Datasets:

samchain

/

econo-pairs

like 0

On the one hand, strong household spending has been induced by a strengthening of consumer confidence, especially confidence on future income as farm income and non-farm employment continue to expand favorably. On the other hand, consumers have benefited much from lower interest rates and greater access to loans from financial institutions, leasing firms, and other non-bank institutions. This pick-up in consumption is most clearly seen in the double-digit growth rate of durable consumption such as passenger cars and motorcycles, which in part reflects a large portion of the stock adjustment or the replacement of old cars bought prior to the 1997 crisis. And more recently, rising stock index, higher corporate profitability and higher dividend yields as well as recovering property prices have boosted household wealth, which would be positive for consumption. Therefore, even though we have seen some moderation in consumption growth from the beginning of this year, favorable underlying factors regarding income, wealth, and financing are likely to stay supportive of consumption growth in the near term. It is thus likely that consumption will continue to be an important contributor to GDP growth, though not as strongly as in late 2002 and early 2003. With consumption growth moderating, the big question is, “How then can people be talking about stronger GDP growth in Thailand next year?” Ladies and gentlemen, 2 BIS Review 46/2003 No economy can or should rely on private consumption as the main growth driver for an extended period of time.

Eddie Yue: Hong Kong: the natural gateway to Islamic finance in Asia – current developments Keynote address by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority, at the 2009 Asia Sukuk Summit, Hong Kong, 18 February 2009. * * * Ladies and gentlemen, It is a great honour to be invited to speak at today's inaugural Asia Sukuk Summit in Hong Kong, and a pleasure to welcome you all, especially those of you who are visiting Hong Kong. This is the first Sukuk Summit to be held in Asia and it takes place at the beginning of the Year of the Ox in the Chinese calendar. The ox symbolises strength, resilience, and – of course – bullishness. For, while it may be true that we are still in the middle of unprecedented financial turbulence, every crisis brings with it new opportunities for renewal and change. The remarkable turnout today clearly reflects a desire to explore new ways of restoring financial market stability and, most important of all, promoting growth. This Summit has assembled an impressive gathering of colleagues from both the public and private sectors from many parts of Asia, Europe and the Middle East. The theme of the Summit – "Towards A New Silk Route for Islamic Finance" – is an apt one: it is a call for partnership in creating new regional bonds and links of the kind that once allowed this ancient trade route to flourish in a diverse yet co-operative world.

As the name suggests the safety net is there to catch banks that are in trouble or, if not the banks, then at least their depositors. This is part of the other aspect of our reform measures that are aimed at promoting the safety and soundness of the banking system. One aspect of this is already in place in the form of a policy statement issued by the HKMA in June of last year on its role as Lender of Last Resort to authorised institutions. The major safety and soundness issues however lie ahead. The first is whether we should introduce a commercial credit reference agency in Hong Kong which would gather and collate information from participating institutions about the indebtedness and credit record of their corporate borrowers. This would enable lenders to obtain a more complete picture of the financial position of their customers, and thus improve their credit assessment and perhaps make them willing to lend. That is the theory, BIS Review 69/2000 4 which seems to be supported by both academic research and the experience of overseas countries. We are currently nearing the end of a consultation period and will consider the way forward in the light of the comments received. As this consultation ends, we are about to embark on another that may be more contentious. I am referring to the possible enhancement of the deposit protection arrangements in Hong Kong.

In addition, this expansion has also fostered the development of complex banking structures and, in some cases, unsustainable business models. The Icelandic banks are illustrative examples in this respect, attracting depositors’ money from the UK and the 2 BIS Review 50/2010 Netherlands and investing these funds in high yield structured products overseas. When their balance sheets had grown to around ten times the size of the Icelandic economy, it was quite clear for anyone to see that, if turmoil broke out, managing the situation was not going to be easy. But to be fair, it was difficult to anticipate the perfect storm in advance. Another lesson from this – and the strenuous and protracted negotiations between Icelandic and, primarily, British politicians that followed – is the need for establishing deposit guarantee schemes that are built up before a crisis occurs. The international expansion of banks and the home country principle have also had other effects on crisis management. Authorities have simply not kept up with developments in the banking system. Contingency arrangements between home and host countries are not highly developed and neither are there any concrete suggestions for how to share the costs of a crisis. While we have achieved economic integration and maintained national sovereignty, we have renounced effective supervision and crisis management. But national sovereignty does not mean that our hands are tied. The remedy is quite simple, at least on paper: we need better and more extensive cooperation between supervisory authorities, central banks and finance ministries in Europe.

Most fundamentally, the more seamless are global and domestic payments, the more UK households and businesses will benefit from the new global economy. Third, as we overhaul RTGS, the Bank is making it easier for the UK financial system to realise the promise of big data. The new RTGS will capture much richer data on every payment made in a format that defines international best practice. The Bank is currently consulting on how to do this, including on the desirability of embedding the best corporate identifier, the Legal Entity Identifier (or LEI), in RTGS and all the UK’s main payment 11 systems. This will improve access to the domestic and global financial system, support greater choice and competition for corporate end-users, and advance anti-money laundering and combating the financing of terrorism efforts. The Bank is also ensuring our rules and regulations – or soft infrastructure – are fit for the new finance. We have streamlined our approach to authorising banks to make it easier for banks with innovative business models to be approved. Since 2013, 37 banks have been authorised, of which 16 are new UK bank startups and four are internet-only. With the FCA we’re are exploring how artificial intelligence and machine learning could be used to make the reading of our rulebooks easier, the reporting of regulatory data quicker and the analysis of that data more efficient.

He believed “the policy was the one and only policy which ultimately would place the City and the country again on that eminence which it occupied before the war”. Such was his confidence that Norman mentioned only once, in passing, that “the policy” in question was to “attempt to regain the gold standard”, and he spent no time at all explaining what, apart from normalcy, would be achieved by it. Of course, this return to past certainties would eventually plunge the country into deflation and a deep recession. The old policy was not suited to the new normal and the UK was forced to abandon it a few years later. After all, what is normal when there are tectonic shifts? This dinner may look traditional, but its attendees have always recognised that the most longstanding and revered tradition of the City is its ability to anticipate, adapt to and accelerate change for the common good. That is why the UK’s financial system remains both a national asset and a global public good. Domestically, there are over 1 million financial services jobs, two-thirds outside London. Financial services run a trade surplus of 3% of GDP, while the rest of the economy runs a deficit almost twice as large. Last year, the UK financial system channelled £ billion in finance to UK businesses and helped 700,000 households to purchase homes. It provides pensions to 21 million people and insures the contents of 20 million homes.

UK regulatory structure and proposals for change Across the world we see a lively debate on how the regulatory cake should be cut. There has been change in France. The Australian Government has set up the Wallis Commission to look at the institutional arrangements there. Their first report has just been published. Reforms are in progress in Japan. In the US the new legislative season is about to open, with a number of runners and riders already saddled up in the financial regulation steeplechase. Similarly, in the UK, a variety of think tanks, and the opposition Labour Party, have produced proposals to amend, or in some cases fundamentally reorder, our regulatory structure. But, before describing these exciting proposals, perhaps a brief description of the British system would be in order. Responsibility for financial regulation in the UK is divided between two Government Departments. Department of Trade and Industry STRUCTURE OF UK FINANCIAL REGULATION HMTreasury Insurance Companies Act 1982 Banking Act 1987 Financial Services Act 1986 Bank of England Securities and Investments Board Personal Investment Authority Retail Regulator Investment Management Regulatory Organisation Securities And Futures Authority Insurance Companies BIS Review 21/1997 Banks Financial Advisers Securities Houses Fund Managers -3- Most falls to the Treasury, but prudential supervision of insurance companies is the responsibility of the Department of Trade and Industry (DTI).

These includes the ways the loans are classified, their provisioning requirements, their potential individual or group guarantees, the supervisory norms of the loan quality etc.. In addition, the counterparty risk is indirectly controlled by the requirements in capital adequacy of the institution. There are also other risks that are considered in the regulation, for which certain requirements have been defined. For the liquidity risk, there have been set up various norms for maintaining sufficient liquid assets and limiting the duration of the loans. For the concentration risk, the regulation requirements focus on the lending activity, and set out the norms for the net exposure in relation to the total assets of the institution. This regulatory framework is 2 BIS Review 88/2005 meant to be actively orienting the activity of the microfinance institutions, and as such, will be revised as the developments may require. Besides these two regulations, the examinations manual of these institutions has been prepared. It is based on the CAMELS system we use for banks, and is aiming at assessing the adequacy of the internal policies and procedures, the quality of the management and the identification, assessment and monitoring of risks. The Accounting Manual is also prepared and is based on the national accounting standards, adjusted for the microfinance activity. We retain current regulatory framework, after some expected changes and approval, is adequately monitoring microfinance activity in Albania while not becoming an impediment for its development.

As they say, necessity is the mother of all invention, and nowhere else is this more pressing than in Asia, where a high proportion of unbanked population is concentrated. In 2017, the World Bank found that China, India, Indonesia and Bangladesh alone contributed to one-third of the world’s unbanked adults5. 7 . This has resulted in a well-trodden path among digital businesses in Asia: Build a digital business around something non-financial, say ride-hailing, food delivery, groceries or gaming. Then offer your customers a seamless payment experience through an e-wallet, to pay for the things that they buy from you. Let me offer a few examples: a. In Singapore, Carousell offers an online marketplace for individuals like you and me to sell or buy anything. You take a photo of what you want to sell, the app can recognise items like shoes and suggest an appropriate category, and you post it for sale. They have about 150 million listings today, including cars and property. And they are launching CarouPay to help its customers to pay for all of them. b. Some of you, like a couple of my colleagues, may have come here this morning using the ridehailing service, Grab. It is very convenient. You book the ride, the driver arrives, you reach your destination, you thank your driver, and you are on your way. No money needs to be exchanged with the driver. You don’t even click “pay”.

Because different banks were acquiring the same merchant so that they could offer the merchant lower on-us rates for their cards dipped in their own terminals. This was good for merchants, and even for the consumer as the merchants passed on some discounts to them. But there were hidden costs: Cashiers had to be trained on different terminals, customers at self-checkout lanes fumbled with which terminal to dip their card into. So we set out to study the market, see which merchants had more than one POS terminal, prioritise them by the volume and value of transactions that they handled, and worked closely with their acquirers one-by-one to on-board onto a single terminal that can accept all schemes that use chip and contactless near-field communication (NFC). Today, the process is still underway, but you can already see these UPOS terminals deployed in supermarkets, convenience stores and petrol stations – these are merchants that we visit daily, if not weekly. Besides addressing the challenges I mentioned above, this has certainly made the self check-out experience a delight. 17. Second, Singapore Quick Response (SGQR) code. Besides chip and contactless NFC payments, many mobile payments are optical via a Quick Response (QR) code. Just as we started to tidy up the POS terminals at merchants, we started to observe a proliferation of payment QR codes as each e-payment company deployed its own QR code sticker at each merchant’s cashier. We identified the problem early and immediately formed an industry task force comprising payment schemes and acquirers.

Chances are, not really. I certainly do not, but then I’m just a lawyer. There may be a tendency to believe 4/7 BIS central bankers' speeches that brilliant people built and tested the product. Surely they know better than you or I about how it works. We should therefore just trust the experts. I have seen this movie before. Similar assumptions existed a decade ago about CDOs and other complex securitizations and hedges. It has been said that the financial crisis occurred because of a failure of imagination—of not anticipating risk.13 There was also a more basic failure. Not enough people understood how complex financial products actually worked. It is critical that all three lines of defense—and, especially, the first line of defense—understand technology. I urge you to question your current technology, and to think ahead to further changes. For example, how will artificial intelligence challenge traditional methods of testing and assurance, which address static coding rather than dynamic learning? How will machine choices about access to financial services, or the cost of those services, avoid perpetuating or exacerbating historical disparities of race, gender, age, or zip code? These questions do not have easy answers, and they will likely lead to more questions. So don’t rest. Keep learning so that you can better anticipate risks. Professionalism and the first line of defense Finally, I encourage you to continue to develop a sense of your field as a profession. Now, I do not mean to imply that anyone in this room is unprofessional.

The changing geopolitical landscape In conducting monetary policy, in supervising financial institutions and in developing Singapore as a financial centre, MAS must be keenly aware of the larger geopolitical picture. International events and politics play a big part in the economic prospects of our region, including Singapore. Let me first sketch for you the geopolitical situation. Though there are many uncertainties and serious challenges, international relations are essentially stable. The US is unrivalled as the pre-eminent global power. As terrorism is a serious threat to the American homeland, the global fight against terror will remain President Bush’s overriding priority. He will have to find a way to stabilise the situation in Iraq, hold elections and hand over the task of rebuilding Iraq to the Iraqis. He will want to rebuild ties with Europe. On the economic front, President Bush will try to keep the US economy humming, while managing the growing trade and fiscal deficits and weakening dollar. In Asia, both China and India are on the rise. They will exert an increasing influence on global economic developments and trade and capital flows. China is now the location of choice for a wide range of manufacturing activities. It produces goods so cheaply that even Bangladesh complained about it. When I was in Bangladesh recently, they complained that Chinese textiles were edging out their own textiles in Bangladesh. But China is not a sweatshop for cheap, shoddy consumer goods. MNCs and Chinese companies produce high-quality goods there for the international market.

2/7 BIS central bankers' speeches Arrears grew more in the retail loan portfolio than in the corporate portfolio but also moderately — from 6.6 to 7.9%. Impairment was mostly seen in unsecured loans, while mortgage quality has remained consistently high. At the same time, non-performing loans are well covered by reserves (more than 75%). Significant loan impairment was avoided thanks to numerous support measures for borrowers by the Government and support measures for banks, and the easing of the reserves on restructured loans adopted by the Central Bank. Since the start of the pandemic, banks have restructured within the framework of their programs as well as repayment holidays about 10% of the total portfolio; the significant amount of 1.5 trillion Mr Aksakov referred to mostly concerns small and medium businesses and individuals. And if you take all the restructuring that banks carried out on large loans and large enterprises — it comes to more than 5 trillion, i.e. it is a rather large amount of restructuring. Its peak was in May, and as of July there has been a steady decline in the demand for restructuring from borrowers, which also suggests there is a normalisation and gradual recovery of economic activity. Restructuring was really important during the most serious period of the pandemic when a significant chunk of businesses ceased operating and many people’s incomes declined.

But what fundamentally distinguishes today’s situation from, say, that of 2014–2015 is that regulatory easing was, in fact, just one additional comfort factor in a period of difficult conditions, and not “the last chance” or the only way to stay afloat. Undoubtedly, in the conditions of the epidemic, it helped greatly that Russian banks boast a high level of digitalisation. Almost all services were available online, and of those in demand on a daily almost all were available. Even before the epidemic, most banking customers extensively used remote services, but even those who previously rarely used remote services started using them without great difficulty. In my speech today, I would like to focus on two clusters of issues. The first deals directly with the impact the epidemic had on the banking business, the current situation, and the measures we are taking to ensure that going forward banks are resilient in their operations. The second concerns what comes next, how to develop the banking business with allowance for the long-term repercussions of the pandemic. How does the current situation look? In the last few months, we have seen a gradual recovery in business activity, the financial markets are stabilising, and lending is also recovering. It has to be said that the economy shrunk less than many expected. The recovery may be uneven, but it is proceeding broadly in line with our forecasts. In particular, this can be seen in our monitoring of sectoral financial flows, which we started conducting during the pandemic.

Dear guests, The fact that the leaders of this Fund offered to present their financial services in the Republic of Macedonia, the Central Bank certainly encouraged and supported this initiative, shows that these important partners consider the Republic of Macedonia a friendly environment for launching various mutually beneficial business initiatives and projects. Yet, we do not forget though, that some of these institutions had no doubts whatsoever about the Republic of Macedonia even in the most difficult periods for us after gaining the independence, since when nobody else was coming, they were here. We certainly appreciate that. Regardless of all above, we still have many reasons that urge us to notice and convince others why is it good to invest in the Republic of Macedonia and to develop partnership with our economic agents and, of course, to inform on the activities that all of us in our country perform, directed towards increasing the attractiveness of the Republic of Macedonia as investment destination. Hence, we definitely need such financial offers. The economic growth could be accelerated by more investments, competitive offer of financial instruments and products, which are likely to eventually bring about lower costs for borrowing capital. The potential investors should be aware that the Macedonian financial sector is booming, but that the room for investments is yet to be opened. The gross national savings is low, not more than 12-17% of GDP, over the recent several years.

But, eventually, the potential investors and creditors have to believe that: - the political and security shocks in the region and inside the country are behind us, - the economy accelerates its growth, which over the recent years is not below 4% real GDP growth, - we preserve high macro-economic stability that implies exceptionally disciplined monetary and fiscal policies, which in turn result in low inflation, stable exchange rate and foreign exchange market, sustainable trade and current account deficits and strictly controlled public debt and that these policies for maintaining macro-economic stability will be further conducted, as a prerequisite for good business, - the price stability policy will be further implemented, - the growth will accelerate registering rates higher than before, - serious structural reforms are underway under the leadership of the government in cooperation with the World Bank and the IMF. The tax policy has undergone reforms by reducing the tax burden. The administration has undergone reforms for increasing its capacity. Additional reforms in the financial sector and improvement of the financial market operations have been underway. There are reforms in the cadastre. The conditions for foreign direct investments have been improving. The process of economy deregulation has been underway. The judiciary reforms have improved the efficiency in the contract execution. The ownership rights have been protected. The bank soundness and safety have been strengthening. The depositors feel that and repay with over 20% deposit growth over the last several years.

Consumers may attach more importance instead to the inherent qualities of goods and services and to their price in relation to these qualities. That would more likely lead to stronger competition and increased downward pressure on prices and profit margins. The new technology would then turn out to benefit consumers rather than shareholders. Diagram 5: Real return on equity 1900-98 1000 100 Trend 7% per year 10 1 0,1 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Sources: Frennberg & Hansson, Affärsvärlden and Riksbank calculations BIS Review 90/2001 5 Returning to the comparison with the United States at the turn of the nineteenth century, we find that the profits of electricity producers were not higher than normal. The increased competition pushed prices and profit margins down. All this means that there are many reasons for supposing that even in the future the long-term real annual return on equity will probably continue to be in the vicinity of the historical trend of around 7 per cent, though it is liable to vary. That has been the case in Sweden throughout the twentieth century (Diagram 5) and in the United States for virtually two hundred years. Major technological breakthroughs occurred in this period. This long historical perspective shows that over considerable periods the real return on equity has been fairly constant. Conclusion In conclusion it can be said that my argument basically points to a positive finding.

Many of the issues we face are not unique to any one of us, but rather are shared across the region and the globe. Recent events, from the COVID-19 pandemic to the war in Ukraine, have only underscored the importance of active dialogue and transparency among central banks. Beyond the global economic impact of these events, it’s important to emphasize that the pandemic is first and foremost a public health crisis, and that the Russian invasion is inflicting tremendous hardship and suffering on the Ukrainian people. In terms of economic impacts, all of us in the Americas were affected by lockdowns and shutdowns at the start of the pandemic. All of us have faced supply-chain bottlenecks and imbalances, as people around the world shifted their spending habits—buying more goods and spending less on services. And many of us are now confronting a sharp rise in inflation, especially for food and energy, which is hardest on our most vulnerable populations. Of course, each country is facing its own set of circumstances, and each has its own domestic mandates. But it’s important to remember that the policies we implement can affect our neighbors, just as developments that take place outside our borders can impact our ability to achieve our domestic goals. The actions we take can also affect the flow of capital across countries. As central bankers, it is vitally important that we clearly communicate our policy strategies and reasoning for our actions as we carry out our mandates.

The rapid progress of information technology in recent years has brought new risk measurement models to aid in the measurement of market risk. The most widely accepted of these is the ”Value-at-Risk” model, called ”VaR” for short. VaR is the maximum loss that can occur in the value of a portfolio having a certain investment horizon under a certain probability. Since it is a simple and clear-cut concept, the VaR model is widely used for measuring market risk. It permits comparison of the market risk of different investment instruments, so that portfolio performance can be evaluated in terms of the risk undertaken. Especially for measuring market risk to determine capital adequacy, this model has become a necessity in many countries and financial institutions. Another method widely used for measuring market risk is ”Scenario Analysis”. Scenario Analysis is a technique used to see how the value of a portfolio would be affected by various probable changes in market conditions. A last widely used method for measuring risk is the ”Stress Test” method. The Stress Test is used to estimate how the value of a portfolio would be affected by large, unexpected fluctuations in the markets, such as have been observed during the global crisis which is still with us. Though similar to Scenario Analysis, the Stress Test mainly aims to predict the maximum value that would be lost by a portfolio under certain extraordinary market conditions. The success of this method depends on successfully predicting market conditions.

Mr. Erçel discusses financial risk and its management Address by the Governor of the Central Bank of the Republic of Turkey, Mr. Gazi Erçel, at the Sixth Annual Global Finance Conference, Bilgi University, Istanbul, on 8 April, 1999 _________________________________________________________________________ $ University. Today I like to discuss financial risk and its management which are one of the hot topics in the international financial circles. The 1980s and 1990s witnessed a major transformation in the international financial markets. The advent of more complex and dynamic transactions have substantially increased uncertainties in the marketplace, and, in today’s environment, dominated by a dynamic, aggressive financial service industry, market participants are exposed to greater financial risks than before. Of course, there are several reasons for these changes. The first reason is the globalization of the international markets. Markets all over the world are becoming consolidated into a vast world market as obstacles to the free movement of capital are gradually being removed. This can be seen in the present global crisis, which arose because problems occurring in one region of the world promptly made themselves felt by markets and investors in other regions. Another reason is that the international markets have become much more volatile. Volatility, which means the fluctuation of market prices and ratios, is one of the principal sources of financial risk. When market volatility increases, market participants are exposed to greater uncertainty--and greater risk. Still another change of conditions in the international markets is the appearance of new forms of investment with very complex structures.

The task is to make the best forecast we can of how the economy and inflation pressures will evolve and to adjust policy to ensure the outcome is consistent with monetary stability. Financial stability by contrast is more about the tail of the probability distribution than the central probability – about what could happen rather than what is likely to happen. Our task is to ensure the financial system avoids very bad outcomes. Or, if they cannot be avoided, that the system can weather them without breaking down and without acting as an amplifier of stress. Though infrequent and unlikely, the events we lived through 10 years ago demonstrated that such breakdowns not only can happen but are also extremely costly when they do happen. So although it may appear gloomy, we are always looking for the downside risk, always asking what risks could the financial system generate, what risks could it withstand, what risks could it amplify? And, by extension, whether it is worth insuring against those risks crystallising. The past of course gives us some guide. We know many of the things that have caused financial crises in the past that we need to prevent causing problems in the future. But our job is not just about preventing the last war; it is also about anticipating and assessing new risks as the financial system grows and evolves. And, where justified, taking action to address them.

As I have noted, to the extent that these are sensible regulatory improvements in line with global norms intended to enable delegation and global business models to operate effectively and practically while managing risk, one would have little concern. To the extent, however, that they are motivated by Brexit and a desire to pull activity and risk back within jurisdictional boundaries, 22 contrary to current global practice, I do have a concern that they could act as the harbinger of fragmentation to come. That would raise the cost and reduce the efficiency of market-based intermediation of savings in the EU and, if it led to wider effects, further afield. It would also slow, and perhaps frustrate, the development of market-based finance globally as a way of diversifying economic risks and benefits across jurisdictions and of dampening economic and financial shocks. And from a macroprudential perspective, for the reasons I have set out earlier this morning, that could be the biggest long-term loss. 22 The stated aims of the European Commission’s proposal are to ensure effectively supervision of outsourcing, delegation and risk transfer arrangements in third countries.

Purchases of private assets and assets other than government securities are primarily relevant when markets that are important to the financial system are threatened, and we risk an acute financial crisis, such as at the start of the pandemic. Under the new Sveriges Riksbank Act, the Riksbank can – under certain conditions – buy and sell Swedish securities issued by the government and private actors. Our monetary policy toolbox in this respect remains the same as before. However, the new act has a more restrictive view of when it may be relevant to purchase private securities. The Riksbank may only buy and sell such securities if there are exceptional reasons. This means in practice that, from a monetary policy perspective, we can only buy and sell private securities when we cannot achieve the desired effect on the economy by using other measures. The new act also gives the Riksbank a more explicit mandate than before to trade in securities, also within the scope of our task of contributing to a stable and efficient financial system. To counter serious disruptions in the financial system, the Riksbank may if there are exceptional reasons buy and sell financial instruments at predetermined prices to temporarily support the functioning of systemically important financial markets. An important task for the Riksbank is to be the lender of last resort for important credit institutions that have problems, but also, under certain conditions, to act to keep markets that are critical to the financial system going.

Perhaps the recent proposals of the European Commission could contribute.12 One aim is to make it easier for authorities to use the resolution tool for smaller banks as well. Among other things, the proposal means that the authorities should be able to actively use the funds in the deposit guarantee funds to facilitate the resolution. However, this proposal needs to be analysed in greater detail. The requirements on banks need to be strengthened The third question concerns the requirements we should impose on banks. There are several lessons here. Some may seem detailed, but they have a major impact on the banks' operations and the risks they take. Let me focus on three of these lessons. One lesson from the Silicon Valley Bank run is that deposits are not always as sticky as many people assumed. This is important for the liquidity rules banks must follow. After the 2008 financial crisis, the Basel Committee developed new global standards for this. As part of the Basel III agreement, countries were required to introduce two liquidity measures, the LCR and the NSFR. The LCR framework makes assumptions about how different types of liabilities flow out of a bank and how stable different forms of funding are. Deposits are normally assumed to be sticky. The question now arises whether the outflows assumed in the LCR framework are reasonable, given the outflows we saw in this case. I think we need to assume that deposits, especially unsecured deposits, are more unstable than we previously thought.

