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If this labor market improvement continues and the FOMC is reasonably confident that inflation will move back to our 2 percent objective over the medium term, then it would be appropriate to begin to normalize interest rates. At their March meeting, the FOMC removed language from the statement that indicated that we would be patient in beginning the process of normalizing monetary policy. But, as Chair Yellen remarked in her most recent press conference, removal of the word “patient” from the statement does not indicate that we will now be “impatient” to begin to normalize monetary policy. Rather, the timing of normalization remains uncertain because how the economy evolves is also uncertain. When, hopefully, the data support a decision to lift off later this year, it does not mean that U.S. monetary policy will be tight. Rather, we will simply be moving from an extremely accommodative monetary policy to one that is only slightly less so. I would view this as a positive signal about the progress we have made in restoring the U.S. economy to health. It is important to remember that near zero short-term interest rates and the large expansion of the Federal Reserve’s balance sheet were designed to be a temporary extraordinary treatment to help the economy regain its vitality, and not a permanent palliative. I remain confident that when the FOMC decides to begin to remove policy accommodation that we have the requisite tools to support this decision.

There's no use in complaining about "populism", which incidentally is a label that is too easily used, if we can't provide the "people" with the ability to ask the right questions and then evaluate the answers. France has therefore made a firm commitment to implement a strategy for financial education based on the principles set out by the OECD and endorsed by the G20 leaders. Work on the strategy began in 2013 and on 20 December of last year, the Minister of the Economy called the first meeting of the National Committee for Financial Education. This Committee brings together relevant administrations and institutions, consumer associations and finance sector professionals, and gives the political impetus at the very highest level. The Minister also reaffirmed the role entrusted to the Banque de France of conducting the national strategy. Before continuing with a presentation of our first collective achievements, I would like to focus on the role of the Banque de France. *** 1. The Banque de France, the conductor of the national strategy [slide 4] The Banque de France has concrete, everyday experience of our fellow citizens' needs in terms of information and explanations through its three core tasks of monetary strategy, financial stability and services to the economy. For example, as part of the over-indebtedness procedure managed by the Banque de France, each year we provide solutions to more than 200,000 households experiencing financial difficulties.

Ladies and gentlemen, let me end my remarks by quoting a line from the book: “Risk of crisis as financial integration increases will never disappear, and countries must pursue protection from risks of volatility and sudden stops”2. We should always be vigilant, even in peace time. To Mr Kawai and other authors, congratulations yet again on the launch of this new and important book. 15. 2 Thank you. Chapter 4: “Managing large capital inflows: taking stock of international experiences” (by Susan Schadler). BIS central bankers’ speeches 3

John C Williams: Preparing for the unknown Remarks (via videoconference) by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 2021 US Treasury Market Conference, 17 November 2021. * * * As prepared for delivery Introduction Good morning, and welcome to the seventh annual U.S. Treasury Market Conference. This is our second time gathering virtually. Although I miss seeing all of you in person here at the New York Fed, I am pleased that so many of you could join us today. This conference is a great opportunity for market participants, as well as members of five publicsector bodies—the Treasury, the Board of Governors, the SEC, the CFTC, and the New York Fed—to come together and take stock of the U.S. Treasury market. The events of the past 20 months have further underscored this market’s significance in the global economy—and the important role our five entities perform in ensuring that it functions as it should. In fact, the Inter-Agency Working Group for Treasury Market Surveillance (IAW G) came together to examine recent, notable disruptions to the Treasury market, and it issued a report ahead of this conference that identifies steps to strengthen its functioning and resilience.1 I won’t have time to go over the report in detail, but I strongly encourage everyone to read it. Severe disruptions to critical financial markets like we saw last spring should be rare.

Investment projects amounting to more than USD160 billion to be financed by the Gulf states in Asia have been announced since 2005 2 . In 2006 alone, mega-deals 3 involving corporate acquisitions and real estate purchases from the Gulf to Asia, are estimated to total more than USD18 billion, including multi-billion dollar IPO purchases in financial institutions in China, large oil refineries and telecom companies. The value of such investments are expected to increase to between USD20-30 billion in 2007. For economic regions with high savings and surpluses such as Asia and the Middle East, the challenge is to recycle part of these surplus funds to productive investments in the region. The supply of savings in Asia and the Middle East is by far higher than in any other part of the world. Savings rates here in Asia are expected to remain in the region of 30-40% of GDP for some years to come. 1 The Gulf Cooperation Council represents Saudi Arabia, UAE, Bahrain, Qatar, Oman and Kuwait 2 "A route to riches on the new Silk Road", Financial Times, 21 Dec 2006 3 Worth more than USD1 billion BIS Review 31/2007 1 Similarly, savings in the Middle East economies have been rising in the recent decade and is expected to average about 30-35% of GDP in the coming years. In 2006, the current account surpluses as percentage of GDP for Asia and the Middle East were about 5% and 23% respectively 4 .

Responsible investment is an integral part of the investment strategy and includes the exclusion of companies on an ethical basis. In 2016, the Ministry of Finance, at the request of the Storting, introduced two new criteria for ethics-based exclusions: a climate criterion and a coal criterion. Norges Bank has conducted extensive research to collect data and perform analyses to identify the companies that fall under the coal criterion. Based on the results, the Executive Board decided to exclude 69 companies and place 13 companies under observation in 2016. On the advice of the Council on Ethics, the Board also decided to exclude a further eight companies and place one company under observation, while the exclusion of one company was revoked. The exchange of information and division of responsibilities between Norges Bank and the Council on 1/2 BIS central bankers' speeches Ethics functions smoothly. At the end of 2016, Norges Bank submitted a recommendation to the Ministry of Finance to increase the share of equities in the GPFG. Historically, equities have generated a higher return than bonds, but the return has also been more volatile. A lower return on bonds is the price we pay to dampen fluctuations in the fund’s value. In recent years, bonds have become a more efficient, but also more costly, hedge against security market volatility. Both factors suggest that the bond allocation should be somewhat lower. In addition, Norway’s petroleum wealth as a whole has become more diversified over the past ten years.

Today I would like to address the importance of adopting a forward-looking approach in our framework for financial stability. At the same time, following the advice of the Italian statesman and philosopher Machiavelli that “whoever wishes to foresee the future might consult the past”, I would like to make the case that, to ensure a sound regulatory system for the future, we must look carefully back at the lessons of the past. It seems especially appropriate to discuss, here in Asia, the important relationship between financial stability and sound growth. After enduring a period of regional financial distress in the late 1990s, Asia’s re-emerging dynamism and growing stature can be seen in many indicators: for example, in its capacity as an importer of raw materials and foreign direct investment, and as an exporter of manufactures, financial capital, etc. Asia is a central partner with the rest of the world through its roles both in trade and finance. Indeed, in a recent address at the Centre for Banking and Monetary Studies in Geneva, Mr Yam offered an accurate overview of Asia’s vibrant potential. He set out some impressive figures such as the amount of foreign reserves held by Asian economies, the amount of portfolio and direct investment going into and coming out of the region, and the high level of rates of private-sector saving, which is increasingly institutionalised and professionally managed. Certainly, Hong Kong is a prime example of the enormous potential that is being realised in Asia.

For this very reason, the award ceremony for the best diploma thesis has become a consolidated activity of the Bank of Albania geared toward supporting promising students in the field of scientific research within the scope of central banking. This year, students also showed a high interest in presenting their diploma theses. We received 1/2 BIS central bankers' speeches 27 studies on a wide range of economic, financial, and legal topics focused mostly on the Albanian economy. It is a delight to see how these studies use contemporary research methodologies and valuable information intelligently to analyse economic phenomena, employing theoretical and empirical arguments. In spite of the challenge of choosing the most interesting studies, we now have our verdict on the “Governor’s Award for the Best Diploma Thesis 2018”. The selection has not been easy. Each year, we receive increasingly more qualitative studies in terms of research methodology, topic originality and methods applied in research. I take this opportunity to congratulate all the contestants for the high quality of the presented studies. I hope and encourage you to further enrich your theoretical and empirical capacities as you advance in your careers, wherever that may lead, in academia or as experts in specific fields. I hope you will be unremittingly engaged in scientific research, in a relationship of which only the starting date is known. Thank you and happy holidays! 2/2 BIS central bankers' speeches

Although the phasing-in of petroleum revenues is a gradual process, the contest for labour resources will intensify. As a result, monetary policy is likely to remain fairly tight in the years ahead. A high interest rate level may, as we are now experiencing, result in a strong krone in periods . This may accelerate the scaling back of manufacturing industry. However, in the long run monetary policy cannot influence overall employment or its distribution across industries. A lower interest rate would have resulted in higher price and cost inflation, which would also have weakened profitability in the manufacturing sector. The end result would have been the same for employment and production, but in addition we would have had high inflation. Even if manufacturing employment and production show a decline, the situation for Norwegian enterprises will not necessarily be negative. Some enterprises could be at the forefront of technological developments and increase efficiency in pace with the relatively sharp rise in costs in 1 The figures are based on the national accounts. We have defined private service industries as wholesale and retail trade, hotels and restaurants, other transport industries, financial intermediation, commercial services and part of other social and personal services. 4 BIS Review 65/2002 Norway. In recent years, we have also seen that many enterprises have moved large portions of their production abroad, particularly the most labour-intensive production. Norwegian manufacturing companies could still be profitable. Export industries generate foreign-exchange earnings to finance imports of goods and services.

At least since the end of the 1990s, it seems that enterprises, households and employees have adapted to expectations of strong income growth. This may contribute both to the appreciation of the krone and to widening the cyclical divergence between Norway and other countries. If the increase in the use of petroleum revenues has already been priced into today's exchange rate, both the longterm trend in the real exchange rate and interest rate expectations suggest that the krone exchange rate will return to a more natural long-term range. In the short term, other factors may also influence the krone. Global equity markets have seen a sharp fall in prices over the past year. When there is a large degree of uncertainty in stock markets, many investors make portfolio shifts. Money and bond markets become good alternatives. The NOK market, where interest rates are relatively high, might seem attractive. These portfolio shifts result in an appreciation of the krone. This trend may be reversed by a turnaround in the stockmarket. Another factor that we have pointed to earlier is that the Norwegian krone may also be perceived as an attractive investment alternative - or a safe-haven currency - in a situation with tensions in the Persian Gulf, high oil prices and a global downturn. Potential gains may, however, be offset by the risk associated with investing in less liquid markets. This may limit capital inflows to the NOK market.

You could probably do the Volcker Rule in a more efficient way to achieve the same objectives without the burden of regulation that you have right now. You know, right now, if you’re an equity trading desk and the equity market falls very violently, you really aren’t supposed to go in and buy equities unless you actually have customer orders. So, you actually have this crazy situation where the equity desk can’t actually buy equities to support the market. So, I’d like to see the Volcker Rule looked at to see if there’s a way of doing it in a way that – if you’re a client-facing business, and you’re trading your own asset class, you have a little bit more freedom to buy and sell when markets are volatile and maybe provide actually a little liquidity support in the market. But also make it a lot easier, I think, to enforce the Volcker Rule. The other thing I would say is relief for smaller banking institutions. The financial crisis was not about small banking institutions. It was about large banking institutions and particularly it was about large broker-dealers. And so I think the Dodd-Frank Act imposed a lot of compliance and regulatory costs on smaller banking institutions. And I think – we have about 6,500 smaller banks in the United States plus a lot of credit unions and other financial intermediaries.

And if you don’t have that, then I think that has its own set of consequences. Maureen O’Hara: Yes, well, I think you’ve raised a great point, that there are both positive and negative consequences of globalization. Let me raise something that may have similar negative and positive, and that’s the impact of technology. I think we’re all beginning to see a brave new world in which technology is entering ways that even 10 years ago were hard to fathom. And you know, I think that just as globalization seems to have made people nervous about the future, so has technology. Now, what are your thoughts on that? Is technology going to be the bigger influence over the next decade? Is that what’s going to change our economy and the ability of people to make that leapup that you just talked about? President Dudley: Well I think technology is always challenging. I think it’s been challenging for decades, even centuries. My mom for many years lived in Westville, Massachusetts, and if I have this right, it was the buggy whip capital of the world at one point. Well, Westville had to make the transition from being the buggy whip capital of the world to other things. And I think – so, I don’t think this is new. I don’t think this is a new story about technology.

The second major difficulty in our present situation relates to the strength of the exchange rate. We are, of course, acutely aware of the problems that this is creating - and has been creating for the past year or so - for those sectors of the economy that are engaged in international trade and exposed to international competition. Given that the UK chemical industry exports nearly two-thirds of its output, and that this country imports nearly 60% of the chemicals we consume, it is just possible that one or two of you are suffering from the strong exchange rate. I only ask you to believe that we both understand and share your concern. From a macro-economic standpoint it is - as I say - important that the pace of growth of aggregate demand should slacken. But it is clearly not desirable - either in terms of sustainability or in terms of the balance of the economy - that the slowdown should simply be a result of a sharp deterioration in our balance of payments. Our problem, potentially, is excess domestic demand. And that is the root of the dilemma. We have needed to tighten policy to moderate the strength of domestic demand. That has no doubt contributed to the continuing strength of the exchange rate - although you can’t plausibly explain anything like all of that strength in terms of relative interest rate movements here and abroad. It certainly has a good deal to do with market perceptions about the future strength of the euro.

In any event, I take macro-economic sustainability as the theme for my remarks this evening. Many people think that - because the objective of monetary policy is typically nowadays defined by governments in terms of permanently low inflation - that is seen as an end in itself. But in fact, as I say, we see low inflation - effective price stability - not just as an end in itself but rather as a means to the end of sustainable growth and macro-economic prosperity. Rising prices - across the board - are essentially a reflection of imbalance between aggregate demand in the economy and its supply-side capacity to meet that demand. There is not much frankly that we can do - directly - to affect the supply-side capacity of the economy. That is a function of its structural characteristics, including the productive abilities of both sides of industry, which can be influenced over time by the whole raft of government policies. Monetary policy operates essentially on the demand side - aiming to keep the growth in aggregate demand more or less continuously in line with the underlying, sustainable growth in the supply-side capacity of the economy. I probably need not remind an industrial audience what happens if we get it wrong and let demand run ahead of supply. The inevitable result is accelerating inflation, with all the damage that can cause - by distorting the outcome of investment decisions and obscuring the relative price signals that direct resource allocation.

BIS Review 37/2008 13 Over the past year, we have seen a growing international debate about government-owned investment vehicles; so-called sovereign wealth funds (SWFs). The increased attention reflects their rapid growth over the last decade. The debate has revealed some scepticism towards these funds, where key concerns relate to a lack of transparency and possible nonfinancial investment objectives. In my view, the debate should also reflect these funds’ potential to positively influence international financial markets through enhancing market liquidity and financial resource allocation. Typical features of this type of funds are long investment horizons, no leverage and no demands for the imminent withdrawal of funds, unlike the growing number of leveraged hedge funds with short time horizons. Hence, sovereign wealth funds have a high risk-bearing capacity and are resilient to short-term volatility. They may therefore act as a stabilising factor in financial markets by dampening asset price volatility and liquidity risk premiums. Let me elaborate and exemplify this by looking at the Government Pension Fund – Global: The Pension Fund is a policy tool to support long-term management of Norway’s petroleum wealth and avoid the resource curse. An important objective is to shield the Norwegian economy from fluctuations in prices and extraction rates in the petroleum sector. The Fund is only invested abroad in financial markets. The alternative to an oil fund would have been to regulate the extraction path by putting a conservative upper limit on annual extraction.

But even with this substantial source of income, only a share of future pension payments – which basically are financed by current income – will be matched by revenues from the Pension Fund. Estimates show that the capital in the Fund will only cover some 50-60 per cent of public pension expenditure in the future. One key element of the Fund Management Model is accountability. The role of the political authorities as well as of Norges Bank as manager is clearly defined. Another key feature is transparency and disclosure of information. The management of the Fund is based on two ethical commitments. 16 BIS Review 37/2008 First, there is the consideration relating to future generations. The Fund must ensure high capital returns at a moderate risk, by means of professional management with effective control of operational risk. Since 1997, the average annual net real return has been a little above the expected 4 per cent, partly due to excess return attributable to Norges Bank’s management. Second, the Fund must respect the fundamental rights of those affected by the companies in which the Fund has invested. The instruments used here are the exclusion of companies from the Fund’s investment universe and the active exercise of ownership rights. The Ministry of Finance excludes companies that produce certain types of weapons. They also exclude companies when they identify an unacceptable risk of contributing to gross corruption, severe environmental degradation, and serious violations of human rights and of fundamental ethical norms.

Should the general economic situation indeed deteriorate further, the solvency of borrowers would also worsen. This would result in losses in the big banks’ lending portfolios. The effect on banks with a domestic business focus would depend on the extent of the deterioration in the international environment. Entering into risk is a bank’s core business and, as such, is desirable. What is important is that these risks can be both calculated and carried. However, experience shows that is not always the case. In each of the three most recent international financial crises, a Swiss big bank was particularly hard hit. Each time a crisis occurred an increasing amount of equity was wiped out. This should serve as a warning. If the wheels are not set in motion now, the impact of the next crisis could be even more severe. Should a big bank collapse, the consequences for Switzerland would be dire. Therefore, measures need to be taken now in order to ensure that the Swiss big banks are sufficiently BIS Review 80/2008 1 resilient in the future. The SNB and the Swiss Federal Banking Commission recognise a need for action in – basically – four areas: capital, liquidity, monitoring and crisis management. In our stability report we discuss measures in all four areas. Today I would like to focus on the most important measures in the area of capital. It is in the nature of the financial markets that there will always be crises.

As clearly outlined in our Financial Stability Report, leverage at the Swiss big banks is very high, and since the mid-1990s, average indebtedness at the two big banks has risen from 90% to over 97%. That means over CHF 97 of borrowed capital for every CHF 3 of equity. This ratio is also very high by international standards. In terms of return on equity, high leverage may appear attractive. In terms of financial stability, however, it is also a source of risk. Thus, in the current crisis, losses arose on Swiss big bank risk positions which are relatively small in comparison to total assets. However, because leverage was high, in the case of UBS these losses destroyed almost half the bank’s equity. The two measures mentioned above have a complementary effect. The risk-based requirements ensure the best possible risk-sensitivity for capital adequacy purposes. Alongside this, a leverage ratio would guarantee a minimum safety buffer which does not depend on complex models. Thus, the leverage ratio would be a protection against unexpected shocks that are not sufficiently covered by the risk-weighted requirements. This limitation set on the degree of indebtedness would mean that capital requirements would increase for activities based on large amounts of borrowed funds, such as proprietary trading. In the US, banks have long been subject to a leverage ratio. They have to comply with a capital-to-assets ratio of at least 5% in order to be considered as well capitalised.

The debate on international monetary policy coordination There are different proposals on how the IMS should change. In particular, there have been several calls to establish a more formal framework of monetary policy coordination, or some kind of revised Bretton Woods system. Overall, I will argue that the forces which are at play today in the IMS, as described above, call for a strengthening of some of its features rather than an overhaul. Theory First, while the literature suggests that international monetary policy coordination may be instrumental in achieving a globally optimal solution, it generally concludes that the gains from coordination are small relative to an environment in which national policy-makers pursue optimal domestic policies.7 Second, it is not clear that the benefits from coordination increase monotonically with economic and financial integration.8 On the one hand, financial integration intensifies the impact of foreign shocks on the domestic economy. On the other hand, it also improves diversification and insurance opportunities, hence mitigating the impact of foreign shocks. It is difficult to know ex ante which of these effects will dominate both in “normal” and “crisis” times. My suggestion would be that while the diversification effect dominates in “normal” times, in “crisis” times the effects from large adverse spillovers prevail. I will come back to this issue later. Practical obstacles There are also several practical challenges that make more explicit and binding forms of monetary policy coordination difficult. The first stems from political economy. Central banks operate under different mandates, time horizons, objectives and accountability arrangements.

This has taken place since the demise of the Bretton Woods system at the bilateral level in the context of the IMF’s Article IV consultations and it has expanded recently at the multilateral level with the IMF’s Spillover and External Sector Reports as well as the G20 Mutual Assessment Process, not to mention regional exercises. The resulting recommendations are however not binding and therefore constitute only a light form of multilateralism. Clearly, countries may be reluctant to submit to closer scrutiny, fearing that the recommended policies may not be in their national interest. Thus, better awareness and maintaining a spirit of multilateralism will be a crucial element in strengthening the effectiveness of surveillance and contributing to global stability. This requires institutions that are both legitimate and effective. In particular, lack of progress in global governance reform (reflecting the shift towards a multipolar world) would fuel a lack of trust in the IMS. It would encourage the ring-fencing of national systems and the re-nationalisation of savings, harming growth and jobs in all economies. BIS central bankers’ speeches 5 Conclusion Let me conclude. The belief that the comfortable pre-crisis world could return is long gone. And I also believe that we should not aspire to turn the clock back. The global economy has changed fundamentally, and there is clearly a greater understanding of the role of crossborder linkages. The current IMS leaves countries with more domestic policy options to counter adverse idiosyncratic shocks than the inflexible system of the Bretton Woods era.

Dato’ Ooi Sang Kuang: Malaysia – ready to face a new world Keynote address by Mr Dato’ Ooi Sang Kuang, Deputy Governor of the Central Bank of Malaysia, at the National Economic Outlook Conference 2010–2011, Kuala Lumpur, 1 December 2009. * * * The global economic and financial environment of the past two years has been extremely challenging. Financial market events previously thought to be highly improbable, occurred to create a financial crisis on a global scale. The international financial system froze, wealth destruction not seen since the Great Depression took place, world trade collapsed, and many advanced and emerging economies entered into a deep synchronised recession. Several well-known global financial institutions disappeared overnight while many others were rescued by Government bailouts. The global financial crisis saw policy makers having to respond strongly and adopting a wide range of unorthodox policy measures. A prolonged recession was averted and now the global economy is recovering. What is uncertain is whether the current revival can be maintained and growth sustained. Risks remain that the current recovery could lose momentum. Arising from the worst global financial crisis since the last depression, the world’s economic order and the character of the global financial system will be undergoing a process of transformation that will be significantly different. In a transformed new world, Asia is set to emerge as one of the most vibrant regions, and will increasingly play a critical role in determining the shape of the future global economic landscape.

BIS Review 158/2009 3 As economic revival gathers pace, the immediate policy priority is to ensure that the domestic foundations for recovery are more firmly entrenched and the medium and longer term growth potential is established. The private sector will need to resume its primary role in driving economic activity. Of particular importance is the growth of private investment. Towards this end, the Central Bank will continue to ensure that access to financing across all segments remains in place. While it is critical for the public sector to play a counter-cyclical role, sustained fiscal stimulus that leads to excessive fiscal burden would be detrimental to longer-term economic prospects. Thus, the Government’s current commitment to fiscal consolidation and enhancing efficiency in public spending reflects a measured and sound approach in budgetary management. As for monetary policy, it is recognised that a prolonged period of low interest rate globally could lead to potential market distortions, particularly in an environment of ample liquidity. While consumer inflation is expected to remain low in the international environment, there is a need to be watchful of developments in asset markets and asset prices. Promoting monetary and financial stability is complicated by the frequency of very large short-term capital flows. Better prospects for recovery and expectation of a head start in the unwinding of policies in the Asian region compared to the rest of the world could lead to strong capital inflows.

Economic theory says that such goods will not be offered to a sufficient extent or sufficiently efficiently by the private market. Tobin (1987) 15 argued that this aspect of the monetary system means that central government should have a central role on the payment market and I am inclined to agree with him. The implementation of payments involves the exchange of a large amount of information, demanding large IT systems which are expensive to obtain but with 13 The banks’ possibilities for creating new loans are also limited, to a certain extent, by the requirement that they have a certain amount of equity in relation to the size of their balance sheets. There are also regulations for the composition of the balance sheet that are aimed at reducing the risks in the financial system. 14 Up to SEK 950,000 per person and institution is protected according to the deposit guarantee. See www.riksgalden.se/sv/Insattningsgarantin/Om_Insattningsgarantin/. 15 See Tobin, J. (1987) “A Case for Preserving Regulatory Distinctions.” Challenge 30 (5). 5 [15] which the marginal cost for executing a further payment is small. In other words, there are economies of scale, which, in theory, leads to natural monopolies. This means that, if the market is left unregulated, the dominant company will have an incentive to supply too little of the product for too high a price. Monopolies can also create worsened conditions for innovation as these are often driven by competition. In addition, the system can be vulnerable when one company, and thus one technical platform, dominates.

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

Fourth, the measure of risk-weighted assets – the denominator of the capital adequacy ratio – is constructed to better capture the risks that banks are taking in their activities. For example, the risks weights on trading account assets and for counterparty exposures have been increased substantially to reflect the lessons of the crisis. Note that due to better capture of the underlying risks, at least initially, aggregate risk-weighted assets in the system are likely to increase. This is not because the inherent riskiness of bank balance sheets has increased, but rather because that riskiness will be better captured. In addition to the 4.5 percent minimum common equity standard, there is also a new capital conservation buffer requirement equal to 2.5 percent of risk-weighted assets. If a bank were to incur losses and fall deeper and deeper into this buffer, increasingly tough limitations would come into play in terms of the bank’s ability to make capital distributions by paying dividends or buying back shares. This capital conservation buffer is designed to forestall the type of behavior that we saw during the crisis – banks continuing to dissipate capital by paying out dividends in order to demonstrate that they were strong. Instead, banks will have an incentive to raise additional equity to exit the buffer and its restrictions on distributions.

Third, higher bank lending spreads almost certainly will push some activity into the capital markets, constraining the magnitude of the rise in total lending costs. Finally, banks may be forced via competitive pressures to lower their compensation levels. By cutting compensation costs, banks could have smaller lending margins and still earn sufficient profits to generate a level of returns necessary to attract capital. Given all the potential margins for adjustment, there are good reasons to expect that the increase in lending margins will actually turn out to be quite modest. Although any increase will be a real cost, this appears to be a necessary and appropriate price to pay for a much more resilient financial system. The cost represented by higher lending spreads has to be weighed against the benefits of a more robust and resilient banking system. Recent years have surely taught us that easy access to credit that is underpriced because it is not backed by sufficient capital is not a sustainable route to prosperity. Indeed, to the extent that tougher standards reduce the misallocation of resources in the real economy that often accompanies periods of financial excess, ensure more consistent access to finance over time and encourage investment by holding out the prospect of greater economic stability, the new standards could be consistent with a more rapid sustainable growth rate over the long run.

