Datasets:

samchain

/

econo-pairs

like 0

Regulations will affect the interest rates that firms and households meet and this is something that the central bank needs to take into consideration when setting the policy rate – in much the same way as monetary policy has to take into account changes in interest-rate spreads due to changes in financial conditions. Regulation vs. policy rate Even if regulation and supervision are the first lines of defence, I do believe that the policy rate can also be used to counteract the build-up of imbalances in financial markets. When BIS central bankers’ speeches 3 facing an excessive and rapid increase in property prices and credit volumes, central banks should “lean against the wind”, that is keep interest rates higher than would otherwise be the case. This is by no means in contradiction with monetary policy’s goal of stabilising inflation and the real economy. The reason is that by “leaning against the wind”, the development in property prices and credit volumes becomes more balanced, and then the real economy and inflation become more stable as well. However, there are complications involved when trying to integrate this thinking into the conventional forecasting framework. It is, for example, not entirely easy to incorporate the risks that may be associated with the rapid increase of property prices and credit volumes into the normal work of forecasting and analysis. At present, efforts are being made to better include financial variables in the central banks’ forecasting models.

– We must review our framework for extending ELA; – Our analysis needs to focus more than before on liquidity developments in major cross-border bank groups. Where such groups exist, the home country of the parent bank is vulnerable to threats to financial stability in other countries, both where the funding markets are located and those where the group has subsidiaries or branches. For Sweden, this situation is accentuated since our banking system is four times larger than our GDP, and since our major banking groups depend on 6 BIS central bankers’ speeches funding in international markets to a high degree. The financial stability analysis will have to expand to identify threats early on and to deal with them. We must be alert to potential contagion between unsustainable monetary and fiscal policies in other countries and their potential repercussions on the stability of our own country’s financial groups. – The crisis showed the need for clear roles and mandates for the authorities involved in crisis management, in particular for resolving problem banks. The Riksbank, the Financial Supervisory Authority, the National Debt Office and the Ministry of Finance had frequent contacts throughout the crisis and coordinated their actions. That said, the division of responsibilities is not clear in all situations and the Riksbank has asked Parliament to clarify the legislation on this and a number of other crisisrelated issues. Matching goals with tools The Riksbank has a fairly well-developed structure for macro-prudential analysis.

This forces the Riksbank systematically to consider whether there are any transitory factors that ought to be disregarded when deciding the repo rate. It also facilitates a correct evaluation of monetary policy. One risk with this arrangement is perhaps that the discussion may sometimes become rather technical and focused on details. Should or should not the index we use include a given tax change that alters inflation by one tenth of a percentage point? Continuous minor revisions of our target variable are also liable to make us less intelligible, which may ultimately render monetary policy more difficult to scrutinise. So we evidently face a difficult choice. Since the clarification, we have chosen so far to start from UND1X, which unlike the CPI excludes house mortgage interest expenditure and price effects of indirect taxes and subsidies. In addition, we present a more detailed picture of how we view certain price movements that could be regarded as transitory, for instance the recent oil price rise. There are those who argue that the Riksbank ought to disregard downward price effects from structural factors. Examples are effects on the price level from various deregulations and the increasingly strong international competition. Reasons for doing so are difficult to find. What matters is not whether a price movement is “structural” but whether it affects the path of inflation more fundamentally, that is, as a part of the inflation process. If it does, it ought to be taken into account when policy is formulated, regardless of whether its effect is downwards or upwards.

The banks have also increased their capital levels over the past few years. As a result, the financial system in Norway is now more resilient to shocks. An accountable and credible macroprudential policy must be based on an understanding of how systemic risk arises. The academic research on macroprudential policy issues is growing, but is still at an early stage. Some conclusions seem, however, to be robust. Many studies single out rapid credit growth in particular as a symptom of rising systemic risk. This is in line with the recommendations from the Basel Committee and the EU, which state that decisions on the countercyclical capital buffer should be based on the credit gap. Chart: Basis for advice on the countercyclical capital buffer: key indicators In preparing its advice on the buffer decision, Norges Bank adds three other variables as key indicators. The three variables are, as shown in the chart: house prices, commercial property prices and banks’ wholesale funding ratio. Together, the four indicators contain a considerable amount of information about how cyclical systemic risk evolves. Chart: Early warning models for financial crises A number of studies have indicated that credit growth, real estate prices and banks’ wholesale funding ratio show a systematic pattern ahead of financial crises. At Norges Bank, we have examined data from 16 OECD countries to see whether such a systematic pattern exists. 2 We have developed empirical models for estimating the probability of a crisis.

Firstly, households and the economy as a whole need functioning financial services. Secondly, all experience shows that the consequences of a financial crisis are very costly for households, employees, taxpayers and bank customers. As citizens of a modern society, we thus have a right to expect that the authorities will do their best to prevent and manage financial crises. In turn, the authorities need tools and a clear responsibility structure to prevent crises, as far as is possible. It is equally important that there be efficient tools to manage crises if they break out anyway. Sweden cannot afford to go through another crisis like that in the 1990s. Neither can the world afford a new 2008. This is why it is so important that we constantly strive to ensure that new financial crises do not break out. This is in the interests of every citizen.

(2012): “Are American Homeowners Locked into Their Houses? The Impact of Housing Market Conditions on State-to-State Migration”, Working Paper No. 12-1, Federal Reserve Bank of Boston 10 BIS central bankers’ speeches

Public interventions have been massive to contain the scale of the turmoil but in return have implied a cost and led to a transfer of risk out of the banking sector onto the public sector balance sheet. For instance, interventions from European governments amounted to about 1800 billion EUR or 14% of the European GDP. 13. Let me also underline that – like in many previous financial crisis such as the Latin American ones – financial markets ignoring the long term risks of their investments helped accommodate unsustainable financing requirements of many countries. A major assumption underpinning our fiscal governance frameworks in Europe has been that markets would impose discipline earlier on. Experience reveals that this has not been the case: the market discipline was imposed, far too late. 14. All this emphasizes that sound fiscal frameworks are essential to sound financial regulatory frameworks. Indeed, no longer will be raised the question of the importance of the Stability and Growth Pact and the role it plays in anchoring market confidence. 15. Let me add how fiscal problems in Europe have been addressed. First, the Greek adjustment package, relying on IMF financing and conditionality plus bilateral loans has been decided. Beyond Greece, the European Financial Stabilization Facility provided the Euro area with massive resources to fight contagion risk within the area. Elsewhere in Europe, governments have embarked into sizeable fiscal consolidation efforts and in many cases have frontloaded their efforts. 16.

However, the adverse second-round effects felt in the Macedonian economy were far weaker than those registered in the other countries in the region, although the Macedonian economy is more open than the other economies in South East Europe (with the exception of Bulgaria). The average decrease in GDP in SEE countries was nearly 2%. At the same time, the pace of economic recovery in the post-crisis period is faster than the average for the region. Thus, in the period 2010 – 2013, the cumulative increase in the economic activity is close to 8 percentage points, which is nearly 3 percentage points more compared to the average cumulative growth for the region. In fact, Macedonia is one of the few countries in the SEE region, which has already exceeded the pre-crisis maximum economic activity. Therefore, quite logical is the question: what are the factors that provided a relatively good response to the crisis and a relatively solid economic recovery of the domestic economy, amid an anemic global setting? And more importantly, whether these factors will continue to be the engine of growth in the medium term, determining the future prospects of the economy? Domestic factors are also very important. Sound macroeconomic policies in the pre-crisis period prevented major imbalances in the economy and left room for conducting countercyclical policies in the wake of the crisis relieving its effects (which was not the case with the other countries in the region).

In formulating a consolidation model for Sri Lanka, we studied several consolidation models of other countries, as they were useful for us to fashion our programme in an effective manner. In Asia, following the Asian financial crisis, many countries consolidated their financial institutions successfully. However, in the Western countries, mergers and acquisitions in the financial sector were largely one-off, market driven arrangements, and no consolidation was recorded as a pre-emptive national policy even after the series of crises reported in their financial sectors. Let me highlight a few success stories of financial sector consolidation that have taken place in the Asian region. BIS central bankers’ speeches 7 Malaysia: Following the Asian financial crisis in 1997, Malaysia realised the necessity of having a strong and resilient financial system and accordingly initiated a merger programme to consolidate the financial sector. Within one year of the merger programme, the non-bank sector was strengthened and the number of NBFIs was reduced from 39 to 8. By 2000, 50 out of 54 banking institutions were consolidated into 10 banking groups and as of today, all finance companies have been merged with commercial banks. Successful reforms of the financial sector have further reinforced the strong fundamentals supporting a sound financial sector in Malaysia. It was observed that overall confidence and stability in the Malaysian financial sector was preserved during the recent global financial crisis underpinned by a strong and well regulated financial sector.

Accordingly, the Monetary Law Act together with the subsequent enactments of the Banking Act and the Finance Business Act have empowered the Monetary Board to issue Regulations and Directions to the banking and NBFI sectors with a view to ensuring financial sector soundness, protecting the financial institutions from any mismanagement and failures, and maintaining public confidence. Hence, I believe you can understand that the Central Bank has a pivotal role to play in steering this consolidation process in line with its key objectives and responsibilities as the policymaker and the regulator of the financial system of the country. In this regard, the Central Bank’s role in the financial sector consolidation process will be that of a pragmatic systemic risk mitigator, and a guide that encourages innovation in order to ensure the overall goal of financial system stability. The Central Bank’s policies are forward looking and designed to balance global policies and adjust to sudden volatilities, and to preempt, as much as possible, any possible financial distress or any possible failures in the financial sector in the future. Within this scope, the regulatory framework will be further 6 BIS central bankers’ speeches improved to promote competition, develop sound and effective institutions, enhance operational aspects including IT and payment infrastructure, and foster a culture of innovation in the financial sector, thereby strengthening and maintaining financial system stability. Basis 2: Evolution of the financial system of Sri Lanka Ladies and gentlemen, now I would like to briefly take you through the evolution of our financial system.

On the contrary, support should focus on 16 Indexation clauses already cover 24.4% of wage-earners with an agreement in force for 2022, compared with 16.1% at end-2021. By 2023, they will cover 45% of wage-earners with an agreement in force for that year, although as yet this only includes a limited number of workers. 11 lower-income households, who bear the brunt of inflation, and the firms most vulnerable to this new shock. Moreover, any measures should be temporary, so as not to further increase the structural budget deficit, which was already very high even before the pandemic. They should also be designed to avoid significant distortions to price signals. But offsetting the adverse effects of the current supply-side shock also calls for ambitious policies to boost productivity growth and potential GDP. In other words, the optimal economic policy response to an adverse supply shock, such as the present one, entails structural reforms (including, naturally, of the energy market) to ease the supply-side tensions. The common European instrument to realise this ambition is the European Union’s NGEU recovery plan. Under NGEU, investment projects must be carefully selected in order to optimally complement, and act as a catalyst for, private investment. But they must also be accompanied by, or even help fund, structural reforms to support, for example, the reallocation of resources across firms and sectors. At the same time, the sustainability of national public finances must be ensured; this is essential for the smooth functioning of the monetary union.

The actual implementation of the International Financial Reporting Standards is part of the central bank’s area of concerns, since relevant and adequate assessments of credit institutions’ assets, debts and shareholders’ equity are essential prerequisites for the calculation of real prudential indicators. In order to fulfil this objective, the NBR has steadily cooperated with the commercial banks and the Romanian Banking Association and has enjoyed the support of leading consulting and audit firms in Romania. The Institute of Chartered Accountants in England and Wales, an institution famous for its rich experience regarding International Financial Reporting Standards, has recently provided the NBR support to carry on/complete the implementation of financial reporting standards. Today, its experts will present useful information and recommendations to accurately comprehend and implement the International Financial Reporting Standards. Within the process of accounting reform intended for credit institutions in Romania, following the transposition of the EU acquis – given that European standards did not establish any rules –, the NBR has contributed to the enlargement of the European regulatory framework by adopting solutions consistent with the principles of International Financial Reporting Standards. Thus, the implementation of these standards at individual level by credit institutions in Romania has taken a graduated approach. At consolidated level, i.e. banking groups, the International Financial Reporting Standards have been transposed via a seamless approach; the NBR exerted its national options embedded in the acquis, but included all credit institutions, not only the listed ones, in the scope of applicability.

Our goal with regional banks is to ensure that managers at those firms recognize their vulnerabilities and develop appropriate mitigation strategies to enhance their resilience. 4. Structure and Culture: The final area, or challenge, I wanted to touch on is organizational structure and culture. Firms need to ensure that business strategy, organizational structure and desired culture are aligned to successfully operate in a fast-paced, ever-changing world. Whether you are a small community bank or a large global institution, you need to be agile enough to act quickly without risking the integrity of your structure and culture. I will touch on culture again a little later. In the short term, these are issues that we see as “top-of-mind” in terms of challenges and should continue to be areas of focus for firms. I thought I would close out today with thoughts on two areas. At times I have described these as being on my list of “things that keep me awake at night,” and I think it’s fair to say that these two issues continue to be near the top of that list. They are: information technology and culture. What keeps me awake at night 1. Information technology My first issue is a topic that I had the opportunity to address with many of you earlier this year: the broad area of information technology, which has a few dimensions to it. The first dimension won’t surprise you or your boards: cybersecurity.

It is not possible for an outsider to take in the size of the holes in the banks' balance sheets as a result of bad credit; it is probably not possible for the Japanese authorities to see this either. However, all of this must eventually rise to the surface, just as it did in Sweden during the finance crisis. It remains to be seen whether the new administration will bring problems in the finance sector closer to a solution. In Sweden we can of course be pleased that the stock exchange has made a slight recovery during April, although it is too early to conclude that the lowest level has been reached. The stock exchange tends to jump the gun a few times before it really takes off. There is still great uncertainty on the financial markets. At the same time, many of the recent signals regarding economic activity have been distinctly negative. A fall in the inflow of orders and weaker production growth are reported in the telecommunications and motor vehicle industries, for instance. Exports and investment are declining. 2 BIS Review 34/2001 Household sector consumption and expectations for the future are also showing a downturn. The number of newly registered vacancies on the labour market is giving negative indications, although employment is still rising. The inflation figures turned out to be higher than expected, both with regard to the consumer price index and underlying inflation.

In the case of social bonds, for example, the European Platform on Sustainable Finance has been working on a proposal for a social taxonomy, but this area evolves very quickly and more dimensions need to be included, such as diversity, equity and inclusion. In addition, the focus of sustainable finance is widening from climate to include nature and the environment because climate change and biodiversity loss are interconnected and mutually reinforcing. 7 Central banks are starting to analyse the consequences of the loss of biodiversity for the financial system. The Network for Greening the Financial System (NGFS) has set up a task force on biodiversity loss and nature-related risks. We need to research and learn more about the transmission channels from nature loss to the economy and the financial system, as we are already doing in relation to climate change.7 Thus, we have a further challenge here, and probably next year there will be a session at this conference focusing on biodiversity. In the meantime, to conclude, we can see that the issuance of green bonds is recovering in 2023. However, other bonds in the sustainable finance family are seeing less interest from investors. The challenges are several: i) the lack of common definitions, ii) the voluntary aspect of the European green bond standard, and iii) the lack of verification of sustainabilitylinked bonds. In addition, a higher degree of transparency and a global disclosure standard would contribute to the development of sustainable bond markets and a reduction in greenwashing. 7 See NGFS (2022).

- Green bond issuance saw the largest increase, comparing with the previous quarter and with the same quarter a year earlier. Financials and governments remained the largest issuers with a share of over 73 percent in 2023 Q1. Indeed, new sovereign issuance increased sharply in 2023 Q1, the European Commission issuing € billion of NextGenerationEU green bonds in its fourth syndicated transaction for 2023. 1 See IMF (2023). Climate Finance Monitor Q1 2023. May. 1 - Conversely, the issuance of most other types of bonds declined. For example, sustainability-linked instruments saw slower growth in the first quarter of the year, which, according to the IMF, “may reflect market participants’ perceptions around greenwashing and the credibility of the asset class to drive companies to meet sustainability targets”. Focusing on the euro area, according to the experimental indicators on sustainable finance developed by the Eurosystem: - The outstanding amount of sustainable debt securities issued in the euro area has more than doubled in the last two years. Securities designed to finance green and social projects, which account for the majority of the market, have seen a particularly strong increase. - Over the same period, sustainability-linked bonds recorded the highest growth rate. However, the relevance of these instruments in the overall debt securities market remains minor. Another interesting aspect highlighted by these experimental indicators is holdings. Since the beginning of 2021, euro area holdings of sustainable debt securities have grown continuously, following a similar trend to the one observed for euro area issuances.

Within Kuwait, we also engage closely with different government institutions such as the Capital Markets Authority, the Ministry of Commerce and Industry and the Communication and Information Technology Regulatory Authority. And finally, the CBK is focused on continuous capacity building to ensure the development and sustainability of our team and to provide technical support to the industry. Through the Kuwait Institute of Banking Studies (KIBS), we are supporting sophisticated programs tailored for specific areas of focus to equip our teams as well as the banking industry with the latest tools and know-how. KIBS is playing a critical role in promoting capacity building in Kuwait, having provided training to over 4,700 banking staff in the last year alone. I am delighted to announce the launch of the “Kafaa” initiative, in collaboration with the Kuwait Institute of Banking Studies and Kuwaiti banks. Kafaa provides advanced Central Bank of Kuwait - Public ‫ عام‬- ‫بنك الكويت المركزي‬ - 18 - programs to financial sector employees including post graduate studies, cybersecurity, risk management, Shariah audit, etc. In addition, we are proud that Kuwait hosts and sponsors the IMF’s Middle East Centre for Economic and Finance (CEF), that provides training for candidates from across the Arab world. Last year, 1,477 candidates benefited from programs run by the Centre, at a total cost of $ million. With the support of enabling institutions such as educators and regulators, the banking industry can transform itself for the future and play its rightful role in supporting inclusive, sustainable prosperity.

As the banking industry goes through a radical transition, banks will need to widen their talent pools and attract Central Bank of Kuwait - Public ‫ عام‬- ‫بنك الكويت المركزي‬ - 13 - a broader range of skills, in line with their shifting business models and changing customers’ preferences. Staff at banks of the future will no longer be limited to mostly finance professionals. Instead, the role of data scientists, visual designers, digital marketing and media experts, software developers and customer experience professionals will become more significant. Banks might even need to recruit psychologists, philosophy majors and other professionals with diversified skills that can bring in new perspectives. These people will be very different from traditional bank recruits, with different expectations for their roles, work environments and contributions. And banks will be in direct competition with technology firms, leading corporates and start-ups to hire them. Banks will need to overhaul their entire process around acquiring, managing, deploying and retaining talent. Like technology companies, they will need to invest in their talent pools to leverage their expertise and creativity. They will also need to transform their corporate culture into one which promotes agility, collaboration and responsible risk-taking when it comes to delivery of solutions. The banking industry needs to succeed on all of these battle fronts: customer loyalty, value, efficiency, resilience and talent. Failure to win on any front could have dire consequences, regardless of a bank’s size or market share.

5 If deflations per se were costly you’d expect to see Charts 3 and 4 become shallower south of the origin. 4 BIS central bankers’ speeches Chart 3 Those deflations no more costly than other disinflations… Chart 4 …same was true for wage growth Source: ONS and Hills,Thomas, Dimsdale (2010). Source: ONS and Hills,Thomas, Dimsdale (2010). Chart 5 Interest rate unconstrained by zero bound But what must also have been important, it seems to me, is that the appropriate level of real interest rates was sufficiently high through the period that monetary policy never had to contend with the zero lower bound on the nominal rate 6. Chart 5 adds to Chart 2 the series for Bank Rate, in green. The real short-term interest rate – which we know, after the event, can’t have deviated that much from the level necessary to sustain stable growth and prices (since that’s what generally occurred) – averaged 4% between 1850 and 1914. If the neutral real rate is anything like that high, only a very severe deflation would drag the appropriate nominal rate close to zero. As it was, Bank Rate was unconstrained from responding to lower nominal growth 7, when that occurred, and never fell below 2%. Source: ONS and Hills,Thomas, Dimsdale (2010). 6 By “zero” I mean the effective lower bound on nominal interest rates; this may not be precisely zero.

In practice people may take time to react to real income shocks; it’s also possible they expect some of the recent declines in energy prices to be reversed 10. But, in the data, there’s no correlation between household saving rates and changes in real energy prices, either here or elsewhere in the OECD 11. This suggests their effects on income are in general matched by equivalent shifts in real spending. Note that the UK is not the only place where consumer confidence has risen in recent months (Chart 10). 9 This point was made in a recent speech by the Governor (Carney (2015)) and, in an article, by Kristin Forbes (2015). 10 Forward markets discount an oil price of $ at the end of next year, quite a bit higher than the current spot price though still well below where it was in mid-2014 $ and $ respectively). 11 In regressions of changes in saving rates on the contribution to real income growth of energy and food prices, the estimated coefficient is close to zero and statistically insignificant in all 17 OECD countries for which we have data. BIS central bankers’ speeches 7 Nor is it unusual to see stronger demand at a time when these survey measures of household inflation expectations are falling. Typically, these near-term expectations surveys track actual inflation 12.

Banks have more capital, they have more liquidity and are more resilient. The bigger concern is profitability, which was already low. European banks are solvent but I am aware that this crisis will have further impact on their profitability. In the medium term, banks will need to continue to take steps to eliminate excess capacity and consolidation could be a sensible way of dealing with profitability. From a solvency angle, this is 2/3 BIS central bankers' speeches not a banking crisis. This time banks can be part of the solution, rather than the problem. If the recession is worse than expected, is there a risk that some banks will lose money on loans which they are currently granting? All governments, Portugal included, have approved State guarantees. When there is this level of uncertainty and a drop in GDP, these guarantees are very important and useful if a credit crunch is to be avoided. A number of economists have expressed the view that the euro area’s response to the crisis has been weak compared to the United States or the United Kingdom, where central banks will even finance the State directly. How would you respond to these criticisms? Looking at the whole package of ECB measures, it is impressive. Then we have fiscal policy, involving the various programmes of the national governments, and lastly there is the decision of the Eurogroup. Europe’s response is comparable to that of other world economies.

In recent weeks, the SNB has pursued a policy which has brought the repo rates close to zero. This does not mean, however, that our monetary policy will cease to transmit further expansionary impulses. In addition to the short-term repo rate, we use a whole range of other methods to pursue a more expansionary monetary policy. We can, for instance, extend the maturities of our money market transactions or intervene in markets other than the money market. Updates to monetary policy instruments The SNB’s monetary policy instruments have fared quite well since the onset of the crisis. However, a review has highlighted two areas in need of adjustment. First, a liquidityabsorbing instrument was found to be necessary, and second, the conditions of the liquidityshortage financing facility were no longer deemed appropriate. The liquidity-shortage financing facility serves to bridge unexpected, short-term liquidity bottlenecks. It can only be accessed if a bank has a corresponding limit and if that limit is fully covered by securities at all times. Let’s start with the liquidity-absorbing instrument: The crisis has made it clear that a central bank must be able to offer large quantities of liquidity at short notice and do so via a number of channels and with different maturities. Repo transactions and foreign exchange swaps meet these requirements very well. However, the SNB lacked a separate liquidity-absorbing instrument to handle large volumes. We therefore introduced our own debt certificates – SNB Bills – to our range of instruments in October.

Following this idea and backing it up in figures, please allow me to shortly through a glance back in the past. The soundness of the Albanian state in these last years, the economic growth and amelioration of the tax and customs entities performance, enabled the reduction of the budget deficit. This deficit fell from 11.4 percent of the GDP in 1998 to 6.9 percent in 2002. In 2003, it is expected to fall at the level of 5.8 percent of the GDP, whereas the draft-budget for 2004 has an even more ambitious objective: the reduction of the general budget deficit at the level of 4.8 percent of the GDP. This fiscal discipline has given its own results. It influenced the reduction of treasury bills interest rates, bringing about an overall reduction of interest rates in economy. The reduction of interest rates and the government’s demand for funds gave a greater respiration to economy crediting. It has extended more funds - at lower interest rates - to be used by the public sector. According to the data provided by the Bank of Albania, economy crediting increased at an average of 90 percent per year during 1999-2002. On the other side, the reduction of the Bank of Albania’s financing to state budget, gave positive impacts on the liquidity indicators in the system. Now the long-term monetary assets gave a straightforward contribution on keeping inflation at low levels. Inflation fell from 8.7 percent in 1998 to 2.1 percent in 2002.

A full and consistent implementation of the euro area’s existing fiscal and macroeconomic surveillance 2 BIS central bankers’ speeches framework is key to bringing down high public debt ratios, to raising potential growth and to increasing the euro area’s resilience to shocks. We are now at your disposal for questions. BIS central bankers’ speeches 3

In the baseline scenario of this Report, the sum of the effects of the catastrophe, the changes in conjunctural data and other specific elements shapes a scenario where inflation will converge to 3% sooner than was forecast in December. The change in the medium-term inflation scenario is determined by the effects of the earthquake and tsunami on productive capacity and by the persistence and magnitude of a potential contraction in private consumption. In the baseline scenario, annual CPI variation will exceed 3% in the second half of this year, standing around 4% for a few months. It will later fluctuate around 3% through 2011 until the end of the relevant projection horizon, which is currently the first quarter of 2012. Annual CPIX1 will show a more gradual convergence to 3% (table 2). All this within a substantially more uncertain setting than before. This scenario rests on other working assumptions. First, it is assumed that in the long term the real exchange rate (RER) will be similar to its current level. This assumption is made considering that, with the nominal exchange rate and parities prevailing at the statistical closure of this Report, the RER is consistent with its long-term fundamentals. Another working assumption is that inflationary pressures from the labour market will generally not experience any significant change with respect to current indicators. Finally, the external scenario will continue to add momentum to the economy and imported inflationary pressures will remain contained.

