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Mervyn King: Monetary policy developments Speech by Mr Mervyn King, Governor of the Bank of England, at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London, London, 16 June 2010. * * * My Lord Mayor, Mr Chancellor, My Lords, Ladies and Gentlemen, May I join the Lord Mayor in welcoming you, Chancellor, to your first Mansion House Dinner? You have set a rapid pace in your first month in office, not least in your announcements this evening. In previous years I have sometimes set this gathering a quiz question. Tonight I want to reverse the process by providing the answer and asking you for the question. The answer is 23, and later I shall ask you – to what question is 23 the answer? Over the past year, there has been no slackening in the pace of economic and political upheaval. The financial crisis that began in 2007 is not yet over. Much of the recent market volatility reflects concerns about the ability of governments to service their own debt and provide assistance where necessary to weakened banking systems, especially in the euro area. Such risks have the potential to derail recovery and we cannot ignore them. At home we face the challenge of ensuring recovery while rebalancing the economy, reducing the fiscal deficit, and reshaping the structure and regulation of our banking system. In playing its part to meet this challenge, the Bank of England has two priorities.

The Bank of England cannot effectively perform its role as lender of last resort without first-hand knowledge of the health of the banks to which it might provide support. In peacetime, regulation can be conducted outside the central bank. But in a crisis, decisions must be made quickly and decisively and the central bank, working with government which is always responsible for any use of public money, needs to be in charge. That was one of our painful lessons. In approaching our new responsibilities we shall build on the real improvements to its regime of prudential regulation made over the past three years by FSA. But the Bank will bring its own central banking culture. The focus of regulation needs to be on maintaining stability of the banking system as a whole. We shall be looking not just at those aspects of a bank that make it look unsafe in comparison with other institutions, but even more so at whether there are common features that threaten the stability of the system, such as the dangerously high leverage prior to 2007. We shall aim to avoid an overly legalistic culture with its associated compliance-driven style of regulation. That is an important reason for the separation of consumer protection and market conduct from prudential regulation. We will need to exercise discretion when setting capital and liquidity ratios for individual banks. And to do that properly will require changes to the current legislation and rule book. We must reverse the seemingly inexorable trend towards more regulation and more regulators.

In this regard, flexible exchange rate serves as an automatic stabilizer to cushion against external shocks and economic imbalances in the short-term, and as an important price signal for resource allocations and catalyst for structural changes in the long term. In some cases, however, exchange rate flexibility and fluctuations can have costly consequences given some economic contexts, particularly in emerging market economies, including Thailand. First, financial markets in these economies are less developed and relatively illiquid compared to advanced economies. This may potentially cause extremely large asset prices and exchange rate movements in response to capital flow volatility. Additionally, the availability of foreign currency hedging instruments, especially to small enterprises, remains limited, amplifying the negative repercussions from exchange rate volatility. Moreover, many emerging market economies, including Thailand, rely on exports as the main engine of growth. Many of their export items often command little bargaining power and hence need to compete on the basis of price. As a result, extreme and sudden exchange rate movements would affect firms’ competitiveness. For these reasons, many emerging market economies cannot neglect the implications of exchange rate movements. This leads us to the next part of my talk this evening. Managing capital flow and exchange rate stability Ladies and Gentlemen, There is no one-size-fits-all measure to deal with capital flow and currency volatility, as well as its impacts on the real economy. Take Thailand as an example. We have adopted multi-dimensional responses to the financial spillovers.

On the other hand, tighter financial linkages imply large and swift transmission of shocks across countries, particularly through a large expansion in gross capital flows with an increased volatility of those flows and exchange rates. The challenges we face in Thailand to large extent also apply to emerging markets as a group. The massive equities and bonds sell-offs in emerging markets during the taper tantrum episode in 2013 were vivid examples of “financial spillovers”. There is no doubt that the benefits of integration into global economic and financial markets outweigh their costs. Therefore, the relevant question is thus how countries should respond to increased capital flows volatility. This year, we gather here at an important juncture of what seems to be yet another shift in global economic and financial landscape. This may create a challenging environment for small open economies to conduct policy, particularly capital flows and exchange rate policy. Given recent economic and financial development, it is clear that the main drivers of ensuing volatility in capital flows and exchange rates are threefold. First, policy divergences among advanced economies appear to be on course recently. While the US is expected to raise its policy rate, likely by the end of this year, recovery of the euro area economies and Japan remains unsteady, with ultra-loose monetary policies put in place for a longer period. Second, uncertainties surrounding Greece’s bailout program have rendered great shifts in market players’ risk on and off sentiments. Third, growth momentum and prospects in China and some other emerging markets are deteriorating.

eBay Incorporated (2012), “Full year 2011 http://investor.ebay.com/releasedetail.cfm?ReleaseID=640656. results”, available at European Commission (2010), “Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories”, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0484:FIN:EN:PDF BIS central bankers’ speeches 15 Financial Stability Board and International Monetary Fund (2011), “The Financial Crisis and Information Gaps: Implementation Progress Report”, June, available at www.imf.org/external/np/g20/pdf/063011.pdf. Financial Stability Board (2012), “Technical features of the Legal Entity Identifier”, March, available at www.financialstabilityboard.org/publications/r_120307.pdf. Financial Stability Board (2011a), “Key Attributes of Effective Resolution Regimes for Financial Institutions”, October, available at http://www.financialstabilityboard.org/publications/r_111104cc.pdf. Financial Stability Board (2011b), “Policy Measures to Address Systemically Important Financial Institutions”, November, available at http://www.financialstabilityboard.org/publications/r_111104bb.pdf. Financial Stability Board (2010), “Implementing OTC derivatives market reforms”, available at http://www.financialstabilityboard.org/publications/r_101025.pdf. G20 Leaders’ Summit (2009), “Pittsburgh summit declaration”, September, available at http://www.g20.org/images/stories/docs/eng/pittsburgh.pdf. G20 Leaders’ Summit (2008), “Declaration: Summit on financial markets and the world economy”, November, available at http://www.g20.org/images/stories/docs/eng/washington.pdf. Ginsburgh, V and Weber, S (2011) “How many languages do we need? The economics of linguistic diversity”, Princeton University Press. Grean, M and Shaw, M (2002), “Supply-Chain Integration through Information Sharing: Channel Partnership between Wal-Mart and Procter and Gamble”, University of Illinois. Haldane, A G (2011), “The money forecast”, New Scientist, 10 December 2011. Hardgrave, B C, Waller, M, Miller, R and Walton, S M (2006), “RFID’s Impact on Out of Stocks: A Sales Velocity Analysis”, University of Arkansas Information Technology Institute, January.

As a result, by issuing securities in a segmented TIPS market, the Treasury may keep realized yields on bill and nominal coupon securities lower than they otherwise would have been. The last noteworthy fiscal benefit from TIPS issuance is the fact that it reduces risk to the U.S. government in terms of the variability of its net financial position. The rate of inflation influences both the cost of TIPS and the government’s tax receipts. Thus, some level of TIPS issuance may reduce the variability of the government’s net financial position. This, in turn, should lead to a more regular and predictable pattern of issuance, which should help minimize interest costs. In summary, our analysis of the ex-ante costs of the TIPS program and the more difficult-tomeasure benefits suggests that TIPS issuance provides at least a modest net benefit to the Treasury. So, now I want to turn to a related question: Are there ways to increase the benefits? 6 See Fleming (2002), Krishnamurthy (2002), Laubach (2003). BIS Review 14/2009 5 I would be willing to make two modest suggestions here. First, it may make sense to emphasize longer-dated TIPS issuance rather than shorter-dated issuance. Analytically, the logic goes as follows. Inflation uncertainty is likely to increase at longer time horizons. Thus, investors are likely to pay a greater premium for inflation protection at longer-time horizons. This implies that the cost savings associated with TIPS are likely to be greater for longer maturities rather than shorter maturities.

However, not all incumbent banks are able to fully bridge the technology gap, particularly for newer services; d. This results in migration towards digitally-focused challenger banks such as Atom, Fidor and Monzo that will provide similar services of traditional banks, but utilise technology to deliver faster and cheaper services that better meet the needs of customers; and e. The implication of this is that the landscape of finance will remain largely filed by banks, but a new breed of purely digital banks will gain in significance. The names that we immediately think of for financial services will change from the current banks that we are so familiar with. The fourth scenario is what I call ‘the Tech take-over’ a. Like scenario one, this is a more extreme and less probable scenario, but still one that is worth a thought. In this scenario, technology adoption by incumbent banks is low, with a high level of fragmentation among finance providers; b. However, in contrast to scenario three, technology firms enter as the new preferred provider, successfully capturing the loyalty of consumers due to superior ability in using data to deliver customer-centric solutions; c. Financial services will thus be offered via a wide range of providers such as social networks (e.g. Facebook, Wechat) and e-commerce platforms (e.g. Amazon, Alibaba); and d. Growing comfort with the ability of technology to ensure secured transactions also gives rise to the popularity of peer-to-peer financial services.

Finance has come a long way- from serving the basic societal needs to save and borrow at its infancy to its role today as the backbone of the global economy. In ancient days, kings and rulers look to astronomers, magicians and soothsayers to tell them about the future. The Greeks for example, consulted the Oracle at Delphi before embarking on major decisions. The world today is much wiser I hope, and we no longer believe that the future can be predicted with absolute certainty. What finance and technology can bring for the future of human kind is so exciting that it can go beyond containment. Yet if left on its own, the outcome can be perilous. Resisting them, however, is not an option. While we embrace them as they synthesise and evolve, we also need to shape and control them such that they would not lead us to face extreme financial market fragilities and devastation. In the words of Nassim Taleb, we need to make ourselves “antifragile” – not only able to withstand shocks, disruptions and volatility but able to position ourselves to take advantage of it. But I always like the quote by Peter Drucker, “The best way to predict the future, is to create it.” 5/5 BIS central bankers' speeches

The global dimension must be the responsibilities of the IMF and the FSB given their comparative advantage as international organization. And as I already noted, EWE by the IMF and the FSB should focus on monitoring the development of risk in the key global financial markets, risk linked to activities of the internationally-important financial institutions, and the economic conditions and policies of the systemically-important economies. These are the areas of risk that have global-wide implications but are not being monitored sufficiently relative to their importance. Third, the focus of the EWE at the country-level also needs to expand beyond detecting and avoiding local macro-misalignments, and to include assessment of the resiliency and robustness of the domestic economy and financial system to withstand large external shocks. The key point here is that, even with good policies, crisis can happen to an economy if the externally-induced factors overwhelm the abilities and the robustness of the domestic economy to cope with. 2 BIS Review 19/2010 And forth, the value of early warning is that warning leads to the needed actions being taken in advance. This means the EWE process should serve to facilitate actions to deal with the important risk and issues by the relevant parties. To serve this end, credibility and effectiveness of the EWE depends on appropriate degree of transparency of the structural models and its appropriateness to the context, whether national or markets, as much as its track record.

That selling pressure overwhelmed the capacity (or willingness) of intermediaries to warehouse those instruments, leading to sharp and disorderly price declines in core assets relied upon, directly or Page 5 indirectly, by households, firms and governments to support economic activity. And central banks’ traditional tools, working through banks, were unable to direct liquidity to the source of the shock (Figure 1). European energy markets in Spring 2022 saw similar dynamics too, when sharp price movements triggered by the invasion of Ukraine triggered large margin requirements on energy derivative positions that thinly-capitalised intermediaries struggled to meet, driving liquidation of positions that further amplified the initial shock to energy prices. Some may argue that Covid, Putin and the UK’s autumn 2022 fiscal announcements are truly exceptional shocks that would challenge any market structure, and are unlikely to be repeated. Maybe. But the underlying vulnerabilities are real and growing, and hoping for calmer times is not a strategy. LDI was just the latest warning of the need for action. 2) Public backstops vs. private self-insurance Given that the evolution of this new form of systemic liquidity risk is real and growing, there is an important debate to be had about how responsibility for insuring against the social consequences of that risk should be shared between private and public interests. It is a core function of public institutions to provide a backstop against genuine tail risks. The alternative – systemic collapse – would be hugely costly to the real economy.

After his death, Collett’s heirs insisted on maintaining an extravagant lifestyle as if the income was still intact. Their wealth rapidly withered away and in 1829 the coffers were empty. The farm was taken over by the state. 1 The time it took Collett to make a fortune is about the same as it took Norway to build up its oil-based financial wealth. Nearly 40 years after Phillips Petroleum discovered commercially viable oil reserves in the Ekofisk field 2, we have an oil-based sovereign wealth fund worth more than NOK 3 trillion. Few other countries are sitting on such huge financial reserves. But our wealth primarily comes from other sources than the oil fund, now called the Government Pension Fund Global. The value of our current and future labour resources is more than ten times as great as the value of our oil and the oil fund combined. 3 The oil fund would be depleted in three years if government tax revenues were to disappear entirely. Our economic future depends above all on our capacity to produce goods and services that others value. But the visible oil revenues may give the impression that we have a huge treasure trove at our disposal. Sound wealth management is therefore first and foremost a question of maintaining and developing the value of our productive resources, particularly our labour resources. A nation that comes into a large fortune must make a number of choices and trade-offs. They can be considered from a legal, ethical or financial standpoint.

Instead, the industry must continuously evolve to meet the needs and preferences of its consumers which are rapidly changing. It must proactively and strategically position itself to offer products via diverse and innovative delivery channels to reach out to different segments of the population with varying levels of financial knowledge. In this regard, under the LIFE Framework, the Bank envisions the market share of regular premiums/ contribution products sold/ marketed via non-agency channels to exceed 30%. Currently the ratio is 14%, and this statistic provides compelling evidence that the industry must double its effort to reach the target of 30%. Similarly, for us to expand the penetration rate to reach 75% by 2020, the industry must add and expand the reach of its non-agency channels. Throughout the world today, financial inclusion has been identified as an important area of focus to achieve a more balanced and sustainable economic growth. Societies that are adequately empowered and supported by suitable financial tools can assist in helping them cope during temporary period of emergencies. Empirical evidence showed that microinsurance customers can be as valuable as a company’s any other customers. This is where the industry can play a major role to develop suitable microinsurance/ takaful products that would enhance the social safety net of this underserved segment enabling them to get back on their feet and become financially independent even after experiencing an adverse event. Yet many in the industry appears uninterested in microinsurance/ takaful for reason that it is a loss making venture and uneconomical to pursue.

Whatever is negotiated, in terms of both the final arrangements and the transition to them, the most important influence on demand in the short run will be the degree of access to the single market since the UK runs a 1.5% trade surplus in services and a 5% trade deficit in goods. 45 External demand for UK exports will also reflect the extent to which UK firms can maintain their positions in EU-based global supply chains. The proportion of UK exports that are intermediate components of EU value th rd chains has increased from about 1/5 of exports in 1995 to about 1/3 in 2014 (Chart 13). 46 Increasingly, 44 Literally: stepping back in order to jump better. The ultimate impact of Brexit on EU demand for UK exports depends on the extent to which UK access to EU markets resembles being a member of the customs union for goods and the single market, which covers trade in goods and services as well. 46 World input-output database. See also Credit Suisse, ‘Brexiting the supply chain’, European Economics Research 11 August 2016. 45 17 All speeches are available online at www.bankofengland.co.uk/speeches 17 the UK doesn’t so much export to Europe as through Europe; it is a supplier of components to final goods that are exported beyond the continent.

57 A point made by Ken Rogoff; see ‘Globalization and global disinflation’, Economic Review, Federal Reserve Bank of Kansas City, Issue Q IV, pages 45-78. In technical terms, Rogoff uses the Barro-Gordon inflationary bias framework to show that the increased competition that results from greater global integration reduces the central bank’s incentive to generate surprise inflation by: (i) reducing the wedge between the “efficient” level of output – that which would be produced if there were no nominal or real frictions in the economy – and the “natural” level of output – that which would be produced if there were only no nominal frictions – through reduced monopoly power in both the product and labour markets); and (ii) increasing price flexibility. Arguably, the increases in central bank transparency and accountability that have occurred over the past couple of decades have reinforced this decline in inflation bias. 24 All speeches are available online at www.bankofengland.co.uk/speeches 24

Relatively firm growth in domestic demand in the period ahead, coupled with the fact that it should become increasingly difficult for companies to boost output without also adding to their workforces, means that we foresee higher demand for labour in the coming years. The announced labour market policy programmes for next year entails that total employment will rise more than regular employment, but there should also be an increase in the number of regular jobs. Our forecast is that the number of employed will rise by 0.4 per cent this year and 1.1 per cent next year. Open unemployment is estimated to be 5.9 per cent this year, 5 per cent in 2006 and then to drop somewhat more. Wages are forecast to increase faster as the labour market improves. During the latter part of the forecast period growth in productivity is also expected to diminish, which is natural when growth in the economy will be driven to a greater extent by domestic demand and higher output in the private services sector. Overall, that means that companies’ costs will begin to increase faster again, but our assessment is that the rise will be comparatively slow and that cost pressures will be moderate throughout the forecast period. It is difficult to determine exactly how much the productivity upswing will be dampened. It is possible that the rate of increase in productivity has been raised on a more permanent basis compared with before.

Provision of Financial Services Broadly speaking, the fundamental purpose of banking is to provide financial services such as credit provision, payments, and deposit-taking to support sustained economic growth. This is true in normal times, and is even more true in the current environment. The Fed has taken a number of actions to help the U.S. banking sector perform these critical functions through changes to supervision, regulation and the provision of liquidity. Collectively, these steps are designed to limit the potential for financial channels to amplify the initial economic shock created by the COVID-19 virus. Beginning with supervision, the federal banking agencies, in consultation with state financial regulators, are encouraging financial institutions to work with borrowers in a safe and sound manner.1 The agencies view prudent loan modification programs as positive and proactive actions that can help both borrowers and lenders. This approach is consistent with the agencies' longstanding practice of encouraging financial institutions to assist borrowers in times of natural disaster and other extreme events. The Fed has also provided information to banks on how we are adjusting our supervisory approach.2 This includes, for example, monitoring and outreach to help banks of all sizes understand current challenges and risks; a temporary reduction in exam activities, particularly for the smallest and lowest risk institutions; and additional time to resolve non-critical existing supervisory findings. These actions should help financial institutions deploy their resources as efficiently as possible and continue to support their customers and local economies in a prudent and fair manner.

Firstly, there are the roles relating to supervision of firms and markets where financial instability could arise. Secondly, there is the oversight of the financial system as a whole - the systemic issues which could impinge on society. And thirdly there is the fiscal underpinning which may exceptionally be required to restore confidence in the event of failure. The fiscal underpinning is a role for Ministries of Finance. The other roles can either be combined institutionally or separated. I am sure each model is represented here today. In the UK, HMT has responsibility for the fiscal underpinning, FSA for the supervision of firms and market regulation, and the Bank of England for the stability of the system as a whole. ii) The “Must Dos” for the Bank of England The roles as such are set out with slightly more precision in the MoU, and it is from there that we start on our quest to decide what initiatives we – the Bank of England – should undertake, and how far we go with each. The MoU highlights three “must dos” for the Bank. I expect that these are similar in many central banks. They really define our mandate. a) Assessment of Threats to Financial Stability Firstly we need to assess the threats to the financial system. We need to be in a position to inform ourselves and to advise HMT at all times on the implications for UK financial stability of developments in both the domestic and international market places.

Instead I want to discuss how to approach some of the challenging issues faced by many central banks as we seek to decide how best to organise our work and to allocate resources in order to promote financial stability. We need to be clear, accountable and transparent as to how we devote our resources in this area. And just as the financial system becomes more complex, so the judgements as to what we do and what we do not do are increasingly difficult. That is why we need a framework – a set of organising principles – that enables us to provide context and understanding to our endeavours, to provide a source of focus and rigour to our approach, and to motivate our people. The issues are, I believe, of general application. Though you will forgive me I am sure if I start by looking at the framework within which the Bank of England, as a non-regulatory central bank with a remit for system-wide stability, addresses the vulnerabilities. 2. Challenges in Creating a Framework i) Monetary Policy I want to start by considering the governance of the Bank’s accompanying mandate, the conduct of monetary policy. This highlights the clarity of our accountability in the monetary policy arena. In line with many central banks, we have a mandate in statute – the Bank of England Act – to conduct monetary policy. The Government sets a target inflation level which we are required to meet.

BIS central bankers’ speeches Although Solvency II is a European directive, with the vast majority of the technical rules in place, a review is planned of the standard elements in 2018, as is typical with many directives post-implementation. In addition to establishing a European-wide regime, work is also underway to try and harmonise at least some elements of a global capital standard for insurers5. A simple Basic Capital Requirement (BCR) for Global Systemically Important Insurers (GSIIs) has already been agreed. The UK currently has two GSIIs – Prudential and Aviva – out of the 9 globally. Work is now ongoing on a Higher Loss Absorbency (HLA) Standard which will reflect the degree of systemic importance of the firm/group. The plan is that all GSIIs should meet capital requirements based on the BCR plus HLA by 2019. The third step in the international plan is to develop a risk-based global International Capital Standard which would apply to all Internationally Active Insurance Groups (IAIGs). That is likely to be challenging, not least because of the different accounting principles used in different jurisdictions, but that is the long-term direction of travel. Work is also ongoing in the IAIS to identify the assessment approach which most accurately identifies whether or not reinsurers pose systemic risk. The final element on insurers is that stress testing is also being applied to the sector.

Legislation to enable the IBC proposals was passed in 20138. The benefits from separation are several. Retail deposits tend to be a cheap source of funding. In part that is because retail deposits are protected up to a limit by statutory guarantee – so they tend be safe, and sticky. Banks that have a range of activities would have an interest in using cheap, protected retail funding to engage in its most risky activities – for which direct funding is likely to be much more expensive. Furthermore, historically, banks with large retail activities have also been viewed by credit rating agencies to have a large degree of implicit government support thus making their public debt issuance cheaper as well. The funding advantage from being seen to be “too big to fail” has been estimated from a range of studies to be equivalent to a subsidy on the scale of hundreds of billions of dollars globally,9 encouraging and enabling greater risk-taking by firms than true costs of funding would justify. Separation also means that the structure of firms is simplified and hence they would be easier to resolve if necessary. The EU more generally is still deciding on its precise approach to structural reform, although the Liikanen report (2012) took a slightly different approach from the IBC.

To answer those questions, I want to consider three possible explanations for why inflation has not so far risen despite substantial falls in unemployment and spare capacity. First, reforms enacted over the past twenty-five years have made the labour market more flexible and lowered the rate of unemployment consistent with stable growth in money wages. Incentives to work have increased - through initiatives like the New Deal and the Working Tax Credit. Benefits paid to the unemployed have fallen relative to earnings. And the share of wage settlements covered by collective bargaining has fallen sharply. Those reforms, and a steady growth in total money spending, ensured that unemployment fell in almost every quarter since 1992 while wage inflation remained broadly stable. Moreover, changes in unemployment have resulted in smaller movements in the rate of wage increases than in the past. It is possible that migrant labour may be easing the bottlenecks and skill shortages in what is undoubtedly a tight labour market. Reports from our business contacts around the country, collected by our Agents, suggest that migrant labour is indeed relieving some of those shortages, more so in recent months with recruitment from the new members of the European Union. Migrant workers are employed in fish processing here in the South-West, and even in the production of Cornish pasties, as they are in an increasingly wide range of industries in manufacturing, construction and services. That may be suppressing signs of underlying wage pressure that would otherwise have become evident by now.

6 See Financial Stability Board (2013), “Progress and Next Steps Towards Ending “Too-Big-To-Fail””. 7 For example, at the FDIC Systemic Resolution Advisory Committee Meeting on 10th December 2012. The webcast for the meeting is available online at: http://www.fdic.gov/about/srac/2012/2012_12_10_agenda.html BIS central bankers’ speeches 3 (5) The resolution agenda is not just about banks and dealers. It is about central counterparties too, for example Banks became TBTF by accident. The G20 Leaders having mandated that standardised OTC derivatives must be centrally cleared, there is a risk that central counterparties (CCPs) will come to be seen as too important to fail as a matter of policy. That makes it incredibly important that CCPs are robust, effectively managed, effectively supervised, and have first rate recovery plans. And, beyond that, they absolutely must be subject to a credible resolution regime. I worry that CCPs are “for profit”, or are typically part of “for profit” groups. If a CCP fails and it turns out that its risk management was slack, this point is bound to come up in the public response. Policymakers should think about that now in the context of the governance structure they want for CCPs embedded in vertically integrated groups. Meanwhile, work is underway in CPSS/ IOSCO8 on loss-allocation rules. Unlike banks, CCPs are essentially rule-based machines for netting and allocating risks. Those rules need to be enriched so that it is clear what happens when, due to a member’s default , both the initial margin and default fund are exhausted.

One of the forms taken by this unease is that of rising government bond rates in these countries, which is further increasing the burden of debt (see Slide 8). The high levels of public debt are partially a consequence of the fiscal policy stimulation packages introduced during the crisis. In many cases, the situation has been exacerbated by the excessively weak development of public finances in the years leading up to the crisis. Several countries are now facing a difficult balancing act. On one hand, significant fiscal policy tightening will be necessary for a long time to come in order to reduce public debt to a more reasonable level. On the other hand, this tightening must not be so comprehensive as to threaten the economic recovery. Hopefully the planned European Financial Stability Facility will have a beneficial effect, but the public finance problems will characterise developments for a long time to come, one way or another. The United States also has a large and growing central government debt, and it will require comprehensive fiscal policy tightening to gain control over this development. One advantage is that US government bond rates are still low (see Slide 1). Moreover, asset purchases by the US central bank have contributed towards keeping interest rates down. These expansive financial conditions, together with high profits within the corporate sector, suggest that the recovery will pick up further speed, despite the need for fiscal policy tightening.

CPIF inflation has shown significantly more stable development than CPI, which includes the effects on mortgage interest expenditure of the drastic interest rate cuts implemented during the crisis, as well as the recent interest rate increases. Inflationary pressures are starting to increase in tandem with the economic recovery. This means that the repo rate has also been increased from the very low level of 0.25 per cent that prevailed one year ago to 1.5 per cent today. This allows us to safeguard the balance of Sweden’s economy and simultaneously attain the inflation target of 2 per cent. Where are we going? Having come this far, it may be appropriate to stop and spend a moment reflecting over the financial crisis and long-term economic development. As I mentioned in my introduction, the period from the mid-1990s until the financial crisis was characterised by good growth, low inflation and decreasing variation in output and prices. In addition, the financial crisis was preceded by a period of about 60 years of unbroken growth in the world economy. So we could ask ourselves: are crises of the type we have just experienced “improbable events” that take place perhaps once in fifty years and something we just have to accept? My answer is both yes and no. We have learned that financial crises are extremely costly. Governments and central banks are now busy discussing different measures both to reduce the likelihood of crises arising and to mitigate the consequences of any such crises.

