominal and real exchange rates between the euro and the krona but also in conditions for a reasonable valuation of the krona.

These operations have helped to stabilise bank lending to the private sector as well as the banks’ holdings of government securities. However, the effectiveness of these operations has been reduced, as banks have preferred to place a substantial part of the additional funds with the ECB’s deposit facility. BIS central bankers’ speeches 1 In fact, in Chart 2, the blue line shows the sharp increases in the volume of bank liquidity provided by the ECB through its longer term operations over the course of the crisis. The red line shows the increases in the volume of funds placed by the banks with the ECB deposit facility. The inflow of funds into the ECB’s deposit facility has neutralised a substantial part of the added liquidity. This reflects a persisting lack of activity in the interbank market and a hesitation on the part of the banks to provide more credit to households and businesses. This accumulation of excess liquidity comes at a cost to the banks, currently amounting to 0.75% – the difference between the 1% MRO rate charged by the ECB on the LTRO and the 0.25% paid by the ECB at its deposit facility. In a similar manner Chart 3 shows the path followed by various monetary aggregates during the crisis. The monetary base – shown as the blue line – includes mainly bank deposits with the central bank. The base consists of those central bank liabilities that form the foundation for expansion of the money supply – M3, represented by the red line.

In line with our monetary policy strategy, we take the view that the sustained underlying strength of monetary and credit expansion in the euro area over the past few years has created upside risks to price stability. Over recent quarters, these risks appear to have become manifest as inflation has trended upwards. Not least in the face of the ongoing tensions in financial markets, the monetary analysis helps to support the necessary medium-term orientation of monetary policy by focusing attention on the upside risks to price stability prevailing at medium to longer horizons. While the growth of broad money and credit aggregates is now showing some signs of moderation, 2 BIS Review 105/2008 reflecting the policy measures taken since 2005 to address risks to price stability, the strong underlying pace of monetary expansion points to continued upside risks to price stability over the medium term. The currently flat yield curve has given rise to a substitution from longer maturity assets into monetary instruments, which offer similar remuneration but greater liquidity and less risk. This substitution has led the current headline rate of M3 growth to overstate the underlying pace of monetary expansion. At the same time, shifts out of overnight deposits drove the annual growth rate of M1 down further in July. These effects, as well as other temporary factors, must be taken into account when assessing monetary developments and their implications.

However, the majority of these non-banking financial intermediators is controlled by financial groups headed by commercial banks. A relatively low share of investment companies and investment funds were negatively influenced by missing regulation and supervision in this field, however, there has been gradual improvement in recent years. In the area of pension funds we also witness gradual improvement caused mostly by government incentives, but we can expect quicker development if the government proceeds with intended pension reform. Increasing Role of NonNon-banking Intermediation 9,0 8,0 7,0 6,0 Insurance C. Financial Leasing Investm ent C. Pension Funds Other Credit Unions 5,0 4,0 3,0 2,0 1,0 0,0 1996 Total 1997 1998 1996 21,2 1999 1997 17,9 2000 1998 18,6 2001 1999 20,0 2002 2000 19,0 2001 20,6 2002 21,7 10 4 BIS Review 53/2003 The banking sector generally consists of previously state owned banks [since privatized to foreign banks], new banks established after 1990 as private institutions, and subsidiaries and branches of foreign banks. The approach to bank privatization differed in the new member states, but the results are now rather comparable. The banking sector is dominated by institutions governed by foreign banks [mainly from the EU], with exceptions being Slovenia, Malta and Cyprus.

Source: Bank of England and Bank calculations. (a) Spread between quoted rate on two-year fixed-rate mortgages and gilt yields (before August 2008) or overnight interest swaps (from August 2008) of matching maturity. Chart 3: Household debt and consumption growth Chart 4: Distribution of loan to income ratios over 2007-12(a) on new owner-occupier mortgages, 2014 & 2017 Sources: Flodén (2014) and OECD National Accounts. (a) Change in consumption is adjusted for the pre-crisis change in total debt, the level of total debt and the current account balance. See ‘Did household debt matter in the Great Recession?’ (Flodén, 2014). Source: FCA Product Sales Data and Bank calculations. (a) Proportion of new regulated mortgages, bucketed by loan to income ratios in increments of 0.25. Excludes remortgages with no increase in principal. 11 All speeches are available online at www.bankofengland.co.uk/speeches 11 Chart 5: Net lending to the household sector by lender type (a) Source: Bank of England and Bank calculations (a) Calculated as the 12-month moving average of the net flow of lending to households. 12 All speeches are available online at www.bankofengland.co.uk/speeches 12

0109 0108 0107 0105 0909 0509 0109 0908 0508 0108 30 0907 0 0507 70 0107 100 0106 110 200 Source: Bloomberg. Source: Goldman Sachs. The course of food prices is another important assumption for inflation forecasts. Contrary to the upward trend in previous years, the seasonally adjusted food prices displayed a decline in the third quarter (Figure 33). This change was mainly driven by the decline in unprocessed prices fuelled by prices of fruits and vegetables decreasing at a faster pace than seasonal averages. Unprocessed food prices had displayed an upswing in the first half of the year. Deceleration in annual inflation in processed food prices continued as well and prices fell compared to the same period of the previous year for the first time in the history of the index (Figure 34). The July Inflation Report envisaged food inflation to be 7.5 percent at the end of 2009 and 6 percent for the following years. However, better than expected outcomes regarding food prices necessitated a downward revision in food inflation to 5.8 percent for end-2009, while the projection of 6 percent was maintained for the following years. 14 BIS Review 143/2009 Figure 33: Food Prices Figure 34: Food Prices (Seasonally Adjusted, (Annual Percentage Change) Quarterly Moving Average) 2 1,5 1 0,5 0 -0,5 Source: TURKSTAT, CBRT.

In a possible downturn, authorities can release the CCyB, as many did during the pandemic, freeing up capital that banks can use either to absorb losses or to lend to the real economy. This mitigates the likelihood of a downward spiral of emergency credit 2 At the end of 2020, total banking sector assets stood at roughly CHF 3,800 billion. This is equivalent to around 500% of Swiss GDP – a high ratio by international standards. tightening. Finally, the activation of a CCyB could increase lending costs and reduce credit growth, thereby dampening the build-up of vulnerabilities. In theory, the range of feasible instruments is broad. In practice, the design and character of macroprudential instruments are typically adapted to country-specific circumstances in order to increase their acceptance and effectiveness. Let me explain how we have achieved this in Switzerland. In Switzerland, three agencies share a mandate to contribute to financial stability: the SNB, the Swiss Financial Market Supervisory Authority (FINMA), and the Federal Council and administration. These authorities have directly involved banks in the design of macroprudential instruments. In fact, the borrower-based instruments implemented in 2012 build on a pre-existing tradition of qualitative self-regulation guidelines of the Swiss Bankers Association concerning mortgage lending. Authorities and banks have worked together to complement these qualitative guidelines with quantitative requirements concerning the degree and speed of amortisation and the necessary down payments by borrowers. These quantitative guidelines serve now as minimum standard requirements.

As confirmed by G20 Finance Ministers and Governors at their meeting in Shanghai, the aim is now to focus on making Basel III effective without further increasing regulatory capital requirements. In addition, in 2015 the Basel Committee initiated a review of the prudential treatment of banks’ exposures to sovereign risk. This review – which is being conducted in a “careful, holistic and gradual manner” – is meant to take into account several broad issues relating to the role of sovereign debt markets and the impact that any changes may have on this role and on certain market segments. In particular, in reviewing the existing regulatory treatment of sovereign risk, due consideration should be given to the liquidity function of sovereign bonds and to its potential implications for monetary policy implementation and transmission. Given the widespread reach and impact of any policy action in this area, consistency at the global level is key to ensuring a truly international level playing field as it is stated in the Five Presidents Report. Conclusions Let me conclude. 4 BIS central bankers’ speeches Europe is facing a number of challenges simultaneously, in the economic sphere and beyond. Addressing these challenges requires a joint response. The ECB is doing, and will continue to do, its part by taking the necessary measures to fulfil its mandate.

These efforts have also included working closely with WAIFEM and its technical partners to streamlining the back office functions of the MoF; and enhancing institutional capacity building efforts. Government will continue to keep these measures under constant review, because the process of achieving effective debt management is not like a sprint race, but rather, could be likened to a marathon involving medium to long-term policy thrusts and interventions. Ladies and Gentlemen, Over the past couple of minutes, I have attempted to sensitize you on some of the issues that would be dealt with in detail during this course. Even so, I make no pretensions to any exhaustive analysis. I am aware that the expert faculty assembled by the organizers will do just that. All that is left for me to do is to invite you to take maximum advantage of the opportunity presented by this course to strengthen your competencies in debt data compilation in line with best practices. 4.0 Conclusion Ladies and Gentlemen, I would be remiss in my duty if I ended this address without expressing the profound appreciation of the Board of Governors of WAIFEM to COMSEC, IMF, and World Bank for their support to WAIFEM in strengthening capacity of countries of its member central banks in the area of debt management capacity building. Before I take leave of you to commence the technical sessions, let me enjoin you to take some time off your crowded schedule to visit some of the tourist attractions in Freetown, and its environs.

With the savings rate still high at about 35% of GNP and the rising incomes, Malaysia has the potential to promote a higher level of consumption without undermining the potential for financing of private investment from domestic sources. The higher consumption has also not created risks of increased household indebtedness which has remained within prudential levels at less than 60% of GDP. Ladies and gentlemen, Capital spending continues to gain momentum both in domestic and export oriented activities. Domestic companies are also forging strategic alliances as part of the strategy to expand to new export markets and leverage on new technologies. The on-going capacity expansion and more competitive business environment will keep inflation low thereby allowing domestic interest rates to continue to remain low for sometime to come. Malaysia's trade and investment links with Asia, particularly with the large economies in the region, is also expected to strengthen further. There also continues to be steady inflows of foreign direct investment. In addition to sustained inflows into the manufacturing and oil and gas sectors, these flows have become more broad based with higher shares of new flows shifting towards higher value-added activity in the services sector. This structural change in FDI flows reflect the changing opportunities Malaysia accords with the services sector now gaining significance as an engine of growth. The new inflows have also tended to be low import content and higher value added. The FDI in services sector has also been increasingly broad based.

• There will be a greater rebalancing between the role of the public and private sectors in the economy, with the public sector activity focussed on providing the enabling environment to strengthen the role of the private sector in the economy. • While large domestic corporations and multinational corporations will continue to be important in the economy, the role of the small and medium-scale enterprises will gain significance. • Greater focus will be given to secure competitiveness on a more comprehensive basis in terms of other dimensions such as productivity and efficiency, labour quality, logistics, research and development, the delivery system and the supply chain. BIS Review 44/2004 1 Malaysia will also continue to leverage on our low country risks in terms of the political stability, industrial maturity and the supply of a skilled workforce. To promote endogenous sources of growth, greater focus has been directed at promoting greater private investment, including by the small and medium enterprises (SMEs). The financial infrastructure and incentive structure will continue to be enhanced to promote investment in new sub-sectors in particular, the services, agriculture and manufacturing sectors. On the external front, while there has been a synchronisation of growth among the major economies, there has also been some rebalancing of the relative strength of the growth among the economies. The increase in the expansion of world trade and the strengthening of labour market conditions in most of these economies suggest continued and self-sustaining growth.

I and my colleagues on the Executive Board have, for example, discussed what would happen if the market’s policy rate expectations were rapidly brought into line with the Riksbank’s repo-rate path. If we assume an immediate alignment, then the upward effect on long-term rates would depend on what measure one sees as being representative of the monetary policy expectations. In the Prospera surveys in November, expectations were higher than those reflected in the forward rates but lower than the Riksbank’s repo-rate path. If we assume that it is the Prospera surveys that best reflect expectations, rather than the forward rate curve, the upward adjustment will thus be smaller, as will the effect on the long-term rates. Market expectations are thus clearly an item on the list of those factors that are difficult to assess and that monetary policy decision-makers must take a stance on. The assessment of market expectations was especially critical earlier in the autumn when the variation in different measures of market expectations was particularly great, with forward rates at a much lower level than other measures. When various indicators of monetary policy 1 The somewhat simplified term risk premium is used throughout instead of the more correct term maturity premium. 2 The price gain made on a long-term bond if the short-term interest rate is lower than expected is, on the other hand, somewhat higher than the price loss that will be made if the short-term interest rate is to a corresponding extent higher than expected.

It is not the case that I personally believe that the risks associated with household borrowing constitute an immediate threat to the economy, or that housing prices are dramatically overvalued and that a rapid downward adjustment is on the cards. But I do believe that there are risks further ahead if household borrowing continues to increase at a much higher rate than incomes for an additional extended period. And if monetary policy continues to be too expansionary for too long, these risks will increase even further. I also believe that this is roughly the view of the majority of the members of the Executive Board. It is not possible to exactly determine at what level household borrowing will reach the “critical point”. As long as economic activity is favourable, the labour market is improving, incomes and wealth are increasing and the households have confidence in the future everything is hunky-dory. But in a different economic situation with increasing uncertainty on the labour market the behaviour of the households may change; they may begin to consolidate their balance sheets. This would reduce their consumption and reinforce the downward tendencies in the economy. The higher the debt burden the greater the risk of significant consequences. If housing prices fall in such a situation, households’ assets will be undermined while their debts will still remain. Households would therefore want to amortise rather than borrow, which would dampen demand.

chart 6). The latest World Economic Outlook by the IMF reports that “Global growth is in low gear (…) and downside risks persist.” The IMF now anticipates global growth of 2.9% for 2013 and 3.6% for 2014. BIS central bankers’ speeches 3 A change in growth momentum is becoming evident at a global level. Chart 7 shows the purchasing managers indices (PMIs) for various countries. On the vertical axis we see the current level of PMIs and on the horizontal axis, movements over the past six months. Momentum in the emerging economies has declined recently (red ring). By contrast, the advanced economies are picking up, in particular in the euro area (green ring). Moreover, PMIs for most of these economies are above the growth threshold of 50 points. Growth in the US, especially, is very robust and, on this side of the Atlantic, the UK has exceeded expectations (blue ring). Particularly important for Switzerland were the surprisingly favourable economic indicators in Europe this summer. In the second quarter of 2013, the euro area reported positive growth for the first time in six quarters. There are encouraging signs from the peripheral economies, especially. Since mid-year, for instance, these countries have again been recording surpluses on their current accounts. Nevertheless, these signs must be put into perspective. The improvement in the peripheral economies is beginning from a very low base level and the unemployment figures are oppressive. The banking system is very fragmented and unhealthy bank balance sheets give rise to declining levels of lending.

European financial markets calmer thanks to monetary policy If you take a look at chart 1, you can follow the movements in both the euro/Swiss franc exchange rate and the average risk premium for the government bonds of five peripheral euro area countries (Italy, Spain, Greece, Portugal and Ireland). The risk premium is drawn on an inverted scale, in other words, a movement downwards signifies a higher risk. This chart serves as an illustrative example for two developments. On the one hand, it shows that uncertainty in the euro area has decreased greatly over the past twelve months. At the time of the last Money Market Event in Geneva, the risk premium was almost 1,200 basis points; it is now below 400. On the other hand, the chart illustrates the fact that the upward pressure on the Swiss franc has abated. Following a long period last year when the exchange rate stuck closely to the minimum exchange rate of CHF 1.20, it moved away in January and, since May, has fluctuated within a relatively narrow range of CHF 1.22–1.26 per euro. BIS central bankers’ speeches 1 Here, the situation has calmed in two respects. In order to reduce the risk of the euro area collapsing, the European Central Bank (ECB) resorted to an unconventional measure in late summer 2012, the outright monetary transactions programme. Market participants were persuaded, and since then the risk premium for peripheral economies in Europe has declined steadily. What is remarkable is how persistent this trend has been.

All in all, the evidence points to discretionary fiscal policy having a moderately positive impact on economic growth in advanced economies. Yet the effectiveness of such measures depends on the way in which they are taken and their timing, in particular with regard to delays in the recognition, decision and implementation process. Precisely because of such difficulties, a budget policy which is 16 aimed ex ante in an anti-cyclical direction tends to produce pro-cyclical effects ex post. The effectiveness of discretionary measures also depends on the temporary nature and on the possibility of withdrawing them in a timely manner once the shock has passed so as to guarantee fiscal sustainability. 3.2 Comparing the importance of automatic stabilisers and discretionary policies in the euro area and in the United States If we compare budget policy on the two sides of the Atlantic, we see that the automatic 17 stabilisers play a more important role in the euro area. First of all, the greater the percentage of government spending over GDP, the greater the budget position’s response to fluctuations in economic activity. Automatic stabilisers are smaller in the United States, where government is smaller in relative terms (government 18 spending is worth 37% of GDP, whereas it tops the 45% mark in the euro area countries).

Durmuş Yilmaz: Press conference for the presentation of the Inflation Report Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the press conference presenting the third issue of the Inflation Report, Central Bank of the Republic of Turkey, Ankara, 28 July 2008. * * * Distinguished Guests and Members of the Press, Welcome to the press conference for the presentation of the third issue of the 2008 Inflation Report, one of the most important communication tools of the full-fledged inflation-targeting regime that we have been implementing. In this conference, I would like to give you a short summary of our evaluations and the Central Bank’s inflation forecasts in the Inflation Report which will be posted on our website later today. 1. Inflation developments Esteemed Members of the Press, I would like to start with a general assessment of inflation developments in the previous period and share with you the factors impeding the disinflation process in the first half of the year. Distinguished Guests, In April, both the Open Letter and the Inflation Report issued by the Central Bank of Turkey presented a detailed explanation for the factors impeding the disinflation process. The source of inflation has not changed in the past quarter. In the second quarter of 2008, prolonged increases in food, energy and other commodity prices continued to exert significant upward pressures on headline inflation.

I am positive that, like in the banking sector, the society will benefit from this. It will result in more efficient production, lower prices, better service quality and curb the power of the monopolistic producers. To date, as in the early 1990s, we again face the question of what is the right fiscal policy. Of course, today this problem is raised in a slightly different way. But, in essence, it is the same question - what fiscal policy shall ensure the stable development of the Estonian economy within the fixed exchange rate regime and as part of the euro area. I shall return to this question towards the end of my presentation. Thus the economic policy key issues we are facing in the beginning of the 21st century resemble in many aspects the problems we tried to resolve in the beginning of 1990s. We have achieved progress in finding solutions to some of the problems, others have remained unresolved. One thing is clear - undue postponement of tough issues is no good to anybody. If we want to be treated as equal partners in the European Union, if we want to sustain the rapid growth rate and 2 BIS Review 51/2002 growing income level, we must tackle these problems with similar resolution and energy we did 10 years ago. B. Challenges facing Estonian economy on its way to the European Union - internal policy So - what are today’s and tomorrow’s challenges facing Estonian economy?

Limited spare capacity in the Norwegian economy and persistent external inflationary pressures may lead to inflation accelerating further. On the other hand, the rise in interest rates and high inflation may cool down the housing market and curb household consumption faster than currently envisaged. There is also a risk of a sharper slowdown in global growth. The future path of the policy rate will depend on how the economy evolves. We cannot make any promises about the policy rate. The promise we can make is that we will continue our efforts to fulfil the mandate of keeping inflation low and stable and to promote economic stability. 1 A new set of forecasts was not prepared for the monetary policy meeting on 17 August. Updated forecasts will be presented when Monetary Policy Report 3/22 is published on 22 September. 3/3 BIS central bankers' speeches

Equity does a much better job than debt of sharing risk between borrowers and lenders as repayment terms adjust automatically with servicing capacity. Equity is also better able to support the financing of long-term investment projects because it is perpetual. So a world without equity is likely to be one with poorer risk-sharing and weaker long-term investment. To illustrate these costs, consider the portfolio behaviour of pension funds around the financial crisis. At this time, global equity prices fell sharply and risk appetites evaporated. These are precisely the circumstances in which pension funds, as long-term investors, could play a stabilising, counter-cyclical role. In particular, those pension funds with stronger balance sheets might be expected to bear greater risk when its price is cheap – for example, by buying equities. In fact, the evidence suggests quite the opposite happened. We have looked at the portfolio behaviour of over 2000 corporate pension funds between 2006 and 2012, splitting them into those with “strongest” and “weakest” balance sheets. Strongest is defined here by the net funding position (ratio of assets to liabilities) of the pension fund. Chart 8 shows the changes in equity portfolio allocations of the strongest and weakest pension funds, together with the FTSE All-Share index, over that period. 9 Both the strongest and the weakest pension funds began the period with a similar equity allocation. As equity prices started to fall in 2008, however, the allocations of strongest and weakest funds diverged sharply.

In summary, over the course of the past decade or so, the asset management industry has fundamentally changed shape. It is now large and is set to get larger still. The assets it manages are increasingly being allocated into illiquid assets or indexed strategies. And the risks on these asset allocations are increasingly being borne by (perhaps trigger-happy) endinvestors. Too-big-to-fail Given this evolving structure, what risks to financial stability might the asset management industry pose? The financial crisis alerted us to the perils of banks that are “too-big-to-fail”. During the crisis, the collateral damage from big bank failure necessitated state bail-outs. These nourished the beast that had already eaten the farm. A variety of regulatory reforms are being put in place in an attempt to house-train this beast (Haldane (2012a)). 4 Some of this is a mirror-image of trends in the pensions industry, but the pattern is also evident for nonpension savings products. BIS central bankers’ speeches 3 One natural question, then, is whether the asset management industry has spawned similar such behemoths. Two relevant factors here are, first, the relative degree of concentration in the industry and, second, the scale of its largest players. Table 1 shows the world’s top 10 largest asset managers and banks by asset size. The degree of concentration across the two industries is broadly similar. The top 10 asset managers account for just less than 30% of the sector, the top 10 banks a little more than 20%. Their balance sheets are also similarly-sized.

Third, as central bankers we had to design intervention strategies that had not been studied in recent times. The extraordinary liquidity measures that central banks took at the height of the crisis on both sides of the Atlantic had been expelled from the economics textbooks. 1 The Works of Tacitus translated by Alfred John Church and William Jackson Brodribb (1864–1877). http://www.sacred-texts.com/cla/tac/a06010.htm. BIS Review 29/2010 1 Modern monetary economics had suggested that unlimited arbitrage in financial markets would make such measures irrelevant and unnecessary. 2 In the event, amid conditions of extreme uncertainty, private arbitrage was unavailable. As in ancient Rome, public credit became vital because private finance had – at least temporarily – disappeared. What are some of the long-term lessons we can draw from the current crisis? Just as we have had to re-evaluate our understanding of the nature of risk of market disruptions and the potential responses in terms of implementation of monetary policy, so we must re-evaluate our understanding of the role of financial markets in our economies and our societies. The lack of a framework for monitoring and addressing systemic risk in the run-up to the crisis is part of the motivation for financial reform and improved market regulation. But we must also consider fundamental questions about the relative importance and limits of the pure financial “game” in markets, the potential abuse of market power, and, more generally, the role of the financial sector in the economy.

To overcome this perception, there should be adequate and reliable credit information mechanism, such as an SME credit bureau, that serves the needs of both the SMEs' and the potential lenders'. The establishment of a proposed SME Credit Bureau under this strategic alliance between CGC and D&B would complement other initiatives of the Government and the financial sector to further enhance SMEs' access to financing. One of the most important roles of the Bureau is to make available SME information, which includes their operational and financial status to potential lenders. In addition to relevant and timely information, potential lenders could also take comfort that the information is independently provided, hence increasing its reliability. The importance of a credit bureau in the current environment cannot be over-emphasized. A World Bank report stated that a good credit information infrastructure can contribute significantly towards assisting SMEs' access to capital. The report further highlighted that small firms with access to credit bureaus have a 40% chance of obtaining a loan, whereas firms without access to credit bureaus have only a 28% chance of receiving a loan. Therefore, significant opportunities exist to increase lending activities to SMEs in Malaysia with the establishment of an SME credit bureau. BIS Review 76/2007 1 Currently, information available for lenders to assess the creditworthiness of Malaysian SMEs is quite fragmented. Although there are a number of parties providing information on SMEs, the information are mostly tailored towards specific requirements and does not add the necessary values required from the perspective of potential lenders.