This was the path that most observers counted on last spring. It was, however, questioned by others, particularly outside the United States. In general, they foresaw a more protracted, U-shaped recovery. Time would be needed for the adjustment of the over- 2 BIS Review 86/2001 investments that excessive optimism had generated. There is a lag before measures of economic policy have tangible effects. In some quarters, finally, there is an even more pessimistic scenario, an L. This envisages that growth in the U.S. economy comes more or less to a halt as the imbalances undergo a painful correction and measures of economic policy have little effect. In my discussion with you last spring I believe I likened my version to a banana. This was because the Riksbank believed that in many respects the cyclical path would follow the normal pattern. An expansionary phase is usually followed by a period of slacker activity. The longer the upward trend has lasted, the more likely it is to take a pause. That made it difficult to believe in the V-shaped scenario that the financial markets were mainly counting on at that time. The path has been accentuated by the recoil from the excessive optimism that had attended the technological breakthrough and given rise to the notion of a new economy. With rising demand, the supply side of the American economy had been expanded on the basis of expectations that simply were not realistic.

With due respect for all the forecasting difficulties at present, the Riksbank counts on demand in the industrialised countries turning upwards during the second half of next year. GDP growth in the OECD area is calculated to be 1 per cent this year, followed by 1,5 per cent in 2002. Under present circumstances the uncertainty around our main scenario is, of course, considerable. BIS Review 86/2001 3 We count on GDP growth in Sweden in the coming years being lower than we assumed earlier. The combined economic effect of interest rates and the exchange rate is therefor stimulatory. As the Committee is no doubt well aware, in the years ahead both increased transfers and tax cuts will also contribute to a rapid increase in household disposable income. Given a gradual recovery in the rest of the world, this appreciable overall stimulus from economic policy will lead to a gradual upturn in Sweden’s economy. GDP growth is expected to be 1.3 per cent this year, followed in 2002 and 2003 by rates of 2.2 and 2.8 per cent, respectively. The lower GDP growth — particularly this year — compared with our earlier assessment implies lower resource utilisation. At the same time, the recovery towards the end of the forecast period means that resource utilisation will then be rising again. Monetary policy is currently formulated on the basis of an assessment of inflation excluding transitory effects from indirect taxes, subsidies and house mortgage interest expenditure (UND1X).

I understand that this is a very good participation rate when compared to similar exercises done in other jurisdictions. 19. Given the scale and breadth of the Focused Review, the exercise is expected to complete around early next year. After that, we plan to share with the industry the identified insights as well as practices that lead to good customer outcomes. Through this exercise, we also aim for better alignment of incentive systems whilst preventing potential misconduct behaviour. We trust this would advance bank culture development in Hong Kong to the next level. Accountability 20. While a proper incentive system will encourage desirable staff behavior, we should not lose sight of the other side of the coin, which is accountability framework. In the past few years, the HKMA has been making greater use of accountability reviews as a tool to identify those responsible for misconduct incidents. The idea is that those who have pursued undesirable behavior have to face the consequences of their own misconduct. Another aspect of accountability that banking supervisors in several jurisdictions have been trying to tackle is how can we effectively address the problem of “rolling bad apples”. 21. As this phrase literally means, “rolling bad apples” refer to individuals who have committed misconduct behaviour, but are able to obtain subsequent employment elsewhere without disclosing their earlier misconduct to the new employers. 22. When “bad apples” tried to “roll” from one institution to another, this cannot be easily dealt 3/4 BIS central bankers' speeches with by individual banks working alone.

Both the financial crisis and the recession which followed it were global economic events. No major economy in the world was unaffected by the financial turbulence and the dramatic downturn in world economic activity in late 2008 and early 2009. And on the inflation front, we have seen major global forces operating too, with the inflation rate in the UK and other countries being significantly affected by large price swings in global energy and commodity markets. The global economy is now much more integrated and interdependent than at any time in the history of the world. Four main forces have come together in the past two decades to create the “New Global Economy” of the 21st Century. First, new technologies have had a major impact, notably the development of global information technology, media and communications networks. Second, barriers to trade have been reduced, with most of the world’s nations now participating in a liberal and open trading system. The World Trade Organisation now has 153 members, covering 97% of the world’s population. Third, political change has extended the global market economy to large parts of the world which were previously closed to international trade and investment – including China, India and the former Soviet Union economies. And fourth, there has been a tide of deregulation of markets – including financial markets – in many countries, and as markets have been deregulated, they have also been opened up to international competition.

Liquidity can be compared to the ability to pay one’s bills as they fall due. Even if you have large capital, you may not have good liquidity. This is particularly important for the banks. While they receive money from depositors and borrow on the market at fairly short horizons, their lending is usually long term – perhaps 30 years or more for a mortgage. This ability to transform short-term saving into long-term loans is the banks’ main function in society. It enables companies to invest and households to buy their homes. Normally, a shortage of liquidity does not present a problem. Withdrawals from bank accounts follow normal patterns and the banks are able to monitor this. If special needs arise, the banks can manage the situation by selling assets and thus acquire cash. Normally the banks have also been able to manage their short-term borrowing without problems. But during the crisis problems arose on many markets. In some cases there were quite simply no buyers at all and market funding ceased functioning. And as the banks had become dependent on short-term borrowing, there was little they could do when their financiers decided it was safest to demand their money back. Money the banks could not get hold of. In these situations there is not much a bank can do. The usual remedy is liquidity assistance from the central bank. But most central bank make tough demands regarding collateral for lending money to banks with liquidity shortages.

The internationalization of the Chilean peso can enhance financial stability, by alleviating liquidity concerns during stress episodes and reducing counterparty risks, among other effects. All of these changes must be accompanied with more robust and developed financial infrastructures. Also, the wider cross-border usage of the Chilean peso improves our position as a financial center. Regarding concrete measures towards accomplishing these goals, the CBC is reviewing its FX regulation, in order to modernize and simplify it. In addition, a larger and more developed FX market should benefit from having access to more robust financial market infrastructures. Page 12 of 20 Central Bank of Chile September 2019 In order to do so, the CBC issued regulation and is implementing a Trade Repository for OTC derivatives, relying on its current faculties and in coordination with the Financial Market Commission. Additionally, the CBC is working on an initiative that will allow its Real Time Gross Settlement (RTGS) payment system to settle US dollars large-value interbank transactions. These measures add to the future inclusion of the Chilean Peso as the first CLS-eligible currency in South America. This is a priority for the CBC, therefore we are working closely with the CLS Bank to materialize this in the next three years.

For example, by December 2008 nearly all our respondents were sure the U.S. economy was in a recession; thus, the 70 percent probability of being in a recession in six months can be interpreted as a 30 percent probability of an expansion in June 2009. The NBER subsequently declared July 2009 as the turning point into an expansion. Another approach to predicting recessions, which is a form of the wisdom of the crowd, is to use financial market asset prices. The well-known argument is that because large amounts of money are on the line, this different form of aggregation of diverse views will tend to be more accurate. Of course, asset prices also include compensation for risk, and much of modern asset price theory is focused on how fluctuations in this compensation drive much of the asset market volatility we observe. In the technical language of modern asset price theory, the probabilities from our surveys are physical ones, whereas those that use asset prices without adjustment for risk aversion are risk neutral probabilities. The classic variable to use here is the term spread, the difference between a long-term interest rate and short-term interest rate. The seminal paper showing the power of the term spread to predict recessions, measured as the 10-year Treasury rate less the three-month rate is by Arturo Estrella and Rick Mishkin.

A small number of these participants quickly separated themselves from the pack and consistently maintained their exceptional performance. Tetlock dubbed these individuals "superforecasters" and subsequently focused his team on aggregating the forecasts of these standout performers—a strategy that draws from the "wisdom of the crowd." As you well know, this strategy relies on some degree of independence in the information, approaches, and insights producing the forecasts. We often think of independence in a very statistical sense, but Superforecasting conveys a useful framing of independence as how one assembles diverse teams and how team dynamics can be established to maintain this diversity. 4 This approach won the IARPA tournament by a substantial margin with the use of one subtle but important tweak. Tetlock extremized the aggregated prediction probabilities—so, for example, a probability of 70 percent became 85 percent. 1/6 BIS central bankers' speeches So what can we learn from these non-technical superforecasters who outperformed the intelligence community? Tetlock lists a number of characteristics that generate individual diversity and maintain that diversity in a team dynamic. My quick summary of these lessons is to be humble, always question, listen to alternative views, and—very comfortingly for Bayesians like me—always express your forecast as a distribution rather than a point forecast, and crucially update that forecast when new information arrives. Further, constantly assess why forecasts worked and didn't work.

Regulation of SGX as a self-listed entity When the SGX was listed on itself (on its Securities Trading subsidiary), MAS assumed the role of frontline regulator for the listing and trading of SGX's shares. MAS was the approving authority for SGX's listing, and was directly responsible for vetting SGX's prospectus. We are also conducting surveillance of trading in SGX's shares, and monitoring the continuous disclosure of material information by SGX. MAS has powers under the Exchanges (Demutualisation and Merger) Act to issue directives to SGX to resolve any conflicts of interest arising from its self-listing. Such conflicts are also addressed in a Deed of Undertaking to the MAS. In keeping with the Deed, SGX has appointed a Conflicts Committee to deal with such issues, and MAS is the approving authority for the composition of the Committee. Revisiting the regulatory structure will be necessary The relationship between the regulator and the exchange is evolving internationally. Regulators are monitoring the effectiveness of self-regulation by the exchanges, and the division of responsibilities between regulators and exchanges. No single model has gained universal acceptance, and no model is regarded as good for all time in any jurisdiction. The present MAS-SGX regulatory arrangement has major elements in common with that in the major jurisdictions which have seen the exchanges demutualised, and in particular with arrangements in Australia. The UK approach is also similar, except that the Financial Services Authority (FSA) has taken over the listing authority from the London Stock Exchange (LSE).

I will touch now on a number of issues concerning the regulatory functions of the SGX as a demutualised, profit-oriented and listed exchange, and its relationship with the MAS as the statutory regulator. Can a demutualised, listed exchange regulate the market? As a focal point of market activity, exchanges have traditionally been accorded the role of frontline regulator of the securities markets. With the demutualisation and public offering of shares by a growing number of exchanges - most recently the Deutsche Borse - questions arise as to whether a listed for-profit exchange is able to discharge its role as frontline regulator competently and effectively. Conflicts of interest in the regulatory functions of an exchange are not new however. They existed before demutualisation. Members of the former Stock Exchange of Singapore (SES), a mutual body, had to set and enforce rules in the public interest that could negatively affect their commercial interests. The exchange was also expected to conduct effective and impartial supervision of its member-owners. The potential conflicts of interest in these respects were mitigated by the fact that the SES had only a small number of members, accentuating the financial risks that they each faced from a failure of the exchange to properly regulate. 2 BIS Review 14/2001 More importantly, the potential conflicts of interest made it necessary for the MAS to take a heavy hand in the affairs of the exchange.

And it works in part by shifting net interest income from those who do save to those who borrow (and hence are more likely to spend out of marginal income). Not surprisingly, loosening monetary policy is often unpopular with savers, just as tightening policy is unpopular with borrowers. We have every sympathy for those who are net savers and especially if they rely on investment income, but we have to set policy for the good of the economy as a whole, in line with our Remit. Ultimately, economic recovery is in everyone’s interests. Monetary policy famously has “long and variable lags”. One of the main reasons why is because the demand for money depends on many other factors in the economy outside of the central bank’s control. There are other forms of money apart from sterling as I have defined it so far. Economic activity is also supported by the extent of deposits created by the commercial banks. Various measures of this are available, usually labelled “broad money” and the definition most commonly used in the UK is known as M49. Ideally, that wider definition of money is what we would like to boost to ensure an increase in nominal demand for goods and services. In the UK it has been clear over the past four years that while we have been busy increasing the supply of narrow money, the growth of broad money has remained weak.

Financial sector weakness was at the heart of the problems in Asia, a crucial element in Argentina and Mexico earlier in the decade, and a contributing force in Russia. Just as strong financial systems act as stabilizers when a domestic economy is battered, weak financial systems amplify the scope and reach of the problems, making bad situations worse. While important progress has been made in rehabilitating Asia’s financial systems, a great deal remains to be done to continue the strengthening of weakened financial and corporate sectors, and improve the region’s resistance to future problems. I am well aware that universal policy prescriptions are difficult to draw, given the wide range of experience and initial conditions. Indeed, individual countries in Asia have followed differing reform strategies, and the results of these efforts will help to inform the ongoing debate. Nonetheless, international experience with financial sector reform suggests a number of cautionary lessons. Let me cite a few: • Restructuring and reform must adequately address both the current “stock” of problem assets as well as the potential “flow” of new problems attributable to deficiencies in the broader financial system infrastructure. Lack of adequate action on either front can lead to a continuation of the substantial costs of weak banking sectors, sometimes well beyond the immediate crisis itself. • Clean-up efforts must be sufficient to the task. Half-done measures that leave financial institutions with significant levels of impaired assets at best postpone the reckoning and potentially create incentives for excessive risk-taking.

So, on top of the various internship programmes we have been organising, we have just launched the Industry Project Masters Network pilot scheme which provides internship opportunities to postgraduate students to work on real-life fintech projects of banks. Another major initiative is the launch of a brand new Future Banking Bridging Programme in collaboration with HKIB and the industry. This Bridging Programme is free and provides good opportunities for university students to gain practical knowledge in the hottest areas of banking. The inaugural class will be open for application very soon. 33. In saying all this, we should not miss out existing banking practitioners. So, the second direction is to better “connect” our workforce to the future of banking to ensure they stay relevant in the new era. Our success will be all about upskilling our people to meet the future needs of the industry. For this to happen, an essential ingredient is the availability of in-demand training programmes with credible certification frameworks. 34. To date, more than 13,000 banking practitioners have obtained certifications in numerous professional areas under the Enhanced Competency Framework, or ECF. As the industry demand for fintech and green finance knowledge is strong, we will launch a new ECF on fintech later this year to provide more structured and comprehensive training programmes for fintech practitioners. We will also look into the feasibility of developing an ECF on green finance. 35.

So, have we done enough in terms of financial inclusion? 14. The pandemic has taught us that we must deepen our commitment to financial inclusion. And we should try to weave that into our financial development objectives going forward. In fact, our ability to enhance the financial inclusion role can be helped hugely by technology. With technology, our banking system can provide a more equitable and fairer access to banking services for all. 15. And this brings me to the second role the financial system can play – to build a smarter financial system. Let me share with you an example of how a smarter financial system can help promote financial inclusion. For a long time, SMEs have found it difficult to obtain bank financing without collateral, because banks lack reliable and timely financial data to assess the repayment ability of SMEs. 16. We believe that the introduction of the Commercial Data Interchange can help address this long-standing pain point. This next-generation financial data infrastructure can facilitate banks’ access to customers’ commercial data with their consent. With such data, banks can apply advanced data analytical tools for credit risk assessment. This could allow corporates, especially SMEs, without sufficient collateral or credit history to borrow more quickly, easily and at a lower cost. It is a win-win situation as this will also enhance banks’ risk management capability and unleash new business opportunities. 17. So, we strongly encourage banks, large or small, to embrace digital transformation to provide fair and efficient financial services to customers.

This is why, for instance, the minutes taken at the monetary policy meetings are normally published two weeks after the meetings. In addition, the Chairman and Vice Chairman of the General Council have the right, according to the Sveriges Riksbank Act, to attend the meetings of the Executive Board, which they normally make use of. 3 The purpose of this is in principle that they are monitoring that things are done correctly, on behalf of the Riksdag and the general public. We decided only a couple of weeks ago to make some changes in these areas. I shall return to this shortly. But let me first state another aspect as to why openness and clarity are so important to us. Target fulfilment – openness and clarity contribute to efficiency There are not merely democratic reasons as to why central banks have become more open and clear. Many central banks have seen greater transparency as a means of more easily attaining their objectives and of making monetary policy more efficient. Openness and clarity can even here enable us to better meet the requirements made by our principal. Firstly, openness and clarity regarding monetary policy make it easier for economic agents to be convinced that the interest rate decisions made are really intended to attain low and stable inflation. This contributes to greater credibility and to anchoring expectations around the target.

For one thing, it may well happen that policymakers, in the light of new facts and figures on ongoing developments, come to the conclusion that the interest rate pattern currently followed needs to be corrected quite considerably. This would mean correcting a pattern that, from today’s vantage point, was not optimal in the past. For another, it may be desirable in certain situations to take the markets by surprise and cause expectations to be revised. Second, it is in the nature of the concept that the information content of a pre-announced interest rate target is much smaller with respect to the time dimension than used to be the case for money supply targets. Under the aspects of transparency and central bank accountability, this is a drawback. We have therefore taken effective countermeasures by defining price stability and deciding to publish our inflation forecast, thus submitting our decisions to public discussion. This has made it clear - and equally clearly communicated - how our actions are oriented and how they are to be measured. I have thus addressed issues that have all seen a particularly large number of changes in the past few years: independence, transparency and accountability. 3 BIS Review 35/2000 3. Independence - mandate - transparency Independence Right into the 1980s, independent central banks were the exception - such as those of the US, Germany and Switzerland - rather than the rule. This has changed on a broad front in the past ten years.

Whilst non-performing loans in the banking sector rose from around 5% in July 2008 to their current levels of around 10%, they remain within the prudential ceilings above which concerns of systemic risks would be warranted. The increase in non-performing loans thus reflects the deterioration in the real sector of the economy. It is in this sense, i.e. the absence of a significant volume of impaired assets in the financial system, that I describe “financial markets” rather than the “financial system” as bearing the brunt of the crisis. The weight of adjustment was reflected in exchange rates and the Balance of Payments – reflected in a marked draw down of international reserves. However, the ramifications of the crisis on the real sector of many sub-Saharan African economies are real and potentially far reaching, and it is to these that I now turn. In my reflections on the impact and implications of the global economic crisis on Africa, I wish to emphasize four key points: The first and perhaps the most significant effect of the global financial and economic crisis has been the marked slow-down in real GDP growth in SSA, to a projected 1.5% in 2009 from an estimated 5.5% in 2008. This slow-down in growth has occurred after a significant period of strong economic growth and investment that had laid the platform for sustained and significant reductions in poverty across the continent.

1 The circumstances in which financial markets can affect the real economy were covered in my speech: ‘Market finance and financial stability: will the stretch cause a strain?’ (February 2018). 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 So as we consider the bear of stretched valuations in credit markets and the bergs of leverage and liquidity that could affect the resilience of those markets, I’ll look at whether each is an issue just for market risks or also of relevance to the wider economy too. Let’s begin with the moonwalking bear in debt markets. Consider this: The yield on a basket of dollar-denominated corporate bonds is now closer to the expected average short-term risk-free rate over the life of those bonds than at any time in the past twenty years (see slide 3). The premium investors earn for taking interest rate and credit risk is squeezed. On the face of it that suggests an unusual degree of investor confidence about the interest rate outlook and corporate prospects generally.2 This compression of the premium has meant that – unusually – dollar corporate bond yields haven’t risen, even as the US risk-free rate has. (slide 4) Perhaps companies, globally, have become less risky? That seems to be the view in the market for credit default swaps at least. Two years ago, the average annual premium of insuring against investment-grade corporate default was 85bp of the amount insured. Today, it is 50bp.

Banks have become more vulnerable to distortions in the credit markets. Historically, our 4 banks primarily obtained funds through deposits by households and enterprises. In recent 1 Folketrygdfondet will manage the new Government Bond Fund. 2 The Government has increased the capital of Kommunalbanken Norway (the local government funding agency), it has increased the scope of GIEK (the central government export credit agency) and Innovation Norway, and has offered state loans to Eksportfinans Norway (the credit institution for export financing). 3 Figures for banks’ equity capital before 1918 are based on: Jan Tore Klovland (2007): “A reconstruction of the balance sheets of savings banks in Norway 1822-1875” and “A reconstruction of the balance sheets of commercial banks in Norway1848-1900” in Øyvind Eitrheim, Jan Tore Klovland and Jan F. Qvigstad (Ed.) (2007): “Historical Monetary Statistics for Norway – Part II” Norges Bank’s Occasional Papers, No. 38, Oslo. Statistics Norway is the source for figures from 1919 to 1995. Norges Bank is the source for figures from 1996. 4 Figures are taken from the sources in footnote 3 and Hege Imset Matre, H. I. (1992): Norske forretningsbanker 1848-1990: En tilbakeføring av forretningsstatistikken (Norwegian commercial banks 1848-1990). Report No 41 from the research programme Det nye pengesamfunnet. 2 BIS Review 37/2009 years, banks have borrowed in both domestic and foreign markets. When credit markets dried up, this proved to involve high liquidity risk for banks.

Might this perhaps be a niche which a cooperative bank, setting up shop here, might be able to exploit? Furthermore, I think that perhaps I should modify an observation I made earlier: namely, that the need to set up a cooperative bank in Malta has never so far been felt. On second thoughts, perhaps, this is not entirely true. For one of our smaller banks, one that, not surprisingly, was founded by a Jesuit priest in 1910, actually did begin life as a cooperative society. It was originally called the Lega dell’ Apostolato della Preghiera, and its main aims were the setting up of a number of initiatives, all with an underlying social purpose. These included: a savings bank, intended to instil habits of thrift among the working classes; a mutual benefit society; a printing press; the publication of a Maltese language periodical; an evening school for the teaching of languages, music and crafts; an emigration bureau to help Maltese citizens wishing to settle in other countries; schemes for the free provision of food, medicines and medical care to the needy; a public lotto office; and a recreational club for members. It – or at least the savings bank part of its operations – only became a private limited company as recently as 1970, just before Malta’s first Banking Act was enacted. And this, perhaps, should give us a clue as to why we do not have a Maltese cooperative bank today.

The rapid spread of the pandemic in March 2020 also led to wide, abrupt swings in financial markets. The global composite equity index fell by 20 percent in 22 days. However, markets recovered rapidly, and by the second quarter the GPFG had posted one of its best ever quarterly results. For the year as a whole, the GPFG’s investments posted an overall return of 10.9 percent before management costs. The return was 0.27 percentage point higher than the return on the benchmark index the GPFG’s performance is measured against. The Executive Board is pleased that a solid excess return was achieved in a turbulent year. The positive trend has continued, and the return on the GPFG in the first quarter of 2021 was 4 percent. The GPFG’s performance must be assessed over time. The Executive Board is satisfied that the return over time has also been good. The substantial market fluctuations in 2020 nevertheless serve as a reminder that the return on the GPFG may vary considerably. The GPFG’s equity allocation is the decision that has the greatest impact on the volatility of the fund’s return. The equity allocation is not specifically assessed in this year’s report to the Storting, but the Ministry has proposed a number of changes in the equities selected to be included in the benchmark index. Norges Bank has provided analyses and advice when requested by the Ministry.

Øystein Olsen: Management of the Government Pension Fund Global Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting, Oslo, 3 May 2021. * * * Please note that the text below may differ from the actual address. I would like to thank the Committee for the invitation to speak on the Bank’s management of the Government Pension Fund Global (GPFG). Norges Bank manages the GPFG with the objective of achieving the highest possible return over time within the limits of the investment mandate defined by the Ministry of Finance. The GPFG is to be managed within an adequate control and risk management framework and in a responsible and efficient manner with a high degree of transparency. The GPFG is managed to track the benchmark index fairly closely, ie the return largely tracks the return on the benchmark index. The benchmark index is defined by the Ministry of Finance and endorsed by the Storting. However, even though Norges Bank closely tracks the GPFG’s benchmark index, many large and small choices have to be made every day. These choices are based on a clear mandate from the authorities and a well thought-out investment strategy. The year 2020 was a special year for us all, including the GPFG. As for many others, working conditions during the Covid-19 pandemic have been demanding.

Japan's take-off continued right up to the onset of World War II. Economic historians have estimated that Japan experienced a 14-fold increase in income levels over this period. Total defeat in World War II reduced Japan to ruins. After the war, Japan faced the massive task of reconstruction and development. Japanese firms cooperated with the Americans, raised their technical expertise, and benefited from institutional reforms of the Occupation period for a new, market-based economy. By 1950, the pre-war zaibatsu conglomerates were dissolved and family control had been eliminated. The zaibatsu system was replaced by the keiretsu system, built around the main banks, which shared large cross-shareholdings with the corporate sector. Control passed from shareholders to top managers. Managers and workers worked together as one to rebuild the country. The whole system was underpinned by the consistent and coherent political leadership of the Liberal Democratic Party, supported by an elite civil service. This strategy yielded 30 years of unparalleled growth. By the 1980s, Japan had become an economic superpower. But the formula did not work forever. In 1990, the excesses of the bubble economy ended in the collapse of Japan's property and stock markets. Japan entered a prolonged period of stagnation, whose end is still not yet in sight. Policies and institutions had not kept up with the demands of globalisation. The keiretsu model and the lifelong employment system were too rigid to adapt to the rapid changes of the new economy.

A report released shortly after I came to the New York Fed showed that the typical New York State community college engages with more than 100 local employers, spanning every industry sector.4 More recently, the New York Fed hosted an event that explored ways to advance economic prosperity in rural areas.5 Many great insights were shared, including a framework for workforce development programs that contained four principles: 1) fashioning a strategy around a community's assets; 2) designing programs that are adaptable; 3) including traditionally marginalized groups in decision-making; and 4) bringing together community, business, and government leaders-like you are doing today. 2/3 BIS - Central bankers' speeches Conclusion Developing career-building programs that meet the needs of local employers and are accessible to job seekers is critical to bridging the skills gap. Collaboration is a key component of any successful program. By joining together, we can advance the economic resilience of rural areas like Columbia and Greene Counties-and strengthen our Jenga tower. 1 Columbia-Greene LWDA Local Plan, July 1, 2021 – June 30, 2025. 2 Office of the New York State Comptroller, Availability, Access and Affordability: Understanding Broadband Challenges in New York State, September 2021. 3 Investing in America's Workforce, a Federal Reserve System initiative in collaboration with the Heldrich Center for Workforce Development at Rutgers University, the Ray Marshall Center at the University of Texas at Austin, and the W.E. Upjohn Institute for Employment Research (2019).