But another strand in the debate draws the opposite conclusion from the crisis – focusing on the risk that central banks might lend “too little”, too rarely or too late, amplifying what might begin as short-term liquidity shortages into deeper or more persistent solvency concerns, and subsequently causing financial institutions to over-insure, reducing their capacity to lend. The main policy conclusion from this way of thinking is that central banks need stronger toolkits for detecting and responding to liquidity crises. These (deliberately stylised) perspectives seem diametrically opposed. National debates have tended to lean one way or the other, depending on each country’s specific crisis experiences. But, in truth, it is vital we pay heed to both. Without an effective LOLR framework, economies cannot hope to foster strong and sustainable growth over the long run. History shows that, sooner or later that growth, and the employment it supports, will be threatened by an unexpected withdrawal of liquidity from key parts of the financial system, unconnected to the underlying quality of real assets in the economy. Historically that liquidity risk resided primarily in the banking sector. But as economies migrate towards more market-based forms of finance, liquidity risk is increasingly likely to originate (or be concentrated) elsewhere: including broker-dealers, central counterparties (CCPs), or traded instruments themselves. The herd mentality that can develop during crises can sometimes only be tamed by well-designed intervention – be it covert or overt – using a credible backstop. Countries lacking such backstops are likely to sustain large-scale, and preventable, economic damage.

A ‘tilt’ strategy starts from the same investment universe as a standard market capitalisation-weighted index, but then adjusts the weights on individual securities or sectors in that index up or down to reflect various climate factors. A common tilt might be ‘low carbon’, in which portfolio weights are adjusted based on a measure of each issuer’s carbon footprint – or better still a forward-looking assessment of an issuer’s transition trajectory to net zero, such as that produced by the Transition Pathway Initiative.39 Tilt strategies avoid binary composition issues of the previous strategies, and can be dynamic in nature as the parameters used to construct the portfolios evolve. But they can be more reliant on those very consistent, decision useful and forward looking metrics I mentioned earlier, which are not yet universally available. 39 https://www.transitionpathwayinitiative.org/. 19 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 19 ‘Unconstrained’ investment – the final category in the chart – is a catch-all for the wide variety of active management strategies that investors can employ, either across an entire portfolio, or as an overlay. Such strategies may for example be driven by top-down or bottom-up research, or by quantitative statistical analysis of correlations between environmental factors and risk-adjusted returns. While such approaches have at least the potential to deliver stronger performance, by substituting judgment or modelling for current data gaps, they are clearly more costly to undertake and harder for end-investors to monitor.

From a business management perspective, this point is obvious: to be useful in shaping strategy, a metric has to be something with a direct influence on investment decisions. And from a financial markets perspective, it has to be relevant to understanding risk and return. A lack of meaningful, consistent metrics makes it hard, or impossible, for investors to construct viable portfolios by comparing climate performance across firms. And that, in turn, dampens the incentive of those firms to improve and disclose their climate performance in the first place. 23 https://www.fsb-tcfd.org/wp-content/uploads/2019/06/2019-TCFD-Status-Report-FINAL-053119.pdf 9 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 9 Chart 4: Correlations between environmental scores from different rating providers24 Key Each matrix displays correlation coefficients between Environmental ratings given by five rating providers (labelled P1 – P5 in the charts) on a sample of 924 firms (2017 data). Right: Correlation coefficients between aggregate Environmental ratings. Below: Correlation coefficients between ratings of a selection of more granular environmental categories.

Stefan Ingves: The development of a modern financial sector in Sweden Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the Indira Gandhi Institute of Development Research, Mumbai, 16 November 2006. * * * I am honoured and grateful that you have invited me to speak here today. This is an institute of development research so it is appropriate for me to talk about development in the financial sector. It has become gradually more acknowledged by academics as well as by practitioners and policymakers that a well developed financial sector is necessary to a country’s overall economic growth and stability. It also improves the services provided to the individual citizens. A well-functioning financial services industry facilitates the transformation of savings into productive investments. It assumes, transforms and distributes risks to those willing and prepared to hold them. It facilitates payments between people and companies. The financial sector is an instrument to promote the smooth functioning and sustainable development of the whole economy. Conversely, experience has clearly shown that a badly-managed or inadequate financial system is detrimental to the stability and development of society. It may provide inefficient and expensive services and it may run hidden or explicit losses, which in the end may have to be covered by private and public money. It may also distort competition. The conclusion is obvious: Arguments for social and economic development speak in favour of conducting reforms with the aim of creating a well-functioning financial system.

Our economies and our societies have suffered heavily – indeed, on all available forecasts, this year will see the biggest declines in GDP recorded in peacetime – and we will have to endure a period of painful reconstruction for which sound knowledge and also good judgment will be essential. 1/1 BIS central bankers' speeches

With mobile payments, the cost of travel to a financial service provider is reduced to pressing a button, the risks associated with carrying cash are managed by simply securing a pin number. Since the mobile telephone industry has seen tremendous growth in its coverage, mobile payments seems to be the inevitable retail payment method that reaches out to large segments of the population a way that the conventional ones do not. Chairperson, notwithstanding these advantages, mobile payment platforms are not without challenges. At the centre of these challenges is the need to protect the consumer or user of mobile payment platforms. Undoubtedly, the number of people with access to mobile payment services in Zambia has significantly increased since the early days of Celpay. However, for us at the Bank of Zambia, as regulators we have taken note of how growth has been accompanied by a change in the character of mobile payments. The line between a mobile payment product and a conventional banking product has now become a fine line. For this reason developing appropriate regulations that protect the consumer against fraud and such risks anti-competitive practices, is a critical and necessary response to the innovations brought about by the mobile telephone technology. But it is important to understand that by its nature technological innovation can achieve an overnight quantum leap by the sheer ingenuity of one person. Where this happens, there is a danger that the development of appropriate regulation can lag behind technological advancement.

Exchanges with colleagues from market operations, payment systems and economic analysis will help the supervisors to develop a different viewpoint on current market developments, the importance of a specific institution for payments and the economic environment. One area in which cooperation will be particularly intensive is macro-prudential supervision. Our aim here is to bring together insights from both the macro-prudential and the micro-prudential areas, and to address undesirable developments in a targeted way. Conclusion Ladies and gentlemen, the European supervisory landscape is facing a major change. With the SSM, we have created a strong, new supervisor at the European level. The SSM will be able, and have the responsibility, not to do everything differently, but to do some things better. With the conclusion of the comprehensive assessment, and the publication of the results in the second half of October, and the start of our supervisory activity on 4 November, we have a few stressful months ahead of us. But we must also remember to occasionally pause for a moment and to reflect beyond the immediate tasks at hand. The SSM may have been created as a consequence of, and as a solution to, certain problems in Europe. But it is BIS central bankers’ speeches 3 destined to be able to achieve much more and – at least that is my hope – to have an effect over and beyond Europe. Thank you for your attention. I am now at your disposal for questions. 4 BIS central bankers’ speeches

Rather than take you through the legislative history of this evolution, I want to refer you to the Financial Crimes Enforcement Network—or “FinCEN,” for short. Its website contains short and accessible histories of major anti-money laundering laws.3 These summaries highlight the important public goals of the Bank Secrecy Act and other anti-money laundering statutes—why they are more than just a compliance cost. One theme that emerges is the increasing reliance on banks and other financial institutions to safeguard the payment system. Our laws and regulations increasingly bring the industry into partnership with the government on combatting national security risks to the United States and financial crime. Anti-money laundering is not just a matter of historical record. Our rules continue to evolve. For example, in 2016 the Treasury Department updated its regulations to require that banks and other financial institutions verify the identity of the natural persons—that is, the “beneficial owners”—who own or control companies that hold accounts.4 The beneficial owner rule, like other “know your customer” rules, is a regulatory floor, not a ceiling. Covered firms can take the initiative to implement more stringent internal rules based on their risk. Indeed, in December 2018, the federal banking agencies published guidance that encouraged innovation in anti-money laundering compliance—pilot programs that exceed the legal minima, or at least make compliance more efficient.5 Experiments in ratcheting up internal thresholds are welcome.

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

It increases the import bill: widens the current account deficit: adversely impacts on the exchange rate stability; raises domestic fuel prices causing a serious supply side shock; and raises both headline and core inflation since domestic inflation becomes adverse with the demand pressure in the economy and supply side shocks. At a time when the entire world is strengthening its security capabilities to meet the threat against terrorism, Sri Lanka too would need to address the prevailing situation. At the same time, it is important that the business community continues with its investment plans in Sri Lanka because the very concerns regarding security provides a certain “discount” which could be of advantage in a highly competitive global business field. External and internal shocks and vulnerabilities may also thrust fresh challenges to financial system stability. Hence, it would be useful to consider a few such shocks and risks as well. The continuing high growth in private sector credit could also pose threats to price as well as financial system stability. First, it could deteriorate the quality of the assets of commercial banks and that situation could increase the risk of high non-performing loans in the future. Second, such expansion of credit could generate inflationary pressures in the economy through increased aggregate demand. With the rapid and intense integration of the Sri Lankan economy with global financial markets, money laundering, terrorist financing and pyramid schemes could threaten financial stability.

Some of the Primary Dealers who are dealing outside the Scripless Securities Settlement System could have caused potential threats to the system. This may have been particularly due to the fact that using SWIFT was considered to be an expensive method of transferring data. Therefore, the Central Bank has now introduced a low cost method of transferring data using the Wide Area Network connecting them with the Central Bank. Accordingly, all Primary Dealers are now urged to use this method to ensure retail transactions are not proceeded outside the system. Two new laws, namely the Prevention of Money Laundering Act No. 5 of 2006 and the Financial Transactions Reporting Act No. 6 of 2006 have been enacted last year to prevent money laundering and terrorist financing and to strengthen the reporting mechanism for financial transactions. Arising from such initiative, the Financial Intelligence Unit has already been established to investigate and take action to combat money laundering and terrorist financing. The work of the FIU will be further expanded during the year 2007. In line with the global trends, we will be taking steps to further promote corporate governance in the financial sector by implementing several measures. Mandatory corporate governance rules covering important areas of corporate governance principles will be introduced in place of the existing voluntary codes.

1.3 The necessary constraints on model risk that the package contains should not be gold plated in the European transposition 1/3 BIS central bankers' speeches The Basel 3 Final Agreement constrains overly aggressive internal models thanks to the introduction of the output floor at the highest level of consolidation. The EU should beware of not adding unnecessary constraints that would increase the impact of the output floor in a superequivalent way. In addition, in Europe, Pillar 2 requirements also cover model risks – whereas it is not the case for US banks, which do not have a specific Pillar 2 add on in their capital requirements. We therefore have to find a way in Europe, in some form or another, to eliminate any overlapping capital charges. 1.4 The need for a stabilization of the regulatory framework after the implementation of Basel 3 finalization We are now coming to an end of this regulatory cycle with the implementation of the Basel 3 finalization. Back in November 2020, the GHoS clearly committed the BCBS to abstain from major regulatory changes in the Basel framework in the near future. We need that banks focus now on other challenges in particular those related to the sustainability of their business models and those related to the new risks such as climate related risks or cyber-risks. 2. The stress testing framework in Europe: past, present and future Now, let me turn to the topic of the stress test in this second part of my remarks.

Daily trading on the New York Stock Exchange (NYSE) went from two million shares a day in the early 1960s to twelve million by the end of the decade. Meanwhile, stock trades continued to be settled by the physical delivery of engraved stock certificates between brokerage firms. As trading volumes soared, the post-trading industry could not keep up with the paper blizzard. By 1968, the NYSE was forced to close every Wednesday for six months to catch up with the paperwork. It then reduced its official operating hours for a further six months to enable its 4 member brokerage firms to keep pace with the trading volumes. Technology subsequently caught up. A second example is “Black Monday” when, on 19 October 1987, stock markets crashed all over the world. That day, the Dow Jones Industrial Average dropped by over 22%. One factor that increased the severity of this market crash was the difficulty people faced in obtaining reliable information. The record trading volumes on Black Monday – three times the daily average – overwhelmed many systems. As the Brady Report put it: “On the NYSE, for example, trade executions were reported more than an hour late, which … caused confusion among traders. Investors did not know whether limit orders had been executed or whether 5 new limits needed to be set.” In the years since 1987, both trading and post-trade technology have come a long way. Today, trading algorithms buy and sell hundreds of thousands of times in a single second, leading to increased trading volumes.

BIS Review 88/2007 1 Strong GDP growth and investment 8.0 31.0 GDP growth (%) 7.0 29.0 Investment (%GDP) 6.0 27.0 5.0 25.0 4.0 3.0 23.0 2.0 21.0 1.0 19.0 0.0 -1.0 2001 2002 2003 2004 2005 2006 2007F -2.0 17.0 15.0 Banking system health strengthening Net NPL 23 Return on Assets 2.0 1.8 1.6 18 1.4 1.2 13 1.0 0.8 8 0.6 3 0.4 0.2 -2 2 2002 2003 2004 2005 2006 0.0 BIS Review 88/2007 Unemployment declining (%) 13 12 11 10 9 8 7 6 5 4 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Public debt declining (% of GDP) External Government Debt 58 59 45 46 45 2002 2003 2004 BIS Review 88/2007 60 Domestic Government Debt 58 50 53 47 44 40 2005 2006 2007F 3 As you may have noted, just yesterday, Standard & Poors revised the outlook for Sri Lanka from negative to stable and that is indeed a useful confirmation of the success of the manner in which the economy is progressing.

Ajith Nivard Cabraal: Inequality, poverty and development Inaugural address by Mr Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka, at Annual Sessions of the Sri Lanka Economic Association (SLEA), Colombo, 10 August 2007. * * * Mr. Chairman, Distinguished Invitees, Ladies and Gentlemen, At the outset, I wish to congratulate the Sri Lanka Economic Association (SLEA) for their initiative at organizing this important and timely event, the Annual Session focusing on Inequality, Poverty and Development. This forum would give a wonderful opportunity to all the participants to share their valuable thoughts and eventually enable them to contribute to the prosperity of this country and the well-being of our people. I am also delighted to have been invited to deliver the inaugural address to this distinguished audience and I must say that I consider it a great honour and a privilege. The SLEA has been organizing events of this nature for many years and at most such events I have been an active participant. I have myself benefited immensely from these fora, and I know most of you academics, and professionals have also gained from these well balanced sessions and fruitful discussions. Further, the themes that have been selected by SLEA and the calibre of the resource persons they have invited during the past prove their willingness to make an important contribution to the development in this country.

In several parts of the business sector, however, the shortage was greater than normal, for example in the manufacturing industry and the construction industry, and for several types of labour, for example technical white-collar workers in the industrial sector and computer consultants (see Figure 21). The fact that the shortage of labour is already so high even though unemployment is still higher than normal indicates that matching on the labour market has deteriorated. This is also indicated by the Beverage curve, which shows the relation between unemployment and vacancies. This has shifted outwards, that is a certain level of vacancies is compatible with a higher rate of unemployment. In part, this may be a cyclical phenomenon, but the change is so large that it may also relate to a structural deterioration (see Figure 22). 16 One difficulty at present is to assess whether the normal rate of unemployment has changed due to the financial crisis and economic policy. In connection with a severe downturn, the sustainable rate of unemployment (NAIRU) usually increases, at least initially. But the NAIRU will probably also be affected by the labour-market reforms implemented in recent years. Some of these reforms will probably reduce the NAIRU while others may increase it. It remains to be seen what the net result of these factors will be. BIS central bankers’ speeches 9 Repo rate level I also believe that we should take the level of the repo rate into account when deciding on monetary policy.

Inflation increased to a level that was tangibly higher than the inflation target, resource utilisation was higher than normal and there was a rapid expansion of credit. Despite this, the repo rate was lower than normal for most of the period leading up to the crisis. A more rapid increase of the repo rate would have been better. We did not foresee the financial crisis, but once it hit the Swedish economy with full force in September 2008 the Riksbank acted quickly and forcefully. This mainly concerned measures to preserve financial stability. However, the expansionary monetary policy conducted by the Riksbank also played an important role in reducing the severity of the downturn that followed in the wake of the financial crisis. Looking forward, I think that the repo rate should be raised at every meeting this year, considering the economic development we envisaged at the last monetary policy meeting. If inflation becomes higher than we had expected, it may be necessary to raise the repo rate to a normal level of around 4 per cent as soon as next year. The average for the repo rate over the last 10 years cannot be taken as a starting point for what the average repo rate should be in the longer term. However, at the same time, I am, of course, prepared to reassess my view of the direction of monetary policy if the external conditions should change significantly, as they did in September 2008. There are those who think that monetary policy is too tight.

Temporary or provisional financing is better than none, but a clear-cut schedule on how the very large debt should be financed over the next ten or twenty years must be made if investors and trading partners are to have confidence or a clear idea of what they are dealing with, and I think that is essential. How central banking will be done is also important. The Bank of Thailand itself is being revolutionised. The pay system will change, the promotion system will change and career development has been instituted. Risk management supervision will be instituted from the first of January next year. Simple things such as a letter of transmittal of the supervision team to the manager of the bank will be required. This may seem trivial, but it will put responsibility firmly on the supervisors, which was never possible before because supervision missions went whenever they felt like it and did not tell anybody except the banks. It also makes job control of the supervisors impossible and it is very dangerous to allow people with criminal prosecution capabilities to work in this manner. The most important thing about the new central bank though is probably to keep it really independent. Thailand is now quite a complicated place, a large economy with considerable sophistication. The role of the central bank in helping finance development and directing among the sectors of the economy will soon no longer be possible. If the central bank could keep the economy stable, that would be a major achievement.

The relative importance of consumption in the economy has increased from 56% in 1998 to 61% of GDP in 2002. The savings rate has, nevertheless, remained high at 35% of GDP, having declined from a peak of 42.2% in 1998. While household consumption and private investment would continue to remain important in sustaining domestic demand and economic activity, this needs to be balanced against the need to save. While there is potential to increase consumption further, of importance is for households to improve the management and planning of their finances over the different stages of their lives. Indeed, financial planning is essential to sustain living standards and long-term financial security. With the rapid development of the financial system and the broader array of financial products and services available to consumers, there is an increasing need for Malaysians to make wise savings and investment decisions that will have lasting implications for their financial well-being. Such financial planning and management will determine the extent of consumption expenditure, the indebtedness and the savings that is possible at the respective stages of one's life. The strengthening of domestic demand in our economy has also been supported by increased lending by banks, including to households. For a number of advanced economies, this trend has become a source of concern. This is in view of their rising household debt that have exceeded prudent levels in the range of 80-100% of GDP. Household indebtedness in Malaysia has, however, remained within prudent levels at 60% of GDP.

At the same time, however, employers are claiming that the inflation target is no longer an obvious startingpoint. According to the Swedish Association of Industrial Employers, it is instead competitiveness and wage outcomes in the euro area that constitute their benchmark. 3 The implications of this are not obvious. Ultimately, the outcome depends on each respective party’s negotiating strength. But since wage increases in Germany, for example, have tended to be quite modest and since the industrial sector’s wage agreements in turn constitute a benchmark for other collective agreements in Sweden, it is conceivable that this could have contributed to the flat Phillips curve since 2011 in Figure 4. In the long term, however, this should not be a major problem as the euro area has an inflation target of “close to 2 per cent”, i.e. very close to our own target. This should imply that wage increases will also be higher in the euro area going forward. But tensions may arise periodically, of course. All in all, therefore, there are numerous feasible explanations for why wage increases have been relatively low despite good economic development. But so far we have no definitive answer to why it is like this nor to how permanent the phenomenon is. Research on the Phillips curve ongoing As I mentioned, the discussion about the Phillips curve is international to a high degree. Quite lively debate has been taking place in various countries recently centred on intensive estimation of Phillips curves, using slightly different specifications and different methods.

This occurs not only inside Sweden but also in the form of teleworking from other countries in organisations that are located in Sweden. Teleworking makes it possible to use the labour force more flexibly over the business cycle, so that the work can be part-time when economic activity is low and full-time when activity is high. The third cause has to do with changes of institutions in a broad sense. A concrete Swedish example is that more and more collective agreements contain agreements on working time “banks”. According to these agreements, the number of hours worked for an employee can be redistributed over the business cycle. Another example is the emergence of temporary employment agencies in Sweden. From once upon a time being illegal, the industry is currently about 80,000 strong. In 2017, 250,000 were employed by the temporary employment industry in the areas of temporary staffing, career transition and direct recruitment. In Sweden, we have also seen greater labour supply among older people. According to the LFS for the first quarter of 2018, almost four per cent of those employed were between 65 and 74 years old. One can assume that their labour supply is very flexible. If we add all these explanations together, it is perhaps not so strange that the correlation between resource utilisation and nominal wage increases seems to have weakened in recent years. Other explanations also feasible But there are also other feasible explanations for the observation in Figure 4.

We may also be faced with unexpected and unusual situations, as was the case with Covid-19. Avoiding this kind of shocks completely is an impossible endeavor. What we can do is improve our capacity to cope with them. The Central Bank of Chile took a step forward in that direction by activating the Countercyclical Capital Buffer last month. As we reported then, this is a precautionary measure. Notwithstanding the fact that the macroeconomic scenario has evolved in line with expectations, as we confirmed in this Report, we have mentioned external risk scenarios of a macro-financial nature that, though unlikely, may have a high impact. Thus, we have considered it necessary to have a capital buffer, the release of which by the authority will help mitigate their amplifying effects on the evolution of credit to households and businesses. We have also made progress by initiating a program to replenish and expand our international reserves a few days ago. The purpose of this program is to strengthen the country’s international liquidity position. With this, the Bank will contribute to the necessary process of recovering the slack that every segment of our economy must carry out. Thus, as of Tuesday, 13 June, we began a $ billion forex purchase process, which will last for a period of twelve months. This will be executed through regular dollar purchases of $ million per day through competitive auctions, and its monetary effects will be sterilized so as not to affect the monetary policy stance.

The developments I have just described offer some insights into how the future steady state risk management framework might look. At the moment, I see four key features: First, while the temporary collateral framework has successfully eased potential collateral shortages, it could be argued that it should not become part of the regular framework. As liquidity demand declines, there will also be less need for an expanded set of eligible collateral. Whether some temporary measures might be transformed into a state-contingent framework, ready to be activated again in the future if circumstances so require, is an open question. As experience shows, each crisis needs a tailored response. Second, we will need to keep the flexibility to adjust the collateral framework to financial innovations, especially when it comes to complex new financial products. The new “simple, transparent and standardised” securitisation regulation is a case in point. It will allow us to better assess the collateral we accept. In a similar way, we will need to forcefully deal with new types of securities, such as conditional pass-through covered bonds, whose risks may not yet have been fully appreciated. 3/4 BIS central bankers' speeches Third, we will have to retain the risk control frameworks for the asset purchase programmes beyond the horizon of our net asset purchases. As long as we keep outright portfolios on our balance sheet, the reasons behind the risk control measures, including eligibility criteria, purchase limits, benchmarks ensuring diversification and the different risk-sharing agreements, will continue to apply.

In recent months, Malta’s HICP inflation may have been biased upwards because of methodological changes related to the measurement of tourist accommodation. Meanwhile the RPI, which is unaffected by accommodation prices, stood at 2.9%. It is the RPI that determines with a lag the COLA increase. The core RPI inflation rate, which is a good gauge of persistent inflation, stood at 2.0%. BIS central bankers’ speeches 3 On the other hand, a number of labour market indicators remain positive. As seen in Chart 8, the most recent LFS unemployment rate is 6.5%, the same as it was on average in 2007, prior to the euro area crisis. In fact, Malta’s unemployment rate is at the lower end of national unemployment rates across the euro area. Meanwhile the latest registered unemployment rate stands at 4.2%, in June. Malta has avoided the two essential sources of the Euro area crisis: the deficit ratio has been moving in the right direction while the banking model followed by the core domestic banks remained prudent. In Malta, the core banks generally rely on traditional, domestic sources of funds, specifically retail deposits. Malta’s banks remained largely unaffected by the euro area crisis, averting the need for any government assistance and avoided what in other countries became a major source of fiscal overruns and distress. Malta must position itself in a way that builds on the strengths of the economy and minimises its vulnerabilities.

The European Systemic Risk Board (ESRB), which is an EU-level body established with a mandate to oversee the macro-prudential oversight of the financial system, recommended the setting up of an authority or body to make recommendations on macro-prudential aspects of the financial system. The Central Bank in its capacity as the macro-prudential authority has agreed with the MFSA, to set up a Joint Financial Stability Board which will be formally constituted in a few weeks. The objective is to enhance the cooperation between the two bodies for the assurance of the stability of the financial system. The intention is to strengthen the resilience of the financial system and to mitigate the build-up of systemic risks. To these ends, the Board’s mandate includes the development of mechanisms that would identify risks to financial stability, and the establishment of the necessary macro-prudential policy tools. The Joint Financial Stability Board will also be able to make recommendations to the CBM or MFSA boards on macro or micro prudential issues, as the case may be. The board is also responsible to follow-up on recommendations made by the ESRB. Second, in the current situation, it must be ensured that fiscal consolidation is not compromised and the commitments under the Fiscal Pact are achieved. The room for fiscal manoeuvre is very limited at this present juncture of contraction in the euro area economy and the current debt-to GDP levels in the Maltese economy. Third, higher productivity allows sustainably higher wages and living standards.

IMF (2011a) examined international capital flows over the last 30 years and found that net capital flows to emerging markets have been strongly correlated with changes in global financing conditions, rising sharply during periods with relatively low global interest rates. Based on these and similar observations some observers have conclude that the effects on capital flows to other countries should be taken into account in, for instance, Federal Reserve policy decisions. For example, Eichengreen, Rajan, and Prasad (2011) find that the political authorities in large economies “should let considerations of these external effects play an explicit role in the monetary policy framework. Central banks in these countries should pay more attention to their collective policy stance and its global implications.”5 I do not agree with that conclusion. The Federal Reserve’s mandate concerns U.S. inflation and employment, and the Federal Reserve is not responsible for inflation, real developments, and monetary policy in other countries except as they feed back into the United States. That responsibility should rest with the policy authorities in those countries. Countries that choose to stabilise their dollar exchange rate or even peg to the dollar will tend to import U.S. expansionary monetary policy into to their own country. This monetary policy may in many cases be too expansionary for the countries concerned, creating an overheated economy with risks for bubbles and other negative consequences. A flexible exchange rate would give the countries the option of conducting an independent monetary policy appropriate for the country in question.