We always cooperate with the market in financial technologies and innovations. Thereby, in 2015, we held the first forum on innovative financial technologies; it was in demand with businesses and we are going to hold it again in autumn. We have established an institution of bond programmes. The development of debt instruments is extremely important for our financial market, because it is the best instrument for large companies, while banks should be more focused on lending to small and medium-sized businesses. In 2015, we laid foundations for the development of a national rating industry, and the new legislation allows us to expect that a really respectable and professional rating industry will be built in our country. Now about the national payment system. In 2015, operations and clearing centre of the NPCS was launched. It processes all operations made in Russia through cards of international payment systems. The transfer of payments into Russia was implemented in a very short period due to external risks but its implementation was of high technological quality in line with international standards. In the end of the last year a pilot issue of national payment system cards Mir was implemented. The cards are already issued by banks of the Crimea (and accepted throughout the Crimea) and some other banks. The mass issue of the cards is to start in the second half of the year. Besides, we have improved the system of Bank of Russia financial messaging system, a SWIFT counterpart.

We applied them because the external conditions throughout 2015 were persistently challenging, even extraordinary, and really required the Bank of Russia to take special substandard measures. The Bank of Russia used special-purpose refinancing instruments which somewhat backed up the real sector in the fields where the market failed: project financing, non-commodity exports, and small business. BIS central bankers’ speeches 1 Now, the upcoming transition to structural liquidity surplus is putting the expansion of specialpurpose instruments on hold. The efficiency of these instruments varies, that is why we will focus on fine-tuning them. Thereby, we have revised the criteria for driving non-commodity exports in order to focus on technological and manufacturing projects. As for project financing, we will refinance liabilities only for the projects already selected by the Interdepartmental Commission. The use of allocated limits only slightly exceeds 70% or 97 billion rubles. To solve the issue of external debt repayments, FX refinancing instruments were used. As a result, the external debt shrank by $ billion, i.e. by 16%, in 2015. The total debt reduction for the two years was 30%. It means that the debt burden for our economy has decreased considerably. Banks’ demand for foreign currency, provided by the Bank of Russia, was sinking noticeably over the past year and we are gradually abandoning these instruments. We expect banks to redeem the FX debt by the end of next year. We offered banks temporary regulatory easing to support the financial system.

That be as it may, like in many other developing countries the financial sector in Zambia still faces a number of challenges. The Financial Sector Assessment Programme (FSAP) Report of 2002 highlighted a number of these including limited access to financial services by the rural and peri-urban population and doubtful sustainability of financial services in Zambia. In light of these findings, and in recognition of the strategic importance of the development of the financial sector in contributing to sustainable economic growth and poverty reduction, the Government of the republic of Zambia developed and launched the Financial Sector Development Plan (FSDP) in 2004. The FSDP is a comprehensive five year strategy to build and strengthen the financial sector infrastructure to enable it to support economic diversification and sustainable growth. In addition, and in furtherance of the objectives of the FSDP, the BoZ Strategic Plan for 2008 – 2011 has made financial inclusion as one of its key strategic objectives. Under the FSDP two important studies, the FinScope™ Surveys of 2005 and 2007, on the demand for and supply of financial services in Zambia have been completed. These studies have augmented the earlier findings of the FSAP with respect to the key developmental challenges for the financial sector in Zambia.

At the same time, the SSM will develop its own more detailed supervision manual, which lays down the supervisory approach to be taken by the SSM including on off-site and on-site reviews, risk assessments and model validations. The ECB and the EBA are cooperating closely to ensure that these two projects are fully consistent. Here again, the existence of the SSM will greatly facilitate the work of the EBA, as all SSM members will naturally converge in their supervisory practices. Third, the conduct of stress tests. The Council Regulation requests the SSM to conduct a comprehensive assessment of the banks that the ECB will supervise directly. This will have two main building blocks. First, a balance sheet assessment, which is a point-in-time evaluation of the asset side of banks’ balance sheets. Second, a forward-looking assessment of individual banks’ capital positions and provisioning levels in the form of a stress test. This stress test, and future stress tests undertaken as part of the SSM’s regular supervisory functions, will be conducted in close cooperation with the EBA, in particular regarding the design and timing of the exercises. European Systemic Risk Board As regards interactions with the European Systemic Risk Board (ESRB), the activities of the SSM will have a clear systemic dimension and so cooperation between the SSM and ESRB will be essential.

The financial industry should also address any negative perceptions by having an effective communication strategy and ensuring swift response time to SME customers, as these are vital in maintaining the integrity and public image of financial institutions. Moving forward, it is imperative and almost inevitable for financial industry to undertake measures to advance financial literacy and capabilities of SME customers. The commitment to better serve the SME segment would reinforce the critical role of the financial industry in supporting the Government’s development agenda in a well-functioning financial system. CGC has demonstrated that efforts to assist underserved SMEs can be achieved in a financially sustainable manner through its suite of innovative financial products and services. Financial institutions should also explore strategic partnerships with adjacent industries such as telcos and fintechs to reduce market gaps and reliance on Government subsidies for the SMEs. Importantly, the financing ecosystem needs to be complemented with a comprehensive SME development ecosystem to nurture and elevate our SMEs towards greater size and competition. I hope today’s recognition and appreciation of FIs and CGC customers would spur both parties to become more innovative, resilient and progressive. My heartfelt congratulations to all the winners and may you continue to inspire and set benchmarks on SME financing landscape. 3/3 BIS central bankers' speeches

Distinguished participants, recent industry estimates indicate that Islamic finance is set to continue growing at an annual rate of about 15%. The increased trade between the subSaharan region and Islamic nations in the Middle East only reinforces our view that partnerships among the corporate players between the two regions will foster more developments in the area of Islamic finance. Ladies and gentlemen, the Government of the Republic of Zambia (GRZ) recognizes that the limited access to financial services and low number of products available to the different sectors of the economy has hindered the development potential of Zambia’s economy. There is need therefore, to revitalize the financial sector so that it meets the challenges of accelerated and sustained investments in key sectors of the economy. This can only be achieved where the financial system is able to improve its allocative efficiencies by providing appropriately designed products and services to all segments of the population like the Muslim community. Recent developments in the financial sector world-wide offer some encouragement that working together could extend the range and reach of financial services that are available to our people. Still a lot remains to be done to extend financial services to the majority of our people, particularly those that are economically active and to foster ongoing sustainability of our financial institutions. It is against this background that Bank of Zambia accepted your invitation to present the keynote address as a way of marking our commitment to ensuring that the financial system caters for all segments of the population.

Previous work by the Committee, embodied in a March 1996 report, recognized that settlement risk depends not only on the payments system infrastructure, but also on the way market participants use this infrastructure and manage their internal processes. A follow-up report was issued one week ago that applauded the progress made, while noting that there were further opportunities for private sector initiatives in reducing settlement risk. The central banks, of course, are ready to work closely with the private sector in achieving this goal. Closing Preventing future banking crises poses difficult issues for policymakers. Given the indispensable role that banks play in a nation’s economic well-being, all governments have found it important that financial institutions be subject to regulation or oversight. It is important to understand from the start, however, that there are limits to the supervisory process. Supervisors have limited ability, for example, to detect fraud. Most important, in a market-oriented banking system, bank directors and management must have the ability to set the bank’s overall course, to seek a BIS Review 64/1998 -6- reasonable profit, and to innovate and experiment with new banking activities and products. In other words, supervision can not be so heavy-handed as to stifle competition and innovation. As such, the supervisory process has an inherent tension between the freedom banks need in order to earn reasonable profits and the latitude to take such large risks that their future could be endangered.

Eddie Yue: Developing local-currency bond markets in Asia Statement by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority and Head of the Delegation of Hong Kong, at the 45th Asian Development Bank Annual Meeting, Manila, 4 May 2012. * * * I would like to thank the Government of the Philippines for hosting the 45th Annual Meeting of the Asian Development Bank (ADB). I would also like to congratulate ADB on the successful conclusion of the Tenth Replenishment of the Asian Development Fund (ADF XI), which would provide critical resources to ADB to further its work in poverty reduction in Asia. The global economy has shown signs of improvement in 2012 following a marked slowdown amid the intensification of the euro zone debt crisis in the latter part of last year. Nevertheless, significant downside risks remain, with the euro zone debt crisis yet to be fully resolved and rising oil prices adding further uncertainty to the recovery outlook. Asia has remained resilient so far, in large part attributable to the reforms taken by regional economies over the years to strengthen economic fundamentals, improve fiscal discipline and enhance the resilience of their financial systems since the Asia financial crisis. Nevertheless, the region is not immune from the lingering fragility in the global environment. To date, the deleveraging by European banks has not caused significant short-term credit tightening in Asia, with banks in the region and elsewhere having stepped in to fill the gap left by European banks.

Ardian Fullani: Economic and financial developments in Albania Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the presentation of the Bank of Albania’s Annual Report 2009 to the Albanian Parliament on 29 April 2010, published on 30 April 2010. * * * Honourable Ms. Chairwoman, Dear deputies, It is a privilege to present to you today the Bank of Albania’s Annual Report for 2009. This Report, the key conclusions of which will be briefly reviewed in my speech today, makes a thorough and transparent analysis of economic and financial developments in Albania, and provides an overview of the Bank of Albania’s work to meet its legal obligations and institutional commitments. The year 2009 was a challenging year for the Albanian economy in all its dimensions. In response to the global economic and financial crisis, the following were put to the test during this year:  The country’s macroeconomic balances;  Our financial system’s stability;  The business models and the private sector’s financial sustainability; and  The analytical and responsive capacities of macroeconomic policies. In a broader setting, the shock that hit the Albanian economy in 2009 put the flexibility of Albania’s economic development model and its capacity to respond to a thoroughly transformed global environment to test. The global crisis provided a quick impact on the economic activity at home.

Dimitar Radev: Achieving the financial stability objective through macroprudential measures cannot be sustainable without understanding the financial cycle Opening remarks by Mr Dimitar Radev, Governor of the Bulgarian National Bank, at the Conference "The Current Global and European Financial Cycle: Where Do We Stand and How Do We Move Forward? ", jointly organized by the Bulgarian National Bank and the Bank for International Settlements on the occasion of the 140th Anniversary of the Bulgarian National Bank, Sofia, 7-8 July 2019. * * * Dear colleagues, Distinguished guests, We are delighted to have you with us to participate and share in our joint BNB-BIS conference organized on the occasion of the 140th anniversary of the Bulgarian National Bank. I would like to extend my special thanks to the General Manager Agustín Carstens and the BIS for their support in organizing this event. This is only a latest example in decades of cooperation between our two institutions. The BNB is among the oldest central banks in the world, 13th by order of establishment1. Today’s conference, therefore, marks a long history of central banking in Bulgaria. Evolution of a central bank’s mandates A central bank is historically associated with the goal of keeping the national currency and prices stable. After the Great Depression of the 1930 s supervision has become a function entrusted to or taken away from central banks in cycles depending on crisis experiences. With respect to supervision as a central bank function, the 2007/2008 global crisis had two effects.

At the sector level, it is necessary to have an effective insolvency regime to ensure that nonviable companies can be wound up in an equitable manner before they have the chance to build up even further losses. However, liquidation should generally be a last resort and there should be an alternative to insolvency that allows distressed, but commercially viable, companies to survive as going concerns, thus preserving employment and productive capacity. This requires a framework that encourages negotiation and compromise between distressed borrowers and their creditors. The objective should be to agree a standstill on debt payments and a moratorium on legal proceedings to provide a breathing space during which negotiations on a debt restructuring can take place. In Hong Kong, the Association of Banks has issued non-statutory guidelines for the conduct of debt workouts. These are based on the so-called London Approach to workouts that was developed by the Bank of England. Other countries in the region have also used this as a model for dealing with corporate restructuring. The success of some of these schemes has yet to be proved, but I can say that the Hong Kong approach has generally worked well. The increase in the number of companies requiring financial assistance and the multiplicity of banks involved are however putting some strains on the system. Workouts are becoming more protracted and more difficult to arrange. This is partly because of the shortage of workout specialists already referred to, but also because banks do not always display the necessary spirit of cooperation.

The bad debt charge for our locally incorporated banks in respect of their Hong Kong business more than tripled in 1998, albeit from a low base. Non-performing loans (measured by those that have been classified as substandard, doubtful and loss) rose from around 2% at end-1997 to 7.3% at the end of last year. This is a sharp increase but it is important to put it into regional perspective. The equivalent figure for non-performing loans in Thailand at present is around 46%. The picture in Indonesia is even worse. Hong Kong has therefore fared better in respect of credit risk than its neighbours. It has no doubt been helped in this by the solid regulatory framework in Hong Kong and the infrastructure of business laws that makes it relatively easy to take and realize collateral and to put defaulting borrowers into liquidation. Banks are also free to carry on their business without political interference. I believe that Hong Kong has also benefited from its openness as a financial centre, though this can also have its drawbacks. Major international banks are allowed to play a full role in our banking system, including in many cases participating as full retail banks. This has allowed cross-fertilization of talent, systems and products between the local and foreign banks. Finally, another point in Hong Kong’s favour is that it had already gone through a banking crisis in the early 1980s, in which abuses such as connected lending had played a part.

We are the same people, speaking the same language and sharing the same customs, hence, there is no point for us to be held back by the absurd barriers of time. The completion of the new road and its stretch to the largest harbour in the country create the proper grounds to turn the Kukës town into an extraordinary transit point for passengers, goods, services, art and culture. Fourth, your district should make clever and great use of the presence of a university in this town. My call is just plain: invest in mobilizing a professional and specialized teaching team. Spend on education, on knowledge and the culture it produces. In this context, the local government could set financial stimuli. The final goal will be to establish a national educational centre, which serves to the local community living on both sides of the border. I honestly hope the future managers grow and be a product of this university. Fifth, I believe you should pay your utmost attention to the presentation and spreading out of information on the potentials your district has to offer. Pretending you possess something that is worth it is only one side of the coin. The other is how able you are to find buyers, to get them buy what you want to sell. In this context, the complete identification, regulation, presentation and promotion of these great potentials are of prime priority.

If a firm is easily resolvable as described, then the authorities may care less about the potential for recovery. That could be a matter left for the shareholders. The more difficult a resolution would be, the more interest the authorities have in removing any barriers to resolvability in advance. Failure is usually more problematic for banks than for other commercial firms. When a bank is known to be in trouble, its customers may withdraw funds quickly, creating a liquidity run that might spillover to similar institutions. That places an emphasis on speed of action. In 2009 the UK government introduced permanent legislation that enables banks to be resolved by the authorities, and designated the Bank of England as the UK resolution authority. For the EU as a whole, the Banking Recovery and Resolution Directive (BRRD) took effect at the start of 2015, and brings European legislation on recovery and resolution into line with the FSB’s international standards. It requires there to be a resolution authority in every EU country and, amongst other things, specifies how decisions are made to put banks into resolution, how resolutions may be conducted, and what tools should be available to resolution authorities. But there is not yet a special resolution process for insurers. That remains on the wish-list for now. Effective resolution can be greatly enhanced if the authorities have prepared for the event, with the assistance of the firms concerned. The larger and more complex a firm, the more complex and challenging such planning is likely to be.

(2004), ‘Remarks by Governor Ben S. Bernanke’, Meetings of the Eastern Economic Association, Washington, DC, 20 February. Blair, T (2005), ‘Common sense culture, not a compensation culture’, speech given at the Institute for Public Policy thinktank, reported in the Guardian. Available at: http://www.theguardian.com/politics/2005/may/26/speeches.media. Blinder, A (2004), ‘The Quiet Revolution: Central Banking Goes Modern’, New Haven, CT: Yale University Press. Blinder, A and Morgan, J (2007), ‘Leadership in groups: A monetary policy experiment’, International Journal of Central Banking. Available at: http://www.ijcb.org/ journal/ijcb08q4a4.pdf. Broadbent, B (2013), ‘Forecast errors’, Speech given at the Mile End Group of Queen Mary. Available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2013/ speech653.pdf. Calomiris, C (2014), ‘Fragile by Design: The Political Origins of Banking Crises and Scarce Credit’, Princeton University Press, ISBN 978–0691155241. Capie, F, Goodhart, C and Schnadt, N (1994), ‘The development of central banking’, in Capie, F.; Fischer, S., Goodhart, C. and Schnadt, N. (eds), The future of central banking: the tercentenary symposium of the Bank of England. Cambridge, UK : Cambridge University Press, pp. 1–261. Cross, K (1977), ‘Not can--but will college teaching be improved?’, New Directions for Higher Education, 17 (Spring): 1–15. BIS central bankers’ speeches 13 Debelle, G and Fischer, S (1994), ‘How Independent Should a Central Bank Be? in J.C. Fuhrer (ed. ), Goals, Guidelines and Constraints Facing Monetary Policymakers. Federal Reserve Bank of Boston, 195–221. Diamond, P and Vartiainen, H (2007), ‘Behavioral Economics and Its Applications’, Princeton University Press. Elder, R, Kapetanios, G, Taylor, T, Yates, T (2005), ‘Assessing the MPC’s fan charts’, Bank of England Quarterly Bulletin 2005 Q3.

Conclusion Behavioural biases afflict us all, in every activity from setting concrete to setting interest rates, from stress-testing steel to stress-testing banks. Central banks cannot be immune. Because central banks’ judgements affect society at large and in large ways, it is important there are institutional means of safeguarding against these biases. The Bank of England’s new policy framework is part of the response to that challenge. By design, it contains institutional safeguards against many of the biases most important for UK monetary and financial stability. But it is early days. In developing this framework further, three principles will be important – recognition, research and revision. Because behaviour biases are often unconscious, recognising them is crucial for building robustness. Put differently, denying their existence is proof of their importance! Research can help in identifying and understanding these biases and assessing institutional means of leaning against them. The Bank hopes to make a real behavioural change of its own on the research front in the years ahead. Armed with that research, the Bank should be better-placed to make revisions to policy. Historically, flexing policy frameworks has often been taken as a sign of regime failure. Quite the opposite ought to be the case. If the Bank’s policy machine is to be robust over time, it will need to evolve and flex. If central bank regimes are encased in glass, they are apt to shatter when next hit by a falling Rock. 64 Stockton (2012) also reaches this conclusion.

From 2006, growth is expected to slow gradually to, and eventually somewhat below, the level of growth in potential output. In Inflation Report 3/04, the output gap is projected to become clearly positive in the course of 2005 and to remain positive until the end of the projection period. Inflation is projected to show a marked increase over the next year. In the short run, the depreciation of the krone in 2003 will continue to exert upward pressure on imported consumer goods. We also assume that the pronounced fall in prices for some goods and services last autumn will to some extent be reversed. In the somewhat longer term, inflation will show a more gradual rise. Higher resource utilisation in the Norwegian economy will lead to somewhat higher wage growth and will also make it possible for enterprises to increase their operating margins. However, inflation will still be restrained by low external price impulses. The positive contributions from the exchange rate depreciation in 2003 will unwind in the course of spring 2005. The contribution from the exchange rate to inflation will then gradually become slightly negative. There are prospects that inflation will reach the inflation target towards the end of the projection period. There is uncertainty surrounding the projections. The projections are partly based on our analysis of relationships in the economy, the exchange rate assumption and the forward interest rate assumption. We can give some indication of the uncertainty surrounding the projections on the basis of historical deviations between projected and actual price developments.

This could in turn result in lower demand and lower commodity prices. High oil prices have mixed effects on the Norwegian economy. Lower demand abroad will have a negative impact on parts of the Norwegian economy. At the same time, domestic demand is normally stimulated by higher petroleum investment. The balance in the Norwegian foreign exchange market will not be affected to any appreciable extent. So far, the effects of high oil prices on developments in the real economy have been relatively limited. Credit developments in the past year have given ambiguous signals to our interest-rate setting. Growth in household debt is high. Enterprises have been reducing their debt for some time, but developments over the past months may suggest that this trend has been reversed. Norwegian enterprises and households borrow primarily at variable rates. Loans with no form of fixed rate agreement account for over 80 per cent of the value of loans to the household and enterprise sector. The current interest rate level is very low. Long-term investments cannot be made based on the assumption that this interest rate level will persist. According to money market expectations, the interest rate will eventually stabilise at close to 5½ per cent. This interest rate, plus a premium for banks’ margins, provides a more realistic indication of the interest rate level that will apply over the loan’s life than the variable interest rates prevailing today. Growth in the Norwegian economy is now solid. It appears that growth will also be high in 2005.

House prices and financial stability Households have been increasing their borrowing at a rapid rate for a fairly long time now. The rise in household debt has been accompanied by a fast upswing in prices in the house market. There have been no clear signs to date that this development has begun to moderate in earnest. In all likelihood, there is a limit to how long it can continue. The Riksbank’s assessment is also that the rate of increase will slow down in the coming years as interest rates rise. Developments in the property market, chiefly as regards commercial properties but also housing, play an important part in the Riksbank’s analysis of factors that affect the stability of the financial system. A central question when judging whether house price developments have the potential to pose a threat to financial stability is the extent to which they can be assumed to be driven by exaggerated optimism and speculation. If such driving forces are significant then there is a risk that households could have difficulty meeting their interest payments when interest rates rise; further, the downward adjustment in prices could be very dramatic when the lack of realism in estimates finally becomes evident. The combination of households’ payment difficulties and sharp falls in collateral values could potentially cause problems for the banks. However, this is unlikely to happen in Sweden for several reasons.

One is that house price developments in the country as a whole – as indicated by the analyses in the Financial Stability Report we published about a month ago – seem to be explained pretty well by normal underlying factors. These include of course the interest rate level, which for a relatively long period has been low. At the end of 1996, when house prices began to rise again after the crisis years, the average nominal mortgage rate for households was around 9 per cent. Today, it is approximately 4 per cent. Furthermore, households’ disposable incomes have grown firmly during this period. Another factor, of course, is the developments on the supply side, where construction of new homes has been very modest. This fell dramatically in conjunction with the crisis in the 1990s and has only begun to pick up in recent years. So it appears that the upswing in house prices has not been driven by general overoptimism among households and lenders. It might also be worth mentioning here that one reason why the elements of pure speculation probably are small is that Swedish households, unlike those in some other countries, mainly buy homes to live in and not as an investment. The risk of speculative price formation increases in countries where it is common to buy-to-let, with the investor waiting for the home to rise in value before realising a capital gain.

In order to avoid more drastic changes in monetary policy at a later stage, we chose to adjust monetary policy in a somewhat less expansionary direction. The repo rate was raised in December from 4.10 to 4.35 per cent. (Diagram 6. Inflation Forecast December 1997) BIS Review 14/1998 - 10 - CPI an d Underlying In flation annual percen tage ch an ge 4.0 4.0 Underly ing infl ation 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 CPI 0.5 0.5 0.0 0.0 -0.5 -0.5 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Sources: Statistics Sweden and the Riksbank The current crisis in Asia was discussed chiefly in our risk scenarios. A small reduction in the growth of exports was made in the main forecast. But it was primarily a possible deepening of the crisis compared with the situation in December that, it was deemed, might have substantial effects on economic and price developments in Sweden. Thus the Asian crisis was taken into account in our risk assessment. Since then the crisis in Asia has worsened, both in terms of its effects on the financial markets and its likely consequences for real economic growth. For Sweden’s economy it means that the negative effects of the Asian crisis probably will be somewhat more extensive and prolonged than we expected in December.

As a result, we continue to expect real GDP to grow at a moderate but steady pace and euro area inflation to rise gradually over the coming months, in line with the path already implied in our June 2016 staff projections. The Governing Council will continue to monitor economic and financial market developments very closely. We will preserve the very substantial amount of monetary support that is embedded in our staff projections and that is necessary to secure a return of inflation to levels below, but close to, 2% over the medium term. If warranted, we will act by using all the instruments available within our mandate. Meanwhile, the Governing Council tasked the relevant committees to evaluate the options that ensure a smooth implementation of our purchase programme. Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.3%, quarter on quarter, in the second quarter of 2016, after 0.5% in the first quarter. Incoming data point to ongoing growth in the third quarter of 2016, at around the same rate as in the second quarter. Looking ahead, we continue to expect the economic recovery to proceed at a moderate but steady pace. Domestic demand remains supported by the pass-through of our monetary policy measures to the real economy. Favourable financing conditions and improvements in the demand outlook and in corporate profitability continue to promote a recovery in investment.