The EU Member States’ constitutions, on the other hand, tend more towards the principle of proportional representation, which some consider to be in favour of universal programs designed to benefit various groups and thus higher government spending. 25 It is common knowledge that, in an effort to avoid the pitfalls of unsustainable budget policies, the Maastricht Treaty and the 1997 Stability and Growth Pact lay down the conditions necessary for safeguarding budget discipline within a monetary union. The Pact’s underlying philosophy in the budget field is that countries must structurally pursue breakeven budgets or a budget surplus, in order to then allow automatic stabilisers to function without any restriction. This institutional setup, comprising constraints of an almost constitutional nature in the field of budget policy, is different from that in the United States where tax regulations are in some ways more flexible, although they have been much altered in recent decades. It has been repeatedly proposed to introduce a break-even budget rule in the United States, but it has not happened yet. Another example of the importance assigned to discretionality over regulations in the United States can be seen in the fact that, while the overall debt is nominally subject to a ceiling approved by Congress, that ceiling is in fact regularly modified, thus in actual fact it is not binding at all. For example, the deficit targets established in the 1985 Budget and Emergency Deficit Control Act (Gramm-Rudman Act) were abundantly breached and later relaxed.

Thus, while the euro area shows a unique institutional setting – in contrast to monetary policy, fiscal policy is far from being single – national governments have agreed to common rules which ensure that the euro area remains an efficient and stability-oriented single economic area. 4 BIS Review 61/2001 Conclusion Let me conclude by saying that the single currency and the establishment of a new European institution responsible for monetary policy in the euro area complemented the process of economic integration that started half a century ago in Europe. This process and the institutional build-up, together with clear and coherent policy goals and an efficient allocation of the respective responsibilities, are transforming the euro area into an increasingly unified economic entity which, in many respects, resembles the US. Although most of the required structural reforms still have to be implemented, it cannot be denied that substantial progress has been made. The introduction of the euro has been and will continue to be a powerful catalyst, contributing to greater competition in the economic and the political sphere, thereby further enhancing the welfare of the citizens in the euro area. Ladies and gentlemen, political leaders throughout Europe have recognised the need for structural changes in both taxation and expenditure policies and regarding the deregulation of product and labour markets.

The problems with inflation were then accentuated when the financial markets were deregulated. Prices and wages rose steeply and Sweden was caught in wage-price spirals. The occurrence of price bubbles made investment decisions more hazardous and led to weak productivity. A high level of inflation became a permanent feature of our economy. As monetary policy at that time was focused on maintaining a fixed exchange rate, fiscal policy ought to have been tighter. Bit by bit, there was a growing awareness across party political lines that in the longer run this economic policy strategy was not viable, a perception that had already dawned on most countries in our part of the world in the early 1980s. It was now that low inflation in Sweden came to be seen as a necessary condition for achieving stable and sustained growth and thereby high employment. This was clearly expressed officially for the first time in the Budget Statement in January 1991. Combating inflation was given pride of place on the economic policy agenda. The final policy objectives were the same as before but the perception of the conditions that were needed to attain them had changed. This realignment of stabilisation policy occurred, however, at a time when the earlier policy’s negative consequences had begun to leave their mark. Due to the high level of costs in manufacturing, for example, economic growth in Sweden was weak. In addition, a rising real interest rate coincided with a period when the tax reform made savers and investors more sensitive to interest rates.

Opinions in the Union presumably differ from time to time about the practical application of this commitment but the basic requirement is that policy focuses consistently on stability. The Riksdag has left the door open for Sweden’s participation in the monetary union at a later date and stated that in connection with such a move it can be relevant to join the European exchange rate mechanism (ERM). In this perspective, too, it is an advantage if the krona is more or less stable. Monetary policy in the euro area is to have the primary objective of price stability. We do not yet know just how the European Central Bank (ECB) will formulate its target but it is unlikely to differ from the norm that has applied in Germany since the mid 1980s. This means that inflation is not to exceed a medium-term level of 2 per cent. In practice, therefore, the differences in this policy field between the ECB and Sweden will probably not be so great as to have any real consequences for the exchange rate. With policy focused on price stability both in Sweden and in the monetary union, there should be good possibilities of a stable exchange rate between the krona and the euro. This is supported by the path of the krona relative to the German mark in recent years. As measured, for example, by the long-term interest rate differential with Germany, confidence in Swedish economic policy has been high since 1996.

The Central Bank’s tight monetary stance has, on the other hand, brought results, as last November inflation dropped below the target of 2½ %. Old theories reappear Recently there has been extensive discussion concerning the Central Bank of Iceland, its policy and objectives. Now that inflation has been subdued, old theories to the effect that the Central Bank should pursue multiple objectives have once more come to the fore. The Bank is to ensure full employment, it should have specific exchange rate objectives and ensure economic growth. These views reflect considerable over-estimation of the power of the Central Bank and the instruments at its disposal. It is also an oversimplification to focus exclusively on interest rates, as many people do, and expect that further interest rate reduction will solve all the problems. The Central Bank has, over the past two years, cut its rates thirteen times, and the bank’s policy rate is currently 5.3%. While this is naturally a higher rate than in the Euro zone, the problems which have to be grappled with there include long-term economic stagnation and high unemployment, and the future is by no means bright. In Norway, on the other hand, the Central Bank rate is 6%, to take an example of a neighbouring industrialised country. The Central Bank of Iceland’s real policy rate is currently around 2¾% considering future prospects, which is slightly under current estimates of the equilibrium interest rate.

François Villeroy de Galhau: Ethics and trust in finance Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the 6th "Ethics and Trust in Finance" Global Prize ceremony, Paris, 15 January 2018. * * * Ladies and Gentlemen, It is with great pleasure that I welcome you all to the auditorium of the Banque de France for the 6th "Ethics and Trust in Finance" Global Prize ceremony. I would particularly like to welcome Angel Gurria, Secretary-General of the OECD, and Professor Paul Dembinski, the Co-chair of the prize. The venue that you have been invited to today sends a message in itself: as the Autorité de contrôle prudentiel et de résolution is backed by the Banque de France, some might have a tendency to think that the bank and insurance supervisor, as the "guardian of the temple", would only be concerned with compliance with prudential rules, which are collective and compulsory. They might also think that the supervisor would consider that an ethical approach is too poorly defined to be inspected, as each financial institution – and even each professional – has their own perspective on it, and would also consider that an ethical approach leaves them free to look after the interests of their clients. The philosophers among you will have recognised in this divergence between rules and ethics the classic contrast between Kant's "categorical imperative" and Aristotle's "practical wisdom".

How much central bank reserves the private banks had depended, among other things, on how much bank deposits they had on their books, related to the reserve requirements the Federal Reserve applied. The banks’ demand for reserves then determined how much bonds the Fed was obliged to purchase to steer the interest rates to the desired level. This led to the Fed already having a substantial portfolio of government bonds before the financial crisis. Since the level of interest rates in many countries has ended up close to the lower bound, most central banks around the world have made significantly greater purchases of financial assets with the aim of making monetary policy more expansionary. Longer market rates can be divided up into the sum of future expected short-term interest rates plus a premium. If the markets are not frictionless, the size of this premium may partly depend on the relative supply of a certain bond, which is to say the outstanding stock in the hands of the private sector. If the central bank purchases a significant proportion of the stock, the price of the remaining bonds can therefore rise and interest rates thereby fall. When the Riksbank purchases bonds, liquidity is injected into the market – the investor swaps the bond for deposits in a bank and the amount of central bank reserves in the banking system as a whole increases. How effective quantitative easing is depends on how investors and bankers use this liquidity.

In addition to earnings, equity must generate a reasonable surplus so that the Riksbank has profits that can be used to build up equity in the event of losses. The Inquiry’s proposals restrict the Riksbank's equity to SEK 60 billion, calculated only using inflation. As I have said, one interpretation of this is that the Inquiry sees a return to a steady state in which the balance sheet should be small – and, in such a world, a small amount of equity is adequate, assuming that the real interest rate returns to at least 1 per cent and that adjustments to the repo rate are enough to achieve the monetary policy objectives. The proposed act certainly makes it possible for the Riksbank to ask to raise the capital ratio, for example if seigniorage should fall or the real interest rate become lower. The problem is that, if the earnings capacity is initially set to just cover expenditure, there will be no scope to use the profit to build up equity independently. If revenues fall because real interest rates are low, it will not matter if target equity is higher – the Riksbank will make losses until the framework triggers a recapitalisation. When it comes to allowing for a larger balance sheet, the problem is that risks can increase quite quickly – and then, the Riksbank could find itself in a situation where retained profits are not enough to build equity up quickly enough.

This was pointed out by the Swedish economist Knut Wicksell in 19072: "...the upward movement of prices, whether great or small in the first instance, can never cease so long as the rate of interest is kept lower than its normal rate". Calculations seem to indicate that the neutral real interest rate for Norway is between 2½ and 3½ per cent and it has probably fallen somewhat in recent years. Monetary policy is functioning It takes time for an interest rate reduction to have an impact on inflation. We are now seeing the effects of monetary policy decisions some of which were taken two years ago. The interest rate has affected inflation via the krone exchange rate and via demand for goods and services. In particular, the rise in prices for domestically produced goods and services has picked up. In addition, the reduction in the interest rate has probably contributed to holding up expectations of future inflation even when inflation is low. 2 Knut Wicksell (1907): “The Influence of the Rate of Interest on Prices”, Economic Journal, XVII (1907), pages 213-220. BIS Review 10/2005 3 Norges Bank’s key rate is an overnight rate. The interest rate on deposits and loans with longer maturities will reflect expectations as to future interest rate decisions. As the key rate was gradually reduced, expectations also fell, and banks reduced their lending rates. Monetary policy has had a greater impact because market participants expected the low interest rate to persist over a period.

About overall economy, a more sustainable development should be ensured, relating mainly to better control on trade deficit, supporting the sectors that actually contribute or may contribute to increasing exports in the country. Public authorities should strengthen their commitment to developing the non-bank financial market, which gradually leads to reduction of economic dependence on the banking sector condition and improves access to financing of a higher number of private entities. In this way, a greater opportunity would be provided to the financial system to finance projects in the agricultural sector, which has a high potential for ensuring competitive advantages in the Albanian economy. Allow me to conclude by emphasizing the Bank of Albania’s willingness to contribute, through its policies on monetary and financial stability, to maintaining a better climate of sound development of the financial and banking activity, as a condition for a greater financial support to business development in the country. I think that this forum will make a valuable contribution to setting some concrete development policies and projects, about which, I believe that the Black Sea Trade and Development Bank will offer its own support and expertise. Wishing success to the proceedings of this forum, I thank you for your attention! 2 BIS central bankers’ speeches

A large financial system can be more readily versatile, i.e. provide investors and those in need of financing with a full range of options to choose from according to their requirements. What does all of this mean for financial stability in the euro area? First of all, I should like to remind you that the financial system of the euro area showed a high degree of stability during last year’s period of financial turbulence as well as during the rather dramatic structural shift connected to the changeover to the euro. In the former case, it is true that there was a significant spillover effect for the euro area markets, but they recovered quickly and without suffering any lasting damage. There was no disruption to any of the basic functions of the financial system, and public confidence in it remained strong throughout. Second, the foreseen structural changes require, as I mentioned earlier, the need for adjustment to be taken seriously by all participants in the financial system. This adjustment appears to have intensified recently: there has been an increase in merger activity, an establishment of alliances and an introduction of new products and services, often based on modern information technology. The process of structural change contains risks, but if these risks are identified early and analysed carefully, they do not present a threat to financial stability. After all, we are talking about decision-making and planning by people who are dealing with risks every day at the highest professional level.

In this regard, the smooth changeover of the financial system to the euro demonstrates the virtues of efficient and careful forward planning. Third, I do not view efficiency and stability of the financial system as being contradictory. In many ways these qualities actually support each other by laying a firm foundation for the financial system. An inefficient financial system, in addition to being costly to society, can be more vulnerable to shocks. At the ECB, we play our part in the evolution of the euro area financial system by providing it with stable monetary conditions. By creating an environment of price stability, we allow private sector agents to focus their attention on the questions that are most relevant to their activities and to take advantage of the benefits of this stable environment, such as the lengthening of their planning horizons. 5 BIS Review 63/1999

After the “sprint” to monetary normalisation started in July 2022, we are now entering a new phase of monetary policy that is more comparable to a longdistance race: it will be longer – above all we must not claim victory too rapidly -, but more gradual and more pragmatic in the pace of the next interest rate hikes. It is clearly too early to tell beyond the 3% that we are expected to reach in March – which is well below the current rate of 4.75% in the United States, or 4% in the United Kingdom – at what "terminal" rate key rates will stabilise. But I believe it is possible to shed some light on the path that we should follow, in order to provide some degree of economic predictability. First, regarding the calendar, it seems to me desirable to reach this terminal rate by summer, i.e. by September at the latest. And our decisions will be guided by the economic data: our central criterion for deciding on monetary stabilisation should be the fairly certain turnaround in the underlying inflation trajectory. It is this underlying inflation that monetary policy can best treat, and which provides the best indication of the medium-term perspective of headline inflation. We have not yet reached that turnaround, that economic "threshold". I would also like to dispel a fear: the disinflation that we are about to carry out will not lead to a recession, given the resilience of economic activity and employment.

It is aiming at preserving and improving the situation of employees and of all our fellow citizens in the euro area. Such a responsible policy directly benefits those who are unemployed by significantly improving their employment possibilities. It benefits all our fellow citizens by supporting the purchasing power of their income, thus preserving the well-being of euro area households. And it contributes to meeting one necessary condition for sustainable long-term growth and active job creation in the euro area, which is price stability. Naturally there are also a number of other factors that are contributing to sustainable growth and job creation, in particular sound public finances and, as I already said, structural reforms that enhance competition, increase productivity and foster economic flexibility in order to elevate the growth potential of our vast euro area economy. Augmenting the growth potential of Europe is a major goal for all of us. Background information Table 1: Compensation per employee growth (whole economy) across euro area countries 2 BIS Review 52/2007 Table 2: Unit labour costs growth (whole economy) across euro area countries Table 3. Labour productivity growth in the euro area countries BIS Review 52/2007 3 Table 4. Employment growth in the euro area countries Table 5. Unemployment rates across euro area countries 4 BIS Review 52/2007

Therefore, the agencies' incentives to do a proper job should be quite enough without regulation. Crisis management – preparedness needs to be strengthened Another issue that I believe needs particular attention is how to achieve better crisis preparedness, which means that I am now switching to talk about crisis management issues. As on numerous occasions in the past, many countries were ill prepared for this crisis and had to rely on ad-hoc solutions for handling it. In the case of the EU, member states quickly had to reach an improvised agreement on a co-ordinated and comprehensive financial support plan. We have had the same situation in Sweden, both when we had a crisis in the early 90s and, more surprisingly, even now. Despite the quite recent experience of a systemic crisis, legislators had not been able to get a proper framework for the management and closure of distressed banks in place. Thus, also this time we had to rely on improvised solutions. Even if these ad-hoc measures often seem to work out pretty well there is no guarantee that they will do so consistently. To let financial system stability become the hostage of improvised political processes is obviously not an optimal order. Experience from previous crises also shows that improvised crisis management measures often come too late, are inadequate, and ultimately turn out to be more costly then they would have needed to be. I would say that British Northern Rock is the perfect example of all this.

Robert Ophèle: Cyber security in the financial sector Opening speech by Mr Robert Ophèle, Deputy Governor of the Bank of France, at the Conference “Cyber security in the financial sector”, Paris, 17 June 2014. * * * Emmanuelle Assouan, Frédéric Hervo, Claudine Hurman, Caroline Keribin, Clément Martin and Axel Petitprez have also contributed to the preparation of this speech. Ladies and gentlemen, I am very happy to introduce this conference about cyber-security in the financial sector. This issue could be considered in the first place as very technical, the type of issue that has to be addressed only within a limited forum of experts. This would be an error and on the contrary, it is key that public authorities, including central banks, dedicate sufficient attention to cyber-security, given its system-wide implications notably for the functioning of the financial system. Over the past decade, the financial sector has changed considerably with the emergence of the Internet and the use of new information technologies. The market has been able to innovate and improve the quality, the performance and the efficiency of services such as online banking, mobile payments, and settlement platforms. Public authorities have indeed encouraged dematerialization in the financial sector to foster economic growth and also to reduce the operational risks inherent in previously non-automated processes. For example, the new European regulation on Central Securities Depositories requires using dematerialized securities and promotes automated and straight-through processes in securities settlement systems.

I believe, particularly in the case of physical collateral, that banks using the internal ratings-based approach must obtain a timely, third-party view of the collateral’s value. One test, for example, is that should the need arise, the bank must be able to dispose of it with relative ease. As a former commercial banker, I cannot see how any responsible banker would be able to sleep at night if these conditions are not met. On the other hand, it seems clear to me that if these conditions are satisfied, then the collateral does offer a bank protection against loss and banks will need to hold less capital against those loans. Let me try to anticipate an immediate question you may have. What do we expect will be the net effect of the changes I have discussed? I believe that the impact of more risk-sensitive proposals will be very positive for small and medium-sized businesses in many countries. I understand that Jochen Sanio, the very capable President of the BAKred and, as of the first of May, President of the newly established FSA, expressed a similar view at a recent parliamentary hearing. He pointed out that based on our current proposals, on average, German banks’ exposures to small and medium companies would require less than the 8% capital currently needed under the 1988 Accord. But the issue is not simply a question of impact. The principal motivation behind the Basel Committee’s efforts has been for bank capital requirements to take appropriate account of risk.

The Home Affordable Refinance Program, or HARP, was set up to facilitate refinancing of high loan-to-value prime conforming mortgages. The announced goal of the HARP was to 13 We should want the cost of misrepresenting loans to be invariant to the state of the jobs market. 14 Risk retention will also apply to some forms of mortgages in future. 6 BIS central bankers’ speeches refinance 3 million to 4 million mortgages. However, shortcomings with the original program mean that less than a million HARP refinancings have taken place. Legal risks discouraged lenders from participating more fully in HARP to date. Notably, if a lender refinanced a loan made by another company, it was liable for the underwriting associated with the original loan. The profit from refinancing was unattractive relative to the risk of being forced to repurchase the loan. Given this, lenders had little incentive to compete to refinance loans and this led to higher mortgage rates and less refinancing. Many of these issues have been addressed by recent revisions to HARP and related decisions by Fannie Mae, but more could and should be done. Remaining legal issues could be alleviated by harmonizing standards between Fannie and Freddie. I would like to see refinancing made broadly available on streamlined terms and with moderate fees to all prime conforming borrowers who are current on their payments. This could substantially increase the number of refinancings.

Now that the MPR is at 5%, it is approaching the range that has historically been thought of as neutral. Still, a high degree of uncertainty surrounds the true neutral interest rate. There are many definitions and methodologies to determine what would be the interest rate consistent with inflation being at the target and the economy operating at full capacity. Although this is not the moment to get involved in a lengthy discussion over the level of the neutral rate, I think some observations are in order. On the one hand, the neutral rate is not a fixed number. It changes with the state of the economy and can even fluctuate in the short run. On the other hand, in an open economy the neutral interest rate depends not only on domestic factors such as the long-term growth rate, but also on external variables. The world is going through a period of low interest rates and in the short term the neutral interest rate is likely to be somewhat below previous estimates (figure 16). BIS central bankers’ speeches 5 I also want to point out that the objective of monetary policy conduct is not to attain a neutral rate, whatever its level is. The monetary policy interest rate (MPR) fluctuates around this neutral rate in order for the monetary impulse to be consistent with achieving the target. Accordingly, just as there are periods during which the MPR is below the neutral level, there are times when it is above.

 JPM has made material contributions to Singapore’s financial markets with developments such as the launch of the Singapore Kilobar Gold Contract with the SGX in October this year. 2 BIS central bankers’ speeches  JPM was one of the lead managers in Singapore’s first RMB corporate bond issuance earlier this year, which helped to broaden the range of RMB product offerings in the market. On this note, let me congratulate JP Morgan on 50 years of growth in and with Singapore. MAS looks forward to deeper partnership with JP Morgan in further developing Singapore’s financial sector. I am confident that your strong presence in Singapore will serve you well as you extend your footprint in Asia. Thank you for being part of the Singapore growth story. BIS central bankers’ speeches 3

Average earnings have been growing at around 4.5% per year, house prices have been rising by between 10-15%, and total consumer borrowing is the highest in real terms since 1988. But, even given these factors, consumption growth has been strikingly strong. There are, of course, downside risks to the outlook for consumption in the UK. Consumer confidence fell in September, even before the terrorist attacks. Despite the recent rally, equity prices are still much lower than their peaks eighteen months or so ago, and that will have reduced consumers' financial wealth. And there may be the first sign of easing in the labour market which, if it persists, will reduce disposable incomes. Despite this, however, there is little sign yet of any sharp reduction in consumer spending. Retail sales volumes grew by 5.9% in the year to September. That picture of continued strength is corroborated by the CBI Distributive Trades Survey measure for September (gathered largely after the 11 September attack), which was the highest since October 1996. And the higher frequency British Retail Consortium survey suggested that sales volumes by the end of September had returned to pre-attack levels. I focus on the continuing strength of consumption because it - together with its partial correlate on the output side, the retail service sector - is absolutely key to understanding why UK interest rates have fallen less far than in other countries. But, of course, elsewhere in the economy, things have been looking less bright for some time.

If inflation is more than one percentage point either side of the target, we are required to write to the Chancellor explaining the reasons for the miss and the steps we are taking to bring inflation back to target. There was a flurry of excitement earlier this year when inflation reached 1.8%, and many commentators thought that we might soon have to polish up our letter writing skills. But so far we have not had to put pen to paper. Of course, a number of factors have contributed to the stability in inflation. Monetary policy takes time to affect inflation, so inflation in the early part of this period reflects decisions taken before the MPC was formed. And in the short term at least prices can reflect factors other than monetary policy. But, judged against previous policy regimes in this country, inflation targeting has been successful. Of course, you might expect me to say that. But the growing credibility of the arrangements is also reflected in measures of expected inflation in coming years, most of which remain close to the 2½% target. People often ask if this relative success at targeting inflation has come at a cost in terms of lost output or employment. It is increasingly accepted, I think, that there is no such trade-off in the long run. And, looking at the recent UK data, it is hard to see any trade-off even in the short run. Output has now risen for 36 consecutive quarters, the longest continuous expansion since post-war records began.

Everyday Economics Speech given by Andrew G Haldane Chief Economist Bank of England Nishkam High School, Birmingham 27 November 2017 The views expressed here are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Guy Brett-Robertson, Shiv Chowla, Raakhi Odedra, Jasmine Stenning, Philippa Wall and Ann Whittaker for their help in preparing the text. I would like to thank Ben Broadbent, Claire Crawford, Neil M. Davies, Jonathan Fullwood, Richard Harrison, Ian McCafferty, Sandra Newton, Alice Pugh, Michael Saunders, Emma Sinclair, Sarah Smith and Arthur Turrell for their comments and contributions. 1 All speeches are available online at www.bankofengland.co.uk/speeches Terrible title, right? Not the “everyday” bit – that’s fine. It is the word “economics”. For most people, this is an instant turn-off. “Economics” just sounds too conceptual, too academic, too impersonal, too dismal. 1 Stephen Hawking was once told that every equation he included in a book would halve its readership. The word “economics” probably has a similar effect. If I’d taken media studies rather than economics, I’d have gone about things differently. I’d have drawn you in with a “hook”, such as people or children or dogs. Had my title been “Economics for the People”, I’d have doubled my readership. Had it been “Economics for the Kids”, I’d have quadrupled it. And if I’d opted for “A Fluffy Labrador Puppy Explains the Economy”, the Bank’s website would have crashed. 2 It is too late now.

To conclude, I would like to reiterate the importance of preventive measures to combat fraud, and I applaud your efforts in holding a conference on this topic as it shows that you place a high degree of importance in this area. While no institution can ever be expected to be completely fraud proof, institutions maintaining key elements I discussed will have taken a big step towards fraud mitigation and avoidance. I wish you great success for this seminar. I hope you accomplish your objectives and I know you will all take a lot of valuable information from this timely and meaningful event. Thank you again for inviting me to join you today and thank you very much for your attention. BIS Review 52/2008 3

Several of these measures have had an impact on the Bank’s assets, either by reducing them (sale of foreign currency) or increasing them (purchase of bonds and loans to commercial banks). The adjustments on the asset side have counterparts on the liabilities side, either by active measures (repurchase of long-term bonds from the Central Bank), or by monetary sterilization or liquidity absorption, or finally, to respond to changes in the demand for cash. The net effect of these operations and portfolio revaluations has an impact on the Bank’s net worth. On aggregate, these operations have involved an 86% growth in the balance sheet in one year, the equivalent of almost 10 points of GDP. At the same time, there have been significant changes in the composition of the balance 6 For further detail on these measures, their operating margins and effective execution, visit https://www.bcentral.cl/web/banco- central/medidas-excepcionales. 8 sheet (Figure 16). Now the Bank records on the assets side internal credit items (FCIC-LCL) and local securities. The latter yield more than international reserves, although with a somewhat higher credit risk compared to the sovereign securities that make up the former. On the liabilities side, the counterpart has implied an increase in short-term debt placements (PDBC) and the use of permanent facilities that drain the system’s excess liquidity. There has also been an increase in the monetary base, explained by an increased cash demand from the population.

(2) Percentage corresponds only to FCIC1 and FCIC2 The LCL is limited to the reserve requirement of each banking company. These measures were complemented by a bank bond purchase program. Sources Central Bank of Chile based on the International Monetary Fund, central banks and budget offices. Peru Table 2 Domestic scenario (annual change, percent) 2019 2020 (f) 2021 (f) MP Report Jun.20 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) Gross fixed nominal capital formation (% of GDP) 1.1 1.0 1.5 4.2 0.8 -2.3 -2.3 -3.9 18.9 22.4 MP Report Sep.20 -7.5/-5.5 -10.4 -6.8 -15.9 -4.2 -0.3 -14.1 0.8 17.5 20.0 -5.5/-4.5 -7.1 -5.6 -10.6 -4.2 -2.2 -9.4 -1.4 18.5 21.0 (f) Forecast. Source: Central Bank of Chile.