Since the onset of the financial crisis in 2007, the prolonged slump in global growth and valiant efforts by central banks have pushed interest rates even lower. As a small open economy, Switzerland cannot decouple itself from these global developments. On the contrary, exceptionally low interest rates around the globe have farreaching consequences for our economy. In the past, Switzerland has invariably had lower interest rates than its trading partners, namely the euro area countries, as shown in slide 3, where the blue shaded area depicts the difference between short-term interest rates in euros (yellow) and Swiss francs (red). This interest rate advantage primarily reflects the lower average inflation rate in Switzerland compared to other countries, although political stability, sustainable fiscal policy and credible monetary policy also play a role. Investors have therefore traditionally been willing to hold Swiss franc investments at lower yields. This interest rate advantage was for a long time the ‘natural’ state of things in Switzerland. However, in the wake of the financial crisis, this advantage came under mounting pressure. Monetary policy easing on the part of the European Central Bank resulted in a narrowing of the EUR/CHF interest rate differential. In 2014, yields on short-term government bonds in Switzerland were, at times, even higher than in Germany. This caused upward pressure on the Swiss franc to intensify. 2 From a monetary policy perspective, Swiss franc appreciation calls for monetary policy easing, since the exchange rate has a substantial influence on inflation and economic developments in Switzerland.

This – along with the SNB’s willingness to intervene in the foreign exchange market – has helped to relieve pressure on the Swiss franc. The effect of the negative interest rate on the exchange rate is currently playing a decisive role in enabling the SNB to fulfil its monetary policy mandate. It allows the SNB to counter the aforementioned consequences of the Swiss franc appreciation on economic developments and inflation. Without the negative interest rate, inflation and economic growth in Switzerland would be lower. 3 Low interest rates and Swiss banks’ profitability The negative interest rate thus remains indispensable from a monetary policy perspective, and has, as explained, achieved the desired effect. A monetary policy geared to price and economic stability is also a precondition for a profitable, stable financial system. An environment of decreasing prices and low growth would lead to reduced demand for banking business and increased credit defaults, losses and write-downs. At the same time, the exceptionally low interest rates are fraught with significant challenges. Above all, over time they can have economically undesirable consequences for financial stability. We have arrived at the main topic of my remarks today, namely, how does the SNB assess the effects of low interest rates on financial stability? The answer to this question largely depends on the extent to which low interest rates affect banks’ profitability.

Ravi Menon: Inauguration of Swiss National Bank’s Singapore branch Congratulatory remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at the inauguration of Swiss National Bank’s Singapore branch, Singapore, 11 July 2013. * * * Mr Thomas Jordan, Chairman of the Governing Board, Swiss National Bank Ambassador Thomas Kupfer Ladies and Gentlemen, Good afternoon. I am delighted to be here to celebrate the opening of Swiss National Bank’s first overseas branch office, right here in Singapore. The opening of SNB’s Singapore branch is significant. It reflects the growing importance of Asian markets in the portfolios of many long-term investors such as the SNB. Currently, there are over 500 players in the asset management industry operating in Singapore with total assets under management of around USD 1.1 trillion. If Asia is the heart of the global economy, then it is in Singapore that you feel the heartbeat. From Singapore, you will get a good feel of not just the well-established markets in Northeast Asia, but also the rapidly emerging ones in South and Southeast Asia. This new branch office will help SNB form closer and stronger ties with partners in this fast-growing part of the world. In particular, SNB will have the opportunity to exchange views with the vibrant asset management community in Singapore, including many Asia-focused managers and investment professionals. We are doubly pleased that SNB has chosen to come to Singapore, because our two countries are like kindred spirits.

Zeti Akhtar Aziz: The development of Islamic finance Welcoming remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Royal Award for Islamic Finance gala dinner, Kuala Lumpur, 25 October 2010. * * * It is my very great honour to welcome this distinguished audience to this special gala dinner organised by Bank Negara Malaysia and the Securities Commission to commemorate the presentation of the inaugural Royal Award for Islamic Finance. This gala dinner is also held in conjunction with the Global Islamic Finance Forum 2010 that is taking place this week, and which commenced this morning. Tonight, in commemorating this prestigious Royal Award for Islamic Finance, we are blessed and honoured to have Kebawah Duli Yang Maha Mulia Tuanku Haji Abdul Halim Mu’adzam Shah who will graciously confer the winner with the award. Bank Negara Malaysia and the Securities Commission are proud to jointly sponsor this award under the auspices of the Malaysia International Islamic Financial Centre initiative (MIFC). Allow me to take this opportunity, as Chairman of the MIFC Executive Council, to record our utmost gratitude to the Rulers’ Council of Malaysia for bestowing the Royal title to the award, giving it the highest distinction and recognition. Earlier this year, Malaysia launched a global search for the winner of this auspicious award which seeks to honour the exceptional individual who has made the most outstanding contribution to Islamic finance.

Details on our proposal can be found on the website of the Bank for International Settlements, and the Committee has invited public comment on the approach through the end of this year. In recommending this revision, the Committee seeks to ensure that risk management systems distinguish between losses that can be anticipated versus those that cannot. Moreover, the new framework would include explicit incentives for banks to address each kind of loss appropriately ensuring strong incentives for banks to provision properly against expected losses. Since the proposal would require only modest revisions to the text of CP3 and would not alter the underlying system and data requirements for banks wishing to adopt an advanced approach to credit risk, we expect that the revised treatment will conform closely to the work that banks have already completed to prepare for implementation. The work plan to improve the framework discussed during our last meeting identified several areas in addition to this important EL-UL issue. We think that this work plan is perfectly compatible with the original time schedule to implement the New Accord by yearend 2006. Other issues ahead: complexity Beyond the “EL/UL” issue, the Committee has put at the top of its work plan for the next few months several other credit-risk related issues that emerged in consultations. Of these matters, I’d especially like to highlight three, namely complexity, conservatism, and competition. Certainly, the complexity of the proposals continues to draw the public’s attention.

The legislation also provides for the resolution of Islamic financial institutions to be in line with distinctive elements of the relevant Islamic contracts, thus improving the legal and procedural aspects for the orderly resolution of Islamic financial institutions. Another important area of priority is to achieve the further harmonization and mutual recognition of Shariah interpretations across jurisdictions. The progressive harmonization will be a major driving force for the internationalization of the Islamic financial system. The reduced uncertainty from differences in Shariah interpretations will also contribute to safeguarding financial stability. The continuous and constructive engagement amongst scholars, regulators and practitioners within and across the regions will pave the way for greater understanding and mutual respect for the Shariah views. This also needs to be supported by in-depth research and greater transparency on Shariah rulings and resolutions. The International Shari’ah Research Academy for Islamic Finance (ISRA), through its Shariah research undertakings and activities in promoting constant engagement among international scholars, has been at the forefront in driving progressive harmonization of Shariah at the regional and international levels. Its annually organized Muzakarah Cendekiawan Shari’ah Nusantara has emerged as an important platform for greater consensus to be forged among the Shariah scholars in the Nusantara. Finally, is the imperative for a robust liquidity management infrastructure for Islamic finance, both at the national and international levels. This is vital not only to ensure the resilience and stability of the Islamic financial system but also to reduce the cost of intermediation.

A second positive aspect of UK business performance through this recession has been the ability of companies to maintain their financial strength through the downturn. As Chart 4 shows, the retained profits of private companies in the UK fell only slightly during the downturn and have already begun to recover. In the first half of 2010, the financial balance of the private sector (excluding financial companies) was back above its average level over the last two decades, as reduced interest payments offset a squeeze on profits. Companies have also sustained profits by exploiting flexibility in their cost base – including measures to contain labour costs. They also conserved cash during the recession by aggressive destocking and holding back on investment. 6 BIS Review 158/2010 This more healthy financial position puts the corporate sector in a better position than it has been coming out of previous recessions to increase investment as they see demand recovering. The most recent reports from the Bank of England Agents around the country are relatively positive about the investment outlook and this is consistent with investment intentions indicated by other business surveys. 9 These indications of rising business investment also suggest that constraints in the banking sector – which are making it more difficult for many small and medium sized companies to obtain finance – are not acting as a serious obstacle to a recovery in business investment. The third positive development for the supply-side of the UK economy following the recession is the low level of company failures.

If I tell you to shoplift, then I am committing an unethical act - and so are you, if you follow my instruction. “I was only following orders” is not a legitimate defence. There is, if you like, a double-lock on unethical instructions within a wholly human environment - on the part of the instructor and the instructed. This is one reason why firms and regulators are so determined to promote ‘good’ cultures, including, for example, ‘speak up’ cultures, and robust whistle-blowing. But there is no such double-lock for AI/ML. You cannot tell a machine to “do the right thing” without somehow first telling it what “right” is - nor can a machine be a whistle-blower of its own learning algorithm. In a world of machines, the burden of correct corporate and ethical behaviour is shifted further in the direction of the board, but also potentially further towards more junior, technical staff. In the round this could mean less weight being placed on the judgements of front-office middle management. 6 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 6 There have been some initial steps to promote the ethical use of big data and AI/ML in financial services. Notably, for example, in Singapore,7 and – more broadly – within the EU.8 In the UK, the Centre for Data Ethics and Innovation is looking at maximising the benefits of AI,9 and many consider them leaders in this field. Principles-based expectations have focused on areas such as fairness, ethics, accountability and transparency.

Chart 1: Annual GDP growth percentage changes on a year earlier 12 10 Average annual grow th since 1970 8 6 4 2 0 -2 -4 -6 1970 1975 BIS Review 5/2009 1980 1985 1990 1995 2000 2005 5 Chart 2: Property prices Indices: March 2003 = 100 150 Rat io of house prices t o earnings 140 130 120 110 100 90 80 Rat io of commercial property prices t o PNFCs profit s 70 60 50 98 99 00 01 02 03 04 05 06 07 Chart 3: Customer funding gap Chart 4: Survey measures of activity £ billions Ratio Cust omer funding gap (RHS) Int erbank deposits from abroad (RHS) Household saving rat io(b)(LHS) 8 7 5 500 4 400 3 300 2 200 1 100 0 02 03 04 05 06 07 08 Expansion Indices: 50 = output unchanged on a month ago 70 700 600 0 6 800 6 01 08 60 50 Construction Services 40 Contraction Manufacturing 30 97 98 99 00 01 02 03 04 05 06 07 08 BIS Review 5/2009 Chart 5: Global output Chart 6: Investment intentions 65 Global output balance August 2008 60 Services Manufacturing Balance reporting an upwards revision to 40 55 30 50 20 45 10 + 0 10 UK CIPS output 40 35 20 30 2006 2007 2008 30 88 90 92 94 96 98 00 02 04 06 08 Chart 7: Growth in secured lending 3m annualised growth rates (nsa) Other lenders Major lenders 25 20 15 10 5 0 -5 -10 2003 BIS Review 5/2009 2004 2005 2006 2007 2008 7

The increasing integration of the Albanian economy and the financial system in particular caused the global crisis to be reflected early in our country. The main channels the Albanian economy was exposed to were:  2 Decline of exports; BIS Review 78/2010  Decline of remittances and other foreign currency inflows;  Increased uncertainty in the financial institutions; and, in response to the latter  Review of almost all economic agents’ business plans. This impact was reflected in low growth rates and shaking of some macroeconomic balances in 2009. According to the Statistics Institute, GDP grew 3.1 percent in annual terms in 2009. The slowdown of GDP growth reflected the contraction of activity in industry and construction, while the services sector’s value added remained the key contributor to economic growth. Given the difficult circumstances in which economic activity took place and compared with other regional countries’ experiences, the preservation of the economic growth rate at positive levels is an encouraging development. However, its slowdown and the new macroeconomic balances need due attention by all economic agents in their projections for the future. Albania’s economic development outlook also requires greater support from the private sector, while the contribution of the public sector to economic growth is expected to decline. The data on aggregate demand show that the contraction of private consumption and the fall in investment were determining factors in the slower growth of demand at home.

Despite strong growth in the past several quarters, the weakness of the developed countries will eventually erode their dynamism, a situation that is already apparent in some countries. However, unlike the developed economies, the emerging world has more space to implement economic policies that help mitigate the effects of the worsened external scenario. Chile has this capacity too. Actually, according to several international assessments, Chile is among the best suited to confront such a scenario. Our country has made progress in recent decades to build an economic policy framework, which has already given proof of its capacity to properly deal with a difficult conjuncture. If necessity demands it, we have the capacity to adopt the necessary measures to mitigate the effects of the global crisis on our economy. The lessons learned from the experience of 2008–2009 give us a positive edge. The external impulse that our economy will be receiving in the coming quarters will be smaller than we thought just a few months back. However, we must not forget that still our relative position in the world is favorable. We have managed to diversify the destinations of our exports and China is now our main client. The copper price and the terms of trade, although not as good as some months ago, are still high from a historical perspective. Our country risk is low and, although our external financing cost has risen in recent weeks, it is still lower than it was in previous years ago.

Today we are again facing a scenario of external turbulence. Thus, we need to continue developing and adjusting our policy toolkit to the changes in the financial environment. Our experience of recent years has also taught us the importance of close and transparent communication of our assessments of the economy and its prospects, as it fosters a better understanding and effect of our decision. This is an area where we have made substantial progress in the past few years, but where there are always new challenges ahead. Among these challenges, we believe that improving the general public’s financial education is an important one. We will actively cooperate in initiatives in that sense. During these years the Central Bank has contributed to the country’s economic development by acting on inflation which, throughout history, has proven to be one of the greatest plagues a society can suffer, especially its most vulnerable segments. As the new Governor of the Central Bank of Chile, I want to confirm to this Commission our commitment to carry on the work done to this date, always ensuring high technical rigor in the analyses and decisions, as well as making every effort to take our Institution to the highest possible standards. Our responsibility is twofold. On one hand, keeping inflation low and stable, favoring sustainable growth. On the other, using our powers to identify and address the risks that could jeopardize the normal functioning of our financial system.

MAS recognises that the insurance funds are different in nature from the equity of the company or the group because they belong to the policyholders and not the shareholders. Therefore in principle investments using the insurance fund should be treated separately from the investments of the company and the group. Nevertheless the insurance fund should also be used only for portfolio investments, and not for the purpose of controlling other companies in the group, especially nonfinancial companies, whether by itself or together with other investments by the group. Currently, some banking groups have used these insurance funds as the vehicle for owning and controlling their investee companies. For example, the bank itself may own only 5% of an investee company, but the insurance fund of the insurance company may own another 15%, giving a total stake of 20%. This is not satisfactory, because it presents the same problems of contagion, non-transparency and dilution of management focus as the bank itself investing directly in these companies. BIS Review 53/2000 6 MAS will study the appropriate investment limits of insurance funds for both bank-related and independent insurers. The limits set should protect the interests of policyholders through adequate diversification, and ensure that the investments do not amount to controlling stakes. These measures will be developed in consultation with the industry, and are expected to be finalised by the end of the year.

The costs for the banks' payment services should thus, all else being equal, be lower in Sweden than in countries that apply systems similar to the textbook one. We can therefore say that our system is more cost-effective than the textbook's system. Following the tragic events in the USA the other week, some central banks announced that they were prepared to supply liquidity to avoid a shortage of liquidity on the market. During periods of unease the demand for risk-free investments normally rises. This leads to investors demanding higher compensation for taking credit risks. It can also lead, as a consequence, to an increase in the interest rate on the interbank market. In extreme situations, access to liquidity can be valued so highly that banks and other market participants are not prepared to lend money at any price. As a result of the great uncertainty prevailing, the daily lending market in US dollars functioned very poorly during the days following the terrorist attack, daily rates rose and there were indications that some banks were experiencing difficulty in obtaining dollars at all. Given these developments, the Federal Reserve offered the US banks increased opportunities to borrow dollars from the central bank. However, the European banks were also affected, and therefore with the aim of maintaining the dollar market function, a number of central banks, including the Swedish Riksbank, offered a dollar facility to the market.

During 2006 the Bank of Albania started examining the prerequisites and implementation conditions over a mid-term period (year 2009), of a new monetary policy regime. In this context, analyses are carried out about the possibilities of improving the legal infrastructure for the creation of such conditions in compliance with international standards in this area. Also, the possibility of improving the organic law of the Bank of Albania has been considered, coinciding with the prediction of its alteration as a mid-term priority of the National Plan for the Implementation of the SAA. It is forecasted that these alterations will stipulate clearly the competences and procedures for the decision-making process of the Bank of Albania and the transparency of this process, which constitutes also a substantial precondition for the compilation and implementation of an effective monetary policy. In the framework of the legal reforms undertaken by the Ministry of Justice for the amendment and improvement of the Civil Procedure Code, the Bank of Albania has been 12 BIS Review 80/2007 fully committed to cooperating with the banking sector for the completion and accuracy of mandatory execution procedure of executive titles. The Bank of Albania proposals have aimed at improving the legal base on the application of procedures for the execution of acts that constitute executive titles. The main purpose is to cut the time for the execution of those acts, aiming to increase security in the lending activity, thus reducing the credit risk the banks are faced with.

At end of 2006, the Bank of Albania closely cooperated with the Ministry of Finance in compiling the draft-law “On Preventing Money Laundering and Terrorism Financing”. In accordance with the respective European Union directives and other international recommendations, the Bank of Albania, being the supervisory authority of the banking system, regards with priority the legal framework improvement for preventing the use of banking system for laundering money and wealth that derive from criminal activities. During this year, with the assistance of the World Bank, the drafting and completion of the regulatory framework for foreign reserve management was carried out successfully, reviewing the Bank of Albania’s policy on the management of such reserve, the management criteria and terms, as well as the decentralization of decision-making competences during this process. Internal audit In 2006, 44 audits and 3 verification procedures were carried out. The inspectors presented 269 findings and 197 recommendations out of these audits, which were carried out at the Bank of Albania and at its five district branches, the Printing House included. 11. Bank of Albania balance sheet During 2006, the Bank of Albania assets further increased, totalling ALL 255.5 billion, about 14 percent higher than at end 2005. The constituent groups, both foreign currency and domestic assets, have reflected growth, while the first group occupies about 68 per cent of total assets, the same level as that of the previous year.

Unfortunately, it would seem that it hasn´t been till recently that this call for action has been taken seriously. In his keynote presentation Lord Stern will shed some light on whether we are still in time to avoid the worst impact. Thank you very much for accompanying us today. Still, we shouldn´t forget that the fight against climate change also has a human and social dimension. The transition to a low-carbon economy must also be “fair” or “just” for the economic sectors most affected. This is one of the objectives of the 2030 Agenda for Sustainable Development, which commits to eradicate poverty and achieve sustainable development worldwide by 2030, ensuring that no one is left behind. The Agenda integrates in a balanced manner the three dimensions (economic, social and environmental) of sustainable development through seventeen Sustainable Development Goals. Ms. Cristina Gallach, High Commissioner for the 2030 Agenda, will moderate the panel that will follow Lord Stern´s presentation, and will share with us the progress that is being made in this respect. Thank you very much, Cristina, for being here today. I am sure we are all looking forward to hearing Lord Stern’s speech. But first, let me say a few more words about the implications that the transition to a low-carbon economy has for the financial sector, and the kind of actions that Supervisors and Central banks are taking to address this global challenge.

https://eba.europa.eu/sites/default/documents/files/documents/10180/2854739/916f8c4b-7099-4abaac1f-882cfd4c3583/RAQ %20Booklet %20Spring %202019.pdf?retry=1 7 https://ec.europa.eu/info/business-economy-euro/banking-and-finance/green-finance_en 3/5 2030 targets agreed in Paris, including a 40 % cut in greenhouse gas emissions, we have to fill an investment gap estimated at 180 billion EUR per year. The effects of climate change and actions to mitigate them also pose risks for both insurance companies and banks. It is well known that the climate change-related risks may be divided into two categories: physical and transition risks. This requires banks to consider climate change-related risks and the transition to a low-carbon economy in their integrated risk management. One of our panelists, Mr. Sean Kidney, co-founder and CEO of Climate Bonds Initiative, will be able to give us an overview of the evolution and prospects of green financing instruments, in particular green bonds. Meanwhile, Ms. Danae Kyriakopoulou, OMFIF´s8 Chief Economist and Director of Research, will give us her insight into this adaptation by the financial sector to the challenges posed by climate change risks. Thank you for your participation in today´s panel. As regards international collaboration in the field of sustainable finance, I believe both the Paris Agreement and the 2030 Agenda for Sustainable Development acted as a wake-up call for supervisors and central banks to join forces, setting in motion a whole agenda of policies intended to contribute to the objective of avoiding this increase above 2oC. In this short period of time, many initiatives, both from the official and private sectors, are being undertaken.

More public equity has been issued so far this year than at the same point in any year in the past decade. [See slide 5 of accompanying deck] But that issuance has all been by listed companies. On our estimates, the vast majority of the possible equity needed will be for companies not listed on a stock exchange. And so the challenge is to give a wide range of businesses every opportunity to access growth capital. That’s capital willing to invest in assets – like unlisted equity – that can’t easily be traded and doesn’t deliver a quick or stable return. Unlocking more growth capital Unlocking more growth capital is not a new challenge. Three years ago, the Treasury launched a review of what it called Patient Capital. Since then, many changes have been made. The Pensions Regulator has clarified its guidance to funds. New funds, including British Patient Capital (a subsidiary of the British Business Bank), were established. And the Financial Conduct Authority now permits retail investors greater access to funds invested in illiquid assets. There is more to do. And the need for more equity finance to minimise the scarring to the economy now creates a case for ambition. A range of authorities have a role to play. Lots of attention tends to be given to schemes and ideas involving public money and the taxation of equity relative to debt.

But the shares of assets allocated to growth capital assets like unlisted equity can be small. UK insurance companies and pension funds together allocate only around 3% of their assets to unlisted equity. The collective investment funds, in which they and others invest, allocate only 2%. [See slide 6 of accompanying deck] There seem to be biases in the system. Even investors who should have the longest horizons seem to have a fetish for liquidity and an aversion to really illiquid growth capital assets. Getting to the bottom of this should be the focus of our efforts. Consider the £ trillion of assets in UK investment funds. The mass of these – just over 85% by assets – are open ended14, offering investors the opportunity to redeem their holding for cash each day by selling a slice of the funds’ assets. Because they offer this, these funds aren’t suited to investing in highly illiquid growth capital. The alternative closed end fund structures issue a fixed number of shares, which can be listed on a stock exchange. Because investors ‘redeem’ by selling their share to another in the secondary market (and typically at a discount), the assets held in the fund do not need to be traded. These funds are therefore more able to invest in truly illiquid growth capital. So it is no surprise that a bigger proportion of their assets is allocated to assets like unlisted equity [See slide 6 of accompanying deck] But these funds are much smaller.

Changes to the target range for the policy instrument - the 3-month Libor - are commented by a press release. They are also discussed after each Quarterly Board Meeting, which are fixed in advance. At our biannual press conferences, we provide our assessment of the economic situation. At these occasions, we inform the public how we judge the risks facing the economy and present our inflation forecasts for the next three years. The forecast should guide the public in monitoring inflationary risks. Given all this, we have taken the extra step to publish the forecasting models that are used to generate our inflation forecasts. The meaning of faith in financial markets Trust is relevant not just for central banks but also for the entire business and financial community. Trustworthy business standards are one of the most important forms of social capital. Trust is paramount to the efficient operation of financial markets, which is a key ingredient of a well-functioning economy. This trust includes confidence in the people who run the companies, and in those who watch them. It also means that the information required to make sound investment decisions is disclosed fully and accurately. The disclosure moreover must be fair. There must be confidence that insiders are not trading on information unavailable to everyone. Only when all these components of trust are in place do we have healthy, efficient financial markets where everyone benefits. What is lost when accounting fraud and the abuse of management power occur?

However, the increased volatility in equity markets has also been pronounced because of peculiar events: the integrity of financial analysts’ recommendations and the increased spread of fraudulent accounting practices. It is the latter that has struck the financial markets particularly hard in recent months. U.S. firms, such as Enron, WorldCom, Global Crossing and Xerox, have become household names not because of their services and products but for their alleged accounting abuses. Investors in these firms undertook investment decisions based on apparently false information. The fear is that only the top of the iceberg has been revealed and more unpleasant news is expected to fill the front pages of the daily newspapers. The fallout from the financial scandals has unearthed several dormant issues that twitch the nerves of financial markets. In turn, this has generated considerable discussion in the financial press, on the airwaves, and in the corridors of government buildings. While the issues are complex, the list of proposed solutions is long. This all suggests that consensus and reform will not be achieved overnight. Trust as an asset As in all walks of life, trust is a valuable attribute. Central banks, as well, value the importance of credibility and trust. Allow me a few minutes to explain why these qualities are important to the National Bank. At the same time, they can provide a good illustration as to why these same qualities are equally important for the private sector. Let me begin with what I mean by trust.

Besides these welfare-enhancing effects on the “domestic” economy of the euro area, the new setting also has far-reaching consequences for the world economy and the international community. Let me shed some light on the international ramifications of Monetary Union by highlighting three interrelated aspects. First, the use of the euro as an international currency in the global financial system; second, the growing role played by the Eurosystem in international policy cooperation; and, third, relevant aspects of the exchange rate of the euro. Before dealing with these points in turn, I should like to recall some key economic features of the euro area. Key economic features of the euro area Let me begin by putting the euro area into an international perspective. The euro area represents a large and relatively closed economy. Given its population of almost 300 million people and its significant weight in the global economy, the euro area is broadly comparable with the United States. As regards its size and structure, the most striking fact is that the euro area economy has a share of world output of around 16%. This is more than three times that of its largest national component (namely Germany, which accounts for 4.7%), significantly higher than that of Japan (which accounts for about 8%), while being lower than that of the United States (which stands at 21%).

In this case, a third and independent party, such as the IMF or OECD, regularly monitors and assesses the economic policies of its members. The ECB participates in the surveillance process for policies falling within its competence (e.g. monetary policy, payment systems oversight). This means that, whenever monetary policy is under surveillance, the ECB is solely responsible for its interaction with the IMF and OECD. Standards and codes recently adopted by the IMF and other relevant international institutions are a way of defining best policy practices and enhancing transparency in the field of monetary and financial policy. In this respect, the ECB’s involvement in regular surveillance further strengthens its accountability through being transparent. Third, in the area of macroeconomic policies, consultation and surveillance are the only forms of international cooperation that are relevant to the Eurosystem. Any form of ex ante policy coordination of monetary with other macroeconomic policies would neither be advisable for the Eurosystem nor be compatible with the ECB’s mandate and independence. Apart from the well-known recognition and decision lags in policy-making, attempts to coordinate ex ante would not only blur the specific responsibilities of individual policy-makers, but also reduce their accountability. In determining its monetary policy stance, the ECB should and does take into account all relevant information. It cannot let its policy solely be determined by the current and future course of other policies. This could easily compromise the maintenance of price stability.

