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An outstanding event has been the announcement by the Chinese authorities of a lower growth goal for this year. In Chile, the effects of the international crisis have been limited and lower than was foreseen a few months ago. Several effects that were noticeable toward the end of last year have been reversed to a great extent or have become less intense. Terms of trade have improved over the last months, due to rises in the copper price. Conditions for external financing have also improved, as a result of increased confidence in international markets. Local financial markets – one of the transmission channels of external crises towards the domestic economy – show that stock indexes, risk premiums and exchange rates have gone back to levels similar to those that existed before the intensification of international financial tensions. Other indicators such as amounts and terms of external banking sector financing have stopped the decline that occurred toward the end of last year. The Chilean peso has appreciated nearly 7% so far this year. The real exchange rate is close to its average level of the past 15 to 20 years. The movements of the exchange parity have matched the evolution of the US dollar in international markets, in the face of calmer markets and a greater appetite for risk. This has occurred with the price of copper at 3.8 dollars a pound, its highest level of the last five months. Its trend has been similar to that of other markets of commodities.

However, as our economy grows and current agreement ends at 2009, we will soon get full ownership of our economic policies with a reduced role of IMF under article 4 of the Agreement. The Bank of Albania has a proven track record of competence, credibility and professionalism in the service of our economy. These three elements provide necessary conditions to support and guarantee achievement of economic goal of stable prices and boost credibility in Albanian economy; but, we can not be hold responsible for the behavior of the other players. I am convinced that we need to find and implement clear domestic and foreign anchors to preserve the credibility of our reforms in the future. For the way ahead we are focusing our efforts in the identification and utilization of key elements of the state, politics, markets, institutions and general public that could efficiently play the role of domestic anchors. As part of this preemptive action, the Bank of Albania is carefully considering the possibility BIS Review 121/2006 3 to launch a fully fledged inflation targeting regime of monetary policy in the midterm. This will be a conditional decision based upon results of current ongoing research, evaluation of the preconditions and building up of capacities. Other possible anchors such as a memorandum of understanding with ministry of finance and public education are considered as well. On the foreign side we see numerous prestigious partners which understand our concerns and appreciate the value of fiscal discipline.

In addition, with enhanced risk management capabilities, banking institutions will be better equipped to price products and services more competitively while ensuring that their risk exposures remained within manageable levels. Better insights into their risk profile also facilitate in their formulation of business strategies and enable the optimal use of their capital. In this context, banking institutions must be prepared to beef up their financial strength and capital level during the current favorable economic environment so that they could weather vulnerability during downturns and crisis situations. 4 BIS Review 32/2005 Ladies and Gentlemen, While the responsibility for strengthening competitiveness rest with the banking institutions, Bank Negara Malaysia plays an important role in spearheading the development of the banking sector. In realising the vision of a progressive and dynamic banking system, Bank Negara's policy initiatives aim at providing a more conducive environment that encourages innovation and competition, while maintaining the safety and soundness of our banking sector. In line with this, Bank Negara Malaysia will ensure its prudential framework is adaptable to changing market circumstances and business practices, and does not contain features that might inhibit banking institutions from upgrading their capabilities or delaying their response to changes. Our regulatory approach has shifted away from prescribing detailed rules towards "principle-based" regulations. There is now greater focus on providing "incentive compatible" parameters that encourage banking institutions to conduct their businesses prudently, whilst allowing them the flexibility to develop strategies within the broad principles.

BIS Review 39/2004 1 It is something of a paradox that the decline of the dollar has been concentrated against the currences of the least dynamic economies whose current accounts are relatively balanced, while it has held very stable against the currencies of the highest-growth countries which account for most of the US trade deficit. In any event, the contribution exchange-rate movements may be expected to make in correcting global external imbalances is limited; what are needed are economic policy adjustments by the main countries. Not only was no headway made in 2003 in this area, but economic policies remained oriented, in certain cases, in the opposite direction to what was needed to reduce the imbalances, especially as regards the US budget deficit. As mentioned, the international economic outlook has improved appreciably in 2003 and early 2004. In turn, the recovery will foreseeably take hold in those countries most ahead in the cycle, while those most behind are expected gradually to join the upturn. Nonetheless, certain risks remain and should be borne in mind when assessing the future course of the recovery. An initial risk is that the persistence of current-account imbalances may exacerbate volatility on international foreign exchange and financial markets. Achieving a distribution of world growth more in line with more balanced current-account positions without jeopardising the recovery is, therefore, one of the main challenges facing the world economy.

8 All speeches are available online at www.bankofengland.co.uk/news/speeches 8 In contrast, in the pursuit of price stability, central banks deploy a handful of policies, primarily changes in interest rates and purchases of assets, that all relate to the current and future price of money. Third, the time horizons are different. The costs of macroprudential interventions can be felt today but their benefits are often realised far into the future. And fourth, these benefits – moderating downturns and avoiding crises – are not directly observable. The bad outcomes that macroprudential policies prevent have to be estimated. But counterfactuals are difficult to sell: “it could have been worse” doesn’t quite have the ring of “you’ve never had it so good.” All these complexities and uncertainties make it challenging to implement macroprudential policies and harder to communicate the rationales for them. Over time, and particularly during good times, these challenges can feed a bias towards inaction. As memories of the last crisis fade, complacency sets in and pressures to ease policies re-emerge. When it comes to financial stability, success is an orphan. These tendencies can be exacerbated by similar time inconsistency problems to those that plague monetary policy. Lighter-touch regulation can be a powerful tool for authorities to boost near-term growth, a temptation that is reinforced by governments motivated by electoral cycles and the complacency curve of the financial cycle. In the long-run, the cost of such indulgence is financial and macroeconomic instability, bringing fiscal strains, lower growth, and higher unemployment.

Resilience with a reason. That reason is the ultimate objective that unifies the Bank of England’s monetary and financial functions – the meaning of the central banker’s life which can be found in the opening sentence of our 1694 Charter – “to promote the good of the people of the United Kingdom”. It has been my honour to do so. 34 All speeches are available online at www.bankofengland.co.uk/news/speeches 34

As a result, house prices are now rising in most areas of the country and homebuilding activity has strengthened. Moreover, there is further scope for gains in homebuilding. After all, the current annualized rate of housing starts – around 900,000 – is considerably below the rate consistent with the country’s underlying demographic trends and the expected long-run rate of household formation. By these metrics, housing starts should ultimately climb back to about a 1.5 million annualized rate. The underlying fundamentals supporting business investment are also good. Profit margins have been high and cash flows strong for some time. Credit availability has been gradually improving. For example, the Federal Reserve’s Senior Loan Officer Opinion Survey indicates that banks are continuing to gradually ease their lending standards for commercial and industrial loans. However, against these improving economic fundamentals, we have two important offsets. The first offset is the unusually high degree of fiscal drag, which the Congressional Budget Office (CBO) estimates at about 1¾ percent of potential GDP in 2013.1 The two most important components of this restraint are the end of the payroll tax holiday and the increase in income tax rates this past January, and, more recently, the government spending cuts resulting from budget sequestration. Another new source of drag for the economy is the sharp rise in long-term interest rates, especially residential mortgage rates – that has occurred since May. So far we don’t have much hard data on how this is affecting the housing sector.

With respect to the first metric, we have seen labor market improvement since the program began last September. Over this time period, the unemployment rate has declined to 7.3 percent from 8.1 percent.4 However, at the same time, this decline in the unemployment rate overstates the degree of improvement. Other metrics of labor market conditions, such as the hiring, job-openings, job-finding rate, quits rate and the vacancy-to-unemployment ratio, collectively indicate a much more modest improvement in labor market conditions compared to that suggested by the decline in the unemployment rate. In particular, it is still hard for those who are unemployed to find jobs. Currently, there are three unemployed workers per job opening, as opposed to an average of two during the period from 2003 to 2007. With respect to the second metric – confidence that the economic recovery is strong enough to generate sustained labor market improvement – I don’t think we have yet passed that test. The economy has not picked up forward momentum and a 2 percent growth rate – even if sustained – might not be sufficient to generate further improvement in labor market conditions. Moreover, fiscal uncertainties loom very large right now as Congress considers the issues of funding the government and raising the debt limit ceiling. Assuming no change in my assessment of the efficacy and costs associated with the purchase program, I’d like to see economic news that makes me more confident that we will see continued improvement in the labor market.

However, a good thing came out of this: the Romanian people is virtually the result of a fiscal and monetary decision. This explains the linguistic and historical similarities that stem from our common Latin roots. Nevertheless, I have discovered similar words with other languages as well. For example, in Slovenian and Croatian, a regional ruler used to be called a ban, which was also the case in parts of Romania. Since these rulers had the right to mint coins, money was and still is called bani in Romanian. Looking now at the Baltic countries, maybe it is no coincidence that they and Romania have folk songs called doina and daina, respectively, included in the intangible UNESCO heritage. Romania is a mostly Greek-Orthodox Christian country, the same as Greece, Cyprus and Bulgaria. By the way, let me congratulate our Bulgarian friends on the 140th anniversary of the establishment of their central bank! The legal and political systems of modern Romania were inspired by the French (I limit myself to just mentioning the Napoleonic Code). This is also the case with modern Romanian culture: prominent Romanian artists such as Constantin Brâncuși and George Enescu achieved international recognition in Paris. Coming back to the legal system, the first Constitution of modern Romania in 1866 took after the Belgian one. In addition, the NBR was founded based on the constitutive principles of the Belgian central bank.

FSAP was jointly developed by the IMF and World Bank in 1999 in response to the financial crisis of the late 1990s, when it became clear that financial sector weakness played a critical role in triggering and contributing to the severity and contagion of the economic crisis that ensued, and that both the standard macroeconomic surveillance by the IMF and the financial sector development work of World Bank were inadequate. Thus, FSAP was conceived with the twin objectives of helping countries to identify and resolve financial sector vulnerabilities and thereby helping to prevent future crises. It also aims to foster financial sector development and efficiency. I think these are indeed admirable objectives to which we can all agree. As for the implementation, there are essentially three aspects to the FSAP: The first involves an assessment of the health of the country’s financial system, its short-term vulnerabilities, medium-term risks, and resilience to economic und financial shocks. A range of analytical tools can be used tot this purpose, including stress testing, macro-prudential analysis, and financial soundness indicators. It is here that private sector involvement becomes crucial. Stress testing, as a means to gauge institutional capacity in responding to crises, requires real-world data. And such can only come from financial institutions. The second aspect of the FSAP is an assessment of the country’s compliance with international standards and codes that are considered best practice. Some would be tempted to say that nowadays there are really too many international standards and codes.

The changeover to the euro does not call for extensive reforms in Estonia, rather, it is a more exhaustive utilisation of the opportunities Europe has to offer. • The changeover to the euro cannot and must not be a seasonal election issue but an area where we proceed from Estonia's interests - hence, common sense, analysis of the economic situation, and knowledge of the theoretical foundations of the EMU. 2 BIS Review 26/2004 • The European Central Bank has indicated that due to the differences in the economies of the new member states, a single approach suitable for everyone for joining the exchange-rate mechanism, ERM II, and adopting the euro cannot be suggested. Besides, a common approach was not possible for the present member states either. An approach that takes into account Estonia's particulars means that accession is going to be based on the present currency board arrangement and that our application to join ERM II will be submitted as soon as possible. Prior to adopting the euro a country has to be a successful member of ERM II for at least two years. Also Estonia's technical readiness for changing over to the euro should be achieved by mid-2006. If such a scenario materialises, we will be among the first new EU members to adopt the euro.

Vahur Kraft: A successful Estonia - in a successful Europe Speech by Mr Vahur Kraft, Governor of Eesti Pank (Bank of Estonia), at the Euro Conference of Eesti Pank, Tallinn, 3 May 2004. * * * This year spring is going to be different, chirp-chirp! Different, this year different… These are the words by Henrik Visnapuu, an Estonian poet, in his third letter to his beloved Ing in May 1919. May has been a month of important events in the history of Eesti Pank. 85 years ago, on 3 May 1919, the first entry regarding the fixed capital of Eesti Pank was made into the general ledger, and the first payment was accepted into the current account. Thus, 3 May 1919 was the actual day the doors of the Bank opened. (By the way, the historical entry into the general ledger can now be viewed at the Museum of Eesti Pank.) Today, on 3 May 2004, Eesti Pank made its first share capital transfer to the European Central Bank. Eesti Pank has become a member of the European System of Central Banks, one of the owners of the European Central Bank. Today, 3 May 2004 is already the third day of being a fully-fledged member state of the European Union. Two out of three Estonian citizens voted for accession to the European Union in the referendum held last September. What is going to happen now? This is largely up to us.

Our policy-making has been in a “nonstandard mode” for a considerable period of time. In October last year, we adopted a fixed rate tender procedure with full allotment for all main refinancing operations and longer-term refinancing operations with maturities of up to six months. In addition, the ECB expanded its list of assets eligible for use as collateral in Eurosystem credit operations. As a result, the size of the Eurosystem balance sheet has increased substantially during the financial turmoil, by around € billion between June 2007 and March 2009, mainly reflecting the expansion of liquidity provision to the banking system since last autumn. This is of particular significance for the euro area because the banking system plays a more important role in the financing of the private sector than in other major economies. At the same time, owing to the ECB’s liquidity management, overnight money market rates have fallen even more steeply than the key ECB interest rates since last October. Money market rates in the euro area are now very low, also in an international comparison. Overall, the provision and management of liquidity by the ECB have played a crucial role in the implementation of the ECB’s monetary policy. They have ensured that banks have adequate access to central bank funding so as to continue financing the economy and that liquidity constraints and perceived risks have not triggered a systemic crisis.

There was a spirited public debate whether such rate increases would invite more capital inflows. But we viewed that other factors, such as the strength of the domestic economy and high risk appetite of international investors, played a larger role in inducing capital inflows than a gradual increase in the policy rate. Our concern for medium-term financial stability was also a key element of policy deliberations at the time. Subsequently, things became more challenging as the Thai economy suffered domestic setbacks. As the boost from the government’s temporary stimulus measures dissipated at the start of this year, domestic demand slowed down markedly. At the same time, domestic credit growth was still quite high, stock prices continued to advance, and activity in the housing market remained brisk. Moreover, portfolio capital inflows continued and the baht was appreciating. This presented a dilemma and was an example of the difficulties posed by policy spillovers. Against the backdrop of weak global demand, we cut the policy interest rate. We contemplated the use of certain prudential measures, including those on capital flows, in order to complement domestic monetary policy as well as offset some of the impact of capital inflows on domestic financial conditions. But since the QE tapering talk began in earnest in May, the global financial environment changed dramatically, and with it the nature of the policy trade-offs. The communication by the Federal Reserve about possible tapering of its bond purchases was a key turning point for global financial markets. Financial conditions suddenly tightened in response.

But it was not until two hedge funds from Bear Stearns with active exposure in the sub-prime market had almost lost all their capital by June 2007 and when some rating agencies in early July announced that they would downgrade many asset-backed securities (ABSs) and collateralised debt obligations (CDOs) that a significant reassessment of the expected returns of structured finance products took place and AA and AAA-rated assetbacked securities (or ABS) also started falling in value. The following general re-pricing of risk [see Chart 15] and tensions in credit markets (e.g. also the corporate bond market) now affected several countries other than the US (e.g. the corporate bond markets in the US and Europe). Financial market liquidity for most structured credit products started evaporating [Chart 16]. Equity markets have also been affected by the increase in risk aversion and a general flight to quality. 19 As a consequence of inadequate risk management, and in particular liquidity risk management, the interbank money market came under pressure. Due to the complexity of pricing structured credit products and the lack of transparency of banks’ exposures to investment vehicles heavily in need of refinancing their ABS investments (which, at that time, were more or less fully illiquid), an adverse selection problem in the interbank market led to concerns about systemic risk. Banks were reluctant to lend to each other because of concerns about the counterparty’s exposure to sub-prime related assets and also uncertainty about their own liquidity needs.

The really hard question for us is could we - or should we - attempt to protect those businesses most affected by the strong exchange rate even if that meant putting the economy as a whole at significant risk of rising inflation. The reality is that, were we to do so - notwithstanding our specific mandate from the Government - we would not succeed in protecting even the suffering sectors except possibly in the very short term; and in the medium to long term our overall economic performance - in terms of growth and employment would - on all past experience - almost certainly be worse. As it is, Mr President, the recovery in the world economy, and the extraordinary efforts of UK businesses themselves to cope with the hostile international environment, are already resulting in a stronger net external trade performance. That in turn is contributing to the recovery in our own economy, particularly in manufacturing output growth, and to the more encouraging news in recent surveys. To the extent that this improvement in external demand persists, it will help to ease the exceptional pressures on the most internationally-exposed sectors, and contribute to a better balance within the UK economy. But it needs, of course, to be accompanied by corresponding moderation of the growth of domestic demand - after the offsetting stimulus of a year ago - if we are to maintain overall stability. That essentially is why interest rates have had to rise since last autumn.

Broader explanation of the reasons for passing this decision is the following: 1) Negative effects of the world crisis over the world economy continue to grow. The latest IMF projections point out that the world growth will switch towards the negative zone thus in 2009 world’s GDP will drop between -0.5 and -1.0 percent. This will represent the first negative GDP growth rate within last 60 years. The reduction of the world’s GDP below the potential, together with the downward trends of food and energy prices, by themselves not only eliminate the inflationary pressures, but also create deflationary risks, especially in the developed economies. Unfortunately, continuous revisions of the projections of the world‘s growth are further towards deeper recession. In the less developed economies, including ours, the external sector risks appear as most essential, where the large reduction of the external demand as well as the lower inflows and/or larger net foreign capital outflows create serious pressures over the value of national currencies. 2) Macedonian economy, as we stated, is under a strong influence by the global macroeconomic developments. As almost everywhere in the world in our case as well the inflationary pressures fade and the economic growth decelerates because of the reduced external demand, contracted and more expensive financing sources and increased negative expectations of economic agents. The external sector imposes itself as a main problem of our macroeconomic policy.

starting at end-2007 and during the whole of 2008, being concerned first of all because of the growing inflation but also of the growing deficit of our economy to the rest of the world, we undertook a number of measures for tightening the monetary policy. However, in the meantime, the world crisis has deepened. In the fourth quarter of 2008 it started delivering to us high „paying invoices”. The demand as well as the prices for our main export products dropped dramatically . This continues even stronger in the first quarter of the this year. At the same time domestic aggregate demand (stimulated by the wage and pension growth, higher budget consumption and the high credit growth) was not appropriately and timely accommodated in accordance with the foundations of the economy. The trade as well as the current account deficit were growing, without being followed by the appropriate inflows in both, the capital and the financial account in the balance of payment. Practically, imbalances and pressures on the foreign exchange market were growing and so continue to grow thus being increased by the not that seldom carelessness or by, I even don’t exactly know what, other reasons, in creating numerous well founded negative expectations related to the foreign exchange rate stability.

Its demand, trade and cross-border investment activities will reinforce this potential. The recent trend for the use of the renminbi for settlement of trade and cross-border investment activities will facilitate this potential. It is my pleasure to welcome you to this Seminar on “Renminbi Trade Settlement and Investment”. I would like to take this opportunity to extend a warm welcome to our guest speakers from the People’s Bank of China and the Ministry of Commerce (Mofcom) of the People’s Republic of China. I also wish to welcome our panellists from the financial industry and the corporate sector that are here today to share their experiences in operating in the current challenging economic and financial environment. The economic relationship between Malaysia and China is longstanding and grounded on strong foundations. Today, China is Malaysia’s largest trading partner accounting for 14% of our country’s total trade. Malaysia also ranks as China’s most significant trading partner in the Asean region. Our trade with China has continued to expand, increasing by 20% annually, in this recent two decades. Our bilateral trade with China is now seven times higher than the level in the early 1990’s. Our economic relations have also evolved and expanded beyond the area of trade – into the services sector, particularly the financial sector, tourism and education. China is among the top five tourism markets for Malaysia and Chinese nationals represent the largest foreign student population in Malaysia’s private universities and colleges.

This serves to provide a safe and efficient clearing and settlement platform that supports trade and investment flows in renminbi. A nationwide awareness program by the banking institutions and the business chambers is also creating greater awareness on renminbi for trade settlement and investment. The Bank has also participated in the Chinese interbank bond market. In 2011 alone, the size of renminbi trade settlement in Malaysia expanded by four times from the level a year ago, reflecting a growing interest in renminbi as a settlement currency. The expansion in renminbi usage has also been underpinned by a diffusion of corporate players, both in size and across the sectors. Not only has the number of corporate players increased, but there has been a shift in relative significance in the use of renminbi as a trade settlement currency from the smaller to the larger corporations. There has also been more widespread corporate participation from a larger cross-segment of economic activities, namely the commodity based industries, manufacturing and services sectors that also includes tourism and education. There has also been an increase in the number of financial institutions participating in renminbi trade settlements. There are now 19 financial institutions that facilitated such trade settlements, double the number in 2009. More recently, there has been an increase in the use of the renminbi as an investment and funding currency. In the first seven months of this year, renminbi deposits in the banking system had tripled.

