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For the coming year, BISIH have announced 6 thematic priorities for driving innovations and staying ahead of the digital challenges. Responding to New Developments in the Payments Landscape 4. No doubt payment has been a key area for innovations in recent years. Traditional payment systems have undergone transformation, not least with the introduction of fast payment systems. And new payment methods have emerged in the private sector. Consumers are increasingly reliant on digital payments that offer better speed and convenience. However, when new forms of digital payment are increasingly used by the public, or even become the dominant means of payment in society, central banks would rightly be concerned about the resilience of the payment landscape, as disruptions could cause not just inconvenience, but also potentially significant economic damage. 5. At the same time, cryptocurrencies and stablecoins have emerged as a new class of assets that are sometimes claimed to be also a medium of exchange despite their volatility and concerns about their security. Widespread adoption of these digital currencies by the general public could also diminish the use of the sovereign currency, and even affect a central bank’s monetary operations. 6. Notwithstanding all these developments, the core role of central banks in ensuring trust in money as a public good for the economy at large remains unchanged. So whether central banks should provide a new form of central bank digital money completed with new payment infrastructure to households and businesses has become a very pertinent question.

As of now such competence resides mostly in big internet platform companies. However, many data subjects have no way to make better use of their own digital footprints, or data about themselves currently scattered in various different platforms, for their own benefit. 12. For example, SMEs are facing the long-standing problem of having limited access to finance. Conventional credit scoring approaches are not particularly favorable to SMEs because they often lack auditable operating data, which large corporates have. This disadvantage hinders not only the growth of SME businesses, but also the stability of our job markets and economic growth. Worse still, the blow of the pandemic has put the survival of many SMEs at stake, and their need for financing is stronger than ever. So is there a way to better empower data subjects to make better use of their own data for their own benefit? 13. With this objective in mind, we are expanding our financial infrastructure to enable data to take the centre stage. Our recently launched initiative, the Commercial Data Interchange (CDI), is a centralized platform which allows data owners to share their digital footprints voluntarily with banks through data providers in an efficient and secure manner. With a more substantial body of up-to-date and authenticated data shared by SMEs (such as monthly or even daily trading and turnover statistics), banks could use data analytics to perform more accurate credit assessments, and then provide more tailored services to SMEs.

Should additional pre-funded capital or liquidity resources be needed for cases of resolution, this will have to be shared in a fair way among all relevant stakeholders. Global coordination and consistency is therefore important in order to ensure a level playing field. Looking beyond the debate on CCP loss-absorbing resources, we should keep in mind that there are other key questions regarding resolution. Indeed, the success of a resolution process will not only depend on whether the CCP has adequate resources, but also on whether it is actually resolvable (for instance, whether its viable activities can be separated from its non-viable ones and transferred to another CCP). This will depend to a large extent on the operation and design of the CCP being resolved – e.g. whether its viable clearing activities are insulated from losses from the non-viable ones through separated default management silos. It will also depend on whether or not positions from the CCP which undergo resolution can be successfully transferred to another entity in a safe and timely manner, via an interoperability link or some other means. Further analysis will probably be required regarding the means to facilitate the porting of positions in a resolution scenario, in order to guarantee substitutability across CCPs.

What is needed is an empirical assessment from case to case. I think that monetary policy does have the flexibility needed to deal with the problems with which we are faced. At the same time, clarity in the formulation of objectives brings advantages. The basis of the way in which the Riksbank evaluates the future path of inflation and makes decisions on the repo rate is the guiding rule, which we have followed for a number of years. According to this simple rule, policy is based on an inflation forecast with a horizon of several years. If, in one or two years' time, inflation exceeds the target, we have said that there is normally a case for raising interest rates and vice versa. But there can be reasons for deviating from this rule. Some of these reasons are given in the clarification issued by the Executive Board of the Riksbank when it took office. Other 1 reasons have been presented in various speeches. Perhaps I should also say right at the beginning that what I am going to say today is nothing new. I 2 have presented the same message in varying forms in a number of speeches for several years. It is, however, important to emphasise that in practice there are seldom any straight answers when decisions have to be taken on the repo rate. It is often possible to come to different conclusions based on convincing arguments, even when one has the ambition of keeping to a simple and clear rule.

Ravi Menon: Monetary Authority of Singapore’s Annual Report 2012/13 Opening remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the Monetary Authority of Singapore’s Annual Report 2012/13 Press Conference, Singapore, 23 July 2013. * * * Good morning. Welcome to MAS’ annual report press conference. I would like to highlight five key messages today. • first, macroeconomic outlook better this year than last; • second, strong $ more than offset good returns on MAS’ investments; • third, banking system sound but build-up in household debt worrying; • fourth, stepped up efforts to ensure we remain clean and trusted financial centre; • fifth, good progress in key drivers of financial centre growth. GDP growth stronger and CPI inflation lower this year compared to last Let me start with the economy. The overall macroeconomic outlook this year is better than last year. Barring shocks, Singapore’s GDP growth will be stronger and CPI inflation lower in 2013, compared to 2012. Economy comfortably on track to meet 1–3% growth forecast The Singapore economy will comfortably meet the growth forecast of 1–3% for 2013. Growth was estimated at 2% in H1 and should pick up further in H2 First, the advanced economies are in better shape this year. • Tail risks have receded. There is less likelihood of a Eurozone break-up or a fiscal cliff in the US.

• For property loans, tighter loan-to-value ratios, higher minimum cash downpayments, caps on loan tenures, and guidance on total debt service ratios. • For car loans, tighter loan-to-value ratios and caps on loan tenures. • For credit card loans, new proposals to: – help individuals with credit problems avoid further debt accumulation; – improve due diligence conducted by FIs; and – empower consumers to make informed decisions. These measures helped to limit risks facing financial institutions but more importantly helped to encourage greater financial prudence among borrowers. • It is important that we act now to limit the build-up of leverage. • It is much harder to do so later, when growth might be weaker, interest rates higher, and property prices lower. Stringent efforts to ensure Singapore’s financial centre remains clean and trusted Next, let me touch on the efforts we have been making to ensure that Singapore remains a clean and trusted financial centre. • There has a growing concern internationally on the use of financial centres to hide illicit funds or evade taxes. Singapore takes seriously the integrity of its financial centre and is fully committed to international efforts to combat money laundering and tax evasion. The policy measures Singapore has taken on this front well-known; so I will not elaborate. • Laundering proceeds of tax evasion and tax fraud is now a crime in Singapore, effective 1 July.

This is because the risk to financial stability can come from many sources other than domestic inflation. In the current crisis, it was the housing bubble and excessive risk-taking by financial institutions that precipitated the crisis in the environment of stable prices. Therefore, to maintain financial stability, attention must be paid to all the key sources of risk and imbalance, other than price stability, that can have systemic implications for the economy’s growth and stability. This is the second lesson. The third lesson relates to the importance of having a robust and resilient financial sector at all times. For emerging markets, this means a strong banking sector. In the current crisis, it is the strength of the banking sector that has enabled the Asian economies to cope more successfully with the impact of the global crisis. These strengths are underpinned by the sector’s strong capital base, its limited exposure to subprime-related and other toxic assets, and its low reliance on external funding. Such strength and qualities are no accident. They are the results of deliberate policies to reform the financial system, strengthen supervision of financial institutions, and revamp financial regulation, risk management, and governance after the Asian financial crisis. The point I want to stress here is that these are the qualities that helped us through the current global financial crisis and they are the qualities that we need to keep.

To do this the MPC has to assess the prospective balance between demand and supply in the economy as a whole. That requires an analysis of both demand and supply developments. The interesting feature of recent quarters has been the combination of strong demand growth and a tight labour market, on the one hand, with weak wage and price pressures, on the other. So the MPC monitors monetary data as well as signs of tightness in both labour and product markets in order to detect early warning signs of inflationary pressures. The MPC needs as much timely and accurate information as possible. Official statistics and surveys provide an excellent starting point. But they often need to be complemented by more timely and focussed information on particular aspects of the economy. So the Bank has a network of twelve Agencies, which gather economic intelligence from all parts of the United Kingdom – from Cornwall to the Highlands, and from County Tyrone to the Norfolk Broads. The task of these Agencies is to provide information on the state of the local economy. In total, the Agents have around 7,000 business contacts covering all sectors of the economy from farming to finance and textiles to tourism. Our Scottish Agent, Janet Bulloch, who is with us tonight, is well known to many of you. I would like to thank those of you who give your valuable time to see Janet and her team.

Peter Pang: Launch of the new cross-border collateral management service Remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary, at the cross-border collateral management service signing ceremony and press conference, Hong Kong, 20 June 2012. * * * Mr. Grimonpont, Mr. Bhatia, ladies and gentlemen, Good afternoon. It is my pleasure to welcome you to this signing ceremony. The bilateral agreements that I shall sign on behalf of the Hong Kong Monetary Authority with the Euroclear Bank and J.P.Morgan today will pave the way for the launch of the new cross-border collateral management service, a critical building block of the cross-border bond investment and settlement platform launched in March 2012. The new service, which will commence on 25 June, will bring significant benefits to the contracting partners and the money market as a whole. For Hong Kong, it will advance the development of our repo market, enhance the stability of our financial system and strengthen further Hong Kong’s role as the global hub for offshore renminbi business. The repo market is a key component of major international financial centres. It serves as the link between the money and capital markets, and is vital to the well functioning of the financing channels. By providing credit enhancement through the use of securities as collateral, the repo market also serves as the lubricant that keeps the financial engine running particularly during times of risk aversion.

At the same time, over 1,100 renminbi correspondent accounts were maintained by overseas banks with banks in Hong Kong. The amount due to and due from such overseas banks amounted to RMB 128 billion and RMB 146 billion respectively. This is a clear indication that banks from around the world are using Hong Kong’s robust platform and large liquidity pool to offer renminbi services to their customers at home. As more and more companies and financial institutions conduct business and transactions in the renminbi, we will see an increasing number of financial centres offering offshore renminbi business in different parts of the world. These centres can benefit significantly from having an access to the offshore renminbi platform and liquidity pool in Hong Kong. The HKMA is taking proactive steps to aid the private sector in this endeavour. The private sector led Hong Kong – London Forum is an excellent example of this effort. The Forum just held its first meeting in Hong Kong in May this year, and agreed on a number of joint actions in the areas of renminbi liquidity, payment and settlement arrangements and development of products and services, to bring mutual benefits to the growth of offshore renminbi business in Hong Kong and London. One of the key action points agreed at the Forum is to expand cross-market renminbi funding activities through the cross-border collateral management arrangement that will be launched jointly by the HKMA, Euroclear and J.P. Morgan on 25 June.

In January of this year, the Committee released a paper on the range of BIS Review 32/2000 6 current practices in banks’ internal ratings systems. As the Committee builds on this work to develop operational proposals, we will be focusing on the need for banks to have robust standards and procedures governing the assignment of internal ratings, as well as the need for the Committee to establish appropriate supervisory guidelines. In this vein, we will be working to ensure that disclosure practices regarding internal ratings systems play an important role in the ongoing supervisory validation of these approaches. External ratings Of course, I also expect that a revised standardized approach will be a critical element of the new capital adequacy framework. As you may know, last June’s consultative paper described a revised standardized approach building on the current Accord by tying risk weights to external credit assessments, such as credit ratings. In other words, OECD membership would no longer be relied on for setting regulatory capital for sovereign or bank claims. For example, loans to similarly-rated banks located in OECD and non-OECD countries would receive the same risk weight. Industry participants have expressed support for the use of external ratings as an alternative to the current OECD/non-OECD distinction. Comments have also been received in favor of incorporating greater credit risk differentiation into the standardized approach, particularly for credit exposures to corporate entities. Some respondents have suggested that this might be achieved by introducing additional risk buckets into the framework.

I strongly encourage all financial market participants - commercial and investment banks, domestic and foreign - to approach the issue of disclosure as users of financial statements rather than as issuers. Clearly, a full appreciation of risk cannot be achieved without BIS Review 32/2000 4 sufficient information. What we need to know about each other to be comfortable and secure in making our credit decisions should drive the debate. While effective bank level management and meaningful market discipline are crucial elements of an overall strategy for promoting and preserving financial stability, neither can substitute for the critical role played by official supervision. While banks perform functions that are indispensable to the success of any market economy, these same functions, by their very nature, introduce risks that are capable of undermining the prospects for such success. This reality was acknowledged by Adam Smith over two centuries ago in his seminal tract The Wealth of Nations. It is with this fundamental reality in mind that governments have long recognized that banking and other financial institutions must be subject to some form of regulation and official oversight. The Gramm-Leach-Bliley supervisory framework The Gramm-Leach-Bliley Act presents major challenges to US supervisors. Under the terms of the Act, the Federal Reserve will continue to serve as the umbrella supervisor of all bank holding companies, including the newly authorized FHCs.

My colleagues at the Dallas Fed and I submit that Louisiana’s and the nation’s community and regional banks play on an uneven playing field against the giant moneycenter banks. The Fed is coming down hard on the big guys to ensure they are adequately capitalized and liquid. We are using all means within our power to make sure they never again place the American taxpayer at risk by bringing the financial system to its knees. But the fact remains that the big banks have a greater share of the deposit market than ever, are coming into our communities and regions to lend money on terms and at prices that any banker with a memory cell knows from experience usually end in tears, and are putting independent bankers in a precarious position. And as to Dodd-Frank, I am skeptical that the bureaucracy and rules and regulations this massive legislative initiative has created, even with the careful execution by the Fed, will vanquish too big to fail – the law’s very intention as stated in its preamble. But of this I am certain: It has made the lives of community and regional banks vastly more complicated. Like almost anything that comes out of the U.S. Congress, it has primarily been a boon to lawyers and consultants and compliance officers, adding to expenses but doing little to help you grow your businesses. We at the Dallas Fed are acutely conscious of this.

Now that Sweden’s economy seems to be moving into a stronger phase, in large measure as a result of higher domestic activity, it is of the utmost importance that we do not land in a situation with wage drift and overheating as a consequence of an unduly expansionary fiscal stance. Against this background, I shall be talking today about the conditions for monetary policy and its interaction with fiscal policy and labour market developments. 1 BIS Review 77/1999 Interaction with fiscal policy Fiscal policy affects the chances of success in monetary policy in various ways: via its impact on general confidence in monetary policy, via short-run effects on demand and by modifying the longterm conditions for economic growth and low inflation. Let me begin with credibility. If the direction of fiscal policy is perceived as being unsustainable in the longer run, economic policy’s overall focus on low inflation and stable growth is liable to be questioned. Few industrialised countries have experienced this as recently and tangibly as Sweden. The massive budget deficits in the early 1990s, with rapidly accumulating government debt, made Sweden’s economic future uncertain and pushed interest rates up. With the consolidation of government finances, however, and the long-term ambitions for fiscal policy that the Government, supported by the Riksdag (Sweden’s Parliament), has presented, confidence has improved.

In the euro zone, developments during the fourth quarter were roughly as expected, but the indicators published since then point towards slightly more favourable developments there than was expected in February. At the same time, the oil price has risen much more than expected and forward prices for oil have also risen. We can therefore assume that oil and petrol prices will remain at a high level for some time to come. This of course comprises an uncertainty factor for the economic assessment and it is difficult to ascertain what consequences it will have. The experiences so far indicate that the international economic upswing has been resistant to the increasing oil prices. At home, a considerable amount of new statistics have been published since February, including the national accounts for the final quarter of 2005. GDP growth during the fourth quarter was slightly lower than expected, but for the year 2005 as a whole growth was nevertheless in line with our forecast because the outcomes for earlier periods had been revised upwards. The figures show that exports increased more than anticipated last year, which with hindsight is not surprising, given the strong international growth. On the other hand, both household consumption and investment were weaker during the fourth quarter than in our earlier forecast. Judging by the recent economic indicators, developments so far this year have been better than at the end of 2005.

Stefan Ingves: The Riksbank and monetary policy Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the School of Business, Economics and Law, Göteborg University, Göteborg, 23 May 2006. * * * Let me begin by thanking you for the invitation. It is always a pleasure to have the opportunity to come and talk about monetary policy and our work at the Riksbank - but I shall refrain from commenting on whether it is always a pleasure for the listeners. I hope that you will in any case get a picture of our view of the economy and inflation prospects and of our method of how we conduct monetary policy. I shall begin with a rough outline of what I intend to discuss in my speech and the main conclusions: First, I shall describe my view of the current monetary policy situation. A brief summary of my conclusions is: • The upswing in the international economy appears to have been slightly stronger than we envisaged in the February Inflation Report. • With regard to Sweden, the statistics received since the Inflation Report was published indicate that the economy has developed approximately in line with our assessment, although inflation temporarily rose more rapidly than anticipated as a result of developments in energy prices. • Our earlier monetary policy considerations from February and April still apply to a large extent. Monetary policy will need to be less expansionary in future.

A key lesson of the crisis is that there is scope to strengthen what is known as macroprudential supervision and regulation. This should be seen as complementary to monetary policy, to aid attainment of the twin goals of price stability and financial stability. Allow me to explain this in more detail. A framework for macroprudential supervision and regulation Put simply, macroprudential supervision and regulation is concerned with the stability of the entire financial system, rather than that of individual institutions, which is the domain of microprudential supervision and regulation. Macroprudential supervision and regulation involves examining systemic risks that arise from the interaction between individual banks or the risk that the default of a single bank – because of its size or market share – could jeopardise certain functions that are vital for the economy, such as payment transactions or lending business. For example, one solution that could significantly reduce such problems would be progressive capital adequacy requirements. In other words, the greater a bank’s systemic importance, the more equity it would be required to hold. If capital adequacy requirements rise in step with systemic importance, banks have an incentive to stay smaller and thus less systemically important. Capital reserves for systemically important banks in excess of a minimum level could also act as a kind of “automatic stabiliser”. Reserves built up in “good times” allow banks to absorb losses in “bad times” without having to cease normal business operations.

And we also need to identify the needs in the areas of monetary and prudential policies, where the CEF’s member countries have urged it to continue expanding its activities. This is a full agenda, and I am sure it will not be the last time we get together to exchange views on these issues. I believe strongly that we stand to gain immeasurably from considering these challenges on a regional basis. We can learn from each other’s experience; we can engage at times in a joint dialogue with the external actors in the region; and perhaps our political leaders can find some opportunities to launch reform initiatives in parallel – for example, in developing structural reforms to help promote a flow of new capital to, and within, this region. In this spirit, I look forward to very fruitful discussions – now in Tirana and in the future! 2 BIS Review 162/2009

I note with interest that the workshop will discuss potential solutions to this dilemma. It is important that as the credit reporting landscape continues to evolve and assume more prominent roles in influencing borrowing and lending behaviours, appropriate attention is paid to consumer education to mitigate consumer anxiety and ensure that consumers understand and can exercise their legitimate rights. As uncertainties continue to cloud the global economic outlook at a time when borrowers have become more financially literate, lenders have become more innovative, and financial products have evolved to become more sophisticated and intricate, the need for an effective and efficient financial infrastructure becomes increasingly more critical to ensure the prudent expansion of credit and risk taking. This workshop addresses a key part of that infrastructure that can contribute towards avoiding damaging effects of a financial crisis induced by credit excesses. 2 BIS central bankers’ speeches Before I end my remarks, allow me to say a few words about this magnificent building, Sasana Kijang. Designed to be a nexus for thought leadership and collaboration in central banking, “Sasana” is a Sanskrit word that describes a site, centre, building or arena where communities gather for meetings, while the Kijang is a small yet very intelligent animal that is depicted in Bank Negara Malaysia’s logo.

Bordo M., Stock Market Crashes, Productivity, Boom, Busts and Recessions: Some Historical Evidence, Rutgers University, unpublished manuscript. Bordo M. Jeanne O., Boom-Bust in Asset Prices, Economic Instability and Monetary Policy, NBER Working Paper, No. 8966, June 2002. Borio C., Lowe P., Asset Prices, Financial and Monetary Stability: Exploring the Nexus, BIS Working Paper, No. 114, July 2002. Cecchetti S., What the FOMC Says and Does When the Stock Market Booms, article presented at the conference held at Reserve Bank of Australia, Asset Prices and Monetary Policy, Sidney, 18-19 August 2003. Cecchetti S., Genberg H., Lipsky J., Wadhwani S., Asset Price and Central Bank Policy, Geneva Report on Global Economy. Cecchetti S., Measuring the Macroeconomic Risks Posed by Asset Price Booms, NBER Working Paper, No. 12542, September 2006. Chadha J., Sarno L. Valente G., Monetary Policy Rules, Asset Prices and Exchange Rates, IMF Staff Papers, vol. 51, No. 3 International Monetary Fund 2004. Filardo A., Monetary Policy, Asset Price Bubbles: calibrating the monetary policy trade-offs, BIS Working Paper, No. 155, June 2004. 6 BIS Review 134/2007 Gruen D., Plumb M. Stone A., How Should Monetary Policy React to Asset Price Bubbles?, International Journal of Central Banking, December 2005. Helbing T., Bayoumi T. Are they in all the same boat: The 2000-1 growth slowdown under the G-7 Business Linkage, IMF Working Paper 2003. Kohn D., Remarks by Donald Kohn at Monetary Policy: A Journey from Theory to Practice, An ECB Colloquium held in honor of Ottmar Issing, 16 March 2005.

In very brief terms, these measures must, first, be conducive to maintaining market order, second, aim to tackle the structural causes of systemic crises wherever possible, third, contribute to the robustness of the regulatory setup and fourth, be consistent with international regulatory principles while, at the same time, not fail to take account of national circumstances. This list of criteria must be 9 Cf. Buiter/Sibert (2007): The Central Bank as Market Maker of Last Resort. 10 Cf. Nikolaou (2009): Liquidity (risk) concepts. Definitions and interactions. 11 Cf. Tucker (2010): The Crisis Management Menu. In: Ayadi et al. (ed. ): Crisis Management at Cross-Roads, pp. 13–25. 6 BIS Review 146/2010 interpreted as a systematic and pragmatic set of procedural instructions – or, to use the term I used before, a roadmap. By observing these criteria, we can make a significant contribution to better managing the challenges that arise in connection with systemic risk in the financial system. To a large extent, ongoing international regulatory reform fulfils these criteria. For instance, the narrower definition of capital and the adjustment of risk weighting under Basel III removes a number of key weaknesses in the Basel II standard. The individual regulatory efforts undertaken in Switzerland are also in line with these criteria, in particular the TBTF package and the leverage ratio. However, the reforms have not yet been fully carried through. For example, work to contain the TBTF problem at international level has only just begun.

In this way confidence in the financial institutions can be restored, and the vicious cycle of liquidity bottlenecks, forced fire sales and bank runs can be ultimately avoided. By providing emergency liquidity assistance, central banks aim primarily to stabilise the precarious liquidity situation faced by solvent institutions. Above and beyond this, the increasing importance of systemic risk has made the emergency liquidity provision to entire markets ever more imperative. Markets can also be faced with liquidity runs. This was only too evident from the high risk premia observed in the interbank market during the recent crisis. It is conceivable that central banks will take on the role of market maker of last resort in such situations in order to secure key market functions. Indeed, in certain situations it is essential. 9 In an acute crisis, the costs and probability of a system collapse can be reduced in this way. However, the assumption of a lender of last resort or market maker of last resort function is not without problems. First, it does not guarantee long-term stabilisation in every case. Second, these crisis measures are no substitute for tackling the root causes or for lack of robustness on the part of financial market participants. In particular, the presence of a market maker of last resort is associated with a variety of incentive problems. 10 It can, for instance, encourage market participants to enter into excessive risk exposure in the expectation that the central bank will step into the breach if necessary.

Nevertheless, the United States could be doing better. The U.S. fiscal policy program, for example, does not appear well-calibrated to the current set of economic circumstances. We have too much fiscal restraint in the short term, and too little consolidation in the long term. The degree of fiscal restraint this year (about 1¾ percent of gross domestic product [GDP] in 2013) is quite large relative to the forward momentum of the economy. Thus, we have a tugof-war between the improving economy and the current large negative fiscal impulse. How this tug-of-war gets resolved – which force dominates – won’t be known for some time. In other words, the level of uncertainty about the near-term outlook in the United States remains quite high. Meanwhile, the long-term fiscal outlook for the United States is still troubling. So far, partisan divisions in Washington have limited progress in reaching the type of “grand bargain” needed to put the United States on a sustainable long-term fiscal path, though of late we have at least seen some renewed talk about this. Nor have we yet deployed a comprehensive set of policies to support the rebalancing of the U.S. economy toward a growth path based more on business investment, trade and broad-based income gains than the type of asset price gains and credit-fuelled consumption, which dominated the last business cycle. For Europe, the near term macroeconomic outlook seems less bright. The good news is that the peripheral countries have made substantial efforts to bring down their structural budget deficits.

BIS central bankers’ speeches 1 To its advocates, the wave of innovation sweeping through the world of financial technology promises nothing short of revolution. ‘FinTech’ heralds the dawn of narrow banking and portfolio optimisation. It will change the nature of money, 1 shake the foundations of central banking and deliver nothing less than a democratic revolution for all who use financial services. Revolutions are not always abrupt, and sometimes their origins remain obscure. In noting the possibilities at the start of the Twentieth century, Keynes remarked that “the inhabitant of London could order by telephone, sipping his morning tea in bed … the various products of the whole earth … adventure his wealth in the natural resources and new enterprises of any quarter of the world…; [or] decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend…” Such global portfolio management was made possible by technological developments stretching back decades, ranging from the ‘pantelegraph’ of the 1860s – capable of transmitting signatures to verify bank deposits – to the cable buried deep beneath the Atlantic that could transmit eight words a minute. Such remote trade confirmation and low latency that made the Flash Boys of the day possible. The financial globalisation these innovations enabled was built on a much earlier, simpler, and more profoundly transformational development: the ledger. For there is no finance without the ability to record transactions, balances, and obligations.