But first of all, let me briefly outline what exactly have been the challenges in recent decades that have required us to rethink the way we conduct policy. Globalization has been a long and drawn out process. Countries have jumped at the opportunity to reap the benefits of globalization, with advanced countries leading the pack. Jumps in technology in recent decades, particularly in information and communications, have ensured that services – particularly financial services – have become truly borderless for advanced and developing countries alike, in a much shorter period of time. 2. Challenges to traditional monetary policy under globalization We are all familiar with the benefits of globalization, with the past few decades seeing cheap exports from emerging markets fueling global trade and growth, albeit with some hiccups along the way. China’s accession to the WTO and the subsequent flux of Chinese exports to the rest of the world, as well as oil exports from the Middle-East, helped to create an environment of prolonged low global prices and low global inflation. We are all familiar with this episode and have given it a few names: the great moderation, the Goldilocks’ economy – not too warm and not too cold, and stable disequilibrium. This is an episode in our history where variability of growth in real output has declined along with the variability in inflation. Along the way, imbalances in the global economy began to build up.

The spike in oil and commodity prices last year, which initially appeared as a supply shock at the individual country level, in fact represented economic overheating at the global scale, and domestic monetary policy tightening may not have been the most effective way to deal with this situation in the global context. In addition, at the present juncture, the unprecedented and contagious slowdown in each country’s economies as a result of global linkages means that monetary policy now needs to respond to the monetary policy stance in other countries. This has added an extra international dimension to policy making, in addition to previous considerations such as the impact via capital flows and trading partners’ economies. 4. Testing the limits of monetary policy under globalization But what exactly are these changes that globalization has brought about to traditional monetary policy? And in particular, how have these changes affected central banks? The first aspect has been the challenge to the basis of our traditional monetary policy decision-making process. Traditional conduct of monetary policy would rely on the accuracy of our forecasts of the economy, of inflation dynamics, and of our understanding of how the economy works. With globalization, making accurate economic forecasts become more difficult. The recent economic cycle has demonstrated that shocks to the economy and the price level have been both rapid and frequent. This is most clearly demonstrated by the volatility in 2 BIS Review 33/2009 inflation in the past year.

Furthermore, China currently has either very low inflation or deflation, which normally points to devaluation pressure rather than revaluation pressure (a need for real depreciation). Finally, China and other the Asian economies that are trying to prop up the value of their currencies are the main purchasers of US Treasury bonds. So, in a situation where the US government finances are deteriorating, the Chinese exchange rate regime is actually helping to depress US long yields and indirectly bolstering the US recovery. My conclusion is that China in the short term should retain its fixed exchange rate until such time as its financial system has undergone more substantial reform, which is something that nevertheless must be done in the coming years. In the long term, however, a floating exchange rate appears unavoidable for a country that is on the way to becoming one of the world’s leading economies. It is only in the much longer term, when China is highly integrated with the world economy, that fixed exchange-rate cooperation can become a possibility once again. This conclusion brings me back to the main line of my argument: Europe can gradually be enlarged to become a relatively big currency area that includes all the countries, from Ireland in the west to Estonia in the east, where the long-term microeconomic gains outweigh the recurring but temporary macroeconomic costs.

If there are such gains to be made from a common currency in a reunified Europe, would it not be possible that such gains may also be attained on a global level? Should we continue on a path towards more global monetary cooperation? There are many arguments both for and against such an arrangement. In recent years we have seen substantial exchange rate fluctuations between some of the world’s large economic blocs. These have largely been related to developments in the US dollar. The dollar’s weakening against the euro has recently gained impetus once again; in two years, the euro/dollar exchange rate has gone from a low of 84 cents to 1.18 dollars in recent weeks - a rise of just over 40 per cent. Discussions of the implications of an overvalued dollar for the US current account deficit have quickly turned into concern over the effects of the rapid fall in the dollar on euro area growth. Should there be a quicker correction in the US current account deficit due to diminishing interest among international investors in US assets, the dollar could weaken further. A fast and dramatic depreciation of the dollar could derail Europe’s fragile recovery.

Several insurers and FA firms recognise the risks of associating with representatives who may be distracted by other commitments and remuneration opportunities outside the realm of financial advisory services. These companies accept only representatives who are fully dedicated and committed to providing quality financial advice to their customers. This is how it should be. But practices vary across financial institutions, and it may not be practical to ban representatives from undertaking other activities that earn an income. MAS will work with the industry to push for a consistent industry-wide approach to representatives who engage in multiple activities. Role of introducers FAIR will also review the current practice of FA firms and their representatives making use of “introducers” to reach out to customers. An introducer may be another representative, but may also be any man-on-the-street. Introducers are typically paid a fee to refer customers to financial advisers, or they get a cut of the commissions generated from sales to the customers. The use of introducers means customers risk dealing with individuals whose credentials have not been vouched for by any financial institution. It also means that customers may not receive proper advice when introducers go beyond introducing and pressure customers to buy products. Financial advisory activities in insurance broking firms Making sure that the financial advisory role is the primary focus of FA representatives is only one side of the coin. The other aspect to ensure, is that firms whose primary activity is not financial advisory services, are fully capable of managing this part of their business.

This was why MAS introduced the Financial Advisers Act, or FAA, ten years ago. The FAA was a landmark regulatory reform, providing for consistency in the regulation of persons engaged in advisory activities:  across sectors: in insurance companies, banks, stockbrokers, and financial advisory firms; and  across products: life insurance, securities, futures, and unit trusts. Two years before the FA Act, an industry-led committee, the Committee for the Efficient Distribution of Life Insurance, or CEDLI, made far-reaching recommendations on minimum standards for the advisory process, and the competency of insurance agents. The FAA and CEDLI together helped transform the landscape for financial advisory services in Singapore. They have contributed to greater consistency and better quality in the advisory services provided on both life insurance and investment products. Disclosure practices have also improved. Life insurance coverage and financial investments among Singaporeans have grown over the last decade.  Life insurance as a percentage of the total assets of Singaporeans has nearly doubled from about 4% in 2000 to 7% in 2011.  Financial investments as a percentage of the total assets of Singaporeans has increased from about 14% in 2000 to 17% in 2011. But there are important gaps to fill. BIS central bankers’ speeches 1 We need to do better We have a large protection gap. The average Singaporean is still grossly underinsured.

By and large, we would like to avoid a situation in which competition for the benefit of a customer in the form of the state or a public company, is undermined by such lists or unreasonable criteria. Therefore we suggest a course of action wherein only limited supervisory information is disclosed to a potential customer, with the bank’s consent, if that customer is seeking to raise public funds. We believe that this approach may help to ensure a competitive environment for banks of different size. I am certain that banks convinced of their own stability will give us permission for such a disclosure. We suggested this approach to the government for the funding of agricultural companies, among other things, and the Chairman gave the command to do so. Therefore, I hope we will be able to work on this, bearing in mind large customers’ concerns about the possibility of money loss. Coming back to the banking resolution, I would like to emphasise that we intend to complete clearing in the upcoming years. We estimate that this process will take two to three years. I hope that a bank’s financial fragility leading to the revocation of its licence will have become an extraordinary event by that time. However, it does not mean that today we should not try to keep a troubled credit institution afloat. If a bank does not conceal difficulties or produce inaccurate reports, we let it remedy the situation.

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.

There is no doubt that having to call off a test at the last minute because of insufficient planning will be counter-productive to reaching such a goal. Contingency Planning The final issue I will discuss today is contingency planning. Much has been said about the need to develop contingency plans for the Year 2000 conversion, and I fully support these efforts. We need contingency plans in place for two main reasons. First, to ensure that we have considered how to handle the inevitable disruptions that will occur as a result of Year 2000, and, second, to help build confidence that disruptions will not have systemic consequences. In the process of contingency planning, we must also keep in mind that it is prudent to consider the possibility of some very serious, but improbable, events. Contingency planning for Year 2000 will not be limited to the century rollover itself. As my colleague, Roger Ferguson, has described it, there will be a Year 2000 “shadow” that will affect financial markets both before and after the event itself. This shadow will relate to BIS Review 85/1998 -8- the uncertainty among market participants about the possible consequences of Year 2000 disruptions for particular firms and markets. In some cases, this concern will lead market participants to consider conventions and procedures for limiting risks during the rollover itself. For example, some transactions that normally would be executed for settlement on January 3, 2000 may be postponed.

Malaysia also made significant investments in talent development for the financial services sector. Given its significance in defining performance and resilience of the financial sector, comprehensive institutional arrangements have been put in place for all levels of the industry; at the entry point, at the working and specialist levels, at the professional level and at the leadership levels including for the boards of financial institutions. Finally, as the financial system became more regionally and internationally more integrated, regional financial stability arrangements have also been established. These included advancing collective initiatives in the areas of regional surveillance, the development of regional financial markets and payments infrastructure, and cross-border supervision. Forums for assessment of risks to regional financial stability have also been initiated, and work on establishing an integrated crisis management and resolution framework for the region is in progress. As part of these initiatives, a regional support mechanism has also been established. With these pre-conditions in place, Malaysia commenced initiatives to internationalise our financial system beginning 2003. The internationalisation of the financial sector entailed the advancement in two main areas; financial sector liberalisation and capital account liberalisation. In pursuing greater regional and international financial integration, the aim was to enhance the diversity of the financial system in terms of its product offerings, to improve further the competitiveness of the financial system and to strengthen our economic linkages with the region and other parts of the world. The financial sector liberalisation involved increased foreign entry and participation in our financial system.

We believe that countries should adopt the options and approaches that are most appropriate for the state of their markets, their banking systems, and their supervisory structures. Basel II is not a “one size fits all” framework. Supervisors can adopt the framework on an evolutionary basis and use elements of national discretion to adapt it to their needs. For any country that is considering adopting Basel II but may not yet be ready, I like to suggest a three-stage approach towards building a foundation for the new framework: (1) strengthening the supervisory infrastructure; (2) introducing or reinforcing the three pillars; and then (3) making the transition from the 1988 Accord to Basel II. The first stage is strengthening the supervisory infrastructure. Basel II is not intended simply to ensure compliance with a new set of capital rules. Rather, it is intended to enhance the quality of risk management and supervision. One of the things that I strongly encourage for all countries is a review of implementation of the Basel Committee’s Core Principles for Effective Banking Supervision. These principles are key to laying a successful supervisory foundation. Likewise, sound accounting and provisioning standards are critical to ensuring that the capital ratios, however calculated, meaningfully reflect the bank’s ability to absorb losses. The second stage, then, is to consider how the second and third pillars of the new framework can be implemented. Supervisors do not need to wait for the formal adoption of Basel II to start introducing or using the principles of the three pillars.

However, in recent years, we have learned more about the concurrent need for macroeconomic stability and a stable financial system. That concept includes the need for businesses and consumers to have access to credit on fair and reasonable terms through all stages of the business cycle so that they can build and grow. We need an efficient and resilient payments system to maintain the flow of funds through the economy at all times. We need financial markets that remain active, liquid, and trusted regardless of events in the economy. The challenge for supervisors is to promote the health of the banking sector with a broad range of tools. We have certainly found that problems in the banking sector tend to have a “ripple effect” across the wider economy. Therefore, it is in everyone’s interest that a country’s banks should be able to manage their risks today and respond to challenges tomorrow. This is first and foremost the responsibility of the banks themselves, but supervisors also have an important role to play in ensuring that banks are prudently managed and capitalised. Banking is fundamentally about trust. Banks are charged with a special public trust to safeguard customers’ wealth. We have all seen what happens when customers lose trust in the ability of individual banks or the banking system as a whole to protect their savings. This puts a special onus on banking supervisors to ensure that banks operate soundly.

The domestic financial safety net Before turning to the global safety net, let me first say a few words about how the financial regulatory reform agenda in the UK has enabled the strengthening of the domestic safety net – the provision of liquidity insurance to the financial system by the central bank. Since the onset of the financial crisis, to keep the financial system open for business, central banks have used their balance sheets as never before. At the Bank of England, for example, new published liquidity facilities have been introduced that extend liquidity for longer durations against expanded sets of collateral to new counterparties. 5 As with any kind of insurance, however, liquidity insurance creates incentives to take more of the insured risk. The extent of this moral hazard and how best to tackle it was a key concern for the Bank of England when making these changes – it is not the role of the central bank to lend to insolvent institutions. 6 To that extent, the expansion of the provision of liquidity insurance was enabled by reform to the regulatory framework for banks, including: (i) Micro prudential supervision that raised the levels and quality of capital and liquidity banks are required to hold; (ii) Regular, transparent stress testing to ensure an ongoing assessment of solvency under different scenarios; (iii) A credible resolution regime for insolvent banks that reduces contagion to the wider system and the need for taxpayer support.

Several key initiatives contribute to this Financing Union and already exist: (i) the Capital Markets Union, which promotes the diversification of private financing; (ii) the Juncker Investment Plan, which mixes public and private investment towards the real economy; and (iii) the Banking Union, which addresses persistent financial fragmentation. These initiatives, however, lack the unified governance of a Financing Union, which would help circumvent bureaucratic barriers and foster synergies. In addition, progress towards a Financing Union is still needed in four key areas: First, providing incentives for cross-border investments – mainly in equity – through accounting, taxes and insolvency laws. Strengthening the free movement of capital within the EU requires overcoming a wide range of legal obstacles. We should improve the 2/5 BIS central bankers' speeches predictability of insolvency frameworks, eliminate tax-related biases that penalise equity and harmonise the accounting rules for small businesses; Second, developing pan-European savings products more oriented towards long-term investment. This could be done through a variety of savings vehicles: the creation of European venture capital funds, new market initiatives for green bonds, securitised portfolios that are diversified across member states, and so on and so forth; Third, completing the Banking Union; Fourth, controlling financial activities and risks that are of vital importance for the euro area, such as supersystemic CCPs. Improvements in these four areas are needed so as to reach significant gains for digitalisation, SME’s scaling-up or energy transition. In each of these fields we have significant investment needs.

33 Because of improved prepayment characteristics, agency MBS that have been outstanding for a number of years are often more valuable than newly issued securities that are otherwise similar. Therefore, these securities tend to trade at a higher market price than TBA, making them unsuitable for trading through the TBA market. 34 Selling SOMA’s agency MBS holdings as specified pools may have a liquidity disadvantage compared to TBA. However, this may be mitigated by the fact that a substantial portion of the SOMA portfolio is in very large securities. Owing to the use of CUSIP aggregation, a process which allows multiple securities to be combined into a single larger security, more than 25 percent of the SOMA agency MBS portfolio is in 20 individual securities. 10 / 10 BIS central bankers' speeches

However, since the beginning the annual excess return on equities has been close to ½ percentage point. We have 2 BIS Review 53/2009 established an equity management strategy that seems to be fairly robust to market fluctuations and that has, as we have seen, generated solid returns viewed over a longer period. Developments in the Fund’s fixed income portfolio have followed a different path. The annual return on the actual portfolio was ½ percentage point lower than the return on the benchmark portfolio. The results were not due to investment in high-risk fixed income instruments. At the end of 2008, as much as 64 per cent of the bonds in the Fund’s fixed income portfolio had the best credit rating, AAA, 20 per cent had the second best, AA, while ten per cent were rated A. Five per cent of bonds were rated BBB, which is the rating the credit rating agency Standard & Poor’s has assigned companies such as Telenor and Statkraft. Only one per cent of the fixed income portfolio has a lower credit rating. Realised losses as a result of bankruptcies have been low. The following table provides a static situation report. As the recession follows its course, and the credit rating agencies continue to respond positively to criticism, ratings will probably be adjusted to a certain extent. The emphasis will nevertheless be on high-quality paper. How then can an excess return become negative from one year to the next?

We allow third country branching, under certain conditions outlined in our 2014 Supervisory Statement. 11 The key factors which have determined the PRA’s stance towards non-EEA branches are the equivalence of the supervisory regime of the home state, and arrangements for resolution. Second, information sharing is fundamental. Even if two countries have exactly the same set of rules, if they cannot share information on the financial positions of different entities within a global financial group, they cannot clearly gauge and manage the risks that the firm may be running on a consolidated basis. We have seen a few examples of the value of such cooperation in recent years. The FSB and Basel Committee have developed a number of guidelines on information sharing, which have helped foster trust, cooperation and enhanced dialogue between international regulators. These include supervisory and crisis management colleges and supervisory assessments. The EU has further enshrined 10 A global code for the foreign exchange market, put together with support from central banks, will be launched in May as the first globally consistent code of conduct for these markets. 11 ‘Supervising international banks: the Prudential Regulation Authority’s approach to branch supervision’, SS10/14, available at http://www.bankofengland.co.uk/pra/Documents/publications/ss/2014/ss1014.pdf. 7 All speeches are available online at www.bankofengland.co.uk/speeches 7 these practices through legislative requirements in the CRR and BRRD for supervisors and resolution authorities respectively. The Bank is a staunch supporter of these mechanisms.

Sources of finance are increasingly diversified between banks and markets, helping to keep the cost of finance low. And the system is demonstrating an ability to dampen shocks rather than amplify them. Despite this transformation, there are nascent risks that, if left unchecked, could reverse the progress made and ultimately undermine the G20’s objective of strong, stable and balanced growth. Indeed, the global financial system is at a fork in the road. On one path, we can build a more effective, resilient system on the new pillars of responsible financial globalisation. On the other, countries could turn inwards and reduce reliance on each other’s financial systems. That would, in turn, fragment pools of funding and liquidity, reduce competition and impede cross-border investment. The net result would be less reliable and more expensive financing for households and businesses, and very likely lower growth and higher risks in all our economies. 3 The British Social Attitudes Survey (2013) reported that only 20% of UK citizens now think banks are well-run, down from 90% in the late 1980s. 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 The outcome of the Brexit negotiations could prove highly influential in determining which path the global financial system takes.

In connection with the outbreak of the crisis, China stopped the appreciation of the renminbi that had been going on for several years and instead pegged the renminbi to the dollar until June last year. This meant that China’s currency followed the depreciation of the dollar that came when the worst of the crisis was over and investors once again began to turn to higher-risk assets, for example by investing in assets in the emerging economies (Figure 3). 14 My own calculations in accordance with the method used by the IMF to identify major falls in house prices in WEO in October 2009 (a fall in house prices is defined as major if a four-quarterly moving average of the annual growth in real house prices falls below –5 per cent) shows that 2/3 of the countries that experienced falls in house prices had large current account deficits while only ¼ those that did not experience price falls had deficits. 6 BIS central bankers’ speeches Figure 3 China’s nominal exchange rate against the dollar and real and nominal effective exchange rate indices USD/CNY and index 2005=100 10 90 Exchange rate USD/ CNY (left) Real effective exchange rate (right) Nominal effective exchange rate (right, inverted) 9 100 8 110 7 120 6 130 05 06 07 08 09 10 11 Note.

It appeared probable that the dollar would depreciate as it was difficult to believe that the United States would be able to maintain its deficit indefinitely, 2 and the real exchange rate normally weakens when a current account deficit needs to be corrected. And the dollar’s status as a reserve currency throughout the world made the entire global economy sensitive to rapid changes in the dollar rate. Although a dollar crisis did not occur, the analysis was reasonable. Substantial and persistent current account surpluses or deficits may be a sign of an underlying weakness or imbalance in the economy. Even though global imbalances have subsequently declined, this is due more to cyclical factors than to structural factors. They have also increased again recently in pace with the recovery of the global economy. The International Monetary Fund (IMF) continues to monitor the development of global imbalances and says that an adjustment of these imbalances is necessary if the recovery is to rest on stable foundations. 3 The association of developed countries and emerging economies that goes under the name G20 has therefore decided to perform thorough analyses when surpluses or deficits become substantial, in order to determine whether the country concerned should take measures. In the risk survey conducted by the Riksbank in May this year, in which participants on the Swedish fixed-income and foreign-exchange markets were asked to assess the risks to the Swedish financial system, global imbalances were seen as the greatest risk.

Following the examples of other central banks, we are also in the process of creating an innovation hub for closely monitoring of fintech developments, interacting with institutions that plan to launch new services, which will help them better understand the regulatory environment, but it will also help us adequately comprehend the fintech developments, assessing the risks and possibly recalibrating the regulatory framework. To sum up, innovation in digital finance, underpinning the nexus between digitalization and finance, offers wide-ranging opportunities, which authorities are keen to foster. It holds the promise of reducing costs and frictions, increasing efficiency and competition, narrowing information asymmetry, and broadening access to financial services – especially in low-income 3/4 BIS central bankers' speeches countries and for underserved populations. Ongoing innovations and technological advances support broader economic development and inclusive growth, facilitate international payments and remittances, and simplify and strengthen regulatory compliance and supervisory processes. At the same time, authorities are concerned about potential risks posed to the financial system and to its customers. Moreover, the adoption process may also pose transition challenges, and policy vigilance will be needed to make economies resilient and inclusive, so as to capture the full benefits. In response, policymaking will need to be nimble, innovative, and cooperative and importantly will need to strike the right balance between enabling financial innovation on the one hand and addressing challenges to market and financial integrity, consumer protection, and financial stability on the other.

The capital savings are even more dramatic for SME loans that qualify for retail treatment: participating banks from Basel Committee member countries reported that their capital requirements on SME exposures qualifying for retail treatment would decline by an average of 12-13% under the standardised approach and up to 31% under the IRB approach. Similar conclusions can be drawn for those European banks participating in this study. Actually, EU banks in general reduce their capital charges for loans to SMEs compared to the current rules, and this decline is slightly stronger than the average of all banks providing data. I should note that QIS 3 did not fully recognise the risk-mitigating effects of collateral and guarantees, so we expect that, in some cases, banks may experience even larger “savings” when the New Accord comes into force. Other studies concur. For example, researchers at my home institution, the Bank of Spain, combed through a database covering almost every loan made by a Spanish bank to evaluate the potential effects of the New Accord on SME lending. Their findings, which, if you are interested, I can share in written form with you, agree that the New Accord will not create tougher capital requirements for loans to Spanish SMEs and may, indeed, reduce them. We are extremely pleased now to have tangible evidence that the New Accord will not create burdens for banks that lend to SMEs.

We are pleased to note that the World Bank Ease of Doing Business team is finally making serious efforts to understand our national specificities. The Central Bank urges and supports Government’s ongoing efforts to take the Ease of Doing Business conditions to a new level. Of course, it would be unforgivable of me not to seize this opportunity to urge the consultancy community to ensure that the information we provide to international competitiveness ranking agencies is up to date and factually correct. I also take this opportunity to observe that in 2018, Malta will undergo a comprehensive and detailed analysis of its financial sector through a Financial Sector Assessment Programme (FSAP) conducted by the International Monetary Fund. At the same time, Malta will be evaluated against international standards on Anti-Money Laundering and CounterTerrorism Financing (AML/CFT) by MONEYVAL as part of the Council of Europe’s peer review process. We are eagerly looking forward to both. Our economy has managed to outperform because we managed to evolve and diversify rapidly. I believe that our financial services and banking sector needs to mirror this, to continuously evolve and adapt to the changing economy. After the success of recent years, we are now in an excellent position to solidify our gains. This requires us all to focus our glance further into the future, and to devote a greater share of current economic prosperity towards financing more long-term projects. If we do not, we run the risk of undermining our own future prosperity.

Page 9 of 10 I believe that the financial services community can and must contribute to change our nation’s mentality. At the interface between our nation’s savings and investment it is best placed to leverage more effectively our current economic success. Thank you. Page 10 of 10

What I suggest is a slight evolution in our analysis – the data mix – and in our implementation – the instrument mix. Page 8 sur 9 On the data mix, the Governing Council already has to ensure its decisions comply with the proportionality principle and so has to consider the side effects of its policy actions. However, it does pose a more difficult analytical challenge: financial stability, unlike price stability, is not easily summarised by one statistic (inflation in the case of price stability), so we need in any case to look at a range of indicators. To respond to this challenge I believe we should broaden the current monetary second pillar into a monetary and financial pillar. This second pillar would be responsible for deepening research into the origins of the financial cycle. More specifically, let me mention a few examples of variables that could be monitored under this new pillar: - Indebtedness of firms and households; - Bank balance sheet information, which is useful for assessing the functioning of the bank lending channel (including in a forward-looking way); - Indicators of excess risk tolerance and excess credit, which provide information on the risk-taking channel; - Stock and house prices, which provide information on the asset price channel. On implementation and the “instrument mix”, we now have quite an arsenal of unconventional policy instruments. With multiple monetary policy instruments, we now have a set of combinations that can deliver the required stance with respect to inflation.

Third, by disclosing the criteria by which we value assets, we can set a standard that others will follow. And market neutrality – which should take into account the mispricing of climate risks – should not put a brake on carbon neutrality. II.B. Inequalities Page 7 sur 9 Monetary policy inevitably has redistributive effects. It transfers revenue between lenders and borrowers, and affects asset prices and hence wealth. The evidence is preliminary but it suggests that the effects of more accommodative monetary policy has reduced income inequality by boosting revenues thanks to increased employment for the lowest parts of the income distribution and diminishing savings revenues at the highest end. On wealth, the jury is still out, as the middle class benefited from the rise in housing prices, but the better-off could have benefited still more on their financial assets. That said, fiscal policy is and should remain the best tool for fighting inequality as it can be more targeted than monetary policy. This is especially true in Europe; thanks to our social model. Indeed, the debate about inequality and monetary policy seems to be somewhat less passionate on our side of the Atlantic. However, to the extent that ECB programs currently support governments borrowing and fiscal policy, we can see this as an indirect channel to reduce inequalities. II. C. Financial stability Financial stability is related to the inequality debate: the common link is the level of asset prices. The question of asset bubbles is not reserved for economists or financial markets.