Specifically, we call for the creation of an International Monetary Policy Committee composed of representatives of major central banks that will report regularly to world leaders on the aggregate consequences of individual central bank policies.” 6 Ferrero, Gertler, and Svensson (2009) provide a suitable model for such thought experiments, a New Keynesian DSGE model of a world with two large countries and tradable and nontradable goods. BIS central bankers’ speeches 7 foreign economy. Everything else equal, this has two consequences for the domestic economy. First, due to increased foreign activity, foreign demand for domestic exports increases somewhat. Second, the interest-rate differential between the domestic and foreign interest rates increases. This will trigger an incipient capital inflow into the domestic economy and appreciation of the domestic currency. Suppose the appreciation is so large as to trigger depreciation expectations that balance the increased interest-rate differential. This will again stabilise the capital flow at zero. Everything else equal, the appreciation of the currency is a real appreciation, which is contractionary for the tradable-goods sector. Assume that this contractionary effect dominates over the initial increase in export demand, so the net effect on the tradable-goods sector is contractionary. Demand for, and the output of, nontradable goods may expand somewhat from the appreciation, but assume that the contraction of the tradable-goods sector dominates so the net effect on domestic output is a contraction. The appreciation also leads to lower inflation, through lower prices on imported goods.

Instead it involves identifying ways to induce and encourage desired behaviors. I would also suggest that it means avoiding departures from normal market functioning whenever possible. Interventions should seek not to override or suspend market functioning, but rather to guide market processes. § This is not to say that payment suspensions always can and should be avoided, or that ever-larger bailouts are desirable or feasible. I would note that we at the New York Fed in numerous instances, spanning several decades, have worked to help borrowers and creditors find mutually beneficial solutions that involved some degree of concerted or coordinated financing. § But in such instances, when payment interruptions or resort to concerted financing truly are unavoidable, experience has shown that minimalist approaches - - where only certain payments are suspended or delayed, and only when absolutely necessary - - generally offer the best BIS Review 61/2002 prospects for minimizing spillover effects and for restoring market access rapidly. G • The linchpin of a market-based, minimalist approach has to be a strong policy response on the part of the country in crisis. Markets may not always be reasonable, but they usually have reasons for reacting adversely. Those reasons most often relate to policy or institutional shortcomings.

But we also must keep in mind the implications for the functioning of the global financial system in the near and medium term. This requires consideration of prospects for restoring normal market functioning and access, and the creation of appropriate incentives. • When difficulties arise, the challenge remains, as always, to encourage and work with countries that are ready and able to implement strong corrective actions and to find financial solutions best suited to both the specific case and the broader functioning of the global financial system. A flexible, case-by-case, managed-market approach, represents the best bet - - and the only realistic option - - for achieving those goals as we face a challenging future. Thank you. BIS Review 61/2002 7

They are more of a speculative investment instrument than a means of payment capable of retaining its value. The chart on the right-hand side of the slide illustrates this. Compared with exchange rates, commodities and equities, cryptocurrencies are subject to very high volatility, and investors must be aware of the financial risks they are taking on when buying them. Cryptocurrencies therefore do not meet the requirements of a currency. However, this does not mean we can simply dismiss them out of hand, for behind all of the hype there is an array of technological innovations. Particularly important among these is the distributed ledger technology, known as DLT for short and often also referred to as blockchain. In other words: it is important to make a clear distinction between cryptocurrencies as assets, and the underlying technology, which does indeed have potential. DLT could facilitate solutions in various areas of the economy that would enhance the safety Page 2/8 and efficiency of digital information flows. A distributed ledger is essentially a decentralised and synchronised database that allows participants to read, write and save information. DLT makes it possible to unequivocally define ownership structures within a computer network, without the need for a central third party. These facets also give rise to interesting possibilities for the financial sector, and DLT is therefore regarded as one of the biggest innovations in the fintech area.

© Swiss National Bank

It is a European financial centre, and by providing competitive trading facilities in the euro London can help provide better facilities for business and industry across the whole single market and bring more business into Europe from the rest of the world. Opportunities in euro for market participants 29. I have talked so far principally about the steps the authorities are taking to help prepare the London markets for the euro. But of course, at the end of the day, the authorities can only facilitate: the real challenge in seizing the opportunities presented by the single currency has to be met by market participants themselves. Let me touch on three areas where the advent of the euro is likely to usher in significant changes -- but, I believe, positive changes, offering new business opportunities -- for financial market participants. 30. First, in the bond markets, monetary union will serve to unify the various national government bond markets of the EMU participants, and the already substantial ECU bond market, into a single market in a single currency with multiple national government issuers. Currency risk will be removed, at a stroke. This does not, of course, mean that all government bonds of the different national issuers will trade at the same price: differences will still remain in trading structures and liquidity, in perceptions of sovereign risk and the scale of supply by different governments, and in investors’ basic preferences.

At the beginning of 2009, the severe downturn in the global economy had translated into a very serious threat of deflation in Switzerland. For example, the inflation forecasts produced by the IMF showed inflation in Switzerland to be in negative territory for two years in a row. Price stability was evidently not assured. The substantial increase in the value of the Swiss franc since the beginning of financial crisis represented an inappropriate tightening of monetary conditions. Yet, it was imperative that monetary conditions be kept as loose as possible, a fortiori to avoid a further monetary tightening. Given that the interest rate was effectively at a zero level, the SNB decided to prevent any appreciation in the Swiss franc with respect to the euro from March 2009 on. The SNB achieved this goal by repeatedly intervening in the foreign exchange market during the course of 2009. This policy was maintained until the monetary policy assessment (MPA) of December 2009. By the end of 2009, the economic situation was showing some signs of improvement and the threat of deflation was estimated to have diminished. As a consequence, the SNB decided that a certain appreciation in the Swiss franc could be allowed without price stability being compromised. At the December MPA, the SNB therefore announced that it would act 8 There are, however, twice daily margin calls in case of variations in the collateral market value. 9 Source: IMF (2003), “Deflation: Determinants, Risks, and Policy Options”, April 2003.

Oil You will not be surprised that the increases in the oil price have featured highly in many recent MPC discussions. We have observed the significant increase in demand for petroleum products, particularly from China and the USA. But did you realise that China’s average annual consumption of oil is currently almost two barrels per capita per year, but Brazil’s is about 4 barrels, and the USA’s just over 25? Depending on the assumptions one makes, it seems to me to be plausible, despite efficiency gains and possible replacement of oil by other sources such as nuclear power, that China with its growth rate of 9% per annum will reach Brazil’s per capita level in just over 15 or so years. And with its population of 1.3 billion that could mean an additional demand of some 3.5-4 billion barrels per annum roughly equivalent to the 2004 production of Saudi Arabia or around 13% of global production. Add India in with a slightly lower growth rate and you easily approach 5-5.5 billion barrels per annum which is not far off the 2004 production of the whole of the North American continent - getting on towards 20% of world production. So on the demand side there is clearly a challenge. There is also great complexity in assessing the evolution of supply. The supply and price of crude is complicated by OPEC politics, and the length of time that it will take to get non-OPEC production such as Canada’s tar sands significantly on stream.

Any signs of expectations becoming dislodged would be a signal that policy might need to be tighter than otherwise, in order to provide insurance that expectations remain on track. I will revert to this theme later. Over recent years long term inflation expectations have remained anchored close to the target level. This is important in delivering price stability: the fact that people think the MPC will be successful in sticking to the target conditions their behaviour in a number of ways. Higher prices for oil products, and indirectly other goods and services, leaves less disposable income for other things. Whilst the MPC takes comfort from the observation that so far inflation expectations and earnings growth have not risen, it is nonetheless possible that this could lead to demands for higher wages. Such demand, if granted, could be inflationary and even result ultimately in increased unemployment. The likelihood of this happening may be slight and there is no real sign of expectations presently becoming dislodged in the UK. And it is striking that although the effects of oil may have some impact in today’s modest slowdown of consumption, that we have nonetheless managed to weather a significant price increase with so little disruption to the economy. Quite different from the late 1970s. But I think it is still too early to relax in relation to inflation expectations, and I think that the subject of oil will feature as a significant issue for some time to come in the monetary policy arena.

Similarly, although the flooding in June 2013 was the most severe in Germany since the 1950s, its macroeconomic impact was limited. As a result, the ECB, in its short history, has never yet been compelled to take action in response to climate-related shocks. So far their largely temporary effects on output and inflation have allowed us to look through them. This meant that central bankers thought the horizon of climate change was extending well beyond the one of monetary policy. But this may change. Indeed, I would argue that the horizon at which climate change impacts the economy has shortened, warranting a discussion on how it affects the conduct of monetary policy. That is, climate change is likely to affect monetary policy one way or the other – whether it 2/9 BIS central bankers' speeches is left unchecked or humankind rises to the climate change challenge. This is my second corollary. Let me start with the more disturbing scenario in which both the private and the public sector fail to take prompt action to cut CO2 emissions in line with the COP21 commitments. On this trajectory, climate change is likely to affect the conduct of monetary policy in three important ways. The first relates to our ability to correctly identify the shocks hitting the economy. In recent years, for example, we have repeatedly observed an unusual blip in economic activity in the United States in the first quarter.

Only last week, ECB Banking Supervision communicated to banks that climate-related risks have been identified as being among the key risk drivers affecting the euro area banking system. And, of course, the Central Banks and Supervisors Network for Greening the Financial System published its first progress report just a few weeks ago, reasserting that climate-related risks fall squarely within the supervisory and financial stability mandates of central banks and supervisors. An area that has received less attention though, both in policy and in academia, is the impact of climate change on the conduct of monetary policy. Today I would like to contribute to this debate and offer a way of thinking about how climate change fits into our current monetary policy framework – the way we react to shocks and the way we think policy propagates through the economy – and how it may affect our monetary policy implementation. I will argue that climate change can be expected to affect monetary policy one way or the other. That is, if left unchecked, it may further complicate the correct identification of shocks relevant for the medium-term inflation outlook, it may increase the likelihood of extreme events and hence erode central banks’ conventional policy space more often, and it may raise the number of occasions on which central banks face a trade-off forcing them to prioritise stable prices over output.

Banks have demonstrated in recent stress tests their resilience to a sharp adjustment in credit market, and markets, rather than banks, have been the driving force behind recent growth. 10 But recent IMF work shows how rapid growth of corporate debt overall, and any skewing of corporate debt towards riskier firms can – by creating a debt overhang – add to medium term risks to economic growth. 11 The jury is out on whether what we have seen in the UK is material in this respect. But to keep the wider economy protected from financial disruption, it’s important that banks are resilient to these risks if they do become material. And that’s one reason why (as the Financial Policy Committee said in the Record of its March meeting) the FPC intends to “re-consider the adequacy [of capital levels] in June, with a focus on the evolution of domestic risk appetite.” Let’s move on to the other hidden risks: the underwater bergs that can make markets less resilient There were certainly plenty of these lurking under the surface of the system of 2008, making it fragile and amplifying market adjustments. They help to explain how $ of losses on subprime mortgages turned into well over $ of write-downs in the global banking system. The post-crisis reform programme has dealt with them. But our duty is not just to prevent the last crisis, it is to keep up with new risks as the financial system evolves and, where needed, take action to address them.

Incidents of the Libor being manipulated, whether already admitted or suspected, are problematic for the reputation of the banks involved, and for the financial sector as a whole. This discussion 2 BIS central bankers’ speeches on the Libor is also significant for us, because we use the three-month Libor in the implementation of monetary policy. No Swiss franc Libor distortions relevant to monetary policy have thus far been ascertained. Furthermore, an SNB survey conducted among banks this year confirmed that the Libor remains an important variable for credit transactions, namely for mortgages. Of the banks surveyed, 80% indicated that they use the Libor as a benchmark for pricing loans. It also continues to play a key role in the pricing of financial products and derivatives. Neither the sharp decline in unsecured loans on the interbank market nor the incidents of manipulation have so far changed this. In July 2012, the Financial Services Authority (FSA) in the UK was commissioned to undertake a review on reforming the Libor. At the end of September, the working group convened for this purpose presented its findings in the Wheatley Review, which included a series of proposed measures. These aim to prevent further attempts at manipulation, and to restore confidence in the Libor. The report recommends, inter alia, that rate-setting processes and their oversight be improved, and that certain maturities and currencies be withdrawn. Under the proposals, the three-month Swiss franc Libor will continue to be determined.

This so called “productivity puzzle” – why the UK’s productivity had fallen so far and had not recovered – was a major part of the uncertainty the Committee faced about how fast the UK could grow without generating inflation pressure. If some or all of that lost productivity growth could be recovered, the economy could grow faster and for longer without putting the inflation target in jeopardy. But looking forward the Committee took a cautious view and based its view of the future on the expectation that productivity growth would recover only slowly and that none of the “lost” productivity would be recovered. Third, the MPC was operating under the “forward guidance” it had agreed in August last year and to which I had subscribed on joining the Committee. The underlying concern behind forward guidance was that the market might react too quickly and too simplistically to strong GDP growth numbers and forget the amount of spare capacity still in the economy. If the market predicated the Bank’s reaction to strong growth on a pre-crisis basis and, incorrectly, began to price in a tightening of policy the recovery could be choked off. To head off that risk the Committee had, earlier in the year, made clear its intention, through “forward guidance” not to consider tightening policy at least until there was a substantial reduction in spare capacity as evidenced by a fall in the unemployment rate to below 7%. So, over the subsequent year what have we learned? Have the puzzles and uncertainties resolved themselves?

There is nothing to suggest that the rate of and pressure from these changes will ease off in the years ahead. On the contrary, international integration seems to be becoming more intense. The establishment of EMU means that this trend will accelerate. EMU affects the financial system The introduction of the single currency will affect the financial system in various ways. The most obvious change is the end to exchange transactions between the national currencies in the euro area. This also means an end to forwards and swaps in these currencies. By itself, this will leave its mark on the earnings of European banks. The coming of the euro will also affect financial activities in Europe more profoundly and may necessitate a number of changes. The euro area will constitute a larger and more uniform market with a population of about two hundred million. This market, moreover, is likely to attract investors from other European countries and other parts of the world. Via growing competition, a larger market normally leads to lower costs and increased liquidity. With more investors and the elimination of exchange risks, it will cost less to diversify savings by placing them in more countries. In other words, savers in one country will transfer some of their assets to other countries. This process has, in fact, already begun. Briefly, then, all at once there will be a much larger and much more liquid European capital market that in time may resemble the US market in size and nature.

But, if the athlete cannot breathe for some reason, he will soon be dead notwithstanding his fitness. Your liquidity, or your cash inflows and cash outflows is also like breathing in and out. These cash flows have to be monitored very carefully. Liquidity management has to be practised diligently. The board members of finance companies must also learn and appreciate the principle of liquidity management. Don't think that it can only be left to the executives of the company. In the final analysis, the executives may not even be responsible in a legal sense. The legal responsibility will rest with you! BIS Review 55/2008 3 I am sure the other speakers will expand on all these aspects that I touched upon. So, I will now conclude with a few overall thoughts. My dear friends, take your responsibilities as Directors very seriously. Keep abreast of what is happening. Keep abreast of the markets. Keep abreast of the risks that are taking place, both globally and locally. Watch the world and environment carefully. Be alive to new techniques. Take the interest to do all that, because if you do, then we can all have a healthy market. That is what we at the Central Bank, are hoping you would discharge your responsibilities diligently. The last thing we would like to do is to call you up and to say that your business is not run properly. We don’t want to do that.

Do you think your depositors are going to have the same confidence in you, even if it is somebody else that has failed? Do you think they are going to say, “it’s okay. Only one finance company has failed. The company that we have deposited our money in is okay. Therefore, we can go on without any problem”. Do you remember the finance company crisis in the late 1980s and early 1990s? When one finance company failed, what happened? Why is it that Northern Rock had to be supported so strongly by the Bank of England, even though it is not a clearing bank? Isn’t it simply because the Bank of England realized that if one major bank fails, the domino effect, or the contagion effect will take place? So, my dear friends, it must be now clear to you, that as directors, you are not only responsible to your shareholders; you are not only responsible to your own depositors; you are also indirectly responsible to all depositors. Don't forget that if one fails, the resulting effect on the industry and the markets is going to be very very serious. Nobody is going to be spared. That's why we want you all to understand your responsibilities. That's why we take the necessary steps to regulate the industry so diligently. We have a responsibility, to preserve the financial system stability of this country. We take that responsibility seriously.

The rationalisation of current regulations will also take into account international developments which will help to reduce the compliance costs for internationally active insurers operating in Malaysia. The transition to the new structure has, so far, been smooth. As expected, the industry is still familiarising itself with new personalities and the new functional responsibilities of the various Departments. For this purpose we have designated the Insurance Supervision Department as the main contact point for insurers in their communications with Bank Negara. Internally, we will ensure that the issues raised are channeled to, and speedily resolved by, the right Departments. Under a more principle-based approach to regulation, Bank Negara will continue to introduce more flexible prudential standards for insurance companies. This will reflect an increased emphasis on the strength of an insurer’s corporate governance and risk management capabilities. It is also in line with the Bank’s implementation of the risk-based approach to supervision. Insurers that demonstrate sound risk management and strong governance can expect to enjoy greater capital efficiency and a lighter supervisory touch. In this connection, the Bank is putting in the final touches to risk-based capital framework which will issued before the end of March for implementation on a parallel run basis for a period of two years. Ladies and gentlemen, As life insurers gear up to take advantage of expanding opportunities in the changing environment, it is essential that commensurate efforts be directed at raising standards in the fair treatment of consumers.

In the long run, the industry as a whole has a clear interest in informed, responsible and 2 BIS Review 24/2007 capable consumers. As past experience, whether in Malaysia or abroad, has invariably shown, the irresponsible and unfair treatment of consumers is damaging to the consumer, damaging to the firm, and damaging to the reputation of the industry. The Bank is encouraged by the high level of commitment shown by some insurers towards significantly improving their market conduct practices. Nevertheless, much more can be achieved across the industry to address overly aggressive sales practices that result in unsuitable products being sold to consumers. Bank Negara is investing significantly in raising the level of financial capability among consumers through initiatives under the Consumer Education Programme. Additional focus has been given to this task with the setting up of the Consumer and Market Conduct Department. But this is an extensive task, for which a significant improvement in the level of financial literacy among across a widereaching spectrum of consumers may only be seen in the next generation of consumers. It is, therefore, important now that insurers take their responsibility for the fair treatment of consumers seriously. In particular, we would like to see a far greater interest by the Board and senior management in improving selling practices, as well as the quality of disclosures and advice provided to consumers.

It takes very significant decisions, which made it an extremely attractive proposition. How do you explain the arrival of people like you or Christine Lagarde, who have a different profile to the one that ECB Executive Board members have traditionally had? I don’t think anything was predetermined or premeditated. Members of the Governing Council have different profiles and each of them contributes according to their experience. I contribute my knowledge of the European economy and the financial system, and my experience taking decisions when the Spanish economy was at its most delicate moment. What role does politics play in the ECB? The 25 members of the Governing Council don’t always agree, although many of the decisions we take are unanimous. There are those who think that the situation requires further measures, and others who think we have already gone too far. We look for a consensus. The decisions are very democratic – one Governor, one vote – but actually taking a vote is an exception, not the rule. In recent months there has been very strong, unprecedented public criticism. I’m not at all concerned by the fact that there are differing views, that’s healthy and it’s normal because there are 25 of us. But what has been happening in recent months has not been very helpful. It hasn’t undermined the effectiveness of the September package of measures, because it went ahead as planned, but it’s much better to be united. We are a collegial institution and once we have reached an agreement, everyone should defend it.

Here in Asia, as in other markets, more work needs to be done to improve the quality of disclosures regarding traditional banking activities. Time and again experience has shown that in periods of stress, insufficient or inaccurate information about asset quality can lead to rumors and overreactions in the marketplace, creating the potential for problems to spread to institutions that may otherwise be in good health. Of course, progress on the disclosure front will be limited until accounting standards are enhanced to ensure proper valuation and to reflect innovations over the past decade, both in terms of new products and modern risk management techniques. Accounting systems serve a variety of purposes, but none more important than helping creditors make rigorous decisions as to which enterprises meet market tests of efficiency, competitiveness, and profitability that are necessary for those enterprises to fulfill their obligations. Sound accounting systems also enable investors to determine the value of enterprises, and, in so doing, assist in attracting capital, both foreign and domestic. With these important purposes in mind, ongoing efforts to enhance accounting standards worldwide should continue and even intensify. There is also a need for greater harmonization of accounting standards across countries. We simply must get to a point where supervisors and market participants alike can analyze and compare all internationally active financial institutions on a consistent basis. And it will not be possible to have uniform capital standards until we have achieved some consistency in accounting standards across countries.

Moreover, the banking sector has significant exposure to the NBLs, through commercial loans to these institutions. In particular, loans to this segment have increased among medium-sized banks in recent years. Thus, the exposure—to NBL debt—of the large and medium-sized banks, as of February 2019, represented 12.7 and 27.2% of their regulatory capital, respectively. The profitability of the NBLs, measured through ROA, has been relatively stable, standing at 4.6% at year-end 2018 for retailers; 3.8% for S&Ls; and 2.6% for factoring, leasing, and car dealership (FL&A) together. In the case of the CCAFs, ROA has increased in the last two years. The leverage ratio, in turn, is highest for the FL&A group, and it increased for the retailers in 2018. Page 6 of 12 Central Bank of Chile September 2019 High-level Policy Seminar on Integration or Fragmentation?

(2015), shows that EMEs countries exposed to the original sin (unable to borrow internationally in local currency) appear as tightening CBMs on banks’ liabilities during the 2013-2015 period. Our understanding is that the databases used in cross-country analysis still contain a high degree of self-judgement by reporting countries that sometimes affect the quality and consistency of the information provided. At least this is our experience regarding answering the IMF’s survey on exchange rate Page 3 of 12 Central Bank of Chile September 2019 arrangements and exchange restrictions (AREAER), which is used in the majority of cross-country comparison of CBM and capital controls usage. High-level Policy Seminar on Integration or Fragmentation? International Capital Flows in the Post-crisis World, September 2019 CENTRAL BANK OF CHILE Currency-based measures With the exception of China, only countries suffering from original sin used and tightened CBMs on banks’ FX liabilities Tightening No tightening No Original Sin Original Sin Source: De Crescenzio, Golini, and Ott (2015), “Currency-based Measures Targeting Banks - Balancing National Regulation of Risk and Financial Openness,” OECD Working Papers on International Investment 2015/03. Recent evidence on the evolution of capital controls shows that Chile has taken more liberalization actions than tightening actions on both inflows and outflows (Pasricha et al., 2018). The following Figure shows the cumulated weighted net inflow easing actions and weighted net outflow easing measures in Chile and in a group of EMEs (excluding Chile).

Actually, I would like to point out that the Albanian banking system left the crisis in healthy condition and that it guarantees growing stability. Our banking system, during this period, has carried out a considerable amount of work, which has served to consolidate each bank’s position prior, during and after the crisis. Hence, the banks are now able to use again their full lending potential. For the truth’s sake, it must be underlined that the latest figures speak of growth in the order of 10 per cent in annual terms, a figure which should not go unnoticed or be considered as inadequate. I would suggest the same philosophy to the business community. For objective reasons, the concept of free money belongs to the past. By that I mean that a bank loan should be earned, which means unconditional and honest cooperation within the legal and regulatory framework approved by the country’s authorities. Of course, banks are established to lend money, but first and foremost we need to bear in mind that the public deposits’ stability is more important than an individual business loan or bank portfolio. Moreover, the business community needs to recalibrate its position in relation to recent developments both in the national and global economy context. It must aim a higher productivity, primarily through identifying comparative advantages in the framework of global changes. In that regard, it is necessary to adopt new business administration philosophies on capacity building and investment in human resources, governance, internal control, financial and legal expertise, and risk management.

The global financial crisis that erupted in late 2008 had its influence on our economy by stiffening this cooperation. On the one hand, the system found itself in a difficult liquidity situation, while on the other hand businesses found it difficult to access markets. With some additional subjective reasons, the outcome of this was a deterioration of the system’s loan portfolio and companies’ liquidating capacity. Consequently, 2009–2010 marked a slowdown of lending growth to the economy, reflecting the increased prudence, fully justified by the system, and BIS central bankers’ speeches 1 business inability to earn a meritable new loan. The period coincided with a review of balances and portfolio restructuring, when possible with provisions, directly affecting the system’s financial performance. The Bank of Albania has played a major role as a guardian of the country’s macroeconomic and financial stability. Macroprudence has been the prevalent word in our communication with the market, authorities and the public. We have translated macroprudence as a need for more capital and liquidity, and increased banking system payment capacity. Consequently, the Albanian banking sector did not experience contracting. The Bank of Albania has provided and continues to provide the necessary liquidity to the banking system, to stimulate not only to the market but also to the entire economy. Prudent policies and timely legal regulations guaranteed effective banking supervision and enabled satisfactory businesses’ access to bank loans.

Let me comment on some of these four aspects and touch on how we intend to fulfil our mandate to support the ESRB. Conceptual issues of systemic risk Systemic risk analysis is nothing new to the central banking community, including the ECB. One reflection of this fact is the series of triennial central bank conferences held under the G10 Committee on the Global Financial System between the mid-1990s and early 2000s. Even the European Monetary Institute, which was the forerunner of the ECB, contributed to systemic risk work in this context, alongside the US Federal Reserve, the Bank of England, the Bank of Japan and many other central banks. 4 For instance, from the outset, the ECB drew up a research agenda on financial stability and systemic risk. 5 In addition, in 2004 we started to publish a Financial Stability Report (FSR) twice a year. The main objective of this Report is to help identify, at an early stage, potential vulnerabilities and to raise awareness among market participants with a view to promoting preventive and remedial policies. Each issue also contains several special features offering a wealth of further insight into financial stability and systemic risk. This background suggests that the ECB is a logical choice as a provider of analytical support to the ESRB, but it should not obscure two major challenges we are facing. First, the phenomenon of systemic risk is extraordinarily complex.