But change and development are also linked to new risks that need to be managed by governments and authorities. I have today spoken about some of the changes and the developments that have taken place in the financial system in recent decades, and what consequences they have for the Riksbank’s different fields of operation: payments, monetary policy and financial stability. Changes in the payment market is very rapid. Many of them benefit households and companies as they simplify payments. But changes also create new risks. For the Riksbank, this has entailed developing the systems the banks use to make payments to one another. The new RIX-INST will offer instant payments 24/7. But perhaps of greater interest to ordinary citizens is that we are also working on supplementing cash with ‘digital’ cash – a so-called e-krona. The financial system has become more integrated – and risky. An increasingly rapid integration of the financial markets has led to financial capital being able to move rapidly and more freely between different countries. This has led to monetary policy becoming more dependent on international developments and less independent. National financial market policy has also become more restricted. Avoiding financial crises therefore requires more cooperation at a supranational level, which indicates for instance that Sweden should join the Banking Union. To enable the Riksbank to manage its tasks and deal with the challenges offered by the changes on the financial markets, the monetary policy tools need to be fitfor-purpose and flexible.

The state’s cost for the part of the debt the Riksbank has purchased is thus the policy rate. Economists usually say that the Riksbank’s purchases of government bonds are actually a maturity transformation of the state’s debts from 51 Central bank reserves are electronic central bank money that the banks hold in their accounts with the Riksbank. Central bank reserves are the money the banks have in accounts with the Riksbank overnight, but also the money the banks have invested in Riksbank Certificates with a particular maturity. The total of these investments comprises the banking system’s so-called liquidity surplus towards the Riksbank, which can also be called the banking system’s reserves with the Riksbank or just central bank reserves. 52 See also Vlieghe (2020). 21 [35] long-term to very short term, as central bank reserves are a state debt with a very short maturity. In other words, the state pays a very short-term interest on the government bonds the Riksbank purchases, and a more long-term interest on the government bonds that private agents hold. In the cases where people are concerned about monetary financing, it is almost always a fear that government bond purchases will lead to rapidly rising inflation, or so called hyperinflation, as was the case in Zimbabwe and Venezuela not so long ago. But the Riksbank's and many other central banks’ government bond purchases have not led to this type of situation. Why is this? One explanation could be that the size of the purchases is important.

The EEA Agreement is basically a mechanism through which EFTA countries like Iceland and Norway were allowed to participate in the EU single market, which includes free movement of capital and provision of financial services. The underlying principles are those of home licensing for operation anywhere in the area and of a level playing field for competition, where size and location are not supposed to matter. It therefore goes against the underlying principles of this framework to consider the size of banks relative to GDP as a metric for concern, as is now so rightly in fashion. This so-called European “Passport” enabled the Icelandic banks to operate throughout the EEA, including through branches in other EEA countries. We now know that there are deep flaws in this framework and that these flaws are important elements in the current euro area crisis. A key issue here is the contradiction between the European Passport rights, on the one hand, and national supervision, national deposit insurance, and national crisis management and resolution regimes, on the other. This is what recent proposals of a banking union are supposed to address. All of these problems are much aggravated when different currencies come into play, and for EEA countries and EU countries outside the euro area, this framework also has embedded in it a potentially huge foreign currency liquidity risk in the banking system that is not covered by a LOLR.

The run up to the financial turbulence of the 1990s During the past twenty years, the financial systems in many countries have been deregulated. For the first time since the outbreak of World War One, capital can again pass more or less freely across national borders. Moreover, major changes in communication and information technology have paved the way for new instruments and methods for risk management. Taken as a whole, this has led to the financial system being more extensive and global today than ever before. This holds even though capital flows relative to GDP were also large at the end of the last century. The rapid financial development and internationalisation are per se a logical consequence of the production of goods and services being globalised, with a massive increase in cross-border trade. They also have to do with growing wealth in many parts of the world. This in turn has increased the need for new financial solutions for businesses and households. The increasing globalisation of production and trade in goods and services generates a demand for a more developed and internationalised financial system so that the opportunities for increased prosperity can be used to the full. Note that this, as always, involves a trade-off between risk and return. It is of course possible to substantially increase stability, in the sense of lowering risk, by measures that result in very low returns. However the solution is not to turn back to a less turbulent, but also less prosperous past regime of capital controls.

In its last meeting in June, the ESRB underlined the threat to financial stability stemming from the interplay between the vulnerabilities of public finances in certain EU Member States and the banking system, with potential contagion effects across the Union and beyond. To ensure the resilience of the EU financial system and limit the potential for adverse spillovers, BIS central bankers’ speeches 1 the ESRB at the time also stated that backstop plans should exist, starting with resources from private markets and, if necessary, with public funds. As we also said at the time, we are furthermore working on specific issues such as FX lending, complex financial products and mismatches in the funding structure between various currencies. Let me mention that we have our next ESRB General Board meeting next Wednesday. Basel III implementation As regards Basel III, compared with Basel II, the new framework envisages higher minimum capital requirements, better risk capture, stricter definition of eligible capital elements and more transparency. These elements should substantially improve banks’ capital position and loss absorbing capacity, thus enhancing the resilience of the financial sector. The new Basel framework also introduces entirely new concepts, such as a non-risk-based leverage ratio and mandatory liquidity requirements. It has been agreed that these measures will be introduced gradually during a transition period. It is essential that prior to their introduction the potential impacts of these new elements on financial markets are carefully assessed to ensure that these measures do not hinder banks providing funding to the real economy.

But I also want to look at the road ahead: we must not stop here and leave our task halffinished. There is still very important work to be done on a number of regulatory challenges. And with all our reforms and with all our new institutions of economic and financial governance, we must ensure timely implementation so that we can ensure that we have done everything to make a difference as regards the resilience of the global, regional and national financial systems. The ESRB Let me start with some of our accomplishments before moving on to highlight some key areas where we need to make progress. The first accomplishment is the establishment of the European Systemic Risk Board (ESRB) earlier this year. As you know, the ESRB brings together the policy makers such as central banks, supervisors and the Commission, thus fostering a broad-based review of risks and vulnerabilities and a deeper understanding of interlinkages and spillovers between different parts of the financial system. This wide-ranging perspective, which encompasses both micro and macro elements, is an essential feature of the new European supervisory framework and it fills a gap identified at the global level. Although the ESRB does not have direct binding powers, the effectiveness of its “comply or explain” mechanism builds upon the high reputation of the ESRB’s members and the quality of its analysis.

However, this time there is also reason to ask whether we are sufficiently prepared. Is our economy sufficiently robust? The fall in oil prices was triggered by an international financial crisis and slower growth in the world economy. The Norwegian economy is highly exposed to international fluctuations. Is our own financial system and business sector strong enough to cope with this situation? How should monetary and fiscal policy be formulated in such an exposed and oil-dependent economy? These are the issues I would like to address this evening. A turbulent world Even before oil prices started to fall, the warning signals were flashing for everyone to see. The Norwegian economy was overheating in an environment of global economic distress. The signals from Asia were clear. 1 BIS Review 20/1999 The problems first appeared in Thailand a little more than 18 months ago, but spread quickly to Malaysia, the Philippines, Indonesia and South Korea. In most of these countries, a sharp upturn had been stimulated by low interest rates and financed through a considerable accumulation of debt in the business sector. Borrowers became increasingly nervous and withdrew capital. Capital inflows from industrial countries were suddenly reversed to massive capital outflows. Equity and property prices fell sharply and currencies came under pressure. The contagion effect led to a sharp downturn in production and employment. Large population groups that had recently experienced a pronounced increase in living standards slid back into poverty.

I think we’ve been clear in our expectations around AML/BSA: • That AML/BSA needs to be managed on an enterprise-wide basis; • That AML/BSA needs to be a high priority for the board of directors, senior management and line management; • That the message on compliance needs to be carried down well into the organization, so that those who are on the front lines making daily decisions understand the importance of compliance and the consequences for failing to meet the requirements; and • That AML/BSA shouldn’t be treated as a static exercise – standards and best practices evolve and you are required to keep up with and adhere to the latest requirements. As I know you are also aware, we are seeing keen competition for talent/resources in this area. While we recognize that it may be difficult to identify and retain talent, having a solid recruiting strategy and ongoing training in place, as I mentioned earlier, are important components to addressing the problem. You might wonder why this topic remains on my list – and it’s because in spite of the heavy public attention on the matter, including a range of public enforcement actions, it remains a work in progress for many firms. And, for firms that haven’t yet been faced with MRAs or a public enforcement action, I worry about complacency. So, I raise it again because it seems that another warning shot is warranted. 2.

The falling price level has to do with transitory effects, above all the Riksbank’s marked reduction of the repo rate during 1996. Excluding house mortgage interest costs, the rate of inflation in January 1997 was about 1.5 per cent. The outlook for inflation points to room for a fall in bond rates. Moreover, underlying economic factors suggest that, after the depreciation in recent months, the krona is undervalued and should be capable of appreciating. The present monetary stance appears to be well balanced. After the major changes in the past year, for example in the repo rate, time is needed to assess their effects. Another matter to consider is the recent months’ developments in financial markets. They, too, call for a cautious line in monetary policy. I note that the Swedish economy seems to have made good progress in adjusting to a low inflation regime, with stable, sustained growth. What gives cause for concern, however, is that the recovery of employment appears to be much more sluggish and that unemployment is persistently high. High cost of unemployment As shown in Diagram 1, registered unemployment in Sweden rose sharply in the early 1990s; from a level between 2 and 3 per cent, it shot up to around 8 per cent. This was accompanied by increased participation in labour market programmes. Total unemployment accordingly reached around 13 per cent, an increase of almost 10 percentage points or up to half a million people. This is the highest level since the 1930s.

I believe that the patient can of course be cured, must continue to take the prescribed medicine and should not be out on the town at night. Many thanks, again, to the Academy and the President for your invitation and to all of you for your attention. BIS central bankers’ speeches 5

At 8 per cent, the vacancy rate is still relatively high, although in some central areas, it has fallen to below 4 per cent. The share of vacant office premises in Bergen has been lower than in Oslo for the past three years. The value of property has increased, both in Norway and in other countries, even though the rise in rental rates has been moderate and the vacancy rate has been high. Investors have been willing to pay more than previously for a krone, a dollar or a euro in future net rental income. The direct return, i.e. annual rental income minus operating costs as a share of the price paid for the property, for office premises in Oslo has fallen to a historically low level. This is probably related to developments in longterm interest rates. An investor will expect a higher return on property, and property as an asset class is probably midway between equities and bonds in terms of both risk and return. Since nominal interest rates are low, many investors prefer to move their low-risk investments from the bond market to alternative vehicles such as property. Developments in the real value of office premises and our estimates of capacity utilisation in the Norwegian economy seem to co-vary in the period 1980-2005. The effect on the value of office premises prior to the banking crisis was much greater than the effect of a similar level of capacity utilisation in the years 1998-2000.

The rise in prices for domestically produced goods and services slowed somewhat towards the end of 2005 and into 2006. The 12-month rise in prices for these products is estimated at 1.6 per cent in April, adjusted for the effects of lower maximum day-care rates. However, several factors point towards rising inflation. Capacity utilisation in the Norwegian economy is increasing, and tighter labour market conditions may result in higher wage growth in the coming years. The rise in oil prices is resulting in higher input costs for producers. As a rule, monetary policy shall not take account of the direct effects on consumer prices resulting from changes in the interest rate level, taxes, excise duties and extraordinary, temporary disturbances. However, there is no certain method for distinguishing extraordinary, temporary disturbances from more long-lasting price changes. The inflation measure CPI-ATE excludes the effects of changes in taxes and energy prices. Norges Bank has given weight to this indicator of underlying inflationary pressures in the economy, but also keeps an eye on other indicators. The 12-month rise in the CPIATE adjusted for the effects of lower maximum day-care rates is estimated at 1.0 per cent in April. BIS Review 41/2006 3 However, the CPI-ATE not only strips out temporary effects of changes in tax changes and fluctuations in energy prices, but also trend changes in these variables. Thus, this indicator is not a perfect measure of underlying inflation.

Look at these two graphs. One shows the share of the US financial sector in GDP going back to 1860. The other shows relative skill-corrected wages in the financial sector and an index of deregulation (where down is more regulation). We can see that there is a peak in all of these measures around the time of the 1929 crisis, followed by a secular decline. Regulation reaches a peak and relative wages bottom out in the 1960s and 70s. Then there is a long climb until just before the current crisis. If this was all we had to go on, it would be difficult to escape a certain prediction of what happens next! The big question is what it might mean for growth and prosperity. So it is important that we strike the right balance, as it is so aptly put in the programme for this event. Thank you very much. 4 BIS central bankers’ speeches

King (2013) “Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply” Journal of Financial Economics Volume 108, Issue 2, Pages 425-448 for evidence associated with programmes conducted in the US and Joyce et al. (2010) in the UK. vii See speeches of August 2016 (Handelsblatt conference), September 2016 (annual CERS conference) and April 2017 (conference at Columbia University). viii Stefan Zweig, Visiting the billions (Besuch bei den Milliarden), 1932. ix Stefan Zweig, The World of Yesterday, Memories of a European, 1944.

Ben was among the first to highlight their potential significance for monetary policy. Another example of Ben’s tendency to go against the mainstream is his critique of the use of rational expectations in macroeconomic models. When the rational expectations revolution transformed the field of macroeconomics in the late 1970s, Ben remained sceptical. He criticised the assumption that economic agents form their expectations based on a perfect understanding of how the economy works. These models did not address the question of how economic agents derive this knowledge in the first place. More recently, the literature has begun to develop models with forward-looking agents that have a limited understanding of how the economy works. This research programme is very much in the spirit of Ben’s early criticism. Page 3/4 A final example of Ben’s willingness to challenge the accepted wisdom of the day is his reservations about inflation targeting. When one central bank after another started to adopt inflation targeting in the 1990s, Ben became one of the most prominent critics of this new monetary policy strategy. His concern was that inflation targeting would lead central banks to focus single-mindedly on price stability. In doing so, Ben feared, they might lose sight of their ultimate goal of promoting economic well-being more broadly. Ben is widely recognised as one of the world’s leading macroeconomists. However, his research interests go far beyond that. Ben is a polymath, something that has become rare in modern academia. His writings cross academic boundaries between economics, philosophy, history and religion.

An excellent example of Ben’s interdisciplinary work is his book ‘The Moral Consequences of Economic Growth’, published in 2005. Economists have written countless papers on how to increase growth. But very few have addressed the question of why growth is desirable in the first place, in particular for societies that are already rich. Ben’s book fills this gap. It argues that economic growth improves the moral character of society. People tend to be more generous and tolerant towards each other when the economy grows. Economic stagnation, on the other hand, is associated with repression and bigotry. Ben’s latest book, ‘Religion and the Rise of Capitalism’, was published last year. It describes how religion has shaped economic thinking since the beginning of our discipline. The early economic thinkers of the European Enlightenment, such as Adam Smith, were not committed to religion. Ben argues, however, that their world view was profoundly influenced by developments in religious thinking. There is therefore a close connection between religion and the beginning of modern capitalism. With this I would like to conclude my remarks, since you are surely eager to learn more about this fascinating topic from Ben himself. Ladies and gentlemen, please join me in welcoming Benjamin Friedman with a big round of applause. Page 4/4

Spencer Dale: Tough times, unconventional measures Remarks by Mr Spencer Dale, Executive Director and Chief Economist of the Bank of England, at the Association of British Insurers Economics and Research Conference, London, 27 March 2009. I would like to thank Rohan Churm, Alan Mankikar and Tim Taylor for their considerable help in preparing these remarks. The views expressed are my own and do not necessarily reflect those of other members of the Monetary Policy Committee. * * * The UK economy is in a deep recession. Output in the United Kingdom fell at its fastest rate in nearly thirty years in the final quarter of last year, and a similar fall in output in the first quarter of this year appears likely. We are in the throes of a synchronised global downturn, which has spread far and wide. But the darkest hour is just before the dawn. Although immediate prospects appear bleak, the substantial economic stimulus that is underway means that there are grounds for thinking that economic conditions may start to improve later this year. An important part of that stimulus stems from the extraordinary measures taken by the Monetary Policy Committee over the past six months, including our decision to start using unconventional policy measures. Today, I will describe my view of the economic outlook and outline the factors that I believe will spur a gradual turnaround in our economy.

The causes of this downturn are very different from those of most recent recessions and, as I have just described, the policy response on this occasion has been much quicker and more decisive. There is also a third factor that needs to be borne in mind when drawing lessons from history. This is the first recession in the UK for nearly 20 years. The structure of our economy has changed significantly since the early 1990s, and even more so since the early 1980s and 1970s. The UK economy has undergone extensive reforms and deregulation, and businesses have been transformed by the implementation of new technology and the effects of globalisation. It is hard to quantify precisely the various ways in which the structure of the economy has changed. The appropriate data are not always available and it may be a long time until the effects are discernible in aggregate economic statistics. Importantly, the significance of some of these structural reforms may not be fully apparent until the economy is subjected to a substantial shock. For example, one consequence of globalisation is that supply chains around the world are far more integrated. This is likely to have played an important role in the speed and synchronisation of the world downturn, as the effects of falling demand in a few countries were translated into lower orders and production in many in a matter of weeks. That increased integration is also likely to affect the speed and nature of the recovery.

I shall come to this episode later on. But first I should like to go a little more deeply into the characteristics of international capital flows. I shall then discuss the implications, practical and philosophical, that they have for free and open markets, which collectively make up an increasingly seamless international financial system, but which continue to rely largely on their own limited resources when they encounter the problems that this system throws up. International capital flows 4. Like wind currents and weather patterns, international capital flows carry with them a mixture of benefits and risks. Let me try briefly to pin down what makes them so powerful and so protean in their effects on the international financial landscape. I find it helpful, as a mnemonic, to think of their main characteristics in terms of what I shall refer to as the six ‘V’s: Virtue, Volume, Variety, Velocity, Volatility, and Viciousness. 5. By Virtue, I mean simply that international capital flows, by promoting an efficient and balanced use of financial resources, bring enormous benefits throughout the world. Over the past few decades they have been of crucial importance in developing new economies and revitalising old ones. When they work smoothly, international capital flows help to relieve shortages of capital in previously segmented markets. They provide a competitive environment that encourages innovation. And, by affording better returns to investors, they help to put spare capital to the best possible use.

Given what we have been through in Hong Kong and in this region in the last twenty months, we are eager that the momentum on this issue should not be lost, and that it should not require the disruptions and dislocations of another major financial crisis for the importance of preventive action to be driven home. 7 BIS Review 35/1999

Unlike the situation today, not only banks, but also households and companies would be able to open an account with the SNB. There might also be other forms of digital central bank money for the public, e.g. digital banknotes which would be issued rather like private cryptocurrencies. From an economic perspective, however, the features of the different forms of digital central bank money are largely identical. Therefore, when I speak about digital central bank money, I will continue to use the example of money held at the SNB in the form of a sight deposit account. 10 Implementation throws up a number of practical questions: How would eligibility for digital SNB money be defined? Would residence in Switzerland be the decisive factor? What account holder due diligence would the SNB have to carry out as part of compliance? What services might account holders expect? Would deposits generate interest and, if so, at what rate? In addition, would it be possible to invest all of one’s assets at the SNB, or would there be an upper limit? Depending on the answers to these questions, the economic impact of broader access to digital central bank money could vary greatly. This evening, we are principally interested in the implications for commercial banks’ money and credit creation. Much would depend on the structuring of any sight deposit accounts, most especially with respect to interest rates.

In other words, why is inflation higher than what we have experienced historically, and is monetary policy responding in an optimal way? Implications for Inflation First, it is important to recognise the complex interplay of demand and supply factors underpinning the recent price developments in Singapore. Demand-side pressures on prices have built up as domestic economic activity rebounded strongly from the Great Recession of 2008/09. Regional demand has been firm, supporting the continued expansion of many of our services industries, while strong employment conditions in Singapore have underpinned robust consumption growth for a range of goods and services. Sustained low global interest rates and capital inflows have supported the demand for housing – a point I will return to later. At the same time, supply-side factors have become more significant, with the immediate constraints in labour and housing markets pushing up domestic costs. These reflect structural capacity constraints in the economy. Policy measures are being put in place to help the economy transit to a more sustainable model of productivity-led growth, as Singapore’s reliance on foreign workers is reduced. As the economy adapts and productivity growth rises, price pressures are likely to subside and provide a lift to real wages, making Singaporean workers better off. Implications for monetary policy My second observation is that the monetary policy stance has to be carefully calibrated to take into account the multiple influences on consumer prices. Monetary policy should act decisively to ease short-term inflationary pressures driven by strong demand, through applying an appropriate constraint on overall economic activity.

We are actively promoting all these areas, capitalizing on our reputation and brand name. Singapore welcomed 380,000 Indian tourists in 2002, 11% more than the year before. We especially value Indian visitors, who stay longer and spend more than tourists from elsewhere. To attract more tourists from India, we have relaxed visa requirements, and made multiple entry visas more available. We are also wooing corporate customers from the region, to use our financial, legal and other professional services. Many Indian companies choose Singapore as the venue for their arbitration proceedings. We liberalised our financial sector thus freeing our capital markets and wealth management industry to grow. Indian companies that are expanding need capital, and will find Singapore a viable location to raise funds, be it debt or equity. The companies can tap into a large and growing investor base in Singapore. Close to 200 international fund management firms and 150 venture capitalists operate out of Singapore, managing over $ billion in assets. To support the growth of our economy, we are investing heavily in human capital, upgrading our skills and refreshing our knowledge. But in a small country of three million people, the talent pool is never big enough. We will therefore continue to attract talent globally. Over the years, we have benefited greatly from an inflow of talent from India, as well as of NRIs from around the world, and we will BIS Review 3/2004 3 continue to welcome them.

Through its actions, it will continue to uphold the trust which has been placed in it thus far. 4 BIS Review 71/2007

Taking into account the write- BIS Review 168/2009 5 downs on loans and securities recorded until end-October 2009 and the loan loss provisions until end-June 2009, the potential further write-downs of euro area banks until end-2010 could reach EUR 187 billion. The euro area insurance sector Turning to the euro area insurance sector, it continues to be confronted with challenging conditions. The results for the second and third quarters of the year remained rather subdued, as premiums written declined on average. Reduced demand for life insurance products, in particular unit-linked products – where the investment risk was borne by the policyholder – have contributed to lower premiums written. Premiums written growth in the non-life segments has been hampered by the weak economic environment, which kept demand from households and firms muted. However, investment income, which has benefited from the improvements in the capital markets after mid-March 2009, was on average higher than in previous periods. The improvement in investment income has, however, not been enough to avoid a broad-based decline in profitability. Large euro area insurers have continued to increase their investment exposure to government and corporate bonds during the first half of 2009, as they have continued to shift their investment strategies away from equities in an attempt to de-risk their investment exposures At the end of the first half of 2009, a sample of large euro area insurers had about 70% of their investments in bonds, up from about 50% at the end of 2007 (See Chart 13).

Exiting before the underlying strength of key financial institutions is sufficiently well established runs the risk of leaving some of them vulnerable to adverse disturbances, possibly even triggering renewed financial system stresses. Late exits, on the other hand, can entail the risk of distorting competition, creating moral hazard risks that come with downside protection – including the possibility of excessive risk-taking – as well as exacerbating risks for public finances. To cushion the risks that lie ahead, banks will need to be especially mindful in ensuring that they have adequate capital and liquidity buffers in place. If the circumstances require it, some banks may need to raise new and high-quality capital. In addition, some banks, especially those which have received state support, may need fundamental restructuring in order to BIS Review 168/2009 7 confirm their long-term viability when such support is no longer available. This could involve the shrinking of balance sheets through the shedding of unviable businesses with a view to enhancing their profit-generating capacities. At the same time, banks should take full advantage of the recent recovery in their profitability to strengthen their capital positions, so that the necessary restructuring of businesses and the enhancement of shock-absorbing capacities do not impinge materially on the provision of credit to the economy. Thank you very much for your attention. I am now at your disposal for questions.

39 All speeches are available online at www.bankofengland.co.uk/speeches 39 Annex Chart 1: Level of real GDP in the Great Recession and Great Depression US UK Index, Year 0 = 100 Index, Year 0 = 100 140 140 130 130 120 110 120 100 110 90 80 100 70 60 0 1 2 3 4 5 6 7 8 9 10 90 0 1 2 Years from start of crisis Great Depression (Year 0 = 1929) Great Recession (Year 0 = 2007) Continuation of pre-crisis trend (1998-07) Great Recession (Year 0 = 2007) Continuation of pre-crisis trend (1998-07) Germany France Index, Year 0 = 100 0 1 3 4 5 6 7 8 9 10 Years from start of crisis Great Depression (Year 0 = 1929) 2 3 4 5 6 7 8 9 10 Years from start of crisis Great Depression (Year 0 = 1929) Great Recession (Year 0 = 2007) Continuation of pre-crisis trend (1998-07) Index, Year 0 = 100 150 140 130 120 110 100 90 80 70 60 140 130 120 110 100 90 80 70 0 1 2 60 3 4 5 6 7 8 9 10 Years from start of crisis Great Depression (Year 0 = 1929) Great Recession (Year 0 = 2007) Continuation of pre-crisis trend (1998-07) Sources: ONS, Bank of England ‘Millennium of Data’ (2017), IMF WEO, Maddison Historical GDP Data and Bank calculations.