I must hasten to mention however that in striving to increase credit, banks must always comply with the regulations as stipulated in the Banking & Financial Services Act to ensure the safety of customers’ deposits. Furthermore, much more credit needs to be directed to sustainable productive sectors like Agriculture, Manufacturing and Tourism. This entails increasing borrowing options available to the small scale farmers and the SME sector. At current levels, interest rates are too high for the SMEs to access credit and venture into meaningful projects. In order to reduce the incidences of default, the Bank of Zambia has through NB Circular 3/2008 of December, 2008 made it mandatory for every lender in Zambia to go through the Credit Reference Bureau. Any loans approved without passing through the Credit Reference BIS Review 4/2009 1 Bureau will attract Regulatory Action. This will undoubtedly help to reduce the cost of borrowing. I therefore, urge banks and other financial institutions to continue reviewing the cost of borrowing as part of the process to improve SMEs access to the much needed finances to expand their operations, employ more people, and thereby provide impetus to significantly reduce poverty rates in the country. It is also my hope that the coming on board of the Citizens Economic Empowerment Commission will significantly aid the development of the SME sector. Hon Minister, Distinguished ladies and Gentlemen, As a direct consequence of being an open economy, Zambia has not been spared by the effects of the current global financial turmoil.

There are also wide-ranging international implications, not least in today’s highly globalized institutions, markets and capital flows. Weaknesses and vulnerabilities in one country may affect other countries and financial systems. The benefits of having a globalized financial system are indisputable as long as it is well structured and managed, but the contagion risks of a weak or badly managed system are large. To create a stable and efficient international system we need good domestic systems but also strong international institutions and good cooperation. I know that the authorities in India during recent years have taken major steps in modernising your finance sector and I wish you good luck in your future endeavours. I am confident that they will prove to be very worthwhile. BIS Review 111/2006 9

The ARRC was also tasked with developing a transition plan to facilitate the adoption of these rates in a voluntary and orderly manner, and with considering best practices in contract design to prepare for the possibility that LIBOR ceases to be published. Publication of Alternative Reference Rates by the Federal Reserve The ARRC has made important progress in achieving its mandate. Notably, in June 2017, it selected the Secured Overnight Financing Rate, or SOFR, as its preferred alternative to U.S.dollar LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight using U.S. Treasury securities as collateral, and is thus relevant to a wide range of market participants. The rate is entirely transaction-based, and the underlying market is robust, with current daily volume of more than $ billion. (By comparison, unsecured three-month U.S.-dollar wholesale borrowing totals roughly $ billion per day, as I mentioned earlier.) SOFR moves closely with LIBOR and other money market rates over time, and because it covers multiple segments of the repo market, it provides scope for future market evolution.17 Besides being more resistant to manipulation, this nearly risk-free rate should also prove much more resilient during periods of financial stress, because the U.S. Treasury repo market is likely to remain deep and active during such episodes. The New York Fed administers and produces SOFR in cooperation with the Office of Financial Research.

It also illustrates the importance of continuing to focus on bank culture and proper incentives in order to support financial stability over the longer term. At its core, the problem we face today is that the financial system has built a tremendously large edifice on a structurally impaired foundation. While many in the industry cannot recall a time when LIBOR did not exist, in fact, it was only developed in the 1980s. Since then, the use of LIBOR as a reference rate has exploded—with the size of financial contracts referencing U.S.dollar LIBOR today estimated at close to $ trillion.2 The vast majority of these exposures are derivative obligations, such as interest rate swaps. But, that tally also includes trillions of dollars of cash products, such as residential and commercial mortgages, corporate bonds and loans, and securitized products. And, with new contracts referencing LIBOR still being written, this balance continues to grow significantly. Broadly speaking, reference rates are vital to efficient market functioning. They facilitate trading in standardized contracts, which lowers transaction costs and increases market liquidity. Robust reference rates can also reduce information asymmetries and the risk of misconduct by providing transparent, independent pricing. But, in the case of LIBOR, the foundation had serious flaws. Most notably, LIBOR was (and is) based on submissions from individual banks—which, in turn, were based on hypothetical borrowing rates or expert judgments, and not actual transactions. Moreover, deficiencies existed in regulatory oversight and governance of the rate-setting mechanism.

Andrew Sentance: Sustaining the recovery Speech by Mr Andrew Sentance, Member of the Monetary Policy Committee of the Bank of England, at the British American Business Council in association with RSM Tenon, London, 13 October 2010. * * * I would like to thank Tomasz Wieladek and Abi Hughes for research assistance and I am also grateful for helpful comments from other colleagues. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Monetary Policy Committee. I am delighted to be giving this speech this evening here in the heart of Westminster and I am grateful to the British American Business Council for hosting this event and to RSM Tenon for sponsoring it. As an active member of the Church of England, I am also very pleased to be giving this speech at its headquarters in Church House. The Church of England plays a vital role in supporting the spiritual health of our nation, just as the Bank of England has a key responsibility in underpinning its economic and financial health. A healthy economy is normally a growing economy. So ensuring the right conditions for a sound and sustained recovery is a key challenge for UK monetary policy at present. And it is that challenge that I want to discuss in my speech to you this evening. The current recovery in context The UK economy has been recovering for about a year now.

It has been estimated that during a financial crisis, poor households lose 10 times more of their income compared with the average household The role of financial inclusion has thus become more magnified as a means to improve the livelihoods and as a means to strengthen the financial resilience of the disadvantaged. It provides the opportunity to save for the future, to invest and generate income and to insure against adverse events. The relative stability and improving global conditions, therefore, provides us with the opportunity to accelerate the financial inclusion agenda as a global imperative. The theme of this year’s Forum, “Global Partnerships, National Goals, Empowering People” highlights that financial inclusion is a shared responsibility. The significant progress that has been achieved in advancing financial inclusion, has also provided us with the opportunity for further advancement that would support and facilitate greater scale and sustainability of inclusive finance. Allow me to touch on five potential areas which I believe would cumulatively contribute towards advancing financial inclusion to its next level, both at the national and international level. Priority 1: Focus on relevant and quality financial services Significant strides have already been made in the area of improving access to financial services. Within a short span of three years, AFI has been instrumental in galvanising commitments from member countries to enhance financial inclusion policies, resulting in 20 million of the unbanked to gain access to financial services. Yet we wish to achieve more than just access.

14 All speeches are available online at www.bankofengland.co.uk/news/speeches 14 Chart 17 Map of who holds leveraged loans and in what form Indicative estimated global stock of leveraged Indicative estimated holdings of leveraged loans by loans by product type global investors Sources: BarclayHedge, Bloomberg Finance L.P., FCA Alternative Investment Fund Managers Directive (AIFMD), Firm public disclosures, LCD, an offering of S&P Global Market Intelligence, Morningstar, National Association of Insurance Commissioners, Securities Industry and Financial Markets Association, Solvency II submissions and Bank calculations. Notes: (a) Estimates of the total stock are based on Bloomberg’s definition of leveraged loans. Given the lack of a consistent definition of leveraged lending, there is uncertainty over the total stock of outstanding leveraged loans. (b) For loans that are distributed to non-bank investors and CLOs, allocation across investors is based on ‘bottom-up’ estimates of holdings from a range of sources. Hence, there is a significant proportion of institutional loans that are unallocated. (c) For hedge fund holdings of leveraged loans and CLOs we scale up holdings reported to UK authorities by non-EEA managed AIFs to reflect the size of the global hedge fund universe. This means these estimates are particularly uncertain. (d) Revolving credit facilities and amortising term loans are allocated to banks given that they are typically the holders of these facilities. This picture is consistent with wider developments in corporate credit. Non-banks account now for 56% of the stock of UK corporate debt.

It is our expectation that the board of directors and senior management of institutions to play their roles in ensuring that the compliance programme is fully implemented and that any money laundering and terrorism financing activities are promptly detected and reported. Hence, I urge all reporting institutions to improve both the quantity and quality of STR submitted. In the same vein, the FIU will continue to improve its feedback mechanism to reporting institutions. The fourth area is to give greater emphasis on compliance. This is important so as to improve the compliance level among the reporting institutions in order to preserve the integrity and stability of the financial system. More focus will be given to enhance and raise the compliance level among DNFBPs in view of the emerging risks. To this end, greater collaboration between the FIU and the various self-regulatory organisations would be pursued actively during the year. BIS Review 46/2009 3 The fifth and last area is to ensure that the enforcement of the AML/CFT regime should be achieved without undue increase in the regulatory cost. It is important that the controls in place are commensurate with the associated money laundering and terrorism financing risks and the risk mitigation measures are adequate. This underscores the progressive introduction of more risk-based approach in the national AML/CFT regime. I understand that this is among key topics to be discussed in this conference, and I am sure it will generate interesting discussions between the experts and the participants.

This publication aims to enhance the knowledge and information about remittances in the Albanian market, and to convey messages in the context of needs for intervention and the potential of remittances for various actors in the economy. For all the issues addressed above, especially related with the commitment of various stakeholders in the modernisation of payment systems in Albania, I invite you to actively participate and contribute to this conference. Concluding, I would like to wish you fruitful conference proceedings and thank you for your participation and attention. 2/2 BIS central bankers' speeches

I’m here today to speak about how some of those changes are showing up in the economic data as it relates to the recovery. But it’s also important to remember that behind the numbers are families, businesses, and communities that have suffered and continue to face tremendous challenges of all kinds. In my remarks this afternoon I’ll share more about how what we are seeing in the incoming data relates to the economic picture nationally and to this region. I’ll also highlight some of the unique inflation dynamics we are seeing. Finally, I’ll explain what that means for monetary policy and the path forward. Before I continue, I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System. Dual Mandate I know there are a lot of economics students in today’s audience. I won’t quiz you about the Federal Reserve, but one aspect of our work that you may be familiar with is the Fed’s “dual mandate.” These are the two goals set by Congress: maximum employment and price stability. Given these goals, our focus is studying and understanding the wide range of developments that affect employment, unemployment, and inflation. The Economic Outlook So, what are these developments telling us about the current economic outlook? I’ll start by saying that the economy continues to grow at a strong rate.

Progressive recovery in the Spanish economy Allow me to begin with a brief overview of the current situation of the Spanish economy, which is far different from that two years ago, when the extreme tensions on the capital markets derived from the institutional crisis of the euro area, the vulnerability of public finances and of part of the banking system, and the recession under way drove the Spanish government to apply for financial assistance. At present, the economy, after beginning to show moderately positive growth rates in the second half of 2013, is set on a path of recovery. The information available indicates that year-on-year growth rates might draw close to 2% late next year. Positive figures can likewise be seen in the labour market. Following a process of job destruction that ran for over five years, the incipient recovery in the market observed in the closing months of 2013 has gained in momentum in the first half of 2014, providing for a slight reduction in the unemployment rate which, however, remains at unacceptably high levels. The firming of the improvement in the labour market is crucial for driving the expansion of domestic demand and, thereby, making the incipient path of recovery sustainable. Contributing factors here must also include the adjustments made by the economy, which have seen an appreciable moderation of the main imbalances in public finances, the external balance, private-sector debt and the real estate market.

Jacqueline Loh: A coordinated and forward looking approach towards ASEAN disaster and climate risk resilience Keynote address by Ms Jacqueline Loh, Deputy Managing Director of the Monetary Authority of Singapore, at the NTU-ICRM's 10th Annual International Symposium on Catastrophe Risk Management, Singapore, 1 August 2019. * * * Distinguished guests, ladies and gentlemen, Good morning. Introduction 1. It is my pleasure and honour to join you today at the 10th anniversary of the NTU Institute of Catastrophe Risk Management (ICRM)’s annual symposium. Since its establishment in 2010, ICRM has come a long way to become one of Asia’s leading research institutes in catastrophe risk modelling and management. 2. The theme for this year’s symposium - “Towards Viable Disaster Risk Financing Solutions for Southeast Asia” - is a timely one. In the face of growing climate and disaster risks in the region, it is a pressing priority for all of us to come together to tackle the widening natural catastrophe protection gap, and contribute towards a sustainable and resilient future. Reaching Boiling Point 3. Asia has borne the brunt of catastrophe disasters. Over the last 50 years, Asia accounted for half of the world’s economic losses from natural disasters, amounting to more than $ trillion. In 2018, Asia was again the worst affected, beset by a number of significant events, including: Typhoon Jebi and Trami, which affected Japan and Taiwan, Typhoon Mangkhut, which impacted mainly Hong Kong, China and Philippines; and the Earthquakes and tsunamis in Sulawesi. 4. Natural disaster losses are high and rising.

In Hong Kong, banking, in a rather narrow definition, is estimated to contribute about 7.5% to gross domestic product and about 3.5% to employment. Despite the withdrawal of a number of individual banks, particularly Japanese, from Hong Kong in the late 1990s, the share of banking in GDP appears to have remained roughly stable for a number of years now. However, the share in employment has declined somewhat of late – as has also been evident in, for example, the USA and UK over a slightly longer period. This implies that there have been significant productivity gains, including no doubt those arising from the process of consolidation, which has been evident among international banks with presences in Hong Kong for some time and has now been spreading to the local banks. Permit me one further historical reflection, related partly to my earlier comment about attitudes towards banking. When I first studied economics, there was a respected body of literature which argued that productivity growth in manufacturing would always outstrip that in other sectors because manufacturing was more amenable to the application of new technologies and economies of scale. In services, output was regarded as too firmly dependent on the specific input of labour for there to be much scope for productivity gains.

Ravi Menon: Bending the curve of nature loss Keynote remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore and Chair of the Network for Greening the Financial System, at the COP15 Finance and Biodiversity Day, Montreal, 14 December 2022. *** Ladies and gentlemen, I am honoured and delighted to be able to address you on this important occasion of COP15 of the Convention on Biological Diversity. The world is getting painfully acquainted with the impending climate crisis. There are promising efforts at mitigating this crisis, though far from what is necessary to avert disaster. But the planet faces a second crisis –– nature and biodiversity loss. The nature crisis is no less threatening than the climate crisis. But it is much less appreciated and much less is being done to mitigate it. We assiduously measure and seek to grow our physical and human capital. We speak of the importance of social and political capital. But we fail to appreciate let alone measure natural capital – the world's stock of natural resources, comprising soils, air, water, plants, animals, and minerals. These are assets that sustain our food supplies, underpin our economy and society, and enable human life. We are collectively depleting our natural capital and degrading the ecosystems that support it. We are consuming more resources than the Earth can produce in a year. At current rates of consumption, we use up 1.6 Earths' worth of resources. By 2050, our annual resource use will rise to 2 Earths' worth.

Few times ago, I have been informed about a new EU initiative, which requires to set up, within a certain period of time, among others a unified payment system within the euro area, including payments with cards. Presently, small and medium businesses in the euro area have not the same payment opportunities as they have in their respective countries on a national scale. Such a case includes credit cards, which cannot be employed equally across the borders. For this purpose I would suggest that respective experts from the Association and Bank of Albania be as soon as possible informed about this project, making the relevant suggestions in this direction. I personally remain consistent in my position that in Albania we have to adopt the most advanced solutions in all the infrastructure projects that we are going to implement. I believe that we do not need to examine old-fashioned models, which, in addition to the initial cost, will continuously require other funds for maintenance and modification. Besides the developments in the field of payments I would welcome from you a broader commitment even in other directions. I think that the system must further expand its geographical coverage, aiming at including also areas, which, though having at first sight the appearance of being inactive, have large financial potentials in the form of threasurised savings outside the system. Also, the service level should be further improved.

The second element of the strategy is a comprehensive analysis of the risks to the outlook for price stability, according to two perspectives: economic analysis and monetary analysis. These two perspectives offer complementary analytical frameworks to support the Governing Council’s overall assessment of risks to price stability. The economic analysis aims at identifying those factors that have a bearing on risks at short- to medium-term horizons. It includes, inter alia, projections of key macroeconomic variables and an analysis of shocks hitting the euro area economy. In turn, the monetary analysis – which has been broadened and deepened over time – draws on a wide range of tools, techniques, models and frameworks, complemented by the use of informed judgment, in order to identify risks at longer horizons. After the evaluation of the strategy in 2003, the Governing Council of the ECB explained that the monetary analysis mainly serves as a means of cross-checking the short to medium-term indications coming from the economic analysis. When compared to the strategy of inflation targeting, the Eurosystem’s Monetary Policy Strategy shares the essentials: that is, the importance of price stability and the need for monetary policy to act pre-emptively and make comprehensive use of all available information. The strong belief that institutional independence must necessarily be supplemented by high standards of accountability and transparency is also shared by both camps. This is reflected in the growing weight that central banks, in industrial countries and beyond, place on the importance of communication.

The other option, described by Kohn as the “extra action” policy, provides for a deviation of current inflation from a level determined as stable, in return for an improvement of the perspectives of achieving price stability in the future. However, the extra action policy does not mean bursting speculative bubbles by central banks. It rather means “buying” additional insurance against possible negative shocks, which may happen in the future. In Kohn’s opinion, the extra action policy may be run very rarely and only where the three conditions are met: • the central bank must be able to identify bubbles on the asset market in a timely manner and with high certainty as to the correctness of conclusions from the analysis, • the probability that a slight tightening of monetary policy will be able to stand against the speculative activity on a given asset market must be high, • the expected improvement of the future economic situation resulting from a smaller speculative bubble must be significant and higher than the costs incurred by the economy in the aftermath of running the additional action policy. In view of the available studies, it may be stated that it is extremely difficult to sufficiently fulfil the three abovementioned conditions. It may not be excluded, however, that in the future, the understanding of economic processes will improve as much as to enable running the additional action policy in justified cases.

That makes monitoring the economy closely, and setting policy to support it, more important than ever. At present, the largest clouds on the economic horizon in the UK come from: the effects of rising numbers of Covid cases across the UK and the accompanying policy measures taken to contain them; risks to business activity and jobs in the light of these public health developments; and the effects of moving to new trading arrangements with the EU at year-end. This unholy trinity of risks give good grounds for caution. Some degree of caution is desirable - in how we socialise, shop and work - to prevent the spread of this awful disease. But we need at the same time to prevent healthy caution morphing into fear and fatalism. Pessimism can be as contagious as the disease - and as damaging to our economic fortunes. Avoiding economic anxiety is crucial to support the on-going recovery. This has important implications for how businesses and policymakers act and communicate. The Fall and Rise of the UK Economy Let me start by running through the fortunes of the economy so far this year. The early months saw a collapse in UK economic activity unprecedented in its speed and scale – a fall in GDP of around a quarter in a matter of weeks. This recession was unique in its source as well as its speed and scale. An extreme shock to public health required extreme public health measures, restricting the flow of goods, services and people.

In conclusion, the exchange of views and experiences is an important step to develop a coherent overall sense of economic identity. With this note, I would like to thank Bilkent University once again and wish a successful conference. Thank you. 11 4 Speech by Issing, O. (2004). “EMU and Economic Governance”. BIS Review 35/2007

Norman Chan: Self-made life pension Remarks by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at the Philanthropy for Better Cities Forum, Hong Kong, 20 September 2018. * * * Distinguished guests, ladies and gentlemen 1. One of the biggest challenges in many societies in recent decades is how to ensure that the elderly have sufficient income or financial means to maintain a decent retirement life. Many governments have introduced different forms of pay-as-you-go retirement support schemes, which unfortunately have now proved to be hard to sustain fiscally in the longer run if the population is ageing rapidly. 2. The Hong Kong population is also ageing. While we celebrate having the longest life expectancy in the world, with women reaching 87 and men 81, this also creates tremendous challenges for retirement protection. In the context of retirement protection, I can divide the population into three groups: high income people who have accumulated significant amount of savings and (i) wealth during their working life. They have the financial means to take good care of themselves during retirement and we need not worry about them; the underprivileged, working poor or lifelong poor. This group of people depends crucially on the social safety net provided by the Government as they don’t have the ability or financial means to look after themselves. In Hong Kong, the Government (ii) support mainly takes the form of Comprehensive Social Security Assistance, highly subsidized housing, health care and education.

SPEECH DATE: 9 November 2016 SPEAKER: Martin Flodén VENUE: West Sweden Chamber of Commerce, Göteborg SVER IG ES R IK SB AN K SE-103 37 Stockholm (Brunkebergst org 11) Tel +46 8 787 00 00 Fax +46 8 21 05 31 registratorn @ riks ban k.se www.riksb ank.s e The Riksbank’s bond purchases affect government finances Prior to the financial crisis of 2008, the Riksbank could make profits without taking any actual risks. The assets on our balance sheet mainly consisted of foreign debt securities while the main liability items were outstanding banknotes and coins and our equity. The assets generated a reliable return, although their value fluctuated with foreign exchange rates, while the liabilities were interest-free. The Riksbank could therefore easily fund the bank’s operations as well as distribute a surplus to the government. But the current picture of the Riksbank’s financial position and risks is entirely different, something that, in part, can be illustrated by how the balance sheet has grown and changed in nature (see Chart 1). One important change is that the decline in the use of cash and the low interest rates have impaired our earning capacity, something which my colleague Kerstin af Jochnick has previously highlighted. 1 Another important change is that the Riksbank has purchased large volumes of Swedish government bonds since the beginning of 2015. These purchases have increased the risks on our balance sheet and made our profits and dividends more sensitive to interest rate changes.

When the reallocation mechanism is working, the transfer of capital and labour from the less productive to the more productive pulls up the level of productivity in the economy and reduces the divergence between firms. The high degree of divergence between firms at present implies that this reallocation mechanism is working significantly less powerfully now than before the crisis. This can also be seen in the proportion of loss-making firms which stands at around 20% higher than its long-run average. 2 Company liquidations also remain low. So there is still more than a hint of ‘zombiness’ in the corporate sector. 2 4 Changes in 2002 to the HMRC’s preferred creditor status means that the proportion of loss-making firms might not return to its long-run average. BIS central bankers’ speeches The damage to the banking system has certainly played a large part in this. A wellfunctioning banking system is a key part of the reallocation mechanism. It allocates capital efficiently to its most productive use and matches risk to reward. A badly damaged one, recovering slowly from a period on life support does not play that role well. And the exceptional stance of monetary policy that has been necessary to cushion the fall of the economy and to provide the platform for recovery may also be part of the story here by reducing the pressure on poorly-performing firms. As an aside, I want to make a brief comment in the context of the other part of my job: financial stability.

Specific examples are the action plan on critical raw materials - aimed at reducing the EU's external dependence in the sourcing of such goods -, the "RePowerEU" initiative - aimed at reducing the EU's energy dependence -, and plans to drive the digitalisation of European economies. A second set of measures aims to protect EU countries from possible abusive practices adopted by third economies - practices that may be related to strategic or political objectives. These measures include those aimed at monitoring foreign direct investment flows from third countries and other measures designed to limit coercive actions against European companies. A third class of measures aims to preserve the international level playing field by compensating for competitive disadvantages that EU companies might face due to less stringent environmental and state aid policies implemented by third countries. Examples are the regulation on foreign subsidies that distort the internal market and the Carbon Border Adjustment Mechanism (CBAM). 5 Other countries have started to include geopolitical considerations in their economic policy decisions as well. Foremost among these is the recent move by the US to restrict exports of semiconductors and advanced chip-making manufacturing equipment to China, and the adoption of the Inflation Reduction Act, which provides tax credits to clean energy and electric car producers conditional on assembly and production in North America.

Dimitar Radev: The Bulgarian banking sector in 2020 – how have we coped and what is forthcoming Publication by Mr Dimitar Radev, Governor of the Bulgarian National Bank, in the Bulletin of the Association of Banks in Bulgaria, issue 64, December 2020. * * * Dear Colleagues, We are approaching the Banker’s Day in a year of unprecedented challenges: first, in relation to the consequences of the COVID-19 pandemic; andsecond, with the completion of the strategic project of the entry of the Bulgarian Lev into the European Exchange Rate Mechanism (ERM II), simultaneously with the accession of our country to the European Banking Union, including to the Single Supervisory Mechanism and the Single Resolution Mechanism. From the banking sector’s perspective, there are two key questions: how we have coped to date, and what is forthcoming? Our goal, defined as early as the start of the crisis, was for the banking sector to generate solutions, rather than problems. As a result of our effort in the recent years, we were well positioned for the attainment of this goal. The banking sector ‘entered’ into the crisis with a Common Equity Tier 1 capital adequacy of over 19%, and with a liquidity coverage ratio of over 260%, i.e. times above the regulatory requirements. Regardless of the good starting position, we were aware that, because of the abrupt deterioration of the environment in which banks operated, there should be new measures for further strengthening of their capital and liquidity positions.

We trained them to deliver talks to the migrants in their native language on various aspects of using formal remittance channels. This helped not only to address communication barriers, but also encouraged confidence as the migrant workers could better connect and identify with the ambassadors. In our education efforts, bringing our programs to the locations where the migrant community live, work and congregate also had a significantly positive impact on narrowing a perceived power distance between formal MSB providers and workers. It also had the effect of creating a positive impression on the quality of services offered by MSB providers. This was also true for SMEs, with a positive effect observed between higher levels of proactive engagements with SMEs and businesses’ perception of MSBs. 2/4 BIS central bankers' speeches In short, there are many factors that influence an individual or business decision to use MSB services, beyond cost and access considerations. The combined impact of even simple actions taken to address all factors is significantly amplified. Third, while greater transparency and competition have played a key role in driving down remittance costs, an excessive focus on price competition on the part of MSB companies would be misplaced. Our work under this project, including field studies that were conducted, affirmed that users of remittance services basically want safe, easy and fast, and affordable services. For some customers, safety, speed and convenience are often as, if not more, important than cost, with customers willing to pay a reasonable price for these benefits.

The aims of transparency are to allow better informed decisions in both public and private sectors, to reduce the risk of contagion by allowing markets to differentiate among borrowers and to encourage macroeconomic policy to become more predictable. Transparency is not simply a question of making available certain data. It is an approach to economic policy, almost a way of life. The G22 Report of the Working Group on Transparency and Accountability (which I was privileged to co-chair with Andrew Sheng of the Hong Kong Monetary Authority) was published in October 1998. Its recommendations were endorsed in full by the G7. It stressed the importance of transparency in three different sectors: national governments, the private sector and the international financial institutions. Good progress has been made in implementing many of its recommendations. Rather than give an exhaustive account of progress in transparency, let me give a few examples. In March of this year, the IMF’s Special Data Dissemination Standard was strengthened by the inclusion of a template covering the disclosure of net foreign exchange reserves and short-term foreign currency liabilities of central government. These data are required to be published monthly with a lag of no more than one month, and the transitional period for observing the standard runs to the end of March 2000. Agreement is very close on a Code of Monetary Policy Transparency to match the earlier Code on Fiscal Policy Transparency. BIS data on international banking statistics will be produced quarterly from next spring and the lag in publication shortened.