The experiences with the crisis and the decision to establish a macro-prudential stability function in Europe suggest that, even when building on existing structures, significant efforts are called for in order to extend and further improve models and tools. While it would be desirable for the risk assessment exercise to be increasingly quantitative, it should never become mechanistic or fully model-based. Expert judgement and qualitative assessments will always be crucial to understand the messages coming from various analytical tools, also taking into account overall intelligence efforts. Comprehensive information base Irrespective of their level of sophistication, models need to be fed with the appropriate data in order to produce results that, in addition to their analytical interest, can support policy messages. A comprehensive information base is also key in the risk surveillance phase that precedes the actual risk assessment. This is because the establishment of a wide radar screen supporting rigorous monitoring is only possible if the critical information is available. The current crisis has convincingly shown that a significant part of credit intermediation was channelled outside the banking sector and the regulated financial sector. The non-regulated or “shadow” banking system was almost totally off any surveillance radar screen. Not enough was known about special investment vehicles, conduits, securitisation markets and instruments, or about all the financial intermediation that takes place outside the traditional banking system. Moreover, little was known about the direct and indirect exposures between this shadow banking system and the regulated one, which turned out to be substantial.

Consideration is thus given to the sustained implications of monetary stability measures on the real economy. The law therefore requires the Bank to take a balanced view to avoid the adoption of rigid frameworks that may result in strong biases that would lead to a fundamental and sustained damage to the economy. This balance is also extended to the explicit role of the Bank in developing an inclusive financial system in its responsibility to develop a sound and progressive financial system. These considerations are particularly important for emerging market economies so as to ensure balanced economic progress and development. The new Central Bank of Malaysia Act 2009 also institutionalises the autonomy for the formulation of monetary policy, thus providing for the integrity and credibility of the decisions made. It also provides for greater flexibility in monetary policy implementation, allowing for a diversified range of instruments that can now be deployed for the implementation of monetary policy. As financial markets trend towards greater sophistication and demonstrate periods of extreme volatility, central banks must have commensurate capabilities to conduct monetary policy operations in order to maintain price stability. Equally important is the mandate to provide oversight over the money and foreign exchange market to ensure the orderly development and functioning of the markets. These necessary powers are however, combined with a system of checks and balances to enable the Bank to act decisively, but yet having in place safeguards so as to enhance transparency and accountability.

Zeti Akhtar Aziz: Current challenges confronting central banks Opening and keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the SEACEN-BNM Banking and Financial Law School 2009 "Current Challenges in Central Banking – Legal Perspective", Lanai Kijang, 24 September 2009. * * * It is my great pleasure to speak at the 5th Banking and Financial Law School 2009, jointly organized by the South East Asian Central Banks (SEACEN) Research and Training Centre, the Institute of Bankers Malaysia and Bank Negara Malaysia. The theme for this year's Banking and Financial Law School on "the legal perspective of the current challenges in Central Banking" has particular relevance in the present environment. Indeed, global attention is now focussed on an overhaul of the financial architecture in the efforts to address the fundamental weaknesses that have surfaced in this recent global financial crisis. The current policy debates cover a wide ranging set of issues that include far-reaching regulatory reforms to strengthen the foundations for financial stability, institutional arrangements to achieve more efficient functioning of financial markets, effective coordination of financial stability measures and greater clarity of central bank mandates in promoting monetary and financial stability. The theme of this conference also has special relevance to us at Bank Negara Malaysia, as our new Central Bank of Malaysia Act 2009 will come into force later this year.

Mr Lee comments on what Singapore and other Asian countries are doing in post-crisis Asia Speech by Mr Lee Hsien Loong, Chairman of the Board of Directors of The Monetary Authority of Singapore and Deputy Prime Minister, at the Credit Suisse First Boston Investment seminar, held in Singapore on 26 October 1999. * * * Pre-crisis Asia: a mirage? The Asian crisis swept through the regional economies like a huge tidal wave. The euphoria from more than a decade of boom in East Asian economies was abruptly punctured. Overnight, headlines switched from the “Asian century” to the “Asian disease”. Some analysts questioned if the earlier prosperity had been real, or just a bubble. Others attributed the crisis to fatal flaws in the Asian model, which was masked by a classic asset bubble. Asia would not recover, and investors would not return, until these deep flaws were corrected. This pessimism was exaggerated. The transformation of Asia in the last few decades was no mirage. It had sound fundamental underpinnings. Countries maintained high savings and investment rates. Education levels were rising. Economic policies generally became more liberal, outward oriented, and welcoming to foreign investments. Asia had all the ingredients for the takeoff that we witnessed. True, the crisis was a major setback but, compared to a decade ago, the regional economies are still way ahead in terms of development and already, most of them are beginning to bounce back. Undoubtedly, the economies did have serious problems that contributed to the crisis.

It would not opt out of the region. Other investors may not have such a long history in Asia, but for you too, taking a long and informed view will be worth your while. 5 BIS Review 117/1999

We run the risk of ending up with international banking groups in which the advanced approaches tend to be used almost exclusively by the parent company. I think that this outcome is neither optimal nor desirable, and falls short of the goals of improving the stability and efficiency of the international financial system, to which Basel II can make a much more effective contribution if it is applied appropriately. Problems also arise over how to consolidate the capital of these subsidiaries. Take, for example, a bank applying an advanced approach at group level with subsidiaries outside the home country that use a standard approach. This bank will have to perform a double calculation: first, using the method applicable under the approaches adopted by its subsidiaries; then, it must recalculate those same subsidiaries’ requirements using the approach for the group as a whole, ie that of the parent company in the home country, for consolidation purposes in order to calculate the overall capital requirement. This double calculation can impose a heavy burden - although a necessary one in some instances and will in any case require close collaboration between home and host supervisors to ensure that the entity’s overall system adequately takes account of the characteristics and sensitivity of the local market. The AIG is attempting to pinpoint which criteria would be acceptable at the consolidated level, assuming the - fairly frequent - scenario of a bank with subsidiaries governed by local requirements that differ from those of Basel II.

Neither is there an urgent need to update the assessments; in this respect, one should stress the validity of the self-assessments carried out by the countries themselves, as a complement to the assessments performed by the Fund and the World Bank during their FSAP missions. The second general direction followed by the Core Principles revision was to keep their character of a single universal standard for assessing the quality of banking supervision, independently of the complexity of each country’s financial system. To maintain this universality, on the one hand, it was decided to place greater emphasis, throughout the text, on the idea that the Principles should be applied proportionally, always taking into account the material impact of the risks or the complexity of activities, which allowed application to be adapted to less sophisticated financial systems. On the other hand, the new Principles, by taking into account the most advanced practices, have gained in validity as regards the assessment of complex financial systems which were previously outside the scope of many of the established criteria. I would like to express my view that this universal character is one of the most positive aspects of the Principles. To achieve this, the Committee worked closely with a very large number of supervisors. Thus the initial drafts were prepared using groups made up of equal numbers of representatives from Committee members and non-members, involving both the IMF and the World Bank as interested parties.

4 BIS Review 29/2009 balance between stabilising inflation and stabilising the real economy. An ex ante evaluation should then aim to assess whether the central bank has succeeded in doing this. Before making such an assessment of the central bank's forecasts it is natural to first examine the general quality of the forecasts. Any assessment of the quality of the forecasts obviously entails an ex post analysis with the help of historical forecast errors. If the assessment is that the forecasts are of a reasonable quality it then becomes a question of assessing the monetary policy deliberations held on the basis of the forecasts the central bank makes. This primarily entails an ex ante analysis. Were the forecasts good enough? The first question we should ask is thus whether the central bank's forecasts are normally good enough. It would of course be going too far to demand that the central bank's forecasts should be perfect. As I have said, the economy is constantly subject to unexpected shocks, which means that the forecasts are always likely to be incorrect to some extent. Analysing the accuracy of a forecast in an individual year thus provides limited information. A significant forecasting error may indicate that the forecast was poor, but it may also be due to the fact that a shock occurred that could not have been predicted. 3 Do the forecasts systematically over- or underestimate the actual outcomes?

This means that it is not quite as easy to determine the position of the modified Taylor curve. It is still possible, however, to enter the position of various forecast alternatives on the graph and at least assess whether the forecast is extreme in any respect with regard to the deviation of inflation from the target and the deviation of resource utilisation from the normal level. As yet, it is in practice mainly a question of whether the choice of interest rate path was extreme in either direction in the sense that the central bank gave considerable or very little relative weight to the stability of the real economy. Another interesting aspect to investigate is whether the weight attached to the stability of the real economy actually has been constant over time. If it has not been constant then the central bank's loss function has not been consistent over time, or it is more complicated than the quadratic loss function that I have discussed here and that is regarded as normal and reasonable in the literature on monetary policy. Figures 4 and 6 can be studied more closely in the light of this discussion. In Figure 4 we can see that the main scenario for February 2008 leads to resource utilisation being stabilised rather well, but that the CPI forecast is a little high in relation to the target of 2 per cent.

Second, periods of higher productivity growth may lay the basis for high corporate earnings, heightened optimism and reduced risk awareness. At the same time, with strong productivity growth, inflation remains low. Banks that record low losses and solid results can increase lending without eroding their capital. Debt-financed investments may then lead to a faster rise in property prices. Third, strong international competition may contribute to curbing inflation during a period of strong economic expansion. Given that a conflict between the two goals may arise; how are financial stability considerations incorporated into monetary policy decisions? There seems to be widespread agreement among central banks, that extreme events which could threaten financial stability should be met by resolute use of monetary policy. For example, leading central banks made an effort to ensure continued liquidity in the markets in the aftermath of the terrorist attack on the World Trade Centre on September 11, 2001. As a consequence, the risks confronting the financial system were limited. However, risks to financial stability due to evolving financial imbalances are likely to develop over a long period of time. From this perspective, the question of whether financial stability considerations should be explicitly included in monetary policy is heavily debated, both in academia and within central banks. The answers diverge and international consensus has not yet been reached. One view is that an explicit and proactive monetary policy response to financial imbalances is neither desirable nor feasible. A number of concerns have been raised to explain this view.

In addition, French national regulators are recognised for their credible action, and for being at the cutting edge of technological developments, as Geoffroy Goffinet from the ACPR will develop in more detail. Let me just briefly highlight one last course of action at the Banque de France. We have been a pioneer in central bank digital currency (CBDC): in addition to taking an active part in the work on a potential euro retail CBDC, as early as 2020 we launched a series of twelve experiments on a wholesale CBDC, both for payments and securities settlement. The first nine experiments have been very valuable, and the three experiments underway focus on cross-border payments and tokenised asset settlement. 4 We are keen to pursue our long-standing partnership with commercial banks, to reconcile innovation and security. To conclude, this stay in New York is also the opportunity for me to point out that the Statue of Liberty, which so forcefully embodies our common values, is the fruit of a tight cooperation between France and America. Let this fruitful cooperation carry on throughout the 21st century; we will be happy to welcome you in Paris. I thank you for your attention, and will now leave the floor to Olivier Vigna, deputy CEO of Paris Europlace. 1 ECB, Macroeconomic Projections, 16 March 2023 2 Eurostat flash estimate, 31 March 2023 3 Bloomberg, 22 March 2023 4 An updated report will be published by the Banque de France within next months.

In business abroad, ordinary earnings improved notably, driven by the strength of business in Latin America. Thus, the Spanish banks with the most international activity obtained ordinary profit in excess of pre-pandemic levels. 10 Between December 2021 and April 2023, the pass-through was 42% in the case of lending for house purchase and to NFCs, and 27% in other lending to households. 11 The year-on-year improvement in this ratio was driven by loans to firms (-1.8 pp, to 9.7%), while the ratio increased in loans to households (by 0.9 pp, to 5.7%). 12 The cumulative decline from the December 2012 peak is 79.6%. 13 ROA excluding the windfall tax on banking sector profits and other extraordinaries rose to 0.83% in Q1. 14 By comparison, net interest income rose by 17.2% between March 2014 and March 2019 and fell by 1.8% between March 2019 and March 2022. 5 Dividend payments amounted to more than € billion in 2022, with a payout ratio of 40%, similar to the pre-pandemic level. Also noteworthy were the rise in earnings per share and the sharp increase in share buy-backs made by some banks, the aim being to subsequently cancel the repurchased shares and reduce share capital, thus providing additional remuneration for shareholders. Solvency After falling by 25 bp in 2022, in 2023 Q1 the CET1 ratio was virtually unchanged on the same period of 2022.

Agreements signed in 2023 – affecting around 1.5 million workers – provide for an average wage rise of 4.3%. 2 See the results of the Banco de España Business Activity Survey. 3 Indeed, while Eurosystem financing amounted to 10% of Spanish banks’ consolidated liabilities in 2020-2021 (3% in 2007), that figure fell by nearly 5 pp in 2022. 3 an increase in deposits.4 However, these fell in 2023 Q1 by nearly 2.5%, especially among firms.5 In 2022, the average interest expense on bank liabilities increased by nearly 60 bp compared with the 2020-2021 average, to stand at 1.1%, still slightly below pre-pandemic levels. This change highlights the fact that the rise in the 12-month EURIBOR has only partially passed through to deposit costs, far less than in previous monetary tightening cycles.6 Banks’ comfortable liquidity position helps to explain this. Similarly, the fall in the cost of equity – by 2 pp between December 2021 and May 2023, when it reached 6.6% – has cushioned the rise in the cost of borrowing from banks.7 The cost of equity rose during February and March 2023, mainly owing to the higher equity market risk premium, although the increases have been moderate. The liquidity coverage ratio stood at 173% at March 2023, much higher than the required minimum threshold and likewise above pre-pandemic levels8. Meanwhile, the net stable funding ratio stood at 130% at December 2022, again above the minimum requirement of 100%.

Against this background, this calls into question whether the surveillance mechanisms available at the moment and the role played by emerging markets in international cooperation are adequate in ensuring international financial stability, the essence of the mission of IFIs. It is therefore in times of crisis that the value of the international cooperation be measured and the voice and representation of emerging markets be heard IFIs. The unprecedented events of the past months present a historic opportunity for the international bodies to rise to the challenge. The time has come for them to be more proactive and become truly global institutions. Apart from strengthening the roles of IFIs, I believe that regional cooperation can play an important role in supplementing both national and global responses. I’d like to raise two observations on this issue. First, the global financial crisis highlights the need to put in place an effective regional surveillance mechanism that can detect weakness early on. International financial institutions will remain useful for global surveillance and financing balance of payments need when necessary. However, waiting for the global community 2 BIS Review 163/2008 through international financial institutions for regional surveillance may be too little too late for timely policy measures that can safeguard the region from contagion from other parts of the world. Indeed, it is very important for policymakers with common challenges to put greater efforts in having a clear and in depth understanding of one another’s policy and practices.

Tarisa Watanagase: Combating the global financial crisis – role of international cooperation Remarks by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the HKMA Distinguished Lecture, Hong Kong, 16 December 2008. * * * Governor Draghi, Governor Yam, Distinguished Guests, Ladies and Gentlemen, I am honored and delighted to be here among this gathering of distinguished policymakers, financial experts and academia, at this year’s HKMA Distinguished Lecture and would like to thank Governor Yam for the kind invitation. This lecture truly provides an excellent opportunity for us to share our views on the topical issues that are at the center of international financial community. Ten years ago, we had the Asian financial crisis. In Thailand, there were plenty of discussions about the causes and remedies of the crisis, some of which still continued until these days. To me, the Thai crisis had 4 main causes, namely, we had weaknesses in the macroeconomic management leading up to bubbles, lax supervision, excessive risk taking of both the financial sector and the private sector in general, and the inadequate legal and information infrastructure. The crisis we are facing now has many surprises as pointed out by Governor Draghi, but I also see plenty of similarities in the underlying root causes. Because of the crisis’s global scale and its severity, this time around we have seen unprecedented efforts taking at both the national, regional and international levels. Today, one decade after the Asian financial crisis, emerging markets look less vulnerable to financial disturbances.

Asset purchases promote this mandate by putting downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. The current purchases reduce interest rates and ease financial conditions through the same transmission channels as previous purchase programs. As has been widely discussed in the academic literature, one of the most important channels is the portfolio balance effect.4 This theory relies on the premise that financial assets are imperfect substitutes in investors’ portfolios, and, as a result, a rise in the demand for a particular financial asset relative to its supply – reflecting the Federal Reserve’s asset purchases, for example – will increase its price and reduce its yield. After selling that asset to the Federal Reserve, investors may rebalance their portfolios by investing in other assets, raising the prices of those assets, lowering their yields, and easing overall financial conditions. The Federal Reserve’s asset purchases are designed to remove risk from the portfolios of private investors. For example, Treasury and agency MBS purchases remove duration risk, thereby lowering longer-term interest rates and reducing private-sector borrowing costs. Furthermore, agency MBS purchases also remove prepayment risk from the market, since homeowners have the option to prepay their mortgages at any time. Investors generally demand an extra return to bear this risk, which is incorporated into agency MBS yields and passed along to borrowers in the form of higher primary mortgage rates.

The Desk’s January Survey of Primary Dealers indicates that the median respondent expects the FOMC to purchase about $ trillion in securities over the course of 2013 and early 2014, roughly equally split between Treasuries and agency MBS. As a group interested in forecasting, you will appreciate that while individual survey respondents may provide a modal expectation for asset purchases – that is, the total amount that they think the FOMC is most likely to purchase – they also place probability on a variety of other outcomes. If a respondent is more uncertain about the economic outlook, the way the FOMC will respond to the outlook, or the Committee’s assessment of the efficacy and costs of purchases, he or she will place much higher odds on a wider range of outcomes for the size of the Federal Reserve’s portfolio. The Survey of Primary Dealers asks respondents about their individual forecast distribution about the size of the Federal Reserve’s portfolio in the future.5 These individual probability distributions can then be aggregated by simple averaging to form an estimate of the probability attached to different sizes of the Federal Reserve’s portfolio. The evolution of this probability distribution can be seen in Figure 1. As can be seen, the probability attached to a very small amount of purchases or a very large amount of purchases has come down over the last few months.

We have imperfect knowledge about the state of the economy, nor are we absolutely certain of how economic relationships function. Alan Greenspan, the former Chairman of the US Federal Reserve, described this in the following words: “Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape” 7 Sometimes, the nature of the uncertainty allows one to draw inferences regarding the probabilities of different outcomes. It is possible, in other words, to judge the risks one is facing, at least to a certain degree. In that case, decisions can be made on the basis of a calculated risk, which is an approach underlying theories of equity investment, 8 for example. But the financial crisis reminded us that keeping the overall risk picture in view may be difficult. When Queen Elizabeth visited the London School of Economics in autumn 2008 she asked why no one had foreseen the crisis. The British Academy Forum replied to the Queen in a letter six months later. Included in the letter was the following: 4 The euro area operates under rules intended in principle to facilitate long-term policy choices. The Maastricht criteria require participating states to keep fiscal deficits and public debt within defined limits. Recent history has shown that this framework must be reinforced through sanctions. Decision-makers need an incentive to comply with the rules in practice.

The author-narrator has embarked on an expedition to a South Pacific island with six companions. On the island they experiment with different forms of social organisation. After the group tries despotism, anarchy, democracy, etc., Loe concludes that enlightened despotism has much to recommend it: “Of course it very much depends on who the ruler is and how enlightened he or she is, but at its best this is probably one of the more sensible forms of government.” 16 Martin, one of the other members of the expedition, also thinks that this system might work well. He stresses, however, that the form of despotism must be a truly enlightened one: “Not just moderately enlightened, but ultra-enlightened. The ruler needs to be highly educated, plus be well travelled and have lots and lots of varied interests (…) Just find an exceedingly likeable individual, someone you trust, someone who is warm-hearted and good-natured, and ask him or her to manage things as best they can.” 17 Most people would probably argue that despite certain benefits, enlightened despotism would not be very robust. As you may have noted, a number of assumptions underlie Martin’s conclusion, and these assumptions are not always satisfied. Delegating decisionmaking responsibility to a group may help to guard against situations where the individual’s weaknesses and vested interests come to dominate. It can also provide some insurance attending the IMF meeting). The business card revealed the date and magnitude of the British devaluation. It was a busy night.

Or, put differently, curbing the credit cycle appears to be an important ingredient of broadly-based macro-economic stability. In principle, monetary policy could be used to curb the credit cycle. In practice, the differing duration and synchronicity of the credit and business cycles means this is unlikely to work well. Pre-crisis experience illustrates well just that point. At the same time as the wider economy was operating in cruise control, credit markets were in overdrive. Hitting these two birds – one flying high, the other low – with one (monetary policy) stone would have defied even the most astute marksman [King, 2013]. What is needed, in these instances, is a second instrument. In the language of Tinbergen [Tinbergen, 1952], two cycles and two objectives call for two instruments. This is where macro-prudential policy comes in. One of the aims of macro-prudential policy is to act counter-cyclically on the credit cycle, constraining credit booms and cushioning busts BIS central bankers’ speeches 1 [Aikman et al, 2014]. In this role, macro-prudential policy is complementing monetary policy in its role of stabilising the macro-economy. Macro-economic policy then becomes, in effect, two-handed or ambidextrous. Since the crisis, this two-handed approach to policy has been taken up actively by a number of countries internationally [IMF, 2013]. For example, counter-cyclical prudential policy is now baked into new international regulatory rules. The so-called Basel III reforms introduced for the first time a “Counter-cyclical Capital Buffer” (CCB) to be adjusted to counteract the credit cycle [BCBS, 2010].

Intended outcome of Shariah emphasises on minimisation if not prevention of negative impact and maximising positive value creation to wider stakeholders namely people and planet. The dos and don’ts of Shariah aim to enhance people’s wellbeing by preserving five stipulated key outcomes of Shariah (maqasid) namely the wealth, faith, lives, posterity (lineage) and intellect4. In the context of financial intermediation, preserving wealth entails beyond its literal meaning – to include encouragement to generate, accumulate and distribute the wealth in a just and fair manner. ii. Secondly, real economy. Islamic financial intermediation activities must be backed by real economic activities, thus aligning innovation with the needs of productive activities. Requirement to support the real economy thereby avoids element of speculation. iii. Thirdly, partnership. Another distinct aspect of Islamic finance is the application of risksharing in financial transactions. This strengthens the incentives for both financial institutions and business clients or investors to screen and monitor transactions for commercial viability and risks. The growing momentum in global trend towards sustainability agenda does not only sharpen the focus on formulating necessary solutions to key global challenges such as poverty, food security and inequalities. Most importantly, it creates a sense of urgency for financial institutions to embrace long-term value creation mindset. Increasingly, stakeholders are setting higher expectations on financial institutions to manage the threats of climate and environmental-related risks that are real, with irreversible consequences. Failure to respond appropriately and in a timely manner may have adverse implications on the economy and direct financial consequences on financial institutions.

But one of the consequences of economic development can be gentrification, where richer people move in and they make housing less affordable for people who have been living here for a much longer period of time. So, all these type of issues that we talk about when we visit. And oftentimes I get some personal stories and anecdotes that are actually pretty valuable to me in terms of how I think about how the economy is operating and what we need to do as the Federal Reserve in terms of how we 1 / 15 BIS central bankers' speeches set monetary policy. Dr. Olajide Oladipo: Thank you. The economy is coming out of a serious crisis that started in 2008. From your perspective, where do you see the greatest growth in the economy right now? President Dudley: Well, the good news is the economy is actually in a pretty good place right now. Not for everybody, but if you think about the unemployment rate today, it’s 4.7%, which is pretty close to what we think is full employment. You could probably push that unemployment rate even lower, but if you did, you’d probably start to have an inflation problem. So, that would not be something that you could sustain over the longer term. The Federal Reserve has two missions: maximum sustainable employment and price stability. And so we’re trying to find that balance. Right now we’re doing pretty well. We’re pretty close to both our objectives.

On the foreign exchange market, the Swiss franc came under increased upward pressure for a brief period after the Brexit vote. This pressure abated again, not least due to the Swiss National Bank’s willingness to intervene on the market. While the pound sterling continued to lose value over the summer months, other key currencies, including the Swiss franc, moved sideways within a narrow range (cf. chart 3). Heightened uncertainty in the run-up to the US presidential election was once again reflected in growing demand for safe-haven currencies on the foreign exchange market, leading to slightly higher Swiss franc exchange rates. Following the US election, the US dollar appreciated on a broad basis. The strengthening of the currency occurred against the backdrop of the rise in US interest rates mentioned earlier. The dollar gained approximately 3% in trade-weighted terms after the election. The recent developments in the US also had an impact on other currency areas. Currencies in emerging economies in particular came under pressure and, as a group, weakened by around 4% against the US dollar. On a trade-weighted basis, the Swiss franc has changed little from its end-June level. Nevertheless, Swiss franc exchange rates moved in different directions. While appreciating more sharply against the yen than against the euro and pound sterling, the Swiss franc weakened against the US dollar and currencies of commodity-exporting countries. Overall, the Swiss franc is still significantly overvalued. The market environment remains challenging and fraught with global economic and political risks.