In light of the information currently available, and against the background of the Bank of Thailand’s long-run goals of price stability and sustainable economic growth, I believe that the risks at present are weighted mainly toward conditions that may generate economic weakness in the foreseeable future. Such weaknesses could come from further retrenchment of business and consumer confidence, undershooting of fiscal expenditure targets, and slower than expected recovery in the industrialized countries. Whatever risk ultimately materializes, we would make timely and decisive adjustment of our monetary policy. With strong international reserves, at 140% of short-term debt, we can afford to adjust our monetary policy to support growth, if needed. At this juncture, I would like to stress that the Bank of Thailand remains committed to the open and transparent monetary policy framework that has served us well since May 2000. Let me emphasize that inflation targeting is a framework, not a rule. Just as the case of a real-life anchor, inflation targets keep the economy on the desired growth path in the long run, while permitting it to respond in the short run to unpredictable tides and currents. As long as the inflation rate is within the targeted range, I believe monetary policy is allowed sufficient flexibility to address other challenges currently facing our economy. Given the supportive policy mix, the recovery process in Thailand should remain on track for next year.

Almost all NPLs of government banks have been transferred to AMCs, and all multi-creditor NPLs of private commercial banks have been transferred to the TAMC. And we will speed up our effort to clear them out. However, please be informed that when similar financial crises occurred in the US in 1982, the US economy was not in as bad a shape as Thailand has experienced in the past four years. At that time, Japan, Europe and the Middle-Eastern economies were strong and contributed certain capital flows into the US economy. But now, under current world economic conditions, where every country has its own problems to solve, we know well that we cannot expect foreign investors to help us clear this NPL mess, so we have to help ourselves. I do not see why we cannot do it. And we will do it. Back to the economic forecast for next year. One important source of growth in 2002 will be fiscal spending, and the projected central government deficit of 224 billion baht or 4.4 percent of GDP strikes a good balance between improving the economic infrastructure, raising external competitiveness, and fostering economic recovery. It is very important, however, that the fiscal stimulus program meets its spending target. 2 BIS Review 99/2001 Safeguarding the recovery would require timely as well as effective disbursements of the 58 billion baht emergency spending plan.

The Basel Capital framework was flawed: it didn’t provide adequate loss absorbency in going concern; and it failed to consider what would happen in gone concern states of the world. The global framework remains in that position until we can get agreement on, and implementation of, a Total Loss Absorbency framework. This is our single most important objective, at the heart of the global work of the FSB in respect of the largest banks – the globally significant. The huge effort to secure what will be an historic agreement comes to the table in Brisbane next month. I’m not going to 2 BIS central bankers’ speeches tempt fate; but my fingers are crossed, and I should add that this is the nearest I get to insider trading, as I know the impressive quality of the work that has gone on in the FSB. The second area on which I will comment concerns the insurance industry, namely the introduction of Solvency II. It will happen in 2016. It is a major step forward as a framework for risk assessment. It is not the first time that insurance firms will be using models to assess safety and soundness and policyholder protection. That would be an absurd thing to say for an industry that has modelled from the outset. But, it does represent a step change in the use of models in the prudential process. Very briefly I want to be clear that we will be using these models in an appropriately diagnostic fashion.

I am not going to reflect on that tonight, but while the original announcement came as a shock to some business models, the PRA’s assessment was that it did not appear to compromise the safety and soundness of firms in way that threatens our objective, and nor did it threaten our insurance objective of policyholder protection. No firm has failed, but bear in mind that orderly failure is very much consistent with our objectives being met. That is what should happen in my view, namely the prudential position should be sufficiently safe and sound to accommodate changes in other areas of public policy. It is not easy in our world to point to indications of when our objectives are met, a point made to us quite rightly by the National Audit Office. I would offer this as one such indicator. I will spend the rest of my time commenting on a four areas where we are either taking action or watching very carefully to determine whether action may be required. The first is the capital framework for banks – which is distinct from, but related to, the capital position of banks that I mentioned at the start. There are now three planks to the capital framework: a risk-based assessment which may be based either around firms’ internal models or a standardised approach; a measurement of leverage; and stress tests.

Such approaches were used for more than 80 per cent of the relevant banking assets at 1 January 2008. I would also like to point out that the impact of Basel II on credit institutions’ capital goes beyond the capital requirement calculation stipulated in Pillar 1 (even though it provides more comprehensive coverage than Basel I of new risks, such as securitisation activities). Regarding Pillar 2, the new regulations call for major additional arrangements to refine banks’ risk management and planning for capital cushions. This could lead to additional capital requirements, or other appropriate measures to enhance bank stability by considering risks that are not dealt with or are inadequately dealt with under Pillar 1. By the end of the year, this approach should lead to individual ratios for each institution that the Commission Bancaire sets on the basis of structured dialogue with each institution. BIS Review 82/2008 3 We have also undertaken a series of major actions that are directly in line with the general framework of the recommendations made by the Financial Stability Forum. Many spheres of action have been defined, but I would like to speak about three that I think are priorities, starting with transparency and valuation, followed by adapting the capital requirements set by Basel II for certain instruments, and finally, liquidity risk. First of all, enhancing transparency and financial disclosure was quickly identified as one of the key requirements for ending the crisis.

On the one hand, productivity growth has serially disappointed and could continue to do so in future. In that case excess demand could build more quickly and inflation could stay above target. That said, I am optimistic about the potential for Fintech and other new technologies to lead to productivity gains, either directly or by driving competition, and in turn to potentially higher, and non-inflationary, wage growth. 15 One thing to emphasise about our central forecast is that it is conditional on the market yield curve. At the time of the May Inflation Report that yield curve was pricing in roughly three rate rises over the three years covered by our forecast. And those three rate rises were one of the forces preventing excess demand rising faster in the forecast and inflation from remaining persistently above target. To demonstrate what would happen without those rate rises, we also publish a version of the forecast in the Inflation Report showing what would happen if Bank Rate remained unchanged (Chart 13). In that version of the forecast inflation does not fall back to target. Instead excess demand and domestic cost pressures build much more rapidly. And so inflation stays persistently at around 2.4%, little changed from where it is now and materially above our inflation target. 15 I set out my views on the opportunities presented by Fintech in a speech in March – see: Ramsden, D (2018), “The Bank of England – Open to Fintech”, speech at HMT’s International Finance Conference, London, 22 March 2018.

Furthermore, the central banks of the Eurosystem observe the issuing behaviour of Member States, banks and market players for signs of collusion. If, for example, a country were to convert all its bond issues to a short maturity (of up to three years), we would react. BIS central bankers’ speeches 3 Possible consequences of the ECB’s measures for national budgets The rapporteur has also asked us to address the possible consequences of our measures for national budgets. Of course, conducting monetary policy will always be associated with risks. For this reason, central banks hold capital and set aside funds for provisions and reserves as a pre-caution. This adds to their financial independence. In view of the expansion in balance sheets in previous years and the added risks associated with this, the central banks of the Eurosystem have further strengthened their financial buffers. By the end of 2012, funds for provisions had increased to € billion and those for reserves to € billion. The Eurosystem is obliged to keep financial risks under control as best it can. The institutional framework for OMTs is therefore designed in such a way that risks for the Eurosystem are manageable and controllable, for example through the aforementioned orientation of the programme towards short-term maturities. The risks associated with OMTs would materialise only if a Member State operated un-sound policies and failed to service its debt.

And I would like to share with you that some banks have launched what we may call a “pre-vetting” process for account opening. This means an applicant may request to first submit the documentation and information required for opening an account to the bank by mail, fax or email, and the bank will “pre-screen” or “pre-vet” them before arranging the applicant to have a face-to-face meeting in Hong Kong. I trust this change in process flow would be welcome by customers based overseas. 8. We are also working closely with the industry to explore the use of technology to enhance the efficiency of account opening processes, such as KYC Utilities (“KYCU”) and technology to allow remote account opening. You may have heard about KYCU, which are third-party platforms that aim to manage data as a strategic asset across banks to reduce duplication and cost and assist banks in making decisions, on all types of risks, including but not limited to AML, and as a result to make smarter business decisions. For example, a single source of customer data or documents would remove the need of a customer to provide KYC documentation to every bank, and may shorten the turnaround time for new account opening. We have had a number of discussions with major banks and relevant technology providers and steps have already been taken by both the HKMA and some major banks to take this work forward.

Let me briefly give you our (Albanian) experience with remittances and some suggestions to improve their ingress and effectiveness in the economy. During 90s, Albania experienced a massive migration movement abroad, which soon became a crucial financial source for the new market economy. According to some studies (Barjaba, 2004; INSTAT, 2002; Kule et al, 2002, 2002), since 1990, nearly 800,000 Albanians may have left the country either permanently or temporarily. Some more recent estimations show that the number of Albanians living abroad may have reached 1 million. This is a considerable figure for a small country like Albania with just 3 million of inhabitants. As a result, exodus phenomenon has attracted a great deal of attention in political and economic circles. Remittances role in the economy has grown considerably over time. We can appreciate their weight easier if we put them against some main economic indicators. However, before doing that I want to say a few words on data reliability of remittances. It is very difficult to carry out an accurate estimation of remittances in Albania bearing in mind that a large share does not go through formal (official) transferring channels, therefore escaping the official registration of capital flows. The Bank of Albania traces only that part of remittances that goes through the official network, which includes banks and money transfer agencies. Remittances sent unofficially such as, cash brought by emigrants or their friends during their visits to Albania, need to be estimated.

Niklaus Blattner: Review of the Swiss economy Introductory remarks by Prof Dr Niklaus Blattner, Member of the Governing Board of the Swiss National Bank, at the half-yearly media news conference, Geneva, 14 June 2002 * * * Gold sales Since May 2000, the National Bank has been selling gold that is no longer required for monetary policy purposes. A total of 1,300 tonnes of gold is planned to be disposed of under the agreement on gold sales concluded on 26 September 1999 between fifteen European central banks. This agreement limits the total quantity of gold that can be sold by the signatories until September 2004 to 2,000 tonnes. To date, we have sold almost 520 tonnes of gold, which corresponds to 40% of the total quantity earmarked for sale. As shown in our periodic Bank returns, we are conducting regular sales of approximately one tonne a day. We consider this method more flexible, less costly and better suited to the characteristics of the market than the strategy chosen by the Bank of England, which is holding gold auctions of its own. Our average selling price has by now reached USD 279.4 per ounce (level of 31 May 2002), which is USD 2 higher than the average London gold fixing price, the benchmark price for gold. This performance has, to some degree, been realised thanks to the National Bank having been allocated a somewhat higher portion of the central banks' total annual quota of 400 tonnes since September 2001.

But it seems reasonable to assume that some common causes lay behind both the crisis and the imbalances themselves. International capital flows have made countries increasingly interconnected and interdependent. At the same time, major transformations have occurred over the past decade in our international environment. The monetary and financial system has become truly “multipolar”. An increasing number of countries, both developed and emerging, have become active participants in the global capital market. While there are currently three main currency blocs, at least one (the Chinese RMB) and maybe other additional systemic currencies will emerge in the future. Participants in the international financial system are increasingly diverse from the point of view of their economic structure, their demography, their level of development, and, more importantly, their social choices and preferences. For instance, different saving rates may be seen as resulting from divergent time preferences. Likewise, diversity in capital account regimes may, to some extent, reflect different choices and tradeoffs between efficiency and stability in the financial infrastructure. These characteristics will most likely persist over time. A large number of different countries, with different preferences, will permanently be linked and interdependent through growing and active international capital markets. It is not clear, at this stage, how the coexistence and interaction between national financial systems worldwide will finally play out.

First, countries could come to a common understanding about the core elements and principles governing their financial markets development and regulations. Full harmonisation is neither desirable nor feasible. But policy‐induced divergences may prove very destabilising and lead to a reduction in welfare. It should be possible to agree on the core principles governing, for instance, capital account regimes, the treatment and resolution of internationally‐active financial institutions, deposit insurance, and the organization and functioning of securities markets. Divergences in financial development are a fact of life. Some of them reflect true social choices and preferences that must be respected and accommodated. Others result from deliberate or inadvertent policy‐induced distortions, which should have been reduced or eliminated. Disentangling these two sources of divergences in financial development should be a priority in the international agenda. Second, the search for an efficient and powerful “financial safety net” should be pursued. Stabilising the demand for international reserves would bring huge benefits in terms of world welfare. At present, reserve accumulation can only occur through a conjunction of balance of payment surplus and some degree of exchange rate intervention. In addition, if sterilisation proves difficult or impossible, it also leads to unwanted changes in monetary policy. Precautionary reserve accumulation, however legitimate, unavoidably creates side effects for domestic macro policies as well as spillover effects on other countries. All countries, therefore have a common interest in finding ways to disconnect reserve accumulation from exchange rate management and, more generally, from balance of payment situations and monetary policies. The difficulties, however, are huge.

The experience of the past few months already suggests a number of key lessons for liquidity risk management and supervision which I will cover later. But I would first like to review the impact of market developments in recent years for liquidity risk management. Section II: Changing environment and business models How then has the financial environment changed in the past few years, and why has this led to a greater vulnerability to liquidity risk? The decade leading up to July 2007 has been described as a period of great stability: around the world, economic conditions were dominated by low inflation, low nominal yields, and lower volatility of the economic cycle. The benign macro background was associated with a fall in financial market volatility. And advances in technology spurred a wave of financial innovation and the development of new products offering improvements in the tailoring and matching of risks to investors’ risk BIS Review 50/2008 1 appetite. This combination of factors encouraged investors to seek out riskier investments in search of higher returns – the “search for yield”. One feature of this “search for yield” was the rapid expansion of structured financial instruments; for example, where individual loans are packaged into tradable securities, such as residential or commercial mortgage-backed securities (RMBS/CMBS), or where the risk of a pool of loans is packaged into complex securities offering different levels of exposure to the potential losses in the pool (a collateralised debt obligation – CDO).

4 BIS Review 50/2008 Section IV: Lessons The recent turmoil has highlighted clear deficiencies in banks’ liquidity risk management. And it has also demonstrated that these deficiencies pose serious risks to financial stability and thus to the economy more broadly. To address this risk in the near term, central banks globally have provided additional liquidity to the banking system and emergency operations have been conducted to support Northern Rock and Bear Stearns. Additional liquidity has been provided at longer-term maturities to address the problem of funding an unexpected overhang of illiquid assets. The Bank’s recently launched Special Liquidity Scheme is enabling UK banks to liquefy a proportion of their outstanding stock of illiquid assets by swapping them for high quality liquid government securities, while ensuring that credit risks remain very clearly with the banks. That should ease current funding pressures. But in the medium term, it is clear that action is needed to strengthen the financial system’s defences to liquidity risk to limit the likelihood of any recurrence of the recent problems. Central banks globally are reviewing the lessons of the episode for their market operations, for example, to ensure that the usefulness of facilities is not undermined by perceptions of stigma that may be attached to a bank that uses them. But it is clear that primary responsibility for bolstering the defences lies with the banks themselves and that supervisory regimes for liquidity risk need reinforcing to support that process.

Det framtidige omfanget av petroleumsvirksomheten på norsk sokkel” [The future of petroleum activity. The future scale of offshore petroleum activity in Norway]. BIS Review 145/2010 1 The Committee had limited confidence in the government’s ability to save: The Committee stated the following concerning a savings fund: “It is up to the political authorities to determine whether such a fund construction designed to avoid a future decline in income is realistic. The Committee chooses not to build on such an assumption.” The notion of a sovereign oil fund matured through the 1980s. The government, under the premiership of Kåre Willoch, called for the establishment of such a fund in the Long-Term Programme presented in spring 1986, and the Act on the Government Petroleum Fund was passed in 1990. The main rules are: First: The totality of government petroleum revenues is transferred to the Fund. Second: The Fund is integrated into central government budgets and accounts. The non-oil deficit is covered by an annual transfer from the Fund. The government cannot borrow to finance current expenditure as long as there is capital in the Fund. Third: The capital in the Fund can only be used for domestic spending via general budget transfers, and not for earmarked transfers. Fourth: The Fund’s capital must be invested abroad. When the Act was enforced, the Norwegian economy was in a deep downturn, with high unemployment and government budget deficits. Projections also indicated that offshore production would pass the peak in the early 1990s 5 .

We have also pointed to possible improvements to the investment guidelines for the Fund. The fixed income portfolio has a number of weaknesses. We have learned that we should not necessarily invest most in those companies and states that are the most eager borrowers. Large borrowers thus have a high weight in the portfolios. Our assessment is that the fixed income portfolio should instead be weighted based on the income that is to service the debt. The GDP-weighted alternative is the most relevant alternative for government debt. Both the equity and fixed income portfolios are constructed using regional weights. Today’s distribution was partly determined using Norwegian import weights from the mid-1990s. It should be considered whether the regional weights should no longer be used so that the Fund’s holdings across all companies and recognised markets are of equal size. If regional weighting is discontinued, the share of the Fund’s European equity and bond holdings will be 13 See “Norges Banks aktive forvaltning av Statens pensjonsfond utland” [Norges bank’s active management of the Government Pension Fund Global], letter to the Ministry of Finance of 23 December 2010. 14 “Utvikling av investeringsstrategien til Statens pensjonsfondutland” [Development of the investment strategy for the Government Pension Fund Global], Norges Bank’s letter to the Ministry of Finance of 6 July 2010. 6 BIS Review 145/2010 reduced. Investments in the Americas and Asia will then increase. With such a revision, the stability of economic and political systems must also be assessed.

Prominent examples of “dread risks” with these characteristics are plane crashes and terrorist attacks, such as 9/11 in the US. This exaggerated sense of risk is stronger, the more recent the event. In other words, the over-estimation of risk is subject to time decay. This is known as disaster myopia (Guttentag and Herring (1986)). Rates of time decay from dread events are, however, typically slow. While the psychological scars from dread events fade, they do so only gradually and never fully disappear. Although the over-estimation of risk is, in one sense, “irrational”, its anthropological roots are deep. They are found in the hunter-gatherer communities that existed thousands of years ago, typically involving groups of 50–100 people. Simultaneous loss of 100 people would, in this setting, have threatened these communities’ very existence. And this “dread” appears to have hard-wired itself into our psyche to this day (Gigerenzer (2014)). The consequences of dread risk may not, however, be benign. It generates risk-averse behaviour which, while instinctive, may be counter-productive even from a risk perspective. The dread risk associated with 9/11 led to an exaggerated fear of flying and a sharp rise in car use. The loss of life from this increased car use may have been greater than the loss of life from 9/11 itself (Gigerenzer (2014)). This is the paradox of precaution. The self-same logic applies when moving from catastrophic losses of life to catastrophic losses of livelihood. Financial crises are the classic example of such catastrophic events.

They too cause large losses of income by a large number of people at the same time. In other words, they have all the hallmarks of a dread event, albeit one associated with economic, rather than physical, insecurity. The Great Depression was the most prominent example of an economic dread event in the 20th century. Historical accounts point clearly to it having generated an exaggerated sense of insecurity (Galbraith (1954)). One way this manifest was a surge in demand for safe assets. In Friedman and Schwartz’s words: “Expectations of great instability enhanced the importance attached to accumulating money and other liquid assets”. In the 1930s, this search for safety resulted in a rise in the demand for, and price of, government securities, lowering their yield. The yields on US and UK government bonds fell significantly and persistently during the 1930s (Chart 6). Insecurities revealed themselves in securities. The Great Depression also widened the gap between the return on safe and risky assets such as equities. This wedge – the equity premium – appears to have risen sharply after the Great Depression. It remained elevated for several decades thereafter. In finance circles, this is known as the “equity premium puzzle” (Mehra and Prescott (1985)). Recent academic evidence has argued, persuasively, that this puzzle can be solved by recognising that the Great Depression, and other catastrophic output losses, are dread events which exaggerate and prolong risk perceptions. Catastrophe risk then explains the size and persistence of the equity premium (Cogley and Sargent (2005), Barro (2005)).

Consumer goods price inflation hovered around zero for most of the last ten years, until the recent rise in oil prices. As a result, the purchasing power of UK consumers has risen with higher real wages achieved without any cost to employers. In other words, for a period the beneficial tailwind allowed the economy to run at a higher level of activity than would otherwise have been the case, without generating additional inflationary pressures. But the economic environment overseas has taken a turn for the worse. In many ways it is a tale of two cycles. The financial cycle The first cycle has been in the financial sector in the West. A banking cycle is not a new phenomenon but the scale of the expansion of cheap credit for some years and speed of the downswing in the last year has been exceptional. It started in the US with a real downturn in the housing market and rising default rates on sub-prime mortgages in particular. That led to a freeze in the structured credit markets built on those loans as investors lost confidence in the credit ratings they depend on. In finance at least, it is still true that when America sneezes the rest of the world catches a cold and the sub-prime crisis swiftly spread to financial institutions across the world. They became uncertain about the value of the financial positions they held, let alone what their counterparties held.

To put this in context, in the preceding 3 decades stretching back to the 1960s, annual GDP growth deviated from its 10 year average by more than 1 percentage point about half of the time (about 20 quarters in each 10 year period). 2 BIS Review 80/2008 employers and employees are less likely to adjust their prices and wages to a surprise movement in inflation. In other words, their expectation of inflation in the medium-term remains low, stable and anchored at the target. And that has helped to contribute not only to the stability of inflation, but output as well. Reforms to both the labour market and monetary policy have undoubtedly played an important role in the reduction in output volatility and emergence of a stable, low inflation environment. But there was a third factor at play that was probably also quite fundamental. Over the first decade of the MPC the economic cycles in the rest of the world were generally moderate, although not without excitement. And there is good evidence to suggest that the integration of emerging economies, such as China, into the global economy was beneficial to countries like the UK. The share of Chinese goods in total UK goods imports has almost tripled in money terms over the past fifteen years to around 8 per cent, and it’s likely that much of the content of imports from elsewhere originated in China. This rising share of Chinese imports has reduced manufactured imported goods prices relative to other prices and wages.

New legislations, both in the central bank act and financial institution act will empower the central bank to have much more ability to manage the nature of commercial banks and will follow the principle of transparency when we shall BIS Review 111/2000 2 be able to do much more for such an important event as a national election and hopefully then commercial banks would be much less inclined to cooperate in less than virtuous activities. Whilst it is probably true central banks of the modern era spend so much time in trying to stabilise national events, the biggest single cause of untold misery, poverty, death and famine in the modern economy is probably neither disease nor natural events, but it is the ever more frequent financial and currency crises and many central banks in many economies have been helpless in this prevention. There are now many international fora to tackle these problems, but all of them now are bent on making emerging markets behave themselves better with a better system, monitor themselves better and monitor what’s going on in the rest of the world, the latter is actually an impossibility. All financial transaction of significance is now computerised. A central bank with any kind of competence will have good access within the nation and understand and manage their own destiny. Given a reasonable government and even minimal legal system, each nation should be able to keep peace and stability. But international transaction is something else.

But human nature being what it is, they also began issuing paper notes equivalent to the value of precious metal which they don’t have in the vaults and the various currencies issued by the various banks became devalued very quickly. Another aspect to the whole thing is that people do cash in paper notes at times and banks have to hold large reserves sometimes up to 30% of their liabilities in order to make sure that they have adequate liquidity that may be used in case of unforeseen events. The first central banks in its relatively modern form were therefore established to provide the function of being the sole issuer of currencies and the single keeper of reserves as defined by law, notably the Bank of England in 1694 and epitomised in a tome in 1873, Lombard Street by Bagehot, Editor at the time of the Economist, where the concept of the Banking Department and the Note Issuing Department was so clearly explained. This gave credibility and value to paper currency and it was also a very much more efficient system in that the single reserves at the central bank could be used by the many commercial banks who thereupon kept much smaller contingencies, historically sometimes as low as 4 % of liabilities and accessed the joint “reserves” at the central bank whenever necessary enabling a much more efficient use of financial reserves than each bank having its own large reserves. Thus was born the term “banker to the bankers” and “lenders of last resort”.

Finance must serve the good and is no longer about greed and selfinterest. Raising the impact of Islamic finance to the economy and society through stronger leadership, values and ethics Islamic finance has always been subjected to higher overarching objectives that place ethical and moral conduct at its centre. The Maqasid Shariah first articulated by al-Ghazali in the 12th century and developed further by later scholars, speaks towards preservation of religion, life, family, mind and property with the ultimate aim of prevention of harm and attainment of benefits. At the onset, such objectives entail the prohibition of any unethical or unlawful conduct in Islamic finance while putting in place features of an embedded governance that support the highest level of integrity and good conduct within Islamic finance. This is achieved through the branch of Shariah of Fiqh Muamalat which governs business and financial relationships in the Islamic economy. The main objective of Islamic economics itself is the human well-being, a concept that not only cuts across the necessities of Maqasid Shariah, but also extends towards a more 1/4 BIS central bankers' speeches comprehensive social and economic aspiration for the betterment of the material and spiritual well-being of a society. Islamic finance therefore naturally has the potential to take the lead striving towards an ethical, moral and also sustainable model for finance in the global financial system. In developing the Islamic financial system, these unique propositions are drawn out further from underlying Shariah principles.

The banks’ progress and effectiveness of VBI-related initiatives would be captured through the VBI Scorecard. The underpinning thrusts of VBI are also gaining relevance in the takaful industry as takaful operators are taking initial steps in exploring value-based protection for their customers. Given the universal nature of VBI, I believe that its adoption by financial groups which comprise the conventional financial institutions, as well as issuers and investors would be a natural evolution in the financial ecosystem. Expectations on the next generation of Islamic financial institutions The next generation of Islamic financial institutions would thus be driven by values and not just profit. With a moral outlook for the ultimate good, strengthened by self-discipline, greater accountability and integrity, Islamic financial institutions will have stronger consideration of the impact of decisions made. There should be greater drive to continuously improve their offerings and treatments towards customers and employees, which include fair and transparent disclosure in order to increase the positive impact of their activities. Development of banking practices based on VBI concepts are also anticipated to encourage the creation of new business opportunities and provide the foundation for better returns for Islamic banks over the long term. An example is assessment of financing application by Islamic banks based on value-creation instead of mere credit scoring which would benefit business propositions from new sectors such as SMEs. Another example is refocusing, strengthening and repositioning of personal financing 3/4 BIS central bankers' speeches by Islamic banks to best meet the needs and circumstances of customers.

