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Under passporting, currently we cannot apply our preference for retail subsidiaries to banks from elsewhere in the EEA. It would be odd to continue with this if the UK and EU27 become third countries following Brexit. Subject to the negotiations, our current planning assumption is therefore that all international banks will need to put material retail business in a subsidiary. This should be no surprise given our existing policy – we are 7 engaged on this with the handful of relevant branches and will continue to promote a smooth transition . How far does this logic go? Overseas there are moves afoot to apply elements of this logic to other parts of financial services, in particular to wholesale banking. Why does this matter to us? The UK provides unrivalled access to global capital markets. Over three-quarters of foreign exchange and OTC interest rate derivatives trading in the EU takes place here. International banks from Asia to the Americas use their UK presence to raise finance on behalf of their home group. Since the first Eurobond in 1963, which financed the Italian motorways, international banking in London has driven growth in real economies around the world. And custody banks operating here safeguard and administer assets on behalf of institutional investors from east to west. Wholesale capital markets and the banks which serve them are deeply interconnected and contribute to the efficient allocation of capital. International banks match savers and borrowers across the globe, reducing 8 funding costs, facilitating cross-border investment and financing trade .

First up, how the new accounting standard interacts with the bank capital framework here in the UK – a most enjoyable discussion, because you can never have too much of accounting standards. Next on the menu: consumer credit, of which you definitely can have too much. Some of the most difficult issues greeting our return, however, were not so domestic in nature. Would cross-border reinsurance contracts function properly in the wake of Hurricane Irma? How might a bad outcome on the Korean peninsula affect British banks and financial markets? Supervisors of the world's leading international financial centre have always had to juggle domestic and global risks. In between them, however, is a dynamic which is fundamental to retail and wholesale finance in the modern economy. It is a dynamic at play in the cliff-edge risks from Brexit and the differences of view between countries over Basel 3 finalisation. I am thinking of the impact of borders, location and distance on the shape of banks, insurers and financial regulation. Put simply: the impact of geography on the geometry of finance, a dynamic we might call 1 geofinance . With the revolution in regulation following the financial crisis coming to its end, and with changes to the geopolitical landscape looming large, I think that geofinance is likely to be the defining challenge of the next few years. The domestication of retail banking Soon after the crisis I worked with the Independent Commission on Banking (ICB).

Michael Gondwe: 50 years of central banking in Zambia – repositioning for the future Speech by Dr Michael Gondwe, Governor of the Bank of Zambia, at the official launch of the 50th anniversary celebrations of the Bank of Zambia, Lusaka, 10 May 2014. * * * • Deputy Governor – Administration • Senior Directors and Directors • Representatives from Commercial banks • Members of Staff and Former Members of Staff Present • Members of the Press • Ladies and Gentlemen I would like to extend a warm welcome to you all on behalf of the Bank of Zambia and indeed on my own behalf, to the official launch of the Bank of Zambia’s 50th Anniversary Celebrations, since its establishment on 7th August 1964. The theme for the Bank of Zambia’s jubilee celebrations is “50 Years of Central Banking: Repositioning for the Future”. This is indeed a momentous year for our country, as it will also mark the commemoration of Zambia’s Golden Jubilee. Distinguished Colleagues, the Bank of Zambia has during the last 50 years gone through different phases of transformation and development. I am proud to say that the Bank has, from the time of establishment in August 1964, matured into an institution whose roles have changed to respond to the growing and changing demands of an emerging economy and deal with complexities of globalisation.

This will not – and should not – diminish the happiness of the occasion. Indeed, much of the history of Bank Negara Malaysia is the history of timely, productive, and often courageous response to crisis, and examining that history gives cause for optimism in our present circumstances. In my comments today, I shall touch only briefly the current crisis. Instead, I shall reflect on the achievements of Bank Negara during the decade or so that followed the last great crisis – the Asian financial crisis of 1997-8. As I hope I shall demonstrate, these achievements are more than of merely historical interest. It is clear to any observer that Bank Negara Malaysia has been a driving force in the building of this country. To speak only of its purely central-banking functions, Bank Negara has fully discharged its responsibilities through keeping inflation under control and maintaining stable interest and exchange rates, despite rapid economic growth. This has been crucial in supporting rising living standards and an increasingly diverse external trade. As adviser to the Government, the Bank has played a key role in formulating economic policies. The Bank has also been at the forefront of financial-sector development, in particular through building efficient and advanced payment systems. This work has stimulated a diverse financial system, with impressive growth in stock-market capitalisation and other non-bank activity. All of this is indeed impressive, and reason enough for celebration. But Bank Negara's contributions to the well-being of the country go somewhat beyond the more conventional central bank functions.

However, the usefulness of such disclosure depends very much on the level of breakdown in the risk disclosure. Furthermore, the US President’s Working Group on Financial Markets recommends (a) a reporting framework for large hedge funds to disclose more meaningful and frequent market risk information to the public, and (b) a requirement on public companies to disclose information about their material financial exposures to HLIs. A challenge here is for other authorities to take similar steps to require such standards of disclosure, as this would help to avoid the possibility of regulatory arbitrage. At the market level, a working group set up by the G10, and led by Jean-Pierre Patat of the Banque de France, studied the feasibility of collecting and disseminating aggregate positions data in the foreign exchange market. I believe the initiative, if implemented, could have helped smaller and open markets in better understanding their currency markets and the accumulation of highly concentrated positions. However, in November 1999, the G10 Governors decided not to proceed further with work in this area. In making this determination, the G10 found that there were a number of practical limitations to the proposal, including the difficulty in obtaining compliance, the unfeasibility of producing the data in a timely manner, and the substantial costs involved. The demise of this initiative left a vacuum in the area of transparency on market concentration. This is unfortunate and the international community should explore other alternatives to bridge the information gap.

The result is a staggering bank restructuring cost of an estimated 25% of GDP for the crisis-hit economies in Asia. 1 The Manila Framework Group is a forum comprising senior finance and central bank officials from 14 economies, namely, Australia, Brunei Darussalam, Canada, China, Hong Kong SAR, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, the United States of America. Senior representatives of the International Monetary Fund, the World Bank, the Bank for International Settlements and the Asian Development Bank also attend the meeting. The Group meets twice a year. 1 BIS Review 24/2000 Since the outbreak of the Asian financial crisis, economies all over the region have taken important strategic steps to promote conditions that foster a full and speedy recovery. But recovery cannot be sustained unless it is accompanied by thorough structural reforms. It is encouraging to see that notable initiatives are taking place in Asia where extensive programmes are in progress to restructure and recapitalise banks. There are also efforts to tackle the problems posed by over-stretched and highly indebted corporations. But there is a risk that the problems that were so evident then will be swept under the carpet in the face of rapid growth. It is crucial that the reform momentum should not be allowed to falter, as it could undermine the fledgling recovery.

9 The effective loan rate on mortgages is 3.5% and on business loans 2.9%, compared to CPI inflation of 3.1% at present. In the early stages of the 1990s recovery, bank base rates fell to 5.25% in early 1994 but rose to over 6% at the end of the year. Typical loan rates would be 1-2% above this level. 8 BIS Review 134/2010 I believe it is an open question on how serious a constraint the financial sector will prove to be on the recovery. But there has been some recent encouraging evidence. Over the last few quarters, the Bank’s regular surveys have been pointing to an easing of credit conditions. And the CBI’s quarterly Industrial Trends Survey has showed a sharp fall back in the proportion of companies citing access to external finance as a constraint on output, exports and investment. As Chart 9 show, these indicators have returned to around pre-crisis levels from the very elevated and unprecedented levels we saw at the peak of financial crisis in late 2008 and early 2009. BIS Review 134/2010 9 The importance of the supply side All these factors – the global economy, the impact of fiscal tightening and the effects of the continued adjustment in the financial sector – will have a bearing on the growth of the UK economy through the recovery and hence on monetary policy. But there is another element which is crucial to the progress of the recovery which we need to acknowledge.

Last but not least, other than the monetary policy, there is still a concern over the structural problem of the Thai economy in the medium and the long term. Given the tight labor market and increasing wage costs, we need to improve the country’s infrastructure and productivity. This involves the upgrading of technology and innovation to move Thailand up the value chain. The well-being of workforce, as well as quality of education and training are also crucial to increase competitiveness ahead of the AEC integration. This cannot be done by only one party. Long-term coherent vision and concerted efforts among all agencies, both public and private, are needed. Ladies and Gentlemen, To close my remark this evening, I believe that the JCC will have a big role in shaping Thailand’s future and I hope that with the long history of partnership between Japan and Thailand, we will continue our close cooperations in all aspects in the years to come. Thank you. BIS central bankers’ speeches 3

But they do not say anything about preparedness regarding liquidity in foreign currencies. This is particularly important to us in Sweden. Around 50 per cent of the banks’ funding is through the markets, and a large part, around two thirds, through the international markets. This requires that we at the Riksbank can provide the banks with liquidity in foreign currency when funding runs short. We must therefore hold liquid funds in our foreign currency reserves, and this costs money. The Riksbank is thus supplying an insurance – an insurance that the banks know they can use but don’t pay a premium for. This type of problem is not dealt with in the Basel regulations, or anywhere else for that matter, but it is something we need to discuss here in Sweden. So although I hope I have made it clear that neither Finansinspektionen nor we at the Riksbank – nor our international counterparts – have been idle, there is still a lot of work that remains to be done to make the bank system less vulnerable and more resilient. Both globally and here in Sweden. And at the same time we must continue our daily work on maintaining financial stability. We at the Riksbank are constantly trying to refine our analysis so we can detect at an early stage any risks that could threaten the stability of the system. And we must be clear in communicating the risks we see.

The monetary reform in 1965 replaced the earliest Lek banknotes with new ones, in a ratio of 10 to 1, by changing at the same degree the value of prices, wages and, of any other financial operation. Since then, most of citizens have not been adopted yet with this change and are used to communicate with the outdated term “old lek”, driving to confusion in both the communication of prices of goods and services and the accurate reading of economic and financial indicators. Even before the launching of this awareness campaign -postponed due to the difficulties caused by the restrictions imposed to tackle the Covid-19 pandemic situation – the Bank of Albania has been attentive in encompassing this message in its educational publications and programmes, such are: Global Money Week, or the campaign on the issue in circulation of the new banknotes. Recently, we have conducted the measurement on the use of terminology “new lek” – “old lek” on a national level, through the inclusion of dedicated questions in the survey on measuring financial literacy of the Albanian population structured pursuant to the model of International Network of Financial Education (INFE, OECD). The analyses of these questions provides information on the degree of wrong use of terminology by: location-residential, age-group, gender, education, employment and average level of income, as well as the settings where it is more frequently used; aimed at adopting the campaign undertaken by the Bank of Albania on the elimination of the outdated terms “new lek”- “old lek”.

For Mervyn, I am guessing that one hundred years may not seem like a long time, given that the Bank of England is over 300 years old, but I am sure he will graciously allow us our moment. We are also joined by many other friends and associates of the New York Fed, and a great number of our current and former staff. For 100 years the Federal Reserve has been an essential contributor to American economic prosperity and stability and that record is reflected in this fascinating exhibit. Rather than focus on its achievements during my brief remarks this evening, I thought I’d highlight what I think makes the institution that I have the honor of leading, the New York Fed, such a remarkable place within this extraordinary System. First, we are a bank within government. That means we not only have researchers, supervisors and market analysts, but we also provide banking services and possess significant operational capabilities. We accept deposits, make loans and operate the System Open Market Account for the Federal Open Market Committee. When exigent and unusual circumstances require extraordinary operations, be it in a financial crisis or to implement BIS central bankers’ speeches 1 unconventional monetary policies, we stand ready. Our operational capabilities complement our more conventional central bank policy role in a way that is, I think, very special within the Federal Reserve System. Second, the New York Fed is a vital component of the international role played by the Federal Reserve System.

And it is that attitude, ability and esprit de corps that will no doubt allow us and the System to meet the important challenges on the road ahead. I will focus briefly on a few such challenges: The first will be on the monetary policy front. The Federal Reserve has engaged in a set of unconventional monetary policies in recent years. These policies have been necessary because the FOMC could not ease monetary policy further by conventional means – the federal funds rate was constrained by the so-called “zero lower bound”. Exit from these unconventional set of policies is certainly feasible – the ability to pay interest on excess reserves gives us a viable tool to manage monetary policy even with an enlarged balance sheet, and the New York Fed is prepared to execute on this mission, as we always are. But we do have to be a bit humble about what we don’t know. There will undoubtedly be communications and operational challenges and unexpected consequences. We will need to be sufficiently agile so that we can best achieve our dual mandate of maximum sustainable employment in the context of price stability. The second challenge for us at the New York Fed, and within the regulatory community more generally, will be in staying the course and implementing a regulatory regime in which no institutions are “too big to fail” (TBTF). TBTF is wrong for several reasons. It creates an unfair disparity between large and small institutions.

In other words, according to the exercise, the balance sheets published by Spanish banks reflect, on average, the risks arising from their investment with greater rigour than that seen in the other jurisdictions, with fewer valuation flaws or provisioning shortfalls being detected as a result. This is a particularly positive outcome as it arises from the application of a methodology – common to all the banks analysed – based on objective observations and which, unlike the stress test, does not depend on the design of debatable macroeconomic scenarios or working hypotheses. In any event, the stress test also provides positive results for the Spanish banking sector which, in virtually all cases, exceeds fairly comfortably the minimum capital thresholds set. Only one bank evidenced a very small capital shortfall as at 31 December 2013, and this has now been more than covered following the capital increase made by the bank in the first half of 2014, which gives it a solvency level in line with the sector average. Accordingly, Spanish banks may be said to have comfortably passed the test, evidencing both high quality of disclosed financial information and considerable resilience to adverse macroeconomic developments. Naturally, there is no room for complacency, and the results should not be taken as conclusive proof of the unquestionable and generalised health of our banks. The challenges are manifold, and I shall refer to some of them later.

Dimitar Bogov: Activities and developments in EU payment systems Address by Mr Dimitar Bogov, Governor of the National Bank of the Republic of Macedonia, at the Seventh International Conference on Payment and Securities Settlement Systems, Ohrid, 6–9July 20414. * * * Ladies and gentlemen, esteemed colleagues, It is a great honor and privilege to open the seventh conference on payment and securities settlement systems. This conference has had an international character for several years now, and this year, the list of participants and guests is even broader. Apart from the National Bank of the Republic of Macedonia, we must give due credit to the Central Bank of the Netherlands and the Central Bank of Portugal for making this conference a success. Without their support and active participation, the quality of the conference would not be at the same level. Therefore, I would like to acknowledge the traditional cooperation of the National Bank of the Republic of Macedonia with the Central Bank of the Netherlands and the Central Bank of Portugal, and at the same time to salute this year’s participation of the representatives of the central banks from Central, Eastern and Southeastern Europe, as well as representatives of the Committee on Payment and Settlement Systems at the Bank for International Settlements, Euroclear and Commerzbank. To us, the perennial active participation of the representatives from the domestic payment system is of great importance as well. Esteemed colleagues from the financial sector!

of ops Covid Corporate Financing Facility (CCFF) per week US dollar swaplines Audio/video calls bank wide (RHS) Attendance in Threadneedle Street office (LHS) 3000 40 2500 30 Calls per day Attendance 11 Mar: Bank rate cut 19 Mar: Bank rate cut 23 Mar: Lockdown begins 14000 12000 10000 2000 8000 20 1500 6000 1000 4000 10 500 2000 0 28 Feb 13 Mar 27 Mar 10 Apr 24 Apr 08 May 22 May 0 Mar.20 0 Apr.20 May.20 Source: Bank of England Source: Bank of England What have we learned? Some (very) tentative lessons The Covid-19 crisis is very far from over. The medical and economic challenges we face are huge and potentially persistent – and many are not for central banks to resolve. Against that backdrop, I have covered only one aspect of our actions during the crisis: the steps we took to prevent the initial shock, and the uncertainty that came with it, from threatening monetary and financial stability. Let’s take the good news first. The central banking response was bigger, faster, and more comprehensively co-ordinated with domestic and international partners than ever before. We deployed the tools developed since the GFC – extending the dollar swap lines, the CTRF, the TFSME and asset purchases.

And such incorrect expectations may then lead to unwarranted increases in housing prices and household indebtedness. But I would like to point out that it is genuinely difficult to know what will be a “normal” or average level for future mortgage rates. It is not at all certain that the Riksbank’s long-run assessments of the repo rate are more correct than those of households or other market agents. A low repo rate is necessary, despite the risks I have observed that there are risks linked to holding a low repo rate over a long period of time, and that monetary policy should in principle take these risks into account. But at the 9 At the Riksbank, we usually say that the average repo rate in the longer run can be expected to be in the interval of 3.5 to 4.5 per cent (see, for instance, the Riksbank 2013b, p. 47). Short-term mortgage rates are usually 1.5 to 2 percentage points higher. Households’ expectations of short-term mortgage rates five years ahead are now around 4 per cent. And market agents’ expectations of the repo rate five years ahead are around 3 per cent. See Figure 5 and Figure 6. BIS central bankers’ speeches 7 most recent monetary policy meetings I have nevertheless advocated cutting the repo rate even lower. There are several factors behind this stance.

34 Even once allowance is made for subsequent balance sheet inflation, this evidence implies that economies of scale in banking may cease at double-digit dollar billions of assets. Evidence from banking mergers offers little more encouragement. There is no strong evidence of increased bank efficiency after a merger or acquisition. 35 And there is little to suggest cross-activity mergers create economic value. 36 That rather chimes with recent crisis experience. Of the bank mergers and acquisitions which have taken place recently, the majority have resulted in the merged firm under-performing the market in the subsequent period. Of course, all econometric studies have their limitations so these results do not close the case. Nonetheless, the uniformity of the evidence is striking. (b) Economies of scope Turning from economies of scale to economies of scope, the picture painted is little different. Evidence from US bank holding companies suggests that diversification gains from multiple business lines may be more than counter-balanced by heightened exposures to volatile income-generating activities, such as trading. 37 This mirrors the evidence from Charts 4 and 5 and from the Great Depression. Internationally, a recent study of over 800 banks in 31 Santomero and Eckles (2000). 32 For example, Calomiris and Hubbard (1995). 33 Saunders (1996), Berger and Mester (1997). 34 Amel et al (2004). 35 For example, Berger and Humphrey (1997) based on a survey of over 100 studies. 36 For example, De Long (2001). 37 Stiroh and Rumble (2006).

The growing importance of Islamic finance Indeed, Islamic Finance has grown most significantly in the last decade, posting double- digit rates since 2007, at close to 20%, compared with growth of 4% in the “conventional” financial sector. It has now reached a volume of $ 2 trillion, which is a very significant figure that represents around 1% of total global bank assets. The surge of Islamic Finance is apparent both in Islamic countries and also, in European markets, with the establishment of Islamic banks and the development of the Sukuk market for private and official issuers under some European jurisdictions. The prospects for Islamic finance are also positive, given the extensive scope for the financial inclusion of a population in a number of countries, with very low rates of bank access and usage. The regulatory challenge of Islamic finance The further development of Islamic finance will nonetheless depend on implementing the necessary financial reforms to ensure its integration into the wider financial system. Here, I think that the challenges are twofold: FIRST, in Islamic jurisdictions the challenge is to continue developing the architecture of Islamic finance in areas such as payment systems and supervisory and resolution regimes. In particular, it would seem vital to advance towards the standardisation of Islamic finance regulation, breaking the existing jurisdictional heterogeneity, in order to take advantage of a wider international market. The SECOND challenge refers to the integration of Islamic finance into the wider financial system.

10 Today, let me focus on the first strategy of developing Singapore’s alternative risk transfer market through insurance-linked securities and public-private partnerships. Insurance-linked securities (ILS) 11 Let me begin with insurance-linked securities, or ILS. 12 We know that alternative capital has been growing more rapidly than traditional capacity over the years, a clear demonstration of greater acceptance of ILS instruments by both investors and issuers. In particular, issuance of catastrophe bonds have grown strongly and total catastrophe bonds outstanding reached a new high of almost USD 30 billion as at the third quarter of this year. This is despite the persistent reinsurance headwinds of excess capacity and depressed rates. 13 Catastrophe bonds present unique benefits to reinsurers: they provide multi-year capacity and pricing certainty; they are more secure due to their fully collateralised nature and ability to be rated; they are a good alternative to traditional reinsurance for risks that are hard to model; and they are capital-efficient. 14 To an investor, catastrophe bonds proffer strong benefits too: their low correlation with the 2/4 BIS central bankers' speeches financial markets make them an effective asset diversification instrument; they have low volatility and stable returns; they provide liquidity; and they can be issued via private placements or as tradable securities. 15 We are therefore seeing a growing cluster of institutional investors and fund managers like Quantedge exploring allocation into catastrophe bonds, as they venture into niche and specialised strategies to extract better risk-adjusted returns.

Lim Hng Kiang: Metamorphosis – Singapore as a global capital for Asian risk transfer Official keynote address by Mr Lim Hng Kiang, Minister for Trade and Industry and Deputy Chairman of the Monetary Authority of Singapore, at the 14th Singapore International Reinsurance Conference, Singapore, 1 November 2017. * * * Opening Distinguished guests, ladies and gentlemen, a very good morning to all of you. 2 I am delighted to be here with you today at the 14th Singapore International Reinsurance Conference. 3 This year’s conference is significant because this is the first year the SIRC becomes an annual event. It is a milestone worth commending as the SIRC is now finally able to serve as a platform for annual renewals, much like the Monte Carlo Rendez-Vous and Baden-Baden Meetings of the East. And this is just the beginning. In the longer term, I am confident that the SIRC can be built up into an annual gathering of key global and regional industry practitioners, meeting to discuss key issues facing the industry, and charting out future growth directions. 4 The SIRC’s journey reflects the transformation of the Singapore reinsurance industry over 20 years – from starting out as a domestic market in the early days, to going through market liberalisation in 2000, to being a regional insurance powerhouse in 2010, and now to becoming a global insurance marketplace going into 2020. 5 Singapore is now widely recognised as the leading specialty insurance and reinsurance hub in Asia.

Unlike a normal firm, part of the value of a bank does depend upon its capital structure. There is also a deeper point here about the wider benefits to the economy of the maturitytransformation services delivered by banks financing their longer-term loans with monetary 2 Basel 2 in effect required a minimum equity capital ratio of 2 percent. But under Basel 3 there is a greater focus on the equity that is truly free to absorb losses. As such, almost all regulatory deductions from capital are to be made from equity rather than being split across tier 1 and so-called tier 2 “capital” or made from total “capital”. Also, some risk-weights are increased; for example, on counterparty credit risk exposures. Together those changes mean that an old Basel 2 core tier 1 minimum risk-weighted asset ratio of 2% is equivalent to around 1% on a Basel 3 basis. Taking into account the capital conservation buffer and the surcharge for systemically important financial institutions, for the largest banks the Basel 3 equity minimum comes to around 10% (plus any Pillar 2 buffers). 3 For the original paper, see Modigliani and Miller (1958), “The Cost of Capital, Corporate Finance and the Theory of Investment”, American Economic Review, 48, 261–97. Later papers by the same authors addressed the implications for their result of tax, bankruptcy costs etc. 4 This assumes a bank’s post-tax return on equity is determined, given the riskiness of the bank’s business, in competitive global capital markets, with excess returns competed away.

Whether it is liquidation or resolution that beckons makes a difference, as resolution can materially reduce both the private and social costs of bankruptcy. Relative to a world in which liquidation is a credible threat, having an effective resolution regime will tend to reduce the cost of bond finance and so increase its share in the capital structure. But as explained earlier, it will tend to raise the cost of bonds and reduce their share in the capital structure relative to a state of affairs in which government bailouts are confidently expected. Effective 5 See Kashyap, Rajan and Stein (2002), “Banks as liquidity providers: an explanation for the coexistence of lending and deposit-taking”, Journal of Finance, vol, 57(1), pp. 33–73. 6 See Kashyap, Lamont and Stein (1994), “Credit Conditions and the Cyclical Behaviour of Inventories”, The Quarterly Journal of Economics, Vol 109, Issue 3 (Aug. 1994), P565–592. That bank failure itself has wider spillovers, through impaired credit availability, is itself another departure from Modigliani-Miller, which assumes that all households and firms have symmetric access to credit markets. 7 In addition, the management of the bank will find themselves out of a job. In contrast to the managers of failed firms in other sectors, they face regulatory hurdles to re-entering the industry. That provides a clear incentive to avoid a fragile capital structure. As widely discussed, that needs to be reinforced by remuneration packages that expose their wealth to downside risks. Agency issues internal to banks are not covered in my remarks today.

Overall, it is surprising how little commentary there has been from the perspective of securities market regulators. An exception is Luigi Zingales, “The Future of Securities Regulation”, Chicago Booth School of Business Working Paper No. 08–27. While I do not necessarily support all of his prescriptions, the paper is noteworthy for approaching the reform agenda from the perspective of securities markets and regulation rather than solely that of bank soundness and prudential supervision. 12 See Gorton, op cit. 13 See Bank for International Settlements (1986), “Recent innovations in international banking”, prepared by a Study Group established by the Central Banks of the Group of Ten Countries, known as “the Cross Report”. 14 For examples of market intelligence on innovations at the beginning of the latest cycle see, Rule D (2001), “Risk transfer between banks, insurance companies and capital markets: An overview”, Bank of England Financial Stability Review, December 2001. BIS Review 6/2010 7 “shadowing banking” has become significant to sustaining stability in the provision of essential financial services to the broader economy; when it is founded on liquidity lines, incomplete risk transfer or other kinds of support from the core commercial banking system; and when it involves the provision of the liquidity or monetary functions of banking as well as credit intermediation. Running leverage and liquidity risk is not sufficient to make a firm or fund a de facto bank. I do not think AIG’s securities lending/credit spread business was really a bank. More like a hedge fund.

5 And as recommended in the recent Group of 30 (G30) Report, “Financial Reform: A Framework for Financial Stability”. BIS Review 6/2010 3 ABCP, and SIVs The same is true of the Asset-Backed CP market. These vehicles are similarly reliant on committed lines of credit from commercial banks and, furthermore, in many cases were sponsored and managed by a bank. The case of Structured Investment Vehicles was subtly different. Some were sponsored by banks but did not have committed lines from them. Other SIVs were independently managed. With hindsight one fairly obvious solution would have been for banks to consolidate, for accounting and regulatory purposes, any such vehicles that they sponsored, managed and provided credit lines for. Looking ahead, banks should perhaps quit using such devices to move assets off balance sheet while retaining de facto control. Supervisors should be alert to such devices in future. They might consider whether consolidation for these and other vehicles could be avoided only where a sponsor had made it 100% clear that they would not provide any support in any circumstances. Securities dealers The case of securities dealers is different – in that they were real businesses which had developed over many decades. After Big Bang – in the 1970s in the US, and a decade later in the UK – their balance sheets grew.