But the Committee updates its inflation forecast on a regular basis and so the forecast can be adjusted and revised as the Committee learns about the responsiveness of productivity to a pickup in demand. 7 Indeed, Ben drew attention to this relationship, and why it is not likely to hold in the current environment, in a speech last month (Broadbent 2013). 6 BIS central bankers’ speeches policy to the level of unemployment makes that clear. Its levels not growth rates that matter. Likewise, those expecting to see the close synchronisation between UK and US policy rates that held during much of the Great Moderation to reassert itself as rates begin to normalise need to remind themselves about the differences in the extent of the recoveries in the two countries to date. The US economy has been growing for almost 4 years; the UK for barely 6 months. The level of US GDP is 5% above its pre-crisis level; UK GDP is 3% below. Its levels not growth rates that matter. I don’t know how quickly Bank Rate will begin to rise. That will depend critically on the extent to which productivity recovers as demand increases. But the MPC’s forward guidance makes clear that, after the worst recession in post-war history and the weakest recovery on record, this time is likely to be different. Its levels not growth rates that matter. Conclusion The financial crisis and its aftermath provided a tough examination of the UK’s inflation targeting regime.

Indeed, a noteworthy addition to the MPC’s remit when it was renewed by the Chancellor earlier this year was a request that “… the Committee should promote understanding of the trade-offs in setting monetary policy to meet a forward-looking inflation target while giving due considerations to output volatility.” The forward guidance announced by the Committee clarifies its view of the appropriate trade-off. The primacy of the inflation target makes clear that the long-run objective for monetary policy hasn’t changed, and the inflation forecast knockout provides information about the minimum speed at which the Committee judges it acceptable to bring inflation back to target. At the same time, the unemployment threshold provides guidance about what the MPC is trying to achieve in terms of real activity as the economy gradually normalises. Moreover, by making clear its view of the desired trade-off, the MPC helps to make our monetary policy more predictable. This enables financial markets, companies and families alike to make more informed decisions and so improve the effectiveness of policy. Let me summarise where we have got to so far. The inflation target served us well during the financial crisis. Straight A’s for preserving credibility and for anchoring inflation expectations. But the aftermath of the crisis has posed particular challenges of communication and accountability that, on its own, an inflation target is ill equipped to address. The MPC’s forward guidance is designed to help us to meet those challenges head on.

Importantly, the exercise required firms to understand how their real economy customers were both exposed to these risks and the actions they would take to manage them. This was one of the most challenging aspects of the work – as it revealed gaps in real economy firms' understanding of what climate transition means for them. A gap I will return to. The CBES also showed that costs were lowest, and opportunities greatest, with an early and well managed transition. That underlines that while governments set public climate policy, banks and insurers have a collective interest in managing climate-related financial risks in a way that supports that transition over time. Managing climate related financial risks Second, interactions with banks and insurers had revealed them to be in the early stages of developing their climate risk management capabilities. To address this, we set the world's first supervisory expectations for climate risks in 2019 – expectations that became part of the PRA's core supervisory processes last year. 2/7 BIS - Central bankers' speeches Our reviews and observations – including the CBES – have shown significant progress. However, a distance remains to the end-point and all firms need to invest to make further progress. We have given firms a huge amount of homework to do, as set out in our latest Dear CEOOpens in a new window letter and in direct supervisory feedback. I can assure you we will be marking that homework.

And for the Bank of England, it is to work within its objectives to ensure the financial system is resilient to the risks from climate change and supportive of the transition to net zero. With that in mind, today I wanted to reflect on a speech I delivered in 2020 on how to move beyond rhetoric to make climate action a reality. I had split our journey into three phases. Firstly, recognising and identifying the financial risks climate changes poses. Secondly, building capabilities to enable us to turn aspiration into action. And thirdly, making business decisions to advance the transition. With almost three years passed, I want now to evaluate our progress, identify the barriers we have encountered, and consider what else is needed if we are to progress. Back in 2020, I suggested that we had probably achieved the first phase of our journey to net zero. Conversations with leaders in the financial sector made it increasingly clear that climate change is central to the future of their businesses, not just the confines of Corporate Social Responsibility departments. I suggested we had entered the difficult second phase of turning aspiration into action, across the financial sector and the real economy. This phase involves a lot of hard work: the collection of data and the building of new tools that better enable climate considerations to be embedded in strategy and risk management.

John Galbraith, for instance, has carefully documented the role of debt and leverage in crises going back to the 17th century. 6 More recently, the President’s Working Group on Financial Markets concluded in 1999 that, “The principal policy issue arising out of the events surrounding the near collapse of Long-Term Capital Management is how to constrain excessive leverage.” 7 3. Is there a need for better regulation? Assuming there is agreement that excessive leverage has been a major factor in past crises, what ought to be done about it? An obvious response is to limit leverage. But is it really that obvious? After all, some people would argue that regulation is at least partly to blame for past crises. Before I go any further, I want to clarify where I stand in the debate on regulation vs. free markets – my ideological baggage, so to speak. I believe that free markets are the best available mechanism to allocate resources and that they are ultimately the best way to promote welfare and economic growth. Fundamentally, I am therefore wary of elaborate efforts to interfere with the functioning of free, competitive markets. At the same time, it is obvious to me that, under certain conditions, free markets produce inefficient outcomes. If these market failures are apparent and important enough, they justify and indeed require interference in the market mechanism.

Is Germany imposing its conditions on the rest of Europe? The ECB has a range of tools to ensure price stability and the proper functioning of the market. It can remedy market disruptions. It has done so several times in recent years to avoid a “credit crunch” by greatly increasing its provision of liquidity to the banking system and by lengthening the maturity of refinancing operations. Still within our mandate, we are able to take quite significant non-standard measures and we have done this on several occasions. The mandate of the ECB is also to ensure the solidity of the euro. But the ECB cannot replace governments, nor spare them from making the necessary efforts to control their debt and restore the competitiveness of their economy. The credibility of BIS central bankers’ speeches 1 governments cannot rest on the central bank. And yet, the former must demonstrate their determination to improve their fiscal position. But under Germany’s pressure, the ECB is not using all the instruments at its disposal. How is this justifiable when huge efforts are required of Spain and Italy? The ECB is being unfairly accused. No central bank in the world – neither the Fed nor the Bank of England – directly funds governments or purchases sovereign debt on the primary market to finance their deficits. However, it is possible on the secondary market. We have done so in the past. There are no differences of opinion between the French, the Germans and the European Commission.

One example is our work with the Hong Kong Association of Banks in carrying out a comprehensive review of credit card practices in Hong Kong, drawing on reforms undertaken in the UK and US. As a result, we have been rolling out in stages 31 measures aimed at promoting fair and responsible business practices by credit card issuers, and all these will become effective by 2013. A second example is our partnership with the Financial Services and the Treasury Bureau and the Securities and Futures Commission to establish the Financial Dispute Resolution Centre. The objective is to help consumers settle monetary disputes quickly by means of mediation and arbitration. The Centre came into operation in June this year. 2 BIS central bankers’ speeches The HKMA & consumer education On consumer education the HKMA has also been very active. From time to time, we publish articles, called “insight articles”, to increase consumers’ awareness of their rights and obligations in relation to particular consumer products like accumulators, Octopus cards and instalment payment plans. We also highlight key features and risks of certain investment products, and remind consumers not to invest if they do not understand a product. We have launched earlier this week a “Consumer Corner” on the HKMA website to provide important information on local banking consumer issues, including a set of “frequently asked questions” based on public enquiries and topical issues. As with protection, so with education, we are also working with our partners.

This is a great strength for the industry and highly beneficial to both banks and consumers. However, we should also acknowledge that it can expose some customers to higher risks arising from investment in complex financial products. I have in mind especially consumers who may be less sophisticated but who may nonetheless have a high level of trust in banks. In that sense, it was not surprising that following the financial crisis, there was greater demand by consumers and consumer groups to better understand the risks of investment products offered by banks. This demand has been amplified by a number of other trends, namely: the greater complexity of financial products; the rapid pace of change in financial standards and regulations; the rising number of high net worth individuals in Asia-Pacific actively looking for investment opportunities; and the recognition that regulation alone is insufficient to protect consumers. Financial education has thus become an important complement to market conduct and prudential regulation. Raising the financial competencies of individuals has become a long-term policy priority for the financial industry. This is particularly crucial in Hong Kong where, as you know, we have a regulatory framework based on disclosure and complementary customer suitability assessments. In that context, it is especially important that consumers understand a product’s features and risks thoroughly when considering their investments. They have to decide whether or not an investment suits their objectives, and whether they have the ability to assume the associated risks.

Page 9 Chart 6: Indicators of pay growth are elevated Sources: HMRC, ONS and Bank calculations A tight labour market is accompanied by resilience in business confidence. In line with evidence from the Bank’s Decision Maker Panel survey, this may reflect business-to-business pricing power within supply chains still suffering from supply disruptions. After all, within a single supply chain, one firm’s sourcing problem is another firm’s resilient demand. Supporting this view, the Banks’ Agents report that a further strengthening of margins is likely, especially in firms that are not directly facing consumer demand. Page 10 Chart 7: PMIs suggest business confidence is resilient(a) Sources: S&P Global/CIPS. (a) A reading of above 50 indicates positive change on the previous month while a reading below 50 indicates negative change. Data for April 2022 are flash estimates. Chart 8: Banks’ Agents report further strengthening in margins is likely (a) Question: ‘To what extent have you already passed through higher costs to prices?’ The influence of monetary policy On the back of this assessment, the current momentum in UK headline inflation developments is Page 11 substantial. But, given lags in the transmission of monetary policy to price developments, high inflation today does not, of itself, justify tighter policy today. Rather monetary policy has to be forward looking, calibrating the policy stance to be appropriate at a horizon of 18 months to two years, once the transmission lags unwind. And that is where the MPC’s May forecast gets more complicated.

If we were to see commodity prices rise further, would this lead to stronger second round effects in domestic wage and price setting behaviour? Or would the real income squeeze implied by higher energy prices lead some of those that left the labour force during the pandemic to seek jobs, easing cost pressures stemming from the tightness in the labour market? The scenarios published by the MPC thus far reveal the impact of changing one of the conditioning assumptions for its baseline forecast, while holding the other assumptions unchanged. Such exercises can provide insight into the marginal impact of changes in the assumptions on the inflation outlook. But they don’t reveal the overall impact that incorporates the joint interaction among the conditioning assumptions. In interpreting the implications of the MPC’s published forecast and scenarios for the monetary policy outlook, this limitation of the published scenarios needs to be kept in mind. The conjuncture To sum up, the MPC’s current forecast embodies a tension between two elements. On the one hand, headline inflation is clearly too high, the UK labour market is tight, wages are growing at stronger rates than would normally be deemed consistent with the inflation target, and business confidence is resilient, in part in anticipation of being able to re-establish profit margins. In short, inflationary momentum in the UK is currently strong.

These may lead to different price developments across countries within the Monetary Union in the short run via indirect tax changes, liberalisation measures and administrative price changes. These are generally not of the same magnitude and timing across countries. Differences in growth and inflation may also occur over relatively short periods due to the occurrence of “asymmetric shocks” or differences in the responses to common shocks. A very clear example of such an asymmetric shock was German reunification. Other shocks affect countries in a more or less similar fashion - for example, recent increases in oil prices have tended to lead to higher consumer prices in all euro area countries in the past few months. Shocks may affect countries in a diverse way due to different structures of the economy, patterns of trade and/or production for example. Evidence tends to suggest, however, that the industrial specialisation of the euro area countries is not one-sided, so that there is no risk of significant asymmetric effects. Moreover, the high degree of trade between euro area countries means that country- or region-specific developments tend to have significant spillover effects within the euro area. Nevertheless, a common shock may have different consequences, depending on the precise institutional frameworks within the different countries. The possible so-called “second-round effects” of oil prices on wage and price developments may be considered to fall into this category. Short-term or cyclical differences in demand pressures - though difficult to measure with precision - are an important cause of short-term variations in price increases.

A short list of the lessons should reflect all these aspects: what we have learned or think we have learned about the causes of the crisis; about the efficiency of the institutional texture and the array of instruments at hand; and, last but not least, about the most appropriate positioning in the event of a crisis. With these criteria in mind, I will refer to nine lessons, of which seven are universally valid and two hold particularly true for emerging economies, such as Romania. In order to root out any possible confusion, I would like to point out from the very beginning what these lessons do NOT deal with. First, they do not address the issue of shorter or longer economic cycles and do not suggest that a crisis means the end of an economic cycle. Second, the lessons do not provide an answer to the question whether we could ever avoid a financial crisis. 1. Low inflation is not a sufficient condition for ensuring financial stability in the long run. Past experience appeared to have confirmed the opinion that inflation is the major source of financial instability. High inflation episodes were usually accompanied by pronounced financial instability and banking sector crises or were followed by recession after the authorities took inadequate measures to curb inflation. The current global financial crisis became manifest after nearly two decades of relatively low, stable inflation. A number of factors caused low inflation to coexist with ample liquidity.

With this, the MPR is between 150 and 200 bp below its levels considered neutral. The speed with which we have made this reduction responds to our conviction that the medium-term inflation outlook was revealing a scenario that jeopardized the fulfillment of the policy goal. All this, because of the implications that the evolution of the macro scenario, in particular weak activity, had on them. Considering the cuts already made, we believe that monetary policy is now highly expansionary and consistent with inflation at 3% over the projection horizon. Within this horizon we will see in the coming months that annual inflation will fall again, approaching 2%. We will also see months of poor activity, as shown by the latest Imacec. But the improvement in external conditions, the disappearance of specific factors that have affected activity and prices, and the monetary impulse itself, will allow the economy to regain more growth in the second half of this year and in 2018, with capacity gaps that will begin to close in the course of 2018 at the same time that inflation will converge to the policy target. This, by the way, does not mean that the MPR will not be adjusted again, but that in the most likely scenario no new changes are needed, and that the most important thing will be to let the monetary impulse permeate the economy for as long as necessary in order that, combined with the other mentioned factors, it will generate a visible convergence to the policy target.

These BIS central bankers’ speeches 1 estimations conditioned the retaining of the stimulating nature of monetary policy during the second quarter of 2012. The key rate stood at the lowest historical level, providing eased monetary conditions in order to meet our inflation target and support the Albania’s economic activity. Also, the Bank of Albania has continued to inject sufficient liquidity demanded by the banking system, against an expanded collateral base and at adequate maturity terms. According to recent data from INSTAT, the Albanian economy recorded an annual fall of 0.2% in the first quarter of 2012. Industry contracted 19.3% y-o-y, mainly due to the significant decrease in electrical energy output. Also, Construction decreased its activity in real terms, by 17.6%, thus providing a negative contribution to the performance of the gross domestic product. By contrast, Services contributed positively to the economic activity, pointing to an annual growth of 6.0%. Agricultural sector grew 4.5%, y-o-y during this period, providing a positive contribution to the growth of the gross domestic product. Estimations on the aggregate demand in the first quarter of 2012 suggest a continuing weak domestic demand. The consolidated fiscal policy determined the lack of fiscal stimulus in this period and a downturn in public sector’s demand for goods and services. Private consumption remains slow, thus reflecting the prudent consumer’s behaviour and the increasing tendency for saving. Private investments also remained low.

Peter Pang: A decade of Hong Kong Dollar settlement in the CLS system Opening remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary Authority, at the 10th anniversary celebration of Hong Kong Dollar settlement in CLS, Hong Kong, 21 October 2014. * * * David 1, distinguished guests, ladies and gentlemen, I am honoured to be here today to celebrate the 10th anniversary of the Hong Kong dollar settlement in the CLS system. Opening 2. If we were a married couple, this event would mark our Tin Anniversary, with tin symbolizing durability and pliability. It is good to note that our bonding remains robust, despite the fact that CLS has 16 other currency partners, and its desire to have more in the future. 3. According to Jane Austen, “happiness in marriage is entirely a matter of chance”. Being a monetary authority, the HKMA would not leave such an important financial infrastructure for addressing the FX settlement risk to chance. 4. The one thing that keeps our bonding with CLS strong is our common vision – to provide the solution to help market players eliminate the FX settlement risks through a highly effective and efficient settlement platform. 5. Our decision to join the CLS in 2004 was based on the simple fact that CLS provides the most powerful global solution to eliminate the FX settlement risks among market players. And CLS has delivered such a solution without a hitch in the past decade. Good times 6.

A reference to the letter appeared in Skidelsky, R. John Maynard Keynes Volume 1: Hopes Betrayed, 1883-1920, Macmillan, London, 1983, page 280. The official attendance on 13 September was 38,575; the Villa scorer was the incomparable Clem Stephenson, who may have lacked pace but whose passes were, according to contemporary observers, “as sweet as stolen kisses”; and the ‘most expensive’ right winger for Blackburn Rovers was John “Jocky” Simpson who cost Blackburn a record fee of £ when he was transferred from Falkirk in 1911. BIS Review 5/2004 1 do those prices come from? Each month - on “Index Day” (either the second or third Tuesday of the month) - around 300 “price collectors” visit a wide range of retail outlets and record the prices charged for 130,000 different items, ranging from small loaves of brown bread to large lawnmowers. Each of these different items will have changed in price by a different amount. A key difference between the CPI and RPIX is how these 130,000 price changes are averaged to give a measure of overall inflation. RPIX inflation is, for most goods, an arithmetic average of the inflation rates for each item. In contrast, CPI inflation is measured as the increase in the geometric average (the average of the logarithms) of the different prices.

The fact that, last summer, most banks came out with information on their positions in the sub-prime market only hesitantly, providing an incomplete picture, has made a significant contribution to the uncertainty in the interbank market. Consequently, we are reiterating our request that banks do a better job in making information available on their existing risks. In order to promote market discipline, it must be possible for outsiders to be able to assess a bank's resilience under both normal and stress conditions. Second, recent events highlight the limitations of risk-weighted capital adequacy requirements. The problems in risk management have made it clear that the modelling of bank risks will always remain imperfect. In interpreting capital adequacy requirements which are based on such risk models, we must therefore proceed with appropriate caution. This is particularly relevant in view of the new capital adequacy requirements that will also be introduced in Switzerland next year. The main change under these requirements, known as Basel II, is that capital adequacy requirements will rely more heavily on banks' own risk assessments. Bearing this in mind, the lesson learned last summer may well have come at the right time. This now begs the question as to whether – in addition to the complex, riskweighted capital adequacy requirements – other criteria, such as volume limits or the simple debt-equity ratio should not also be considered. The reason for this is that the higher this ratio, the greater the leverage effect of losses on the soundness of a bank.

CPI inflation still reflects the effects of the previous repo-rate increases on housing costs. Various measures of underlying inflation show that inflationary pressures are moderate (see Figure 21). As economic activity recovers, underlying inflation will gradually rise towards 2 per cent in the years ahead. Continued low repo rate will facilitate stable development Our forecast for the repo rate is that it will remain unchanged until sometime next year and that monetary policy will continue to be expansionary — the repo rate is low in an historical perspective (see Figure 22). This will contribute to a gradual normalisation of inflation. Apart from stabilising inflation, monetary policy also aims to stabilise the real economy. Stabilising the real economy means, in more concrete terms, stabilising resource utilisation, that is the deviation of production and employment from long-term levels. Resource utilisation can be measured in many ways, but our overall assessment is that it is somewhat below normal at present. An ongoing expansionary monetary policy may also help to normalise resource utilisation during the forecast period. As resource utilisation and inflationary pressures increase, the need for an expansionary monetary policy will decline. There will be a need to gradually raise the repo rate to bring inflation close to the target and to stabilise resource utilisation. As the situation is highly uncertain, however, things may develop in a different direction than we expect. We see two main risks at present.

As a result, by the first quarter of 2022, inflation in the EU was already at its highest level since the creation of the monetary union. Lastly, in this unstable scenario in which supply and demand had yet to adjust, the outbreak of war in Ukraine fuelled further instability in the inflation outlook and hindered the economic recovery that was starting to take hold in early 2022. Europe is particularly exposed to the economic repercussions of the Russian invasion of Ukraine. First, the continent has close commercial ties with Ukraine, a supplier of primary goods such as grain, sunflower oil or corn. These products are widely used in the European agriculture, farming and food industries. Second, and most importantly, Russia continues to play a major role as an exporter of energy products to Europe (mainly oil and gas), and remains of key importance for some European countries. Russia is the euro area’s main supplier of natural gas and oil: in 2019, 36% of all of the natural gas consumed in the euro area came from Russia, as did 22% of all of the oil consumed. As a result of the war, the European Union has taken measures to sanction certain activities that could be used to finance Russia and, by extension, the invasion. In turn, Russia has restricted supplies of gas to Europe, and these are hard to replace in the short term. All these elements make up a cocktail that is hard to digest.

Potential drawbacks of the new framework on a small open economy But would the introduction of the euro be only good news for the Swiss economy? We know that a revolution is always associated with risks and uncertainties, thus it should not surprise you that we were very much concerned about possible negative developments. In the mid-1990s, as the European monetary construction was under way, we tried to imagine the potential negative effects of the euro introduction on the Swiss economy. Our goal was to be prepared to face difficult situations. We had identified three main challenges: a) First, the major risk was that the new European currency would destabilize the Swiss franc. In the past, the Swiss franc, along with the German mark, played the role of a safe haven currency whenever monetary crises occurred. With the disappearance of the German currency, the Swiss franc would find itself first in line of fire in case of a dollar crisis, for example, or even worse, in case of doubts about the stability of the European currency. b) Second, we risked seeing the euro being increasingly used as a means of payment in Switzerland. As the common currency was about to become the main unit of account for our exports, we feared that domestic firms might adopt the euro as well, so as to minimize exchange rate risks. Some were even considering wages being paid in euro.

There are also other challenges, technical in nature, against the importance of economic governance, 9 such as causality problems and what is called the missing variable threats . However, in the view of our experience in the Turkish economy during the last couple of years, these counter arguments do not provide evidences strong enough to challenge the importance of good governance for economic and social prosperity. Distinguished guests, Until recently, Turkey had displayed disappointing performance in good governance principles compared to other emerging economies. In 2000, according to the World Bank’s calculations, Turkey ranked 134 among 193 countries in governance indicators. The thirty-years of high and chronic inflation, the macroeconomic instability and the subsequent crises, the delays in structural reforms, and the poor capability of institutions to deliver prudent policies and to initiate structural breakdown have all been the main determinants of this poor governance structure. 5 United Nations, Economic and Social Commission for Asia and the Pacific. “What is Good Governance” 6 Brouwer, G. (December 2003). “Macroeconomics and Governance”, Treasury Working Paper. 2003-4. 7 Australian Economic and Financial Management Initiative. “Economic Governance”. 8 AusAID, (April, 2003). “Economic Governance and the Asian Crisis”. Quality Assurance Series. 9 Avellaneda, S. D. (May 2006). “Good Governance, Institutions and Economic Development” 2 BIS Review 35/2007 However, after 2001, Turkey has launched one of the largest structural changes in its economy and put significant efforts into implementing good governance principles and searching for a new institutional matrix.

In other words, the accountability is the price that institution pays for its independence. In democracies, every independent institution or 3 organization is accountable to the public and to its institutional stakeholders . Third, the participation principle ensures that every person in the system, in one way or the other, has 4 a voice in the decision-making process . 1 AusAID, (April, 2003). “Economic Governance and the Asian Crisis”. Quality Assurance Series. 2 United Nations, Economic and Social Commission for Asia and the Pacific. “What is Good Governance” 3 Ibid. 4 AusAID, (April, 2003). “Economic Governance and the Asian Crisis”. Quality Assurance Series. BIS Review 35/2007 1 And last but not least, good governance requires a fair legal framework and impartial enforcement of this legal system that protects property and individual rights and constitutes a strong base for prudent 5 policy-making . This legal structure assigns the principle of the rule of law. Distinguished guests, The analysis of good governance brings me directly to the question of why good governance is important. The good governance provides key institutions and policies for the equitable and efficient allocation of 6 resources, both labour and capital . To put it differently, it allows an economy to yield higher growth rates by using the same amount of factors of production. The strengthened economic governance across a broad spectrum of policy, administrative and institutional issues, is now widely accepted as a key factor in rebuilding domestic and international 7 confidence in an economy .

Central bankers rightly become nervous - or at least slightly uncomfortable - if public expectations become too high or are elevated to quasi-religious dimensions. Moreover, if a central bank - for whatever reasons acquires prestige and standing that transcends the strict confines of its mandate and becomes an object of faith or mythical devotion, this may suggest that it fills a void left elsewhere. In particular this may be an indication of a lack of confidence in other - more important - institutions in society. To my mind independent central banks fulfil an important function for the benefit of society. Their job is to maintain price stability, maintain trust and confidence in the currency. Nothing more and nothing less should be asked of them. This reflects a clean division of labour and a clear allocation of responsibilities vis-à-vis other economic policy actors and, especially, vis-à-vis democratically elected governments. Stable money is too important to be overburdened with other purposes. This is especially important in the process of European integration. 7 BIS Review 96/2000 5. Faith in the European Central Bank, faith in Europe? The move to European Monetary Union is an important step in the long history of closer European integration. In particular, in the field of monetary policy the Maastricht Treaty represents a decisive act of delegation of decision-making authority or sovereignty. The Treaty entrusts the objective of price stability to an independent and supranational body, the European Central Bank.

In addition, the conducive tax regime which accords neutrality in treatment between Islamic and conventional financial products sets the stage for greater innovation to take place to support the progressive development of the Islamic financial services industry going forward. With this strengthened Islamic financial infrastructure now being firmly achieved in the first phase of the Financial Sector Masterplan, the Islamic financial services industry is poised to tap new growth opportunities and maximize the full potential of Islamic banking and finance. The entry of Commerce Tijari Bank Berhad into the Islamic financial services industry at this juncture is indeed timely. The challenge that lies ahead calls for strategic positioning to maximise the potential that a universal Islamic banking licence accords in tapping new growth areas. While Islamic retail, corporate and investment banking product offerings have grown in sophistication, financial activities such as private equity investments, real estate investments, private wealth and fund management are now rapidly gaining prominence. There is therefore a need to allocate adequate resources to build distinct capabilities in these newly emerging areas. The move into these strategic niche markets would also increase the diversity of new asset classes for Islamic investment. This would not only contribute to further enhance the effectiveness and efficiency of the financial intermediation process in the Islamic BIS Review 26/2004 1 financial system but also enhance Malaysia’s potential as an attractive international hub for Islamic finance.