First of all, there are a number of events that could slow down the economy, thereby moderating inflation. A deterioration in the international growth outlook associated with a widening of the impact of the crisis in the US real estate market should be placed in this first category. If the resulting slowdown in the growth of the Swiss economy remains moderate, this would reinforce price stability. However, a substantial slowdown would necessitate a change of direction for us. Next, there are some developments that could simultaneously slow the economy and threaten price stability. An example of this, if it were to prove persistent, is the rise in oil prices. In this respect, monetary policy finds itself in a dilemma and care needs to be taken in order to prevent prices from spiralling out of control. Finally, there are developments that could stimulate economic activity – which is already at a high level – as well as exacerbating inflationary risks. In this category we should mention a possible continued weakening in the Swiss franc. To date, the depreciation of the currency has mainly stimulated the economy without pushing up prices. Negative effects on inflation have been limited due to productivity gains, the opening up of the labour market and the appearance of new international competitors. 2 BIS Review 150/2007 The concurrence of these contradictory risk factors makes a global evaluation difficult and encourages the adoption of a prudent and watchful attitude.

BIS Review 150/2007 3 Observed inflation December 2007 2004 Q1 Inflation 2005 Q2 Q3 Q4 Q1 2006 Q2 Q3 Q4 Q1 2007 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0.06 0.87 0.91 1.38 1.35 1.06 1.18 1.10 1.23 1.33 1.22 0.46 0.09 0.52 0.63 Inflation forecast of September 2007 with Libor at 2.75% and of December 2007 with Libor at 2.75% 2007 Q1 Forecast September 2007, Libor at 2.75% Forecast December 2007, Libor at 2.75% 4 2008 Q2 Q3 Q4 Q1 2009 Q2 Q3 Q4 Q1 2010 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0.66 1.20 1.50 1.38 1.57 1.69 1.75 1.80 1.85 1.91 1.96 2.00 1.62 2.14 1.54 1.56 1.51 1.47 1.46 1.46 1.48 1.51 1.53 1.55 BIS Review 150/2007

Sources: ONS, IHS Markit/CIPS, CBI, Bank of England and Bank calculations. Chart 3c: Government balance also cyclical Chart 4: When the monetary regime is stable policy rates are more responsive to economic growth and inflation is less volatile Sources: ONS and Bank calculations. Based on GDP growth and inflation smoothed over 2-year periods, and Bank Rate changes over 2 years. Sources: Thomas and Dimsdale (2017), Feinstein (1991), O'Donoghue et al (2004), ONS and Bank calculations. In the interim, and especially during and between the two world wars, the correlation between interest rates and economic growth was lower and the volatility of inflation higher. This is as you’d expect. To stabilise 7 With the nominal price of the metal fixed, the effective target for the price of goods and services in a gold standard regime is the inverse of its real equilibrium price. A rise in the supply of metal, from new discoveries for example, leads to inflation in the CPI (allowing the real price of gold to fall). If demand for gold rises (for example because of strong economic growth more generally), without any increase in the supply, the CPI tends to fall. Subject to these variations, a gold standard amounts to a target for the level of the CPI. 8 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 8 inflation the monetary authority needs to lean against the cycle, at least when it’s driven by swings in demand8.

Yves Mersch: Euro clearing - the open race Keynote speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, at the Frankfurt Finance Summit, Frankfurt am Main, 29 May 2018. * * * During the 2008 financial crisis, counterparty risks became infamous. Obviously, every finance textbook deals with the risk that, when you enter into a financial contract, the other party may not fulfil their part of the agreement and may even default on their obligation. But the failure of Lehman Brothers and the large losses suffered by AIG in over-the-counter derivatives markets revealed that there were counterparty risks throughout the entire financial system. This was due to the domino effect of counterparty defaults in leveraged products. As a response, G20 leaders agreed at the 2009 summit in Pittsburgh to move all standardised derivatives contracts to clearing through central counterparties (or CCPs). CCPs address the weaknesses exposed during the crisis by insulating counterparties from each other’s default risk. They specialise in managing counterparty credit risk, and by doing so they reduce the risk of defaults spreading across the financial system. But CCPs can only make the financial system safer if they are safe themselves. In the European Union, they are subject to a comprehensive regulatory framework. The European Market Infrastructure Regulation (or EMIR) ensures that they hold robust resources to deal with financial distress.

This issue was present during the first asset purchase program, especially when the pace of weekly purchases reached a peak of about $ billion in the middle of last year. The pace of those purchases at times put pressure on liquidity in the MBS market, leading the Desk to take mitigating actions when possible. 8 In the current circumstances, there would seem to be room for the Federal Reserve to expand its holdings of Treasury securities without creating difficulties for market functioning. The SOMA currently holds about 12 percent of the outstanding stock of Treasury coupon securities – a smaller share than it held before the financial crisis. Moreover, the supply of Treasury securities will remain ample, as the Treasury is expected to issue around $ trillion of securities over the next year. Any purchase program that the FOMC decides upon, whether aimed at Treasury securities or MBS, would be designed to support market functioning as much as possible while still achieving the program’s economic objectives. The deep liquidity of these markets has considerable value to our economy, and we should take whatever steps possible to leave this liquidity intact. The second operational challenge I mentioned comes at the other end of the program – the exit. In particular, it is important to consider whether balance sheet expansion would complicate the eventual exit of the Federal Reserve from its accommodative policy stance. I am confident that our ability to exit will not be compromised by any further expansion of the balance sheet.

The Chairman’s speech in Jackson Hole and the August FOMC minutes both indicated that reinvesting in MBS rather than Treasury securities might become desirable if market conditions were to change. Balance sheet expansion as a policy option As you can see, the decision to simply keep the balance sheet unchanged involved a number of considerations and choices. Let me now turn to the possibility that the FOMC could go a step further and expand the balance sheet beyond its current levels. This policy option has been the subject of intense focus among market participants. Chairman Bernanke has indicated that any decision about expanding the balance sheet would depend on the FOMC’s assessment of the costs and benefits involved. Of course, that assessment is difficult to calibrate. Federal Reserve Bank of New York President William Dudley discussed many of the relevant issues in his speech last Friday. 7 In terms of the benefits, balance sheet expansion appears to push financial conditions in the right direction, in that it puts downward pressure on longer-term real interest rates and makes broader financial conditions more accommodative. One can reach that judgment based on the empirical evidence from the earlier round of asset purchases, as mentioned before. In addition, the market responses to more recent news about the balance sheet also lean in this direction.

The forces that have kept down inflation thus appear to some extent to have been common to other small, open economies in our region. One such common denominator is probably that prices of imported goods have developed weakly. The ongoing globalisation process is one reason for this. Low-cost countries, in particular China, have taken on an increasingly large role in the world economy and we have begun to import more and more goods from these countries. If one looks at price developments for consumer goods - a category that contains many imported goods - prices have actually fallen in recent years, both in Sweden and our Nordic neighbours (Figure 4). Another factor that has held back inflation in Sweden, and has probably been even more important, is that productivity growth has been unexpectedly strong. This has kept down production costs in companies and subdued price increases on domestically-produced goods and services. As imported goods are processed and distributed in the country before being sold to consumers, productivity growth has also held back price increases on imported products (Figure 5). It is not entirely clear why productivity improvements have been so rapid in recent years. One possibility is that the major investments in information technology made at the end of the 1990s have now begun to show results. It is also conceivable that the higher productivity growth is a result of companies in many sectors perceiving increased competition, not least as a consequence of globalisation.

In the current circumstances, economic policies have an important role to play by holding the euro area firmly on course to meet its macroeconomic stability objectives, which are those that make sustained growth possible and shore up the economy against shocks and outbreaks of insecurity and uncertainty. As mentioned above, the main task of monetary policy is to ensure euro area price stability in the medium term, and it is against this background that monetary conditions have gradually been normalised since December 2005. This process has been correcting the benign monetary conditions of the Spanish economy in recent years and promoting a more balanced growth pattern. The most valuable contribution fiscal policy can make is to ensure the commitment to budgetary stability. This commitment has been essential for establishing the conditions propitious to the recent long period of economic growth of the Spanish economy and it is particularly relevant to the macroeconomic setting I have described. 4 BIS Review 130/2007 The latest official forecasts for the general government account are for a surplus of 1.3% of GDP in 2007. This would amply meet the requirements of the Stability and Growth Pact and enable a further reduction of the public debt/GDP ratio. Moreover, it represents an improvement of 30 bp on the target set in the latest update of the Stability Programme. This improvement basically reflects a positive deviation of tax revenue with respect to budget, in a setting of higher-than-expected growth.

It is the combination of accounting and prudential rules which shape the incentives of investors and managers. Partial reform, limited to the prudential field for instance, will not suffice and could even introduce additional distortions. The Basel Committee has come out with a comprehensive approach to capital and accounting reform to reduce procyclicality, embodied, in particular, in the Principles for revision of IAS 39 (“Financial Instruments: Recognition and Measurement”). It should be strongly supported. Second, on leverage. Excessive leverage has been a major cause of the crisis. In many instances, it could not be detected early enough, because attention was focused on riskweighted measures of capital utilisation. There is great merit, therefore, in introducing a leverage ratio as an essential tool of macro-prudential supervision. It is also envisaged as part of the capital requirement regime as a complement and "backstop" to risk-weighted measures. It may be almost impossible, however, to use it as a binding instrument on an international basis. The reason is simple: while it is relatively easy to measure the evolution of the leverage ratio over time for an institution or group of institutions, it is almost unfeasible to 2 BIS Review 133/2009 measure it consistently across countries, due to differences in accounting regimes and banking structures. An enormous amount of work is therefore necessary before integration of a leverage ratio into the Basel framework can be implemented. In particular, full convergence in accounting measurements of both assets and capital is an absolute prerequisite.

In the euro area, the economy depends on the banking system for more than two-thirds of its financing. Any lasting disruption to credit flows would cause considerable harm. Regulators could jointly decide on the following sequence. In the immediate future, priority should be given to capital conservation. As I mentioned, most of the current banking profits are, in fact, by-products of public policies and there is a good case for requesting that they should be kept inside the banking system and used to strengthen balance sheets and finance credit to the economy. This would require some restraint in dividend distribution and, of course, in the overall amount of variable compensation. In parallel, all possibilities to issue new equity should be exploited. This would be a first step. As a second step, a progressive schedule of capital strengthening could be precisely defined and published for the future. It would be crucial that this schedule be made explicitly contingent on the state of the world economy. Again, we want the direction and the path to be clear. But it is important to avoid any negative procyclical effects. The same approach could apply to the new liquidity regime when it is introduced. Let me conclude by mentioning one broader and fundamental issue. We don't know yet what kind of financial system will emerge from the crisis. We need to think about this. We want to reduce or eliminate moral hazard, but the definition of a systemic institution still eludes us.

The Bank of England’s own November Discussion Paper was only one manifestation. Another is the IMF’s recent review of the macroeconomic policy framework. 11 The basic question is whether the authorities could lean against credit-fuelled booms by tightening capital or liquidity requirements for lenders or, as some economists have advocated, by raising the amount of collateral that borrowers have to put up. 12 In principle, this could be aimed at aggregate or sectoral credit conditions, and it could have a goal of making our banks more resilient. It would need to be pursued by executive agencies under clear mandates from legislators, and it would benefit greatly from transparency. A painful lesson for the Bank of England is that our warnings of “underpriced risk” and system-wide fragilities in our Financial Stability Reports were perhaps admired by some but made no difference. And, alongside our domestic and international peers, we are not in this for plaudits! People – the markets, firms, households – take notice of our Inflation Report, MPC minutes and speeches on monetary policy not, essentially, because they might sometimes be interesting or well done, but for the simple reason that the MPC is the body that sets sterling interest rates in the real world. If the authorities were able to deploy credible macroprudential tools, their stability warnings would probably be taken more seriously in future, because they would be able to follow up words with actions. Monetary policymakers would need to be attentive to the use of such instruments, as they would affect credit conditions.

This is unambiguously preferred to point A, with greater stability in both the financial system and, in particular, the wider economy. But could we do better still by having monetary policy assume explicit responsibility for safeguarding financial stability? If we augment this monetary policy rule to take account of financial stability factors, by having interest rates respond to credit spreads, we move to point C. This has the benefit of improving financial stability relative to the conventional monetary policy case. But this comes at the cost of destabilising somewhat the macro-economy. It is unclear whether point C dominates B in a welfare sense. In other words, having monetary policy meet both macroeconomic and macro-prudential objectives involves a trade-off. Once we add an explicit macro-prudential instrument to the equation, however, this trade-off disappears, or at least is lessened. In particular, let’s add a regulatory-set counter-cyclical capital buffer for banks, the like of which is now part of Basel III. Used in tandem with optimal monetary policy, this moves the economy to point D. This involves both greater macroeconomic and financial stability than the alternatives. On the face if it at least, it is welfareimproving. Although the model used is specific, the policy lesson appears to be a general one. Having two instruments (monetary and macro-prudential) leads to an improvement in macro-financial stability. Two policy hands beat one when there are two policy objectives.

After client on-boarding, the ongoing contact between the insurer and the insured is limited to premium payment and processing of claims. Many people do not see a need to meet their insurance agents regularly to review their coverage. Some, I am told, even shun calls from their agents. New insurance apps can transform the insurer-policyholder relationship into a broader partnership. The insured person can benefit from various lifestyle information, healthy living tips and other information, emerging trends, advisories on new products and various service options. These can include transactional services such as the option to buy additional insurance based on new needs – all done digitally. Claims can also be an automated self-service process, with expedited settlement based on digital submissions of proofs. The use of Chatbots can also support a customer by providing on-demand standard reports or for other procedural or contract information. I read that in some countries, new InsurTech players now offer universal all-in-one “plug and use” insurance cover. They use AI-enabled insurance platforms that allow a person to key in his details – like his health statistics, occupation, business and personal travels, his car, family, home and home possessions, pets and so on – and get all the insurance that he needs under one policy that can be flexibly adjusted across the difference risk coverage over his life cycle. What this does is to make the customer experience more pleasant and fuss-free.

William C Dudley: The national and regional economic outlook Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the University at Albany, Albany, New York, 18 November 2011. * * * Good morning. I am pleased to be at the University at Albany. It is always a pleasure to speak with students and faculty because of the intellectual leadership role you play in your communities. I also welcome the addition of business leaders to this gathering because you shape the economic landscape in the region. So, I thank you all for coming today and helping make this such a rich audience. Over the past 20 months, I have been engaged in a series of outreach meetings all across my Federal Reserve District. I consider these visits just as important as my trips to Washington, D.C., to help formulate monetary policy or to Switzerland to shape international bank regulation. The understanding of issues and concerns that I gain today will help ensure that my policy decisions reflect the public interest in the broadest sense. Each visit within the region helps me deepen relationships with the people I represent. As you may know, the New York Fed’s District includes all of New York State; 12 counties in northern New Jersey; Fairfield County, Connecticut; Puerto Rico; and the U.S. Virgin Islands. In August, I met with community leaders, businesses and elected officials in Newark, Patterson and Jersey City.

It peaked at 13%, which is very high, at the height of the crisis and now it’s at 9.8%, so it’s below 10%. The euro area has created 4 million jobs in four years, that’s not bad. Yes, this morning we have to say “Thank you, ECB”. The Banque de France has just said this morning that it is lowering its growth forecast for France to 1.3% for 2016 and 2017, and then to 1.4% in 2018 because of the worsening international environment. Is the Banque de France more pessimistic than the ECB? Because you are saying that the growth situation isn’t bad in France. No, we agree with the Banque de France – growth will be weaker in France than in the rest of the euro area, unfortunately. 1.3%, 1.4%? Yes, 1.3% in France, 1.7% in the euro area, so France is lagging behind in terms of growth. And what does France have to do to recover or catch up with the other countries? When you read the programmes of the candidates for the presidency, whether on the right or the left, do you ever say to yourself that this one or that one would enable France to catch up? The ECB doesn’t get involved in politics... Of course. So don’t expect me to express a preference for one of the candidates. However.

According to the forecast of Statistics Sweden, the population will only increase by around 0.1-0.2% this year and during the first decade of the 21st century. With GDP growth of 3% and a population increase of around 0.7% a year, a rough measure of productivity is obtained which shows that it has increased on average by 2.3% per year during the 20th century as a whole. Nowadays, the figure is lower; most analysts estimate that trend productivity is under rather than over 2% per year, although there has been some improvement in recent years. The standard of living has accordingly not risen as quickly during the 1990s as it did during a number of earlier decades during the century. Figure 3. GDP per capita 3. GDP per inhabitant Average annual percentage change of GDP per inhabitant in 1990 prices in US dollars 4 3 2 1 0 1820-50 1850-70 1870-90 1890-10 1910-30 1930-50 Sweden 1950-70 1970-90 UK In order to obtain an idea of developments in Sweden we can look at the United Kingdom. Sweden is considered to have become industrialised about hundred years after the UK. GDP per capita therefore grew more quickly in Britain than in Sweden during the first half of the 19th century. From 1870 onwards, however, the relationship between the two countries changed. Growth per capita became the same in both countries and after 1890 and up to 1970, Sweden took the lead.

Markets worry that the next chapter will be another unfortunate event. I would call this the “slow healing” story. Recoveries from financial busts tend to be slow and painful. Indeed, that is why it is worth doing all that you can – in advance and in good times – to avoid financial crises. The academic literature suggests it takes an average of eight years to recover.2 If in the meantime you are hit by other bad surprises it can take longer. And in this 1 “A Series of Unfortunate Events” is a series of children’s novels written by Daniel Handler (using the pen name of Lemony Snicket). 2 This finding refers to recovery in real per capita GDP to its pre-crisis level rather than to making up lost output relative to precrisis trends. See Reinhart, C.M., and Rogoff, K.S. (2014) “Recovery from financial crises: evidence from 100 episodes”, NBER Working Paper No. 19823. Reinhart and Reinhart (2015) report that ten years after the fifteen worst financial crises of BIS central bankers’ speeches 1 story most of the events are related. As many commentators have observed, as well as country-specific factors, many of the stresses now seen in emerging markets are knock-on effects, if not from the financial crisis itself, then from the responses to it in the post-crisis recession. One can tell a version of this slow healing and unfortunate events story for the world economy as well as for the UK.

The MPC’s central estimate that QE had a total peak impact on GDP of around 2.5% in 2013 implies that adjusted Bank Rate fell below 0.5% during the depths of the crisis. In the May 2014 Inflation Report the MPC judged that maintaining the stock of asset purchases at £ would provide continued, albeit declining support to activity implying that adjusted Bank Rate is still currently below 0.5%. BIS central bankers’ speeches 5 natural rate of interest will not rise to pre-crisis levels which is why we believe increases in Bank rate will be both gradual and limited. Moves in financial markets may also be signalling nervousness in the slow healing story. Financial markets drifted down in the second half of 2015 and they fell quite sharply in the first months of this year. Some of these moves have recovered a bit in the last week or so. But nevertheless current market signals seem to be suggesting a structurally weaker economic picture. UK 10-year real yields are negative. And yield curves are flat as far as the eye can see – the 5-year point on the UK forward market interest rate curve has fallen by around 0.8 percentage points to 1% in the last month.8 It is difficult to identify any really major economic news in 2016 that might underlie this. Rather it may be that markets are shifting to a new perception of the world economy and risks, and of policy-makers’ ability to respond to future challenges.

2 BIS central bankers’ speeches Regarding global activity, a stronger growth outlook has consolidated in developed economies together with a slowdown in the emerging world. Still, some downward adjustments are being made to the projections for this year, mostly driven by actual first-quarter data, leading to a marginal adjustment in the overall figure. Thus, it is expected that in the period 2014–2015 our trading partners will grow 3.7 percent on average, a tenth of a point less than was expected in March. In Latin America a less favorable picture emerges. Downward revisions in Argentina, Brazil and Mexico stand out in these settings. The price of copper has fluctuated significantly in recent months. After coming close to $ per pound, it returned to the order of $ The baseline scenario assumes copper prices of 3.1 and 2.9 dollars per pound in 2014 and 2015, respectively. The terms of trade would fall this year slightly less than projected the March IPoM, but somewhat deeper in 2015 (table 1). Inflation has remained well contained in developed countries, while in emerging markets, particularly in Latin America, the short-term outlook has been revised upwards, reflecting the depreciation of Latin American currencies in the past year. This, plus the changes in parities mean that foreign dollar inflation this year and next will be somewhat higher than forecast in the last Report. The Board estimates that in the baseline projection scenario, inflation in Chile will remain above 4 percent still for some months, ending 2014 around that figure.

10 BIS central bankers’ speeches Table 2 Domestic scenario (annual change, percent) 2012 GDP Domestic demand Domestic demand (w/o inventory change) Gross fixed capital formation Total consumption Goods and services exports Goods and services imports Current account (% of GDP) Gross national savings (% of GDP) December CPI December CPIEFE 2013 (e) IPoM Dec.13 5.4 6.9 7.1 12.2 5.6 1.1 5.0 -3.4 21.7 1.5 1.5 4.2 3.9 5.1 3.9 5.4 5.3 4.4 -3.2 21.1 2.6 1.9 IPoM Mar.14 2014 (f) IPoM Dec.13 IPoM Jun.14 4.1 3.4 4.2 0.4 5.4 4.3 2.2 -3.4 20.5 3.0 2.1 4.1 3.4 4.2 0.4 5.4 4.3 2.2 -3.4 20.5 3.0 2.1 IPoM Mar.14 3,75-4,75 4.8 4.5 4.1 4.7 3.1 4.6 -3.7 20.6 2.5 2.9 IPoM Jun.14 3,0-4,0 3.3 3.3 0.8 4.1 3.2 2.4 -3.6 19.5 3.0 2.8 2,5-3,5 1.7 2.4 -0.7 3.4 3.2 -1.1 -2.5 19.9 4.0 3.7 (e) Estimate. (f) Forecast. Source: Central Bank of Chile.

That said, this increase eased to 7.2% in July. One of the key factors behind the rise in credit over these months was the progressive activation of the Official Credit Institute’s guarantee facility for NFCs and individual entrepreneurs, which proved particularly favourable to SMEs. In fact, of the € billion lent to NFCs from December 2019 to June 2020 via new lending business, € billion (41%) corresponded to guaranteed loans. As a result, the sector’s aggregate debt-to-GDP ratio has risen for the first time since 2010, to 82% in 2020 Q2 (the highest level since 2017), owing both to the increase in debt and to the decline in GDP. True, the intensity of these rises will be corrected to some extent when the GDP data for the coming quarters are incorporated. But the simulations by the Banco de España also suggest a deterioration in the financial position, measured as each firm’s net debt relative to its net assets. This would be greater in the SME segment and in the sectors most affected by the pandemic. As was the case with firms, households’ financial position improved significantly following the previous global financial crisis. At the same time, mortgage-related lending standards have been much more prudent, although consumer credit has been growing at high rates in recent years and certain groups of households have remained in a situation of vulnerability. However, household income has been considerably cut in the current crisis, owing to the reduction in hours worked and the increase in unemployment.

Lack of effective competition in the payment card industry had led to higher costs for payment card transactions, which would in turn raise costs for businesses and consumers. Over a period of 14 months from May 2013 to June 2014, interchange fee, that is the wholesale fee paid between banks in a payment card transaction, were hiked several times. As interchange fee is priced into the MDR, the hikes in interchange fee contributed towards an increase in the MDR for merchants. A lack of price transparency and the overall competition further weakened market pressure to lower interchange fee and MDR. BIS central bankers’ speeches 1 The highly concentrated market also discouraged merchants from switching to another payment card network given concerns over losing significant competitive advantage if they did. Clearly, left unchecked, such indiscriminate interchange fee hikes risked bringing about a broad-based increase in MDR which would in turn be passed on to consumers through higher retail prices of goods and services. To curb indiscriminate increases in payment card acceptance cost and foster a competitive payment card market, Bank Negara Malaysia implemented the Payment Card Reform Framework in July 2015. Under the Framework, the interchange fees are subject to objectively-set ceilings, while a market incentive structure was instituted to strengthen the incentives for investments in payment card infrastructure. In addition, measures were also introduced to enhance transparency and competition by prohibiting restrictive trade practices. The results of such measures are very encouraging.

Indeed, the proportion of housing loans as a percentage of total loans in the euro area increased from around 50% in 1990 to more than 70% today, which is a type of lending that tends to be associated with lower growth.2 Structurally, a smaller banking sector could – at least in theory – help to avoid those negative effects on growth and insulate the euro area from some of these risks. Still, a smaller or downsized banking sector is no guarantee for lower overall risk. The business models, risk attitudes and profitability of the banks need to be taken into account as well. Likewise does geographical expansion into foreign markets when it is not accompanied by local knowledge. Another aspect is that a downsized banking sector provides impetus for capital market development in Europe – after all, if savings are not being intermediated through banks, they must be being intermediated through capital markets. I see this as central to a more balanced and contested financing mix in the euro area. Contrary to the trend in most advanced economies, the relative importance of bank versus non-bank financing in the euro area has actually increased in the last two decades – from already high levels – and this may have given banks excessive market power.

In the case of employment, the statistics traditionally used in Chile are built by extrapolating the results of surveys to the population, using expansion factors, which in turn are based on population projections that are updated at every Census. Thus, between one update and the next, the surveys do not have the capacity to reflect exogenous changes in demographics. Therefore, a phenomenon of immigration of the magnitude that our country has experienced in recent years cannot be represented correctly until the expansion factors are updated. So, information about levels in the labor force such as employment and other aggregates delivered by the different surveys do not necessarily provide a faithful representation of the reality whenever substantive changes occur in population aggregates. As you can see in Box III.3 of the Report, using different sources of information a revision can be made of the evolution of employment, factoring in the impact of the migrant inflows we have seen recently in Chile. In particular, this exercise shows that between 2016 and 2018 employment would have grown between one and two percentage points annually more than shown by the surveys, that is, between double and triple the data obtained from the surveys over the last few years. The difference in growth originates in the assumptions made regarding the new immigrants that entered the country in the last year, which are not available as yet.

Stocks in different companies in a variety of sectors, loans to governments and corporations, and real estate investments in a number of global cities are all parts of the portfolio. At the end of 2014, the fund had investments in securities from almost 10 000 issuers in 75 countries. The fund is a global investor. Prices in financial markets carry information about the risk and return prospects of different assets, and the markets are fairly efficient most of the time. Hence, a natural starting point for the allocation across regions is the size of the different financial markets. However, the weights assigned by the fund to different geographical regions are the result of a trade-off between various considerations. The fund is a minority shareholder and dependent on good corporate governance and protection of our rights in legal systems. Regulatory conditions in investee countries must be relatively stable, and we must be reasonably sure that our investments are safe. From the start in 1998, a large share of the fund was allocated to Europe. At that time, the emphasis was on exchange rate risk related to the trade pattern of the Norwegian economy. As European countries are our most important trading partners, Europe was overweighted compared with market weights. Three years ago, the Ministry of Finance concluded that exchange risk had diminished, partly due to increased globalisation. Consequently the fund’s overweight in Europe was reduced. At the same time, the allocation to emerging markets was increased.