These differences suggest that we should be careful in crafting the regulatory answer to the crisis. Our experience in France is that our banks’ universal model has weathered the storm relatively well. It would be a major paradox to put in place rules which would challenge such universal models. There needs to be scope for different countries to tailor solutions to their circumstances, while at the same time doing so within a globally agreed framework. BIS Review 35/2010 1 Many banks have improved significantly their capital position through raising high quality capital. Yet, banks may not feel comfortable if their new capital position is barely above the new minimum. Indeed, a critical issue going forward relates to the behavior of banks with respect to capital buffers they retain on top of the existing minimum. If banks target buffers above the regulatory minimum, which is an endogenous market outcome, they may need to raise even larger amount of equity than what can be expected just looking at the current package. On the one hand we know from empirical studies that weaker capitalized banks typically exhibit weak loan growth compared to other better-capitalized banks. On the other, banks may find it less costly to adjust loan volumes and loan pricing than capital, as frictions in the market for bank capital make the latter option more expensive. Finally, any regulatory framework needs to manage avoidance and regulatory arbitrage, and keep up with innovation and other forms of structural change.

Christian Noyer: Financial stability in Europe and in the world – a French perspective Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Open podium debate on “The euro in the financial crisis – lessons and perspectives”, Copenhagen, 22 March 2010. * * * It is a great pleasure to be here in Copenhagen at the gate of the euro area. This makes it all the more stimulating to discuss here with you issues related to the single currency, the financial crisis and the emerging new financial order. It allows for sharing experience and perspectives, which in and of itself is valuable for policy-makers. I would like to focus my remarks more on the emerging new financial order. More specifically, in the few minutes I have, I would like to share with you some thoughts, in a candid way, on three important policy questions. How can we make our financial systems more resilient? How can we reduce the procyclicality of financial systems? How can we best address systemic risk? Resilience Central banks have a strong stake in the resilience of financial systems. An environment of financial stability reduces the risk that monetary policy instruments become less efficient due to frictions and volatility in financial markets. Strong prudential standards are a certainly a prerequisite.

In addition, we reduced the annual commission rate of 0.02 basis points that had been applied since 1 February 2015 on euro-denominated accounts of banks and financing companies at the CBRT to a yearly 0.005 basis points as of 1 July 2015, and abolished it as of 27 July 2015 due to the recent developments in the euro area. 2 BIS central bankers’ speeches Thanks to the tight monetary policy stance and the macroprudential measures, loan growth continues to stay at reasonable levels. Adjusted for exchange rate changes, loans provided to the non-financial sector increased modestly by 18.1 percent year-on-year in the second quarter of 2015. A comparison of consumer and commercial loans shows that commercial loans continue to grow more at a higher rate than consumer loans, partly due to BRSA regulations. The annualized growth rate of commercial loans dropped to 15.1 percent at the end of the second quarter of 2015, whereas this rate was 21.6 percent for exchange rateadjusted commercial loans. Likewise, comparing their growth trend to averages in past years, commercial loans are close to the average whereas consumer loans are significantly below the average (Charts 10 and 11). Due to the moderate economic activity and the recent tightening in financial conditions, loan growth is likely to slow somewhat in the forthcoming period. 2. Macroeconomic developments and main assumptions Now, I will talk about the macroeconomic outlook and our assumptions on which our forecasts are based.

Accordingly, we revised assumptions for annual percentage changes in average import prices downwards by 1.7 points for 2015 and 1.4 points for 2016. Developments in food prices show that unprocessed food prices exhibited a notable correction in the second quarter of 2015 and the contribution of food prices to inflation witnessed a significant decline. Due to the projections that this correction will continue and the effects of measures taken by related institutions will materialize, we revised the food inflation assumption for end-2015 downwards from 9 percent to 8 percent. Our medium-term projections are based on the assumption that tax adjustments and administered prices will not exceed inflation targets and be consistent with automatic pricing mechanisms. The medium-term fiscal policy stance is based on the Medium Term Program projections covering the 2015-2017 period. Accordingly, we assume that a cautious fiscal 4 BIS central bankers’ speeches stance will be implemented and the primary expenditures to the GDP ratio will decrease gradually. 3. Inflation and the monetary policy outlook Now, I would like to present our inflation and output gap forecasts based on the outlook I have described so far. Our medium-term forecasts are based on a framework that a cautious monetary policy stance will be maintained by keeping the yield curve flat until there is a significant improvement in the inflation outlook. Moreover, we envisage that the annual loan growth rate will continue to hover around the recent reasonable levels in 2015, also thanks to the macroprudential measures.

Looking forward, it seems to me that the most likely next move in monetary policy will be a gradual and limited increase in interest rates. The current weakness in headline inflation largely reflects transitory – albeit sizeable – factors such a close to 50% decline in the price of oil, and the appreciation of sterling over the past two years. The underlying picture is one in which domestic demand is expected to continue growing robustly, facilitating a pick-up in wage growth, which we are starting to see, and a return of inflation to target. But we don’t have a crystal ball, and should circumstances turn out differently, the MPC has the means, the will and the responsibility to return inflation to 2%. On the upside, should the remaining slack in the economy be absorbed more quickly than expected, the MPC can increase rates more quickly than currently implied by market yields. On the downside, should we perceive that low inflation is beginning to have a self-reinforcing effect through inflation expectations, we will have several tools at our disposal. One would be to increase rates more slowly than currently implied by market yields. Another would be to expand the Asset Purchase Facility and with it the Bank’s balance sheet. Another would be to cut Bank Rate further: the banking system is now operating with substantially more capital than it did in the immediate aftermath of the crisis.

Let me reaffirm that this is still one of our primary goals. To be sure, broadening access to financial services does not mean ready availability of loans for unscrupulous spending. It does not mean consumers can more easily borrow to finance extravagant consumption and lifestyle that they cannot really afford and are unlikely to be able to repay their debt. Broadening access to financial services must come hand in hand with responsible lending on the part of service providers and responsible borrowing on the part of consumers. Failure to observe these fundamental principles can lead to very painful BIS Review 64/2008 1 consequences and adjustments for lenders, consumers, and the economy as a whole. It is essentially this kind of failure that lies at the heart of current global market turmoil which, as we all know, originated from loose or non-existent credit underwriting standards in the US subprime mortgage market. And this is exactly the kind of problems that we sought to prevent a few years ago when we introduced a package of prudential measures related to unsecured personal and credit card loans. These measures – such as pre-requisite minimum income, cap on credit lines in multiples of income, and minimum monthly installments – were aimed at pre-empting excessive household debt, especially by people in the lower income group, who could otherwise have faced severe financial distress and led eventually to social problems at large.

For the past couple of years the banks, along with international bodies and fast-food chains, have become the main target for antiglobalisation and anti-capitalist protests. I leave others to muse on the motivation and justification for such actions, but I do note that bank finance for developing countries, and more particularly the question of debt forgiveness, are prominent items on the protest agenda. I also note that this is a subject which has for several years been keenly debated, more soberly, by governments, international organisations such as the IMF and World Bank, and banks themselves. It is a complex issue. One must never lose sight of the fact that bank lending involves a contract between the bank and the borrower, and the parties should be expected to honour that contract. If it is treated otherwise, then the basis for all future relationships crumbles. But in practice the situation is hugely complicated if there is a syndicate of lenders, giving rise to problems of co-ordination and potential free riding, or if the World Bank or IMF are involved, which typically expect to be at the front of the queue for repayments. At the end of the day, commercial banks may decide that a degree of debt forgiveness (possibly disguised as a generous rescheduling) is advisable as the best means of minimising overall losses and, perhaps, preserving longer-term business opportunities with the country or customer in question. But this should be a commercial decision.

Throughout the world we can now see examples of how banks and other financial institutions have facilitated the funding of the development of the rest of the economy, and how at the same time they have enabled savers to obtain returns on their savings and to allocate desired expenditure efficiently between the present and the future. Of course, there have been shortcomings, mistakes and disasters along the way, where market failures have impaired efficiency or where banks have collapsed as a result of poor judgement or of circumstances beyond their reasonable anticipation or control; but such experiences are found in all areas of economic activity. Despite, however, the evident benefit from having an active and efficient financial sector, there have remained people at different times in history who have been sceptical of the intrinsic worth of banking as an economic activity contributing to aggregate welfare. This attitude has often reflected a presumption that activity only has merit if it delivers tangible output – food, clothing, cars, clearly consumable services such as television programmes, and so on. But this belief contradicts the evidence of the contribution which efficient finance makes to the economy, and the necessary role which it plays. Even the strictest communist regimes of the twentieth century found it impossible to dispense entirely with banks, even if, as a result of fantastic accounting and rotten economic policies in general, the banks mostly ended up bankrupt and depositors penniless.

This means that action needs to be taken in those policy domains where we do enjoy some freedom of manoeuvre, that is, fiscal policy, macro-prudential policy and structural reforms. Policy recommendations: On the fiscal front, the recent developments I have just highlighted are encouraging. I would stress the importance of meeting our fiscal targets in terms of structural adjustment and reduction in the debt ratio. Apart from compliance with domestic and European fiscal rules, it is important for Malta to build up sufficient fiscal buffers to allow us to counter eventual adverse economic shocks with fiscal policy if needed. In this regard, judicious control of government expenditure is Page 6 of 8 essential, bearing in mind that some important government revenue streams may be past their peak and need to be replaced through new initiatives. Enhancing labour productivity is critical - forgive me for possibly boring you by repeating myself but I am sure you will agree with me that better bored than sorry. This requires ongoing investment in our labour force, in our people. In terms of the general business environment, it is important to ensure that Malta remains an attractive location for investment, especially foreign direct investment. We need to keep costs competitive, not only labour costs but also the costs of ancillary services including energy, transport and finance, as well as transaction costs generally. Permit me, at this point, to stress the importance of containing the asymmetries of knowledge facing investors, especially foreign direct investors.

The new comprehensive package of measures that we adopted on 10 March 2016 reflects two main objectives: first, to return to inflation rates below, but close to, 2% over the medium term. This is not the case at present since inflation stood at –0.2% in the euro area in February, taking account of the sharp decline in oil prices, but it should return to positive territory in the second half of 2016. The other objective is to bolster the financing of the real economy and to protect it from the pressures related to market volatility. The new series of targeted refinancing operations extension of the asset purchase programme, for its part, will be of particular benefit to large French corporations. We are convinced that these additional measures will deliver concrete results, as did the successive measures we have implemented since June 2014. The latter have indeed boosted lending to businesses, while lowering the cost of credit, and made a 0.3% contribution to French growth in 2015, or even 0.4% according to INSEE. This represents about 80,000 additional jobs for the economy. We are therefore consistent in our objective, and ready to act using the right instruments. But we also remain vigilant as to the possible risks that our monetary policy could generate.

If you invest in either of these, you are not promised all of your investment back, though of course you expect to make a positive return. Such an investor ordinarily expects the full return of their investment, but this is not assured. Investment in debt and equity can of course be managed on a collective basis, as asset management. You may remember the Woody Allen quote that a stockbroker is someone “who invests your money until it’s all gone”. Cruel I know, but it illustrates the difference between deposits, other forms of debt and equity. A distinguishing feature of banks is that by providing deposit contracts, far more of their liabilities take the form of value certain contracts. This alone makes capital and solvency critical for banks. In contrast, for asset managers, the contract does not promise such value certainty. Two particular conditions need to be met in my view to make asset management effective and robust to wider economic conditions. First, that there is no lack of clarity of the nature of the assets held under management. Second, that there is no illusion give to investors about 1 Anat Admati and Martin Hellwig: “The Bankers New Clothes: What’s wrong with Banking and what to do about it”. P38–40 BIS central bankers’ speeches 1 liquidity of their assets. It follows therefore that capital and solvency matter much more for bank supervision, and market liquidity conditions matter more for asset management supervision. So bank capital matters a lot.

The next question, rather obviously, is how much of it banks should have as a liability on their balance sheet? This has been the subject of lively recent comment. Most of that comment has focussed on the core issue of how much capital and overall loss absorbency banks should have as part of their balance sheet liabilities to protect the value certainty of deposits. This is a very reasonable debate because there is no monopoly of wisdom on such a subject. I do however discount heavily those commentators who have seamlessly switched from attacking on the grounds that as supervisors we were choking off lending by requiring too much capital (the so-called at the time “Capital Taliban” argument) to arguing now that we are falling down by setting the standard too low. The main argument of late has been whether our recent proposals on capital buffers for the largest banks operating in UK markets have diverged from previous post-crisis commitments on the level of capital banks should maintain both in going concern, and the overall level of loss absorbency available amongst the liabilities of a bank to enable a resolution to occur if needed. To put it into context, the capital standard we have developed is based on the last quarter century of bank performance – including the financial crisis – such that the probability of bank failure during that period would have been extremely low.

Additionally, we will cultivate further our staff’s ability to evaluate advanced risk measurement and management methodologies for operational risk, especially because so much of that work centers on advanced statistical analysis. Externally, the Committee anticipates providing more assistance, both formally and informally, to other supervisory agencies that are preparing for the added responsibilities we will all assume as the New Accord comes into force. Moreover, I am pleased to note that the Financial Stability Institute will continue its collaboration with the Basel Committee, especially in assisting supervisors globally in understanding and implementing all aspects of the revised Accord. The "FSI" anticipates that more than half of its 40 seminars and programs in 2003 will concentrate on components of the New Accord. In fact, shortly after the release of the Third Consultative Document next year, the FSI intends to offer three special seminars around the world to introduce other supervisors to the most important features of the new framework. 3. Working toward consistent implementation: Accord Implementation Group The third area of activity will be to deepen the level of communication and cooperation among supervisors so that we implement the new rules more consistently across jurisdictions. A "level playing field" demands that international competition be driven by each bank’s strengths, rather than by each country’s rules. Within the Basel Committee itself, we’ve established the "Accord Implementation Group" as a forum for sharing information on ways to assess risk management processes under the New Accord.

Evaluating banks’ readiness First, the member countries of the Basel Committee have begun to survey their banks’ preparation for the New Accord. Some are gathering information on how banks plan to benefit from the new framework, while others have already evaluated selected banks’ internal rating systems and databases to understand how close those banks may be to meeting the stringent requirements associated with the more advanced approaches. In all cases, we are working to understand the challenges that banks will face and are seeking ways to smooth the transition to the new framework. BIS Review 52/2002 5 2. Training and preparing supervisory staff Likewise, supervisors in all of the Basel Committee’s member countries are laboring to make sure that they, too, will be ready for the new rules, which is a second area of focus. From the supervisor’s perspective, the New Basel Accord will require a heightened sense of the internal processes used to identify and quantify risk. This, in my mind, focuses our energy on exactly the right place – that is, how we can encourage improvements in risk management by critically evaluating current practices. Our supervisory assessments will encompass several relatively new elements – importantly, validating the integrity, accuracy and consistency of the bank’s process for assigning internal credit ratings. Since those ratings will feed directly into models used to manage credit risk, we will scrutinize more than ever their accuracy and integrity. If the initial inputs are wrong, the whole capital allocation system becomes faulty.

Yet there are many commentators who still refer only to the central path. It would be extremely dangerous to start publishing fan charts for future interest rates unless we were confident that all commentators would understand the probabilistic nature of such statements. When the Riksbank first published a fan chart for its future policy rate in February this year, an article written by one of the most sophisticated investment banks totally ignored the probabilistic nature of the exercise. Against that background, would we be able to convince the media’s huge audiences for personal finance advice that they should not base their decisions on our central projections for interest rates because they will almost certainly not come to pass? Overall, then, I do not think that a compelling case has yet been made for the MPC to publish a forecast of the path for Bank Rate. But we must certainly provide the information necessary for financial market participants to form their own view as to the likely path of interest rates, and we must always be trying to improve the quality of that information. We shall also keep in close touch with our colleagues in central banks that do publish forecasts of policy rates to see what we can learn from their experience. If we feel that there are net benefits from following their example, then we will do so. 16 See Goldman Sachs (2006). 17 There are many ways of aggregating individual votes on paths of interest rates, but none is particularly attractive.

One of the issues that I pursued in my role as Managing Director of the Swedish Bankers’ Association was that Swedish banks should be competitive in a European context. So, how has my background shaped my view of my new job as a member of the Executive Board of the Riksbank? A marked change since I last worked at the Riksbank is Sweden’s increased dependence on developments abroad. One could also say that what I primarily “bring with me” from the different perspectives of my earlier working life – the supervisory 1 I was, for example, a member of the Basel Committee from 2003 to 2009 and chaired the Committee of European Banking Supervisors (CEBS) – which was the forerunner of the European Banking Authority (EBA) – in 2008–2009. BIS central bankers’ speeches 1 perspective, the international perspective and the banking-sector perspective – is this realisation of the increase in Sweden’s international dependence. Monetary policy – my view Sweden is what we usually call a small, open economy. This means that our economy cannot be seen in isolation as we are highly dependent on the world around us – a factor that it is important to take into account, not least in monetary policy.

Our domestic Islamic financial system is one of the most developed, with its diversity of players and financial products and services in Islamic banking, takaful and the Islamic capital market. Today, we are witnessing the establishment of another dedicated Islamic banking subsidiary that will contribute towards further strengthening the Islamic financial institutional infrastructure in Malaysia the launch of Affin Islamic Bank Berhad as an Islamic banking subsidiary of Affin Bank Berhad. With the domestic Islamic financial infrastructure in place, the emphasis is now to become more internationally integrated with the international Islamic financial system, thus increasing our economic and financial linkages with other parts of the world. Our efforts are to position Malaysia as an international Islamic financial centre and thus facilitate this international integration process. In this regard, the establishment of an Islamic subsidiary also increases the opportunity for entering into strategic partnerships with foreign interests, thereby increasing the potential for greater interface with more extensive markets beyond our domestic borders. On the domestic front, while tremendous progress has been achieved, much more needs to be done. The Islamic financial industry needs to allocate more resources toward investment in research and development to create more innovative products. Consumer awareness and consumer education also needs to be enhanced to support the growth of the Islamic financial industry.

London’s pre-eminence in certain key financial market segments For decades, Europe’s leading financial centre has been the City of London and, in some notable areas, the EU’s financial ecosystem has relied heavily on services provided by UK-based banks and market infrastructures. Derivatives clearing – a critical segment of financial markets – is a striking example. As of December 2019, almost 90% of all over-the-counter (OTC) derivatives positions taken by euro area institutions were cleared at UK global clearing houses. Derivatives clearing is not the only example, however. Large investment banks operating from London play a significant role in euro area bilateral OTC derivatives markets. In August last year, over a quarter of uncleared OTC derivatives held by euro area institutions were sourced from the United Kingdom. While the activities of these investment banks were considered unlikely to create financial stability risks in a hard Brexit scenario (also thanks to the temporary measures taken by EU and national authorities), they are still relevant to the provision of liquidity to euro area markets over the longer term.1 UK-based investment banks are also key providers of advisory and financing services related to securities issuance, M&A activity and syndicated lending to euro area clients. They play an active role in debt and equity issuance for euro area non-financial corporations, including book running and underwriting services. Between 2012 and 2018, almost half of all debt and equity issuance for euro area non-financial corporations was carried out by global banks serving our market from London.

Why we did it and how well it worked The global financial shock associated with the collapse of Lehman Brothers and AIG in September 2008 triggered a sharp and synchronised downturn in the world economy. In the UK, GDP fell nearly 4% in 2009 H1 alone, and by the end of that year was some 10% below where it would have been, if growth had continued at its previous trend. This was one of the largest falls in output ever recorded in the UK. At its March 2009 meeting the MPC cut Bank Rate to just 0.5%, the lowest level in the Bank of England’s 300 year history. While that represented a significant loosening of monetary policy, the MPC agreed that more stimulus was required to mitigate the risk of depression and deflation. Given that Bank Rate was close to its lower-bound, the MPC decided to increase the supply of money in the economy directly, by embarking on a programme of asset purchases, financed by the creation of central bank reserves (QE). This largely took the form of purchases of UK government bonds – “gilts” – but included small purchases of corporate bonds and commercial paper undertaken in order to improve conditions in those markets. I won’t say any more about the latter today.

The bulk of the medium-term impact from the asset purchases should come from the stock of purchases not the flow. There will be approximately £ extra money stimulus in the system, until the MPC decides to withdraw it (or to increase it). When the time does come to unwind the purchases, the MPC will face a number of difficult decisions. First, it will have to decide at what point monetary policy should be tightened. That decision will, as with any decision to expand the purchases further, be judged on a month-bymonth basis, taking into consideration developments in the economy, and the outlook for our mandated target, CPI inflation. As the Governor said in June 13 , when the MPC does want to tighten policy, it is most likely to raise interest rates first. Gilt sales would be started later and conducted in an orderly programme over a period of time. That would leave Bank Rate as the active or “marginal” instrument of monetary policy. Second, the MPC will have to decide how fast to sell the gilts. Again, that would depend on the outlook for inflation at the time, so we cannot commit now to any particular scale or pace. But it is not in the interests of the UK economy to generate unnecessary volatility in the gilt market.

All this confirms my main contention that the current environment, per se, creates no reason for delay. Conclusion Let me conclude. The economic outlook for the euro area is brighter today than it has been for seven long years. Monetary policy is working its way through the economy. Growth is picking up. And inflation expectations have recovered from their trough. This is by no means the end of our challenges, and a cyclical recovery alone does not solve all of Europe’s problems. It does not eliminate the debt overhang that affects parts of the Union. It does not eliminate the high level of structural unemployment that haunts too many countries. And it does not eliminate the need for perfecting the institutional set-up of our monetary union. But what the cyclical recovery does achieve is to provide near perfect conditions for governments to engage more systematically in the structural reforms that will anchor the return to growth. Monetary policy can steer the economy back to its potential. Structural reform can raise that potential. And it is the combination of these demand and supply policies that will deliver lasting stability and prosperity. BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11 12 BIS central bankers’ speeches

Second, public dissatisfaction with the economic status quo is forcing governments to reconsider fiscal policy, especially public spending and tax reforms that can potentially boost the economy’s productive capacity. It is in the US that the nascent rise of fiscal policy has attracted most interest. Historically, a clean sweep of Congress and the White House has led to expansionary fiscal policy. But the size of the fiscal stimulus will depend on the balance that will be struck between the ambitious spending plans of the White House and concerns about debt sustainability among House Republicans. There is considerable uncertainty over not just the size of the fiscal package but its composition. There appears to be broad consensus on reducing corporate and personal income taxes, broadening the tax base, and offering a one-time tax holiday on repatriated overseas corporate profits. But there is no clarity on the details and hence the size of the fiscal impact. On plans to increase defence and infrastructure spending, there is currently less consensus. It is also not clear how these spending increases will be financed. Besides uncertainty over the size of the fiscal stimulus, there is also uncertainty over the impact of a given stimulus on growth. This impact will depend on how much slack there is in the economy. Signs are that the US economy is close to full employment. Unemployment is at or near the natural rate and wages are increasingly healthy.

Banking regulation implicitly provides a trade-off between these considerations. The other main activity of banks is payment services, which are services we use virtually every day. Today, most people in Norway receive money as a bank deposit directly into their account. As long as there are payment solutions that give us cheap and simple access to money, the account is an efficient and safe wallet. Chart: Banks provide payment services But how is it that bank deposits can become money that we can use as payment? An important pre-condition is that there is an infrastructure to enable deposits to be efficiently transferred 2/7 BIS central bankers' speeches between customers and banks. As the bankers’ bank, Norges Bank creates the money banks use to pay each other, so-called central bank reserves, which are the banks’ deposits at the central bank. Transfers of customer deposits between banks can take place without frictions because a corresponding amount of central bank reserves are transferred between banks’ own accounts at Norges Bank, where banks have a common and trusted means of payment and settlement system. This helps ensure that there is no difference between the money created by DNB and money created by Nordea. The money is interchangeable. For us, it is all Norwegian kroner. As such, banks play a key role in delivering services we want from the financial system, albeit subject to a framework designed by the Norwegian authorities. The banking sector is more strictly regulated than most sectors of the economy.

6 In order to limit their liquidity risk, banks tend to procure funding at longer maturities, eg by issuing bonds. In addition, banks must use equity to finance a portion of their assets in order to satisfy the applicable capital requirements. 7 BigTech companies’ activities in financial services and possible policy implications are discussed BIS (2021): “BigTechs in finance: regulatory approaches and policy options.” FSO Briefs No 12. 8 A detailed description of the FinTech sector is found in Claessens, S., J. Frost, G. Turner and F. Zhu (2018): “Fintech credit markets around the world: size, drivers and policy issues”, BIS Quarterly Review, September 2018. The business areas have a wide range and include both specialised payment solutions and proprietary platforms for channelling credit from savers to investors. 9 Adrian, T. and T. Mancini-Griffolio (2019): “The Rise of Digital Money”, FinTech Notes 19/01, provides a thorough overview of new forms of digital money and discusses possible scenarios for the banking system. 10 A portion of household saving ends up in the equity and bond market. Fixed income funds, insurance companies and other investors finance firms by buying bonds and short-term paper. An example is money market funds, which resemble banks without being banks. They receive bank deposits from customers as payment for fund units. The deposits are placed in a client account in a bank and are lent to firms or the government. Unlike a bank, the fund must obtain money before it can lend.