The corresponding figure for the United States is just below 1 per cent, or USD 100 billion.3 Eurostat has calculated the figure for the EU as a whole at 0.7 per cent, or EUR 90 billion.4 But these figures are only the direct public costs of keeping the financial system more or less on its feet. The real social costs of the crisis are significantly higher. Financial crises lower output and the growth path. In addition, a part of the effect is permanent, even if it is difficult to say how large a part. A historical estimate of the cost of financial crises, calculated as a present value, is about 60 per cent of GDP. For the global financial crisis, this figure is considerably higher.5 The banks are playing an important role in the sovereign debt crisis The banks are also central to the problems that succeeded the global financial crisis, which is to say the sovereign debt crisis in the euro area. As I mentioned, several governments in Europe were forced to manage problems in the banking sector, often at great expense. Those countries with domestic property bubbles were hit particularly hard. But financial exposures to the United States and the other countries most affected by the crisis impacted the banking systems of several countries. These stresses led to financial problems in many European banks and countries, and, eventually, to the current sovereign debt crisis.

For 2012, the inflation rate will amount to –0.7%. For 2013, we expect inflation of –0.1% and for 2014, 0.4%. In the foreseeable future, therefore, there is no risk of inflation in Switzerland. The third quarter of 2012 saw weak growth and a decline in trading activity worldwide. Although growth in the US economy and some of the emerging economies picked up, a mild recession persisted in the euro area. In Switzerland, real GDP in the third quarter increased again following a temporary downturn. For the fourth quarter, however, we expect significant weakening in growth. Consequently, economic growth in Switzerland for the year 2012 is likely to remain unchanged at around 1.0%. For 2013, we expect growth of 1.0–1.5%. The downside risks for the Swiss economy remain considerable. Although the measures announced by the European Central Bank (ECB) have significantly reduced the probability of extreme developments in the monetary union, there is still substantial uncertainty in connection with the management of the debt crisis in the euro area. It also remains to be seen how far the upcoming budget consolidation in the US will hamper growth. This question is weighing on the sentiment in the financial markets and the real economy. Moreover, momentum in the Swiss residential mortgage and real estate markets remains strong, and has led to a further increase in risks for financial stability. Global economic outlook I would now like to outline the outlook for the global economy and Switzerland in more detail.

A central task performed by the Central Bank aimed at financial stability is the publication of the Financial Stability Report, twice a year. The banking regulation has evolved gradually and steadily, adopting proven international standards and best practices. A new General Banking Law will provide for a gradual convergence to the Basel III framework, which will raise the quality, consistency and transparency of the capital base; strengthen risk hedging; introduce leverage limits; promote a countercyclical capital framework; and introduce a global liquidity standard. These requirements will be implemented gradually through 2019. They will provide higher stability and sustainability and contribute to Chile’s reputation and access to international markets. Chile largely complies with the Principles for Financial Market Infrastructure established by the BIS. An assessment made by the World Bank and the IMF last year identified a high level of compliance with the principles on the part of the entities assessed, as well as the authorities. The main conclusion was that Chile has sound and robust financial market infrastructures, in line with international standards and best practices on risk management, the finality and irrevocability of settlement, efficiency and transparency. The Chilean financial market is, in general, deeper than those of other Latin American countries, with larger institutional investors and greater maturity. Banks' capital adequacy indicators are similar to those of other economies in the region, but lower than in OECD countries, while their exposure to credit risk is low relative to both OECD and emerging economies.

Experience in the run-up to the crisis suggests, if anything, the opposite. Paying in equity appears to have increased the probability of failure. Among US bank CEOs pre-crisis, the top five equity stakes were held by Dick Fuld (Lehman Brothers), Jimmy Cayne (Bear Stearns), Stan O’Neill (Merrill Lynch), John Mack (Morgan Stanley) and Angelo BIS central bankers’ speeches 7 Mozilo (Countrywide). This is not a random sample. 16 It also suggests the macro-economic costs of this principal/agent problem may have been non-trivial. (b) Collective action problems: the “ownerless corporation” A second stakeholder friction arises because a diffuse and dispersed set of shareholders are likely to find it difficult to corral management (Shleifer and Vishny (1986)). There is a coordination problem among shareholders. Moreover, most individual shareholders tend to have modest amounts of skin in the game. This reduces their incentives to exercise corporate control in the first place. This shareholder collective action problem is not new. It lay at the heart of Berle and Mean’s concern about “ownerless corporations” in the 1930s. But there are good reasons for believing this problem may have become more acute since then, as the shareholder base has become more fragmented and diffuse and shareholder co-ordination more difficult (Kay (2012)). One reason is that the role of institutional investors has changed. They have tended historically to play an important stewardship role. But this role has waned. As recently as 1990, pension funds and insurance companies held more than half of UK equities.

Expectations concerning future inflation and economic stability have considerable impact, not least in the foreign exchange market. In the long term, output and employment are determined by the supply of labour, capital and technology and restructuring capacity. Monetary policy can contribute to smoothing fluctuations in output and employment. Norges Bank weighs stable inflation against stable output and employment. The economy grows over time. Output will in some periods lie below long-term trend growth and in others above trend. Stabilising output growth means seeking to maintain actual output near trend. The output gap is a measure of the difference between the actual level of output and potential output. Developments in the output gap provide a basis for assessing cyclical developments and can thus also shed light on domestic price and cost pressures in the economy. It is difficult to know how high capacity utilisation is at any given time. Output and employment figures are often revised and do not therefore always present an accurate picture of the current economic situation. Norges Bank therefore also uses a number of other indicators to gauge the temperature of the Norwegian economy. The period of high capacity utilisation that began in 1997 came to an end in winter 2003. The Norwegian economy was hit by a pronounced downturn in the global economy. An economic turnaround has now occurred in Norway, with a soft landing after the long period of high domestic cost inflation and sluggish external activity. Output is showing a marked increase, but inflation is low.

The region is very export-oriented. The county of Sogn og Fjordane is Norway’s second largest in terms of exports per inhabitant, while Møre og Romsdal ranks third. After declining in recent years, exports have now picked up in both counties. Møreforskning in Molde relays information regularly from our contact enterprises in Sogn og Fjordane and Møre og Romsdal. In September, these enterprises reported a rise in demand and output in all industries, with the exception of the fishing and fish processing industries. Output in the construction industry, retail trade and manufacturing output focused on the construction industry have also picked up. The public sector reports considerable investment needs, for example in connection with health sector projects. This snapshot report on the current situation in this part of the country and similar reports from the other regions provide information that is important to interest-rate setting. Employment has shown only a moderate increase since last summer, even though output growth has been high. The labour market has thus improved somewhat. The number of persons employed in Norway began to increase in summer 2003 and unemployment stabilised. Adjusted for seasonal variations, LFS unemployment stood at 4.5 per cent of the labour force in July. The most recent figures from the Directorate of Labour show that in September unemployment rose in the health care sector but declined in manufacturing, construction and science professions. Unemployment has fallen in most regions.

Mr Duisenberg reports on monetary policy in the euro area Speech by the President of the European Central Bank, Dr Willem F Duisenberg, at the New Year’s reception organised by the Deutsche Börse, at the Chamber of Commerce and Industry, Frankfurt/Main, on 25/1/99. Thank you for the invitation to speak at this New Year’s reception. 1999 is a special year: the year in which the euro was launched, and the year in which it will have to become a stable currency. This is the challenge which lies ahead. The introduction of the euro was a very happy event for all involved. The euro is present on all major financial markets around the globe. Currency trading in euro has commenced and for three weeks now shares have been denominated in euro on most European stock exchanges. Although not yet embodied in the physical form of new banknotes and coins, there is no doubt that the new currency is set to play an important role, both in the euro area and beyond. The euro is a symbol of the achievements of Europeans in the pursuit of common goals. It is unprecedented in European history. After years of intensive preparations and successful efforts towards convergence, the single monetary policy for the entire euro area is being determined by the European Central Bank (ECB).

The choice of M3 as an aggregate is supported by empirical evidence regarding the long-run stability and leading indicator properties of this aggregate. Moreover, conceptual arguments pointed to the considerable importance of including in the monetary aggregate those assets which have a high degree of substitutability with narrower definitions of money. Therefore, in addition to currency in circulation and deposits, repos, units or shares of money market funds and money market paper as well as short-term debt securities, all of which are close substitutes for more traditional bank deposits, have also been included in this definition. The first reference value for M3 growth has been set at an annual rate of 4½%. This reference value is consistent with the maintenance of price stability over the medium term, while allowing for sustainable output growth and the trend decline in the velocity of circulation of M3. In setting the reference value for monetary growth, the Governing Council has taken account of various factors and emphasised its medium-term orientation. First, the Governing Council is committed to maintaining price stability according to the definition enshrined in the Treaty on European Union. This requires increases in the HICP for the euro area of “below 2%”. Second, the Governing Council takes the view that a figure in the range of 2% to 2½% per annum for the trend growth in real GDP in the euro area appears to be reasonable.

Further, in the last few years Spanish institutions have shown notable skill in managing operating costs, becoming some of the most efficient players in the world. In the current circumstances, progress along these lines is even more necessary. Third, and very importantly, some of the international markets on which Spanish institutions have raised financing in recent years have narrowed substantially. In this respect, the lack of discrimination seen in the last few months is surprising, as the markets have similarly penalised products whose features, in terms of level of complexity and risk, are substantially different. This is the case, for example, of Spanish securitisations which, on account of their simplicity, the high quality of the securitised collateral and the low level of bad debts recorded, bear no relation to the more complex structured products used by banks in other countries. A particularly striking case is mortgage covered bonds, whose credit quality is very high and easily measurable. This quality resides in their legal characteristics, since they are backed by the whole of the issuer's mortgage portfolio and their minimum level of overcollateralisation is 25%. However, financial market participants have not taken these arguments into consideration. In fact, banks have to keep explaining to the market the differences in their issues. An effective way of doing so is to start issuing medium-term securities again. And, as mentioned above, congratulations are in order because this is the path successfully taken by some banks in recent months.

Miguel Fernández Ordóñez: Turbulence in the world markets – a Spanish view (five lessons and some homework) Address by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, at the “Círculo Financiero”, Barcelona, 14 May 2008. * * * Let me begin by thanking you for the invitation to deliver this speech. I shall not be going into details today on either the sequence of events that have triggered the turbulence in international financial markets, or on the various suggestions for reform that may prevent a similar situation from arising in the future. We currently have several reports by various institutions addressing these matters in depth, including, for example, the most thoroughgoing report by the Financial Stability Forum. The scope of my speech this evening will be more modest: to examine the Spanish banking system in the context of this turbulence. The central idea I wish to convey is as follows. Spanish banks and savings banks have not contributed to any extent either to the generation or to the subsequent propagation of the turbulence, which in principle puts them in a sound position to withstand it. However, and as recent events have clearly reminded us, we live in an increasingly global world. Accordingly, the Spanish financial system cannot remain immune to the consequences of the current problems, which affect not only those who originated them but all of us.

The personal computer, for example, is a great tool that enhances the productivity of people with lots of education, while it may actually be a substitute for unskilled labor. In addition to its effect on earnings, higher education improves one’s quality of life by improving other outcomes, like health. Even when the large net benefit of college attendance is accurately perceived, there are significant financial constraints on many families’ ability to finance a college education. After all, the costs of college are concentrated in a few years at the very beginning of a career, while the benefits are spread out over a long period that comes later. Borrowing is a natural solution to problems like these, but there is limited enforceability of uncollateralized debt BIS central bankers’ speeches 1 contracts and the private sector may be willing to provide less than the optimal amount to support good educational outcomes. In this environment, even optimal private debt contracts will not account for the second important part of the benefit of higher education: that which accrues to society as whole. Better-educated workers are higher paid and so pay more taxes, and they have a lower incidence of dependency on programs like unemployment compensation and welfare. There are positive spillovers from educated workers to others, raising aggregate productivity. Better-educated workers produce more innovation and are more civically engaged. In a democracy we are all better off when our fellow citizens understand the issues facing the country. Overall, a more skilled workforce is beneficial to us all.

This conclusion has been reinforced in the recent publication of the Senior Supervisors Group (SSG) in which the PRA participates (Senior Supervisors Group (2015)). The SSG has concluded that “key supervisory concerns centre on whether the risks associated with algorithmic trading have outpaced control improvements. The extent to which algorithmic trading activity, including HFT, is adequately captured in banks’ risk management frameworks, and whether standard risk management tools are effective for monitoring the risks associated with this activity, are areas of inquiry that all supervisors need to explore”. As supervisors of almost all of the world’s major trading banks – through their operations in London – we can provide some helpful assessment of these events. We have observed that the balance between aggregate buy and sell orders submitted to banks’ electronic trading systems can shift instantaneously, and sometimes violently, upon this type of occurrence. 4 BIS central bankers’ speeches The impact is often exacerbated by the simultaneous reduction in order book depth on organised multilateral electronic trading venues. The electronic trading contribution was more evident on 15 January, as a foreign currency market event than the 15 October (a bond market event), reflecting the different patterns of trading in these markets. On the 15 January, the ability of banks’ e-trading systems to hedge positions consistently through automatic risk management broke down as the necessary reference prices became discontinuous and unreliable.

Norway was close to being placed under IMF administration. In fact, it was not possible to steer the economy towards permanent prosperity. The old doctrines collapsed.6 New ideas for managing the economy took shape because the old system no longer functioned. Underlying the new truths was the notion that economic policy needed to operate through the proper market incentives and that economic policy must be sustainable and predictable. At the Ministry of Finance, the new ideas took hold primarily because a younger generation was taking over, just as when Nissen was pushed aside. Political micro-management lost considerable traction. Through the 1990s and up to the mid-2000s, economic growth was high and both inflation and unemployment low in much of the world. Cyclical fluctuations were moderate. The new truths appeared to be working well. This period is known as the Great Moderation. But underneath the positive developments, imbalances were building up both within and across countries. As we have all experienced, it is easy to ignore the bill as long as the food keeps coming and the conversation keeps flowing. Countries and governments can live with deficits for a while, but sooner or later the bill has to be paid. 5 Einar Lie provides a detailed account of the break between classical and the new, more Keynesian thinking at the Ministry of Finance in the book Norsk økonomisk politikk etter 1905 [Norwegian economic policy after 1905], Pax forlag, 2012.

4 See the box ”Uncertainty regarding future interest rate movements”, in Inflation Report 2006:1. 4 BIS Review 33/2006 In the second method, the uncertainty interval is instead calculated with the aid of the market’s pricing of interest rate options. The current prices of interest rate options reflect expectations of future interest rates. This method is therefore forward-looking and based on the fact that the redemption price for identical options can vary. This variation reflects the market’s assessment of the uncertainty in the future price of the asset on which the option is based. Since this variation can be observed, it is possible to construct an uncertainty interval around the implied forward rate curve. These uncertainty intervals are largely similar to the uncertainty intervals based on historical deviations (see Figure 5). To summarise, the strategy for monetary policy is being maintained with the new interest rate assumption. We normally try to attain the inflation target within a two-year period and we take the real economy into consideration. However, monetary policy cannot as before be described by the simple rule of thumb that was based on the assumption of a constant repo rate. Instead the forecasts that are based on the assumption that the repo rate will follow implied forward rates are studied and assessed. It is the whole path of inflation and the real economy that is important in monetary policy decisions.

The IFRS Foundation plans to set up by the end of this year an International Sustainability Standards Board (ISSB) as a global standard setter. An IFRS work group is already developing a prototype climate reporting standard. The IFRS work group’s recommendations on the prototype will be reviewed by a technical expert group co-chaired by MAS and the US Securities and Exchange Commission, under IOSCO’s Sustainable Finance Taskforce. The expert group will assess if the prototype could be a basis for developing the ISSB’s standards. MAS and SGX will set out roadmaps for mandatory climate-related financial disclosures by financial institutions and listed entities respectively. The roadmap will take a phased approach. A more ambitious timeline can be considered for listed entities that are larger or more exposed to climate risks. Larger financial institutions can similarly be prioritised. These details will be worked out in consultation with the industry in the coming months. SGX will soon consult the industry on making climate-related reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). SGX already subjects listed entities to annual sustainability reporting on a “comply or explain” basis, but without specifying any particular framework for them to follow. The TCFD recommendations provide a good baseline disclosure framework. They have gained broad acceptance internationally and will be the basis for future ISSB climate reporting standards. MAS will consult the industry later this year on mandatory climate-related disclosures by financial institutions.

Although the market itself can manage most of the conflicts of interest, it may take some time before a common practice is established. Experience also shows that good practice and good ethics can be eroded rather quickly in certain market situations. This is where the supervisory authority can help to develop and maintain confidence 4 BIS Review 47/2004

Muhammad bin Ibrahim: The “Islamic Finance Country Report for Malaysia 2015” Keynote address by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia (Bank Negara Malaysia), at the launch of the “Islamic Finance Country Report for Malaysia 2015”, Kuala Lumpur, 30 June 2015. * * * Thank you for the invitation today to officiate the launch of the “Islamic Finance Country Report for Malaysia 2015” published by IRTI, the research and training arm of the Islamic Development Bank. This country report is the fifth in its series and features Malaysia’s ongoing initiatives and prospects in transforming into a high income economy and the contribution of Islamic finance in this endeavour. Islamic finance in Malaysia has undergone three decades of progress and its current state of development is the reflection of the collaborative effort between the industry and the government. While Malaysia has achieved a number of successes, a lot needs to be done still. Islamic finance needs to advance from domestic-centric growth and expand beyond our borders. The next phase of achievement would very likely hinges on our ability to collaborate successfully with others and harness our capabilities to ensure that Islamic finance will progress and expand transactional activities across borders to remain competitive and dynamic.

These indications show that businesses are seeing the economic and business merit of Shariah-compliant products and services and that its appeal extend beyond the traditional captive market. However, growth of the magnitude that Islamic finance experienced over the last decade would increasingly become more difficult if the industry does not continue to be nimble and agile in its approach. Innovation is therefore a key priority for Islamic finance players to keep expanding and gain market share. As indicated by the results of the retail consumer banking and insurance survey in the country report, the demand for Islamic banking by survey respondents far exceeds that for its conventional counterpart. This should be an encouragement for Islamic banks to boost its innovativeness in meeting customers’ needs. The Islamic Financial Services Act 2013 is already paving the way for the development of Islamic banking solutions that are differentiated from conventional products by allowing funds to be mobilised either through deposits or investment accounts. This classification brings greater options for the BIS central bankers’ speeches 1 public and reflects an enhanced risk-sharing approach to Islamic banking. It also gives the industry additional options to create creative solutions for its customers. Greater engagement and collaboration between industry and academia would also ensure mutually-reinforcing efforts in driving innovation through the development and implementation of new research findings and breakthroughs.

In principle, households and companies could be granted access to digital central bank money via both a token-based and an account-based system. Broad access to digital central bank money would call the existing two-tier banking system into question. Instead of being the banker to the banks, as it is today, the SNB would act like a commercial bank, taking on the role that is currently played by the private sector. Moreover, broad access to digital central bank money could pose a threat to financial stability. Switching over from bank deposits to digital central bank money is easier than changing to physical banknotes. In a crisis situation, this could increase the risk of a bank run. Thus, overall, the implementation of this proposal would have far-reaching consequences not just for banks, but also for the entire financial system. These fundamental concerns would argue against opening up access to digital central bank money to all households and companies. Furthermore, cashless payments in Switzerland are already reliable, secure and efficient and the system is continuously being updated and refined. So from that standpoint, too, access to digital central bank money for all households and companies, whether in the form of Swiss franc tokens or sight deposits, would bring virtually no advantages. Now let’s turn to the second potential area of application for state-issued digital tokens: digital token money exclusively for financial market participants.

For our guidance to be reliable, we need to be as clear, credible and consistent as possible. We cannot be clear like a train timetable but more like how a captain sets a course and adapts to the wind and the waves. So our sequence of steps for policy normalisation is very predictable: First, we halved our net asset purchases to 15 billion this month and will very probably end them in December; 1/4 BIS central bankers' speeches Second, we set down a guide post with our long-dated forward guidance: we will maintain interest rates at current levels until at least through the summer of 2019; And third, we will retain our stock of assets for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. Let me insist on this: the end of the net asset purchases will not be the end of our monetary stimulus, far from it. Moreover, this sequence doesn’t depend on the fiscal uncertainties that can appear in member states. The Governing Council is clear about the fact that there is no fiscal dominance in the euro area and no influence of any national fiscal policy on our common monetary policy. In addition, our past consistency forges our credibility for the future. Since March 2016, we took decisions on the evolution of our net asset purchases at intervals of approximately 9 months.

In the slightly longer term, questions also remain about the outlook for global trade at large, a factor that has a substantial impact on an export-dependent country such as Sweden. According to some analysts, the development of global trade is now weaker than implied by historical links with global growth.10 If this is the case, is it because companies have less access to trade credits in the wake of the financial crisis or because there has been a structural shift in the growth curve for global trade? It is perhaps not reasonable to expect the high rates of growth that we saw in the early 2000s – and which were boosted by globalisation in the wake of technological development, lower transports costs, increased specialisation, China joining the WTO and so on – to continue. It is also important to monitor how Swedish exports develop in relation to global trade. These are complex questions that it is probably too soon to answer. However, there is every reason to return to these questions too, particularly with regard to the potential consequences for Sweden. All in all, the Riksbank’s assessment from the September Monetary Policy Update is nevertheless that 10 See, for example, the World Trade Organization (2013) BIS central bankers’ speeches 9 economic activity abroad will, if only gradually, make a positive contribution to Swedish growth. Figure 7 What can we expect of world trade?

Sveriges Riksbank (2012), “Long-run developments in the Swedish labour market” article in Monetary Policy Report, July 2012. Sveriges Riksbank (2013),”Financial imbalances in the monetary policy assessment” article in Monetary Policy Report, July 2013. The World Trade Organization (2013) “World Trade 2012, Prospects for 2013” Press release April 10, 2013. Williams, J.C. (2013), “A Defense of Moderation in Monetary Policy” Working Paper 2013:15, Federal Reserve Bank of San Francisco. Woodford, M. (2012), “Inflation Targeting and Financial Stability” Economic Review, 2012:1, Sveriges Riksbank. 12 BIS central bankers’ speeches

By deepening our insight into a bank’s risk management, we gain a much better understanding of its strategies and controls. We learn what risks the bank believes are ahead and what measures it takes to mitigate them. We also develop a more refined sense of a bank’s sensitivity and ability to adapt to potential conditions in the future. This first trend of adopting a more “risk-focused” approach to banking supervision has a positive effect on banks as well. When we examine the quality of a bank’s risk management, we demonstrate to management the importance that we ascribe to developing and maintaining safe and sound control structures. A risk-focused approach thereby creates implicit incentives for bank management to understand and to find better ways to control its risks. What results is not just a more proactive risk management function, but also a greater commitment to sound corporate governance across the bank. 2.2 Second trend: incorporate incentives into supervision Basel II recognises this result and goes one step further by creating not just implicit but also explicit economic incentives for banks to improve the quality of their risk management. The inclusion of incentives directly in the regulatory framework represents the second important trend in supervision. The proper use of incentives can help to align a bank’s objectives more closely with public policy goals of safety and soundness.

As we review the text of Basel II to consider our next steps, it is easy to be impressed by some of its advanced techniques for quantifying the risk of loss. But the formulas in Basel II are not revolutionary. The advanced approaches to credit and operational risk contained in Basel II reflect the tremendous advances in risk management achieved among some of the most sophisticated banking organisations. Indeed, rather than inventing something new, the Committee adopted many of the sound practices that the industry had already identified. What is new in Basel II, and what matters most for supervision, is the marriage of two important trends. By building on these trends, Basel II will incorporate principles that are relevant for all supervisors. 2.1 First trend: qualitative assessments of internal controls The first trend that is captured in Basel II represents a shift in the focus of safety and soundness evaluations. In the past, supervisors emphasised the use of backward-looking evaluations of a bank’s performance to determine its financial condition. This drew our attention toward past results rather than future risks and a bank’s readiness to manage them. In contrast, today many supervisors focus more on qualitative reviews of the internal control structures that protect a bank against its specific risks. This represents a far more difficult way of evaluating a bank’s safety and soundness. It requires that we look beyond the numbers and into the bank’s internal processes.

Even if we cannot reduce the gradient of the rock faces significantly, we can make sure firms understand the nature of the path ahead so they can adequately plan and be well prepared as the demands become more complex and as investment in more specialised equipment is required. Many of the new banks authorised since 2014 seem to have underestimated the development required to become a successful, established bank. It is however in all our interests to work together to mitigate the risks that such growth might entail. A common theme with new firms that encounter problems is that they have not anticipated, and put in place steps to mitigate, the risks they face. Inadequate underwriting skills can translate into loan losses further down the line, just as poor anti-money laundering procedures can result in problems with financial crime and costly remediation programmes. It may be tempting to start up the mountain at a sprint. But those that take their time, ensure their crampons are firmly in place and plot their path for each stage of the climb are much less likely to come unstuck later. Stumbling on the path and having to re-climb a section of the mountain can be scary, frustrating and costly in equal measure. The view from the summit Of course, in climbing any mountain, the conditions play an important part in success. We need to ensure that those at the top of the mountain do not have an unfair advantage, perhaps because of access to some better weather at the top.

Climbing Mountains Safely Speech given by Sarah Breeden, Executive Director, UK Deposit Takers Supervision Building on remarks given at the PRA Annual Conference for Chairs of the Non-Systemic UK Banks and Building Societies on 6 July 2020 22 July 2020 I am grateful to Nick Lock, Will Saunt, Philip Sellar and Alex Stringer for their assistance in drafting these remarks 1 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice Introduction Today the Prudential Regulation Authority (PRA) is launching a consultation1 on a new guide for banks – a guide that is designed to help new and growing banks scale the mountain from initial authorisation to becoming an established player in the banking market. The guide builds on the steps we have already taken to lower barriers to entry for new firms, and which over the past few years have helped support real change in the UK banking system. But there is more to do. And we hope these clear expectations will promote continuing competition in the sector by allowing firms to plan a safe route higher up the mountain. As firms plot their path out of the Covid stress, we must do our best to support competition, not risk a return to the ways of the past. The start of our climb In the years following the financial crisis, consolidation rather than competition seemed to be the norm.