Chart: A countercyclical investor The long-term horizon puts the fund in a position to be a countercyclical investor on a systematic basis. This is done through rebalancing the share of the portfolio allocated to equities. According to the rebalancing rule, when the equity share increases to more than 64 percent of the fund, we sell equities and buy bonds. Conversely, when the equity share falls below 56 percent, we sell bonds and buy equities. This strategy has proved to be profitable for the fund, and has increased the average annual return by about 0.5 percentage point. 2 Chart: International real interest rates So far, the fund has earned an overall annual real return – after inflation and management costs – of 3.8 percent. The cumulative return on the fund in money terms is equivalent to 1 John H. Cochrane (2011): “Discount rates”, The Journal of Finance 66 (4), 1047–1108. 2 For an analysis of the impact of rebalancing, please see Norges Bank (2012): The history of the rebalancing of the fund, Discussion Note 4. BIS central bankers’ speeches 3 more than a third of the fund’s total capital at the end of 2014. Going forward, the returns are likely to be lower. The starting point for calculating the expected rate of return on the portfolio is the real interest rate on high-grade government bonds. In recent years, bond yields in real terms have been close to zero.

Another reason for the rapid development in Internet usage in Sweden could be connected to the structure of the Swedish banking system. The banking sector in Sweden is dominated by a small number of large operators, all listed on the stock market and with a strong incentive to rationalise their operations. They have also had the resources to rapidly implement new technology. The same applies in the Netherlands, which has a similar bank structure. The more Internet services a bank can offer its customers, and the better they are, the more customers will use the Internet bank and the cheaper the administration costs will be for the bank. If we compare this with the USA, which has a bank market consisting of a large number of small operators, developments there have not been anything like as rapid. Only a few US banks offer advanced Internet services. The range of services is also much smaller than in Sweden. 2 BIS Review 51/2002 There is a lot to be gained by making payments via the Internet, both for the banks and for their customers. Sweden, like the other Nordic countries, has a giro-based payment system. Giro payments corresponded to more than 95 per cent of the total value of payments made in 2000 and to over 70 per cent of the number of transactions. Giro instruments are traditionally paper-based. However, the Internet enables the paper-based giro system to be speeded up by making it paperless.

The Swedish Telecommunications Administration’s monopoly began to break up as early as the 1980s, but the real turning point came in 1993, when the Administration was privatised as Telia. The market was opened up and exposed to competition; new challengers could gradually take over more than a quarter of the total market and a significantly greater part of the mobile telephony and Internet telephony segment. At the same time, technical developments were very rapid. Fiberoptics enabled lower costs for long distance calls and increased the speed of transfer of large amounts of data, which benefited the development of the Internet. Together, increased competition and rapid technological developments led to a fall in prices with regard to both telephony and Internet connection. The lower prices for users have probably contributed to the widespread use of the Internet in Sweden. The new technology was perhaps available in all essentials to all developed countries, but the views on deregulation varied. Only eight of the 25 member countries, today 30, of the OECD allowed competition in the telecommunications market, while the remaining countries retained a monopoly. There is also a clear connection between use of the Internet and competition. Competition is allowed in the telecommunications markets of six of the nine countries with the highest Internet usage. These countries have also experiences an increase in access to the Internet six times as fast as countries that have a monopoly market.

The precise objective of policy - even within the confines of the concept of price stability - remains a political decision: there will always be those who argue for a somewhat higher or somewhat lower target, and the fact that the Government endorses a precise target rather than just the vaguer goal of “stability” certainly strengthens our hand by allowing us to concentrate upon our essentially technical task. I am bound to say that in practice it seems to me to be rather a second order issue anyway given the narrowness of the range of definitions of “stability” that would carry conviction with the public, including financial markets. The Act confers the responsibility for meeting the Government’s inflation target specifically on a newly created Monetary Policy Committee, comprising myself as Chairman, the two Deputy Governors, two Executive Directors appointed by the Governor after consultation with the Chancellor and four members appointed from outside the Bank by the Chancellor. The Governors are appointed as members of the Committee for their full five year (renewable) terms; the remaining members are appointed for three year terms which are also renewable. The Committee’s policy meetings are also attended by a senior Treasury Official in the capacity of an observer, who may participate in the discussion - essentially to inform the Committee of any relevant aspects of the Government’s wider economic policies and explain the Committee’s thinking to the Chancellor - but he may not express a view on the monetary policy decision or, of course, vote on that decision.

In that commentary Exter first outlines the case for the new central bank being “non-political” and having “a considerable amount of independence” - essentially on the grounds that central banking “puts the government into the business life of a country at especially critical points, namely banking and other credit activities, capital markets, foreign exchange markets and the supply of currency”, and that it “embraces problems which are of an unusually technical nature”! But Exter goes on to recognise that “there are many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank must necessarily work in close harmony with the government”. Noting that many governments had learned to value the sort of independent and objective, detached, advice that central banks are able to give, Exter nevertheless acknowledges that “on matters of vital interest to the state it would be impossible for a central bank to adopt a policy contrary to the policy of the Government of the day”. His killer argument is that no central banker can help but be “acutely conscious of the fact that, since no Parliament can bind its successors, their independence is limited by the ultimate power of the Government to change the law”.

John C Williams: When the facts change… Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 9th High-Level Conference on the International Monetary System, Zürich, 14 May 2019. * * * Accompanying Figures of the speech. Introduction John Maynard Keynes is credited with saying, “When the facts change, I change my mind. What do you do, sir?” Over the past decade, policymakers across the globe have been focused on getting their economies and financial systems back in order. But at the same time, a sea change in supply-side realities has taken place. These changes have redefined what is achievable, and challenged conventional wisdom on monetary policy. Shifting demographic trends and a slowdown in productivity are driving slower trend growth and historically low levels of real interest rates across the globe. This new set of facts requires us to rethink what we once knew, reassess how to best foster strong and stable economies, and ready ourselves for the future. With that start, it’s time I remind everyone that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. The Road to Recovery Following the global financial crisis, central banks took bold and decisive actions to right their economies and bring them back to health. Short-term interest rates were brought to near zero— in some cases below zero—and held there for many years (Figure 1).

Mohd Razif bin Abd Kadir: Economic outlook and business opportunities in Malaysia Opening remarks by Mr Mohd Razif bin Abd Kadir, Deputy Governor of the Central Bank of Malaysia, for Malaysia Country Showcase at the IFSB Summit: "Economic Outlook and Business Opportunities in Malaysia", Dubai, 14 May 2007. * * * I would like to welcome you to the Malaysia Country Showcase held in conjunction with the 4th Islamic Financial Services Board Summit. On behalf of the Malaysian delegation, I wish to thank you for your presence here on this important occasion as it gives us an opportunity to share the Malaysian business proposition and to nurture strong trade and investment ties in the region. We are fortunate to have with us distinguished panel of experts who will be engaging in an interactive discourse. Today's forum provides a platform for greater awareness of the economic climate and outlook as well as the business potentials and opportunities in Malaysia. A decade after the financial crisis, the Malaysian economy including the financial system is at its strongest position. Malaysia has greater economic flexibility to shift to new areas of growth and thus sustain the development momentum. Economic growth has been achieved with relative price stability, low unemployment and strong external balances. The level of savings remains high at 37 percent as a percentage to the GDP and the level of external reserves remains strong at USD91 billion.

The Fund should be a forum in which countries can discuss these risks. It should also hold countries to account. In these ways, it can indirectly support global monetary stability. With countries naturally reluctant to cede any control over their own monetary and fiscal policies, it is likely that the IMF will have as instruments only the powers of analysis, persuasion, and, in Keynes’ own favourite words, “ruthless truth-telling”. That phrase does not conjure up many memories of any of the many international meetings I have attended. But unless the IMF has the self-confidence to play 4 BIS Review 11/2006 that role, its deliberations and statements will carry little weight. The Fund requires an independent, respected and clear voice. The Fund should focus its work on the international monetary system around three tasks. First, it should provide and share information about the balance sheets of all major countries, their composition and size, and the links between them. The Fund has been in the forefront of the analysis of balance sheets for emerging market economies, and it needs to extend this approach to its surveillance of the industrialised world. In conducting this analysis, the Fund must look at countries’ exchange rate choices. But no one price is a sufficient statistic for the effect of one country’s policies on the rest of the world - even one as important as the exchange rate. Balance sheet analysis should be at the heart of the surveillance process.

Some of the more idealistic aspirations for Bretton Woods – such as the creation of an international central bank and new currency – were never likely to be adopted and look impossible absent a world government. But an arbiter of the international monetary system can play a more limited role – not so much the referee brandishing the yellow and red cards of the football pitch, more the cricket umpire warning the players not to attack each other verbally and making it clear publicly when they believe the players are not abiding with the spirit of the game. Invoking the MCC’s “spirit of cricket”, when a country knows that a policy such as an exchange rate regime requires modification, the player should walk. Indeed, the players might in time come to realise that most games benefit when played according to a clear and agreed set of rules. So although it is not an international central bank, and the SDR is not a currency, the IMF still has a role to play. Given that most systemically important countries allow their exchange rates to float, the Fund cannot have an independent remit for global monetary stability. Hence, the Fund’s role should be to support national policy makers by providing expert analysis about external risks to their domestic monetary policy objectives. National policies which appear sustainable in terms of countries’ own objectives may interact and, through the resulting balance sheet effects, create risks to those same countries further ahead.

The lesson that the foundations for resilience are built during good times was earnestly embraced. Therefore, once stability was restored, the Bank embarked on a comprehensive restructuring and reform of the financial sector. This included the consolidation of domestic financial institutions; the strengthening of corporate 4 BIS Review 12/2009 governance, risk management and the institutional capacity of domestic financial institutions; as well as the deepening of the bond market. These efforts have put the Malaysian financial system in a much stronger position to weather the current global financial crisis. Regional cooperation From the beginning, the Bank has had an active engagement in the region and was from the very beginning part of the SEACEN grouping which is the oldest and most inclusive regional grouping. Starting in 1967, SEACEN has been a valuable regional forum. While it is a group of highly diverse economies, this did not prevent it from being a cohesive grouping. The permanent secretariat of SEACEN resides in Kuala Lumpur since 1979. The Bank is also part of other groupings including EMEAP and the Asian Consultative Council (ACC) of the BIS. Collaborative efforts in surveillance, regional financial market development and sharing of information have been extensive. In Islamic finance, the Bank is a founding member of the Islamic Financial Services Board to promote and enhance the soundness and stability of the Islamic financial services industry. Modernisation of the Central Bank In the 50 years, the Central Bank has also been fundamentally transformed.

These institutions join us today in celebrating the long tradition of cooperation to meet the common purpose. Specialised development financial institutions were also established to promote access to financial services to sectors that are not being serviced by existing financial institutions. Financial inclusion, to ensure all economic activities and all segments of society have access to financial services, has been a key priority. Currently, about 80% of our population have some forms of banking accounts Other financial infrastructure established by the Bank to support the intermediation process includes the comprehensive centrally coordinated credit information system at the national level which allows for better-informed credit decisions by financial institutions. In addition, the Credit Guarantee Corporation was established to provide support for small businesses. Cagamas, the national mortgage corporation, was established by the Central Bank to ensure a steady flow of funds to the housing industry and develop a secondary mortgage market. At the centre of the financial infrastructure is the payments infrastructure which has been enhanced and modernised over the years to achieve greater efficiency and reliability of the payments system. The payments landscape has evolved from one that was mainly paperbased to include a range of new electronic forms of payment. Internet banking which was not available in Malaysia as recent as 10 years ago is now widely used by the entire population 2 BIS Review 12/2009 of internet subscribers in the country.

The additional liquidity infused into these economies occurs at a time when it is necessary to withdraw economic stimulus and normalize or even tighten monetary policy. This is an example of the inconsistency between global liquidity and regional economic cycles. 3. The second issue is the current international monetary system which is not aligning with the changing structure of the global economy. As we all know, one outcome from the current crisis is the growing role of emerging market economies, particularly in Asia. This multi-polar economic landscape is something for policymakers to consider whether there is a need to move to a multi-polar currency system. The end goal should be to retain the efficiency of the current system while enhancing its stability going forward. 4. The third issue is, despite the shortcomings of the current international monetary system, the international community has not been able to make a transition to an alternative system. In practice, it is difficult to identify a currency to compete with the US dollar as there are certain criteria to qualify as reserve currency. First, a reserve-issuing country has to illustrate a good track record of prudent macroeconomic policy. Second, such country must have an open capital account regime supported by deep and liquid financial markets. Should these two criteria are satisfied, such currency has a potential to be widely accepted and used in private international transactions. Today, it is difficult to find an alternative currency which satisfies these conditions.

Prasarn Trairatvorakul: Towards a multi-polar currency and reserve system Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the High-Level Conference on the International Monetary System, Zurich, 10 May 2011. * * * Governor Hildebrand, Managing Director Strauss-Kahn, Distinguished Speakers, Ladies and Gentlemen, 1. I would like to thank the co-hosts, the Swiss National Bank and the International Monetary Fund, for inviting me to speak at this high-level conference. So far in this session, we have listened to a number of insightful presentations by well-known speakers. To avoid repeating what has been said, I will try to frame my talk from the perspective of a small emerging market economy. My focus will be on the three problematic issues facing emerging market economies and the current international monetary system, and how we may think of what needs to be done to put our international monetary system on a more sustainable path. 2. Let me start with the first issue. As of now, excess global liquidity generated under the current international monetary system is complicating the conduct of macroeconomic policy in many emerging market economies. Although the expansion of the global economy has strengthened in the past few quarters, economic cycles and thus monetary policy stance among various regions greatly differ. This has been widely regarded as a key push factor for international capital flows into emerging markets.

All business executives worth their salt organize their teams and resources to minimize uncertainty of factors under their control; and they develop contingencies and operating tactics and strategies for factors over which they have no direct control. Obviously, the less-clear external influences are, the greater the degree of angst about budgeting and planning for the future. Even the saltiest of helmsmen cannot confidently navigate a ship in a dense fog. Going back to the earliest days of the current recovery, my business contacts have regularly complained of the fog of uncertainty emanating from Washington: They have consistently cited fiscal and regulatory uncertainty as major impediments to capital investment and expanding payrolls. Given uncertainty about the implications for overhead of the Affordable Care Act and other government mandates, they’ve complained of not knowing what their all-in labor and other costs will be and of how that lack of knowledge has made long-term employment planning nearly impossible. I’m sure that many of you have heard similar complaints – or have voiced them yourselves. What you may not realize is that until quite recently, economists who study business cycles and monetary policy paid scant attention to the effects of uncertainty on aggregate job and output growth. The profession’s standard models assume that the economy is populated with households and firms that are identical to one another, or that people and businesses can insure away individual risk and so are effectively, theoretically, identical.

Interbank GIRO (IBG) grew at a higher rate of 36% in 2014 and this strong growth rate was sustained at 36% in the first 9 months of this year compared to an average rate of 19% between 2011 and 2013. Instant Transfer (IBFT), the real-time fund transfer service on the other hand, has consistently maintained its high growth rate of over 60% since 2011. This contributed to an increase in Malaysia’s e-payments per capita which is projected to increase from 43 per capita in 2010 to an estimated 80 per capita in 2015. BIS central bankers’ speeches 1 To reduce the country’s dependency on cash usage, Bank Negara Malaysia has implemented the Payment Card Reform Framework this year with the objective to create an enabling environment for the expansion of payment card terminals and higher usage of debit cards at affordable and reduced costs. In this regard, encouraging progress is seen in the area of deployment of payment card terminals. Payment card terminal growth which had slowed from 14.6% in 2011 to 4.5% in 2014, is likely to rebound to an estimated growth rate of 12.0% for 2015. This would increase the number of payment card terminals from 8 per 1,000 inhabitants in 2014 to 9 per 1,000 inhabitants in 2015. We envisage that with the implementation of a Market Development Fund by the payment card industry, about RM455 million funds would be used to deploy additional terminals and spur the expansion of the terminal network.

Trade restrictions were eliminated and the Turkish currency was made fully convertible. There were also notable changes on the domestic financial market infrastructure. For the monetary policy to be effective what is needed is the existence of well-developed financial markets. For this purpose the Central Bank played a leading role in the creation of domestic money, foreign exchange and government bond markets. To further strengthen the financial markets infrastructure the Central Bank established a well-functioning electronic payments and securities settlement system. Contrary to these developments, the performance of the Turkish economy in terms of inflation and growth was not satisfactory. Aside from short-lived periods of relative stability, loose fiscal policies along with accommodative monetary policies were the main causes of high inflation. Under these circumstances backward indexation became a common practice in pricing behavior; inertia evolved in inflation, which was very difficult to eliminate. As inflation increased, inflation expectations also increased and a self-nurturing inflation cycle began. In the meantime, there were number of attempts to get out of this impasse. First, there was a monetary program introduced in 1990. This was very important in that it reorganized and re-structured the Central Bank balance sheet and explained to the financial community and to the general public how the monetary policy operated. It was the first time when certain monetary concepts like base money or central bank money were brought to the attention of the public. However external developments like the first Gulf war brought this program to an end.

Except the temporary amendment concerning the short-term advances to the government before the Second World War, no major amendments were made to the Central Bank Law. 1950s and 60s were relatively easy years. However, the authorities thought that the provisions of the Law of the Central Bank fell short of meeting the necessities of contemporary central banking. Therefore, on January 14, 1970 a new Law on the Central Bank of Turkey was adopted. The new Law brought in changes on the structure of the Bank as well as changes in its policy implementations. The most important organizational change was replacing the General Director, the highest post in the Bank, with the Governor. As regards policies, the Bank was directly authorized to set monetary policy in line with the development plans and annual programs. The Bank was also authorized to conduct open market operations in order to manage money supply and liquidity and was entrusted with medium term discount credit facilities to real sector through the intermediary of commercial banks. In the 70s, there were significant developments in the world economy. In the aftermath of the first oil shock in early seventies, inflation all over the world economies became rampant. Accordingly, the main focus was directed towards the fight against inflation. The 1980s and 90s were the years where a number of structural and institutional changes were introduced in the Turkish economy. With various measures taken between 1980 and 1989 Turkey’s both current and capital account transactions were fully liberalized.

Clearly, these estimates are only illustrative and should be understood as a ceiling for the actual effects, as it is probably difficult to achieve such a low non-performing loan ratio in a setting of lower indebtedness and with significant changes in credit portfolio composition. 17/29 And also because part of the increase in banks’ costs are the result of technology investments, which are allowing banks to adapt to the new environment and are therefore essential. They are also indicative of the measures that banks should be prioritising. Fourth, the role that consolidation can play as a mechanism for harnessing economies of scale and improving efficiency and, therefore, for increasing profitability, is regularly discussed. Added to this is the cost pressure associated with the high IT investments being made to address changes in a competitive environment with new competitors. And also the need for banks to have preferential access to international capital markets to be able to respond efficiently to the implementation of the new post-crisis banking regulations and, especially in Europe, to comply with the MREL requirements. In the last decade the Spanish banking sector has already undergone a very significant consolidation process. Specifically, since 2009 the number of banks has fallen by more than 30%. Looking ahead, potential future consolidation processes should be led by the market, in other words, by value creation for shareholders, while we supervisors should ensure that these processes do not undermine financial stability.

In view of this situation, central banks have responded by further easing monetary conditions. In the case of the European Central Bank (ECB), at our September meeting we resolved to launch a package of measures which included cutting the deposit facility interest rate by 10 basis points (bp) to -0.50%, strengthening forward guidance on interest rates and improving the financing conditions of quarterly targeted longer-term refinancing operations (TLTRO-III). We also decided to resume net purchases under the asset purchase programme at a monthly pace of € billion as from 1 November and without a defined time limit. Our analysis indicates that this package of monetary policy measures provides a substantial monetary stimulus which will help to further ease the conditions of lending to households 2/29 and firms and thus assist the economic recovery of the euro area and, consequently, the sustained convergence of inflation towards our medium-term target. In any event, from the financial stability standpoint, the downward revision of the growth and inflation outlook and the resultant higher expectation that interest rates will remain very low, or will even be negative for a further period pose challenges of at least two types for credit institutions. First, this macroeconomic context will represent a challenge for deposit institutions to recoup levels of profitability more in line with the cost of capital. Indeed, in the last few months market expectations for growth of bank profits have declined.

In a world where attention to our analysis is limited, it may be preferable to keep our ‘audience’ focused on the MPC’s analysis of the outlook for output and inflation. Sometimes that analysis lends itself naturally to a contingent statement, by individual members, of a possible path for policy. I have already referred to one such example around the end of 2003/beginning of 2004. In a similar vein, circumstances may arise where we explained the broad path for inflation we were trying to deliver. For example, a shock to the economy might be sufficiently nasty that returning inflation to target on the usual timetable would threaten undesirable volatility in output. We might then want to set policy in a way that accepted deviations from the inflation target for a period, while committing to achieve the target in the medium run. Related to that, our mandate makes specific provision for communication if inflation outturns were to miss our target of 2% by more than one percentage point. In those circumstances, the Governor of the Bank would be obliged, as part of the Committee’s public accountability, to write an open letter to the Chancellor of the Exchequer explaining why inflation had deviated from target, the Committee’s plan for returning to target, and its time horizon for doing so. Such circumstances have not yet arisen, but they illustrate that provision is made for theCommittee to explain what commentators would call its strategy.

Government has also set a financial access target of 50 percent by the end of 2009 under the Performance Assessment Framework (PAF). The holding of this Conference is therefore, consistent with our aspirations to increase levels of financial access in the country. As earlier alluded, the aim of this Forum was to bring together practitioners and regulators of microfinance to learn from each other in order deepen and broaden financial services provision. In this regard, the forum has a number of eminent persons who will share with us their unique experiences. 2 BIS Review 46/2009 Ladies and Gentlemen: This FIA programme is customized and among the issues that will be addressed include the following: 1. Emerging best practice in microfinance; 2. Self-help group models for microfinance, which may be viable for countries in our region; 3. Microfinance product development knowledge and risk management strategies; and 4. Specific micro-credit practices for agricultural-related businesses, which is relevant for most our countries’ strategies to diversify into agriculture. Distinguished Participants: We consider the timing of this workshop appropriate given the impact of the on-going global financial crises. I therefore, call upon all of you to take advantage of this unique opportunity to learn and share experiences, so that we can come up with efficient and effective ways of advancing financial inclusion in our respective countries.

In these respects it is also possible to produce various numerical examples and simulations. Alternative assumptions can be made, for example, about what would be a reasonable exchange rate in the long run and test them against different underlying cyclical developments. An important issue for the Riksbank here is the effect on inflation. If it is found that inflation would be unduly high, for example, fiscal policy might have to be tighter. The interaction of the business cycle, for example, and the choice of fiscal policy and exchange rate can be studied in this way. The discussion would benefit from several independent analyses of this kind. Economic policy in ERM2 If Sweden becomes a full participant in the monetary union, the conditions for Swedish stabilisation policy will change. The task of conducting a stabilisation policy for Swedish needs would then rest - to the extent that it is considered desirable - entirely on the Swedish parliament or Riksdag and the Government. I want to underscore that this change already takes place essentially during the period in ERM2. It should be noted that a good state of readiness is absolutely essential. At the Riksbank we usually reckon that it takes between 1 and 2 years for changes in monetary policy to elicit their maximum effect on the rate of inflation. We do not know exactly what the corresponding time lag is for the real economic impact of fiscal policy.

Purchasing power parity, which is the simplest exchange rate theory and presupposes, it is important to note, that the real exchange rate is constant over time, states that movements in nominal exchange rates are explained by differences in relative rates of inflation. It turns out, however, that Sweden's higher average rate of inflation in this period compared with the euro area explains only half of the krona's depreciation (Table 1). In other words, purchasing power parity tells us that one euro ought to cost about 6.75 kronor, which is quite a lo ng way from the current SEK/EUR rate. The rest of the krona's depreciation accordingly mirrors a weakening of Sweden's real exchange rate with the euro area, that is, a trend where Swedish goods become cheaper than goods produced in the euro area. The path of the real exchange rate is influenced by a number of so-called fundamental variables. Since the real exchange rate is basically an 'ordinary' relative price, the explanatory variables are, of course, the fundamental conditions for demand and supply in the domestic economy relative to the rest of the world. Relative GDP growth or relative productivity growth are commonly used. The hypothesis is that real exchange rates appreciate in countries where growth and productivity gains are higher than elsewhere. The mechanisms behind this relationship differ somewhat, depending on the model, but it does seem to be supported empirically. This can be summarised by saying that, as Swedish tourists often discover, "Goods are more expensive in rich countries".

In this way, recruitment is meritocratic, a Darwinian survival of the fittest. Yet most organisations are not singular. They are team sports. What matters most to organisations is collective performance, not individual brilliance. Most successful ones are not a Darwinian dog-fight. Diversity is important precisely because it improves collective functioning, over and above individual ability – recall the “Page equation”. Diversity is, by definition, a collective concept. That lays bare a potential tension between recruitment practices, which typically focus on the characteristics of the individual, and organisational success, which typically relies on the characteristics of the collective. This disconnect is, interestingly enough, the self-same one exposed by the global financial crisis. Pre-crisis regulation was also individually-focussed. Regulators looked at banks one by one. Each of them individually had good CVs, strong social skills, were smartly dressed. Yet the collective consequence was a financial system in which everyone looked the same, thought the same and placed the same bets. That lack of diversity left the whole system vulnerable to collapse which, of course, it duly did. Since the crisis, regulators have learned their lesson. Regulation has taken on a systemic orientation, with regulatory measures calibrated to risk across the financial system as a whole. That means regulators taking measures which promote system-wide diversity, such as encouraging new entrants into the field with new business models. In short, financial regulation these days seeks to take explicit account of the social externalities of systemic risk.

A second – and important – explanation can be seen in the red shaded area of this chart (slide 8). Domestically focused banks have reacted to the decline in liability margins by increasing asset margins by around 50 basis points. Specifically, following the introduction of negative interest, they raised rates for long-term mortgages (shown here in blue), while returns on long-term market investments (illustrated here using the ten-year swap rate in yellow) continued to fall. The banks have since managed to keep asset margins high, notwithstanding the fact that market rates have continued to decline. But there is another, equally important explanation for the limited impact of the low interest rate environment on the profitability of domestically focused banks: these institutions have increased their risk appetite. This applies particularly to affordability risk (typically measured using the loan-to-income ratio) in lending and to interest rate risk from maturity transformation. Let’s take a closer look at the current risk situation with respect to domestically focused banks in Switzerland. Affordability risk refers to cases in which a borrower can no longer afford to make interest and amortisation payments for a loan under unfavourable conditions. 5 A representative quarterly survey conducted by the SNB indicates that a substantial share of new mortgages exhibit high loan-to-income ratios. Moreover, this share has been rising since 2013. 6 Put simply, interest rate risk is the risk that banks will suffer losses as a result of rising interest rates.