Commercial paper investors who had shunned the market returned because they were no longer worried that they could get their money back. In extremis, the Federal Reserve could purchase the commercial paper from the issuer, generating the funds to repay the private investors’ commercial paper investment. The fourth and final goal of the Fed’s liquidity facilities has been to ease financial conditions. This has been particularly important in the current environment because the federal funds rate cannot be pushed below zero (the so-called zero-bound constraint). This means that with the federal funds rate having been effectively lowered as far as it can go, the Federal Reserve has had to turn to other tools such as asset purchase programs if it is to ease financial conditions further as warranted given macroeconomic conditions. The Federal Reserve’s purchases of agency debt, agency MBS and longer-term Treasuries have been implemented mainly with one goal in mind – reduce longer-term private sector interest rates, and thereby provide stimulus to the U.S. economy. The Federal Reserve’s Treasury purchase program is designed to hold down the level of longer-term interest rates. To the extent that a lower level of long-term Treasury rates pulls down the level of private long-term rates, then these purchases should also ease financial market conditions. So how have the Fed’s facilities worked in practice? In general, I think the facilities have worked quite well. In those areas where the facilities have been active, we generally have seen an improvement in market conditions.

That is because the balance sheet size is being driven by a large number of different actions. Is a dollar of TAF lending equivalent to a dollar extended through the CPFF or to a dollar of Treasury purchases? How important is the PDCF? It backstops lots of lending, but outstanding amounts are very low. The differences between the various programs and activities mean that the balance sheet size should be interpreted in light of the impact on market function and financial market conditions, not by the impact on the size of the balance sheet. The size of the balance sheet is also not a good standard because the use of the different facilities depends on the degree of impairment in market function. If market conditions were to deteriorate, I would expect that usage of the Fed’s facilities would increase and the balance sheet would grow in size. This would be appropriate. The Fed’s balance sheet would act as a shock absorber, cushioning the impact of the shift in market conditions. In such 4 BIS Review 48/2009 circumstances, the balance sheet would act as a counter-cyclical dampening mechanism. I would view that as a desirable outcome. In contrast, if the Fed were committed to a particular balance sheet trajectory, then, as market conditions improved and financial conditions eased and usage of the Fed’s liquidity facilities diminished, the Fed would have to offset this by increasing the scope of its liquidity facilities or by expanding its asset purchase programs.

And I recognise the theoretical attraction of having an additional degree of freedom in economic adjustment. In practice, however, there must be doubt about whether, in view of the possibility of severe exchange rate volatility and overshooting, this is a luxury that all economies can afford. There is also the question of whether the relationship between the current account balance and the exchange rate is always the same across different economies so that exchange rate adjustments are a panacea for correcting external imbalances. Regrettably these questions are simply not asked, or, if asked, they are drowned by political noises that appear to be made on the basis of narrow, political concern over bilateral, rather than multilateral, trade imbalances. In any case, flexible exchange rates for many currencies in Asia does not necessarily mean exchange rates determined freely by the market, as proponents would have it. As it turns out, more flexible exchange rates in Asia have meant exchange rates being determined in a flexible manner by the authorities, through intervention, controls and restrictions, at levels that are considered in their best interests. And their best interests, whatever they are, seem for the time being to be manifested in the substantial accumulation of foreign reserves. Perhaps reserve accumulation is the objective. And I can understand why, if this is the case. The comfort of substantial ammunition for coping with the recurrence of financial turmoil has become essential for emerging markets in Asia.

Here I am specifically referring to those with financial markets that are small relative to the amount of international portfolio capital that can be mobilised by foreign investors, and those acting for them, but big enough to whet their appetite for profit. Arguably, the market discipline imposed on macro-economic policies of emerging markets may de facto be more stringent than those imposed on developed markets. Indeed, what is acknowledged by many as an unsustainable, large current account deficit has been sustained in the United States for some time now, no doubt for a lot longer than if one of equivalent size relative to GDP were run by an emerging market. To be sure, there is consensus on the need for greater macro-economic discipline, robust institutions and market structures, as a defence against monetary and financial instability. There has been much progress, for example, on improving corporate governance, and I do not wish to belittle the serious efforts made at this important micro level, through the promotion, and the interaction, of individual, regulatory and market disciplines. There is also much greater discipline in pursuing prudent macro-economic policies, to the extent of attracting criticisms of excessive conservatism, particularly in respect of the running of substantial current account surpluses and the accumulation of large foreign reserves. I am sure these independent efforts of individual jurisdictions, reflecting their different pre-occupations, arising from different domestic circumstances, will, in the fullness of time, ease their tasks in the maintenance of monetary and financial stability.

On the other hand, significant increases in international energy, food and goods prices over the past year imply a substantial squeeze in UK residents’ real incomes, which will weigh on future demand and employment. Looking beyond the shorter term, UK inflation is set to fall as global commodity prices stabilise, bottlenecks in global supply chains ease, and domestic inflationary pressure dissipates as the real income squeeze opens up a margin of economic slack. These two elements define the two sides of the narrow path along which the MPC has to navigate. The MPC sees an upside skew in the risks around the inflation baseline in the latter part of the forecast period. The balance of risk is tilted towards inflation proving stronger and more persistent than anticipated in that baseline. A number of underlying structural developments point in this direction. For example: (1) Brexit may Page 14 have reduced the contestability of UK labour markets by EU immigrants and workers;[13] (2) the broader globalisation process – which helped contain external inflationary impulses to the UK around the turn of the century[14] – looks to have stalled and may be in retreat, reducing the competitive pressure on UK producers to contain costs; and (3) the impact of aging and longerterm health consequences of the pandemic may have led to a decline in UK labour force participation.

It is in no way justifiable to allow bank customers or taxpayers to pay for either exorbitant profits or inefficient operations, which is happening in many countries in the euro area. There is no doubt that we in Sweden can also do more to promote competition in the financial market, not least when it comes to banking activities aimed at private customers and small firms. The largest market players continue to enjoy a high level of market concentration. However, the establishment of a number of new niche banks in the past few years and the recently raging price war on credit for tenant-owned apartments show that deregulation gradually leads to increased competition and consequently to lower prices for consumers. Continued reforms necessary To sum up, we have reason to be proud of the reforms introduced in Sweden over the last decade. They have resulted in Sweden today having a higher growth potential than several of the large economies on mainland Europe. At the same time, we cannot settle for what we have done so far. Sweden must continue to remain a step ahead on the reform agenda that the EU Member States BIS Review 45/2003 5 decided upon in Lisbon in 2000 and which aims to make the euro area “the most competitive and dynamic knowledge-based economy in the world by 2010”. Reforms are under way in a number of countries in the euro area and will in the long run make the euro area countries more attractive to international investors.

Henrique Meirelles: Brazil-Argentina Local Currency Payment System Speech by Mr Henrique Meirelles, Governor of the Central Bank of Brazil, at the Inauguration of the Brazil-Argentina Local Currency System, Buenos Aires, 2 October 2008. * * * It is an honor to attend today the launching of the Brazil-Argentina Local Currency Payments System (SML). I am certain that this initiative will be a watershed in the bilateral relations between the two nations. Coincidentally, the new system kicks off in a period of financial turmoil and liquidity crunch in international trade, in which cooperation among central banks becomes fundamental to facilitate trade and to deepen economic ties. Central banks are responsible for ensuring adequate international payments systems. In processes of economic, financial and trade integration, the objective is to establish an efficient payments structure for intra-regional transactions. When flexible and unobstructed payments systems are available, trade transactions flow with greater ease and lower costs, and financial flows tend to intensify. This is what we expect from the new SML system. Initial obstacles have been overcome. The mechanism of the SML will trigger significant changes in the way in which companies export and import. In Brazil, exporters may now operate in real, while Argentine businesspeople may operate in pesos. Each one of our countries established a consistent framework for management of the system.

Second, to facilitate market adoption, MAS also started publishing, on a daily basis, Compounded SORA rates for 1-month, 3-month and 6-month tenors, and a SORA Index.7 These provide market participants with a standardised and simplified way of obtaining compounded rates for any given tenor, and can easily be referenced in new SORA products of different maturities, to suit the needs of different customers. Third, to provide a market-based pricing reference for SORA cash products, and spur hedging activities through the SORA derivatives market, MAS has broadened our suite of money market instruments by issuing floating rate notes based on SORA (MAS SORA FRN). We are encouraged that the first two MAS SORA FRN auctions were met with strong market demand. Fourth, to facilitate price discovery in a nascent SORA derivatives market, MAS established in June, a daily auction process for SORA Overnight Indexed Swaps (or OIS) and SOR-SORA Basis Swaps up to 5-years in tenor. These are the key instruments for developing the SORA derivatives market and for facilitating a transition from SOR derivatives. Going forward, MAS will extend the auction tenors, and make available this process to the wider interdealer market. 11 But MAS’ efforts alone are not enough to achieve a successful transition from SOR to SORA. The financial industry and its stakeholders have a critical role to play, given that you are the ultimate end-users.

Banks’ profits have become significantly more volatile over the past few decades, with the standard deviation of banks’ return on equity trebling comparing the forty-year periods either side of 16 “At Goldman Sachs, we calculate the fair value of our positions every day, because we would not know how to assess or manage risk if market prices were not reflected on our books. This approach provides an essential early warning system that is critical for risk managers and regulators”, Lloyd Blankfein, Financial Times, October 13 2009. 17 Quoted in Seligman (2003). BIS Review 28/2010 7 1970. There is also evidence of banks’ equity prices having exhibited higher correlation as fair value principles have been extended. 18 Consider a hypothetical experiment. Imagine banks in the UK had been required to mark their banking books to market over the period 1999 to 2008, in addition to their trading book. Market prices are used to proxy different categories of loan. For example, Residential Mortgage Backed Securities (RMBS) and covered bond prices are used to proxy mortgage loans. As with banks’ trading books, all gains and losses arising on the banking book are assumed to flow directly to profits. Chart 6 plots the path of UK banks’ profits, both actual and simulated under the mark to market assumption. Simulated profits are around eight times more volatile. Between 2001 and 2006, UK banks’ cumulative profits would have been around £ billion higher than recorded profits, as the expected future returns to risky projects were brought forward.

This may well be the true answer or reality, but it is rather disappointing if not frustrating that the wide gap between demand and supply has continued to exist. 3. So the natural question for us would be how we can close that gap and bring about a winwin outcome for project proponents and operators on the one hand and financiers or investors on the other. And in this connection, I should say that Hong Kong is uniquely well positioned to play a pivotal role in facilitating and catalysing investment flows to infrastructure projects in the region. We have well-developed capital markets and a deep pool of professional talents, in addition to Hong Kong being a leading centre in arbitration and dispute resolution, all of which are essential building blocks in support of infrastructure investments and their financing. It was against this background that the HKMA set up the Infrastructure Financing Facilitation Office (IFFO) in July 2016. IFFO has the following mission: (a) provide a platform for the key stakeholders to get to know each other and share experiences; (b) enhance the capacity of the investing and recipient countries in infrastructure financing; and (c) facilitate infrastructure investment and financing flows. 4. IFFO now has 90 stakeholders from Hong Kong, Mainland China and overseas joining as Partners. They include project developers or operators, commercial and investment banks, multilateral development financial institutions, asset owners and managers and professional service firms. In the last two years, IFFO has accomplished a lot.

The bulk of the requirements effectively describe controls that each Direct Participant must have in place – and these controls collectively are designed to mitigate the key risks to the end-to-end CHAPS system and support financial and operational resilience. Importantly, this includes risks the participants pose to each other. For example, the ‘Throughput’ rules require direct participants to process a certain proportion of payments by value by fixed times in the day. By 7 https://www.bankofengland.co.uk/-/media/boe/files/payments/chaps/chaps-reference-manual 3 All speeches are available online at www.bankofengland.co.uk/news/speeches 3 smoothing the flow of payments across the operating day rather being concentrated at stress points such as the end of day, this approach contributes to both financial and operational resilience. We require participants to attest to meeting the CRM requirements and we also undertake verification. But risks to the payment system are constantly changing and we need to ensure that the CRM adapts accordingly. Outages of CHAPS may disrupt the smooth flow of critical and time-sensitive payments that are core to the smooth operation of the financial system and real economy. Such outages would hurt end users and, if frequent and prolonged, potentially undermine monetary and financial stability. We are currently working on three sets of requirements to further mitigate these risks: cyber, incident management and Cloud.

First, we plan next year to enhance the Security Requirements in the CRM to align to the globally recognised National Institute of Standards and Technology (NIST) Cybersecurity Framework.8 The new requirements would align with NIST’s principles of Identify, Protect, Detect, Respond and Recover, and will be more outcome focused, balanced with prescriptive requirements when necessary. This will increasingly enable Direct Participants with different resources and business models to apply their own methodology to comply, thus supporting our strategy to allow a diverse range of financial institutions to use CHAPS. Second, the CHAPS rulebook clearly defines the Bank’s expectations around Direct Participants’ incident management approaches and reporting obligations. As I mentioned earlier, the FCA has observed a significant increase in technology-related outages across the financial industry. And for the first eight months of 2019, there were around half a dozen CHAPS Direct Participant incidents a month. The CHAPS rulebook provides an effective and timely means to manage risks through a focused root cause analysis, assignment of appropriate remediation plans and trend analysis to inform our assessment of the risks to the end-to-end CHAPS system. In line with the FCA’s analysis of incident reports,9 we have found that weaknesses in how changes are managed is a key driver behind nearly half of all CHAPS participant incidents. We are therefore revising the controls that Direct Participants should have in place in order to target areas that have contributed to incidents, for example, single-input of static data.

A systematic review of the international literature by Casiday et al (2008) assessed 43 longitudinal, cross-sectional and qualitative studies of the impact of volunteering on mental health. It found that volunteering reduced the incidence of depression, stress, hospitalization, pain and psychological distress. It is difficult to put precise numbers on those benefits. But Fujiwara et al (2014) find that, on average, the well-being benefit from relief from depression or anxiety is worth around £ per year. And New Economy Manchester (2014) estimate that the average cost of treating those suffering from depression or anxiety is around £ per year. 19 Even a small effect from volunteering on mental health could deliver large benefits. (c) Increased skills and employability The evidence on the impact of volunteering on employability is more mixed. Ellis Paine et al (2013) find a significant, but weak, effect of volunteering on the probability of finding a job. Not all types of volunteering will lead necessarily to better employment outcomes. And it is important not to overlook the potential benefits from volunteering felt by employers, as well as their employees. A recent poll by YouGov found that nearly all managers believe that workplace skills can be gained from volunteering. 20 And recent research suggests a link between the emotions induced by volunteering (like confidence and self-esteem) and factors important in the workplace (like performance ratings and efficient problem solving). 21 Oswald et al (2014) provide evidence that happiness makes people more productive.

This might sound fluffier than a GDP-equivalent measure. Yet even the hardest-nosed economist would recognise the existence of those private benefits. Why else would anyone volunteer in the first place! Volunteering is a prime example of revealed preference theory in practice. Surveys of individuals overwhelmingly support this conjecture. The 2006/07 Helping Out survey of volunteers found a range of benefits including enjoyment, satisfaction and achievement, meeting people and making friends, broadening life experience, boosting confidence, reducing stress, improving physical health and learning new skills (Figure 11). The balance of benefits differs across individuals. For example, younger people are most likely to highlight the importance of acquiring new skills and enhancing employment prospects, while older volunteers see the benefits from increased social interaction and improved health. But enjoyment and satisfaction rank high across all volunteer types. This survey evidence is consistent with PBE’s experience. Our economist volunteers are often young. PBE offers the chance to apply existing skills to different sets of problem in very different environments. I think without exception, PBE volunteers have found projects enjoyable and satisfying – and, especially among government economists, liberating too. Digging a little deeper, these self-reported benefits appear to fall roughly into three categories: enhanced well-being, health benefits and increased skills and employability. It is worth considering the evidence on each in turn. (a) Enhanced well-being There are various ways of assessing the impact of volunteering on individual well-being. These include “stated preference” surveys, where people are asked directly about how factors affect their well-being.

The median SMA respondent also anticipated euro area inflation returning to 2% at the end of 2024. Therefore, our October decision was consistent with market analysts’ expectations of a policy rate path whereby inflation is expected to return to target by the end of our medium-term projection horizon. 3 2 See Burriel, Kataryniuk, Mo reno and Viani (2022), “A new supply bo ttlenecks index based o n newspaper data”, Working Paper, Banco de España (fo rthco ming). 3 Surveys by Blo o mberg and Reuters befo re o ur Octo ber meeting po inted to similar co nclusions. However, the latest Survey o f Pro fessional Fo recasters (SPF) pro jected an inflatio n rate o f 2.4% in 2024, mo re in li ne with the ECB’s September fo recast. 2 With the recent interest rate hikes, we have made substantial progress in withdrawing monetary policy accommodation. Since July, we have raised interest rates by 200 bp – the fastest increase in the history of the euro. But we are not done yet. We will need to move rates to levels that allow inflation to converge to our 2% medium-term objective. And for this, we still have some way to go. 4 However, given the high degree of uncertainty of the inflation and economic outlook, the specific level that interest rates may have to reach to be consistent with this objective is uncertain, as it is entirely data-dependent and may change over time.

First, appropriate intervention by supervisors vis-à-vis prime brokers to make sure that they ask for and get broad information from hedge funds and that they put in 12 Angeloni, Kashyap and Mojon, 2003 13 Noyer, 2006a 14 Noyer, 2007 4 BIS Review 42/2007 place comprehensive risk management of all hedge funds-related exposures is essential. Second, there may be scope for policy-makers to encourage appropriate organisation of infrastructure in order to improve the information available on the markets in which hedge funds operate. Third, a specific information system to be triggered in the event of a crisis could be established ex ante in order to ensure that relevant information on exposures and positions could be quickly gathered if necessary. - At the macroeconomic level • Increased financial asset holding resulting from financial innovation is likely to result in higher sensitivity of households to asset price booms and busts 15 . On the liabilities side of non-financial agents’ balance sheets, by facilitating the management of risk and easing liquidity constraints, financial innovation stimulates both the supply of and demand for credit, which may lead to higher leveraging and financial fragility. Note that both effects run counter to the result I mentioned at the start, i.e. that financial innovation tends to reduce growth volatility. Although this result may still hold true in normal circumstances, it may thus be reversed in specific ones, especially in stress situations.

They also include the fact that the distribution of income and productivity across regions has been uneven: the pie has been unequally sliced. The opportunities flow from these challenges. Given these sharp regional differences, if a way could be found of raising the productivity of lower-performing regions, this could have a material impact on aggregate productivity and hence national income. For example, if all of the regions in the lower part of the productivity distribution were lifted to the UK average, this would raise average levels of UK productivity by around 6%. If all regions were lifted to the average level of London and the South East, this would raise the average level of UK productivity by 20%. Levels of UK productivity would then rival those in France and Germany. But how is this to be achieved? At least over the longer run, it is reasonably clear that monetary policy is ill-equipped for the task of either expanding the economic pie or altering the way it is sliced. Over those horizons, nominal things like money and monetary policy cannot affect real things like productivity, skills and investment. In the language of economics, money and monetary policy are neutral in their impact. 14 You do not have to be an economic theorist to see why. If printing money or setting interest rates had a durable impact on activity, incomes and living standards, economic policy would be simple and we would have long since cracked it.

This is currently around 12% lower than immediately prior to the EU referendum. Indeed, uncertainty about the outcome had already caused the exchange rate to depreciate ahead of the vote, such that it is now 17% lower than a year ago. The Bank’s contacts in financial markets attribute this fall in sterling to expectations that the UK’s future trading arrangements, and hence income-earning capacity, will be materially less favourable than at present. Whatever the precise explanation for sterling’s fall, its near-term impact on inflation and growth is likely to be significant. It will provide some support for net exports in the short-term. But it will also cause a sharp rise in import prices, and in time consumer prices, over the course of the next few years. That will in turn tend to depress inflation-adjusted household incomes, and hence consumer spending, over this period. It is unclear at present how the disconnect between the relative optimism of households and some companies, on the one hand, and the relative pessimism of financial market players and the other half of companies, on the other, will be reconciled. Is this a case of skittish financial market players over-sensitive to economic risks that may never materialise? Or sluggish consumers insensitive to the weaker economic prospects that lie ahead? Only time will tell. In the meantime, however, the MPC needs to form its own judgement on prospects for inflation and output. These were set out in the November Inflation Report.

These rules set provisioning percentages based on risk and criteria so that banks may make an assessment of country risk by monitoring economic developments and the political and institutional situation; further, they contain exemptions arrangements, with such exemptions depending on the type of transaction, its term and the modus operandi. Notably, these rules do not affect foreign direct investment by the Spanish financial system, since they do not apply to debt instruments and to contingent risks, nor to risks vis-à-vis European Union countries. The impact of these rules on foreign trade is low since most trade finance products are not subject to country risk provisioning. Trade credits with a maturity not exceeding one year are exempt, as are pre-financing credits with a term equal to or less than six months for specific export agreements. The rules also provide for an exemption for CESCE insurance operations, which is an added incentive for banks to have this guarantee in medium- and long-term transactions since, in addition to eliminating default risk, they do not then have to set aside country risk provisions. The prudential treatment of instruments supporting internationalisation and, specifically, of instruments linked to short-term trade transactions draws on two significant regulatory frameworks: Basel III, at the international level; and the Regulation (which is directly applicable in all Member States) and the Directive on prudential requirements and their attendant supervision, drafted within the European Union, namely Regulation (EU) No.

This trajectory is all the more significant when compared with events in other developed economies and, in general, in the euro area as a whole, where export shares fell during the crisis. Our sound export performance has been underpinned both by gains in competitiveness and the pick-up in external demand, as well as by more structural factors, allowing us to expect this potential to continue and become more entrenched in the long run. The structural factors include the geographical diversification of exports of Spanish goods and services to emerging markets and the more export-oriented gearing of our companies, which is reflected in the increase over recent years in the number of Spanish companies competing on international markets. The re-directing of exports towards emerging markets has contributed significantly to these developments, thanks to the substantial dynamism of the demand for imports in those BIS central bankers’ speeches 1 countries. Indeed, their dynamism has compensated for the cyclical weakness in the developed countries, particularly in the euro area. The relative weight of goods exports to emerging countries has increased since 2007, coming to account for 30% of the total. The increases have been across the board, although particular mention may be made of Latin America, China and North Africa. However, the share of the developed countries has fallen on the same scale, owing to the loss in the weight of sales to the euro area, which at end-2013 stood slightly below 50%.

The stock of Swedish covered bonds (housing bonds) issued in Swedish kronor (SEK) is just under SEK 2,000 billion. This is more than double the size of the outstanding volume of government bonds in the same currency. The stock of corporate bonds issued in SEK corresponds to almost 700 billion, while the stock of municipal bonds issued in SEK by municipalities and Kommuninvest is just over 400 billion. All in all, this means that the Riksbank has the possibility to increase its bond purchases. However, the fact that the possibility exists does not make it an appropriate measure. There are several aspects to consider; for example, how it affects resource distribution in the economy and the risks for to the Riksbank’s balance sheet. Another issue is whether the Riksbank should consider sustainability aspects in its bond purchases. I will come back to this at the end of my speech. Allow me to summarise what I have discussed so far. I feel confident that the Riksbank can act with strength and security if a crisis threatens to destabilise the Swedish economy. However, we should be humble when it comes to the difficult considerations that may then be required in monetary policy. The scope for combatting a severe downturn in the Swedish economy is improved substantially if other policy areas also contribute, in particular fiscal policy.13 The remaining issue is the most difficult – should central banks just try to combat the potential negative effects of climate change or should they also act to combat climate change itself?

Also, the IMF assumes solid growth of the Macedonian economy of 3.2% in 2014, which is higher than the growth projected for the regional countries and wider, and provides a clear vision that there is potential for achieving the economic growth. As the central bank, for us, it is extremely important that the surveyed companies largely expect increase in the exports. Thus the larger export potential, the higher foreign exchange inflows, i.e. narrowed trade imbalance. After all, in 2013 we witnessed trade deficit narrowing in the trade of goods that equaled about Euro 190 million, annually, given the increase in the exports (of 3.2%/3.9% in services) and a decrease in imports (of 1.5%/0.9% in services). This improvement in the trade is closely linked to the increase in the production capacity of the economy, i.e. the increase in the export potential. The policies that were applied in the previous period, which were aimed at attracting foreign investors in the tradable goods sector, which meant export diversification, proved as a good pillar for reducing the foreign trade imbalance. The export growth capacity of TIDZs plans indicated that the foreign exchange rate is not a barrier to exports, i.e. that it is not overvalued. On the contrary, the stability of the Denar exchange rate, in the past against the Deutsche Mark, and today against the Euro, is an important pillar of all business decisions.

Changes in the population pyramid, increased immigration, the growth of the demand for second homes by residents and nonresidents and, above all, the continuous growth of income and the pronounced fall in interest rates are factors that help explain the trend growth of the relative price of housing in Spain. In addition, the unfavourable course of stock market prices in the last three years has enhanced the attractiveness of alternative investment opportunities, such as those offered by real estate. Yet in a market such as that for property which, by its very nature, sees supply adjust relatively slowly, demand pressures such as those arising from the aforementioned factors may cause excessive price reactions that tend to be corrected subsequently. This appears to be the situation currently in our country where, even with a significant rise in the rate at which houses are built, property values may have exceeded the levels consistent with the trajectory of their determinants. In such a situation, it is likely -and desirable- that house-price growth rates will be brought back progressively and in an orderly fashion to levels more in line with their fundamentals. This process, which should run parallel to gradual moderation in the resort to credit financing by the households and companies most directly involved in the real estate business, would prevent house prices from moving too far away from their equilibrium value.