The market for these securities had dried up because the traditional investors in these securities – SIVs, bank-related conduits and securities lenders – have either disappeared or are balance sheet constrained. This has reduced the availability of credit for consumers and led to higher borrowing costs. The first subscriptions for financing under TALF Version 1.0 will occur on March 17. The first batch of new securitizations will be funded on March 25. TALF Version 2.0 will follow. This will broaden the TALF into new asset classes such as Commercial Mortgage Backed Securities. Development of this phase is still in its early days. But it anticipated that the size and scope of TALF will expand sharply in the months ahead. So how will the TALF restart securitization activity and provide balance sheet capacity to the private sector? By providing leverage and 3-year term, non-recourse financing to investors, the TALF should increase the demand for AAA-rated securitizations. Yields of LIBOR + 400 4 BIS Review 28/2009 basis points may not be sufficiently attractive on an unleveraged basis, but at 10 times leverage the returns become very attractive. The non-recourse nature of the loans is also important. If the price of the security falls considerably, the investor just loses an amount equal to size of the haircut.

Let me conclude with a reflection on monetary policy. The economy is bouncing back rapidly, which is good news. With that has come a rise in inflation, and we expect that rise to continue in the near term as we go through the rest of this year, such that CPI inflation is expected to pick up further above the target, owing primarily to developments in energy and other commodity prices. I have set out the reasons why we expect this rise in inflation to be a temporary feature of the bounce-back. The reasons for taking this view are well-founded, it is not a vain hope or a matter of whistling in the wind. It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions. But it is also important that we watch the outlook for inflation very carefully, which of course we do at all times, particularly for signs of more persistent pressure and for a move of medium term inflation expectations to a higher level. And if we see those signs, we are prepared to respond with the tools of monetary policy. Over the last sixteen months we have used monetary policy decisively to respond to an unprecedented crisis which was disinflationary. We were able to act in this way because the framework of monetary policy and the record of its use are robust. This credibility gave us the scope to act in a crisis.

Source: Norges Bank If necessary, Norges Bank can supply liquidity to the payment system. Norges Bank is the bankers’ bank. 13 In addition, Norges Bank has a special responsibility for the payment system. The Bank oversees and supervises various components of the payment system and should drive new and efficient solutions. NORGES BANK ECONOMIC PERSPECTIVES 14 FEBRUARY 2019 Today, nearly all payments from customers’ bank accounts are made using deposit money.7 This is money created by banks. When people borrow money from a bank, the bank credits the same amount to an account. The money deposited was created at the instant the loan was made. Deposit money circulates through the banking system, in and out of people’s accounts and is only to a limited extent converted to cash. As long as we have confidence in both the value of the Norwegian krone and in the banking system, we will also have confidence in deposit money. The cash provided by Norges Bank has important attributes. While deposit money is a claim on a private bank, cash is a claim on the central bank. Cash is a safe alternative if private payment solutions are not functioning or do not meet the expectations of the public in terms of security and efficiency. Even though the use of cash has declined, cash is still in use and has important contingency functions. But new digital alternatives are emerging.

The primary responsibility of understanding the risks run by the bank and ensuring that such risks are appropriately controlled and are within the risk parameters of the Bank, i.e. its risk appetite, is vested with the Board of Directors. It is now a widely accepted principle of good corporate governance that bank management understands new banking products and businesses of the Bank. Without proper understanding of the risks associated with such new products the management should not give their assent to the introduction of such products. It is the responsibility, therefore, of the Board of Directors to set the parameters for risk taking beyond which banking business should not be permitted. What then are the essential pre-requisites for good and effective risk management? Timely and reliable information is the foundation upon which good risk management is built. Lots of questions come to my mind here - do those responsible for credit decisions have a knowledge of the industry they are lending to? Why do banks depend so much on collateral when we all know it is the last resort? This is where information plays an important part. If you do not have knowledge of the industry or sector to which you are lending, your credit decision is seriously flawed and sooner or later will translate itself into NPA. Why do we have high levels of NPA? Is the information necessary for evaluation of creditworthiness of a borrower available to the banks?

Structural reforms were also needed to correct earlier structural mistakes and restore our economic vitality. Whether the measures that have been taken up to the present are sufficient is a debatable issue; but the point I want to make is that a change of direction and some political action had already been initiated in the 1980s. The work has continued since then and been undertaken by governments of diverse political hues and personalities. In other words, something happened to Swedish economic policy in a wide sense in the late 1980s. When the immediate crisis had been managed in the early 1990s it was clear that the weak government finances would have to be tackled. Moreover, the independent status of our central bank has been formally confirmed, accompanied by a clear mandate. The floating exchange rate regime and the explicit target for price stability have worked well. Several segments of the Swedish economy have been deregulated, though less has been done in this way in the labour market than in markets for goods and services. But the labour market organisations have been working on their own account to improve the system for wage formation. As a result of all this, the Swedish economy is doing better than we have seen for a long time. The economic upswing has now continued for more than six years, during which annual GDP growth has averaged around 3%. And notwithstanding the strong growth of demand, inflation has been lower than one would expect from earlier relationships.

Urban Bäckström: The Swedish economy cyclical upswing or a more fundamental improvement? Speech held by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, at a meeting with Institut International d’Etudes Bancaires, held in Stockholm, on 19 May 2000. * * * The current economic situation in Sweden differs appreciably from the early-1990s, when our country was on the brink of a serious financial crisis, with a currency and banking crisis, sizeable public sector deficits and rapidly rising unemployment. Today the picture is considerably brighter. The question I want to consider here with you is whether the impressive performance in recent years amounts to a conventional cyclical upswing or has to do with a more fundamental improvement in the workings of the Swedish economy. In the three years from 1991 to 1993, the Swedish GDP fell by a total of 5%, employment dropped more than 10%, unemployment shot up from 3 to 8%, the public sector financial deficit grew to 12% of GDP and government debt accumulated rapidly. Meanwhile, the stock of non-performing loans in the banking sector peaked at 10% of GDP or 8% of the total loan portfolio. The fixed exchange rate was questioned, there were sizeable interventions and for some days in the autumn of 1992 Sweden’s central bank raised its instrumental rate to 500%. Various explanations have been put forward for the depth of Sweden’s economic crisis.

Mojmír Hampl: An uncertain world Speech by Mr Mojmír Hampl, Vice Governor of the Czech National Bank, at the 8th Corporate Research Forum (CRF) International Conference "An Uncertain World: Planning for 2025 and beyond", Prague, 12-14 October 2016. * * * Ladies and gentlemen, Good evening and let me welcome you all here to the premises of the Czech National Bank. I’m really pleased you have chosen our Congress Centre for your cocktail reception. On behalf of the Bank Board of the Czech National Bank I’d like to say that we are delighted to have such a distinguished gathering here today. And I don’t say that just out of courtesy, I really mean it. When we started organising this welcome speech with Richard Hargreaves, he asked me to introduce the Czech Republic in 10 or 15 minutes. I said: “Wow, what a challenge”. Typically I speak about interest rates, inflation or the exchange rate rather than about typical features of this country, but then I thought sometimes even a central banker should try to do something useful. So I put my mind to work. I will not repeat the known facts to this noble audience of educated people. I’m sure most of you will have heard about Czech beer, about our former president Vaclav Havel (or Vaklav Hejvl as many tend to pronounce his name) or about the international success of Czech sports stars in tennis, ice hockey and sometimes even soccer.

Since then, a number of structural forces have probably pulled down the ‘equilibrium’ level of global and domestic real interest rates, making this a conservative calculation. See, for example, Vlieghe (2016) ‘Debt, Demographics and the Distribution of Income’ http://www.bankofengland.co.uk/publications/Pages/speeches/2016/872.aspx 8 This point was made back in 2012 by my colleague Ben Broadbent. See Broadbent, B. (2012) ‘Deleveraging’, remarks given at Market News International, London, on 15 March 2012. http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2012/speech553.pdf 9 All speeches are available online at www.bankofengland.co.uk/speeches 9 Lenders’ own assessments of how risky these loans are, which they use to calculate how much capital they need to withstand losses, have fallen. Over the past two years, these ‘risk weights’ on credit card loans have fallen by 7% and those on other consumer loans by 15% (Chart 11). This improved performance doesn’t reflect a tightening up of lending standards. Credit scores of new borrowers are actually a little lower than they were 2 years ago (Chart 12). Instead, the improved performance of borrowers reflects the environment of continued employment growth and easier credit terms. Lenders have been the lucky beneficiaries of the benign way the economy has evolved. In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions. Car finance Car finance has drawn particular attention, with growth of 15% in the past year and more than 100% in the past 4 years. The way we buy cars has been transformed.

Süreyya Serdengeçti: The Turkish economy and the European Union Remarks by Mr Süreyya Serdengeçti, Governor of the Central Bank of Turkey, at the London School of Economics, London, 27 October 2005. * * * Distinguished Academicians, Guests, It is a great pleasure for me to be here with you today at London School of Economics (LSE), and to have an opportunity to give this lecture on such a delicate subject, that is the Turkish economy in the context of the European Union (EU). I would also like to express my heartfelt thanks for the establishment of the Chair in Contemporary Turkish Studies that, I believe, will play an important role in the relations between Turkey and the EU. I want to begin my speech by first giving you a simple description of Turkey on its way towards the EU membership. I will be referring to the words of Sir Winston Churchill. On November 10, 1942, after the victory at El Alamein that changed the course of the Second World War, he said, "This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning ". Personally, I think this is exactly how we should see the Turkish membership in the EU as of October 3rd; it is simply the end of a long beginning. Three important points now: the first one is about the fact that in Turkey, the EU accession has always been a long-term goal.

It can also be said that Turkey is the only country in the region with the necessary institutional structure and capacity for integrating the region to the world economy through business association networks and partnerships.6 In addition to this, in terms of the EU’s long-term energy policy including petrol, natural gas and water sources, the increasing importance of the Middle East and Caspian Region has made Turkey a bridge to the energy sources in the region. With this strategic location, it is in the geo-strategic interest of the EU to have Turkey as a member with regard to the foreign and security policies dimensions. And, I believe that the Turkish accession will be a strategic opportunity for Europe. Distinguished guests, Despite the improvements in the Turkish economy, it is obvious that at the present stage Turkey has lower income per capita compared to the new members and acceding countries. However, we know that income per capita of the new members and acceding countries when they started negotiations was similar to that of Turkey. Actually, decomposing the equation of income per capita, we see that it is a product of productivity, employment rate, inverse of the dependency ratio7 and participation rate.8 In other words, increase in income per capita can be accelerated by productivity growth, increase in employment and labour participation rate and decelerated by increase in the dependency ratio. I will 6 Sak, G. (2005). "EU-Turkey Relations: Time for Contemplation? Time for Reality Check?” Berlin.

The SGX has direct and frontline regulatory responsibilities of the securities and futures markets, and over the broker-dealers who trade on the exchange. This MAS-SGX regulatory relationship applies to all the major areas of regulation: a. Regulation of capital raising • SGX defines and enforces the rules that apply to companies that seek to raise capital on the exchange through primary or secondary issues. • MAS' approval must be sought for any changes to SGX's listing rules. Under the proposed SFA, the SGX will have to notify the MAS of any rule changes 21 days before its announcement. MAS will be able to approve, alter or stop any rule change during that 21-day period. b. Continuous listing and disclosure requirements • SGX enforces the continuous listing requirements on companies, to see to it that listed companies maintain timely and adequate disclosure of material information. SGX has the power to suspend and even de-list a counter if a company fails to meet the standards set out in the listing rules. BIS Review 14/2001 3 • Continuous disclosure by listed companies will also become a statutory obligation under the proposed SFA. This means that non-disclosure or late disclosure of material information will be a breach of the law, not just a breach of SGX's listing requirements, and carry either civil or criminal penalty. c. Market surveillance • SGX carries out market surveillance to detect unusual trading activities that could reflect attempts to manipulate the market.

That decision was shaped by the inappropriateness of leaving the listing authority with the LSE when other competing exchanges are emerging in the UK. We believe that the current arrangements for the regulation and supervision of the securities markets between the MAS and SGX, with an enhanced oversight responsibility for the MAS and 4 BIS Review 14/2001 powers to pursue civil prosecution, will prove robust. But we will continually review the arrangement, keep in touch with international practices, and re-calibrate the roles of MAS and SGX where necessary to ensure effective oversight of the local markets. I would now like to touch on two features of the regulatory arrangement that we have recently reviewed. The first concerns the approval of substantial shareholdings in the SGX; the second, proposed changes in the prospectus registration regime. Approval of substantial shareholdings in the SGX The Exchanges (Demutualisation and Merger) Act requires anyone who wishes to acquire 5% or more of SGX to seek prior approval from MAS. This provision recognises the unique and important role of SGX in providing the infrastructure and marketplace for the trading, clearing and settlement of securities and derivatives in Singapore. Strategic investors As announced previously, MAS will allow suitable strategic investors who can promote SGX's growth and development to acquire substantial stakes of 5% or more in SGX.

In contrast to the typical IMF program, governments were permitted to use a BIS Review 69/2007 3 portion of the IMF-supplied resources to take some pressure off the exchange rate, as foreign investors sought to reduce their exposures to the crisis countries in the initial stages of the crises. But the provision of large external financial resources was not, by itself, sufficient to achieve stability. The critical feature of every program was a set of policy measures designed to address the causes of the crisis, to stabilize confidence and to put in place conditions for recovery. In some cases, the initial policy response looked tentative or inadequate. In others, the reform program did not appear to have broad support within the government. Broader political uncertainty associated with a pending election or change in leadership also undermined confidence in the commitment to a credible recovery plan. Where confidence in the recovery plan was weak, the financial resources had little impact on market sentiment and confidence faltered. Even though the resources looked large relative to past financial interventions, they were easily overwhelmed when markets were unimpressed by the policy response. Ernesto Zedillo explained the policy challenge exceptionally well when he wrote that since markets tend to overreact at the onset of crisis, so policy needs to overreact too. A classic problem in financial crises is to distinguish between problems of illiquidity and insolvency. This diagnosis is critical to the design of an effective response, but it is very hard to do.

Inequality has increased within many countries and economic integration is blamed, although research shows that technological change plays a significantly bigger role. At least in part, the case of financial integration is different. Finance is an integral part of economic progress, and there are significant benefits from global financial integration. But more is not always better when it comes to finance, as we learned the hard way during the latest financial crisis. Furthermore, large and volatile capital flows can undermine the financial stability of countries. It is not clear who the winners are in that case nor what the compensation mechanism would be. Spillover effects from monetary policy of global rate setting countries to small, open and financially integrated economies (SOFIEs) increase as global financial integration intensifies. In particular, if the global rate setter experiences an economic slack at a time when a SOFIE is booming, the SOFIE might find it difficult to pursue warranted macroeconomic policies without risks to financial stability and/or significant detrimental effects on export sectors. This could be the case if there are perceived limitations to the use of fiscal policy; for instance, if there is already a sizable headline surplus. In this situation, macroprudential and even capital flow management measures could help. In Iceland’s case and some others, this raises the issue of compatibility with existing international and regional treaty obligations regarding free movement of capital. The jury is still out on these issues.

At that time, Middle East tensions had not induced further Western military intervention and the oil price had been relatively stable, falling to around the $ mark. One could argue that central banks – and other authorities – had validated expectations. During this period from the Autumn of 2012 to the Spring of 2013, financial markets were relatively calm but periods of “risk on” were lasting for longer and leading to greater risk taking. Equities and other risky asset prices generally rose. Interest rates were low and stable at the short end and increasingly depressed at longer maturities as the FOMC maintained its asset purchase programme. The hunt for yield intensified, especially down the credit spectrum, with some investors being driven by return targets, mandates and benchmarks rather than a true reflection of risk-adjusted returns. The volatility of market prices also became compressed during this period (Chart 1). BIS central bankers’ speeches 1 Chart 1 Implied volatility from various asset markets 27 Feb 2009 Standard deviations from mean since 2006 USDGBP 01 May 2013 16 Jul 2013 3 2 1 Japan long rates Japan short rates JPYUSD USDEUR 0 -1 -2 US long rates FTSE 100 US short rates S&P 500 UK long rates Nikkei 225 UK short rates Chart 2 shows a “heat map” constructed by colleagues in the Bank’s Financial Stability Directorate, showing how market functioning has changed over time based on issuance levels and spreads.

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.

This is in line with the credit growth rates observed in some euro area members since the mid-1990s. Some recent empirical literature has indicated that the probability of bank failures and banking crises increases with credit booms. Banks may become less cautious in granting loans during the boom, due to the prevailing optimism and good performance at the macroeconomic level. And even if the optimism is justified by the fundamentals, it may go a bit too far, leading to an eventual build-up of financial imbalances. Their subsequent bursting could hit the real economy to such an extent that it would have repercussions for the financial system. Here I come back to the issue of euro adoption, which may be a very relevant factor in this debate for several reasons. First, by providing easier access to external financing for banks, adoption of the euro may amplify a credit boom. Second, it may be associated with a wave of optimism about the future economic prospects of the acceding countries, given the positive net benefits expected from euro area entry. Third, euro adoption requires nominal convergence, including a reduction in nominal interest rates to the euro area level. This may support a credit expansion to some economic sectors. Finally, in a currency union a national credit boom cannot be addressed by monetary policy actions. To take the current euro area members as an example, the ratios of private credit to GDP a decade ago in Ireland, Portugal and Spain ranged between 45 and 75 percent.

At present, this ratio exceeds 100 percent in all these three cases. The trend has been also growing fast in Greece, albeit from a lower base. In Portugal, for instance, domestic banks took the opportunity to issue eurodenominated bonds in euro area markets to increase rapidly the volume of domestic loans both to the corporate sector and to households. Capital inflows through banks financed a mounting current account deficit. It also fuelled fast growth of domestic demand and GDP in 1998-2000. This experience could in principle be viewed as a manifestation of the expected potential benefits of monetary integration. In fact, it has been argued that euro area membership has enabled the participating countries to overcome the famous Feldstein-Horioka puzzle, i.e. the traditional strong link between domestic savings and investment. In other words, the current account constraint may become non-binding after euro adoption, which should lead to a more efficient allocation of capital in the long run. However, it might be also questioned whether such a fast credit expansion will lead to a build-up of vulnerabilities in the balance sheets of financial institutions, firms or households. In the case of Portugal, for example, the debt burden of the household sector has exceeded 100 percent of yearly disposable income, even though a decade ago this ratio was comparable to the current situation of some acceding countries. As a result, one can think of adverse scenarios in which the repayment capacities of the banks’ clients would deteriorate substantially, with adverse consequences for financial stability.

Fixed, or managed, exchange rate regimes may help to limit the real economic costs of “excessive” volatility that reflects short-lived shifts in market sentiment, but if they impede desirable adjustments of real exchange rates, they contribute to unsustainable patterns of spending. There are other reasons why emerging economies, in particular, have managed their exchange rates. Perhaps the most important is that pushing down on the exchange rate is a means to pursue a strategy of export-led growth. Another motive, important in the wake of the Asian financial crisis, was to build up large precautionary balances of foreign exchange reserves as a way of insuring against sudden reversals in capital flows, especially of shortterm bank lending, that proved so damaging in the 1990s. 2 BIS central bankers’ speeches Such policies distorted saving and exchange rates, and created large capital flows unrelated to the distribution of profitable real investment opportunities. Given imperfections in financial markets in both borrowing and lending countries, such capital flows can lead to a degree of fragility, such that, when adjustment comes, there is a high probability that it will be abrupt. For example, the distortion from a “too important to fail” implicit subsidy to the funding costs of banks in the industrialised world led to excessive leverage in these countries. Creditors were prepared to lend at lower rates and on a greater scale than they would have without the implicit subsidy. In other countries, financial repression artificially raised saving rates by making borrowing too costly.