The most important result of international efforts aiming at sound financial markets was the approval of modern risk management techniques as a part of regular financial intermediation process. In this context the Basel II, the new capital adequacy framework, is a very important outcome of the action taken in the international arena. Although, the main aim of the original Basel Accord, which was applying institutionalized and international standards to the global financial system, has not changed in the Basel II Accord, the Basel II puts more emphasis on the risk management aspect of the financial intermediation process. It is expected that a sound and resilient risk management in the banking sector would also lead to more efficient risk management in the real sector. Therefore, in this way, as the financial system becomes more stable, less pro-cyclical and reinforced against shocks, more sources will be available for the real sector. However, it should also be considered that healthy and efficient risk management requires more than the three main pillars of the Basel II Accord. A good understanding of the risks that a financial institution might encounter, a clear definition of risk taking procedures, compliance of risk taking decisions with the strategic goals of the institution, ensuring the risks are within the limits that were set by the management and adequate capital for given risk structure are other essential elements for a more significant advance in risk management in financial institutions.

Only then are we able to exercise thoughtful judgment. There will be a balance between supporting innovation and technology use, while pre-empting new or heightened risks that these may present. MAS takes an even-handed approach by providing a regulatory regime that is risk-proportionate across the range of institutions involved in regulated financial activities. We seek to provide the environment, and even to encourage new FinTech and other players to establish themselves to compete, collaborate and innovate. We allow for adoption of technology and innovation in 3/5 BIS central bankers' speeches financial services, especially those that hold promise in raising efficiency, in creating new opportunities, in enabling new or value-adding services or simply to manage risks better. MAS adopts a “materiality and proportionality” test, and seeks to right-size regulations to be fitfor-purpose; for both traditional as well as new business models, according to the risks the activity poses. For example, in the new Payment Services Bill that MAS has consulted on, regulatory requirements for payment activities will be differentiated according to the risks that specific activities pose rather than apply a uniform set of regulations on all payment service providers. Regulation comes in when the risk posed becomes material or crosses a threshold. The weight of regulation must be proportionate to that risk. Singapore is one of the first jurisdictions to have established regulatory sandboxes where firms can experiment their innovative solutions in a contained environment, with access to a limited pool of actual customers.

Collateral which the banks in many cases were lacking during the crisis, or at any rate to the extent needed to compensate for the enormous decline in funding on the international capital markets experienced by many banks – in Sweden and abroad. So central banks were forced to change the regulations so that the banks could pledge collateral with a less reliable value. But this solution is not sustainable in the long run, as it exposes the central bank – and ultimately taxpayers – to unacceptable risks. In practice, it means that the central bank is forced to act as dumping ground for bad assets as soon as there are problems in the financial markets. Of course, we want to avoid such situations in the future, and this is why the Basel Committee has produced a number of regulations aimed at making the banks less sensitive to liquidity problems. So what do the regulations entail? In future, a certain part of the borrowing must be longer term. Moreover, it must come from more stable sources of funding. In concrete terms, the regulations mean that one multiplies the amount the bank borrows from each type of funding source by a stability factor – in roughly the same way as for risk adjustment of the value of assets when calculating capital requirements. This gives a stability-adjusted funding profile for each institution that should better match the maturities for the banks’ lending.

Barbro Wickman-Parak: New international regulations for banks – a welcome reform Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, at a meeting with Tjänstemännens Centralorganisation (TCO), Stockholm, 26 November 2010. * * * Over the past three to four years the world has undergone the largest financial crisis since the Great Depression of the 1930s. The scope of the crisis and its catastrophic economic consequences quickly led to the realisation that something had to be done to avoid this happening again. As soon as the worst phase of the financial crisis was over, extensive work began on correcting the inadequacies in the regulatory systems that had come to light. The reform work is conducted in many forums at both national and international levels. And not least at EU level. But today I shall focus on the reform work in the Basel Committee on Banking Supervision, in which both the Riksbank and Finansinspektionen (the Financial Supervisory Authority) participate. This Committee is the international body that has established frameworks for bank regulation since 1974. In line with internationalisation that has taken place in recent decades, banks in different countries have become increasingly dependent on one another. This also applies to our Swedish banks, which to a great extent fund themselves on the international markets. Both Swedish banks and Sweden in general therefore benefit from banks around the world becoming more resilient.

In Switzerland by contrast, the collateral accepted in 99.8% of the transactions in the secured interbank market corresponds to the definition of the SNB collateral basket, that is, to the collateral accepted by the SNB in its own repo operations. The SNB’s collateral policy is based on a transparent, essentially rule-based approach. This means that when securities are excluded from the list of acceptable securities 2 See Diamond and Dybvig (1983). “Bank runs, deposit insurance, and liquidity”, Journal of Political Economy 1983, vol. 91, no. 3, pp. 401–19. 3 Typically, the total amount of the deposit will be some amount less than the value of the underlying asset, with the difference called a “haircut”. For more details, see Gorton and Metrick (2009) “Securitized Banking and the Run on Repo”, NBER Working Paper Series (NBER Working Paper No. 15223), August 2009. 4 This could be a reasonable approximation. See Gorton (2009): “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007”, Prepared for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference, May 2009; and Gorton and Metrick (2009). 5 Chart 4 illustrates the average repo haircut on structured debt. This is a good indication for an overall “haircut index”, as shown by Gorton and Metrick (2009). 6 Another important difference is that the Swiss repo market is conducted on a highly efficient automated and centralised platform while US repo transactions are traded over the counter. 7 Hördahl and King (2008).

The results of this appropriate policy mix, which placed the burden of the response to the crisis on the shoulders of the SNB, can be seen in the remarkable accounts of the Swiss general government: public surpluses in both 2009 and 2010 (+0.8% and +0.2% relative to GDP, respectively) and a reduction of the debt level to less than 40% of GDP.11 One reason for the misperception is probably the view, propagated by the academic literature on the subject, that central bank interventions in foreign exchange markets are geared to achieving an exchange rate target and that they are generally unsuccessful at doing so. As has been repeatedly emphasised, this was not the objective for the SNB in 2009–2010.12 The SNB’s objective was to provide appropriate monetary conditions to the Swiss economy. A given exchange rate level in that context may be maintained for a limited time period, but it is subject to review as macroeconomic conditions evolve. And as the SNB’s experience in 2009 demonstrates (illustrated in Chart 7), influencing the exchange rate level temporarily is feasible and makes sense at the zero lower bound when the traditional monetary policy instrument is exhausted. III. Conclusion: how to judge whether interventions were successful? All actions by the SNB have to be considered in the light of its mandate. The primary goal is to ensure price stability, while taking due account of the overall economic situation. In this way monetary policy contributes to creating an environment that fosters prosperity and economic growth.

In 2006, as the strength of economic growth progressively alerted to the emergence of inflationary pressures, the monetary policy stance became less expansionary in virtually all economies, developed and emerging alike, and inflation rates held at low levels overall, without any substantial passthrough of higher energy prices to core inflation being discernible. Yet the reduction in spare capacity and labour market tightening will heighten inflationary pressures in many economies, and further oil price rises cannot be ruled out. Moreover, as the business cycle matures, the task of monetary policymakers may become more difficult, especially for certain central banks like the Federal Reserve which will have to square inflationary risks with those stemming from the economic slowdown. The euro area As already stated, the euro area economy finally managed to emerge from the phase of low growth experienced in recent years. GDP for the area grew at a rate of 2.9% in 2006, almost double that of the previous year and the highest rate since 2000. For the year as a whole, inflation, measured by the rate of increase of the HICP, stood as in 2005 at 2.2%, much influenced over the course of the year by oil price movements. Core inflation moved mildly upwards during the year, perhaps reflecting some BIS Review 67/2007 1 minor indirect effect of the rise in energy prices against a background of strengthening activity and employment. Nonetheless, there has been notable wage moderation so far, perhaps in response to greater labour market flexibility and growing competitive pressures worldwide.

Today, I would like to give my views on the challenges that lie ahead this year. I believe that the four main challenges are to: • Adapt to an environment that is still changing rapidly; • Resolutely pursue efforts to strengthen the resilience of the financial system by preparing for and implementing new regulations; • Further improve the competitiveness of the Paris financial centre; • Continue to support the economy by ensuring the best possible financing conditions. 1. A rapidly changing legislative and regulatory environment First, your working environment will continue to evolve rapidly, in terms of both international financial regulation and France’s legislative framework. 1.1 A few words on the draft banking reform law in France The financial crisis highlighted some major shortcomings of international banking and financial sector regulation as well as the inadequacy of the tools at the supervisory authorities’ disposal to reduce and address risks. The draft banking reform law reflects the commitment of the President of the French Republic to separate activities that are useful for the financing of the economy from speculative activities, which will either be ring-fenced or banned. This law sets out to enhance the protection of deposits and the security of market activities while – and I believe that this is also particularly important – striving to ensure that you are still able to offer a broad range of financial services that allow economic agents to hedge risk, borrow or invest.

But, the auditor’s role is simply to function as a pointer and not a financial crusader. If he chooses to function as a financial crusader, he may not only embarrass his masters, but also endanger his own position as well. Without any penal power vested in the auditor, it is also practically impossible for him to act as a penal authority. The auditor is a watchdog and not a blood hound Businesses today, specifically those involving banking institutions, are very much complex in nature. Hence, one may rightly question whether the old adage relating to auditing could still serve a purpose. Though the complexity of the businesses has grown tremendously, I feel that the old adage relating to auditing is still valid and relevant. It has demarcated the boundary within which an auditor has to operate. If he steps outside this boundary, the most likely consequence would be the creation of a hostile atmosphere for the auditor to perform his duties. No organization, whether big or small, could function effectively and efficiently in that scenario. This caution is equally valid for both external auditors and internal auditors. The role of the internal auditor Internal audit, as against the external audit, is the first safeguard available to the management and owners to run their business free from financial irregularities and misbehaviour. Internal auditor is available on site throughout the period and, therefore, can play his role as an effective watchdog continuously.

The main objectives are to reduce the probability of failure of such institutions and, in case a failure occurs, to reduce the impact on the financial system. In September 2010, the Governors and Heads of Supervision agreed that systemically important financial institutions should have additional loss absorbing capacity. Work is currently underway on how to define institutions that are systemically important, and how to determine the capital surcharges, contingent capital and other elements to limit systemic fallout. With the shadow banking system, we have to ensure that tighter regulatory rules do not provide incentives for financial institutions to shift their activities to unregulated areas. Oversight of the shadow banking sector needs to be improved. The FSB has already done valuable work – supported by the ECB – on shadow banking. In this context, the ECB is providing the Financial Stability Board (FSB) with flow of funds data on the composition of the financial sector concerning the euro area. The concrete challenges lie in the establishment of a suitable definition of shadow banking and outlining possible regulatory options to address the risks posed by this sector. Given the background of the crisis, regulatory effort on financial institutions has focused on banking, but there is important work underway also for other financial institutions, such as the further specification of the capital adequacy regime for insurance companies (“solvency II”). II. Market regulation Let me turn to the second building block, namely regulation of financial markets. This area is as challenging and as complex as banking.

Prudential controls also limit bank exposures to exchange rate risk, thereby reducing a source of instability in the context of a pegged exchange rate regime with international capital mobility. In conclusion, EU accession and, in particular, the adoption of the euro would cement the strong links that already exist between Malta and the Union. From the Central Bank’s point of view, the prospect of EMU membership will reinforce the current commitment to price stability through the use of an exchange rate peg. Overall, the adoption of the euro would represent a logical step for an economy already closely integrated with that of the EU and influenced by the monetary policy of the ECB. We are, however, under no illusions: achieving this goal will require the continued pursuit of fiscal consolidation, structural reform and financial stability. But we are confident that these challenges can be met. 2 European Central Bank, ‘Financial Sector Developments and Convergence in Accession Countries: An Overview’, December 2001 4 BIS Review 46/2002

Mugur Isărescu: Gaps and economic crises in South-East Europe – present and past Opening speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the conference "Gaps and Economic Crises in South-East Europe: Present and Past", Bucharest, 28 October 2016. * * * Distinguished guests, Ladies and gentlemen, Allow me to warmly welcome you to the National Bank of Romania. The board of the National Bank of Romania and I are glad to host, for the second time, the Annual Conference of the South-East European Monetary History Network. Five years ago, in March 2011, when NBR hosted this event for the first time, we expressed our interest and support. We firmly believe that a good understanding of history, of how our forerunners addressed issues linked to monetary and economic developments, sets the foundation for finding solutions to present day challenges. This conference brings together central bank representatives from Albania, Austria, Bulgaria, Greece, Serbia and Romania, as well as prominent members of academic and scientific European circles. I welcome you to Romania and hope you will have opportunity to enjoy your brief stay. This year, the meeting is focused on economic cycles and economic crises in South-East Europe, both past and present. This is a generous and challenging research topic. All the more so, there has always been a permanent concern in the past 150 years for the policy makers in the region to reduce the economic gaps between the countries in South-East Europe and the developed ones.

This underlines my earlier point that strong institutions of prudential policy (macro and micro) are important to enable these decisions to be made.

As mentioned earlier, reflecting large fiscal imbalances and a loss of confidence on the part of investors, government bond spreads increased dramatically for some euro area countries and became very volatile in 2010. The willingness of investors to support governments’ financing needs declined, with the result that the governments of three euro area countries have since then required financial support by means of joint EU/IMF programmes. These programmes are subject to strict conditions on fiscal adjustment in order to restore public finances to health. However, the need to pursue more ambitious consolidation targets is more general. It is striking to see that there are currently only two euro area countries that are not subject to an excessive deficit procedure. Fiscal consolidation is essential to ensuring an environment conducive to output growth and price stability. Looking ahead, implementing fiscal consolidation and securing the sustainability of public finances are among the major challenges faced by policy-makers. The consolidation of public finances requires a comprehensive policy comprising: (i) the timely correction of excessive deficits; (ii) the reduction of government debt to more sustainable levels; and (iii) the reorganisation of banks in order to limit strong links between the balance sheets of governments and financial sectors, which typically result in the socialisation of banks’ liabilities in times of crisis. These measures need to be complemented by pension and healthcare reforms to alleviate the fiscal burden arising from population ageing.

Erdem Başçi: Commodity price volatility Speech by Mr Erdem Başçi, Governor of the Central Bank of the Republic of Turkey, at the “G-20 Commodity Price Volatility Conference”, Istanbul, 13 September 2011. * * * Dear Colleagues and Distinguished Guests, Today I will discuss commodity price volatility, a topic which has vital importance for the global economy and thus for policy makers. In my speech, I would first like to discuss the possible sources of commodity price movements and then elaborate on the approach of the Central Bank of Turkey in dealing with commodity price changes in the past few years. Commodity markets cover a wide range of raw materials such as oil, metal and agricultural products. These commodities have different characteristics not only in terms of trade volume, supply and demand structure but also in terms of their exposure to financial market transactions. Understanding the sources of the volatility in prices is essential in order to give appropriate policy response. The challenges posed by high and volatile commodity prices are important worldwide, yet they are more immediate for emerging markets. For instance, the share of food in the typical consumption basket is higher in these economies than in advanced economies. The average weights of food in the consumer price index in emerging market countries and in developed countries are around 30% and 13% respectively. Besides, especially for the net importers of commodities, high and volatile prices pose significant risks on balance of payments and sustainability of growth in developing countries.

Initially, this strategy worked well and medium term inflation expectations were anchored despite the surge in headline inflation. Later, however, the uptrend in commodity prices turned out to be more persistent than anticipated, leading inflation to exceed the targets for two consecutive years by a significant margin, primarily due to the sharp increases in commodity prices. In response, we decided to set the inflation targets by mid-2008 for the following three years on a declining path. In this context, the inflation targets were set as 7.5, 6.5, and 5.5 percent, for the years 2009, 2010, and 2011 respectively. Later on, the inflation target for year 2012 was set at 5% in year 2009 and was kept at 5% for the following year 2013. These targets allowed us to accommodate relative price changes driven by global developments, which itself is the optimal response from a welfare perspective. Second, we wanted to anchor inflation expectations by setting a feasible and credible path for the medium term rather than leaving this job to central bankers’ own inflation forecasts in the interim period. The plan worked reasonably well. The deterioration in inflation expectations stopped right after announcing these targets and the targets were undershot in 2009 and 2010. During this period, many other central banks opted for changing their forecasts significantly above their target for a prolonged period of time.

Early last year, renminbi was estimated to represent 1% of the global foreign exchanges reserves, and the share will grow. Recently, we have also started to see interests in SDR bonds, with the inaugural issuance by the World Bank in China’s domestic bond market, followed by subsequent interests from commercial entities. Having this seminar thus at this juncture is indeed very timely. Uneven global growth with gravity shifting to Asia, particularly China For the past couple of years, the global economy had softened, with a marked slowdown observed throughout both the developed and emerging economies. The International Monetary Fund (IMF) recently revised their global growth forecast to 3.1% for 2016, from 3.2% previously, reflecting softer-than-expected growth in advanced economies and the impact of Brexit. Global trade continued to be subdued, with the World Trade Organization (WTO) expecting only a 1.7% expansion in 2016, marking the slowest pace of global trade growth since the global financial crisis. While China is also contending with moderation in growth during its economic transition, it continued to become the largest contributor to global growth. The gravity centre of global growth has for now, shifted to emerging economies, particularly Asia. China’s slowdown is not all negative – as China’s economic transformation, through various efforts to restructure its economy and internationalise its markets, are important towards a more sustainable path of development. Furthermore, a 6.7% growth rate is an economic performance many would aspire to.

Part III: The side effects of improved incentives Will higher capital restrict bank lending? Let me now turn to the examination of some of the potential side-effects of the measures described in the preceding section. A legitimate first question is whether improving incentives in the way we have described could have undesired indirect effects such as modifying the banks’ lending behaviour. An argument often heard is that higher equity requirements would force banks to set aside, or hold in reserve, funds that could otherwise be used for lending. Here the main observation is that extremely risky gambles should now be avoided as a result of improved incentives. There has been excessive risk-taking in the past; there should be less of it under the new incentives. Beyond this intended effect, which concerns only the most risky activities, the form of financing used by an institution – in itself – should have no impact on the profit-maximising business model. That is, as far as activities and revenues are concerned, imposing extra capital does not change the perspective of the decision-maker beyond restoring the incentives for balanced risk-taking. The exception is the case of marginally profitable activities, and here only to the extent that the cost of financing is increased (more on this later). Provided that activities are profitable, and bearing in mind that in banking the targeted return on equity is not only highly positive but incomparably higher than in other sectors of the economy, the cost of financing should not be the main determinant of activity.

Chart 3 shows the share of HICP items experiencing price falls, year on year. In terms of expenditure weights, around 20% of the HICP items reported negative annual growth rates in May 2009. This share has increased recently but it remains not so distant from the average of the last decade. Excluding food and energy, the share was lower at 14%. The share of items with negative inflation is subject to significant volatility, partly owing to seasonal factors, such as sales in the shops at certain times of the year. This makes the measure more difficult to interpret. However, it is possible to take account of these factors by comparing the proportion of items with negative inflation rates in any given month with the historical average for the same month. As you can see from chart 4, the share of items with negative inflation rates (excluding energy and food) in the year to May was only a touch higher than the historical average, further confirming that there have been no widespread price cuts so far. Let me dwell on this point. Chart 5 shows the distribution of the annual rates of change in all the items included in the HICP basket, weighted by their expenditure share. This also suggests that price cuts are not generalised, but are concentrated on few items. In May this year the bulk of the distribution – around two- thirds – showed inflation rates above 1%, with some items (heat energy) recording an inflation rate above 10%.

To conclude, the ECB is committed to its primary objective of maintaining price stability, which has been defined as a rate of increase of the general price level of less than 2% but close to 2% over the medium term. This requires a constant monitoring of all inflationary risks, both upward and downward, on the basis of a series of indicators and analytical instruments. Ultimately, the firm anchoring of inflation expectations remains the best way to check the appropriateness of monetary policy in an uncertain environment. Thank you very much for your attention. 8 BIS Review 81/2009 BIS Review 81/2009 9 10 BIS Review 81/2009 BIS Review 81/2009 11 12 BIS Review 81/2009 BIS Review 81/2009 13 14 BIS Review 81/2009 BIS Review 81/2009 15 16 BIS Review 81/2009

Aaronson, Daniel, and Andrew Jordan, 2014, “Understanding the relationship between real wage growth and labor market conditions(pdf),” Chicago Fed Letter, Federal Reserve Bank of Chicago, No. 327, October. Aaronson, Daniel, and Daniel G. Sullivan, 2001, “Growth in worker quality(pdf),” Economic Perspectives, Federal Reserve Bank of Chicago, Vol. 25, Fourth Quarter, pp. 53–74. Acemoglu, Daron, and David H. Autor, 2011, “Skills, tasks and technologies: Implications for employment and earnings,” in Handbook of Labor Economics, Orley Ashenfelter and David Card (eds. ), Vol. 4B, Amsterdam: Elsevier / North-Holland, pp. 1043–1171. 15 8 Lockhart (2014). BIS central bankers’ speeches Autor, David H., 2011, “The unsustainable rise of the disability rolls in the United States: Causes, consequences, and policy options,” National Bureau of Economic Research, working paper, No. 17697, December. Burkhauser, Richard V., and Mary C. Daly, 2011, The Declining Work and Welfare of People with Disabilities: What Went Wrong and a Strategy for Change, Washington, DC: AEI Press. Charles, Kerwin Kofi, Erik Hurst and Matthew J. Notowidigdo, 2013, “Manufacturing decline, housing booms, and non-employment,” National Bureau of Economic Research, working paper, No. 18949, April. Daly, Mary C., and Bart Hobijn, 2014, “Downward nominal wage rigidities bend the Phillips curve(external-pdf),” Federal Reserve Bank of San Francisco, working paper, No. 2013–08, January. Dice Hiring Indicators, 2014, “Average job vacancy duration is 25 working days (externalpdf),” release, Chicago, August. Gordon, Robert J., 2013, “The Phillips curve is alive and well: Inflation and the NAIRU during the slow recovery,” National Bureau of Economic Research, working paper, No. 19390, August.

Charles Bean: Business surveys and monetary policy Speech by Mr Charles Bean, Deputy Governor (Monetary Policy) of the Bank of England, at the CBI Industrial Trends Survey 50th Anniversary Reception, Centre Point, London, 24 July 2008. * * * Good evening! It is a great pleasure to be asked to say a few words to mark the 50th birthday of the CBI’s Industrial Trends survey. The birthday boy and I have, in fact, been acquainted with each other for over thirty years – from when I started my professional career in 1975 as a forecaster in the Treasury. In those days, the quarterly Industrial Trends survey was really the only game in town as far as business surveys go. Since then, the field has become more crowded, but the Industrial Trends survey remains a key source of information about business developments. To celebrate the survey’s birthday, I thought that I might say a few words tonight about the part played by business surveys, and intelligence about business conditions more generally, in our setting of Bank Rate each month. Because our interest rate decisions affect UK economic activity and inflation with a rather long, and sometimes rather variable, lag, there is nothing much that we can do to affect the current and near-term rate of inflation. That is already largely baked into the cake. Instead we have to focus on inflation prospects in the medium term – that is, two years or so ahead.

Today, low-inflation policies seem to enjoy high credibility in most countries, which is indicated in part by the fact that the rise in the oil price at least so far has had small effects on inflation expectations. The risk of an oil price rise spreading to wages and other prices in the economy is therefore also likely to be low. Furthermore, in the case of Sweden it should be added that inflation is rising from a low level and that agreements in the labour market have been settled for 2005 and 2006, further reducing the risk of contagion effects via the jobs market. To sum up: the fact that the increase in the oil price is partly a demand-driven phenomenon, that the dependency on oil has decreased and that inflation-targeting regimes enjoy high credibility suggests that the higher oil price should mainly be reflected in a temporary, limited rise in inflation and that the effects on the real economy should be fairly small. If this is correct, the general economic and inflationary developments are more significant for monetary policy than developments in the oil price. This brings me to a discussion of the broad outlook for the Swedish economy in the years ahead. Economic activity in Sweden Despite the Riksbank’s relatively optimistic outlook for the Swedish economy compared with other forecasters, we have gradually revised up our forecasts in the past year.

It is also possible that the increase in debt is partly an adjustment 4 BIS Review 51/2004 to an economy with - compared with before - better functioning financial markets, low inflation and expectations of relatively low interest rates in the future. Most indications also suggest that the majority of households would be able to service their debt even if interest rates were to rise sharply. Nor does it appear likely that banks and mortgage institutions would risk incurring losses that would appreciably affect their capital bases. This wasn’t the case either during the financial crisis at the beginning of the 1990s. While the banks’ losses during the crisis were largely propertyrelated, they did not stem from lending against collateral in housing but from loans secured by commercial properties. And prices of commercial properties have this time not at all shown the same development as prices of residential property. On the contrary, they have fallen during the economic decline and have still not recovered. What remains then are the effects on the economy in general. In this respect it is perhaps first a question of whether the build-up in debt and developments in house prices should prove unsustainable, that the prices therefore should fall and that this on the whole should result in a decline in the real economy in general. The risk of this happening is of course related to your view of residential property prices.

This could in turn fuel asset prices, thereby increasing the risk to financial stability which could undermine the process of economic recovery. Indeed, some countries in the Asian region are already facing these issues and have introduced measures to reduce the risks associated with capital inflows. For Malaysia, however, it should be noted that the financial industry, the private sector and the country have the capacity to manage these challenges, given the stronger overall financial conditions in the country, low levels of corporate leverage, a sound banking system and a strong external balance of payments position. Beyond the immediate priority of establishing economic recovery and preserving macroeconomic stability, it is also acknowledged that the Malaysian economy currently stands at a pivotal juncture. In order to secure continued medium and long-term growth and development, the structure of the economy has to undergo several important changes – changes that would better position Malaysia in meeting the new challenges and reaping the opportunities that the future Asian and global landscape brings. Foremost, the events of the past two years have brought to the forefront the importance of having a more balanced and diverse model of development. Malaysia’s openness and integration with global trade and investment flows is an important source of our economic strength, and must remain so going forward. However, given the more dispersed growth prospects of the global economy in the future, it is important that the export structure of Malaysia evolves to be more diverse too.