Monetary Policy and Inequality”, Journal of Monetary Economics, Volume 88, June 2017. 4 [5] • Deutsche Bundesbank (2016), “Distributional Effects of Monetary Policy”, Monthly Report, September 2016. • Frederiksen, A., O. Paulsen, (2010) “Increasing Income Inequality: Productivity, Bargaining and Skill-Upgrading”, IZA Discussion Paper Series No. 4791, February 2010. • Furceri D., P. Loungani, and A. Zdzienicka (2016), “The Effects of Monetary Policy Shocks on Equality”, IMF Working Paper, WP/16/245, December 2016. 5 [5]

Cross-border problems in resolving different subsidiaries or branches can also be sidestepped.6 Any reorganistion of the operating companies to address the underlying causes of the group’s failure can be made in an orderly fashion after the solvency position has been stabilised via the bailin. Multiple-Point-of-Entry Resolution Multiple-point-of-entry resolution is what it says on the tin. Rather than resolving the group as a single whole, it would be split up into its parts. That is quite probably appealing for those global groups comprising a bundle of regional, on-the-ground commercial and retail banks, operated as separate businesses financially in distinct legal structures but with shared operational and central services. 6 4 See FDIC and Bank of England (2012), Resolving Globally Active, Systemically Important Financial Institutions. BIS central bankers’ speeches Of course, just saying ‘break up the group along regional lines’ does not amount to a resolution strategy. What happens to those regional parts? Healthy parts might be sold or be maintained as a residual group shorn of their distressed sister companies. Those distressed parts would need to be resolved, either via P&A or via bailin of the local subsidiary (if it had issued bonds to the market). I want to stress that last point because ‘bailin’ as a resolution tool should not become synonymous with top-down SPE resolutions: an MPE resolution could involve the bailin resolution-tool being applied to some parts of the group.

The increased international integration of both capital and goods markets has brought a huge increase in the scale of cross-border financial activity. The largest global financial institutions now play significant roles in a large number of financial systems outside of their home market. These changes are likely to affect the manner in which financial shocks in one region are propagated to other regions. Finally, we have witnessed an increase in the degree of concentration in some markets, a development that has the potential to make the system more vulnerable to the deterioration in conditions at one of the major bank or nonbank financial intermediaries. The degree of systemic risk presented by these changes depends importantly on two things. It depends on the robustness of the infrastructure that supports these markets. And it depends on the level of reserves, capital, margin and collateral that the major financial institutions hold against risk, which is in part a function of the strength of risk management systems. In both of these areas, market practice has made significant progress over the past decade, and further improvements are underway. A few quick points about two areas in which we believe further progress offers the highest possible return in terms of improving the overall resilience of the financial system. In the broad area of market infrastructure, we think the greatest near-term imperative is to strengthen the post-trade processing systems that underpin the rapidly growing over-the-counter derivatives market.

A credible stress-testing process has to try to account for not just the effects of a discrete change to some dimension of market risk or some constellation of asset prices, but the effects of those changes on, for example, the behavior of financial market participants and on the broader macroeconomic conditions that might affect credit. It is also critical that firms assess their concentrations not only under current conditions, but also determine how firmwide credit concentrations to names, sectors or counterparties could build up under more stressful economic and financial market conditions. Of course, what is important here is not just that firms do a better job of capturing and valuing potential exposures, but that this information is translated into appropriately conservative judgments about limits and terms. Where uncertainty and complexity is higher, we should see this translate into higher cushions against potential loss. And senior management needs to be willing to lean against the erosion in credit terms and margin practice typically induced by competitive pressure during periods of low credit losses and implied volatility. Overall capital is, of course, an important part of what makes financial systems stable. But the size of the margin above the regulatory minimum or the thresholds that might affect a financial rating is critical, as is the extent to which the initial margin is set at levels that are likely to be sustainable over 2 BIS Review 28/2006 the cycle.

I will not name the bank here, because the HKMA is currently a tenant in a building that bears its name. To avoid giving the impression that the HKMA is a subsidiary of that bank, we have always tried to pretend that the building is called something else, by refraining from mentioning the name on our stationery, or to deliverymen or taxi-drivers, or to anyone else. It is sufficient to say that the bank in question is this year celebrating its 100th anniversary in Hong Kong. Steve has gone to the opposite end of the two-corner solution by entering the floating world of academics and consultants. Since leaving the Reserve Bank of Australia six months ago, he has taken up an appointment as Adjunct Professor at the National Centre for Development Studies at the Australian National University. He also works as an economic consultant, mainly, I understand, on Asia-related topics. Whatever corner Stan and Steve have chosen, the important thing is that they will continue to give their expertise to the region through organisations which, though very different, have an important presence in Asia. They are also here to share that expertise with us today. So without further delay, let me welcome them both and call first upon our speaker, Dr Stanley Fischer, to deliver the Fifth HKMA Distinguished Lecture. Dr Fischer, please. 2 BIS Review 33/2002

Niklaus Blattner: Financial market infrastructures facing technological, economic and regulatory challenges Summary of a speech by Mr Niklaus Blattner, Deputy Chairman of the Governing Board of the Swiss National Bank, at the XI AWK Group Financial Services Lunch, Zurich, 20 September 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * Smoothly and efficiently functioning financial market infrastructures form the backbone of the International Financial Centre of Switzerland. The future of these infrastructures will largely hinge on trends in Europe, which point to stronger consolidation. However, healthy competition is the prerequisite for investment and innovation incentives in a consolidated stock market and settlement environment. This would also contribute to reducing the existing inefficiencies, in particular with regard to the processing of cross-border transactions. Yet a competitive environment will develop only if market participants can choose freely among the different providers and if the infrastructures are interoperable, i.e. if the providers grant each other and their participants mutual non-discriminatory access. At present, competitive obstacles exist at the technological, economic and regulatory levels. For instance, costs for changing providers are high. Moreover, financial market infrastructures are often operated in “silo” mode – either explicitly or implicitly – with clearing and settlement being handled by only one provider. But silos impede competition. A suitable regulatory framework must therefore be created to strengthen competition.

In times of crisis, authorities may use instruments such as lending of last resort, variable-rate lending at longer maturities (credit policy, credit easing), special resolution regimes for financial firms in trouble, government lending guarantees, government capital injections, and so forth. 2 BIS central bankers’ speeches My point here is that this has to be taken into account when considering the lessons of the financial crisis for monetary policy. The interest rate is a blunt and unsuitable instrument for achieving financial stability and it thus makes little sense to assign the objective of financial stability to monetary policy. However, it may make sense to assign the objective of financial stability to the central bank, if the central bank is given control of the appropriate supervisory and regulatory instruments. The fact that financial-stability policy and monetary policy are different does not mean that there is no interaction between them. This interaction need to be considered. Monetary policy affects asset prices and balance sheets and can thereby affect financial stability. Financialstability policy directly affects financial conditions, which affect the transmission mechanism of monetary policy. This means that monetary policy should normally be conducted taking financial-stability policy into account, and financial-stability policy should be conducted taking monetary policy into account. This is similar to how fiscal policy is conducted taking monetary policy into account, and monetary policy is conducted taking fiscal policy into account. Importantly, under normal conditions, financial stability is handled by financial-stability policy, not by monetary policy.

Diversification is a solid protection against failure, but not all mergers and acquisitions are motivated by diversification – they may by contrast be designed to gain greater market share in an existing business and thereby do nothing to increase diversification. Moreover, there is again the 4 BIS Review 43/2001 distinction between individual banks and the system – the system can be diversified by having lots of different specialised banks. This would not in all circumstances be a less robust system than one where individual banks have reasonably diversified portfolios which are all as a result vulnerable to common shocks, or one where a smaller number of large banks are all directly interconnected with each other. And finally, even if we were to conclude that consolidation makes banks safer in the long run, the short run effects could be very different as management tries to resolve inconsistencies in systems or clashes in cultures. Secondly, there is the issue that consolidation is perhaps likely to make bank failure more damaging in its impact, although again this can only be judged case by case. And thirdly, since larger banks tend to be organisationally more complex, there is the question that resolving large bank failures can turn out to be an infinitely more complex task.

Lars Heikensten: The IMF - mandate, means and governance in a changing world Speech by Mr Lars Heikensten, Governor of the Sveriges Riksbank, at the Joint IMF-Bundesbank Symposium “The IMF in a changing world”, Frankfurt, 8 June 2005. * * * The question posed to this panel is "The IMF – a panacea for every illness?". That it is being asked at all indicates that confidence in the IMF is strong today. I agree with those that have great confidence in the IMF. Nevertheless, my answer to the question is no: The IMF is not – and should not be - a panacea for every illness. Allow me to raise a number of issues against this background. Focus on the core functions The IMF has a unique mandate – to promote global macroeconomic and financial stability. This is the fundamental basis of sound economic performance. The IMF’s mission is certainly not less significant today than it was before. It was no coincidence that when the IMF was founded, in Bretton Woods in 1944, it was accompanied by the creation of the World Bank and (later) the WTO – with explicit areas of responsibility. It is important to adhere to these in order for each of the organisations to be able to work effectively and efficiently. A stable economic development is the basis of other international organisations' work. So it is vital that the IMF continues to focus on its core functions – and to do it well.

Many countries do not seriously consider the recommendations given to them by the IMF and/or blame the Fund for its own problems. Other countries want to avoid that the consequences of their own policy actions, for the rest of the world, are discussed within the IMF or prefer to discuss them elsewhere. • To increase the legitimacy of the IMF, there are reasons to consider the formal governance issues, (i.e. the QVR-issues). A consensus has to be built, step by step, on how to deal with this. However, to increase the efficiency of the Fund, a number of other reforms could be implemented that are as important as the QVR-issue. In these areas it is possible start moving forward at once. Thank you. BIS Review 43/2005 5

Sources: The National Institute of Economic Research and the Riksbank. 7 See Rawdanowicz, Bouis and Watanabe (2013). 8 This reasoning is based on Farhi and Tirole (2012). 6 BIS central bankers’ speeches A more tangible source of concern is households’ expectations of future interest rates. Surveys show that households (and market agents, for that matter) are expecting much lower interest rates in the longer run than we at the Riksbank are expecting (see Figures 5 and 6).9 Figure 6 Expectations of the repo rate Per cent 5 5 4 4 3 3 2 2 Survey, Prospera average, 28 August 2013 1 Forward rate, 10 September 2013 1 The Riksbank's repo-rate path 0 0 13 14 15 16 17 18 Note. Repo-rate forecast from the September MPU. Repo-rate expectations among money market participants 1, 2 and 5 years ahead. The broken lines show an interval for the long-term level of the repo rate of 3.5 to 4.5 per cent. Sources: The National Institute of Economic Research, TNS SIFO Prospera and the Riksbank One possible interpretation of these expectations is that households place too much emphasis on the low interest rates in recent years when they are looking ahead. In this case, further repo-rate cuts risk reinforcing the difference between households’ expectations and the Riksbank’s expectations of future interest rates.

Svensson (2013b) says on the other hand that a lower repo rate would entail a lower debt ratio. But in his model there is no real reason to be concerned over household indebtedness, regardless of how the repo rate affects the degree of household indebtedness. For example, he does not allow for households’ interestrate expectations becoming unjustifiably low if the repo rate is cut. BIS central bankers’ speeches 9 Supervisory measures can have direct effects on financial risks and imbalances by limiting the possibilities of particularly vulnerable households, companies or banks to take certain decisions. However, the measures may also have indirect effects on risks and imbalances, or side effects on the economy by affecting the cost of capital or the general demand situation. An example of a measure that probably first and foremost has direct effects is the mortgage cap. This affects primarily a small group of highly-indebted households and can be expected to contribute substantially to preventing financial imbalances arising. But the mortgage cap scarcely has any major effects on the general demand in the economy, or on the cost of capital for a typical household. An example of a measure that can affect the cost of capital is higher risk weights on mortgages. Such a measure would probably lead to an increase in mortgage rates in relation to other lending rates. And higher risk weights would probably also push up average lending rates at a given repo rate, at least in the short run.

Let me cite a few excerpts from Walter Bagehot’s “Lombard Street”:1 “Mercantile bills are an exceedingly difficult kind of security to understand …in years like 1871 many active men make so much money at the end of the year they are worthy of altogether greater credit than anyone would have dreamed of….On the other hand, in years like 1866 a contagious ruin destroys the trustworthiness of very many firms…Persons who buy and sell again soon are often liable for amounts altogether much greater than their own capital; and the power of obtaining those sums depends upon their “respectability,” their “standing,” and their “credit,”…and more simply upon the opinion which those who deal with them have formed of them.” Whilst not directly applicable to the present times and taken out of the historical context of the financial panic around the failure of Overend, Gurney and Co. in 1866, there are still a number of thought-provoking passages that sound so familiar in comparison with what we have been experiencing over the past four years of financial crisis. This is not only the case because the offices of Overend in Lombard Street were only a few miles away from where we are meeting today. So, let me dedicate my speech to the issue of contagion, and more specifically to the experiences with sovereign contagion during the European debt crisis and the related policy responses. I would like to start out by discussing why contagion needs to be addressed by policy and how.

A first characteristic of contagion is that the spread of instability would usually not happen without an initial trigger event – which often appears to be a relatively contained event. A second characteristic is that the transmission of instability is in some way abnormal, for example, in terms of its speed, strength or scope. Though spillovers are to be expected in an interconnected financial system, contagion is distinct in that it often reflects a market failure and a dangerously amplified transmission of instability. The underlying market failure consists of the fact that contagion often involves externalities.3 As a result, the private costs of the initial financial market failure, that is the costs to the actor triggering contagion, are lower than the social costs. In the specific case of the sovereign debt crisis in Europe, the trigger could, for example, be that a country in a precarious fiscal situation does not seriously implement the necessary fiscal consolidation measures. This could lead interest rates on this particular country’s government debt to rise and could in turn also constrain economic growth in that country. This is what I call the “private costs” of such behaviour. Although in this case the lack of fiscal discipline is something which is strictly related to one country, this circumstance may still lead volatile financial markets to also lower their expectations about fiscal consolidation efforts in other countries. As a result, those other countries also begin to face costs in terms of significantly increased interest rates on their government debt.

Michael C Bonello: Financing the small business sector – constraints and opportunities Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the European Federation of Ethical and Alternative Banks and Financiers Seminar, St.Julian's, 15 April 2010. * * * The holding of a seminar on credit for small businesses is both appropriate and timely given the important role played by these enterprises in modern, free-market economies and the contribution they are likely to make in the recovery phase as economies emerge from recession. It is perhaps not widely known that of the almost 20 million enterprises active within the European Union (EU) in 2005, 99.8% were small and medium-sized enterprises (SMEs), defined as businesses that employ fewer than 250 persons. 1 In turn, more than nine-tenths of these were micro enterprises, with a workforce of fewer than 10. In 2005 SMEs accounted for 58% of the value added generated in the EU and 67% of all employment, compared to 55% in the US. 2 Small businesses are a major source of dynamism in the Maltese economy too. SMEs constitute the overwhelming majority of businesses, accounting for over 99% of the total and two-thirds of total employment. The vast majority are micro enterprises. These small operations act as customers of, and suppliers to, larger companies and are an essential source of entrepreneurship and innovation.

In the euro area, credit growth has indeed slowed progressively during the past year. The latest figures, for February, suggest that loans to the private sector contracted by 0.4% from a year earlier. The annual growth rate of loans to all NFCs – large, medium and small – fell from a peak of almost 15% in April 2008 to –2.5% in February. With regard to credit flows to SMEs, a recently published ECB survey, which however does not include the five smallest countries in the euro area, including Malta, shows that SMEs were generally less successful than large companies in obtaining bank loans in 2009, even if the majority received part or all of what they had applied for. In the second half of 2009, 75% of all SMEs reported successful approaches, slightly less than in the first half of the year. The main reasons given by the banks were the general economic and the firm-specific outlook, together with a reduced willingness to extend credit. It would appear, therefore, that both demand and supply factors explain recent credit developments in the euro area. This conclusion is corroborated by the evidence from the Bank Lending Survey, which points to factors associated with the weak macroeconomic conditions, such as a lower demand for credit due to less fixed investment, combined with supply side factors such as the tightening of credit standards.

In that respect, however, I must at once admit to having no clear answer to the question of how the situation will develop. In conclusion I shall be touching on the consequences for economic developments and inflation in Sweden. In that context it is not just international economic activity that is important but also such factors as wages, productivity and the exchange rate. That will bring me to the challenges which monetary policy now faces. The longest upswing ever First let me take you back a number of years. A look at the exceptional performance in the past nine years can, I believe, help us to understand the problems which now have to be handled in the United States. Today we know that the upswing which began in the early 1990s and became successively stronger is the longest period of continuous expansion the U.S. economy has ever experienced. At first this came to be known as the Goldilocks economy: not too hot and not too cold, as the fabled girl commented on the three bears’ porridge. This referred to the phenomenon of high growth without any signs of overheating. Later there was talk of a ‘new economy’ where investment in new technology and growing use of the internet were the primary factors behind a more efficient performance with rising productivity. Firms that utilised the new technology functioned better and competition increased, partly because the internet made price comparisons easier, stocks could be slimmed and distribution became more efficient.

Jean-Pierre Roth: More growth a must Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the Swiss Economic Forum, Thun, 27 May 2005. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). * * * Since the mid-1970s now, economic growth in Switzerland has been significantly lower than that of other industrialised nations. In terms of per capita GDP among OECD countries, Switzerland lost its leading position during this time, falling back into the main field. Economic growth is vital, however, for the sustainability of our social security institutions. Demographic shifts will cause the ratio of pensioners to contributors to double in the next 30 years, with the result that tomorrow’s generation will be faced with a heavy burden – one that could be considerably lightened by higher growth rates. The soft growth in Switzerland is primarily attributable to the lack of competition in the domestic market. There are numerous known ways to boost growth which have proven successful in many other countries. So far, however, Switzerland unfortunately has neither grasped the importance of implementing these measures, nor does it have the political will to do so. Stronger economic growth can only be achieved by opening our domestic market to competition, contributing to the attractiveness of Switzerland as a business centre and strengthening our human capital.

Then comes monetary policy; policy makers are therefore assumed to be able to react to movements in the real economy and in credit markets within the quarter, which does not seem unreasonable. House prices come last. For the United States, the variables in the vector auto-regression are: CPI inflation; GDP growth; the effective Federal Funds rate; the difference between the Merrill Lynch corporate BAA and 10-year Treasury yields; the growth in total private credit market debt outstanding deflated by CPI; the rate of change of house prices (the National Association of Realtors existing homes price index to 1975 linked to the Federal Housing Finance Agency thereafter) deflated by CPI; and the macroeconomic volatility index. For the United Kingdom, the equivalent variables are: CPI inflation; GDP growth; Bank Rate; the difference between the investment-grade corporate bond and 10-year government bond yields; the growth in M4 lending (excluding securitisations and loans to intermediate OFCs) deflated by CPI; the rate of change of house prices (the Nationwide house price index to 1983 linked to the Halifax measure thereafter) deflated by CPI; and the macroeconomic volatility index. The data are quarterly, there are two lags of each variable, and the sample runs from 1966 Q3 to 2010 Q1. A good case can be made for employing only more recent data, on the grounds that monetary policy reaction functions have evolved during this time. But the cost of that is reduced precision and estimates over just the latter part of the period turn out to be rather less well defined.

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters. We also confirmed our other measures, namely the level of the key ECB interest rates, our forward guidance on their likely future evolution, our purchases under the asset purchase programme (APP), our reinvestment policies and our longer-term refinancing operations, as detailed in the press release published at 13:45 today. We stand ready to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at our two per cent target over the medium term. I will now outline in more detail how we see the economy and inflation developing, and then talk about our assessment of financial and monetary conditions. Economic activity The economy rebounded by 2.2 per cent in the second quarter of the year, which was more than expected. It is on track for strong growth in the third quarter. The recovery builds on the success of the vaccination campaigns in Europe, which have allowed a significant reopening of the economy. With the lifting of restrictions, the services sector is benefiting from people returning to shops and restaurants and from the rebound in travel and tourism. Manufacturing is performing strongly, even though production continues to be held back by shortages of materials and equipment.

As history tells us, a national currency and an individual monetary policy are both important symbols of an independent, sovereign country. EMU is breaking with this tradition. The reasons for so doing are numerous: First, a single currency is a desirable addition to the European single market. Cross-border transactions will no longer be impeded by the need to exchange one currency for another or by uncertainties about the future development of exchange rates. Second, the current influence on monetary policy in the EU is unevenly shared among the member states. Germany stands at the center of the European Monetary System and is thus able to significantly influence the course of monetary policy in the EU. EMU will decrease Germany’s influence and will increase the influence of other countries, notably France. Third -- as is hoped and expected by officials in the EU -- the advent of the Euro will strengthen Europe’s role in the international monetary arena. It will thus put the continent on a more level playing field with the United States. And fourth, achieving monetary integration is viewed as an important step towards achieving ever closer cooperation in Europe. Given the various reasons for replacing national currencies by a single European currency, it comes as no surprise that EMU is burdened with high expectations. A failure to achieve it according to the time-table laid down in the Maastricht Treaty is often viewed as a serious threat to further integration in Europe. Now, EMU is certainly an important project.

Real convergence encompasses factors such as labor mobility, price and wage flexibility, exposure towards external shocks, industrial structures, and so on. Judged by these factors, convergence among future members of the EMU still has a long BIS Review 102/1997 -3- way to go. This is important because to be successful a European monetary policy depends exactly on these factors. Without a high degree of real convergence, monetary policy is bound to have different effects in different parts of the monetary union. The very idea of a single European monetary policy would thus become unrealistic. The ECB would come under political pressure to accommodate mutually incompatible wishes from different parts of the monetary union. The result could only be a less than optimal monetary policy and rising inflation and interest rates. For EMU to be successful the member states of the EU should therefore make determined efforts to further real convergence. The convergence criteria as laid down in the Maastricht Treaty require member states of the EU to achieve certain goals by spring 1998. Convergence, properly understood, can however never be something that can be pinpointed to a certain point in time, but must be an ongoing process. It does not make sense to require countries to get their fiscal situation under control by a certain date, just to let them go unpunished on a public spending spree shortly afterwards. Prudent fiscal policies should not only be a requirement for becoming, but also for remaining part of the EMU.

Mr Latter gives an overview from Hong Kong of eight Asian economies Keynote address by Mr Tony Latter, a Deputy Chief Executive of the Hong Kong Monetary Authority, at the Asian Financial Markets Conference held in Hong Kong on 26-27 April 1999. Thank you for inviting me to address your conference today. It is encouraging to see such a wide and distinguished representation here from the financial and commercial communities. Indeed, when I looked down the advance attendance list, I quickly realised that there would be very little which I could tell you about market developments in Hong Kong that you didn’t know already. So, if you will allow me, I should like to spend some of my time standing back a little from specific market topics and looking instead of some of the macroeconomic forces which shape their development. I shall focus my analysis on eight Asian economies [see table]. You will note that the list does not include Japan, Hong Kong or Singapore. That is because they can already be regarded as having relatively mature financial infrastructures and they are largely free of capital controls. Thus, for reasons which will become apparent as I proceed, they do not fit into the story. The table shows the level of physical capital investment within each economy (specifically, gross domestic fixed capital formation as a percentage of gross domestic product) for the ten years to 1997.