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2 Woodford, M. (2005), “Central-Bank Communication and Policy Effectiveness,” paper presented at FRB Kansas City Symposium on “The Greenspan Era: Lessons for the Future,” Jackson Hole, Wyoming, August 25-27, 2005. 3 Providing forecasts based on both a constant interest rate and market expectations give information not only about the sign but may also give some guidance about the range. See, for example, the following citation from the Bank of England’s Inflation Report of February 2008: “Under market interest rates, the central projection for inflation was a little above the target in the medium term, while under constant interest rates, it was below the target.” This suggests that the likely interest rate path lies somewhere between a constant rate and market expectations. BIS Review 94/2008 1 second central bank with endogenous interest rate assumptions, following the Reserve Bank of New Zealand, who introduced it in 1997. More recently, the Swedish Riksbank, the Czech National Bank, and the Central Bank of Iceland have also started to publish interest rate forecasts. Publishing endogenous interest rate paths raises a number of issues, and there is disagreement among both academics and central bankers on whether being that precise about future policy intentions is beneficial or not. The key issue in the debate is whether such communication implies guidance or noise. Some of the arguments for transparency relate to the beneficial effects when private agents understand the central bank’s reaction function, such that market interest rates will adjust more appropriately to economic news.

We therefore need to encourage innovation but also ensure that people trust innovations. At the Banque de France, we have taken various steps to promote innovation. First, we appointed a start-up correspondent at the national level [Maurice Oms], and we will soon have start-up correspondents in the regional French Tech capitals. The Banque de France’s innovation laboratory, the Lab, is working with numerous actors in the field. This year, we inaugurated a new site in Singapore, one of the epicentres of the Fintech industry. And recently, Paris was selected alongside Frankfurt to house the European branch of the BIS’s Innovation Hub. At the ACPR, we are doing our utmost to facilitate contact with Fintechs at all stages. First, there 1/3 BIS central bankers' speeches is a single point of entry: the Fintech-Innovation Unit. Since 2016, it has met and advised between 100 and 150 project leaders per year, to help them flesh out the initial outline of their project before potentially submitting it for approval. The approval procedure has also been simplified with the creation of a digital portal, and we have adapted certain procedures to recent developments: introduction of a streamlined post-Brexit procedure in 2019, and of a simplified procedure for a large number of payment service providers (PSPs) in 2020. On top of this, in our day-to-day supervision, we apply the regulation using a proportional approach. For example, for small establishments, we allow a single individual to hold more than one key positions.

There is still a rationale for central banks to hold gold. 2. Gold selling After having listed all the good reasons for holding gold, you will not be surprised if I reiterate that we have no plans to sell gold! The leading official holders of gold have not changed their attitude in this respect. Neither the American Federal Reserve System, nor the German Bundesbank, nor the Bank of Italy, nor the Banque de France have any plan to sell gold. 3. Gold lending Concerning gold lending, the Banque de France, as most of you probably know, is definitely not among the active players in the market. Quite the contrary, alongside the other major holders, it has refrained from an active management of its gold holdings. The Banque de France has always adopted a very prudent and rather conservative approach, acknowledging the fact that the issue of gold lending is a matter of common interest to the major holders. Two main reasons are traditionally put forward to justify gold lending: – The first one refers to a question of principle. Foreign currency assets are actively managed. Why not extend this management to gold insofar as gold is considered to be part of a country’s external reserves? – The second reason is that central banks obviously have to take into account profit and loss account considerations. From this standpoint, gold should provide a return just like other assets.

As you all know, the Joint Staff Report concluded that further work is necessary in light of the evolving structure of the Treasury market, and it also highlighted a series of additional steps that the official sector will take to evaluate its approach to this market. I remain very supportive of these efforts. In fact, this conference is among the first of those next steps, and presents a perfect opportunity to have a rich debate on the market’s evolving structure and the actions that may be appropriate in response. Thank you once again for coming here today. I look forward to our engagement and discussion. 4 The TMPG has since expanded its mandate to include the agency debt and agency mortgage-backed securities (MBS) markets. 5 A more recent and equally successful practice has also been instituted for the MBS market. 2 BIS central bankers’ speeches

The international dimension I have discussed the interaction of the UK’s macroprudential regime with our domestic arrangements for microsupervision and for monetary policy. But the third set of interactions will be with our counterparts in other countries. This is especially important to the UK. London hosts what is probably the world’s most international financial centre. Crucially for us, it is not an entrepot. It is more than an important source of jobs and tax revenues. Many of the overseas firms active in the City are also active in providing services to parts of the UK’s real economy. We therefore have a double stake in their safety and soundness. If they get into distress, there are spillovers to UK financial firms through wholesale markets, but also at least a temporary reduction in the financial services available to UK firms and households. For all these reasons, the UK has a special stake in the adequacy of international standards for financial firms and markets. And, hosting many subsidiaries of major global firms, our supervisors need to play a special role in the collective consolidated supervision of internationally Systemically Important Financial Institutions (SIFIs). This extends into the macroprudential arena. At a global level, we are active participants in the Financial Stability Board. And, regionally, the UK authorities will be engaged in the European Supervisory Authorities. Our Governor is first Vice Chairman of the European Systemic Risk Board (on which I and Adair Turner, Chairman of the FSA, also sit).

On the US side of the Atlantic, some of you will recognise echoes here of the Paulson Plan for the creation of a financial stability authority in the Federal Reserve. Furthermore, FPC will have a responsibility to advise the government on when the perimeter of the PRA’s microprudential supervision should change. Very obviously, this is aimed at countering the risk of regulatory arbitrage undermining attempts to tighten up banking regulation. It also recognises that the shape of the financial system is bound to evolve in unexpected ways over the years. The regulatory regime needs to be adaptable. It is not all about banks: instruments addressed to network issues That underlines that the UK’s new macroprudential regime is not all about banks. For example, were it to be warranted, the FPC could potentially intervene via Recommendations or Directions to the microregulators on disclosures made around the issuance and structuring of securities; on the trading infrastructure of markets, to increase the likelihood that liquidity would prove resilient under stress; on limits on large exposures amongst different kinds of firm; and on the rules of the game for the many varieties of shadow banking. On the last, for example, it is no secret that, speaking only for myself, I should like to see the rules for money market mutual funds altered to address the “break the buck” problem.

The heady days of the Great Moderation were restrained by geopolitical uncertainty. During the financial and euro crises, by contrast, economic uncertainty dominated. And from 2012 onwards, with the abatement of the acute phase of the euro-area crisis, economic uncertainty began to fall back, only to be replaced by renewed geopolitical tensions and now sharply higher policy uncertainty (Chart 4). Chart 3 UK economic policy uncertainty has increased since the global financial crisis, rising sharply higher in early 2016 Source: Bank calculations and Baker et al, (2015), ibid. Chart 4 Three eras of uncertainty: geopolitical from 9/11 to 2008; economic uncertainty from 2008 to 2012; and policy uncertainty today Source: Bank calculations and authors cited in Charts 1–3 above. Economic policy and geopolitical uncertainty indices are de-meaned and shown relative to their respective standard deviations. Chart shows two-year centred moving average for each measure. 4 BIS central bankers’ speeches 2. What do the combined effects of uncertainty mean? All this uncertainty has contributed to a form of economic post-traumatic stress disorder amongst households and businesses, as well as in financial markets – that is, a heightened sensitivity to downside tail risks, a growing caution about the future, and an aversion to assets or irreversible decisions that may be exposed to future “disaster risk”.7 There may be an affect heuristic at work. Put simply, long after the original trigger becomes remote, perceptions endure. They become embedded in economic narratives and their salience persistently affects risk perceptions and economic behaviour.

The implications for monetary policy will depend on the relative magnitudes of these effects. In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer. The Committee will make an initial assessment on 14 July, and a full assessment complete with a new forecast will follow in the August Inflation Report. In August, we will also discuss further the range of instruments at our disposal. These judgments will benefit from the Bank’s joined-up approach. For example, the PRA’s direct line of sight of banks, building societies and insurers, and the FPC’s oversight of systemic risks, allows the Bank to understand better the net impact of any monetary actions on financial conditions, and ultimately businesses and households. As we have seen elsewhere, if interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price. There are also interactions between prudential rules and the provision of credit in the face of large macro uncertainty. The Bank of England is well positioned to understand these interactions and will work across its policy committees to maximise the coherence and effectiveness of their efforts. I can assure you that in the coming months the Bank can be expected to take whatever action is needed to support growth subject to inflation being projected to return to the target over an appropriate horizon, and inflation expectations remaining well anchored.

Thomas Jordan: Swiss National Bank monetary policy in light of financial market disruptions Introductory remarks by Mr Thomas Jordan, Member of the Governing Board of the Swiss National Bank, at the end-of-year media news conference, Zurich, 11 December 2008. * * * Situation in the financial markets Looking at the financial markets, we currently find ourselves in a historically unprecedented situation. The financial crisis has escalated dramatically since September. In the course of the past three months, it has taken hold in almost every market segment around the globe. At the time of the last news conference in June, we had already experienced three waves of money market turbulence; now, a fourth wave has eclipsed all others (cf. chart 1). 1 The situation in the money markets has calmed somewhat since November. This is due in part to the measures taken by central banks and governments, in particular the generous amounts of liquidity injected into the system, the recapitalisation of banks, the provision of state guarantees for bank liabilities and the transfer of risk positions. After unsecured money markets had all but frozen in the autumn, central banks increasingly found themselves acting as lender of first resort, in other words, they were becoming the primary supplier of liquidity to the financial system. To this end, new monetary policy instruments and facilities were introduced, and the liquidity supply was expanded significantly.

*** The last few years have already been littered with outstanding achievements. It was not so long ago that most people doubted that the single currency would ever see the light of day. Then, when they saw that it would, they speculated that only a few countries would be able to join. But they underestimated the resolve of European governments to be part of this great step forward in Europe’s history. Since then, we have witnessed the two changeovers; the introduction of the euro in book-entry form and then in the form of banknotes and coins. Both went smoothly, not because they were easy, but because of the hard work of all involved. And of course, for nearly five years now, we have had a single monetary policy conducted by the European Central Bank for the euro area. During this time, the Bank has not been without its critics. I have not been without my critics. The nature of that criticism depended on which newspapers you read. If you read the Anglo-Saxon press, then we paid too much attention to monetary growth. It seems that money shouldn’t matter for monetary policy. If you read the German press, well the story was different. Some said we communicated too little. Others said we communicated too much. When you are flanked on both sides, then you must be somewhere in the middle of the park. I conclude from this that we must have positioned ourselves more or less right.

The credit squeeze here has not been, initially at least, a response to losses at home but driven by the dramatic loss of liquidity in financial markets (Chart 1) which was set off by the US sub-prime downturn. One puzzle has been why that problem in one part of one country’s housing market has triggered such global turmoil. Of course the US is not just any country. But while the numbers may look large in absolute terms, even if sub-prime losses reach $ billion as the IMF have suggested 1, they will be quite modest relative to the size of the whole banking system. The answer is that sub-prime provided only the initial spark and the fire fed on much broader weaknesses in the financial sector, which in turn had been allowed to develop by imbalances in the global economy. The most striking feature of the world economy in the last decade has been the explosive growth of China and other emerging economies. For example, since China joined the WTO in 2001, its imports and exports have expanded on average by 25% each year, more than twice the growth in world trade over that period. But these countries have been reluctant to rely, in net terms at least, on foreign capital either because of their own previous currency crises or their observation of the painful adjustment experienced by others. Foreign direct investment has been permitted to allow the transfer of technology and expertise but these capital flows have been re-exported through accumulation of foreign reserves.

Famously Alan Greenspan asked “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions..?” There are two good reasons for care. First policy has to be appropriate for the whole economy; the interest rates which would be needed to have a significant effect, say, on the growth of house prices in recent years might have been far too high for other industries. Secondly central bankers have been cautious to put much weight on their own assessments of when an increase in asset prices is becoming unsustainable. If they get the judgement wrong, they risk slowing growth needlessly and bring inflation persistently below target. Even if central bankers put more weight in future on their judgements of excesses in financial markets, it seems highly desirable also to make the regulatory system more counter-cyclical. BIS Review 94/2008 3 A number of proposals have recently been put forward, which would have the effect of directly increasing a bank's capital requirements during an economic upturn and allow room for capital requirements to fall in a downturn. For instance Professors Goodhart and Persaud have put forward a scheme linking a bank's capital to the growth in its assets. Another possibility is to learn from the Spanish system of requiring banks to set aside general provisions against their loan book in good times which can be a cushion against losses in the downturn.

Negative interest also puts a strain directly on banks, and indirectly on pension funds and life insurance companies, which worry about their profitability and about meeting their obligations. As I have mentioned, the SNB takes these concerns very seriously. Yet the challenges now facing pension funds are not caused first and foremost by monetary policy. Rather, their problems stem from the fact that pension funds have to achieve returns that are nominally fixed and were set when the equilibrium interest rate was higher. For banks, the negative interest rate undoubtedly represents a cost because they have to pay interest on their deposits at the SNB. However, the SNB grants a generous exemption threshold, which reduces the effective interest rate burden for the banking sector. These exemption thresholds give banks the freedom to decide whether – and to what extent – they should pass on negative interest to their customers. From a financial stability perspective, it is not negative interest per se which poses a challenge, but rather the low level of interest rates more generally. It is conceivable that low interest rates will lead investors to take greater risks. This can result in imbalances developing on the real estate and mortgage markets. In Switzerland, a variety of measures have been implemented since 2012 – the countercyclical capital buffer for instance – with the aim of reducing the associated financial stability repercussions. Since then, the pace of growth on the real estate and mortgage markets has slackened somewhat, although mortgages continue to grow faster than GDP.

BIS central bankers’ speeches 11 Figure 8 Sweden’s net external position and accumulated current accounts Percentage of GDP 80 80 Accumulated current accounts Net external position 60 60 Nominal net external position 40 40 20 20 0 0 -20 -20 -40 -40 -60 -60 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Sources: Statistics Sweden and the Riksbank If it is the case that Sweden has no particularly large net claim internationally then this will have some significance for the prospects for the real exchange rate. In theory, countries with a strong external position should in the long term experience appreciating real exchange rates, and vice versa. There is also empirical support for the link between the net position and real exchange rates when studying different countries. 24 With a net claim close to zero one would not necessarily expect any strengthening of the real exchange rate despite a large current account surplus. The fact that Sweden’s external position appears to be close to zero suggests that there is no need for the real exchange rate for the krona to move in any particular direction for this reason. Other factors also affect the real exchange rate, for example relative GDP growth, relative inflation and the terms of trade.

Tilting is a well-developed investment practice, applied to climate-based central bank purchases by Dirk Schoenmaker,22 and has a number of key attractions: - It will allow us to maintain a dynamic engagement with issuers – dialling up those whose strong record improves, and dialling down the laggards (a process illustrated schematically in Chart 9); - Similarly, it will allow us to improve the mix of climate metrics we use over time, as data coverage and quality improves; - Predictable, progressive action of this kind will send a clear message to issuers, and the wider market, about the Bank’s current and future intent, giving time and incentive to adjust transition planning; and - It will help avoid concentrations in the portfolio, and maintain space to use the CBPS for future monetary policy purposes, in either direction. 22 Greening-monetary-policy.pdf (bruegel.org) 13 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 13 Chart 9: stylised illustration of a climate-based tilt To calculate the appropriate tilts, we will explore the use of a ‘scorecard’ approach, capturing a range of metrics related to company climate performance. Judging which metrics to include is a key task for the next stage of the work, and we look forward to receiving input and guidance on this question. Potential candidates include: the level and rate of change of companies’ carbon footprints, the existence of regular climate reporting, commitment to specific reduction targets, and authoritative third-party validation of those targets.

Although foreigners, including non-EU nationals, are present in all sectors and at all levels, their employment has increased mainly in professional and administrative support services, and not as is sometimes claimed, in sectors characterised by lower skill levels. The increased employment of foreign nationals across occupations has enabled organisations to grow and venture in new areas. A sudden reversal of this pattern could stall activity in several sectors. Efforts to upgrade the country’s infrastructure should therefore be complemented by measures that prevent a disorderly depletion of foreign human resources and enhance the skills of Maltese nationals. *** Favourable economic developments, although easing somewhat, are expected to continue to buttress financial stability. Lending volumes remain supportive of interest income but pressures on margins persist due to the low interest rate environment. Notwithstanding, profitability remains a challenge for traditional banking models such as those of our banks. In fact, though still comparing favourably with their European peers, the profitability of domestic banks has been slimming. In addition to the limitations on their ability to generate more interest income, banks have to contend with ‘no-fee’ alternative products being developed by fintech players which operate with a lower cost base and hail from a less intrusive regulatory environment. Concurrently, banks are facing a more rigorous and intrusive supervisory approach coupled with more rigorous standards of Anti Money Laundering and Combating the Financing of Terrorism. This is absolutely necessary and has our full and active support.

In a number of countries in Asia, the global financial crisis has also sharpened the focus on risks in financial institutions which are more systemically important. This includes having the regulatory reach that extends to institutions outside the formally regulated system. The implementation of global financial reforms has however, also substantially increased the regulatory complexity associated with the proliferation of binding “one-size-fits-all” prescriptions. While these rules mainly aim to address the fundamental weaknesses of the global financial system exposed during the crisis, it is important not to lose sight of other critical elements of sound regulation and supervision. The crisis has underscored the need for judgment to have a greater role in regulation and supervision. The implementation of global reforms is also proceeding at a time of tighter global financial conditions and weaker global growth. While the work of the Basel Committee, now more than two years old, suggests that its effects on economic growth will be modest, the highly dynamic global financial conditions needs to be taken into account in the implementation of the new standards. BIS central bankers’ speeches 3 In addition, in a more interconnected world, building Asia’s resilience to future shocks has also included significant progress in the arrangements to respond to potential threats of a crisis on a regional scale. These arrangements are currently being strengthened in Asia, through regional platforms for cooperation and more developed home-host supervisory arrangements that reflect the wider regional footprint of financial institutions in Asia.

We believe that expectations play an important role when prices and wages are set. Expectations concerning future inflation and economic stability have considerable impact, not least in the foreign exchange market. Inflation expectations also influence wage demands and have an effect when companies adjust their prices. It may be difficult to form an opinion about how expectations are generated. Confidence in the inflation target may provide an anchor. Past inflation rates may also influence what we think inflation will be in the future. There is thus an interaction between inflation expectations and inflation. If there is confidence in monetary policy, expected inflation will be equal to or close to the inflation target. This contributes to stabilising inflation around the target. The expectations channel thus amplifies the effects of monetary policy. We therefore place considerable emphasis on ensuring that households, companies, the social partners and financial market participants are confident that inflation will remain low and stable. To the question of how high prices are expected to rise, companies, the social partners and others answer that they expect a rise of 2½ per cent over time. Financial market participants also expect future inflation to be 2½ per cent. This is reflected in developments in long-term bond yields. This indicates that monetary policy has underpinned confidence that future inflation will be 2½ per cent. Consumer price developments There were wide fluctuations in the Norwegian economy in the 1970s and 1980s. Economic developments were marked by high and variable inflation.

At the same time, Norges Bank presented inflation projections based on an exchange rate equal to the average for June and an interest rate of 7 per cent. Since early this summer, the krone has remained in this range. Consumer price inflation was slightly higher than projected in June and July, but returned to the level forecast in our path in August and September. The next Inflation Report will be presented in connection with the Executive Board’s monetary policy meeting on 30 October. Thank you for your attention. BIS Review 59/2002 5

This has taken place in a global environment in which the world economies and financial systems are increasingly becoming more integrated. As a result, it can be expected that there is increased interdependence, events that take place in one part of the world will have implications on other parts of the world. This is likely to be more pronounced in the ASEAN economies and financial systems, given their openness and their high degree of integration with the global economy and international financial system. As the ASEAN and the EU continues to evolve as strategic partners, new opportunities can also be realized. An enhanced relationship will also contribute towards more effective management of the new challenges in the ever-changing global environment. Indeed, this Conference takes place at an important time when it becomes even more constructive and meaningful for our two regions to strengthen our associations, our inter-linkages and our relationships. Learning from the experiences of the EU Ladies and Gentlemen, The unification of Europe on many fronts is a major structural enhancement to the global economic and financial landscape. It is very likely however, that in view of our diversity and different structures and stages of development, the route for the integration process will be significantly different. It can be stated with certainty however, that integration will nevertheless occur. Indeed, the process has already commenced and it is likely to gain momentum as we advance forward. The motivation being the greater stability it brings and the increased growth potential it generates.

The financial institutions are expected to identify, assess and understand the money laundering and terrorist financing risks at the institution level and the Financial Institutions’ leadership and senior management need to be involved and be engaged in the risk assessment process. The institution’s risk level assessment can be leveraged through thematic money laundering and terrorist financing risks assessment conducted at by the institution or periodic reporting by compliance department such as updates on STRs submissions, investigation orders received or findings from internal auditors. By getting the leadership and senior management involved in the risk assessment process, the institution would be better informed in making business decisions, such as when venturing into new markets, services or geographical areas, especially when the new area is vulnerable or attractive to money laundering and terrorist financing risks. In addition, having a complete understanding on the risks will assist the institution in allocating resources for the compliance function, including recruitments of competent personnel and investment into management information system. The communication of money laundering and terrorist financing risks identified is equally important. The risks identified should be shared throughout the organization especially with key business units and the front liners. The risks identified shall also act as a guide in coming up with policies procedures and training needs requirements and its robustness for different business units. In return, the business units should be able to provide feedback to the compliance or risk management departments on any new or emerging risks that they face or encounter in their daily business operations.

Another difference is that, transactions associated with TF may be conducted in very small amounts, which when not viewed in the TF context could be the very transactions that are considered as low money laundering risk. Therefore we have chosen to assess money laundering and terrorist financing risks separately. Methodology of the NRA The methodology used in conducting this NRA is loosely based on factors used in the World Bank’s NRA tool and the Asia and Pacific Group on Money Laundering (APG) Strategic Implementation Planning Framework. The NRA is largely a combination of quantitative and qualitative assessment. It draws together statistical information from across key government ministries, supervisory and regulatory authorities (SRAs) and LEAs. Statistics on the mutual legal assistance requests received from other countries and the types of matters to which the requests relate to, and the financial intelligence requested or disclosed by the foreign FIUs are used as indicators as to the level of foreign proceeds of crime being laundered in Malaysia. This is complemented by qualitative information sources such as perception surveys involving respondents from officers of the LEAs, reporting institutions and foreign FIUs, intelligence insights, independent and external studies and public information on current and emerging threats to form a consolidated picture of the country’s money laundering and terrorism financing environment. The findings were then validated through a focus group involving subject matter experts from amongst the NCC members.

These developments were foreseen by the Central Bank and, after a brief interlude, short-term interest rates began to be reduced again from September 2004.e. No apparent pressure of this kind is expected in 2005 either, provided that the tight monetary and fiscal policies continue to be implemented and the incomes policy follows a course in line with inflation. However, as I have just mentioned, the recent press release “March Inflation and Outlook” needs to be read carefully. Graph 3: Demand Deficit (Total Supply –Total Domestic Demand) 12,0 Excess Supply 10,0 8,0 6,0 4,0 (%) 2,0 0,0 -2,0 -4,0 -6,0 -8,0 2004Q1 2003Q1 2002Q1 2001Q1 2000Q1 1999Q1 1998Q1 1997Q1 1996Q1 1995Q1 1994Q1 1993Q1 1992Q1 1991Q1 1990Q1 1989Q1 1988Q1 -10,0 Source: SIS, CBRT. Although the period of chronic inflation has been left behind, a period of lasting price stability has not yet been entered. As I have occasionally emphasized in my speeches, we are still experiencing a period of “disinflation”. Having said that, the distance covered and the gains attained are significant. Throughout this whole process, inflation dynamics not only changed as a result of the policies implemented, but also the effect of disinflation itself. This, in turn, helped inflation to be pushed down in an irreversible way. Breaking inflation inertia is the first clearly noticeable achievement in terms of the changing dynamics of inflation.

The implementation of policies by institutions with clearly defined goals protected from short-term effects and able to communicate regularly, is crucial to creating the required confidence for economic units in their decision-making process. Central bank independence is a concept that can be defined in various ways. The main pillar of independence is not to allow a borrowing-lending relationship with the public sector. There are three more pillars of independence. The first is goal independence that means the ability to freely determine monetary policy targets. Second is target independence, which means the ability to determine targets at its own discretion when price stability is set as the goal. Finally, the third pillar is the power to freely choose and use monetary policy instruments with the aim of achieving the targets. It is again a widely accepted fact that the ability of the central bank to announce its opinion about the general course of economy and the risks using communication technologies is part of central bank independence. This means warning politicians, non-governmental organizations, financial circles, the real sector, in short all sections of the public. After thirty years of chronic inflation and successive economic crises, the Central Bank of Turkey finally obtained independence in 2001, which was quite close to world standards.