In late 2002 and early 2003, the economic outlook and the trend of financial variables in Latin America improved perceptibly, especially following the positive developments in Brazil and Argentina. The recent crises have highlighted deep-seated shortcomings in the legal and institutional workings of these countries. Emphasis has thus been placed not only on the need to pursue policies supportive of monetary, financial and fiscal stability, but also on how important an institutional framework respectful of property rights and private enterprise is for fostering growth in these countries. Factors of a more global nature have also been pivotal in the recent crises. These have been related to greater risk-aversion on international financial markets, which has caused capital flows to some of these emerging economies to shrink. International markets have, however, tended to be more selective, and there have been fewer episodes of crises spreading from one country to another, although contagion cannot be said to have disappeared completely. The recurrence of these crises has led to reflection on the so-called “architecture” of the international financial system. Numerous reforms have been proposed in this connection. And some have been adopted, and are generally in the initial stages of implementation. Much remains to be done in this area, although the acceptance of sovereign bonds incorporating the so-called collective action clauses, issued by Mexico, Brazil and Uruguay, offer grounds for hope.

Although I believe that low inflation fosters financial stability, it would be wrong to disregard the possibility that changes in the inflationary process can have unintended consequences for the stability of the financial system. The success in bringing down inflation has lowered both nominal and real interest rates. Moreover, factors such as the integration of emerging markets into the world trading system, and high productivity growth, has put downward pressure on prices of manufactured goods. This may have induced key interest rates to be lower, than what otherwise would have been justified in this cyclical position of the economy. Given the fact that the low inflation regime has yielded high and stable growth, in conjunction with low interest rates, it is no wonder that asset prices have surged. While much of this price movement is fundamentally based, there is a risk that households and firms might become too optimistic about future earnings and interest rates. Put differently, there is a risk that 1 2 See e.g. Schinasi, G. (2004): ”Defining Financial Stability”, IMF Working Paper, WP/04/187. BIS Review 101/2007 asset prices rise to unsustainable levels during the transition from a regime with high inflation to a regime with low inflation. Another, but not unrelated issue, concerns how risk is priced in the credit markets. The last few years saw risk premiums in credit markets falling to record low levels.

The general public’s expectations of inflation two years ahead are below 2%, which suggests that the inflation targeting policy has achieved credibility – a matter that is crucial for monetary policy’s ability to produce good results. The foundation for monetary policy credibility has been strengthened in that the new legislation in force from the beginning of this year has created a more independent central bank. Maintaining price stability is now the Riksbank’s statutory function. The Riksbank has defined its target as being to keep annual inflation, expressed as the change in the consumer price index (CPI), at 2%. The ambition to keep inflation low stems from the insights about inflation’s harmful effects on the economy – that higher growth and employment cannot be generated in the longer run by means of higher inflation. It is other matters, such as how the economy functions, achievements in technology and the educational system, that determine those factors. The best way for monetary policy to contribute to high growth and employment is therefore to improve the long-term growth potential via low inflation. To achieve its objective, the Riksbank uses its instrumental rate, the repo rate. If the Riksbank’s monetary stance is unduly expansionary, that is, if the repo rate is too low to ensure macroeconomic balance, in time the economy will be liable to overheat. Demand then grows more rapidly than production capacity and this generates inflationary pressures.

The financial markets are becoming increasingly integrated, banks are crossing more and more boundaries and so on. All this is affecting the Riksbank to a high degree. The same is true of the rapid technical innovations, with increasingly complex payment systems. Add to this the possibility of EMU and you can see the future does not lack challenges. Apropos of what I have been talking about today, a while ago one of my American colleagues, Bill McDonough, said something to this effect: we should be pleased if we are better today than we were yesterday at the same time as we are not yet as capable as we will be tomorrow. I think that's about right. 4 BIS Review 51/2001

They will benefit all member states in the single market. However, they will take time to design and longer to implement, and they will have no impact on the burden of the debt overhang that already exists. For complete solutions to both current and potential future problems the sharing of fiscal risks is required. It is no coincidence that effective currency unions tend to have centralised fiscal authorities whose spending is a sizeable share of GDP – averaging over a quarter of GDP for advanced countries outside the euro area (Table 1). I have already discussed how parts of the UK have benefitted from fiscal risk sharing. The euro area also stands out from federal systems like the US, Canada and Germany. In those systems, the impact of localised shocks to income is reduced by between one tenth and one fifth by centralised fiscal transfers (Chart 6). Without this risk sharing, the euro area finds itself in an odd position. As the Presidents of the European Council, European Commission, Eurogroup and European Central Bank argued in their report, European Monetary Union will not be complete until it builds mechanisms to share fiscal sovereignty. Possible options for sharing fiscal risks range from a transfer union to a pooled employment insurance mechanism. The latter would appear to be an opportunity to combine the current enthusiasm for labour market reform with the longer term imperative to build elements of an efficient transfer union. And it would ensure risk sharing was based on cyclical, rather than structural, labour market positions.

What structural changes will occur in the domestic economy if we increase petroleum revenue spending?  What were the causes of the financial crisis? How can we prevent history from repeating itself?  How can the authorities promote sound and stable economic growth and the efficient use of society’s resources? The last question has been the subject of debate for centuries. The prevailing view has shifted over time. Crises and recessions have often spurred new recognitions and new thoughts. Anton Martin Schweigaard, the lawyer and economist who has given this lecture its name, has been referred to as “the champion of 19th century economic liberalism in Norway”. 3 Schweigaard taught statistics and economics at the University of Oslo from 1836 and was a staunch advocate of free trade. The Scottish moral philosopher Adam Smith laid the conceptual foundation for economic liberalism in his book The Wealth of Nations. According to Adam Smith, economic decisions should be left to individuals. Market forces, or “the invisible hand”, should be allowed to function. Economic liberalism was a reaction to the prevailing mercantilist doctrine of the time, where state control by means of tariff protection, monopolies and other privileges was aimed at promoting certain industries. Schweigaard also strongly criticised government control: 2 In Agnar Sandmo (2006): “Samfunnsøkonomi – En idéhistorie (Economics – a history of ideas)”, Universitetsforlaget, p. 13. 3 Wilhelm Keilhau quoted in Halvor Mehlum (2008): “Samfunnsøkonomen Schweigaard (The economist Schweigaard), Memorandum No 20/2008”, Department of Economics, Oslo University, p. 5.

2 BIS Review 109/2010 “There is hardly a trace of the multitude of unnatural industrial plants that it wanted to promote. That is how powerless we are when we seek to determine the law of nature rather than follow its prescriptions.” 4 The ideals of free competition and a passive state predominated up to World War I, even though not everyone shared this view. The radical German economist and philosopher Karl Marx believed that competition and big industry led to falling profit rates and predicted that it would lead to the collapse of capitalism. 5 In pace with stock market crashes and deep depressions in the 1920s and 1930s, confidence in free market forces waned. The British economist John Maynard Keynes’ theories of economic management set a new standard for post-war economic thinking. Keynes argued that a decentralised market economy alone would not be stable. He advocated in particular that government should stimulate the economy in adverse periods by increasing government spending. Such a countercyclical policy was necessary in order to ensure that the market economy could again function effectively. Keynes’ theories gave support to an era of more state planning and control. Some countries went farther than others. In Norway, the first Nobel laureate in economics Ragnar Frisch was an important agenda-setter. Frisch, who worked here in this department, wanted to make the subject more scientific by using mathematics and statistics. According to Frisch, economic theory should be expressed by mathematical models and supported by quantified relationships.

If we look at the development over the past ten years, we can see for instance that market capitalisation in relation to GDP has grown from approximately 20 per cent in 1990 to almost 90 per cent in 2000. This means that according to this measure, the euro countries have passed Japan, while the USA is still ahead of them. It is interesting to note that the EU countries 2 BIS Review 85/2001 outside of the euro area are at approximately the same level as the USA, or at just over 150 per cent. However, the stock markets in the euro countries are growing rapidly. Between 1995 and 2000 the value of the listed companies in the euro area grew by 276 per cent. The corresponding figure in the USA was 206 per cent. Looking at the number of new issues and number of listed companies also gives a picture of a strong development in Europe. All in all, there is a clear picture that companies in the euro zone use risk capital to a lesser degree than those in the USA, but that the differences are rapidly declining. The rapid developments have also put greater pressure on structural changes in the infrastructure of the stock markets. Since the introduction of the euro, we have seen several examples of co-operation and mergers between stock exchanges in Europe. Euronext, the merger between the stock exchanges in Paris, Amsterdam and Brussels, is one example.

The 40 or so legislative proposals taken up in the plan should come into force by 2005. In an attempt to hasten this process, the Lamfalussy Committee has illustrated how legislation in the financial field within the EU could be adapted more simply. The Committee also identified a number of areas in the action plan that ought to be given special priority. The Committee's proposals were approved at the EU summit meeting in Stockholm in the spring, and the first proposals for directives are now being discussed. I would like to emphasise the importance of this work. Well-formulated, flexible legislation is necessary to enable the financial sector to provide a positive contribution to economic growth. This is made through enabling payments to be made more cheaply, risks to be distributed better and savings to be BIS Review 85/2001 3 more easily channelled into profitable investments. The comparison with the USA also indicates that there is great potential to be realised in this respect in Europe. The securities market has particular importance in this context. Firstly, as we have seen, the securities markets have gained greater importance as sources of financing for companies, both with regard to risk capital and borrowed capital. Their significance for savers is growing correspondingly, which is clearly illustrated by the rapid development in households' mutual fund savings. As the markets develop they, and more specifically pricing on them, also take on greater significance with regard to resource allocation in society. In other words, improved measures are extremely important.

In periods, this has given rise to unrest among local authorities and employees, for example in the traditional manufacturing city of Trollhättan. In Norway, many large multinational companies have closed down operations at home and established their main offices and warehouses in the Stockholm or Malmö/Copenhagen area. Both the Norwegian costs level and population density have been of disadvantage to use with regard to these structural developments. Sweden has partly responded to strong international competition by continuing to develop new and improving existing products and processes. The country has also become a Nordic financial centre by being the home country to four large financial conglomerates. As mentioned the Norwegian economy has benefited from good prices for our export products and proximity to petroleum activities provide Norwegian manufacturing with advantages. However, our oil dependence and a lack of diversification in our industry structure are a source of concern as regard long-term developments Conclusion Monetary policy’s most important contribution is to provide the economy with a nominal anchor. Today, inflation targeting is the norm for small and medium-sized economies. Exchange rates fluctuate, but there are several ways of hedging against fluctuations. After Sweden switched to inflation targeting, the country has experienced solid output growth and low and stable inflation compared with the previous decades. Since 2002, inflation has fallen sharply both in Norway and Sweden. Between December 2002 and March 2004, the key rate was reduced by a total of 5.25 percentage points in Norway.

The high cost level in the Norwegian business sector is adapted to a situation where we are developing the petroleum sector and phasing in the use of petroleum revenues into the mainland economy. After a period, we will be able to cover a smaller share of our imports using current petroleum revenues and by drawing on capital in the Petroleum Fund. The Norwegian cost level will then have to be dampened, also compared with that of Sweden. Competitiveness may in the longer run be brought back to the level prevailing at the end of the 1960s before Norway became an oil nation. During such a period of adaptation, which may start in 5 or 10 or 15 years, a flexible exchange rate, with a fall in the Norwegian krone against the Swedish krona, will have to play an important role. Where do we stand today? Tariff barriers for trade in goods are low. The EU/EEA agreement also provides for increased trade in services. During the 1990s, capital mobility has increased to a level that is higher than 100 year ago. Free capital flows and free trade pave the way for high economic growth and prosperity, but also entail challenges. Competition has increased in many industries. Labour-intensive processes are being transferred to new EU member states such as the Baltic countries. Some multinational companies have streamlined various production processes and distribution and centralised them in the same location. Saab has been acquired by General Motors and Volvo by Ford.

Certainly there are a number of questions and challenges regarding future developments in the banking system and the regulatory framework for it, as has emerged in the recent White Paper on a Future Vision for the Financial System, but further discussion of that topic must await another opportunity. Early this month, Parliament passed legislation lifting restrictions on the remaining stock of offshore krónur, which amounted by that time to 84 b.kr., or just under 3% of GDP. This represented the final step in lifting capital controls on non-residents’ króna-denominated assets. The assets fell into two categories: so-called offshore krónur, on the one hand, and króna-denominated assets held by the failed banks’ estates, on the other. These assets combined amounted to 65% of GDP at the peak. We reduced that percentage to the current level through various measures taken in 2010-2017 — without disturbing the balance of payments or financial stability, without tapping the Bank’s reserves to an inordinate degree, and without significant legal repercussions. This success has been noticed, including internationally. Alongside the final liberalisation of offshore krónur, the special reserve requirement on capital inflows into the bond market and high-yielding deposits was lowered to 0%. This synchronised effort has delivered positive results. The 5 exchange rate of the króna has not been under pressure due to offshore króna outflows, and the Central Bank has not yet needed to use significant reserve assets in order to fulfil its pledge not to allow those outflows to weaken the currency.

It could be argued, too, that this is more likely an underestimation than an overestimation, as there is systemic positive bias in household inflation expectations and the breakeven inflation rate in the market entails risk premiums. The effect that the real rate has on domestic demand and inflation depends on what the equilibrium real rate is considered to be at any given time; that is, the real rate that neither stimulates nor dampens the economy. The equilibrium real rate has probably fallen in Iceland, as it has in most economies in the wake of the financial crisis, but exactly where it lies is highly uncertain. One of the Monetary Policy Committee’s tasks is to attempt to assess it. It is normal that Central Bank interest rate should rise above equilibrium when a positive output gap develops and inflation is above target, but neither is the case at present. That being so, it was appropriate to contain the rise in the real rate by lowering the Bank’s nominal interest rates. 2 BIS central bankers’ speeches Some will surely ask: Shouldn’t the Bank have lowered interest rates earlier? Hasn’t the monetary stance simply been too tight in the recent past? I don’t think this is the right time to dissect these questions, not least because many things look different in the rear-view mirror. As is said in Njáls saga, “Everything is ambiguous in retrospect.” That said, I think there are solid arguments in favour of a negative response to both questions.

In this regard, the reform in late 2022 of the Code of Good Banking Practice (CGP) focuses precisely on orderly debt restructuring for household segments with a high degree of socio-economic vulnerability. The Banco de España will assess its implementation as more data become available. How different banks and financial systems position themselves against these risks will determine how resilient they are. In this regard, amid such high uncertainty, including that surrounding the degree of monetary policy tightening, Spanish banks must implement a prudent provisioning and capital policy. A policy that earmarks part of the short-term increase in earnings to bolster the sector’s resilience would thus put it in a better position to absorb any potential losses should the worst risk scenarios materialise. From a European standpoint, it should also be noted that a smoother-functioning euro area with improved governance would contribute hugely to making the European financial system less vulnerable. In particular, the creation of a fully mutualised European deposit insurance scheme would boost the confidence of citizens and the markets and contribute to increased risk-sharing in the euro area and, thus, to reducing potential episodes of fragmentation. 9 The values within this range are obtained based on different assumptions regarding the percentage of debt that matures in the short term and is refinanced. The 6.8 pp impact at the upper end of the range assumes the full renewal of the debts maturing in the short term.

8 Further, the longer interest rates remain high, the greater the likelihood of additional upward adjustments to banks’ funding costs and of a deterioration in credit risk quality. With regard to financing, the gradual reduction in, and increased cost of, Eurosystem liquidity facilities and the developments seen in deposits (with depositors seeking better remunerated financial instruments and having used up part of the savings buffers built up during the pandemic) may accelerate the increase in banks’ cost of funding. The continuation and/or heightening of the recent tensions in the global banking sector could also contribute to this increase. As for the future increase in credit risk, our estimates show that a market interest rate increase of 400 bp, somewhat larger than the gain of approximately 365 bp seen in the 3month EURIBOR, could push up non-financial corporations’ median gross debt burden ratio by between 2.9 pp and 6.8 pp9 and the share of corporate debt held by firms under high financial pressure10 by between 6.5 pp and 8.9 pp. In the case of households, it is estimated that a 400 bp rise in the 12-month EURIBOR (slightly less than the 410 bp increase seen since the beginning of 2022) would raise the percentage of indebted households with a high net interest burden11 by 3.5 pp. This increase would tend to be stronger for lower-income indebted households, which are also those most affected by the rise in inflation.

Given the major challenge ahead, I feel we are very fortunate to have with us today some of the world's leading experts on these issues. Experts are abound in this room, and I hope you foster good network and contact with all these world class players, some are on the podium, and some are sitting among the audience. Ladies and gentlemen, It is a pleasure for me to declare the opening of the " Seminar on Market Risk Management Techniques for the BIS Capital Regime" and I wish you every success in your endeavor to meet these challenges. Thank you. BIS Review 87/2001 3

Or: With expanded markets and choice available for high net worth customers, will it make it harder for domestic financial institutions to continue supporting inclusion outcomes that are partly cross-subsidised by high net worth business today? Correspondingly, to what extent will this impact the cost of financial services for the poor, potentially making them even more unaffordable than before? Or: Are there opportunities to bring new technologies and emerging practice into domestic markets and simultaneously create an environment for them to take root and spawn original domestic applications that will create additional multiplier effects? Or: How might easier cross-border access encourage new business partnerships that would enable financial institutions to penetrate untapped customer segments more efficiently and reduce associated information asymmetries? Answers to such questions can be important in how we think about and approach financial integration. Ultimately, behaviour matters, and therefore needs to be explicitly addressed in financial integration strategies. Unless we also turn our attention to the behavioural responses of financial actors in a more financially integrated region, we may find that our best efforts to strengthen the pillars for greater financial inclusion ultimately does not deliver as expected. Financial inclusion and financial integration strategies therefore need to come together through deliberate approaches that are mutually reinforcing.

The krona depreciated by around 15 per cent in a very short space of time during the financial crisis. What effects can this have on Sweden’s economy? The effects of the exchange rate on inflation One of the most important effects of changes in the exchange rate, and particularly important for a central bank with an inflation target, is how inflation is affected. We have seen that the nominal exchange rate of the krona depreciated by around 15 per cent over a short space of time in connection with the financial crisis. One way of trying to estimate how this affects inflation is to study pricing behaviour at company level. Let us assume that a company imports a product into Sweden. To make the example more concrete, let us assume that it imports cheese from France. When the krona weakens against the euro, the importing company has to decide how this will affect the price charged in kronor. Let us assume that the krona depreciates 15 per cent against the euro. The importing company probably has an agreement to buy the cheese for a particular price in euro. This means that the cheese will now cost the importer 15 per cent more in kronor. How much of this cost increase should then be passed on to the consumer price? In the long run, if the krona depreciation continues, the importer can perhaps negotiate a slightly lower purchase price in euro.

12 BIS Review 3/2010 Figure 7 Sweden’s current account and real exchange rate Per cent of GDP and index, 18 November 1992=100 Note. Striped bars and broken lines represent the Riksbank’s forecasts. Sources: Statistics Sweden and the Riksbank. Many indications that krona will continue to appreciate Let me now summarise the Riksbank’s assessment of the more long-term developments in the exchange rate. Our assessment is that the surplus on the current account will decline over the coming years, and this is linked to a stronger real exchange rate. In recent years, growth has been relatively high in Sweden compared with other countries, and our assessment is that this tendency will continue. There are thus good arguments why the real exchange rate should strengthen in the coming period. The real exchange rate can strengthen not merely through an appreciation in the nominal exchange rate, but also by inflation being higher in Sweden than in other countries. However, we have no reason to believe that inflation in Sweden will differ substantially from that of other countries over the coming years. The change in the real and nominal exchange rate could therefore be expected to be roughly the same size (see Figure 3). In addition to the more long-term driving forces that I have taken up, there is a further factor pointing to a stronger krona in the coming period. The severe weakening of the krona as a result of the financial crisis was probably linked to the financial turmoil that arose.

William C Dudley: US monetary policy and its global implications Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Central Bank of the United Arab Emirates, Abu Dhabi, 13 November 2014. * * * It is a pleasure to have the opportunity to speak with you here today. In my remarks, I will assess the outlook for the U.S. economy and the progress that the Federal Reserve has made toward its dual mandate objectives of maximum employment in the context of price stability. I will argue that we are now closer to achieving these objectives. That is the reason why the Federal Open Market Committee (FOMC) ended its latest Treasury and agency MBS asset purchase program last month. But we still have further to go. Although the U.S. labor market has shown substantial improvement, there still is a meaningful gap between where we are and full employment. Also, inflation continues to undershoot the FOMC’s 2 percent objective. This argues for patience with respect to the timing of lift-off of the federal funds rate and the beginning of the normalization of monetary policy. Although patience is appropriate, if all goes well, I anticipate that we will begin to raise short-term rates sometime next year. That would be a welcome development, because it would indicate that the U.S. economy has largely recovered from the damage caused by the housing boom and bust, and the financial crisis.

BIS Review 67/2000 4 Chart 3 Consumer confidence indicator and interest rate differential Chart 3 illustrates the correlation between changes in the consumer confidence indicator and the differential between long-term and short-term interest rates since 1992. The consumer confidence indicator attempts to chart households’ confidence in and expectations concerning their own financial situation and the nation’s economy, and represents a leading indicator for private consumption. The differential between long-term and short-term interest rates is an indicator of the tightness of monetary policy. A negative differential means that short interest rates are higher than long rates, and may be taken as an indication that monetary policy is contractionary. The correlation between the interest rate differential and the consumer confidence indicator would seem to imply that monetary policy, at least in certain circumstances, has a swifter and stronger effect than previously assumed. The effects of monetary policy are channelled through the real economy and the exchange rate. As already mentioned, traditionally there has been a considerable lag before changes in the real economy have affected price and cost inflation. However, if expectations are reflected in household and enterprise behaviour, prices may be affected more swiftly. If price expectations are affected, the effect on the exchange rate will be intensified, since lower price inflation in isolation implies a stronger exchange rate. It is thus likely that there is a third channel which monetary policy can affect, which we may term the expectation channel.

These are potential reforms to the international monetary and financial system (IMFS) and how small, open and financially integrated economies (SOFIEs) can preserve monetary and financial stability in a world of global financial integration and large and volatile capital flows. Both of these are unfinished business and the road ahead is foggy. The post-war global economic order was initially based on the principles of free trade in goods, current account convertibility, and monetary stability through fixed but adjustable exchange rates vis-à-vis the US dollar. Open capital accounts were the exception, however. At the time, trade integration was seen to be more important for economic progress than financial integration. It worked well for a long while, and some call the period from 1950 to 1970 the golden years. Yet there were inherent flaws in this set-up that contributed to its demise in the early 1970s, not least the well-known Triffin dilemma regarding the conflict between the domestic economic objectives of the country providing the main reserve currency and the required international supply of that currency. In this case it was the US dollar. Then capital accounts were opened up, with strong momentum in the 1980s and early 1990s. Capital controls were increasingly undermined by technology and financial innovation, and strong arguments were being made to the effect that open capital accounts would bring significant benefits. After all, ongoing real economic integration at a global level demanded at least some degree of global financial integration.

The exchange rate has been relatively stable after the adjustment that took place in the first half of last year, and the króna is currently somewhat stronger than historical measures would warrant, although it should be admitted that determinism is probably not the most suitable approach for assessing currency developments. One reason for uncertainty about the exchange rate is the large current account deficit, as well as the fact that it can easily be driven by factors over which we have no control, given how closely Iceland’s financial sector is now integrated with global financial markets. A central bank with a legislative and regulatory remit to target inflation is of course pleased with such inflation developments, but would prefer them to be built on a more solid foundation. Domestic demand growth has declined, but rather more slowly than the Bank had hoped. The current account deficit is large and will also contract more slowly than the Bank would have desired. Demand remains buoyant in the housing market and there are indications that the rate of credit growth may be on the increase again. For these and other reasons, the Bank will remain on the alert and not ease its monetary stance until even clearer signs emerge that a lasting change has been established. Equity prices have soared in Iceland in recent years.

The main purpose of QE is to extract more duration risk from the bond market; indeed, term premia have already been successfully compressed – the term premium on a 10-year OIS is estimated to be significantly negative at around -60 to -100 bp. I also think that the significant strengthening of our forward guidance, the consequent prolongation of the reinvestment period for the very important stock of QE assets – 2600 billion euros –, and the DFR cut, were already a powerful and consistent combination. The forward guidance now states that we expect rates to remain at their present levels, or lower, until the inflation outlook robustly converges to a level sufficiently close to, but below, 2%, and this convergence has been consistently reflected in underlying inflation dynamics: our forward guidance is now strongly “state based”, reflecting our enhanced commitment to reach our objective. This is significant progress that has been overshadowed by the arguments over QE. For me, it is not a question of a shifting balance between hawks and doves – I have never found ornithological categorisation to be of much help in designing monetary policy. It is a question of pragmatic and objective economic analysis, which takes market expectations as useful indicators but is not dependent on them. But whatever the debate in the Governing Council has been, let us now look forward and stress one simple message that has unanimous agreement: monetary policy has, once more, done its duty.

As a practical application of this framework, consider the Federal Reserve’s commitment to tailoring and ensuring that supervision is scaled appropriately to the risks associated with different types of institutions.8 Recent examples could include the stress testing distinction between large, complex firms and large non-complex firms; expanded eligibility for the 18-month exam cycle; relief from supervisory assessments, stress testing requirements, and other prudential measures for bank holding companies with less than $ billion; the Bank Exams Tailored to Risk (BETR) program; and the multi-agency proposal to better align prudential standards with the risk profile of large institutions.9 Tailoring allows different firms to operate with different parameters of the policy regime. The largest, most systemically important firms, for example, impose larger potential risks to society than other firms, which implies a different risk/return trade-off and policy mix than for smaller institutions. Without the ability to tailor the regime to reflect the risks associated with different types of institutions, we would likely be left with a one-size-fits-all approach that is not optimal for any type of firm or for the financial system as a whole. Discussion Issues The simple framework that I just described is just that—simple. The real world is much more complicated, and I’d like to spend a few minutes discussing some practical issues. 3/7 BIS central bankers' speeches Understanding the Trade-off The chart presented above is clearly illustrative and actual policy analysis requires detailed estimates of the potential benefits and costs of each component and the cumulative effect.