On the other hand, operators of financial market infrastructures are expanding into the core business of banks. For example, a number of central securities depositories and their participants are providing loans and liquidity facilities. Although this is done primarily to facilitate the settlement of securities transactions, the line of demarcation from traditional financial intermediation is becoming increasingly blurred. Also, by granting remote access or by establishing more efficient connections between the individual central securities depositories, they are offering serious competition to the traditional custodians. Technological progress has been the driving force behind this blurring of roles between financial market infrastructures and banks. Technology has enabled large banks to break into the operational field of infrastructure operators without much additional expenditure. Indeed, they have been virtually obliged to do so, in order to utilise their IT platforms to full capacity and to run them efficiently. On the demand side, the smaller financial institutions also benefit. As they outsource their back office functions to larger banks or specialised institutions, they can better focus on their core business. The infrastructure operators, in turn, are finding themselves in a situation where hardly anyone is willing to pay for traditional transaction services that have taken on a commodity character. Consequently, they are diversifying and providing services that generate a higher added value. Those infrastructure operators that are organised as profit-oriented public companies, in particular, are likely to further intensify competition with the banks in the future. This development is confronting the regulators with new challenges.

Princeton, NJ: Princeton University Press Rey, H. (2013), “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, Paper for a symposium sponsored by the Federal Reserve Bank of Kansas City, at Jackson Hole, Wyoming, on August 21-23, 2013 Schularick, M and Taylor, A (2012), “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008”, American Economic Review 102(2): 1029-1061 16 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 16 Thing Global, Act Local Speech given by Minouche Shafik, Deputy Governor for Markets and Banking On the 24th October 2016 At the joint Bank of England, IMF & Hong Kong Monetary Authority conference on Monetary, Financial and Prudential Policy Interactions in the Post-Crisis World, Hong Kong Chart 1 Greater capital openness has facilitated an increase in gross external liabilities of advanced and emerging economies Source: Hoggarth et al (forthcoming), IMF International Financial Statistics, IMF World Economic Outlook and Bank of England calculations. Chart 2 Correlation of credit growth across countries has increased in recent decades Source: Cesa-Bianchi et al. (forthcoming). Note: Bars show average correlation of each country’s domestic credit growth with the average of domestic credit growth in the rest of the world. Chart 3 Reciprocity allows countries to reduce the probability of a crisis by more than if they were acting alone Source: Aikman et al (forthcoming) and Bank of England calculations.

Michael Gondwe: Women’s access to financial services in Zambia Opening remarks by Dr Michael Gondwe, Governor of the Bank of Zambia, at the “Women’s Access to Financial Services in Zambia – Dissemination and Consultation Conference”, Lusaka, 24 June 2014. * * * • Permanent Secretary, Ministry of Finance; • Permanent Secretary, Ministry of Gender and Child Development • Permanent Secretary, Ministry of Commerce • Bank of Zambia Board Members • Your Excellences, High Commissioners and Ambassadors to Zambia present; • The United Nations Development Programme Country Director, Ms Viola Morgan; • The African Development Bank Country Representatives; Dr Freddie Kwesiga; • Representatives from the International labour Organisation (ILO); • Deputy Governor Administration, Bank of Zambia Dr. Tukiya Kankasa-Mabula • New Faces, New Voices Representative, Ms Nomsa Daniels • Chairpersons of the Boards of Commercial Banks, • Chief Executive Officers of Banks and Other Organisations; • Senior Staff and Colleagues from Bank of Zambia; • Members of the Press; • Distinguished Guests, Ladies and Gentlemen. It is my honour and privilege to welcome you all to this conference on Women’s Financial Inclusion in Zambia. May I extend a special welcome to delegates that have come from abroad. I wish you a good stay and hope you will have time to visit the various places of interest and sample the food that Lusaka offers.

In reaction to the taper tantrum, former Governor Jeremy Stein examined the large effects that can be produced if beliefs are dispersed and if ex-ante marginal investors receive information 46 The specific question was: “Please indicate the percent chance you attach to the dollar level of the SOMA portfolio falling within the following ranges at year-end 2014 for each of three hypothetical unemployment rate scenarios.” See the June 2013 SPD survey. 47 “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.” 48 Bernanke (2015, 549). 49 To quote Bernanke again, “In effect our PhD economists surveyed their PhD economists. It was a little like looking in a mirror. It didn’t tell us what rank-and-file traders were thinking”. BIS central bankers’ speeches 13 that leads them to strongly revise their views about how much risk to take. The outcome could be that the new marginal investor driving market prices has a very different set of beliefs and risk appetite.

While there are signs of a certain reversal in this process, a failure in this respect would be particularly harmful for the European project, since integration is at the core of the European Union itself. The policy actions of the ECB and other European authorities, including the decisive drive towards a Banking Union, have been able to overcome or dissipate the worst fears, but the road ahead is still long and difficult. Finally, the role of central bankers should be highlighted in this new context. We are big players in the financial arena, both from the regulatory and monetary policy standpoint; and the framework for our actions – and reactions – must necessarily change and adapt to the new environment. The renewal of the set of instruments to address the price stability BIS central bankers’ speeches 1 mandate, be it in a situation of low growth, as happens to advanced economies, or in a situation of large capital inflows, as happens to emerging market economies, is one aspect of that change. The need to take on board financial stability considerations is another aspect widely discussed. You will devote the final part of the day to this quest. And I do not want to take more time out of the tight agenda you will follow now. Thank you very much for your attendance to this Conference. I wish all of you and excellent day and a good discussion. 2 BIS central bankers’ speeches

According to the latest IMF forecasts, world output will shrink by 1.3% and the advanced economies by no less than 3.8%. However, GDP in emerging markets, though lower than in previous years, will still grow by 1.6%. Despite the crisis, the long-run prospects for emerging market economies remain bright. Projections for long-term growth, based on demographic trends and models of capital accumulation and productivity, suggest that the emerging markets are likely to gain in global importance. A number of studies found startling results regarding the growth prospects for emerging markets. According to one study, Brazil, Russia, India and China (the so-called BRIC economies) could account for over half the size of today’s six largest industrialised economies from 2025 onwards. 1 We have to prepare for a very profound structural rebalancing of world output during the next years. The world economy is changing profoundly, as so should its governance. The creation and the recent reinforcement of the G20 and the enlargement to the G20 of the Financial Stability Board are milestones in this respect. The rise of the emerging economies will also be reflected in the reforms of the international financial institutions. What are the specific implications of the growing role of emerging markets for the euro area? The euro area has close links with emerging market economies. In trade terms, the euro area is actually more open than other major economies. Our exports and imports of goods and services account for more than 40% of GDP, significantly more than in the United States or in Japan.

• The third way is to expand the investment portfolio to include new asset classes and new geographies for consistent and uncorrelated return streams. This option, while not easy, probably offers the best way forward. Consider new asset classes. Many government funds are increasing their allocation to nontraditional assets such as real estate, infrastructure, and even private equity. • Australian and Canadian pension funds have been pioneers in infrastructure investing, from as early as the 1990s. 4 BIS central bankers’ speeches • Norway’s Government Pension Fund Global plans to increase its real estate investments to as much as 5% of its assets, with a corresponding decrease in its bond holdings. • CalPers has been increasing its allocation to private equity and real assets, including real estate and infrastructure. Next, new geographies. Over the last 20 years, government funds have steadily reduced their home bias in their equity holdings, investing in markets outside their own country. The big shift in portfolio allocation in recent years has been to emerging markets. If long-term growth prospects for emerging markets are superior to advanced economies, it seems to make sense to increase the strategic allocation to these markets, beyond what is dictated by market capitalisation. The challenge is in finding ways to translate the superior growth performance of emerging market economies into asset returns, given the limited depth of their capital markets. One way is to perhaps invest in advanced economy corporates with significant exposure and presence in emerging markets.

Turmoil on the financial markets The financial storm of the last nine months has challenged our assessment criteria. Such turmoil poses considerable risks for the future. Before I deal with these issues, please allow me first to look at the factors which have brought us to this situation. After several years of rising home prices in the United States, there was a trend reversal to the downside which hit the high-risk sub-prime mortgage segment hard. It was when credit rating agencies began a massive downgrading of sub-prime mortgage-backed securities that the global financial markets realised the full enormity of what was happening. During the summer months of 2007, the prices and liquidity of these securities plummeted. This turn of events alarmed investors. Risk premiums subsequently increased, with uncertainty as to the extent of the losses incurred by banks triggering a general crisis of confidence among financial market participants. Liquidity on the major monetary markets became scarce and there was a return to volatility on the stock markets. Repercussions for Switzerland Switzerland quickly felt the storm due to the exposure of its financial sector. First, our two big banks saw their profitability fall sharply in the second half of 2007. Losses made in connection with their investment activities in the United States were a decisive factor in this respect. One of the big banks even required fresh injections of capital, such was the extent of the losses it suffered. The private banking sector and domestic banking activities continued to flourish, however.

Final domestic demand thus rose 2% in 2007, compared to 1.7% in the prior year. Thanks to burgeoning demand, employment was up sharply, with the unemployment rate edging down to 2.6% in seasonally adjusted terms by December. The Swiss economy is thus BIS Review 50/2008 1 experiencing a period of virtually full employment and has been able to benefit from the flow of workers from the European Union and the flexibility this brings. The economic figures for 2007 are all the more pleasing given that prices have remained stable despite the hike in commodity prices. Over the year as a whole, prices increased by 0.7% on average. However, by December, inflation was up 2% – an acceleration primarily attributable to the sharp jump in the price of oil. In such a favourable climate, it was important for monetary policy not to stimulate the economy any further. By persisting with excessively low interest rates, we could have aggravated inflationary risks and thereby disturbed the macroeconomic equilibrium. The SNB therefore maintained its monetary normalisation course by lifting the Libor target range by 25 basis points on three occasions. The three-month Libor thus rose from 2.1% at the beginning of the year to 2.75% in September. In view of the considerable financial uncertainty and the effect this was having on growth prospects for 2008, we subsequently left the target range unchanged and stabilised the Libor at the 2.75% mark. We have since maintained this position.

Norges Bank’s most important instruments are its two key rates - the interest rate on banks’ deposits and the overnight lending rate. Experience shows that the central bank’s key rates have a fairly substantial impact on money market rates at the very short end of the market, i.e. overnight and one-week rates. The effect on interest rates on financial instruments with longer maturities is not as direct. Here, expectations concerning the central bank’s course of action and general confidence in monetary policy play a role, as does the level of very short-term rates. Money market rates influence the krone exchange rate directly through the return that can be achieved on krone positions, but also indirectly through the effect on the outlook for the real economy and price and cost inflation in Norway. A higher interest rate will, therefore, normally result in an appreciation. Both the appreciation and the interest rate increase will lower demand. The appreciation will also in itself lead to lower inflation on imports, while lower demand will reduce the general inflation level. Over time both the inflation rate and the activity level will influence the exchange rate. Thus, Norges Bank needs to exercise discretion in monetary policy by considering the effects of interest rate changes not only directly on the exchange rate, but also on the rest of the economy, and to focus on the fundamental conditions for exchange rate stability over time.

At a time when globalisation may leave many behind in advanced economies, when the debate about inequalities is coming back to the forefront – and these are real challenges behind the populist wave –, now is not the moment to give up our social model. Europe and Japan are quite close in their choices. How to move forward: four accelerators of the Economic Union. The assets that I have presented constitute a valuable achievement for Europe. Now, we must actively build on them, and not lazily rest on our laurels. I will now present some avenues of improvement. Indeed, we have clearly succeeded in building a Monetary Union, but this is not sufficient. It is now time to make concrete progress on Economic Union, on which we have not been very effective yet. We are in agreement on the "why". Monetary policy cannot be the only game in town, and therefore we should not overburden it. Furthermore we aim at greater stability, to counter the risk of a new crisis befalling an unprotected euro area, with all its damaging political and economic repercussions; and Page 5 sur 6 greater growth, to catch up our past lag on the United States and finally treat the fatal disease of mass unemployment in Europe. As for the “when”, we obviously have a unique historic opportunity: with the economic recovery; with the new French President and also stable governments in the Netherlands and hopefully in Germany.

Miguel Fernández Ordóñez: Presentation of the Annual Report 2009 Address by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, to the Governing Council of the Bank of Spain on the Presentation of the Annual Report 2009, Madrid, 16 June 2010. * * * Ladies and gentlemen, The presentation of the Annual Report for 2009 is taking place at a particularly complex juncture for Europe and, most especially, for the Spanish economy. What began as an isolated fiscal crisis episode in a euro area Member State has turned into an event of systemic scope that has obliged the European authorities and national governments to adopt measures on an unprecedented scale to defend the stability of the area. At the same time, the spread and heightening of tensions have firmly focused analysts’ and markets’ attention on the situation and on economic policy responses in those countries which, like Spain, face comparatively more demanding challenges and are, consequently, perceived as potentially more vulnerable. This is a demanding conjunctural situation, for which it is difficult to find points of reference in our recent past. And more than ever before, it is important to diagnose accurately the true scale of the challenges our economy faces, to prepare promptly the tools needed to meet the challenges and to use them as decisively and forcefully as the situation requires.

As part of this essential restructuring, all institutions, according to their individual characteristics and circumstances, must strengthen their solvency, resizing and improving their efficiency in the medium term. In short, the challenge consists in adapting to the new reality in which the financial sector will have to operate in the future. The Spanish banking system is generally in a sound position from which to approach this restructuring process. But the present situation is complicated. On the one hand, the need for loan loss provisions will continue to dent profit and loss accounts, as defaults persist against a continuing weak economic backdrop. And on the other, the competition to secure retail funding pushes up the cost of borrowing and drives down margins. Strains in the wholesale funding markets add further pressure. They also entail higher risk premia and, if they persist and intensify, could make access to the wholesale markets more difficult. BIS Review 86/2010 7 Moreover, the sector must absorb the internal imbalances that built up in the years of strong growth in the economy and in banking activity. These imbalances, which are greater in some Spanish deposit institutions than in others, are essentially threefold. The first imbalance derives from their over-reliance on wholesale market funding. Although the term structure of Spain’s financial institutions’ debt is mostly medium and long-term, the severity of the crisis and investor flight in view of a widespread loss in confidence put pressure on institutions, which responded by stepping up their efforts to attract deposits.

The extension also expands the FLS to cover lending to financial leasing and factoring corporations (which are a source of credit for SMEs). We have been clear that the design of the extended FLS particularly encourages lending to SME’s in determining access to the FLS. Incentives to lend to SME’s are therefore in place, BIS central bankers’ speeches 3 no doubt about that. But we cannot promise that the results will follow almost as night follows day, because there is more to it than that. Let me end, by advertising a piece of work done by your chairman-elect, chairing a group that recently produced a report on SME lending in Northern Ireland. In that report, Kate and her colleagues point to structural market failures affecting the supply of finance to SMEs, which mainly relate to imperfect or asymmetric information, and which tend to be exacerbated in times of heighted economic uncertainty and risk aversion. Likewise, the report points to information failures on the demand side for businesses seeking finance. The report goes on to note that over the last five years there has been a market correction as banks have moved away from a lending approach based on property as security to one that is more based on evidence of a business plan that indicates returns to the firm that will repay borrowing.

Muhammad Al-Jasser: Review of the latest economic developments in Saudi Arabia Speech by His Excellency Dr Muhammad Al-Jasser, Governor of the Saudi Arabian Monetary Agency (SAMA), to the Custodian of the Two Holy Mosques, on the presentation of the 46th Annual Report of the Saudi Arabian Monetary Agency, Riyadh, 25 September 2010. * * * It is a great pleasure for me that the celebration of our National Day coincides with the submission of the 46th Annual Report of Saudi Arabian Monetary Agency which reviews the latest economic developments in the Kingdom for fiscal year 1430/1431H. (2009) and the first quarter of the current year. Custodian of the Two Holy Mosques, The impact of the global financial crisis on the world economy continued during 2009, with the world production of goods and services recording a downturn of 0.6 percent in 2009. However, economic variables over the past months of the current year indicate positive growth rates. Given that our national economy is characterized by its openness to the external world and high levels of trade integration with it, it is natural to affect and be affected by developments in the global economic system. The growth rate of GDP at constant prices declined to 0.6 percent in the Kingdom during 2009 compared to 4.2 percent in the preceding year. The non-oil sector maintained good growth rates, growing by 3.8 percent in 2009 compared to 4.3 percent in the preceding year.

The indicator is more reliable after 1997 as it is based on a greater number of underlying measures. BIS Review 50/2008 9

Lessons from the crisis The high equity share, the capacity to increase the risk level in certain periods and the need for diversification are derived from the Fund’s characteristics. Let me now review some of the lessons from the financial crisis that have also shaped the development of the Fund’s strategy. These changes are closer to the centre of the European debt crisis. The risk tolerance of the Fund is to a large degree defined by the strategic equity share, which, as I mentioned, is 60 per cent. Since the Fund is heavily exposed to risk by virtue of its relatively high equity share, the function of government bonds is in essence to reduce the overall volatility of the portfolio. From this perspective, the most important role for government bonds is to hedge the equity portfolio. The hedge is best achieved by holding liquid government bonds with high credit quality. Typically, this entails an overweight of the safest, low-yield government bonds. Conversely, high-yield government bonds are more volatile, and thus they do not serve the overall purpose as a hedge in a global portfolio. 4 BIS central bankers’ speeches Slide 14: Fixed income: new benchmark The Fund’s benchmark index for bonds is divided into 70 percent public and 30 percent corporate debt. Previously, the allocation in the bond portfolio was based on market weights, and thus the portfolio was allocated in proportion to volume of the sovereign debt issued by each country.

The issue of measuring price stability However, this raises another issue, especially in the current context of muted inflationary pressures but ample fluctuations in asset prices: are we measuring inflation accurately? Is price stability being ensured, in the context of large movements in asset prices? Shouldn’t asset prices be taken into account when defining price stability? Up to now, this debate has focused on the role asset prices may play as leading indicators of inflation: one rationale behind this thinking may be that asset valuation is computed in a forward looking manner, and therefore asset prices embed expectations about future economic growth and future inflationary pressures. Empirical evidence gathered on such an issue tend to support the idea that some asset prices, housing prices in particular, may actually play such a role. However, this theory has to be qualified by the fact that, as I mentioned earlier, wealth effects are difficult to establish in a definitive manner. This is probably less true for the US, although this is debatable and could be discussed in this conference, but this is more likely to be true for the euro area. Moreover, there might be a danger that asset prices diverge from the CPI, as this was observed over the last few years. There might be an internal conflict here if the objective of price stability is defined by aggregating the changes in the CPI and the changes in asset prices, and this is a crucial issue since the nature of both types of prices is fairly different.

Anita Angelovska Bezoska: Journalists are one of the main transmitters of monetary policy messages Address by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of Macedonia, at the Journalist Workshop - 2018, organized by the National Bank of the Republic of Macedonia, Skopje, 25 December 2018. * * * Distinguished media representatives, Welcome to the fourth Journalist Workshop hosted by the NBRM. I am glad to see you in greater numbers this year, which is confirmation of your interest in the topics that will be the focus of today’s event. Allow me to take a brief look at several basic, yet important aspects of central bank communication: 1. Why is central bank transparency and communication important and needed? 2. How has central bank communication evolved over the years? What were the challenges in the period after the outbreak of the global crisis and how were they addressed globally? 3. Challenges in central bank communication in the Republic of Macedonia. A comparison between the current and the past transparency level and central bank communication shows an exceptional transformation in this segment. The need for strengthening central bank transparency was brought to the fore for the first time in the 1990s, implying enhanced communication with the public, including the media. This change is associated with the concept of central bank independence, or the independence of the monetary policy from fiscal policy.

Malaysia has made great strides in eradicating poverty. This is the result of numerous efforts to meet the needs of society’s most vulnerable, and to provide them with opportunities for upward social mobility. Nevertheless, the COVID-19 crisis reminds us that shocks affect different segments unevenly, and this has clearly exposed gaps in our social protection system. It is therefore critical to accompany the transition to high income with efforts to close these gaps. The growing economic pie will provide the state with more capacity to deepen its social protection. We must use this space to future-proof the system to impending structural changes: Malaysia will transition to an ‘aged nation’ status, with the old-age dependency ratio expected to increase to 16.6% by 2040. However, in a 2018 Employees Provident Fund study, two out of three active contributors are projected to have insufficient retirement savings to meet a minimum pension of RM1,000 per month. 2/4 BIS central bankers' speeches The nature of work will evolve, as we transition to a more knowledge-based, service-based and gig-based economy. Work arrangements are expected to become more flexible, and provisions must be made to ensure that workers remain adequately protected. Notably, provisions for shorter and more flexible working hours may entice women to participate in the labour force. The third change is the displacement of certain jobs, as we enter the dawn of the next industrial revolution. The trend towards automation and AI requires a smooth transition of the workforce into new skills and occupation areas.

There are not a few cases when clients are not well informed on the interest rate they have to pay for their loans or on the criteria applied by the banks to benefit credit. Communication from depositors is neither the best. While small changes of deposit interests may be justified by the changes of market conditions, changes somewhat stronger need to be accompanied by full relevant information and explanations. The strengthening of this transparency should be accomplished not only in the name of ethics but also in the name of the increase of market competition. The system can play a greater role in reducing cash in the economy, by increasing and improving further the level of services. The positive recent developments have given their effects in reducing cash quantity in the economy. On the other hand, we have conducted an intense public activity, of informative and promotional character, where meetings of another nature have frequently been held and in which we were concretely involved as a banking system. Allow me just to remind you the open meetings we have already organised with the business of utility services and with that of Treasury bills primary market. I hope that now, after finalising the Automated Electronic Clearing House project, each bank should think seriously of increasing the benefit degree from this new facility offered by the Bank of Albania. After the implementation of this project, I estimate that we should think more seriously of increasing the number and the quality of electronic payments.

And AlphaGo learned thousands of years of human knowledge within a matter of months. Against that backdrop, there has been a surge of recent interest in the potential for large-scale job losses, as machines displace humans. This fear is not new. Fears about job displacement have been a recurrent theme for 300 years, as machines first displaced agricultural workers and, more recently, factory workers. These shifts were huge. In 1750, half the labour force worked in the primary sector. Today, it is 1%. Estimates of the potential scale of future job displacement are highly uncertain. Studies suggest between 10% and 50% of the global workforce could see their jobs disrupted significantly, if not displaced entirely, 12 All speeches are available online at www.bankofengland.co.uk/speeches 12 over the next 10-15 years.26 At the upper end, that would be almost 2 billion people globally whose livelihoods could be significantly disrupted. This is vastly more than any previous industrial revolution. As in the past, the costs of this disruption are unlikely to be spread evenly. Recent studies have shown that those at greatest risk are likely to work in sectors and regions still reeling from earlier Industrial Revolutions. Jobs among lower-skilled workers doing routine tasks in the service sector in post-industrial towns and cities are ripe for automation.27 The BBC website has an app which puts this probability at 83%.

In this respect, indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term. Risks to the outlook for inflation are broadly balanced. On the downside they relate, in particular, to the outlook for economic activity, while on the upside they relate to higher than expected commodity prices. Furthermore, increases in indirect taxation and administered prices may be stronger than currently expected owing to the need for fiscal consolidation in the coming years. Turning to the monetary analysis, the latest data confirm a continued deceleration in monetary dynamics. In May, the annual growth rate of M3 declined further to 3.7%, with that of loans to the private sector falling further to 1.8% – the lowest rates since the start of Stage Three of Economic and Monetary Union. This concurrent deceleration supports the assessment of a slower underlying pace of monetary expansion and low inflationary pressures over the medium term. In May, the outstanding amounts of most components of M3 showed a contraction, reflecting, to a large extent, the recent declines in interest rates paid on short-term deposits and marketable instruments and the increased allocation of funds to instruments outside M3 that these may have fostered. Following a substantial strengthening in April, the growth of M1, while having remained strong, also moderated in May. The short-term developments in M3 have been volatile over the past few months.

If their bank becomes insolvent, customers’ claims to central bank money cannot be redeemed, or can be redeemed only up to the maximum amount covered by the deposit guarantee scheme. 5 It is mainly in times of crisis that the public becomes aware of this risk. Were this not the case, there would be no runs on banks such as have been experienced time and again in the past. Credit risk is, however, offset by a number of advantages. Unlike banknotes, sight deposits with banks provide access to services in connection with payment transactions. In normal times, they also generate interest income. How are deposits at commercial banks created? How do deposits at commercial banks, i.e. customer deposits in Swiss francs, come into existence? In our present-day financial system, the creation of deposits by banks is closely linked to the granting of loans. When a bank provides a loan, it credits the amount in question to the borrower in the form of a deposit to his or her account. This leads to an increase in credits on the assets side and in customer deposits on the liabilities side of the bank’s balance sheet. 5 In Switzerland, the national deposit guarantee scheme covers a maximum of CHF 100,000 per customer in the event of a bank failure. Page 4/12 As a rule, borrowers will immediately use their new deposit to acquire the goods or services for which they requested and received the loan.