To this end, the Committee has been working to formulate a set of disclosure requirements that will ensure the availability of sufficient information to assess the appropriateness of a bank’s capital relative to risk, while taking into account the bank’s proprietary needs. This is particularly important in relation to the internal ratings approach to credit risk. In January of this year, the Committee issued a discussion paper detailing guidance for strengthening the third pillar of the new capital framework. This paper provides recommendations on disclosures of banks’ capital structures, risk exposures and capital adequacy. The Committee is continuing to expand on these recommendations as its work on the first and second pillars of the new capital framework evolves. As the Committee continues to fine-tune the new capital framework, we are focusing on issues of primary concern to the industry and supervisors world-wide, seeking to avoid getting bogged down in secondary issues that could slow the overall process. This most certainly is a broad-scoped effort that will not, indeed cannot, meet every priority and concern of everyone. But we are well aware that the perfect cannot be the enemy of the good. With this in mind, I fully expect that we will meet our goal of releasing a new capital adequacy framework by early next year, followed by a short international comment period and then implementation in each of the member countries.

More information can be found in Regulation D. 4 BIS central bankers’ speeches short-term rates like GC repo have tended to be more variable and have, more than in the past, fluctuated with sometimes unpredictable spreads to federal funds. These periodic episodes of weaker linkages suggest that although the IOER rate effectively influences the marginal unsecured funding rate for eligible depository institutions, it may not be representative of, and may currently lie above, the marginal cost of funds more broadly across money markets, for example, secured financing costs faced by repo market participants. This weakening of the relationship between short-term interest rates represents a reduction in the precision with which the Desk is able to control them over the very short term. It’s difficult to know, though, whether the shift in dynamics across money markets we’re seeing is permanent or temporary. While some of the changes could be indicative of an increasing desire by market participants to focus on collateralized rather than uncollateralized markets, it could also reflect more transitory factors related to an elevated level of reserves that leaves banks with no need to borrow funds given the abundance of deposits. Of course, it’s also difficult to know with certainty how money market rate relationships will respond when the FOMC eventually begins to remove policy accommodation in an environment with a high volume of reserve balances.

In principle, these triggers could be tied to deterioration in the condition of the specific banking institution and/or to the banking system as a whole. There are many issues that would need to be worked out regarding how best to design such instruments, including how to determine their share of total capital as well as how to configure and publicly disclose the conversion terms and trigger. But, in my view, allowing firms to issue contingent capital instruments that could be used to augment their common equity capital during a downturn may be a more straightforward and efficient way to achieve a countercyclical regulatory capital regime compared to trying to structure minimum 6 BIS Review 125/2009 regulatory capital requirements (or capital buffers above those requirements) that decline as conditions in the financial sector worsen. So what might such a contingent capital instrument look like? One possibility is a debt instrument that is convertible into common shares if and only if the performance of the bank deteriorates sharply. While, in principal, this could be tied solely to regulatory measures of capital, it might work better tied to market-based measures because market-based measures tend to lead regulatory-based measures. Also, if tied to market-based measures, there would be greater scope for adjustment of the conversion terms in a way to make the instruments more attractive to investors and, hence, lower cost capital instruments to the issuer. The conversion terms could be generous to the holder of the contingent capital instrument.

Some of the firms that encountered difficulties in 2008 paid out large bonuses early in 2008 despite the deterioration in market conditions and in their own financial performance. There is an opportunity to rethink capital preservation policies to ensure that banks’ incentives are consistent with the supervisory objectives of a safe and sound banking system. Such capital conservation rules could operate on both sides of an economic downturn – conserving capital going into the downturn and rebuilding capital coming out. One example would be the imposition of constraints on the ability of banks to reinstate or increase dividends prematurely or to undertake share buybacks during a downturn or during the early stages of an economic recovery. Higher capital requirement for systemically important institutions Currently, some large systemically important institutions may have a competitive advantage because they are perceived to be “too big to fail.” Unless we address this disparity, we will have an ongoing moral hazard problem and inevitable market structure distortions as institutions take steps to become systemically important in order to gain a competitive advantage. The regulatory regime could lean against this in two ways. First, we could improve the resolution mechanisms for large, complex institutions and thereby reduce the costs associated with failure. A more robust resolution regime would make it more feasible to allow the failure of a large financial institution without that failure threatening the stability of the entire financial system.

The two policies I just mentioned – energy and infrastructure – , aside from their incidence in investment, could also result in higher productivity. Regarding employment, a recurrent topic in our country’s policy debates is female participation in the workforce. Despite some increases in recent years, it is still below the average of OECD economies (figure 3). As our population ages and grows at a slower pace, the larger female labor force participation can be a significant ingredient to boost our medium-term growth. Another ingredient could be extending the working life span of individuals, a trend that is gaining importance in many countries as the fraction of population over 65 is growing rapidly and is still able to contribute their bit to the economy. Finally, the challenges relating to increasing labor productivity that everybody recognizes are mainly to improve our educational and training systems. Now, let me describe the macroeconomic scenario that we see as the most likely for the coming quarters, and its associated risks. Macroeconomic scenario Annual headline inflation has remained above 4 percent, but with moderate variations in the past few months. This was more visible in the evolution of the CPIEFE – the CPI excluding food goods and energy prices – reflecting, on one hand, that the pass-through of the peso depreciation to inflation has been a significant development, but declining in intensity as time passes and, on the other, that the weak performance of the economy is already easing the pressure on prices.

It is key in formulating socio-economic programs including the Government Transformation Plan, the New Economic Model and the 10th Malaysia Plan. This commitment towards financial inclusion is reflected in the Central Bank Act 2009, where financial inclusion is legislated as an objective of Bank Negara Malaysia. The efforts to develop a more inclusive financial system have been fruitful. More than 80% of the Malaysian population currently has some form of savings account. Compared to the global median of 8.4 bank branches per 100,000 individuals, Malaysia has 15.5 branches per 100,000 individuals (31 March 2010) with the number of ATM cards in circulation increasing from 19.8 million (Dec 2006) to 28 million (April 2010), with an average annual growth rate of 11% in the last four years. Another important indicator is the total microfinance loans outstanding, which has increased from USD 45 million (RM 151 million) as at end-2000 to USD 757 million (RM 2.5 billion) as at end-March 2010, a compounded annual growth rate of 35.5%. While such positive trends are encouraging, we are also mindful of the associated risks, such as non-performing loans, over-indebtedness and consumption of financial products and services that are not suitable for the user. In this regard, efforts towards financial inclusion are always conducted within the framework of sound banking practices, risk management and adequate consumer protection. Importance of financial inclusion data in the growth and development of an inclusive economic system Policy formulation for financial inclusion is complex for a number of reasons.

The recent narrowing of spreads between benchmark issuances and triple A rated papers indicate that risk aversion has now eased. In the primary market, new corporate bond issuance has increased by about 40 percent to RM28.4 billion in the second quarter of this year. In the secondary market, the recent average daily trading volume has also increased by more than 50 percent. Demand for higher-yielding securities are also beginning to rise ahead of the recovery in the global economy. In addition, in view of the prospects for an earlier recovery in Asia, global investors in the current uncertain international environment will increasingly be looking at Asian financial markets for investment opportunities. This trend is already being observed through the substantial inflow of funds dedicated for emerging markets since the middle of April this year with an estimated average inflows of USD 144 million per week compared to the net outflow recorded in the early part of the year. This positive trend enhances the opportunity for Malaysia to further expand its bond market. Timely issuance of corporate handbook by AmBank The corporate handbook being launched by AmBank today therefore comes at an important juncture in the development of the bond market. Encapsulating the profiles of 100 conventional and sukuk issuers in the Malaysian bond market, it is indeed a commendable 2 BIS Review 27/2009 effort by AmBank to provide this comprehensive information to foreign and domestic investors to facilitate their investment decisions.

As a pioneer in the global sukuk market, Malaysia has remained firmly established as one of the largest issuers of sukuk, with 62 percent of the world's outstanding sukuk having originated in Malaysia. Malaysia's lead is also reflected in the innovative and competitive structures that have been pioneered such as the exchangeable sukuk musharakah and sukuks based on istisna' and ijarah. All these augurs well for Malaysia to evolve as an International Islamic financial hub and as a centre of sukuk origination. BIS Review 27/2009 1 Riding through the global financial market uncertainties The enhanced resilience of our financial system during this challenging international financial environment can be attributed to the comprehensive reform measures undertaken over this decade which has contributed to reduce the impact of the global financial crisis on our financial system and our economy. The domestic financial markets have remained orderly despite experiencing greater volatility, higher outflows and lower trading volume at the height of the crisis. The financial sector has also remained solid and has continued its intermediation function without disruption throughout this period. A number of pre-emptive measures has also been initiated to ensure continued access to the bond market for funding. This includes the establishment of Danajamin Nasional Berhad, a national financial guarantee insurer to provide credit enhancement for viable corporations to raise financing from the bond market. This initiative is expected to enhance the prospects for companies to tap the bond market.

An IMF study of twenty property crises in different countries shows that they entailed a fall in prices of 30 per cent. The countries’ GDP was on average four per cent lower three years after a property crisis had started than it would have been without the fall in prices. 1 The scars in the real economy may well be considerable and given this it is interesting to discuss how a central bank should react to changes in asset prices. In the international debate on asset prices and monetary policy there are several different points of view. A common view is that monetary policy should only react to changes in asset prices to the extent that these affect the central bank’s inflation and growth forecasts. One should thus not have a separate strategy for dealing with changes in property prices. Others think that a central bank can improve the outcome for inflation and production by reacting to changes in asset prices over and above their consequences for the inflation forecast. Two main arguments have been put forward. Firstly, monetary policy can alleviate the effect of the price change on the real economy. Secondly, the actual knowledge that the central bank will react should reduce the probability of exaggerated price movements occurring. The difficulty lies in determining whether or not prices are increasing at an exaggerated rate. It is not necessarily so that a central bank is better qualified to make such an assessment than the market participants.

While liquidity risk metrics remain complex and challenging, I believe that there is scope over time to achieve some degree of enhanced, consistent disclosure across institutions. The final lesson is the need for stronger oversight of banks’ liquidity risk management practices. The authorities’ role is to preserve financial stability by lowering the probability and impact of bank failures that could threaten the functioning of the financial system more broadly through contagion, spillover and damage to financial networks. There is no incentive 6 Senior Supervisors Group: “Observations on Risk Management Practices during the Recent Market Turbulence” March 2008. 6 BIS Review 50/2008 for private banks to bear this cost spontaneously, as their responsibility is to their shareholders rather than to users of the financial system more broadly. The objective of prudential supervision is to correct this misalignment between private incentives and public policy goals, by forcing banks to deliver higher standards of liquidity risk management and to build stronger defences than they would naturally provide of their own volition. That leaves open the formidably difficult question of the level of resilience to liquidity stress that the authorities should seek from individual banks. An answer to this question requires a balance to be struck between the risks to financial stability if resilience is set too low, and the risks of inefficiency of financial intermediation if buffers are set too high.

Unemployment Percentage of workforce, EU definition, 15-74 years of age, seasonally-adjusted data 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Note: The dotted line indicates the Riksbank’s forecast. Data prior to 2001 has been chained by the Riksbank Sources: Statistics Sweden and the Riksbank BIS Review 98/2009 15 17. Inflation close to target Annual percentage change 5 5 CPI 4 CPIF 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 00 01 02 03 04 05 06 Note. Broken lines represent the Riksbank’ s forecasts. 07 08 09 10 11 12 Sources: Statistics Sweden and the Riksbank 18.

Loan losses increasing SEK billion net, totalled over four quarters, fixed prices, 31 March 2009 120 120 Results before loan losses Loan losses 100 100 80 80 60 60 40 40 20 20 0 0 -20 -20 90 92 94 96 98 00 02 04 06 08 10 Source: Finansial Stability Report 2009:1, the Riksbank 8 BIS Review 98/2009 3. World GDP growth Annual percentage change 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 70 75 80 85 90 95 Note. The broken column represents the Riksbank’s forecast. 00 05 10 Sources: The IMF and the Riksbank 4.

These protections mean that the coffee shop where I tapped my phone this morning does not need to worry that the value of my payment will change materially vis-à-vis the sterling-denominated price of the coffee by the time it reaches the shop’s bank account. And, when the payment arrives in the coffee shop’s account, the shop has a clear right to withdraw these funds, in sterling, and receive the same amount that was deposited. They also mean that, as a payments regulator, I don’t currently need to worry about large fluctuations in the money flowing through UK payments systems. I can instead rely on my colleagues in the Bank’s monetary policy and prudential regulation areas to do their jobs. Absent additional regulation, stablecoins may not offer these protections. Regulation of stablecoins will therefore need to be broader than the regulation of current payment chains. At minimum, where stablecoins are used in systemic payment chains as money-like instruments they should meet standards of stability and protections of holders’ rights equivalent to those expected of commercial bank money. It is tempting to view questions about the stability of value of the ‘money’ flowing through payment systems as a new issue – but in fact it is one of the oldest issues in economics. Indeed fifteenth century China’s leap backwards in payments was motivated by precisely this issue. Failure to properly ensure the stability of value led to the collapse and elimination of the innovation in payments.

As industry, you will have opportunities to engage in this work and I hope you will. I look forward to working with you – and to your questions. 8 All speeches are available online at www.bankofengland.co.uk/news/speeches 8

BIS central bankers’ speeches 9 Table 1 Annualized quarter-to-quarter GDP growth (percent) III.2011 Spain Italy Portugal Greece (y-o-y) Germany France Eurozone United Kingdom 0.2 -0.8 -2.5 -5.0 2.3 1.2 0.5 2.4 IV.2011 -1.2 -2.6 -5.0 -7.5 -0.7 0.3 -1.3 -1.2 I.2012 -1.3 -3.2 -0.4 -6.5 2.1 0.2 0.0 -1.2 United States Japan 1.8 7.8 3.0 0.1 1.9 4.7 China (y-o-y) India (y-o-y) Russia (y-o-y) Brazil Peru (y-o-y) Colombia Mexico Chile 9.1 6.7 5.0 -0.6 6.7 6.2 4.8 1.3 8.9 6.1 4.8 0.6 5.5 5.3 2.9 8.2 8.1 5.3 4.9 0.8 6.0 -5.3 5.7 Sources: Central Bank of Chile and Bloomberg. Table 2 International baseline scenario assumptions 2009 Growth Trading partners World at PPP World at market exchange rates United States Eurozone Japan China India Rest of Asia (excl. Japan, China and India) Latin America (excl. Chile) 2010 2011 (e) 2012 (f) Report Dec. 11 Report Mar. 12 Report Jun. 12 2013 (f) Report Dec. 11 Report Report Mar. 12 Jun.

The other question mark concerns the differences between countries, with inflation of 1.7% in Germany. However, following a temporary peak in the first quarter, German inflation is expected to remain under 2% on average throughout 2017. Moreover the inflation differences between countries are consistent with their different national economic situations: growth and employment are also stronger in Germany; and these differences could even contribute, via their impact on relative wages, to correcting the imbalances, hence achieving greater convergence within the euro area. I can naturally grasp the concern of German savers in the face of low interest rates. It is not our aim to keep interest rates low for too long: low interest rates are not a goal in themselves; they are merely the necessary condition today for gradually returning towards our inflation target, and ensuring lastingly higher interest rates in the future, as Mario Draghi himself has put it. This movement has already started for long-term interest rates, with the 10-year Bund gaining nearly 60 basis points since the end of September. In December, in view of the progress achieved, we decided to reduce the volume of our monthly asset purchases from 80 to 60 billion euro. I also repeat that although I am convinced that negative interest rates have their use, they have clear limitations. But, although QE will obviously not last forever, we clearly did not discuss tapering or any exit strategy.

William C Dudley: The national and regional economy Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York and Chairman of the Committee on the Global Financial System (CGFS), at the Business Council of Fairfield County, Stamford, Connecticut, 2 July 2013. * * * Good afternoon. I am pleased to be here with the Business Council of Fairfield County. I am told that your meetings are very inclusive – that you routinely invite education professionals, executives of local not-for-profit agencies and community leaders as well as business leaders. In doing so, you assemble the type of broad Main Street audience that I most enjoy addressing. So, thank you for inviting me here today. Today I want to talk a bit about the outlook for the nation and the region. As many of you know, I was scheduled to speak at this forum on October 29 of last year but that meeting had to be postponed because of the arrival of Superstorm Sandy which hit on that very day. The region covered by the New York Fed was at the center of the storm, and Fairfield County, as well as parts of the Connecticut shoreline suffered extensive damage. Immediately following the storm, our Regional and Community Outreach function worked with all of the affected areas as part of a needs assessment.

Mervyn King: Monetary policy – many targets, many instruments. Where do we stand? Remarks by Mr Mervyn King, Governor of the Bank of England, at the IMF Conference on “Rethinking macro policy II: first steps and early lessons”, Washington DC, 16 April 2013. * * * I would like to thank Charlie Bean, Alex Brazier, Spencer Dale, Andy Haldane and Iain de Weymarn for helpful comments and suggestions in preparing these remarks; and in particular Tim Taylor who I regard as a co-author, although he is absolved of any errors in the current draft. Introduction The past five years has been an extraordinary period for central banks. The breadth and scale of our operations has expanded in ways that were previously unimaginable as we responded to a crisis in the banking sector and the wider economy. In monetary policy, we have moved into uncharted territory. But has our notion of what central banks should do, and how, changed? Now is a good time to reflect on where we stand. I want to focus my remarks on two areas. First, I want to draw out what have we learned about the objectives of monetary policy. Second, I want to reflect on the implications of the proliferation of instruments that have been used to meet those objectives. Objectives For over thirty years the objective of central banks was clear. It was to set monetary policy to achieve long-run price stability.

Any irregularities are detected and reported to concerned authorities to take actions for continually checking that they are corrected. 7. SAMA has established a permanent committee for regular monitoring of financial crimes in general and money laundering crimes in particular. The committee is made up of members from SAMA and banks to review the instructions and procedures taken in this regard so as to be applied as required. 8. SAMA has attached great importance to training in the field of combating money laundering. SAMA’s IOB held 47 training courses benefiting 800 trainees during 2009. Several government authorities, which are concerned with anti-money laundering issues, have also made great efforts to train their employees. A number of conferences and symposiums at the domestic and regional levels have been 2 BIS Review 54/2010 hosted to raise awareness of the issue of money laundering and strengthen human and technical capabilities to combat it. Your meeting today in this symposium is only part of SAMA’s efforts to raise the level of compliance and anti-money laundering. Dear audience, Despite considerable efforts made to promote the principle of compliance and anti-money laundering that have had a significant positive impact, money laundering criminal activities always seek new techniques to be able to continue. Hence, we always need to be alert and cautious, and we should enhance our capabilities and do our utmost to fulfill the tasks entrusted to us.

Achieving success also requires cooperation among all concerned authorities and exchange of information that would help achieve our goal of dealing positively and effectively with the challenges we face. Dear audience, I have looked into the program of this symposium and found it packed with a range of important and useful topics which will be presented by an elite of specialists in this area, and I call on everyone to benefit most from this symposium which will in my view, be reflected positively on our efforts to enhance the principle of compliance and anti money-laundering. I welcome you again to the Institute of Banking, wishing you a pleasant stay in Riyadh. Wassalam Alaikum Warhmatullah Wabarakatuh. BIS Review 54/2010 3

The first day of our seminar is dedicated to this topic. The second day of the seminar targets mainly the corporate sector. The Small and Medium Enterprises’ access to finance is also important for financial stability. Small and Medium Enterprises constitute the overwhelming majority (99 percent) of businesses at European level, with important contributions both in terms of value added generated by non-financial corporations (57 percent) and employment (67 percent). Increasing access to finance in this sector is among the EU priorities. It is also 3 true that this portfolio accounted for the highest post-crisis NPL ratio in the European Union. At its peak, the average NPL ratio for Small and Medium Enterprises reached around 20 percent at European Union level. In Romania, the ratio was 35 percent, while the NPL ratio for microenterprises accounted for 53 percent. Therefore, the same lesson learnt from the household sector also applies here: the Small and Medium Enterpises’ financial inclusion should unfold in a sustainable way. On the other hand, the experience with macroprudential instruments for companies is extremely limited at the European level. For example, France has recently implemented a measure focusing on highly indebted firms, but it applies only to large companies. Therefore, I think that deepening this area of research is very useful for macroprudential policymakers. In Romania we have also tried to come up with solutions that might improve Small and Medium Enterprises’ financial inclusion.

Our macroprudential authority – the National Committee for Macroprudential Oversight, comprising representatives from the central bank, the Ministry of Public Finance, and the Financial Supervisory Authority – adopted last year a recommendation to the Government, seeking to improve financial discipline in the economy and the financial soundness of firms. I strongly believe that addressing these structural vulnerabilities in the corporate sector will significantly increase the number of bankable firms and enhance the financial inclusion of Small and Medium Enterprises. Last, but not least, the climate-related topics have become more and more prominent worldwide. The financial system should not ignore the effects of climate risks. Central banks and supervisory authorities have joined the scene. There is a significant interest at EU level in the role of sustainable finance, a High-Level Expert Group on Sustainable Finance being established by the Union. The Network for Greening the Financial 4 System, that brings together 34 members, out of which 8 are central banks and supervisory authorities, highlighted the role of climate risks as a source of financial vulnerabilities. Not only the increased frequency and severity of extreme weather can translate into economic and financial losses for the real economy and the financial system, but consequences can also arise from transitioning to a low-carbon economy. Governments’ climate policy, new technologies and consumer preferences will be the main drivers influencing the developments in carbon-intensive sectors.

And I would hope, on this evidence, that the future evolution of our approach to overall economic management would be in the direction of further improvements to our supply-side flexibility, rather than any retreat from the present emphasis on macro-economic stability. Of course I am well aware that a stable overall macro-economy does not - and cannot - mean equally stable economic conditions for every individual sector or individual business. A particular complication over the past few years has been the surprisingly persistent strength of the exchange rate against the euro, itself a reflection of the puzzling more general weakness of the European currency. This has contributed to an uncomfortable imbalance within the UK economy primarily between the euro-exposed sectors, which have been under consistent pressure, and the domestically-oriented sectors, which have by and large been doing relatively well. Understandably the suffering sectors and businesses tend to complain that monetary policy takes too little account of their position, often pointing out that inflation has for the past two years fallen somewhat below the target. The implication is that monetary policy has been tighter - interest rates have been higher - than was necessary, which, they say, in turn at least helps to explain the behaviour of the exchange rate. I hope you won't think me patronising if I tell you that I have genuine sympathy with their concerns. Indeed I very much admire the huge efforts that many of them have made to overcome the disadvantage coming from the strong exchange rate.

Given our starting point, with inflation somewhat below target and expected to remain so for a while, we are relatively well placed to weather the storm if it begins to blow more strongly. BIS Review 33/2001 3

BIS Review 3/2007 3 Key implementation issues I. What is the appropriate capital adequacy ratio? Under Basel I, the minimum capital adequacy requirement was fixed at 8% of risk-weighted assets which is expected to be the minimum even under Basel II. In Sri Lanka, we have specified the minimum capital adequacy to be at 10% from 2003, because it was considered necessary to have a cushion of additional 2%, so that any unforeseen risks could be covered to some extent. Under Basel II, the minimum capital adequacy ratio could be well above 10% or even lower than 10% if the bank concerned is absolutely sure that it can mitigate all risks that are associated with its banking operations. We will continue to use the yardstick of 10% for measuring the minimum capital adequacy ratio consisting of 5% for Tier I. The other related issue is “Will 10% be adequate to cover market and operational risks as specified in Basel II?” This is where the regulator is going to leave it in the hands of the banks, but insist that the two new areas of risks are covered and all risks in banking operations are calculated in an objective manner. It is also necessary for the banking institutions to go one step further and take into account the risks of their clients also in a meaningful manner. This is certainly a challenge for both the bank and also the supervisor.

The adoption of IRB approach would entail significant changes to their existing systems, the collection of extensive data as well as the fulfillment of many other qualitative and quantitative requirements. Such banks are advised to start building up the necessary data systems now itself in order to be able to qualify for the advanced approaches and to plan the application of the ratings for their credit management. The IRB approach will permit the banks to use their own estimates for the measurement of credit risk with regard to certain parameters. CBSL will stipulate the minimum qualifying criteria regarding the comprehensiveness and integrity of the rating systems, including the ability for those systems to produce reasonably accurate and consistent estimates of risk. This will be done in consultation with the industry and by announcing a timeframe for permitting the Foundation IRB approach and the submission of applications in 2007. Irrespective of whether the advanced approaches are used or not, the Central Bank encourages all banks to study carefully the more advanced risk management concepts and practices embodied in Basel II and consider adopting those relevant to their risk management purposes, even though they may not use them for capital allocation as such.

107(2), pages 407–437. O’Neill, J (2011), “It is Time to Re-define Emerging Markets”, Goldman Sachs Asset Management Strategy Series. Prasad, E, Rajan, R and Subramanian, A (2007), “The Paradox of Capital”, Finance and Development, Vol. 44(1). Reinhart, C M and Rogoff, K S (2008), “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” NBER Working Paper 13882. Von Peter, G (2007), “International Banking Centres: a Network Perspective”, BIS Quarterly Review, December, pages 33–45. 10 BIS central bankers’ speeches Annex: Charts and tables Chart 2 Chart 1 (a) Gross portfolio equity inflows relative to lagged market capitalisation for G20 emerging markets(a)(b) Gross portfolio equity flows to emerging markets in 2010 Cumulative flows since Jan 2010 $ billions) 90 Index, 31/12/1987 = 100 1,200 1,150 Dedicated EMEs 80 1,100 MSCI EM $ Index (LHS) 70 60 1,050 50 1,000 40 950 30 900 20 850 10 0 800 Jan 2010 Mar May Jul Sep Nov Source: Emerging Portfolio Fund Research, Thomson Reuters Datastream and Bank calculations. Source: Institute of International Finance, Thomson Reuters Datastream and Bank calculations. (a) Flows to equity investment funds. (a) Chinese equity market capitalisation includes A, B and H shares. A-shares are currently available for purchase by domestic residents only but are included since we assume capital market liberalisation occurs in China over our forecast projection.