For this reason, it is of utmost importance to have an accurate diagnosis of the factors that limit the potential growth of the Spanish economy. In this respect, the diagnoses available tend to be unanimous in emphasising, first, the low productivity growth in comparison with other European countries and, second, the insufficient utilisation of labour. With regard to the lack of productivity growth, it is sometimes argued that the reason lies in our productive structure, insofar as industries in which the growth rate of this variable is more modest have a comparatively high weight. This argument has some merit. However, careful examination of the available evidence shows that relative productivity growth in Spain is lower in most industries. This is something that economic policies need to address 8 See Box 9 of the “Quarterly report on the Spanish economy”, Economic Bulletin 3/2020, Banco de España. 19 if we wish to raise the potential growth of the Spanish economy and, thus, the present and future well-being of our citizens. The cornerstone of any strategy to improve productivity growth, and thereby boost the opportunities of all citizens and the transition towards a more sustainable economy, should focus on two areas in which Spain has a worrying shortfall: human capital and technological capital. As regards human capital, Spain’s relative disadvantage with respect to more dynamic European economies should lead to a rethink of the institutional design of the educational system, including a far-reaching review of the curriculum content and the system of learning itself.

Also, for firms with non-viable business models, an orderly market exit should be available, since this would result in a more efficient allocation of resources. To achieve these aims, the introduction of improvements in the operation of in-court and outof-court insolvency procedures would be desirable for greater efficiency and speed. In this same respect, in the case of the income support measures for the workers and households most affected by the crisis, their possible extension should be combined with an improvement in active labour market policies and in the training available to unemployed persons and workers, in order to maintain their employability and facilitate their reallocation within the labour market and avoid long-term unemployment. Apart from these short-term actions, an ambitious structural reform agenda is urgently needed, to increase the economy’s potential growth, which was already low before this crisis. And, at the same time it is necessary to design a credible strategy for a gradual sustained reduction in fiscal imbalances, to be implemented when the pandemic is over and the economic recovery has firmed. Such a strategy is particularly important and appropriate for a country like Spain, which has faced this crisis with public finances in a more vulnerable position than in other European economies.

In the area of product development for example, collaboration within the banking group can be explored to offer a more comprehensive range of products and gain greater scale such as the offering of microfinancing and microtakaful as a composite product. Moving forward, collaboration beyond traditional sectors; and into competitive industries, such as retail, communication and oil and gas should be advanced as it opens up and extends our outreach to form new alliances. Joining forces with other industries will allow us to embark on a faster learning curve, while equipping ourselves with new skill sets. This will enable the intended business objectives and outcomes to be met within a short period of time. A recent example of such collaboration between a few domestic Islamic banks is the establishment of the Investment Account Platform. The test of the collaboration however, lies in its strength and sustainability in pursuing the intended outcomes. At the regional level, there is also potential for industry players to collaborate through the Islamic Infrastructure Investment Platform or (I3P) that is now still at the proposal stage. Through this regional dialogue platform, collaboration may be fostered between financial institutions, regulators and ministries from APEC economies with multilateral institutions and academic experts to explore measures that can expand cross-border investments by Islamic financial institutions. In particular, the potential for Islamic pension funds and takaful to finance infrastructure projects in APEC economies can be explored. In realising the virtues of Islamic finance, it also warrants Islamic banks to progressively strengthen its intermediary functions.

For the future, on the most appropriate way to reduce the intensity of our accommodation when it becomes warranted, two principles should in my view guide us: these are prudence and effectiveness. We need to be prudent, because the recovery is still fragile. This amounts to asking whether the adjustment of inflation towards our target of below, but close to, 2% would continue without our monetary stimulus. At present, the ECB’s Governing Council does not think this is the case. Underlying inflation, without oil and food prices, remains below 1% and should, according to our forecasts, gradually pick up to 1.8% in 2019 according to the pace of wage increases. We also need to be effective, in the sense that, among our combination of various instruments, we should withdraw last the measures that are mostneeded to secure a sustained adjustment in the path of inflation consistent with our target. We will continue to assess the situation with great pragmatism. There is no predefined split between the doves and the hawks on the Governing Council, as is sometimes claimed. I am confident that our future strategy, as the present one, will be the result of a collective discussion and a cohesive decision. b. Institutional framework In parallel, the institutional framework of the euro area has been improved in response to the crisis. Member states have secured key steps to reinforce the resilience of the euro area for the future.

from assessing the resolvability of banks and drawing up resolution plans, to deciding on resolution schemes for failing banks and whether to make use of the Fund in such cases. These tasks are shared between the Board at the European level, which is directly responsible for all banks under direct ECB supervision and all cross-border banks, and the national resolution authorities, which are responsible for the other banks. However, the Board may at any time decide to directly exercise all the relevant powers under the Regulation with regard to any of the indirectly supervised banks. In addition, the Board also becomes directly involved whenever a resolution of an indirectly supervised bank will make use of the Fund. Finally, there is also an option for Member States to choose that the Board will be responsible for all banks in their jurisdiction. These features make the SRM a single system. The Single Resolution Board At the centre of the SRM there needs to be a single authority with operational independence and sufficient decision-making authority to take resolution action in the interest of the euro area and of the Union as a whole. This is achieved with the setting up of the Single Resolution Board. The Board will meet in two different compositions: the plenary and the executive sessions. The executive session will consist of a Chair, four independent full-time members and two observers from the Commission and the ECB, respectively.

There is also the effect of net exports, part of which we saw in the first quarter, resulting from both higher prices in dollars and the reallocation of internal resources derived from the real depreciation of the currency. Add that the developed world will perform better. Finally, there is the impulse coming from public spending, particularly investment, because of the low budget execution of 2013. In the opposite direction point the aforesaid deterioration in business confidence and the downward revisions to the investment project agenda made by the Chilean capital goods corporation for 2014. The 2014 current account deficit forecast is revised downwards mainly because of the foreseen deceleration in investment and a slight increase in savings because of lower private consumption. In the trade balance this is visible mainly in a downward revision to imports. Accordingly, the baseline scenario includes a current account deficit of 2.5 percent of GDP in 2014 (3.6 percent in March). The lower outlook for expenditure also implies that, at trend prices, the deficit will decline further, to 2.2 percent of GDP (3 percent in March) (table 2). The forecast path for inflation rests on several assumptions. For one, in that the passthrough from the peso depreciation to prices will be in line with its historical pattern. In addition, the Board uses as a methodological assumption that the real exchange rate (RER) will remain close to current values, as it is now within the range that is considered consistent BIS central bankers’ speeches 3 with its long-term fundamentals.

A closer look at the figures reveals that the improvement has been most marked in manufacturing and particularly rapid in industries where computers are used most intensively. The upward shift in US productivity growth was preceded by an investment boom that gave pride of place to investment in IT-related capital. Since the 1980s, American investment in computer capacity has doubled in nominal terms; in relation to the dramatic price fall for computer capacity, the level has risen by a factor of more than twelve. To what extent, then, has the improvement in productivity come from IT? What are the mechanisms? Computers have clearly helped to make production processes more efficient and automated, just as new techniques have led to the creation of many new goods and services, from compact discs to tele-medication. But in order to understand the broader implications for the workings of the economy, one should perhaps heed Alan Greenspan, head of the US Federal Reserve, and single out the word “information”. When information flows more efficiently, there will be a better matching of supply and demand both internally and between firms, as well as less tied-up capital for coping with contingencies. In that firms can use IT to enhance “just-in-time” routines, they can cut the levels of stocks and working capital. Better information also paves the way for smaller production units and less bureaucratic structures. All these processes are now being further reinforced by the rapidly growing flow of information on the Internet.

For this and other reasons, the contribution from IT cannot be distinguished from other factors. 2. Implications for monetary policy The implications that the new economy might be expected to have for monetary policy can be illustrated with the aid of a simplified notion of how the economy functions. In the long term, a country’s productive capacity is usually assumed to follow a comparatively stable trend. This trend rate of growth is determined by demographic factors, for example, together with, above all, the pace at which technical advances are made and incorporated in the production process. Thus, the fact that Sweden’s GDP per capita is now appreciably higher than in, say, the 1950s and even more so than a century ago is mainly explained both by our ability to develop new technologies and new modes of production and by the new technology that we have been able to import from elsewhere and introduce here. Monetary policy’s primary contribution is perceived today as being to ensure that the macroeconomic environment, mainly as regards inflation, is stable and predictable. A stable value of money and an efficient payment system are important preconditions for an efficient modern market economy. Monetary policy affects aggregate demand via interest rate adjustments. Policy is normally aimed at steering demand so that the economy remains as close as possible to its long-term growth trend, thereby avoiding unnecessary cyclical fluctuations. This also helps to keep the level of inflation stable. However, it is not only cyclical fluctuations around trend growth that influence inflation.

As regards the short-term predictability of monetary policy, policy moves have been pretty well anticipated by money markets. Recent studies by academics have confirmed the predictability of the ECB at the highest level amongst major central banks. Investors have indeed become more confident in their forecasts of future short-term interest rate developments prior to ECB monetary policy announcements. Bond market indicators paint essentially the same picture. Implied bond market volatility in the euro area is currently close to its lowest level since January 1999. Communication is an ongoing challenge Financial markets evidence indeed indicates that we as a central bank have managed to be understood by market professionals. But this is only part of the picture and should give no reason for complacency. We are well aware that earning people’s trust in the credibility of the ECB remains an ongoing challenge. And we know that the familiarity of the general public with the Eurosystem and the ECB still needs to be further enhanced. One indication of the daunting size of our communication task was the issue of so-called perceived inflation rising much higher than the actual measured inflation. It has turned out to be difficult to explain people that they should not judge the general price level just by observing the prices of some individual goods. We see the dichotomy of different target groups in the fact that there was at times a heated debate about deflation risks among financial analysts while at the same time the general public was deeply concerned about inflation.

The economic agents and the public need to be convinced that the central bank’s monetary policy decisions are consistently focused over time on achieving the announced aim. In a market-based economy the central bank can directly influence only short-term interest rates through its monetary policy instruments. However, consumption and investment decisions, and thus medium-term price developments, are to a large extent influenced by longer-term interest rates, which depend on private expectations regarding future central bank decisions and future inflation. It is important that these developments in longer-term rates support the objective of maintaining price stability over the medium term. This in turn requires that the central bank is regarded as credible and predictable. A central bank which does not succeed in communicating the principles underlying its monetary policy and is perceived as acting in a non-systematic, discretionary manner will over time endanger its reputation. Therefore, the central bank’s communication should ensure that markets understand the systematic responses of monetary policy to economic developments and the current assessment of the central bank. Successful central bank communication supports predictability and correct price formation in financial markets, contributes to efficient allocation of funds and reduces uncertainty about future interest rates. In an environment where the predictability of interest rate movements and their relation BIS Review 5/2005 1 with key macroeconomic developments is well understood, firms can better manage their balance sheets. This reduces both their vulnerability to economic shocks and their risk management costs and creates the conditions for better investment decisions.

Mr. Carse reports on the initiatives taken concerning financial industries in Fujian, Hong Kong and Taiwan Speech by the Deputy Chief Executive of the Hong Kong Monetary Authority, Mr. David Carse, at the Symposium on the Financial Exchange and Cooperation of Fujian, Hong Kong and Taiwan, held on 8/8/98. I am pleased to be here this morning to welcome you to this Symposium. The Chinese Banks’ Association is to be congratulated for organizing this important initiative with the co-sponsorship of the Fujian Provincial Government and Chinatrust Commercial Bank. The idea of the Symposium, as I understand it, is to facilitate the exchange of ideas concerning the financial industries in the three regions and the exploration of cooperative opportunities between them. 2. Such an initiative could not have come at a better time. The current financial crisis is creating havoc among the Asia economies. Initially, the damage was felt in the financial sector. But the full impact is now being seen in the real economy as output and trade are crippled by higher interest rates, the burden of foreign currency borrowing and the credit crunch. The Mainland of China, Hong Kong and Taiwan have survived the crisis in better shape than most other economies in the region. But they have not been unaffected as events of this week have demonstrated in Hong Kong where we have witnessed further speculative pressure on the Hong Kong dollar. 3.

In this kind of uncertain economic environment, it is all the more important that we should be trying to maximize the opportunities to develop trade and investment links between neighbouring economies. That is why this Symposium is timely and important. The existing economic links between Fujian, Hong Kong and Taiwan provide a solid platform on which to build for the future. Taiwan and Hong Kong are already major trading partners with Taiwan’s exports to Hong Kong accounting for 23.5% of its total exports in 1997. Visitors from Taiwan also account for a significant proportion of the total number of visitors to the territory and thus make a major contribution to the tourist industry in Hong Kong which, as you will know, currently needs all the help it can get. 4. Trade between Hong Kong and Fujian is also growing rapidly in both directions and both Hong Kong and Taiwan are a major source of overseas investment into the Province. There are over 10,000 Hong Kong enterprises in Fujian. 5. The Hong Kong presence in Fujian includes a number of banks from Hong Kong, including Bank of East Asia. The same bank also maintains a branch in Taiwan which puts it in a good position to take advantage of the triangular trading links between Fujian, Hong Kong and Taiwan. In its role as an international financial centre, Hong Kong is also the host to a number of banks from Taiwan. The Taiwanese presence here consists of 4 licensed banks, 2 restricted licensed banks and 3 representative offices.

With new cohorts continuing to leave college with high debt levels and entering the housing market at older ages, we can anticipate an overall persistently lower home ownership rate than in the pre-recession period. So what is causing the withdrawal from home and car purchase markets? It is likely that rising student debt and an uncertain economic outlook have depressed demand. But most likely, declines in credit supply play an important role as well. Our analysis shows that average credit scores have fallen for student debt holders relative to those with no student debt. Clearly for the substantial and growing group of student loan borrows who are delinquent or have defaulted on their debt, access to credit is reduced through potentially long-lasting negative effects on credit scores. Better data is required to evaluate the extent to which the decline in car and home loan originations is concentrated among those delinquent on their student loans and those who dropped out of college, or whether it is more widespread among all those with student loans. The fast growth of student debt and delinquencies, and the associated withdrawal of student loan borrowers from mortgage and other credit markets have led to a renewed policy debate about the viability and optimality of our higher education funding model. Some call for increased federal and state support for higher education to reverse the recent trend towards shifting the cost of higher education to students and parents.

In addition, by restricting the availability of loans to those matches that are likely to succeed, the social benefits will be achieved at lower cost. While there is currently little underwriting of student loans in terms of individual or family wealth – which is as it should be – better underwriting of loans may result in higher preparedness standards for students. Just as importantly, it will require evidence, provided by the institution, of sufficient success in graduating students of a specific preparedness level and placing them into viable jobs with sufficient income to permit repayment of the loans. This unfortunately contrasts with the current student loan system. We see evidence of problems associated with the lack of careful underwriting standards for educational matches that are supported by student debt. For example, current performance for some degree programs and some universities are problematically weak, in terms of degree completion rates and loan repayment rates. There have been reports of some schools in cities with large minority populations and low-income residents who tried to build enrollment by encouraging academically under-qualified students to apply for loans that they would be unlikely to be able to repay, especially if they received a substandard education. These practices BIS central bankers’ speeches 7 undermine our commitment to financing effective higher education matches, and it is important that they be addressed. Conclusion Nothing in the analyses I discussed with you undermines the strong case for completing a college degree for prospective students who match well with a particular college.

Another consequence of using HP filters to find the trend-based GDP gap is that one risks interpreting an increase in growth that is due to a temporary rise in productivity as an increase in resource utilisation. But in a situation with sticky prices an increase in productivity may actually lead to a decline in resource utilisation as the increase in productivity makes it possible to use fewer resources to produce the same volume as before. If we were in such a case to use a trend-based output gap as a base, there is a risk that monetary policy would become contractionary when it needed to be expansionary. The difficulty with the trend-adjustment method is thus to distinguish from current developments what constitutes changes in the trend and what are deviations from the trend, that is, changes in resource utilisation. Flexprice gap A theoretically interesting measure of resource utilisation that has gained increased attention in the research on monetary policy is the so-called flexprice gap. This is a measure that relates actual output to potential output in an economy with entirely flexible prices and wages. The advantage of this measure is that it has a well-defined theoretical base. To calculate the flexprice gap one tries to determine the level of output that would be attained without some of the imperfections that the real economy suffers from.

Capacity utilisation in industry Index and percentage deviation from HP trend respectively, seasonally-adjusted data 5 100 4 95 3 2 90 1 85 0 -1 80 -2 75 -3 Statistics Sweden, actual capacity utilisation in industry (left scale) NIER, current capacity utilisation in manufacturing industry (left scale) GDP gap (right scale) -4 70 -5 96 98 00 02 04 06 08 Note. Trend calculated using the Hodrick-Prescott filter. Broken lines refer to the Riksbank's forecasts. Sources: National Institute of Economic Research, Statistics Sweden and the Riksbank Figure 6. Resource utilisation indicator Index and percentage deviation from HP trend respectively, seasonally-adjusted data 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 Resource utilisation indicator Hours worked gap Employment gap GDP gap -3 -4 -3 -4 -5 -5 96 97 98 99 00 01 02 03 04 05 06 07 08 Note. Trend calculated using the Hodrick-Prescott filter. The standard deviation of the resource utilisation indicator is normalised to that of the GDP gap. Broken lines refer to the Riksbank's forecasts. Sources: Statistics Sweden and the Riksbank BIS Review 66/2009 11

In 2021, 1 Firms are understood to be highly indebted when their ratio of net financial debt to (gross operating profit + financial revenue) is higher than 10, or they have positive net financial debt and zero or negative earnings. 4 households’ gross disposable income (GDI) grew by 2.2%, although it was still 2.8% down on 2019. From the onset of the health crisis to end-2021, households’ aggregate net wealth rose by 9.8%, assisted by the increase in value of their financial and, above all, their real estate assets, and by their relatively stable debt levels. Overall, households’ bank debt-to-total asset ratio fell, particularly in the lower net wealth deciles.2 Nevertheless, in the first net wealth decile, debt continues to far exceed the value of assets (by around 50%), thus signalling the financial vulnerability of this segment. Also, households significantly increased their saving rate during the pandemic. The accumulated savings could serve as a cushion, at least in part, in the face of a potential deterioration in their real income. But the increase in saving was uneven across households, concentrated among those with the highest purchasing power. In the housing market, house purchases in Q1 were 22% higher than in the same period of 2019. Meanwhile, new residential mortgage lending has risen, standing at its highest levels since 2010.

Recent developments in these indicators have been mixed. The labour market remains tight on traditional indicators, with employment growth expected to be more resilient and unemployment rates lower than expected a few months ago. But wage developments – particularly higher frequency indicators of current momentum – appear to be easing, even as services price inflation surprised to the upside, albeit largely on the back of components typically though to be erratic on a month-to-month basis. The mixed character of developments in these key indicators makes it all the more important to keep a structural framework in mind on which to form judgements about the overall implications for inflation persistence and monetary policy. For the reasons I have developed above, the evolution of energy prices plays a key role. Now that that terms of trade shock is being at least partly reversed by the large and rapid fall of Page 11 wholesale gas prices – both in absolute terms and relative to the path of futures upon which the MPC’s February macroeconomic forecast was conditioned – developments are moving in a more favourable direction. Relative to where we were a few months ago, the difficult ‘trade-off’ facing monetary policy as a result of the adverse terms of trade shock – that is to say, rising inflation in concert with a squeeze on domestic real incomes and spending – has eased. The MPC should be cautious about ‘looking a gift horse in the mouth’ by viewing better prospects for activity as something inherently inflationary.

The more sustainable banking practices that would be developed based on VBI concepts encourage the creation of new business opportunities and provide the foundation for more sustainable returns for Islamic banks over the long term. Customers, particularly businesses and entrepreneurs would benefit from the opportunity to be more involved, in the design of more innovative products and services, that are best tailored to meet their needs and circumstances. Business propositions from new sectors such as the SMEs, would also benefit from VBI-based practices where financing applications would be assessed by Islamic banks based on their potential value creation, not just their credit scores. Society at large also stands to gain from reduced negative externalities as any activities that damage the community and environment would be reduced overtime. The practice of Islamic banks in giving back to society, such as by integrating waqf and sadaqah within Islamic financial transactions, can also create positive socioeconomic impact in communities. VBI should not be mistaken for corporate social responsibility (CSR). In fact, VBI goes beyond the concept of CSR with a pervasive approach to reconfiguring the way Islamic banking works. Globally, we can also see value-based concepts being demonstrated in the banking sector, where value-based practices have emerged to restore the role of finance in acting for the greater good. TeamBank in Germany for instance, capitalises on the concept of fairness in its dealings with customers to market its EasyCredit as its primary product proposition.

The success of this strategy has positioned TeamBank as the country’s third largest consumer finance provider. Equally commendable is Westpac Banking Corporation, the first Australian bank that has incorporated environmental filters in its day-to-day business decisions. In Malaysia, I believe Islamic financial institutions are now at the right stage of development to drive this important change. It is expected that Islamic banks would take the lead in the VBI initiative and to embrace the new principles in their business strategies and operations. Given the universal nature of VBI, the application and adoption of similar strategies by financial groups which comprise conventional financial institutions would be the next phase of this evolution as we move forward. In time, I believe that the underpinning thrusts of VBI will also be expanded to enhance its relevance to the takaful industry. 2/4 BIS central bankers' speeches Realising the tangible impact of VBI is more of a journey than a fixed destination. However, it is encouraging to note that a number of our Islamic banks have already started applying principles of VBI in one way or another. What is needed now are strategies to realise the full potential and amplify the impact of VBI in creating positive outcomes for shareholders as well as broader stakeholders in Islamic finance. I would like to suggest three critical areas that require immediate attention, for this momentum of change to be sustained. First, VBI calls for a “transformation of the mind”, a change in how we think and how we act.

Although application of the Matching Adjustment is subject to a number of asset and liability eligibility criteria, it has much in common with a similar feature of the previous UK ICAS framework – the ‘liquidity premium’. Within the EU, the main users are UK life companies. Indeed the only countries with firms currently using the Matching Adjustment are Spain (15 companies) and the UK (23 from the UK). 3 2 Under Solvency II, the scope of internal models is comprehensive and firm-wide. A typical insurance group internal model might take 1 day to run 500,000 scenarios with key processes requiring multiple model runs. A diversified insurance group internal model may use around 150 risk drivers, separated into over 10 different risk categories (e.g. credit, market, mortality, lapse, operational). By contrast, under Basel standards and the EU Capital Requirements Regulation, bank internal models are separate and limited to particular risks eg credit and market, with capital requirements from them added up at the firm level. 3 Long Term Guarantee Report, EIOPA, December 2016. 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 In its Financial Stability Report in November 2016, the Financial Policy Committee concluded that the matching adjustment “is beneficial from a macroprudential perspective by reducing potential instability across the financial system”. 4 This combination of internal models and the matching adjustment has created strong incentives for UK life firms to invest in long-term illiquid assets, such as commercial property, equity release mortgages and infrastructure financing.

8 All speeches are available online at www.bankofengland.co.uk/speeches 8 Chart 3: Estimated contributions to annuity Chart 4: Component of annuity rates not rates, using the relationship in Table 1 over explained by risk-free rates using the 2007-16 relationship in Table 1 over 2007-16 Residual Risk-free rate Annuity rate (actual) Corporate bond spread Constant Per cent 8 Residual Per cent 1.0 Corporate bond spread 7 0.8 Component not explained by risk-free rate, excluding constant 6 0.6 5 0.4 4 0.2 3 0.0 2 -0.2 2017 2016 2015 2014 2013 2012 2011 -0.6 2010 -1 2009 -0.4 2008 0 2007 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 1 Sources: Bank of America Merrill Lynch, Bloomberg, Sources: Bank of America Merrill Lynch, Bloomberg, sharingpensions.co.uk and Bank calculations. sharingpensions.co.uk and Bank calculations. 9 All speeches are available online at www.bankofengland.co.uk/speeches 9

That reduces the weight given to those retail outlets where prices are rising the fastest, and allows the overall measure of inflation to take into account the way families are changing their shopping habits away from outlets where prices have been rising relatively rapidly, like traditional high street stores, towards those where they have been rising relatively slowly, like newer more heavily discounted stores. For that reason, the formula used to calculate CPI inflation is superior to the formula used in RPIX. Arcane though it may sound, the “formula” effect reduces estimated inflation in Britain by about half a percentage point a year. In this respect, the difference between RPIX and CPI inflation as a measure of the economic temperature of the economy is rather like the difference between Fahrenheit and Centigrade as a measure of physical temperature. In both cases moving from one measure to another changes the number without there having been any change in the temperature itself. Because the temperature whether physical or economic - is independent of the particular measure, then the implications for decisions which depend on temperature - whether of farmers deciding on when to harvest their crops and then how to price them or the Monetary Policy Committee deciding on when to change interest rates - are unaffected by the measure used, provided the conversion is calculated correctly. Hence the switch to a new CPI target has in itself no implications for monetary policy.

It is 2% as measured by the Consumer Prices Index or CPI, formerly known as the Harmonised Index of Consumer Prices. What is this new inflation measure, and how will it affect monetary policy? On the RPIX measure, inflation was at or above target for the whole of last year. In contrast, the CPI measure of inflation was below 2% throughout the same period. Indeed, CPI inflation has been below 2% for all bar three months since May 1997, and it is almost six years since it was last above 2%. How can it be possible for inflation to move from above to below target - just like that? To answer that question, we need to examine how inflation is calculated. Inflation is measured as the increase in the price of a particular basket of goods and services over the previous twelve months. So there are as many measures of inflation as there are baskets. Since no two people in this room spend their income on exactly the same items, in principle each of you could construct your own measure of inflation. The Office for National Statistics calculates an average inflation measure by weighting together the inflation rates of over 650 different goods and services, using as weights the estimated expenditure on each item for a representative household. But where 1 Unpublished writings of J.M.Keynes, copyright of the Provost and Scholars of King’s College, Cambridge to whom I am grateful for permission to publish this extract.

In light of the more challenging environment going forward, generating the supply pipe line for talent and addressing the short supply of critical talent with new skills need to be given urgent priority. What are these skills? There has been considerable attention to the shortage of new and higher technical competencies – including in the area of risk assessment and management – required by financial institutions in the new operating environment. The growth in Islamic finance has also added important new dimensions to the talent requirements. Beyond these clear gaps however, the promotion of more sustainable business models in finance will require additional new skills which have not traditionally been areas of focus in financial institutions. This includes skills in change and crisis management, business recovery planning, the ability to develop and sustain long-term customer relationships, and skills to direct and manage operations in international and cross-cultural contexts. Also particularly important will be the ability to build, motivate and lead strong teams under significantly more challenging conditions in which institutions may be more constrained by regulation in their ability to recruit and retain talent simply by paying more. Perhaps more than in any other sector, the response to the challenges facing the financial industry in managing talent needs to be much broader, forward looking and more strategic given its central role within the economy.