However, and this is a point I have made elsewhere, monetary policy is too blunt an instrument for addressing specific risks to financial stability, and it can sometimes cause collateral damage to the rest of the economy if it tries to do so. [10] An integrated policy framework could perhaps shed light on the circumstances under which monetary policy could also serve financial stability objectives, and whether there are benefits to jointly calibrating monetary policy and macroprudential policy, as well as how this calibration should be done. The BIS and IMF have both been undertaking research on these issues. Central bankers have at the same time gained considerable experience in employing an eclectic mix of policy instruments, with varying degrees of success. There is merit in bringing these practical experiences to bear in formulating an integrated policy framework. Conclusion Developing effective policy instruments and using them in a coherent fashion will enhance macroeconomic and macro-financial stability. It will help to make financial globalisation safer, especially for EMEs, at a time when there are growing risks of fragmentation in international economic relationships. Your task is therefore vital. I wish you a fruitful conference ahead. [1] IMF Balance of Payments, IMF International Financial Statistics, MAS calculations. [2] Fratzscher, M., Lo Duca, M. and Straub, R. (2013), “On the international spillovers of US quantitative easing”, ECB Working Paper No. 1557; Bhattarai, Chatterjee, and Park (2017), “Global Spillover Effects of US Uncertainty”, Fed Reserve Bank of Dallas, Working Paper No.

Volatility almost doubled in the three years post-global financial crisis compared to the three years preceding the crisis. [3] Volatility has since remained elevated. Third, large and volatile capital flows can create some serious trouble for EMEs. What flows in can flow out as easily, and such reversals can be disruptive for EME financial markets which are typically not deep enough to smoothly intermediate the flows. Capital flows can induce exchange rate fluctuations that are disconnected from macroeconomic fundamentals. There is growing empirical evidence that capital flows to EMEs have grown in importance as a driver of exchange rate movements. [4] In particular, capital flows can cause cyclical deviations to exchange rates beyond movements driven by the current account of the balance of payments. In the face of large and volatile capital flows, a freely floating exchange rate can become a shock amplifier rather than a shock absorber. [5] Capital flows can trigger financial stresses or exacerbate domestic financial vulnerabilities. Strong capital inflows risk fuelling domestic credit and asset price bubbles, heightening risks to macro-financial stability in EMEs. A recent MAS study found that a 1% appreciation of the US Dollar is associated with net capital outflows of 0.3% of GDP for EMEs in the following quarter. [6] Fourth, large and volatile capital flows are here to stay. Ageing populations and slower productivity growth in the advanced economies suggest that the natural rate of interest, r-star, is likely to remain low, making the search for yield and resultant capital flows persistent rather than episodic.

These bills were bought by the Bank and stored in its vaults, in what became known as the “cold storage” scheme.5 By freeing the banks’ balance sheets in this way, the cold storage scheme was intended to stimulate credit. It was only a limited success, with the banks still fearful about making new loans because of the rising risk of default by overseas borrowers. In response, the government announced an extension to the scheme, with the government effectively insuring the banks against the credit risk on these assets too. It worked. Within a couple of months, money market conditions had stabilised and credit was once more flowing. Cunliffe’s cold storage plan had averted a credit crisis. The cold storage scheme was a piece of clever financial engineering by the Bank, designed to support credit and the wider economy. In the past few years, with credit growth and the economy weak, the Bank has been in the vanguard of creating new pieces of machinery to serve a similar end. In 2008, the Bank introduced a Special Liquidity Scheme, or SLS, to help finance UK banks’ legacy asset portfolio. Over £ billion of support was provided to the banks and has since been repaid.6 The SLS bears more than a passing resemblance to the first phase of the cold storage scheme. In June this year, the Bank announced a second scheme, the Funding for Lending Scheme, or FLS.

The relationship between economic activity and inflation is not particularly stable either. In the difficult deliberations we had to make in September we Executive Board members reached different conclusions, with a majority voting to raise the repo rate while the minority to which I myself belonged voted to hold the interest rate unchanged. On this occasion I shall not go into the various reasons for my stance in depth; they were clear from the separate minutes of the monetary policy meeting and I discussed them in a speech I held a couple of weeks ago. 6 BIS Review 121/2008

By that metric, the contribution of equity markets to economic growth in the US, Europe and Asia has been static, at best mildly positive, during the course of this century. Yet that picture of apparent stasis in equity markets conceals a maelstrom of activity beneath the surface. To see this, Chart 2 plots stock market turnover in the US, Europe and Asia over the same period. It shows a dramatic rise, especially in the world’s most mature equity market, the United States. Equity market turnover in the US has risen nearly fourfold in the space of a decade. Put differently, at the end of the second World War, the average US share was held by the average investor for around four years. By the start of this century, that had fallen to around eight months. And by 2008, it had fallen to around two months. What explains this story? Regulation is part of it. Two important, and almost simultaneous, regulatory developments on either side of the Atlantic changed fundamentally the trading landscape: in the US, Regulation NMS (National Market System) in 2005; and in Europe, MiFID (Markets in Financial Instruments Directive) in 2004. Though different in detail, these regulatory initiatives had similar objectives: to boost competition and choice in financial market trading by attracting new entrants. Central exchanges for the trading of securities evolved from the coffee houses of Amsterdam, London, New York and Paris in the 17th century.

5/19/2020 Pandemic central banking: the monetary stance, market stabilisation and liquidity SPEECH Pandemic central banking: the monetary stance, market stabilisation and liquidity     Remarks by Philip R. Lane, Member of the Executive Board of the ECB, at the Institute for Monetary and Financial Stability Policy Webinar, 19 May 2020 19 May 2020 In my recent blog post, I described the range of scenarios that have been developed by ECB staff to support the analysis of the near-term and medium-term macroeconomic dynamics in the context of the coronavirus (COVID-19) crisis. [1],[2] I also explained the current monetary policy of the ECB and outlined our approach to setting the future course of monetary policy. My remarks today aim to reinforce these points by presenting some additional empirical evidence. Macroeconomic outlook Chart 1 shows the three scenarios developed by ECB staff that were published on 1 May. Since then, the Eurosystem staff have continued to track the incoming information (both the economic data and the public health data): the forthcoming June Eurosystem staff macroeconomic projections will provide an updated assessment of the economic outlook. Still, the 1 May scenarios provide an excellent framework for understanding the environment facing policymakers. In all scenarios, the current quarter represents the trough of the crisis, with a cumulative decline in the range of 10 to 20 percent of GDP since the start of the year.

Public savings will remain around 2% of GDP over the projection horizon, in line with compliance with the structural balance target. It is estimated that the current-account deficit will close this year at 3.7% of GDP, to stand at around 4% in 2024 and 2025. In the central scenario, Gross Fixed Capital Formation will maintain a low profile. This projection continues to incorporate a complex external scenario, with high uncertainty and still restrictive financial conditions. Survey information also shows low levels of investment for the coming quarters, and entrepreneurial expectations continue to be pessimistic, mostly so in the construction sector (table 1). The external impulse relevant to Chile will remain moderate. Although first-quarter figures exceeded expectations in some economies, such as China, several factors suggest that this will be transitory. In fact, bank credit to companies has tightened in the U.S. and the Eurozone, pointing to a weak performance of activity and investment ahead. In Latin America, the outlook remains unfavorable, as it combines deteriorating financial conditions with stress factors in several economies. In this context, fiscal spending is not expected to be a major source of external momentum, given the fiscal consolidation process and the weak global scenario. Thus, and heavily influenced by China's improved performance earlier in the year, our trading partners' projected growth for 2023 rises to 3%, up from the 2.4% estimated in March. For 2024 and 2025, there is no change, with projected increases of 2.3% and 3.0%, respectively (figure 18).

Going forward, tight external financial conditions linked to inflation control and low fiscal policy space are expected to impact the global economy negatively. In this sense, credit dynamics in the developed economies anticipate a weak performance of activity and investment. Global financial conditions remain tight, although the volatility associated with the recent banking tensions has decreased. Compared with the March Report, long-term interest rates have shown mixed movements, as they have risen in developed countries and declined in the emerging world. Currencies also performed unevenly, while stock markets have generally traded higher. Nevertheless, developments in the U.S. banking system continue to be a source of uncertainty. Market sentiment 3 remains fragile, with doubts about the extent and magnitude of the latent vulnerabilities in the financial sector (figure 13). In Chile, the financial market has aligned itself with a scenario where inflation will converge to the 3% target and the MPR will begin a downward process in the second half of the year. Thus, both expert surveys and financial prices point to inflation converging to 3% within the two-year monetary policy horizon (figure 14). All this has taken place while the economy has continued to adjust and local uncertainty has diminished (figure 15). Worth noting is the local forex market, whose proper functioning has allowed the Central Bank to dismantle the position of the non-delivery forwards (NDF) program and begin a program of rebuilding international reserves to strengthen our country's international liquidity position.

The core of the discussion is that house prices and lending sometimes develop in a way that does not appear sustainable – in a way that entails risks that are difficult to quantify or to even capture in analyses and forecasts. These are risks of events that often have a low probability of occurring, but if they do occur could have very serious consequences for the economy. So what is so special about asset prices rising and why do “bubbles” arise? Rising asset prices are not necessarily a bubble… The prices of many assets, such as houses or shares, rise and fall in cycles. And asset prices can rise substantially without this entailing an over-estimation or a financial bubble. A BIS Review 70/2010 1 bubble is among other things based on speculation and a strongly over-optimistic view of the future. If, for instance, property prices increase substantially this may actually be justified on the basis of fundamental driving forces and realistic views of the future. Factors such as growth, incomes, construction and housing costs may develop favourably. And if one does not, for instance, build new housing at the same rate as the demand for housing increases, then it is not exactly surprising that the price of the existing housing should rise. Even if prices soar during a brief period, grey reality usually catches up before a bubble has arisen. When this happens prices usually adjust without any great drama and do not have any major effects on the rest of the economy.

In other words it’s a matter of supply not demand. Chart 6 gives a stylised description. In a competitive market the demand curve facing an individual firm (and those in a relatively small country) is essentially flat. Domestic events don’t have much effect on the global price. When the currency falls, pushing up prices and profits of outward-facing firms, the response of export volumes depends on the slope of the supply curve: to what extent do firms in the tradable sector have the capacity to raise output and, where that is insufficient, the willingness to invest in more? Chart 6: For a small open economy tradable demand is highly elastic Chart 7: Depreciations push up the sterling price of goods exports as well as those of imports Source: ONS and Thomson Reuters Datastream. * excluding oil and erratics. 8 All speeches are available online at www.bankofengland.co.uk/speeches 8 Now commodities may be an extreme case. They’re essentially homogenous – one country’s output is much like another’s. But even in non-commodity goods markets you find a similar pattern. The UK is relatively small, accounting for only 3% of international goods trade (even including oil). Many UK firms are to a significant extent “price takers” in international markets. And you can see from Chart 7 the close correlation between the sterling price of the UK’s (non-oil) goods exports and the exchange rate. The reaction is a bit less than one-for-one but in general no less marked than that of import prices.

Global market conditions continued to deteriorate throughout 2007: share prices plummeted, access to credit became much more limited, and interbank business transactions more complicated at best. CDS spreads widened, including those of all the Icelandic banks. Many clung to the hope that conditions would improve in early 2008. That hope proved fruitless. Market conditions continued to deteriorate, and the supply of credit became tighter than ever. The Icelandic banks’ CDS spreads rose to very high levels. As I have mentioned, the banks began to increase their deposit business after the experience of early 2006 by offering favourable premiums. Retail deposits in branches and subsidiaries abroad grew quickly and soon became an important source of funding for two of the banks, particularly in 2007 and early 2008. But the bond markets remained virtually closed to them as the year 2008 progressed. At the beginning of May 2008, the Central Bank published its annual Financial Stability report, which included a detailed analysis of the state of and prospects for the financial system. The report pointed out vulnerabilities but also identified elements that tended to strengthen the system. The title of the Central Bank’s analysis was: “Current conditions test the banks’ resilience.” The report stated that the system was considered broadly sound but that contingency measures were needed. The chief risk factors were a vulnerable foreign exchange market and limited access to capital, which represented a short-term risk.

BIS central bankers’ speeches 1 We need to build a new system – one that delivers sustainable investment flows, based on both resilient market-based, and robust bank-based, finance. We need finance for the long term. We need a financial system that is F-A-I-R: that is Fair, Aligned, Inclusive and Resilient. Let me expand briefly on each, beginning with fairness itself. (i) Fair The twin crises of solvency and legitimacy undermined trust in market mechanisms and the effectiveness of the financial system. Banks were undercapitalised, mismanaged and operated in a privileged heads-I-win-tails-you-lose bubble. In parallel, there was widespread rigging of some markets for personal gain. By replacing such implicit privilege with the full discipline of the market, social capital is now being rebuilt and economic dynamism restored. G20 leaders have endorsed a wide range of measures to end too-big-to-fail in banking. The Financial Stability Board 6 is now working on a series of initiatives to make the system more fair and effective, including examining governance and compensation arrangements to ensure they promote good, and punish bad, behaviour. 7 In the UK, authorities are pursuing reforms that will increase individual accountability, particularly in wholesale financial markets. 8 Such initiatives are beginning to turn the tide of ethical drift which has plagued the system and would hold back the SDGs if left unchecked. (ii) Aligned Aligning incentives will increase finance’s potential to support the SDGs. Alignment requires transparency. Consider the example of climate change.

That is to say, if there were a business segment of this type, it would be very small. Bad debt ratios in the Spanish mortgage market stand at 0.4%, compared with 4% in the United States. The information available for Spain therefore precludes talking of a market of this type. Regarding bad debts, the aggregate ratio for the sector during 2006 was on a declining trend and, in any event, is holding at minimum levels, whether analysed from a historical perspective or in comparison with institutions in other euro area countries. In other words, this indicator of the credit risk borne by institutions is not currently showing signs of difficulties feeding through to the industry, and this despite the higher growth of doubtful assets over the course of 2006. This higher growth, however, must be analysed bearing in mind at least two considerations. First, the increase in doubtful assets is due in part to the strong growth in activity recorded in recent years. In an expansionary setting it is logical that, if the volume of credit increases, the volume of doubtful assets will afterwards increase with some delay even if default probabilities hold constant. Second, it should not be forgotten that the changes in accounting rules introduced by the Banco de España to adapt to International Financial Reporting Standards mean that doubtful assets must be recognised earlier and in a higher proportion.

This was the advice Benjamin Franklin gave to inhabitants of Philadelphia, on the subject of firefighting, writing anonymously to the Pennsylvania Gazette in 1735: “In the first Place, as an Ounce of Prevention is worth a Pound of Cure, I would advise 'em to take care how they suffer living Coals in a full Shovel, to be carried out of one Room into another, or up or down Stairs, unless in a Warmingpan shut; for Scraps of Fire may fall into Chinks and make no Appearance until Midnight; when your Stairs being in Flames, you may be forced, (as I once was) to leap out of your Windows, and hazard your Necks to avoid being oven-roasted.” 32 A firm’s overall loss absorbing capacity is the sum of its capital and subordinated long-term debt which can be bailed in. 33 Of course, it is not the case that changes in banking system capital requirements have no bearing on developments in the wider economy; such changes are likely to impact the price and quantity of credit provided by the banking system and, via this channel, economic growth. But the best empirical estimates we have suggest that this channel is likely to be weak during credit booms, when it’s most needed (Bahaj et al, 2016). Moreover, changes in banking system capital will have no direct impact on build-ups of risk in the market-based financial sector.

Mohammed Laksaci: Impact of the oil price decline on the Algerian banking system Keynote address by Mr Mohammed Laksaci, Governor of the Bank of Algeria, at a meeting with bank executives, Algiers, 26 April 2016. * * * I would first like to point out that in terms of external shocks, the Algerian economy, which is closely linked to hydrocarbon sector resources, has particularly suffered from the shock inherent to the sharp and sustained fall in world oil prices. It is therefore from this perspective that I start my presentation. I shall talk first of the macroeconomic implications of this external shock, before outlining its impacts from the perspective of financial stability, in light of the new challenges for the banking system in the financing of non-hydrocarbon growth. 1. Macro-economic stance Economic and financial performance during 2001-2008, particularly the significantly improved external financial position and a substantial accumulation of budget savings, enabled the Algerian economy to demonstrate resilience in the face of the severe external shock in 2009 inherent to the intensification of the international economic and financial crisis. Following the strengthening of the external financial position over 2010-2013, Algeria continued to preserve monetary and financial stability during 2014, in a context of persistent fiscal deficit and a return to a balance of payments deficit. The impact of the oil price decline on the Algerian economy can be examined through the main recent economic and financial developments.

Notwithstanding some more encouraging recent signs, there is still a possibility that continuing imbalance between domestic and external demand will need additional sedation or that it will eventually precipitate a sharp fall in the dollar and US asset prices. But the dollar has come off its recent peak and some of the exuberance may now have gone from equity prices - including some of the froth from the “new economy” sector, so the risks of sharp correction may be less than they were. Elsewhere, in Japan, after a long convalescence, there may now at last be some better prospect of a gradual but self-sustaining recovery in private sector demand. And there has been more substantial evidence in recent months of strengthening domestic demand and output growth across the Eurozone. That fully justified the European Central Bank’s gradual shift away from its earlier accommodating monetary policy stance; it may also have contributed to the beginnings of a recovery of the euro exchange rate towards a more comprehensible level. We are certainly not yet out of the woods - there is a long way to go before anyone can feel confident that we are in fact in sight of a more sustainable balance between the major industrial economies. But I am more hopeful that we are now at least moving in the right direction. And that is encouraging news for the UK. On a macro-economic overview, our own economy remains in pretty good shape.

Mexico has revamped labor laws, the education system and its telecommunications system, financial and energy sectors – including a plan to open up its oil and gas sector to private investment. The timing is good. The implementation of these new laws will coincide with a strengthening U.S. economic recovery. You know far more about these structural reforms than I do. I cannot pretend to speak with any authority on the detailed economic implications of these reforms, but I do want to offer some perspective from Texas. Last year’s passage of the historic energy reform should, if carefully and deliberately implemented, increase oil and gas production and reverse the nineyear trend of declining output that is currently depressing Mexico exports, industrial production and GDP and adversely impacting government revenues. The Eagle Ford shale oil boom in south central Texas exemplifies the regulatory differences between our two regions that the reform aspires to relinquish. The gap is very telling. As activity has accelerated dramatically north of the border, there is no corresponding drilling or production in northern Mexico despite the contiguous geology. And it’s not because Eagle Ford required the deep pockets of the huge energy corporations. Rather, it is largely independent operators who have developed the vast majority of Eagle Ford projects. The result: sharply rising oil production in the Eagle Ford, from nothing four years ago to more than 1.3 million barrels per day currently. The shale oil boom in Texas has had far-reaching effects on the state.

On my flight home from Zurich, I read about a bank with compliance failures; however, I have to say that as a whole, the Mexican banking system is quite healthy. Bank profits rose in 2013 and Mexican banks are well-capitalized, with an aggregate capital ratio of 16 percent as of year-end 2013. While four small banks failed year-end stress tests by the Comision Nacional Bancaria y de Valores (CNBV) and were asked to boost capital and diversify their portfolios, it was also the first year the regulator fully implemented the stringent Basel III capital rules. The share of nonperforming loans rose slightly; among commercial loans, this was partly due to changes in the accounting methodology, so it cannot fully be attributed to deteriorating credit quality. I am convinced that the biggest problem facing Mexico is not too much credit, but too little. That’s why the recently implemented financial reform is so important; that’s why its core objective is to boost credit. Another advantage that Mexico has is plentiful foreign exchange reserves, about $ billion, and a $ billion standing line of credit with the IMF. Mexico has been amassing more foreign exchange reserves as other emerging market nations have seen them dwindle. While excess liquidity from the U.S. has found its way to all emerging markets, there is a palpable investor commitment to Mexico that sets it apart from the rest. At over $ billion, 2013 was a record year for foreign direct investment in Mexico.

In this paper, we have tried to set out some of the thinking behind the Bank’s approach to collateral. It is driven by a combination of monetary and financial stability policy objectives and the need to protect the Bank’s own balance sheet. To do that, we look through current market conditions to assess the value of collateral and firm behaviour under stressed conditions. We also try to understand the incentives that we create for our counterparties in good times and bad, so as to avoid moral hazard and market distortions. The changes that have been made should mean that in future, the Bank of England is more effective both in providing liquidity insurance to the banking system and in mitigating its own risks. 8 BIS central bankers’ speeches

But anyway, had Lehman been salvaged, one cannot be sure that other systemically important institutions would not have followed. Would a 750 billion dollar package been approved without the collapse of Lehman? If Lehman had been thrown the lifeboat, would such a large package have been necessary? There will be plenty time to discuss this and other issues. However, there is a very straightforward conclusion, which is that policymakers should have been aware of the magnitude and consequences of the downfall of a major financial institution. This is at the core of this conference: evaluating systemic risks in a very complex world. Such a complexity offers big benefits, but also poses enormous challenges in regulation, monitoring and risk assessment. In the future, it will also be necessary to discuss what to do about weak institutions. As has happened in Chile in the past and is now happening in developed economies, in my opinion the balance is tilted towards allocating the losses to shareholders and executives, intervening institutions to ensure good use of public funds and preserving financial discipline. In the past few years we have accumulated a lot of experience, which permits us to be certain that asset price drops and credit market difficulties can impose a large burden on the economy if ignored. Investors have lost confidence in the ability of certain firms to meet their obligations, complicating access to the capital market and short-term financing, and thus accelerating the fall in those firms’ stock prices.

Some disconnection between the valuation process – which should remain anchored on market prices – and income and profit recognition will have to be introduced, if only to account for risks which are there but have not yet materialized. Dynamic provisioning is one technique for doing so, when risks are closely related to the economic cycle. Valuation reserves may also be used when complexity or illiquidity creates additional risk linked to valuation. Provided those adjustments are rule based and made in a fully transparent process, they would not reduce the quantity or quality of information available to investors as to the real health of financial institutions. Another avenue for research would be for the regulatory system to "force" the pricing of risk in all its dimensions. There is a clear analogy with tax theory: internalizing the risk eliminates market failures. This approach would be best implemented to liquidity risk linked to maturity transformation. Quantitative liquidity ratios are currently considered in a number of juridictions to be imposed on financial institutions. However, they may not protect the system against an aggregate liquidity shock, when, by definition, the demand for liquidity becomes infinite and any buffer proves insufficient. Pricing liquidity ex ante in the system would reduce the probability of such a shock and create incentives against relying too much on maturity transformation. Admittedly, the conceptual challenges in quantifying, for instance, liquidity risk, are enormous. But we live in a world of second best, and even very approximate measures would do better than nothing at all. Thank you.

Also, valuation gains and losses may encourage risk taking or trigger sharp pull-backs. Should procyclicality be avoided? Not necessarily: • Financial stability is not an end by itself. It only helps if it is conducive to better macro economic performance. Volatility may be driven by fundamentals. Sharp movements in asset prices may help the financial system to serve as a cushion, an "absorber" for exogenous economic shocks. This is welfare improving since it avoids, or mitigates, adjustment in more rigid goods or labor markets. • By the same token, not all procyclicality is bad. It all depends on the causal link: is the financial system the origin or the amplifier of destabilizing dynamics? Or does it simply react to cyclical evolutions in the real economy? We should only be concerned by "intrinsic procyclicality", which is created inside and by the financial system. 4 It should be noted that there no consensus on whether accounting rules matter. According to one view, accounting is "neutral" and procyclicality in financial variables faithfully reflect an exogenous reality. An opposite view would state that accounting creates incentives, influences behaviour and, therefore, accounting rules have a significant impact on the dynamics of financial systems. The views presented here are my own. 5 See Adrian and Shin (2007). 6 See Adrian and Shin (2008).

22 The most affected sectors include some whose margins would be hardest hit, such as wholesale and retail trade and repair of motor vehicles, land transport, fishing and agriculture. The degree of financial vulnerability is also expected to rise by more than the average in some sectors in which the impact on sectoral margins is comparatively smaller, such as basic metals manufacturing, or publishing, cinema, television and radio. This is largely because some of the firms in such sectors were already hovering around the thresholds determining vulnerable status before the shock. 15 The results show that the greater adverse impact of these scenarios on the sector’s solvency would take the form of a worsening of the credit quality of loans to the private sector, leading to greater impairment losses on business in Spain and less capacity to generate net income from foreign business. Moreover, the simulated interest rate hike entails a slight reduction in the value of the bond holdings on banks’ balance sheets. At the same time, higher interest rates push up net interest income, by improving the net interest margin on loans to the private sector and making investing in debt securities more profitable, whereas the cost of deposits responds more moderately. Overall, the adverse scenario would have a negative impact of 1.8 pp on the aggregate CET1 ratio of Spanish banks as a whole, while the impact under the severe scenario would be as high as 3 pp.

To sum up: the Spanish banking industry has proved resilient to the economic crisis triggered by the pandemic, maintaining the supply of credit to the private sector and an adequate solvency level. It has also been able to swiftly recover its profitability. The banking sector in the new macro-financial climate Despite these favourable circumstances, the recent macro-financial deterioration I described earlier calls for a prudent approach on the part of banks and for close monitoring of the risks associated with the Ukrainian conflict. Indeed, as noted above, these factors have led to a downward revision to the economic outlook published by the Banco de España for 2022 and 2023, as well as a significant upward revision to our inflation projections for 2022. Against this backdrop, our latest Financial Stability Report, published in May, included some simulation exercises on the impact of a potential rise in interest rates or energy prices on the economic and financial situation of Spanish firms, households and general government. I will now turn to the results of these exercises, updated to include the latest developments and market expectations of interest rate hikes. Thus, in the case of businesses, an interest rate hike could drive up the percentage of firms under financial pressure. Specifically, within corporate bank financing, short-term and variable-rate loans predominate, and changes in interest rates therefore pass through relatively swiftly.