Let me mention three: (i) the revision of the reporting framework for large exposures by the EBA (for microprudential supervision), (ii) the FSB’s common template (limited to a small number of globally systemic institutions) to improve data on global banking interlinkages and (iii) a UK exercise to collect interbank data on recovery and resolution plans (with very detailed instrument and maturity breakdowns). While these initiatives address primarily micro-prudential data needs for the time being, their use for macro-purposes could be envisaged, provided that data confidentiality is preserved and that requests are duly justified. For macro-prudential oversight, the importance of reducing gaps in the data on credit and funding exposures beyond jurisdictions and the sample of global players, appears particularly relevant. As the crisis has illustrated, the structure of bank liabilities and the way in which assets are funded are of utmost importance for understanding maturity mismatches and interlinkages. Related to funding, data gaps also arise from limited information on the degree of asset encumbrance stemming from secured funding, as well as from inadequate data on the levels and characteristics of innovative sources of funding used by banks. At present, these elements are essential for analysing fragilities in the funding models of banks established in the EU. Uncertainty about the level of banks’ asset encumbrance is also hampering market participants’ capacity to assess banks’ creditworthiness, thereby reducing the availability and increasing the costs of unsecured funding. Risks to financial stability can also stem from novel sources of funding such as exchange traded funds (ETFs) or liquidity swaps.

In fact, the demand for micro-prudential datasets for macro-prudential analysis also results from the fact that the form in which existing aggregated data can be disseminated is often of poor quality, is not sufficiently granular and is not suited for analytical purposes. Ahead of reaping the benefits from the various initiatives that are under way at the global, EU and euro area level to limit data gaps, there is a need for close cross institutional cooperation between supervisory authorities and macro-prudential bodies, at the national and supra-national level. This calls for more interaction and data-sharing between the ECB (also when acting on behalf of the ESRB) and the ESAs that have access to supervisory reporting data and can collect ad hoc data more easily upon request. Procedures for the secure transfer of information and appropriate legal provisions need to be in place to safeguard confidentiality. More broadly, it is important that the pace at which efforts are being made to address current information needs – at the macro- and micro-levels – does not slow down. At the same time, improvements in datasets already in use for macro-prudential analysis should continue to be given priority. This needs to be done in an innovative way, reusing existing information where possible, so as to minimise the reporting burden, whilst serving the increased demands of users.

The recent repeal of the Glass-Steagall Act in the US will allow the creation of “financial super-markets” or one-stop shops that offer banking, securities and insurance services, and further push this trend towards consolidation. Developments in banking In this brave new world, one fact remains unchanged: the need for countries to have sound, resilient banking systems, and strong banks. But countries cannot achieve this by closing their markets and excluding foreign competition, except at a very high price. Instead, they must use competition to strengthen and upgrade their institutions, so that they can hold their own in an increasingly open environment. This is why Singapore has embarked on a five-year bank liberalisation programme, granting foreign banks new licences and more access to the domestic market, lifting foreign ownership restrictions on local banks, and upgrading standards of disclosure and corporate governance of local banks. Corporate governance Strengthening corporate governance is key to upgrading standards of integrity, professionalism and service in banks in Asia. Relationships between shareholders, the board of directors, management, and other stakeholders must all be configured in a way that encourages sound and rigorous banking practices and strengthens corporate performance. To be an effective instrument of corporate governance, the board of directors must act independently, and participate actively in shaping the strategies of the bank. The board should deliberate and decide on issues in the best interests of the bank, its depositors and all its shareholders.

We developed a Sandy Information Center with the best information we could find for folks impacted by Sandy – including key deadline dates along with expert legal, finance and insurance guidance. Over 2,000 have benefited from our web resources. While we are not yet back to normal in neighborhoods like Midland Beach, Oakwood Beach, New Dorp Beach and Tottenville, the situation is improving and I expect that this recovery will continue over the coming year. We are going to continue to examine where we can provide assistance in supporting this effort. One effort, for example, is to provide assistance in collecting detailed data on the areas that were impacted by the storm. From talking to some local business people late last November, we know that many residents and businesses had to wait a long time for insurance claims and small business loans, as well as to get their heat and power restored. We also know that eight public schools were closed. Unfortunately, timely statistics pertaining specifically to Staten Island’s economy are scarce, thus making it hard to accurately gauge the impact from Sandy or the strength and breadth of the ensuing recovery. So we truly value input from all of you – people on the front lines of the local economy – to assist us in gauging recent trends and developments in Staten Island’s economy. National economic conditions Turning to the national outlook, the U.S. economy remains on the slow growth track that has persisted since the recession ended in mid-2009.

Inflation and Supply-Chain Challenges One of the foremost concerns surrounding the outlook is inflation, which rose considerably last year. There are two main contributors to the current high inflation: very strong demand, especially for goods, and supply bottlenecks. Both have been prevalent throughout the pandemic. The shutdown of factories—particularly those in Asia—and widespread lockdowns led to disruptions to logistics networks, elevated shipping costs, and prolonged delivery times. A new index created by New York Fed research staff shows that global supply-chain pressures shot up last year, reaching historically high levels.1 These challenges are not just top of mind for companies selling their goods or consumers waiting for their purchases to be delivered. Elevated prices have real life consequences for so many, particularly for people who are struggling to cover the rising costs of food, housing, and transportation. The circumstances we are facing today are unlike anything we’ve experienced in the past. 2/3 BIS central bankers' speeches Typical historical episodes cannot be used as reference points for current conditions. As an example, the very large increases in prices that we see today are primarily for durable goods. This is a striking turnaround from the past 25 years when those prices had been trending lower. In contrast, even with the recent increases, prices on services and non-durable goods are now fairly close to their longer-run trends. And, even though the Omicron wave is posing new obstacles, some supply issues are starting to work themselves out as the economy adjusts to the changing circumstances.

John C Williams: Reading the recovery Remarks (via videoconference) by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Council on Foreign Relations, 14 January 2022. * * * As prepared for delivery Good morning, everyone, and Happy New Year. Thank you, Charles, for that introduction. And thanks to Richard Haass for the opportunity to speak with the members of the Council on Foreign Relations once again. For the past two years, I’ve begun my remarks by saying how much I wish we could meet together in person. This time, I really was hoping for a chance to rewrite the script. After seeing so much progress on vaccinations over the past year and a moderation in COVID-19 infections during the fall, just a short time ago many of us had expected that we’d soon be turning the page. The story of the pandemic is a complicated one. It is writing itself as we live it, and the storyline has been far from predictable. This is, first and foremost, a health crisis. The unusual and extraordinary nature of the situation means that circumstances are constantly evolving. For the economy, this has meant that what we’ve experienced is unlike any recession or recovery we’ve seen—or read about—in the past. While there have been significant improvements in the overall economy, setbacks persist in some areas, and new challenges have appeared.

On the other hand, the monitoring and operation of the system should be divided between the two arms on the basis of their size, e.g. balance sheet. Another regulatory framework, which developed historically, takes the form of institutional regulation. It reflects institutional segmentation within each country, with insurance companies, securities houses, mortgage lending companies and banks becoming the concern of differing regulatory bodies. Institutional regulation becomes less practicable as the barriers between operating in differing functional and geographical financial markets have been eroded. BIS Review 55/1997 -4- In between, the regulatory system may be organised along mixed functional/institutional lines. As banks, securities houses and insurance companies compete in each other’s turf, there is now a less meaningful difference between institutions and functions. One model, colloquially known as “Twin Peaks”, consists of a Financial Stability Commission, with responsibility for systemic risk, the prudential supervision of all major institutions, and conduct of business regulation of wholesale activities, and a Consumer Protection Commission, which could be in charge of conduct of business regulation in retail markets, as well as detecting market manipulation and insider dealing. It would also carry out prudential supervision of those stock brokers and fund managers who deal with private clients, and of independent intermediaries. This is essentially the model adopted by the Wallis Commission. Approaches to Regulation The latest mantra on financial regulation is the International Monetary Fund’s approach, which calls for “Internal Governance, Official Oversight, and Market Incentives”(Lindgren, 1996). To this, I would add, “Robust Financial Infrastructure”.

Because I am certain all of you have committed to memory everything I said then, I’ll keep my remarks on LIBOR today short and to the point: We have only 459 days until the availability of LIBOR can no longer be assured, and everyone needs to put their nose to the grindstone in their efforts to prepare for the move off LIBOR. In the immortal words of Captain Jean Luc Picard—make it so! Before I continue on to today’s topic or quote other favorite Star Trek characters, I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. The Heart of the Economy The markets that are the center of attention today—the Treasury market, the repo market, and the mortgage-backed securities market—represent the heart of the circulatory system of our financial system and our economy, and indeed the global economy. When they are working smoothly, all the other parts of the system can perform as they should. But, the opposite is true as well. If these critical markets break down, credit stops flowing, and people can’t finance the purchase of a car or a home, businesses can’t invest, and the economy suffers, resulting in lost jobs and income.1 Financial markets aren’t static—they evolve over time in response to changes in technology, regulation, and business models. The Treasury market is not immune to this process of change.

Hence, we are likewise engaged in a degree of “soulsearching” on the nature of financial risk and how it might best be managed and how the management of that risk might best be regulated. And we certainly have “bought-in” to the global regulatory reform agenda spurred by the Global Financial Crisis. Clearly Asian banking systems and Asian markets do not operate in isolation from global markets and hence, we are all in this together! 4. With this in mind, I would like to take this opportunity to pose a couple of questions, the answers to which would have fundamental relevance to the nature and shape of the global financial system going forward – a. To what extent is the mainstream thinking, that financial or systemic risks can be assessed and forecast through the use of the financial models that have been developed in the last two decades, still valid? b. The financial markets have become very complex and, as we now know, have generated huge risks for the global financial system. Is the current international effort on regulatory reform adequate in addressing the risks arising from this complexity? and c. The Basle Committee on Banking Supervision is undertaking major reform in upgrading global standards on the quality and quantity of the capital, and introducing global standards on the liquidity that banks have to hold in order to improve their resilience to risks and shocks. Some countries have already implemented these standards but some advanced economies have not yet done so.

In theory, the safety and soundness of a bank should be a key factor for customers in choosing the bank with which they want to entrust their money. Again, in theory a bank with a large capital cushion should (all things being equal) have a competitive edge in gaining customer confidence as compared to other banks with a weaker capital position. This being the case, banks should have an incentive to maintain higher capital levels. However, incentives have become somewhat distorted in more modern times, thanks to formal safety nets extended by deposit protection schemes and informal safety nets characterised by implicit government guarantee arising from the “too big to fail” consideration. 13. In the run up to the Global Financial Crisis, it was common for the big banks to maximise their Return on Equity (RoE) by optimising the level of their capital base and by leveraging up their balance sheets. This resulted in a steady reduction in the levels of capital, and as a result in the loss absorbancy capability, of banks in relation to the size of the risks taken by them on and off balance sheet. Even now, there is still a view amongst some banks that the Basel Accord serves more to indicate “optimal” levels of capital or liquidity rather than the absolute bare minimum standard. Some banks, including a few here in Hong Kong, have argued that the late adoption of Basel III by some advanced economies creates or constitutes an uneven playing field, placing them in a competitively disadvantaged position.

It is, however, my firm opinion that confidence is being significantly undermined by at least two sources of uncertainty. One is domestic. It arises from the fiscal and regulatory authorities. Congress and the president must put together a program that will encourage growth in final demand as soon as possible by incentivizing private businesses to do what they do best to make growth in final demand possible: Expand investment, hire workers and go about the business of lifting the income and net worth of the American people. Yet, they must do so without running afoul of the need to reverse the downward spiral of the nation’s finances. To this end, I am encouraged that the president and the Congress are going at it hammer and tong, searching to find the right balance between goosing up the economy short term and reining in the longterm fiscal imbalances that are imperiling our nation’s future. The second source of uncertainty has largely emanated from the European debt crisis, which intensified in the spring of 2010. At that time, risk spreads jumped, and both securities prices and confidence retreated. This helped derail the momentum that the economy had built up in late 2009 and early 2010. The sovereign debt crisis has reintensified, as you are all aware, and risk premiums in bond and stock markets are rising once again. Another global factor that undermined the pace of recovery this year, of course, was the disruptive earthquake in Japan and the economic aftershock from this tragedy.

1 Speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the Banking Seminar organized by De Nederlandsche Bank, Amsterdam, 11 March 2019 2 16 supervisory agencies and 2 international financial organization were interviewed for the purpose of this survey. 3/3 BIS central bankers' speeches

But this does not prevent us from exchanging information on issues relevant to monetary policy and its target fulfilment with, for instance the Riksdag Committee on Finance and the Ministry of Finance. This could, for example, involve how we view resource utilisation in Sweden and abroad. How savings and consumption develop and why. Which shocks to the macroeconomy are permanent or temporary, or how the effects of major shocks to the economy should be analysed, such as during the pandemic. The policy rate should be the main tool of monetary policy and asset purchases should be made with caution. Such purchases are particularly effective to counteract financial crises. Asset purchases in the form of government bonds may be justified in time when monetary policy needs to become more expansionary, but the threshold for extensive bond purchases to safeguard the inflation target should be high. Asset purchases can have negative side effects, which should be closely monitored. For example, markets may start to perform less well or private actors whose securities are bought by the central bank may become accustomed to the fact that there is always some form of government support when making bad deals. Moreover, the economic consequences of large asset purchases are still unclear. We therefore need more analysis and knowledge of the effects. Having said that, I would still like to emphasise that asset purchases should remain part of our toolbox. High inflation It cannot have escaped anyone's attention that inflation is currently very high.

The traditional role of central banks as the lender of last resort and keeping certain markets functioning may have the side effect of increasing risk-taking in the financial sector. If banks assume that central banks will always be there for them in a crisis, risk-taking may increase, as they will nevertheless be bailed out in a crisis situation. This needs to be borne in mind when formulating the terms and conditions for the purchases. But there is also a need for regulation and supervision 22 [30] that can increase the resilience of the financial markets in various ways. This is important to reduce risk-taking and the likelihood that central banks will need to intervene. More analysis of the impact of asset purchases is needed Central banks' balance sheets have grown and become very large since the early 2000s, see figure 5. For example, the Riksbank's balance sheet has increased from just over 5 per cent as a share of GDP before the global financial crisis to just under 30 per cent today. Central banks have bought securities, primarily government bonds, to make monetary policy more expansionary when the policy rate has been close to the lower limit, and have also bought other securities to stabilise the financial markets. There are of course strong links between these two purposes. If there are problems on the financial markets, monetary policy has less impact on other interest rates and therefore also less impact on demand and inflation.

Clearly, Asian economies have benefited much from such capital inflows, but at the same time they have exposed themselves to the threat of a sudden loss of market confidence and hence large outflows of funds due to policy mistakes or shifts in the international economic environment. This is particularly true if a large proportion of inflows are volatile portfolio investment or short-term borrowing. 24. The next monetary problem concerns current account deficits. A number of Asian economies were able to run larger than normal current account deficits in the balance of payments because they were easily funded by capital inflows. The bad news about large capital inflows is that they might allow investment and even consumption to expand without enduring the pain of overheating or loss of competitiveness. Higher levels of domestic credit, consumption, investment, growth and even budget revenues can be sustained at the cost of rapid accumulation of foreign debt. To make matters worse, over 80% of the current account deficits of selected Asian economies was funded from short-term bank debt. In hindsight, the ready availability of short-term external financing might have delayed the necessary policy adjustments in face of cyclical and structural changes in the domestic and international economic environment. In short, we can all easily make the mistake of taking capital inflows for granted. 25. Then there is asset price inflation which is a rather common consequence of capital inflows. In an open economic environment, capital inflows may not lead to consumer price inflation, since imports would alleviate excess demand.

Financial markets in the first quarter of 2012 were serene, reflecting relatively low premiums of liquidity and inflation risks. The interest rate in the interbank money market has followed swiftly the recent key interest cuts. The transmission of eased monetary policy signals is also observable in the deposits market, while it is expected to be transmitted in the future also in other market segments, conform to the time lag of the transmission mechanism. In the primary market, government security yields showed upward trend reflecting developments in relevant structural factors of the demand and supply, without signalling added risk or inflation premiums. Verified developments insofar, change the basic projections for economic developments in the future. Year 2012 is expected to be influenced by unfavourable developments in the global economy, which may affect the Albanian economy as well. Foreign demand is expected to provide lower contribution over the course of the year, impacted by economic slowdown in our trade partners. Fiscal policy orientation towards further consolidation of fiscal parameters limits the space for a substantial fiscal stimulus to foster the economic activity. Under these circumstances, private domestic demand remains determinant for aggregate demand increase in the future. Overall, analyses suggest a better performance of private consumption and spending, helped also by the eased monetary policy stimulus. Estimates of the Bank of Albania suggest that, in the course of the year, demand growth below the potential of the economy will continue to exercise low inflationary pressures from the demand side.

Using this transformation, the policy problem can be re-stated as: min(𝜋𝑡 − 𝜋 ∗ )2 + 𝜆𝑥𝑡2 𝑥𝑡 𝑠. 𝑡. 𝜋𝑡 − 𝜋 = 𝛽𝐸𝑡 (𝜋𝑡+1 − 𝜋 ∗ ) + 𝜅𝑥𝑡 + 𝜀𝑡𝜋 ∗ Because the policymaker cannot commit to future policy actions, she takes expectations as given (i.e. does not internalise the possibility that, by committing to future policy actions, expectations can be manipulated having an effect on outcomes today). The first-order condition in this case is: 2(𝜋𝑡 − 𝜋 ∗ ) Using 𝜕𝜋𝑡 𝜕𝑥𝑡 𝜕𝜋𝑡 + 2𝜆𝑥𝑡 = 0 𝜕𝑥𝑡 = 𝜅, this simplifies to: 𝜆 𝜋𝑡 − 𝜋 ∗ = − 𝑥𝑡 𝜅 giving equation (1) after using 𝑥𝑡 ≡ 𝑦𝑡 − 𝑦𝑡∗ . This optimality condition has three intuitive features. First, positive inflation gaps should be matched by negative output gaps, and vice versa. Given a quadratic loss function, it makes sense to “spread the cost” associated with shocks across both target variables, rather than loading all the cost on to one alone. Optimal policy therefore returns inflation and output back to their target (1−𝛽𝜃)(1−𝜃) In particular, if firms re-set their prices with probability 1 − 𝜃 each quarter, then one can show that 𝜅 ≡ , such that as 𝜃 rises 𝜃 (i.e. as prices become more sticky), the slope of the Phillips curve falls. The average duration of a price is (1 − 𝜃)−1 .

Collective financial assets as a proportion of total financial assets Per cent 60 60 All sectors Private sector 50 50 40 40 30 30 20 20 10 10 0 0 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 Source: Hasselberg and Ohlsson (2016) With regard to the funded pension savings, the period with low interest rates has been a strain. Yield has been low and this has put pressure on the pension funds to meet the guarantees in their insurance plans. This has sometimes been raised as a negative effect of the expansionary monetary policy, but the problem – to the extent that it is a problem – is rather connected to the global falling trend in longterm real interest rates. 10 In light of this, economic agents need to adjust to interest rates probably not returning to the levels we previously considered normal. But at the same time, it is important to remember that interest rates in the long term will nevertheless be much higher than they are now. Price stability creates good conditions for economic growth and high employment If I am to summarise my presentation today, let me first say that I think it is a good thing that distributional effects are once again being discussed with regard to monetary policy.

During this stage, the Fed’s monetary policy implementation regime worked in such a way that control over the size of its balance sheet, and more specifically over the level of excess reserves, was essential to ensure that the Open Market Desk could control the fed funds rate in a manner consistent with the FOMC’s monetary policy objectives. Had the Fed’s special liquidity facilities grown sufficiently large during that period, raising the level of the excess reserves in the banking system, the fed funds rate would likely have fallen far below the FOMC’s target rate. To keep the fed funds rate around the target, the only sure-fire option was to avoid a significant expansion in the balance sheet by funding the expansion of nontraditional assets, such as TAF loans, FX swaps, and PDCF loans with similarly sized liquidations of the Federal Reserve’s portfolio of Treasury securities. Thus, over the period from August 2007 up through the time of the Lehman Brothers failure in September 2008, the total size of the Fed’s balance sheet and the level of excess reserves in the banking system changed very little. The second stage began in October 2008 when the Federal Reserve gained the authority to pay interest on reserves, including excess reserves. The addition of interest on reserves to the Fed’s toolkit effectively broke the link between the size of the Fed’s balance sheet and the stance of monetary policy.

In the bank’s drive for excellence and customer satisfaction, the Bank of Sierra Leone has continued and will continue to create the enabling environment for safe and sound banking. For instance, in collaboration with other stakeholders, the Bank of Sierra Leone is putting in place measures to implement all provisions of the Anti-Money Laundering Act so as to prevent money launderers using our financial system for their criminal activities. A recently concluded workshop organised by UNODC/GIABA//Bank of Sierra Leone succeeded in drafting a National Anti-Money Laundering Strategy with the aim of providing a framework for an Anti-Money Laundering regime that will ensure effective crime prevention and detection, and at the same time avoid creating excessive burden on the financial system and its users. The workshop attracted various stakeholders, including the Association of Commercial Bankers in Sierra Leone to which GTB is an active member. The Bank of Sierra Leone shall continue to maintain the open door policy and encourage dialogue in the process of ensuring a sound and stable financial system. BIS Review 79/2006 1 Mr Chairman, Distinguished Ladies and Gentlemen, allow me to close this brief remarks by once again congratulating the Board, Management and staff of the Guaranty Trust Bank (SL) Limited for another step taken to enhance the public image of the bank. I thank you for your attention. 2 BIS Review 79/2006

At the same time, it must develop this policy framework, for which no template exists and for which the analytical background captures only parts of the tasks. In the medium term, the ESRB and the macroprudential authorities of the 27 EU countries will need operational policy frameworks with specific instruments. The ESRB is ready to support – at a technical level – the work that European institutions have started to design the implementation of countercyclical capital buffers. Other macroprudential instruments are also desirable. Work on these issues has been initiated. For example, new rules on margins and collateral should counteract the fluctuations of the cycle. The specific capital requirements for risk-weighted assets might also be adjusted over the cycle. When these macroprudential instruments are established, possibly around the middle of this decade, the authorities will finally have tools to mitigate the pro-cyclical behaviour of financial 4 BIS central bankers’ speeches players. Authorities will set part of the regulatory requirements not against the solvency or liquidity situations of single institutions, but taking a view of the macroprudential cycle. Other instruments will be needed to address interconnectedness, including the most complex and innovative elements of market functioning. One specific focus of authorities is to ensure that efficient and secure central counterparties are created to reduce risks in OTC markets. Concentration risks produced by increasingly large financial institutions in trading and posttrading will also need to be addressed.

Puerto Rico’s economy has, unfortunately, been in a deep economic slump that has lasted for nearly a decade. Over the past few years, public sector job losses have continued to weigh against modest job gains in the Island’s private sector. And ongoing difficulties in the Island’s labor market continue, with labor force participation still alarmingly low, and unemployment stubbornly high at a rate well above the mainland’s. The good news is that we are finally beginning to see some firming in economic conditions on the Island. At the other end of the spectrum, New York City has been experiencing a robust recovery. While the Great Recession was clearly the worst post-war downturn in U.S. history, New York City was not as badly affected as the rest of the country. As of April, almost five years since the end of the recession, the nation has recovered nearly all of the jobs that were lost. BIS central bankers’ speeches 1 By contrast, New York City reached this milestone more than two years ago. And, as we’ve highlighted in previous press briefings, this rebound has occurred despite the lack of any significant recovery in employment on Wall Street. The recovery has generally progressed at a more moderate pace in the other parts of our region. Consistent with historical patterns, Upstate New York as a whole has been growing modestly, with Buffalo and Rochester doing a little bit better than their upstate peers.

Esteemed Press Members, Overall, we expect aggregate demand conditions to support the downward trend in the underlying inflation, i.e., inflation excluding items beyond the control of monetary policy such as energy, food and tobacco prices. Hence, barring new supply shocks, headline inflation should continue to move towards the target. The speed of the convergence to the target, however, will depend mainly on the course of food and energy prices. Distinguished Guests, 10 BIS Review 20/2008 Our forecast in the 2007 October Inflation Report incorporated two main assumptions: The assumption for oil price was set as 70 USD per barrel. Observing the high base created by the unusually elevated food prices in 2006, we assumed food inflation to correct towards the values consistent with medium term inflation in 2007. However, food and energy inflation turned out to be more persistent than we had envisaged, as the prices of oil and agricultural commodities continued to rise throughout 2007. These developments not only led to an undershooting of our inflation projections for end-year 2007, but also necessitated an upward revision in our medium term forecasts. In this framework, we revised our assumption for oil prices from USD 70 to USD 85 per barrel in 2008. Higher oil price assumption added about 0.5 percentage points to the end2008 inflation forecasts.

This observation shows that inflation target, to a significant extent, continue to serve as an anchor and that economic agents expect the disinflation process to continue in the medium term. Nevertheless, the fact that currently medium-term inflation expectations are significantly above our medium term target of 4 percent necessitates a cautious policy stance 1 . Figure 10: Medium-Term Inflation Expectations* 9 12-Month 24-Month 8 7 6 5 0108 1107 0907 0707 0507 0307 0107 1106 0906 0706 0506 0306 0106 1105 0905 0705 0505 0305 0105 4 Expectations regarding the period after 24 months have been published since May 2006. Source: CBRT. 1 As of January, one-year and two-year ahead inflation expectations are 6.01 percent and 5.17 percent, respectively. BIS Review 20/2008 7 3. Inflation and monetary policy outlook Distinguished Guests and Press Members, After summarizing inflation and monetary policy developments in 2007, in this part of my speech, I would like to share our evaluations on inflation and the monetary policy outlook. First of all, I would like to summarize several factors that might enable the disinflation process to continue in the upcoming period: Annual percentage change in CPI excluding food, energy and tobacco imply an inflation trend of 4.8 percent (Figure 11) 2 . In other words, underlying inflation in the past year was not far away from the medium-term targets.