If the banking community itself turns out to be unable to resist the temptation of descending into practices that are abusive for consumers, we will be responding adequately. As I have already said, the first issue of our concern is misselling and hard selling. We believed the banking community to be interested in retaining people in the financial market and keeping their funds inside the financial system. We were hoping that banks would be able to agree upon selling rules and would not offer such a product to a client that would be disappointing, striving to sign one contract, would not be misleading about product prices or conceal additional services. The associations of financial market participants jointly developed selling standards two years ago already. Eventually, as little as 20 banks have joined these standards, and even these banks fail to comply with them. As you remember, we have held several discussions on this topic, emphasising that if the banking community does not comply with the standards itself, we will have to request legislative authorities to adopt adequate regulation. Disappointingly, that negative episode we have also discussed when investment life insurance policies were being sold through banks was followed by the sales of complex structured products. This implies that even such a dramatic episode as investment life insurance has had no influence on abusive practices in banks’ sales under agency agreements. Therefore, we were forced to request legislative authorities to grant us the powers to stipulate selling rules through our regulation.

Perhaps we shouldn’t be too surprised by the first panel. The “leavers” tend to foresee a positive economic impact, the “remainers” the opposite. The “remainers” are apparently more uniform in their answers: adding them up, the balances in the aggregate sample are also negative. What’s striking, however, is that there’s no Chart 6: Even households who are negative Brexit-induced cut in planned spending, even for the about Brexit do not plan to cut spending “remainers”. We need to be a little careful here, as it’s not clear whether people are telling us about their spending in real or in nominal terms. If it’s the latter then, allowing for inflation, perhaps some of the bars might turn negative when measured in real terms. But, on the face of it, there is very little correspondence between people’s views about the economic impact of Brexit and their consumption plans, and no anticipated response of spending for the sample as a whole. Whatever the reason – perhaps, given all the myriad uncertainties involved, Sources: NMG survey and Bank calculations. 6 The empirical research has demonstrated that, even if consumers do respond to expectations of future income, they are more sensitive than the simple theory predicts to shifts in current income, even when these are identifiably temporary. For an extremely readable account of the prevailing view of the evidence at the time, see Deaton (1992). For a possible explanation, see Carroll (2001).

If, as seems likely, resources in different sectors are highly specialised – the physical and human capital suitable for one area aren’t as productive in others – the effect of this shift on aggregate supply is immediate. This is what the MPC was getting at when it said in the last Inflation Report that a “reduction and reorientation of trade and supply chains… may result in some existing supply capacity becoming obsolete.” The second point involves the importance of expectations, something else the MPC has emphasised. At least until the formal date of departure, and possibly for some time afterwards, the effects of Brexit will depend centrally on what people expect it to do over the future. Those expectations are neither fixed nor uniform – some people are optimistic about its effects, others less so. It’s partly these differences in expectations that can lead to independent moves in demand and the exchange rate. In particular, you can see the current inflation we’re experiencing as the result in part of a more pessimistic view of Brexit in financial markets – above all in the foreign exchange market – than among consumers. This gap in expectations helps to explain why, in Chart 2, the latest figure for the real exchange rate – the diamond towards the right of the graph – is well below the line for domestic demand growth.

Of course, these forecasts are uncertain and can also be made in different ways. One of the main purposes of the Inflation Reports is to explain how we make them, so that others can question us and discuss our methods. I shall return to the forecasts, as we have recently changed our methods in this area. During the spring I and my colleagues on the Executive Board described in a number of speeches the principles that guide our monetary policy. In May we also published a special document where we described these principles. 1 One of the reasons why we considered it important to publish such a document was that there had been a lively debate on monetary policy for some time with disparate opinions. For instance, some people considered we should have more than one objective for monetary policy, in addition to the inflation target. Others claimed that we already had more than one objective, while some debaters pointed out that more than one objective risked creating confusion. Although the debate has not been quite so lively since then – which may of course be connected with the fact that we have had a long, pleasant summer that may have turned people's thoughts to other matters than monetary policy – I see that monetary policy is still sometimes described in a way that I do not really recognise.

In addition, if longer-term viability is not an option, insurers should be mindful that in certain circumstances a managed exit from the market may be most appropriate. As communicated in our Dear CEO letter on 2021 priorities2, we are currently developing our approach to recovery and resolution planning. We will expect firms to demonstrate – in a proportionate manner for their size – that they have a suitable structure and business model, and adequate contingency plans to be able to exit the market smoothly. In some cases, entering into run-off could be in the best interest of existing policyholders. More than fifty insurers regulated by the PRA are currently in some form of run-off and we endeavour to take a proportionate approach, thereby minimising the burden of entering this regime for smaller firms. Diversity and inclusion Mutual insurers have a considerable strength to celebrate in social purpose, and that should provide them with a relative competitive advantage. Within firms, we – at the PRA and the Financial Conduct Authority (FCA) – believe that increased diversity and inclusion will advance our statutory objectives by resulting in improved governance, decision-making and risk management within firms, a more innovative industry, and products and services better suited to the diverse needs of consumers. We would like to see firms collectively consider how they can build a diverse workforce too. 3 in The PRA, together with the FCA and the Bank published a joint Discussion Paper (DP 21/2) July on diversity and inclusion in financial services.

This would lead to a greater-than-expected tightening of global financial conditions, which would cause additional restrictions for the Chilean economy, significantly reducing inflationary pressures. In such a risk scenario, deeper MPR cuts than indicated by the lower bound of the corridor would be needed. Concluding thoughts Dear Senators: After several Reports in which I was in charge of informing you of the complex inflationary situation that our economy was going through, this Report brings news pointing in a more favorable direction. The macroeconomic scenario has evolved in line with our forecasts. The economy is on an adjustment path and imbalances have been resolved in a manner consistent with what we anticipated in the March Report. Inflation has declined to 8.7%, with a significant contribution from volatile prices. Core inflation stood at 9.9% annually, with a slower and smaller reduction than the total CPI. Thus, considering the progress of the economy, the Board of the Central Bank has announced that, if these conditions are maintained, we will soon begin a process of MPR reduction. All in all, inflation is still too high and well above the 3% target. The Central Bank will continue to monitor the evolution of the scenario, ensuring that this downward trajectory of inflation is maintained until it converges to the 3% target, which we expect during the second half of next 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).

Swiss economic outlook What does the economic outlook for Switzerland look like, given a baseline scenario with a world economy on a weak growth path as described above? After two years of fairly robust recovery, we expect the Swiss economy to slow considerably in 2012. The situation remains very challenging for Switzerland. On the one hand, the still very strong Swiss franc is weighing on export performance. Firms are suffering from compressed margins. If the difficult exchange rate situation persists, companies may consider relocating production capacity to other regions. On the other hand, the slowdown in external demand, as expected in our global baseline scenario, will likely weigh on investment spending and labor demand in the quarters to come. Although some recently released indicators point to a slight stabilization, we project the Swiss economy to grow only weakly over the next few quarters. Moreover, as mentioned before, there is a very high degree of uncertainty regarding the global outlook. This is also true for the Swiss economy, which depends particularly on economic conditions in the euro area. If the risk scenario of a further escalation of the debt crisis were to materialize, economic activity in Switzerland would suffer a much more pronounced slowdown than just described. Such a development would lead to a severe risk of deflation. Current Swiss monetary policy Given this highly uncertain outlook, the SNB is – more than ever – committed to enforcing the minimum exchange rate with the utmost determination at any time.

However, such crimes are more common in counties that have weak security, or suffer from weak economy and weak judicial and supervisory systems. Among the most prominent negative effects of this phenomenon is the flight of money abroad, with production losing its most important element, namely, capital, hindering production of goods and services, raising unemployment and reducing savings. As a result, investors lose confidence in the economic system and the legislation governing it, creating an anti-investment environment. All this will be reflected on economic growth and the standard of living of society. Money laundering may also result in the availability of liquidity in quantities not commensurate with the increase in production of goods and services, thus increasing inflation and decreasing the purchasing power of the currency. Money laundering affects the country’s position and its reputation among international bodies, and may give misleading economic indicators. From the social point of view, it is significantly dangerous as it leads to non-productive classes acquiring illegal proceeds at the expense of productive classes, increasing the gap between social classes. Moreover, It increases the opportunities of spreading corruption and bribery. Dear Audience, I would like to commend the fruitful coordination and cooperation between the appropriate entities of ministries, security and judicial authorities, and financial and non-financial institutions for combating money laundering.

26 May 2022 Keynote Speech at ASIFMA China Capital Markets Conference Edmond Lau, Deputy Chief Executive, Hong Kong Monetary Authority Onshore Market Development 1. Good morning. I’m delighted to join you virtually at this year’s China Capital Markets Conference. First of all, let me take this opportunity to thank ASIFMA for organising this event and inviting me to speak. 2. Today’s agenda focuses on onshore market developments. I would like to share my thoughts on the significance of recent developments in onshore capital markets, as well as the opportunities for international investors. 3. Mainland capital markets are experiencing a period of significant growth, with onshore equity and fixed income markets currently the second largest in the world. However, international investors’ exposure to China’s capital markets remains relatively small. Only around 4% of onshore equities and 3% of onshore bonds are owned by foreign investors, which is low by international standards and far smaller than China’s weight in the global economy. 4. We are pleased to see the Mainland’s continued commitment to open up onshore capital markets in recent years. The latest developments to facilitate foreign investors’ access to the onshore markets and adopt international standards have been encouraging and welcomed by the industry. Let me highlight a few of them here. 5. First, with the removal of foreign ownership limits, global financial institutions are able to further expand their footprint in China by taking majority or full ownership in their onshore subsidiaries.

Let me thank you for your attention and wish you a pleasant weekend and for those who are not Parisians a pleasant journey back home... today or I hope for some of you on Sunday!

This brings me to the other big uncertainty: how far will tighter credit conditions affect the wider economy – in the UK and the rest of Europe as well as in North America? It seems highly likely that growth was supported by easier credit over last few years. But to what extent? When it comes to quantifying the effect of changes in credit conditions, our workhorse economic models still cannot help us very much. As far as the UK economic outlook goes, our central judgement is that financial stress will act as a significant drag on demand over the next two years. But there is a high level of uncertainty about this; and, as we now see it, the risks, as they affect output, are tilted to the downside. These are two fold: first, that the financial crisis will persist and possibly intensify; and second, that over time tighter credit conditions and asset price weakness will combine, and in the worst case feed off each other, to sap the strength of overall demand, and put downward pressure on inflation in the medium term. Higher costs Let me come now to the other major area of risk: the upward pressure on inflation from higher external costs. The most recent build up of global cost pressures is just the latest episode in a remarkable period of soaring commodity prices. Oil prices have more than trebled since the start of 2004, and metals and food prices have more than doubled.

Strong demand, particularly from China has clearly been one major factor. But there have been supply side issues too. And the strength of some commodity prices also reflects their status as an investment class at a time of low global interest rates. Over the past year alone, oil prices have risen by around 60% in dollar terms and agricultural food prices by around 50%. Imported cost pressures in the UK will also reflect the fall in the effective exchange rate, down by 9% since the beginning of August last year – the largest such decline since sterling left the ERM in 1992. There are few reasons to expect this to be rapidly reversed. As a result of these developments, producer input and output prices are now increasing faster than at any time since 1990, and import prices have picked up sharply. These cost pressures have not yet fed through fully into consumer prices, but from next month CPI inflation is likely to rise more sharply, in particular reflecting the impact of higher utility bills. There is essentially nothing the MPC can do about this immediate impact on the inflation rate. But its implication for policy depends on whether people recognise the temporary nature of the pick-up in inflation. The MPC’s remit in setting interest rates is clear – to keep inflation at 2%. But we have discretion to decide how fast to return inflation to target, if it is thrown off course by a sharp shock, such as the current surge in world energy prices.

Global Money Week takes place on the 10–17 March and is a worldwide celebration through events and activities to help empower children and youth to be confident and responsible economic citizens. During this week, children are encouraged to engage in learning on how money works, including saving, creating livelihoods, gaining employment and entrepreneurship as well as living financially smart lives. And so for Samoa’s contribution to the event, the Central Bank decided to conduct a financial literacy poster competition to encourage kids to use their imaginations and knowledge about money choices, and help provide a creative outlet to demonstrate their knowledge. For this year’s poster competition theme “I can grow my money by...” myself and Mrs Vicseta Meredith of Business System Limited had the pleasure AND the hard task of judging the entries. We were very impressed with the quality of entries that were presented to us – so it pains us that there are only a limited number of awards we can give out for the competition. “Financial literacy” or “the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources” is an important life-skill in our diverse capacities as students, employees, consumers, savers and investors etc. In short, it is important for all responsible economic citizens to have. – So why not start now and start young? Start young on financial fitness...it will be fun and worth it!

This has largely contributed to the emergence of an environment favorable to price stability and low unit production costs, strengthening the competitiveness of our European economy. Finally, all countries have experienced significant fiscal consolidation in the 1990s Enhanced European performances are also evidenced by the significant fiscal consolidation pursued in Europe in the 1990s. The general government deficit for the euro area fell by 3.5 percentage points between 1993 and 1997 and was brought back below the 3% threshold. Since then, deficits have continued to fall. The most recent data point to a public deficit of 1.2% of GDP for the euro area in 1999, down from 2.0% in 1998. Four countries of the euro area have managed to achieve a fiscal surplus since 1999. The fact that European member states have made significant efforts in order to improve their public finances does not mean that the process of fiscal consolidation is over. In fact, some member states, including France, still have some way to go to meet the Stability and Growth Pact goal of budget positions which are close to balance or in surplus. In addition, there is a need to further reduce government debt levels, which remained above 70% of GDP for the euro area.

Because the origins of the recent crisis appear to have been closely related to lax credit policies in the personal banking segment, commercial practices that lacked transparency and excessive household borrowing, it has brought the issue of consumer protection to the fore. Although also a broader issue, consumer protection is related to the proper functioning and stability of the financial system, particularly if it is understood to include such important 6 BIS Review 142/2010 matters as financial education, transparency with clients and market behavior, It can, therefore, not be ignored when deciding within which institutional framework and with what policies to address this issue. 4. Final remarks Concern for financial stability is at the origin of central banks. It can, in fact, be said to be in their DNA. Although this concern had faded over time, the experience of recent years has again brought it very much to the fore. As a result, there is now broad agreement that central banks have an unshirkable role in this field and debate centers rather on the instruments they need to have. The crisis has left important lessons, especially for the developed economies where it had its origins. They have already begun to implement financial reforms in a bid to remedy the weaknesses that were observed.

Many of these instruments, such as providing liquidity, are inherent or traditional while others, such as regulating and watching over payment systems, have developed in recent decades. The experience of the last few years has suggested a need to review or update the available instruments and to generate the operational conditions in which they can be used without delay when needed. During this latest crisis, for example, many central banks were not operationally prepared to receive collateral that was not in habitual use. It has also been suggested that there is a need to incorporate new instruments, principally with a macroprudential approach. However, in the case of some of these instruments – specifically, the use of regulation for countercyclical purposes – evidence is scarce and debate as yet inconclusive. However, beyond the contribution that a central bank can make, financial stability requires a comprehensive framework of financial institutions, policies and practices. The solidity of this framework and its consistency are crucial. Regulation and supervision, whether or not in the hands of the central bank, are critical, but so too are monetary and fiscal policy. The recent sovereign debt crisis in Europe, for example, has demonstrated the importance of fiscal conditions for financial stability. Market discipline and institutions’ management, although discredited by the crisis, are factors that can, with an appropriate regulatory framework and incentives, contribute to stability. The efficiency of regulation and supervision should, in the end, be reflected in good behavior by institutions and the proper functioning of markets.

As a result, euro area countries cannot afford to implement a sovereign default without suffering as a consequence of such a default a major breakdown of their financial, economic and social structure. There is no post-war example of a government in an industrialised economy restructuring its debt. For a euro area sovereign to seek to restructure its debt would be a huge leap into the unknown. This aspect is frequently omitted by financial analysts in their 10 The classic reference is Fischer. I (1933). “The debt-deflation theory of Great Depressions”, Econometrica 1(4), pp. 337–357. BIS central bankers’ speeches 5 newsletters or by commentators or academics in their short op-eds. And this is the reason why they do not get the point right when they state that default and restructuring is unavoidable in the euro area. The fourth difference is that, given the much greater depth and intensity of financial and economic integration in Europe, the strength of contagion across financial institutions and markets is potentially more significant within the euro area today than was the case in Asia in the 1990s. That is not to say that there was no contagion in the 1990s. But the cross-border exposures within the euro area are an order of magnitude greater than was the case for such intra-regional cross-holdings in Asian EMEs. This means that the potential for spillovers and a systemic area-wide crisis is much higher and has to be factored into the policy responses.

The upcoming debut sovereign issuances from established financial centres and emerging markets and the increasing diversity of the composition of sukuk investors across continents, in addition to the growing trend for multi-currency sukuk issuances, cumulatively contribute towards strengthening the dynamism of the sukuk as a global product for fund raising and investment activities in the international financial markets. Malaysia, has witnessed an increasing trend of issuances of foreign currency denominated sukuk in our domestic sukuk market, reinforced by an increasingly wider investor base as reflected by the increased and more diversified foreign investor participation in such issuances. In parallel with this rapid growth of cross-border financial flows has been the increased attention to the development of the international financial architecture relating to financial stability in the Islamic financial system. With the important two international institutions already well established, that is, the accounting standards setting organisation, AAOIFI, and the prudential standard setting body, the IFSB, concerted global efforts have been directed towards the progressive implementation of the recommendations in the eight building blocks identified in the Islamic Finance and Global Financial Stability Report 2010. In particular, the efforts have been focused on the adoption and operationalisation of the prudential standards and the development of the potential for effective liquidity management as part of the efforts to safeguard financial stability. It is encouraging that there has been a higher adoption of the prudential standards issued by the IFSB, with implementation by 13 regulatory and supervisory authorities worldwide with indications that there are more in the pipeline.

The separation of power between the legislative, executive and judicial arms of the government safeguards against authority being excessively centralised in any particular party. It is the effective separation of power that provides the checks and balances that ensure that there is strong financial governance at all levels of government. It is the effective separation of power that ensures that the decision maker not only considers his or her self-interest but also that of the society at large. It is the effective separation of power that ensures that the risk of abuse or misuse of public funds is minimized. Therefore, if you want to know the state of public financial governance in a country, the first question to ask is whether there is effective separation of power. To a great extent, the current state of public finances reflects the past track record of financial governance in the public sector. If the state of fiscal health in the crisis-affected economies had been in a better condition, monetary policy would not have had to do so much heavy lifting, QE may not have seen the light of day, and we may now be having better economic growth. When there is an imbalance in macroeconomic policies, or when such BIS central bankers’ speeches 3 policies are used as substitutes for structural reforms, the long-term outcomes will always be sub-optimal, not least because of the distortions and imbalances that are created.

In order to avoid the misallocation of resources, these externalities have to be internalised either by aligning the incentives of the decision maker; introducing a more representative decision-making process; putting in place the appropriate institutional arrangements; having effectively enforced laws, rules and regulations; or occasionally, by societal norms. Secondly, sound financial governance encourages discipline in adhering to the budget constraint. All economic agents are bound by inter-temporal budget constraints, and adherence to it when making financial decisions is key to sustainability. This is particular relevant when the repercussions of financial decisions fall on parties who are not represented – for example, decisions that shift a large debt burden onto future generations. Thirdly, strong financial governance has robust external checks and balances. To ensure sound decision making, especially when externalities are involved, decision makers, and the decision making process, must be subjected to scrutiny by external parties. In this regard, accountability, transparency, and the empowerment of the external party to take consequential action are key to effective financial governance. All these principles apply fully to the management of public finances. Sound public financial governance is the legitimate use of authority in the management of a country’s financial resources with integrity to promote sustainable development. At the heart of it all, sound governance practices in the Government can be traced back to the concept articulated by French Enlightenment political philosopher (Baron de) Montesquieu in the 18th century.

The share of private sector gross product, which SMEs are part of, is 33 percent, while the share of SMEs in GDP is 57 percent in Japan, 64.3 percent in Spain, 56 percent in France, 44 percent in Austria, 43 percent in Canada, 33 percent in Australia and more than 50 percent in the United States. The SME’s modest contribution to GDP in Saudi Arabia could be ascribed to the immensity of the oil and public sectors, being the main catalyst for economic activity. SMEs coverage in the national income accounts might be low. Dear audience, Small and medium enterprises are facing clear challenges to obtain the necessary funding to meet their expansion needs because of several reasons; one of which is the lack of guarantees for granting credit. To overcome this problem in the Kingdom, the Ministry of Finance, in cooperation with Saudi banks, has established “Kafalah Program” for financing small and medium enterprises. It is a program administered by the Saudi Industrial Development Fund with a capital of Rls 200 million to cover a proportion of the risk of the funding entity in case the guaranteed enterprise fails to repay the finance or part thereof, and to encourage banks to finance viable small and medium enterprises, which cannot provide the necessary guarantees or accounting records that prove their eligibility for funding. The program has been performing well since its inception in 2006 up to the end of 2010.

The blue line in the chart shows that GDP growth was markedly higher than trend growth in the latter half of the 1990s and in the period from 2003 to 2008, but that it has risen somewhat more slowly in the period following the financial crisis. When developments in output are compared with inflation, a pattern emerges. A pickup in GDP growth has consistently occurred 4–5 quarters before a rise in inflation.5 While the chart says nothing about causality, turning points in GDP growth seem to be a fairly reliable leading indicator of turning points in inflation. The path from changes in output to inflation passes through the labour market, among others. We have seen that when economic growth has picked up, unemployment6 has declined one to two quarters thereafter. The relationship between the “output gap” and the “unemployment gap” is fairly strong. This is a useful observation because GDP figures are published with a considerable lag and often subject to revision, while the unemployment data published at the end of each month are not revised. If there is uncertainty about the GDP figures – which there often may be – falling unemployment can be an indication of a recovery in economic growth. Labour market developments, in turn, affect wage growth, as illustrated by the blue line in the chart. High unemployment results in low wage growth, and vice versa. The chart shows that in periods of falling unemployment, wage growth7 moves up fairly rapidly.

12 To this end, MAS established the industry-led Steering Committee on SOR transition to SORA or SC-STS, in August last year, chaired by Mr Samuel Tsien (Group CEO of OCBC and ABS Chairman). The SC-STS provides strategic direction on developing new SORA-based products and markets, and serves as the key coordinating platform to engage relevant 3/7 BIS central bankers' speeches stakeholders in support of a smooth transition. Since its formation, the SC-STS and its various Sub-Groups have made significant progress in laying the foundation to support benchmark transition by – establishing market conventions and infrastructure, building liquidity in the SORA derivatives market, conducting pilot test trades in SORA loans and bonds, and engaging market participants and end-customers on the transition. 13 I would like to thank Samuel and the Sub-Group leads for their strong and able leadership, and the great work done thus far. Samuel will be sharing more on the SC-STS transition roadmap later, and will also chart out what needs to be done in the remaining 15 months to end-2021. D Executing a smooth transition to the new landscape 14 A key part of our work in the remaining months to end-2021, is the transitioning of legacy contracts from SOR to SORA. Close to $ trillion notional value of outstanding SGD derivatives contracts referencing SOR, and 8 amounting to $ billion, will around 12,000 SOR contracts in SGD cash markets, mature after end-2021, and will need to transition. 15 Transitioning legacy contracts from SOR to SORA is a complex exercise.

They meet the needs of different user groups, with SOR used in pricing of bonds and loans to large institutions with hedging requirements, as SOR is also the reference benchmark in SGD derivatives, while SIBOR is mainly referenced in banking products for smaller corporates and retail customers. Changes underway in the SGD interest rate benchmark landscape will therefore, impact all financial market participants in Singapore – in your capacities as lenders, borrowers, investors, and savers. A Setting the Global Context 4 Central banks and regulatory authorities globally have been undertaking significant and sustained efforts on interest rate benchmark reform for a number of years now. At the global level, the Financial Stability Board (FSB) has identified interest rate benchmark transition as a key priority. Derivatives market participants are encouraged to shift away from interbank offered rates (or IBORs) to near risk-free rates (RFRs). Term unsecured interbank markets that used to underpin IBORs, are no longer sufficiently active, as banks’ funding strategies have fundamentally evolved since the Global Financial Crisis. In response, several major jurisdictions have developed overnight interest rate benchmarks in their respective currency areas, that are underpinned by deep and active underlying markets. These include the SOFR, SONIA, ESTER, SARON and TONA.3 1/7 BIS central bankers' speeches Transition progress and momentum have not slowed despite COVID-19 disruptions. In the UK, while some interim transition milestones were delayed, the overall end-2021 timeline for LIBOR’s discontinuation remains unchanged.

Yield Curve 5 Year-3 Month Differential in Swap Rates (Percent) 9,5 9,0 9,0 1 2 3 4 5 7 8 9 10 -0,5 -1,0 -1,0 -1,5 -1,5 01.16 0.25 0.5 0,0 -0,5 Term (Year) Source: Bloomberg. 02.17 9,5 0,5 0,0 01.17 10,0 1,0 0,5 12.16 10,0 1,5 1,0 11.16 10,5 10.16 10,5 2,0 1,5 09.16 11,0 2,5 2,0 08.16 11,0 3,0 2,5 07.16 11,5 3,5 3,0 06.16 February 3, 2017 11,5 3,5 05.16 January 9, 2017 04.16 12,0 03.16 12,0 02.16 (Treasuries, Percent) Source: CBRT, Bloomberg. Were these policies effective? More time is needed to assess the ultimate impact, but the initial response is encouraging. Turkish lira, which has depreciated relative to peer currencies in the second half of 2016, has stabilized after the policy tightening, partly containing the upside risks on the inflation outlook (Figure 15). Figure 15.