The ASEAN Finance Ministers have agreed in 2003 on the Roadmap on Monetary and Financial Integration of ASEAN in the areas of capital market development, capital account liberalisation, financial services liberalisation and ASEAN currency cooperation. In 2007, the ASEAN Central Banks established a task force, chaired by Malaysia, to chart the milestones and timeliness for ASEAN financial integration. To complement the AEC Blueprint, leaders in early 2009 have agreed to an Implementation Plan to promote the development of an integrated capital market within ASEAN. These initiatives along with other regional efforts will effectively transform ASEAN into a single integrated market, and thus strategically position ASEAN as an important economic zone with a role to play in contributing towards global stability and growth. With the broad diversity within Asia, the pace of development will not be equal for all economies. The general agreement is that growth within Asia will be led by China, India and Korea. In a large part, the shape of Asia’s future will be dictated by the dynamic engagement of these prominent growth drivers with other Asian economies and the rest of the world. The prospects for ASEAN to thrive would depend crucially on its ability to engage with these growth drivers and seize on the opportunities that they offer. However, ASEAN must also recognise that at the same time, the level of competition will further intensify within Asia.

M R Pridiyathorn Devakula: Upon acceptance of the award for Central Banker of the Year - Asia 2006 Statement by Mr M R Pridiyathorn Devakula, Governor of the Bank of Thailand, at the Banker Magazine Luncheon Seminar, Bangkok, 1 February 2006. * * * Distinguished Guests, Ladies and Gentlemen, Back in June 2001, when I landed at the job of Governor of the Bank of Thailand, I was fairly confident that I would be able to do well in the area of bank supervision, given the considerable exposure I’ve had as a commercial banker. I also had some ideas on how to move forward the resolution of NPL and return banks to profitability. But I was a banker and not an economist by profession. My expertise in business administration made me a bit uneasy on matters concerning monetary policy, as I felt that I did not have enough macroeconomic background to master the monetary policy issues. However, I was really fortunate to have a highly competent Monetary Policy Committee as well as BOT staff to support me in this area. Indeed the depth of knowledge and the quality of analysis provided by BOT staff are materials which I can always rely on. All I have to do during the past 4½ years is to pay close attention to their presentation, data analysis and proposals.

As the country with the largest circulation of banknotes and coin in the bimetal system, France played a key role in this complex system at the international level. Things are rarely as simple as they seem. The 19th century is often depicted as a time when the international system was based on a single metal currency. However, this was not the case. Until 1873, it worked with a complex bimetal system, based on gold and silver. Let me turn now to today’s financial and monetary world. I will first present the Banque de France view on gold and follow with comments on the euro after 18 months of its existence. I. Gold A. The Banque de France’s view on gold is based on three main pillars: • We are in favour of gold holding • We are against gold selling • We have a very prudent and conservative approach to gold lending 1. Gold holding The Banque de France is a major gold holder (with more than 3,000 tons). The creation of the single currency has in no way modified our policy and motivations for holding gold, which remains in our view an important reserve asset. Let us review the reasons why central banks want to hold gold. What is the rationale for holding gold, a non-interest bearing asset, given that there is no more official role for gold since the collapse of the gold exchange standard?

Theoretical models often assume the existence of a central bank reaction function. A well-known reaction function can be a powerful tool in stabilizing output and inflation because yield curves can adjust in anticipation of future policy in line with the evolving outlook for the economy. To return to my football theme, Mervyn King referred to this as the Maradona theory of interest rates. But credible reaction functions don’t fall from the sky and need to be earned by communicating and acting consistently through time. We are and will remain predictable for our stakeholders. Through its forward guidance, the Governing Council has also indicated its intention to move gradually and in accordance with the data. Faced with uncertainty about the strength of the transmission mechanism, we should be guided by pragmatism - the level of inflation relative to the medium-term objective and gradualism. The final C is for clarity. Central bankers should try to spell out what they will and won’t do as much as possible. On the first part, we were clear in Riga; on the second part, let me stress that we cannot fully compensate for the uncertainty created by other policy-makers; nor can we fully offset their effects. We have shown in the past few years that monetary policy is flexible, and we have been willing to use every instrument within our mandate to respond to too low inflation.

But once public debt reaches levels at which its sustainability comes into question, for some financial investors at least, there is the risk of self-fulfilling crisis. This uncertainty can weigh heavily on investment and growth. III. Monetary policy response to policy-induced uncertainty How should central banks respond to this policy-induced uncertainty? I would like to return to the three C’s I mentioned earlier: credibility, consistency and clarity. Page 5 sur 5 To protect our credibility, we need to stick to our mandate of price stability. And in this regard I would say that we are more certain about the path of inflation than we are for growth. A protectionist shock would be undoubtedly bad for growth but the effect on inflation is more ambiguous, at least in the short run. A persistently high oil price would as well be negative for growth but contribute to inflation. Sticking to our mandate also means no fiscal dominance. The relationship between monetary and fiscal policy ultimately depends on who determines the price level. The risk with fiscal dominant regimes is that inflation rises in line with public debt because people expect it to be eventually monetized by the central bank. Modern central banking is unambiguous on this point – we cannot have fiscal dominance and the path of inflation is set by the central bank. Not only are central banks forbidden from monetary financing, the timing of monetary policy decisions is not determined by the fiscal problems of member states. The second C is consistency.

I would only like to mention, as an example of fruitful co-operation, that the Committee of European Securities Regulators (CESR), set up last year as a follow-up to the Lamfalussy report, recently embarked with the European System of Central Banks on considering standards to be applied to the European securities settlement and clearing systems. In the field of financial regulation and supervision, the Council of Economic and Finance ministers (ECOFIN) had mandated, last May, the Economic and Financial Committee (EFC) to make proposals concerning the structures for financial regulation supervision and stability at the European level. The framework currently under consideration has the objective of extending the arrangements that are already in place for securities regulation to the other financial sectors, based on existing interinstitutional agreements. Of course, the sectoral specificities are recognized, and especially those of the banking sector, through the appropriate participation of all national central banks in the arrangements concerning the banking supervision. Indeed, one of the statutory tasks of the Eurosystem is to contribute to the smooth conduct of prudential supervision policies and the stability of the financial system. I am therefore convinced that the involvement of central banks in this issue is absolutely crucial. Economic reform is an ongoing process in Europe, in view of the considerable efforts that still have to be made in order to promote sustainable growth and enduring job creation. At the same time, the European Union has to face another important challenge in the near future : the enlargement process. 2.

And I do not believe we will ever achieve a cashless economy completely spontaneously). And this is something we should take into account in the future, as it will further complicate balancing the vertices of the banking triangle, or the banking trilemma I mentioned earlier. Thank you for your attention. 2 BIS central bankers’ speeches

Bandid Nijathaworn: Post-crisis challenges to emerging markets – what are at stake for central banks? Keynote address by Mr Bandid Nijathaworn, Deputy Governor for Monetary Stability of the Bank of Thailand, at the South East Asian Central Banks (SEACEN)/Bank of England Seminar on Macroeconomic and Monetary Policy Management, Brunei Darussalam, 22 March 2010. * * * First, I want to thank SEACEN, the Centre for Central Banking Studies of the Bank of England, and Ministry of Finance, Brunei Darussalam for inviting me to deliver this morning’s keynote address. The SEACEN’s advanced course and seminar have always been an important learning forum for central bankers in Asia to discuss common challenges as well as to share practical experience. So, I very much appreciate the opportunity to be speaking to all of you today. On a personal note, it has also been a few years since I last spoke at this forum, as my responsibility at the Bank of Thailand as a deputy governor up to October last year changed from monetary policy to financial regulation and supervision. This brief tenure of overseeing financial stability, especially managing the financial system at the height of the global financial crisis, has been a valuable experience and makes me appreciate even more the responsibility, the complexity, and the challenge to central banking. And it is a reflection of this experience that I want to share with you this morning, on the post-crisis challenge to emerging economies and what are at stake for central banks.

My address today will focus on three issues. The first is the lessons learned from past crises. The second is the post-crisis environment and their implications for emerging markets. And, the third is the challenge for central banks going forward. First, the lessons learned. Those of you who have been at central banks fifteen years or more will by now have witnessed at least two major financial crises that put the task of central banks in managing the economy under the spotlight. The first is the Asian financial crisis of 1997–98, and the second is the current global financial crisis. Although the two crises share many similarities as well as exhibit important differences, they both have a common origin in globalization and in the inability of the global financial system to deal effectively with the consequences of globalization. In the Asian crisis, the origin was in external imbalance of individual economies, private sector indebtedness, currency mismatch, and a sudden reversal of capital flows. In the current crisis, the origin lay in a large global imbalance, excessive-risk taking by financial institutions, and the accumulation of large systemic risk. In the context of policy, the two crises have produced many useful lessons on what needs to be done to prevent the recurrence of crises. While there is no shortage of lessons learned, having been at the Bank of Thailand through the two crises, my own list of lessons learned comes down to four important lessons. The first is that nobody is above crises.

One example of this is the use of interest rate swaps to manage the interest rate risk in a portfolio of fixed rate loans funded from floating rate deposits. Without modification of the mixed attribute model, such hedges could actually create, not reduce, accounting volatility, because derivatives are required to be marked to market, that is measured at “fair value”, while loans are generally booked at cost. This to me would seem perverse indeed! Another important example arises with the use of credit derivatives as hedges. This has proved difficult more generally to fit into the IAS 39 framework. I should add that the sheer complexity of the hedge accounting rules is also an issue, as the debate in Europe about the treatment of sight deposits and prepayments, and the problems at Fannie Mae and Freddie Mac in the US, well illustrate. We need to ensure that the rules themselves do not result in perverse behaviour as people try to find a way around them. The way forward So where do we go from here? All of the above factors have complicated the debate on IAS 39. And in my view, the only way forward is first to take a few steps back, before work starts on re-engineering the standard. I believe that many of those interested in the debate would be supportive of this approach.

At the macro-economic level, concern has been expressed that greater use of fair values could have a procyclical impact. Banks’ assets might be marked up in booms, as perceived credit risk declined, so boosting banks’ capital base and capacity for further lending. However, for the concerns about intensifying economic cycles to be realised two linkages would need to operate. First, the impact on bank capital would have to increase the volume of bank lending and, second, the increase in bank lending would need to have significant implications for real activity. Neither linkage can be taken for granted, and in any case discretionary policy action, whether monetary or prudential, by the authorities may mitigate any pro-cyclical effects. As I have indicated, we do, however, need to avoid accounting rules which introduce spurious volatility. An example, to which I will return in a moment, is the hedge accounting under IAS 39. The “mixed attribute” model The drawbacks of fair values in some contexts have led to widespread support in the banking industry for retaining the current “mixed attribute” accounting approach. While IAS 39 requires trading instruments, derivatives and many securities to be measured at fair value, bank loans generally continue to be measured at historic cost. However, the debate about IAS 39 has highlighted some difficulties with this mixed approach as it is presently formulated. The area of greatest difficulty has proved to be hedges which straddle the two measurement bases, where so-called hedge accounting comes into play.

While we have seen about 420 Statements on the Global Index, only a small number are from buy-side market participants. At the global level, there is acknowledgement that more can be done to demonstrate to the buy-side community the benefits of the Code, and to articulate more clearly the benefits of adherence. For example, the Code helps the buy-side understand the practices that your counterparties abide by, and helps to inform what you should expect from the relationship, and in turn, who you may want to transact with. The Code also provides a useful opportunity for the buy-side to benchmark your internal processes against global standards of best practices. The GFXC has launched a group that will focus on buy-side outreach to create greater awareness and adoption of the Code. This will not be an effort bound by time, but will be a journey and one which we are committed to. In Singapore, we have seen strong support from buy-side associations and we will continue to encourage Singapore-based buy-side market participants to issue Statements to demonstrate adherence. 12 Second, to continue the existing work on cover and deal which arose in response to the feedback received from the consultation on “last look” practices, and to strengthen FX disclosures. On this front, further work will be done to understand the role that disclosures play in informing market participants how their trade requests are handled in ‘cover and deal’ arrangements.

The Code’s content reflects good practices where clarity is needed, and applies to all wholesale market participants, including sell-side, buy-side, trading platforms and other market infrastructure. The Code incorporates the principle of proportionality, given the diverse nature of market participants. The Code is now owned and maintained by the local Foreign Exchange Committees (or FXCs), through the Global Foreign Exchange Committee (or the GFXC). The GFXC is chaired by Mr Simon Potter, Executive Vice President of the Federal Reserve Bank of New York, and has two newly appointed Co-Vice Chairs from the private sector – Mr Adrian Boehler, Global Co-Head of FX Local Markets & Commodity Derivatives at BNP Paribas, and Mr Akira Hoshino, Managing Director and Head of Global Markets Trading at MUFG Bank. FX Global Code: A Look Back 5 Since the launch of the Code, we have been fully committed to promoting adherence in our respective markets by market participants, from both sell- and buy-sides, to the Code. One year on, the GFXC has done a “stock-take” of our achievements, and I will share some of these with you today. 6 First, on awareness and commitment to the Code. On this front, the GFXC, together with the FXCs in each jurisdiction, has made good progress. A key part of the Code is the Statement of Commitment. This is a single, common basis by which each market participant can demonstrate that it commits to adhere to the Code.

Default rates for consumer finance ABS and SME collateralised loan obligations have also remained low, well below 1%, throughout the worst financial and economic crisis we have experienced. As regards covered bonds, credit quality is ensured by a double recourse (on the underlying assets and on the issuer), which is in fact comparable with the double protection that exists in our standard repo operations. Overall, the decisions announced last week were taken with a view to underpinning the firm anchoring of medium to long-term inflation expectations, in line with our aim of maintaining inflation rates below, but close to, 2%. We expect the two purchase programmes to effectively complement the TLTROs in enhancing the functioning of the monetary policy transmission and in providing further monetary accommodation given that we have now reached the lower bound. The newly decided measures, together with the TLTROs, will have a sizeable impact on our balance sheet, which is expected to move towards the dimensions it used to have at the beginning of 2012, and the Governing Council stands ready to take further action if needed, in compliance with its mandate to maintain price stability. Conclusion Ladies and gentlemen, it is time for me to conclude. My bottom line is also my starting line. Investment is rightly said to be today’s demand and tomorrow’s supply. Yet investment in Europe is falling short. If we don’t manage to get investment going again, we will weaken the economy in the short run and undermine its prospects in the long run.

They have at their disposal a second policy lever of direct relevance for investment, namely fiscal policy. Companies will only invest in the future when there is confidence and certainty about the future, about the medium-term fiscal path, and ultimately about taxes. We need a consistent and credible application of the Stability and Growth Pact across time and across countries. Within the existing framework, governments can find space to support productive investment, and achieve a more growth-friendly composition of fiscal policies by lowering the tax burden and reducing unproductive current expenditures. In parallel, it may be useful to have a discussion on the overall fiscal stance of the euro area with the view to raising public investment where there is fiscal space to do so. In this regard, there is also a complementary role to play at European level in supporting the rebound in private investment. I therefore welcome the € billion package announced by the incoming Commission President two months ago. The role of monetary policy Let me finally say a few words on the contribution of monetary policy. We successfully fought the confidence crisis in the euro that raised interest rates to abnormal levels. We provided the euro area banking system with unprecedented funding. We have continuously lowered our policy rates. Now we have reached the lower bound. To ensure that this very accommodative monetary policy stance is transmitted to the real economy across the euro area in an equal manner, we have also deployed a number of non-standard tools.

The case of some Asian countries, whose governance record is a far cry from the accepted blue print, but have posted impressive and sustained growth, has been cited as part of the contrary evidence. Against this background, it is proposed that further research is needed to provide a definitive position on the matter. The possibility is expressed that though governance and poverty reduction may be correlated, the direction of causation may not be so clear. Further, it is claimed that governance is a multi-dimensional concept and provides an avenue for intrusion into virtually every aspect of state functioning. It thus essentially compromises sovereignty in decision-making, and transfers accountability of government from its own citizens to the donor community. Given the imprecision of the meaning and instability of the concept, approaches to its measurement run into difficulties and yield results of doubtful validity and reliability. Yet these measurements have become the basis for further conditionality in aid distribution and the introduction of selectivity in determining aid recipients. With the wide-spread inclusion of governance criteria in aid conditionality, there is a measure of stress imposed on recipient countries, which generally lack the capacity to pursue the wide range of reforms required, the urgency of some of which have been called into question by some informed observers. Some critics see a more sinister dimension in the governance discourse, claiming that the whole purpose of the approach is to create in the developing countries the state-market relationships typical of Western neo-liberal systems.

It is a fundamental priority of the HKMA to ensure that the community can have full confidence in the system. 15. Confidence in our banks is also key to the functioning of our economy and society. And our work in this area in the last 10 years has affected all of you here today. 16. I think the most high-profile example is the loan-to-value ratio and debt-serving ratio limits on property mortgage loans. The last 10 years have seen strongly rising property prices, and competition between banks has been fierce. To some observers, including home-buyers, mortgage caps seem like a nuisance and make it harder to buy a property. But to the HKMA, it is an important matter of credit risk management and the stability of the banking system. We call these measures “counter-cyclical macroprudential”. And it would be highly irresponsible of us if we did not impose these limits. 17. This is also the case with Mainland-related lending. You all know the ways we have stepped up our supervisory efforts in this area, to ensure credit underwriting standards and risk management. As with property lending, the basic principle is “prevention is better than cure”. To take one example, we are collecting granular data from banks more frequently, to help identify emerging risks. As with mortgage caps, this might not please everyone – but it serves the wider public interest. 18. More generally, we have been implementing Basel III.

Through 2006 and into 2007, inflation was lower than expected, but output and employment were higher than expected. Norges Bank has increased its key policy rate by 1½ percentage points in six increments over the past 12 months. By way of introduction, I will take a closer look at the assessments underlying the interest rate decisions. Monetary policy in Norway is oriented towards low and stable inflation. The operational target of monetary policy is annual consumer price inflation of approximately 2½ per cent over time. The objective of low and stable inflation provides the economy with a nominal anchor. In a small, open and decentralised market economy like Norway, and with our particular industry structure, cyclical fluctuations will occur in periods. When economic agents are confident that inflation will be low and stable over time, the interest rate can also be set with a view to dampening fluctuations to some extent. BIS Review 47/2007 1 In Norway, inflation fell sharply as from the latter half of the 1980s. As a 10-year average, inflation is now 2.1 per cent, which is somewhat lower than, but fairly close the target of 2.5 per cent. Annual variability in inflation is considerably lower than in the 1970s and 1980s. Consumer prices vary from one month to the next, partly reflecting wide variations in electricity prices.

It is still uncertain whether inflation will increase rapidly or whether it will only gradually near the target of 2½ per cent. Unemployment has fallen sharply in the past few quarters. The rate of decline and level of unemployment are reminiscent of two previous cyclical peaks, the one in the mid-1980s and the other that started in the late-1990s and continued into this decade. Both expansions culminated in a sharp rise in wage and cost inflation. While a high level of net inward migration has increased the supply of labour, there have also been large flows out of the labour market into various benefit schemes. Sickness absence is at a high level and a rising share of the working-age population is on disability benefit or rehabilitation schemes. Many choose to retire under contractual early retirement schemes at the age of 62, and these numbers will probably increase in the coming years. In Norway, close to 600 000 persons among the working-age population are on benefit and retirement schemes. This accounts for 25 per cent of the labour force. 8 BIS Review 47/2007 It may seem that household saving has fallen markedly in Norway in recent periods. Saving was negative in the latter half of 2006, and probably during the first quarter of 2007, for the first time since the mid-1980s. Housing investment in the household sector as a whole is thereby fully debt-financed. A favourable economic climate and government surpluses may have created a sense of security that is influencing household saving.

Personally, I think there is good reason to merge the Riksbank and Finansinspektionen.8 Firstly, a merger of the Riksbank and Finansinspektionen would give us an authority capable of acting more forcefully to safeguard the stability of the financial system. Under the present system, the Riksbank can only issue recommendations, while Finansinspektionen can issue regulations and general guidelines. Through a merger, the recommendations that the Riksbank issues in its Financial Stability Reports, which have no binding effect, could instead be formulated as binding regulations.9 Secondly, and more importantly, there must be cyclical tools in the new regulations taking form, such as capital requirements varying over time. Both these and interest rate decisions influence the expansion of credit and thus growth and inflation. If these new tools are to be handled by Finansinspektionen, this would give us, in practice, two central banks, one subject to the government and the other independent of political bodies. A merger would allow us to avoid having two central banks which, under unfortunate circumstances, could be pulled in different directions. Thirdly, there is the matter of macroeconomic expertise. As I mentioned earlier, both macroeconomic expertise and knowledge of the financial system are needed to manage systemic risks. Supervisory authorities are traditionally focused on monitoring individual institutions and do not normally have the former type of expertise to any great extent.

The interest rate influences inflation indirectly via domestic demand for goods and services and via its effect on the exchange rate. When interest rates rise, it becomes more profitable for households to save, and consumption will therefore be postponed. Similarly, borrowing becomes more expensive, and investment will decline as a result. Lower demand then curbs the rise in prices and wages. Higher interest rates make it more attractive to invest in NOK and borrow in foreign currency. Therefore, higher interest rates normally lead to an appreciation of the krone. This makes imported goods cheaper. In addition, a stronger krone reduces activity, profitability and the ability to pay in the internationally exposed sector. Major economies such as the US, Germany and France are struggling with stagnation and fears of recession. Sluggish developments have led many countries to set very low interest rates in an attempt to stimulate growth. The business cycles in Norway and other countries have been desynchronised. While the turnaround abroad took place two years ago, the Norwegian economy continued to show a high level of activity. Towards the end of the upturn, the economy was facing labour shortages, higher wage growth and a sharp increase in household consumption and debt. Interest rates had to be kept at a high level in BIS Review 23/2003 1 Norway. This led to a widening of the interest rate differential against other countries. The main explanation for the wide interest rate differential is that interest rates abroad are at a historically low level.

This is not surprising, for even though the euros (and dollars for that matter) are happily accepted in Swiss shops, cafés, and hotels, the exchange rate is usually unattractive and the change is given in Swiss francs. Shopkeepers and restaurant owners are not in the business of providing financial services, and foreign tourists are still better off changing their euros at banks or using their credit cards. True, Swiss firms use the euro extensively, some do much of their billing in the European currency, and some have even switched their accounting to euros. Some natural hedging takes place as well, although it is not clear how efficient this is. It is noteworthy, however, that some of the largest firms do much of their billing and 2 BIS Review 35/2004 their accounting in dollars, while others quite happily continue to use the Swiss franc. The fact that “euroization” has not taken place should not really surprise us. There have been other examples of small independent currencies surviving in the neighbourhood of much larger monetary zones. The example of the Canadian dollar comes to mind. The loonie has been floating for the past several decades, and it has served Canada rather well. More generally, there is nothing to be gained in having more than one currency for transaction purposes. Much of the double coincidence of wants gets lost if several currencies circulate simultaneously. “Dollarization” only occurs in those countries where hyperinflation threatens.

In response, the international community has strengthened considerably the frameworks for anti-money laundering (AML) and counter financing of terrorism (CFT) and exchange of information on tax-related crimes. These developments will have implications for the wealth management industry globally. MAS is fully committed to safeguarding the integrity and reputation of Singapore as a clean financial centre:  One, we have a strong legal and regulatory framework on AML and CFT, in line with international standards.  Two, we have a rigorous regime of supervision to monitor compliance by financial institutions.  Three, we will strengthen cross-border co-operation to fight trans-national financial crime.  Four, we will step up vigilance against suspicious flows of funds arising from external developments. Let me give you an update on what MAS has done and will do in each of these areas. A robust legal and regulatory framework Singapore has a robust regulatory framework on AML/CFT. The key legislation is the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, or CDSA. The CDSA makes it a crime to engage in the money laundering of benefits from a total of 417 so-called predicate offences, ranging from criminal breach of trust, to dealing with property of terrorist and market manipulation. The CDSA makes the reporting of suspicious transactions mandatory for all persons who become aware of such transactions in the course of their work. MAS gives force to the CDSA by requiring all financial institutions in Singapore to have in place an effective AML/CFT framework.

If the central bank fails to do this, the market will certainly come up 3/4 BIS central bankers' speeches with some alternatives for this purpose. In this connection, you are no doubt aware that the HKMA has just launched the Faster Payment System a few days ago. Once the system goes live on 30 September, people in Hong Kong will be able to enjoy almost instantaneous P2P payments, making use of either mobile phone number or email address, free of charge to the users. While the Distributed Ledger Technology used in crypto-assets creates many issues, the technology has shown great potential in many other applications. For example, the HKMA and the banks in Hong Kong will soon launch a digital trade (d) finance platform using DLT. We are also in the process of developing a DLT interface that can link the domestic trade finance platform with those of other trading partners, such as Singapore, on a bilateral basis. This new interface is expected to be launched sometime next year. Despite some improvements made in the past few years, cross-border payments, especially retail or small value, remain inefficient and costly. This is unsatisfactory as it is not conducive to financial inclusion in relation to remittances by SMEs or (e) individuals. In this connection, I am pleased to note that progress is being made recently, as some banks and non-bank e-wallet operators are now developing new cross-border payment channels, making use of DLT in some instances, that would result in faster and cheaper services for users.

European governments have begun to take steps towards fiscal consolidation, and must convince markets that these steps are credible. Unfortunately, the private sector is not ready to take over the slack in public demand. Private sector debt-to-GDP ratios exceed 250% in the G3 economies. In the United States, where the household debt-to-disposable income ratio reached an unprecedented 135% in 2008, deleveraging is already underway with the recovery in private consumption well below historical rebounds. While Eurozone households are less leveraged than US households, disposable income is likely to grow more slowly in the Eurozone and hence be a bigger drag on consumption. A third source of deleveraging is the banking system. Banks in the Eurozone have to strengthen their capital adequacy position to meet new regulatory requirements as well as buffer against potential losses on their sovereign debt holdings. With uncertain prospects for raising fresh capital in equity markets and facing funding shortages in wholesale markets, some of them are looking to scale back their risk-weighted assets. The resultant crunch in credit could further exacerbate the slowdown in the economy. With governments, households, and banks all having to deleverage at the same time, we are looking at a prolonged period of sub-par growth in the advanced economies. In many advanced countries, debt-to-GDP ratios are not expected to stabilise until 2015 to 2020. BIS central bankers’ speeches 1 Asia: neither decoupled nor derailed What does deleveraging in the G3 mean for Asia? Asia is not immune to developments in America or Europe.