Core inflation is estimated to have stabilised in January, albeit tentatively, at the elevated rate of 5.2% year-on-year, according to the Eurostat Flash estimate. There are other “exclusion-based” indexes that better strip out the effects of transient shocks to items other than food and energy. These indexes are less volatile than the “core” HICP measure and can thus provide a better reflection of the fundamental trends in inflation.12 However, in the current phase, these indicators are not best suited for identifying real time shifts in the persistent component of inflation. 12 Trimmed mean HICP is a real time index that excludes those items hit by large, one-off shocks at that time. It thus gives a reliable reading of underlying inflation pressures. Fine core HICP eliminates most of the problems involved in analysing underlying trends. For a presentation of the fine core indicator developed by the Banque de France, see Lalliard (A.) and Robert (P.-A.) (2022): “A possible new indicator to measure core inflation in the euro area”, Banque de France Bulletin, No. 240/1. 15 Page 16 of 19 Compared with these exclusion-based indicators, the Persistent and Common Component of Inflation (PCCI)13 constructed by the ECB has the merit of including the impact of medium-term shocks to energy and food, to the extent that they have common effects. By construction,14 the PCCI can also potentially provide earlier signals of turning points in underlying inflation. For example, the PCCI was the first indicator to signal the rise in inflationary pressures in 2021.

Abu Hassan Alshari Yahaya: SMEs and financial inclusion Speech by Mr Abu Hassan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the Credit Guarantee Corporation Malaysia Berhad (CGC) SME Awards 2018, Kuala Lumpur, 27 June 2018. * * * It is my pleasure to address you this evening at the SME Awards hosted by Credit Guarantee Corporation Malaysia Berhad (CGC). I would like to commend CGC for the continuous effort in championing the SME cause, and in recognising the banking and financial industry players that have made meaningful contribution in supporting the SMEs. As mentioned by Dato’ Agil, ‘Digital Disruption’ has become the new normal not only for the banking and financial industry, but also for other sectors and industries. We have seen the fortunes of traditional businesses changing overnight with technological disruption. In fact, the financial industry may at times need to play catch up to ensure products and services are relevant in a new digital economy. We believe CGC will continue in its efforts to be agile and dynamic in embracing the higher expectations of meeting the financing needs of SMEs moving into the future. SMEs and Financial Inclusion In broad terms, financial inclusion means access to affordable financial products and services that meet the needs of individuals and businesses and that are delivered in a responsible and sustainable manner. At Bank Negara Malaysia, we recognise the impact of financial inclusion on the broader economic performance of our country.

This is the immediate task ahead because we need to do all we can to clear up uncertainty here. Before going on, let me deal with two points that are related to this argument. First, it is said that this stance on capital is unnecessary because banks have stronger capital positions now than they did in the height of the crisis. This statement on the capital position now relative to the past is true but on its own that part does not tell us whether they have enough capital now. UK banks have made substantial progress over the last four years in building their resilience, but from a low base, it has to be said. There is further to go, but we should not forget the distance that has been travelled. The second point I want to deal with here concerns forbearance, namely the extension by banks of a variance in the terms of loans, which involves forgiveness of various forms. It is easy to imply that forgiveness is a bad thing, turning Japanese in the unfortunate sense of that term. Rather, we should deal with the consequences of forgiveness, not prevent it. The reason for that is because forgiveness has a very good side to it, namely that fewer jobs are lost and fewer homes re-possessed where it takes place. And we can see evidence of both of these in the latest recession relative to previous ones.

Affordability risks of new mortgages financing residential investment property are high and have risen further. These developments have taken place against a background of persistent imbalances in the mortgage and real estate markets. Both mortgage-lending volume and prices for single-family houses and apartments continued to rise at a moderate rate in 2019. Although prices of residential investment property have stagnated of late, there is still a risk of a price correction in this segment in particular. On the one hand, this is due to the sharp price increases in previous years. On the other, larger numbers of vacant dwellings suggest that brisk construction activity in rental apartments may have led to an oversupply. Despite banks’ high risk appetite and the persistent imbalances in the markets, SNB stress tests suggest that the resilience of the domestically focused banks remains adequate overall. Thanks to robust capitalisation, most of these banks would be able to absorb the losses incurred in adverse scenarios. Given the risks I just mentioned, this is positive. It is crucial for the stability of the financial system that banks continue to hold sufficient capital to be able to cover the risks on their books. Ongoing pressure on margins means that the incentive for domestically focused banks to take on risks remains high. This applies to mortgage lending in particular. The revised selfregulation rules for banks in the residential investment property segment, which come into force at the beginning of 2020, should help to prevent a further build-up of risks in this segment.

See, for example, Crockett, A. (2000), “Marrying the micro- and macroprudential dimensions of financial stability”, BIS speeches, 21 September; Borio, C (2003), “Towards a macroprudential framework for financial supervision and regulation?”, CESifo Economic Studies, 49: 181–216. 5 See ESRB (2014), op. cit. 6 See, for example, Recommendation of the European Systemic Risk Board of 22 December 2011 on the macro- prudential mandate of national authorities (ESRB/2011/3); Recommendation of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macro-prudential policy (ESRB/2013/1); the ESRB response to the European Commission’s Consultation Document on the “Review of the EU Macroprudential Policy Framework”; and the ESRB handbook on operationalising macroprudential policy in the banking sector. 7 See the ESRB’s website for a breakdown by country. The ESRB’s annual review of macroprudential policy in the EU provides a detailed description of these measures. 8 Belgium, Denmark, Finland, Luxembourg, the Netherlands and Sweden. 9 Czech Republic, Germany, France, Iceland and Norway. 10 Hellwig, M (2009), “Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis”, De Economist, 157(2): 129–207. 11 3/4 BIS central bankers' speeches 11 See ESRB (2018), Macroprudential provisions, measures and instruments for insurance, November. For recent work on the topic by the European Insurance and Occupational Pensions Authority (EIOPA), see, for example, EIOPA (2019), Discussion Paper on systemic risk and macroprudential policy in insurance, March. 12 ESRB (2019), Features of a macroprudential stance: initial considerations, April. 4/4 BIS central bankers' speeches

This increase in financial institution resilience has not been achieved at the expense of economic activity. This brings me to the crux of the question put to me by your Academy today. First, the objective of the regulators was clearly to limit the potential adverse effects of their reforms on the real economy, and to ensure that financial activities support growth and economic development. In 2010, before the roll-out of Basel III, major work was carried out12 to measure the impact of these reforms. The Basel Committee’s Macroeconomic Assessment Group concluded, from a broad range of estimates, that for every 1 percentage point rise in the target capital ratio, the cost of credit would increase by an average of around 0.15 percentage point. Yet in practice, this credit tightening never materialised. The favourable effects of the fall in interest 3/7 BIS central bankers' speeches rates under the accommodative monetary policy stance have far outweighed any negative consequences of stricter regulatory requirements. Today in Europe, as in France, the flow of bank lending to businesses and households remains robust. Indeed, the strength in private sector lending is even the focus of particular vigilance in France and on the part of the HCSF. In September 2017, growth in bank lending to households and businesses reached 5.7% and 5.4% respectively in France, twice the rates observed in the euro area as a whole. Since the start of 2010, the cumulative growth in both forms of lending (29%) is almost twice that of nominal GDP.

If a marketplace has a high level of liquidity in an asset, many people will probably trade there, as they will be able to trade at the best, that is to say, the most correct prices. If a marketplace has liquid trading in one asset, it will often attract trade in other assets, as other companies want their instruments to be traded on a marketplace with many participants. In other BIS Review 66/2004 3 words, there are natural tendencies towards concentration in financial instruments trading. The same applies to settlement and registration of ownership. However, technological developments have enabled increasing integration of the various parts of the transaction chain. This has also created incentives to establish automated systems all along the line, from order placement to settlement. The result is a vertical integration, where different stages of the value chain are integrated. Integration requires cooperation between, or even a merger of, the various parts of the infrastructure. Even if this, as I have mentioned earlier, leads to lower transaction costs, it is not certain that these cost reductions will benefit the end customers. When all of the stages of the chain are implemented automatically and ownership of the various parts may even lie with the same organisation, everyone will be dependent on a single supplier. This creates a risk that pricing will follow monopoly principles, which rarely benefits the economy.

You have probably seen pictures of bank runs – when queues form outside banks in crisis as people want to withdraw their money in the form of (safe) cash. This is why central bank money is still the linchpin of the system, even if it is rarely used in normal circumstances. The fact that it is available as an alternative acts as a kind of guarantee for the private bank money. 4 It is also the case that some key systems for payments are increasingly concentrated to a few agents. See, for instance, the card payment market where two American companies are entirely dominant in Sweden. Unlike our neighbouring countries, we do not have any domestic card payment network. This means that we are dependent on foreign infrastructures to make the majority of households’ payments. Without cash, therefore, an important part of the Swedish infrastructure would be completely in private ownership and dependent on foreign infrastructures and foreign companies. So if the use of cash continues to decline, it is not enough to say that this works fine at present, because the future will look rather different, regardless of whether we produce an e-krona. Other functions that cash has performed include functioning as a back-up when there have been disruptions to other forms of payment. It has also helped ensure 3 See, for instance, Fung et.al. (2018) and Söderberg (2018). 4 See, for instance, Tobin (1985).

See also Krishnamurthy, A. and A. Vissing-Jorgensen (2013), “The Ins and Outs of LSAPs,” presented at the Federal Reserve Bank of Kansas City’s Jackson Hole Symposium on the Global Dimensions of Unconventional Monetary Policy; IMF Policy Paper on “Global impact and challenges of unconventional monetary policies”, October; Neely, C. (2013), “Unconventional Monetary Policy Had Large International Effects”, Federal Reserve Bank of St. Louis Working Paper 2010–018E, updated August 2013; Joyce, M., M. Tong and R. Woods (2011), “The United Kingdom’s quantitative easing policy: design, operation and impact”, Bank of England Quarterly Bulletin Q3. BIS central bankers’ speeches 3 The concerns expressed by various economists and the media that the extraordinary increases in the monetary base in many countries would lead to significant inflation rates, never materialised. As the following slide illustrates, there was no transmission in the prevailing economic situation by the banks, to credit or broad money aggregates. Inflation did not respond, putting in doubt the quantitative vision about its origin. When asked about what Japan should do to overcome deflation, Milton Friedman answered in 2000: “It is very simple. They can buy long-term government securities and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy into an expansion”.2 The more recent Japanese experience is still open to analysis but the channels envisioned by Milton Friedman have seemingly not been operating in the other advanced economies.

As a result, expected short-term rates have fallen by 10 basis points at all horizons and the euro has depreciated since May by 2.5% to 1.354. If taken as new conditioning assumptions, these developments would move the whole path of the inflation projections upwards and ensure a faster return to price stability. The second channel through which the recent ECB decisions will be consequential is the credit channel, which is expected to be positively impacted by the new targeted LTRO facility and the extension of the ACC programme.7 The third channel has to do with expectations. The announcement of the measures adopted at the beginning of June has been accompanied by a clear communication concerning the future path of policy. In his Press conference, President Draghi emphasised again that “key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for 7 The Additional Credit Claims (ACC) programme is an extension of our collateral policy to accept directly loans to non-financial firms as eligible collateral for banks to borrow from the ECB. BIS central bankers’ speeches 7 inflation”. He also added that “if required, we will act swiftly with further monetary policy easing.

The Bank can set only one interest rate – the interest rate on Bank of England money. This interest rate affects every region, every sector, every company and every individual that uses Bank money. In practice, this means pretty much everyone in the UK. In other words, monetary policy affects the fortunes of the whole of the UK economy and it does so equally. The Bank cannot set a different interest rate for the steel and the shipping industries, for Port Talbot and Portstewart, for Wales and West Lothian. If monetary policy is singular, does that imply it should be set in a way which is single-minded? In other words, should monetary policy focus only on the economy-wide picture, taking no account of developments across different sectors or regions, income and age ranges, savers and borrowers? My answer to that, quite different, question is a resounding no. That is for four distinct reasons. First, we know that official data on the economy are noisy and mis-measured. They also often fail to capture fully some areas of economic activity – for example, sectors of the economy that are either rising rapidly (such as the digital economy) or contributions that fall outside of the National Accounts framework (such as volunteering). Forming a picture of the whole economy from official statistics is rather like doing a jigsaw puzzle with half of the pieces missing and the other half slightly water-damaged.

$ q]Y& 4 8 83%8-3%78-#433734#3434%8384 373488! 847"834 4% $ 8 83%8-3%78-3834'7438%374%#%(8% %3"8# ##8"73%8"8%4 +45,467.7373#%7 3 "--=*. 388417434738%%848738%7 774  999847-83(8%-+,+)-,5-,?-9'%8 3%' (%833#87478#34 999#4 "--84%3#348#( 83 ). *,,.55.l78l

Also, further development and consolidation of financial market segments, completion and expansion of pension system in the favour of private incentives, investment with priority in education and medical fields deserve the attention of all stakeholders of the BIS Review 94/2009 3 economy. We also deem that it is just the time for the private sector to reflect the new development stage of the country, by enhancing and fostering its management. This requires a better management of business and financial risk, signifying also a closer cooperation with specialised agents in the market, extension of business plan horizons and their better orientation towards the global reality and the country’s development priorities. In light of this, the financial system should respond more prudentially to these requirements, enhancing the transparency and efficiency of its products. Now that the banking system has overcome the delicate moments it was faced with at end-2008, it should enhance its contribution to financing the private sector’s activity of the economy. However, I avail myself of the occasion to once more emphasise that the financial stability of the banking system is another major objective, to which the Bank of Albania remains deeply committed. This system will be constantly subject to Bank of Albania’s supervision and stress-test analyses. 4 BIS Review 94/2009

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

There is a need for the major stakeholders to align with some form of regulatory approach or framework which would provide a basis for assessing risks, and to implement regulations 2 BIS Review 162/2009 that are proportionate to the risks identified. In this Forum, some of the key elements of such a regulatory framework will be dealt with, such as Know Your Customer, compliance with Anti-money Laundering regulations, Consumer Protection and achieving greater levels of system interoperability amongst service providers. As such, branchless banking will require an inter-disciplinary approach given the different types of expertise needed to drive this important agenda. The third area of policy concern I would like to touch on relates to the issue of accountability with cross-sector regulatory requirements. There must be clarity over the accountability for the integrity of transactions, security of information transmitted, adherence to a consistent set of regulations and proper maintenance of the system. And it is important to note that higher standards of control will also result in higher costs to the service providers. Cross-sector policy issues must be resolved, and clear accountability with respect to the operations of the system must be established. Systems of governance to engage with different legislative requirements, from capital requirements to anti-money laundering regulations, must be in place. Players need to have the requisite skills and knowledge to address issues promptly with different stakeholders, such as customs, immigration, police and international agencies like Interpol.

This involves transparency on the part of service providers; and iv. Customers should not be faced with unreasonable post sale barriers imposed by banks and financial institutions or service providers, forcing them to purchase supplementary products and services. 4.3.5 Ensure fair treatment to customers: Treating customers fairly throughout the life of a payment product, as well as at service points, is an essential theme that should be focused on by all stakeholders. In this regard, it is necessary to establish principles-based regulations on payment related activities rather than compliance or rules-based regulations. The regulations should relate to the payments mode or the payments product life cycle and the payments culture in each country. The principles and related reviews should seek to accomplish the provision of solutions to significant and persistent problems in the distribution of products in the retail segment of the payment services, and to build financial capability, i.e. equipping customers with the skills and knowledge needed to achieve a fair deal. 4.3.6 Established customer protection and rights, and legal framework: The retail customers and their rights should be protected in the legislation. Several countries have passed separate laws to achieve this. In the Payments and Settlements Act, the Central Bank of Sri Lanka has included a separate section on customer protection. In 2005, the Reserve Bank of India established regulation and supervision within its Payment and Settlement Act. It is imperative that customer rights are looked after as many financial institutions and service providers have been accused of customer exploitation.

We are currently awaiting the official figure, but project that the economy in the second half of 2014 to have grown by 1.7%, which translates into an annual growth of 0.8% for 2014. (Slide 1) Prospect for 2015 and projections As for 2015, we project that the Thai economy will continue to recover at an annual growth rate of 4%. Let me briefly highlight a few key points underlying this projection. First, we anticipate that the growth momentum is carried forward from last year’s second half. The economy should show stronger signs of recovery. Private consumption, investment and government spending will be the main drivers of growth. Lower oil prices certainly have also given consumers a hand in the recovery process. Exports are also expected to grow, but at a slower pace than we have seen in the past. Second, our estimate of exports is conservative. We project merchandise exports to grow mere 1% this year compared to 3–4 % expected by the market. Demand growth from our trading partners is still slowly recovering, especially in the euro zone and Japan. While the US economy is picking up its growth momentum, the risk of global growth and lower commodity prices has undermined many Asian countries’ exports including ours. With regard to exports of services, particularly the tourism sector, things are however somewhat brighter. With tentative signs of improvement, we project tourism to grow approximately 10% compared to last year. Third, there are critical assumptions in this projection, which hinges on government spending.

Ibnu Sina, Ibnu Rushd and Al Jabir were among the many legendary thinkers who not only excelled in one specific area of study, but in multiple areas of knowledge such as philosophy, science and theology. The great thinkers of the past have indeed demonstrated exemplary intellectual qualities for us to emulate. The current highly competitive and demanding operating environment requires presentday Ibnu Sina, Ibnu Rushd and Al Jabir to formulate and develop solutions to the challenges faced by the ummah. Today, the definition of Shariah scholars is often understood in a narrow context where recognition is largely attributed to one’s proficiency in the field of Islamic theocracy. However, the nature and challenges faced by society today demand a broader context of scholarly endeavours that necessitate a new cadre of Islamic finance scholars. Such scholars, not only excel in their depth of Shariah knowledge and wisdom, but also possess knowledge in other related disciplines such as economics, finance and law. The combination of technical knowledge and Shariah wisdom, together with a strong understanding in other disciplines would produce great thinkers who are able to translate theoretical reasoning into practice. These thinkers could contribute to the society with their contemporary innovative solutions, starting from even small ideas that could potentially bring incremental changes with bigger positive impact over the long run. Great thinkers of yesteryears were known for the audacity to think beyond the sphere of conventional wisdom to shift into a new paradigm that molded civilisation into the next leap forward.

Our challenge was to free up this industry so that it could continue to develop and grow, without compromising stability and soundness in a changing landscape. Strong and wellmanaged local banks, with a significant share of the home market, were and are critical to the resilience and stability of our financial system. However, we could no longer maintain this by restricting access to the domestic market. We needed to permit more competition, but in phases, to allow the local banks to adjust and compete effectively. 2 BIS Review 39/2004 MAS therefore introduced a five-year programme to liberalise access to Singapore’s domestic banking market. We made the first moves in 1999. As we lightened our regulatory touch, we also worked with banks to set guidelines for best practices and give banks greater room for enterprise and innovation. Stronger banking industry Today, Singapore’s banking sector is more open and dynamic. This has come about without sacrificing strength and stability. Individual banks and the industry as a whole have risen to the challenge. Existing players have upgraded and strengthened themselves. Banks have maintained high prudential standards, become more efficient and improved their service quality and product ranges. The foreign banks have contributed to the vibrancy of the Singapore banking scene. Competition has led to the development of a rich array of innovative products and more discriminating pricing models. Customer service as a whole has improved.

b. Secondly, MAS is prepared to grant a limited number of new Wholesale Bank (WB) licences to applicants that meet our admission requirements. BIS Review 39/2004 3 c. Finally, QFBs will with immediate effect be allowed to negotiate with the local banks on a commercial basis to let their credit card holders obtain cash advances through the local banks’ ATM networks. Singapore now has one of the most liberal banking environments in Asia. However, over time, as the industry changes, we must be ready to liberalise further. MAS will reassess the environment before deciding on any further measures. While it is still too early to make a final judgment, banking liberalisation has so far achieved its aim of bringing about greater competition. It has fostered the consolidation of the local banks, which might otherwise have taken much longer. The overall market shares of local and foreign banks have not changed drastically, but there has been an all-round qualitative improvement which has enhanced the vibrancy of Singapore’s financial sector. The liberalisation measures and reforms of the last few years have set the financial sector on a firm foundation. However, we cannot afford to rest on our laurels. Challenges as well as opportunities exist for both the banking industry and the financial sector as a whole. We must identify and respond to them, in order to keep the financial sector dynamic and competitive. Challenges for banks For banks, I will focus on two main challenges.

The biggest challenge for an autonomous institution is to not stay behind the new demands of its environment, acting with timeliness and effectiveness to meet its institutional objectives in new circumstances, gaining the trust of the public. This confidence is far from being a sure asset. In today's ever-changing world, where confidence can be lost in a wink, we must work day after day to preserve it, especially considering the challenges that we face, both economically and socially. In this context of greater transparency, better communication and contribution to the people's needs, I want to mention two elements that accompany this Report: a report on the determinants of the trend growth of the Chilean economy and a set of modifications to the monetary policy decision-making process. Determinants of the Chilean economy’s trend growth As I said a while ago, alongside this Report we have published a document summarizing a body of research that our technical teams have made on the determinants of long-term economic growth. Although these investigations date back many years, they have tended to remain at an academic level. However, because in recent years our economy has slowed down quite significantly, it seemed to us on the Board that it would be appropriate to make an additional effort to consolidate our analysis, in an area that is not only key to adequately achieving the objectives mandated by the law, but also of general interest for the country.

(2) The Norges Bank announced in May 2017 that it will increase the frequency of its meetings from six to eight per year beginning in 2018. Source: Central Bank of Chile based on information from the respective central banks. Table 4 Adjustments to monetary policy process Current Official MPM* communication Brief summary of economic scenario Official MPM communication (end of each MPM) (end of each MPM) Monetary policy decision New Main economic background developments Monetary policy decision and explanation Voting outcome Background minutes (1 day before MPM) MPM charts (1 day after MPM) Review of evolution of local and world economy MPM minutes based on public information known since previous MPM (11 bank working days later) Main charts presented by the staff to the Board at MPM MPM minutes Voting outcome (11 bank working days later) Options presented by Research Division Summary of discussion MPM transcript Detail of opinions of each Board member and the MPM transcript Finance Minister (10 years later) (reserved) Main charts presented by the staff to the Board at MPM Review of evolution of local and world economy based on public information known since previous MPM Options examined by the Board Arguments for and against monetary policy options considered Detail of opinions of each Board member and the Finance Minister *MPM = monetary policy meeting. Source: Central Bank of Chile. 21

We monitor all financial market data: equity prices, interest rates, capital flows. Corporate and sovereign debt markets are also important. What is going on there? We have seen a sharp increase in the risk premia that firms have to pay when raising debt on the markets. For high-risk firms in particular, these risk premia have shot up. Yields for countries such as Italy have also increased signficantly. We see a broad increase in risk premia. Another question that arises is whether the markets are still functioning. Is supply still matching demand? The central bank should intervene if liquidity dries up, that is if the markets suddenly seize up because of a lack of available liquid funds, or if the transmission of monetary policy is endangered, that is if our measures are not reaching the real economy. And that is exactly what we have been doing in greater measure since last Thursday. Our bond purchases have a stabilising effect on the market. US Treasuries have seen some severe temporary disruptions. There was a series of short intervals in which the trade in US Treasuries was disrupted. That’s a sign of considerable nervousness in the markets. Besides the markets, we are closely monitoring the situation of banks in Europe. We have taken measures to prevent banks from having to overly restrict their lending during the crisis. But the pressure on banks will intensify if economic conditions deteriorate. We are also closely watching investment funds. What is happening there?

Deposit and credit growth of the banking sector continued, with revival in the lending to the corporate sector, accompanied with a decline of the NPL ratio in the first quarter of 2018 to 5.1%, due to claims collection. Current account deficit in 2017 additionally reduced to 1.3% of GDP, reflecting the positive contribution of the foreign capital companies on the export side, which indicates further strengthening of the economic fundamentals. Regarding the recommendation from the last year’s dialogue, the central bank prepared draft strategies for NPLs management and strengthening the use of local currency, both agreed 1/2 BIS central bankers' speeches with the Ministry of Finance and currently subject to consultation with other relevant stakeholders. In both areas, as already being confirmed in the assessments and final conclusions, we have already achieved tangible results; however the adoption of these comprehensive strategies will put in place additional mechanisms to deal with these issues. In light of the challenging time that we have faced in recent years, we need to point to the maintenance of price and financial stability as important pillars of the macroeconomic stability, as well as the need to continue strengthening the fundamentals and resilience of the economy. Implementation of structural reforms and strengthening institutional capacities, including sound public finances, should remain main priorities for faster income convergence and EU integration. Thank you! 2/2 BIS central bankers' speeches

Ajith Nivard Cabraal: Money laundering and terrorism financing Speech by Mr Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka, at the AsiaPacific Group on Money Laundering Typologies Workshop 2008, Colombo, 27 October 2008. * * * His Lordship, the Chief Justice, Hon Sarath N Silva, the Attorney General, other distinguished guests from Sri Lanka as well as from abroad; my dear friends. At the outset, I wish to extend to all of you a very warm welcome to this Asia Pacific Group Seminar on Money Laundering and Terrorism Financing. It is indeed a pleasure to see all of you here, from 34 different countries, and we hope that you will have a wonderful stay and take back happy memories of your period here; not only as far as the Conference is concerned, but also by experiencing our country. Sri Lanka has been in the forefront of the worldwide efforts on the containment of money laundering and terrorism financing. We have been associated with this effort in a special way, not only to help the international effort, but also to fulfil our own local needs. That is why we are very pleased to see such a large gathering of experts on this subject who are getting together to develop ways and means by which this vexed problem could be dealt with.