In this field, I believe that an important step forward is represented by the recent MoU on financial stability arrangement signed by the EU central banks, supervisors and ministries of finance in June 2008. Finally, referring more to the supervisory domain but still linked to the central bank interest, the turmoil has evidenced the need for strengthening the macro-prudential dimension of regulation and supervision. This means the regulatory and supervisory requirements should be able to ensure adequate capital and liquidity buffers throughout the economic cycle. In this regard, the actual impact of the new capital adequacy regime under of Basel II will have to be monitored very closely. BIS Review 106/2008 1

I will return to the monetary policy implications of this growth outlook in a while. The missing instrument problem But before doing so, I want to report on the progress that has been made in strengthening the macroeconomic policy framework in the UK in response to some of the fault lines exposed by the financial crisis. Much analysis and soul searching has been conducted in the aftermath of the crisis, and the lessons and implications for different aspects of economic, financial and other areas of public policy are wide ranging. In terms of the lessons to be learnt for monetary policy, many commentators and policymakers – myself included – told a variant of what could be termed the missing instrument problem. 3 This analysis argues that the case for an inflation targeting framework remains sound: the focus on a clear numerical target for monetary policy has served our 3 4 Dale (2009). BIS Review 161/2010 economy well, and low and stable inflation remains a cornerstone of our long-term prosperity. However, it acknowledges that control of short-term interest rates – the main tool of monetary policy – is a relatively blunt instrument best deployed maintaining a broad balance between nominal demand and supply. In particular, movements in short-term interest rates are not well suited to managing risks from credit cycles and other imbalances within the financial sector.

Perhaps more tellingly, the increased competitiveness of our goods exports has succeeded in arresting the persistent decline in our share of world export markets seen over the past 15 years or so. In contrast, exports of services – at least as measured – have fallen. These declines are concentrated in exports of financial and business services, areas in which the UK has particular expertise. It would not be surprising in the current environment if this weakness partly reflects reduced global demand for these types of services. If that is the case, our prospects for net trade will depend in part on the extent to which demand for financial and business services revives as the recovery in world demand continues and the functioning of the financial system gradually returns to normal. Where does all this leave us? Judging the net impact of these opposing forces on the growth outlook is very difficult. The pattern of growth from quarter to quarter is quite likely to be choppy. But smoothing through this, my central view is that over the next few years the economy is likely to grow at rates around or a little above its historical average, supported by monetary policy and the lower level of sterling. This is similar to the outlook in the November Inflation Report. But to repeat the point I made earlier: the depth of the recession means that output and employment are likely to remain below what would feel like normal levels for many companies and families for some considerable time.

In theory, Pillar 2 requires banks to have a formal process for allocating internal capital against the wide range of risks that are not explicitly part of Pillar 1. This formal process is sometimes referred to as the Capital Allocation Assessment Process or "CAAP". However, it has to be acknowledged that very few banks currently have such a process in place, and only the largest and most sophisticated institutions have been able to devote the resources necessary to building these types of formal capital allocation systems. Consequently, as a regulator, we do not plan to require all banks to develop internal capital allocation models, at least initially. The need for such models must be commensurate with each institution's scale and sophistication. In place of requiring all AIs to develop these models, the HKMA has developed its own internal Supervisory Review Process, or "SRP". As you may know, the HKMA has for a long time set capital ratios on a bank-by-bank basis. This has been with the aim of trying to ensure that the capital ratio reflects the risk profile of an individual AI, taking into account the full range of risks to which it is potentially exposed. We intend to use the SRP to bring greater rigour into the process of setting AI-specific minimum capital ratios. In effect, the SRP is our own credit scoring system. It takes a large number of variables, each carefully chosen to reflect a different aspect of risk, and combines them to produce a single overall "score" for each AI.

But it brings very material benefits through increased competition as a result of greater transparency of prices and lower transactions costs, through broader and more liquid financial markets, and through the associated improvement in economic resource allocation. And there is no doubt that intra-European exchange rate certainty in particular will enhance the benefits to be derived from the European single market. Whether or not it is essential, therefore, most people would, I think, agree that, other things equal, the nominal exchange rate certainty that comes with the move to the single European currency is very desirable in this context. What then are the economic arguments against it? Essentially they can be summarised as the risk that the single monetary policy - the single, one-size-fits-all, short-term BIS Review 88/1998 -2- interest rate within the euro area, which is a necessary corollary of the single currency - will not in the event prove to be appropriate to the domestic needs of each of the euro-member countries. There is no doubt that such risk exists. It may result from cyclical divergence within the euro area, with some participating countries needing to stimulate domestic demand while others are already operating close to capacity. It may arise from differences in fiscal positions even though these are to be constrained through the Stability and Growth Pact. Or it may result from economic shocks of some sort that have a bigger impact on some countries than on others.

We need to avoid a repeat of the 1997 Russian default, where Russia received a programme of aid, everyone expected it to work, but the needs turned out to be much bigger two months later. There is also a very rapidly increasing risk of citizens running on Greek banks as well as a rocketing risk of some other EU/eurozone country’s voters producing an outcome that will, in addition to other more likely and more profound consequences, further complicate finding a solution to the technical issues, i.e. how to structure the debt restructuring. To conclude, this is a crisis whose causes lie in eurozone institutions, which we were assured were created – together with the eurozone itself – to prevent crises. Without further close involvement of eurozone institutions, including the ECB and eurozone member states, it will most probably result in a disorderly meltdown of at least some European economies. On many levels, including the level of European institutions, the crisis was caused by incoherent and/or insincere communication, which increased the uncertainty of market participants in the broad sense. Our country’s history tells us that a generally predicted loss of a currency fix has much lower costs (including political ones) than an unexpected one. If eurozone countries and EU institutions opt for “safe” Greek membership in the eurozone, they must present a solution that is broad, generous and general enough to convince the markets of its credibility. This solution had better come fast, though, as muddling through has significant economic costs and increases the risks dramatically.

Ability to act Of course, notwithstanding these design features, exit will require a number of policy decisions. Therefore, an important question and the third cornerstone of our exit strategy is whether a central bank has the technical and institution capability to take such decisions. a. Technical capability and the operational framework On the technical side, the question is whether we need to set up new rules and procedures to exit. This is not the case. The ECB’s operational framework is well equipped to facilitate 6 BIS Review 103/2009 the unwinding of non-standard measures when the need arises. The framework embodies a rich and flexible set of instruments, including fine-tuning operations, for the absorption of abundant liquidity – promptly if necessary. Moreover the framework permits short-term interest rates to be changed while keeping some non-standard measures in place, should continued credit support be needed. This feature is of great consequence: it means that the Governing Council can choose the way in which interest rate action could be combined with the unwinding of the non-standard measures. There is no pre-determined sequence between a change in interest rates and unwinding of non-standard measures. Hence, the Eurosystem retains appropriate flexibility as to the way in which interest rate action will be combined with the unwinding of the additional credit support measures, notably its extended framework for longer-term refinancing operations. In short, the ECB has in place all the technical ability to absorb liquidity as required. b.

In this regard, the euro area is seriously lagging behind: equity capital amounted to only 68% of GDP at end-2016, compared with 128% in the United States. And yet, resources are abundant: the excess of savings relative to investment is around EUR 350 billion per year, which is more than 3% of GDP. It is therefore crucial for the euro area’s economy to better steer these savings towards productive investment across borders, notably by shoring up equity which is the key to an innovation economy. Start ups are well aware of this, but our European scale-ups, midcaps and SMEs also need greater access to equity leverage. The insurance sector has a key role to play since it is the largest institutional investor in the euro area, with total assets of close to EUR 7,800 billion in the second quarter of 2017. In practice, what is the way forward? A large part of the solution lies at the European level. The efforts so far are going in the right direction, but work should now be accelerated with what I call a “Financing Union for Investment and Innovation”. This Financing Union is the microeconomic accelerator that we need to make concrete progress towards a genuine Economic Union in the euro area.

In line with this principle, the validation of internal models, for instance, should preferably remain the responsibility of the NCA in order to reflect the close link between this decision and the on-going dialogue that takes place between the insurer and its national supervisor; EIOPA for its part could concentrate more efficiently on the essential task of enhancing the harmonisation between national practices. In addition to these desirable adjustments of the European institutional framework, there is a need to make concrete progress towards a European resolution mechanism, which would provide more adequate tools to limit the impact of an insurer failure and increase trust and confidence. France has been working along these lines at national level and such a mechanism will be in place in our country before December. 1 The French resolution insurance regime requires insurers of a certain size to set up preventive recovery plans, which will form the basis for preventive resolution plans. Moreover, the ACPR is entrusted with several powers to be used in a resolution context, such as the possibility of appointing a resolution administrator in the insurance undertaking, limiting the distribution of dividends, or organising portfolio transfers to another insurer. 2. Economic innovation Let me now turn to my second point: economic innovation. As Europe’s economy is close to the “technological frontier”, businesses need to innovate more. As such, they need to be able to take more risks, which requires more equity financing, over the long term, rather than debt financing.

On the contrary, they need to contribute to the design of the measures to make them robust and effective across countries. Similar holds for regulatory objectives, as what is considered a priority for regulators in advanced countries, like the G20 countries, might not be considered as urgent in emerging market countries. In this regard, I welcome and strongly support the effort of the Basel Consultative Group (BSG) as a forum for deepening the engagement of the BCBS with non-member authorities, international institutions, and regional groups of banking supervisors on the regulatory reform and banking supervisory issues. I see cooperation between the BCBS and the BCG as a key component helping to design robust regulation and supervision, taking into account financial sector aspects in both advanced and emerging markets and developing countries. As a member of the BCG, the CNB has actively participated in the work of the group. We contributed to the work agenda evaluating major intended and unintended consequences of Basel III implementation for emerging and smaller economies in the past. We also hosted a workshop on this topic in 2013. As I see your workshop agenda, I appreciate that you are going to discuss the timely issue of sovereign exposures in emerging markets. The reasons for the high share of government bonds in commercial bank assets in emerging markets are clear and straightforward. Financial markets in these countries are still under development and shallow, which is limiting their ability to diversify assets.

Jiří Rusnok: Basel Consultative Group Meeting - welcome speech Welcome speech by Mr Jiří Rusnok, Governor of the Czech National Bank, at the Basel Consultative Group Meeting, Topic "Regulatory Treatment of Sovereign Exposures - Survey of Recommendations", Czech National Bank and Bank for International Settlements, Prague, 4 October 2016. * * * Dear Basel Consultative Group members, Dear experts from all around the world, Dear ladies and gentlemen, Let me warmly welcome you to the Czech National Bank (CNB). We are proud to host the expert meeting on the Basel regulatory reform and its design, using the perspective of emerging markets and developing countries. In the wake of the recent global financial crisis, the Basel Committee on Banking Supervision (BCBS) is making reform steps towards more healthy, stable, and resilient banks and financial systems. The latest Basel reform includes more and better bank capital, leverage and liquidity requirements, as well as macro-prudential measures, ranging from G-SIB surcharges to countercyclical capital buffers. The reform effort is successfully underway and new standards are gradually being implemented worldwide, covering advanced as well as emerging markets and developing countries. When designing further details of the regulatory reform, we have to pay special attention to differences in financial systems among countries and regions. Namely, financial systems in emerging markets and developing countries are often shallower and less liquid than in advanced economies. Therefore, emerging market countries can hardly take over all regulatory measures without modifications.

For example, one of the alternative scenarios in the new Monetary Bulletin assumes a considerable delay in the construction of the Helguvík aluminium smelter and related power facilities, with the bulk of the development taking place in 2012. Economic recovery is delayed, and the contraction in GDP will be 4% in 2010, instead of just under 2½%. • Inflation has been higher than forecast in the recent term, as a result of a weaker króna and a slightly smaller output slack than previously projected. • Inflation will subside quickly in 2010, however, and underlying inflation will be at or near target in the latter half of the year. As regards the current economic situation, the outlook I have described here, and indicators that private sector balance sheets are somewhat less exposed to exchange rate risk than previously thought, the Monetary Policy Committee decided to make changes in Central Bank interest rates that entail an unchanged or slightly more relaxed monetary policy stance. The main change, however, involves adapting the Central Bank interest corridor to the effective level of monetary restraint, which is currently determined primarily by interest on the Bank’s current accounts and certificates of deposit. If the króna remains stable or appreciates, and if inflation falls as forecast, then the preconditions for further monetary easing should soon be in place. Available forecasts assume that the Icelandic economy will recover in the next few years.

Those as long in the tooth as me will know that, even in nominal terms, it costs less to buy a pair of jeans and a t-shirt today than it did thirty or forty years ago. The result is a significant contribution to real income growth over that period. In what follows I’ll flesh out these numbers a little further and say something too about their distributional effects. (One particular point in this respect is that the real income benefit of lower import prices is probably most marked for those at the lower end of the distribution.) I’ll mention the parallels, long recognised by economists, between the effects of growing trade and those of technical progress, and the role of the latter in rising inequality in the US. I’ll conclude with some remarks about the sort of things economists might have to think about as the UK leaves the EU. Globalisation and its effects on UK clothing Globalisation hasn’t occurred smoothly nor is there a single, discrete date at which it began. Its broad features are reasonably clear in Charts 1 and 2. Chart 1: Globalisation: a timeline Source: NBER Macrohistory Database and Barclays calculations (Keller et al 2017) 1 D. N. McCloskey, "The Industrial Revolution in Britain 1780-1860: A Survey," in Roderick Floud and Donald McCloskey, The Economic History of Britain since 1700.

This serves the interests of governments and taxpayers; but it is also in the fundamental interests of the financial system itself, since it is not impossible that a future crisis could outstrip the resources of monetary and fiscal policy, thus rendering it impossible to rescue systemically important banks. 2. International approach Consequently, there is broad international consensus between the relevant authorities on what the objectives of future regulatory measures should be. The Financial Stability Board (FSB), in which Switzerland is an active participant, has clearly formulated these objectives. The financial system must be brought to the point where it contributes to sustained economic growth. Never again must it be allowed to combine such high risks with such minimal safety buffers. Moreover, steps must be taken to avoid profits being privatised while losses are borne by the public at large. In essence, there are two ways of achieving this goal. The first approach is to adopt preventative measures aimed at reducing the probability of a bank collapse or a systemic crisis. This can be done by increasing safety buffers – for example, by imposing higher capital and liquidity requirements. The second approach is to take steps designed to reduce the costs of a crisis once it has already occurred.

In such cases, it pays for the country to try to reduce its current-account deficit by restraining domestic expenditure or increasing production. Many of the euro countries that are having problems have had both current-account deficits and deficits in their public finances. Probably the most effective way of reducing the deficit in such cases is to improve competitiveness and reduce domestic expenditure at the same time. Postponing consolidation in such a situation would only entail domestic demand continuing to be higher than it should be. Figure 4 shows the current-account balance in a number of euro countries last year. 4 BIS central bankers’ speeches Figure 4. Current-account balances Per cent of GDP, 2011 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 -10 -10 Source: European Commission Like the Riksbank, most forecasters expect a tighter fiscal policy to dampen growth in Europe in the period immediately ahead. It is difficult to assess the precise effects as these will depend on how and when the measures are implemented. But the measures will of course have an impact, particularly when several countries reduce their public spending and/or raise their taxes at the same time. This will happen, furthermore, in a situation in which there is little scope for monetary policy to further stimulate demand. But what’s the alternative?

MAS has circulated draft prudential guidelines for securitisation to industry participants for comments. The guidelines for banks have been finalised.5 These take into account feedback from the industry and existing securitisation transactions. They set out the capital treatment of securitised assets, as well as disclosure, separation and other requirements for the various roles that banks take on in a securitisation transaction. The guidelines seek to define clearly the roles, responsibilities and risks that banks retain or undertake, when they participate in a securitisation transaction. They also ensure that banks hold appropriate capital against the risks they accept. Thus, a bank that has securitised its assets will be granted capital relief only where the transfer of risks and rewards of the securitised assets has been effective and complete. The internet and its impact on the securities industry The second major issue is the impact of technology and the internet on capital markets. In the securities industry, the internet has caused fundamental change, slicing the value chain more and more finely, and recombining it in novel configurations. Functions previously offered as a package by brokers, such as analysis and advice, recommendation and order routing, are being separated and broken up. New entities, such as aggregators or navigators, have emerged, offering hitherto-unseen types of services. These changes will bring major benefits to the industry and investors. Firstly, the internet has fostered a free flow of investment information. With a surfeit of news, financial institutions are rethinking their business models.

Credit derivatives form one potential growth area. Credit risk is an important issue for banks, particularly in Asia. Before credit derivatives were invented, banks generally had to stop extending new loans or services to customers to whom they had excessive exposure. This worked against the banks’ efforts to maintain valued client relationships. Credit derivatives provide banks an alternative. Banks can now repackage and divest excess credit risk exposures, and continue to service their clients. MAS has studied how credit derivatives should be captured under the existing capital adequacy framework for banks. It has circulated draft guidelines to industry players and associations for comments. MAS has now finalised the guidelines,4 which address capital treatment for three main credit derivative products: the credit default swap, the total rate of return swap and the credit-linked note. The guidelines reaffirm the principle of maintaining capital for risk exposure. If banks assume credit exposure via the use of derivatives, they will be subject to capital charges. But if banks use credit derivatives to hedge their underlying risk exposures, they will be granted relief, depending on the degree of risk transfer. For example, where the hedge is imperfect, because of mismatches in maturity, asset or currency, regulatory relief will still be available, albeit to a smaller extent. A second promising area is that of securitisation. Like credit derivatives, securitisation allows banks to manage their credit risk and capital more effectively. In its basic form, securitisation involves pooling assets in a special purpose vehicle, which is then funded by issuing securities.

And repo has enriched the money markets. But it is also true that anyone holding a securities portfolio can build themselves a shadow bank using the securities lending and repo markets. One simply lends out the securities at call for cash, and then one employs that cash by making loans or buying credit-assets with a longer maturity. This is leverage and maturity mismatch. That example assumes the shadow-banking business is built by the investor who holds the securities outright. But, of course, nothing is so simple. The first lender of securities might lend against securities collateral and do no more; that is relatively common in European markets. But the entity that has borrowed those securities could themselves repo out the borrowed securities for cash, and employ the cash in a lending or credit-asset business. And 4 BIS central bankers’ speeches so on – ie at any point in the chain of securities lending, an intermediary can build themselves a shadow banking business. Such chains can prove fragile for all sorts of reasons – because many securities are at call, and because many secured lenders try to realise their collateral instantly upon default. It is also worth mentioning that some asset managers have no – zero – appetite to hold the underlying paper outright in the event of their counterparty defaulting, either because the assets are not covered by investment mandates or the fund managers do not know how to manage them, etc.

These have included the change of competition law and the regulatory framework, the reform of the judicial system, and the reform of regulated professions and of the housing market. Finally, programme targets for privatisation were achieved ahead of time. Structural reforms need a long-term commitment As I said at the start of my remarks, an improvement of the underlying prospects for these economies has moved expectations. Perceptions about the sustainability of the recovery path in Portugal, in particular, have been reflected in persistent improvements in confidence and associated reductions in risk premia. Over time the economic and social pay-offs of reforms will be high, in terms of higher wealth and employment. High and sustainable GDP growth will in turn bring about improvements in fiscal positions and sizeable reductions in debt-to-GDP ratios in the medium to long-run, contributing therefore to long-term debt sustainability. However, to reap these benefits implies a long-term commitment. The reform process is a continuum. A reform that has just been legislated does nothing for the citizens of a country, if it is not followed-up with effective implementation. Making sure that reforms transfer from the statute book to the real economy requires painstaking monitoring, as well as a prompt reaction in case outcomes deviate from expectations. When countries exit adjustment programmes, such an orientation will help prove to markets that reforms have been undertaken not only due to external pressure, but also out of a genuine recognition of their benefits.

In reality, the capital drawdown banks would have faced, had the COVID shock happened in 2007, would have been a function of their 2007 balance sheets – so the loan losses may well have been higher than those we pencilled in for banks as part of the illustrative scenario. 6 In the first quarter of the year, major UK banks expanded their net lending to businesses by £ (compared to a reduction in net lending of £ by these banks in 2019 as a whole. 6 All speeches are available online at www.bankofengland.co.uk/news/speeches 6 outweighed by the losses they would suffer from the broader economic damage that would result from a widespread withdrawal of credit. No financial system of course can be infinitely resilient. Given its function of providing credit and risk mitigation to firms and households, the banking system is exposed to the real economy. There is inevitably some level of damage to the economy that the banking system cannot weather. Over the coming months we will learn more about how well the post crisis reforms work under stress. One particular area of attention will be the usability of the capital and liquidity buffers intended to absorb a tail event shock. The results of the FPC’s desktop stress test reinforces the message that the clue, as they say, is in the name: the buffers exist precisely to buffer a shock like this. All elements of the buffers banks now have are intended to be usable in stress.