If we look back to the time when the first deposit banks were established in Italy in the late Middle Ages, we see that the financial system has undergone continual change. After the establishment of banks, central banks and bank regulation emerged, partially in response to the fragility of the banking system in its early years. What we see today is a system that has evolved incrementally over time. While there are differences between countries – often for historical reasons – they all have a fractional reserve system, i.e. they do not have sovereign money. Page 11/12 We will no doubt continue to see changes. Technological advances, which are notoriously difficult to predict, are among the key drivers here. It is therefore hard to know precisely how the banking system will look in the future. It is clear, however, that central banks and financial market supervisory authorities will need to find ways of responding to these changes. This is not a new challenge, but it is one we will have to face time and again. Page 12/12

Part of the puzzle of the crisis of 2007–09 was that the excessive leverage and private money creation took place outside of commercial banks, and outside of firms that were subject to broad consolidated supervision – in the “shadows” as some have put it. It is important that we recognize that in the modern era the conditions for a financial crisis can be created by nonbanks. A lesson of the crisis of 2007–09 was that financial crises, modern ones, do not have to be characterized by lines from bank teller windows in which depositors are withdrawing cash, or even be centered in banks. Instead, in a more market-oriented, in contrast to bank-oriented financial system, different sources of stress come to the fore. While employing a different recipe, the flavors of the crises are the same: financial intermediaries, through having overextended credit or engaged in an over-reliance on the issuance of short-term debt, or in the midst of a general panic, have difficulty in raising funds and are forced to sell off positions abruptly, putting further downward pressure on prices, worsening the situation systematically. Preparing for (unwanted) guests In response to the 2007–09 crisis, the policies of the Federal Reserve were focused primarily on liquidity injections, which can be thought of as replacing the privately created money that was being withdrawn from circulation as intermediaries delevered.

13 In Q1 2022 Financial Stability in Focus Bank of England sets out the role of cryptoassets and DeFi in the financial system and identified potential risks associated with them. 14 Breeden (2022) talks about the economy’s transition to net-zero, and the role central banks can play to support it. 7/7 BIS central bankers' speeches

The same may undoubtedly be said about the Central Bank. After all, useful and supportive as these institutions may be, they neither can nor should play a leading role. That role can only be performed by the financial companies themselves. Because they rely so heavily on open access to credit markets, it is crucial for them to enjoy the confidence of their creditors. In this respect like many others, credibility is a fragile thing and a very high price can be paid for losing it. Turbulence in global markets is sure to continue. Naturally people try to read the signs and foresee the most important parameters, in order to adapt to them in good time or respond sensibly. Important as it is to keep a close watch on developments and changes in global markets, what matters most of all is to be strong and well-positioned enough to withstand the most unexpected shocks. Global liquidity has been exceptionally abundant in recent years, and has been widely tapped on good terms. The benefits of resourcefulness and bold, quick action can be realised to the full in such circumstances. It is impossible to rule out that such a climate will persist for a long while, but this is by no means certain. And when a change does take place, it may be caused by unexpected circumstances and strike quickly. It is then that caution and prudence prove most effective.

While this process is not easy, Rochester possesses a unique set of assets that will help it succeed, and in many ways is on the cutting edge of adapting to these changes. Rochester is, in fact, becoming a leader in workforce development. Reinvention like reform can be difficult, and requires a degree of boldness. This sentiment was expressed by Rochester’s social reformer, Susan B. Anthony, who said that “Cautious, careful people, always casting about to preserve their reputation and social standing, can never bring about a reform.” Rochester is doing Susan B. Anthony proud, showing spirit and determination. Thank you for your attention, I would be happy to take a few questions. BIS central bankers’ speeches 5

So the central bank needs to take account of the infamous long and variable lags in the transmission of monetary policy decisions to the things it cares about 5 . In other words, in today’s vernacular the central banker has to be forward looking, in particular about the outlook for inflation. That, essentially, is why some economists refer to central banks as undertaking inflation-forecast targeting 6 . Under this regime, the central bank needs to form judgments on some big things. On the current and prospective pressure of demand on the supply (or productive) capacity of the economy; on the implications for the outlook of any cost shocks (eg oil price rises); and on whether medium-to-longterm expectations of inflation are well anchored to its (explicit or implicit) target. Having done that and so formed a view on the outlook for inflation, the central bank may have to decide how quickly to bring inflation back to target, in the light of how much weight it gives to containing volatility in output 7 . It then needs to decide whether it should set policy so as to restrain or stimulate aggregate demand, or to be neutral. And it therefore needs to judge whether the current level of interest rates is, in fact, likely to deliver its desired degree of stimulus or restraint. Underlying those ‘big picture’ judgments are, at least implicitly, views on some fundamental economic variables.

While this implies that a one-size-fits-all level of transparency is unlikely to exist, a number of economic forces are omnipresent and therefore allow us to draw some conclusions from the academic literature on post-trade transparency. In those market segments that the MiFID II review aims to address, liquidity providers play a central role as they intermediate between end investors and thereby help to secure a wellfunctioning marketplace. Yet an efficient and resilient market requires a sufficient level of competition. Several studies6 show that a lack of transparency can be a serious threat to a level playing field because intermediaries may use their private knowledge of customer order flow as an informational advantage that allows them to exert market power. Therefore, 3 See opinion of the ECB of 25 January 2012 on a proposal for a Directive on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and a proposal for a Regulation on prudential requirements for credit institutions and investment firms (CON/2012/5). 4 In particular the Money Market Contact Group, the newly established Bond Market Contact Group, the Foreign Exchange Contact Group and the Operations Managers Contact Group (see the ECB website for more information on these groups).

Cross-border capital movements were also subject to little or no regulation in the decades prior to 3 1914. Capital markets were integrated in countries that had adopted the gold standard. There was solid confidence in the gold standard, and exchange rate risk was regarded as very low. Movement of capital between countries was often long-term, and tended to be associated with specific projects. As a small, open economy, Norway was totally dependent on an open, smoothly functioning capital market. From 1885 to 1913, the fixed investment rate in Norway was on average higher than the saving ratio. Although short-term gross capital movements were far from their current levels, they were nevertheless significant. Monetary policy was restricted by the gold standard. Capital was highly mobile, and the interest rate had to be set to ensure that the exchange rate remained between the gold points. As a result, monetary policy could not normally be used to stabilise economic 4 developments. Countries that suspended the gold standard were penalised with higher interest rates. A look at earlier crises A weak stabilisation policy, relatively ineffective banking legislation combined with a poorly developed financial industry provided fertile ground for many financial crises. The Oppland crisis occurred in 1864. It was a backlash of the boom in the latter half of the 1850s, when a sharp upswing in the timber industry led to widespread speculation. Growth was also very strong in the early 1870s.

Despite such progress, we are faced with daunting challenges. These include harmful effects of environmental degradation and climate change that threaten global prosperity, stability and sustainable living. Socioeconomic challenges such as rising inequality and lack of affordable housing are affecting the well-being of many communities. At around 225% of global GDP, global debt is at a record high level and may leave a heavy burden for future generations to bear. It is increasingly clear that economic prosperity in the long run cannot exist without social equity and environmental responsibility. While the governments of 150 countries are committed to realising the United Nation’s 17 Sustainable Development Goals (SDGs) by 2030, this must be a shared responsibility. The private sector has a key role to play – a role, with finance at its centre, that has yet to live up to its full potential. With much at stake, the call to action for sustainable finance is one that the financial sector, perhaps more particularly Islamic finance, cannot afford to ignore. Encouragingly, more, though not nearly enough, Islamic financial institutions are moving beyond Shariah compliance to performance and risk management practices that reflect social and environmental impacts. A key question for us present today, and for those beyond this forum, is how the value propositions of Islamic finance can be further developed, to bring us closer to the reality of “finance beyond profit”.

16 We also used crisis dating from Lopez-Salido and Nelson (2010) for the US. BIS Review 168/2010 15 Table 3 asks what proportion of crisis years occurred within 5 years of the peak in the credit cycle in those countries. On average, more than half of all financial crisis years across the 12 countries appear to have been preceded by a credit boom. Among Anglo-Saxon countries, such as the US, UK and Australia, closer to 75% of crisis years occurred following a credit boom. This is relatively concrete evidence of the credit cycle having real and damaging effects on output. 17, 18 4. Credit cycle spillovers This empirical evidence to date, operating at a macro-economic level, is consistent with the model in Section 2: a credit cycle is clearly discernible; its frequency is different and its amplitude larger than the business cycle; and its fluctuations may exacerbate the business cycle. But the model also has implications at a micro-economic level, arising from strategic complementarities, or spillover effects, across firms. In this section we consider empirical evidence on such credit spillover effects. The model implies that the cross-sectional distribution of returns to banking should be compressed during a credit boom, as banks seek to keep up with competitors by collectively boosting returns. This is a time-series phenomenon. A second implication is that the dispersion in returns may be smaller for financial than for non-financial companies to the extent that former are more susceptible to risk illusion. This is a cross-sectional phenomenon.

Condition 2: State Monotonicity: is non-decreasing in . Condition 3: Uniform Limit Dominance: There exist and such that (1) for all and and (2) there exists such that for all . Condition 4: Strict Laplacian State Monotonicity: There exists a unique . solving Condition 5: Finite Expectations of Signals: Condition 6: Continuity: and density . is well defined. is continuous with respect to signal Morris and Shin use these to show be defined by Condition 4. Then for any Lemma 1: (Morris and Shin 2003) Let there exists such that for all , if strategy s survives iterated deletion of strictly dominated strategies, then = {Tight} for all and = {Risky} for all . Proof: See Morris and Shin (2003), Proposition 2.2. 26 BIS Review 168/2010 i.e. that agents play cut-off strategies, adopting strategy = {Tight} when in receipt of a , and adopting strategy = {Risky} when in receipt of a “high’ “low” signal . Condition 4 gives the threshold. signal BIS Review 168/2010 27 Annex 2 International medium-term frequency cycles in real GDP and credit 28 BIS Review 168/2010 BIS Review 168/2010 29 30 BIS Review 168/2010 BIS Review 168/2010 31 32 BIS Review 168/2010 References Acharya, V.V. (2009), “A Theory of Systemic Risk and Design of Prudential Bank Regulation”,Journal of Financial Stability, Vol 5, 3, 224–255.

I think we need both in a well organised financial system because as banks have a predominance of deposit liabilities with the characteristics I described earlier they are not on their own natural equity providers. This brings me to the last part of the story, namely the growth of non-bank asset management in its broadest sense as the size of bank balance sheets has tended to reduce post-crisis. It is striking that if you were familiar only with a chart of the evolution of global assets under management over the last twenty years, you should be excused for failing to spot that a global financial crisis had occurred. It follows from what I have said that this shift from banks to non-banks makes sense as we seek to achieve a clearer demarcation of the types of liability or funding contracts and the assets best suited to go with them. But it only makes sense if a few conditions are met, two in particular. First, that there is no lack of clarity about the nature of the assets held under management. Thus the label on the can is an accurate description. Take as an example the recent failure in the US of the Third Avenue Focused Credit Fund (focused on what a comedian might say). The purpose of the Fund was to invest in high yield debt. The label seems to have made that clear, and it wasn’t therefore in the form of a AAA label which obscured the reality.

The failure of this Fund has not made major ripples all on its own. Why? I would argue because there was no obvious lack of clarity around the assets, and this is a reminder against the re-appearance of opaque instruments and complex tranching. The second condition to meet is that there is no illusion about the liquidity of the assets. It is critical that investor expectations are well adjusted to the prevailing liquidity conditions. A lot of work is under way to assess the market liquidity implications of the expansion of assets under management, and this is important for our remit in financial stability. An important part of this work is to do all we can to ensure that investors understand the characteristics of the assets they hold, and that the liquidity promised by funds to their investors mirrors the market liquidity of the underlying investments. Conclusion In conclusion, the objective of the financial reform programme is clearly not to return to the unstable pre-crisis years, however attractive some of the statistics of that period look in isolation. The response has been to strengthen the loss absorbency of the banking system but also to enable greater clarity between the different forms of bank liabilities consistent with the economic terms of the contracts. This may seem like dry balance sheet stuff but the benefits are major.

Surely, a growthfriendly strategy is one that minimizes the risks of major financial disruptions in the future, that does not impede the smooth functioning of financial intermediation and that does not block the transmission of monetary policy. In several countries of the euro area, sovereign spreads are still at penalizing levels. In so-called “core” countries, including France, the situation is different with historically low interest rates. While, in some cases, this reflects the consolidation achieved in fiscal accounts, there are also other temporary factors at work. Low interest rates are the product of low growth expectations in the short run; and they also result from exceptionally accommodative global monetary and liquidity conditions. This environment offers a unique window of opportunity to consolidate and bring public debt to a more appropriate level. Ultimately, growth in the euro area will depend on the ability to undertake the necessary structural reforms and enhance competitiveness. The euro area, like all advanced economies is facing a double challenge. First, it must absorb the consequences of the crisis, resorb financial imbalances, eliminate excessive indebtedness and restore the normal functioning of capital markets. And second, it must adjust to the deep changes taking place in the world economy. Looking past current difficulties, it is clear that the euro area is well equipped to confront the challenges of the 21st century. With 370 million consumers and high purchasing power, it remains the biggest market in the world. It is also the most economically integrated area, with highly qualified manpower and very good infrastructures.

Christian Noyer: The euro area is getting stronger Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Paris Europlace International Financial Forum, “Post-crisis growth and investment opportunities in Europe”, New York, 22 April 2013. * * * Mr Chairman, Ladies and Gentlemen, I am very pleased to have this opportunity to speak to you here in New York. I’d like to offer you some views about the euro area from both a short- and long-term perspective. I’ll start with Cyprus. This was certainly a traumatic episode. Obviously, the decision process was not optimal. And the adjustment effort requested from the country, while absolutely necessary, was totally unexpected by the population. As a result, many observers have interpreted the Cyprus crisis as a sign of fragility and uncertainty about the euro. In fact, it’s quite the opposite. Imagine if the situation in Cyprus had occurred nine months ago. Most likely it would have resulted in a new wave of turbulence in euro sovereign markets, with interest rate increases and strong capital flows out of the periphery. This was not the case. There was no contagion, and no spill-over effects from Cyprus to other euro area countries. During the first quarter of 2013, when the Cyprus crisis developed, long-term interest rates in Greece, Portugal and Ireland actually declined by around 270, 120 and 130 bps, respectively.

That is, whether they can make adequate returns to satisfy shareholders’ expectations. The most obvious reason for the difference between banks’ returns on the one hand and shareholders’ expectations on the other is the disappointing returns that UK banks have made in recent years. Average return on equity for UK banks fell from around 17% in 2006 to 2% in 2015. But there may be another reason, on the other side of the equation. Shareholders’ expectations may not yet have adjusted to the change in the risk and return profile that banks now represent. I want to look in a little detail at both the question of disappointing returns and the question of unrealistic expectations. Banks’ returns First, what is behind the disappointing returns? It is not lending on residential property. Our latest estimates of the return on equity of bank mortgage books seem to be around 20%, on average, beaten only by overdrafts and asset and motor finance. 13 Indeed, UK banks’ underlying return on equity on retail lending overall is currently around 20%. Margins on the flow of UK retail business for the large UK banks are currently lower than margins on the stock because new mortgages are being written at a lower average interest rate than average back-book mortgage rates. So return on equity on new lending is lower.

A good rule of thumb for financial stability is that when some form of credit is growing fast one needs to look very carefully at whether lenders’ underwriting standards are slipping and at what is happening to the distribution of borrowers’ indebtedness. The Prudential Regulation Authority (PRA) conducted a review of lending for buy-to-let mortgages and concluded that there was indeed some evidence of loosening underwriting standards and a possibility that this might increase. As a result, the PRA Board has issued a Supervisory Statement to clarify expectations for underwriting standards in the market. The statement includes guidelines for testing the affordability of interest payments and a minimum stressed interest rate for use in lenders’ affordability tests. There are also substantial tax changes affecting the buy to let market. The FPC’s expectation is that the Government’s changes in stamp duty and mortgage interest tax relief for buy-to-let, together with the PRA’s actions, will probably dampen the growth of buy-to-let lending. Mortgaged buy-to-let accounts for only around 10% of all housing transactions for house purchase so the impact on the housing market as a whole may not be great. But market dynamics are difficult to predict and given the uncertainty around the impact of the tax and supervisory changes, the FPC decided to wait and see how the market reacted before considering whether to take action on buy-to-let. The Committee continues to watch the buy-to-let market closely. 3 For further details, see Cunliffe (2016). 4 See Bank of England (2016a).

This effort can often be successful because the agent is a relatively small group of people who hold all the relevant information and share very similar motivation, while principals tend to be much more numerous and less informed and their objectives are often highly differentiated. And so, corporate managers are often able to push through their will even if it goes against the interests of many shareholders; international organisations often take steps that their founding members do not like to see; and by the same token the EU administration is able to shape the integration process in ways that differ from what many member states previously intended. To give you just one banal illustration of this process: the remuneration of employees of international organisations and of Eurocrats is invariably higher than the remuneration they would be able to earn in similar positions at home. Therefore, the principals watch – with little joy, of course – a brain-drain in favour of their agent. Thus, an agent gets dominance over its principals and principals even contribute to this dominance. The observation that agents try to become more powerful than their principals is usually considered to be beyond the boundaries of political correctness, so we rarely hear about it. The same holds for another hindrance to proper execution of the European integration idea, namely the asymmetry among different principals, that is, among different member states of the EU.

That evaporation appears to have played a key role in propagating stress during the Flash Crash.24 19 “Latency” refers to the time it takes from sending an order to it being executed. 20 Haldane (2011b), Mackenzie (2011). 21 Menkveld (2012). 22 Angel et al (2010). 23 Egginton et al (2012). 24 CFTC-SEC (2010). BIS central bankers’ speeches 5 So too did message traffic congestion. One side-effect was to slow-down price discovery across exchanges. Many traders firms found themselves observing stale prices. As a result, identical stocks traded at different prices across exchanges (Chart 5). In principle, this represented an arbitrage opportunity. In practice, arbitrage relies on costless trading and, at that time, trades could not have been executed at any price. The Flash Crash was short-lived. Some have argued the lessons have been learned. Yet it appears to have been anything but a flash in the pan. In the period since, researchers have identified a large number of “mini-Flash Crashes”, with temporary dislocations in prices in markets as varied as Japanese yen and cocoa futures.25 As with the Flash Crash, there appears to be no convincing explanation for these gyrations. The uncertainties and externalities associated with the race to zero are one candidate explanation. Liquidity mirages and message traffic congestion are nibbling away at the common good of market stability. The competitive quest for individual speed risks a fragile evolutionary equilibrium.

Jean-Claude Trichet: Preserving monetary and financial stability in an increasingly globalised world Keynote address by Mr Jean-Claude Trichet, Governor of the Banque de France, at the OECD Forum 2001 on Sustainable Development and the New Economy, Paris, 16 May 2001. * * * Ladies and Gentlemen, It is a great pleasure for me to be invited today to this OECD Forum to talk about preserving monetary and financial stability in an increasingly globalised world. One should keep in mind that financial globalisation has brought about improved macroeconomic efficiency. As you know, the globalisation of the world economy and the development of financial markets were driven by two key factors: • firstly, financial deregulation – reinforced in Europe by the setting up of the single market and subsequently of the Economic and Monetary Union – which liberalised capital flows and enhanced competition among financial sectors; • and secondly, technical and financial innovation, which simultaneously paved the way for the creation of financial markets that are deep, liquid and interconnected. What is interesting to stress is that the interaction of free capital movements within interconnected markets, increasing integration of market segments and hedging opportunities provided by new financial instruments have allowed a better fit between the financing capacities and borrowing requirements of both governments, households and companies. The use of market interest rates, which represent the markets’ consensus on the risk incurred at a moment, as a driving force is fully beneficial to an efficient allocation of capital.

The point is that, even while capital requirements are fulfilled, losses can reduce banks’ own funds at a time when capital issuance is difficult or costly; in such a juncture, some analysts argue that banks may be led to restrict credit lending during downswings although they are not bound to do so for prudential reasons. I consider that the future capital requirements of the New Accord will significantly improve the situation as regards the risk-sensitivity of capital requirements. Let us now turn to asset price moves. As previously mentioned, financial asset prices may fluctuate widely and sometimes deviate from economic fundamentals for long periods of time. Several factors may be in play when this happens. I shall give a few examples. • Some market participants may have become more inclined to engage in "short-termism", that is, they are only preoccupied with their short-term results. This trend might result, in particular, from growing pressure to yield high immediate financial results that are not necessarily sustainable. Marking-to-market financial products may also have contributed to this widespread focus on immediate financial performances. This focus on short-term performance can translate into additional volatility in the price discovery process: the shorter the investment horizon of market participants, the bigger the impact of any new information on prices. • Mimetic behaviour is of course by no means a new phenomenon on financial markets.

This has prompted several emerging economies to restructure their fuel subsidies in an effort to create more efficient economies and to achieve more sustainable fiscal positions. This has been followed by the consequent adjustments in consumer prices as the gap between international market prices and domestic prices narrow. In Malaysia , petrol prices were adjusted by BIS Review 90/2008 1 40.6% while diesel prices by 63.3%. This adjustment would be reflected in the consumer price inflation in June, which is expected to exceed 6%. Beginning 1 July, electricity tariffs have also been raised by up to 18% for households and an average of 26% for some commercial and industry users. While domestic inflation is expected to remain elevated for the remaining part of this year and early next year, it is expected to moderate in the second half of 2009. In the current international environment, the policy response needs to be contextualised to the conditions prevailing in each individual economy. In those economies that are experiencing overheating and strong demand conditions, there is greater clarity in terms of the need for policy to rein in demand. However, for economies that are experiencing moderating growth, the risks to growth and inflation need to be carefully evaluated. In addition, consideration needs to be given to the deflationary impact of the fuel price increases on consumption.

In facilitating this transition, Bank Negara Malaysia is reducing transaction fees for the RENTAS system (the real time gross settlement system operated by Bank Negara Malaysia) for payments made by financial institutions on behalf of their customers. With effect from 15 July 2008, the RENTAS transaction fee imposed on the member banks will be reduced by RM1.00, from RM2.50 to RM1.50. This reduction in fees will result in a corresponding reduction in bank charges imposed by member banks on their customers for RENTAS payments with effect from the same date. In addition, the banking industry will be reviewing the fee structure for fund transfers to apply a fixed fee instead of the existing Inland Exchange Commission of 0.03%. In this environment, the SMEs also need to initiate their own measures to complement those undertaken by the Government and the banks. Achieving cost efficiency and productivity improvements needs to be a priority for SMEs. SMEs should look at every facet of their business operations to identify ways to streamline processes, eliminate waste, consolidate activities and adopt new technology and energy-efficient processes. SMEs that operate in common geographical locations and that have similar production inputs, should also consider pooling their purchase requirements to benefit from bulk discounts by suppliers, in addition to sharing common costs such as transportation. In this regard, the Chambers of Commerces and industry associations can have a key role. They can facilitate the bulk purchase of raw materials for their members.