And I would also like to urge you to take a little time off to visit some places of interest, while you are in this beautiful country, Sri Lanka. Thank you. BIS Review 50/2004 1

The deployment of tokenised settlement assets across borders would also pose a risk to our monetary sovereignty, if it resulted in the use of stablecoins backed by foreign currencies or CBDCs. B- To reconcile competition and sovereignty, a “retail” central bank digital currency is obviously a potentially important lever. 1- This was the main aim of the investigation phase launched by the Eurosystem in July last year. Issuing a retail CBDC, nevertheless, raises a number of operational challenges. In particular because financial intermediaries, including banks, play a key role in the security and financial stability of our monetary and financial system. Introducing a CBDC must therefore neither result in the conversion of a significant proportion of bank deposits into assets held in CBDCs – in normal times as well as in times of stress – nor compete with banks in their day-to-day relations with their customers. These issues need to be addressed by design in the architecture and functionality of a digital euro, for example by introducing holding limits or by promoting an intermediated model. This is why it is essential that the financial intermediaries, along with the other stakeholders, be properly involved in the investigation phase that we are conducting: an expert advisory group has already been set up at European level,1 and this consultation will be extended to all stakeholders in the coming months, in particular via the European and French market bodies at our disposal. 2- But other levers will be needed to reconcile competition and sovereignty. First and foremost, the regulatory lever.

Sources: Bureau of Economic Analysis and the Riksbank GDP growth in the euro area Quarterly changes in per cent calculated at an annual rate, seasonally-adjusted data 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 00 01 02 03 04 05 06 07 08 09 10 11 Note. Broken columns represent the Riksbank’s forecasts in M PR 2008:2. The dot is the outcome for Q2 2008. Sources: The OECD and the Riksbank BIS Review 100/2008 9 GDP growth in the world Annual percentage change 8 8 6 6 4 4 2 2 0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Note. Broken columns represent the Riksbank’s forecasts in M PR 2008:2.

Firstly, we need to consider the sovereign level. Both in the developed and emerging worlds, government debt levels have risen to unusual heights. Second at the corporate level, where current levels of borrowing both to banks and through securities are high. And thirdly we need to consider household debt. You have only got to read the newspapers to know that in the UK the level of debt to income has risen significantly. In the USA it is even higher and other countries such as Australia and Holland, which are subject to a similar low interest rate environment, are seeing similar trends. The question is just what are the vulnerabilities? We are now at historically low rates of interest. Servicing high levels of debt seems quite realistic. But a variety of things could get people to behave differently. To save more, or to repay debt. This could come if they felt that interest rates might rise and we did raise them modestly earlier this month. But it could also come for other reasons: a wish to save more for retirement for example. If a substantial change occurred it would, in the first instance, impact on monetary policy and our ability to meet our inflation targets. From a financial stability perspective too however we would clearly need to follow the evolution of any reactions and their BIS Review 49/2003 3 consequences very closely.

Internationally, we have contributed expertise and advice to the standard setting process via bodies such as the Basle Committee and the International Accounting Standards Board. And we contribute actively in the work of official international bodies like the Financial Stability Forum, the Group of Twenty and the G10 central banks’ Committee on the Global Financial System. On a separate tack, we have also increased our focus on insurance, where the FSA is developing a prudential approach along the lines of Basel II for insurance companies. We recently led work in the CGFS to better understand techniques of credit risk transfer and their implications - particularly important for reinsurance. We also wanted to obtain better data on who was shedding and who was taking on what risk. This should in due course allow more effective monitoring of the transfer and accumulation of risk. And earlier this year, I was myself heavily involved in drawing up the Group of Thirty study “Global Clearing and Settlement: A Plan of Action”. It detailed 20 recommendations in relation to interoperability, risk management and governance that once implemented should improve efficiency and reduce risk in securities clearing and settlement. The task now is to get them implemented: and we are involved in that process too. So in these areas we try to help to influence standards that are being set at a global level. Standards which of course also bear directly on much UK-based activity.

To do this, ASEAN has advanced the target date of establishing an ASEAN Economic Community from 2020 to 2015. ASEAN Leaders will, at their Summit in Singapore in November, issue a legallybinding blueprint to implement the ASEAN Economic Community by 2015. You may think that the time-frame is not ambitious enough but remember that ASEAN is like a centipede in its movement where all legs must move in unison. Also, the 10 countries are at very different stages of development, with per capita ranging from a low of $ for Myanmar to a high of $ for Brunei. With the ASEAN Economic Community, ASEAN will eventually evolve into a single market with free flow of goods, services, investment and talent. An integrated ASEAN is expected to boost the region’s GDP by 10%. For businesses, an integrated ASEAN means greater market access and more harmonized rules and standards. For investors, an integrated market of half a billion people will be an attractive investment destination. ASEAN’s combined GDP of $ trillion is not insignificant. It is, in fact, bigger than India’s $ billion and more than a third of China’s $ trillion. ASEAN Finance Ministers have identified capital markets as a key area to fast-track integration. ASEAN bond markets have tripled, from $ billion in 1997 to $ billion in 2007. From 2001 to 2006, ASEAN market capitalization has grown by more than 120%. ASEAN has in place further initiatives to harmonise and integrate financial markets and boost liquidity.

So, with the recovery momentum remaining firm but the risks to economic stability rising, the Monetary Policy Committee saw less need for maintaining low interest rates and felt that the monetary policy stance should be adjusted to give priority to economic stability, with the adjustment being gradually paced. This is essentially the rationale behind the decision on Wednesday by the Monetary Policy Committee to raise the policy interest rate by 25 basis points. At this juncture, many of you may wonder whether higher oil prices together with higher domestic interest rates might be too punitive to the health of the domestic economy. Let me say that we have looked carefully at this issue and are of the opinion that the growth momentum at this time is quite firm. Although the adverse effects an growth from higher domestic interest rates will be there, the effects will not be large to the extent that they will derail the ongoing momentum of recovery. This is because the fundamentals of the economy at present are quite good, and with a strong fiscal position, these two factors should allow the economy to flexibly adjust to the negative shocks without interrupting the momentum of growth. On the contrary, the early rise in domestic interest rates will help maintain macroeconomic stability which is cruial for sustaining economic growth in the medium term. Ladies and Gentlemen, A few weeks ago, I had the good fortune of visiting both Melbourne and Sydney and came across this concept of a cleanskin wine.

In Malaysia, the payment system has significantly transformed over the last 25 years. The journey started many years ago in 1997, major changes to the payment landscape occurred with the consolidation of the three ATM networks in the country into MEPS. This initiative removed duplication and enhanced the network multiplier effects. In fact, Malaysia was among the first in the world to complete the migration to the more secure chip-based payment cards in 2005. To provide a roadmap for the development, in 2011, Bank Negara Malaysia developed a 10-year Financial Sector Blueprint which amongst others, outlined the initiative to displace paperbased payment instruments, namely cheques and cash, in favour of the more convenient and cost effective e-payment methods. We now have PayNet, the domestic shared infrastructure at the heart of the country’s payment systems. We envision PayNet to be a catalyst, one that challenges the status quo to drive its diverse members to foster competition and innovation, develop cost effective solutions and advance financial inclusion through digital payments. We should expect PayNet to ensure that the payment infrastructure of this country will always be at the cutting edge of technology. This will enable the economy to innovate, be competitive and productive. The results speak for themselves; we have made great strides. Payment card spending has increased by more than threefold since 2006 to RM176.9 billion in 2017. From 2011 to 2017, epayments per capita have more than doubled to 111 transactions.

Only ambitious policies will deliver concrete benefits for the people of Europe. This is also what our common history tells us. This year marks the 25th anniversary of the Single Market and of the Maastricht Treaty’s entry into force. Those were bold decisions and we continue to benefit from them today: goods, people, services and capital can move freely and EU legislation ensures that commensurate rights and obligations apply throughout our Union. With the creation of Economic and Monetary Union (EMU) we went further by adopting the single currency. It is in this spirit that I look forward to the coming months and the pivotal discussions we will have on reforming EMU governance. Thank you for your attention. I am at your disposal for questions. 1 www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180205.en.html 2 See “Low inflation in the euro area: Causes and consequences”, ECB Occasional Paper Series, No 181, January 2017. 3 See “Domestic and global drivers of inflation in the euro area”, ECB Economic Bulletin, Issue 4 /2017. 4 General Court’s judgment in Case T-496/11 United Kingdom of Great Britain and Northern Ireland v European Central Bank. ECLI: EU:T:2015:133. 4/4 BIS central bankers' speeches

As one example, it is estimated that annual investment in sustainable infrastructure could top £ billion for decades. 27 Firms that align their business models to the transition to a carbon-neutral world will be rewarded handsomely; those that fail to adapt will cease to exist. The new finance can smooth the transition to a carbon-neutral economy. The City has been leading the way. UK underwriters, led by the former Lord Mayor Sir Roger Gifford, helped create the green bond market which has doubled every year since 2012 to reach $ outstanding.28 UKbased banks, like Barclays and HSBC, insurers, like Aviva, and asset managers, like Generation, helped develop climate financial disclosure standards and were amongst the TCFD’s first adopters. Now a range of firms at the heart of the City are beginning to reshape the management of climate-related risks and opportunities. But we must go much further if the UK is to reach net zero carbon emissions. Disclosure must become comprehensive. Risk management must be transformed. Sustainable investing must go mainstream. 26 See: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/790626/2018-provisionalemissions-statistics-report.pdf. 27 See: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/703816/green-financetaskforce-accelerating-green-finance-report.pdf. 28 Source: Climate Bonds Initiative Data. 10 All speeches are available online at www.bankofengland.co.uk/news/speeches 10 Fortunately, the momentum is growing.

19 20 21 7 All speeches are available online at www.bankofengland.co.uk/news/speeches 7 also act as the unique identifier for a digital ID, which could help the two-step verification process required for a secure system. The Bank will submit a formal response on how to develop an open platform for competitive SME finance to the Smart Data Review referenced by the Chancellor this evening. Strengthen resilience in the face of new risks The City of London has maintained its pre-eminence by innovating. This was as true in the First Industrial Revolution when finance oiled the pistons of the steam engines, as it is today at the dawn of the Fourth Industrial Revolution, with the advent of cloud computing and the robosapien fund manager. Today the key competitive advantage in financial services is how firms – and supervisors—collect, store and analyse the explosion of data. Just as the steam engine transformed manufacturing, AI, ML and cloudbased technologies are transforming services. Accordingly, the second focus of the Bank’s initial response is how new general purpose technologies, like the Cloud and AI, can be used to strengthen the resilience of the system. Embracing these technologies could herald leaner, faster and more tailored financial services.

In recent years, with the financial crisis and the sovereign debt crisis, the real return has been lower, averaging about 2½ percent since 1998. 1 Source: Lie, E. and C. Venneslan: Over evne. Finansdepartementet 1965–1992 [Beyond our power. Ministry of Finance 1965–1992]. Pax forlag, 2010. 2 See Report no. 25 to the Storting (1973-74): “Petroleumsvirksomhetens plass i det norske samfunn” [The role of petroleum activity in Norwegian society]. 4 BIS central bankers’ speeches We should be careful about taking a rear-view mirror approach to forming expectations about the future. Equity prices fluctuate considerably and there is a possibility that the results of the past few years will be counterbalanced by good years ahead. But changes in the global economy affect the growth outlook and the balance of risks, and hence financial market returns as well. (Chart 9: Real return on 10-year government bonds) The yield on the presumably safest long-term government bonds can provide a basis for estimating the return on the Fund. Returns exceeding this will reflect the risk we are willing to take. In 2001, real interest rates on long-term government bonds averaged around 3 percent internationally. Real interest rates have since fallen and long-term real interest rates are now at a historical low of between 0 and 1 percent. At the moment, it would seem that economic growth ahead will be more modest than in the favourable pre-crisis years.

We must therefore be prepared for an extended period of lower returns, even though growth and financial market returns do not always go hand in hand. Over time, we expect equities to yield a higher return than bonds. Over the past few years, the Fund has increased its allocation to equities, compensating to some extent for low bond yields. However, the excess return on equities must be considerable to keep up the overall return on the Fund. This is not impossible, but perhaps more than we can expect. A bolder investment strategy could compensate for low interest rates, although the risk of substantial losses would also increase. This is hardly a tempting path. (Table: Estimated real return) Today’s situation is different from when the fiscal rule was drawn up in 2001. At that time, a real return on the Fund of 4 percent, or a little higher, based on the then prevailing distribution between equities and bonds, was a reasonable assumption. Today, calculations yield a lower figure for expected real return3. The real return on bonds in the Fund’s portfolio can now be estimated at 1 percent. With a normal risk premium on equities, the real return on the whole Fund can be quantified at 3 percent. There is a possibility that the real return will be higher, but it may also be lower. If we spend more than the annual return on the Fund, we will be eating into the savings portion.

This would facilitate more active trading of SGS and $ bonds and deepen bond market liquidity. Repo transactions with non-residents are presently subject to a $ million consultation limit. Banks have told us that this requirement to consult is a psychological hurdle, even though MAS has assured them that the decisions will be liberal and quick. A non-resident borrowing $ through a repo must first obtain the equivalent amount in SGS, which is a $ asset. Given that MAS Notice 757 already limits a non-resident to no more than $ million of Singapore dollar credit for such investments, allowing banks to transact $ repos freely with non-residents will not lead to a significant net increase in $ credit facilities to non-residents. MAS has therefore decided to lift the $ million consultation limit. Banks in Singapore may now, without prior consultation with MAS, enter into repo transactions in Singapore government securities BIS Review 130/1999 3 and $ denominated bonds listed on SES with any party, and for any amount, on condition that there is full delivery of collateral. OTC interest rate derivatives OTC interest rate products would open more avenues for non-resident investors to manage their $ interest rate risks arising from investing in the $ debt market. But hitherto MAS has restricted OTC interest rate derivatives, because they could facilitate speculative volatility in the $ In September this year, SIMEX introduced the $ three-month interest rate futures contract.

Conclusion Beyond the immediate Y2K issue, it is clear that Asian bankers face many serious challenges. They need to keep abreast of changing developments, and anticipate new trends. They must significantly improve their corporate governance. Technological innovations will continue. Policymakers have a full agenda to liberalise prudently, while tightening standards of supervision and enforcement. As financial liberalisation proceeds, new market opportunities will emerge and there will be a demand for more differentiated products and services. Capital markets should grow in Asia, providing an alternative means of intermediation for regional economies. If Asian financial systems can do these things and respond to new opportunities, they will be a source of strength, and not weakness, to their countries as the new millennium dawns. BIS Review 130/1999 5

The PTIS, which was announced in Budget 2023 and will go live on 1 January 2024, will allow qualifying donors in Singapore to claim 100% tax deduction, capped at 40% of the donor's statutory income, for overseas donations made through qualifying local intermediaries. 1 We hope the introduction of PTIS will encourage philanthropic giving to become a regular, professional feature of family offices here. HOW IS MAS SAFEGUARDING THE OFFICIAL FOREIGN RESERVES AGAINST CLIMATE RISKS? Let me say a few quick words about our 2023 Sustainability Report which we are releasing today alongside our Annual Report. The Report gives a good account of how sustainability is integrated across MAS' various functions: as a central bank safeguarding Singapore's OFR against climate risk; as a financial regulator ensuring a climate-resilient financial sector; 13/16 BIS - Central bankers' speeches as a promoter of the financial sector developing a vibrant sustainable finance ecosystem; and as an organisation trying to reduce its own carbon footprint. Today, I will focus on an area we have not spoken about much - how MAS is safeguarding the OFR against climate risk. It is probably the least news-worthy of the issues I have covered today but likely to be the most critical for the future. In 2021, MAS developed and published a climate risk management strategy to enhance the climate resilience of our investment portfolio. We conducted a climate scenario analysis for the whole portfolio.

However, the very fact of sharing and the multiple parties involved can give rise to risks of their own - particularly of a legal nature - which means that the documentation in syndicated loans needs to be as watertight as possible. The benefits of standardised documentation This is why the Association’s initiative in producing a suite of standard loan documents is so important, and is probably the Association’s major achievement to date. Good documentation is not glamorous and is generally not fascinating reading, but it plays a vital role in underpinning the growth and liquidity of markets in financial products. This is not a theoretical proposition. The explosive growth in the derivatives market is to a large extent due to the role played by the International Swaps & Derivatives Association (ISDA) in the development and maintenance of its derivatives documentation. The most recent testimony to this is the emergence within the space of the last few years of a $ 1 trillion credit derivatives market, built on the platform provided by the Standardised ISDA Default Swap Documentation. Why is standardised documentation such a powerful driver of market growth? The answer is that it creates more predictability and certainty about the characteristics of the financial contract in question. BIS Review 33/2002 1 People are better able to understand what their rights and obligations are under the contract, and this gives them more confidence to enter the market and transact.

Regrettably, however, the then Deputy Governor’s only comment on the book appeared to be that he was grateful to Keynes for writing in a style which an educated man could read with pleasure, and for having the book printed in a particularly attractive style. This Deputy Governor has learned a great deal from Keynes’ book. I refer to it in almost every lecture I give. In this lecture I shall discuss three aspects of the significance of the labour market for monetary policy. The first of these concerns the link between unemployment and inflation in the transmission mechanism of monetary policy. The second issue is how the Monetary Policy Committee uses the available empirical information about the UK labour market when deciding on interest rates. How do unemployment figures and earnings data enter the MPC’s decisions? The third issue is the way in which unemployment enters the objectives of monetary policy. With an explicit inflation target, is it true that the MPC neither cares about unemployment nor takes it into consideration when setting interest rates? The labour market and the monetary transmission mechanism The theory of unemployment has spawned more concepts, and – without doubt – more acronyms, than almost any other field of economics (apart, perhaps, from measures of price inflation). I shall return to the language of unemployment later. But I want first to discuss the two concepts which are at the heart of any discussion of monetary policy and the labour market.

Second, the temporary improvement in the terms of trade that followed the rise in sterling in 1996 reduced the wedge between the real consumption wage – which is of relevance to employees and which reflects a mix of both domestic and imported inflation components – and the real product wage – which is of relevance to employers and which reflects the prices only of domestically produced goods. That reduction in the wedge is likely to have reduced the pressure on nominal wage growth for any given level of unemployment. So it is quite possible to believe that the NAIRU has fallen even if the natural rate has not. But this is likely to be temporary. As the impact of sterling’s appreciation on wages and prices wears off, the NAIRU will, other things being equal, rise towards the natural rate. But other more BIS Review 103/1998 –5– lasting changes may reduce the natural rate (and hence the NAIRU). For example, a range of government policies, including changes to the Jobseekers Allowance, the New Deal and the new Working Families Tax Credit, have increased incentives to work. The National Minimum Wage works in the opposite direction. Assessing the impact of these structural factors on the natural rate is no easier than calculating the effect of macroeconomic shocks on the NAIRU. But it is useful to distinguish the two concepts, not least because they can move quite differently in the short run. Enough of this theory, some of which may appear largely semantic.

7 Bank of England: Quarterly Bulletin 1, 2011, Chart 13: http://www.bankofengland.co.uk/publications/quarterlybulletin/qb1101.pdf BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11 12 BIS central bankers’ speeches BIS central bankers’ speeches 13 14 BIS central bankers’ speeches

The recession after the credit bubble burst and oil prices fell in 1986 was deep. The recession was deeper than would have been the case if we had maintained a larger and competitive manufacturing sector. Norwegian industry lost export market shares in the late 1980s in spite of the booming conditions abroad and substantial capacity slack at home. It was recognised that a substantial revision of economic policy would be necessary and that the problems created by inflation had to be taken seriously. The exchange rate was chosen as the nominal anchor in 1986. A fixed exchange rate was an intermediate target for achieving low and stable inflation. Inflation fell gradually to 2-3 per cent in 1991-1992. We had to abandon the fixed exchange rate policy in 1992. An important reason was the weakness inherent in the fixed exchange rate regime in a world with free capital flows and deep financial markets. The krone exchange rate showed, however, little change to begin with and rapidly found a new range. A formal inflation target for monetary policy was introduced in the spring of 2001. The operational target of monetary policy as defined by the government is inflation of close to 2.5 per cent over time. Many countries had already gained many years’ experience in operating such a system. New Zealand was the first in line towards the end of the 1980s. Canada followed shortly thereafter.

Svensson (2003) has proposed that each MPC member declares a preferred path for Bank Rate. The collective path is formed by taking the median value of Bank Rate at each date in the future. In general this collective path is not the path preferred by any single MPC member and does not reflect an internally consistent set of views, posing a considerable communications challenge. The least bad idea my staff in the Bank have been able to come up with is one that aims to balance the preferences of all committee members – that is to maximise the Committee’s overall satisfaction with the outcome. To operationalise this, there could be two rounds of voting. In the first, each Committee member would propose a preferred path for interest rates. In the second round, Committee members would vote on the paths proposed by the other members. This vote could be structured in a number of ways, for example: a simple ranking (with transferable votes to break ties); allocating a fixed number of points over the alternative paths (again with transferable votes to resolve ties); or an arrangement like the current one where, after discussion, the Governor proposes a motion which is likely to command a majority. How all this would be communicated to the public I leave as an exercise for the interested reader. 10 BIS Review 43/2007 How successful are the MPC’s communications to financial markets and business more generally, and should the Committee be considering other changes?

Rising importance of this topic is clearly demonstrated by the adoption of the Bali Fintech Agenda of the IMF that provides guidance for national authorities on how to cope with new and evolving financial landscape, and underlines the need for stronger international cooperation as financial services are blurring boundaries, both institutionally and geographically. In what follows, I would like to briefly focus on the challenges of fintech developments for the banking industry and policy makers. We do have to take into account that digitalization of banking is not a new phenomenon; it has been present for more than 3 decades (in the form of automated teller machines, electronic payments, e-banking). The emergence of fintech is only the latest wave of innovation to affect the banking industry. Still, in the last decade, a significant change has occurred in the way of using technology, thus creating environment in which disruption can happen more quickly, and urging traditional banks to adjust faster to maintain market share. Besides the advancement in technology, a few other factors have also contributed to proliferation of financial innovation. The fact that banking industry was dealing with the legacy issues of the global financial crisis-impaired balance sheets, perhaps was important factor that provided space for non-banks to penetrate in financial business. Also, banks’ resources to a great extent were tilted towards implementation of the new Basel 3 requirements aimed at increasing the resilience of the banking system.

But there is scope and attraction for experimenting with greater flexibility in the fullness of time and that is indeed the declared intention of the Mainland authorities. However, with ongoing macro-economic adjustment, I doubt if this is the right time for experimenting. Conclusion In this speech I have surveyed the characteristics of Asian finance and concluded that it is, at least to me, in a rather unhappy, and possibly unsustainable, state. We have to seek a long-term solution through Asian monetary co-operation, or continue to be vulnerable to financial instability and defend ourselves through ad hoc retreats from financial openness. The Mainland of China, itself facing a most difficult task of financial reform, is an increasingly important factor in all this, as trade and economic integration of the region continues apace. Thank you. 8 BIS Review 66/2004

These price control schemes coupled with the price support projects outlined above mean that the market mechanism is not well-functioning. Distorted prices in the spot market may have also discouraged foreign players from participating actively in our futures markets. A freely traded spot market is a necessary condition for a successful futures market. Ladies and Gentlemen, I would urge the board of directors of AFET and AFTC, the Ministry of Commerce, the government, all members of AFET and key players in our main agricultural products to be totally committed to making AFET a highly successful futures market - an exemplar to our neighbours and one where global trading is benchmarked. We need to be strategic, prioritising our products and evaluating needs of different participating groups. I pledge my full support to this cause. I have spent a great deal of time talking about the AFET, I would now like to briefly touch on its siblingTFEX. TFEX is launching its very first product SET50 futures in the next few months and from the road shows to date, I hear that it has been very well-received. As the next step, the Stock Exchange Commissioner and the Bank of Thailand are currently working on launching the much-anticipated bond futures or interest rate futures. I hope that once Thai financial market has been complemented by these interest rate futures, our players will be able to make much progress in the area of risk management, financial product innovation and trading.

Finally, I would like to know about the dynamic properties of the new FCI. Are particularly high (expansive) readings dangerous and should they be taken as suggestive of asset bubbles? Should the Federal Reserve try to prevent such occurrences because loose financial conditions precede episodes of financial instability? In this respect, when financial conditions become unusually expansive, is the fed funds rate the right tool to use to constrain or counteract such expansiveness? Or would it be better to use macroprudential tools such as leverage limits or loan-to-value requirements on residential real estate to keep financial conditions from becoming unusually expansive in the first place? I could imagine circumstances in which macroprudential tools might be used to tighten up the relationship between the fed funds rate and financial conditions. Would the use of such tools be helpful in achieving greater macroeconomic stability? At this stage, there are many more questions than answers. I would strongly encourage the authors and others to continue their work on financial conditions and in exploring how developments in the financial sector influence both the real economy and monetary policy. The financial crisis has demonstrated that financial market developments matter greatly. The paper successfully makes the case that it would be useful to have a good set of summary statistics to serve as benchmarks to keep track of such developments. It also would be useful to have a better understanding of how shifts in financial conditions should be considered in the ongoing conduct of monetary policy.

All of the Federal Reserve Banks have their areas of specialization. In my opinion, the New York Fed has at least four that are worthy of mention today because these affect the work of the New York Fed’s economists. First, we are the operational arm of the Federal Reserve, responsible for the implementation of monetary policy. This means we have a unique set of relationships with the securities dealer community and with respect to monitoring financial markets. It also means that we work very closely with the Board of Governors and the Federal Open Market Committee (FOMC) in implementing monetary policy. Second, we have a unique endowment and responsibility by virtue of our location. New York City is a global financial center, and finance is a very important aspect of the Second District’s economy. Most of the largest global financial institutions have a major presence here. With delegated authority from the Board of Governors, we are responsible for the supervision of most of the major financial institutions headquartered in our district, as well as numerous foreign banking organizations that do business here. Third, we are the fiscal agent for the Treasury and conduct the Treasury debt auctions on their behalf. Additionally, we are responsible for Fedwire, which along with Clearing House Interbank Payments System (CHIPS), is one of the two large-dollar, real-time payment systems in the U.S. Fourth, we have a unique set of international duties. We provide banking services to foreign central banks, including investment of reserves and administration of foreign exchange swap lines.