Property prices soared as a result (Chart 1). Such excesses were possible because a decade of non-inflationary, consistent expansion turned initially well-founded confidence into dangerous complacency. Beliefs grew that globalisation and technology would drive perpetual growth, and that the omniscience of central banks would deliver enduring stability. With a growing conviction that financial innovation had transformed risk into certainty, underwriting standards slipped from responsible to reckless and bank funding strategies from conservative to cavalier. Financial innovation made it easier to borrow. Bonus schemes valued the present and discounted the future. Banks operated in a heads-I-win-tails-you-lose bubble and were capitalised for perfection. And a steady supply of foreign capital from the global savings glut – and in Ireland’s case, the initial euphoria of European Monetary Union – made it all cheaper. When the Minsky moment finally struck, debt tolerance decisively turned and the kindness of strangers evaporated. UK households swung from borrowing 4% of GDP annually to saving 2% of GDP. The comparable swing in Ireland was more than twice as large. 3 In the wake of the crisis, three truths came back to the fore. First, while asset prices rise and fall, debt endures. Second, the distribution of debt and assets matters. And third, it is very hard to reduce high debt in one sector or region without at least temporarily increasing it in another. The debt tail is wagging the market dog. These realities continue to weigh on the European financial system.

It might perhaps have been possible to avoid the house price bubble if tighter monetary policy had been conducted at the beginning of the 2000s, but the price in terms of deflation and low growth could have been unreasonably high. Given the situation at the time the decision was made, the chosen policy appears well-motivated. Should central banks try to prevent financial bubbles from arising? Despite the fact that central banks perhaps cannot be blamed for the crisis arising, I think there is reason – given what has happened recently and the research carried out in recent years – to further consider what role they can and should play with regard to these issues. One often tries to distinguish between pure monetary policy, which is conducted with the policy rate as the primary instrument, and measures that are first and foremost aimed at promoting financial stability. However, this crisis has shown that it can sometimes be difficult to make this distinction. Without the measures to reduce the turbulence on the financial markets, the low interest rate policy conducted to counteract the recession would hardly have had any great impact. At the same time, it may be important to make this distinction as monetary policy is something for which the central bank has sole responsibility, while promoting financial stability is a task shared with other public authorities. There is currently important work being done on designing better methods for promoting financial stability, both nationally and internationally.

Of course, markets only clear in textbooks. In fact people are irrational, economies are imperfect, and nature itself is unknowable. When imperfections exist (which is always), adding markets can sometimes make things worse. Take credit derivatives, which were supposed to complete a market in default risk and thereby improve the pricing and allocation of capital. Financial alchemy seemed to have distributed risk, parcelling it up and allocating it to those who wanted most to bear it. However, the system had only spread risk, contingently and opaquely, in a way that actually ended up increasing it. Risk ended up concentrated on the balance sheets of intermediaries that were themselves capital constrained. With the fates of borrowers and lenders tied together via hyper-globalised banks and markets, problems at the core spread violently to the periphery. A truth of finance is that the riskiness of an asset depends on who owns it. When markets don’t always clear, the ultimate owner may be surprised to find what they do own. When that surprise is – or is thought to be – widespread, panic ensues. The impossibility of completing markets was not the only practical problem with the pre-crisis approach. Even if markets were perfect, nature itself is unknowable. Recall that the Arrow-Debreu world relies on people being able to calculate the odds of each and every possible scenario. 6 Keynes, J M (1936), Chapter 12. 7 But economists of a more nuanced persuasion pointed out as far back as the 1950s that this logic is flawed.

It is important to stress the complex interdependence at the core of the entire mechanism, in which an individual investor’s strategy depends not only – as in the standard efficient markets’ paradigm – on the discrepancy between the market price and the fundamental price, but also, and crucially, on what other agents are doing. And as is well known, such interdependencies can give rise to markedly sub-optimal outcomes, with the Prisoner’s Dilemma being the simplest and best-known. A second rationale for the “mopping up” position was that even if the central bank were able to identify an asset price bubble in real time, monetary policy is simply too blunt an instrument to try to deflate it, especially because bubbles typically affect only a subset of asset markets, whereas monetary policy exerts its impact on the overall economy. This implies that a central bank that wanted to deflate a bubble in (for example) the housing market would risk pushing the economy into a recession. Further, it has been argued that such a risk of “overkilling” is especially serious because, given the very nature of asset bubble dynamics, and the sizeable capital gains typically accruing to those who are “riding” them, the standard interest rate increase of 25, or even 50 basis point would most likely just be shrugged off. To put it differently, a central bank that truly wanted to deflate a bubble should be willing to run the risk of inflicting serious damage on the economy, by hiking interest rates by significant amounts.

Even though I was a commercial banker for over 20 years of my career and fully share and understand the challenges facing this profession, I would not be able to witness the recovery and resilience of our banking system today if not for your remarkable efforts and hard work. Let me conclude by thanking the management of the “Banker” magazine for honoring me with this award and all of my colleagues at the BOT for their untiring support. The award is a great encouragement for me to continue dedicating myself to the cause of my work. Finally, let me leave you with a quote that has always been close to my heart. These were the words of one of my mentor, Dr. Puey Ungphakorn, one of the finest Governors we’ve ever had, who once said that: “If one is not concern about holding on to one’s position, then one can always make the right decisions.” So you can rest assured that I will continue to do what is right and in the best interest of our country. BIS Review 10/2006 1

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

The increase in productivity and investments will contribute to sustain growth in the medium term. Hence, the increase in employment is also expected to continue in the coming periods. Graph 9: Employment (Index for those Employed in the Manufacturing Industry, 1997=100) 86,0 85,0 84,0 83,0 82,0 81,0 80,0 79,0 2001 2002 2003 2004 Source: SIS. 10 BIS Review 36/2005 A reflection of the high rate of growth recorded in 2004 was the increase in the current account deficit, as often discussed by the public. It is useful to point out before anything else that it is a natural outcome for economic growth above forecasts to widen the current account deficit. The realization of the rate of growth as 9.9 percent in 2004, which had been forecasted as 5 percent, led to a parallel increase in the current account deficit above forecasts. However, the rise in the current account deficit today should not be interpreted as resulting in crisis as in the past. The world trend also supports this assessment: Deepening of commercial and financial integration makes it possible for countries with macroeconomic stability to sustain higher current account deficits than before. Within this context, in order to have a clear understanding of the situation Turkey is in today, we need to reflect on what happened in the past. At this point, I would first like to give you a brief overview of what we experienced in the past.

Interest rates on credit spiked, and lending to households and businesses came to a standstill. Partly as a result, it gradually became apparent that the hit to demand had been accompanied by a large and permanent hit to the level of productivity – that is, the amount of output the economy was actually capable of producing – and a sustained slowing in its growth rate. GDP took many years to return to trend growth. And that trend was itself much weaker than what had become seen as normal in the pre-crisis decades. Having appeared to be among the most resilient economies in the G7, the UK revealed itself to be one of the least resilient. I take three key lessons from the financial crisis and what followed. The first lesson – which seems obvious in hindsight – is that the past is not necessarily a good guide to the future. The second is about what constitutes resilience. We had thought the UK economy was resilient, but we were looking at a narrow form of resilience – by focusing on resilience in terms of GDP growth and inflation, we had failed to realise how fragile the financial system had become, both in response to and as a source or amplifier of shocks. We should have been thinking about and tracking developments much more broadly. And, following on from the first two, the third lesson is that policy needs to be prepared for the unexpected.

Although there is a considerable stock of equity in owner-occupied housing, with banks tightening the supply of both secured and unsecured credit, consumers will find it more difficult to borrow to finance spending. So in 2008 it is likely that a less buoyant housing market will go hand in hand with slower growth of consumer spending. Tighter credit conditions mean that, as a nation, we are likely to save more of our income this year than in the recent past. In the short run, that will slow economic activity, possibly quite sharply. And there is a risk that weaker activity and lower asset prices could result in another round of losses for banks and a further tightening of credit conditions. The adjustment which not only the British but the world economy is experiencing is necessary as the imbalances, between spending and saving and between domestic demand and trade, unwind. As part of a longer-run rebalancing of the UK economy, an increase in our national saving rate, both private and public, is necessary. The low level of national saving is apparent from the current account deficit – our new net borrowing from overseas – which in 2 BIS Review 8/2008 the third quarter of last year was, relative to GDP, the biggest in the past fifty years and the largest in the G7. It is possible to run a current account deficit for a considerable period. Australia, for example, has done so in every year since 1974.

The Bank’s sermons on the storms ahead would have had more influence if at the same time a collection plate was passed round the congregation so that money was available in the event that the church roof had to be replaced. But a macro prudential regime also has a key role to play in the downswing phase of the cycle. Since 2008, credit conditions have tightened, jeopardising the recovery and, in turn, threatening renewed losses for banks. By allowing banks to draw on their macro prudential capital buffers, while credit conditions remain tight, the system is counter-cyclical. In other words, a credible macro prudential regime could help forestall both excessive exuberance and unnecessary caution. By altering the pressure on the financial brakes according to circumstances, regulation, far from being an inflexible foe, would become a flexible friend. This type of regulatory regime, and its objectives and tools, are largely untried and untested. But that is not a reason for not trying and not testing. The Financial Policy Committee will be a first. Over the next few years we will put in place a framework for financial stability to BIS Review 84/2010 3 parallel that for monetary stability. We need both. As we have seen, one without the other is not enough.

This is something that has to be renounced to enable us to perform our tasks properly and both attract and retain the best university graduates. An open internal dialogue with management is needed to promote an informal exchange of ideas. Taking responsibility and meeting deadlines must also be rewarded. It is easy to say that some mistakes are acceptable provided things get done but that attitude is by no means customary in a central bank. Last but not least, we must have an open attitude to the outside world, accept impulses and explain what we are doing. So what have we done in recent years to make the Riksbank a more modern place to work in? Here are some examples: · We have aimed for a better organisation by making it flatter and delegating more to heads of department and division. That in turn means that general objectives and tasks must be formulated clearly for all concerned so that everyone is aware they are not just piling stones on top of each other but actually helping to build a cathedral. · We have accentuated the analytical and academic profile. Our advisers are world-class academics and members of the staff have access to further education in Sweden as well as abroad. We have also made the basic operations more efficient. · Another aim has been to give staff a more flexible working life.

This scenario represents both a short-term challenge, insofar as new competitors may enter specific areas, such as retail payment services, with the consequent drop in business and income for banks in this area, and, fundamentally, a major future challenge deriving from the risk that banks may be relegated to providing undifferentiated and low value-added basic services. Against this competitive background, banks have a number of initial advantages but are being forced to react in order to capitalise on the opportunities the new situation offers. The responses may range from specialisation to digital transformation, taking advantage of the possibilities offered by technology and the new regulations, with an emphasis on adequate data management. In any event, this transition will entail a short-term increase in costs in a context of low profitability. Issues such as cybersecurity also take on particular significance in the process of adaptation of institutions to new technologies as they can also lead to an increase in operational and reputational risk. I would also like to highlight the growing challenge BigTech firms are posing in the financial sector, not in their more prominent customer-facing facet, but as providers of a significant amount of financial-sector infrastructure in areas such as cloud-based services. These actors now constitute a critical component of the financial sector. In any event, new technologies offer banks fresh opportunities, both in terms of business and potential efficiency gains.

References 4/5 BIS central bankers' speeches Brainard, W. (1967): “Uncertainty about the effectiveness of policy”, American Economic Review 57, 411–425 Constâncio, V. (2016): “The challenge of low real interest rates for monetary policy”, speech delivered on 15 June 2016 Hamilton, J. D., J. Hatzius, E. S. Harris and K. D. West (2015): “The equilibrium real funds rate: Past, present, and future”, Hutchins center on fiscal & monetary policy at Brookings, Working Paper 16 Hansen, F. and K. Torstensen (2016): “Does high debt growth in upturns lead to a more pronounced fall in consumption in downturns?”, Economic commentaries 8/16, Norges Bank Laubach, T. and J. C. Williams (2015): “Measuring the natural rate of interest redux”, Hutchins center on fiscal & monetary policy at Brookings, Working Paper 15 Lund, K., K., K. Tafjord and M. Øwre-Johnsen (2016): “What drives the risk premium in Nibor?”, Economic commentaries 10/2016, Norges Bank Rachel, L. and T. D. Smith (2015): “Secular drivers of the global real interest rate”, Staff Working Paper 571, Bank of England Zhu, F. (2016): “Understanding the changing equilibrium real interest rates in AsiaPacific”, BIS Working Papers 567 1 The spread between the money market rate and the expected key policy rate (the interest rate premium) can vary somewhat over time (see Lund et al (2016) for a discussion of the premium in the Norwegian three-month money market rate). 5/5 BIS central bankers' speeches

Instead, it implies that the latest inflation data matter insofar as they contain information regarding medium-term inflationary pressures. By its very nature, the medium-term orientation requires projecting the future path of inflation. Surveys and financial market instruments provide us with a useful tool in this respect, as they give us evidence of how different agents (experts, households, firms, and financial market participants) see inflation evolving going forward. In addition, central banks rely on their staff’s forecasts for inflation and economic activity –which typically draw on a huge amount of economic and monetary analyses– as a key input in their decision-making process. Summing up, our task is not to respond to the latest inflation data point, a futile and – especially in the face of adverse supply shocks– counterproductive task, but to stabilise inflation over the medium run at the desired level, in our case 2%, while ensuring that longerrun inflation expectations remain anchored to the target. Returning inflation to 2 % over the medium run In the context of a steady increase in medium-term inflation expectations, as economies recovered from the worst phase of the pandemic crisis, at the end of 2021 we started at the ECB Governing Council a process of progressive normalisation of our monetary policy. The first step was to withdraw the extraordinary policy stimulus that we had launched at the onset of the pandemic. To this end, in March we stopped the net asset purchases under the PEPP.

Enhanced international coordination between monetary authorities is ensuring that their actions are part of a consistent overall strategy. These measures are highly exceptional with indeed unprecedented monetary easing leading key policy rates to historically low levels and the adoption, in certain cases, of unorthodox monetary policy actions. As such, they should greatly contribute to restoring confidence and a smooth functioning of money markets. Governments have moved aggressively to support banks' solvency and resilience. Since the Paris Declaration by euro area member-countries, Europe, under the leadership of France until year end, has been acting according to what I consider a sound and consistent action plan. I won’t enter into the details. Just bear in mind the three following elements. First, authorities are extending guarantees to banks’ refinancing so that they can, in turn, properly finance the economy. Second, significant reforms of accounting rules are now being implemented. Basically, these reforms allow banks to transfer instruments previously marked to market to portfolios where that will no longer be the case. They also provide for greater flexibility in methods used to value assets whose market has shut down. Third, and lastly, governments have confirmed their willingness, when warranted, to step in and support banks’ capital. What about France’s actions? Government and Parliament very quickly put meat on the bones of the European principles. A new bill has been passed, which provides for two things. First, it sets up a EUR 320 billion funding vehicle to guarantee banks’ medium-term refinancing (i.e. up to five years).

These data series R sometimes are constructed using different base years, making comparisons of series even of the same variable problematic. Besides weak data series, there is also the problem of coping with lags in monetary data. The computation of the estimated supply of total reserves (OSR), on the day of OMO market often involves several days lag. This means that to be able to obtain OSR, where “t” is the OMO market day, the compiler must be able to project both the sources and uses of monetary base, several days prior to 2 BIS Review 45/2007 the OMO market day say OSR . The techniques for doing this are yet to be fully developed in all t-3 WAIFEM constituent countries. • Determination of public sector borrowing requirement The primary target for OMO is the difference between the estimated supply and demand for money under equilibrium conditions. But in arriving at the ultimate target for OMO, the excess supply needs to be adjusted to accommodate public sector borrowing requirement in the period. Thus there would be need to make the problematic forecasts of government cash revenue and expenditure, including float items. In this regard some of our member countries, notably Ghana have taken considerable strides through the application of some appropriate software. • Capacity for econometric forecasting Familiarity with the use of econometric techniques is a sine qua non for liquidity forecasting.

It erodes what some commentators call the “culture of compliance”, and it tends to foster an employee population that will be inclined to look for loopholes, to place toes on the edge of the permissible, or even to turn a blind eye to a black letter compliance rule. And, the organization’s compliance staff will also suffer from a stifled motivation and the absence of any meaningful authority – it relegates that staff to a bunch of box checkers, rather than people working toward a safer and better world. Is it a surprise then that foreign institutions have problems with sanctions compliance and U.S. institutions do not? I do not excuse this in any way, but I do understand it. Let us now turn to tax evasion. On May 19, Credit Suisse pled guilty to conspiring to help certain Americans evade their tax obligations to the Federal government. Credit Suisse agreed to pay a fine of $ billion. Like the criminal disposition concerning BNPP, this was headline news. Credit Suisse had well developed compliance rules addressing what relationship managers could and could not do when travelling into, and through, the United States. But those compliance rules, while cogent, were largely ignored by certain Credit Suisse personnel. Why is that? Here, again, I believe that the answer lies in the organizational value system. Credit Suisse was not alone in aiding customers to evade taxes. UBS had similar problems although it escaped without a plea to a Federal felony.

Since then, global debt has stabilized, growing by only 1% in total, relative to global GDP, over the past 5 years. The aggregate growth rate is not therefore signaling an impending correction. The level, however, may well represent a significant vulnerability given that high levels of debt are associated with deeper and more persistent recessions. Assessing the sustainability of this debt is more difficult. Whether debt is sustainable depends on the difference between the interest rate and the growth rate of the income stream that will be used to repay the debt. The future is not known – in assessing today whether a given level of debt is sustainable, we must rely on our best forecast of future interest rates and growth. The level of debt that is sustainable in an economy is not a constant. It can change over time and indeed has changed enormously over the last 150 years. The ratio of credit to GDP in the late Victorian British economy was under 20% (not including the financial sector). In the mid-twentieth century it was around 60% and by the early 1990s over 100%. It is influenced by many factors including, very importantly, the long run real rate of interest. There is strong evidence that the long run, or trend real rate has come down materially over the past 40 years as a result of slow moving, secular changes in the supply of savings and the demand for investment.

Jean-Pierre Roth: What to expect from monetary policy? Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the International Center for Monetary and Banking Studies (ICMB), Geneva, 25 November 2003. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). * * * A number of current issues, such as the weakness of the economy and the new National Bank Law, raise the question as to what we can expect from monetary policy. With regard to the stability of consumer prices, the answer is relatively simple. The goal of price stability is at the very top of the Swiss National Bank’s priority list. Since both inflation and deflation are monetary phenomena over the long term, the SNB can and will guarantee price stability in future too. Expectations of monetary policy are considerably lower when it comes to regulating economic activity. Economic activity in Switzerland is strongly dependent on growth abroad. Inflation does not bring about long-term economic growth. Stable prices, however, are the best precondition for sustained growth. A goal of price stability automatically ensures a degree of stability in the economy. Because of uncertainty and time lags, however, fine-tuning the economy is an impossible task. Speculative bubbles in the real estate and equity markets have been an increasing source of macroeconomic instability during the past two decades.

In the run-up to the coming autumn Duma session we will come up with a package of amendments to legislation to allow the Bank of Russia to set up a special-purpose Banking Sector Consolidation Fund. This fund would be a participant in the equity of banks under resolution. Also, a dedicated management company would be created to provide operational management to a bank under resolution. In such a scheme, the central bank would oversee the bank turnaround programme. Capitalisation support would come in quickly, available immediately; where necessary, resolution would involve both reorganisation and merger. Either of these would be followed by sale of banks, recovered to a satisfactory financial condition. Thanks to the new model to migrate to, the processes of bank resolution are sure to become less inexpensive, faster, more manageable and overall more effective. We will see banks under resolution being reorganised so as to ensure that financial recovery yields maximum results and raises investment appeal of such banks. Concurrently, this will predetermine optimisation of the banking sector’s structure. Both commercial banks and private investors would be able to enjoy the outcomes as they acquire well performing banks and those with capital top-up. Apparently, the mechanism will be the subject for discussion with the bank community. Looking forward, I would like to tell you that we have looked into potential risks this approach involves. Here are our key findings. The risk of banking sector becoming nationalised. In our understanding, we are running no such risk, for two reasons.