This dynamic should have been mitigated to some extent by the rating agencies as they assigned ratings to these new securities, but that process too proved inadequate, especially for residential real estaterelated securities. The problems associated with these misaligned incentives for issuers and inadequate rigor on the part of the rating agencies became apparent as the housing sector turned down and the economy weakened. The result was a dramatic spike in credit losses and an almost complete loss of investor appetite for non-agency, residential mortgagebacked product. A second factor contributing to the collapse of the ABS market was that the benefits of pooling and distributing risk more widely proved to be somewhat illusory. In practice, the performance across different loans that collateralized the securities was much more highly correlated than was anticipated, and the risks associated with these securities was significantly more concentrated than had been assumed. Some banks that were unable to sell the highest-rated tranches kept them on their books. In other cases, the sales were made to off-balance sheet vehicles, in which the banks retained residual risk. This correlation contributed to the aversion of investors to the asset class as a whole. A third contributing factor was the fact that these securities were often complex and heterogeneous and, thus, hard to value. In a stressed economic environment, this complexity exacerbated the erosion in market liquidity conditions, which in turn led to a vicious circle of falling prices and even further diminished liquidity.

We think it is unlikely that the Treasury will lose money on this program, and it sits ahead of the Fed in terms of its loss exposure. The risk posed to the Federal Reserve therefore seems quite remote. Instead, we expect that the program will be profitable for the taxpayers and will be successful in pushing down yields and increasing credit availability. Turning from the issues of design and risk to issues concerning implementation and effectiveness, we have been rolling the TALF out in stages – first the consumer ABS market, with the first subscriptions for TALF loans in March; second, new CMBS securitizations that will start in early summer; and third, legacy CMBS and, possibly legacy RMBS, later this summer. By legacy assets, we mean highly-rated existing securitized assets that are already outstanding. The legacy TALF program will help support asset-backed-securities prices. This should help aid market liquidity and make financial firms that hold such assets less vulnerable to the risk of further losses. So far, the evidence indicates that the program is working as designed. First, the issuance of consumer ABS securities has been gradually reviving. In March, four deals came to market worth $ billion. In April, there were another 4 deals worth $ billion. In May, there were 8 deals worth $ billion and this week, there were 13 deals worth $ billion. We’re not back yet to the $ billion annual rate of issuance before the crisis and we don’t expect to get there, but we are making a good start.

Here it is essential that practitioners such as risk experts, auditors, consultants and the supervisors themselves should strive to learn of and transpose all these regulations to their daily duties. I believe it is time to reflect on our subject today in something of a critical frame of mind. I have some concerns over the scope of the new regulatory arrangements. By way of example, the transposition of Basel III to the European Union has required almost 700 articles, many of which not only involve notable technical complexity, but also entail the promulgation of extensive technical standards and additional supervisory guidelines for better implementation. Just as banking industry practitioners face the challenge of implementing and applying this regulatory agenda, the challenge to regulators and supervisors is to reflect on how to square effective regulations with a framework that should ideally be simpler and more transparent, since the effectiveness of the new regulations will also hinge on this. Thank you. 4 BIS central bankers’ speeches

A big part of that reflects recent success in averting tail risks that were weighing on investor confidence. Europe’s common currency hasn’t fragmented, the U.S. didn’t go over its fiscal cliff, and China hasn’t had a hard landing. But in each of these cases, there is plenty of unfinished business, and important challenges remain. In the euro area, while there are grounds for cautious optimism, much remains to be done to restore confidence and growth. Fiscal adjustment is far from complete and is likely to continue to weigh on growth for some time to come. Financial conditions in the periphery have improved, but remain much less supportive than in the core. Plans to build a banking union and deepen economic, fiscal and political integration remain very much works in progress. And, as the elections in Italy have reminded us, there is an important political counterpart to the economic and financial challenges and risks confronting the region. In the U.S., we are only part way toward addressing our fiscal challenges. Recent measures are chipping away at the deficit, but the approach hardly corresponds to anybody’s ideal of efficiency. While there is little mystery about what ultimately needs to be done, we simply have not yet mustered the political will to make the compromises needed to get there. And, unfortunately, with deadlines coming – and one just having passed for decisions on mandatory spending cuts and spending and borrowing authorizations – we can’t be comfortable that this is going to go smoothly.

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

12 Market fundamentalism – in the form of light-touch regulation, the belief that bubbles cannot be identified and that markets always clear – contributed directly to the financial crisis and the associated erosion of social capital. Ensuing events have further strained trust in the financial system. Many supposedly rugged markets were revealed to be cosseted: • major banks were too-big-to fail: operating in a privileged heads-I-win-tails-you-lose bubble; • there was widespread rigging of benchmarks for personal gain; and • equity markets demonstrated a perverse sense of fairness, blatantly favouring the technologically empowered over the retail investor. 13 Such practices widen the gap between insider and outsider returns and challenge distributive justice. More fundamentally, the resulting mistrust in market mechanisms reduces both happiness and social capital. We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital. It is necessary to rebuild social capital to make markets work. This is not an abstract issue or a naive aspiration. I will argue that we have already made a start with financial reform and that by completing the job, by returning to true markets, we can make capitalism more inclusive. What then must be done? There are a wide range of policies to promote inclusive capitalism from early childhood education, training and the importance of differentiated pathways and mixed-income neighbourhoods. These are all fundamentally political issues.

And that explains the solid the anchoring of our inflation expectations, which we see as one of our major assets because it helps avoiding second round effects when we have oil price increases in particular. Clearly, in particular on the side of energy and commodity prices we have a number of developments that we will continue to monitor closely. WSJ: Tighter monetary policy would have the biggest impact on countries like Spain, Greece and Ireland where private debt is linked to Euribor. Can you understand why those peripheral countries are concerned about this hawkish shift? BIS central bankers’ speeches 1 TRICHET: I also said in my last press conference that the present interest rates were appropriate. In any case all countries in the euro area have an immense stake in the solid anchoring of inflation expectations because medium and long-term interest rates incorporate future inflation expectations. WSJ: Inflation is being driven by energy and commodity prices and higher value-added taxes in some countries. Is the ECB’s focus on headline inflation misplaced? Does the Fed have it right by focusing more on core inflation? TRICHET: In the U.S. the Fed considers that core inflation is a good predictor for future headline inflation. In our case we consider that core inflation is not necessarily a good predictor for future headline inflation.

2 All three of these reasons – evidence that U.S. monetary policy is currently only moderately accommodative, the fact that U.S. financial conditions have been influenced by economic and financial market developments abroad, and risk management considerations – argue, at the moment, for caution in raising U.S. short-term interest rates. So, directionally, the movement in investor expectations towards a flatter path for U.S. short-term interest rates seems broadly appropriate. That said, to my eye, market expectations derived from futures prices – which price in about one 25 basis point rate hike through the end of 2017 – appear to be too complacent. If the incoming information validates my view of the outlook, then I believe that U.S. monetary policy will likely need to move at a faster pace than implied by futures prices towards a more neutral posture as the labor market tightens further and U.S. inflation rises. Moreover, market expectations may be putting insufficient weight on the possibility that the economy could outperform our expectations, that financial conditions could ease, or that the risks to growth from Brexit and other international developments could fade away. If such events were to occur, this might necessitate a faster pace of adjustment. For these reasons, I think it is premature to rule out further monetary policy tightening this year. As I said before, it depends on the data, broadly defined, and, as we all know, that is not something one can predict with any accuracy.

Indeed, for European banks affected by big operational events, this deterioration has stood at over 1.25 pp of CET1 in the past five years, with a rise to 2.1 pp in 2018. In Spain’s case, the potential materialisation of costs associated with legal risks continues to contribute to deposit institutions’ operational risk. The processes linked to past litigation such as that of the floor clauses have had an estimated cost for the sector 7/10 of over € billion to June 2019. Moreover, there are other significant legal processes still pending resolution. In any event, legal risk and certain other factors relating to banks’ conduct have had a considerable impact on the reputation of the banking sector, and not only in Spain. It is worth recalling here that reputation and customer confidence are fundamental to the banking business. Therefore, institutions should strive to reverse this tendency by providing their customers with financial products and services suited to their needs and capabilities, and they should likewise supply the relevant information clearly and transparently. Lastly, in relation to the systematic assessment of the balance of risks to financial stability that we regularly make at the Banco de España, we are including other elements, whose materialisation could occur over a longer horizon. I refer here to the potential changes technological innovation may entail for the market structure of the financial sector, and those arising from climate change. The importance banks give to these changes will have to increase accordingly.

Over the past six months, corporate profitability has remained very low and leverage ratios have generally increased, intensifying the balance sheet vulnerabilities of the non-financial corporate sector. In addition, banks have continued to apply conservative lending standards, albeit at a moderating degree. Improvements in financial market conditions have allowed larger firms to partly substitute bank loans with market-based debt or equity. Looking forward over the next few months, the overall balance sheet conditions are expected to remain challenging, as firms’ access to external finance is not likely to improve significantly in the coming months, while profitability is likely to remain low. Low profitability and high leverage are putting a severe strain on firms, making them less resilient to adverse shocks. As a consequence, some measures of corporate credit risk, such as unconditional expected default frequencies, remain high for most industries although they had declined recently for most sectors. (See Chart 5). Conditions in the euro area commercial property markets have deteriorated further during the past six months and continue to be a potential source of risk to many financial institutions. Capital values – i.e. commercial property prices adjusted for capital expenditure, maintenance and depreciation – for prime property had declined by an average of 12% (year-on-year) in the third quarter of 2009. All euro area countries had recorded declining capital values compared with the third quarter of 2008.

2 BIS Review 8/2010 Other challenges ahead for the global Islamic financial system The Islamic banking and finance industry is still relatively young and to a certain extent, is functioning at the experimental stage of development. At this stage, it requires an enabling and conducive environment to innovate new products and try out the various Shariah concepts in Islamic finance. However, going forward, there are some challenges that may impede our efforts in developing the Islamic financial system. A rigorous and well developed Shariah framework is needed to govern market practices of the Islamic financial institutions. To achieve consistency in the development of Islamic finance, all stakeholders involved in Islamic finance must work in a concerted manner on interpretation issues. Nonetheless, there has to be a check and balance between the need to have innovative and advanced products and the need to uphold the Shariah requirements. Efforts, time and resources must be pooled among the Islamic finance community to expand the industry and compete healthily with the larger conventional finance markets. As such, mutual recognition and understanding of different practices are essential in allowing Islamic finance to grow. For instance, Bursa Suq Al-Sila’ could also be used as a unifying application of Tawarruq practices by adopting acceptable best market practices for the Islamic financial institutions and at the same time observe the Shariah principles. In Malaysia, we adopt a stance of mutually recognising the various Shariah interpretations.

Bahrain and Malaysia has one of the strongest relationships among the countries in the Middle East. It was further cemented with the signing of a Memorandum of Understanding between the Central Bank of Bahrain and the Central Bank of Malaysia in 2001 to jointly develop Islamic finance internationally. In fact, an 80-strong Malaysian delegation led by HRH Raja Dr. Nazrin Shah, Crown Prince of the State of Perak and Malaysia’s financial ambassador, visited Bahrain in October 2009 to forge greater financial ties with the Bahraini Islamic financial community. It is heartening to note that common grounds have been reached on the standard contracts that the Association of Islamic Banking Institutions Malaysia or AIBIM, and the International Islamic Financial Market, or IIFM, have produced. This is invariably a reflection of the growing cross border harmonisation of interpretations of concepts and agreements. Furthermore, AIBIM’s interbank Murabahah master agreement (IMMA) and the corporate Murabahah master agreement (CMMA), recently launched in Malaysia, would further unlock the potential of the Malaysian Islamic money market, which saw around $ billion worth of transactions daily last year. In the global scene, it is estimated that the global commodity murabahah market is valued at more than $ trillion, giving rise to a huge business potential. I would encourage you to focus more resources here as it is one of the key areas that we can jointly promote in our regions.

Rather than simply resetting the quantitative standards, we sought a framework that would be better able to evolve with, and indeed encourage, future improvements in the measurement and management of risk, and one that would be well-anchored on a solid corporate governance structure and a sound risk culture. On a grand scale, we sought a capital framework that would promote greater financial stability, a public good that benefits consumers, businesses and banks alike. Comprehensive approach The new capital framework is much more comprehensive than the 1988 Accord for many reasons: it applies to a wider scope of entities within banking groups; it offers a menu of different alternatives to fit different circumstances; it encompasses additional risks, in particular operational risk; it widens the recognition of credit risk mitigation techniques; it sets out a thorough framework for securitisation transactions; and, most importantly, it is based on three mutually reinforcing pillars. As you may know, the first pillar refines the measures of minimum capital requirements. It aligns capital charges more closely and comprehensively to the actual economic risks a bank faces, and creates explicit incentives for banks to improve their internal measures and approaches to risk. Let me just add that this better alignment of capital to risk is a principle that we supervisors hold dear. It can sometimes be tempting to vary the capital rules in favour of particular sectors, but in my view this divorces capital requirements from risk, which ultimately benefits no one.

Also from a European perspective, I believe that the EU should seek to implement the trading book changes at the same time as other major countries. Moving now to the second initiative, the Basel Committee has long intended to conduct work to re-confirm that the new framework meets our objective to broadly maintain the aggregate level of capital requirements, while keeping incentives to adopt the more advanced approaches that are offered. In order to establish a common data set on which to base this review, the Committee has decided to begin a recalibration exercise in autumn this year, some months earlier than anticipated. As I said earlier, I don’t believe that this will imply a significant change to the framework. We are already satisfied that the new capital framework clearly differentiates the degree of risk in particular transactions on a relative basis. What we need to confirm is that the absolute requirements are right and that the appropriate incentive structure is maintained. 5. Conclusion In my testimony today, I have sought to outline the reasons why Basel II matters so much and how it will support the continued safety and soundness of the banking system. When we motivate banks to improve their understanding and approaches to risk, I believe that banks will become less sensitive to the ups and downs of the business cycle, better able to weather periods of distress and better able to serve as a source of credit and growth to the economy.

The decline in traditional exports will then persist. Sooner or later, the oil market will also feel the effects of the downturn and oil prices will decline. If the world economy experiences prolonged stagnation and the krone remains firm, a markedly lower interest rate will contribute to a weakening of the krone and mitigate the effects for Norway. On the other hand, any fiscal slippage will contribute to maintaining a strong krone. A precondition for countering a possible downturn by means of monetary policy easing is slower growth in labour costs. Monetary policy cannot prevent an increase in unemployment that is caused by a significantly higher rate of growth in labour costs in Norway compared with other countries. A stagnating global economy has changed the domestic inflation outlook in recent months. World stock markets have continued to decline. It does not appear that interest rates in the US and Europe will increase in the near future. They may even be reduced further before the recovery starts. In Norway, the interest rate has also been reduced. At the same time, fiscal policy is stimulating activity, partly through tax reductions and growth in government allocations. In addition, state finances weaken when the economy shows little growth and unemployment rises. As a result of the strong krone, however, overall economic policy is tight. With an equally tight policy ahead, inflation would probably have been lower than the inflation target. A gradual easing of monetary policy would thus seem appropriate. Does the inflation target promote stability?

The central bank alone cannot, with the instruments at its disposal, steer the exchange rate. During the years when a fixed or stable exchange rate was the objective of monetary policy, fiscal policy was responsible for smoothing fluctuations in the economy. At the same time, incomes policy’s role was to keep wage growth in line with wage growth abroad. The objective of exchange rate stability therefore provided a framework for economic policy. When foreign interest rates moved up, the interest rate in Norway also had to be raised in order to prevent a weakening of the krone. Conversely, interest rates in Norway were often reduced following a reduction in interest rates abroad. One can imagine how this division of responsibility would have been implemented in the face of the disturbances to the Norwegian economy which occurred in 2001 and 2002. The upward tendency of the krone would have led to reductions in the interest rate down to the international level. As a result, interest rates would also have reached a historical low in Norway. Low interest rates would have fuelled lending growth, pushed up house prices and intensified the shortage of labour. In order to prevent another bubble of this type in the Norwegian economy, substantial fiscal policy tightening would have been required in 2001, 2002 and 2003. The fiscal rule stipulates that the central government budget deficit shall over time be equivalent to the expected real return on the Government Petroleum Fund.

It must be frequently adjusted in response to various changes and new information so as to enable the stability goal to be reached. Against the background of our knowledge of the monetary policy transmission process and its lag structure, it is obvious that it is hardly the level of money market rates that is decisive, but rather the interest rate path optimised over time in uncertain circumstances. The condition for success of the policy is not that the three-month Libor rate is exactly right today; rather, it must be possible to constantly optimise the interest rate path - which leads to the set goal - in a way that the deviations of the ideal line, which can only be defined ex post, will be as small as possible and easy to correct. Interest rate steering will therefore often follow a fairly gradualistic pattern. This has nothing to do with macroeconomic activism, quite the contrary. The macroeconomic fine-tuning activists have lost their case because they have assumed totally unrealistic information conditions and underestimated the uncertainty of political decision-making. With interest rate steering, the situation is exactly the opposite. Precisely where there is considerable uncertainty and false steps are liable to occur, there are good reasons for implementing a policy of small steps. The danger of slipping is smaller, and a false step is easier to correct. But there are also valid grounds for fairly substantial interest rate adjustments.

Sound and robust risk data aggregation capabilities and risk reporting practices have become even more important since the global financial crisis, which demonstrated that an institution’s ability to manage risk-related data has a significant impact on its overall risk profile and the sustainability of its business model, especially under stress conditions. The presence of board members with IT expertise has increased significantly in banks, allowing them to be more aware of this shortcoming and to make better-informed decisions to implement an effective RDAR framework across the institution. Additionally, some institutions have invested in strengthening their processes, by including dynamic dashboards in risk reports, which allow for a deeper dive into several types of risk. In conclusion, although it has been in the supervisory spotlight for several years, awareness of the benefits of good risk data management has shown limited progress in institutions. Thus, the accuracy and timeliness of internal reporting still needs to be improved, as not doing so will limit management bodies’ ability to make the right strategic decisions. Conclusion The board’s oversight role is one of the core elements of good governance. Adequate skills, challenge and independence are three factors that ensure good governance of our institutions, and it is therefore helpful if both their business model and their risk management are geared towards making them robust and profitable. 5

Grill, M, Hannes Lang, J and Smith, J (2015), “The leverage ratio, risk-taking and bank stability”, preliminary version; www.eba.europa.eu/documents/10180/1018121/Grill,%20 Lang,%20Smith+-+The+Leverage+Ratio,%20Risk-Taking+and+Bank+Stability+-+Paper.pdf. Haldane, A and Madouros, V (2012), ‘The dog and the frisbee’, www.bankofengland.co.uk/ archive/Documents/historicpubs/speeches/2012/speech596.pdf. IMF (2009), Global Financial Stability Report, April. Laeven, L and Valencia, F (2010), “Resolution of Banking Crises: The Good, the Bad and the Ugly”, IMF working paper, 10/146. Pozsar, Z (2016), “Money Markets after QE and Basel III,” Credit Suisse June 2016. 6 BIS central bankers’ speeches BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9 10 BIS central bankers’ speeches

The interplay between the Riksbank and the market is of central significance for monetary policy. It is a question of mutual dependence. For example, the Riksbank is to supply an efficient payment system – a financial infrastructure. We also oversee the stability of the system. Moreover, we are responsible for providing Swedish banknotes and coins. However, at the same time we are dependent on the financial markets to implement monetary policy measures. The game rules for our interaction with the financial markets have changed quite a lot over the past 25 years. The most dramatic changes took place in connection with the deregulation of the credit and foreign exchange markets that begin in the 1980s. The deregulation has contributed to more efficient pricing which better reflects demand and supply conditions. The efficiency of the financial markets has considerable importance for the impact of monetary policy via the transmission mechanism. The impact of our policy also depends on how well we succeed in communicating our intentions to the market. The more open and clear we are, the better chance we have of influencing interest rate setting in the way we want, not just in the short term, but also over a part of the so-called yield curve. This makes some demands of our actions. BIS Review 40/2007 1 The other aspect – that we are a public authority with responsibility towards the general public and their elected representatives – also makes a number of demands of us.

Jarle Bergo: Projections, uncertainty and choice of interest rate assumption in monetary policy Speech by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), at the Foreign Exchange Seminar of the Association of Norwegian Economists, Sanderstølen, 27 January 2006. The Charts in pdf-format can be found on the Norges Bank’s website. Please note that the text below may differ slightly from the actual presentation. The speech does not contain new assessments of the economic situation or of current interest rate setting. * * * Introduction First of all, I would like to thank you for inviting me to this seminar. Participants at this and other seminars have occasionally shown some interest in Norges Bank’s views on future interest rate developments. For a long period, our analyses were based on the assumption that the interest rate would move in line with market expectations, and the discussion was usually about whether the bank agreed with this interest rate outlook or had a different interest rate path in mind. In Inflation Report 3/05, projections were based on the Bank’s own projected path for future interest rates for the first time. In other words, from using technical assumptions and others’ assessments of our future monetary stance, we have now in a sense “assumed ownership” ourselves of the interest rate path in our projections. This seminar would therefore seem to give me an appropriate opportunity to provide some background on this issue and on the assessments underlying our forecasting.

The reverse side of that same coin is that as more payments are carried out outside of the banking system, they also start to fall outside of typical central bank oversight like the ACH and RTGS. As it stands today, the portion of digital payments is still a small fraction of 9. total payments. Even in China, where mobile payments have sky rocketed, the total volume of mobile payment transactions in 2016 stood at CNY 208 trillion7, a fraction of the CNY 3600 trillion8 processed by China’s High-Value Payment System. However, as more payments go through these e-wallets and as more consumer monies are held by non-banks, it is important for us to consider the risks that we typically look out for: a. As individual e-wallets, how do we keep them safe to use? b. Collectively, how do we manage risks that e-wallets may pose to the financial system? 2/6 BIS central bankers' speeches c. As a market, how do we ensure that e-payments function smoothly with each other and with the financial system? 1 0 . Let me run through these three questions, and share how MAS is addressing these through the proposed Payment Services Bill (PSB) – striking a balance between innovation and sound regulation – as well as industry collaboration. The proposed PSB also follows an activity based framework which calibrates regulation according to the risks that the specific payment activity poses, rather than applying a fixed set of regulations to all payment service providers.

When China, India and Eastern Europe joined the global market economy, the labour force of countries participating in world trade doubled.9 Norges Bank Economic perspectives 15 february 2018 The result is that workers in advanced economies face competition from new groups, which pushes down wage growth and affects the income distribution between labour and capital. Lower unionisation levels have also weakened workers’ bargaining power. Since 1980, unionisation in the OECD area has fallen from around 35 percent to below 20 percent. Low wage growth feeds through to prices for goods and services. Many firms also face competition from firms that have relocated production to lower-cost countries. In addition, online shopping reduces the advantage of physical proximity to customers, narrowing the scope for passing on higher costs to prices. Globalisation thus restrains the general rise in prices. Cheap imports from low-cost countries have long been an important source of low inflation in advanced economies. In Norway, prices for clothing and footwear have fallen by almost half over the past 20 years. The price effects of globalisation have not been exhausted. A rising number of low-cost countries are competing on the global stage. So far, global competition has had less influence on services prices than on goods prices (Chart 8). However, global trade in services has increased recently. This may lead to renewed downward pressure on prices. Chart 8 Goods and services inflation. Average annual change 2000 – 2017.

At the same time, in a highly interlinked global economy consensus-building concerning the transmission of spillovers is crucial for dealing with shocks that affect substantial parts of the global economy. Moreover, the IMS should also provide incentives to foster appropriate preventive action that renders economies more resilient to shocks, and provide the necessary standards and infrastructures to make global markets work better as well as make coordination possible when warranted. This is already a robust policy agenda. 6 BIS central bankers’ speeches

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

The Economic Development Board’s investment arm, EDBI, will establish a Growth IPO Fund, that is starting with a fund size of $ million to invest in growth stage companies, grooming them for IPOs in Singapore. We are bringing down listing costs and improving the research ecosystem. MAS has enhanced its Grant for Equity Market Scheme (GEMS) to provide additional support for listings in Singapore. The GEMS listing grant defrays the cost of listing on SGX by co-funding up to $ million of listing expenses, an increase from $ million before. The coverage of the scheme will be expanded to defray the listing costs of special purpose acquisition companies (SPACs) and real estate investment trusts (REITs). The GEMS research grant seeks to groom equity research talent and expand Singapore’s research coverage of listed companies by co-funding the hiring costs of research analysts. We are expanding the listing pathways for corporates. SGX launched its framework for SPAC two months ago. Traditionally, IPOs can be a time-consuming process, and it can come with some uncertainty over valuations and pricing. 3/4 BIS central bankers' speeches With good quality sponsors, SPACs can meet the expansion needs of Asia’s fast growing companies by letting them gain greater certainty on price and timing, as well as strategic partners that can help them grow further. We are positioning SGX as a platform for sustainable investments. There is much that capital markets can do to direct funding towards sustainable projects and corporates seeking to reduce their carbon footprint.

Directors must devote their time to the bank, cannot be a director of more than three other profit-seeking companies, as well as disallowing of borrowing where cross ownership is more than one percent of the paid up capital of the borrower. Of the 92 people involved, 53 have now complied, and arrangements have been made for most of the others to comply, with the possible exception of the representatives of the Ministry of Finance who may find that their representatives are not the sort of people who can devote that much time to the bank because they are not part of the ownership or operation of the bank, but are just government representatives. We are looking into this and will discuss with the Ministry when the time is right. The problem in fact is not as innocuous as it looks as state bank remunerations are affected by considerations other than just how should directors be rewarded so that shareholders’ value can be maximised. But all this is being done through sanctions and coercion, and in the New Commercial Bank Act the authority will be explicit. My last words on commercial banks, the intervened banks might not yet be completely taken care of, but at least the cost of rescue can now be well estimated. The proper financing of the debt burden is probably one of the first jobs of the new government.