In this regard, on 2 September we learned that the Nord Stream 1 pipeline that connects Russia and Germany had been shut down indefinitely, which might suggest that we are now closer to that scenario. However, it should be noted that the downside scenario includes other negative shocks that have yet to materialise. Moreover, the current prices of gas, electricity and other energy and non-energy commodities are lower than those included not only in the downside scenario, but even in September’s baseline scenario. We will also have to watch out for a potential de-anchoring of medium and long-term inflation expectations above the 2% level. Such de-anchoring would affect the price- and wage-related decisions that firms and households make in the present, causing even higher and more persistent inflation, thereby requiring still more forceful monetary policy measures. While we have yet to observe any signs that expectations are being de-anchored, there are some signals that need to be watched. The most recent surveys of professional forecasters put inflation in 2024 at, or just above, 2%. The data from inflation derivatives markets (adjusting for risk premia) suggest likewise. However, the most recent round of the ECB’s monthly Consumer Expectations Survey (CES), published earlier this month, puts the median inflation expectation three years ahead at 3%, up from just over 2% at the start of the year. We will be extremely vigilant of these indicators in the coming months.

Ravi Menon: Islamic finance – continued growth Remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the 5th World Islamic Banking Conference Asia Summit, Singapore, 3 June 2014. * * * Distinguished guests, ladies and gentlemen, good morning. And to all our foreign guests, a warm welcome to Singapore. The sun is shining on Islamic finance. Let me highlight three promising global developments. First, Islamic finance continues to grow rapidly. The industry grew at double digits last year, as it has for the previous five years, despite global economic uncertainties and market volatility. Global Islamic financial assets are estimated to have reached $ trillion by the end of 2013, from $ trillion in 2012. Second, global regulatory standards and best practices are being established for Islamic finance. The Islamic Financial Services Board (IFSB), the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), and the International Islamic Financial Markets (IIFM) have been at the forefront of this effort, helping to narrow differences in market practices and regulatory treatment. Common standards are good for facilitating cross border transactions. They help to address risks that are idiosyncratic to Islamic finance, such as Shariah non-compliance risk. In so doing, these standards serve to bolster confidence in the safety and soundness of the Islamic finance industry. Third, more countries are catering for Islamic finance. In Asia, Indonesia has set out to significantly grow its Islamic banking sector and develop its Islamic capital markets.

In particular, the flow of new mortgages slowed considerably in the second half of 2022, falling 5.4% year-on-year in Q4, in line with the moderation in house purchases and prices. - The stock of lending to non-financial corporations and sole proprietors fell by 1.5%, with a more marked drop in the sectors hardest hit by the pandemic (6.9%). This despite new loans growing 15.2%, while the principal drawn on available credit lines rose by 23.3%. 4 - The average interest rate on loan portfolios increased during 2022, particularly in the last quarter of the year. However, the pass-through of the changes in reference rates (around 30%-40%) was lower than that implied by the historical sensitivity to the cycle. Credit quality - In 2022 the non-performing loan (NPL) ratio4 fell by 0.8 pp to 3.5% at December, the lowest level since 2008, with cumulative declines since the start of the pandemic of 1.6 pp for the corporate sector and 1.4 pp for households. In the sectors hardest hit by the pandemic, the NPL ratio fell by a lesser degree (0.3 pp in 2022, to 5.6%). 4 The faster decline in NPLs in 2022 was driven both by smaller inflows and larger outflows. 5 - Stage 2 loans likewise declined, falling by 0.9 pp to 7.1%, as a result of both lower inflows and larger outflows to performing status. However, the stock of Stage 2 loans remains 24.5% higher than pre-pandemic levels.

Lastly, it must be borne in mind that the short and medium-term challenges posed by the recent period of extraordinary crises do not make tackling the banking sector’s structural challenges – such as those linked to the management of climate-related risks, digitalisation and growing competition from technology firms – any less urgent. Thank you. 10

Moreover, fair value accounting is consistent with the increasing use of mark-to-market techniques in risk management. Such techniques in part reflect a progressive but fundamental shift from the traditional banking approach of holding assets until maturity to today’s approach of managing on the basis of continually assessing the opportunity cost of maintaining the existing balance sheet. It is clearly beneficial to transparency if publicly-available accounting information as far as possible reflects the basis on which management actually run a business. However, there are a number of complications associated with the wider use of fair values. First, there is a question as to how one can obtain robust fair values for instruments which are not priced, even indirectly, in reasonably deep and liquid markets. Model-based valuation techniques may be used, but they may not be analogous to genuine market clearing prices. The issues here include determining the conceptual basis for valuation (“the model”), obtaining the necessary inputs, and avoiding slavish adherence to a model which may in some circumstances deliver misleading results. In other words how, and to what extent, can human judgement properly be used to modify the model? Second, there is the question of the economic relevance of unrealised gains and losses - particularly if they are not immediately realisable. For example, while information on changes in the fair value of bank loans conveys useful economic insights, it needs to be interpreted carefully.

BIS Review 71/2004 3 We perhaps need to look again at the process for considering, and reaching a conclusion about, the fundamental “design parameters” some of which I have touched on today. This is no small task, but if agreement could be reached on the fundamentals, these could be stated as clear principles in a preamble to any new standard, to guide the more detailed requirements. And it might enable the widely-held vision of a less detailed and prescriptive standard to be realised, to replace the hundreds of pages of complex rules. To address this, however, raises three questions: (i) On what is early consensus necessary? (ii) How should the transition be approached? And (iii) What does this mean in institutional terms? Early consensus Early agreement seems to me particularly important in three areas. The first is to review the conventional understanding on who the accounts are for, and clarify how the different interests of different stakeholders are to be met. The second is to agree where the standard should be placed along the spectrum between historic cost and fair value measurement. A particularly difficult conceptual question in this area is: precisely what economic meaning is there in so-called fair valuation of instruments in which (a) there is little or no secondary market, or (b) there is a market, but a clear intent to hold an instrument to maturity? Finally, the implications of any increase in measured volatility will need to be assessed.

Since its establishment more than six years ago, the French Monetary Policy Council has reiterated, notably in the Banque de France’s Annual Report, the three other main prerequisites for growth and durable job creation: a sound fiscal policy aimed at controlling public spending and reducing deficits lastingly; ambitious structural reforms in the areas of education and training, the labour market and welfare and, lastly; the continuation and strengthening of a policy aimed at containing unit production costs in the economy and improving corporate competitiveness. These guidelines are equally valid for the entire euro area economy as for the French economy. BIS Review 55/2000 2 With regard to the first two conditions, and without forgetting the major achievements in the fight against unemployment in recent years, the Banque de France is convinced that we could have even lower unemployment - as low as in the best-performing economies in Europe and the world - if the level of public spending (which can be likened to the overheads of our economies) was lower and if the labour market functioned in a way even more conducive to job creation. It should be recalled that our Monetary Policy Council recommends, as an essential first step, that our public spending be reduced to below 50% of GDP as quickly as possible (it came to 52.4% in 1999). Note also that the Stability and Growth Pact recommends that public finances be “close to balance or in surplus” in the current period. This is not yet the case in France.

Underlying inflation, which measures the rise in prices, excluding products with highly-variable prices (notably energy and fresh produce) and also public utility charges, after stripping out the impact of tax measures, rose at a slower twelve-month rate of 0.7%. France was thus the best performer of the euro area in this field, along with Germany, with twelve-month HICP growth of 1.7% in December 1999. Since the start of 1999, the Eurosystem - comprising the European Central Bank (ECB) and the eleven national central banks of the countries having adopted the euro as their currency - has been responsible for defining and implementing monetary policy. In accordance with the Maastricht Treaty, the primary objective of the single monetary policy is price stability. This is defined as a year-on-year increase in the HICP for the euro area of below 2%. The definition of this medium-term objective is the same as that adopted by the Monetary Policy Council for French monetary policy when the Banque de France was granted independent status a little more than six years ago. 1 BIS Review 55/2000 In order to achieve its main goal of price stability, the Governing Council of the ECB decided, as you know, to refer to two groups of indicators, or “pillars”, for European monetary policy: – the first pillar is a prominent role for money, reflected by the choice of a quantitative reference value for growth in M3, the broad monetary aggregate for the euro area. This reference value has been set at 4.5%.

Figure 1 Monetary policy and housing prices Monetary policy Housing prices (percentage) (nominal index, first quarter 2001=100) 15 15 250 250 12 12 200 200 9 9 150 150 6 6 100 100 3 3 50 50 0 0 0 90 93 96 U.S. Chile (*) 99 02 05 Canada 08 01 02 04 05 Australia Chile Canada 07 08 0 U.S. Spain (*) Starting August 2001, the MPR is set in nominal terms. Previously, it was set in inflation-indexed terms. Sources: Central Bank of Chile, Bank of Canada, Bloomberg and U.S. Federal Reserve. 10 BIS Review 113/2009 Figure 2 Nominal exchange rate (CLP/ USD) 700 700 650 650 600 600 550 550 500 500 450 450 400 400 Jan.08 Apr.08 Jul.08 Oct.08 Jan.09 Apr.09 Jul.09 Source: Central Bank of Chile.

Furthermore, in some cases housing prices did go up high, with clear indications that there was a bubble. However, their financial systems made it through and remained stable and, 1 A flexible inflation targeting regime balances the cost of output fluctuations with those of inflation instability, and the result should be a decline in both, output and inflation volatility. For an exposition of this framework and how it relates to the definition of the inflation target parameters see De Gregorio (2009a). BIS Review 113/2009 1 despite the current difficulties, have avoided acute financial crises. This is the case of, for example, Australia and Spain. Naturally, when facing disproportionate increases in housing prices, both the increase in credit and the boom in construction are symptoms that the downturn will be severe. Still, this need not result in a systemic financial meltdown. In any case, monetary policy can and does help in the creation of bubbles, although not so much by the level of the interest rate but by the monetary policy strategy with which financial turmoil is dealt with. In the United States, the strategy of turning a blind eye to the period of soaring asset prices and then, when the bubble burst, reducing aggressively interest rates used to be the Fed’s strategy (the “mop-up strategy” according to Blinder and Reis, 2005). This approach was first used on the “Black Monday” of October 1987, then with the breakdown of Long-Term Capital Management (LTCM) and later with the bursting of the high-tech bubble.

Without answering those questions, I wish to argue that complexity theory might be a useful lens through which to begin exploring them. The architecture of complex systems may be a powerful analytical device for understanding and shaping the new architecture of macro-financial policy. Modern economic and financial systems are not classic complex, adaptive networks. Rather, they are perhaps better characterised as a complex, adaptive “system of systems” (Gorod et al (2014)). In other words, global economic and financial systems comprise a nested set of sub-systems, each one themselves a complex web. Understanding these complex subsystems, and their interaction, is crucial for effective systemic risk monitoring and management. This “system of systems” perspective is a new way of understanding the multi-layered policy architecture which has emerged since the crisis. Regulating a complex system of systems BIS central bankers’ speeches 1 calls for a multiple set of tools operating at different levels of resolution: on individual entities – the microscopic or micro-prudential layer; on national financial systems and economies – the macroscopic or macro-prudential and monetary policy layer; and on the global financial and economic system – the telescopic or global financial architecture layer. The architecture of a complex system of systems means that policies with varying degrees of magnification are necessary to understand and moderate fluctuations. It also means that taking account of interactions between these layers is important when gauging risk. For example, the crisis laid bare the costs of ignoring systemic risk when setting micro-prudential policy.

This is a remarkably favorable picture; and yet there is growing concern about the long-term challenges for the U.S. economy and their implications for future prosperity. In parts of the business community, there is growing anxiety about a perceived shift in the locus of dynamism and growth away from the United States toward Asia and other parts of the world. Public opinion surveys report increased concern among Americans about economic security; about the prospects for future income growth and economic mobility; and about the implications of the long-term increase in income inequality. And there we can see growing concern among the general public and in the business community about the struggle to find a political consensus to support reforms to help us meet these challenges. The United States has long been one of the most open of the major economies. This basic policy choice, along with a range of other actions that have made our economy relatively flexible, has allowed us to be a substantial beneficiary of the rapid increase in global economic integration and in the growing economic success of the rest of the world. Globalization has brought challenges as well as benefits, however. The combined forces of technological change, immigration, and the rapid integration of China, India, and other economies into the world economy are altering the dynamics of competitive pressures on U.S. companies. The pace of change seems to be increasing, and more things we produce, and more of our services, are becoming tradable.

Although responsibility for supervision of the bank has passed to the FSA, the Bank retains an interest in the design of the regulatory structure and the impact that this has on the stability of the system as a whole. The Bank is represented on the Basel Supervisors Committee and has been closely involved in discussions on the new Basel Accord and the capital requirements to be applied to banks. Clearly ensuring that individual banks are adequately capitalised has a direct bearing on the ability of the system as a whole to withstand shocks. However it is only really in a crisis or an economic downturn that it is possible to tell what the full story is. As one of my colleagues colourfully puts it, it is only when the tide rolls out that you find out who is not wearing swimming trunks! The final area I would like to mention is the Bank’s role in reviewing financing for business in the UK. This is more focused on efficiency and competitiveness than financial stability but, over several years, the Bank has built up a leading role in looking at financing conditions for small firms and high-technology companies. More recently the Bank has also become involved in the government’s initiatives under the Social Exclusion unit to look at financial exclusion and the provision of banking services to deprived areas. On occasion, the Bank also takes a role in corporate restructuring, holding the ring between large debtors and their bank lenders.

The first session will address the challenges of digitization and how we can measure its impact on the economy. We will review how the international statistical community has had to adapt to new sources of information to develop indicators that account for the impact of this new age. Also, during the first session, we will analyze the implications of digitalization and the use of electronic invoicing data in Chile to support the activities of central banks, mainly in the fields of monetary policy, economic analysis and financial stability. Finally, we will learn about the estimation of the contribution of the digital economy to the GDP of the US. The second session will address how the globalization of production has imposed demands for greater generation of statistics that provide information on interdependence between countries. We will learn about the experience of Mexico and the US in the development of new national accounts statistics. Page 3 of 4 Central Bank of Chile October 2019 In the third session, we will see how digitalization provides us with an opportunity to integrate databases of different sources and sizes, becoming a valuable tool for the design and development of economic and financial indicators. Finally, in the last panel, we will try to find answers to questions like: What is the role of the digital economy in the decline of productivity estimates? How are we capturing the contribution of digital platforms in the labor market? And how would current statistics and macroeconomic measurements be affected? among others.

Purchase surprise in the 28 Sep-14 Oct 2022 financial stability (FS) intervention is assumed to be £ the mean of a uniform distribution of purchase expectations based on the announced £ ceiling. In liquid markets the MD line looks to be less steep. As I said earlier, the fact that central banks now pay interest on reserves will surely have tilted it in that direction. At least in normal times there’s arguably less difference, as far as the private sector’s concerned, between a deposit in the central bank and (say) a short-term public debt instrument such as a Treasury bill. If repo markets are working smoothly financial institutions can use even longer-term government debt to raise cash. This increases the degree of substitutability between the two sides of the QE transaction and has the effect of flattening the MD curve. Conversely, bouts of illiquidity are characterised by a lower degree of substitutability – relative to government debt, the distinctive liquidity value of central bank reserves becomes more pronounced – and, as well as moving to the right, the MD line steepens (Chart 11). Page 20 Chart 11: Money demand schedule is steeper when markets are less liquid The MPC has often pointed out that QE seems to have had differing effects, according to economic and financial circumstances (they’re “state-contingent”[12]).

And why, at least across these two periods, does neither measure of money growth seem to have much to do with inflation? What follows is not remotely a full and comprehensive answer to these questions. Nor are the points made here remotely novel. Over the years, reams have been written about all of them, including in some very good articles by Bank economists. But they’re certainly relevant in interpreting these data and therefore worth touching on. One I mentioned in the introduction: commercial banks can create and withdraw deposits – principally in the act of extending or reducing the quantity of their lending – independently of their reserve holdings at the central bank. Suppose you borrow £ from a bank. What the bank actually does, in granting the loan, is to put an extra £ into your deposit account. This is newly created (broad) money, matched, on the asset side of its balance sheet, by the debt you now owe the bank. This process doesn’t require any matching increase in reserves[9]. It has its limits, not least because banks are obliged to fund a proportion of their lending with equity (rather than deposits). They can’t (and don’t) expand or reduce the quantity of money Page 17 indefinitely. And monetary policy, via its effects on the wider economic environment, will also influence these decisions.

For Norwegian banks, which have a large proportion of 6 The Act relating to debt settlement (Act 99/1992), which came into force in 1993, shall provide individuals with serious debt problems with a possibility to regain control of their finances. The Act was amended in 2003. A new proposal to amend the act is now being circulated for comment. 7 NOU 1973:3 Taxation of dwellings (headed by Tor Sekse) and NOU 2003:9 Tax Commission (headed by Arne Skauge). 8 The IFRS, or a simplified application of the IFRS, applies to banks belonging to a listed company. Under the regulation, financial instruments are to be stated at fair value, in practice at market value. See Act no. 56 of 17 July 1998: Act relating to annual accounts, etc., (Accounting Act), Chapter 2. BIS Review 110/2008 5 housings loans in their loan portfolios, Basel II entails a substantial reduction in capital requirements after a transitional period. This is because highly secured housing loans have a low risk profile. Bank equity ratios have fallen in recent years. At the same time, Tier 1 capital, which is a risk-weighted measure of financial strength, has been stable. This reflects a sharp increase in bank lending secured by mortgages on residential property in this period. The Basel II framework offers limited experience so far. It presupposes that risk assessments consider the prevailing macroeconomic environment. There is still a risk that banks give excessive weight to recent years’ experiences in their assessments and models.

See Department for Business, Energy & Industrial Strategy (2022), 'Energy efficiency: what you need to knowOpens in a new window' 5 See CFRF (2022), 'Climate Financial Risk Forum Guide 2022: Scenario Analysis in Financial FirmsOpens in a new window', NGFS (2023), 'Scenarios PortalOpens in a new window', Bank of England (2021), 'Guidance for participants of the 201 Biennial Exploratory Scenario: Financial risks from climate changeOpens in a new window' 7/7 BIS - Central bankers' speeches

Global fiscal and current account imbalances The negative correlation recorded during the crisis between the current account and the fiscal balances has been largely in line with expectations. In the long run, however, current account deficits could well increase again globally if the fiscal expansion which has taken place in recent years is not reined in. In fact, the available evidence suggests that the adjustment of current account imbalances has so far been largely cyclical. The reduction in trade imbalances following the crisis has slowed and, in several cases, has started to reverse. In both the United States and China we are already close to pre-Lehman levels in absolute terms. The sheer asymmetry in size and composition of the fiscal stimulus in advanced countries compared with any measures taken in emerging economies is likely to magnify the expected resurgence of current account imbalances. Similarly to the pre-crisis situation, advanced economies’ indebtedness would be financed with capital flows from emerging economies. This implies not only a massive misallocation of global capital, but also undermines the credibility of any initiative to rebalance savings and investments both within and across the main regions of the global economy. As a result, it risks creating – once again I should say – delusional expectations in financial markets about the sustainability of imbalanced financial and trade flows. Policy discussions are likely to return to where they were a few years ago. The crisis has given us the opportunity to question their analytical and practical basis.

Given that such a shift in resources cannot occur instantaneously, it should not be surprising if the US economy experienced a period of temporary higher unemployment. In that case, trying to stimulate growth and reduce unemployment to achieve the pre-crisis equilibrium through macroeconomic policies, as some are suggesting, might only delay the adjustment and lead again to an unbalanced path. On the other hand, some surplus countries, such as Germany, might be able to achieve higher growth than in the past decade, because of the increased potential resulting from their better positioning in international trade specialisation achieved over the years and if they are able to employ resources more efficiently in the non-tradable sector. The second issue that I would like to raise relates to the endogenous factors that induce rebalancing of growth between deficit and surplus countries. Theory suggests that if external demand falls, owing to the lower levels of growth in deficit countries, surplus countries will be able to export less and thus also experience lower growth. This would free up resources in the latter countries which should then be allocated to the non-tradable sector. Furthermore, the interest rate in surplus countries should fall, inducing residents to save less and consume more. However, these adjustment mechanisms may take time and may lead to temporary sub-optimal growth. It is necessary to investigate whether the adjustment process is indeed slow, especially after a crisis such as the one we have experienced.

Going negative has sharply lowered and flattened the yield curve in the euro zone, which is especially relevant given the importance of long-term financing. And so far the substitution for cash has also remained negligible. Yet, there are limits on how far one can go. Thus lower key interest rates should be combined with other non-conventional measures. In short, CBs have innovated a lot, both in terms of rates and quantities. We knew CBs could do a lot and they have actually done a lot, even if they cannot do everything. In the main advanced economies, the precise macroeconomic effect of large-scale asset purchases is still under discussion. But I can summarize the Eurosystem’s shared analysis and Mario’s recent statement: our purchases will add around half a point to inflation in 2016 and almost the same to growth. In the US case, the QE2 launched in late 2010 is the most similar to our QE. Controlling for its size, roughly half of ours, it has had a broadly comparable impact, even if published estimates differ somewhat. Fourth challenge: how to deal with the risk of a mismanaged exit from the ZLB and financial instability? Staying too low for too long would be counterproductive: ultra-low margins may discourage financial intermediation and lending to the real economy, while addiction to forward guidance may silence contrarians and hamper market information on fundamentals. Yet the exit may be bumpy and, hence, postponed or even aborted.

Considering all the new information and analyses which have become available since our meeting on 5 August 2010, we continue to expect price developments to remain moderate over the policy-relevant medium-term horizon, benefiting from low domestic price pressures. Recent economic data for the euro area have been stronger than expected, partly owing to temporary factors. Looking ahead, the recovery should proceed at a moderate pace, with uncertainty still prevailing. A cross-check of the outcome of our economic analysis with that of the monetary analysis confirms that inflationary pressures over the medium term remain contained, as suggested by weak money and credit growth. Overall, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households. Inflation expectations remain firmly anchored in line with our aim of keeping inflation rates below, but close to, 2% over the medium term. The firm anchoring of inflation expectations remains of the essence. Turning to fiscal policies, current developments at the euro area aggregate level appear to be broadly in line with previous expectations. At the country level, any positive fiscal developments that may emerge, reflecting factors such as a more favourable than expected macroeconomic environment, should be exploited to make faster progress with fiscal consolidation. At the same time, in countries where there is still a need to take additional specific measures to achieve consolidation targets, such measures should be adopted swiftly to ensure that consolidation commitments are fulfilled.

This, in turn, raises issues of co-ordination and communication for both internationally active banks and also supervisors, about which I will say more later. Risk aggregation and quantification Collecting risk data across many business lines has catalysed further efforts to aggregate those measures of risk by quantifying them in a more rigorous and more consistent fashion. This quantification of risk is the second major risk management trend identified in the Joint Forum report. It is not a new concept. In the insurance industry, for instance, actuaries have long sought to estimate the likelihood of various events taking place. What is new is that, in recent years, financial risk managers and researchers apply mathematics, statistics and modelling to many risk exposures that were previously not thought to be readily quantifiable. In the banking industry, for example, statistical and computational analyses developed for evaluating exposures to market risk led, over the past decade or so, to the application of similar techniques to credit risk. The introduction of increasingly reliable estimates of the drivers of credit risk, such as the probability of default, led to many of the proposals that form the basis for the new Basel II bank capital framework. The Joint Forum found that the “ultimate expression” of risk aggregation is the summation of many types of risk into a single risk measure. This measure, often called “economic capital,” estimates the amount of capital a firm requires to protect itself against all risks with a certain degree of confidence.

Peter Pang: Developing critical financial infrastructure between Hong Kong and Thailand Opening remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary Authority, at the HKMA-BOT Joint Press Conference on the Launch of US Dollar – Thai Baht PvP Link, Hong Kong, 28 July 2014. * * * Deputy Governor, ladies and gentlemen, 1. Good afternoon. It is my great pleasure to welcome you all to this press conference jointly organised by the Hong Kong Monetary Authority (HKMA) and Bank of Thailand (BOT). I would like to thank Deputy Governor Mr. Krirk Vanikkul for joining me here to announce the launch of the payment-versus-payment (PvP) link between BAHTNET, the Thai Baht Real Time Gross Settlement (RTGS) system in Thailand, and the US dollar RTGS system in Hong Kong. 2. Time flies. About a year ago the HKMA and BOT announced in Bangkok to build this PvP link. With the concerted effort of colleagues on both sides, the link went live today as scheduled, after completion of the system development and meticulous testing with the users. The banks in both jurisdictions have been fully engaged to ensure maximum readiness, on both technical and business fronts, for the launch of the link. 3. This PvP link is an iconic project that symbolises the determination of the HKMA and BOT to work together to promote financial integration and financial stability in the region through the linkage of critical financial infrastructure. It will bring significant benefits in three areas. 4.

In other words, same risks same regulation. In the UK, recognising the importance of payments for financial stability, the Bank of England supervises systemic payments systems such as Bacs, the Faster Payments Service, CHAPS, and Visa. And internationally, there are principles – the Principles for Financial Market Infrastructure – which Benoit helped to create when he was at the helm of the Committee for Payments and Market Infrastructure - that govern how payments systems should be regulated and the standards they should meet. These standards form the basis of the BoE’s regulation. 6 All speeches are available online at www.bankofengland.co.uk/news/speeches 6 While same risk, same regulation may seem obvious, in many countries it will require changes to the regulatory framework. Where stablecoins are used in place of money, they need to offer the same protections as money. Problem 2 is how do you ensure the stability of the “thing” being transferred in the payments chain. Existing systemic payment arrangements transfer money that is stable and reliable – in bad times and in good. This generally takes two forms: public central bank money - either reserves held at the central bank or cash; or private commercial bank money – bank deposits. Prudential regulation, access to central bank liquidity, and deposit insurance give holders confidence that underpins their willingness to receive commercial bank money as payment. This gives payment recipients – shops and businesses - confidence that when someone taps their card or phone to pay, the amount promised will arrive in their account.

This is why the 7 All speeches are available online at www.bankofengland.co.uk/news/speeches 7 UK Financial Policy Committee has said that where stablecoins are used in systemic payment chains as money-like instruments, they must meet standards equivalent to commercial bank money in terms of stability of value, robustness of legal claim and the ability to redeem at par in fiat. Stablecoins’ borderless nature of course also means that international regulators’ coordination is necessary and work is indeed underway. A Financial Stability Board consultation is ongoing with supervisory recommendations for global stablecoins, aligned with the Bank’s view on same risk – same regulation. Is there a role for central banks (public money strikes back)? The changes in how we pay I described at the beginning of this presentation have not just involved a switch from physical cash to electronic payment. It has also necessarily involved a switch from public, central-bankissued money to private money. This is because central bank money is currently only available in physical banknotes or in reserves, which certain regulated financial institutions hold in accounts at the central bank. For the public and most businesses, the only current option to hold money backed by the central bank is in the form of physical banknotes. I’ve assumed in the story so far that the cash decline and the rise of online continues the march towards the dominance of private money in our transactions. But is this right?