Despite the role of seasonal factors, this slowdown is more apparent compared to that of recent years (Chart 3). Accordingly, the exchange-rate-adjusted annual credit growth rate is expected to converge at around 25 percent by year-end, as envisaged. In the baseline scenario presented in the July Inflation Report, global economic activity was assumed to continue to improve gradually; however, it was also highlighted that downside risks on the global economy were growing stronger. Indeed, right after the publication of the Report, risk perceptions deteriorated rapidly and debt problems in the euro area further intensified changing the baseline scenario. In response, we introduced a comprehensive package of measures to contain the potential adverse effects of these developments on financial stability and economic activity. The objective of these measures was to supply liquidity to markets in a timely, controlled and effective manner in the event of financial turmoil that may be driven by developments in the global economy. Moreover, we opted for a modest cut in the policy rate in order to contain the risk of recession in domestic economic activity that may be posed by escalating global economic problems. Moreover, Turkish lira required reserve ratios were adjusted in order to extend the maturities of liabilities of the banking system (Chart 6). The mounting uncertainties facing the global economy since the July Inflation Report and accelerating capital outflows from emerging economies called for a series of measures intended to contain fluctuations in the foreign exchange market.

Denis Beau: Financial regulation and supervision issues raised by the impact of Tech firms on financial services Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the ESSEC – Centre d’excellence, Paris, 30 January 2019. * * * Ladies and Gentlemen, Dear students, It is a pleasure to be at the ESSEC Centre d’excellence today to discuss the financial regulation and supervision issues raised by the impact of Tech firms on financial services. To date, in Europe, we have been accustomed to a bank-centric intermediation model. However over the last decade we have witnessed the rise of Fintech start-ups and the entry of Bigtechs in the financial sphere. Do they bring anything new to the way financial systems operate? According to some commentators they should bring a structural shift and see the replacement of the “old world” of bank-centric financial intermediation with disintermediated peer-to-peer systems. Others consider that rather than eliminating intermediation, if left on their own these new comers will more likely bring new intermediation models, in which Fintechs and Bigtechs intermediate banks. Hence I would like to focus the first part of my remarks on the possible impact of these new competitors on the traditional bank-centric financial intermediation model (1). I will then highlight some of the risks that go hand-in-hand with the changes underway and the regulatory and supervisory challenges they raise (2).

1/6 BIS central bankers' speeches Balance-sheet-light payment services have so far been the main gateway to the financial sector for Tech firms. From there, Tech firms have an avenue to expand their business further along the value chain, from payment to retail and commercial banking, wealth management and insurance. The Tech firms’ model is based on the unbundling of traditional universal banking into an array of distinct core functions (such as channelling payments, providing financing, sharing risk and allocating capital), which are reassembled in an online platform. In this model, the control of the platform is more strategic than the provision of financial services itself. (B) Among these Tech firms, the Fintech start-ups (also known as simply “Fintechs” with an “s”) and the Bigtechs are likely to have a different impact on financial intermediation. Fintech start-ups have already been a game changer in the financial sector. They have imported a customer-centric culture from the internet industry into the financial sector and they have targeted and called into question many of the long-standing financial rents. However, Fintech start-ups do not have the capital resources to disrupt incumbent banks and their future role is likely to be shaped by two main alternatives: to be acquired by an incumbent bank or to compete on niche segments such as equity crowdfunding or market place lending. It could be different with Bigtechs. The market capitalisation of the GAFA companies – Google, Amazon, Facebook and Apple – is 25 times higher than that of the whole Fintech universe.

This means that the Riksbank must make assessments of how the krona will develop in relation to other currencies during the forecast period, and assess what effect the development of the krona will have on demand for Swedish goods, as well as the impact the krona will have on consumer prices. None of these assessments is simple. Allow me first to point out the mechanisms that are important with regard to a direct impact on inflation via import prices. If the krona weakens and prices on the goods we import are determined in the exporter’s home country currency, the weaker krona will have a direct impact on import prices. For the weaker krona to have a full impact on prices of imported goods in the consumer channel, all domestic intermediaries must pass the price increases on to the end consumer. During the years with a floating exchange rate we have been able to note that the weakening of the krona has not had the impact on consumer prices that we had expected. One explanation could be that internationalisation and increased competition have first and foremost meant that the exporting companies endeavour to adapt their prices to developments on the markets where they sell, in order to retain their market share. It is reasonable to imagine that large corporations with sales and production spread around the world can act in this way without facing large fluctuations in profits.

Second, are growing capital market activities involving credit risk, such as equity and corporate debt underwriting, foreign exchange and credit derivatives, and securitization creating new liquidity stresses, in particular, greater liquidity risk for financial institutions and their customers, when credit quality declines? Third, to what extent are markets signaling greater uncertainty about the nature and level of risks in the world economy given the tremendous structural change in the world financial system and the world economy over the last two decades? Fourth, what do recent market developments tell us about the capacity of financial firms to define and manage risk, or to fully understand their own risk profile? The question of what current market conditions may be signaling about confidence in prior credit judgments is especially important for supervisors. For example, do supervisors need to revise what they expect banks to know about their customers, their business strategies and the business purpose of their transactions? In the run-up to the recent market problems, we have seen customers make use of innovations in financial products and strategies developed since the mid1980s to a much greater extent than before. For example, banks, corporations and governments in the emerging markets world are far more involved in foreign currency funding, derivatives markets and use of the international capital markets for debt issuance than before. New groups of institutional customers, such as hedge funds, are devoted almost exclusively to developing and executing strategies based on innovative financial instruments and techniques.

Caleb M Fundanga: Local bond market developments in Zambia Speech by Dr Caleb M Fundanga, Governor of the Bank of Zambia, on the occasion of the Listing of the Development Bank of Zambia Bond, Lusaka Stock Exchange, Lusaka, 4 April 2007. * * * • The General Manager – Lusaka Stock Exchange • The Chairman, DBZ Board of Directors • The Chairman, Standard Chartered • The Secretary – Securities and Exchange Commission • Mr Ade Adebajo, Director, Standard Chartered Africa Debt Capital Markets • Member of the DBZ Board • All Senior Government Officials Present • Acting Managing Director, DBZ • Managing Director – Zambia State Insurance Corporation • Chief Executive Officer – Stock Brokers (Z) Limited • Representative of DBSA • Distinguished invited guests; and • Ladies and Gentleman Today marks another important milestone in financial sector development indicative of the coming of age of the Zambian financial system in general and local bond market in particular. The issue of the K68.620 billion senior unsecured floating rate note under the Development Bank of Zambia (DBZ) K150 billion Medium Term Note Programme and listing of the note on the Lusaka Stock Exchange (LuSE) is a landmark transaction for two key reasons. The first is that this is the first time in the history of the local bond market that a local currency medium term note programme has been established. The second is that this transaction marks the largest single issue ever offered to Zambian fixedincome institutional investors.

Ladies and Gentlemen, the development of the local bond market is central to Government’s strategy for diversification of the economy for one key reason. All businesses, including state owned enterprises, require finance, covering both equity and debt, and ranging from short-term to long-term. In the absence of a properly functioning local bond market, those in need of capital and qualified enough have had to turn to international financial markets to finance their local projects with the attendant exchange rate risk. Similarly, those seeking a competitive return on their investments that also meet their maturity preferences but are unable to find these features locally, have always sought out alternative avenues offshore in foreign currency, thereby creating pressures in the foreign exchange market. Therefore, Government’s involvement in improving the local bond market has been deliberate. Ladies and Gentlemen, Government’s participation in improving the functioning of the local bond markets has seen the establishment of appropriate market infrastructure that facilitates cost-effective and secure trading, and a transparent price discovery process. Further, Government’s decision to bring to market longer term bonds in 2005 have proved to be positive and catalytic for the local bond market as this has resulted in an extended yield curve that has provided a benchmark for pricing longer dated security issues by the private sector and banking industry.

Alongside reinforcement of the capital base, liquidity also needs to be strengthened to increase the resilience of banks. Consequently, a comprehensive revision of the liquidity regulations for big banks is currently underway. Nonetheless, better capital and liquidity requirements do not rule out the possibility that banks will again face existential difficulties in 2 BIS Review 77/2009 the future. The SNB therefore considers all of the efforts that are going into facilitating orderly wind-downs of large international institutions in future to be just as important. The lack of any clearly defined and internationally coordinated wind-down procedure contributes to a de facto obligation on the part of the state to provide assistance to these institutions. Any rescue of a large financial institution brings more than just high costs. The “too big to fail” issue also has a tendency to harbour incentives for banks to enter into excessive risks. In Switzerland, the “too big to fail” question is particularly relevant and, in many respects, unique, given the importance of the big banks for the country’s banking sector and its economy. A clearly defined and internationally coordinated wind-down procedure would help to ease this problem. The interplay between national jurisdictions is, however, extremely complex, and finding a solution for a predefined and internationally coordinated procedure of this kind is correspondingly challenging and time-consuming. The SNB therefore believes that careful consideration must also be given to alternative approaches. These include rules governing the organisational structure of large financial institutions.

Initial examples are the work on the introduction of a leverage ratio and on the reform of liquidity regulations, which FINMA and the SNB have been driving forward together. This development does not essentially call into question the division of responsibilities between the supervisory authority and the central bank. However, because of the importance of the big banks for our financial system and our economy, greater weight must be given to the macroprudential perspective, both in the oversight of the financial system and in its regulation. 4 BIS Review 77/2009

Should this happen, the MAS will take tough enforcement actions for breaches of our regulatory requirements. Where laws are broken, we will also not hesitate to refer these to the law enforcement agencies for investigation and prosecution. 23. Last year, we announced the centralization of our enforcement function into a single department. The team in our Enforcement Department will deepen our capabilities in investigative work that were previously undertaken by prudential supervisors. A centralised enforcement function in MAS will also allow us to take a holistic approach to “follow the funds” should these cut across different types of entities in our financial sector. 24. Let me now highlight the fourth key element of our AML/CFT framework: International Cooperation and Partnerships. 25. I have mentioned Singapore’s commitment to the international efforts to combat ML/TF risks. We fully support the important work of various international organisations including the FATF. In addition, it is important to have close supervisory co-operation between financial regulators and we hope to expand on our supervisory cooperation network. Another area which we will strengthen is our partnership with the financial industry. 26. While law enforcement and regulatory authorities have wide powers, the financial industry has an “on the ground” vantage point with front-line knowledge of business and clients. It is hence advantageous to adopt a collaborative “eco-system” approach to holistically deal with 3/5 BIS central bankers' speeches ML/TF risks. Such a partnership should be as inclusive as practicable – involving law enforcement agencies, regulator and the industry.

Inflation forecast I shall now turn to the course of inflation and our new inflation forecast. Our inflation forecast of June 2002 (the green dash-dotted curve in the graph) shows that at that time we assumed, based on a stable three-month Libor rate of 1.25%, that inflation would gradually rise to 1.9% in the first quarter 2005. Year-on-year inflation, as measured by the national consumer price index, dropped to 0.3% in the third quarter 2002 from 0.7% in the second quarter. In October and November it rose to approximately 1%. These fluctuations are due mainly to changes in the exact points in time when data on clearance sales prices are collected. This is also the main reason why our forecast of June 2002 over-estimated the development of inflation in the third quarter 2002. Our new inflation forecast (red dashed curve) is based on the assumption that growth in the US will pick up again from the second quarter 2003 onward. The US economy is likely to achieve its growth potential stepwise until the beginning of 2004. In the EU, the upswing will take a little longer. We are not expecting a significant acceleration of growth before the end of 2003. We assume that the BIS Review 73/2002 1 dollar/euro rate will remain at about the current level and that the oil price will be around $ per barrel.

We could afford to accommodate these upside pressures on inflation last year when there were worries that a broader deflationary trend could emerge and the recession was threatening to deepen further. But the serious downside risks to the economic outlook we saw then have since receded. The UK economy has actually bounced back more strongly than in previous recoveries, supported by both domestic and overseas demand. 11 According to data from the Council for Mortgage Lenders, both house repossessions and arrears peaked in the recent recession at lower levels than in the early 1990s, and the numbers have been falling since early 2009. BIS Review 158/2010 9 These upside pressures on inflation from import prices and VAT have been one reason that inflation has not fallen back in the way we expected in the aftermath of recession. The other significant factor is that spare capacity has not exerted as much downside pressure on cost and price increases as expected. That is partly because the margin of spare capacity appears to be less than we have seen in previous economic cycles. In the labour market, this is the flip-side of the resilience of employment and a lower level of unemployment relative to the early stages of previous recoveries. But survey evidence also suggests that there is limited spare capacity within firms to take up the slack as demand recovers.

The CBI Industrial Trends Survey shows that in manufacturing industry investment intentions are the strongest recorded since 1997. BIS Review 158/2010 7 making tax payments to ease cash flow constraints. And a further supporting influence has been the relative strength of company cash flows I commented on earlier. The flip side of the fact that more companies have survived the recent recession is that there has been a fall-off in measured productivity. Instead of slack being created in the labour market through company failures and job losses, there is the possibility that more spare capacity has been retained within companies which have survived the recession – particularly in the services sector, which accounts for the bulk of business activity in the UK. However, the extent of this margin of spare capacity and the way it will impact on the performance of the economy going forward is a big uncertainty at present, as I will discuss later. The 1990s recovery A third reason for optimism about the private sector and business activity to drive the UK economy forward in the current recovery is the experience of the previous recovery from the early 1990s recession. Through the mid-90s, the UK economy grew healthily – with annual GDP growth averaging close to 3.5% while the public sector deficit was being brought down in a broadly similar way to the reduction planned by the current government.

Large shares of the sizeable oil revenues were transferred to our sovereign wealth fund, the Government Pension Fund Global (GPFG). GPFG assets are now more than double the GDP of Norway’s mainland economy. High oil prices and a profitable petroleum production industry have been accompanied by record-high oil investment in recent years (see Chart 4). The level in 2014 was equivalent to overall investment in domestic non-oil industries. The positive spillovers to the oil service industry and other private operators have been substantial. Employment has remained high and unemployment low, even when the financial crisis hit in 2008. The Norwegian economy has made use of favourable winds and seized the opportunities offered. The other side of the coin is an economy that has become increasingly dependent on oil, and thereby more vulnerable to changes in oil prices and petroleum revenues. The vulnerability manifests itself in several ways. 2 BIS central bankers’ speeches A large share of the business sector and the labour market is now linked to the oil industry. A relatively small share is directly employed in the oil and gas production industry. But if account is taken of all the suppliers to the petroleum sector, about 1 in 9 jobs in Norway, a total of 300 000, are linked to the oil industry.2 Exports from Norway to the oil industry in other countries account for a growing share of this activity, and this may be a path forward in the face of a decline in petroleum investment in Norway.

However, flexibility can be made fully operational only on the basis of strong fundamentals. In fact, exchange rate flexibility implies taxing the capacity of the financial system to adapt, as well as that of private enterprise to adjust. Moving towards exchange rate flexibility implies a structural change, as the costs of exchange rate risk coverage fall upon the private sector, rather than the Central Bank or the government. To be successful, a change of this magnitude requires strong fundamentals. The role of fiscal policy must be emphasized in this context. Predictability of public sector reactions to shocks is a must for the appropriate functioning of all markets. Chile has recently moved to a fiscal policy guided by rules. The budget is planned in such a way that, under conditions of a long-term rate of growth of the economy and long-term prices for copper, a surplus of 1% of GDP is achieved. The level of expenditures is maintained through the cycle while government reserve moves with it, generating larger surpluses during booms and smaller surpluses, or deficits, in a slowdown. Today, Chilean macroeconomic policy is defined by a monetary policy based on inflation targeting, the free float of the Chilean peso and a fiscal policy guided by rules. We expect that this policy set-up, together with well-established strong institutions in all areas will help us ride the waves of a rapidly changing world.

The Financial Stability Report In our FSR, we communicate every June and December the recent macroeconomic and financial developments that may influence the financial stability of the Chilean economy. As opposed to the MP Report, the FSR is not articulated around a baseline scenario, but rather focuses on the most significant risks threatening the financial system. In this FSR, we note that in the second half of this year the Chilean financial system has suffered no major disruptive events and the data at hand indicates that the sector continues in a strong enough position to withstand the impact of stressful scenarios. We also observe that the internal and external payment systems have worked normally, while the traditional credit risk indicators have remained low up to this moment. However, some alternative risk measures show increases in certain sectors. As we warned in the MP Report, if the local economy's slowdown of recent years is further prolonged, this situation could deepen. In the external scenario, as usual, the risks identified in the MP Report's baseline scenario that I just 7 presented are very similar to those considered in the FSR, particularly those relating to a sharp increase in external interest rates and their impact on our local financial conditions. The FSR notes that the good financial conditions abroad have been mirrored locally. Likewise, we emphasize that the cost of short-term bank financing has remained coherent with the MPR and that the cost of issuing long-term debt for companies and banks has been compressed lately.

11 The Bank will complement this by intensifying its dialogue with key market players and observers, in order to strengthen its capacity to identify and interpret new developments that influence the behavior of the financial sector and the economy at large. Such dialogue with the outside world of both market players and regulators will also be part of a broader and more transversal effort to involve the technological dimension in the different areas of our work. Through several concrete initiatives, including technological laboratories and an observatory, we will enhance our capacity to comprehend, analyze and formulate hypotheses about the impact of disruptive technologies on the Bank's business model and financial intermediaries, adopting innovations that can help us maintain the quality and availability of the services provided by the Bank. We also aspire to perfect the regulatory framework in a timely manner in order to advance in those areas that offer an opportunity to strengthen the financial system and mitigate risks in the event that some of these disruptive technologies become accessible to everyone in the financial industry. Our 2018-2022 strategic plan also includes various initiatives to strengthen the Bank's insertion in its economic and institutional environment. I can mention some efforts to simplify regulations, ensure environmental and financial sustainability, active transparency and financial education. With this we seek to reflect that the Central Bank of Chile, despite being an autonomous institution of an essentially technical nature, is recognized as part of the society in which it must lead by example as an organization.

Determining the economic value of the institution is thus being done with the utmost care since, as the FROB indicated in its methodological note, this is of paramount importance from three standpoints: from that of Community competition rules, to ensure that public aid is granted on an arm’s length basis; from that of the proper use of public funds, so that they are disbursed in accordance with rigorously set subscription prices; and from that of the institution itself and of the “interested parties”, because the market value will also determine the FROB’s actual stake and, consequently, that of the former stakeholders in the resulting capital and in the institution’s governing bodies. On conclusion of this process, before 30 September 2011, the FROB will have taken a stake in the capital of these institutions and will vote on the decisions of their boards of directors on a scale proportionate to the economic valuation. Thereafter, the FROB will participate directly in their management with the mission to monitor fulfilment of their business plans. It shall remain in the institutions only temporarily, and never any longer than the maximum term of five years in which the shares it holds must be disposed of to third parties through a competitive procedure. * * * In sum, we are at the last stage of savings bank restructuring. The aim is that by 30 September the various steps outstanding should have been completed.

At the same time, the monetary policy stance of the ECB, while fully oriented towards the price stability objective, does influence the exchange rate. From a theoretical viewpoint, one can argue that the member countries of the euro area have chosen to go beyond a fixed exchange rate by adopting a single currency. The adoption of the euro implies the irreversible abolition of national currencies and, hence, of national exchange rates themselves. This choice involves a trade-off. On one hand, a single currency, as we have seen, eliminates the volatility of exchange rates within the monetary union. The euro, as a freely-floating currency, helps protect the economies of its member countries from external shocks. The single currency also facilitates trade between them, deepening economic integration. However, the elimination of national currencies implies that market signals regarding domestic economic imbalances are lost, allowing such imbalances to build up. More importantly, the absence of national currencies also implies that a valuable tool for stabilising the economy in the short term in the face of asymmetric shocks is no longer available. The sovereign debt crisis in the euro area has brought home the implications, both positive and negative, of membership of a single currency area. It remains my firm opinion, however, that the gains outweigh the losses. It is also my firm opinion that greater efforts need to be made to reduce and eventually eliminate internal imbalances within the monetary union in order to protect its sustainability.

BIS Review 67/2006 13 The stagnation in the downward tendency of the risk premium was reflected on the real interest rate as well and real interest rates that are calculated by using benchmark securities interest rates and twelvemonth ahead inflation expectations obtained from the CBRT Expectation Survey followed a relatively horizontal course in the first quarter of 2006 (Graph 21). Graph 21. Developments in Real Interest Rates (According to ISE Benchmark Interest Rate and Twelve-Month Ahead Inflation Expectations) 35 30 25 20 15 10 Jan-06 Oct-05 Jul-05 Apr-05 Jan-05 Oct-04 Jul-04 Jan-04 Apr-04 Oct-03 Jul-03 Apr-03 Jan-03 Oct-02 Jul-02 Apr-02 Jan-02 5 Source: ISE, CBRT. The appreciation of the New Turkish lira continued in the first two months of 2006. In March, however, the New Turkish lira depreciated against the basket consisting of Euro and USD due to the rise in the risk premium (Graph 22). Graph 22.