At the heart of those distortions lay turmoil in the government bond market – the largest capital market in the euro area. The government bond market is extremely important for price formation in other capital market sectors – for bank and corporate bonds, for example. Spreads between the yields on the government bonds of euro area countries increased to levels that, in a number of cases, significantly exceeded those justified by fundamentals. Yields on Spanish and Italian ten-year government bonds incorporated premia of more than 6 and 5 percentage points respectively relative to German government bonds. Even at the short end of the yield curve, distortions could be observed: in July 2012 the yields on Spanish and Italian two-year government bonds peaked at 6.6% and 5.1% respectively, while the ECB’s main refinancing rate was 0.75% at that time. Those spreads could, in part, be attributed to concerns by market participants regarding the sustainability of public finances. Fiscal reasons alone did not provide a full explanation, however, because the rapid rise in spreads in the first half of 2012 was not accompanied by an equivalent deterioration in those countries’ fundamentals. At the same time, there was an acute risk that contagion would affect other euro area countries, pointing to systemic risks that were not limited to specific countries. A key factor driving those developments was fears in the markets regarding an involuntary break-up of the euro area – i.e.

Secondly, we need to revisit the second (monetary) pillar in light of financial stability concerns – which are increasing. Monetary and macroprudential policies have traditionally been guided by a separation principle2. But in practice, macroprudential tools have limitations, while over the past years we have considerably extended the monetary toolkit. As a result, it may now sometimes make sense to approach monetary policy decisions in order to deliver the monetary stance called for by our price stability objective while choosing the appropriate combination of instruments that minimize risks to financial stability. Such a soft coordination is more promising than a strict separation. Lastly, how should we incorporate climate change in our monetary policy analysis? It affects price stability in the long run, and the value of our collateral, notwithstanding the fact that “a high level of protection and improvement of the quality of the environment”3 belongs to our secondary objectives in the EU Treaty. Speaking about financial stability, let me add a few words on Basel III. The agreement reached in December 2017 is the finalisation of an unprecedented and fruitful regulatory effort that began in 2009. I strongly reiterate that: it is a fair and reasonable compromise. The US had to accept the permanent recognition of internal models elsewhere, although their banks don’t use them; and both Europe and Japan had to accept an increased comparability of these internal models, leading to some increase in their capital requirements. Some people, starting with banks themselves, are now contesting the agreement.

3/4 BIS central bankers' speeches It has been said that regulators are pessimists in our DNA and always inclined to worry about things going wrong – and certainly, we cannot ignore the possibility of the failure of key FMIs no matter how remote, and this may occur in FMIs overseas. I started my speech this morning, noting the increasing connectedness between markets. This is true in the ‘life’ of a CCP - and can be true in its ‘death’ too. The failure of an internationally active CCP, that provides critical services in multiple jurisdictions, will have significant cross-border impact. When a CCP fails, its members are inevitably affected. Such members are likely to also have relationships with other financial institutions, or may trade and clear on other trading venues and CCPs. Through these network of interdependencies, the default of a CCP can trigger destabilising effects not only in the home market it serves directly, but outside of it. It is therefore important for authorities of jurisdictions that may be affected by a CCP’s failure to participate in that CCP’s resolution planning. Similar to the establishment of Supervisory Colleges to support ongoing supervisory co-operation, setting up Crisis Management Groups (CMG) for CCPs will allow the cross-border impact to be considered in resolution planning. In a failure situation, when resolution actions are time-sensitive, it may be necessary to limit the size of a CMG to enable efficient and effective discussions. But in normal times, resolution planning can benefit from a broader participation of relevant authorities.

Notable innovations that came under Mr. Masud’s time include the commissioning of the bank’s Branch Queue Management System at its Mutaba and Kafue House branches and Northend ATM Lobby, as well as the launch of Premier Banking. Barclays Bank Zambia Plc may have not pioneered all of these innovations, but they have provided reasonable competition to their colleagues which we at Bank of Zambia believe will be of benefit to the Zambian financial sector in the medium to long-term. It is my expectation that Barclays Bank Zambia PLC will continued to contest the market in a meaningful and beneficial way. Let me also acknowledge the contribution made by Barclays Bank Zambia Plc under Mr. Masud through the bank’s partnering with the corporate world to cosponsor the first ever Euromoney Investors’ Conference in Zambia. In addition, it is worth mentioning that BAZ, under the chairmanship of Barclays Bank Zambia Plc and Mr. Masud, helped initiate the beautification of Cairo Road by adopting the maintenance of its wonderful gardens. The positive change to our immediate surroundings particularly around the Bank Square is there for all to see. Further, Barclays Bank Zambia has continued to work closely with Junior Achievement Zambia where I serve on the Board. The bank has been providing office space as well as hosting the meetings of Junior Achievement at its premises. As a matter of fact, on 22 February, 2009, the Junior Achievement Worldwide/Barclays Bank partnership was launched in Dubai.

Caleb M Fundanga: Financial sector development in Zambia Remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the farewell cocktail hosted in honour of the Barclays Bank Zamia Limited Managing Director, Lusaka, 4 February 2010. * * * The Chairman – Barclays Bank Zambia Plc, Mr J J Sikazwe The Chairman – Bankers Association of Zambia, Mr Saviour Chibiya Chief Executive Officers of Commercial Banks Outgoing Barclays Southern Africa Regional Managing Director, Mr Zafar Masud Acting Barclays Bank Plc, Managing Director, Mr Bret Packard Management and Staff of Barclays Bank Zambia Plc Colleagues from Bank of Zambia Distinguished Guests Ladies and Gentlemen Ladies and gentlemen I am privileged to officiate at this farewell cocktail as we say goodbye to Mr. Zafar Masud who has been the Managing Director of Barclays Bank Zambia since January 2008. In the past few years, Barclays Bank Zambia Plc has contributed to making banking more accessible through its outreach programme which saw an increase in its ATM and branch network to over 150 ATMs and 55 distribution points comprising branches and agencies nationwide. Clearly the grass-root population in Zambia has continued to benefit from this initiative. As is the case with a number of other banks, Barclays Bank Zambia Plc has continued to innovate and positively contribute to financial sector development in Zambia.

While we have completed a vast amount of work in developing the international standards, we cannot rest yet. The ultimate success of Basel II still demands a high level of dedication and energy from all of us. I commend and thank the members of the European Parliament for their contributions to the international discussions on Basel II and for their hard work in European discussions on the Capital Adequacy Directive. I know that you will give the directive careful consideration, taking account of the global environment in which European banks are operating. I would like to pledge any assistance that members of the European Parliament believe may be necessary and I would be honoured to participate in future parliamentary discussions on Basel II and the Directive. The considerable efforts that the European Parliament, the Council, the Commission and the Committee of European Banking Supervisors have already demonstrated give me great confidence that we will achieve our goals. Our citizens, businesses and banks deserve nothing less than the promise and benefits of greater financial stability and more sustainable economic growth. BIS Review 3/2005 5

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.

This means that heavy and prolonged interventions may be self-reinforcing over time, steadily increasing the necessary volume of intervention purchases required to maintain the krone exchange rate. The foremost example of such a game situation in Norway’s exchange rate policy history was Friday, 20 November 1992, when we made intervention purchases for NOK 37 billion from the time the market opened until the market closed. Norges Bank does not want to intervene in such a way that this type of game situation arises. However, the Bank will use interventions if the krone moves substantially out of line with what we consider to be reasonable based on fundamentals or in the event of exceptional short-term volatility. It may also be appropriate to reinforce a desired development in the exchange rate that has already been observed in the market. In such a situation, it is assumed that the risk of ending up in a game situation against exchange market players is marginal. However, we must take into account that the krone exchange rate cannot in the long run deviate substantially from the level implied by economic fundamentals. The instrument available to Norges Bank for influencing economic fundamentals is the interest rate. Over time, therefore, the interest rate is the most important instrument of monetary and BIS Review 10/1999 –8– exchange rate policy. This is also recognised in the formulation of the guidelines for monetary policy. According to the National Budget for 1999, “Interest rates must be adjusted in order to avoid persistent and large-scale interventions”.

A precondition for maintaining a stable exchange rate against the euro is that price and wage inflation is on a par with that of euro countries over time. When the krone exchange rate is weak, Norges Bank therefore sets the interest rate with a view to low price inflation. At the same time, we must avoid a situation whereby interest rates are so high that monetary policy contributes to a downturn that undermines confidence in the krone. Interest rates are set based on these considerations. This is not a new policy. In an address to the annual general meeting of Forex Norge in August last year, Kjell Storvik stated: BIS Review 10/1999 –9– “I would point to the well-known fact that a lower krone exchange rate may contribute to fuelling inflation expectations and that such expectations may in turn generate expectations of a weakening of the krone exchange rate, thereby reinforcing depreciation pressures. Price expectations may thus prove to be a self-fulfilling prophecy. The interest rate level which has now been established should, in addition to directly contributing to stabilising the krone exchange rate, also limit price expectations...” I should also like to quote the following from the Revised National Budget for 1994: “A stable exchange rate can generate expectations of continued low inflation, which in turn influence both price and wage determination.

The fund’s global equity holdings doubled in the same period. Petroleum investment has increased substantially in recent years. Investment increased between 2008 and 2009 in spite of postponements and cancellations of a number of projects after the financial crisis unfolded in autumn 2008. This reflects that investment projects in 2009 were to a large extent determined by contracts that were concluded prior to the financial crisis. Petroleum investment still showed a substantial decline through 2009. The volume of petroleum investment is expected to drop further this year and next, followed by a pick-up in 2012 and 2013. The investment decline this year and next reflects postponements of projects and the near completion of large investment projects. Exports have picked up after world trade showed a faster and somewhat stronger increase than expected. Export companies in our regional network report that new orders have increased and that production is expected to rise over the next six months. A further increase in world trade will contribute to underpinning growth in exports. Measured by relative labour costs, Norwegian labour has never been as costly as it is now. As a result, the Norwegian export industry may lose market shares ahead. There are no prospects of another rise in export prices as sharp as in the 2000s, when Norway’s terms of trade improved considerably. Norges Bank raised the key policy rate on two occasions by a total of 0.50 percentage point in the fourth quarter of 2009. The feed-through to bank lending rates has so far been somewhat smaller.

The interest rate was raised by 0.50 percentage point towards the end of the year with a view to maintaining inflation at 2.5 per cent over time. New information suggests that the recovery in the Norwegian economy is continuing, but that capacity utilisation is probably somewhat lower than anticipated in autumn 2009. Combined with lower interest rates abroad, a stronger krone and lower wage growth suggest that the interest rate forecast should be revised down somewhat in relation to the October Report. Interest rates in Norway are low. The effect on private consumption of the substantial interest rate cuts in 2008 and 2009 has probably not been exhausted and high consumption growth is expected to continue in 2010. House prices have risen. The new guidelines for prudent residential mortgage lending issued by Finanstilsynet (the Financial Supervisory Authority of Norway) may curb household debt accumulation. Over time, household borrowing may nevertheless increase considerably and saving may fall. The aim of guarding against the risk 4 BIS Review 38/2010 of future imbalances, which may disturb activity and inflation somewhat further ahead, suggests that the interest rate should be gradually brought closer to a more normal level. On the other hand, a marked interest rate increase in Norway and a wider interest rate differential between Norway and other countries may entail a risk of a considerably strongerthan-projected krone, resulting in inflation that is too low. This will make it difficult to bring inflation up to target within a reasonable time horizon.

Asia remains the fastest growing and most dynamic region in the world today and is likely to remain so in the foreseeable future. According to projections by The Conference Board, China’s growth in the next ten years will average close to 5% per annum, with India at about 4.2% and the rest of Asia at 4.5%. 1 These projected growth rates for Asia are well above the 3.8% for emerging economies as a whole, and the 1.7% expected for the advanced economies over the same period. Looking further into the future, the Asian Development Bank has projected that the sum of the GDP of China, India and ASEAN in purchasing power parity terms could quadruple by 2030 and even exceed that of the US and Europe combined. 2 5. Asia’s already large middle class, will continue to register strong growth. In ASEAN for instance, the middle class is projected to rise to two-thirds of the population by 2030, from less than a quarter in 2010. 3 The rapid expansion of the middle class will, from the demand side, spur the growth and development of a wide range of goods and services. 6. Alongside Asia’s sustained economic development in the medium-term, financial services will be an important facilitator of growth as well as a growth engine in its own right. 1 “New measures for global growth projections for The Conference Board Global Economic Outlook 2014,” The Conference Board, November 2013. 2 “ASEAN, PRC and India: The Great Transformation,” ADB Institute, Asian Development Bank, 2014.

For instance, a seemingly credible threat by one party to take actions that lead to mutual disadvantage can prompt concessions from the other, (or not). A former American President, 1/3 BIS central bankers' speeches Richard Nixon, called this his “mad man” theory when applying it to the war in Vietnam and there are echoes of this idea in current international trade disputes. Such behaviour undermines multilateralism which has been an important source of stability and growth over many decades. If strategic uncertainty is a source of unilateral advantage, it will not dissipate but remain a source of latent policy risk. Last, “Structural change and monetary policy” uncertainty There are fundamental structural changes occurring, notably in the euro area economy but also elsewhere, that are poorly understood. The ongoing demographic transition, for example, is changing employment, investment and saving decisions, which will probably lower the natural rate of interest. The monetary policy transmission mechanism also seems to be changing. A sustained period of accommodative monetary policy has boosted growth and employment and is finally showing up in nominal wage growth: this first part of the Phillips curve is at work. But higher nominal wages have not yet been passed through to core inflation. It should eventually, but the more pertinent issues – of when and by how much – are unclear. There is, thus, not a single mechanical relationship between monetary policy instruments and inflation, rather a distribution of likely responses.

Although this topic is under discussion in the Minister’s working group, I can suggest some options drawn from the experience of other countries, which the banks and the government may want to consider during their discussions on the accessibility of banking services: • A cashback system in shops – when paying for their food in shops by card, people can add some extra to the total amount paid and then get that in cash from the shop. For this to work, the commercial banks need to allow shopkeepers to offer this service without charging them any percentage of the cash that is withdrawn. The banks would gain by having a more efficient cash network, shopkeepers would gain additional clients in their shops, and those clients would benefit by being able to withdraw cash more conveniently and securely. • State service points – offices providing a wide range of services from the state, the banks and other enterprises, all in one place. This would allow people in rural areas to make payments at regular intervals, and get cash, medicines, letters and newspapers and other services. Cash and medicines would probably need to be ordered in advance, but this would bring the services closer to people. This would make more sense for the state and for companies than maintaining separate offices, each dedicated to only one service.

This is also in line with expectations in the money and foreign exchange markets. The interest rate was last raised in March. In line with the forecast in the March Inflation Report, there are prospects of another interest rate increase in the second quarter – at the monetary policy meeting in May or June – and a further increase thereafter. 2 BIS Review 39/2006 Conclusion Increased globalisation and the ensuing terms of trade improvements have exposed the Norwegian economy to a significant upward income shock. This has amplified the domestic upswing. So far, however, strong growth impulses have not led to major imbalances in the labour market or strong upward wage and price pressures. This may be seen as an indication that the macroeconomic framework, most notably the fiscal and monetary policy regimes, has been quite successful so far in shielding the Norwegian economy from excessive fluctuations. More importantly, as long as we adhere to the macroeconomic framework, it will shield the economy when oil prices eventually fall and our terms of trade are reversed. Thank you for your attention! BIS Review 39/2006 3

Other important events that affected Zambia’s economic development in her early stages of nationhood included: (i) The pronouncement of the Unilateral Declaration of Independence (UDI) by the Ian Smith regime in the then Southern Rhodesia (now Zimbabwe). The declaration of UDI had both positive and negative impacts on the Zambian economy, although the negative effects outweighed the positive gains. The positive gains relate, mainly, to the relocation of industries from Southern Rhodesia (now Zimbabwe) to Zambia to avoid being affected by the sanctions imposed by the International Community, as a result of the declaration of UDI in 1965. This contributed to the growth of the Zambian manufacturing sector and the increase in employment levels. However, the declaration of UDI had serious adverse effects on the blossoming Zambian economy. As you may recall, at independence, the economies of Southern Rhodesia (now BIS Review 5/2005 1 Zimbabwe) and our economy were intertwined. Southern Rhodesia was Zambia’s biggest trading partner as well as the main supply route to the sea. The severing of trading, commercial and transportation relations with Southern Rhodesia on account of UDI therefore, meant that Zambia had to invest heavily in her own transportation infrastructure, which finally led to the construction of the TAZAMA oil pipeline, Indeni refinery, TAZARA, the Great North Road (which used to be known as the Hell Run), etc., in order to transport her essential imports and exports. These were huge projects whose construction required enormous borrowing from countries like China, Italy, France, etc.

All this has resembled at times an economics version of Big Brother; indeed I expect the viewing economics community will ask next for the right, through a telephone poll, to vote members off the Committee! Occasionally the differences of view that surface in the Committee arise from different views about the workings of some economic relationship; on other occasions they represent a difference in tactical views. There is more than one interest rate path which would give an inflation profile consistent with the target. And so there can be differences between those who might at any moment prefer to wait and see - recognising that this might require a sharper movement in interest rates later on - and those who might prefer a more pre-emptive activist approach to setting rates, what might be termed the Macbeth School of Economics: “If it were done when ‘tis done, then ‘t’were well it were done quickly”. The fact that there are different paths to achieve the 2.5% target is one reason why there is no automatic link between our inflation forecast, which we publish on a quarterly basis, and that month’s interest rate decision. I mentioned that the setting of interest rates requires one to peer into the future. Unfortunately it is more difficult than that. It also requires policy makers to have a view about what is happening currently.

We know more specifically that the outcome firms view most negatively is that the UK leaves the EU without a deal or any agreed transition period. What the economics tell you is that it’s likely to be nervousness about these worst-case outcomes specifically that are deterring new investments, at least among businesses in the traded sector of the economy. 5 There’s quite enough Greek here already so I haven’t included the derivation in this talk: details are available on request. I say “all” these models but this result rests on the assumption that it doesn’t take long to implement an investment and to start earning a return on it. If instead you think it requires a significant “time to build” the potential upside risks could matter for the investment decision. There’s some incentive in that case to having the investment in place by the time the news is revealed, and the decision will depend on both L and G. See, for example, Bar-Ilan and Strange (1996). 7 The toy model here, with only two possible ways in which the uncertainty can be resolved, is as simple as it could be. But the “Bad News Principle” applies more generally, including in cases where there’s a continuum of possible outcomes. Boyarchenko and Levendorskii (2007) give a good description (see in particular section 1.3 for a brief summary). Dixit and Pindyck (1994) is a more readable account of the general approach.

Yet growth in new investment has been falling, and in the past year or so has turned negative. To me this suggests that even the rise in the profitability we’ve seen has not been enough to compensate for the increase in the risk premium that’s been occurring in the background. And if you take seriously the crude estimates we’ve just been through, you might expect that to have had a significant effect on productivity growth. A brief summary Let me try and sum up. Business investment fell in every quarter last year and surveys suggest the underlying trend is still negative. This is remarkable at a time when profits are high, when the economy’s not been in recession and when employment has been growing strongly. A plausible explanation is that rising uncertainty has acted like an extra hurdle on the required rate of return for new capital projects, deterring expansion in productive capacity and encouraging firms to meet new demand with labour instead. The economics tells us that, because such spending is costly to reverse, perceived downside risks to future profits can act as a powerful disincentive to 12 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 12 new investment projects. If something’s easier to get into than out of, you naturally worry about what might subsequently go wrong. Those perceptions may have been worsening for some time. The evidence suggests that we’ve been living with a high risk premium on new investment for several years.

Given that in the long run the nominal interest rate is the real equilibrium interest rate plus expected inflation, a fall in the latter implies lower average nominal rates, causing them to collide with their lower bound more often. This entails less headroom to provide stimulus in recessions with low inflation, further lowering inflation expectations, and so it continues. In this setting of historically low natural rates, a loss of interest rate policy scope and deanchoring risk for inflation expectations, the main central banks have deemed it necessary to rethink their monetary policy strategy, i.e. how they structure their monetary policy targets and how they pursue them with the tools available. To date, within their strategic frameworks most central banks have followed variants of what is known as inflation targeting, whereby they target inflation running close to a precise numerical value — e.g. 2% — over the medium term. 5 See, for example, Brunnermeier and Koby (2018) for a discussion of the effect of interest rates on bank profitability and their ability to lend. 6 Arce et al. (2018) estimate that these negative rates do not necessarily tighten the credit supply of European — or, in particular, Spanish — banks. 8 Yet alternative monetary policy strategies exist whereby a central bank attempts to make up for past deviations of inflation from its target. These are the so-called make-up strategies.7 One of them is known as price-level targeting. In this case, the central bank announces a target price-level growth rate, e.g. 2%.

To begin with, the Federal Reserve is among the most transparent of central banks in disclosing the specifics of its market operations, including the data reported under the requirements of the Dodd-Frank Act. Details about foreign exchange transactions and foreign exchange investment operations are reported in the 11 Primary dealers are expected to bid in every auction for, at a minimum, an amount of securities representing their pro rata share of the offered amount. That share, currently 1/22nd, is based on the number of primary dealers at the time of the auction. 12 Stephen V. O. Clarke, Central Bank Cooperation 1924–31 (New York: Federal Reserve Bank of New York, 1967), pp. 162, 175–76, 205, and 209. BIS central bankers’ speeches 5 quarterly foreign exchange reports released to the public by the New York Fed. In addition, summary information about all operations appears on the weekly Federal Reserve balance sheet, which is available on the Board’s website. The Desk posts comprehensive results of all domestic open market operations with primary dealers and expanded counterparties to the New York Fed’s public website within a few minutes of the operations’ completion. Results of Treasury auctions are likewise released to the public within a few minutes of the close of competitive bidding and contain considerable detail regarding participation by primary dealers and both direct and indirect bidders. Such reporting by the Treasury exhibits a high level of transparency relative to foreign treasuries’ reporting.

In the year to November, total household borrowing rose 4%, and consumer credit rose over 10%, the fastest rate since 2005. How household spending evolves, and the inter-temporal trade-off that households strike, will be important considerations over the next year. The MPC will continue to monitor these dynamics. In November, the MPC reiterated that we were choosing a period of somewhat higher consumer price inflation in exchange for a more modest increase in unemployment. But it also noted that there are limits to the extent to which above-target inflation can be tolerated. Those limits depend on the cause of the inflation overshoot, the extent of second-round effects on inflation expectations and domestic costs, the scale of the shortfall in economic activity below potential, and any risks around the development of imbalances that could threaten a sustainable return of inflation to the target. Recently, there have been signs of continued solid consumer momentum domestically and a stronger growth outlook globally. The MPC will monitor developments in the light of its inflation tolerance, and will explain its assessment and policy stance accordingly. 16 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches 16 It remains the case that the outlook for inflation will depend on the evolution of the prospects for demand, supply and the exchange rate. Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target. 7.

Within limits, it has tolerated periods of above-target inflation in order to support the real economy, while at all times respecting the primacy of the inflation target. That said, it is important not to over-interpret these results. Specifically, the MPC’s average revealed lambda in the past does not reveal a simple monetary rule that can govern decisions regarding inflation control in all scenarios in the future. I stress this point because some have suggested monetary policy ought to follow, or be evaluated against, a simple rule, such as a Taylor (1993) rule. 21 But it is important to recall that, while such rules were estimates of actual stances of past policy – positive descriptions of central bank behaviour – they have been reinterpreted as guides for what the central bank should do in all circumstances – normative prescriptions. Taking the past as a strict guide to the future is to assume that the nature shocks does not change and that the structure of the economy remains constant. Such stability is hard to square in an era of financial crises; deep, variable technological change; and potentially large shifts in openness. In a changing world, monetary policy decisions would more properly emerge from optimal control approaches to monetary policy, which respect the different nature of shocks and circumstances which the monetary authority must weigh in setting its strategy.

With a couple of taps I can hail a cab, and monitor my home CCTV, or buy any number of goods from across the world, which might, in the not too distant future, be delivered to my doorstep by a flying drone. Given how extensively technology has altered our world today, being technology savvy has become a crucial requirement for risk managers today. In what seems like a blink of an eye, companies like Uber, Waze and Airbnb which barely existed a decade ago have become household names. Now valued in the billions, they are a source of income for thousands of people across the globe, and are shaping our modern economy in a myriad of ways. Technological savviness is crucial for two reasons. First, technology can be harnessed to improve business operations and enhance risk management. Secondly, it allows us to quickly identify and respond to new sources of risks emanating from technological developments. The potential of technology in risk management is vast, not only for the automation of tasks, but increasingly as a tool for making business decisions as well. The application of big data analytics and artificial intelligence to assess and predict human behaviour, for instance, can provide great value to businesses in terms of reducing risks. In the motor insurance sector for example, General Motors Assurance in the US has been utilising mileage and driving behaviours captured through in-vehicle telecommunication devices.

BIS Review 97/2008 1 Meeting challenges – people and values There is no magic formula for meeting the challenges I have just outlined. Rather, as always, the fundamentals boil down to having the right people with the right values. In the 2007 Insurance Banana Skins survey conducted by UK’s Centre for the Study of Financial Innovation (CSFI), the quality of talent was cited as one of the key risks facing the global life insurance industry. I am therefore pleased that GE Life is using the FICS framework to proactively develop talent for the company. As for values, I understand that GE Life embraces the 3 core values of integrity, initiative and involvement. In the spirit of this commemorative year, allow me to borrow your values framework to illustrate its relevance to the industry as a whole. Integrity First, integrity. Integrity is the foundation of trust, and for the insurance industry with a longterm relationship, this is crucial. Even as more complex insurance products are being introduced in the market, insurance intermediaries have a duty to ensure that consumers are only offered products they can understand and find suitable. Any undesirable sales practice such as churning and inappropriate switching will undermine the reputation of the insurance industry, and also affect its ability to attract good quality talent. Intermediaries must therefore uphold the highest standards of integrity, professionalism and exemplary business conduct, and ensure that any advice given is fair, objective and in the best interest of the client.