Chart 1 shows that the decline in yields in the euro area was somewhat greater than in the US. The yields on ten-year German government bonds have fallen by almost 20 basis points since the end of June. In France and Italy, the decline in yields was more pronounced. Meanwhile, yields on ten-year US treasury bonds have changed relatively little. On the Swiss capital market, almost the entire yield curve has shifted downwards again since mid-year. Yields on Confederation bonds with terms of up to 13 years are currently in negative territory. This corresponds to three-quarters of the outstanding volume. At the beginning of December, the yield on ten-year Confederation bonds reached a new low of –0.4%. Most recently, it was trading at –0.25% or about 40 basis points lower than mid-year. BIS central bankers’ speeches 1 How negative interest works In the second part of my remarks today, I will talk about the way in which negative interest works. Since January, the Swiss National Bank (SNB) has been charging negative interest of –0.75% on sight deposits held by banks and other financial market participants at the SNB. Negative interest is a key instrument in our monetary policy. Together with our willingness to intervene on the foreign exchange market, it counteracts the overvaluation of the Swiss franc. When calculating negative interest, the SNB grants the banks exemptions so that the banking system does not have to carry the full burden resulting from the high level of sight deposits.

In place of investment quotas, they will merely need to be registered with the PBC. Shares of companies in emerging economies Since the beginning of the year, the SNB has also been investing in shares of companies in emerging economies. In view of the growing importance of these countries for the global economy and financial markets, this was an obvious step in further diversifying foreign currency investments. With this move, the SNB is now covering most of the market capitalisation of the global stock markets. The decision to invest in the shares of companies in emerging economies was taken during the regular review of our investment policy. It is guided by longer-term risk/return considerations and is independent of short-term developments on the financial markets. Equity investments in emerging economies are managed passively, in the same way as those from advanced economies, by replicating a combination of different indices. Overall, however, these investments only account for a modest proportion of total equity investments. BIS central bankers’ speeches 3 4 BIS central bankers’ speeches BIS central bankers’ speeches 5

While the optimal supervisory structure of the EU is a topic that deserves a separate speech of its own, it may suffice to say that this supervisory review may be a very good occasion to consider the suitability of moving both supervision and resolution together into an even more European set-up. Likewise, there are already legislative proposals for a network of national EU deposit guarantee schemes, having the possibility to borrow from each other, if need be. I consider this as an ambitious plan which rightly mirrors the cross-border nature of our banks. In fact, such a mutually supportive structure of deposit insurance is not far removed from an EUlevel fund of funds, nor from an EU-level deposit guarantee scheme. Concluding words Let me conclude by saying that the seeds of an integrated EU resolution framework are already there today, but it is an open question whether the EU will have the audacity, and, in particular, the political will, to move towards that. I firmly believe that if we wish to preserve the benefits of integrated cross-border banks in Europe and globally we must built an European resolution regime that enhances market discipline by mitigating moral hazard, maintains stability by ensuring continuity of basic services of unwinding institutions, orderly allocates losses and protects taxpayers. To achieve this goal, we will have to make sure that our authorities speak a common language and that the thorny issue of public burden-sharing is replaced by private burdensharing as far as possible.

In the last rate tightening cycle, we observed that banks with larger concentrations of long-term earning assets experienced lower margins. It will be important for community banks that are very sensitive to interest rate risk to evaluate the risk management of their loan portfolios. Finally, when I meet with community bankers, I am often asked the following question: “When will we see regulatory relief?” My simple answer is soon, I hope. There is wide ranging consensus—across party lines and among regulators, the Federal 1/2 BIS central bankers' speeches Reserve included—that we need to reform the regulatory requirements for small banks. As I have said, I favor regulatory relief for smaller banking organizations.2 Their size and complexity do not pose a significant risk to the system, and they lack the scale to absorb large compliance and other regulatory costs. Given broad agreement on this issue, I am hopeful that relief will be forthcoming. Let me conclude by saying that we continue to recognize the important role community banks play in our economy. According to a study by our colleagues at the Kansas City Fed, the U.S. banking system is unique because of its balance between a small number of large banks and thousands of community banks.3 That balance helps serve the needs of a large and diverse U.S. economy that includes businesses of all sizes and consumers with different needs and preferences.

The range of policy proposals that have been supported by G20 leaders and finance ministers, the Financial Stability Board, the Basel Committee on Banking Supervision, and international accounting standards setters, include calls for strengthening of micro- and macro-prudential regulations that aim at capturing risks of individual institutions and risk arising from interconnectedness of the financial system, as well as more robust governance framework. The shift in policy paradigm from this crisis has been the increasing recognition of the concept of macro-prudential policy in dealing with the problem of systemic risk posed by the interconnectedness within the financial system, as well as between the financial system and the real economy. The key macro-prudential policies are, for example, a proposal on build-up of capital buffer and the introduction of a simple leverage ratio as a supplement measure to the BIS ratio. We look forward to the BCBS’ proposals on these measures by the end of this year. While vital, this is a tall order, and demanding on supervisory capacity, especially in emerging markets. Let me highlight some of these challenges. The standards being discussed are complex, with still many unresolved issues on technical aspect such as calibration. Among the new guidelines, some key coefficients may be base on data of developed markets, and therefore might not be representative of emerging market conditions. Both calibration and actual implementation will require adequate data, which is often a constraint in emerging markets.

The principle of so-called “insignificant host”, as viewed from home supervisor’s perspective, may contradict with the agreed principle of the need for the host to oversee systemically important institutions. Thus, a host supervisor should receive better information and even be included in supervisory colleges by home supervisor, if the global bank branch operations are systemically important to the host economy. Colleagues, ladies and gentlemen, This is a challenging time, with new paradigm, and therefore leadership by all of us is required to ensure that we set a balanced agenda in our reforms going forward. I believe SEANZA forum would become all the more valuable in the future in cementing our network and friendship. Thank you for your attention. 6 BIS Review 146/2009

The major dealers and their principal supervisors met at the Federal Reserve Bank of New York about two weeks ago to review progress and discuss next steps. The dealers are now in the process of reaching agreement on a new set of proposals designed to build on the progress to date and produce a more mature, efficient and operationally robust post trade processing infrastructure for the OTC derivatives market. I want to conclude with a few observations about the role of supervision in encouraging progress in both these areas of risk management and the infrastructure for these markets. We live in a system in which nonbank financial institutions play an increasingly important role in a wide range of financial markets, in which the differences between the activities of bank-centered financial institutions and nonbanks has substantially diminished, and in which the largest banks and investment banks in the world compete together in the U.S. market and in other major markets. These changes have many positive implications but they also mean that differences in the incentives faced by institutions with different supervisory and regulatory regimes can have larger competitive effects, and the effects of regulatory arbitrage can reduce the impact of changes applied only to regulated or supervised institutions. They suggest that adverse developments outside the banking system, such as the failure of a major nonbank financial intermediary, can potentially cause greater damage to the core of the financial system than might have been the case in the past.

The importance of fisheries as a generator of foreign exchange revenue has diminished in relative terms - to less than a half of the total - while the importance of other sectors has risen, such as manufacturing industry, information technology and tourism. In these developments, Iceland is among other things drawing benefits from globalisation to strengthen the foundations of the economy. Foreign direct investment regulations are liberal with the exception that such investment is not permitted in the fishing sector. Foreign direct investment is most noticeable in power intensive industry, such as the production of aluminium, which is based on Iceland’s abundance of untapped renewable energy resources. Recent changes in corporate taxation in Iceland, lowering corporate taxes to among the lowest to be found, serve to attract foreign business to Iceland and encourage Icelandic companies with international operations to favour Iceland as the base of their operations. 2 BIS Review 51/2002 Direct investment by Icelandic companies abroad has risen rapidly in recent years and in a variety of areas, such as fisheries and fish processing, pharmaceuticals, retail commerce and financial services. These developments also benefit the Icelandic economy in the long run as they integrate Iceland further into the global economy, allow Iceland to draw more easily on the experience of others and bring in dividends.

The exchange rate management framework focuses on mitigating short-term excessive exchange rate volatility and ensuring alignments with economic fundamentals in the medium to long term. Exchange rate flexibility constitutes the primary buffer to cushion the effects of capital flow volatility. In the case that resulting movements in exchange rates are deemed excessive and unjustified by fundamentals, foreign exchange interventions can be undertaken. More controversial, but now increasingly accepted internationally as one of the policy options, are capital flow management measures (CFMs), aimed at directly curbing international financial flows via regulations and taxes. While there are clear economic rationales for CFMs, given the abundance of market inefficiencies and externalities, many countries tend to regard these measures only as a last resort. As such, reputation costs, asymmetric effects in managing outflows versus inflows, lack of long-term effectiveness, and limited room for calibration are but a few considerations that policy makers need to take into account. 2 BIS central bankers’ speeches Regarding foreign exchange rate interventions, we are always mindful of its costs and limited effectiveness. In particular, interventions against market views would employ large financial resources while yielding limited success, usually only to delay the pace of exchange rate movements. Active interventions under the inflation targeting framework regime may also have unintended consequences on policy framework credibility, as the central bank’s commitment to safeguard the overall macroeconomic stability may be called into question by the public. For this, consistent communications about monetary policy framework and stance would help increase central bank’s transparency and public understandings.

The implementation of Basel II will pose a challenge to the entire BIS Review 42/2006 1 financial community, while for the newly emerging economies this process will be a serious test since their banking systems are very much open. The discussion of the common supervisory framework also brings forward the question as to what extent the high rates of growth of credit for the private sector, globally, and in many of the dynamically developing countries, in particular, poses a risk to financial stability and how much supervisory policy could be used as a tool for solving this problem. The process of financial sector globalisation, which I already mentioned, raised for many countries the issue of choosing between either following a national monetary policy or joining a monetary union and carrying monetary policy to a supranational level. The experience of a successful realisation of the Economic and Monetary Union in Europe, as well as the experience of the countries from the area of the Frank are a good practical example for all of us about the potential advantages and challenges associated with a country's participation in a monetary union. Taking monetary policy to a supranational level is inevitably related to providing greater independence for the national central banks and delegating certain powers at a supranational level. In the democratic world, the independence of conducting policy on the part of central banks is inseparably linked to the higher degree of their transparency and reporting.

Major differences from when I last worked at the Riksbank I have worked at the Riksbank twice, during two entirely different regimes – or paradigms, if you wish. The first time was during a period of around fifteen years from the early 1970s to the mid-1980s. At that time, the credit and foreign exchange markets were regulated. The Riksbank determined both the price and size of the credit on offer and had access to tools such as liquidity ratios and lending caps. The Riksbank also had regular meetings with the commercial banks, to closely monitor that they were observing the regulations. The banks were told in no uncertain terms if they had failed on some point. The Riksbank was able to conduct a policy that stabilised economic activity to some extent, but monetary policy – to the extent that one can call it such – was largely subordinate to other economic policy. One important task for the Riksbank during this period was to secure the funding needs of the government and the housing sector. This was of course only possible because the markets BIS central bankers’ speeches 1 were so strictly regulated and separate from the surrounding world. In other words, the situation was completely different then – although some of the regulation tools used then have begun to come back into fashion, albeit in another form and context.

The regulatory model for stablecoins could include different applications of these features – as long as it offers equivalent protections to those for commercial bank money. As part of this, a key requirement will be to ensure that, unless the stablecoin is operating as a bank, the backing assets for stablecoins cover the outstanding coin issuance at all times. An alternative to a private stablecoin, but not a mutually exclusive one would be central bank digital money in the form of a central bank digital coin (CBDC). Central bank money has a unique role in anchoring value and promoting confidence in monetary systems. A CBDC could therefore play an important role in sustaining, and potentially expanding retail access to central bank money. I have discussed the public interest in the safety and security of money. But there is another very important public interest in this area which goes to the heart of the monetary and financial system. I mentioned earlier that commercial bank money combines in one place – bank accounts – the store of value and means of payment functions of money and in doing so enables lending to the real economy. What if new forms of digital money – Stablecoins or CBDC – result in a large scale displacement of commercial bank money which means that a higher fraction of money in the economy must be backed by high-quality liquid assets rather than by loans to the real economy, with this being necessary to preserve the stability of a now more fragmented financial system.

Further, it is necessary to equip the European regulatory framework10 to deal with a hypothetical systemic crisis, to address the problem of the liquidity of institutions under resolution, and to analyse the possible role of asset management companies in the event of severe impairment of European financial institutions’ balance sheets. EU Member States should also move swiftly to reach an agreement on creating a common European procedure for the administrative winding-up of credit institutions. Lastly, we should not overlook the importance of making headway on the agenda of measures for the capital markets union project. In October, the European Commission launched a new action plan, identifying 16 areas for action to drive the project forward. I would like to highlight some of the most significant ones: supervisory convergence; sustainable finance to consolidate European leadership worldwide; changing the regulatory treatment of securitisations to strengthen banks’ lending capacity; or promoting market financing to SMEs and the development of venture capital markets. In general, progress on these and other key matters, such as the creation of a European safe asset, is a complex task that requires the adoption of measures and regulatory changes in a wide variety of areas, and entails the full implication not only of EU authorities, but also of the Member States. It is crucial that the authorities concerned have the firm political will to implement the required measures and do away with barriers and red lines. In short, to avoid a piecemeal approach and the loss of momentum, the utmost political ambition must be mobilised.

8 projects mean that the main mechanism for financing the public deficit continues to be traditional access to markets. An aspect I would like to underscore regarding the economic policy response to date is the high degree of complementarity of the measures adopted by the different authorities. If the ECB's response and the decisions of the European Council have enabled governments to expand the scope for fiscal action, it is the action taken by the latter and the ECB itself that has been vital for guaranteeing liquidity and reducing risk for non-financial corporations. This, along with the decisions taken by micro and macroprudential authorities and the ECB, has helped sustain the flow of credit to economic agents. It is very important that this degree of complementarity is maintained in the future. Outstanding European architecture reforms This crisis has also shown that, despite the progress of recent years, further improvements are needed in euro area governance. In particular, beyond the importance of having access to a recovery fund with the characteristics described above, we must continue to stress the major limitation for the proper functioning of the euro area of not having a permanent macroeconomic stabilisation mechanism that allows for greater risk-sharing in response to economic shocks.

But then a common currency BIS Review /1998 –2– of the region, not the dollar, will be agreed upon and the first step in this direction is to have a strong real. Responsibility I have been in the government since the beginning of 1995. I feel myself responsible for what has been done during this whole period. Pedro Malan has a key role in the government. Few Brazilians have his international credentials. He has good relations with men that make this world of international finance. His continued presence is essential to consolidate this transition period. But we should care about policies rather than names. Malan and I are carrying out a mission. Devaluation of the real No economy in the world could sustain a devaluation in real terms of 40%. The difficulty in maintaining a devaluation of that magnitude is that inflation would resume. The exchange rate has overshot, but it will come back, appreciating as time elapses. Currency Board I would like to stress my opposition to the idea of adopting a currency board in Brazil. This subject has already been examined and the government has decided against it. The Brazilian economy is not dollarised and I believe it would be a disastrous policy option. Brazil tried a similar regime in 1906. Nowadays, money supply in the expanded concept (M4) comes to $ billion, while international reserves reach $ 36 billion. To implement this regime we would have to dollarise and lengthen the maturity of these deposits.

Nevertheless, the issue of diversification continues to strike a chord among regional central banks and major institutional investors, driven by the accelerated pace of reserves accumulation in the past decade, low-yield environment in the G7 economies and changing trends in trade pattern and currency regimes. This necessitates a rethinking on how reserves should be invested. The fast pace of reserves accumulation and low yields on G7 assets remained the most compelling reasons for diversification in the quest to seek better risk-adjusted returns in alternative asset classes, such as emerging market debt, commodities and equities. BIS Review 162/2010 3 Intra-regional trade in Asia has surged from 32% of total exports in 1995 to an average of 50% in 2008, while the use of regional currencies for trade settlement has started. Furthermore, most Asian economies have gradually shifted from a US dollar focus to a more flexible exchange regime against broad basket of currencies, a trend which underlies the rationale of diversifying away from US dollar. In tandem with the rising savings and reserves accumulation by regional central banks, these reinforce the argument for more intra-regional investments which will contribute to the goals envisioned by the Asian Bond Fund (ABF) initiatives. The ABF was a fund launched by EMEAP, comprising foreign reserves held by regional central banks for investments in regional bonds with the aim of contributing to the development of regional bond markets.

Although the outlook for price stability is favourable, having allowed interest rates to fall to historically low levels, monetary policy cannot by itself generate lasting and sustainable growth and employment in the euro area. Part of the weakness in economic growth in the euro area may be linked to a lack of ambition in recent years in both fiscal and structural reforms to improve the conditions for investment and employment in the euro area. The euro area needs structural reforms which increase the flexibility of labour, financial and product markets and effectively increase potential output growth, job creation and investment. Although the extent and implementation of labour market reforms have been uneven across countries, the efforts made in the 1990s resulted in positive progress in two areas: first, in fostering employment growth across most sectors, which rose to 1.5% per year on average between 1997 and 2001, and second, in helping groups, such as women, the young and old and the least educated, to enter the labour market. Labour market reforms should now focus on reducing high structural unemployment and increasing participation and employment rates. Indeed, it is important that, alongside social considerations, the countries of the euro area give more weight to economic efficiency within labour markets. Capital market reforms can also play a major role in making the euro area economy more flexible. Much has been achieved, not least due to the introduction of the euro, and the bulk of the Financial Services Action Plan has been implemented.

Monetary and fiscal policy, and structural reform The achievement and maintenance of strong growth implies a perspective that extends beyond shorter-term cyclical developments. Indeed, over the medium term, economic growth tends to be negatively affected by the considerable costs associated with inflation, and the prospect of stable prices is therefore a key factor of growth. By being strictly geared towards maintaining price stability in a credible and lasting manner, monetary policy makes an important contribution to achieving a high level of output and employment, and to sustaining growth. Confidence in lasting price stability removes the inflation risk premium on interest rates, ensuring low real interest rates, which in turn foster investment, growth and employment. Theoretical and empirical evidence clearly confirm that there is no long-term trade off between price stability and economic growth. Trying to use monetary policy to fine-tune economic activity or to gear it above a sustainable level will, in the long run, simply lead to rising inflation - not to faster economic growth. Fiscal policy also plays a key role in contributing to macroeconomic stability. Stable, sustainable and efficient fiscal policies exert a favourable effect on long-term growth performance. They stimulate savings, capital formation, employment and innovation. And they facilitate the task of the monetary policy-maker in maintaining price stability. Sound public finances should rely on automatic stabilisers, rather than discretionary fine-tuning, to dampen the cyclical fluctuations of aggregate demand.

Its growth forecasts are among the highest in the EU, but does it serve as an example when levels of unemployment and indebtedness are so high? There are many models: Ireland is one, and Spain too… Employment is a lagging indicator. Moreover, unemployment figures, especially youth unemployment, have already fallen to levels below those at the time that the bank bailout was requested. Indeed, they are above 2008 levels, but I can still recall the levels of 20 years ago, so it’s all relative. They have always been higher than in the rest of the EU, even during the boom years. But I believe the mentality in Spain has changed. The ability to acknowledge the reality and to adapt to it shows that it is a mature democracy. That is the type of mortar we need for a monetary union. Spain feels particularly underrepresented in the EU since you took, in 2012, the rotating seat on the ECB’s Executive Board, which it had occupied since the institution’s creation. Do you think that, given its demographic and economic weight, the situation should be corrected? Passports should play a minor role in European representation, especially in supranational institutions like the ECB. Quotas are inappropriate. When we enter the ECB’s Governing Council meeting room, we leave our passports in the cloakroom. The only conditions laid down by the Treaty are competence and reputation. That’s quite different however in intergovernmental institutions where appointments are the result of allocation. 2 BIS central bankers’ speeches De Guindos in the Eurogroup?

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

Given the Bank’s somewhat chequered record on gender diversity up to that point, it was rather unfortunately named CHAPS. And indeed still is. In 1993, the Bank stepped-in to rescue a flagging project to upgrade the securities settlement process in the UK. The Bank designed and built a new, safety-first, system which again exists to this day. Fortunately, we did not call this one BLOKES, but rather the gender-neutral CREST. Most recently, in the light of the crisis, the Bank has been at the forefront of the debate about re-organising the structure of banking, with a ring-fence or firewall between the basic retail and investment banking sides of the business. This structural approach is increasingly finding favour both in the UK (through the proposals of the Vickers Commission) and internationally (for example, through the Volcker proposals in the US and the recent Liikanen proposals in Europe). 9 Sayers (1976). 10 Sayers op cit. BIS central bankers’ speeches 5 For the past half-century, the Bank’s structural agenda has become a central feature. But at the time it marked a radical departure from the Bank’s past. Designing what are in effect financial public goods is a front-foot activity. The Bank had grown a new limb, augmenting its crisis-management right arm with a crisis-prevention left arm. Stitching it all together So far, I have made no real mention of monetary policy. That is because, for much of its life up to the early 1970s, monetary control at the Bank of England was pretty simple.

These two winds have stirred up the water through which the UK economy must pass. The westerly gale first hit us in August as developments in the US mortgage market led to turmoil in global financial markets. For some years, banks were able to borrow cheaply in world capital markets to expand their lending. They packaged the resulting loans and sold assets backed by those loans to capital market investors. They were able to do that because some investors had failed to adjust to lower rates of return caused by high savings in emerging economies and low inflation at home. Those investors engaged in a “search for yield” by buying risky assets without always understanding fully the risks attached to them. Families and businesses had access to more finance at lower cost. That was most obvious in the growth of the US sub-prime mortgage market, where the potential problem of lending to people who could not repay when the interest rate was reset on their floating rate mortgages was becoming only too clear. In the United Kingdom too, borrowing and spending growth were strong and inflationary pressures built up. BIS Review 8/2008 1 But in August all that changed dramatically. Rising default rates in the US mortgage market led investors around the world to question whether they were being adequately compensated for the risks they were bearing on a wide range of assets – not just those associated with sub-prime mortgages.

Eva Srejber: Frameworks and stabilisation policy in a monetary union Speech by Ms Eva Srejber, First Deputy Governor of the Sveriges Riksbank, at the Bank of Uganda, Kampala, 17 August 2006. * * * Let me begin by thanking you for the invitation to come here and speak today on the occasion of Bank of Uganda’s 40th anniversary. On several occasions the members of the Executive Board of the Swedish central bank, including myself, have had reason to address the interesting topic of monetary unions. Besides being a stimulating theoretical exercise, it has been of great practical importance with the creation of the euro. Also, from a Swedish point of view, because of the national referendum in 2003 when a majority of Swedish voters said no to adopting the euro. Another reason, from an international point of view, is the trend in exchange rate policies towards corner solutions, of which membership in a monetary union is one. Although the East African Community (EAC) – with member states Uganda, Kenya and Tanzania – aims at eventually forming a political federation, and not only a monetary union, I am convinced that the experiences from other monetary unions, for instance the CFA Zone, will prove valuable to you in your efforts. However, since my comparative advantage concerns the Swedish and European experience I will discuss monetary unions from that perspective and I hope that this might be of some value.

When thinking about the set-up of national fiscal stabilisation policy in a monetary union intended to create credibility, these five guiding principles – consistency, commitment, transparency and accountability, coupled with independence of policy makers – are a good starting point. Fiscal stabilisation policy set-up Turning to its design, three relevant questions provide a framework for discussing the set-up of a fiscal stabilisation policy regime for a country in a monetary union: what is to be stabilised, how should it be stabilized and who should do the stabilising? 6 Addressing what is to be stabilised, two alternatives that were discussed in Sweden were the output gap and the inflation rate. Irrespective of what target is chosen, it should apply in the medium term, thereby allowing temporary deviations in the event of shocks hitting the economy. In the case of an 6 6 This discussion is based on Boije, Borg and Eklund (2002) and Boije and Shahnazarian (2003). BIS Review 73/2006 inflation target, it should be designed in such a way as to take account of necessary changes in relative prices; i.e. allowing for adjustments in the real exchange rate. Different targets have different advantages and drawbacks. For our purposes, when discussing the framework, it is more important to stress that the motives and forecasts behind the stabilisation policy decisions should be presented in a clear and open fashion. In turn, this helps build credibility through accountability. How is the policy objective to be stabilised?

In the next few years, job growth picked up sharply and real estate markets soared, a clear sign that a growing number of people had regained confidence in the city. But, even during the booming 1980s, crime rates continued to increase—it wasn’t until 1990 that crime rates peaked and began a long downward trend. I returned to New York in 1983. The draw was an employment opportunity in finance. At the time, the city’s circumstances were improving but crime was still high, and there were still lots of problems caused by years of underinvestment. For example, I recall that the New York City subway system at the time was a near-wreck, with train speeds sharply reduced in many areas due to poor track conditions and dilapidated infrastructure. But, the seeds of improvement were in place. The financial services industry was beginning a long boom marked by financial market innovation and the rapid development of the nation’s debt capital markets—a boom that ended with the financial crisis. When I arrived, the build-out of the Battery Park City neighborhood was just starting. My first year, I lived at Gateway Plaza, which was the first big apartment complex in Battery Park City. However, it was early days and the nearest grocery store was about half a mile away north on West Street! Although a major economic downturn throughout the Northeast in the early 1990s took its toll on New York City—especially on employment and home prices—the city’s population continued to grow and its crime rate began to decline.

With more competitors around, the wider effects of the failure of an individual bank would in all likelihood be smaller. The stability authorities need to be more alert than in the past to this source of economic vulnerability. Consistent with that, as we prepare for the transfer of prudential supervision, the Bank of England wants to reduce barriers to entry somewhat, so that the banking system can, over time, become less concentrated. But for that to be sensible, we need to be confident in the authorities’ ability to resolve those banks that get into distress without dramatic spillovers – lowering barriers to entry by removing barriers to exit. For smaller banks, that should already be possible using the Special Resolution Regime introduced in 2009. Prudential supervisors will need, as a priority, to ensure that banks are set up to enable the Financial Services Compensation Scheme to pay out rapidly. To be clear, for banks funded by insured deposits, the costs of failure will fall on their peers. Over time, I suspect that that will increase pressure for a funded deposit-guarantee scheme with risk-based levies. The Bank would welcome that. Prudential regulation: higher risk-based capital requirements and a cap on leverage But the reform agenda is not just about handling failure. Banks will be better capitalised, more liquid, and less interconnected. To take just one of those changes in the global order, higher capital requirements will affect behaviour as well as resilience.