For example, a “core” measure that relied exclusively on inflation in the services sector would have run above 2% in the pre-crisis era, when overall inflation was around 2%, in light of low inflation rates in goods prices. A “core” measure with a higher weight on goods prices would have shown the opposite. 22 For example, although they are uncertain, estimates of the pass-through of exchange rate movements to CPI inflation suggest that, on average a 1% appreciation reduces consumer prices by around 0.3%. Those effects take time, though they are mostly complete in around three years – consistent with complete but gradual passthrough of exchange rate changes to consumer prices. That likely reflects, among other things, rigidities in retailers’ pricing decisions. See the box on page 28 of the November 2015 Inflation Report for further discussion.

I would note this is something the Committee was able to anticipate before the referendum, the minutes of the MPC’s May 2016 meeting stating that “[t]he implications for the direction of monetary policy will depend on the relative magnitudes of the demand, supply and exchange rate effects.” And my colleague Ben Broadbent has recently set out in more detail what this means in the particular context of Brexit. True to this statement, the MPC has set monetary policy since the referendum on the basis of its assessment of how those effects are interacting. This is made difficult by the large, uncertain and sometimes offsetting implications of the decision to leave the EU. So it is not surprising that even though all Committee members sign up to the framework I have laid out, their individual assessment of the economic outlook has differed along the way. Decide Which brings me to the second phase of ‘end to end’ monetary policy: Decide. In the MPC’s meeting at the start of this month, a majority of its members thought that the evolution of supply and demand was such that the margin of slack in the economy now seemed fairly limited, and that underlying inflationary pressures had shown some signs of picking up. As a result, they judged that this reduced the degree to which it was appropriate for the MPC to tolerate an extended period of above-target inflation, and that a small reduction in stimulus was warranted.

In addition, inflation expectations, which may affect wage and price setting, appear to be edging lower: We see this both in survey results and in the financial markets— through noticeable declines in “inflation compensation”, measured by the difference between the yields on Treasury bonds with and without inflation protection. A third factor is productivity growth. BIS Review 52/2005 1 There have been concerns that a structural productivity slowdown was in the offing, which could put upward pressure on inflation; the good news is that structural productivity growth apparently still remains above the levels reached during the second half of the 1990s, although it may have edged down just a bit over the last few years. A final factor impacting the inflation outlook is the degree of slack in the labor market. Right now, the unemployment rate is relatively low: at 5 percent it’s near most estimates of the so-called natural rate. But other measures—such as the employment-population ratio, a survey of job market perceptions, and industrial capacity utilization—suggest that some slack still remains. Risks to economic growth and employment Now let me turn to the real side of the economy—growth and employment—and highlight some of the risks that affect my optimistic baseline projection. Even though overall growth has been respectable, economic activity has been burdened by some major drags over the past year or so. Three major ones result from the oil price shock, the deterioration of the trade balance, and a still relatively low level of business investment spending.

7 With the leaders of the industry here, we hope that today’s discussions will identify emerging risks and challenges, and explore how we can all work together to address potential vulnerabilities as we continue to build real markets for the good the people of the UK and beyond. In this spirit, before concluding, I want to briefly touch on one of the biggest challenges facing us right now – the transition to Risk Free Rates. The move to new Risk Free Rates Libor is a prime example of critical hard (market) infrastructure that has not kept up with market developments. Libor is meant to measure the short-term unsecured funding costs of banks. But the reality is that, since the financial crisis, Libor really has become the rate at which banks don’t lend to each other. Bank funding markets have changed enormously. Banks no longer take sufficient short-term wholesale deposits to form the basis for a robust transaction-based Libor benchmark. As a result Libor is overly reliant on expert judgement rather than actual transactions. And global markets remain overly reliant on Libor, a benchmark that may not exist beyond 2021. That reliance is neither desirable nor sustainable. That’s why authorities internationally have worked with market participants to identify alternative benchmarks based on actual transactions. These are overnight rates – a relatively pure read on risk-free rates in each economy. In sterling, the market has chosen SONIA, a benchmark now administered by the Bank of England.

The global FICC Market Standards Board (FMSB) is 2 The UK accounts for 40% of both global FX volumes and trades in OTC interest rate derivatives, and two-thirds of trading in international bonds. More international banking activity is booked in London than anywhere else. And finance is one of the largest sectors of the UK economy. Around 400,000 people are employed in financial services in London alone, 1.1 million across the country as whole. Their enterprise contributes £ billion to our national income, £ billion to our exports and £ billion to the Exchequer, equivalent to two-thirds of the NHS budget. 3 This is set out in more detail in the FEMR Progress Report being published today at: https://www.bankofengland.co.uk/markets/fairand-effective-markets 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 establishing readily understood standards for their markets. And the global FX Committees have published the FX Global Code, the first globally consistent code of conduct for FX markets. But codes are of little use if nobody reads, follows or enforces them. This is where the UK’s Senior Managers Regime (SMR) comes in. 4 Senior Managers Regime The SMR gives teeth to voluntary codes by incentivising firms to develop, adopt and embed them. It is very welcome that the FCA is currently consulting on proposals to recognise industry codes publicly under the SMR. By requiring identification of the most senior decision-makers, the SMR re-establishes the link between seniority and accountability, strengthens individual accountability, and reinforces collective responsibility.

A large part of the improvement of banks’ risk-weighted capital ratios over the last few years has taken place as a result of banks using internal models to a greater degree to calculate lending risks, and not by building up more capital. The use of these internal models has meant that the risk weights on banks’ lending have fallen, which has contributed to a rise in equity in relation to risk-weighted assets. Our analysis shows that without this transition to internal models, the major banks’ core tier one capital ratios would only have increased by a few percentage points over the period 2006 to 2013. The banks’ equity as a proportion of total assets, or the leverage ratio, has been largely unchanged over the last few years (see Figure 10). 15 Figure 10 The major Swedish banks’ core tier one capital ratio and leverage ratio Per cent Note. The blue line indicates CET 1 in relation to total assets and thus differs from the Basel Committee’s definition of leverage ratio. Sources: Banks’ annual reports and the Riksbank. Even though measures have been taken to reinforce banks’ capital levels, more is needed. One important measure for which the Riksbank has argued for a long time is the introduction of a leverage ratio requirement. But we have also argued in favour of raising the countercyclical capital buffer to 2.5 per cent along with raising the risk-weight floor for mortgages to 35 per cent.

Facing the deep European Investment and growth gap, we need to implement major European investment programmes to bridge that gap while tackling common structural priorities such as the fight against climate change which must absolutely not become a collateral victim of the crisis, or digitalisation which will be even more than before the key driver of future productivity. 2/ Preserving the single market while “repairing” firms is our second common goal in the recovery phase. National governments did well in the acute phase, by taking emergency measures such as providing guarantees and liquidity support to their SMEs. But, as these measures will have to be prolonged and transformed into long-term solvency measures, national differences could create an “unlevel playing field“. A single market – which is in the interest of all Member States, starting with Germany – means common rules for corporates: Page 7 sur 10 if not, our economies risk further divergence and that would be very unfortunate. The solvency of European business is our shared challenge, and calls for shared solutions. Focusing on these two objectives is more important than arguing about public debt. But let me, for the sake of consistency, propose two basic principles: Existing debts are and will remain the responsibility of national governments. Let us stop this fruitless debate about Eurobonds and the mutualisation of past debt. Fiscal consolidation will remain a national obligation – including in France –, but with appropriate timing in order to avoid the premature and procyclical tightening of public finances.

So, imposing new trade barriers – or “bilateral deals” – on some trade partners not only has almost no chance of eliminating the overall current account deficit, but it also threatens long-run economic growth. Alternatively, it would also be misleading for countries to carry out non-cooperative domestic macroeconomic policies. Competitive devaluations first: after some unilateral and unfortunate declarations last week, several of us on the Governing Council of the ECB felt the need to reiterate that during the last IMF Annual Meetings in DC last October we committed with all our partners to a multilateral approach saying that, I quote, “we will not target our exchange rates for competitive purposes”. Any deviation from this common rule would be at the cost of breaking mutual trust and global growth. Speaking of the Governing Council of the ECB, let me say a few words on our monetary policy. It is following, with confidence and with patience, a path of gradual normalisation. But one shouldn’t focus excessively on the sole instrument of monthly net asset purchases: whether we end them in September or taper them somewhat more gradually is not a “deep existential” question… There are two more important issues: First, we prefer, as in Irish dancing, a four-hand reel rather than a solo; we will rely more and more on the entire policy package, including the sizeable stock of acquired assets, the forthcoming reinvestments and the forward guidance on interest rates. And we will follow a predictable sequence.

Large current account imbalances, in particular deficits, pose significant risks for external debt sustainability and raise the possibility of sudden stops.6 Gross positions are now 3 to 4 times larger than their 1995 level, ranging from 150–300% of GDP (150% in the case of the US and 300% in the case of France, for example). Net positions are considerably smaller [Slide 8, table on right-hand side], but have widened by a factor of 5 to 10 with respect to their level in 1995. The counterpart of persistently large current account imbalances is large net external asset positions [as already shown in Slide 3], but also continued accumulation of external assets and liabilities. In this respect, the composition of the financial account (FDI, equity and debt portfolio flows as well as the other investment category, which largely comprises banking flows) matters. Examining the different financial instruments, one notices that the volatility in overall flows is largely driven by banking flows [Slide 9]. Given the large pre-crisis expansion in cross-border banking flows, especially within the euro area, the “low” level observed in recent years could 2/5 BIS central bankers' speeches simply be interpreted as a return to normal. Indeed, in the aftermath of the Great Financial Crisis, banking flows retrenched the most, followed by debt portfolio flows.7 Portfolio equity flows have been much more resilient than debt flows, which have halved between the pre- and the postcrisis periods.

This will become increasingly important when it involves strategies and positioning of the “ummah” in the economic sector. Shariah assessments that include input and findings of multiple disciplines as well as variations of insights will provide more added values to a particular Shariah research. This effort can be implemented through active involvement of professionals in the BIS central bankers’ speeches 1 process of researching Shariah issues. I am confident that through this approach, we will be able to formulate a collective ijtihad that is comprehensive, in comparison to ijtihad that is peripheral and exclusive. In the Malaysian context, we have decided to encourage the combined expertise and experience between Shariah members and professionals through the Shariah committees of Islamic financial institutions. In fact, we also encourage qualified Shariah scholars to be appointed as members of Board of Directors at Islamic financial institutions, specifically to form a “bridge” or point of connection between the Board and the Shariah Committee members, and to allow them to gain greater exposure to the operational situation in the management of Islamic financial institutions. The process of knowledge sharing and discussions on Shariah as well as on other realms of Islamic knowledge among the Board members of a particular financial institution will enrich the justifications of a particular deliberation before a decision is made. Another key aspect is the importance of Shariah scholars to thoroughly understand the impact of ijtihad on the growth of the Islamic finance industry and society at large.

4 T. Padoa-Schioppa, “Capital Mobility: Why is the Treaty Not Implemented?”, Address to the Second Symposium of European Banks, Milan, June 1982. 5 Pietro Catte, The Reform of the International Monetary System, Background note prepared for Conference in Memory of Tommaso Padoa-Schioppa, Rome, 2011. 6 T. Padoa-Schioppa, “The European Monetary System: A Long-Term View”, in F. Giavazzi, S. Micossi, M. Miller, The European Monetary System, Cambridge University Press, 1988. 7 Banque de France, « Coût des carences de coordination des politiques économiques dans la zone euro », Bulletin de la Banque de France, n° 211, Mai-juin 2017. English version: “Cost of the lack of coordination of economic policies in the euro area”, Quartely Selection of Articles no. 46 (Banque de France Bulletin), to be published in Summer 2017. 8 T. Padoa-Schioppa, “Capital Mobility: Why is the Treaty Not Implemented?”, Address to the Second Symposium of European Banks, Milan, June 1982. 9 7/8 BIS central bankers' speeches 9 See for instance: speech at Bruegel in Brussels on 22nd March 2016 or speech before the Committee on Economic and Monetary Affairs of the European Parliament on 28 September 2016. 10 W. Churchill addressing the crowd on place Kléber in Strasbourg on 12th August 1949, day of the First Session of the Consultative Assembly of the Council of Europe. 8/8 BIS central bankers' speeches

In November 2019, the Bank issued the “Value-based Intermediation Financing and Investment Impact Assessment Framework – Guidance Document” (VBIAF). This provides guidance on the assessment of financing applications and investment opportunities, taking into consideration economic, social and environmental impacts. VBIAF may also serve as a reference for the wider industry that seeks to incorporate ESG risk considerations in their own risk management system. We are also working with our industry partners to produce three sector-specific guides for the VBI Impact Assessment Framework, namely, palm oil, energy efficiency and renewable energy. These will be issued for consultation in 2020 to supplement the VBIAF with technical and step-by-step procedures for industry players in those sectors. Ladies and gentlemen, The sustainability agenda, carried by the VBI initiative for the Islamic Finance sector, complements directly to the national aspiration in this area. To date, the country is progressively marching towards growth with sustainability following its commitment to the UN Sustainable Development Goals (SDGs) and as a signatory to the Paris Agreement to tackle climate change. Strategic plans involving various sectors such as green technology and renewable energy have been and are being implemented to achieve the SDGs. In 2018, Malaysia ranked 55 out of 156 countries in terms of its overall SDG performance and is on track in increasing affordable and clean energy to fulfill this particular SDG7. Under the 11th Malaysia Plan (2016 – 2020), green growth has been identified as the game changer in bringing Malaysia towards a sustainable socio-economic, development path.

Since 2016, several new legislations, policies and action plans were introduced, while existing financing mechanisms were strengthened to support the uptake of green initiatives. As 2020 approaches, Malaysia is committed to continue implementing its strategic long-term plans and green friendly policies. Budget 2020 is reflective of this commitment, with the allocation of a matching fund of RM10 million towards a joint United Nations SDG-government fund to co-finance SDG initiatives 2/5 BIS central bankers' speeches in Malaysia. While government funding is important to realise the SDGs, most of the investments would need to be sourced from the private sector. An annual target of RM350 billion from private investments by 2020 was identified in the national roadmap for the SDGs, in line with achieving the targets of the 11th Malaysia Plan. Thus, financial institutions are expected to embark on new financing and investment opportunities towards sustainable projects and practices. There is a large financing gap needed to be filled to realise the SDGs in developing countries, which is estimated to be between USD 2.5 – 3 trillion annually. One major sector to drive a green economy is renewable energy. Projections provided by the Sustainable Energy Development Authority (SEDA) estimates that RM 33.5 billion is needed by private sector financing to achieve the national target of 20% installed capacity of renewable energy by 2025 in Malaysia. Beyond that, financing is needed for other important sectors such as education, healthcare, social entrepreneurship and food production to galvanize sustainable development.

If you are able to trust the other party to the contract, you do not have to hedge against all possible outcomes.10 The wheels of business turn faster and more smoothly. The 1800s were characterised by upheaval and a change in the pace of economic development. In the old society, safety lay in close-knit networks and small institutions: the family, relatives and neighbours. Once the pace of development picked up, however, these networks and institutions were no longer sufficient. New ones were needed. Local savings banks are a good example. Specialisation, a market focus and new tools demanded more financial muscle than the old, family-based networks could mobilise. The solution was for villages to join forces to create savings banks, an institution rooted in the local community but reaching beyond the old networks. Løten savings bank opened in 1855. A good public school system is a prime example of an inclusive institution. In May this year, I had the pleasure of visiting Stavanger Cathedral School. The head teacher, Turid Myhra, showed a portrait of one of her predecessors, Johannes Steen; schoolmaster, statesman and nation-builder.11 Steen was notably a key driving force behind what was to become an important milestone in the construction of Norway’s collective identity: the adoption of the Primary School Act in Andenæs found this to be an interesting statement.

The choice made was 2 BIS Review 100/2006 imposed by the circumstances: lack of developed financial instruments and institutional financial structure; absence of the interest rate transmission mechanism, and high interdependence between the aggregate demand and money supply. In October 1995, NBRM made a shift towards monetary strategy of targeting the nominal exchange rate against the German Mark, and later against the Euro, with the Denar exchange rate stability being the intermediate monetary policy objective. Such a strategy, applied in a small and open economy such as ours, has proved to be very successful for maintaining the price stability until present day. All reforms in the monetary policy instruments since the independence have been directed towards introducing indirect, market-oriented instruments for enabling efficient monetary policy conduct. Therefore, in 1993 deposit and credit auctions were introduced, and at the end of 1994 CB bills auctions were introduced. The initial development and strengthening of the financial system of the Republic of Macedonia, especially of the government securities market, enabled us to include new instruments, following the example of the modern central banks. In April 2005, we promoted the overthe-counter market for government securities. In the same year, we launched the general repo agreement and we started with repo operations when concluding lombard credits. In March this year, together with the Ministry of Finance we introduced Treasury bills for monetary policy purposes. The transition of the monetary strategy and of the monetary instruments would not have been successful without adequate banking reforms.

In particular, this is the role of the two new liquidity ratios: – The one-month liquidity ratio or Liquidity Coverage Ratio (LCR) has the two-fold objective of preventing short-term liquidity shocks and requiring institutions to selfinsure against liquidity shortages in order to limit refinancing exclusively via the central bank. Institutions should in no way consider that they have a guarantee of permanent access to such refinancing. In this respect, the use of foreign currency funding is not always justified by the need to fund assets denominated in these currencies in the absence of a sufficiently broad customer base in the countries concerned. Such strategies are also used for arbitrage purposes. They contribute to overall market liquidity but they must remain of a magnitude that allows institutions to unwind positions in stressed market conditions. However, during complete liquidity dry-ups some institutions became largely dependent on swap lines between central banks, as was the case from the end of 2007 to the start of 2010. It is also clear that the use of swap lines between central banks cannot be considered a natural market adjustment. In this respect, it is advisable for banking supervisors to have indicators that enable them to measure possible foreign currency mismatches, without necessarily imposing a specific currency matching requirement. – The one-year liquidity ratio or Net Stable Funding Ratio (NSFR), for its part, aims to limit the risk of excessive maturity transformation such as illustrated by the failure of Northern Rock.

Participant deposits in the ALF are backed by a fund of high quality securities – sukuk – 3/5 BIS - Central bankers' speeches complemented as needed by cash deposits at the Bank. The return from these instruments, net of hedging and operating costs, may be paid to depositors in lieu of interest. Deposits held with the ALF help enable participant banks to meet regulatory requirements to hold a buffer of high quality liquid assets to meet obligations as they fall due. Using our convening power as a central bank we collaborated with and learnt a lot from numerous institutions in the Islamic finance sphere from around the world, whose experience and input was essential in helping us create the facility. Since launching the ALF in December 2021 we have seen strong usage of the facility and received, and continue to receive, positive feedback on its design. We are pleased with progress in meeting the challenge. First from the perspective of fairness, but also in the support that it gives to the real economy, be that through lending to businesses, or as the focus of today's event, supporting sustainable investment. The approach we took in developing the ALF can be extended to efforts beyond the world of central banking.

They, surely, have both liquid liabilities and engage in maturity transformation; and, of course, they do actually operate partly through banking entities outside their home jurisdictions. Again, however, I think appearances may deceive. The liabilities of the houses are not in fact a bit like bank deposits. While it is true that the houses have increased the extent of their unsecured funding, for example through public issues, the bulk of their liquid liabilities are still secured - with, as I said, some 55-80% of the total funding of the US houses we have looked at typically in the form of repos. Nor do the houses hold themselves out to take deposits BIS Review 13/1997 -7- from the public at large. Nor, finally, are their liabilities directly usable as a payments medium. In all these respects the houses’ liabilities are non-monetary - even if they can rapidly be turned into money. On the assets side of the balance sheet, the securities houses continue to invest primarily in liquid, marketable assets which can readily be sold. This is partly a reflection of the nature of investment banking business, in particular trading, underwriting and so on, and of regulatory requirements, but also of funding uncertainty: the securities house protects itself by being able, if necessary, to contract the size of its balance sheet very rapidly.