2/3 BIS central bankers' speeches ** Since we are in Berlin, allow me to conclude with a European perspective: Europe has not developed global social networks like some important countries. This raises the stakes for the European authorities, if they want a stronger, more autonomous and more innovative European financial sector, to succeed in developing a coherent strategy. We do not have much time to decide this consistent European payment strategy, including EPI and a possible CBDC: one to two years. This makes our today’s discussion still more welcome. 3/3 BIS central bankers' speeches

Throughout my whole first term of office I followed these principles, and today I would like again to state that my second term of office will be governed by the same principles. I have permitted no political interference in the activities of the Bank, which is a fundamental principle underlying the Law on the BNB and the Treaty on the accession of Bulgaria to the EU. I will not allow any political meddling in the work of the BNB in my next term of office. I highly appreciate the first words of the newly elected Speaker of the 41st National Assembly at our first meeting: „Mr. Iskrov, we are well aware of the Law on the BNB, of BNB’s key role for the financial stability in the country, and in spite of our disagreement with the early timing of your reelection, no one questions the independence of the central bank. This is a question of principle, on which there is no argument”. These were Ms. Tsacheva’s first words, and I am really grateful to her for them. BIS Review 104/2009 1 Independence should certainly not be an excuse for idleness or work not done. I would emphasise once again, just as I have so far worked with two Bulgarian Governments and all legitimate political parties and their representatives regardless of the political spectrum they belong to, so they too can count on BNB’s expert advice and support in the future.

I appeal for this decision to be made this week, if possible, for the sake of assuaging all concerns regarding BNB's governance. Ladies and Gentlemen, thank you very much for the confidence I’ve been given. Thank you for your attention. 2 BIS Review 104/2009

The Islamic banking industry now accounts for 16.7% of total assets in the industry. Similar trends can be observed in the growth of deposits that have reached RM180.4 billion, an increase of 27.7% during this period while, total financing has also increased by 24.5% to RM143.4 billion. This growth has also accompanied by an increase in the number of full-fledged Islamic banking branches. From January to September this year, 93 new branches were opened thereby enhancing the outreach of Islamic financial products and services. BIS Review 146/2008 1 Another area that has seen significant growth is in the Sukuk market. The Malaysian sukuk market has expanded significantly with an average annual growth rate of 22 per cent since 2001. Despite the current market conditions that have affected the volume of new bonds and Sukuk issuance, the Islamic capital market has continued to structure innovative Islamic financial instruments. By the first half of 2008, the composition of the more innovative Sukuk Musharakah had increased to 84% as compared to 58% of the total sukuk issuance in 2007. In addition, several new Islamic financial products have been introduced including residential mortgage backed securities, Commodity Murabahah deposit products, commodity based financing, credit card based on ujrah , as well as, structured products based on Musharakah, Mudarabah and Ijarah. Malaysia has acquired a unique market space for driving Shariah-based innovation by combining the depth of knowledge with the drive for innovation.

The success of the SNB cannot be measured in terms of our annual results but by whether we fulfil our mandate, which is to ensure price stability while taking account of the development of the economy. In order to fulfil this task, the minimum exchange rate remains necessary for the foreseeable future. And so we return to the starting point of my presentation. I will repeat what I said before, that only the minimum exchange rate can prevent an undesired tightening of monetary conditions, should the upward pressure on the Swiss franc increase once again. Should it become necessary, we will therefore enforce the minimum exchange rate by buying foreign currency in unlimited quantities. BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11 12 BIS central bankers’ speeches

At that point, I look forward to hearing and learning from you in what I hope will be a rich discussion session. Purpose of regulatory capital First, let’s look back for a moment to understand the path we’ve taken. The Basel Committee has long sought ways to ensure that banks hold sufficient capital relative to the risks they face. Capital, of course, helps individual banks to weather unexpected losses. On a macro scale, requiring all banks to maintain adequate levels of capital helps to safeguard the stability of the financial system. When a financial system is more stable, banks are better able to provide businesses and consumers with funding and credit through good times and bad, which promotes the long-term growth of the economy. The risks involved in lending and borrowing have long been recognized, “For [a] loan oft loses both itself and friend,” warned Shakespeare some centuries ago. For their part, banks – like all companies BIS Review 27/2002 1 – seek a healthy balance between risk and opportunity. Because banks serve as key intermediaries of credit within the economy, poor credit decisions harm not just banks, but borrowers as well. Overly restrictive terms for credit make loans less accessible to all businesses, impeding their ability – and that of the economy – to grow. If the terms for credit are too lax, loans may be extended in volumes that borrowers ultimately may be unable to repay in full.

This diversification is bringing about an “unbundling” of financial activity – that is to say, breaking the financial services activity and value chain into its component pieces. The shift towards digital payments can enable competition and ultimately benefit consumers, and the Bank, given its role at the heart of the financial system, is in a unique position to support that. As the Governor said yesterday, this includes updating our own hard and soft infrastructure to provide a platform for private innovation to serve the digital economy. I’ll give three examples of what this means in practice. First, the Bank is renewing its Real Time Gross Settlement service (RTGS), the UK’s core payments infrastructure – Victoria Cleland, our Executive Director for Banking, Payments and Innovation, spoke about this at a roundtable discussion here yesterday. Our goal is to deliver a materially stronger, more resilient, flexible and innovative sterling settlement system, with the ability to support a diverse range of payment technologies such as those built on distributed ledger technology. 9 6 This project, led by Huw van Steenis, is looking at how financial services might evolve over the next decade, and what this means for individuals, businesses and financial service providers. For more information see the project webpage at https://www.bankofengland.co.uk/research/future-finance. 7 For more detail on the work of the Fintech Hub, see the article “Embracing the promise of fintech” in the Bank’s Q1 Quarterly Bulletin, available at https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2019/embracing-the-promise-of-fintech. 8 See WorldPay’s Global Guide to Alternative Payments, available at http://offers.worldpayglobal.com/rs/worldpay/images/worldpayalternative-payments-2nd-edition-report.pdf. 9 See https://www.bankofengland.co.uk/news/2018/march/rtgs-renewal-proof-of-concept and https://www.bankofengland.co.uk//media/boe/files/payments/a-blueprint-for-a-new-rtgs-service-for-the-uk.

13 As noted in the Minutes of the February 2021 MPC meeting. 14 The Bank set out some initial thinking on this in a March 2020 Discussion Paper, and together with six other central banks and the Bank for International Settlements published a report in October 2020 identifying the foundational principles necessary for any publicly available CBDCs to help central banks meet their public policy objectives. 10 11 12 6 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 6  Central banks including the Bank of England are considering what contribution they can make, consistent with their remits, to encourage an earlier and more orderly transition to a carbon-neutral economy. QE as a monetary policy tool I will say more about QE and climate change as part of the potential “future normal” towards the end of my lecture but for now I want to focus on QE in the context of the here and now. The fact that QE only came into use in the UK in March 2009 means that in practice its history, at least in the UK, is a short one. As Figure 2 illustrates, it has been used essentially five times in twelve years. QE1, 2 and 3 came in response to the financial crisis and the euro area crisis that followed; QE4 followed the Brexit referendum; and QE5, which is still ongoing, formed part of the policy response to the Covid crisis last March.

The MPC has set out forward guidance that it does not intend to tighten monetary policy at least until there is clear evidence of significant progress being made in eliminating spare capacity and achieving the 2% inflation target sustainably. As time passes and the economy recovers the forward guidance will become more salient, providing reassurance that there is a high bar to any future tightening. Figure 9: February 2021 Monetary Policy Report GDP projection, based on market interest rate expectations £ bn, 2018 prices 640 Projection 620 600 580 ONS data 560 540 520 500 480 460 440 420 2016 2017 2018 2019 2020 2021 2022 2023 400 2024 Source: February 2021 Monetary Policy Report. Conclusion In conclusion, my view as I have set out in this third Peter Sinclair Town Hall lecture, is that QE is a policy tool that has worked: it has proved its worth in the policy response to the Global Financial Crisis and more recently in the response to the ongoing Covid crisis. Over the past twelve years, QE has meant an expanded role for the central bank balance sheet as a key feature of what Peter termed “the new normal” for monetary policy. Of course, public scrutiny and debate about the role of QE is also valid – it is a relatively new tool about which we still have much to learn.

For example, only about 20 percent of the respondents to the July NABE business conditions survey indicated their firms face shortages of skilled labor. 11 And if skills mismatch was a large ongoing problem, we’d expect to see wages rising much faster for those with the skills in excess demand. Here, there is evidence of larger wage increases in some occupations, but the degree of wage-growth dispersion does not appear to be unusual. Wages Indeed, wage growth in general continues to be very modest–at a bit over 2 percent per year. That is a long way from the 3 to 4 percent benchmark implied by productivity growth and our inflation objective. Indeed, over the past three years, the unemployment rate has fallen by a percentage point per year; yet real wage growth has barely budged. It’s hard for me to imagine a full labor market recovery without genuine improvement in compensation growth. But am I wrong? Has the wage Phillips curve completely broken down? Some claim the answer is no – you just have to look at the right measure of unemployment.

Over the past 20 years, long-run inflation expectations in Japan have averaged a little over 1 percent. Yet during that period, the only time inflation was palpably above zero – let alone not in outright deflation – was when consumption taxes increased or oil prices spiked. So inflation expectations may remain stable while inflation itself lags for a prolonged period. 17 Conclusion As I think about the process of normalizing policy, I conclude that today’s risk-management calculus says we should err on the side of patience in removing highly accommodative policy. We need to solidify our confidence that our ultimate exit from the ZLB will occur smoothly – and in a way that sustains our escape from it. A corollary to this is we should not shy away from policy prescriptions that generate forecasts of inflation that moderately overshoot our 2 percent target for a limited time. Such a policy strategy more properly balances expected costs and benefits. And it would leave me with much more confidence that inflation will not stall out below target once we start raising rates. I agree with Atlanta Fed President Lockhart in thinking that we ought to be “whites of their eyes” inflation fighters. 18 The last thing we want to do is regress back into the ZLB. Indeed, such a relapse would be a sign there was something else going on that was preventing the economy from being as vibrant as we thought possible. 17 Consensus Economics, Inc. (1994–2014). 18 Lockhart (2014).

More importantly, in recent years, China has become a net exporter of direct investment into Malaysia, contributing to significant source of capital for development in various sectors such as infrastructure construction, power plant and steel manufacturing. Outstanding direct investments from China and Hong Kong SAR had grown significantly, almost reaching USD11.1 billion in first half of 2016, as compared to USD6.5 billion three years ago (end-2013). China’s recent One Belt One Road initiative has also added more excitement and opportunities for countries like Malaysia, which is strategically located along the maritime Silk Road. Joint initiatives had been developed to upgrade several ports in Malaysia, with significant investments in the development to come from China. The high-speed rail development between Malaysia and Singapore paired with China’s initiative to develop the network within Southeast Asia and Central Asia will further enhance the connectivity within the region. In fact, today’s headlines carried more developments on the East Coast Rail project with again, strong participation of China in the financing and construction of the project. As you know, our Prime Minister is leading a delegation to China discussing areas of bilateral cooperation, regional and international issues, as well as investment. Malaysia is also a member of the Asian Infrastructure Investment Bank (AIIB). Recently, the Parliament passed the AIIB Bill 2016, granting approval for Malaysia, a founding member, to contribute capital for the institution. Beyond trade and investment, China- Malaysia bilateral relation expands further with people to people connection, through culture, tourism and education.

When a home falls greatly in price, the household becomes unable to move without realising major losses. Individual households can then find themselves in particularly dire straits. A couple of days ago, Finansinspektionen presented a report on housing loans in Sweden.2 Encouragingly, this report showed that the mortgage ceiling introduced in 2010 may have dampened indebtedness and risk. At the same time, it can be noted, for example, that over half of new loans approved have no amortisation requirements whatsoever. Of the remaining loans, almost half must be amortised over a period of 50 years or longer. A large percentage of the loans being issued at present will remain for a long time. To a certain extent, these entail risks that the banks will also have to manage in several decades’ time. The higher capital adequacy demanded by the Ministry of Finance, Finansinspektionen and the Riksbank for the major Swedish banks should be seen in light of this. The banks need to lend a little more of their own money and slightly less of other people’s. This would mean that they would be able to bear losses more easily and would reduce the risk of future costs for all of us, as citizens. The European Commission is concerned about developments in Sweden The European Commission is also concerned about the high debts accumulating among Swedish households.

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

Under one important prerequisite: the private sector should play its part in the effort, and we should unlock cross border capital flows for the transition; this is the strongest argument in favour of a Green Capital Markets Union, which I advocated with my German colleague Joachim Nagel x). Except in 2022 and the exceptional energy shock, the euro area had a structural excess of savings to investment of 2% of GDP. Hence, provided we have the right economic incentives, Europe can finance its ambitious climate transition; this final and fundamental conviction is a good piece of news. * ** Good news is also important in what could seem like an ocean of alarming information on climate change. Our natural tendency to shut our ears when faced with pessimistic announcements was best captured by Homer with Cassandra. She repeatedly tried to warn that Troy would fall should they let Ulysses’ Trojan horse get into the city. I don’t claim to be Homer or even Cassandra. I tried this morning to sum up in a fair way what we know and don’t know yet about the macroeconomics of climate change, but above all what we can and must do as soon as possible – we are already in “money time”. I thank you for your attention.

Furthermore, the risk to financial stability would be less, in part because domestic parties’ currency-related risk would be lower and because it would be possible limit the size and growth of the banking system. To summarise, the possible reforms are as follows: • Fiscal policy must support monetary policy more effectively. Well-formulated fiscal rules could help in this context. • Improved financial stability policy where prudential rules and other instruments are applied in order to reduce risk in the financial system as a whole and address the procyclical interactions between it and the real economy (so-called macroprudential policy). • Intervention in the foreign exchange market with the aim of leaning against excessive capital inflows and mitigating the negative impact of capital outflows on financial system stability. Such intervention would also be applied to smooth out excessive exchange rate volatility. • Prudential rules after capital account liberalisation: - Rules on domestic banks’ foreign liquidity and foreign exchange balance aimed at reducing foreign exchange risk and foreign-denominated liquidity risk in domestic financial institutions, as well as making it more difficult for them to provide foreign-denominated loans to domestic borrowers without income in the borrowed currencies. - Restrictions on deposit accumulation in foreign branches of domestic financial institutions. - A ban or other restrictions on foreign-denominated lending to borrowers without foreign-denominated income. - A temporary tax or reserve requirements to temper excessive capital inflows.

It is not only through low policy rates Norway’s economy is influenced by monetary policy abroad. In a number of areas, we import the effects other central banks are seeking to achieve through quantitative easing. Chart: Yields on 10-year government bonds One example is the government bond market. For investors seeking safe investments, Norwegian government bonds have been one of several alternatives. Norwegian 10-year government bond yields are now quoted at around 1½ percent. Other investors have turned to the Norwegian equity market. Equity prices on Oslo Børs have tracked the rise in equity prices abroad. Even when oil prices – and oil equities – began to fall, the rest of Oslo Børs continued to rise. The commercial property market is another example of foreign capital finding its way to Norway in search of higher returns. The required rate of return on attractive office premises has fallen in pace with long-term yields, and prices have risen considerably. At the same time, rental prices in a number of locations are showing a downward trend. Large foreign capital inflows have probably contributed to the fall in the required rate of return. Like their counterparts in other countries, Norwegian bond-issuing enterprises and banks have over time been able to obtain cheaper funding. Lower risk premiums on covered bonds, for example, have reduced banks’ residential mortgage funding costs.

That being the case, it is worth considering the “second wave” of diversity initiatives that might augment the first. An obvious place to start here would be the other dimensions of diversity – cognitive and experiential. The evidence suggests these confer societal benefits every bit as great as identity. Indeed, diversity of thought and experience go the very heart of decision-making diversity. Moreover, because these dimensions are less well-recognised and harder to measure, unconscious biases around them may be harder to detect and correct. That underscores the importance of purposive action to move the diversity dial in these directions. (a) Cognitive diversity Cognitive diversity is far from easy to define and measure. It is stored between our ears in an organ which, despite recent neuro-scientific advances, remains largely a black (or grey) box. A second reason is that it is clearly multi-faceted, including diversity of perspectives, interpretations, heuristics and predictive models. 62 It comprises not just technical problemsolving, in an IQ sense, but also social and interpersonal problem-solving, in the EQ sense. Together, these comprise an individual’s cognitive toolbox. Recognising even that this toolbox exists, and what might lie inside, is a useful first step. Work by sociologists, psychologists and neuro-scientists has, over recent decades, shone a light on these wide-ranging cognitive competencies, their implications for behaviour and their source. Yet this evidence is only now beginning to percolate into the workplace, much less into wider society. Let me give an example.

The proportion of BAME employees is around 17%, greater than the proportion for the UK as a whole. Representation at senior management remains much lower at 5%, but is increasing. 56 Walton and Spencer (2009). 57 Page (2010). 58 Davies (2015) 59 Resolution Foundation (2015) 60 Although around half of that reflects the fact that there is a greater proportion of women working part time than men. 61 European Women on Boards (2016) 10 BIS central bankers’ speeches Like many other organisations, the Bank has sought to support diversity through a range of diversity networks covering, among other things, gender, ethnicity, LGBT, mental health, disability, caring and some of the main religions. One of my responsibilities is as Executive Sponsor of the Bank’s Ethnic Minority Network. This Network has put in place some valuable new initiatives to support greater ethnic diversity across the Bank over recent years, including reciprocal mentoring schemes and an Afro-Caribbean Scholarship Programme which funds students through university. The Bank has also recently signed up to UPstanding – an initiative to showcase BAME professionals working in the US, UK and Ireland. Plainly, there is further to go along these identity-based dimensions of diversity, in the Bank and more broadly. But there is wind in society’s sails, as well as in the Bank’s, on these dimensions of diversity, which gives good grounds for optimism about the future.

This will enable us to make possible further adjustments, for example regarding the liquidity rules that will apply as of 2015. The question of systemic risk is still outstanding and we will deal with it in 2011. Le Figaro – Are you in favour of more stringent requirements for larger banks, considered to be systemic? Christian Noyer – This should be an option rather than automatic. Who would have thought that Northern Rock or Bear Stearns could be regarded as systemic? I think that, in the context of each country, a wide variety of instruments is necessary to allow supervisors to ensure that banks increase their loss-absorbing capacity. In particular, the experience of national supervisors should be taken into account. In France, for example, we adjusted, as permitted by Basel II, the ratios required of each institution based on its risk profile. The experiment was conclusive. The amounts that each bank had to raise from the State during the crisis proved consistent with the requirements that we had determined. Other countries that have not had this experience are likely to implement automatic rules. Le Figaro – In the United States, some believe that European banks, and in particular French institutions, are undercapitalised relative to the size of their balance sheets... Christian Noyer – The idea that US banks all comply with Basel III and that efforts are only required in Europe is false. Those who believe this are victims of an accounting and prudential optical illusion.

Although that means that a given amount of growth translates into bigger employment gains, it certainly is not an unmitigated good development. Also, we cannot lose sight of the fact that the economy still faces significant headwinds and there are some meaningful downside risks. In the headwinds department, I would include the 1 This recurring pattern has led some economists to question whether the depth and duration of the Great Recession has distorted the usual patterns of seasonal adjustment. BIS central bankers’ speeches 3 run-up in gasoline prices mentioned earlier because that will sap purchasing power, the continued impediments to a strong recovery of the housing sector, and fiscal drag at the federal and state and local levels. In terms of downside risks, these include the risk that growth abroad disappoints and the risk of further disruptions to the supply of oil and higher oil prices. On the inflation front, the overall rate of increase of consumer prices, as measured by the 12-month change of the consumer price index slowed to 2.9 percent in February from a recent peak of 3.9 percent last September. Despite the recent rise of gasoline prices mentioned above that may interrupt this pattern, we expect this moderation in the growth rate of consumer prices to resume later this year.

That would provide gone-concern loss-absorbency for new improved resolution regimes to draw on. A still richer Accord might include instruments that aid recovery by converting into equity in the face of meaningful but not life-threatening losses. This approach moves away from seeing runnable short-term wholesale debt as a source of discipline on banks, to instead seeing longer-term bonds as providing a mass de manoeuvre for recapitalising distressed banks. Not all forms of leverage are the same. But no static regime can ever be enough. If they were, crises would not recur. That is why the new macroprudential authorities, such as the Bank of England’s FPC, will be able temporarily to adjust capital requirements when circumstances warrant. I have stressed that it is oversimplistic to think of macroprudential interventions to improve capital adequacy as always inevitably leading to higher funding costs and tighter credit conditions. It will depend upon the prevailing circumstances: whether the banks started out with solid balance sheets, what the market knows and thinks. The FPC will need to be transparent in order to build understanding of its actions. 15 I worry about the withering away of a market for bankers’ acceptances; claims by one company on another, but guaranteed by one or more banks, and historically eligible for discount at central banks. As I have said before, corporate treasurers, bankers and central banks could usefully work together on this.

One way of overcoming this is for the prudential regulator to make a firm raise the required equity capital once the deficit is identified. Another way might be for banks to issue so-called hightrigger contingent capital instruments (CoCos), ie bonds that convert into equity if a bank’s capital ratio falls below a prescribed but reasonably high level. In steady state, for a bank with a minimum equity ratio of 10%, that trigger might be, say, 8%: sufficiently below the required level for the insurance provided by these CoCos not to be prohibitively expensive, but sufficiently high that the bonds would convert to equity while the bank was still able to fund itself in the market.8 The second, and in some ways bigger, issue relates to the problem of a debt-overhang.9 Suppose, due to a marked deterioration in the macroeconomic environment, a bank’s equity base, even after the conversion of high-trigger CoCos, is revealed to be too thin to cover the risks in the business. Debt spreads rise and, in consequence, the value of bonds in issue falls. An injection of fresh equity would increase the value of the business, by reducing the probability of bankruptcy. But since bond-holders ultimately pay the bankruptcy costs, they and other creditors would be the main beneficiaries of recapitalisation: there would be a transfer of resources from equity holders to bond holders. Shareholders in a poorly capitalised firm have an incentive, therefore, to keep their hands in their pockets and gamble that the economy, and with it their bank, improves.

Their average annual per capita growth rates of 6-8% are historically unprecedented and greatly exceed those attained by the present advanced economies at their earlier stage of economic development by at least three folds. Similarly, ASEAN-5 experienced growth rates of more than doubled that of world average during the past two decades. Nevertheless, Asia's growth path is no different from those of the other economies. Asia too follows a similar industrialisation process of moving from traditional to BIS Review 130/2009 1 modern activity, from the production of low value-added goods to incrementally higher valueadded products to eventually the services sector. What makes Asia different, however, is that this process has been considerably accelerated. The success of Asia has not been a result of one single factor, but instead, a confluence of factors that has promoted, facilitated and driven economic development. Given the immense diversity of the continent, it would not be possible to draw on exact and specific development strategies that have contributed to the rapid economic progress and transformation. Nevertheless, four general but salient features have been critical in the development strategies of most of the Asian economies. First, sustained economic growth has always been given a steadfast priority in the Asian economies. The governments in most South-East Asian and East Asian countries have focused on institution-building and promoting industrialisation. Institutions have been established to plan, drive and monitor the laying of necessary economic foundations, including enabling infrastructure, in the broader economy, while potential impediments have been addressed.

The Rt Hon Sir Edward George: Global economic recovery - where to from here? Speech by The Rt Hon Sir Edward George, Governor of the Bank of England, at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London, Mansion House, 26 June 2002. * * * My Lord Mayor, Mr Chancellor, my Lords, Aldermen, Mr Recorder, Sheriffs, Ladies and Gentlemen. On this great annual occasion last year I spoke about the problems that confronted us in keeping the UK economy on course in the face of the cold winds blowing from abroad. I drew attention to the risk that in seeking to avoid being sucked down into the Charybdis of adverse external influences, by lowering interest rates in this country, we could find ourselves thrown onto the Scylla of excessive domestic exuberance. In the event, the cruel terrorist attacks on New York and Washington on September 11th - had a damaging short term impact on economic conditions everywhere. We were drawn irresistibly towards Charybdis despite the resilience of domestic consumer demand, which we sought to sustain by steering towards Scylla, with further reductions in interest rates. The economy as a whole became becalmed over the winter. That of course, was disappointing after 37 successive quarters of relatively steady growth. But the economy as a whole still managed to grow in the year to the first quarter - by 1% on the present data which was somewhat faster than in a number of other G7 countries.

However, I think a sensible way to address signs of severe misalignments, beyond the leaning against the wind with monetary policy, is through sterilized intervention. But, in order for this to be effective and coherent with the inflation targeting framework, some conditions must be met: • In the first place, it must be consistent with the inflation target, in order for the intervention not to jeopardize the credibility of monetary policy. • Secondly, to safeguard monetary policy independence, once the intervention is announced, it must be implemented mechanically. All this shields the conduct of monetary policy, typically carried out in regular pre-established meetings, from the extraordinary decision of buying or not buying foreign currency. In particular, the sterilization of intervention decisions permits to preserve both the credibility and the independent management of monetary policy. • Finally, and because of this sterilization requisite, the cost of intervention must be properly considered, because it entails a quasi-fiscal component that could be significant. The Chilean experience last year was in line with the aforesaid principles. It was done in a moment where there was clear evidence of misalignment with respect to the levels deemed consistent with long-term fundamentals. It was also totally consistent with the inflation objective, and started at a moment – April 2008 – in which there were rather benign inflation figures that revealed a smaller risk of unwanted inflationary propagation.

Our estimates of the potential output level have increased in pace with the emergence of new information. Our best guess is nevertheless that the output gap is now positive and widening. Low inflation combined with high growth in output and employment is therefore a challenge to monetary policy. 2 BIS Review 49/2006 Even though economic growth has been strong over the past 15 years, business cycles have fluctuated. A pronounced upturn in the years from 1993 to 1998 was followed by a period of more moderate growth and a mild recession in 2002 and into 2003. Since summer 2003, there has again been a clear upturn in the Norwegian economy. Wage developments reflect and influence business cycles. Strong employment growth in the 1990s resulted in a rise in labour costs, which in turn had a dampening impact on growth. Moderate wage growth in recent years has been accompanied by a strong cyclical upturn. So far, the upturn has been marked by strong growth in output, with an ample supply of labour and unusually low inflation. For a longer period employment showed a smaller rise than in previous cyclical upturns, partly reflecting the decline in sickness absence since summer 2004 and solid growth in productivity. Employment showed a turnaround last autumn and the number of persons employed is now increasing sharply. Unemployment is falling rapidly.