This MoU sets a framework of cooperation among OIC member countries in key economic activities, with the objective of enhancing the opportunities for economic growth and development. Today’s Seminar is indeed a testimony to the continued efforts by both the IDB and Malaysia in enhancing the cooperation and deepening of business relationship. As all of us are aware, infrastructure development is a critical component to unlock potential economic activities, thus supporting sustainable economic growth of a nation. Malaysia has placed great emphasis on infrastructure development as part of its economic transformation, diversifying from agriculture to manufacturing and, in more recent years, in the services sector as well. Over the last ten years, the Government of Malaysia has allocated a total of nearly RM100 billion for infrastructure development mainly in transport, energy and public utilities. The Malaysian government has also encouraged the participation of the private sector in the development of infrastructure through privatization and the public-private partnership (PPP) policies. On the global front, the estimated value of infrastructure development is estimated to be USD35 trillion over the next 20 years. For the Asian region alone, a study done by the Asian Development Bank (ADB) reveals that the region needs USD750 billion per year over the year 2010–2020 to meet the rising needs of infrastructure development. Out of this, the needs for the ASEAN region have been estimated to be over USD60 billion per year. Considering the vast opportunities of infrastructure projects regionally and globally, Malaysian contractors should seize the opportunity for further expansion of their business.

At the same time, tax financing may be politically difficult to implement.4 In the short term, the politically easiest way of financing war, but in the longer term perhaps the most harmful, is through the printing of money, as this almost inevitably results in higher inflation. A fairly large share of the literature on the effects of war on inflation is about the financing of war. A review of the effects on inflation of the United States’ wars from the American Revolution to the First Gulf War shows that when the US has been involved in more limited wars, they have usually been financed through higher taxes or increased borrowing or a combination of these. However, in the case of major wars, the point where these two methods of financing have been considered exhausted has often been reached, and the government therefore turned to the printing press. The result has often been a considerably higher inflation rate.5 The two world wars are examples of this. After a war, sovereign debt has often increased considerably. At the same time, it may be difficult to raise tax revenue in the same way as before the war. This may be because the political situation has become more unstable or the economy's production capacity has declined. In such a situation, there may be a great temptation for a government to try to alleviate the situation by using the printing press to finance current expenditure and pay off the loans.

In addition, the effect on credit momentum of the other measures announced by the Federal Council in June 2012, namely the revision of the risk-weighting and the self-regulation rules, remains to be seen.16 Taking these issues into consideration, the SNB decided in August 2012 not to issue an immediate proposal to the Federal Council for activation of the CCB. It will reassess the situation regularly. The second key question pertaining to the functioning of the CCB is whether it is an effective instrument to strengthen the resilience of the financial system and thus help to limit negative spillovers (slide 7). The impact of higher capital ratios and more provisions on the resilience of banks is self-evident. This is also the case from a system-wide perspective. To assess the effectiveness of the CCB in strengthening resilience, we can draw some lessons from historical experience, namely the Swiss real estate crisis in the early 1990s. Internal calculations suggest that, had the proposed CCB regime been in place in the run-up to that crisis, the resilience of the system as a whole would have increased significantly. From an aggregate perspective, this additional capital would have absorbed a large portion of the losses that were reported as a result of the crisis. The third key question is: To what extent the CCB is able to contain the build-up of excesses? 13 IMF (2011), Drehmann et al (2011). 14 Namely, domestic mortgage volume indicators and domestic residential real estate price indicators.

Given these developments, Switzerland is facing an increasing risk, both of defaults in the mortgage market and a sizable correction in property prices, either of which might impair financial stability in the medium term. Specifically, an adverse shock – such as rising interest rates, lower growth or increasing unemployment – would leave some borrowers unable to service their loans, increasing the possibility and number of defaults, and ultimately leading to a vicious feedback loop of falling property prices and impaired balance sheets throughout the banking sector. At the same time, Switzerland currently serves as perfect example for the afore-mentioned argument that the interest rate is unlikely to suffice as instrument to ensure financial stability (slide 5). Notably, it is clear that the current exchange rate situation invalidates the interest rate as an available instrument to dampen the persistently strong growth in credit volumes. At present, the interest rates required for monetary policy objectives differ considerably from those required for financial stability policy objectives. This perfectly demonstrates the need for specific instruments to be able to address both policy objectives – financial and price stability – simultaneously. Against this background, the Federal Council announced a package of measures in June 2012 addressing these risks in the mortgage and real estate markets. In addition to the CCB, this package consists of a structural revision of capital requirements for residential mortgage lending as well as a revision of the banking industry’s self-regulation guidelines.

15 12 All speeches are available online at www.bankofengland.co.uk/speeches 12 While simple, these maps suggest there is important information on economies and societies to be found by peering through different lenses: lenses that operate at different resolutions, as the striking UK regional differences in income, wealth and health demonstrate; and lenses that focus on different economic attributes, as the striking differences between the UK’s regional income and well-being maps demonstrate. Chart 8: Cartogram of UK well-being Sources: ONS Annual Population Survey (APS) and Bank calculations. Notes: Responses to the question, “overall, how satisfied are you with your life nowadays?” where 0 is ‘not at all satisfied’ and 10 is ‘completely satisfied’ for 2016/17. UK NUTS 1 regions re-sized and coloured by mean response. (b) Differences within regions Given these striking regional differences in health, wealth and happiness across the UK, an interesting supplementary question is how those differences compare within-regions. As we alter the resolution at which we view the economy, do these differences narrow? Do economic patterns look different when 13 All speeches are available online at www.bankofengland.co.uk/speeches 13 comparing them within and between regions? Or are these patterns self-similar at different resolutions, as when we use a microscope to study the shoreline? Chart 9 provides one visualisation of these patterns at different resolutions. These “violin” plots compare the distribution of income per head at the regional (NUTS 1) level with the distribution at NUTS 2 and NUTS 3 level.

Under the said assumption, output gap becomes clearly negative as of the third quarter of 2006 and the contribution of demand conditions to falling inflation increases. According to the projections produced under such conditions, inflation drops rapidly compared to the previous scenario and is realized between a 1.9 4.5 percent by the third quarter of 2007. Thus, the possibility of inflation falling evidently under the path consistent with the target increases (Graph 26). Risk elements Distinguished Participants, It should be emphasized once more that the forecasts that I have presented were produced under a main scenario, which was developed on the basis of the above-mentioned assumptions and shortterm outlook in the light of current data. In the event of a possible threat to the medium-term inflation outlook by risk elements, the Central Bank will review both its forecasts and the stance of monetary policy towards the future. Distinguished Guests, In the final part of my speech, I would like to touch on the risks in question. Uncertainties about the course of oil prices are the leading risk element with respect to the achievement of the inflation target in the coming period. In the forecasts produced in the previous Inflation Report, oil prices were assumed unchanged. However, these prices persisted to rise throughout this period and reached high levels in recent times. The unfavorable impact of oil prices on BIS Review 67/2006 19 annual inflation became one of the factors that slowed down the decline in inflation expectations in the first quarter of 2006.

Full separation may also be operationally simpler to implement than the existing structural proposals. Finally, enhanced banking competition would potentially help to reduce some of the problems of too-big-to-fail by reducing the degree of banking concentration. Greater exit from banking, through enhanced resolution regimes, can help. But a bigger problem still is bank entry: the UK went 100 years without a new retail bank being set up. One potential barrier to banking entry is the difficulty of switching deposit accounts and loan contracts. A shared banking platform, containing customer account details, would dramatically reduce the frictions in search and switch for deposit and loan products for customers (Leadsom (2012)). It could lower materially barriers for new banking entrants. A powerful counter-argument to all of these more radical proposals is that they could erode the economies of scale and scope associated with large banks. These economies clearly do exist in banking, as they do in other industries. For example, fixed costs are large in finance and spreading them widely ought to deliver productivity improvements. The interesting question is at what point these economies of scale are exhausted. Indeed, informational and managerial diseconomies of scale are likely at some scale, whatever the business line. In his classic theorem, Ronald Coase tells us that firms will seek a privatelyoptimal size which balances the benefits of economies of scale against these diseconomies (Coase 1937)). How does all of this apply in banking? The empirical evidence on economies of scale and scope in banking is surprisingly patchy.

We have seen the value of this in our own region in the 1980s and early ’90s, and, when discussing the problems created by capital flows, we should never forget that they have specific and beneficial functions. 6. The second characteristic is the sheer Volume of capital movements around the world. In April 1995 the global value of foreign exchange transactions taking place on an average day was $ trillion. In April 1998 this figure increased to $ trillion, or, to put it in more meaningful terms, to around 48 times the daily value of world trade. It is also worth stressing that these are largely private capital flows. In 1997, for example, the amount of private capital flowing into developing economies was estimated by the World Bank to be five times the size of official flows. 7. Within these private flows there is considerable Variety and fluctuation in the nature and organisation of capital. With financial liberalisation and the globalisation of financial markets, portfolio capital flows are of increasing importance compared with the more traditional foreign direct investment and commercial bank lending as a source of international capital flows. An aspect of this Variety is the growing number of complex investment tools, and different orders of derivatives therefrom, involving different degrees of leverage, available for moving money around the world, or indeed enabling investments to be made in markets without having actually to move money around. 8.

Protection products, such as green housing insurance, also remains an unexplored market in Malaysia despite the steadily increasing number of green buildings in the country. Within existing product offerings, novel features such as additional protection for non-certified green buildings to rebuild in green when damage occurs, could also be explored. Responding to the need for green housing calls on financial institutions to take an approach that is at once novel but not entirely unfamiliar. The journey towards greater incorporation of sustainability considerations is one which many institutions have embarked on, and a focus on green housing is both highly strategic and impactful to the broader agenda of greening the economy. It does, however, bring with it some specific challenges. Housing affordability in Malaysia is already presenting a significant challenge to home ownership with house prices remaining beyond the reach of many Malaysians. This is further compounded by current high levels of household debt. The goal for institutions is to develop green housing solutions that would not substantially worsen these conditions and help steer the market towards a just and orderly transition. Rising to this challenge will require creativity and collaboration between public and private institutions. I am encouraged to see the broad range of participants assembled at this event, including social housing enterprises, government bodies, and non-profit organisations which along with the private sector, have the wherewithal to open up opportunities for the development of new business and funding models for green housing.

We undoubtedly need a 2 BIS Review 84/2005 greater degree of co-ordination between supervisors than hitherto, and we need greater consistency in supervisory practices. As I said, we need a framework that rationalises the compliance burden and streamlines the interaction between supervisory authorities. We need banks that manage risks, not unnecessary supervisory requirements. Thirdly, we need an approach that uses the full range of tools at our disposal. In other words, we should not just look for legislative solutions to the challenges that face us. What we need is effective and timely implementation of the laws and regulations that exist, and convergence in their application. This comes through co-operation and information-sharing between supervisors. And let me also mention here the potential offered by supervisory transparency. We have heard much about market discipline in the context of the disclosure requirements that will apply to banks under pillar 3 of the revised Basel capital framework. But I think that increased disclosure by supervisors, especially on a comparable basis, also has an important role to play, not only in helping us to monitor consistency of approaches across countries, but also in driving greater convergence through exerting a kind of market discipline for supervisors. Finally, allow me to put my Basel hat on for a moment. I think Basel II certainly offers its fair share of implementation challenges, but also provides us with by far the biggest opportunity to make progress in building a more consistent and efficient co-operative approach to supervision.

Like other central banks, we too are committed to establishing a standard for worldwide rules on foreign exchange market practices. Within the framework of the Swiss FX Market Roundtable, a broad spectrum of market participants has been working with the SNB to develop a global standard ‘FX Code of Conduct’. I would like to take this opportunity to thank these market participants for their contributions. Longer-term correlation between monetary policy and financial markets Ladies and gentlemen, I now come to the last part of my speech, where I would like to talk about the longer-term interactions between monetary policy and financial markets. Through their monetary policy measures, central banks influence financial market prices. To what extent this influence is stronger today than it used to be is the subject of a number of studies. Indeed, we observe that some traditional relationships and correlation patterns on the financial markets have changed in recent years. This is illustrated in chart 5. It shows the correlations between the prices of seven asset classes, including equities, government bonds, corporate bonds and commodities. The blue bars show the distribution during the period 2000 to 2007, before the financial crisis and during a period of conventional monetary policy, while the red bars depict the observed distribution since 2010. It is clear that the correlation between asset prices has significantly increased since 2010. There are various explanations for why financial market prices globally are moving more in unison.

French banks do not have so called “toxic assets” in their balance sheets but sovereign exposures on countries which are part of a monetary union. Some of these exposures need to be provisioned. These provisions will be increased for Greece. And all these risks are fully disclosed according to the European Banking Authority (EBA) templates. Despite the deleveraging taking place, their profitability remain strong and will enable them to face, in due time, the increase of capital requested by the new regulatory environment. I would therefore emphasize that these so-called “vulnerabilities” are mainly the consequence of the internationalization of banking activities. And there is a certain paradox in a situation where these globalized banks, with diversified activities and balanced business models, are perceived riskier than more specialized institutions. **** To conclude: in these turbulent times, Europe has a special responsibility. Currently, at the epicenter of the crisis we are fully aware of the necessity to take and implement vigorous decisions. However the interaction between markets and governments has become more complex. We live in democracies and have to accept that political decisions follow their own process and obey their own constraints. In all our countries, rising public debt and the unstable state of public finances is creating enormous anxiety, which, in turn, makes it more difficult to reach the necessary decisions. There are, however, some reasons for optimism. On the supply side, our economies remain robust and dynamic. Corporate balance sheets are strong.

Refinancing their foreign currency liabilities had become a concern in the mini-crisis of 2006, as I will discuss later, but proved increasingly difficult as the global financial crisis tightened its grip in successive waves from the autumn of 2007 onwards. The banks were thus forced to halt any further expansion and begin deleveraging in order to create the foreign exchange liquidity they needed in order to survive until foreign funding markets opened again. In the conditions then reigning, it was not easy to dispose of assets; however, two of the banks, Landsbanki and Kaupthing, were able to improve their foreign liquidity position by collecting deposits abroad. Kaupthing did so mostly through subsidiaries, but Landsbanki collected deposits primarily through branches in the UK and the Netherlands. This was to prove devastating for Iceland when the bank failed, because of the resulting dispute about the settlement of deposit insurance. But what had been difficult before the Lehman collapse in mid-September 2008 became almost impossible afterwards. In the immediate aftermath of the Lehman bankruptcy, crosscurrency liquidity management of banks and other entities became very difficult as FX swap markets became severely impaired and there was a general scramble for dollar liquidity around the globe. The Lehman bankruptcy led to a major loss of confidence, where concerns over protecting one’s own solvency and liquidity led financial institutions worldwide to take action that, although rational from the standpoint of individual institutions, was disastrous for the system as a whole.

This problem was significantly mitigated with the FX swap lines that the US Fed negotiated with the ECB and other major central banks, especially after these became uncapped in some cases. But the problem was not confined to currency pairs involving the US dollar, and a similar kind of dynamic played out for smaller currencies in Europe vis-à-vis the euro, especially where banking systems had significant short-term foreign refinancing needs, or what can also be called rollover risk in terms of foreign currency. In some cases, FX swap lines were granted vis-à-vis the dollar, the euro and the yen, and in some cases not. Where swap lines were granted, it helped. And for some of the smaller players, it might not have mattered terribly much which of the major international currencies they hooked on to in this sense, especially after the uncapped swap lines had been established. What we observed during this peak of the crisis was thus a run on cross-border banking operations. We know how to solve such problems domestically by letting central banks lend to markets and/or institutions through their almost unlimited short-run capacity to expand their domestic balance sheet. However, when it comes to foreign currency, a central bank’s capacity to help banks to refinance the foreign liquidity denied them on the market is limited by the size of its reserves or the willingness of its big neighbours to help. This is what did the Icelandic banks in.

From the perspective of the National Bank, this means that the Government is trying to anticipate the policies that we implement to maintain the level of the exchange rate and it takes them into consideration when adopting the budget. It is clear that the National Bank and the Government may adopt essentially good decisions in their respective spheres of action if they cooperate even during the discussions which precede the decisions. The cooperation with the Government would also be in terms of creating conditions for the social dialogue to take into account the challenge we face in conducting the monetary policy. This actually means that the inflationary pressures which in themselves would result in faster development of the domestic economy, as well as more positive output gap compared with the countries of the Eurozone, would also lead to more pronounced interaction with the increase in unit labor costs. The perception of close coordination between the Central Bank and the Government in dealing with this challenge would mean that both public institutions are aware of the need to adjust to the conditions that the maintenance of price stability through the exchange rate brings. This adjustment would prompt the Government, through dialogue with social partners, to advocate a moderate growth of wages, i.e. wage growth which will take into account productivity in both the tradable and non-tradable sectors. This would lead to increased employment, while simultaneously improving the competitive position of enterprises, which would alleviate the emergence of imbalances in the economy as a whole.

The French government and the French financial authorities, including the Banque de France, are also working together to facilitating the dissemination of sound and safe financial innovations and fostering the scaling up of sustainable finance. These investments are protected by a very resilient banking system, accompanied by consistent regulation. Let me remind you that Paris is already home to the European Securities and Markets Authority and will soon host the European Banking Authority. In addition, the Paris Court of Appeal was granted an 3/4 BIS central bankers' speeches international chamber last February, with international commercial affairs falling within its remit. That will duly complete the Paris court organisation, which already includes an international chamber in its commercial court. Last but not least, let me stress that the French authorities are making sure that the Paris financial centre and its participants benefit from a streamlined and business-friendly regulatory framework, for instance in areas such as bond issuance and securitisation. Meanwhile, significant efforts have been made by the French government to alleviate the tax regime and social contributions of “impatriates.” Starting in 2016 under the previous government, they have been amplified by the new one, including on the eve of the business summit last January. *** France is changing, for the better. But it is still dependent on its economic environment, obviously. Let me conclude with two wishes. First: that Europe is courageous enough to strengthen itself through this cyclical upswing.

Charles Bean: Polymer banknotes Remarks by Mr Charles Bean, Deputy Governor for Monetary Policy of the Bank of England, at the Bank of England, London, 10 September 2013. * * * Good morning and welcome. One of the Bank’s most visible responsibilities is the issuance of banknotes. It is a long-standing responsibility that dates back to shortly after our founding in 1694 and over the past three centuries, our objective has remained the same, namely to supply good-quality, genuine banknotes that command the people’s trust. Meeting that objective helps us to achieve one of our core purposes, which is to maintain confidence in the currency. Following a three-year research programme, we are today announcing the launch of a public consultation regarding the possible introduction of polymer as the basis for the next generation of banknotes. Polymer banknotes are made from a durable, yet thin and flexible plastic film. Design features of the banknote are printed on the film, meaning these notes can look very similar to notes printed on paper. If the public reception to the proposal is supportive, then the recently announced Sir Winston Churchill £ and Jane Austen £ notes would be issued on polymer. This change would happen in 2016 and 2017 at the earliest. The Bank’s research programme has been wide ranging, investigating the impact of the introduction of polymer notes along several dimensions, including: security, durability, costeffectiveness, the impact on stakeholders in the cash industry, environmental considerations, and the likely impact on noteholders.

In undertaking the research, we have worked closely with external stakeholders from the cash industry and have already engaged with the public through several independently-managed focus groups. And we have consulted other countries that have undertaken research into different banknote materials, of which several have already switched to the use of polymer, including Australia and Canada. Based on this research, we are confident that printing our banknotes on polymer would bring several benefits: First, polymer notes are more secure. Polymer notes are harder to counterfeit and allow for the inclusion of “windows” or clear portions in the design, which considerably enhances counterfeit resilience. Such features also allow users to check whether notes are genuine quickly and easily. Second, polymer notes are more durable and resistant to damage. As a result, polymer banknotes last at least two-and-a-half times longer than notes printed on paper. And because polymer banknotes last longer, they don’t need to be replaced so frequently, meaning they are cheaper to produce. Third, polymer banknotes repel dirt and moisture better than paper banknotes, and so stay cleaner for longer, reducing the incidence of ‘tatty’ notes. Finally, polymer banknotes are more environmentally friendly than paper notes. Given these benefits, we are confident that a switch to printing notes on polymer makes sense. But we also recognise that the public takes pride in their banknotes, and that changes to the design and format of notes are consequently of great interest. Because of this, we have decided to consult with the public before making any final decisions.

What concerns would you have? What concerns at a European level, at the ECB level, are there about Brexit? Let me make three points on this. One is, as I think it’s well understood here: we’re in a pause. Brexit has happened, but until we know what the new trade deal is going to be, the uncertainty remains. The more quickly a trade deal is concluded the better, because we do think uncertainty in general is holding back the European economy. A second point to make is trade frictions: the more severe the trade frictions, the worse we think the medium-term performance of the UK and European economies will be. But taking the overall European view: the United Kingdom is not big enough. It’s a big country, but compared with the EU27 it is not big enough to be the driving force for the future of the euro area. Of course, it’s more important for us (in Ireland), as it’s the closest neighbour. But for the euro area, while it’s an important concern, compared with global trade and the future of, say, China and the emerging economies, this is a medium-priority topic. The last point is that, in terms of the financial system, it’s very important that we have good 3/4 BIS central bankers' speeches supervisory relationships with the Bank of England and the other supervisors in the United Kingdom.

The Swiss franc money market is still in a position of structural liquidity surplus vis-à-vis the Swiss National Bank (SNB). Consequently, our focus is on liquidity-absorbing open market operations. Currently, a large proportion of the surplus Swiss franc liquidity is being absorbed through SNB Bills amounting to around CHF 110 billion and daily repo auctions (reverse repos) of around CHF 25 billion. The volume being absorbed has not been increased over recent months. Consequently, the total sight deposits of domestic banks have, at approximately CHF 25 billion, remained almost unchanged. This is a significantly higher level than before the financial crisis. It exceeds the minimum reserve requirements many times over. As a consequence, interest rates on the Swiss franc money market are still close to zero. Despite the fact that interest rates are still very low, the volume of activity on the secured Swiss franc money market remains at a relatively high level. By contrast, the volumes traded on the unsecured Swiss franc money market are still markedly lower than their pre-crisis level. The management of the three-month Libor is, however, not affected by this, and can still be guaranteed. The management of the foreign exchange reserves Allow me to conclude with a few words on the management of our foreign exchange reserves. First, let me stress that the increase in the foreign exchange reserves in 2009 and 2010 was a direct consequence of monetary policy measures. It had nothing to do with the pursuit of investment goals.

Budget balance percent of GDP 2 0 -0.9 -2 -2.2 -2.9 -4 -4.2 -6 -4.8 -2.5 -0.3 -0.2 2013 - 2015 at MTO -2.1 -3.3 -5.4 -8 -8.1 -8.8 -10 2005 2006 2007 2008 2009 budget balance ESA Source: Eurostat 2010 2011 2012 2013 structural budget balance 2014 2015 2016 2017 primary budget balance Figure 15. Current account balance - regional comparison percent of GDP 10 5 0 -5 -10 -15 -20 -25 2008 2009 Romania Source: IMF 2010 Bulgaria 2011 2012 Croatia 2013 2014 Czech Republic 2015 Hungary 2016 Poland 2017 Figure 16. Current account and FDI 8 Current account deficit and non-debt-generating flows % nominal GDP 4 0 -4 -8 * Mainly European structural and investment funds ** Current account balance + Capital account balance -12 -16 2005 2006 2007 2008 2009 2010 2011 Capital account balance* Current account balance 2012 2013 2014 2015 2016 2017 Direct investment, equity (including reinvested profit) Net lending (+) / borrowing (-)** 2018Q1 (4Q moving average) Source: NBR 12 Structure of FDI (%) EUR bln.

My assessment is based on a longer time perspective and it may differ from a year on year approach. Romania is one of the few success stories of converging within the European Union, even during and after the crisis. GDP per capita at PPS increased from 50.6% of EU average in 2008 to 62.5% in 2017. The real GDP was higher by 17.5% in 2017 as against 2008; and the real potential GDP was 23% higher in 2017 as against 2008 (Figure 1). By the end of 2018, these figures will further grow by approximately 4 percentage points, according to IMF and EC forecasts. 2 IMF/EU programs from 2009 to 2015 were successful in many ways, contributing to a sharp adjustment in the budget deficit, exit from the Excessive Deficit Procedure in 2013 and reaching the MTO in the period 2013-2015. Structural reforms also advanced during the programs, one indicator of these being the large reduction in public government and state enterprises’ arrears. Exports of goods and services doubled in the last ten years, from 38.3 billion euro in 2008 to 77.9 billion euro in 2017, while imports increased by only 42.7% over the same period. CPI-based Real effective exchange rate (REER) is also lower than in 2008 (Figure 2). Consequently, the negative contribution of net exports to GDP has diminished, and the current account deficit witnessed a major adjustment of about 10% of GDP.

A prominent exception is the ECB, which uses a reference value for the growth of the money stock M3 as a second pillar besides a broad-based assessment of the inflation outlook to achieve its objective of price stability. The SNB abandoned money supply targeting two years ago. Its new concept is based on an inflation forecast and an operational target range for the three-month Swiss franc Libor rate. The main goal has been, and will remain, price stability. Price stability is considered to have been achieved if inflation, measured by the national consumer price index, is below 2% in the medium term. In achieving this goal, the SNB always takes account of the economic development. This is also stipulated in the draft of the revised National Bank Law. Due to the strategy change from money supply targeting to inflation forecast-oriented interest rate steering, shifts in the demand for money have become less problematic, as they are being offset automatically. But although the money supply no longer serves as an intermediate target, its development is an important element duly considered – along with other indicators – in producing the inflation forecast. The centuries-old observation that sustained changes in the price level are linked to changes in the supply of money remains valid. 4.2. The significance of the exchange rate Another important variable in producing a medium-term inflation forecast is the exchange rate. The significance of the Swiss franc exchange rate against the major currencies is due to the Swiss economy being so small and open.

Nina Stoyanova: Bank of Bulgaria’s latest projects in the area of financial services and payments Speech by Ms Nina Stoyanova, Deputy Governor (Banking Department) of the Bulgarian National Bank, at the opening of the “Innovations” Financial Forum, Sofia, 14 June 2016. * * * Dear colleagues and guests, I would like to welcome you at the Financial Forum ‘Innovations’ organised for the third year in a row by the ‘Bank of the Year’ Association in partnership with the University of Finance, Business and Entrepreneurship (VUZF). The topic of this forum gives us the opportunity to present and discuss the innovations in the financial sector in the area of technologies, banking products and regulations. In this regard, I would like to briefly present the latest projects in the area of financial services and payments, on which the BNB is working. Later today our colleagues are going to give you more details on these projects, which will have an impact on the financial sector over the next couple of years. As you are well aware, the legal and regulatory framework of financial services and payments in Bulgaria is consistent with all European trends and requirements aiming to achieve an integrated European market, to harmonise the rules and conditions for providing payment services, to promote innovative payment methods, to ensure a high level of security for payments and better consumer protection.