While a clear consensus on the best way to capture these risks has yet to fully emerge, these are very active areas of risk modeling at banks, and this is clearly a frontier area in both the regulatory and consensus economic capital regimes. In this regard, an important question to ask is how well the current capital frameworks capture the possibility of extreme events, those far in the “tail” of the distribution. Stress testing can play an important role in addressing these concerns. Stress tests should allow institutions to assess likely losses under extreme market events, those that happen too rarely to be captured under traditional value-at-risk measures, but that could cause very significant losses to the institution should they occur. Institutions have long engaged in this kind of analysis for internal management purposes. Now, however, those at the forefront of risk management are assessing the adequacy of their value-at-risk results against stress losses and finding ways of integrating the results of stress testing into their capital frameworks. Indeed, an important aspect of our supervisory process includes critically assessing stress-testing regimes. More rigorous and comprehensive stress testing of large shocks across multiple markets, geographic regions and business lines is vital, particularly for systemically important institutions. In this context, we need to see more attention paid to risks to market liquidity, and the effects on market liquidity that could result from the exit of a major dealer.

The NPC has prepared a well-focused action plan after detailed deliberations with all stakeholders and is the apex body for payment system development policies and operations. I understand that India and some other countries too have NPCs. It BIS Review 79/2007 5 may also be important to set up a secretariat in one of the countries to lead the regional payment initiative. The SPC, as well as the task forces, should establish close links with international organizations such as the WB, IMF, BIS and also with other regional payment groups and developed country central banks for guidance and technical assistance. As I mentioned before, the ACU is the only regional clearing mechanism that exists today among SAARC member countries. It needs a clear reform agenda to mitigate risks involved in that system and ensure safe payment flows among the member countries. Already, a technical committee has been appointed under the Chairmanship of Sri Lanka to look into some elements of modernizing the ACU. The whole of yesterday we debated on some of the short-term measures that need to be introduced to the ACU clearing arrangements in order to avoid any disruptions to cross border flows. That committee too could report its recommendations to the SPC. There may be many other modifications, modernizations and reforms that need to be introduced at national and regional levels which will shape the annual work program of the SAARC regional payment initiative.

Although it is a Herculean task, establishing an acceptable level of regional coordination to generate and facilitate trade and investment and ensuring that cross border flows take place safely and efficiently, without disrupting the national financial systems is an imperative. The rapidly changing global payment system infrastructure is challenging the existence of domestic and regional payment systems that are lagging behind in the pace of development of technology, communications and globalization. Each country has to reform their payment BIS Review 79/2007 1 systems to keep up with advanced technologies and complex processes. Given the nature of cross border transactions, the need to mitigate risks involved in them and the high cost of quality infrastructure, it is advantageous for countries in the region to undertake reforms collectively in coordination with each other. A regional payment group can attract rich intellectual and resource capacity for payment system development in the region. Within the framework of a common payment initiative, all members can create productive and collective working relationships to address issues relating to the common quest for developing the national and regional payment systems. In this regard, the central banks should promote close coordination among experts in the region to strengthen the payment system infrastructure. 3. Case for a SAARC region payment initiative The SAARC region-wide payment system has a long way to go in improving its performances, as many others have organized themselves better for the task.

3 The slow decline in consumption is consistent with a recent rebound in employment and reduced local political and economic uncertainty. Developments in the global economy, prior to the banking turmoil, operated in the same direction. Thus, seasonally adjusted, recent months have seen an increase in employment, especially salaried jobs, which has contributed to a slight rebound in the wage bill. Indicators of domestic uncertainty have declined significantly, approaching the levels observed prior to the October 2019 social outbreak. The slower adjustment in consumption also coincides with an increase in revolving consumer credit flows, which reflects a greater use of credit lines and credit cards (figure 5). In contrast with consumption, investment has been performing poorly for several quarters. The revision to the National Accounts also shows that, seasonally adjusted, the level of gross fixed capital formation has been stagnant since mid-2021. This is consistent with the increase in the cost of credit; for some quarters access to long-term financing was severely constrained; and business expectations deteriorated amid high local political-economic uncertainty. Some of these factors have eased their importance in recent months (figure 6). As for the current account deficit, in the last quarter of 2022 it showed a significant decrease, and partial first quarter data suggest that this trend will continue. Considering the data for the end of 2022, the cumulative deficit for the last four quarters narrowed to 9%of GDP (10% in the third quarter).

This was especially true in the United States, where the task of containing inflation was still pending and history teaches us that the process has never been easy. In fact, in the last few weeks, some of the risks that we identified in the face of a process of interest rate hikes in the developed world have materialized. Doubts about the financial situation of some banks in the United States have opened up a major channel of uncertainty. 8 So far, its impacts have been contained. In fact, the central scenario of this Report considers that there will be effects on growth in the developed world and this will have repercussions on our economy. But these are impacts of a much smaller magnitude compared to episodes such as the Global Financial Crisis of 2008. Now the effects are associated with lower confidence and, therefore, with a contraction of credit levels and tighter financial conditions, a consequence of the search for safe assets worldwide. Since the most recent focus of uncertainty originated in the banking sectors of other economies, it is important to review what is happening in our country. The first thing to reiterate is that the Chilean banking system is subject to adequate regulation and supervision, which makes situations such as those that triggered the current uncertainties in international banking very unlikely to occur. This does not mean that the Chilean economy, including the banking system, is immune to a further deterioration of the external scenario.

Obviously this can delay the whole process - a point to which I will return later. This is only a very short description of the mechanics of a workout and hardly does justice to what can be an enormously complicated exercise involving banks with widely different levels of security as BIS Review 45/1999 2 well as non-bank creditors whose interests also need to be taken into account. But I hope that I have given you enough to illustrate the central principles of the process: a willingness by the debtor to recognize that there is a problem and to approach the banks to seek assistance, matched by support and forbearance by the banks and a willingness to work together to reach a solution by consensus. That solution may not be the optimum one for every individual bank but the objective should be that each bank is at least better off than it would be in a liquidation and is treated fairly vis-à-vis others. In the course of preparing this speech I have had the benefit of talking to a number of market participants about how effectively the workout process in Hong Kong and the HKAB Guidelines are working. It is fair to say that there are varying shades of opinion on this point, but there is general agreement that the Guidelines have made an important contribution in codifying what is expected of banks in Hong Kong. It is equally true that there may be room for improvement in the workout process.

Caleb M Fundanga: Payment system developments in the region Speech by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the official opening of the 2007 SADC Payment Systems Regional Conference, Livingstone, 2 April 2007. * * * • SADC Payment Systems Project Team Leader; • SADC Payment Systems Project Country Leaders; • Chairperson, Bankers Association of Zambia; • Delegates from all SADC Countries; • Distinguished invited guests; and • Ladies and Gentlemen On behalf of the Bank of Zambia and indeed on my own behalf, I wish to welcome you all to Zambia and Livingstone in particular. For those of you coming to Livingstone for the first time, you will no doubt soon discover that this historical city, which incidentally was Zambia’s capital city until 1935 when it was moved to Lusaka, is one of the world’s pristine tourist destination and boasts of a number of magnificent sights and places of cultural interest. For those of you that have been here before, I wish you a joyous time as you renew your acquaintance with this beautiful city and enigmatic Victoria Falls. To all of you, I implore you to shop around and take a piece of Livingstone as souvenir on your return. Ladies and Gentlemen, allow me to thank you all for being here for the 2007 SADC Payment Systems Regional Conference. This event has now become interwoven into the tradition and fabric of SADC.

But more is required; the unemployed and youth cannot afford to wait. In addition to emergency plans, at least four reforms appear obvious since they have worked for our European neighbours: apprenticeships on a widespread level; simplifications, including in the area of labour law; the development of entrepreneurship; and lastly the decentralisation of social dialogue to the company level, i.e. as close as possible to the economic and human reality. Corporate investment depends first and foremost on the willingness and the confidence of thousands of entrepreneurs, but it must naturally be promoted by financing… and therefore by you. BIS central bankers’ speeches 1 2) This brings me to my wish concerning the smooth financing of the economy, against the backdrop of persistently low interest rates. Monetary policy is proving to be effective: in 18 months, since June 2014 and the announcement of non-standard policies, bank lending rates to business have fallen by around 80 basis points in the euro area, and outstanding bank loans have risen from a negative growth of 2.5% in June 2014 to positive growth of 0.9% in November 2015. According to estimates, including the decisions of 3 December 2014, non-standard policies improve the growth outlook for the euro area by 1% between 2015 and 2017, and that of inflation by 0.5 percentage point in 2016 and 0.3 percentage point in 2017. Bank lending must therefore remain accessible. In this respect, French banks have achieved good results.

The federal banking agencies, for example, made clear that lenders and servicers should adhere to consumer protection requirements, including fair lending laws, and provide the opportunity for all borrowers to benefit from these arrangements.8 The federal banking agencies have confirmed that in the context of the Community Reinvestment Act, they willl favorably consider retail banking services and retail lending activities in a financial institution's assessment areas that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by COVID-19 consistent with safe and sound banking practices.9 This includes, for example, waiving certain fees, easing restrictions on check-cashing, expanding availability of credit, providing alternative service options, and offering alternative payment options. Prudent efforts to modify terms on new or existing loans will receive favorable CRA consideration. In addition, financial institutions will receive CRA consideration for community development activities, e.g., activities that help to revitalize or stabilize low- or moderate-income geographies such as support for food services and digital access, as well as lending, investment and service activities that support health care and small businesses, particularly for low- and moderate-income individuals or communities. In terms of supervisory focus, the Fed has prioritized monitoring to evaluate the impact on consumers to ensure that banks work in good faith with consumers, apply fair treatment and mitigate consumer harm. We are monitoring consumer loan deferrals and modifications and corresponding servicing activities to ensure banks' responsiveness.

These developments have spurred the necessity of our having to better understand and perform more analysis on banking risks. After all, banks do live and prosper by accepting risks, but these risks have to be managed with proper care. As we have all seen, well-managed banks have tended to stay resilient to the banking crisis and provided a backbone for restoration of financial stability. We must therefore, continuously adopt new techniques and technologies in risk analysis to ensure appropriate risk management of all financial institutions in the future. Of course, prevention is always better than the cure. As financial regulators, one of our main tasks is to provide a prudential framework ensuring the overall improvement of risk management of financial institutions. In the case of Thailand consolidated supervision as well as prompt corrective action will be introduced under the new Financial Institutions Act. Study is also on the way to prepare ourselves for the implementation of the BIS New Capital Regime, and we look forward to their conclusion for an explicit framework that will complement our current practices where we ask the Board to understand the nature of their organization’s business activities and risk appetite in order to provide an adequate internal control system to monitor and mitigate risks. Risk-based supervision represents yet another endeavor to tackle the effectiveness of risk management of financial institutions as transaction testing may no longer be an effective approach to examine the ever-more complex financial institutions of today.

For a small, open economy like Switzerland, in particular, the effectiveness of monetary policy measures can be largely dependent upon acceptance by the international environment. An important example for our country is the minimum exchange rate – an exceptional measure taken in an extreme situation. With this measure, the Swiss National Bank is countering distortions in the foreign exchange market which can be traced back to international events. The minimum exchange rate is accepted internationally because markets, international organisations and foreign central banks have understood the objective and motivation behind it, which they see as justified. BIS central bankers’ speeches 1

In the same way, the crisis revealed the critical deficiencies in the toolkits available to the regulators to deal with nonbank institutions in duress. Emergency lending by the Fed might be enough to forestall the disorderly failure of a systemically important institution and all the wider damage such a failure might cause, but it was a blunt and messy solution, employed as a stopgap measure because better alternatives were not available. What is needed – what our country still lacks – is a large-firm resolution process that would allow for the orderly failure even of a systemically important institution. 2 BIS Review 6/2010 Thus, in the fall of 2008, regulators and policymakers found themselves facing the prospect of the total collapse of a complex and interconnected system. It was these circumstances, and the prospect they created for an even deeper and more protracted downturn in real economic activity and employment, that required truly extraordinary actions on the part of the Federal Reserve, as well as the Treasury and many other agencies. This is a situation in which the United States must never again find itself. For its part, the Federal Reserve is hard at work on developing and implementing new regulations and policy guidance that take on broad lessons of the recent crisis. We are working with other banking regulators in the United States and overseas to strengthen bank capital standards, both by raising the required level of capital where appropriate and improving the risk capture of our standards.

The fact that the Fed needed to take those actions provides a stark illustration of the significant gaps in our regulatory structure, gaps that must be eliminated. Among those holes was the absence of effective consolidated oversight of certain large and deeply interconnected firms; the collective failure of regulators – including the Federal Reserve – to appreciate the linkages and amplification mechanisms embedded in our financial system; and the absence of a resolution process that would allow even the largest and most complex of financial institutions to fail without imperiling the flow of credit to the economy more broadly. Addressing these shortcomings will require important reforms in our country’s regulatory architecture. We entered the crisis with an obsolete regulatory system. For one, our regulatory system was not structured for a world in which an increasingly large amount of credit intermediation was occurring in nonbank financial institutions. As a result, little attention was paid to the systemic implications of the actions of a large number of increasingly important financial institutions – including securities firms, insurance conglomerates and monolines. In addition, many large financial organizations were funding themselves through market-based mechanisms such as tri-party repo. This made the system as a whole much more fragile and vulnerable to runs when confidence faltered. With the benefit of hindsight, it is clear that the Fed and other regulators, here and abroad, did not sufficiently understand the importance of some of these changes in our financial system.

In the area of monetary and banking policies, SAMA followed monetary policy aimed at achieving stability in the financial sector and providing the necessary liquidity to meet domestic demand for credit, by taking a package of proactive measures to enhance the liquidity position and reduce the cost of lending in order to ensure that banks continue their financing role in the development process in the Kingdom. The most prominent measures were: reducing the Statutory Reserve requirements ratio, the Repo and the Reverse Repo Rates several times, enhancing the liquidity position in the banking system by placing long term deposits in local currency and US Dollar with local banks on behalf of government institutions and organizations, reducing the pricing of treasury bills, facilitating foreign exchange swaps in order to provide the necessary liquidity in US Dollar for the local banking system. As for fiscal policy, the government continued the expansion in public expenditure and increasing the pumping of funds to specialized lending institutions by an estimated amount of Rls 40 billion during 2009. Custodian of the Two Holy Mosques, In spite of the adverse impacts of the successive financial crises, they clearly resulted in combining international efforts to review the global financial system and commence taking reforming measures to perform its role effectively and positively in the global economic activity and international external trade.

The thresholds for establishing and operating companies have been lowered. Existing production processes can be made more efficient. The internet has made information more accessible and many firms can cut transaction costs. There is less need to hold large stocks that tie up capital. The same applies to consumers, who can quickly search the internet for cheap goods and services. So far, however, prices on the internet differ relatively little from shop prices. But this will presumably change as the internet continues to be developed and usage rises. Sweden, spearheaded by the telecom company Ericsson, is one of the countries where the IT sector is relatively large. This sector is also contributing a growing share of our annual output. But we are also one of the countries with a relatively high level of spending on the introduction of new information technology in various parts of the economy. The introduction and development of information technology in Sweden has been facilitated by an efficient capital market, particularly as regards the supply of venture capital. So, as I have tried to show, the favourable economic development at present has many aspects. But it should not be forgotten that the fundamental economic laws still apply, just as they did in the late 19th and early 20th centuries. That makes it important to prevent a build-up of imbalances that can create tensions and jeopardise a continuation of good economic growth and low unemployment. This brings me to the subject of stabilisation policy.

At the end of my speech I expressed concerns that the correction of financial imbalances, and the associated re-pricing of risk, might not have run its full course. As we now know, this was indeed the case. Only ten days later, the re-pricing in markets took a quantum leap. In mid-September the turbulence turned into a full-blown crisis. The chart of money market spreads tells this tale clearly. BIS Review 103/2009 1 As you can see, credit spreads soared. Financial market activity fell dramatically, volatility spiked and the global financial system came close to seizing up. Central banks stepped into the breach, addressing this unprecedented market failure. The ECB was in the vanguard of actions to contain these intensified tensions, taking a number of standard and non-standard measures. The measures by the leading central banks eventually paid off. As you see in the chart, money market spreads – a symptom of the market failures that I mentioned – retreated from their peaks. They are now back at levels comparable to those before the intensification of the crisis last year. But they still remain elevated in a longer time perspective. The crisis triggered a freefall in economic activity. The chart shows that within a few months only, from January to July 2009, the projections for 2009 shifted massively to the left, in highly negative territory. After they centred around -1.5% in January 2009 and -3.2% in April 2009, they dropped to -4.5% in July, entirely outside the distribution range still a few months earlier.

They went through three crises – the subprime crisis in 2007, the 2009 global economic slowdown and the euro crisis from 2010 on – without a common fiscal backstop (that only came in 2010 with the European Financial Stability Facility) and without the foundations of a banking union. If we were to draw lessons from the experience, I would rather insist on the fact that the euro area was too late and too timid in cleaning up and shoring up its banking system, i.e. stress testing the banks, raising capital and shedding bad loans. That partly explains why our recovery is lagging behind that of the United States. In banking matters, forbearance doesn’t serve a purpose. You can’t buy time. We’re catching up now, but we still have some way to go, and the banking union isn’t complete. Some countries, such as Germany, insist that there should be a limit on euro area banks’ sovereign exposure. Do you agree? There are three dimensions in my view. There is the question of sovereign risk for banks. But we must also consider the consequences for government financing, and the functioning of financial markets, which need risk-free assets as liquidity instruments. If you focus on one aspect of the problem and ignore the others, you run the risk of shifting risk around instead of reducing it. The ECB’s policy is increasingly unpopular in Germany. Do you foresee a moment when it might become an obstacle to your own action? Europe nowadays is a source of irritation for many.

We see that as we move further down on the list, fewer countries satisfy the criteria. Based on this approach, Norges Bank is among the five most transparent central banks, as we satisfy every criterion on the “natural order”. The point I will make by showing this is not to win transparency competitions, but to illustrate that transparency has many dimensions, and there is no unique way to measure it. As a general guideline, Norges Bank applies Wim Duisenberg’s definition of transparency: The external communication reflects the internal deliberations. 10 When assessing whether we should publish a given piece of information, we do not ask ourselves if there are any good reasons for publishing it. Instead, we ask ourselves if we have any good reasons for not publishing it. Usually, we find no convincing arguments for not publishing what we find useful in the internal deliberations. An argument often heard against publishing certain information is that the public might misinterpret it or put excessive weight on it. However, the danger of misleading the public by providing additional information could also be seen as an advantage: It forces us to be clear and pedagogic in our communication. Transparency is, however, not just a means to improve the effectiveness of monetary policy and discipline in the internal decision process. We should not forget that transparency is important for democratic accountability. Central banks have gained considerable independence during the last 20 years, and central bank independence is probably an important commitment mechanism for securing price stability.

If these are not of sufficient quality, we will be criticised. Public scrutiny disciplines the internal process and, I believe, results in better monetary policy. 4 BIS Review 132/2008 Measuring transparency Even if I have focused on certain dimensions of transparency, such as openness about our intentions for future interest rate decisions, transparency has many other dimensions. Petra Geraats 4 distinguishes between five dimensions of transparency: 1. Political transparency refers to openness about policy objectives 2. Economic transparency focuses on the economic information that is used for monetary policy 3. Procedural transparency is about the way monetary policy decisions are taken 4. Policy transparency refers to the announcement and explanation of policy decisions 5. Operational transparency concerns the implementation of the central bank’s policy actions Due to the many dimensions of transparency, it is not possible to talk about transparency as if it were a one-dimensional concept. One could claim that some central banks are more transparent than others in some particular dimensions, but it is difficult – if not impossible – to measure overall transparency by a single metric in a precise and non-controversial way. However, for some research purposes, for example for cross-country comparisons and for analysing historical developments, it is useful to try to measure overall transparency by a single metric.

Let’s be clear that the business model and the risk are owned by the firm – the PRA’s job is make sure that a firm’s approach to risk management is sound and that their policy holders are adequately protected. I believe Solvency II will help to do this. It will introduce greater risk-sensitivity; co-operation across jurisdictions; and consistency in approach. Being a risk-based regime means that insurers should be able to evolve and adapt to capture all risks they are exposed to and the qualitative risk assessment introduced under Pillar II will further support this move towards a more responsive, reflective and adaptable solvency regime. This in turn will mean that insurers will need to think carefully about the risks they are exposed to and how this is captured and managed. This does not mean that Solvency II should dictate firms’ business models. Rather, market forces and expectations of policy holders will inform insurers’ pricing and strategies. As referred to earlier, there is much we can do to prepare for the future by learning from mistakes of the past. One such area where this should be borne in mind is in the use of risk models which will play a huge role in Solvency II for the larger, more complicated firms. Firms need to be able to understand their models and their limitations, and be able to challenge them. As the Governor said last year: “The dangers of using poorly designed models were made all too clear in the banking sector.