BIS central bankers’ speeches 19 Table 2 Projected equity home bias for G20 countries(a) (2010–50)(b)(c) Advanced G20 2010 2020 2030 2040 2050 USA 0.51 0.44 0.36 0.24 0.09 UK 0.53 0.47 0.41 0.33 0.22 Germany 0.41 0.33 0.26 0.17 0.03 France 0.53 0.46 0.38 0.27 0.13 Italy 0.45 0.39 0.34 0.31 0.23 Japan 0.81 0.75 0.67 0.60 0.51 Canada 0.59 0.53 0.46 0.35 0.22 Australia 0.70 0.62 0.53 0.41 0.26 Weighted average 0.56 0.49 0.41 0.30 0.16 Un-weighted average 0.57 0.50 0.43 0.34 0.21 Argentina 0.55 0.48 0.38 0.25 0.09 China 0.96 0.93 0.87 0.79 0.67 South Africa 0.78 0.74 0.68 0.58 0.45 Mexico 0.88 0.82 0.75 0.66 0.54 South Korea 0.82 0.74 0.68 0.61 0.51 Brazil 0.92 0.87 0.80 0.72 0.61 Turkey 0.87 0.81 0.73 0.64 0.52 Russia 0.97 0.91 0.83 0.73 0.62 India 0.99 0.98 0.95 0.89 0.80 Indonesia 0.97 0.95 0.91 0.84 0.75 Weighted average 0.93 0.89 0.84 0.77 0.68 Un-weighted average 0.87 0.82 0.76 0.67 0.56 Weighted average 0.65 0.62 0.61 0.57 0.49 Un-weighted average 0.74 0.68 0.61 0.52 0.40 Emerging G20 Total G20 Source: IMF International Financial Statistics, IMF WEO database October 2010, S&P Global Stock Markets Factbook (2010), updated and extended version of dataset constructed by Lane and Milesi-Ferretti (2007), Thompson DataStream, UN Census Bureau, Penn World Tables and Bank calculations.

For analogy purposes, I would like to bring an example: It is now for two years that the Bank of Albania has been organizing the yearly competition “The Governor’s Award for the best diploma thesis”. Last year, the third prize went to a student of the University of Shkodra for a very original thesis which introduced the potentials and opportunities of the Puka Region, the development of mountain tourism and the positive macroeconomic impact it will bring to the region. This paper was assigned a prize for the originality of the topic chosen to be explored and the economic impact its presentation may have. The thesis did not only seek to present a profitable business opportunity, but also make an assessment of the positive impact this investment would have on the life of the community. The positive influence on the latter is crucial for important strategic investors. We awarded this paper not only for its original exploration by a passionate student from Puka, but also to increase public awareness and promote this new and modern mentality. When a single student manages to produce this much, a university, a local community and all of us together have great potentials to achieve even more. I brought with me today a copy of this thesis. Dear participants, I tried to briefly discuss some issues that I personally find vital and benefiting for you and the Bank of Albania.

The opening of the border with Kosovo in particular has provided us with real opportunities to perceive the Northern Alps as a single complex with their continuity to Kosovo and why not to Montenegro. I think the completed airport, which 4 BIS Review 115/2008 could very well be used for the transportation of winter sports fanatics, is another strong point. It is the local authorities’ task, to undertake in co-operation with the local stakeholders projects and feasibility studies, which in a later time may be submitted and presented to the central authorities or the specialized international operators. I would like to inform you that at the moment, their interest is overwhelming and concrete. Time is ripe for you to increase the marketing of these potentials and point out their strong advantages accurately. Second, your district is well-known for being rich in minerals. I do not know if you have any geological inventories or maps which accurately identify the mineral resources. If you don’t, this is too late. The current price structure is very favourable and I believe that any reactivation of existing mines and the opening of new mines implies more employment, more hope for this region and fewer migratory movements. Third, your district, in particular the town of Kukës, finds itself in a crucial economic crossroad, not only in terms of roads but also of air. Unfortunately, statistical information related to cross-border economic and financial activity is missing. Nonetheless, I have to admit that the potentials are not being rightly handled.

But while central banks need to be mindful of the possible side-effects of their policies, I would caution against requiring them to make more granular distributional judgments. Low and stable inflation and smoothing output volatility are public goods that benefit all; technocratic central bankers should use the tools available to them to achieve that public good and avoid as far as possible taking views on distribution. Distributional considerations and decisions should remain the province of elected authorities that have many instruments to address these issues. 9 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 9 I have discussed some of the policy implications of a low natural rate for central banks generally. In the UK, of course, Bank policy is now focused on assessing and, where necessary addressing, the implications for the economy over our policy horizon – the next two to three years – of the UK’s forthcoming exit from the European Union. I don’t need to say too much about this today. The minutes of the MPC’s November meeting and the November Inflation Report give a detailed picture about the Committee’s current forecast and policy stance to which I fully subscribe. But there is one point that is relevant to the analysis I have just laid out on the natural rate. As I said earlier, the policy rate may need to depart from the natural rate if the policymaker is faced with a shock that creates a tradeoff – for example between bringing inflation to target and smoothing output volatility.

First, it decided to continue to support ample liquidity conditions by conducting its refinancing operations as fixed-rate tender procedures with full allotment, at least until mid-January 2012. Let me point out that the outstanding Eurosystem credit in our refinancing operations currently amounts to about € billion and has come down since last year. The total value of marketable securities already presented and approved for Eurosystem credit operations amounts to € trillion and our counterparties have at their disposal almost € trillion out of the overall total of 2 BIS central bankers’ speeches existing eligible securities of about € trillion. Therefore, this confirms that there is no liquidity or collateral shortage for the euro area banking system. Second, the ECB resumed its government bond market interventions under its Securities Markets Programme (SMP) in August. Via these interventions, the ECB Governing Council aims to help restore a more appropriate transmission of its monetary policy stance in an environment in which key market segments, such as those for government paper, are dysfunctional. The interventions do not influence our monetary policy stance. In order to sterilise the impact of these interventions on the liquidity conditions in the banking system, we re-absorb the liquidity injected. Let me underline that the secondary market purchases are not, and cannot be used to circumvent the principle of budgetary discipline as a pillar of Economic and Monetary Union.

The major global banks have raised $ billion of new equity over the past few years and are on course as a group to meet the Basel III standards more than four years in advance of the deadline. In the UK, all major banks and building societies now have in place credible plans to achieve the Bank of England’s thresholds for capital and leverage. To finish the job, international regulators need to agree over the next year new rules for capital to be held in banks’ trading books, a simple leverage ratio and a guideline which governs the stability of banks’ funding. Alongside these efforts to increase resilience, our focus is on solving the problem of banks that are too big to fail. Systemic resilience depends on being able to resolve failing banks in a way that does not threaten the entire system. Fairness demands the end of a system that privatises gains but socialises losses. And simple economics dictates that the UK state cannot stand behind a banking system that is already many times the size of the economy. Moreover, without a credible means to resolve failing banks, regulatory Balkanisation will continue as national regulators seek to protect their own interests, threatening the efficient operation of the international financial system and accordingly London’s competitiveness. To avoid these risks, we need to make the resolution of global banks a real option. Successful cross-border resolution requires coordination and cooperation between authorities across multiple jurisdictions.

While today’s announcement is significant, it does not mark the end of history for the Bank of England’s market operations. We will continue to evolve our approach as the financial sector changes. In particular, we need to respond to two big questions. First, should the Bank of England allow non-banks to have access to our regular facilities? After all, our responsibilities for financial stability run much wider than the banking sector. Institutions that play a central role in markets, like broker-dealers, are obvious first candidates. We will also consider the case for opening them to other participants including financial market infrastructures. If the scope of access to central bank facilities increases, the scope of regulation can be expected to expand in a proportionate manner.13 Backstopping the collateral management of a range of institutions should reduce the need for the Bank to act as a Market Maker of Last Resort.14 Second, given that we host an international banking system and global markets, to what extent should the Bank of England provide liquidity in currencies other than sterling? As markets evolve, banks and markets here may need backstops in other currencies in our time zone before business opens for the Federal Reserve and after it has closed for the Bank of Japan. Although the Bank of England can supply limitless quantities of sterling, we rely on other central banks for access to their currencies.

And, although we bring as much economic and statistical science to bear as we can, we know that our forecasts, and indeed our policy judgements, are subject to a range of error. They cannot be accurate to every last digit. We can't expect to hit the target all the time, but by consistently aiming to do so (and we do consistently aim to do so looking 2 years or so ahead - whatever you may have read in some recent media commentaries) we can hope to get reasonably close to the target on average over time. Given the uncertainties, which are well illustrated by the sudden - and no doubt to some extent erratic - jump in the RPIX inflation rate in the year to January of 2.6% announced this morning, the overall results over the past decade since the recession of the early 1990's have been encouraging. Whether that's a result of good luck or good judgement I leave to others to decide - I'm more interested in the outcome. Since the Summer of 1992, inflation, on the target measure has averaged just 2.6% - and has been more stable than at any time in our history. And it has been consistently remarkably close to target over the past 5 years. But the even better news is that stable, low, inflation has been accompanied by steadily increasing overall output and employment, and by a progressive fall, until very recently at least, in the rate of unemployment.

But for the time being, and whatever the precise numbers, the overall prospect for the British economy over the next couple of years is for output growth picking up to around trend and inflation to around target. And it was against that background that we left interest rates unchanged at our MPC meeting last week. I gather that the EEF was "deeply disappointed" at that decision, having been hoping for a cut. And I really do understand why, seeing things from the perspective of the manufacturing sector in particular, you might take a somewhat more pessimistic view of the prospects than did the MPC. We are - as I have explained - well aware of the degree of uncertainty inherent in any forecast, and do not pretend we have a crystal ball. But I can assure you that if, as we move forward, it seems likely that the overall economy will be weaker than we currently expect, and inflation lower, then we are prepared to reduce interest rates further, just as we stand ready to raise them if the overall economy, and inflation, appear likely to be stronger than we currently anticipate. Mr President, the past year or so has been a difficult time for the world economy which has made life increasingly difficult for the internationally-exposed sectors of our own economy - including large parts of manufacturing. And things could remain difficult for a time. But it won't last for ever.

Moreover, the Governor shall be heard by the Minister for the Economy about the appointment of six members of the Governing Council. Propose to the Governing Council the Council members that shall form part of the Executive Commission. Propose to the Executive Commission the appointment and dismissal of the Directors General, for ratification by the Governing Council. The Governor shall have the powers delegated by the Governing Council or the Executive Commission. 2 Powers of the Deputy Governor    Manage, at the highest level, the common internal services of the Banco de España. Stand in for the Governor when the post is vacant or in the event of the latter’s absence or illness. The Deputy Governor shall have the powers delegated by the Governor, the Governing Council or the Executive Commission. 3 Powers of the Governing Council  Approve the general guidelines of action of the Banco de España so that it may fulfil the functions entrusted to it.  Debate monetary policy matters and supervise the Banco de España’s contribution to implementation of the monetary policy of the European System of Central Banks by the Executive Commission, all in accordance with the ECB’s guidelines and instructions and observing the independence and professional secrecy obligation of the Governor as a member of the ECB’s governing bodies.

The ECB recently published the methodology and results of our economy-wide climate stress test, showing that there are clear benefits for both banks and companies if they act early and ensure an orderly transition. The exercise will also be used to inform the 2022 supervisory climate stress test that will be conducted to test banks’ preparedness to assess climate risks. ECB Banking Supervision has also asked banks to conduct self-assessments in the light of the ECB guide on climate-related and environmental risks and to draw up action plans. The preliminary results were published in August and show that banks have made some progress in adapting their practices, but they are still moving too slowly. Next year, ECB Banking Supervision will conduct a full supervisory review of banks’ risk management and disclosure practices. As regards the digital economy, the ECB will continue to contribute to the G20 initiative to enhance cross-border payments to make them faster, cheaper and more inclusive, and to address the opportunities and challenges of the digitalisation of finance. At the ECB, we have launched the investigation phase of a digital euro project that will address key issues regarding the potential design and distribution of a digital euro, which would be a complement to cash, not a replacement for it. International cooperation on digital currencies will remain essential in the period ahead. 4/4 BIS central bankers' speeches

Internationally, we have catalysed a series of actions at the Financial Stability Board (FSB) that will be presented to the G20 Leaders’ Summit in July. Allow me to review the main elements before concentrating on how codes of conduct and the Senior Managers Regime (SMR) can lift standards and improve culture. Let me be clear at the outset that the Bank of England holds itself to the highest standards. In that spirit, I will extend my remarks to review some lessons the Bank can learn from the events surrounding Charlotte Hogg’s resignation, and the steps we are taking in response. The UK Action Plan to improve conduct Our action plan for the financial system begins with stronger deterrents. In the UK, important steps have 5 been taken to strengthen laws and regulations, though some gaps remain, most notably in the FX market. But authorities cannot and should not try to legislate for every circumstance, watch every transaction, or anticipate every market innovation. So while fines and sanctions have roles in deterring misconduct, they will not, on their own, bring about the cultural change we need. We must move from an excessive reliance on punitive, ex post fines of firms to greater emphasis on more compelling ex ante incentives for individuals, and ultimately a more solid grounding in improved firm culture. This includes reducing opportunities for bad behaviour, for example, by overhauling the regulation of key benchmarks in FICC markets. More fundamentally, it requires compensation rules that align better risk and reward.

In order to cope with this new situation, we have slightly modified our existing framework of inflation targeting by explicitly highlighting the increasing role of financial stability in our objective function. Accordingly, first we have announced the details of our exit strategy from crisis measures in April 2010. As a first step, we have normalized the liquidity support facilities and brought back the TRY reserve requirement ratios to pre-crisis levels of 6 percent. Second, we started to highlight the macro financial risks and contingent policy responses. For example, we have stated through our policy documents that, if divergence in growth rates between domestic and external demand continues in the forthcoming period, and if this pattern of growth coexists with rapid credit expansion and deterioration in the current account balance, it would be necessary to utilize other policy instruments such as reserve requirement ratios and liquidity management facilities more effectively. The primary objective of the CBT is to achieve and maintain price stability. However, the recent crisis has taught us that this single objective may not be enough for attaining macroeconomic and financial stability. In this respect, we reminded the public that financial stability is one of the fundamental duties of the CBT as stipulated in our Law, and we approach financial stability from a macroeconomic perspective. From an emerging market point of view, the concept of “macroprudential” measures may not be the same as it is perceived in advanced economies.

• Through the work of our business line specialists, we are developing a better understanding of the businesses you all are engaged in, including improving the dialogue with the front office and getting to know those business leaders. This has given us a much improved window into your strategies – into how you are thinking about the changes you will make and need to make in the face of increased regulation, increased regulatory pressure, competition and future economic growth. Areas where work remains Of course, there are many more areas where progress is being made, but those are the ones that I would highlight for you today. And, while I tend to be a “glass half-full” kind of person, I am also a realist and recognize the tough road ahead to continue implementing the kinds of changes needed across the system to achieve the end state of a more resilient, better managed and less complex financial system. In this regard, I’d highlight four areas where additional work is needed across firms and supervisors/regulators: 1. Resolution planning 2. Coordinating supervision across global organizations 3. Bank Secrecy Act/Anti-Money Laundering (AML/BSA) compliance 4. Culture of firms and the system 1. Resolution planning I noted earlier that resolution planning was an area where progress had been made – and it has.

In this context, the Central Bank’s informing the public about the economic situation and risks, using various communication channels, must be viewed as a significant part of its independence. In the last four years, our Central Bank has experienced a historical transformation in terms of its communication policy. It all started with carrying out a new organizational arrangement within the Bank, founding a separate department. This department has the responsibility of preparing documents and booklets, and organizing meetings and conferences to explain monetary policy as well as improving the information set provided through the web page of the Bank. What we have achieved next was to elucidate the newly established conceptual framework of monetary policy. To this aim, we have tried to explain to the public concepts such as ‘inflation targeting’, ‘price stability’, ‘floating exchange rate regime’, ‘good governance’, and ‘sustainable growth’, standard elements of textbooks and generally known only in academic circles. To make economic agents familiar with these concepts, the communication policy of the Central Bank has effectively been used on every occasion through lectures and speeches across the country. Now, we know that these concepts are much better understood by the public. I truly believe that this good communication has played a very important role in the performance of the Central Bank in bringing down inflation. Dear Guests, Two important developments and their possible effects on the economy made us decide the year 2005 as a transition period and adopt full-fledged inflation targeting regime in 2006.

If the higher starting level of GDP were maintained, the cumulative loss of GDP would more than halve to around 8%.12 “The Third Quarter” Looking to the second half of the year, what might we expect? In the May MPR, the MPC’s scenario foresaw a sharp pick-up in activity, with quarterly growth rates of 12-13% in each of Q3 and Q4. These increases were driven, in large measure, by the assumption of a phased relaxation of lockdown measures, and accompanying policy support, between July and September. To my mind, two paths are possible in the second half of the year. One involves a negative feedback loop from higher unemployment to lower spending, the other a positive feedback loop from higher spending to lower unemployment. The first poses a downside risk to the outlook, the second an upside risk. As things stand, it is unclear which of these scenarios, or feedback loops, will prove the more potent. The negative loop has its roots in the labour market. So far, levels of employment appear to have fallen less rapidly than output. Against that, the number of furloughed workers has exceeded expectations, perhaps by in excess of a million people. This is good news for household incomes in the short run, as the income loss from furlough is far lower than from unemployment. Indeed, this might help explain some of the greater than expected strength in demand in Q2.

There is now a growing body of evidence on the very damaging impact of financial crises on the productive capacity of economies. Third, we should not imagine that there is some recent halcyon world of banks supporting the real economy to which we can quickly return if the regulatory straitjacket is loosened. The system was badly distorted in the long run up to the crisis. The post crisis world requires a major adjustment in bank business models. This is not some unintended consequence of overzealous regulation. It is a necessary, if painful adjustment to a new reality. Some numbers from the UK illustrate this point starkly. In the long upswing of the credit cycle, the stock of domestic lending by UK banks in the UK grew enormously from 95% in 1997 to 170% of GDP in 2008. The stock of non-property lending to companies as a proportion of GDP, however, grew only modestly from 19% in 1997 to 23% in 2008. Meanwhile, mortgage lending increased from 45% to 70% of GDP; lending to real estate tripled from 5% to 15% of GDP; and lending to the UK non-bank financial sector – including institutions like hedge funds, securities dealers and insurance companies – shot up from 25% of GDP to 60%. And these numbers do not count the explosion in UK-owned banks’ overseas exposures which more than quadrupled between the end of the 1990s and 2008.

At a minimum, the exchange of views and a better understanding of country positions may help to avoid even worse outcomes. For example, in 2009, there was real concern that countries might respond by resorting to protectionist measures. That has, by and large, been avoided. And some aspects of the international policy process have worked well. A good example is, in my view, provided by the redrawing of the scope of financial regulation. Here the G20 has set the overall political direction and tone, delegating the task of developing a detailed template for new international rules and regulations to the technocrats on the Financial Stability Board and the Basel Committee on Banking Supervision. This division of labour has enabled a substantial amount of new regulation relating to matters such as bank capital and liquidity requirements, financial sector compensation, and the principles for handling failing financial institutions to be developed in a relatively short period of time. So, despite the modest progress in restoring our economies to Strong, Sustainable and Balanced Growth in the global economy, policy makers can claim some successes. And on that more upbeat note, let me conclude. Thank you! BIS central bankers’ speeches 5 References Bean, C R (2002) “The MPC and the UK economy: should we fear the D-words?”, Speech given to The Emmanuel Society. Borio, C and Disyatat, P (2011) “Global imbalances and the financial crisis: Link or no link?”, Bank for International Settlements Working Paper No 346.

The ECB has had to use different instruments at different stages of the crisis. Now the economic and financial situation in Europe is significantly better. Financial fragmentation has receded, Member States have made significant efforts towards economic convergence and the governance of the euro area has been strengthened. We are gradually moving out of the BIS central bankers’ speeches 1 crisis phase into a different environment, with the focus shifting from solving the crisis to ensuring stable economic growth and inflation close to 2%. It requires a different approach and different instruments. The developments beyond our eastern border are the big topic of debate in Poland at the moment. Could the conflict between Russia and the Ukraine affect Europe and its economy in any way? The impact on trade or the financial system has thus far been limited. But this situation does give rise to uncertainty, so it can be regarded as a potential negative factor that could hinder economic growth in Europe, and that is part of our risk assessment. What about the strong euro? Aren’t you worried it could cause problems for European exporters and hinder the recovery? The ECB doesn’t target the exchange rate. Our primary mandate is price stability, and within this mandate, the exchange rate of the euro is among the factors determining the level of inflation. And indeed, the strong euro is contributing to the current low inflation.

The precipitating factors vary but the event as such is simply a matter of time. The collapse in Sweden began in 1991. Share prices were already declining and property prices soon followed suit. The real economy is liable to be affected by falling asset prices, just as it is when asset prices rise. Households perceive a loss of wealth that prompts them to restrain their consumption. Another effect comes from the interaction of the credit market and the balance sheets of households and firms: when asset prices and their value as collateral fall, creditors become less willing to provide loans. In addition, falling asset prices may make banks generally less inclined to provide credit, so that even profitable projects suffer. This can ultimately paralyse the supply of credit and lead to the total collapse of the financial system. While Sweden can be said to have avoided a financial crisis in that sense, both the wealth and the balance-sheet effects probably contributed to the course of the worst economic recession here since the 1930s. Demand in general fell, financial saving rose and credit was rapidly repaid. The steep reduction of the loan stock in the first half of the 1990s is evident from Diagram 1. BIS Review 127/1999 2 However, a severe bank crisis was only one of the factors that hit the Swedish economy. At times in the early-1990s there was also heavy pressure on the krona. In November 1992 the Riksbank was finally obliged to change to a floating exchange rate.

In addition to the extensive financial worries of this type, there have been relatively abrupt shifts in interest rates, exchange rates and share prices. In some instances the financial turbulence has stemmed from inconsistent economic policies, as well as from notable shortcomings in the supervision of banks and other institutions. It has not infrequently coincided with and even been the direct cause of far-reaching macroeconomic adjustments in the economies concerned. In Sweden, for instance, GDP fell for three consecutive years, from 1991 to 1993, by a total of 6% and unemployment shot up. Other countries have experienced similar and even greater setbacks. Large loans have been provided by the International Monetary Fund to assist various countries. In the light of all this, it is hardly remarkable that in recent years matters to do with the global financial system and how it works have been discussed more intensively throughout the world. So my subject today is indeed topical. But let me say at once that I will be considering just a couple of the aspects the title of my talk encompasses. Time is obviously a consideration here but a more important reason is that we do not yet know enough about many of the complex matters in this field. I shall begin with the crisis in Sweden in the early-1990s because it illustrates some underlying problems that crises in other countries have had in common.

The calculations indicated that industrial production and investment would increase, public finances would improve, the current account deficit would disappear, employment would increase and unemployment would be kept down. After Kjell-Olof Feldt had made contact with the Nordic finance ministers and central bank governors, as well as the German central bank governor, the size of the devaluation was altered to 16 per cent and the planned pegging of the krona to the German D-mark was postponed indefinitely. I had reason to return to these calculations later on during the 1980s and I could observe that they were pretty accurate on most points, except with regard to price and wage developments. I had assumed that inflation and wage increases would adjust downwards to the international level. For devaluation to be successful, price and wage developments must be kept down after the devaluation. However, this was not the case. Sweden had an inflation rate much higher than that in Germany every year of the 1980s. Economic policy was not sufficiently strict during the 1980s to keep down price and wage increases after the devaluations in 1981 and 1982. Although public sector finances improved substantially, this was primarily due to automatic improvements resulting from a number of years of good growth.

The conclusions I have drawn from developments during the 1970s and 1980s are that the economic policy conducted together with the functioning of the economy during this period could not lay a foundation for macroeconomic stability and good economic growth. Price and wage formation that got out of hand in the 1970s, a series of devaluations that created considerable pressure in the economy during the 1980s, deregulation of the credit market that triggered a large credit boom, which could not be counteracted by monetary policy as this was detailed to defend the krona’s fixed exchange rate, and a fiscal policy that could not withstand inflationary pressures. All in all, this led to repeated crises and finally to economic collapse. This leads me in to the next three episodes. The reform of wage formation Before I get into the changeover in exchange rate and monetary policy at the beginning of the 1990s, I want to mention two episodes that have contributed to making the changeover in exchange rate and monetary policy successful with regard to bringing down inflation to a level comparable with other countries. These are the reform in wage formation and the budget consolidation in the 1990s. At the end of the 1980s it had become increasingly evident that Swedish wage formation did not function in a manner compatible with macroeconomic balance.

The basis for calculating income tax was expanded, rates were reduced and corporate and personal income taxation was better integrated. Distortions were remedied, bringing business and economic returns more closely into line in the case of business investment. More neutral tax rules reduced the scope for companies and industries to obtain special tax advantages. The reform contributed to solid economic growth in the 1990s and a substantial increase in government tax revenues even with appreciably lower tax rates. BIS Review 15/2010 9 But the wave of reform ebbed out before the work was completed. There is now a striking contrast in the quality of various components of our tax system. There are major weaknesses in the taxation of wealth and property. First, income and the value of various types of capital are taxed differently. The return on and value of financial capital and business capital are fully taxed. Rental income is fully taxed, while owner-occupied dwellings are exempt from a corresponding tax. Mortgage interest is tax deductible while capital gains on dwellings and the benefit of home ownership are not taxed. Housing is taxed as an asset, but not at its market value. The table shows the distortionary effects of the tax system. Housing investment is considerably more profitable than repaying debt or investing in a business. This is the case for those who pay wealth tax and for those who are not liable to wealth tax. Second, property is taxed differently across municipalities.

Svein Gjedrem: Economic perspectives Annual address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the meeting of the Supervisory Council of Norges Bank, Oslo, 11 February 2010. * * * This current global crisis had its origins in an abundant supply of credit, market participants who took steadily higher risk and a lack of oversight on the part of banks, companies and authorities. This is reminiscent of a play by Bjørnstjerne Bjørnson’s entitled “A Bankrupt”. In a conversation between the main character, Tjælde, a businessman, and his daughter Valborg, she says that no man of honour would keep his family or his creditors in ignorance of the events that foreshadow a crisis. Her father rebukes her: 1 “… you don’t understand what a business-man’s hope is from one day to the other – always a renewed hope. That fact does not make him a swindler. He may be unduly sanguine, perhaps – a poet, if you like, who lives in a world of dreams – or he may be a real genius, who sees land ahead when no one else suspects it.” The conversation is also reminiscent of current discussions about accounting principles. Then, as now, the mark-to-market value of assets was under debate. Tjælde says: “[…] values are fluctuating things; and [a businessman] may always have in hand some venture which, though it cannot be specified, may alter the whole situation.” Valborg has little regard for ventures at creditors’ expense. She thinks accounts should be transparent.