2.4 Stress testing should also prove helpful in informing macroprudential policies While stress tests have become an important part of the microprudential toolkit, they have also taken a key role in macroprudential analysis in recent years for financial crisis prevention purposes, enabling central banks and macroprudential authorities to assess the vulnerabilities of the financial system as a whole. Informing macroprudential policy with a comprehensive overview of the financial sector’s resilience is and will remain an essential objective for the future of stress testing. In that regard, improving the accuracy and relevance of our top-down models is one of our priorities at Banque de France, but also at the European level, to better use them in the macroprudential field. 3/3 BIS central bankers' speeches

Although equity and property prices serve as important indicators for the future development of economic activity, they are not a goal of monetary policy. Many reasons militate against a direct monetary-policy response to changes in asset prices. The question nevertheless arises as to whether monetary policy could not do more to prevent any speculative bubbles from forming in the first place. BIS Review 53/2003 1

Chart 12: Pay for alternative work Median real weekly income (2018 prices), 2007/08 = 100 Employees 120 Self-employed without workers Self-employed with workers Zero Hour Contract Workers Median real hourly wages (2018 prices) All Workers 14 110 12 100 10 8 90 6 80 4 70 2 60 2007-2008 2009-2010 2011-2012 2013-2014 2015-2016 2017-2018 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 Sources: ONS and Bank of England calculations. With thanks to Steve Machin and Rui Costa at the CEP for kindly providing the data for these charts. 5 Datta, Giupponi and Machin (2018). For example, Datta, Giupponi and Machin (2018) and https://www.tuc.org.uk/news/two-thirds-zero-hours-workers-want-jobsguaranteed-hours-tuc-polling-reveals 7 https://www.tuc.org.uk/news/1-9-workers-are-insecure-jobs-says-tuc 8 https://www.bankofengland.co.uk/events/2018/november/townhall-blog-scotland-november-2018 9 Tomlinson (2018). 10 Mas and Pallais (2017). 6 11 All speeches are available online at www.bankofengland.co.uk/speeches 11 These changes in the nature of work are likely to have contributed to the recent weakness of pay. The creation of larger numbers of, on average, lower paid jobs will have had a direct, dampening effect on pay. And income insecurity and the lack of unionisation among gig workers may also have lowered their pay bargaining power. Summing up, then, a jobs boom has reduced the scourge of job insecurity that troubled workers in the past. But in its place has emerged a different scourge – static or lower pay and rising income insecurity.

The value of the Norwegian krone against the Deutsche mark was nearly halved between 1973 and 1987. We paid about 2 kroner for 1 mark in 1973 and close to 4 kroner in 1987. Since 1987, the krone exchange rate against the Deutsche mark has remained more or less unchanged. During this period, price inflation in Norway has been no higher than that in Germany. We cannot be sure how fast the inflation differential between Norway and other countries will translate into changes in nominal exchange rates in the future. Nevertheless, we must expect that any differences in the rate of inflation may be a key cause of changes in the nominal krone exchange rate over time. The Norwegian monetary authorities abandoned the devaluation approach in 1986. From 1986 to 1992 Norway had a fixed exchange rate with a defined central rate and fluctuation margins. This system was abandoned in 1992 following extensive speculation against the krone in connection with the turbulence in European exchange markets. After the krone was allowed to float on 10 December 1992, the guidelines for monetary policy were also revised. Monetary policy was still oriented towards the objective of krone exchange rate stability, but no specific central rate with fluctuation margins was stipulated. The krone depreciated slightly in 1992, but thereafter it remained relatively stable. Looking back at developments in the Norwegian foreign exchange market in the 1990s, no significant change really appears to have occurred in 1992. However, there was a marked shift in January 1997.

12 We have vacancies only at what’s known as the “section” level (i.e. across a crude division into 18 broad sectors). Chart 18 uses official output data at a “two-digit” level (100 sectors). The DMP allows us to look at variations at the level of individual firms. 11 14 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 14 mismatch rose sharply during the pandemic and, despite the recovery in the first half of this year, remains relatively elevated. One reason for this might be continuing divergence in demand. Chart 18 plots the degree of dispersion in output growth across sectors, this time at a much finer level of disaggregation, over the previous two years. As we know, the pandemic was highly skewed in its effects, hitting some sectors and regions far harder than others. Some even benefited. You can see that in the big jump in the series from the second quarter of last year. And at least up until the first quarter of this year (we don’t have any data since) there was no sign of any sort of correction. Chart 17: Relatively poor correspondence between available jobs and furloughed employees so far Sources: ONS vacancy and Labour Force Survey data and Bank calculations. Chart 18: Up until 2020Q1 there was still significant sectoral dispersion in output Sources: ONS and Bank calculations.

17 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 17 You’d expect all this to lead to matching reallocations in employment – job shedding in the weaker sectors and regions, strong rates of hiring where demand has picked up the most. And in the DMP survey that is indeed what you do see (Chart 21). But it hasn’t yet happened to the same degree as in firms’ reported sales – nor, if we extend the series backwards with other sources of data14, to the same extent as after the financial crisis, whose impact on firms’ output was also highly uneven. Chart 21: Employment reallocation has picked up but still looks lower than after the financial crisis Sources: Decision Maker Panel, Bureau Van Dijk (based on Companies House data) and Bank calculations. For similar reasons, and again both on the demand and supply side, I would expect these imbalances to subside somewhat as the economy recovers. The underlying dispersion in demand is more likely to narrow than widen further. We’ve already seen some signs of that across sectors, with “social consumption” recovering faster than areas of spending since the economy re-opened (Chart 14 again). In the meantime, the reallocation of jobs, which should also reduce these strains, is likely to continue and may even pick up for a while. However, I’m more uncertain about this process, and the implication for costs in aggregate, than about the transitory nature of goods-price inflation.

Hence, addressing the global risks to financial stability requires that source countries also properly monitor and control these risks with adequate supervision and regulation. BIS central bankers’ speeches 5 Figure 1 Nominal Exhange Rate (CLP pesos per US Dollar; day of intervention announcement = 100) 116 116 112 112 108 108 104 104 100 100 96 96 92 92 t t+5 t+10 t+15 t+20 2008 t+25 t+30 t+35 2011 Source: Central Bank of Chile. Figure 2 Copper Price (day of intervention announcement = 100) 110 110 105 105 100 100 95 95 90 90 85 85 t t+7 t+14 2011 t+21 t+28 t+35 2008 Fuente: Bloomberg.

Not dealing with inflationary pressures in a timely manner, however, could result in economic overheating and rising inflation. Most emerging markets have enjoyed great success from trade openness and export-led growth, and hence their worries arising from exchange rate appreciation are well justified. However, it is important to distinguish between real appreciation – the relevant variable from BIS central bankers’ speeches 1 the competitiveness standpoint – and nominal appreciation. Exchange rate actions that attempt to mitigate a real exchange rate appreciation will have only transitory effects, which could provide valuable time for the economy to adjust to a new global environment and might hence be relevant from the point of view of welfare, but cannot be thought of as a permanent tool to foster competitiveness. In order to sustain the real exchange rate, real actions need to be taken, such as increasing domestic savings. It is time to rebuild fiscal buffers in emerging market economies and accelerate the pace of reforms to achieve productivity gains that can sustain competitiveness. It is important to note that the economic strength of EMEs relative to advanced economies is the main reason why their real exchange rates are appreciating. In addition, the correction of global imbalances requires both an increase in consumption in surplus economies and a shift of this greater demand towards goods produced by advanced economies, especially since in the latter growth of domestic demand will be sluggish because of the post-crisis deleveraging process. Relative price adjustments around the world should help this process.

In the long term, wouldn’t “Grexit” risk putting on record that a country can, in fact, leave the euro area, and thus that the euro is not irreversible? If Greece had to leave the euro area, that would risk casting doubt on the nature and functioning of the monetary union. That would create fragility. It would be a tragedy for Greece and, moreover, for its economy. It would be a challenge that Europe would have to rise to as quickly as possible, by substantially reinforcing its institutional framework. The stability of the euro area depends on a balance between responsibility and solidarity. In order to be stronger and more convincing, concrete initiatives are required to reinforce these two dimensions. What would you say to the Greeks to convince them not to leave? It is vital to put Greece back on a growth path, to reach a consensus in order to recreate a viable economic model for the country. Total factor productivity in Greece grew at a rate of only 1% per year between 1981 and 2014, against 2% per year in the euro area, and that happened despite the sizeable transfers Greece has benefited from. To achieve this, the Greek economy must remain within the single European market and be able to rely on its institutions. What’s more, were Greece to leave, austerity would be far worse. The country would no longer benefit from the solidarity of the euro area, which has given it the time to make the necessary adjustments.

On the other hand, there is the outstanding debt under the debt purchase programme established in 2010 (SMP), which amounts to close to € billion. Are we looking at a scenario entailing a potential loss of close to € billion if Greece leaves the euro? I do not want to speculate on that. Greece can remain in the euro area. What would be the consequences for the euro area of a “no” vote in the referendum, which would undoubtedly lead to “Grexit”? A distinction must be made between the short and long-term impact. The reaction of global financial markets on Monday demonstrated that they were surprised. Up until Friday evening, it was not envisaged that the negotiations would break down and a referendum would be 2 BIS central bankers’ speeches called. The markets have become risk-averse. But their reaction remains relatively calm. This shows the extent to which Greece’s current situation is a unique one – it is a special case. Other countries in the euro area have experienced great difficulties. They have been through adjustment programmes, and come out of them. For these countries, this has been a chapter with a successful conclusion. This is the case in Ireland and Portugal. The Cypriot programme is still ongoing and proceeding well, which should allow the ECB soon to begin purchasing Cypriot securities. I do not underestimate the efforts these programmes have required, or their social costs. The citizens of these countries have paid dearly.

For instance, effective supervision and stress testing could inform the decision to release the CCoB with an ex-ante assessment of the banking system ability to absorb potential future losses without breaching minima – a number of authorities did and published such tests in the midst of the pandemic. We would also need to ensure that an effective capital conservation mechanism is in place. This would prevent the released capital from being distributed inappropriately and ensure that firms would be able to rebuild the buffer in the future. The current tool, known in the UK as Maximum Distributable Amounts (MDAs), cannot serve this function because it does not apply to the portion of released capital. MDAs restrict dividends, AT1 coupons and bonuses when non-releasable buffers are used and appear to have two effects – one intended and one unintended. The intended effect is to prevent banks distributing away capital that could be otherwise used to build capacity to absorb losses and support lending. This is exactly what some global banks did in the early stages of the subprime crisis, which left them weakly capitalised when the Lehman shock hit the system later on. But MDAs can also have an unintended effect – they can disincentivise banks from using their regulatory buffers, for fear of market stigma, pushing them to cut lending and hurting the economy and therefore ultimately themselves. Page 5 A recent study co-authored by colleagues in the Bank of England sheds light on both these effects.

[17] And the liquidity framework has been designed from the start to facilitate the usability of those liquid asset buffers when banks face liquidity pressures. For example, there is no minimum and buffer structure in the LCR. It’s all one giant buffer. And there are no automatic restrictions that result from drawing down liquid asset buffers, unlike in the case of usage of capital buffers that incurs distribution restrictions. There is no specific time period in the regulatory framework within which banks need to rebuild their high quality liquid assets (HQLA) after a draw down. And there is no expectation on banks to hold excess liquid assets in order to avoid falling below the regulatory standard in the event of a potential stress. And some jurisdictions, like the PRA, had gone out of the way before the crisis to say that liquid asset buffers should be usable. [18] Yet during the early stages of Covid-19, we saw evidence that suggested banks were overly reluctant to use their HQLAs, reinforcing similar evidence gathered from the Bank of England’s exploratory liquidity stress test. In February 2020, the market reacted to the Covid-19 stress through a typical flight to safety leading to increased prices of safe assets and falling safe asset yields. In mid-March however, the illiquidity of other markets turned a ‘flight to safety’ into a fevered ‘dash for cash’: to meet sudden large margin calls, firms began to sell their most liquid assets, which drove safe assets prices down.

Elvira Nabiullina: Speech at congress of Association of Banks of Russia Speech by Ms Elvira Nabiullina, Governor of the Bank of Russia, at congress of Association of Banks of Russia, 28 May 2021. * * * Good afternoon, dear congress attendees, The pandemic is slowly but abating, there are signs that life is returning to normal, and in-person conferences are gradually coming back. All the same, we are lacking in real-life communication, so I am very glad to welcome you here today. Of course, there are changes taking place not just in how we communicate. We can see that the actions taken as part of our anti-crisis agenda are gradually being replaced by those on a development trajectory, as before. With account for the fact that the pandemic has had a serious impact on society, on the economy as a whole, and on the financial sector, we must think about the future, and about how the financial sector will help the development of the economy. Last year, the banking sector made a positive contribution amid pandemic conditions. It supported the economy, its clients, and, I am sure, will be able to further support the development of the economy. I would like to take this opportunity to thank the entire banking community for their wholly responsible behaviour during the pandemic. It is thanks to you, really, that we managed to greatly mitigate the negative effects of the pandemic.

Following the monetary policy meeting on 11 August, the Executive Board stated that with the prospect of continued low inflation for a period ahead, wide deviations from projected economic developments would be required before the interest rate should be increased. The Executive Board also stated that uncertainty concerning the effects of previous monetary policy easing and the unusually low interest rate imply, on the other hand, that we should exercise caution with regard to further interest rate reductions. 6 BIS Review 47/2004

This might include actions to 1) prudently expand access to mortgage credit for homebuyers, including by limiting putback risks that discourage loan origination and addressing problems with appraisals; 2) eliminate frictions and lower costs to refinancing for all borrowers with prime conforming loans; 3) enable borrowers who are “underwater” on their loans but continue to make their monthly payments to earn accelerated principal reduction over time; 4) provide bridge financing for borrowers with proven ability to service their debts who lose their jobs and may take longer than normal to find new jobs in today’s weak labor market; and 5) manage the disposition of homes repossessed by creditors in a manner supportive of large-scale conversion into rental units. I am encouraged by the recent decision by the Federal Housing Finance Agency (FHFA) to make it easier for certain borrowers with high loan-to-value ratios to refinance. I hope this initial step will be followed by others that collectively move in the direction of stabilizing house prices. I believe this would not just be good economic policy, but it would also be extremely beneficial for taxpayers, who now effectively own the credit risk of those home loans guaranteed by Fannie Mae and Freddie Mac. On the fiscal policy front, ongoing support for demand from the public sector at a time when many households are deleveraging sustains jobs and incomes.

BIS central bankers’ speeches 3 To understand our prospects a bit better, we need to look at the likely behaviors of business and household sectors separately. Circumstances for the business sector are mixed with larger corporations generally in much better shape than smaller businesses. Many large corporations entered the recession with healthy balance sheets. While leverage1 did increase sharply in the recession, it has subsequently come back down to levels similar to the 1990s. Record profit margins have enabled large corporations to build substantial buffers of highly liquid assets. Large businesses are cautious because of concerns about the sustainability of growth and demand, political dysfunction, the health of the financial system and their ability to retain their access to credit throughout the business cycle. For smaller firms, the situation is generally more difficult. Because this sector has a higher exposure to real estate, falling real estate values pushed up leverage for this group and it remains well above previous historical highs. Although small businesses identify weak demand as their major problem, the availability of credit is also an issue. An improvement in their ability to obtain credit would seem to require some stabilization of real estate prices and a substantial increase in demand for their products and services. Turning now to the household sector, Chart 4 shows that a combination of the fall in interest rates, paying down of debt and debt write-offs has substantially lowered the share of income required for households to service their debt.

Supervision is about how we apply that framework every day. They are not the same thing. Rules are for the most part in our world the product of international agreement, eventually. There are good reasons for this in terms of seeking to ensure comparable standards of protection where services can be provided across borders, and where encouraging free trade in services is consistent with open economies. When it comes to supervision the PRA will be applying judgement around the framework of rules. This is important for a number of reasons, but above all against a background of inexorable increases in rule making we must have the determination to be focussed on the key risks that matter to our objectives. One of my commitments is that we must be focussed on the (I hope) small number of big risks that threaten our objectives of safety and soundness and policyholder protection. I don’t have any difficulty with intensive and intrusive supervision where it is focussed and justified by the risks. We are not, however, substitute compliance officers – that is the job of firms, and one that we will expect to see in place and functioning along with risk and audit functions. Another key aspect of judgemental supervision is that it must be forward-looking to the risks that may arise. This is crucial, and was not properly incorporated into the pre-crisis regime of supervision. Let me give a few current examples of this for insurers.

The essence of the With Profits contact as I understand it is that the provider offers a guaranteed minimum return, variously structured , plus the prospect of additional returns derived from the return earned on a pooled fund that combines many contracts including over different generations of policyholders. There is of course a logic to pooling returns, but for the policyholder the return can be complicated, and sometimes made opaque, by the practice of pooling different generations of policyholders who may have different expectations on their returns (conditioned, for instance, on changes in the external BIS central bankers’ speeches 3 environment); and by the practices of smoothing returns and of charging differentially for the economic value of the guarantees. Additionally, problems have arisen because the funds are made up of many different groups of policyholders with different guarantees, some of which, essentially on the annuity side, became increasingly valuable as nominal interest rates fell from the mid 1990’s. The existence of these guarantees was often, at best, unclear or, at worst not disclosed to new joiners to the fund. Bear in mind also that these contracts are long-lived with maturities typically of 25 years of more; and that the With Profits insurers themselves have often built up over many years through the take-over or mergers of many smaller providers, each with their own distinct products, associated policyholder expectations, and administrative “legacy” systems.

2 BIS central bankers’ speeches – are able to muster the courage to craft tax, spending and regulatory incentives for jobcreating enterprises to mobilize liquidity for expansion and payroll growth. Thus far, inflation has yet to raise its ugly head, and inflation expectations as measured by consumer surveys and market-traded instruments have remained stolid. However, with each passing day, constantly adding massive amounts to the monetary base will inevitably present a significant challenge to the FOMC, which must ultimately manage this high-power money so that it does not become fuel for sustained inflation above the committee’s 2 percent target once it is activated and flows into the economy. Thus, I was more than supportive of the collective decision of the FOMC to begin cutting back on our rate of accumulation of assets beginning in December. Over the course of our recent meetings, we have cut back from accumulating $ billion per month in Treasuries and MBS to a present rate of $ billion per month. This is still somewhat promiscuous. Even with the taper, the recent decline of mortgage supply has driven our absorption of the MBS market to 85 percent of fixed-rate MBS issuance. The fall in net MBS supply is outpacing the taper. At the current reduction in the run rate of accumulation, the exercise known as QE3 will terminate in October (when I project we will hold more than 40 percent of the MBS market and almost a fourth of outstanding Treasuries).

This is the very best we can offer you, whether you are from ancient Ithaca or Delphi or modern Hong Kong. Those who think we can be more specific in stating our intentions and broadcasting our every next move with complete certainty are, in my opinion, clinging to the myth that economics is a hard science and monetary policy a precise scientific procedure rather than the applied best judgment of cool-headed, unemotional decision-makers. We will cross the river that separates us from a normalized economy and a normalized monetary policy by feeling the stones. We may slip on occasion, but you should not underestimate our intention to apply whatever talents we possess as policymakers to do what is right to advance economic prosperity while strictly adhering to our commitment of containing inflation and maintaining market stability. Thank you (謝 謝). 7 6 Richard Fisher joined Mario Draghi, Mark Carney, Joachim Fels and others at a symposium on “Financial Stability and the Role of Central Banks,” organized by Jens Weidmann and Deutsche Bundesbank in Frankfurt am Main on Feb. 27–28, 2014. BIS central bankers’ speeches

Up to now, for NPLs outstanding more than 1 year, banks have been required to provide for 100 percent of the amount of loan net of collateral. We will, from the end of this year, require incremental provisioning for remaining amount of loan for NPLs outstanding for more than 2 years. By this new rule, if an NPL still remains outstanding for more than 4 years, provisioning for the entire value of the loan must be set aside. By that time, banks’ balance sheets will be very prudent. More important is the introduction of more prudent criteria to classify NPLs of banks. On top of the record of non-payment, the Bank of Thailand auditors have, since the beginning of 2003, looked at the “ability to repay” based on the potential cash flow as well. All these prudential measures are designed not only to strengthen the Thai financial system, but also to increase its credibility. Ladies and gentlemen, To sum up, the Bank of Thailand has taken several measures to ensure monetary and financial stability. The Thai economy has proven to be resilient. This year, despite the many recent challenges, the economy has been able to adjust well to shocks, owing importantly to the strong underlying fundamentals und a continued growth momentum. Going forward, as economic recovery continues, we need to be alert and be vigilant on the possible risks to economic stability, especially the risk on inflation.

M R Pridiyathorn Devakula: Maintaining stability with a nuanced approach Speech by Mr M R Pridiyathorn Devakula, Governor of the Bank of Thailand, at the Stock Exchange of Thailand, Bangkok, 20 September 2004. * * * Distinguished participants, ladies and gentlemen, Let me begin by thanking the Stock Exchange of Thailand for inviting me here to speak today. You have already heard from our Minister of Finance a comprehensive framework for sustainable growth in the next five years, with an integrated set of targets for various sectors and various dimensions of the economy. This is a welcome initiative and an important policy development. The Bank of Thailand’s role is to ensure economic and financial stability in order to support continued growth of the economy. From our experience, monetary policy alone is not enough to achieve desirable stability. WE need to involve ourselves in two other areas, i.e. to guard against possible build-ups of financial imbalances and to further strengthen the financial sector. First of all, I will begin with our assessment of the current economic conditions to assure you that, in spite of the greater risks and challenges that have emerged this year, Thailand’s growth momentum continues to remain firm, with economic and financial stability intact. Key challenges have included increased external pressure from higher oil prices, rising global interest rates, and the potential impact of a slowdown of the Chinese economy.

So targeted macroprudential measures for residential real estate markets and the activation of macroprudential capital buffers 2/4 BIS central bankers' speeches should be considered in some euro area countries to build resilience in a timely manner. In the medium term, after the COVID-19 crisis it will be important to look at the capital framework for banks holistically, with a view to simplifying it and removing potential obstacles to its effectiveness. In particular, the functioning of capital and liquidity buffers warrants further consideration, and an assessment needs to be made of whether there is sufficient releasable capital in place to address future systemic shocks. Specific attention may need to be paid to the non-bank financial sector, where the COVID-19 market turmoil revealed significant vulnerabilities. Taking into account its growing role in financing the real economy and the interlinkages with the rest of the financial system, the sector needs to be made more resilient through regulatory reforms and the further development of a macroprudential approach. Longer-term financial stability vulnerabilities have been also building up. The pandemic has left a legacy of significantly higher debt in non-financial sectors. Residential real estate prices have continued to rise sharply in many euro area countries, underpinned by strong lending dynamics, which raises concerns of potential overvaluation. Vulnerabilities in financial markets have also increased amid strong risk exposure and deteriorating liquidity at non-bank financial institutions.

It is estimated that 2.7 billion adults in the world economy are currently excluded from the financial system. In addition to the G20 initiative, there are other global institutions such as the Consultative Group to Assist the Poor (CGAP), Alliance for Financial Inclusion (AFI) and the International Finance Corporation (IFC) that have assumed an increasingly active role at the international level in developing new research, setting standards and providing a platform for policymakers to share experiences. This improved visibility of financial inclusion on the global agenda has lent significant support to the initiatives at the national level to promote greater financial inclusion. In this recent decade there has also been a growing body of research in the area of financial inclusion. This has contributed towards enhancing our understanding of the different approaches and policies that have been adopted and their relative successes in achieving greater access to financial services. This has also allowed for an enhanced appreciation of the issues that need to be addressed and on how sustainable financial inclusion might be achieved in our own countries. While considerable progress has been made in improving the financial inclusion environment, the sheer numbers that remain excluded from the financial system suggest that much more needs to be done, both at the national and international level. Barriers to financial inclusion continue to exist in many countries.

Were we still producing the same labour-intensive goods as before, with output concentrated in industries like agriculture (including hops), textiles, coal-mining and ship-building, we too would have seen the price of our own output fall, just as it did for hop growers a century ago. Instead we allowed output and employment to expand in those industries where we could exploit a comparative advantage. In Kent, the expanding sectors include financial services, transport (with 18 million tons of freight passing through the Channel Tunnel each year) the exploitation of life sciences, and higher education (with five universities in the county). As consumers, we have benefited from falling prices of goods made in China and elsewhere in Asia. Between 1995 and 2005, the prices of imported manufactured goods fell by a sixth and, relative to the price of domestically produced output, by no less than a third. So over the past decade we have been able to increase consumption by more than the increase in production. Openness to the world economy has resulted in a higher standard of living. The second signpost marks the rise in oil and other commodity prices. Rapid growth of production in China, India and other newly integrated economies has led to a substantial rise in the demand for oil and other raw materials. Between 1995 and 2004, net imports of oil to China rose by a factor of seven.