And this is why, as I have said many times, I believe there is a strong case for governance of structural reforms to be exercised jointly at the euro area level: to help each country to achieve the necessary level of resilience; and to ensure that they maintain that resilience permanently. 4 Since structural reforms in any euro area country are a legitimate interest of the whole union, there needs to be stronger ownership of reforms not just at the national level, but at the European level as well. Several countries have however made significant progress with structural reforms during the crisis, and we can already see how this has altered the relationship between inflation and unemployment. Various estimates of the euro area Phillips curve show that, while the slope has varied over time, it has steepened in recent years. In particular, there is evidence that inflation has become increasingly responsive to cyclical conditions in countries that have reformed their product and labour markets, such as Spain 5 and Italy 6. Raising potential growth Besides this issue of resilience, as the central bank of the euro area we also have another, equally direct interest in structural reforms. This is related to their effect on growth – or more specifically, the challenges posed by a period of low potential growth. International institutions currently estimate potential growth to be below 1% in the euro area, compared with above 2% in the US (Chart 3).

Finally, low potential growth can have a direct impact on the tools available to monetary policy, as it increases the likelihood that the central bank runs into the lower bound and has to resort recurrently to unconventional policies to meet its mandate. The euro area’s weak long-term performance also provides an opportunity. Since many economies are distant from the frontier of best practice, the gains from structural reforms are easier to achieve and the potential magnitude of those gains is greater. There is a large untapped potential in the euro area for substantially higher output, employment and welfare. And the fact that monetary policy is today at the lower bound, and the recovery still fragile, is not, as some argue, a reason for reforms to be delayed. This is because the short-term costs and benefits of reforms depend critically on how they are implemented. If structural reforms are credible, their positive effects can be felt quickly even in a weak demand environment. The same is true if the type of reforms is carefully chosen. And our accommodative monetary policy means that the benefits of reforms will materialise faster, creating the ideal conditions for them to succeed. It is the combination of these demand and supply policies that will deliver lasting stability and prosperity. *** In every press conference since I became ECB President, I have ended the introductory statement with a call to accelerate structural reforms in Europe.

As can be seen in this graph, the Spanish construction workers had to face a sharp contraction of the share of employment in that sector, from 13% of total employment to 5% and find a job in other sectors. The decline is less significant but still relevant in countries which experienced a construction boom. More generally, according to a Banque de France research paper 2, the Beveridge curve has shifted in the euro area and the United States, with more vacancies associated with a similar level of unemployment, pointing at an increase in structural unemployment. These effects of the crisis on human capital would fade away only slowly, with the arrival of new cohorts on the labour market. However, they could be mitigated by active labour market policies, such as an appropriate training policy, which have a very effective and targeted impact on human capital depreciation. 1.2. Second, in Europe, the ECB has significantly loosened monetary policy in recent years even after the limits of conventional monetary policy have been reached. But this has been no ordinary recession. It has also been associated with an acute financial crisis and history has shown that recessions associated with financial crises can have an even longer lasting impact on economic performance. During financial crises, credit constraints can tighten drastically for banks and for firms and households which in turn harms physical capital and labour productivity growth. Financing constraints may lead to increased firm defaults.

There is a term for it – mutualism, describing a mutually beneficial relationship between living things. And let me explain why I am talking about biology in a financial forum to begin with. 3. I have always longed to find an appropriate way to describe the financial relationship between Hong Kong and the Mainland. In my view, Hong Kong’s dynamic with the Mainland is truly unique in that it is a dynamic which no other pair in the world shares. In the financial world, our win is their win and their win is ours. As financial competition amongst the world’s hubs continues, Hong Kong and the Mainland have long enjoyed a mutually beneficial relationship. Sounds familiar? Yes, perhaps neither of us are exactly the same as a bee or a flower, but Hong Kong and the Mainland share a very similar dynamic as them in the financial world – one of mutual benefit. RMB internationalisation: Hong Kong stands out 4. And that brings me to the topic that I want to discuss in more detail today, which is the internationalisation of the RMB. With the continuing growth of the Mainland economy and its increasing financial integration with global markets, it is natural that RMB will be increasingly used in international transactions. The 14th Five-Year Plan has made clear that promoting RMB internationalisation should be conducted in a prudent manner, based on a marketdriven approach. 5.

We have already discussed these in detail on many occasions, therefore today I will dwell only on the amendments introduced to the bills to be considered by the State Duma in the second reading. As regards proportional regulation, I would like to return to the promotion of competition. When we first proposed the concept, many small banks voiced concerns that they might face tougher competition. We took this concern very seriously and have held many discussions on the matter. However, we do not think that the three-tier system disrupts competition. Instead, it will boost the stability of banks - irrespective of their size - and result in more realistic business models in the future. In addition, the system not only imposes restrictions on operations, but also considerably eases regulatory burden for banks holding basic licences. Banks holding basic licences will have to comply with only five required ratios and will not have to meet new highly technical standards. Along with two capital adequacy ratios, one current liquidity ratio and two credit concentration ratios will be applied. The current version of the bill, though aiming to focus small banks on servicing small businesses and individuals, provides a more flexible mechanism and allows lending to larger borrowers if they comply with both a more strictly concentrated ratio of credit risk per borrower and the related party risk ratio. We took these comments into account after the dialogue and discussion with the banking community. We believe that the niche we are establishing for banking will be popular among investors.

This will make possible clearer, more transparent and, consequently, more interesting banking business for new private investors. No less important is the fact that we are creating a system which will help banks chose their development strategy as to how to turn a small banking business into a large one, while avoiding risks to its stability. A few words about the development of a new resolution mechanism. The existing credit resolution mechanism is not only more expensive and time-consuming than that which has been proposed, but it also hampers the competitive environment. Today, a bank operating under this resolution may not comply with the ratios, but nevertheless carry out the same operations as a normally operating bank, meanwhile a turnaround manager obtains access to almost free benefits. Turnaround managers fiercely competed for this credit resource exactly because it gave them a considerable competitive advantage. We do not think that the new mechanism will trigger significant growth in resolutions. Resolution means that the state takes up losses incurred by previous bank owners, thus this mechanism should be applied with caution. 3/4 BIS central bankers' speeches We call the new instrument the Banking Sector Consolidation Fund, because we expect that banks under resolution will be able to be united into banks with larger capital, which will then attract more investors. We consider it important to encourage growth in the number of banks with large capital to avoid excessive concentration in any one level of the banking system.

If monetary conditions in Switzerland called for it, the SNB could sell some of its reserves in order to shorten its balance sheet. Although we have not yet reached this point, such an eventuality should not be ruled out. 11 The SNB must be able to deploy its balance sheet at all times, quickly and without restriction. These reserves therefore have to meet stringent security and liquidity requirements. Consequently, as chart 3 shows, we invest a very large proportion of our reserves in government bonds denominated in the major currencies, such as the euro, the dollar, the yen, pound sterling and the Canadian dollar. Holding liquid investments that can be mobilised rapidly allows the SNB to use its balance sheet at any time, should monetary policy require it. A second aspect that differentiates us from other investors is that we remain as neutral as possible vis-à-vis the market. In other words, we must be able to move large volumes without unduly influencing prices. This neutrality ensures that the SNB is able to build up and scale back its investments quickly and efficiently, while avoiding conflicts of interest with its mandate. Neutrality also guarantees that the SNB’s investment policy remains independent of all political considerations. In this sense, neutrality is an essential condition for the optimal fulfilment of our mandate. Finally, at the operational level, the SNB differs from other investors in that it cannot protect itself against the greatest risk to these reserves – currency risk.

First, both climate change and its effects on the economy are hard to estimate with any degree of accuracy. 4 Second, the impact of climatic phenomena is transnational and this complicates efforts to respond appropriately. Third, the effects of climate change are felt incrementally and over a very long timescale, which includes future generations. The needs, precise aspirations and technical capabilities of these future generations are, by definition, unknown and therefore difficult to integrate into the analysis. And finally, the effects of climate change are potentially irreversible. How can this problem be solved? When economic agents fail to take sufficient account of the cost of their actions, economic theory recommends introducing a tax which incentivises them to adapt their behaviour. In the case of climate risks, a carbon tax can be used to incentivise individuals and organisations to reduce their emissions of CO2, the main greenhouse gas. 5 The theory may be clear; however, important considerations, such as setting and realising an overarching objective, require political dialogue. These considerations are not part of the SNB’s mandate. The SNB contributes to the stability of the economy as a whole, and it is not within its legal remit to promote or hinder any particular economic or societal development. The SNB can only credibly and effectively fulfil its mission of maintaining price stability if it concentrates on the monetary policy tasks assigned to it by law. 2 3 4 5 Hsiang S. and R.E.

Early in his career Professor Rogoff worked as a central banker in the International Finance Division at the Board of Governors of the Federal Reserve System. In this period, he wrote two of the most celebrated papers in monetary economics and international finance. One, which appeared in 1985 in the Quarterly Journal of Economics under the title “The optimal degree of commitment to an intermediate monetary target”, is especially cherished among central bankers (and still his most cited contribution according to Google Scholar with over 2,100 citations). It forcefully laid out the rationale for the delegation of monetary policy to an independent central bank with an explicit price stability objective, a fundamental principle obviously enshrined in the ECB mandate. The second contribution, co-authored with Richard Meese, appeared in 1983 in the Journal of International Economics under the title “Empirical exchange rate models of the seventies: Do they fit out of sample?” and is one of the most cited papers in international finance. It established key empirical regularities about major currencies exchange rates. The implication that nominal exchange rates are best modelled as unpredictable “random walks” is still the basis of the best practice followed by many institutions. This paper marked the beginning of Professor Rogoff’s long-standing prominence in the field of international finance and was followed by a steady flow of equally distinguished contributions, in some instances literally rewriting history.

William C Dudley: The importance of incentives in ensuring a resilient and robust financial system Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the US Chamber of Commerce, Washington DC, 26 March 2018. * * * It is a pleasure to have this opportunity to speak to you. In my remarks today, I will discuss financial regulation and the ways in which proper incentives help ensure resiliency in the financial system. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System.1 We have come a long way since the global financial crisis in building a more resilient financial system—one that can better support the provision of financial services to American households and businesses such as those represented here, both in good times and in bad. But, there is still unfinished business. On the regulatory side, for example, there is more work to be done to ensure that a systemically important bank can be resolved effectively on a cross-border basis in the event of failure. Additionally, the efficiency, transparency, and simplicity of the regulatory system could be improved without weakening the core reforms to capital, liquidity, and resolution that have made the financial system much stronger. Most importantly, we need to recognize that an effective regulatory regime and comprehensive supervision are not sufficient. We also need to focus on the incentives facing banks and their employees.

Selecting an inflation target of two per cent implicitly chooses one of the possible combinations. If we succeed in this, we gain greater scope to manage future economic shocks, compared with if we give up and allow a new level of inflation that is lower than the inflation target to be 18 An interesting academic discussion on helicopter money is taking place; see, for example, Galí (2020). 18 [25] established. After all, in the discussion above, we noted that, if anything, the international discussion revolves around raising the inflation target. A closely related problem is that it has turned out to be difficult to understand the development of inflation recently using the standard theories that form the basis of the monetary policy analysis. The Phillips curve is estimated to be increasingly flat, which is to say that the relationship between real activity and inflation seems to have become weaker. 19 Many economists were surprised by inflation not falling further in the financial crisis, when resource utilisation was seen as being very weak. We need a better understanding of how companies actually set their prices and of how their behaviour interacts with the macroeconomy. A great deal of research is currently focusing on studying different types of micro data and hopefully we will have more knowledge of these matters in the period ahead. Appropriate monetary policy requires freedom of action There are many interesting things to think about regarding all of the different suggestions circulating in the discussion.

The sole purpose of these actions has been to promote the dual mandate objectives of maximum employment and price stability in the wake of the financial crisis. The FOMC has stated that it currently anticipates keeping short-term interest rates exceptionally low until late 2014 and this has contributed to the decline in long-term rates. In addition, large-scale asset purchases and the maturity extension program have pushed down longer-term interest rates by removing duration from the private market. As a result, both the U.S. government and private-sector borrowers have benefited from unusually low borrowing costs. Indeed, the net interest burden data shown in Figure 2 actually overstates the net cost to Treasury. That is because the interest payments from the Treasury to the Federal Reserve are included in the net interest cost shown in Figure 2, but no offsetting adjustment is made for the fact that the Fed remits almost all of the interest it receives from the Treasury and on BIS central bankers’ speeches 1 its other portfolio holdings right back to the Treasury. The Federal Reserve’s remittances to the Treasury are included in the budget separately in the miscellaneous receipts category. Thus, one should deduct these receipts from the debt service numbers to properly measure the Treasury’s net interest burden. Normally, this adjustment doesn’t change the picture much. However, it is relevant now because Federal Reserve remittances are unusually high.

This would not be problematic if nominal rates could fall as far as necessary; for example, with expected inflation of 1%, to achieve a real interest rate of, let’s say, -2%, the nominal rate would have to be lowered to -1%. The problem is that nominal interest rates cannot drop as far into negative territory as sometimes would be necessary. Were central banks to set interest rates of -5%, for example, commercial banks would endure negative yields on a large part of their assets, which would adversely affect their profitability and, ultimately, their financial intermediation 2 The concept, determinants and implications for monetary policy of the natural rate of interest are discussed in Galesi et al. (2017). Holston et al. (2017), for example, estimate that in 2016 the natural rate was positive, but very close to zero, in the United States. 4 See, for example, Fiorentini et al. (2018). 3 7 capacity. This would have an attendant negative impact on credit supply, economic activity and inflation. There is therefore a lower bound on nominal interest rates. Should central banks lower interest rates below this bound, the effect on the economy may be contractionary rather than expansionary, owing to the adverse effects on the financial system as a whole.5 The level of this lower bound on interest rates is not directly observable and varies over time based on the financial sector’s situation. In any event, it represents the floor for central bank interest rate cuts.

True, some of them had to do with political change and policy uncertainty to the heart of the developed world, but on top of that, major empirical and theoretical puzzles are challenging central tenets of monetary policy. In particular, inflation appears not to be responding to monetary policy as expected in advanced economies. Despite record- low interest rates over many years and massive liquidity injections by central banks through asset purchase programs, inflation has not picked up as expected. Explaining the apparent unresponsiveness of inflation has become a theoretical and empirical challenge that has drawn great attention from academia and policymakers in the last couple of years. Inflation dynamics and the way they interact with other economic variables are, of course, crucially important to central banks that have price stability as their core mandate. Most of them currently deliver on this mandate under a forward inflation targeting framework, whereby the stance of monetary policy seeks to achieve convergence of forecasted inflation to the target over a medium-term horizon. This prevents central banks from having to respond to short-term price volatility, but if inflation does not respond to monetary impulses as predicted by models, policymaking may become a much more complex game. If price responses get delayed in a highly accommodative environment, financial imbalances may build up, fiscal discipline may be eroded and inflation risks may get underpriced by markets, exposing themselves to reversals with data surprises in the future.

First, the potential for this outcome is mitigated by the fact that the Federal Reserve has considerable non-interest bearing liabilities on its balance sheet – namely currency. These liabilities incur no interest expense regardless of the stance 2 While I have categorized providing a forecast for the future path of the policy rate as a form of unconventional monetary policy, this may be a misnomer in that some central banks use this form of forward guidance as part of their standard communication strategy, and the Federal Reserve may choose to continue to provide this form of forward guidance even after its policy rate is no longer constrained by the zero lower bound. 2 BIS central bankers’ speeches of monetary policy. This means that short-term interest rates have to rise appreciably before the Federal Reserve’s net interest margin turns negative. Second, even if the Federal Reserve were to incur an operating loss either because of an increase in interest expense or because of realized losses on asset sales, the Federal Reserve can create a deferred asset on its balance sheet, obviating the need for funding from the Treasury to the Federal Reserve. In this sense, the Federal Reserve would retain its budgetary independence. In the case where the Fed recognizes a deferred asset, its remittances to the Treasury would cease until that deferred asset was paid down.

The public consultation launched by the Commission is a unique opportunity to put forward constructive proposals, on both sides of the coin: on the demand side, through well-calibrated prudential incentives for market participants; and on the supply side, notably with the extension of the scope of clearing, for products and entities. We have a collective responsibility to reduce systemic risk and we have to act now. As a conclusion, let me take a take inspiration from the recent Adam Mc Kay and Leonardo di Caprio movie “Don’t look up” to provide a broader perspective. We may be coming out of a storm called Covid, which has heavily disturbed our traditional landmarks and consumed a lot of our energy. We may be facing another crisis in geopolitics. But we must not forget to “look up” at the stars to see where we are in our journey and to remember where we are going… The two “great transformations” ahead of us require a Financing Union in Europe. The time to act is now. I thank you for your attention. 4/4 BIS central bankers' speeches

The latter system provided the economy and prices with a fixed nominal anchor. Inflation was determined by growth in output on the one hand the supply of gold on the other. This was a system we had in common with our trading partners. Furthermore, we participated in the Scandinavian currency union as from 1875. The gold standard was suspended during World War I when the British government largely financed the war by printing money. Parity policy in the interwar years was unsuccessful in many countries. After World War II, countries made a joint effort to stabilise price BIS Review 102/2007 1 developments by establishing the Bretton Woods system. The US dollar was pegged to gold and the other currencies to the dollar. In this way, we chose – with the value of gold as the basis – a fixed exchange rate and indirect inflation in other countries as our nominal anchor. The Bretton Woods system collapsed in 1971. In the absence of gold as an anchor, the real value of banknotes and coins and bank deposits was now dependent on confidence that the central banks would not inject so much cash into the economic system that the value of money declined. The various countries chose different solutions. In Norway, we looked to other countries for both confidence and our inflation level, by tying our exchange rate in various ways to other countries’ currencies. In the ten years from 1976 to 1986, confidence in this policy was severely eroded.

In addition, both house prices and debt accumulation are affected by structural changes in capital and credit markets and by changes in lending willingness, demographic trends and migration patterns. It is difficult to determine to what extent house prices have risen as a result of structural changes and wealth gains and to what extent house prices have been pushed up by expectations of a continued high rise in house prices. Developments since the beginning of the 1990s may have engendered expectations that house prices will only continue to rise. This may have increased house purchases for pure investment purposes and induced younger buyers to enter the housing market earlier than otherwise. The pronounced fall in 4 BIS Review 102/2007 saving over the past few years indicates that households take greater chances. The housing market may have been in a state of euphoria. We can influence house prices through the interest rate, but if the interest rate had been increased to a markedly higher level in order to curb house price inflation, the krone would have been significantly stronger and CPI inflation significantly lower. Yet it is low and stable inflation that is the operational target of monetary policy. There is symmetry here as well. Should house prices fall sharply, we will in interest rate setting concentrate on dampening the effects on inflation and overall activity in the economy.

Department for Business, Energy & Industrial Strategy (2017), ‘Industrial Strategy: building a Britain fit of the future’, BEIS Policy Paper. Espinosa-Vega, M and Russell, S (1997), ‘History and Theory of the NAIRU: A Critical Review’, Federal Reserve Bank of Atlanta Economic Review, 1997 Q2. Gardiner, L (2016), ‘A-typical year?’, article for the Resolution Foundation. Gordon, R (2013), ‘The Phillips Curve is Alive and Well: Inflation and the NAIRU During the Slow Recovery’, NBER Working Paper, No. 19390. Gregg, P, Machin, S and Fernandez-Salgado, M (2014), ‘Real Wages and Unemployment in the Big Squeeze’, The Economic Journal, Vol. 123, pp. 403-432. IMF (2017), ‘Understanding the Downward Trend in Labor Income Shares’, IMF World Economic Outlook, Chapter 3. Krueger, A (2018), ‘Reflections on Dwindling Worker Bargaining Power and Monetary Policy’, Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole. Manning, A (2003), Monopsony in Motion: Imperfect Competition in Labor Markets, Princeton University Press. Moscarini, G and Postel-Vinay, F (2017), ‘The Cyclical Job Ladder’, Annual Review of Economics, Vol. 10, pp 166-188. Mueller, H, Ouimet, P and Simintzi, E (2017), ‘Wage Inequality and Firm Growth’, American Economic Review, Vol. 107, No. 5, pp. 379-383. Phillips, AW (1958), ‘The Relationship between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957’, Economica, Vol. 25, pp. 283-99.

21 All speeches are available online at www.bankofengland.co.uk/speeches 21 Chart 8: Financial markets’ inflation expectations (5 year – 5 year breakevens) Per cent 9 8 7 6 5 4 3 2 1 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 Sources: Bloomberg and Bank calculations Chart 9: Involuntary part-time share of employment and average net desired hours, alongside unemployment Per cent Hours per person 10 0.7 0.6 0.5 8 0.4 0.3 6 0.2 0.1 4 0 -0.1 2 -0.2 -0.3 0 2001 -0.4 2003 2005 2007 2009 Involuntary part-time share (LHS) Net additional desired hours (RHS) 2011 2013 2015 2017 Unemployment rate (LHS) Sources: ONS and Bank calculations. Notes: Involuntary part-time workers are those that would like a full-time job but haven’t been able to find one. Average net desired hours is the average number of additional hours that employed individuals would like to work at their current hourly rate.

Overseas regulators (as host 2 See The PRA’s approach to the implementation of the systemic risk buffer: Statement of Policy; 5 December 2016. 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 EMBARGO: not for release before 19:30 on Wednesday 4 October 2017 authorities) use their own rules to set requirements for the subsidiaries in their territories. They might consider these businesses to be systemic on a local basis. They might measure financial transactions under different accounting rules, apply different prudential approaches to assessing risks, or restrict capital transfer to the UK parent. Therefore, a UK bank’s overseas subsidiary might be required to have an outsize portion of its group’s capital. Back at home, the parent might fund the subsidiary’s higher capital requirement by raising debt externally. This is known as ‘double leverage’ and firms use it because debt is generally cheaper than equity. But servicing double leverage relies on flows of dividend income which are uncertain and at the discretion of local boards and supervisors across the group. Or the parent might be incentivised to under-allocate resources to unregulated but risk-taking entities within the group. We need to be mindful of the risks this can create, and so today we are announcing a new approach, to 3 ensure that UK banking groups are at least as strong as their parts . Subject to our consultation:  We will expect firms to demonstrate to us that they can manage the cash-flow and other risks associated with double leverage.

According to the literature, for supervision to be considered effective it should be able to effectively develop, implement, monitor and enforce supervisory policies under normal and stressed economic conditions. BIS (2012) defines several preconditions for effective supervision in practice: 1) sound and sustainable macroeconomic policies as a core precondition for stable financial system; 2) a well established framework for financial stability policy formulation i.e. clear framework for macro prudential surveillance and financial stability policy formulation; 3) proper regulatory environment; 4) a clear framework for crisis management, recovery and resolution; 5) an appropriate level of systemic protection (or public safety net) such is a system of deposit insurance which contributes to public confidence in the system and thus limit contagion from banks in distress and 6) effective market discipline. Transparency is another factor that gains growing importance in recent years. Thus, in order to restore confidence and rebuild financial stability there was a strong push towards supervisors to increase their transparency to the markets and the public. One supporting argument for these trends is the role of transparency as prerequisite for accountability. Higher transparency enhances the legitimacy of the supervisor, also safeguarding his independence. When transparent, the supervisory actions become more predictable thus helping to shape expectations and foster linkages across institutions and markets. Finally, transparency sets the ground for careful and consistent decision-making, reducing the scope for arbitrary decisions. Empirical research (Arnone et al., 2007), finds a positive correlation between the transparency of the supervisor and the effectiveness of banking supervision.

Over the last five years, inflation has stayed broadly in line with the price stability objective set by the European Central Bank, i.e. inflation below but close to 2% over the medium-term. Gone are the days when European citizens had to worry about the purchasing power of their savings. This stability goes beyond the behaviour of prices. Inflation expectations themselves have been remarkably stable, including during the recent period when oil prices jumped to levels no one could have expected only a year ago. This, by itself, illustrates the credibility achieved by the Eurosystem of Central Banks, after only six years of existence. Second, European households and companies are reaping the benefits of that credibility. Long term interest rates stand at a historically low level, around 100 basis points below the level in the United States. So, even after the recent increases in short term rates, monetary and financial conditions remain extremely favourable for investment and growth. And indeed, we might be witnessing in Europe the start of period of sustained and stable growth, at least if current projections and surveys are proven to be right in the coming months. A third benefit of the Euro is the boost it gives to financial integration in Europe. In many segments, European financial markets have reached the depth and liquidity which, up to now, were the preserve of dollar markets. This stimulates productive investment, helps in restructuring (as witnessed by the current wave of M&As) and, more generally, allows a better allocation of savings and sharing of risks.