The HKMA has also been very focused on raising the market’s awareness of LIBOR transition. We have spoken in different conferences on this topic, and also encouraged industry bodies, such as TMA, to organise seminars to explain the background and implication of LIBOR transition. All of the efforts, by us or by the industry, have a common goal – that is to reach out to a wide range of audience for their attention and get ready for this important LIBOR transition. Urgency of the LIBOR Transition 10. As we all know, time is running short, and end-2021 is fast approaching. Now, with a clear and certain timetable for LIBOR cessation, we should all work together with a sense of urgency. Although certain US dollar LIBOR settings will continue to be published until endJune 2023, this 18-month extension is intended to allow time for more legacy US dollar LIBOR contracts to mature. And, this won’t alter the fact that – LIBOR will come to an end. It is therefore vital for us to continue our preparation that is currently underway, and avoid any further build-up of LIBOR-related exposures going forward. With that in mind and to smoothen the transition process, we expect banks in Hong Kong to cease to issue new LIBOR-linked contracts by the end of this year. Development of the HKD Overnight Index Average (HONIA) Linked Market 11. As we have stepped into the fourth quarter, we will soon move into a post-LIBOR world.

With that in mind, we strongly encourage you to accelerate your transition efforts and respond swiftly to these important changes, which would no doubt bring about a substantial shift to our market activities and business practices. Above all and most importantly, we must stay committed and work together collectively, with our focus remain firmly on the common goal of ensuring a smooth and timely transition. 21. Given the limited amount of time today, I could only briefly touch on what the HKMA has been and will be doing for being the region’s sustainable financing hub. I look forward to sharing more updates and views with you on other occasions. I would also urge you to stay engaged for further benefitting from the unfolding opportunities in the sustainable financing space in Hong Kong! Thank you. 1 HKMA analysis of the volumes of Asian international green and sustainable bonds arranged in Hong Kong 4/4 BIS central bankers' speeches

Arrangements will be put in place to ensure that the platform will gather useful and relevant intelligence, including those communicated in the Chinese language. The platform would also ensure that users would feel comfortable with providing intelligence on cyber attacks without compromising proprietary information. Needless to say, access to the platform will be through secure channels with robust encryption and on a need-to-know basis. Way forward 10. Ladies and Gentlemen, having announced the launch of the CFI, the HKMA will move full steam ahead in collaboration with our partners and the stakeholders to roll out the programmes I just mentioned with the following timeline: BIS central bankers’ speeches 3 11. 4 (a) the HKMA will issue a formal circular to all banks next week, stating clearly that it is a supervisory requirement for banks to implement the CFI; (b) we will at the same time conduct a three-month consultation with the banking industry on our detailed proposals on the risk-based Cyber Resilience Assessment Framework; (c) we will work with the HKIB and ASTRI to roll out the first training courses for cybersecurity practitioners by the end of this year; and (d) we will work with the HKAB and ASTRI to set up the Cyber Intelligence Sharing Platform by the end of this year. I understand that the timeline for rolling out the CFI programmes is very tight.

A crucial factor affecting the success or otherwise of the CFI is the availability of qualified and competent practitioners who can help the banks and the HKMA in the areas of risk assessment, design and implementation of the defence mechanism and the day-to-day management of cybersecurity. Unfortunately, there is a general shortage, globally, in the supply of qualified professionals in the field of cybersecurity and Hong Kong is of no exception. So the second pillar of our CFI is to develop a training and certification programme in Hong Kong so that we may have an increased supply of qualified professionals in cybersecurity going forward. I am very pleased to announce that, in collaboration with the Hong Kong Institute of Bankers (HKIB) and the Hong Kong Applied Science and Technology Research Institute (ASTRI), a new training and certification programme in cybersecurity will be launched. I am also very pleased to say that we are collaborating closely with CREST, the UK cybersecurity certification body, to ensure that the programme in Hong Kong is designed and benchmarked against the latest international standards in this field. I understand that Mr Ian Glover, President of CREST International, is with us today and he and Carrie Leung of HKIB will talk more about this professional development programme later on. What I would say here is that the training and certification programme in Hong Kong will offer three levels of competence: “foundation”, “practitioner” and “expert”.

This means that downside risks for household income and debt- 2 BIS Review 75/2010 servicing capacity are likely to persist and that banks could face losses for some time, although there are important differences across countries. However, on a more positive note, there are signs that the past sharp falls in house prices, together with low interest rates, have improved housing affordability. This appears to explain, at least in part, the recent turnaround in the extension of new loans to households for house purchases, shown in the Chart 4 on slide 8, although substantial differences in these patterns remain across Member States. III. Main risks identified within the euro area financial system Let me now turn to the three main risks that we have identified within the euro area financial system. The first is the possibility of a setback to the recent recovery of bank profitability. After the sizeable net losses, which were endured by around half of the euro area large and complex banking groups (LCBGs) in late 2008, many of them returned to modest profitability during 2009. Moreover, as shown in the left-side of Chart 5 on slide 10, banks’ financial performances strengthened further in the first quarter of 2010 and all LCBGs which have reported financial results so far have shown a positive return on equity. The same pattern can be seen as regards the return on assets. The leverage ratios of LCBGs have remained broadly constant after a sharp decline in the first quarter of 2009.

Ultimately, the significance of risks for financial system stability must be judged by the probability of their materialisation in combination with their likely impact, both on the financial system and on the broader economy, in the event that they do materialise. By this criterion the two most important risks for euro area financial stability at the current juncture are, first, the possibility of concerns about the sustainability of public finances persisting or even increasing with an associated crowding-out of private investment and, second, the possibility that adverse feedback between the financial sector and public finances continues. Considering other risks, albeit less material, identified outside the euro area financial system include the possibility of vulnerabilities being revealed in non-financial corporations’ balance sheets – because of high leverage, low profitability and tight financing conditions – and the possibility of greater-than-expected household sector credit losses, if unemployment rises by more than currently expected. Within the financial system, the central scenario is for modest banking sector profitability in the short to medium term, given the prospect of continued loan losses, lasting pressure on the sector to reduce leverage and market expectations of higher funding costs (slide 16). Given this outlook, an important risk is the possibility of a set-back to the recent recovery of bank profitability and of adverse feedback with the provision of credit to the economy.

Prasarn Trairatvorakul: Living with capital flows – a delicate balancing act Speech by Mr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the 5th Annual Euromoney Thailand Investment Forum, Living with capital flows: a delicate balancing act, Bangkok, 22 March 2011. * * * Ladies and Gentlemen, It’s an honor to speak before you today in the 5th Annual Euromoney Thailand Investment Forum. Since yesterday, you must have already heard many interesting discussions about Thailand’s prospects. Here, I would like to reaffirm that Thailand is indeed on a recovery path. Over a longer horizon, the prospects of ASEAN integration and the rise of Asia are also offering causes for optimism. As international investors, you naturally would want to participate in Thailand’s exciting prospects. Before putting more money into Thailand, however, I suspect that you would want to understand our macro-policy environment. Our recovery has been gaining momentum, and the central bank has been echoing more vigilance regarding inflationary pressures. Meanwhile, the global environment suggests that more capital is likely to flow into our economy. In this complex situation, I believe that you might want to know what the central bank’s view and stance are. Since the majority of you are in the capital markets, the focus of my talk today will be related to capital inflows. Capital inflows have always been and will continue to be welcomed into Thailand. Indeed, capital inflows have been vital for Thailand’s development.

For the past 30 years, capital inflows have helped finance our country’s productive capacities and thus helped raise the standard of living for millions of Thais. Going forward, more capital is expected to flow into the region for at least two reasons, namely, the growth differential between emerging Asia and advanced economies and the changing nature of global liquidity. On the first reason, the strong growth momentum in Asia is likely to draw in more capital. This factor is especially strong as advanced economies continue to cope with legacies from the crisis. In contrast, Asia has survived the global crisis relatively well. Recent numbers show that Asia’s growth during the past year has been driven by both external and internal demand. For this year, the momentum is expected to continue, while the rapid growth of the middle class in large Asian economies such as China and India makes the prospect of intra-regional demand even more hopeful over the longer horizon. Another development worth noting is the changing nature of global liquidity, in particular, the increase in fluidity that is likely to push capital flow into emerging Asia more easily but could also lead to easier capital flow reversals when conditions change. This rise in fluidity of global liquidity seems to have its roots, at least in part, in the macro policies of advanced economies. Specifically, large fiscal debts and quantitative easing in advanced economies help contribute to the rising fluidity.

Let me now go on to how the interest rate assumption is to be used and interpreted in connection with the monetary policy decisions. 2 BIS Review 33/2006 Communication and the interest rate path The interest rate path which the Riksbank uses in the Inflation Reports is based, as I have said, on implied forward rates, and these are calculated on the basis of interest rates on treasury bills and government bonds. The implied forward rate curve on which the forecasts are based is an average of 15 different daily implied forward rate curves. For instance, the interest rate path used in the latest Inflation Report was based on an average of the daily curves between 20 January and 9 February 2006. The reason we have chosen to use an average is because we wanted to exclude temporary movements in the implied forward rates (see Figure 1). At the same time, this means that the implied forward rate curve, as we calculate it, does not reflect market expectations about the future repo rate at a particular point in time but instead the estimated average expectation during the selected 15-day period. Despite the fact that we now base our forecasts on an interest rate assumption that is normally reasonably realistic, it is important to underline that this assumption does not necessarily coincide with the Riksbank’s own expectations about future repo rates. Our assessment of how the economy will develop can differ from that made by market participants.

Ladies and Gentleman, For Thailand to achieve the goal of long-term sustainable growth, commitments have to be made today. And, this leads to the final part of my talk. As Governor of the central bank, I am committed to pursuing price stability and financial stability to foster medium and long-term economic growth. On the financial stability side, I see that the Thai banking sector has decoupled from the direct impact of the global credit crisis. In fact, the banking sector’s exposure to CDOs was only 0.3 percent of its total assets in 2007, which was completely sold off. On non-performing loans, the net NPL level will be one of the issues that we will be addressing through second-phased financial sector master plan. As of end June 2008, net NPL of the banking sector in relation to its total credit is 3.4 percent, not a terribly high level. In addition, since the potential losses of these NPLs have already been provided for according to IAS39, the international accounting standard, the financial implication of NPLs on the banking sector’s financial standing is very small. However, reducing NPLs further should improve the banking sector’s credit rating. The master plan will also focus on improving competition and efficiency of banks, while also broadening financial access to a bigger base of clientele. After the industry-hearing, we will announce the FSMP so that market players have a clear picture of the banking sector going forward.

The broader concept of the “home market” should be developed further. One of the challenges will be to ensure strong competition in retail markets so that the benefits of integration could be felt by consumers across the region. Fostering sustainable growth in the region requires us to take a systemic view when designing harmonized regulation for the financial sector, and this is where the quality and proactivity of macro-prudential supervision becomes so important. The Nordic-Baltic dimension adds two nuances to the design of macro-prudential policies. First, our own experience of the past decade was a stark reminder of the particular challenges of managing capital flows in highly integrated economies and financial sectors. Second, most of the large Nordic banking groups have been considered as too big to fail in almost all countries in the region. BIS central bankers’ speeches 1 Diversity in the financial sector structures is a challenge for cross-border cooperation As I said earlier, the economies and financial sectors of the Nordic-Baltic region are diverse as well as closely integrated. Different countries in the region have opted for different policy frameworks; the structure of the financial sector also differs by country. It turns out that in a region of only eight countries, some of which are very small, one needs to tackle very much the same array of problems that make the coordination of financial sector policy and supervision so challenging in Europe. There are home and host countries; there are non-EU member states, EU member states, and euro area member states.

This will not only provide an extensive pool of highly trained and capable expertise to spearhead future development, but will also promote greater innovation in Islamic financial products and services. Given the functioning of Islamic finance in parallel with the conventional financial system in our financial environment, neutrality in treatment between Islamic and conventional finance products is important to ensure its viability and sustainability. This competitive environment would in fact encourage greater innovation to take place, thereby supporting the development of the Islamic financial services industry. With the much strengthened and more robust Islamic financial infrastructure that is now firmly in place, the Islamic financial services industry is well positioned to tap new growth opportunities to realize its full potential. This will inevitably increase the breadth and depth of the Islamic financial markets and, more importantly, strengthen Malaysia 's position as an attractive and dynamic international Islamic financial centre. The Bank's regulatory orientation in this changing environment continues to evolve towards a more robust and flexible regime to effectively maintain financial stability. The regulation of the financial services industry in the changing environment will continue to focus on safeguarding the financial system against systemic risk, ensuring the reasonable protection of consumers in financial service dealings and enhancing the efficiency of the financial system. In addition, the regulatory function will also continue to facilitate the achievement of the socio-economic objectives, including increasing the 2 BIS Review 76/2006 insurance penetration, promoting adequate provision for retirement needs and supporting the growth of target sectors.

However, as the former president of the European Monetary Institute suggests, the crisis has changed the world for ever, bringing about significant changes in the economic, regulatory and institutional environment in which the banking industry operates. In particular, Spanish banks, similarly to their European peers, now face challenges that will require them to adapt their business models in a new environment characterised by a structural decline in profitability, a significant increase in regulatory requirements, the harmonisation of supervisory rules and practices in the framework of the banking union and the introduction of new demands by the resolution authorities. As Lamfalussy said, there are no grounds for pessimism, but this view is based essentially on the expectation that banks will be able to successfully complete the work they have started to fully restore investor, customer and general public confidence. Thank you very much. 3 Taken from the keynote speech made at the Ninth BIS Annual Conference on “The future of central banking under post-crisis mandates”, 24–25 June 2010. 8 BIS central bankers’ speeches

The availability and quality of genuine euro area statistics – i.e. those which are more than just the sum of the national data of the Member States – has improved very substantially over the last ten years. Most notably, the ECB and Eurostat now regularly and jointly release quarterly real and financial euro area accounts that are both integrated and comprehensive. And yet, I would strongly favour an improvement in the timeliness of such releases, which would then be even more useful for the ECB’s monetary policy-making. The credibility of euro area and relevant national statistics is of key importance to the ECB, and this also requires that such statistics be effectively communicated. This applies in particular to the HICP. In view of the importance to the ECB of euro area monetary, financial and external statistics, the Governing Council has endorsed a strategic vision that should further increase the effectiveness and efficiency of the compilation of these statistics by the Eurosystem. This entails even more intensive cooperation not only among the statistics departments of the NCBs and the ECB, but also between those departments and external parties such as statistical institutes, supervisors and the financial industry. I hope that the gains resulting from these synergies will then be used to close some of those gaps in the ECB’s statistics that I mentioned earlier and to improve market transparency as regards the issues that have come to the fore in the ongoing financial turmoil.

In this context, the floating exchange rate regime was introduced; the Central Bank Law has been amended and the primary objective of the Central Bank has been, for the first time in its history, defined as achieving and maintaining price stability. Together with these changes, a new economic program entitled “Strengthening the Turkish Economy-Turkey’s Transition Program” was launched in May 2001. This new program addressed the two main issues of chronic inflation and high public debt with tight monetary and fiscal policies backed up by structural reforms. In this environment, the Central Bank needed to introduce a transparent monetary policy regime with a clear nominal anchor to shape inflation expectations, as inflation inertia was the biggest problem and authorities lacked credibility. The choice of the exchange rate as a nominal anchor again was out of question: The exchange rate based stabilization program had been abandoned in total loss of confidence. The other option then could be to use monetary aggregates as a nominal anchor. However, they too were not good candidates for a couple of reasons: One, monetary targeting implicitly incorporates the inflation target as the ultimate objective of monetary policy and relies on a forward looking assessment when responding to shocks; the pure form of this regime considers only money and ignores the potential information contained in non-monetary variables. Two, the success of the monetary targeting regime relies on the two assumptions that the velocity of money is entirely predictable and inflation is solely determined by money growth.

John C Williams: Moving toward "normal" US monetary policy Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Joint Bank Indonesia-Federal Reserve Bank of New York Central Banking Forum, Nusa Dua, Indonesia, 10 October 2018. * * * Thank you and good morning. It’s a pleasure to speak at the Central Banking Forum coorganized by Bank Indonesia and the Federal Reserve Bank of New York. This is our second joint conference, and I am very much looking forward to the exchange of ideas and views on important economic issues affecting our regions. At the outset, I would like to thank Governor Perry and Bank Indonesia for their leadership and support in sponsoring this conference, amid what I am sure has been a very busy time with the IMF/World Bank meetings. Let me also say that our thoughts and hearts go out to everyone affected by the recent devastating earthquake and tsunami. In my remarks, I will focus on the outlook for U.S. monetary policy. The good news is that on the 10th anniversary of the worst days of the global financial crisis, the U.S. economy is doing very well. From the perspective of the Fed’s dual mandate of maximum employment and price stability, quite honestly, this is about as good as it gets. As a result, the Fed has naturally been moving toward more “normal” monetary policy.

Accordingly, we expect to enhance the bank examination methodology to 19 focus on the efficiency, effectiveness 2014 with a view to further and sustainability of individual banks and strengthening the resilience of licensed the banking sector, based on the Bank banks. We have already issued Directions Sustainability Risk Index (BSRI). on the Basel III Liquidity Coverage Ratio Accordingly, amendments will be in April 2015. introduced to the existing risk-based supervision framework based on a mix of quantitative and qualitative indicators to enhance focus on sustainability and operational efficiency of banks. We will conduct the pilot run of the Risk Index on large banks during We have just issued the Direction on Basel III Minimum Capital Requirements for implementation on a staggered basis, commencing 01 July 2017, and to be fully implemented by 01 January 2019 in line with the international timeline. the first quarter of 2017 and With a view to creating a more resilient subsequently, the index will be extended banking sector, we expect banks to to the other segments of the banking maintain a stable funding profile. sector. Accordingly, we plan to introduce the In 2018, the Risk Index will be incorporated to all examination reports and we intend to assign a supervisory rating, based on this index. By 2019, a comprehensive pre-risk assessment will be conducted for all banks and a riskbased examination plan will be formulated.

To sum up, supervision is something that must work based on a regime of verification, analysis and conclusion. It is important to highlight the intensity and deepness of government-owned banks supervision, which brought us the knowledge of their existing problems and the costs involved in their recovery. Significant restructuring has been carried out in federal banks, after deep and comprehensive general consolidated inspections done by the CB. The adjustments that were made aimed at making the government-owned financial institutions sounder, more efficient and more competitive, rendering them apt to meet the same requirements faced by the private financial system. The maintenance of this behavior will reveal the true costs of governmental programs and will avoid recursive expenditures, which could become skeletons (hidden liabilities) in the public accounts. The continuation of reforms is important in other areas of the CB. In the external area, the CB must aim at intensifying transparency and communication with the markets and investors, while seeking to increase flexibility and to simplify the regulations on foreign currency operations, within a process intended to increase the country’s participation in world trade and international financial markets. In the banking area, the restructuring of the Brazilian Payment System improved risk reallocation, and favored a higher efficiency of the system. This is due to the fact that the Central Bank no longer has any role in financing the institutions that did not have the necessary funds for their operations, reducing moral hazard.

The National Bank Act sets out this task and stipulates that the SNB is to ensure price stability and in so doing take due account of economic developments. To this end, the SNB has suitable and effective instruments to influence the interest rate level as well as the exchange rate, and thereby monetary conditions. The appropriateness of monetary conditions determines whether price stability can be ensured in the long term. However, why is a task of such economic significance as monetary policy delegated to an independent institution in the first place? Page 2/5 The most important reason is that governments generally have an incentive to use monetary policy for reasons other than price stability. For example, governments may have an interest in stimulating the economy before an election. Governments may want to finance public spending via the central bank’s banknote printing press. When monetary policy pursues such objectives, over time it inevitably leads to high inflation. An independent central bank, however, is not subject to the same incentives and is protected from the influences of government. It can – and must – therefore devote its full attention to the mandate of ensuring price stability. The independence of the central bank is thus based on the conviction that price stability is desirable for society as a whole and that it can only be ensured over the long term by a monetary policy that is protected from political influence. In many currency areas, independence is therefore tightly coupled with the mandate of price stability.

Such doubts can ultimately lead to an expectation of higher inflation and therefore complicate monetary policy. Seen from the perspective of regulatory policy, demands for the SNB to directly finance government tasks are therefore to be clearly rejected. The SNB’s monetary policy must not be driven by profit or loss. These are just by-products of our monetary policy. Our mandate is to conduct a monetary policy that ensures price stability in the medium and long term while taking due account of economic developments. Price stability is the most important contribution the SNB can make to our country. The SNB will therefore continue to advocate a framework for monetary policy based on the principles of regulatory policy. Page 4/5 The challenge of ensuring price stability Ladies and gentlemen, the current global situation highlights the importance of central banks’ focus on price stability. The monetary policy environment has changed considerably due to the pandemic and the war in Ukraine. After years of expansionary monetary policy aimed at preventing inflation from falling too low, the central banks of many countries are today faced with the challenge of fighting inflation that is too high. I will therefore close by saying a few words about the SNB’s current monetary policy. Inflation in Switzerland is lower than abroad. However, in this country, too, it has still increased much more than was generally expected. At 3.5%, it is at its highest level since the 1990s.

Andrew Haldane: The contribution of the financial sector – miracle or mirage? Speech by Mr Andrew Haldane, Executive Director, Financial Stability, of the Bank of England, at the Future of Finance conference, London, 14 July 2010. This text is taken from a co-authored chapter by Andrew Haldane, Simon Brennan and Vasileios Madouros in “The Future of Finance: The LSE Report” published today by The London School of Economics. * * * We would like to thank Stephen Burgess, Melissa Davey, Rob Elder, Perry Francis, Jen Han, Sam Knott, Nick Oulton, Peter Richardson, Jeremy Rowe, Chris Shadforth, Sally Srinivasan and Iain de Weymarn for comments and discussion on earlier drafts, and Alexander Haywood and Laura Wightman for research assistance. The views expressed are those of the authors and not necessarily those of the Bank of England. 1. Introduction The financial crisis of the past three years has, on any measure, been extremely costly. As in past financial crises, public sector debt seems set to double relative to national income in a number of countries (Reinhart and Rogoff (2009)). And measures of foregone output, now and in the future, put the net present value cost of the crisis at anywhere between one and five times annual world GDP (Haldane (2010)). Either way, the scars from the current crisis seem likely to be felt for a generation. It is against this backdrop that an intense debate is underway internationally about reform of finance (Goodhart (2010)).

A better arbiter of market power may be measures of market contestability, in particular the potential for barriers to entry to and exit from the market. Entry and exit rates from banking have, historically, tended to be very modest by comparison with the non-financial sector and other parts of the financial sector, such as hedge funds. For banks operating in many markets and offering a range of services, aggregate returns may offer a misleading guide to the degree of market contestability. Looking separately at the different activities financial firms undertake provides a potentially clearer indication of the drivers of performance and the structural factors determining them. In this respect, JP Morgan Chase provides an interesting case study. JP Morgan Chase is a large universal bank offering a full package of banking services to customers, retail and wholesale. Its published accounts also provide a fairly detailed decomposition of the returns to these different activities. Chart 36 looks at the returns on equity at JP Morgan Chase, broken down by business line and over time. These estimates are based on the firm’s economic capital model. So provided this model adequately captures risk, these estimates ought to risk-adjust returns across the different business lines, allocating greater amounts of capital to riskier activities. (a) “Low risk/low return” business activities Consider first some of the activities generally perceived to be low-risk/low return – asset management and treasury and securities services and retail financial services.

However, suppose that, for some reason, the appropriate and effective instruments to ensure financial stability are not available, for instance, because of serious problems with the regulatory and supervisory framework that cannot be remedied in the short run. In such a second-best situation, if there is a threat to financial stability, one may argue that, to the extent that policy rates do have an impact on financial stability, that impact should be taken into consideration when choosing the policy-rate path to best stabilise inflation and resource utilisation. Such considerations could result in a lower or higher policy-rate path than otherwise, in order to trade off less effective stabilisation of inflation and resource utilisation for more financial stability 5. However, so far all of the evidence indicates that in normal times 5 Such considerations could include evidence of the “risk-taking channel” as in Borio and Zhu (2008). Adrian and Shin (forthcoming) and Adrian and Shin (2010) argue, in a model with such a risk-taking channel, that short interest-rate movements may have considerable effects on the leverage of securities broker-dealers in the market-based financial sector outside the commercial-banking sector. If we assume that the risk of a financial crisis increases as this leverage increases, and that policy rates affect leverage, then policy rates would affect the risk of a financial crisis (Woodford 2010b). However, new regulation is likely to limit excess leverage and limit the magnitude of these affects.

Dimitar Radev: The Bulgarian banking sector and the challenges in 2020 Publication by Mr Dimitar Radev, Governor of the Bulgarian National Bank, in the Quarterly Bulletin of the Association of Banks in Bulgaria, issue 60, January 2020. * * * The banking sector in Bulgaria ended 2019 with very good overall indicators and positive trends – high capital adequacy and liquidity, credit activity, improving asset quality and the historically highest annual profit of the sector. The asset quality review and the stress test conducted by the European Central Bank confirmed the resilience of the sector overall. The banking sector in Bulgaria will be strategically impacted by the developments in the process of accession to ERM II and the Banking Union, part of which was the assessment of six Bulgarian banks undertaken by the ECB. The final stage of this process is to unfold in the coming months. The fulfillment of the commitments assumed by Bulgaria, including strengthening the capital of two Bulgarian banks, will be followed by relevant external assessment. Following the set path, Bulgaria is drawing near to achieving a fundamentally new level of EU integration – membership in euro area institutions. This will bring about significant change in terms of banking supervision and bank resolution activities. The very onset of the process of establishing close cooperation of the Bulgarian National Bank with the ECB has already expanded the scope and enhanced the intensity of the two institutions’ joint work.