Monetary policy will, therefore, need to be alert to the information contained in a wide range of asset prices, to be forward-looking in its aim of maintaining low and stable inflation, and to be ready to respond to changes in the signposts. The remarkable degree of stability that the UK economy has enjoyed over the past decade has been less evident over the past twelve months. Growth slowed and inflation rose above target. But after a period driving along a smooth new highway, a change to a more challenging road surface does not, as I said recently to the House of Lords Economic Affairs Committee, mean that the wheels are coming off the economy; rather, it tells us that there are somewhat more and somewhat larger bumps on the road. Monetary policy can try to avoid some of the worst bumps, but it cannot ensure a flat road surface. Nevertheless, growth has picked up and inflation has fallen back close to its 2% target. Our central view remains one of steady growth and low inflation. But there are risks to that central view emanating from the rest of the world and we shall watch developments in world capital markets carefully. By keeping inflation close to the target, and so doing what it can to maintain economic stability, the Monetary Policy Committee aims to allow you and other businesses to follow the signposts which guide a market economy.

Presentation at the conference: Arbeidsmarked, lønn og økonomisk politikk, (The labour market, wages and economic policy) University of Oslo, 23 January 2007. 18 BIS Review 15/2007 But growth has a price. This is particularly reflected in increased emissions of greenhouse gases as a result of growing human activity. The highest emission levels per capita are found in rich, industrialised countries. Growth in total emissions is nevertheless highest in Asia.19 Scientific findings are clear: In the past 100 years, the global mean temperature has risen by 0.74ºC. There is more than a 90 per cent probability that the increase in gas emissions has contributed to global warming over the past decades. Developments mean that the Arctic ice may melt away, the climate may become more unstable and the supply of safe source water may decline. The changes also have an economic cost. It is expensive to repair damages to buildings and infrastructure following storms and floods. Insurance pay-outs are rising and premiums are following suit. When insurance is not possible, society must bear the cost directly. It is important to combine knowledge about nature and knowledge about the functioning of the economy in addressing environmental challenges. Maximum positive impacts and minimal negative impacts are achieved by using instruments that induce businesses and individuals to choose the technology and consumption pattern that stem emissions. Using these instruments releases the full 19 John Llewellyn (2007): ” The Business of Climate Change. Challenges and Opportunities”, Lehman Brothers, February 2007.

There were long periods when the Icelandic króna was pegged against or managed with respect to the currency of some trading partner countries or a basket of currencies, with varying degree of adjustability and commitment. During the 1980´s the exchange rate regime had been relatively flexible. But in the first half of the 1990´s it became much more stable, BIS Review 21/2003 1 after the króna was fixed in December 1989. Exchange rate stability during this period was one of the cornerstones of the successful disinflation policy that took inflation in Iceland down from double digits in the late 1980s to below 2 per cent around the middle of the 1990s. Once the liberalisation of financial markets was more or less completed in the mid 1990´s, exchange rate flexibility was gradually increased. The margins around the exchange rate target were widened from 2¼ per cent in either direction to 6 per cent in September 1995 in order to allow for the possibility of greater fluctuations in the exchange rate with more volatile capital movements. In February 2000 the target band was widened further to 9 per cent in either direction in order to create greater scope for monetary policy which was increasingly focusing on the maintenance of price stability. Recent experience around the world has demonstrated that it is difficult to maintain soft exchange rate pegs with free capital movements, and the same has been the case in Iceland.

Aside from a single currency and a fiscal brake, EMU’s institutional architecture was minimalist: governance of economic and financial policies remained firmly a national competence. What lay behind these expectations? Of course, political considerations were a dominant factor, insofar as governments had incentives to limit the centralisation of fiscal, economic BIS central bankers’ speeches 1 and financial policies. But to an extent, it also reflected the economic thinking that prevailed at that time. The rational expectations, perfect foresight paradigm was – and to a large extent still is – dominant. Many of its followers are, of course, aware of its limitations but hope to successfully expand the theory to encompass new aspects of reality. Standard models feature unboundedly rational agents and complete knowledge of all variables’ probability distributions in all possible future states of the world. They do not foresee significant credit cycles or irrational asset price bubbles. Moreover, information is fully symmetric and complete state-contingent contracts can be written and enforced. Default – a situation in which debtors cannot repay due debt in some states of the world – was also ruled out. The optimal lending contracts in such an environment do not even resemble a debt contract. Agents use so-called “Arrow-Debreu” securities. The set-up allows a different payback for every future eventuality so that borrowers are always able to meet due repayments.

In the end, this will make the whole structure more stable and robust. 2. Origins of the sovereign debt crisis in Europe It is striking that those countries which experienced the European sovereign debt crisis in 2010 – notably Greece and Ireland – were among the best performers in terms of growth in economic activity within the European Union (EU) over the decade preceding the crisis (charts 1 and 2). Indeed, Ireland was called the “Celtic Tiger”, drawing a parallel with the fastgrowing “Asian Tigers” in earlier decades. While prima facie a paradox, the relationship between strong pre-crisis growth and the severity of the crisis itself reveals much about the origins of the underlying economic, structural and institutional weaknesses that lie at the heart of recent events. The introduction of the euro in 1999 led to a sharp fall in real interest rates especially in the so-called peripheral countries of the euro area, as nominal interest rates converged to low German levels (Chart 3). In addition, the credibility of monetary policy’s commitment to maintain price stability was bolstered by the institutional changes associated with Monetary Union (Chart 4). The resulting improvements to the growth outlook were further supported by the completion and deepening of the EU Single Market and the prospect of structural reforms underpinning national competitiveness in this integrated market. In this context, the outlook for income growth in the peripheral countries was widely believed to have been transformed for the better.

The first such ‘sustainability-linked bond’ was issued by Enel, an Italian electricity producer, and offered a ‘step up’ coupon penalising the issuer if it failed to meet a specific target for the share of renewable energy in its installed capacity. Such bonds are not a complete answer to the concern of greenwashing: the degree of challenge in the target remains the choice of the issuer, for example, and the use of funds cannot be traced to specific projects in the same way as use of proceeds bonds. But they do illustrate the type of innovation now underway in capital markets. Chart 8: Total green bond issuance Chart 9: Corporate green bonds outstanding by nationality of issuer Source: Climate Bonds Initiative (CBI) data (including all selflabelled green bonds aligned with CBI’s Climate Bonds Taxonomy and with at least 95% use of proceeds financing or refinancing green/environmental projects) and Bank Source: CBI data and Bank calculations. calculations. The billion dollar question, of course, is whether the market is yet discriminating in favour of climate-positive investment, and away from the reverse. There are some encouraging signs from recent primary issuance: green bonds issued by European companies in September priced on average nearly 10 basis points inside existing curves, and tighter than other non-green issuance over the same time period (Chart 11). That’s real money: for example, the average -15bp new issue premium on VW’s recent € green bond issues will save the firm around € a year in interest costs compared to a conventional bond.

3 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 3 Insurers – with one spectacular exception, AIG – generally fared relatively well during the crisis. UK insurers’ balance sheets were in general more robust, and they did not hold many of the same assets that proved so toxic for our banks. Capital resources within the insurance sector did take a hit, but not a fatal one, though of course they benefited from the bail-outs of the banks. But a revolution was a necessary step to achieve greater consistency in insurance regulation across Europe. 3 The UK had already laid the ground for a market-consistent capital regime, through ICAS . But despite this, as the industry knows all too well, the introduction of Solvency II ended up being a rather long and exhausting revolution. There are some bugs we need to iron out (on which I will say more later), but the core elements of the regime are sensible and we will continue to work with the industry to make a success of it. Moreover, across both banking and insurance we now have a robust accountability framework for senior managers, reduced scope for dangerous pay structures, and more effective board governance. In no small part this is thanks to the pioneering work of the Parliamentary Commission on Banking Standards, leading to the introduction this year of the Senior Managers and Certification Regimes. The revolution is over Stepping back, where are we in the course of this revolution?

Starting positions, in terms of equity and credit quality, were already divergent. Moreover, in a crisis such as the current one, in which the pandemic is affecting different regions and sectors of activity in different ways, the worsening of banks’ solvency will foreseeably hinge on their degree of exposure to such regions and sectors. The current situation: the importance of maintaining stimulus measures and targeting them more specifically The current macroeconomic setting is characterised by an incomplete, gradual and uncertain recovery. Indeed, as a result of the restrictions on mobility that had to be applied in the first quarter, a further decline in GDP in this period cannot be ruled out. This would mean that, at end-March, GDP would still be slightly over 9 pp below its pre-crisis level. In any event, we should acknowledge that the development of effective vaccines against the virus has contained some of the risks to the economy. And, in turn, this has equipped the authorities with what is, in fact, also the best economic policy tool available to usher in the recovery: the roll-out of vaccination programmes that allow for the progressive lifting of the restrictions on economic activity. In this situation, retaining the exceptional support measures for the economy is warranted until the recovery firms. This support is also crucial for preventing the crisis from being compounded by a financial component that would deepen and lengthen it.

This translates into a return on assets (ROA) of -0.21% (down 72 bp on the figure of 0.51% recorded in 2019), which rises to 0.33%8 if the negative extraordinary adjustments applied during the year in three of the system’s main banks are stripped out.9 Notable in these results is the increase in impairment losses, of over 50%, which entailed provisioning that was € billion higher in 2020 than in 2019.10 As to Spanish banks’ external business, the effects were also adverse given the global nature of the crisis. This was the case both for the total volume of lending and its contribution to the consolidated result, while the depreciation of emerging countries’ currencies also came into play.11 In any event, the weight of external business in the main Spanish banks’ ordinary net income has increased. Hence, without taking into account the 5 However, behaviour was uneven in firms (with an increase of 6.6%) and in households (where there was a decline of 5.6%). 6 See, for example, the October 2020 Bank Lending Survey in Spain. Menéndez-Pujadas and Mulino (2020) summarise the results of the survey for the participating Spanish banks. 7 See D. Rodríguez-Miera and R. Vegas (2021), “Impact of the dividend distribution restriction on the flow of credit to non-financial corporations in Spain", Analytical Articles, Economic Bulletin, 1/2021, Banco de España. 8 The return on equity (ROE) stood at -3.1% (10 pp down on the figure of 6.9% recorded a year earlier), and at 4.8% if extraordinary adjustments are stripped out.

Household assets and debts in Sweden Percentage of disposable income 700 700 Total wealth Real wealth 600 600 Liquid wealth 500 500 Debts 400 400 300 300 200 200 100 100 0 0 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Note. There is no regular publication of official data for total household wealth and its components. The series are based on the Riksbank’s estimate of the households’ financial and real wealth. Real wealth is the households’ wealth in housing. Liquid wealth mainly consists of household assets in cash, bank deposits, bonds and shares. Sources: Statistics Sweden and the Riksbank Figure 14. Unemployment Percentage of labour force, 15–74 age group, seasonally adjusted data 12 12 Average 1980-1991 Average 1999-2012 Q3 Outcome 10 10 8 8 6 6 4 4 2 2 0 0 80 85 90 95 00 05 10 Source: Statistics Sweden BIS central bankers’ speeches 13 Figure 15.

The different responses of those central banks reflect their institutional framework as well as the economic circumstances of the respective countries. On one hand, the SNB has been more flexible than the ECB. The ECB is a new institution without historical record. Moreover, the ECB has a strict mandate of maintaining low inflation, and there have been upward inflationary pressures in certain European countries due to the convergence process. Those factors induced a less aggressive easing of monetary policy in an uncertain environment. In contrast, with traditionally low inflation, the credibility of the SNB is strong, which allows it to react quickly to economic shocks without creating turmoil in financial markets. In the past few years we have thus been able to act in a flexible way, with our own timing, in order to respond to the global economic slowdown and pressures on the Swiss franc. On the other hand, the SNB reacted less strongly than the Federal Reserve to the deterioration of the international economic environment. The United States is a relatively closed economy where the Federal Reserve mandate is broader than price stability. In contrast, our freedom to maneuver is limited by the openness of our economy. In a small and open economy, monetary activism cannot 4 BIS Review 32/2004 fine-tune economic activity. Institutional and economic characteristics of the different countries and central banks have thus implied differentiated monetary policy profiles. 5.

This means that most participants can be assumed to be highly knowledgeable about the products they trade, and capable of making educated investment decisions. As a result these markets have historically tended to work primarily on the principle of caveat emptor – or “buyer beware.” In legal terms, caveat emptor expresses the basic principle that a buyer of property purchases it at his or her own risk, and that — unless expressly agreed otherwise with the seller — there is no guarantee that the value of that property will not fall. In such circumstances, market participants should invest time and energy in looking after their own interests, voting with their feet when they are poorly treated. Such market discipline has historically always been thought of as a key bulwark against widespread abuse in FICC markets. However, caveat emptor has never meant “anything goes”, and certainly does not trump the obligation on a firm to act honestly, fairly and professionally. Change is happening The structure of these markets is already changing, and recent high profile enforcement actions have brought sharply renewed focus on conduct issues, particularly where they are seen as targeting individuals. The FCA has a “credible deterrence” enforcement strategy, and recently highlighted its intention to pursue a more proactive approach to wrongdoing in wholesale markets. Since 2010 it has issued 15 final notices for misconduct in FICC markets and imposed more than £ million in financial penalties.

And it isn’t just the UK: the most high profile enforcement cases to date, involving the manipulation of short-term interest rate benchmarks, have affected every major financial centre, including London, Singapore, Frankfurt and Tokyo, and have already resulted in global fines totalling nearly £ by authorities in the United States, the United Kingdom and Europe. Good progress has also been made on the design and regulation of benchmarks. In the United Kingdom, the design and administration of Libor has been overhauled, and a new regulatory regime was introduced in 2013, following the Wheatley Report. In August this year, as its first act, the Fair and Effective Markets Review recommended to HM Treasury that this regime should be extended to cover a further seven major UK-based benchmarks: SONIA, RONIA, the WM/Reuters 4pm London Fix, ISDAFix, the London Gold Fixing, the LMBA Silver Price and the ICE Brent futures contract. The International Organisation of Securities Commissions (IOSCO) has introduced a new set of standards for benchmarks, and the Financial Stability Board (FSB) has produced detailed reports on the priorities for further reform of interest rate and foreign exchange benchmarks. A number of broader regulatory, market and firm level initiatives are also under way in this area. The second Markets in Financial Instruments Directive (MiFID 2) is expected to have a major impact on the structure of FICC markets across Europe, with new transparency measures expected to transform the way that they function.

For social systems, this does not sound too implausible. Humans are social animals. Indeed, the feature which set humans apart from other animals is their degree of social interaction Chart 5: The most highly cited articles on agent-based (Harari (2015)). modelling across disciplines This, on the face of it, modest adaptation gives rise to some fundamental changes in model dynamics. Linear, proportional responses to shocks become the exception; complex, non-linear responses the rule. Single, stationary equilibria become the exception; multiple, evolutionary equilibria the rule. I discuss these differences in the next section. Before doing so, I want to bring to life some of the uses of ABMs. These models have found widespread application across a broad array of disciplines in both the natural and social sciences. They have been used to address a Source: Google scholar; Bank calculations. Notes: This was found by performing a Google Scholar search of the relevant term for “agentbased modelling” in each field and then using the citation count of the most highly cited paper which could be fairly and solely attributed to each distinct field. When searching for “Monte Carlo” only papers modelling distinct subsystems were considered and not those using the technique of random number generation more generally. massive array of problems, big and small: from segregating nuts to segregating races, from simulating the fate of the universe to simulating the fate of a human cell, from military planning to family planning, from flocking birds to herding (fat) cats.

Further, based again on standard analysis, the assignment of instruments to objectives ought to be based on the principle of comparative efficiency. Monetary policy is the natural instrument for pursuing price stability. Using again the prisma of Deng Xiaoping, the success of central banks in stabilizing inflation since 1995 strongly supports this view. Macroprudential policies – defined as a set of policies aimed at limiting both excessive credit growth and the build-up of systemic risk within the financial system – will have to take care of preserving financial stability. From here onwards, however, things become less clear-cut, and sometimes positively complex. First, the two objectives are qualitatively different. On the one hand, price stability is very easy to define and to measure in terms of a specific price index. As a result, monetary policy is comparatively easy to communicate, and its performance can be assessed in a relatively straightforward way. Financial stability, on the other hand, is significantly fuzzier, as it deals with preventing the accumulation of systemic risks, the build-up of asset price persistent misalignments, that some call bubbles, etc.. As a result, it cannot be defined in a straightforward fashion, with reference to, in the extreme case, a single indicator, and ought therefore to be communicated and assessed in a more complex way. Second, and crucial, is the unchartered interaction between the two policies. On the one hand, recent thinking has stressed how monetary policy can contribute to sowing the seeds of future financial instability.

However, anecdotal evidence indicates that they have been able to substitute their sources of finance by shifting into bank loans, something that can also be seen as a positive feature of the functioning of financial markets. In fact, the limited transmission of the turbulence through the financial channel is the key difference with the past. More precisely, what has made the emerging markets so resilient this time? The answer is the building up of strengths, not only in Asia, but also in Latin America and in Emerging Europe. On the one hand, growth has become more broad-based and with a much stronger contribution of domestic demand, in other words, more self-sustainable. In addition, southsouth and intra-regional trade linkages among emerging economies have increased. This has mitigated potential trade spillovers from industrial economies, although it has not suppressed them, of course. Very importantly, economic policies have been generally sound. On the financial front, the absence of significant exposures to the subprime market or to complex structured products in domestic financial systems has surely helped in this regard, but there are more structural reasons. In particular, there has been an important reduction of the financial vulnerabilities that were widespread in the past, and which led to costly crisis with important output losses and poverty increases, as the Asian crises ten years ago crudely demonstrated. Many emerging market economies have reduced their financing needs and improved their debt management. Many more run current account surpluses which reduce their reliance on external funding.

4 BIS Review 56/2008 • New capital regulations based on the Basel I model were implemented. In the new regulation there was a more appropriate relationship between loans granted (risks) and capital, instead of deposits and capital. • Banco de España was empowered to issue accounting regulations for banks. It duly laid down new prudent accounting rules, in particular regarding loan classification and loan loss provisioning. Since then, the authority to establish accounting standards for banks has proven to be one of the most powerful tools at our disposal. • Supervisory reporting was established. This is an essential element of supervision which allows for proper monitoring of the situation of banks. • The Central Credit Register was introduced in the sixties, with all credit institutions required to report regularly to it. This database is exploited for supervisory purposes and will play an important role in Basel II supervision. It can also be used by the banks for credit risk management purposes. • Since the seventies Spanish banking supervision has paid particular attention to obtaining "first-hand" on-site assessments of developments, to complement its continuous and close monitoring of every institution. • The growth of the financial markets called for more transparency and better regulation of external auditing. A new law was passed making the external audit of the annual accounts compulsory for every company above a certain size, and for all financial institutions regardless of their size.

These factors have slowed the recovery in primary issuance, and suggest that ABS markets are likely to be much smaller in future. Indeed some markets that were at the epicentre of the crisis, such as those for structured collateralised debt obligations (CDOs), may be permanently gone. 5 Just in the past couple of weeks we have seen the first European CMBS to be issued since August 2007. In the United Kingdom, some corporates have issued long-dated fixed-rate bonds secured on real estate as part of sale and leaseback transactions. Market participants, however, tend to regard these transactions as corporate debt, rather than CMBS. 4 BIS central bankers’ speeches Chart 6 10-year sovereign bond yield spreads to German Bunds Basis points 1400 Portugal Italy Ireland Greece Spain United Kingdom Chart 7 Selected European sovereign CDS premia Basis points 2000 1200 1000 1800 1600 1400 800 600 400 Ireland Italy Portugal Spain UK Greece (LHS) Basis points 0 Jan. Mar. May. Jul. 2010 Sep. Nov. Jan. Mar. May. 700 600 1200 500 1000 400 800 300 600 200 400 200 800 100 200 0 Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. 2009 2010 2011 0 2011 Sources: Bloomberg and Bank calculations.

In the United Kingdom, the Bank of England responded to the collapse in economic activity and the risk of deflation by cutting official interest rates and embarking on a programme of asset purchases financed by the creation of central bank reserves (known as Quantitative Easing). It also separately sought to stimulate markets for corporate debt and commercial paper, and put in place a Special Liquidity Scheme for banks to swap their illiquid collateral for highly liquid T-bills. Other central banks took a variety of similar actions. For example, the Federal Reserve began purchasing a range of private and public sector securities in large scale. And in Europe, the ECB responded by offering its counterparty banks unlimited refinancing operations at maturities of up to 12 months. Despite these differences in policy, one end result was common – they led to a massive expansion of central bank balance sheets (Chart 11) and a significant injection of liquidity into the global financial system. That in turn pushed down yields on “safe” assets, encouraging portfolio rebalancing (one of the key channels through which asset purchases work) and a “reach for yield”.7 More recently contacts, especially those in the United States, have reported that the reach for yield has been exacerbated by a perceived reduction in the universe of acceptable assets for real money investors.8 For example major corporates, especially those in the United States, are reported to be relatively cash rich.

The growing importance of balance sheet considerations in monetary policy only reinforces the importance of transparency in central bank communication. 5 Finally, let me make an obvious but nonetheless crucial point, even if it goes beyond today’s topic. Transparency is a valuable good in its own right. For good reasons, central banks are powerful and for the most part politically independent institutions. Moreover, the officials who run central banks are typically appointed for lengthy terms and are difficult to remove from their positions. Transparency is a crucial element in creating democratic legitimacy for politically independent institutions whose actions can have wide-ranging consequences for a country’s citizens and its elected government. As former Fed Chairman Alan Greenspan (1996) said ten years ago, it “cannot be acceptable in a democratic society that a group of unelected individuals are vested with important responsibilities, without being open to full public scrutiny and accountability.” Transparency is of little use if markets and the public do not believe what a central bank says. Credibility is therefore a condition that is a sine qua non for a successful monetary policy. How can credibility be established? Alan Blinder (1998) summarises credibility as a "painstakingly built up history of matching deeds to words". A long history of actually matching deeds to words, of honest communication and a reputation for delivering price stability will therefore ensure central bank credibility.

I would also like to stress here that the two points for attention I have just mentioned do not, in my view, overshadow any of the following: the many other initiatives announced in the action plan, the work to facilitate remote access and promote an interoperable digital identity, the provisions on cybersecurity, or the forthcoming discussions on artificial intelligence or data sharing in financial services - open finance after open banking. The message that I think is important today is the following: the stakes of this action plan on the financial sector are high and it will have a major impact on the innovative ecosystems of the 3/4 BIS central bankers' speeches French and European financial sectors. That is why the Banque de France and the ACPRwill be particularly attentive, in the coming weeks and months, to your feedback, suggestions and questions on this “digital finance package", which is closely in line with the rationale of the ecosystem that I have just outlined. In other words, we have the opportunity to demonstrate today that the discussions held in recent years between the Banque de France, the different players in the innovative financial ecosystem and other supervisory authorities, the relationships of trust established between us, the complementary expertise, the shared experiments and knowledge, have a concrete and tangible effect: that of further strengthening the dynamics of an ecosystem that is destined to count in the future of the European financial sector. * Thank you for your attention. 4/4 BIS central bankers' speeches

We endorse the Managing Director’s focused and streamlined Global Policy Agenda (GPA) which, amid great uncertainty and significant downward risks to the outlook, lays down a holistic policy framework to restore confidence, build up economic resilience, and help the most vulnerable countries and people. We firmly support the GPA’s advice against a premature withdrawal of policy support before the recovery has gained sufficient traction. We also strongly endorse the GPA’s call for close global cooperation in health, economic, technology and trade areas to see us through the crisis and the subsequent recovery phases. Our constituency is a heterogeneous group of countries at different stages of containing the spread of the virus and kick-starting their economies, but are all united in their common goal of safeguarding the lives and livelihoods of their citizens. Policy responses have been swift and comprehensive, including supportive fiscal and monetary packages, and innovative social protection programs. Nevertheless, in the oil importing countries in the constituency, macroeconomic stability has been undermined by increased fiscal and external imbalances and soaring public debt. The oil exporting countries have been additionally hit hard by the sharp drop in international oil prices, that not only has put significant pressure on their public finances and balance of payments, but has also derailed their long term diversification plans; while oil prices have recovered somewhat, economic activity is expected to remain subdued for some time.