In that sense, monetary union in itself has a clear political dimension. This was only possible because euro area members had achieved a high degree of convergence in attitudes and preferences. It also happens that, in all countries in the world, Central Banks have been made independent in the last decades, and monetary policy has been, as a consequence, depoliticised. This was seen as a necessity to ensure price stability. From that point of view, the euro is no exception and the ECB's mandate is similar to those of other Central Banks. So, monetary union in Europe is well grounded, both on its technical and political pillars. Actually, the euro to day seems to me the main driver for European integration. It exists. It is a success. The institutional process is working smoothly. Sharing the same banknotes and currency has given European citizens a strong sense of common identity and joint destiny. And those who worried that monetary union would impede growth in Europe should be comforted by our recent record. Europe's growth rate to day is equal – or higher – to the US. In the six years since the creation of the euro, twice as many jobs have been created in Europe as compared to the US economy. Admittedly, we are lagging behind in terms of productivity growth, innovation capacity and market flexibility. But there is nothing which cannot be corrected provided the necessary policies are implemented with determination and continuity. This is why, looking beyond the current difficulties, I feel very optimistic.

And in private services earnings actually fell. But this reflects the impact of significantly lower bonus payments this year than last, and is likely to unwind as the bonus season comes to an end. If output growth were to pick up during the course of this year, then some of the recent fall in average hours worked - which appears to reflect a degree of labour hoarding - would be likely to unwind, leading to an increase in earnings growth. So the MPC will continue to monitor carefully developments in both wages and prices. The fourth and final price I want to discuss is the level of interest rates. The MPC sets interest rates in order to try to maintain an overall balance between demand and supply in the economy, thus keeping inflation close to the target. What will happen to interest rates depends, in part, on the response of the three other prices - the exchange rate, the oil price and wages - to developments in the economy. As resources shift from private consumption into both the public sector and net exports, there might be considerable movements in the exchange rate, the oil price, and even wages. The path of interest rates that will be necessary to keep inflation close to the target will depend on what happens to those prices. That is why it is extremely difficult to predict what that path will be. The MPC will take decisions on rates one month at a time.

Thirdly, there is no indication – from our perspective – that the risks entered into in the banking industry have risen: market and interest rate risk have only increased slightly on an aggregate level, and credit risk even seems to have fallen. Consequently, the banking sector is in good shape at the moment. As far as prospects for the near future are concerned, we believe that the macroeconomic environment and financial market conditions pose no major threat to the stability of the Swiss banking system. The outlook for 2005 indicates that economic growth in most regions will only slow down at a moderate pace. In addition, the available indicators suggest that there is currently little risk of contagion effects causing a crisis in the Swiss banking sector. Nevertheless, there are still potential sources of risk. They pertain to credit risks in particular. Firstly, an unexpectedly sharp economic downturn could have a serious impact on the quality of the loan portfolios and the stock market. Secondly, should we witness a swift economic recovery, however, a sharp rise in the still very low interest rates could also result in a deterioration of the loan portfolio. This is because the growing interest burden would suddenly put considerable pressure on households and companies with mortgages to pay off. Banks would also be directly affected by the steep interest rate hike, as the interest rates on their assets tend to be fixed for a longer period than those on their liabilities.

If anything, it looks to be slightly lower than anticipated. However, so far this year wage costs per produced unit nevertheless appear to have increased by more than we had expected as a result of the weaker productivity. Employment continued to increase during the second quarter of this year, but unemployment remained largely unchanged compared with one year ago. The outcomes were close to the forecasts. The number of hours worked per week continued to increase during the first half of the year, which contributed to a decline in productivity. The Economic Tendency Survey in July was also weak. It fell and now indicates that the Swedish economy is much weaker than normal. It is mainly households that are contributing to the low level. This is the most pessimistic that households have been about the Swedish economy for 15 years. The confidence indicator for the Swedish business sector fell, but it is nevertheless at a level corresponding to the average since 1996. The Economic Tendency Survey also shows that sales prices in the wholesale and retail trade continued to rise to a large extent and that continued increases are predicted for the third quarter. Households’ and companies’ inflation expectations continued to rise. They even rose more than is indicated by statistical correlations between inflation and inflation expectations. However, inflation expectations as measured in the bond market, what is known as breakeven inflation, have declined. Inflation rose from 4.0 per cent in May to 4.3 per cent in June and 4.4 per cent in July.

In practice this often means that we allow the time for bringing inflation up or down to the target to vary depending on the prospects for economic activity. According to our monetary policy strategy, our policy is normally aimed at attaining the inflation target within two years. The calculation we made in July indicated that it would probably have required a slightly higher interest rate path than that described in the Report to bring inflation down to 2 per cent in two years. This would have brought down growth even lower next year. Given that inflation was deviating so far from target and taking into account the uncertainty in the financial markets, it would have been better, in my opinion, to aim at bringing down inflation to around 2 per cent in three years. I do not believe that the decision in July can be regarded as any severe tightening of monetary policy. The interest rate is still relatively low. The nominal interest rate prior to the decision at the beginning of July was at a long-term average of 4.25 per cent. But the real interest rate was still lower than an historical average. In July the real interest rate was around 1.5 per cent, but it will rise during the forecast period to just over 2.5 per cent at most. The interest rate path we described in July entailed a change from a relatively neutral to a slightly contractionary monetary policy.

I’ve spent this morning talking about measures to tackle the root cause of the stress last autumn, poorly managed leverage. But LDI funds aren’t the only non-bank to use leverage. [20] And leverage is also not the only vulnerability in the non-bank system. Forced selling that can follow from leverage can also arise from liquidity mismatches[21] or from a lack of preparedness for margin calls. [22] Identifying vulnerabilities is only half the battle. We also need to understand how market participants will behave when a stress hits. To this end, the Bank is very shortly launching its exploratory exercise to enhance understanding of the risks to and from non-banks, their behaviours, and how these behaviours can amplify shocks. As part of this exercise the Bank may reach out to some of you attending this conference. Shining a light on how market participants may behave collectively in a stress will help both the Bank and yourselves better prepare for such events. You’ll hear plenty from us once the exercise is launched. In particular, my colleague Lee Foulger will be giving a speech next week outlining how this exercise will helps us to better understand system-wide resilience. But what should we do about these vulnerabilities? We should seek to contain them and to mitigate their financial stability impact. This is what I’ve laid out today with respect to LDI funds’ leverage. Further frameworks may need to be built up.

It is for staff at the UK authorities to calibrate a range of holdings of liquid assets maturing within a week that would address financial stability risks from MMFs. However, it is easy to see how the illustrative scenario I talked you through earlier could be used to calibrate the appropriate resilience of MMFs. MMFs could have a range of holdings to reflect idiosyncratic and systemic risks. These holdings could be calibrated according to observed historical outflows, as seen in the dash for cash and LDI stress events. And as discussed in the discussion paper, the usability of these holdings will also be a key consideration for the UK authorities. Conclusion The FPC have recommended a framework for the steady-state resilience of LDI funds, built over three building blocks: baseline resilience, systemic resilience, and fund specific additional resilience. The first two building blocks amount to a 250 basis point minimum. And the framework also requires pension schemes to put in place operational processes enabling them to deliver collateral within five days and to support LDI funds in drawing down during stress. This framework provides us with a suitable framework for addressing non-bank vulnerabilities more generally. We can use this framework to contain non-bank vulnerabilities and so to mitigate their financial stability impacts. But this is a conference for pension funds, so I will leave on a message to the experts at this conference. Ensuring financial stability is not only a job for financial stability authorities and regulators such as TPR, but also for participants.

4 See Bogle, 45–46. 5 See What is Banking For? Remarks by Onora O’Neill, Reforming Culture and Behavior in the Financial Services Industry: Expanding the Dialogue, October 20, 2016. 6 5/6 BIS central bankers' speeches 6 See generally Robert H. Frank, Success and Luck: Good Fortune and the Myth of Meritocracy (2016). 7 See generally Dan Awrey, William Blair, and David Kershaw, “Between Law and Markets: Is There a Role for Culture and Ethics in Financial Regulation?” 38 Del. J. Corp. L. 217 (2013) (discussing the need for “otherregarding” norms in finance). 8 See Criminal Accountability and Culture, Remarks by Preet Bharara, Reforming Culture and Behavior in the Financial Services Industry: Expanding the Dialogue, October 20, 2016. 9 See Adam Smith, The Theory of Moral Sentiments, Section III.1.5. 6/6 BIS central bankers' speeches

William C Dudley: Student loans and household finance Opening remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Convening on Student Loan Data Conference, New York City, 4 March 2015. * * * Andrew Haughwout, Joseph Tracy and Wilbert van der Klaauw assisted in preparing these remarks. Good morning. I’m happy to welcome you to the New York Fed for this workshop that is intended to increase our understanding of student debt and how it affects individuals, their families and the economy. I am delighted to see such widespread and growing interest in this important topic. Making continued progress on understanding these issues will depend critically on efforts to identify and address existing data gaps that hamper its study. I am particularly happy to welcome Deputy Secretary Sarah Bloom Raskin, who has spoken frequently and eloquently in the past about the need for improvements in student loan servicing and debt collection, the macroeconomic consequences of increased student debt, and the need for better data and analysis. I look forward to her remarks today. Before I make some specific comments on student debt, let me take a step back and say a few words on household finance more generally. As always, what I say represents my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System.1 There are several reasons the New York Fed has increased its focus on household finance.

Prospects for lower inflation, a weaker growth outlook and lower interest rates abroad were underlying factors. In the course of spring 2011, it has become clear that the upturn in the Norwegian economy has gained a firm footing. There is a rising shortage of labour and cost inflation is picking up. The subdued rise in import prices, combined with the krone appreciation, has resulted in a slower rise in prices for imported consumer goods. With the Norwegian economy’s current solid pace of growth, inflation is nonetheless expected to pick up further ahead. At our meeting on12 May, we decided to raise the key policy rate by 0.25 percentage points to 2.25% to take into account the consideration of stabilising inflation and activity further ahead. Chart: Krone exchange rate – I-44 The krone is strong, reflecting favourable prospects for the Norwegian economy and high oil prices. When oil market conditions normalise, some of the krone appreciation can be expected to be reversed. Norges Bank does not operate with a target for the krone exchange rate, and the krone shows fairly wide fluctuations. With high growth in demand for goods and services and rising price and cost inflation, there is also a risk of a further appreciation of the krone. A strong krone dampens inflation through a subdued rise in prices for imported goods and services. Persistent low inflation could curb the rise in the key policy rate.

Chart: Level of debt high for many households Direct losses associated with loans to households are seldom large in Norway. Even during the banking crisis 20 years ago, losses were limited. However, historically low losses are no guarantee of low losses in the future. A mutually reinforcing dynamic of rising debt and increasing property prices characterises the run-up to financial crises. Higher property prices lead to higher collateral values for loans. With easier access to credit, purchasing power increases. The household debt burden is now higher than prior to the banking crisis. The increase has been highest for middle and lower income groups (deciles). The number of households with a very high debt burden is also far higher. The number is sufficiently high to engender negative spillover effects in the economy in the event of an abrupt change in household behaviour. Such spillover effects may in their turn affect bank losses, which is the main reason that the work on financial stability places particular emphasis on developments in the household sector. While monetary policy and fiscal policy have been anchored within a long-term, operational framework over the past ten years, there has been no comparable, coherent regulatory system for financial markets. Requirements are currently imposed on individual banks, but without adequate regard to overall risk in the financial system. This became clear during the financial crisis. New regulations are underway. The new Basel III framework aims to establish a long-term framework for financial market regulation that lays the basis for a robust financial system.

In this facility, a number of financial entities, such as money market funds, that cannot hold reserves at the Federal Reserve can lend funds overnight to the Federal Reserve against the Fed’s Treasury collateral and receive the overnight RRP rate – currently 25 basis points. The overnight RRP provides these institutions with an alternative investment if the interest rate offered by banks is unattractive. Consequently, these financial 2 In this arrangement, the size of the Federal Reserve’s balance sheet was mainly driven by the amount of currency in circulation. As the amount of currency in circulation increased, this drained reserves from the banking system. The Federal Reserve offset this by increasing its holdings of Treasury securities. 3 The Federal Reserve gained the authority to pay interest on reserves earlier as part of the Financial Services Regulatory Relief Act of 2006; that legislation authorized the Federal Reserve Banks to begin payment of interest on reserves in 2011. As part of the TARP legislation, Congress moved up the date at which the Federal Reserve could exercise that authority to October 2008. BIS central bankers’ speeches 5 entities should be unwilling to lend funds to banks and others at lower rates than the overnight RRP rate. The overnight RRP rate should act, therefore, as a floor on money market rates. As I noted earlier, the tools are working as anticipated.

One might reasonably expect these modal forecasts to be above the mean when inflation is low and the economic outlook is uncertain. Second, the median federal funds rate forecasts for primary dealers and for buyside participants surveyed just prior to the December FOMC meeting differed only marginally from the December SEP median projections of FOMC participants. This reinforces my judgment that the difference between means and modes is the main factor for the gap between the federal funds futures market and the SEP paths. Third, the differences between the interest rates implied by futures markets and the SEP have been quite small at shorterterm time horizons, such as the end of 2016, and grow much larger as the time horizon lengthens. I think this is noteworthy because the confidence one has at longer horizons should be much lower than at shorter horizons. Because I do not know what the federal funds rate target range will be at the end of 2017 or 2018 with any confidence, I am not very concerned if others have a different modal forecast. Projections will adjust as incoming information changes the economic outlook. I would expect convergence over time of the SEP and market expectations as new information informs the outlook. 6 BIS central bankers’ speeches Let me close with some observations about my current thinking concerning our reinvestment of maturing Treasury securities and paydowns in our agency MBS holdings.

Several large Nordic bank conglomerates define the Nordic area as their home market, and have established, or plan to establish, branches in most Nordic countries. The largest Swedish and Danish banks have been the most active so far. A few of them, in contrast to other international banks established in Norway, have started to show an interest in the market for households and small and medium-sized enterprises. The strengthening of the position of Nordic banks in their home market may partly be perceived as a defensive strategy to keep out large global banks. The launching of a single currency in Europe may have been an important driving force. The euro is likely, at least in the short term, to be of greater consequence to the banking sector in euro countries than in Norway and other countries outside the euro area. The loss of income in some areas, such as currency trading, is greater for banks in the euro area, and the costs associated with adapting systems, etc. are also higher. In addition, cross-border competition is likely to intensify more between countries with a single currency than between euro countries and non-euro countries, although this is not certain. These factors point to a reduction in earnings for euro area banks. However, increased competition may in the longer term enhance the efficiency and competitiveness of banks. The introduction of the euro will also have a considerable influence on the development of securities markets in euro countries.

This may make the market more receptive to private bonds, as investors may be willing to accept higher credit risk when seeking a return. This factor, combined with lower borrowing costs, may give medium-sized enterprises, which so far have had to rely on bank financing, increased access to the bond market. It should be emphasised that the expected increase in competition in securities markets in the euro area is not solely due to the single currency. Technological advances, deregulation and harmonisation of laws and regulations are important forces contributing to a freer flow of capital and services in the single market. There is little doubt, however, that the introduction of a single currency will make a major contribution to accelerating this process. In sum, trends influencing developments in the banking and financial industry such as deregulation, internationalisation, changes in customer behaviour and rapid technological advances – leading to intensified competition – have been there for some time and will continue. However, the establishment of monetary union will probably intensify existing trends, creating even greater challenges with regard to competition in the banking and financial industry. This brings me back to the basic proposition made in the introduction. In many respects, the euro will not give rise to fundamentally new challenges. It is highly likely, however, that the euro will accentuate challenges that are already present. And that, I think, goes for the UK as well as Norway. * BIS Review 16/1999 * *

Let me also thank Ms Linda Zuze (the International Consultant on the project) and Mr Shebo Nalishebo (the Local Consultant) and IPSOS Zambia for successfully conducting the Survey. 1/3 BIS central bankers' speeches The Bank of Zambia and its collaborating institutions mentioned earlier are greatly indebted to the respondents who participated in the Survey for completing the questionnaires. We thank you most sincerely for your cooperation. In particular, we are aware that the survey got into the way of your work as you completed the questionnaires. We are pleased to note that the response rate was 90%. This points to the fact that you share in our resolve to bridge the financial inclusion gender gap and engender economic development. Ladies and Gentlemen, having launched the commencement of the project for the development and implementation of a framework for collection of supply-side sex-disaggregated data almost a year ago, I am pleased that today we can mark a significant milestone towards achieving the objective of the project as we disseminate the results of the baseline survey. The survey results not only give us the situation analysis regarding the availability of supply-side sexdisaggregated data, but also provides a synopsis of the magnitude of the financial inclusion gender gap, which we must all work hard to bridge.

Consequences of cross-border banking The increased globalisation of banking has brought both benefits and costs to the economy. For a long time, the benefits have appeared to outweigh the costs, but the recent global financial crisis has put this issue in a new light. I will talk about the economic costs of cross-border banking shortly. But let me first say something about its benefits. A general problem with the banking sector is that it is highly concentrated, which makes it especially prone to anti-competitive behaviour. An interesting question in itself is why the banking sector is so concentrated. One reason is surely that it is heavily regulated. Regulations create entry and exit barriers. From my viewpoint, however, it also seems as if the mechanisms of banking crises are such that you end up with an even more concentrated banking sector after a crisis than before. When some banks run into difficulties, a common solution is to let them be acquired by a more healthy-looking competitor. In Sweden, we went from seven large banks to only four as a consequence of the acquisitions that occurred in connection with the banking crisis in the early 1990s. Four banks now hold around 80 per cent of the total market. That is a highly concentrated market! 13 Williams (2002). 14 See e.g. “Mapping of large European groups with a significant cross-border banking activity for the year 2008” prepared by the Banking Supervision Committee (restricted edition).

I will highlight four ongoing initiatives for the financial and digital inclusion of individuals. pervasive electronic payments affordable cross-border remittances timely health insurance claims holistic financial planning Pervasive Electronic Payments Fundamental to the digital inclusion of individuals and to the success of a digital economy is the ability to make an electronic payment. By broadening access to a common, inter-operable e-payment infrastructure, we extend the benefits of a digital economy to a wider range of users. Singapore’s retail e-payment infrastructure – FAST – enables 24/7 real-time fund transfers through the banking system. PayNow – which rides on FAST – allows us to send money to the bank accounts of individuals using just their mobile phone numbers or personal ID numbers, and to businesses using their unique entity numbers. This secure, inter-operable e-payment infrastructure has supported a boom in e-commerce and a variety of online services, especially after Covid-19. Four out of five individuals and three out of four active businesses in Singapore have adopted PayNow. PayNow monthly transaction values have crossed the $ billion mark – a four-fold jump from July 2019. From February next year, our e-payment infrastructure will be extended to non-bank ewallet payment providers. E-wallet users will be able to transfer funds in real-time between their e-wallets and their bank accounts, and across different e-wallets. This completes the last mile in Singapore’s journey to create an open and accessible epayment ecosystem. Affordable Cross-Border Remittances But making payments abroad continues to be slow, costly, and inefficient.

This leads – again temporarily – to higher growth and more inflation. If, on the other hand, the central bank wishes to curb inflation, it increases its policy rate. I deliberately used the word ‘temporarilyֹ’ because if monetary policy were to target real interest rates below the equilibrium rate on a sustained basis, inflation would go on rising but this policy would not result in higher real growth in the long term. On the contrary, uncertainty about the path of inflation would reduce growth potential. This is one of the reasons why central banks are tasked with ensuring price stability. For this mandate to be fulfilled, the policy rate must be set such that, at the desired inflation rate, the real interest rate corresponds with the equilibrium rate in the medium term. It is likely that the real equilibrium interest rate is lower today than in the past. The case for this hypothesis is supported by the fact that real interest rates have been falling globally for a 1 In fact, there are several possible definitions. The ‘ex ante’ real interest rate is the nominal interest rate less expected inflation. The ‘ex post’ real interest rate is the nominal interest rate less the effective inflation rate. Page 3/16 considerable time because, it is argued, people are investing less and simultaneously displaying a greater propensity to save. The propensity to save is increasing due to population ageing.

Model of international policy reciprocity Extending Aikman et al (forthcoming), the results in Chart 3 are from a new model that builds on their paper by adding a second country to their model and by examining international policy leakages and coordination. For simplicity, the model assumes that there is no market-based finance sector (𝑏 = 1). In its place, the model allows for an additional determinants of the crisis probability. Domestic credit growth (𝐵1 ) still predicts domestic crises (𝛾1 ), but the credit measure is split between credit borrowed from home banks (𝐵1𝐻 ) and credit borrowed from foreign ones (𝐵1𝐹 ). And to capture the empirical finding that global credit growth can help predict crises over and above domestic credit, the crisis probability also depends on credit growth in the foreign country (𝐵1∗ ). In addition, the CCyB setting (𝑘1 ) also still reduces the crisis probability by enhancing resilience. But the effective CCyB setting depends on whether there is a reciprocity arrangement, since it is a 20 Other than credit growth, all variables are measured as annual averages, such that σ = 0.6 implies that an increase in annual interest rates of 1pp for 1 period of 3 years, reduces output by an average of 0.6% in each of the 3 years. 12 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 12 weighted average of the CCyB settings applied to domestic banks’ domestic lending (𝑘1𝐻 ) and applied to foreign banks’ lending in the home country (𝑘1𝐹 ).

A robust and strong level of ethics can be achieved by providing ethics training and sensitisation as a component of continuous professional development. Although you are well qualified and are competent in your respective fields, it is vital that you have continuous training including advancement in ethical knowledge. Equally there is need to promote and ensure that your members exercise high levels of Integrity in whatever they do. As a country, we need professionals with high levels of social and moral awareness so that all of us are aware of the moral obligations and potential impact of our thinking, decisions and actions. We need to be good role models for others in behaviour, attitude and relationships. Let us endeavour to act in a way that is professional and that retains the confidence of others at all times. With these few remarks, it is now my honour and privilege to declare the ESAMI MBA Alumni Association Zambia Chapter officially launched. I thank you. 2 BIS Review 18/2010

In Region East, the rate of growth in manufacturing is somewhat lower than earlier this year, while growth in the building and construction sector is increasing. Residential construction is still driving activity in this sector. Although commercial building activity now appears to be picking up in other parts of the country, this does not as yet apply to Region East. Business sector demand for services is rising. The market for commercial services and IT and telecommunications services is showing marked improvement. The retail trade sector reports rising demand, particularly for consumer durables such as cars and furniture. Our contacts in services and retail trade report a moderate increase in investments in the year ahead. Signals from the regional network indicate that employment is continuing to increase in the building and construction sector, while manufacturing reports a slight decline. Employment in the service sector is rising for the first time since the network was established in October 2002. Directorate of Labour figures show that unemployment has fallen most in Region South and Region East since the beginning of 2004. In Region East, an important sector is commercial services, accounting for close to 15 per cent of employment. It is in this sector, in addition to manufacturing, that unemployment has fallen most on a nationwide basis. Since July, oil prices have varied between USD 34 and 52, the highest nominal levels recorded. Measured in real prices, oil prices are nonetheless clearly lower than the levels recorded in the beginning of the 1980s.

On this issue, the draft of the new Bank of Thailand Act has stipulated this condition. Even though there is a need to review the draft in order to make it more effective, the Bank of Thailand strongly endorses the importance of this Act because it will provide for an up to date framework for the development of the Thai monetary system in the future. In data dissemination, the Bank of Thailand has improved the process of data collection and dissemination to ensure that they are complete, correct, and expeditiously published, such as the improvement of the M3 data, the report on buying-selling of foreign currency especially the forms F.T. 3 and F.T. 4, as well as random checks on the correctness of the report. At this point, we would like to note that the purpose of this random check is not to emphasise the use of penalties but to create awareness amongst the financial institutions the importance of data reporting to the Bank of Thailand, so that the Bank of Thailand can have an up to date database for policy decision-making. On the external data, for the first time there has been a survey and announcement of the International Investment Position (IIP), in order to correctly monitor foreign currency exposure of the Thai economic system. Also, Thailand is the 21st country ranking in the world, in compliance with the International Monetary Fund's Special Data Dissemination Standard (SDDS).

(ii) Data disclosure and stress test methodologies, in order to measure more and more precisely and credibly climate-related risks of financial institutions. It is a prerequisite before possibly deciding about additional capital requirements. For these tasks, believe me: we in NGFS are ready to “roll up our sleeves”, and still have the enthusiasm of the pioneers. ** In conclusion, acceleration has been the name of the game since 2017. Still, we should further accelerate in 2021. We have an exceptional political alignment, with major international milestones: the COP26 of course, but also a G7 summit in June, a G20 conference in July in Venice, and a G20 summit in October in Rome. It is time for all policy makers – us included – to be up to Hans Jonas requirement, for the future wholeness of Man. Thank you for your attention. i Hans Jonas, The Imperative of Responsibility: In Search of an Ethics for the Technological Age. Responsible Investment Report of the Banque de France 2019, June 2020. iii “Progress report on bridging data gaps”, NGFS Report, 26 May 2021. iv “The role of central banks in the greening of the economy”, Speech by François Villeroy de Galhau, 11 February 2021 v “Adapting central bank operations to a hotter world: Reviewing some options”, NGFS Report, 24 March 2021. ii

However, I would like to underline that the attractiveness exerted by advanced countries on our graduates and our specialized profiles is making our task even more complex, especially in recent years. At Bank Al-Maghrib, for example, we lost about 20 computer engineers in just 18 months. I think that this point also deserves to be discussed and debated at meetings such as this one. Thank you! 7

However, in view of the risk exposures and the prevailing uncertainties in the economic environment, it is crucial that the big banks build up a sufficient base of loss-absorbing capital as swiftly as possible during this transition period. After adjusting for the not fully loss-absorbing components, the big banks’ remaining capital buffers are still thin in light of the aforementioned risks. Despite some improvement, leverage for both UBS and Credit Suisse is still high by international standards. Taking only fully loss-absorbing capital into account, the average capital ratio of both big banks amounted to less than 2% of total assets. Against this background, both big banks have already made major strides towards expanding their loss-absorbing capital base. To this end, Credit Suisse issued contingent convertible bonds (CoCos), while UBS retained its earnings. These important first steps have already significantly strengthened the big banks’ loss-absorbing capital base. They also show that the big banks should be in a good position to build up the necessary, additional capital buffer. Situation of domestically focused banks Allow me now to discuss the situation of banks with a domestic focus. The capitalisation of domestically focused banks was almost unchanged in comparison to 2009. The short but sharp recession in Switzerland in 2009 did not have any noticeable impact last year either. Write-downs and provisions were at a historical low. In a long-term comparison, profits remained at a high level overall.