1970 – 2018 1) 250 250 Gas Oil 200 200 150 150 100 100 50 50 0 1970 1978 1986 1994 2002 2010 0 2018 1) Preliminary figures for 2018. Source: Norwegian Petroleum Directorate 9 There is still global demand for oil and gas. If we reduce production on the Norwegian shelf earlier than planned, other suppliers are ready to take over. The climate impact of an earlier reduction would therefore be marginal, while the costs to Norway would be substantial. NORGES BANK ECONOMIC PERSPECTIVES 14 FEBRUARY 2019 The oil industry has been an economic engine for Norway for close to 50 years. The revenues from this industry have improved the welfare of today’s citizens and the citizens of tomorrow. The spillover effects from the oil sector to the wider Norwegian economy are substantial. Throughout our country there are oil-related jobs to be found. More than 10 percent of all employed persons in Norway are either directly or indirectly working for the oil industry.3 Innovation and skills development in the industry have also benefitted other sectors. The oil industry has been through a demanding period of personnel cuts, cost savings and rationalisation. The restructuring in the industry that was already underway became even more pressing when oil prices collapsed in 2014. Today, oil companies are hiring again, and will likely continue to do so in the coming years.

2 INTRODUCTION NORGES BANK From a not too distant future, let’s return to the present day. We can already see the contours of the digital tools used by Kristoffer and his digital assistant. Technology is advancing at a rapid pace. Every day we rely on new technology as we tap our payment cards on the reader. We also have to adapt to new developments on many other fronts. A shift in production methods and consumption is underway in response to global warming. The world economy is marked by densely interwoven trade flows, but also by uncertainty about the path ahead. ECONOMIC PERSPECTIVES 14 FEBRUARY 2019 INTERNATIONAL ECONOMIC COOPERATION IS CREAKING Throughout history, technological innovation and increased trade in goods and services have been important sources of growth and development. The two driving forces have functioned in tandem. Trade barriers have been reduced in recent decades. Faster transport and advanced communications systems have greatly facilitated access to ever bigger markets. Global value chains have emerged, and service providers can be located far from customers. With free-flowing capital, we can invest globally. Since the 1970s, world trade has grown rapidly (Chart 1). As a percentage of world GDP, international trade has almost doubled. Goods are still the dominant component, but trade in services has been on the rise. A host of new countries have also increased their share in world trade. Substantial technological and economic lags have been reduced. The world’s economic balance has shifted. Chart 1 World trade1) has grown markedly.

This is especially important as nearly two fifths of university graduate cite good work life balance as the main thing they look for in an employer. Third, the Bank encourages shared paternity leave and over the last year, 59 colleagues took up the offer, compared to 187 people on maternity leave. We have a generous pay package of six months at full pay and 6 All speeches are available online at www.bankofengland.co.uk/news/speeches 6 three at statutory pay. Colleagues are given ten Keep In touch (KIT) days and are offered IT equipment to take home during maternity leave to enable them to maintain contact with the Bank and ease their eventual return to work. The Bank has been successful in retaining female talent, with the Bank’s maternity returner rate at almost 90% over the past few years. What gets measured gets managed: be transparent about progress Building an inclusive culture is impossible without transparency.10 In recent years, important strides have been made on transparency around the gender pay gap. Transparency delivers accountability and in making this information public, the sector must acknowledge the work it has to do to close the gap. In the financial sector, the average mean pay gap at banks and building societies is 35% and 31% in insurance companies. For the Bank, the mean gender pay gap is better than the industry average at 20%. The gap is driven by the difference between male and female representation at senior levels. This is not an excuse.

Available at: https://www.creditsuisse.com/corporate/en/media/news/articles/media-releases/2012/07/en/42035.html 2 All speeches are available online at www.bankofengland.co.uk/news/speeches 2 The Bank of England values diversity for three reasons. First, it is the right thing to do; a public institution should reflect the people it serves. Second, diversity can build the trust required to deliver our remits, as people are more likely to trust people they recognise, reducing misperceptions that we are experts making esoteric decisions in ivory towers for the benefit of others.5 Third, diversity leads to better decision-making, more creative thinking and reduces the risks of groupthink and bias.6 This last point is critical. Almost all decisions in finance are taken under uncertainty, making it especially important that decision makers are exposed to a range of views, and engage in open debates with people whose perspectives challenge the prevailing wisdom. Articulating why diversity and inclusion are important has helped the Bank move the dial. When I joined the Bank, only 17% of senior managers were women, so we set an ambitious target to reach 35% by 2020. The Bank is on track to achieve this: today, 32% of senior management are female, considerably above the 14% industry average. Our pipeline of future leaders also looks healthy: 46% of colleagues below senior management are women. This didn’t just happen. Reaching this point has required a deliberate, concentrated effort throughout the organisation. The power of organisations like the WIBF is that they help such approaches permeate through the industry.

Chart 2: Central bank policy rates 2016 - 2007, change in pp Policy Rates, end of period in % 20 ECB 2016 SRB 2011 2015 ROM 2010 2014 POL 2009 2013 MKD 2008 2012 HUN 2007 -1 -1.0 14 region average 16 ALB 18 0 -2 12 -3 10 8 -3.5 -4 6 -4.0 4 -4.5 -5 -5.0 2 -6 0 ALB HUN MKD POL ROM SRB -5.8 ECB -6.0 -6.6 -7 12 Spread to the ECB rate in pp 10 8 6 4 2 0 ALB CZR HUN MKD POL ROM SRB -2 average 2004-2007 average 2008-2012 average 2013-2016 Source: Central Banks’ internet pages. The eased monetary stance across of the central banks in the region led to loosening of the financial conditions for borrowing of the private sector. The scrutiny of the lending interest rate data reveals that the downward adjustment of the cost of credit is visible in all of the countries in the region.

180 International Liabilities 160 140 120 100 80 60 40 20 0 Region CEE 2007-2005 2012-2008 SEE Baltics 2015-2013 Source: International Monetary Fund, Balance of Payments Statistics. Data from the balance of payments statistics used as an indicator for the capital inflows in the region point that overall capital flows have continued, but at a much slower pace compared to the pre-crisis period. The slowdown is visible in the most recent period, as well. Thus, during 2013-2015 the capital inflows for the region on average amounted to around 12 % of GDP, compared to a cumulative growth of 38 % of GDP in 2008-2012 and 67 % during 2007-2005. The largest slowdown is observed for the CEE group of countries, where capital inflows almost stalled. Chart 8: Components of capital inflows, cumulative change in p.p.

The easing of concerns over inflation has allowed the Central Bank of Turkey to focus on curbing the potential destruction of the crisis on the Turkish economy without conflicting with the primary goal of maintaining price stability. The majority of policy rate cuts to compensate the additional tightening in financial conditions was antedated. Subsequent data releases on inflation and economic activity have bolstered the credibility of the Central Bank. I would like to underline the gradual decline in interest rates on commercial loans as a positive development in this period. BIS Review 134/2009 1 The common denominator of the Central Bank’s policy preferences and the recent choices should also be emphasized. The primary objective of the Central Bank is to achieve and maintain price stability and this primary objective does not conflict with any other objective of the Bank. The policy stance we have recently adopted clearly reflects this. Although recent data releases indicate that the worst may be over, the recovery is expected to be protracted given credit market problems and rising unemployment rates. The tightness in financial conditions still persist to some extent, and uncertainties regarding the impact of the problems across financial markets on the real economy are ongoing, suggesting that downside risks still remain. Although downside risks are still more significant, recent signs of partial recovery in economic activity should not be discarded. Nonetheless, we are of the opinion that most of the recent increases in economic activity were attributable to the short-term effects of the global fiscal measures implemented.

In the few cases where counterparties have defaulted, for instance in the case of a subsidiary of Lehman Brothers, the Eurosystem was able to fully cover its exposure by seizing the posted collateral. At the same time, the collateral framework ensured that banks were able to obtain sufficient amounts of central bank liquidity throughout the crisis. This became most visible in the context of the two Very Long Term Refinancing Operations that the ECB conducted in 2011 and 2012. In these operations banks obtained collateralised central bank liquidity in the order of EUR 524 billion within only 10 weeks. This basic set-up of the collateral framework has remained the same since the beginning of monetary union; the three constituent parts of the Eurosystem collateral framework, i.e. (i) the counterparty framework, (ii) the basic eligibility criteria for underlying assets and (iii) the risk control measures, have remained largely unchanged. The Eurosystem maintains a broad counterparty framework and its eligibility criteria are still based on the same principles as at the beginning. This shows that the design of the Eurosystem collateral framework is in general very robust. However, some changes were necessary to guarantee a smooth implementation of monetary policy at times of financial market stress that led to a general reduction in access to market funding.

So how do our actions support economic activity? Buying assets and extending interest rate guidance puts downward pressure on longer-term interest rates, so they are lower than they would otherwise be for any given economic outlook. This supports the price of assets such as equities and homes. Buying mortgage-backed securities has the additional effect of BIS central bankers’ speeches 5 narrowing the interest rate spread between these assets and Treasuries, which further reduces mortgage rates. Moreover, to the extent that our actions are seen as supporting the recovery and providing some insurance against adverse shocks, confidence in the mediumterm economic outlook should also increase, making businesses and households more willing to invest, hire and spend. If we are successful, long-term Treasury yields could actually rise as confidence in a sustainable recovery increases. At the same time, the expected returns on private assets should rise and risk premia decline. This matters because such shifts would provide support to the economic recovery. Now it is true that some of the channels through which monetary policy affects the economy may be partially impaired at the moment. For example, because of ongoing restrictions in the supply of mortgage credit to customers with less than perfect credit records, the impact of lower mortgage rates on housing is probably less powerful than normal. While this restraint should slowly ease as house prices stabilize, the difficulties of households with lower credit scores in obtaining mortgage credit warrants ongoing attention.

We therefore seek to minimize how far employment is from its long run normal level and inflation is from our longer-run goal of 2 percent on the PCE measure. Because monetary policy works with a time lag, we base policy not just on where the economy is today but where we expect it to be in the future. To do this, we make economic forecasts, based on data and insights from a broad range of economic models. We also take into account the balance of risks around our base case outlook. Looking ahead, in the absence of further monetary easing, I concluded that growth would remain too subdued over the next several years to make big inroads into the spare capacity that remains from the Great Recession. As a result, unemployment would remain unacceptably high, with economic risks skewed to the downside. Meanwhile, with substantial slack in labor markets and inflation expectations stable, inflation was likely to remain a bit below our 2 per cent longer-run objective. In this situation, I concluded that our policy framework means that further monetary policy easing was appropriate provided that the benefits of using the tools available outweighed the costs. In my judgment, this standard has been satisfied here. I am confident that the costs are manageable, based in part on the experience we have of using the tools these past four years and that the benefits substantially exceed the costs, recognizing, of course, that our actions are not so powerful that they will instantly transform the economic outlook.

As a result of this decline, the Libor, which is supposed to reflect the major banks’ unsecured refinancing costs, is now hardly ever based on effective transaction prices but instead relies almost exclusively on estimates. In response, the UK’s Financial Conduct Authority has announced that it will no longer maintain the Libor after 2021. All market players will have to make careful preparation for this. In Switzerland, work on replacing the Libor is already well advanced, but a complicating factor is the rate’s widespread use. The national working group on Swiss franc reference rates (NWG), which is in charge of ensuring a smooth transition, has identified SARON as the preferred alternative solution to the Libor. SARON has already established itself as a reference interest rate, and there is now an interest rate curve based on SARON. It is crucial to have a SARON-based curve capable of being used instead of the Libor curve, for price setting across the Swiss franc capital market. Amounts outstanding on the overnight swap market (OIS) based on SARON are currently low, but are likely to grow significantly in the future. In this connection, I would also like to mention that the first SARON-based futures contract was launched only around ten days ago, and traded on the Eurex platform. In the future, when products based on SARON (loans, mortgages, etc.) are brought to market, trading volumes for the associated collateral instruments will increase. These instruments, in turn, can be used for loan pricing.

The successful operations of both Macedonian Interbank Payment System (MIPS), the RTGS system of which the central bank is both the owner and operator and Klirinski Interbankarski Sistemi Skopje (KIBS), of which the central bank is the settlement agent, have contributed to a high level of confidence throughout the years and have a positive effect on the stability of the banking and financial system and the economy as a whole. To conclude, commercial banks transferring among them funds held in accounts with central banks have facilitated the proper functioning of the banking and financial systems and mitigated disruptions and instability globally. This historical development has been accompanied with a slow, but steady movement towards a higher velocity of money circulation. Settling payments in accounts at the central bank still provides the link with the two main tasks of monetary policy and financial stability. While steering monetary conditions the central bank cooperates with commercial banks and thereby reduces transaction costs. This reality is a layered architecture in which central bank money is the ultimate settlement asset in the economy. The positive network externality is best described by referring to the risk reduction, service assurance and competitive neutrality the central bank provides. Using money held in accounts at the central bank to effect payment is generally regarded as risk free, service is assured even in extraordinary times of global and domestic crises, while using the central bank as a hub ensures that payment systems’ participants are not forced to rely on actual or potential competitors for payment.

One thing is clear in our work, it is time to take stock on this issue. Thank you. 4 BIS central bankers’ speeches

Nevertheless, when you take up a position as a board member, you also have a responsibility to discharge your responsibility in a very professional and systematic manner. My dear friends, it is necessary for everyone to exercise a certain financial discipline within the organization. If the top people are lax, or if the board members do not ask the questions that need to be asked, then the tendency is for financial discipline to erode within the company. My dear Chairmen and CEOs, don't be frightened of, or upset with, the people who ask tough questions at Board Meetings. My dear Directors, don't feel over-awed or shy to ask the tough questions at Board meetings. You must do that. We want you, as Directors, to do that because it is not possible for the Department of Supervision of Non-Bank Financial Institutions to be doing all the questioning from the Chairmen & CEOs. We are performing a regulatory function. We will see whether the overall framework is in place. We will want to see whether your overall risk assessment positioning is acceptable. But, the actual running of the business is your responsibility. You have to ask the tough questions. You have to ensure that sound internal controls are in place. You have to look at the future plans to ascertain whether you are on the right track. Often, I have seen eminent and respectable people accepting board positions, but not getting involved in the governance of the company. That is not good enough, especially in finance companies.

An eclectic approach should not be ruled out. (c) Rules or discretion? As I have said on a previous occasion, we are doubtful that macroprudential instruments could be operated by a rule. To steer the banking system towards increasing its resilience to incipient problems in a stretched sector, a whole series of judgments would have to be made. Whether the rate of credit growth seemed excessive; whether terms were overly lax; or whether the “bubble bursting” would materially damage banks. That would call for assessments of the levels of indebtedness, of banking system exposures, of the broad probabilities of those exposures turning sour, and of whether herding in the market might be driving the system into an ever more precarious position. Rapid growth in debt does not of itself signify over indebtedness; and default does not necessarily materially impair lenders’ resilience. One possible way of thinking about this is that the authorities could be guided by top-down stress tests of the effects on the banking system of various adverse scenarios potentially affecting different groups of borrowers and exposures. In very broad terms, this would be akin to systematically applying Pillar II-type judgments under the Basel regime to banks in general. It would share with the Pillar II element of micro-prudential regulation a focus on circumstances that warranted a capital charge different from the Pillar 1 minimum. But it would differ in a number of important respects. First, the instrument would be applied to all banks in the jurisdiction.

Or into whether monetary policy could be used to control asset prices as well as doing its orthodox job of steering nominal trends in the economy, which I should say can include taking account of prospective risks of inflation volatility over the medium term. Ideas circulating already include minimum margin requirements or capital ratios that vary not only across instruments or firms but also through time as credit conditions change. We need calmly to explore whether there are also other possibilities. But let me make this absolutely clear: there are formidable obstacles to finding a solution. In the monetary sphere, a regime of floating exchange rates allows individual countries to 6 BIS Review 134/2009 instruments, whether the instruments would be operated under a rule or discretionary judgments, and whether it was feasible for one country to attempt to employ such instruments in a world of freely flowing capital. I will sketch our preliminary views on those questions. The Bank will publish a Discussion Paper, going deeper than I can today, over the next few weeks. We do not have all the answers and I must stress that we are not in advocacy mode, but we have reached the point where we should like to try to inject some further thoughts into the debate.

The main reasons for changing payment habits include the increased convenience of the electronic payments, for example increased limit on the amount of contactless payments, the perceived risk of infection from banknotes, governments’ recommendations to use cash less, as well as more difficult access to and lower acceptance of cash at the points of sale. This trend in payments is unlikely to be reversed. Almost 90% of the respondents stated that they would continue to use cash less once the pandemic is over. Similar trends in payment habits can be observed in our country as well. Consumers have shown strong preferences for using cashless instruments such as cards. For example, the number of payment transactions initiated on the virtual point of sale last year doubled and continued to raise at double-digit growth rates this year. Also, the volume of contactless card payments increased by about 50% in 2020 and this trend has continued this year. Obviously, advancement in technology opens the doors to innovative digital services, but to unlock its true value for businesses and consumers, we as regulators have a role to play. In this context, clear example is the Payment Services Directive 2 (PSD2) that opened up EU payments market to higher competition, by establishing a level playing field for traditional players and new entrants, while providing higher protection for consumers. The new concept of open banking was conducive to richer payment landscape with numerous new entrants (third party providers) and numerous new customer-centric services.

Thus, payments enabled by new providers have just started to take off, but it looks promising to become a new normal as they are expected to improve the user experience. How fast this segment of the financial system in the EU is developing can be witnessed by the approximately 300 new providers operating by midSeptember this year, which is just two years since the application of the new regulation-relevant regulatory technical standards under the PSD2 (Open Banking Report, 20212). Most of the companies that offer these innovative services are fintechs, but open banking also 3 1/3 BIS central bankers' speeches offers a possibility for traditional banks. In fact the survey conducted by Accenture3 finds that three quarters (75%) of the banks see payments modernization as being driven by changes in the national payments infrastructure and regulation, which include improving bank-to-bank payments systems, new industry standards and open banking. The rapid move to digital payments has put additional pressure on banks, with three-quarters (75%) of bank executives saying that the pandemic has increased the urgency of their plans to modernize payment systems. Pressures are felt by the central banks as well. In response to changes in consumer payments preferences, the need to further increase efficiency of payments, as well as the disruption caused by COVID-19, the interest in central bank digital currency (CBDC) has also increased. In fact, last year was the launch of the first “live” digital currency in the Bahamas.

Debt levels and developments in housing prices are taken into account in the Riksbank’s forecast of future inflation through their effects on household wealth and thereby on demand in the economy. It is difficult of course to predict how households will act, but we usually assume that they are rational and able to make sound judgements of how the economy will develop and how this will affect their borrowing costs. This is not necessarily a correct assumption. For example, it’s conceivable that households in certain situations would react stronger to a rate hike than to an equivalent rate cut. Should households not expect interest rates to rise in an economic upturn and a rate hike by the Riksbank came as something of a surprise, it could have effects on consumption beyond those predicted in our models. We discuss these effects and try to take account of them outside our models to the extent that we believe it is justified. Were households to react stronger than expected, it could mean that we don’t need to raise interest rates as quickly in an economic upswing as we otherwise would have done. BIS Review 67/2004 3 The question of the real economic effects beyond the forecast horizon is trickier. When a speculative bubble bursts, it can result in rapid price falls, but also in poorer economic growth and higher unemployment in the longer-term. Naturally, this is something we want to avoid if possible.

In a liberalised financial market environment, the central bank contributes to the reduction in lending rates by reducing inflation. The Government also contributes by implementing prudent fiscal policy, thus limiting the incidence of crowding out of the private sector by the Government. As a result, yield rates on Government securities fall. As inflation and yield rates on Government securities decline, lending rates are also expected to decline in the medium to long term as the two provide the relevant opportunity cost of lending to the private sector. Another factor that commercial banks take into consideration in determining lending rates is the default risk arising from the poor credit culture in the economy in general. In resolving the problem of poor credit culture, the Central Bank through the Financial Sector Development Plan, facilitated the establishment of a credit reference bureau which collects information on borrowers to be used by credit providers. Furthermore, in order to increase competition in the financial sector the Bank of Zambia has registered a number of commercial banks and other financial institutions to operate in Zambia. In 2009, the number of registered banks increased from 14 to 17. In addition, the Bank of Zambia is developing a framework to migrate from the use of monetary aggregates as the anchor of inflation expectations to the use of interest rates.

But the widespread use of such data to price annuities began only with the calculations of Richard Price in 1780 and the Institute of Actuaries in 1869. In Holland more accurate calculations of the prices of annuities date back to de Witt in 1671. See Poterba (2004). 6 Manton et al (1991) and Caselli and Vallin (2001) describe alternative approaches to inferring the limit to human life. Some estimates assume that life expectancy will converge to that of the longest-lived population; for example, that life expectancy in the West will rise to that in Japan, the country with the highest life expectancy. But the level in Japan has itself increased significantly over the past century. So what determines Japan’s life expectancy? Another approach is to examine how life expectancy might change if everyone adopted lifestyle patterns that increase longevity. Mormons and Seventh Day Adventists seem to live longer than the rest of us, but exactly which aspects of their lifestyle we should adopt is not entirely clear. See, for example, Enstrom (1989). Yet another approach is to work out the contributions that different human diseases make to premature death, and calculate the hypothetical life expectancy that would result if medical science were to be able to eliminate these diseases. This ‘cause elimination’ approach was adopted in the 1950s by Pichat. The number derived was 75. This is the number that the UN used until the early 1980s in their population projections.

Both women were convicted by juries which had in all likelihood been influenced by the assertion that the probability of two cot deaths in the same family was extraordinarily low. That assertion was based on the assumption that cot deaths in the same family were independent events, a view for which there was 11 See, for example, Thompson and Schuman (1987). BIS Review 73/2004 5 no scientific evidence and which is a priori implausible.12 The assumption of independence was crucial to the prosecution evidence against Sally Clark that the odds of two cot deaths in a family such as hers were 1 in 73 million and so would be expected only once a century. Given the complex and conflicting medical evidence, it would not be surprising if that striking and simple statistic had played a role in helping the jury come to its conclusion. In fact, as pointed out by Professor Ray Hill, the statistical evidence on cot deaths suggests that in England and Wales we should expect several cases a year.13 Thankfully, both women were eventually released after winning their appeals, albeit largely on other grounds. Why then do probabilities cause us so much difficulty? Our understanding of probabilities evolved through counting the frequencies of various events, whether the number of days in summer on which it rains or the outcomes of tossing a coin. All this was part of our evolutionary experience long before the concept of probability was invented in the seventeenth century.

Chart 14 provides a benchmark in which the 𝑓(·) function is assumed to be linear (an assumption that underestimates net benefits relative to a convex 𝑓(·) function) and the weight on the secondary objective, 𝜙, is set to one. It shows that the tools are likely to provide significant expected net benefits in the event of a housing boom, and these increase as the size of the housing boom increases. In the absence of a housing boom, there are unlikely to be material costs (Chart 14).21 20 To date, the Recommendations have largely acted as an insurance policy. Since they were introduced, banks, in aggregate, have been well within the 15% limit (the maximum share of high LTI lending in aggregate has been 11%). In part, this is likely to reflect the fact that the housing market has been relatively subdued since the policies were introduced. There has, however, been some ‘bunching’ of mortgages with LTIs between 4 and 4.5 suggesting that, as intended, lenders are judging it prudent for some borrowers to take smaller mortgages than may have been granted in the past. In aggregate, this bunching effect has been small. 21 Note that the benefits and costs in Charts 14 and 15 are different. Chart 14 shows a discounted sum of the expected costs and benefits in each year of a scenario. It takes into account the probability that the costs and benefits will be incurred over a given period, the relative persistence of costs and benefits, and discounts both.

The chart shows Norges Bank’s estimate for public purchase of health and care services. The estimate is based on the assumption that the public sector will finance the same share of public services as today. The source for the estimate for public consumption is the Government’s Long-Term Programme, and the estimate is, among other things, based on unchanged tax rates. The fundamental problem is that demand for health and care services is growing faster than tax revenues. There will be a limit on the extent to which the state can reduce appropriations for other important social objectives such as education, research and the judicial system. Something has to give. 17 BIS Review 14/2000 Chart 20 Even after all the structural changes of recent years, there is probably still room for efficiency gains in the health and care sector. However, this is hardly sufficient to fully address the challenges. Users may therefore have to finance a substantially greater share of these services, whether the services are provided by public or private operators. There are limits to the extent to which the public sector should and can impose user fees without creating unacceptable distributional effects. A private insurance system is not a fail-proof solution. It seems obvious that there is a need for a clearer definition of the public sector’s core activities in the health and care sector, and in other areas. There is a need for delimiting what the public sector should finance based on tax revenues.

The agenda for this conference – covering topics such as cyber security, artificial intelligence and digital currencies - gives an insight into the scale and pace of innovative thinking currently taking place in the payments industry. Innovation is at the heart of the topic I will be focusing on today – cross-border payments. I will cover why greater innovation is needed in cross-border payments and outline the G20 initiative to develop a roadmap for action. I will then seek to bring it to life by outlining some of the key developments already underway at the Bank of England to support the international agenda in this area. Cross-border payments lag behind Over the last decade or so, there has been a strong focus on further enhancing domestic payments with a significant increase in instant payments and great innovation at the customer-facing end. Just consider our ability to pay for goods and services not just with cards and phones but also with watches and smart speakers. There is also a move to enhance the core underlying infrastructure. In the UK, the Bank of England is renewing its Real Time Gross Settlement Service and Pay.UK is developing a New Payments Architecture for retail payments. Many other countries are undergoing similar transformations, including the US with FedNow and Australia’s New Payments Platform. Traditionally, however, there has been less focus on cross-border payments even though they are so significant in both value and volume.

Building block 15 calls for harmonised API data protocols and the Bank will support this objective in its development of an API layer. The Bank is also involved in the more exploratory building blocks in Focus Area E. In the light of the continued decline in cash for transactional purposes, and great technological advancement, many central banks, including the Bank of England, are considering whether introducing a CBDC would be appropriate. In March this year, the Bank published a discussion paper10 to explore the benefits, risks and practicalities of a retail CBDC in the UK. We have received valuable feedback from across the payments industry, technology providers, academics and public authorities and we look forward to setting out more information in due course. The Bank’s Financial Policy Committee also set out regulatory expectations for payment stablecoins in 2019 and 2020, which is feeding into our work on designing appropriate regulation and requirements for firms proposing these. As set out in the building blocks it is important that as these issues are debated it is also done with an eye to how they could support cross-border payments. These examples provide just a taste of the areas that the Bank of England is involved in and we will be working closely with other central banks and relevant organisations to address the building blocks as a whole.