We do appreciate that the System is still in a developmental phase and has yet to reach its ideal configuration. The arrival of ten new members, moreover, will not make things any easier for a time. I would nevertheless like to suggest that a collective effort be undertaken to rationalise the work of the ESCB, not least by containing the number of meetings in Frankfurt and elsewhere. The challenges posed by EMU are clearly diverse and vary from country to country as well as across time, depending on a host of factors ranging from the extent of catching-up that needs to be done and the tools available to policymakers, to the degree of cross-sectoral linkages and of consensus on the respective national strategies. In practice, however, the underlying economic causes are probably quite similar across countries, often being manifestations of macroeconomic imbalances and structural inefficiencies. As such they must be addressed sooner rather than later. Only in this way will it be possible for our countries to derive full benefit from EU membership. That probably hardly needs emphasizing in this forum because central bankers understand the importance of coherent policies designed to achieve a more efficient allocation and use of resources. At the same time, however, we are also conscious of the difficulties involved in reconciling what is conceptually desirable with what is feasible in practice.

According to employment by economic activity, as at the 3rd quarter of 2007, of the total occupation, women accounted for 35% and 26%, respectively, in agriculture and manufacturing. During 2003-2007 of the estimated worker contracts abroad, on average, 65% have been females. Although there has been some impact following the removal of export quotas for garments BIS Review 40/2008 1 under the multi-fiber agreement in 2005, the important point is that, in terms of employment, the female labour force has not suffered significantly. Women’s contribution to growth has been much more significant in the recent decades, given their enhanced involvement as garment and apparel factory workers, domestic helpers in the Middle East and other destinations, and tea plantation workers. In terms of foreign exchange inflows during 2007, garments and apparel have accounted for USD 3.3mn, worker remittances for USD 2.5mn and tea exports for USD 1.0mn. Around 80% of exports have been dependent largely on the fortunes of the garments industry in which over 90 per cent of employees are women. The 3 export processing zones, i.e. Katunayake, Biyagama and Koggala, the increasing number of industrial estates located in the different parts of the country, and around 150 rural garment factories, provide employment opportunities for young women between 18-30 years. Although precise statistics are not available to indicate the participation of women or their contribution to enhance foreign exchange inflows, undoubtedly, women’s contribution has been very significant.

Market participants can then use this standardised information to assess the value of projects and price them better. Testing the use of remote sensing technology combined with satellites to more 7 / 10 BIS central bankers' speeches accurately verify carbon sequestration. This is important to ensure that credits issued from a project represent real and measurable reductions in emissions. Complementing the Sustainability Alliance, DBS Bank, Temasek, the National University of Singapore, and Conservation International have come together to research nature-based solutions. I am pleased to share that they launched just this morning a joint report studying the commercial viability of nature-based solutions. Temasek and DBS Bank are leading a six-month Technology Accelerator for start-ups interested to use technology to scale nature-based solutions. The National University of Singapore, the World Bank, and Google have come on board as partners to the Accelerator. International co-operation remains key to growing the Asian carbon credits market. The Task Force for Scaling Voluntary Carbon Markets, sponsored by the Institute of International Finance, has launched a consultation paper outlining 17 very sensible recommendations. Singapore is keen to work with like-minded countries and businesses to test-bed the recommendations of the Task Force… … and to start laying the foundations for a viable carbon credits market in Asia. Green Finance Action Plan The second way in which Singapore seeks to facilitate Asia’s transition to a sustainable future is through the Green Finance Action Plan, which MAS launched at the FinTech Festival last year.

The SNB will closely monitor the effectiveness of the revised self-regulation. In 1 Federal Council (2019): Bericht des Bundesrates zu den systemrelevanten Banken. www.admin.ch/opc/de/federal-gazette/2019/5385.pdf Page 2/4 Berne, 12 December 2019 Fritz Zurbrügg News conference parallel, it will continue to regularly reassess the need for an adjustment of the countercyclical capital buffer. Climate change and financial stability Let me now turn to climate change, a subject already addressed by my colleague Thomas Jordan. Climate change can pose longer-term risks to financial stability. There are primarily two ways in which climate risks can affect the financial system. One is through the increase in the frequency and severity of natural disasters with all their consequences, and the other is through changes to climate policy and to the corresponding regulations. It is the responsibility of individual financial system participants to fully understand climate risks relevant to them and to correctly assess the potential consequences from a business perspective – just as with other risks. For its part, the SNB is focusing on how climate risks could impact on the stability of the Swiss banking system as a whole, as well as on systemically important financial market infrastructures. Currently, the SNB considers the likelihood of risks linked to climate change threatening the stability of the banking system as a whole to be low. In the case of financial market infrastructures, climate risks are minimised, for example, by stipulating that technical facilities be distributed over different locations.

FINMA, as the competent authority, is currently checking whether the submitted plans meet this requirement. As for the overall assessment of the ‘too big to fail’ regulations, the SNB shares the Federal Council’s view that the Swiss regulatory approach is consistent with international Page 1/4 Berne, 12 December 2019 Fritz Zurbrügg News conference developments and that no fundamental change to this approach is necessary. 1 At the same time, the SNB also shares the view that there is a need for selective adjustments. This applies in particular to funding in resolution, which is aimed at ensuring that the big banks have sufficient liquidity reserves in a crisis. To this end, together with FINMA and the SNB, the Federal Department of Finance is reviewing whether current liquidity requirements for the two big banks are sufficient to cover estimated funding needs in the event of a crisis, or whether regulatory adjustments are necessary. Domestically focused banks I shall now turn to the domestically focused banks. There has been little change in their situation since the Financial Stability Report was published in June. Interest rate margins of domestically focused banks remain under pressure and declined further in the first half of the year. Many banks have responded to this challenge in recent years by making efficiency improvements, for instance by digitalising their business processes. At the same time, numerous banks have increased their risk appetite, especially in mortgage lending. This development can also be seen in the course of 2019 to date.

For example, it has been argued that “systemic” financial institutions should be more closely supervised and be subject to a more stringent set of regulations. How exactly to define systemic institutions, and who should deem an institution systemic is far from clear. Closely related reforms are those aimed at reducing interdependence and, therefore, the systemic nature of institutions. The push towards central counterparties, in particular for derivatives, falls in this category. The second category of reforms encompasses those directly related to the specifics of the subprime crisis. I would like to offer some comments on these issues. In particular, I would like to comment on a) accounting methods; b) liquidity; and c) rating agencies. Accounting methods and valuation At the onset of the financial turbulences, there were strong concerns on how precise was the information reported by banks, how large were the losses, and who was bearing these losses. This uncertainty was a critical factor in the shutdown of key financial markets. The International Accounting Standards Board (IASB) and the Financial Stability Board (FSB) have been working and promoting recommendations on accounting and disclosure standards for off-balance-sheet investment vehicles, and fair value methods, among others. However, these “information” requirements by themselves are not enough, and other measures could be necessary, such as forcing originators and other agents to hold part of the risk of the assets created. Liquidity The current financial turbulence has highlighted that for the banking sector liquidity considerations are as relevant as solvency issues.

As Arrow and his team reviewed these 3 See “Little Hiring Seen by Small Business,” by Siobhan Hughes, Wall Street Journal, July 11, 2011 4 See Small Business Economic Trends survey, National Federation www.nfib.com/research-foundation/surveys/small-business-economic-trends. 5 See the Federal Open Market Committee meeting calendar, www.federalreserve.gov/monetarypolicy/fomccalendars.htm. BIS central bankers’ speeches of Independent Business, 3 predictions, they confirmed statistically what you and I might just as easily have guessed: The Corps’ weather forecasts were no more useful than random rolls of a die. Understandably, the forecasters asked to be relieved of this seemingly futile duty. Arrow’s recollection of his superiors’ response was priceless: “The commanding general is well aware that the forecasts are no good. However, he needs them for planning purposes.”6 Keep Ken Arrow in mind when you hear economists tout precise forecasts carried out several places to the right of the decimal point. You may need economists’ forecasts for planning purposes, but you should always take them with a grain of salt, even when the time horizon is a short one. I will direct you to an article in the Feb. 14 Wall Street Journal as evidence. The Journal had polled 51 leading economists, and they forecast that gross domestic product (GDP) would expand 3.6 percent in that very same first quarter.7 Growth came in at 1.9 percent. When economists forecast we will have growth of, say 3.6 percent, remember they are saying .036.

In a system of flexible exchange rates, gold is no longer required for it to perform this function and the gold initiative is therefore unnecessary. Price stability and the stability of the Swiss franc are not determined by the share of gold in the SNB’s balance sheet, but by its monetary policy. It has achieved these goals more effectively than virtually any other central bank: average inflation has remained below 1% for the last 20 years, and never in the history of the SNB has there been such a sustained period of low and stable inflation. Prescriptions on the share of gold in the balance sheet, coupled with a sales ban, would make it considerably more difficult for the SNB to fulfil its mandate in future. For this reason, the gold initiative is harmful. In order to pursue a stability-oriented monetary policy, the SNB needs to be able to supply the Swiss economy with Swiss franc liquidity quickly in periods of crisis. The SNB’s balance sheet expands when liquidity is increased. In the aftermath of a crisis, it is critical that this newly injected liquidity be reduced again, in order to prevent an undesirable rise in inflation. Scaling back liquidity, on the other hand, reduces the balance sheet total. Given that the initiative is calling for gold to make up at least 20% of the SNB’s assets, a temporary liquidity increase would require gold holdings to be increased, too.

2 BIS Review 80/2001 Central banks have ensured the smooth functioning of markets by supplying liquidity to the banking system. Interest rates have been cut in the US, Canada, the euro area, Switzerland, Sweden, Hong Kong, Taiwan, Denmark, Japan, the UK, New Zealand, Korea and Malaysia. These cuts will contribute to mitigating the negative effects on demand, output and employment. The Norwegian economy is characterised by high capacity utilisation and strong cost inflation. The mainland economy appears to be expanding approximately in line with growth in output potential. At present, we do not have sufficient evidence to assert that international developments will change this situation. The announced increase in spending of petroleum revenues may lead to a more expansionary fiscal stance than in recent years. According to Norges Bank’s assessment, with an unchanged interest rate ahead, the probability that inflation two years ahead will be higher than 2½ per cent is the same as the probability that it will be lower. BIS Review 80/2001 3

A comprehensive assessment of our current policy package should not only look at the intended consequences and side effects that can be observed, but also weigh them up against what would have happened in the absence of our exceptional policy [SLIDE 3]. How profitable would our banking system now be had we not eliminated the 2014–15 deflation risk? The landscape for our banking system would have been somewhat dire. In a deflationary environment – and we have avoided this lethal danger thanks to our monetary policy –, the debt-servicing cost for borrowers is heavier in real terms. Defaults are more frequent, and less sustainable debts result in higher credit spreads. The risk of a debt deflation spiral then increases further. But this has been avoided in the euro area and if the price of this is a temporary reduction in bank interest margins, then it is worth incurring such a secondary side effect. 2. – Let me turn now to the price of assets and the financial cycle At the level of the euro area, we consider the financial stability situation to be overall under control. The solvency ratios of significant euro area institutions have improved continuously since 2014, reaching 15% on average in Q2 2017. Overall private debt in the euro zone diminished as a share of GDP: 128% in 2011, 122% today. Non-performing loan ratios have also declined, especially for small and medium sized enterprises. I support the recent SSM initiative for provision rules for new flows of NPL, despite all the criticisms.

Norman T L Chan: A new era of smart banking Opening keynote speech by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at HKIB (The Hong Kong Institute of Bankers) Annual Banking Conference 2017, Hong Kong, 29 September 2017. * * * Dr Patrick Fung, Ms Carrie Leung, Vice President Pan Guangwei, distinguished guests, ladies and gentlemen, good morning to all of you! The theme of my speech is “A New Era of Smart Banking”, “智慧銀行新紀元 ” in Chinese. In the last few years, we have frequently come across two comments amongst the fintech community. The first comment is that Hong Kong is very backward in fintech, quoting mobile payment developments in Mainland China as the evidence. The second is that fintech will disrupt or displace traditional banking. I must say I don’t agree with these two comments for two main reasons. First, Hong Kong has not been slow in developing and adopting fintech. It is not entirely appropriate to use mobile payment as the only benchmark for measuring the state of development in fintech. There are many other important aspects of developments that define the maturity of fintech developments, such as the use of digital or internet banking and the robustness of cybersecurity. Even in the field of mobile payments, we should appreciate that Hong Kong already has a well-developed electronic payment ecosystem. In 2015, each Hong Kong citizen had on average 2.6 credit cards, compared to 0.3 credit cards per person in Mainland China.

So how can the experience of this region contribute to a better understanding of the interplay between finance and growth and the various policy choices? The countries of emerging Europe gained experience from their own deep crises over a decade ago. In most of them, output collapsed at the start of transition. Then almost everywhere there was a banking crisis, leading to heavy private and public losses. But BIS central bankers’ speeches 1 valuable lessons were learned during the economic transformation. Some of the pressing issues were bank insolvencies, debt restructuring and privatisation. The key lesson was that everyone, including not only the general public but also the elected politicians themselves, pays a higher price when reforms are delayed. This is true even if such reforms seem painful and unpopular in the short run. Ten of the former transition economies are today members of the European Union (three of them – Slovenia, Slovakia and Estonia – already joined the euro area). But EU accession was not granted automatically. Membership was not a gift. Many criteria had to be complied with, including the assessment of whether the country had a “functioning market economy” and its “capacity to cope with competitive pressure and market forces within the Union”. That necessitated radical legal and institutional reforms in the candidate countries. Transition Europe had no choice but to learn by experience, well before the recent global crisis, what policies were ultimately beneficial for sustainable economic growth and for the stability of the banking system.

The consistent countercyclical policies of the 2 BIS central bankers’ speeches Bulgarian National Bank played a key role for the good performance of the banking sector, both before and during the crisis. In the booming years before the crisis, the BNB insisted on a build-up of capital and liquidity buffers, discouraging banks from excessive asset growth and risk-taking. Some of the measures then included:  broadening the deposit base for the calculation of MRRs; gradually excluding the recognition of cash balances as reserve assets;  raising the MRR rate to 12%;  imposing additional tough MRRs on banks with excessive lending growth;  keeping the capital adequacy ratio at 12% even after our EU accession (that rate is 50% higher than the existing minimum Basel 2 rule);  keeping risk-weightings higher than what was required under the EU’s Capital Requirements Directive;  excluding the interim profits when calculating banks’ capital;  discouraging foreign currency lending (except in euro for obvious reasons);  imposing a conservative LTV threshold for mortgage loans, etc. However, when the business cycle turned down, our focus shifted towards providing capital relief, supporting liquidity, and easing lending for temporarily constrained, but solvent clients.

Robust compliance function The compliance function of a financial institution is an important element in mitigating risks of abuse of the financial system, especially financial crime and terrorism financing risks. To this end, financial institutions are expected to ensure that the compliance function is independent and have sufficient authority, stature and resources to perform its function effectively. The required AML/CFT compliance program of each institution must clearly describe and outline the roles and responsibility of different segments of the institutions with respect to its compliance function. In this regard, the principle of collective responsibility between senior managements and compliance officers should be upheld in the case of failure. In compliance, continued vigilance is necessary and required. The 2017 National Risk Assessment, by the National Coordinating Committee for Money Laundering (NCC) and the financial sector, showed that the banking sector continues to face high money laundering risk and medium high terrorism financing risk. The sector records the highest value of cash transactions and high risk customers; and provides the highest number of high risk products compared to other sectors within the financial industry. This reflects the central role of the banking sector in intermediating money flows within an economy. One important compliance function that needs to be undertaken is the identity of the ultimate beneficial owner of companies, assets and financial transactions. Financial institutions need to have controls and procedures to identify, verify and conduct due diligence on the beneficiaries. This must be complemented by a rigorous monitoring process.

Nor Shamsiah Mohd Yunus: Reshaping Malaysia's future - setting the goal for greater governance and transparency Keynote address by Ms Nor Shamsiah Mohd Yunus, Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the 10th International Conference on Financial Crime and Terrorism Financing "Reshaping Malaysia's Future – Setting the goal for greater governance and transparency", Kuala Lumpur, 30 October 2018. * * * A very good morning to all of you. It is my pleasure to address all of you today at this very important conference. Financial crime. Terrorism financing. Corruption and money laundering. These are heavy words that carry the feelings of outrage and displeasure, amongst others. The United Nations Office of Drugs and Crime estimates that every year globally, a staggering amount of USD2.6 trillion is stolen through corruption. Yet, I suspect, in reality, figures like these are so large that many may find it hard to relate to it. To put it in perspective, the figure is around eight times larger than the Malaysian economy. Let us also take the UN Sustainable Development Goals that aims to improve the lives of the poor, improve governance and address inequality. Some estimate that it will take around USD5-7 trillion to meet all the SDGs. This represents 2-3 years’ worth of money lost to corruption. In other words, the money lost through financial crimes is a devastating opportunity cost, draining the resources that could have been used to permanently uplift the lives of billions in this world.

All these are challenges currently being shared by many countries and which Chile cannot ignore, nor can it ignore the need to gradually recover the buffers used up in the course of the current crisis. Addressing these challenges calls for measures other than those adopted to contain the crisis. Page 8 of 19 IV. To conclude Having weathered the worst times of the crisis cannot lead us to overlook or postpone the challenges that recovery imposes on a day-to-day basis. The liquidity that the withdrawal of pension savings will cause should not create an artificial feeling of abundance because, as we know, this is only dealing with savings that will be in high need later on. These are no times for self-indulgence. No panacea has been discovered for the economy’s recovery, nor will it adjust automatically. There is no easy way to meet the challenges ahead, and there is no room for bad decisions. On the contrary, well-planned and coordinated work is imperative to confront these challenges in an economy that will emerge from this episode with long-lasting scars. The CBC has been attentive, active, and willing to cooperate throughout the last 15 months in the face of unprecedented difficulties and will continue to be so for as long as necessary. This Commission has been receptive to our contributions and has supported us in our work when we have requested it.

The withdrawal of pension savings will have a significant effect on consumption and trade-related activities next year. The fiscal stimulus will continue to be positive, in accordance with the approved budget. The Chilean economy will receive a slightly greater external boost than previously considered, with our trading partners growing by an average of 4.9% in the years 2021 and 2022, with an average copper price of USD 3.15 per pound in the same years. With this, we project that after falling between 6.25% and 5.75% this year, the Chilean economy will grow between 5.5% and 6.5% in 2021 and between 3% and 4% in 2022 (Table 1). With respect to monetary policy, our assessment of the macroeconomic scenario and its outlook leads us to anticipate that the monetary stimulus will remain high for an extended period of time, so as to ensure the consolidation of the economic recovery and the achievement of the Bank’s objectives. In particular, we foresee the Monetary Policy Rate (MPR) remaining at its minimum level for much of the 24-month monetary policy horizon. As for the unconventional measures, they will remain in place. This considers that the total stock of bank bonds acquired by the CBC under different programs—around USD 8 billion—will be maintained for the next six months, reinvesting the coupons as they mature. This excludes the purchases made under the Cash Purchase and Term Sale (CC-VP) program, which have a different objective. With respect to the FCIC, the Board has made no changes to the total amount of resources available.

Lars E O Svensson: Assessment of monetary policy in Sweden in 2009 Speech by Prof Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at the Centre for Business and Policy Studies (SNS), Stockholm, 18 March 2010. * * * Carl Andreas Claussen and Gabriela Guibourg have contributed to this speech. Assessments of monetary policy are important for several reasons. First, because the Riksbank has had an independent position in relation to the Riksdag and the government since 1999. This means, for instance, that the Executive Board makes the monetary policy decisions without seeking or taking instructions. The Riksbank’s independence gives its governors a great deal of power. It is therefore also important that the activities of the Riksbank can be monitored and assessed and that the governors can be called to account. A high level of transparency and regular assessments are also necessary to maintain the legitimacy of the Riksbank’s activities. Second, regular assessments also help to ensure that the Riksbank can develop its monetary policy analysis in the best possible way. Every year, the Riksdag Committee on Finance examines and assesses the monetary policy conducted by the Riksbank during the preceding years. The Riksbank compiles and publishes material for this assessment. We published such material just a few days ago. The main message in this material is that the Riksbank responded to the crisis by taking forceful measures.

The opposite 3 Alternative forecasts for the repo rate are published in the Monetary Policy Reports, three times per year. Alternative forecasts for the repo rate are also discussed ahead of the remaining monetary policy meetings, but these are not published in the Monetary Policy Updates. 4 The trend is estimated using a so-called Hodrick-Prescott filter (HP filter). This is a statistical method for dividing the movements of a variable into trend and cyclical components. The method can be described as a weighted double-sided moving average where greater weight is placed on observations close at hand and gradually decreasing weight on more distant observations. The output gap according to the HP method should not necessarily be interpreted as the Riksbank’s overall assessment of resource utilisation. 4 BIS Review 32/2010 applies when the gap is negative. Figure 2.d illustrates the output gap based on the two repo rate paths. Both paths resulted in negative output gaps during the forecast period, that is to say resource utilisation below the normal level. However, using the repo rate path in the main scenario gave a less negative output gap, using this measurement method, than using the repo rate path from December 2008. The lower repo-rate path thus stabilised both CPIF inflation and resource utilisation better than the higher repo rate path.

2 Faust, J and Leeper, E (2015), “The myth of normal: the bumpy story of inflation and monetary policy”, mimeo at this Symposium. BIS central bankers’ speeches 1 II. Developments in global inflation The different balance of domestic and global forces across economies can be seen in the dispersion in underlying inflation outcomes since the Great Moderation. The Bretton Woods system collapsed with the onset of the Great Inflation. Cross-country inflation correlations rose sharply from close to zero for much of the 1960s to about ½ in the early 1970s as fiscal shocks were reinforced by the global oil price shock in the absence of nominal anchors. The eventual discovery of these anchors culminating in the widespread adoption of inflation targeting heralded disinflation, with a high degree of co-movement of inflation throughout the 1980s and early 1990s, particularly at lower frequencies (Chart 3 – top two panels). 3 By the early 2000s, inflation resembled random variations around countries’ targets, and cross-country inflation correlations fell – especially for core inflation. While the deflationary shock of the financial crisis and the rise and fall of the commodity super-cycle have boosted correlations of headline CPI, core inflation rates have actually become more dispersed. This evidence of domestic monetary sovereignty is remarkable given the ever stronger crosscountry links via commodity markets, goods and services trade, and financial channels.

The need to move the goal from merely access to well-informed usage is increasingly recognised in the development community. • The World Bank’s Global Findex Database reports that 20% of bank account owners have not used their accounts in the past 12 months. As any entrepreneur joining us at the Festival would know, user acquisition is easy. It is simply a matter of good price and good marketing. User retention is the true test of the utility that a product provides. This is where the focus needs to shift. In other words, policy, infrastructure, and services aimed at improving financial inclusion need to genuinely make a difference in people’s lives so that inclusion is meaningful and sustained. • Products need to be designed with the end-user in mind, to delight rather than to perplex with technology. What is the role of central banks and regulators in ensuring that financial inclusion initiatives stick, while safeguarding that innovation delivers responsible, stable and inclusive outcomes for those most in need? Let me make two major points in this context. • First, FinTech must offer interoperable solutions. 1/3 BIS central bankers' speeches • Second, the solutions must be embedded in the broader context of people’s lives and the daily operations of businesses. Financial products need interoperable rails to reach customers effectively. Let me cite two quick examples: identity and payments. Identity is the starting point in any digital transaction.