In my introduction, I posed a question: do reformed banking regulation and the new macroprudential instruments relieve monetary policy of any responsibility for financial stability? So let me conclude. While increased capital requirements and macroprudential policy can strengthen banks’ solidity and mitigate the build-up of imbalances, we cannot proceed under the assumption that new regulations alone will eliminate the risk of financial instability. A robust monetary policy should therefore take into account the risk of a build-up of financial imbalances. Monetary policy could then contribute to more stable economic developments over time. BIS central bankers’ speeches 5 At the same time, monetary policy must not be overburdened. Banking regulation and supervision must be the first line of defence against shocks to the financial system. When assessing the monetary policy trade-offs, central banks must pursue the primary objective of monetary policy – low and stable inflation. 6 BIS central bankers’ speeches BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9

There have been comments that the Riksbank has been too silent and not prepared market agents and others for a raise. We must, of course, consider this criticism. A natural part of monetary policy is to consider whether there are things we could do better. This is the way we always try to work. There is one aspect of this of which it is important to be aware. This is that we quite simply cannot send clear signals as to how the interest rate will be set two to three weeks ahead of a monetary policy meeting. This would require us to be fairly certain about the majority opinion and that it will not change. The decision-making situation is often unclear to the very last. And, I would say that this was definitely the case this time. Now, I do believe that there is widespread understanding that we cannot in advance state how the interest rate will be set. It may be the case that as a result of the recent turmoil there has been more of a need than usual that the Riksbank comments on the course of events, without anticipating the interest rate decision. Assessing monetary policy Now let us look back and discuss the material for assessing monetary policy, which came about on the initiative of the Committee on Finance. It is for me quite special this time. This is the first occasion on which the material for assessing monetary policy actually covers decisions that I have been party to.

(a) (b) Out-of-sample performance is measured by the mean squared prediction error. A lower number implies better performance. 32 GARCH innovations are normally-distributed. BIS central bankers’ speeches Charts 12–17: Mean Squared Prediction Errors (MSPE) and Decomposition(a)(b) Chart 12: Sample size = 20 Chart 13: Sample size = 500 Chart 14: Sample size = 2500 Chart 15: Sample size = 25,000 Chart 16: Sample size = 100,000 Chart 17: Sample size = 250,000 Source: Bank calculations. (a) MSPE equals the sum of the squared bias and variance. (b) Data generating process: GARCH (3,3) with normally-distributed innovations. BIS central bankers’ speeches 33 Chart 18: VaR violation ratios for portfolio of (a) commodities Chart 19: VaR violation ratios for portfolios of (a) equities Source: Global Financial Data and Bank calculations. Source: Global Financial Data and Bank calculations. (a) Equally-weighted portfolio of silver, wheat and hogs. Validation period starts in 1970. 95% VaR using monthly returns. (a) (b) EWMA: lambda = 0.94. (b) For each k-sized portfolio, the result shown is the average of 100 random k-sized combinations of equities out of a universe of 210 stocks in the S&P 500. Validation period starts in 2005. 95% VaR using daily returns. EWMA: lambda = 0.94. Chart 20: Evolution of bank price to book ratios, (a)(b) historical and present day Source: Thomson Reuters Datastream, Calomiris and Wilson (2004) and Bank calculations.

Unlike covered bonds, the latter are backed by packages or specific groups of foreign trade financing operations. These new bonds may contribute to reducing exporting firms’ financial costs and to increasing the total volume of financing. Along with providing financing, banks also extend coverage for export risks, relating for instance to the recipient country’s economic or political situation, so-called “country risk”; the risk that products may be damaged in transit or withheld at borders; collection difficulties in the event of non-payment, associated with different jurisdictional frameworks; and greater uncertainty in the relationship between the supplier and acquiring company. Banks have used various instruments to extend guarantees on international trade flows. The classic instrument is, of course, the documentary credit. The importer’s bank guarantees the exporter’s bank that payment will be made once it has been confirmed, through presentation of the pertinent documentation, that the transaction has been correctly completed. In this way, exporters notably reduce their risks. Naturally, the demand for coverage of credit risk is higher for trade flows with countries with which there are fewer historical ties and with those trade partners for which greater risk is perceived. Accordingly, this may prove important in the opening-up of new markets and in flows to emerging economies. As regards the medium and long term, the nature and functioning of transactions differ from those for short-term transactions. The financial services provided by banks for longer-dated terms are, essentially, financing and the extension of guarantees and bonds needed to participate in international tender procedures.

His second goal, however, was an example of the power of expectations in the modern theory of interest rates. Maradona ran 60 yards from inside his own half beating five players before placing the ball in the English goal. The truly remarkable thing, however, is that, Maradona ran virtually in a straight line. How can you beat five players by running in a straight line? The answer is that the English defenders reacted to what they expected Maradona to do. Because they expected Maradona to move either left or right, he was able to go straight on. Monetary policy works in a similar way. Market interest rates react to what the central bank is expected to do. In recent years the Bank of England and other central banks have experienced periods in which they have been able to influence the path of the economy without making large moves in official interest rates. They headed in a straight line for their goals. How was that possible? Because financial markets did not expect interest rates to remain constant. They expected that rates would move either up or down. Those expectations were sufficient – at times – to stabilise private spending while official interest rates in fact moved very little. An example of the Maradona theory of interest rates in action is shown in Chart 1.

When Bank Negara Malaysia and the Bank of Thailand first operationalized this arrangement between our central banks in March 2016, we saw the potential and benefits for local currencies to play a more important role in enhancing regional trade linkages. The expansion of the arrangement today to include our close trade partner, Indonesia, underscores this potential. The signing of this MoU between Bank Indonesia and Bank Negara Malaysia represents another important milestone in the move to strengthen the relationship between Malaysia and Indonesia. Following the conclusion of the ASEAN Banking Integration Framework, we are confident financial institutions in both countries will be able to collaborate towards realizing the objective of facilitating greater cross-border trade and investments. Both Thailand and Indonesia share important links with Malaysia, forged through a long history of trade and investment activities, and close cooperation between our central banks. This occasion reflects how far we have come in this process. The cooperation arrangements between our central banks have now expanded to include clearly defined protocols and operational frameworks in a broad range of areas, including financial market development, supervision, surveillance, payment arrangements and crisis management. Bank Negara Malaysia has long been a strong supporter of financial and economic integration in both ASEAN and broader Asia – to unlock the region’s growth potential and support a stronger, more resilient economic community.

The effect has been particularly significant in countries such as Spain, whose initial fiscal space was less than that of other countries, given its high starting level of public debt and structural budget deficit. 2 This amount – around € billion – could cover a volume of losses equivalent to almost twice the current volume of bad loans in the system, i.e. approximately 8.2% of total lending to the resident private sector. 2 The ECB’s targeted long-term refinancing operations (TLTROs) during the crisis have also managed to prevent liquidity problems in the banking sector and have smoothed and encouraged lending by the sector to the economy. For example, in the June TLTRO III operation, the participating banks received a total of € trillion, a record amount in the Eurosystem’s refinancing operations. These operations continue to be significant and, at the last TLTRO auction, TLTRO III.7, settled on 18 March, € billion were allotted to the participating group of Eurosystem credit institutions. The European authorities with prudential powers adopted, in coordination with the national and international authorities, numerous decisions so that the financial system could contribute to overcoming the crisis. Supervisors thus reviewed their guidelines on capital and liquidity buffers, allowing banks temporarily to operate below the regulatory level set for some of these buffers. Various recommendations on limiting the distribution of dividends were also approved.

In 2007, Professor Mak Yuen Teen of the National University of Singapore was commissioned by MAS to undertake a study aimed at assessing the current state of corporate governance practices in Singapore, identifying gaps and proposing measures for improvement. Professor Mak highlighted, among others, the need to enhance the effectiveness of Audit Committees through training, practical guidance and sharing of experience among Audit Committee members. Arising from this, the MAS, the Accounting and Corporate Regulatory Authority ["ACRA"] and the Singapore Exchange established a private sector committee to develop practical guidance to assist Audit Committees to better appreciate their responsibilities and enhance their effectiveness in performing their role. The Committee, led by Mr. Bobby Chin, worked intensely over 9 months and completed its work in October 2008. The Committee's output, "Guidebook for Audit Committees in Singapore", has become a practical and valuable reference for directors who serve on the Audit Committees. We have also been supportive of efforts by the Singapore Institute of Directors to review its structure and strengthen the delivery of its director training program, so that it may better meet the increased demands placed on directors in this current environment. The continual efforts by industry practitioners, investors and regulators to improve corporate governance have enabled Singapore to stay ahead of the field. The World Economic Forum's BIS Review 147/2009 1 Global Competitiveness Report 2009, for instance, ranked Singapore first in corporate governance standards in Asia.

Secondly, there are certain features of the prevailing financial and economic environment that give us pause for thought. Market prices are at historically unusual levels: real and nominal returns on risk free assets are low and credit spreads are tight, both in traditional and structured products. It is of course hard to say definitively the extent to which today’s markets are merely reflecting changed fundamentals. But it is quite possible that some investors have unwittingly taken on higher levels of risk in pursuit of what they would consider to be “normal” levels of return. And it is certainly prudent to plan for the possibility of a sharp reversion of prices to historically more normal levels (or even beyond them, given the tendency of markets to overshoot). There could be a period of impaired market liquidity during any such correction. One could imagine a number of potential catalysts for such a correction, ranging from a geo-political event to some form of major operational disruption. The Bank concurs with the widely held view that the growth of markets in risk transfer should contribute to greater financial stability, by allowing a more efficient dispersion of risks. But the depth and reliability of the more recently developed markets in risk under stressed conditions has not yet been fully tested. Moreover, risk transfer markets can, and probably at present do make the ultimate destination of risks more opaque. This hampers our ability to assess the overall stability of the financial system, and, potentially, to react effectively in a crisis.

First, I can’t help feeling that it is at times such as this, when we have a relatively benign environment, that we should seek to address difficult and contentious issues of the kind I have been discussing. It is certainly true that the risk transfer markets and the financial system have coped, with remarkable success, and with few signs of instability, with the various events and shocks in recent years. But we need to be sure that we are not complacent in placing trust in the ability of the financial system to continue to absorb shocks smoothly. Second, policy makers have found it hard to discuss lender of last resort issues because they can so quickly raise the spectre of moral hazard: by giving too many clues to their likely response to instability, policy makers fear undermining market discipline and so making crises more likely. Equally, public policy makers should recognise the distinction between clarity about processes—where transparency to my mind can only be positive for confidence—and transparency about how decisions might be reached in a particular case, where constructive ambiguity remains important as a mechanism to reinforce market discipline. On the other side of the fence, banks and financial institutions have made impressive strides in coping with these realities, but may be reluctant to move explicitly to transparent best practice standards. Maybe this is for fear of giving up competitive advantage, or maybe it is a fear that regulators might seek to impose unwelcome prescription in how they manage liquidity risks.

In Norway, as in most other countries, this was particularly distinct for credit to enterprises. Both higher spreads and tighter credit standards can have potentially strong contractionary effects on the economy and needed to be counteracted. BIS Review 113/2010 1 Liquidity and capital support was necessary to restore credit flows The contractionary forces from the financial sector were addressed by providing liquidity and capital to banks, through both regular and unconventional instruments in many countries. Government actions enabled banks to continue to provide credit to households and enterprises. The crisis demonstrated that the transmission mechanism is important for the effectiveness of monetary policy. It also demonstrated that the relationship between price stability and financial stability must be given due attention. In Norges Bank there is close integration between the two areas Norges Bank Monetary Policy and Norges Bank Financial Stability. Norges Bank Financial Stability participates at all meetings in the monetary policy process. This ensures that sufficient attention is given to developments in the financial system. It also provided the necessary insight to make wellinformed assessments of the transmission mechanism during the crisis. Considerable revision of the interest rate forecast during the crisis The second lesson is that inflation targeting seems to have survived the test. In my view, increased transparency and the efforts made to improve the communication of monetary policy to the general public have been very valuable.

Transparency eased communication: an account of the factors behind the revision In our Monetary Policy Report, the interest rate forecast is accompanied by a separate chart, shown here, that shows the revision since the previous report due to changes in exogenous factors. By carefully explaining the reasoning behind the revisions of our interest rate forecasts, financial market participants and other interested parties can make their own judgment as to whether the revisions seem justifiable. In general, interest rate forecasting has worked well. As market expectations tend to react to economic news largely in line with the Bank’s response pattern, there is little doubt that the contingency of the forecasts is well understood. BIS Review 113/2010 3 Interest rate forecast and exit strategy Another advantage of publishing our own forecast for interest rates is that the exit strategy is an inherent part of the Bank’s communication. A key element of any exit strategy is that policymakers must guide expectations. An exit that takes markets by surprise can lead to major reassessments of the yield curve. Publishing explicit interest rate forecasts is a very direct way of guiding financial market participants’ expectations. Historical perspective I The decline in world trade during the crises of 1929–1933 and 2008–2010 The third lesson is the need for multilateral cooperation and collective action. As the global economic and financial crises unfolded, joint, massive and unprecedented policy responses were put in place around the world so as to avoid another Great Depression.

Percent 15 15 Actual Holden III 10 10 5 5 0 1970 1980 1990 2000 2010 2020 2030 0 2040 1) Sum of investment, intermediate consumption and labour costs in crude oil and natural gas production. Sources: Ministry of Finance and Statistics Norway In the course of a few years after the oil price fall, oil industry demand6, measured as a share of mainland GDP, declined by 40 percent. A comparable fall in global oil-related demand amplified the downswing in the Norwegian oil service industry. Despite the shock to the oil industry, the downturn in the Norwegian economy proved fairly mild. Employment growth slowed, but unlike during the financial crisis and the downturn in the early 2000s, growth remained positive and registered unemployment did not exceed 3 percent. The mildness of the downturn following the oil price fall shows that the Norwegian economy has effective shock absorbers, such as flexible wage formation, a floating exchange rate and solid government finances. We also had monetary policy space, which we used (Chart 13). 5 See, inter alia, Official Norwegian Reports NOU 2013:13: Lønnsdannelsen og utfordringer for norsk økonomi [Wage formation and challenges facing the Norwegian economy] (Norwegian only). 6 Measured as the sum of investment, intermediate consumption and labour costs in oil and gas production. 12 NORGES BANK Chart 13 Monetary policy is the first line of defence. Policy rate and capacity utilisation.

Percent 88 88 2001 86 ECONOMIC PERSPECTIVES 13 FEBRUARY 2020 86 84 84 82 82 80 80 78 78 76 76 an p Ja da UK na Ca US nd la Fin p. ds ark e n nm h R herla De t Ne c ze C ed en Sw ay rw No Source: OECD Chart 17b No longer at the top of the employment chart. Employment. Share of population aged 25-54.1) Percent 88 88 Now 86 86 84 84 82 82 80 80 78 78 76 76 US De nm ark Fin d lan Ca n a ad No r y wa UK rla the Ne s nd Ja n pa en Rep. ed h w S ec Cz 1) Latest observations. Source: OECD Those outside the labour market share a number of characteristics.8 One is weak formal qualifications. Among them, we find recently arrived immigrants and young persons who have dropped out of school. Another is poor language skills. Moreover, it is worrying that disability rates are rising, particularly among young people (Chart 18).

They include the need to designate a Euro area finance minister with her own budget for macroeconomic stabilisation, a rainy-day fund with or without the possibility of issuing debt, a European unemployment (re-)insurance scheme, and so on. Views on these proposals, however, differ in terms of size, allocation of competences, political feasibility and in many other respects. According to Banco de España simulations, the effective design of any of the proposals needs to be sizable enough to provide stabilizstion for an economy facing a recession, even a large economy facing a deep recession. The trigger mechanism must be clear and smooth to ensure a timely response. But it should also address legitimate concerns over moral hazard and permanent transfers. The phasing-out should ensure that fiscal transfers will not be permanent so as to avoid undue redistribution across member states. To preserve sound incentives, in my view, countries with access to this instrument must comply with fiscal rules and with the rules of the Macroeconomic imbalances procedure. Even countries with a good fiscal record can fail to deal with sizable shocks, but ex ante compliance with fiscal rules –and a transparent process- is necessary to dispel doubts about the behaviour of the country under stress, while also providing flexibility for national fiscal buffers. The Banco de España simulations show that, with an annual contribution of 0.35% of GDP per country, it is possible to design a fiscal capacity with a risk-sharing capacity similar to that of the existing instruments in the US.

Less traditional firms, often with a primary focus on automated, low-latency trading strategies, have entered the arena and helped to transform the landscape. In addition to adapting to these changes, traditional broker-dealers are complying with a more rigorous regulatory framework and are also expanding their use of automated trading technologies. These developments raise a number of important questions. They include: Who are these new entrants and what are their motivations? Has the changing composition of firms affected the nature of market making and liquidity provision? How have traditional liquidity providers responded to the expanded use of new technology? Has the changing structure introduced operational risks in the clearing and settlement infrastructure? How has the evolution of the repo market affected the secondary market for Treasury securities? Are the regulatory requirements imposed upon the Treasury market sufficient in today’s world? And finally, are there any changes – regulatory or otherwise – that could improve the functioning, efficiency and/or integrity of the Treasury market? As I noted in my recent remarks on market liquidity, many open questions remain on the subject of Treasury market liquidity. 2 At the same time, the agenda for this conference makes it clear that there are many other important questions beyond market liquidity worthy of consideration and debate. The breadth and expertise of the attendees at this conference make this forum an excellent opportunity to advance our collective thinking on this range of important subjects.

These include a broad range of tax rate reductions, exemptions and deductions that, ultimately, reduce revenues significantly and introduce distortions that contravene the principles of efficiency and fairness. 3.4 Population ageing and pension system reform One factor that makes it all the more necessary to reduce the vulnerability of public finances in Spain is the challenge of population ageing. The large projected increase in the dependency ratio over the next 30 years will give rise to a very significant increase in public spending on pensions, health and long-term care. Consequently, a crucial aspect of the medium and long-term budget plans is the sustainability of spending in these areas. 32 In the specific case of the pension system, recurrent deficits have been recorded in recent years. In its recent recommendations, the Toledo Pact Commission emphasises that the social security system currently bears burdens for which it should not be responsible and therefore it proposes transferring them to the State. In addition, the AIReF has proposed transferring some of the social contributions currently allocated to the National Public Employment Service to the social security system. These measures seek to significantly reduce the social security system’s deficit, at the expense of the State deficit.

And although the emergence of fresh outbreaks was considered, their containment would only require restrictive measures of limited scope, from the geographical standpoint and from that of the productive sectors affected. In this respect, the impact of these new restrictions on activity would, it was assumed, be relatively limited. Under scenario 2, by contrast, fresh outbreaks on a greater scale in the short term were envisaged. It was admittedly assumed that the containment of these outbreaks would not require the application of such strict and widespread social distancing measures as those in place before the start of lockdown-easing last spring. But it was believed these limitations would have an appreciable adverse effect on activity. In particular, the scenario envisaged the possibility that, in addition to causing more intense harm to activity in the services 2 Illustrating these inequalities, there was a very high year-on-year decline in temporary employees (-13%) to Q3 according to the Labour Force Survey, while in the case of permanent employees there was a 0.8% fall. By gender, the decline in employment was very similar (-3.6% for women and -3.4% for men), and it remained higher among younger workers (aged 16-29), falling at a rate of 12.8% in Q3, compared with the decline of 5.9% among those aged 30-44 and the 1.4% increase among the over-45s. In the case of young people, there has been a 7 pp increase in the unemployment rate to 31.4% compared with 2019 Q3.

If the right infrastructure is not in place or not properly designed, the integration, interconnectedness and complexity in the global financial system may hamper the health of the local financial system as economies become exposed to external shocks and crises, not only generated in the countries that directly relate to them, but also through contagion effects. Therefore, the main challenge for countries like us is managing financial globalisation in such a way that we take full advantage BIS central bankers’ speeches 3 of the opportunities it generates while minimising its adverse impact on the domestic financial sector by properly putting in place the right infrastructure. Reason 3: Avoidance of any possible financial distress Ladies and gentlemen, our financial system has also experienced a few non-systemic financial distresses in the past mainly due to the companies’ own mismanagement practices including poor credit management, non-viable investments made in their group of companies, unsatisfactory accounting systems and revenue recognition practices, inadequate internal controls, and high volume of related party transactions. However, some financial institutions have failed due to reasons such as their inability to adapt to the rapidly changing economic conditions. Small financial institutions not complying with corporate governance principles, capital and liquidity requirements were also a reason for some past crises, which have resulted in exerting pressure on the stability of the financial system of the country. During 1988–90, 13 Licensed Finance Companies reported serious distress, of which 2 companies were revived by infusing new capital while 11 companies were liquidated.

Step 1: Initiation of financial sector consolidation The Central Bank initiated the planning of the consolidation programme several years ago, and since then, a number of things have been done to bring it into reality, with procedures being carefully articulated for smoother implementation. As a result, in 2013, the Central Bank officially informed the Ministry of Finance, through a Budget Proposal, of the need for a strong and dynamic financial sector, by consolidating the institutions in the banking and nonbanking sectors in a prudent manner to ensure enhanced financial system stability and to spearhead economic growth. To support this initiative, His Excellency the President, in his Budget Speech on 21 November 2013, proposed to grant special tax concessions for expenditure incurred by banks and NBFIs, if they merge with, or acquire one or more financial institutions. Further, in view of providing better financial services for the development activity of the country, His Excellency proposed that two development banks, that is, NDB and DFCC be merged, for which too, qualifying payment status would be granted. Ladies and gentlemen, as the Central Bank is charged with the duty of securing financial system stability by its mandate, the major responsibility of implementing the consolidation programme announced by His Excellency the President was entrusted to the Central Bank. Further, in order to meet the funding requirements for the implementation of the consolidation programme, the Monetary Board approved a budgetary allocation from the Central Bank.

Maintaining a stable currency safeguards purchasing power over time and ensures the currency’s continuity across the territory, so that every individual can spend that currency anywhere and at any time and enjoy the same ability to purchase necessary goods and services. Back in the 18th century, France's authorities found themselves unable to guarantee this stability. After the bankruptcy of the John Law note-issuing bank in 1720 and several other 2 failed attempts to set up a central bank,5 the hyperinflation fuelled by monetary financing of the Revolutionary Wars and the ensuing default on two-thirds of France’s public debt in 1797 had destroyed confidence in the currency.6 The most pressing task facing the Consulate government was to rebuild the foundations of that trust, which it did by authorising the establishment of the Banque de France in 1800 and anchoring the value of the franc through the creation of the Germinal franc in 1803. In establishing the Banque de France, France set up a central bank that was capable, because it was trusted by the French people, of offering an “elastic” money supply, to use the economic jargon, that is, of adjusting the money supply to suit the needs of the economy. In this way, the foundations for an active lender-of-last-resort policy were laid very early, providing a means to combat financial crises and thus support the economy.

With this, the Banque de France became the cornerstone of the monetary and financial system spanning the entire French economy.4 Since the Bank was first established in 1800 through to the present day, our core mandate has been to guarantee monetary stability and, through our supervisory, refinancing and lender-of-last-resort policies, to 1 See the Decree of 2 May 1848, indicating that the decision of the Board of Directors of the Banque de Bordeaux was adopted on 27 April, following the decision by the General Council of the Banque de France on 24 April. 2 The branch opened its doors with the decrees of 27 April and 2 May 1848. 3 The other branches that opened in spring 1848 were in Rouen, Nantes, Marseille, Le Havre, Lille, Toulouse, Orléans and Lyon. 4 Leclercq, Yves, 1999, La formation d'une banque centrale: la Banque de France (années 1830 - années 1850), Revue économique Vol. 50, pp. 151-174 1 preserve financial stability. By establishing a branch network, we strengthened and enhanced our ability to serve the regional economies. Moreover, in each era, the Bank has tailored the approach taken to execute its statutory mandate, catering to the economic and financial environment and the institutions of the time in order to provide France's regions with the best possible support.

This assessment still applies, and it is gratifying that recent events have confirmed an improvement, although forecasts of the future of course remain uncertain. 8 BIS central bankers’ speeches Figure 6 Positive signs Purchasing Managers’ Index PMI, manufacturing industry, seasonally-adjusted data 70 70 65 65 60 60 55 55 50 50 45 45 Sweden 40 40 USA EMU 35 35 30 30 06 07 08 09 10 11 12 13 Source: Markit Economics Uncertainty remains However, apart from uncertainty regarding developments in the euro area there are, to paraphrase Donald Rumsfeld, the former Secretary of Defence of the United States, also other “known unknowns” that may affect the short-term prospects. One example of this is if there is a tangible change in market expectations regarding monetary policy in the United States. Ahead of yesterday’s meeting of the US central bank, the Federal Reserve, long-term interest rates had risen in the United States and Europe, partly due to expectations that the Federal Reserve would reduce its asset purchases and partly due to the more positive signals about the performance of the economy. Share prices have risen in parallel with the rise in interest rates. However, a side effect of the better growth prospects and the expectations of a less expansionary monetary policy in the United States has been that several emerging economies have been hit by capital outflows.

Reforms should, in particular, be conducive to capital accumulation and bring about tangible increases in total factor productivity. In other EU neighbouring regions, efforts in structural reforms have varied considerably. Following a severe financial crisis in 2001, Turkey witnessed a strong rebound in 2002 and began an ambitious process to reduce inflation, while still struggling with some of its long-standing problems. This achievement was supported by structural - though still insufficient - reforms. In Russia, after a long delay in the early years of transition, a first package of structural reforms has been implemented in recent years, positively contributing to the strong recovery the country has been enjoying since the 1998 crisis. United States Turning to the United States, labour, product and capital markets have reached a high degree of flexibility. This reflects both the traditional market-oriented nature of the US economic system and reform efforts over the past 20 years, including a variety of deregulation measures in the 1980s. The flexible microeconomic structure of the US economy has helped to make it one of the strongest growth poles in the world, with GDP growth averaging 3.3% from 1983 to 2002 (compared with 2.4% in the euro area). At the same time, the US experience shows that no country can consider structural reforms as “completed”. In its latest Article IV report on the United States, the IMF identified a number of areas where further efforts would be desirable, including the budgetary framework, the social security system and the energy sector.