Further repo-rate cuts in April and July GDP continued to fall dramatically during the first quarter of the year, in Sweden as well as abroad, and the GDP forecast for 2009 was revised further downwards compared to the Riksbank’s assessment in February. The Riksbank also assessed that CPI inflation would fall very rapidly during 2009, which was largely due to the rapid interest rate cuts implemented at the end of 2008 and start of 2009. At the monetary policy meeting on 20 April, the repo rate was cut by 0.5 percentage points to 0.5 per cent. The repo rate was expected to remain at a low level until the beginning of 2011 (see Figure 1). In July, the assessment was that the decline in economic activity during 2009 would be slightly deeper than the assessment made by the Riksbank in April. The Riksbank’s assessment was that the repo rate and the repo-rate path needed to be even lower. The repo rate was cut by 0.25 percentage points to 0.25 per cent at the monetary policy meeting on 1 July. The repo rate was expected to remain at this low level until the autumn of 2010 (see Figure 1). The Riksbank also assessed that the cut did not represent a threat to the functioning of the financial markets. Furthermore, the Riksbank deemed that, following the cut to 0.25 per cent, the repo rate had in practice reached its lower bound.

It is a question of choosing a repo-rate path so that the forecast for inflation and resource utilisation entails the best possible stabilisation of inflation and resource utilisation. As the forecasts play such a central role in the monetary policy decisions, it is of course important that the Riksbank employs good forecasting methods and uses all the relevant information available when the forecasts are produced so that they are as accurate as possible. An important step in the assessment of monetary policy is therefore to investigate whether the forecasts are reasonably accurate. One way to do this is to compare the Riksbank’s forecasts with those of other forecasters. The Riksbank makes such comparisons every year. Another component of the assessment of monetary policy is to analyse how predictable monetary policy is and what impact it has on market rates. Monetary policy mainly acts by influencing expectations regarding interest rates, inflation and the real economy in the future. Expectations regarding the repo rate in the years immediately ahead affect interest rates with 2 BIS Review 32/2010 longer maturities, and therefore inflation and the real economy, more than the repo rate in the period up to the next monetary policy decision. The predictability of monetary policy can be measured in terms of how well the market predicts the next repo-rate path. How effectively monetary policy steers market expectations and market rates can be measured in terms of how closely the market expectations regarding future repo rates correspond to the repo-rate path after it is published.

14 Jonathan D. Ostry, Andrew Berg and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note, SDN/14/02, 2014. 15 Thomas Piketty, Capital in the Twenty-First Century, Belknap Press, 2014. 16 Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Harvard University Press, 1934. See also Philippe Aghion and Peter Howitt, “A Model of Growth Through Creative Destruction,” Econometrica, Vol. 60, No. 2, pp. 323–351, 1992; Katsuhito Iwai, “Schumpeterian Dynamics: An Evolutionary Model of Innovation and Imitation,” Journal of Economic Behavior and Organization, Vol. 5, pp. 159–190, 1984. 17 Hiroshi Nakaso, “Asian Economy: Past, Present, and Future,” Speech at Securities Analysts Association of Japan International Seminar, April 24, 2015. 18 The Wall Street Journal, “Asia Seeks to Reach the ‘Unbanked’,” March 18, 2015. 6 BIS central bankers’ speeches therefore the prospects for further strong economic growth, will be completely different once the issue of limited availability of banking services is addressed. Conclusion In my presentation today, I have emphasized that productivity growth is crucial to sustaining hitherto robust economic growth in Asia. Among many other things, in my view, the continued accumulation of human capital, market-friendly institutional setups and strong financial sectors, all play an important role in productivity growth. We have seen many positive developments in this respect in Asia, but much more needs to be done. What I have discussed today could be broadly categorized as structural reforms.

Population aging implies a continued decline in the proportion of the working-age population, which in turn poses a challenge to sustaining per-capita income growth, as a given income earner has to transfer a larger share of his or her income to the retirees. Chart 5 shows how diverse the region is in this context, with some countries already facing serious challenges. In this chart, the horizontal axis is changes in working-age population, and the vertical axis is the proportion of the working-age population to the total population. A rise in this proportion is often called a “demographic bonus,” while the opposite is called a “demographic onus.” And the size of the bubble is proportional to the absolute number of the working-age population. As you can see, over such a long period of time, even glacial demographic changes seem dramatic. Japan has already entered deep into the period of demographic onus, with the absolute number of the working-age population declining at a significant pace. The NIEs, China and some ASEAN countries are about to follow Japan in this regard in the not-sodistant future. Meanwhile, India and other Asian countries are expected to enjoy a favorable demographic environment at least until the middle of this century. The third challenge is what I call the “Malthusian trap.” In Malthus’ original work, the existence of a limited resource – land in his case – constrains growth. Likewise, limitations in the supply of natural resources, such as oil, are thought to threaten global growth in the longrun.

But with food and energy prices rising, some observers think the Fed should shift its stance to less accommodation – slowing economic growth now to ensure we don’t have undesirably high inflation in the future – even though current measures of core inflation (that is, inflation omitting volatile food and energy prices) remain low by historical standards. As the recovery continues – albeit slowly – several events have occurred that further complicate the outlook for inflation and real economic activity. Political upheaval in the Middle East has contributed to sharply higher oil prices. Severe weather has reduced harvests from Russia to Australia, causing higher prices for many agricultural products. And Japan’s tragic earthquake and tsunami caused not only terrible loss of life, but also disruption to a supply chain that is increasingly global. So today I would like to discuss how monetary policy should react when the economy is buffeted by a series of these so-called “supply shocks.” I’d like to just highlight my major points before getting into the data and analysis that underpin my perspective. First, I want to explain that while I will be making distinctions in this talk between so-called “core” and overall or total measures of inflation, we at the Federal Reserve look at all prices, including food and energy prices, when developing U.S. monetary policy. While we often use core measures as a guide to where overall inflation is most likely to go, our goal is to stabilize overall inflation. Allow me to preview one of my conclusions.

GROUNDED LIKE EARTH – TRUSTED SUSTAINABILITY DATA (PROJECT GREENPRINT) The fifth desired outcome is trusted sustainability data. Good data is foundational to driving the green and transition finance agenda. Financial institutions and corporates need good data on their customers' and suppliers' carbon footprints and compliance with their respective transition targets. They also need good data on the climate-related risks their physical assets are vulnerable to. Quality data is key in the fight against greenwashing and in enabling stakeholders to make well-informed ESG-investment decisions. But the ESG data acquisition process is often manual, tedious and costly. Access to good data sources is often fragmented, and data verification is at a nascent stage. FinTech can be a key enabler in addressing these data challenges. In fact, we need FinTech to do in the sustainability space what it is doing today in the inclusion space. We need Green FinTech. Just as Earth provides a firm, steady ground upon which we stand, we want to create a trusted data ecosystem that provides a firm foundation for sustainable finance. To build a Green FinTech data ecosystem, MAS has launched a collaborative effort with the financial industry called Project Greenprint. Project Greenprint seeks to build digital utilities that streamline the collection, access, and use of climate and sustainability data. It aims to help mobilise capital to sustainable projects, monitor the climate commitments made, and measure the impact associated with investments.

Smoothing out the bumps, surveys of activity and confidence, among both consumers and businesses, have scarcely budged. Although a little weaker than last year, those surveys continue to point to solid, around-trend, growth. What has clearly changed recently is the composition of UK growth. Consumer spending has slowed, perhaps sharply, while there are signs business investment is picking up (Chart 17). Surveys also suggest a strengthening outlook for exports. With their balance sheets strong, their cost of capital low and with demand for their products – particularly from overseas – buoyant, UK companies may be emerging from under the duvet, putting their balance sheets to work. If so, and even if aggregate growth is somewhat slower, this will make for better balanced and more resilient growth. None of this is to suggest that the risks of a Brexit break have disappeared. There are still enough straws in the wind to believe a sharper slowdown than expected is possible, with consumers’ spending on houses, cars and household goods all having slowed sharply. And it might not take much of a squeeze on consumer demand to induce companies to return to their duvets. But there has been no consistent evidence, so far at least, of this discontinuity risk having increased significantly during this year. As for nominal pressures, there have been some signs of a stirring. Consumer price inflation, at 2.9% in May, exceeded market expectations, as did measures of core inflation.

Those data and risks have, in my view, altered materially over the past nine months or so, for a number of reasons. First, the world outlook is materially brighter than it has been for some time, perhaps at any time since the global financial crisis. This year’s Spring Meetings of the IMF saw the first upgrade of world growth forecasts for six years. As forecast errors tend to be serially correlated – forecasters’ models tend to smooth out the bumps and miss turning points - it is possible further upgrades to world growth could lie ahead. One reason to believe stronger world growth may prove resilient is that it appears to have a broader base than in the recent past, both compositionally and regionally. At a compositional level, there are early-stage signs that global growth may be rebalancing away from consumption and towards investment. Since the crisis, global business investment has been structurally weak, growing around 2 percentage points below its pre-crisis average. Meanwhile, growth in world trade has undershot world growth for the past 2 years, after a 5-year period in which the opposite was true. There are now signs those patterns are reversing. Investment in the US, the euro area and China appears to be picking up. So too is world trade. Global supply chains appear to be widening and deepening, with global trade and capital goods orders rising (Chart 13). It is possible greater optimism about world demand may be encouraging businesses to put their fortress balance sheets to work.

Operating hours are often cited as a key friction. We are developing near 24/7 technological capability which will have the flexibility to be upgraded to full 24/7 operating hours in line with industry demand. This will help to tackle the mismatch of operating hours and increase the overlap of operating schedules to make payments quicker and cheaper, an ambition outlined in building block 12. Of course, to fully realise the benefits of extended operating hours other jurisdictions will need to play their respective part, but the Bank can and will lead by example. 8 https://www.bankofengland.co.uk/-/media/boe/files/payments/a-blueprint-for-a-new-rtgs-service-for-the-uk.pdf 6 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 6 The Bank has also committed to adopting, in 2022, the harmonised ISO20022 messaging format in recognition of the benefits of greater interoperability. As set out in building block 14, adopting common message formats can play an important role in the interlinking of payment systems and addressing data quality and quantity restrictions in cross-border payments. It can also enhance automated straight through processing functionalities, supporting quicker and more efficient payments. As part of this work, we are also looking to introduce Legal Entity Identifiers (LEIs) for payments between financial institutions. 9 The renewed service will also provide a new API layer that can support automated data transfer between systems. This in turn facilitates greater integration and interoperability between payment systems and potentially reduces long transaction chains associated with the correspondent banking model.

This is where the introduction of APIs and the greater harmonisation of data through the important move to ISO 20022 can really make a difference. These building blocks have the potential to improve compliance processes and address data handling issues within legacy technology platforms, and maximise the positive impact of the technical, operational and regulatory process changes advanced under the other focus areas. Focus Area E is different: it is more exploratory and long term in nature. It includes assessing the potential for innovative new propositions such as central bank issued digital currencies (CBDCs), privately issued stablecoins and areas that are even less developed such as multilateral payment platforms. These innovations are still in their infancy on a domestic, let alone global, level. But if in time they are introduced, it is really important to consider the possible cross-border benefits they could bring. Importantly, real progress can only be made in these building blocks if work on the earlier building blocks has delivered. Issues around operating hours, AML checks and messaging harmonisation to name but a few will be relevant for these more far reaching innovations. The Roadmap A broad set of building blocks needs a broad set of players to deliver them. And that is why the Stage 3 roadmap is so important. The FSB, working with the CPMI and other relevant international organisations and standard-setting bodies, today published an ambitious but achievable roadmap to deliver these building blocks including initial actions and milestones 7.

In sum, the Asia-Pacific region needs more co-operation and exchange of ideas in the monetary and financial sphere, and to achieve that it needs stronger links between economists working in this area in central banks, international institutions and universities. This is exactly what the Australasian Macroeconomics Workshop is all about, and I am delighted that we could tempt you to come to Hong Kong for this year’s meeting. Thank you and let the fun begin. 2 BIS Review 42/2003

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

Current challenges therefore do not call into question the primacy of the ECB’s objective of price stability. On the contrary, it is precisely in this challenging environment that the benefits of price stability for Monetary Union as a whole will be reaped. The credible achievement of price stability reduces overall uncertainty in the macroeconomic environment and thereby keeps risk premia embedded in financial yields lower than would otherwise be the case. In turn, this will foster growth, and thus provide support to those countries facing financing difficulties. At the same time, price stability is a crucial element in restoring stability to financial markets and improving market access for distressed sovereigns and banks. That said, we must be careful not to overburden monetary policy, in both its standard and non-standard incarnations. Obviously, monetary policy cannot take up the slack where fiscal or other authorities fail to live up to their responsibilities. While central banks can, should and do provide liquidity support to financial markets, they cannot provide solvency support. That would represent an encroachment upon the domain of 6 See the analysis presented in Giannone, D., M. Lenza, H. Pill and L. Reichlin (2011). “Non-standard monetary policy measures and monetary developments,” ECB Working Paper No 1290. 7 See the framework developed in Ciccarelli, M., A. Maddaloni and J-L. Peydró (2010). “Trusting the bankers: A new look at the credit channel of monetary policy,” ECB Working Paper No 1228.

As a result of the crisis, these countries have been undergoing a painful adjustment, unwinding the imbalances created during the boom. The recessions affecting them have sometimes been much deeper, with GDP growth several percentage points below that seen 2 BIS central bankers’ speeches in the euro area as a whole.4 Consistent with this, loan growth has fallen significantly. For example, household loan growth has turned strongly negative in Ireland and has remained stagnant in Greece and in Spain over the past 2 years, while it returned to positive growth rates in 2010 in the euro area average. Has the single monetary policy exacerbated these cross-country differences? The answer depends greatly on the counterfactual scenario you choose. It is certainly possible to construct a theoretical counterfactual within which credible and independent national monetary policies would have ensured price stability in every country now in the euro area, rather than only at the average euro area level. In this scenario, crosscountry inflation differentials would have been reduced, although I should emphasise that these have remained small in the euro area, even when compared with those in different regions of the United States, which is a currency area typically seen as being closer to the optimum size and structure.

22 Such an approach would be consistent with the 2008 CGFS report on Central Bank Operations on this issue: “Insofar as central bank actions might lead to degradation of market participants’ management of liquidity and other risks, a possible offset would be to implement tighter supervisory and prudential policies concerning the management of liquidity and related risks.” It would also seem to comply with the 2008 BCBS Principles on Liquidity Risk Management and Supervision, which say that: “With respect to the composition of its liquidity BIS Review 67/2009 9 That is the approach that the UK’s Financial Services Authority will be adopting in due course, after a number of years’ discussion. We greatly welcome that outcome. Of course, in the midst of the crisis, any such requirement has to be carefully transitioned, but the eventual destination should be clear enough. For such a policy to deliver its potential, it would be good if regulators, internationally, required all banks regularly to turn over a meaningful share of their “stock liquidity” in the market on a reasonably regular basis. That would also help to put banks in a position to reap the benefits of the Bank’s Discount Window Facility, through which, as I have described, sound banks can borrow gilts.

Underlying inflation is now estimated to be between 2 percent and 2½ percent, which is one percentage point higher than one year earlier. Chart 9: Norges Bank’s key policy rate projections Saving, investment and spending decisions are influenced by expectations concerning future interest rates. Communication on the future course of monetary policy, including the publication of key policy forecasts, therefore plays an important role. Even though the key policy rate has been kept unchanged, Norges Bank’s forecasts for the key policy rate ahead were revised down through 2013. The downward revision of the key policy rate forecasts primarily reflects lower growth forecasts for the Norwegian economy. There are also prospects that wage growth will be somewhat lower than envisaged earlier. Growth among our trading partners and interest rates abroad have been somewhat lower than projected one year earlier. At the same time, banks’ lending margins are somewhat higher than expected. Chart 10: Inflation and capacity utilisation The analyses in the latest Monetary Policy Report published in March suggested that the key policy rate should be held at today’s level in the period to summer 2015, followed by a 2 BIS central bankers’ speeches gradual increase. With such a path for the key policy rate, there are prospects that inflation will be slightly below, but close to 2.5 percent throughout the projection period. Capacity utilisation may edge down over the next year and thereafter move up to close to a normal level.

4 When formulating the criteria, there is a trade-off between being too general, which does not provide very much information, and being too specific, which might overly restrict policymakers’ room for manoeuvre and be less robust to changes in the economic landscape. The Bank has developed a set of criteria for an appropriate interest rate path. The criteria serve both the purpose of communicating the reasoning behind the interest rate path to the public and of providing an agenda for the Board discussion, which makes it easier to decide on a particular path. The criteria used by Norges Bank to assess the interest rate reflect policymakers’ general views and assessments. They are therefore not “carved in stone”, but can be changed and modified due to new insights. Currently, the Bank uses five criteria, which can be summarized as follows: 4 For example, the Swedish Riksbank communicates the criteria behind the forecasts as follows: “The Riksbank’s forecasts are based on the assumption that the repo rate will develop in such a way that monetary policy can be regarded as well-balanced. In the normal case, a well-balanced monetary policy means that inflation is close to the inflation target two years ahead without there being excessive fluctuations in inflation and the real economy.” (See p.3 in the Riksbank’s Monetary Policy Report). BIS Review 94/2008 3 1. Achievement of the inflation target The interest rate should be set with a view to stabilising inflation close to the target in the medium term.

The interest rate set by central banks is normally a very short-term interest rate, which in itself has negligible effects on economic decisions. It is mainly expectations about future policy rates that affect market interest rates and thus economic decisions. Most central banks communicate future policy intentions in one way or another. The majority of central banks communicate indirectly through forecasts based on technical interest rate assumptions, and by giving verbal signals about future interest rate decisions in policy statements and speeches. With such indirect communication, the market participants gain information about the sign of future interest rate decisions, but may have less information about the size. Until November 2005, Norges Bank used technical interest rate assumptions in the inflation forecasts, but also on some occasions commented on whether the Bank intended to follow a different policy than what seemed to be reflected in market interest rates. Thus, the Bank gave signals about the sign of future policy intentions relative to market expectations, but not on the size. 3 From November 2005, Norges Bank started to use endogenous interest rate forecasts in the Monetary Policy Report. Norges Bank was the 1 This process has also been acknowledged by the Norwegian parliament: “The majority think that it is a prerequisite for an effective monetary policy that the central bank is open about the interest rate forecasts, and are satisfied with the fact that Norges Bank emphasises this.” (Innstilling frå finanskomiteen om Kredittmeldinga 2007, Innst.S.nr.274, s.11.

Infrastructure Asia harnesses the networks and collective capabilities of public sector agencies and private sector firms across the region to meet Asia’s infrastructure needs by (i) connecting partners in the 2/5 BIS central bankers' speeches ecosystem; (ii) building capacity in demand markets; and (iii) providing top-level project advisory to improve bankability. Infrastructure Asia provides an open platform for Chinese (including Shanghai-based) infrastructure developers and financial institutions to partner players in Singapore in regional infrastructure projects. b. Furthermore, as infrastructure demand and foreign investments along the Belt and Road region increase, we expect a boost in demand for commodities and growth in commodity trade. Singapore’s strategic location in the crossroads of key trade flows has enabled commodity traders in Singapore to capture such opportunities. Shanghai Pudong Development Bank (“SPDB”) opened its first overseas commodity centre in Singapore in October this year, providing global commodity businesses with commodity-related financial services and solutions. c. Singapore banks are also embarking on BRI collaborations with Shanghai banks. UOB signed a MOU with SPDB in September this year to serve companies hoping to tap on BRI opportunities, providing financial solutions covering investment advisory, cross-border RMB transactions, syndicated loans, project and trade finance, and cash settlement. OCBC Bank signed its second MOU with Bank of Shanghai in April this year, leveraging each other’s strengths, networks and platforms to support customers in their BRI expansion plans, including access to OCBC’s funding and risk management solutions for Bank of Shanghai’s corporate clients.

Union Pay International (“UPI”), headquartered here in Shanghai, signed a MOU with NETS, a leading payment services group in Singapore, in November this year to support cross-border connection of their mobile wallets. As UPI’s first cross-border tie-up with another nation’s mobile wallet – NETS’ NETSPay platform – this will allow Chinese customers to pay at NETS merchants in Singapore while Singapore’s NETSPay users can make mobile payments at over 8 million merchants in China. The MOU will also support collaboration on technology know-how between UnionPay and NETS, and facilitate the joint setting up of a research and development centre in Singapore, initially focusing on mobile services technology. 2nd MAS – SFRB Training and Exchange Programme Lastly, deepening information and knowledge exchange between Shanghai and Singapore industry participants and officials. 10 The 2nd MAS-Shanghai Municipal Financial Regulatory Bureau Training and Exchange Programme will be held from 28 to 30 November 2018. Such training a . programmes will encourage mutual exchange and deepen ties between financial regulators, promote better understanding of each other’s markets and enhance their knowledge in specialised topics. Conclusion 11 Asia remains strongly committed to maintain an open global trading system and to preserve multilateralism. There is therefore great potential for Asian countries to ride on each other’s growth, and for cities like Shanghai and Singapore to strengthen our bonds.

I want to avoid the mistakes of lawyers for other organizations who “saw their role in very narrow terms, as an implementer, not a counselor.” 4 I also take steps to improve my understanding of the New York Fed’s operations—even after nearly twenty years working there. In my current role, I try to maintain regular communication and strong relationships with the heads of other groups within the New York Fed. I don’t just talk to them about legal risk. I do an awful lot of listening too, with the hope of better understanding the work they are doing and the issues that concern them. And I think about ways that input from lawyers might help. In those unfortunate instances when legal disputes arise, I look for lessons that I might report back to those colleagues—insights relevant to their primary concerns. This type of information sharing is essential to an organization that seeks to maintain a high degree of public trust in an increasingly complex field of coexisting and interrelated risks. I also believe that lawyers need to reign in their tendency to want to reduce risk—especially legal risk—to zero at the expense of potentially more important goals. Lawyers are worriers. We tend to see what can go wrong. This is a product of training and disposition. And it is part of the value that we contribute to an organization. We must remember, though, that the point of reducing risk must be to aid some broader corporate purpose.

Right idea 3: global standards for globally systemic insurers While much progress has been made on the home front, the focus of the global reform agenda since the crisis has been on putting a third idea into practice: common global standards for systemically important insurers. The goal of this work is to increase systemic resilience; preventing spillovers from the failure of an insurer to the wider financial sector and the real economy. Policymakers agree that traditional insurance activities need not of themselves be a source of systemic risk. Indeed, recent events demonstrated three reasons why insurers are better able to withstand crises than other financial institutions. First, the underwriting cycle is generally not correlated with the business cycle; Second, the inherent resilience of business models that take a long-term view, and Third, an insurer’s production cycle is inverted as they collect premiums today with a view to paying claims tomorrow. This model reduces liquidity risks and immunises insurers against risks of a run. Insolvency takes time to manifest, and wind-down when it happens has historically been more orderly. Given all that, you might ask: why the concern about systemic risk in insurance? The answer is simple: The financial crisis laid bare that the actions of some individual insurers – like AIG – can have broad spillovers; that some insurance markets – like the monolines – are systemic, and that the insurance sector plays a systemic role in diversifying the financial sector thereby reinforcing its resilience. AIG was the extreme case of a systemic insurer.

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

The securities and capital markets are another important source of capital for enterprises. During an upturn, many enterprises find that capital is "cheap", because the outlook for the future is regarded as very bright. There is a risk of over-investment. Optimism may rapidly give way to pessimism if investments fall short of expectations and negative news starts to spread. As a result, the risk that has accumulated during the upturn period may materialise. The financial sector may choose to interpret developments as a sign that the risk associated with new projects has also increased, with the result that this risk may be overestimated. A drying up of credit and capital may trigger or amplify a crisis. The costs of financial instability may be very substantial. Therefore, it is necessary to dampen financial cycles. The outlook for financial stability The outlook for the global economy is now weak. The terrorist attacks on the US on 11 September have increased uncertainty. We have witnessed a bubble in technology shares. From 1998, the price of technology shares rose substantially more than earnings, and since March 2000, there has been a sharp correction in prices. Life insurance companies and pension funds, both at home and abroad, have lost a substantial portion of their buffers due to the decline in share prices. Telecommunications companies have been through a phase marked by substantial borrowing. Credit rating companies have downgraded many telelcoms due to high debt levels in relation to future prospects. This has increased funding costs.

A deterioration in terms of trade then means that the price of cars falls relative to the price of wine in a common currency. In 2 BIS Review 75/2001 order to be able to sell more cars with a view to buying an unchanged quantity of wine and thereby leave the balance on current account unchanged, the country’s real exchange rate has to depreciate. Productivity growth. Suppose instead that the country becomes more efficient at manufacturing cars. This can lead to better quality cars for a given input of resources and a given price in the domestic currency. The cars can then command a higher price in the world market and the real exchange rate can appreciate. In practice, high productivity growth tends to be associated with a higher potential GDP growth rate. In a country where growth is higher than in the rest of the world, the real exchange rate can therefore be expected to show an appreciating trend. However, the relationship between productivity growth and the exchange rate is not stable. Economic theory is not clear cut on this point some lines of reasoning could lead to the opposite conclusion. An additional factor that is closely related to the real exchange rate is the balance on current account. A succession of current-account deficits leads to growing external debt and rising interest payments. The real exchange rate must then depreciate if the country is to achieve enough additional exports to finance the interest payments.

The sizeable purchases of foreign securities by Swedish investors have a similar effect; recently, these purchases have mirrored the opportunities provided by the new pension system. Flows that are comparatively small in this context have also been occasioned by the repayment of government external debt. At the same time, purchases of kronor have presumably decreased in that export receipts have fallen significantly for a number of large companies this year and big concerns have increased their cash holdings in foreign currency accounts. Moreover, in recent years increased unrest in the international financial markets has tended to hit the Swedish krona; this was particularly evident during the financial crisis in autumn 1998. It seems to be a consequence of a generally heightened aversion to risk in the major financial centres, such as New York and London. Money is then withdrawn from countries whose currencies and economies took a beating in similar situations in the past; since the crisis in the early 1990s Sweden is unfortunately included in this category even though the current macroeconomic situation does not warrant this. Finally, the generally stronger dollar should be mentioned as a partial explanation for the weak krona. Many economists consider that according to conventional theory the dollar’s strength is inexplicable and the dollar is markedly over-valued. In this situation the Swedish krona, like most other currencies in the OECD area, has depreciated against the dollar. One problem with explanations of this kind is that they come and go. It is also easy to show that they lack universal validity.