For example, if you look at my preferred measure of underlying inflation, called trimmed-mean inflation—which removes the most volatile price movements—it’s been running at 2 percent. This measure of inflation hasn’t shown any signs of trending up or down. That said, I will be watching developments closely for signs of a persistent shift away from our 2 percent long-run goal. As I mentioned, the economy started the year with a lot of momentum. But there are reasons to believe that the surge in growth won’t persist through the remainder of the year. Taking into account of all the indicators we follow, I anticipate a step-down of economic growth, from the 3 percent growth recorded last year to a still-solid pace of about 2-1/4 percent in 2019. 1/2 BIS central bankers' speeches This is good news. It’s above the economy’s underlying potential, but not unsustainably so. Healthy economic growth should in turn fuel solid job gains, higher wages for workers, and some further declines in unemployment. The strong economy and labor market should also support inflation returning to 2 percent, the Federal Reserve’s long-run goal. The Global Picture In addition to the positive data we’ve been getting for the U.S., we’ve also seen encouraging signs that risks from global economic and financial markets are abating. Last year there were worries that the global growth slowdown centered in China and Europe would spill over onto our shores. This was one factor contributing to a more downbeat assessment of U.S. growth and the stock market sell-off.

Fundamental to the growth of internet banking over the years is the confidence which the public has in its convenience and security. This is something that we cannot take for granted and must be continuously preserved. Advancement in technology and innovation has resulted in greater consumer convenience and enhanced efficiency. However, the same technology and innovation have also created new methods of perpetrating fraud that could be executed faster and with greater reach. Cyber criminals have been active ever since the advent of the internet, and are constantly finding new ways to defraud innocent victims. Safety and security of transactions in the banking system is fundamental in ensuring consumer confidence. Hence, an important function and responsibility of the Central Bank is to ensure online transactions can be made in a safe and efficient manner in the economy, in the pursuit of monetary and financial stability objectives. The need for constant vigilance & cooperation This fight that the banks are launching today is something that requires the support of all parties. We are aware of the creative ways in which criminals have attempted to deceive customers over the years and measures were required to be taken by the banks to protect the customers. While it is good to know that banks have played their roles in investing in robust security systems, they must also ensure that customers play their part in protecting their own assets and savings. The reminder and greater awareness from the Banks through this campaign is timely.

It raises the prospect of LIBOR continuing under a new methodology as “synthetic LIBOR,” at least in some currencies. But the FCA itself has warned that whatever it does will not be an alternative to firms’ transition efforts, and that any synthetic continuation of LIBOR will still not be deemed to be a representative rate.10 The FCA has said that any action it takes will be focused on contracts that cannot feasibly be amended by the parties to mitigate the effects of LIBOR cessation. It will not provide a solution for new contracts. And even at that, it will not necessarily address every LIBOR setting or currency. For those it does reach, users will be giving up control of the economics of their contracts to whatever the new methodology may be. In short, if you rely on these new powers to take care of your LIBOR contracts, you may not get what you want, and you may not like what you get. The message is clear: you must still do everything you can, right now, to anticipate the end of LIBOR and take control of your own risks. https://www.newyorkfed.org/newsevents/speeches/2020/hel200929 2/6 30/09/2020 The LIBOR Countdown Has Not Stopped - FEDERAL RESERVE BANK of NEW YORK In the European Union, there is draft legislation that is similar in approach to the ARRC’s proposed New York law.

Under the solo-approach, capital requirements are also applied to each of Bank A, Bank B and Bank C individually, after having deducted from Bank A’s capital, its investment in B, and from B’s capital its investment in C. Under the sub-consolidation approach, capital requirements would be applied on the consolidated accounts of Bank B, ie after adding the assets and liabilities of B and C and eliminating any intra-group exposures. BIS central bankers’ speeches 3 For groups for which Single-Point-of-Entry – broadly, bail in of debt issued through a holding company – is the preferred resolution strategy, local subsidies need a combination of equity and intragroup GCLAC (ie intragroup bonds) that permits losses to flow smoothly to the topco. By transferring losses upwards, an ailing subsidiary is recapitalised. Whether that suffices for the host authorities will depend on their confidence in the capacity and willingness of the group’s home authorities to execute an effective resolution of the topco. By contrast, for groups for which Multiple-Point-of-Entry – breaking up a group – is the preferred resolution strategy, the host authorities of a subsidiary identified for “separation” must ensure that it has a capital structure and sufficient operational independence to enable them to resolve it themselves with their particular set of powers. Put simply, for firms within a group for which SPE is the preferred resolution strategy, the group as whole is a source of strength on which local supervisors can place weight.

National regulators have been stepping up engagement with financial institutions on issues pertaining to culture and conduct. The industry must itself take collective responsibility to promote good practices and develop codes of conduct, and hold institutions accountable to their peers. Here in Australia, you have set a good example. The Australian Bankers’ Association has commissioned an independent review of sales commissions and product-based payments in retail banking that is now in its final stages. Banks have also agreed to share information among themselves on financial advisers with a history of poor conduct. But ultimately it is the financial institution itself that must bear responsibility for getting the culture right. There are a couple of things they can focus on. 2/7 BIS central bankers' speeches First, set a clear tone from the top that is supported by concrete policies and leaders that walk the talk. Management decisions must consistently reflect the firm’s espoused values. Second, align human resource (HR) policies with the desired culture. From recruitment and training to rewards and penalties, compensation to career development, HR policies send the clearest signal to staff on the values that the firm regards as important. This is difficult but important work. We must move the financial industry to look beyond the question “is this legal” to the larger question “is this right”. Positioning regulation for technological innovation Let me now move to the third key thrust of financial regulation going forward – how to position for technological innovation. Financial technology or FinTech is transforming financial services.

Several regulators have introduced variants of the regulatory sandbox over the past year. In fact, I would say the sandbox is itself an experiment for regulators. There is much we can learn by sharing experiences and lessons from our different approaches. And ASIC is one regulator that we admire and watch closely on this front. Ta k e registration requirements. Most sandboxes require applicants to register prior to experimentation. The UK FCA has two fixed cohorts of applicants a year, while the MAS sandbox is always open for application. ASIC has an interesting approach. It has a class-exemption for firms testing a specific set of services for 12 months and up to 100 clients. Interested firms are required to notify ASIC before commencing business, provided they also meet certain consumer protection conditions. MAS opted for an application-based approach because we wanted to closely engage each applicant, understand the innovation, business model, and risks so as to customise the sandbox conditions. But each application is turning out to be quite time-consuming and we are mindful that our process does not get in the way of speed-to-market. So, we are keen to study ASIC’s experience with the class-exemption approach and see how our own approach can be improved. There are also interesting differences in the qualifying entities. HKMA’s sandbox is restricted to authorised institutions, while ASIC’s sandbox is restricted to FinTech start-ups. The MAS and UK FCA are open to both regulated entities and FinTech start-ups.

17 The model combines a macro part – capturing macro variables that shape household balance sheets over time – and a micro part – built around a household member level logistic model for its employment status – in a fully integrated manner. The framework allows us to compute probability of default (PDs) and loss given default (LGDs) for mortgage exposures directly at the household sector level and link them to macroeconomic stress scenarios. The model-framework offers, for example, insights into how borrower-based instruments – such as LTV and DSTI ratio caps – influence the economy Intuitively, the effect of LTV caps derives primarily from reducing loss given default (LGD) parameters, as the LTV ratio is directly related to the value of the underlying collateral in a mortgage loan. The effect of DSTI caps, on the other hand, stems mainly from the reduction in household capacity to serve the debt, thus their probability of default (PD). These results are confirmed by the model. This module is being integrated in the ECB top-down stress testing framework to account for a consistent stress scenario and for dynamic adjustments of individual households’ balance sheets in response to shocks and related second round effects. Finally, as just illustrated, enhancements to the ECB macroprudential toolkit go beyond stress testing as the complete set of models also provide a tool for impact assessment of macroprudential policy instruments.

2 See ECB (2009), Financial Stability Review, Special Feature B for a discussion on the concept of systemic risk. 3 For an overview, see Bisias, D., M. Flood, A. W. Lo and S. Valavanis (2012), “A Survey of Systemic Risk Analytics”, Office of Financial Research Working Paper No. 0001, January. 4 Hollo, D., M. Kremer and M. Lo Duca (2012) “A Composite Indicator of Systemic Stress in the financial system”, ECB Working Paper No. 1426, March. BIS central bankers’ speeches 1 short-term interest rate) in a MS-VAR, to illustrate the dynamic interaction of systemic financial instability and the macroeconomy in the euro area. 5 CATFIN, a VAR and Expected Shortfall measure at system-wide level calculated with non-normal distributions with fat tails, showing the predictive capacity of financial volatility regarding real economic downturns was proposed by Allen et al. 6 Similarly, Giglio et al. examine 19 measures of systemic risk for the US and 10 measures for the UK and the EU from the perspective of how well they forecast macroeconomic downturns. 7 They also build dimension-reduced risk indexes using principal components and partial quantile regression to demonstrate the robust performance of some indexes in anticipating future macroeconomic downturns. These efforts in developing composite indexes are complementary to the on-going research on the concept of a financial cycle as a sort of a generalisation of the old concept of credit cycle, distinct from the concept of the economic or business cycle. The ECB paper presented this morning by Hiebert et al.

It is no coincidence that we are meeting here today under the theme "Choices for monetary policy" or that the IMF and other organisations arrange conferences on how our ideas on macroeconomic policy should change and that sessions on monetary policy have titles such as "Many targets, many instruments – where do we stand? "29 Nor is there any major doubt about the direction to be taken. The financial crisis made it clear that much more effort must be put into trying to prevent financial imbalances and manage risk in the credit and housing markets. That central banks will play an important role in this work is also fairly obvious. It is already clear that monetary policy will not be conducted in exactly the same way as prior to the crisis – when the policy rate was in principle set with consideration to the short-term business cycle, and when financial stability was more or less taken for granted. One clear lesson is that financial imbalances must be taken seriously and that central bankers' analyses and model work need to evolve to take this into account. I also believe that the analysis of risks will become more central and that "robust” monetary policy will be discussed more than before while ”optimal” monetary policy will be discussed less.30 It have proven their effectiveness, so that there is no ground at present to dismiss the relevance of financial stability considerations for monetary policy deliberations.” (p. 22).

One obvious reason for this is that macroprudential policy is not yet in place in many countries and where there is a macroprudential policy, it has often not yet been put into practice – it is quite simply too new and untested.25 The policy rate is thus as yet one of few instruments available for practical use. 22 See, for example, Nyberg (2005), Ingves (2007) and Heikensten (2008). 23 See, for example, Mishkin (2007) and Cagliarini, Kent and Stevens (2010). 24 See, for example, the Committee on International Economic Policy and Reform (2011) and Mishkin (2011). 25 Woodford (2012), who develops a theoretical model for how financial stability considerations can be incorporated into inflation targeting, notes for instance: ”[I]t cannot be claimed that such tools already exist and 10 BIS central bankers’ speeches But there is also an international discussion on whether the policy rate will have a role to play even when macroprudential policy is in place.26 One reason is that it may very well prove difficult to design a system for macroprudential policy that functions sufficiently well and which inventive market participants are unable to circumvent. The policy rate is a blunt instrument, as it has a broad impact on the economy. But at the same time, this may be a strength compared with macroprudential tools, simply because it is difficult to "circumvent" a policy rate increase.

Different jurisdictions will come up with different arrangements to address this issue, but I would say that every jurisdiction is going to need its own solution. And, perhaps for the first time, that has highlighted the need for some international co-ordination of policies on shadow banks. The FSB is just starting to explore this virgin territory.21 Asset managers and incentives The vast majority of the asset management world is not engaged in shadow banking and, more important, does not of itself jeopardise the stability of the system directly if it gets into trouble. The taking and absorption of risk by unlevered funds is a fundamentally healthy part of the system. But financial stability authorities cannot be indifferent to this industry. By investing in the debt and equity of banks, it is a vital part of market discipline. We do not want – and cannot have – a system where the first line of defence after the management of banks themselves is the cadre of official sector supervisors. For the system to be healthy, we need boards, auditors, equity investors and debt holders to play a big part, and for investment decisions to be subject to constructive incentives. Yet, there is relatively little debate about whether the incentives of asset managers made the system more prone to crisis. Although not a subject for today, an important part of this is the drive to develop resolution regimes that entail debt holders taking losses on their exposures to distressed banks and dealers.

Following discussion at FSB, that gap in the analysis is now being addressed by the IOSCO leadership. Post-trade infrastructure: CCPs as risk managers The other big area of reform is, of course, around central counterparties. Clearing more OTC products; being more resilient; revisiting criteria for access to CCPs, and so on. You don’t need me to rehearse all of that for you. But I would note that this is not just about derivatives markets. LCH’s move to clear repos in Spanish government bonds helped that market stay open during some dark days. And I do want to make one very important general point about the role of CCPs and their management. CCPs simplify the complex web of counterparty exposures through multilateral netting – precisely what the US authorities contemplated trying to achieve ad hoc towards the end of a weekend when Lehman was unravelling. They act as a central market authority for valuing positions and setting minimum margin levels. Having centralised risk upon themselves, they redistribute it to their clearing members through a clear waterfall. They are, in effect, systemic risk managers. They absolutely must think of themselves as that. Their job is not just to deliver ever greater operational and capital efficiency for their clearing members. Too many senior executives at CCPs I have met over the past decade or so have seemed to fall into that trap – a trap encouraged by some being for-profit organisations.

However, I can tell you that the Bank of Thailand will take care of the risks to the system, by maintaining price stability in the long-run while mitigating economic cycles in the short-run. Our flexible inflation-targeting framework targets core inflation between 0.5 and 3.0 percent while taking into account economic growth. And in this framework, the exchange rate is a managed-float and plays a supporting role as an adjustor against external shocks, leaving 4 BIS central bankers’ speeches room to the interest rate as the main instrument of price stability. The managed-float is based on three elements: volatility, competitiveness, and fundamentals. Volatility is managed so as to limit disruption to the private sector in the short-run. Competitiveness is maintained by containing excessive currency movement relative to the region. And most importantly, fundamentals must be allowed to determine exchange rate movements in the long-run. But monetary policy alone is not enough to ensure competitiveness in the long-run. For that we must have sound fiscal policy that supports our national infrastructure with prudent debt management; and structural polices that address education, productivity, and institutional frameworks. At this point, I hope we have clearly laid out the policy vision for Thailand that can serve as a basis for your investment decisions, risk management, and, ultimately, your continued partnership in the Thai economy. On that note, let me conclude my talk here, so that you can proceed with the other interesting program that will follow after this. Thank you. BIS central bankers’ speeches 5

Inflation prospects difficult to assess One consequence of the Riksbank basing its analysis on conditions in Sweden — and not being guided by the actions of other central banks — is that in the past the repo rate has been held at a considerably lower level than in the United States. There have also been periods when our instrumental rate has been below that of the European Central Bank. The central factor when the Riksbank sets its instrumental rate is the prospects for inflation one to two years ahead. A prospect of inflation above the 2 per cent target normally leads to a repo rate increase, while if inflation is expected to be lower than the target level, the repo rate should normally be lowered, and if the rate of price increases is forecast to lie around the target level of 2 per cent, the rate should be left unchanged. The economic outlook in the rest of the world ought to imply a weak tendency in Sweden as well, with an attendant easing of inflationary pressure and consequently a further reduction of the repo rate. However, the decision-making situation is not that simple. Three things in particular make the picture more complicated: · Firstly, inflation is currently above the Riksbank’s 2 per cent target. The greater part of the increase is admittedly attributable to a number of clearly defined transitory factors that are calculated to drop out next spring. Food prices, for example, moved up in connection with mad-cow and foot-and-mouth disease.

This means, among things, that monetary policy is substituting for policies that are traditionally the domain of governments. All this is shifting the focus of the debate from “How deeply negative can interest rates be?” to how to make the two policies work in a particular desired harmony or mix. The former paradigm where they could be independent of each other and hence be regarded as substitutes is turning into one where they complement and reinforce one another. For example, the central bank can help the government by keeping interest rates low, which will facilitate government financing, while fiscal policy can financially support the central bank as lender of last resort, curbing growth 4/7 BIS central bankers' speeches in its balance sheet and giving it more room for manoeuvre and greater credibility in the pursuit of monetary policy. New remits Besides changes in the central bank paradigm, some central banks have been taking on new, secondary remits in recent years. The Federal Reserve has begun to pay more attention to income inequality, while the ECB and other European central banks are starting to go green. Looking first at income inequality, I should point out again that redistributive policies used to be the sole preserve of elected politicians. Despite this, Federal Reserve Chair Jerome Powell recently announced that the Fed will closely track the shortfalls of employment from its maximum level. It is well known that low-income and low-skilled workers from ethnic minorities are the last to enter the labour market.

As with practically everything else, this assumption is associated with uncertainties that only the future can resolve. One of the biggest surprises of the coronavirus crisis concerns the property market. The memory of the post-GFC house price slump is still fresh in our minds. But we have seen nothing like that over the last year or so. The long-running rise in house prices has slowed but not gone into reverse. On the contrary, the property market has been boosted by soaring demand for housing in rural and mountain areas, fuelled by low interest rates. This is really not what an economy on its knees looks like. If we at the Czech National Bank erred in any of the forecasts we made in the dramatic days of last spring, when the pandemic struck with unforeseen force, it gives me some satisfaction to say that we were by no means alone. Obituary The coronavirus has sadly left a trail of economic, social and human devastation in its wake. Each of us no doubt knows someone who has been struck down by it. I’d like to take this opportunity to remember the well-known Czech economist Michal Mejstřík, who tragically lost his life to COVID-19 earlier this year. We always rightly admired Michal for his broad range of expertise, his intellectual curiosity and energy, and his ability to present interesting information and formulate fresh ideas.

Financial response I: Support for market functioning At the outset of the crisis in March, important funding markets seized up. Even the government bond market threatened to do so. The underlying cause of the seizure was not concern about the credit of the government; it was that some investors were forced, by their own circumstances, to sell their bond holdings. Investors ‘dashed for cash’ as some faced calls to post cash margin against derivative positions that had moved against them and others faced challenges in rolling the repo financing of their bond holdings.4 The seizing of some markets was a blot on the financial system’s response to the covid crisis. With international counterparts we will need to review carefully the causes of what happened with a view to ensuring markets are resilient in the future.5 As it was, two emergency responses were necessary. [See slide 3 of accompanying deck] First, central banks around the world stepped in with huge purchases of government and corporate bonds to restore market functioning. In the UK, the Monetary Policy Committee is undertaking a £ programme of asset purchases.

The example of Germany's economic history in the 60 years since the Second World War, which may very briefly be described as 40 years of vigorous expansion and almost 20 years of sluggishness, should be food for thought when extracting all the strong and favourable aspects of decentralisation and avoiding those phenomena entailing risks to the efficient working of the economy, on which any lasting improvement in well-being ultimately hinges. Finally, another policy area to which great heed should be paid when seeking to sustain healthy public finances in the medium and long run is that of Social Security. Admittedly, the forecasts available denote a lack of major problems in the Social Security system in the coming years; however, looking further ahead, it is clear that if changes are not made, the system may become a considerable deadweight holding back growth in the Spanish economy. When the long-term consequences are taken properly into account, it is fairly clear that the sooner Social Security reform begins, the less costly it will be. Or stated the other way round, if Social Security reform continues to be delayed, we may find ourselves faced with a truly dangerous dilemma: either changes are undertaken that will have to be more drastic and may be traumatic in some respect, or otherwise growth in the Spanish economy will be seriously impaired. In sum, on viewing recent developments in the Spanish economy we can draw a positive assessment that should not disregard the accompanying imbalances.

On the contrary, if it is deviated from fundamentals, we assume that the exchange rate will converge to values coherent with its long run levels. 2 In this way, with interest rate parity and certain 1 For further details on projection models and as an example of transparency, see Banco Central de Chile (2003). Also Banco Central de Chile (2007) updates the Board’s vision of monetary policy and its price stability objective. 2 Caputo, Nuñez and Valdés (2008) present the various models normally used to evaluate the real equilibrium exchange rate. BIS Review 92/2008 3 assumptions about the distant future it is possible to have a complete trajectory for the exchange rate. I must point out that, in a floating exchange regime, this is a working assumption made only to provide a model consistent with projections, even recognizing that the disclosed interest rate parity has little empirical validation. In any case, as our experience early this year has shown, a significant deviation from this path can have important implications for the course of monetary policy. At the beginning of the year, it was thought that rates could go up in the first quarter. However, the Board considered that the downward pressure on inflation generated by a pronounced appreciation of the peso relieved pressure on monetary policy. One aspect which has received much attention in monetary policy practice and theory is the assumption about future interest rates used in the projections.

(b) Data on portfolio equity inflows from the Institute of International Finance. Data on equity market capitalisation from Thomson Reuters Datastream. Chart 3 Emerging market equity prices and gross inflows(a) to emerging markets MSCI EM $ index (LHS) Gross inflows to EM $ 1,400 500 1,200 400 1,000 300 800 200 600 100 400 0 200 -100 0 -200 Q1 1990 Q1 1994 Q1 1998 Q1 2002 Q1 2006 Q1 2010 Source: IMF and Thomson Datastream. (a) Includes portfolio inflows, foreign direct investment and bank flows. BIS central bankers’ speeches 11 Chart 4 Cross-border asset holdings (1980–2005) 1980 1985 1990 1995 2000 2005 Source: Kubelec and Sa (2010) and Bank calculations. Advanced economies Emerging market economies Financial centres (Hong Kong and Singapore) Notes: Widths of links are proportional to the log dollar value of cross-border asset holdings. Each arrow denotes ownership, with the arrow pointing away from the holder of the asset and toward the issuer of the liability. Sizes of nodes are proportional to the log dollar value of the sum of all of the country’s cross-border asset holdings and liabilities issued (i.e. equal to the sum of incoming and outgoing links).

Some versions of these crypto-assets – so called ‘stable coins’, which aim to maintain the value of the asset – are intended to function as payment systems. They both replace the current bank to bank machinery for holding and transferring the settlement asset or ‘money’, and at the same time create a new form of ‘money’ – the stablecoin – to be transferred. Technological innovation in recent years has, in short, enabled and can further enable huge changes in the way we transact in the economy and in the types of money we use and how we are able to use them. Such change offers great opportunity. But it also poses some very important questions for the Bank of England, sitting at the centre of ‘money’ in the UK. The change also poses questions more broadly for the UK regulatory authorities, government and parliament. That is why HM Treasury are leading the Payments Landscape Review.9 This is not new; the great debates about money that we have had every couple of centuries have always involved the political authorities as well as the technical ones. The key questions are as follows. First, how do we ensure the availability and acceptability of physical cash for as long as people want to use it? Second, how can we ensure that the money remains reliable and stable while taking the opportunity offered by technology to improve the efficiency, effectiveness and functionality of payments – that is money as a means of exchange?

Some of these are very similar to those I have discussed earlier with regard to private stable coins such as the implications for the supply of credit to the economy if the role of banks changes, liquidity dynamics both in normal times and in stress, and the risk that a CBDC is too successful and becomes dominant and a single point of failure in itself. Those opportunities and those downsides, I think, mainly come back to one issue: the extent to which a CBDC substitutes for commercial bank money and payments in commercial bank money and, looking further ahead, for the non-bank money and payments that might emerge, such as stablecoins. In turn, this will depend on two fundamental questions. First, how great is public demand for a CBDC and how extensively and for what purpose would people want to use it? The answer to this, in turn, is driven by the answer to the second question: what functions would a CBDC perform? 11 All speeches are available online at www.bankofengland.co.uk/news/speeches 11 If we are to get the benefits of CBDC, some substitution must occur. The question is how to make this happen through the careful design of a CBDC to ensure it promotes stability and good economic outcomes. Design questions are critical. For example, who would be able to access CBDC directly? Would it be mainly a payments device and a cash like instrument? Or would it be able to serve as a mainstream vehicle for savings and store of value?

Classical growth dynamics appear for some reason to have stopped operating, with the gap to the frontier widening the more so the greater the distance to it. It is possible to quantify this slowing in convergence using a similar approach to that used to measure output convergence in the cross-country growth literature. 39 Specifically, a country’s productivity growth can be linked by a convergence parameter to its productivity gap to the frontier country. This parameter can be estimated econometrically and tracked over time. 40 Chart 12 shows a time-series of this convergence coefficient estimated using a rolling regression. In the 1980s, this coefficient averaged 0.8. That is to say, every 10 per cent productivity gap relative to the frontier country resulted, on average, in productivity growth being 0.8 percentage points higher than in the frontier country. By 2000, that convergence coefficient had roughly halved. By the end of the sample, the coefficient is statistically insignificant from zero. Convergence had not just slowed but stalled. One of the key determinants of international technology transfer has been found to be cross-border flows of goods and services, people and money and capital. 41 While they have waxed and waned historically, all of th these have tended to rise rapidly since the middle of the 20 century. Other things equal, that would have been expected to increase the speed of diffusion of innovation across countries over that period. In practice, the opposite appears to have occurred.

Chart 17 looks at different percentiles of the firm-level productivity distribution over time, both in levels terms and indexed to 2002=100. There has been a widening dispersion in the distribution of productivity across companies over time. In th particular, there is a striking and widening divergence between frontier firms (say, the 99 percentile of firms) and the long tail of non-frontier companies. If we define frontier firms as the top 5% of firms by productivity performance, in line with the OECD, there is clear and widening blue water between frontier and laggard companies (Chart 18). In arithmetic terms, it is non-frontier companies that largely explain flat-lining productivity over recent years (Chart 19). These dynamics cast the secular innovation versus stagnation debate in an interesting light. The distribution of UK companies’ productivity suggests both forces have been operating, albeit at different points in the distribution – innovation in the upper tail, stagnation in the lower one. Widening productivity dispersion means that secular innovation and stagnation are complementary, not competing, hypotheses. For a relatively small cohort of frontier companies, secular innovation is clearly evident, with both high and rapidly-rising levels of productivity. For example, around 1% of UK firms have seen average productivity growth of around 6% per year. This poses a serious challenge to the notion that stalling innovation has been 46 For example, Andrews et al (2015). This work contains statistical data from ONS which is Crown Copyright.