SCAP was a supervisory stress test, meaning that regulators specified the adverse scenario and determined the resulting loss and revenue estimates on a standardized basis drawing on information submitted by each firm. The CCAR process centered on bank-run stress tests in which regulators specified the scenario but required each bank to model the stress event itself. Dodd-Frank mandates both supervisory stress tests and bank-run stress tests. We are still working out how we will do each of these types, but I expect that the SCAP and CCAR exercises will serve as models. Today I will focus on the SCAP and CCAR exercises. The first important point to make is that the purposes of the SCAP and CCAR are very different. Thus, these processes are conducted in very distinct ways. Turning first to the SCAP, its purpose was to restore confidence in large U.S. banks. The SCAP was designed to accomplish this mission by measuring how much capital these banks would need in a stress macroeconomic environment and then forcing these banks to either raise this capital from private sources or take mandatory convertible preferred equity from the U.S. Treasury. The key attributes of the SCAP include:  A common stress scenario was applied to each of 19 large bank holding companies (BHCs).  This stress scenario was applied in a consistent manner across these banks. The test was applied at the detailed trading book and banking book level, with the expected loss experiences based upon the particular characteristics of the portfolio being examined.

So far, however, estimates of the term premium have remained compressed, suggesting that the recent rise in ten-year US Treasury yields reflects, by and large, a reappraisal of the future expected path of short-term interest rates. [16] The literature points to three potential explanations as to why the impact of QT might be more muted. One is that QT is missing the signalling component of QE. [17] That is, while balance sheet expansions signal a lower-for-longer interest rate policy, balance sheet reductions may provide little, if any, information about the future path of short-term interest rates. The second reason is that the unwinding of QE is typically more gradual than the build-up in assets. [18] The third explanation is that QT often happens in an environment of improved market functioning. Indeed, one reason why QE was so effective at the outbreak of the pandemic is that it quickly improved liquidity and reduced volatility. [19] However, isolating the effect of QT is inherently difficult. Many different forces drive long-term yields. For example, purchases by non-resident investors of US Treasury securities accelerated sharply last year, likely reflecting growing interest rate differentials and the rise in uncertainty on the back of Russia’s unjustified war against Ukraine and its people (Slide 9). Foreign investors alone absorbed nearly 60% of the net supply of US Treasuries in 2022. Increased foreign demand may have offset, at least in part, the impact of the higher actual and expected bond supply from QT.

14, No 5; and Arora, C. and Cerisola, M. (2001), “How Does U.S. Monetary Policy Influence Sovereign Spreads in Emerging Markets?”, IMF Staff Papers, Vol. 48, No 3, pp. 474-498. 25. Gilchrist et al. (2019), “U.S. Monetary Policy and International Bond Markets”, Journal of Money, Credit and Banking, Vol. 51, No S1, pp. 1-200; Motto, R. and Özen, K., op. cit. ; Andrade, S. C. et al. (2023), “Sovereign risk premia and global macroeconomic conditions”, Journal of Financial Economics, Vol. 147, No 1, pp. 172-197; and Eichengreen, B. and Mody, A. (1998), “What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?” NBER Working Paper, No 6408. 26. See, for example, Miranda-Agrippino, S. and Rey, H. (2020), “U.S. monetary policy and the global financial cycle”, The Review of Economic Studies, Vol 87, No 6, pp. 2754-2776; and Gilchrist, S. et al. (2022), “Sovereign risk and financial risk”, Journal of International Economics, Vol. 136. 27. Gilchrist, S. and Zakrajšek, E. (2012), “Credit spreads and business cycle fluctuations”, American Economic Review, 102, No 4, pp. 1692-1720. The excess bond premium has also been shown to be a powerful driver of economic activity. See Gilchrist, S. and Mojon, B. (2016), “Credit risk in the euro area”, The Economic Journal, 128, No 608, pp. 118-158; and Bleaney, M. et al. (2016), “Bond spreads and economic activity in eight European economies”, The Economic Journal, Vol. 126, No 598, pp. 2257-2291. 28. Anderson, G. and Cesa-Bianchi, A.

Detailed rules on governance in banks and deliberations on transposing extensive rules on banks’ internal control systems into national law complicate or even prevent the desired level playing field of consistent supervision – they increase fragmentation. Moreover, European supervisory legislation provides more than 150 options to choose from, options which have so far been exercised along highly different lines at the national level. Some are justified by local features – in this respect, the principle is that similar things should be treated similarly and dissimilar things should be treated dissimilarly. Many of the options are based rather more on tradition, and are in conflict with the principle of “same business, same risk, same rules”. The smaller proportion of these options remains national in character. Competence for the majority of the options – for over 100 – has been vested in the SSM since 4 November 2014. The ECB, together with the national supervisory authorities, has now begun to arrange for their consistent application. This process and the resulting adaptations will not always be simple or convenient, but the benefits of the outcome should outweigh the cost of adaption – not just in terms of financial stability, but also through more balanced competition and lower transaction costs. In some respects, we are still at the beginning of the road, but I am confident that the SSM has put us are on the right path towards achieving these objectives. 5.

Let me mention just a few elements by way of a reminder: • considerably more and higher-quality capital for banks; • new standards for liquidity reserves and indebtedness in banks; • considerably stricter risk management and governance requirements; • the Bank Recovery and Resolution Directive (BRRD) that marks significant progress in dealing with distressed institutions. Thanks to these reforms, the regulatory network within Europe has become considerably tighter and more balanced in recent years. It has developed from a purely capital-based system into a set of diversified standards. This has made it more difficult to circumvent individual regulations. It requires banks to give due consideration to a broad range of relevant factors (capital, liquidity, leverage, interconnectedness/systemic significance and structure) when designing their business models. Despite this progress, there is still work to be done here and there. • We must convincingly weaken the connections between a country and its banks in the long run. Government bonds continue to be considered by regulators as largely risk-free: there is neither an obligation to have capital available that is commensurate with the risks, nor are there rules that address concentration risks. This cannot be allowed. • We must also improve the calculation of equity in individual banks. A great deal of confidence has been lost in this respect over recent years. Internal bank models are today seen by many to be a means for risky capital optimisation and not as a useful tool for bank management and risk-based supervision.

As Mario Draghi stressed, “there should be a good case for monetary policy”7 for the euro area as a whole: our policy cannot be designed according to the specific needs of some banks or jurisdictions. And secondly, we should look at the whole spectrum of possible tools, including various forms of LTRO, to decide about the recalibration of conditions and maturities. Regarding interest rates, I have often stressed in the past the usefulness but also the obvious limits of negative interest rates. Let me quote what I said as early as 2017: “they are difficult to accept by households and SMEs, and so impossible in practice to pass through to them”8. And thus they are believed by many, if maintained for too long, to weigh negatively on the profitability of financial intermediation with possible adverse consequences for the smooth transmission of monetary policy. Hence, if we had to use negative rates for a longer period than expected, we should study pragmatically how to contain their possible adverse effects on the bank transmission of our monetary policy. 3. Relentless efforts towards a stronger Europe Let me come back to the European spirit I pleaded for. Today, it is also an economic requirement: faced with the slowdown and the uncertainties, monetary policy cannot be the only game in town. This is a German worry I fully share with many others. But then, we need to push relentlessly for a strengthening of our Economic Union. The commitment of Mario Centeno, as Chairman of the Eurogroup, is essential.

Both of these factors create new incentives for fiscal policy to focus more on short-term job creation schemes and less on long-term fiscal soundness. And the new member states are not much different in this respect. They have experienced a decade of incredible structural change, and yet more is ahead. Furthermore the new member states have great infrastructure needs and, coupled with high unemployment, there will be continued pressure for fiscal expansion, even in a cyclical upturn. So from this perspective, too, the hope that the recovery alone will “fix” the European deficit problem might be too optimistic. In addition, structural fiscal deficits in many of the euro area member states might be larger than present calculations show since there is a large risk that potential growth is lower than commonly assumed. Estimates of potential growth for the old Europe have successively been lowered as labour productivity growth has fallen gradually during the last two decades from around 2% to about 1% per year. However, the figures for the second quarter of this year were the highest we have seen for some time. The IMF’s latest potential growth estimate for the euro area is about 1.8%. Nevertheless, inflation has been remarkably stable, just above 2% in recent years despite poor growth and presumed large negative output gaps. If potential growth is lower, the need for fiscal consolidation is even higher than present consolidation programmes show. Let me summarize the problem.

Even with the best risk management, banks can be hit suddenly by unexpected events or developments. I am convinced that managements will continue to misjudge situations in the future. This is something we have to live with. The financial system therefore needs to be made more resilient to possible shocks. This means the buffers in the financial system have to be increased. Fine-tuning of the current regulations is necessary in many respects. However, in my view it is an insufficient response to the steadily increasing complexity of financial markets. It is therefore questionable whether the current regulatory approach, with its increasingly complex provisions that intervene at an ever deeper level in the daily business of banks, is the right one. The authorities are, by nature, always a step behind the latest developments. Even the most complex models will never be infallible. In the current crisis, the model-based form of risk measurement failed. The SNB therefore believes that two fundamental adjustments need to be made to the capital requirements for the Swiss big banks. First, the risk-weighted capital requirements for the Swiss big banks need to be tightened. One way of achieving this would be by using an appropriate multiplier to increase the capital requirements under Basel 2. Second, a limit on leverage – often referred to as “leverage ratio” – needs to be introduced for the big banks as a complement to the risk-weighted capital requirements.

The Swiss Federal Banking Commission (SFBC) – as the authority with responsibility for this area – is currently in the process of spelling out in detail what measures will be needed in the area of capital adequacy requirements. Careful planning will be particularly important with respect to implementation of the new measures. First of all, the current crisis has to be seen through. The appropriate measures then need to be introduced progressively over a number of years. In this project, the SFBC can count on the full support of the SNB, in the interests of securing a long-term strengthening of the Swiss financial system. 2 BIS Review 80/2008

The Basel Core Principles are part of the "Key Standards for Sound Financial Systems" laid down by the Financial Stability Board (FSB) that warrant priority implementation, depending 1/3 BIS - Central bankers' speeches on country-specific circumstances. Moreover, implementation of these principles is generally assessed through the IMF/World Bank Financial Sector Assessment Programs (FSAP). Allow me now to make four general points on the topic of policy coordination in a globalised world, focusing again on the financial stability domain. First, I think it is helpful to take a step backwards to review the rationale for international cooperation and global standards when it comes to the financial and banking system. The history of banking crises has painfully illustrated that financial stability is a global public good, with the costs of systemic banking crises often exceeding 100% of a country's GDP. Yet, if each jurisdiction is left to itself when it comes to safeguarding financial stability, the cross-border spillovers of financial distress can result in individual jurisdictions "underinvesting" in financial stability. That is why global cooperation is needed. Another way to think about this is to build on Hélène Rey's seminal work on the monetary policy dilemma/trilemma, which has an analogy in the area of financial stability, as pointed out by Dirk Schoenmaker. In short, any two of global financial stability, financial integration or national financial policies can be achieved, but not all three at the same time.

The main message is that if we want to live in a world with an open global financial system, then safeguarding financial stability requires a set of minimum global standards. Failure on this count could result in regulatory fragmentation, regulatory arbitrage and an uneven playing field for internationally active banks. This philosophy is what drives the work of the Basel Committee, and it underpins a common set of shared values among our members. Thus, it came as no surprise that the Committee – including under Stefan Ingves' Chairmanship – was able to coalesce around the Basel III reforms, given the mutual interest in shoring up banks' resilience. Nor was it a surprise that our members committed to implementing the outstanding elements of Basel III fully and consistently, and as soon as possible. Here I take the opportunity to reiterate the importance for all member jurisdictions of pressing ahead with this commitment to implement all aspects of Basel III. Second, and with that premise established, I would argue that this need for global cooperation has only grown in importance over time. The Great Financial Crisis (GFC) highlighted the deep and opaque cross-border interconnections existing within the global banking system. Yet, while some of the channels of interconnectedness that fuelled the GFC have since subsided, we have also witnessed profound structural changes to the financial system over the past decade that raise fundamental financial stability questions.

For ten years, therefore, Iraq had two currencies: one issued by the official government and the other backed by no government at all. The Swiss dinar continued to circulate in the North, even though backed by no formal government, central bank, nor any law of legal tender. For a fiat currency this was an unusual situation. Whatever gave the Swiss dinar its value was not the promise of the official Iraqi government, or indeed any other government.13 Although there was little or no trade between North and South Iraq, both the Swiss and Saddam dinars were traded against the dollar. The implied Swiss to Saddam dinar cross-exchange rate from 1997 onwards is shown in Chart 3.14 Chart 3: Saddam/Swiss Dinar exchange rate, Jul 1997-Oct 2003 Saddam/Swiss Dinars (log scale) 400 200 100 50 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Source: United Nations, Central Bank of Iraq After 1993 the Swiss dinar deviated from parity and rose to around 300 Saddam dinars to the Swiss dinar by the time Saddam’s regime was deposed in 2003. The appreciation of the Swiss dinar is 13 At no stage did the Kurdish groups lay claim to the Swiss dinar as their currency - they had no control over it - as shown by the interview given to Gulf News on 30 January 2003 by the Kurdistan Regional Government Prime Minister Barzani who said, “We don’t have our own currency”.

The Swiss notes traded at above the parity because of the risk that holders of the 10,000 note would find that they had a forgery and could not exchange it at the central bank. Second, before the capture of Saddam Hussein there was inevitably some uncertainty about the prospects of the new regime and the new currency that it issued. The circulation of Swiss dinars in Kurdish controlled Iraq during the 1990s was a market solution to the problem of devising a medium of exchange in the absence of a government with the power to issue currency. Changes in the relative price of Swiss and Saddam dinars show that the value of money depends on beliefs about the probability of survival of the institutions that define the state itself. V. Case Study 3: Monetary policy in Japan and the zero bound on interest rates My third case study shows that institutional arrangements need to be consonant with the underlying economics, or failure will result. Recent experience in Japan has led to the rebirth of interest in monetary policy when official interest rates are constrained by the zero lower bound. Official shortterm interest rates in Japan have been approximately zero since the beginning of 1999. Of particular interest in this context is the question of how responsibilities should be divided between the central bank, on the one hand, and the finance ministry, on the other. Guy Debelle and Stanley Fischer (1994) introduced the distinction between instrument and goal independence of central banks.

Let me now focus my remarks on four major implications of the changing global financial regulatory landscape for Islamic finance – first, particularly in financial systems in which Islamic finance is being developed alongside the conventional financial sector in a dual system environment, (which is the case for most IFSB member countries), there will be a need to ensure that the reforms are undertaken in parallel. The concern is that there would be insufficient attention given for Islamic finance and consequently, the tendency for broad- 2 BIS Review 64/2010 brush application of regulatory measures intended for conventional finance on Islamic finance. In developing the appropriate regulatory framework for Islamic finance, it is not uncommon to leverage on the established wisdoms of prudential regulation for conventional finance to achieve regulatory efficiency particularly in a dual system environment. Whilst it may be envisaged that it is not necessary to reinvent the wheel, it should not override the importance of addressing the specificities of Islamic finance where necessary. Such a prudential regulatory design that takes into account the unique mix of risks associated with Shariahcompliant instruments would enhance the effectiveness of the regulatory outcomes intended for Islamic finance. Although there is already a broad international consensus on the prudential areas that need to be enhanced, different regulatory parameters may be necessary to address the specific risks and unique characteristics of Islamic finance.

At its most basic level, the government exists to provide services that otherwise cannot be carried out by private market – things like infrastructure, law enforcement, or national defense. Public policy may also pursue social welfare objectives in accordance with its citizen’s wills, for example to promote income equality or access to health care and education. Finally, but no less important, public policy must provide a stable environment for the nation to prosper, and avoid being the cause of malaise itself. Based on these basic tenets, the present challenges for Thai policymakers are twofold. Public policy must first aid the private sector in overcoming structural bottlenecks and lift the economy’s potential growth by addressing areas where market has failed. Secondly, the policymakers must restore and maintain macroeconomic policy credence, and lay a stronger foundation for the economy to grow on a sustained basis. Let me take each of these in turn. 1. Structural policy to boost potential growth The Thai economy is growing at a pace well below what a typical country with the same level of income should be able to attain. Failure to sustain a higher pace of growth over an extended period, even when demand pressure has eased, suggests that part of the problem could be from the supply side. It is no secret that infrastructure in Thailand needs an overhaul. Indeed, very few would dispute the merits of large-scale public investment.

So it is important that both households and mortgage institutions take account in their estimates of the possibility that interest rates will be higher in the future than at present. That also means that the rate of increase in house prices cannot be expected to remain as high in the long term as it is today. The consequences of this assessment of house price developments differ somewhat depending on which of the Riksbank’s two tasks we are talking about. As regards payment system stability, i.e. financial stability, I do not believe that house prices and household debt pose any threat at present. 2/6 The bulk of lending to households comprises loans secured on housing. A home is part of a household’s wealth and if the value of a home or apartment were to fall, it naturally would mean that the homeowner’s ability to pay would decrease. But the household’s income is not tied to the value of its home, and as long as the household is able to meet its borrowing costs, it does not represent a threat to the banks and the payment system. Both higher incomes and lower interest payments have resulted in a good ability to pay in the household sector at present.

4/6 Growth in the swedish economy continuing to strengthen For the Swedish economy, too, it was concluded in the Inflation Report that the economic upswing appeared to have gained impetus again after the slowdown at the start of the year. Compared with the previous assessment, GDP growth and resource utilisation were forecast to be somewhat higher in the years ahead, largely owing to more expansionary economic policy. All in all, the assessment was that growth would be relatively firm in the Swedish economy in the coming years. The recent years’ high productivity growth has partly laid the foundation for this development. Companies have been able to boost output with their present workforces, which has improved their cost situation and held back price increases in the economy. The low inflation rate has enabled monetary policy to be expansionary for a comparatively long period. In addition, the high productivity and relatively good profitability is anticipated to create scope for comparatively favourable wage growth in the period ahead. This means that there are good prospects for firm growth in domestic demand over the coming years. Expansionary fiscal policy will also help to boost domestic demand, while more robust growth in Swedish export markets will contribute to stronger exports. New information broadly supports the picture of a continued improvement in economic activity in Sweden. The National Institute of Economic Research’s (NIER) latest business tendency survey provides a relatively bright picture of economic conditions in most of the surveyed industries.

While $ billion was authorized for the program, only approximately $ billion in total was lent. Moreover, because loans were paid back as private credit markets improved, the maximum amount of credit extended under the program was about $ billion. Today, there is about $ billion of TALF credit outstanding. It is worth considering why the program was able to achieve such significant market improvements with a limited amount of balance sheet. The success of the TALF may reflect that it targeted a market under severe stress, one characterized by extreme liquidity premiums that had caused asset prices to become detached from the underlying credit quality of the securities. Under those conditions, our involvement was able to have a substantial effect, in part by pushing those markets back toward more normal functioning and pricing. To be sure, improvements in funding markets broadly and in the macroeconomic outlook during the course of the program clearly influenced the recovery of securitized credit markets. That said, the TALF lending mechanism has been widely credited with helping to jumpstart those markets. As markets have improved and the liquidity premium on securitized credit has shrunk, the TALF has become a less appealing source of funding. Indeed, borrowers have been prepaying their loans as spreads have narrowed below the TALF lending rate. At this point, those asset-backed securities markets that were supported by TALF appear to be standing on their own.

Dimitar Radev: Spillovers from the ECB’s monetary policy decisions are fast and strong Statement by Mr Dimitar Radev, Governor of the Bulgarian National Bank, for the IFLR Yearbook: Global Banking & Financial Policy Review 2019/2020, published on 24 September 2019. * * * There is much discussion these days about the course of monetary policy in the euro area. What global headlines rarely catch, however, is how such policy affects the European economies outside the euro area. Bulgaria is an example where, due to the high openness of our economy and the strong financial links with the euro area, spillovers from the ECB’s monetary policy decisions are fast and strong. Around 50% of Bulgaria’s exports go to the euro area. Investors from the euro area account for 67% of our FDI stock. Our banking system is dominated by the presence of euro area owned banks, which hold around 55% of the sector’s assets. The monetary policy regime in Bulgaria (a currency board with the national currency fixed to the euro) is another factor enhancing the direct transmission of ECB’s monetary policy. Therefore, even though Bulgaria is not a member of the euro area yet, it is important to consider how our economy is affected by the ECB’s continued accommodative stance. Financial stability and its implications are issues to be potentially concerned about. The ECB’s monetary policy in recent years has succeeded in sustaining the economic recovery in the EU following the great financial crisis.

These two pieces of legislation will usefully supplement the Second Payment Services Directive adopted in 2015, which paved the way for the creation of payment institutions, i.e. regulated entities that do not have to be registered as credit institutions. As you are well aware, however, the challenges linked to better regulation of digital finance are not confined to Europe. Globally, several major initiatives are under way. Because of time constraints, I will mention only two. First, the Financial Action Task Force, an intergovernmental body that works to prevent money laundering and terrorist financing, recently extended the scope of transfer transparency requirements, also known as the “travel rule”, to include virtual assets. Second, the Basel Committee on Banking Supervision is currently doing work on the question of setting prudential requirements for banks’ crypto-asset holdings. In a fast-changing world, there are a number of issues that regulatory authorities have yet to get to grips with. For example, we need to develop an adequate approach to regulate bigtech activity in finance. I would now like to talk about regulatory responses in the area of sustainable finance. The EU leads the field in this regard[SLIDE 6]. A major step forward was taken with the adoption on 18 June 2020 of the European Taxonomy Regulation, which seeks to promote sustainable investment through a common classification of economic activities (not of financing or businesses).

On the other hand, the experience with models based fully on rational expectations sometimes shows that certain aspects or policy implications are at odds with what is considered reasonable. One example is the forward guidance puzzle, i.e. the unrealistically large responses of inflation, long-term rates and output to the announcement of the future path of interest rates. Therefore, we as macroeconomists want to reconsider the assumption of superrational agents and replace it with something more realistic. The second session on Friday will be devoted to two papers that may challenge our ideas about the economy and the way we think in terms of our usual models. It is always extremely useful to listen to new concepts and visions and to rethink our current approaches. Discussing thoughtprovoking and stimulating papers is the only way to avoid rigidity in ideas and opinions. Rigidity that will – sooner or later – lead to wrong attitudes and decisions. I believe that good policymaking will always benefit from cutting-edge research. I would therefore like to thank the participants of the high-level policy panel, the presenters and commentators in the individual sessions, and all other participants for coming to our event. Ladies and gentlemen, thank you for your attention. I wish you all an interesting conference, fruitful discussions and an enjoyable stay in Prague. 2/2 BIS central bankers' speeches

If the currency market had been as sanguine as households sterling would not have fallen as far, if at all, and inflation of import prices and the aggregate CPI would not have risen to the same extent. If, conversely, consumers shared the currency market’s more pessimistic view of the future, domestic demand would have been weaker and inflationary pressure would again have been lower. 4 All speeches are available online at www.bankofengland.co.uk/speeches 4 Resource allocation and aggregate supply Let me say a little more about these points, starting briefly with productivity. I want to offer a slight corrective to a view I often hear that, were there any wider supply effects from Brexit – things that either improve or impair the UK’s productive potential – these could only come through very slowly, too slowly to have any material bearing on monetary policy. The MPC typically concerns itself with policy horizons of 2-3 years. If only implicitly, it often has to form a view about the economy’s trend rate of growth over that period – its “speed limit”, in the language of the latest Inflation Report. But if any impact on potential output takes years to come through, it’s not clear that either the fact or the nature of Brexit should change those short-term estimates. If you accept the way macro-economists often think about aggregate supply, this view makes sense.

changes in the relative prices of exports compared to imports: this is the theme of today’s conference. The subject chosen is highly topical, following the very sharp drop in commodity prices, in particular oil prices, between mid-2014 and early 2016, the effects of which on exporting countries had been underestimated, both by the countries themselves, but also by the international financial community. Thus, the economic growth forecasts for sub-Saharan Africa made by the main international organisations were revised downwards only very late. In January 2016, the IMF still expected Sub-Saharan Africa to grow by 4% in 2016 and by 4.7% in 2017, but the forecasts in the October 2016 global economic outlook were only 1.4% for 2016 and 2.9% for 2017, almost solely as a result of the recession in the oil economies. The Ivorian economy is another illustration of the importance of the terms of trade for economies focused on commodities. After experiencing exceptional growth over the last three years, partly driven by the good performance of cocoa prices, contrary to that of other commodities, activity appears to have slowed down, in the wake of the downturn in prices. The subject is also of major importance for central banks because the challenge here is to find how to implement appropriate counter-cyclical policies in the face of large-scale shocks that monetary policy cannot deal with either on its own or in the long run.