Let me express a clear personal opinion; financial crises of the past were often, in large part, created by the people at the top making poor decisions – people not possessing the right information; not having due regard for risk; not being properly incentivised. Significant failures have often had their roots in poor governance with insufficient checks and balances to the decisions of powerful individuals. Strong, effective systems of oversight and risk management are paramount in meeting the PRA’s objectives for the safety and soundness of firms and insurance policyholder protection. Not surprisingly, governance issues are consistently at, or near the top, of the PRA’s agenda whether for banks or insurers. I can safely predict that this focus is not about to lessen any time soon. Firms in tomorrow’s world need to aim for governance best practice. BIS central bankers’ speeches 1 The recent banking crises further illustrated that one of the most obvious ways in which financial stability can be undermined is through disorderly firm failure and the consequent disruption of financial services. The PRA’s stance is that unsuccessful business models need to be allowed to fail, but that failure should be in an orderly manner so as not to disrupt the provision of core financial services. And I think we would all agree that the taxpayer should not be asked to bail out a failed firm. One difference from banking is that failing insurers usually do exit in an orderly manner.

The banks borrowed the foreign currencies abroad and on-lent them to customers, avoiding open exchange risk exposures. However, when the krona was attacked and the fixed exchange rate subsequently had to be abandoned, banks were doubly affected. Foreign counterparties, perceiving the banks’ weakened position, reduced or withdrew credit lines. This forced the banks to demand either early repayment from customers or loan conversion into domestic currency. This led, in turn, to sharply increased loan losses because, at short notice, borrowers were unable to raise the larger amounts in krona that were needed to repay the foreign currency loans, which the krona’s depreciation had made much more expensive. Neither had the supervisory authority, the Bank Inspectorate, adjusted. It continued its traditional formal supervision, ensuring that reports, permits et cetera were formally correct, rather than supervising the actual risks. The authority was also somewhat complacent about risks (to be frank, the Central Bank and the Ministry of Finance should share the blame for this) since BIS Review 65/1998 -3- Sweden had not experienced a financial crisis since the 1930s. Lacking relevant crisis experience, the authorities did not perceive that the 1980s could pave the way to a new financial crisis. The decade was, after all, characterised by sustained economic growth, rising bank profits and extremely low loan losses. The financial weaknesses I have described so far are quite similar in Sweden and Korea. However, some differences should also be noted: • In Sweden, banks had built up good capital reserves.

Caleb M Fundanga: The importance of multi-cultural awareness and language learning Opening remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the signing ceremony of the Memorandum of Understanding between the Bank of Zambia and the Chinese International School in Zambia, Lusaka, 22 December 2010. * * * The Ambassador of the People’s Republic of China to Zambia, H.E Mr. Li Qiangmin The Chairperson – Chinese International School in Zambia, Mr Li Tie The Deputy Governor Administration – Dr Tukiya Kankasa-Mabula The Deputy Governor Operations – Dr Austin Mwape The Principal – Chinese International School in Zambia, Mr. Tan Haitao Distinguished Teachers from the Chinese International School in Zambia Colleagues from the Bank Members of the Press Distinguished Ladies and Gentlemen It gives me great delight, on behalf of the Bank of Zambia, to welcome you all to this important signing ceremony of the Memorandum of Understanding (MoU) between the Bank of Zambia and the Chinese International School in Zambia. The MoU that we are about to sign today provides a framework for the provision of Chinese language lessons to members of staff at the Bank of Zambia. Your Excellency, the Bank of Zambia attaches great importance to the need for staff to learn other international languages. In the process of both economic globalization and diversity of culture, language has become more and more important.

The impacts of various shocks on inflation may differ according to time and period. As a consequence, the period required for inflation to converge to the target again will be announced after the occurrence of shocks and the determination of their sources, if there is a significant deviation from the target. Forecast horizon The forecasts presented in the Inflation Reports published throughout 2006, covered a period of one and a half years. From 2007 onwards, forecasts will refer to a two-years period. This change aims to help economic agents to predict the future better. Furthermore, forming a comparable forecast period with the results of the Expectations Survey will provide us with the opportunity to analyze and assess inflation forecasts more easily. 1 Inflation forecasts and interest rate path While producing inflation forecasts, one of the most critical questions to be answered is how the monetary policy is shaped over the forecast horizon. Country experiences reveal that there are many different approaches related to the presentation of forecasts and the method of signaling future monetary policy. Accordingly, central banks can be classified into three groups: (i) Countries in which central banks produce inflation forecasts by considering their own potential policy responses: New Zealand, Norway, Canada, Sweden, Czech Republic, Turkey, Columbia, Peru, Rumania. In addition, these countries announce their forecasts on the interest rate path in verbal or numerical terms. (ii) Countries where central banks employ the market expectations: European Union (European Central Bank), Chile, Brazil, Czech Republic, Sweden, and England.

31.08.2019 The European economic policy response to a scenario of lower growth and inflation La Granda Summer Courses Pablo Hernández de Cos Governor Distinguished rector, honourable mayor, academic authorities, dear students, ladies and gentlemen. Let me begin by extending my particular thanks to Professor Velarde for his kind invitation to participate in the closure of the 2019 La Granda summer courses. It is an honour for me to be here in this building, whose doors are open to all those interested in discussing and delving into the essential issues ever-present in these courses. Today I would like to share some thoughts with you on the complex economic outlook the European Union (EU) and, in particular, the countries comprising the euro area currently face. This is at a time when free trade, the bedrock of the European project and an essential source of the improvements in economic well-being in recent decades, is subject to continuous threats. I shall first describe the latest economic developments and the main challenges ahead. Then I shall analyse what, in my opinion, the economic policy responses to these challenges should be. The return of protectionism Only two years ago the global environment was a favourable one. It was marked by a synchronised expansion of the emerging and advanced economies, reflected in the highly robust world trade performance. But the international economic setting turned more unfavourable in 2018. This situation has run into 2019 to date, with a slowdown in growth (acutely so in manufacturing) and, in particular, in trade.

Speech given Nishkam High School, Birmingham. Available at https://www.bankofengland.co.uk/-/media/boe/files/speech/2017/everyday-economics. ING – Economics Network. 2017. “ING-Economics Network survey of the public understanding of economics”. Available at: https://www.economicsnetwork.ac.uk/research/understandingecon. Laibson, D. 1997. “Golden eggs and hyperbolic discounting”, Quarterly Journal of Economics, Vol. 112, pp. 443-477. Mullainathan, S. and Shafir, E. 2013. “Scarcity”. Allen Lane. 6 All speeches are available online at www.bankofengland.co.uk/news/speeches 6

Ranee Jayamaha: Promoting credit culture and expediting the process of debt recovery Speech by Dr Ranee Jayamaha, Deputy Governor of the Central Bank of Sri Lanka, at a workshop on proposed law on restructuring of sick industries and other legal issues at the Centre for Banking Studies, Rajagiriya, 1 February 2005. * * * Honourable Mr K C Kamalasabayson, Attorney General, Mr Sumant Batra the Guest Speaker from India, distinguish guests, Ladies and Gentlemen. I am happy to be associated with this Workshop aimed at deliberating on vital issues relating to the proposed law on Restructuring of Sick Industries, and other legal and financial system issues on debt recovery by financial institutions. As you are aware, the two core objectives of the Central Bank are: to secure economic and price stability and financial system stability with a view to encouraging and promoting the development of productive resources of the Country. Debt recovery is one of the core elements of financial system stability and it depends on the performance of economic sectors, the industrial sector being one of the important areas. This is why the Central Bank has been interested in promoting credit culture and expediting the process of debt recovery. In recognition of this, in the year 1990, the Central Bank was associated in the enactment of a package of fourteen Debt Recovery Related laws.

But the more important question remains whether the institutional framework for overseeing financial markets, seeking to prevent crises and, when prevention fails, to manage them, is adequate. Open financial markets will always be prone to bouts of irrational exuberance, but do we do enough to contain the collateral damage which excessive volatility can cause? Some academics, notably John Eatwell at Cambridge, argue that we need a fundamental recasting of the international financial institutions. He favours the creation of World Financial Authority charged with setting the regulatory framework for financial markets across the globe, and endowed with powers of intervention when crisis threatens. His arguments are persuasive, but it seems unlikely that countries will be prepared to cede sovereignty to such an authority on a scale which would be necessary to make it work effectively. There have been many other less ambitious proposals, both from within the IMF and the World Bank, and from individual countries. For a time it seemed as though the creative departments of every BIS Review 25/2003 1 Finance Ministry in the world – if that is not an oxymoron – were engaged in a kind of architectural competition to draw up a new set of relationships between the international financial institutions, their member countries, and the key regulatory organisations in the financial sector. On the face of it, the changes made as a result of this frenzy of creativity have been very modest. No major new institutions have been set up.

The Icelandic banking sector experienced a dramatic expansion in just a few years, funded by cheap foreign financing, which allowed it to boost its assets from 100 to almost 900 percent of GDP between 2004 and end-2007. This expansion made the Icelandic banking system one of the largest in the world in relation to GDP. As global conditions deteriorated in early 2008, banks’ CDS spreads rose to unprecedented levels. In response, banks slowed lending growth, enhanced liquidity buffers, reduced costs, and started a process of downsizing non-core operations and laying off staff. But their ability to deleverage was limited by the global risk aversion. A recent FSAP update and Article IV Consultation conducted in June 2008 pointed to several risks that were mounting throughout 2008: (i) liquidity and funding risks, associated with the banks’ reliance on market funding and their large funding needs over the short run; (ii) credit and market risks, resulting from foreign currency, equity exposures, and high indebtedness of domestic borrowers, as well as collateralized lending, connected lending, and large exposures; (iii) operational risks, associated with the banks’ rapid expansion in recent years; and (iv) quality of capital risks, related to complex ownership structures. In this light, the Staff Report concluded that “if risks were to materialize in full, Iceland could face severe financial strains.” Despite the authorities’ attempts to prepare for contingencies earlier in the year, the crisis brought down the three main banks within a week.

It is one of the most robust interbank clearing systems in the world, and is a very important piece of financial infrastructure contributing greatly to financial stability in Hong Kong. But in running the system, the HKMA cannot avoid lending to the banks at the end of the day to effect what are really residual interbank payments. But in providing such liquidity money is created in the form of a larger overnight balance of the banking system that appears not to be directly matched by an increase in the holding of foreign reserves by the HKMA. BIS Review 19/1998 - 11 40. However, the manner in which this “last resort” liquidity is provided does not involve any real conflict with the discipline of the currency board system. Lending through the LAF is organized largely through a repo arrangement of paper issued by the HKMA22. Such paper, in the form of Exchange Fund Bills and Notes, are liabilities of the HKMA which are fully backed by foreign currency assets. The HKMA runs an Exchange Fund debt programme involving the issue of debt instruments of maturity from three months to ten years. The proceeds of such issues have largely been switched into foreign currency assets. In any case, with a real time payment system, overnight lending in the term of repos through the LAF, though essential, is infrequent and the money is to be repaid the first thing in the following morning.

To banks, we urge you to embrace fintech, and join the CDI platform. To data providers, we invite you to contribute meaningful data, such as logistics data and procurement data between buyers and suppliers, to enrich the types of data available. To SME owners, we encourage you to contact your bank and understand more about CDI. Together, we can take Hong Kong’s data ecosystem to new heights, and ultimately contribute to bridging the global trade financing gap. 15. The benefits of a more digitally integrated trade finance system are plentiful, that much is certain; and the HKMA strives to help bring about an enhanced system in collaboration with different stakeholders. We look forward to working with the International Chamber of Commerce (ICC) and the Fung Group in this regard so that the needs of the underserved segments can be better catered for. 16. Before I close, I’d like to take this opportunity to offer you a glimpse of the HKMA’s vision of digitalising cross-border trade. For those of you who have been following our CBDC developments closely, you will know that we are working on a project called mBridge. We have already developed a trial CBDC platform, and it has proven ability to speed up crossborder payments from multiple days to near real-time. 17. We are now exploring the feasibility of connecting eTradeConnect, CDI, and mBridge to strengthen the synergy between the three and further digitalise the cross-border trade process.

Let me share with you another observation from Preet Bharara. A common element in many of the frauds his office has prosecuted is the failure of colleagues to call out bad conduct by raising their hands. This is so telling of a culture that condones or promotes misconduct. People see something, but do not say something. And, it is so shortsighted. It prevents problems from being addressed while they are small. By not raising their hands, these colleagues are “quietly adding risk to your books [and] invisibly enlarging your liabilities.”8 They are also tacitly encouraging bad conduct by skewing incentives. There may be many reasons for choosing silence over raising your hand. You may face a conflict of loyalties. It’s uncomfortable to tell on a colleague. You may think that the problem will just go away, or that calling attention to a problem will harm the firm. Raising your hand is difficult. But, it is also absolutely necessary. As rising leaders in the industry, you need to lead by 4/6 BIS central bankers' speeches example. In doing so, you will make it easier for others to follow your lead. My final message is a request that each of you commit to a candid assessment of yourselves, your firms and your industry. For Adam Smith, candid observation was a cornerstone of economic behavior: “We suppose ourselves the spectators of our own behavior, and endeavor to imagine what effect it would, in this light, produce upon us.

Research must be designed like an increasing spiral, where the newly gained knowledge in philosophy, economic history, empiric research and application of mathematic and statistical models must return to the starting point to confront the set of all new and old problems, prove the generality of its application, and evaluate the set of potential externalities. As I mentioned at the beginning, this is the 100th jubilee of Albania’s independence and our annual conference this year focused on the development of monetary policy during the last 2 BIS central bankers’ speeches 100 years and paid particular attention to the impact that domestic and international political and economic events have had on the nature of the central bank and its monetary policy. Addressing the mixture of historic and economic developments, the large variety of monetary regimes, abrupt swings in economic, politic and philosophy systems, and modern economics was amazingly refreshing, interesting, and thought-provoking. It certainly deserves more attention. Our traditional approach to research has largely contributed to our understanding of monetary and financial stability issues and models with a large set of parameters, forecasts and shock analysis. It has enriched the envelope of models and methodologies that are available in the process of policy design and implementation and has increased our confidence. However, it is time to go deeper in the understanding the fundamental of economic behaviour as an individual and social phenomenon. This understanding requires, among others, proficient research in economic history and economic behaviour and economic welfare.

José De Gregorio: Exchange rate and export development Speech by Mr José De Gregorio, Governor of the Central Bank of Chile, at the Special Session on Exchange Rate at the Chamber of Deputies and the 23rd National Meeting of Fruit and Vegetable Producers, Santiago de Chile, 6 October 2010. * * * Chile has prospered during recent decades thanks to globalization. Having tried various strategies, we can say we have reached consensus on this matter. For an economy of our size and characteristics, opening up to the rest of the world is essential for creating the competition and efficiency that will stimulate development. Four decades ago, this idea was a voice in the desert in developing economies, but today it is the accepted norm. There is also consensus that monetary and exchange policy should be conducted by an autonomous central bank, and that fiscal policy should be governed by transparent, predictable and sustainable rules. After much trial and error, our country adopted an institutionality that has allowed us to walk through complex international situations with relative stability. Today I would like to discuss how we at the Central Bank of Chile view the challenges facing export development, in particular with regard to monetary and exchange-rate policy. Let me open by explaining the four principles guiding our decisions, so I can clarify some misconceptions with respect to the Central Bank and the exchange rate.

The effects of exchange rate fluctuations on activity are an important factor in our evaluation of the inflation outlook and in our monetary policy decisions. At the present time, interest rate differentials with developed economies are well below historic averages and the interest rate is still below normal levels. The fourth principle I want to discuss is that stronger countries generally have stronger currencies. In other words, the purchasing power of their wage packets is comparatively greater as these economies outpace the rest of the world. We could discuss many more factors, such as ways to mitigate appreciation, what circumstantial factors spur it, etc. At the end of the day, what we need is to transform the cyclical strength of our economy into greater productivity which will increase our potential for growth. But it is important to note that this principle does not work the other way around. In the past we have been obnubilated equating a strong currency with a strong economy, but we soon had to realize that the strength of the currency was not due to a fundamentally sound economy but rather the outcome of policies inducing currency misalignment. I would like to draw your attention to the fact that I have not included a flexible exchange rate as one of the principles, in order to avoid dogmatism. But in our country, experience overwhelmingly shows that exchange rate flexibility, managed pragmatically, is the most adequate system for us.

Zeti Akhtar Aziz: Key issues confronting the financial sector in Malaysia Keynote address by Mrs Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Financial Industry Conference 2009, Kuala Lumpur, 17 November 2009. * * * It is my great pleasure to welcome you to our financial industry conference for this year. This conference takes place at a time when the global financial landscape is experiencing fundamental change. Even as we meet, events continue to unfold in directions that are likely to fundamentally alter the way in which financial institutions conduct their business. Reforms to strengthen the foundations of financial stability are wide-ranging to improve the supervision and regulation of financial institutions, and the institutional arrangements for coordination and cooperation in the area of surveillance and crisis management within and across jurisdictions. This Conference is organised by Bank Negara Malaysia to engage in constructive dialogue with the industry on developments affecting the international and domestic financial industry, focusing in particular on implications for financial institutions in Malaysia. Economic developments and outlook After a challenging beginning to this year, Malaysia is now gradually moving on a path of recovery supported by strong macroeconomic fundamentals and a sound financial sector. Economic activity has continued to show a marked improvement in the third quarter, with positive growth expected in the fourth quarter.

This is evidenced by the significant transformation of the financial system that is now more diversified with well developed financial markets and broadened product offerings, that is more competitive with home-grown regional players, that is more inclusive with higher levels of banking and insurance penetration, and with improved financial strength indicators as financial institutions are better supported by strengthened governance and risk management standards and practices. The development of Islamic finance has also made significant strides both in the domestic and international front as Malaysia evolves as an international Islamic financial hub. Enhancements to the payment infrastructure have also supported the increased use of epayment channels. With these building blocks in place, the financial system has also been progressively deregulated and liberalised. The more recent liberalisation to allow for greater foreign participation in the domestic financial markets and increased foreign presence will enhance further our financial and economic international linkages. As we move into the final phase of the Masterplan, we are confident of the strength and resilience of the domestic financial sector to face greater competition and benefit from the liberalisation measures recently announced. We have received strong interest in the new licences from Asia, the Middle East, Europe and the United Kingdom that bring with them strong value propositions that will add significantly to the depth and breadth of the financial sector in Malaysia. In the insurance sector, greater competition will emerge from the progressive deregulation of product rates.

MONETARY POLICY REPORT PRESENTATION BEFORE THE HONORABLE SENATE OF THE REPUBLIC Mario Marcel Governor Central Bank of Chile 5 September 2018  The September 2018 Monetary Policy Report can be downloaded at http://www.bcentral.cl. The Spanish original prevails. Introduction Mr. President of the Senate, senator Carlos Montes, honorable senators, ladies, gentlemen, On behalf of the Board of the Central Bank of Chile (CBC), I am grateful for your invitation to present the Monetary Policy Report (IPoM). As usually in September of each year, this coincides with the report that, according to the Organic Law of the CBC, we must submit annually to the Senate. In compliance with this obligation, the Monetary Policy Report that I will be summarizing in a moment contains our view of the recent macroeconomic and financial developments in the Chilean and international economy, as well as their prospects and implications for the conduct of monetary policy. It also includes the Bank’s financial results of the first half of 2018, the results of the management of international reserves and a summary of the main decisions adopted by the Board this year to date. The Monetary Policy Report Incoming data this year has been showing greater than expected economic growth, and inflation consolidating its prospects of convergence to the target, in a context of positive surprises in several areas, an upward revision of potential growth and a faster closing of the activity gap.

Thus, by working to ensure price stability as well as maintenance of a safe, sound and efficient financial sector, the Bank is contributing to the achievement of sustainable economic growth and, ultimately, poverty reduction. In a nutshell, following the amendment of the Bank of Zambia Act in 1996, the Bank’s main responsibilities comprise price and financial system stability. The Bank ensures financial system stability by licensing, supervising and regulating the activities of banks and non-bank financial institutions so as to promote the safe, sound and efficient operations and development of the financial system. BIS Review 74/2004 1 Ladies and Gentlemen, I trust that, as members of UNZABECA, you have actively participated in these series of lectures and expanded your knowledge of the functions of the Bank of Zambia. On our part as Bank of Zambia, we strongly encourage investment in education, which has been demonstrated by the sponsorship of these Lectures. In this regard, I wish to take this opportunity to call upon other institutions to support our university by either sponsoring a series of lectures, like the Bank of Zambia has done, or rendering any financial assistance. As many of you may be aware, most of the companies in Zambia have benefited, in one way or the other, from the services offered by our universities. As for the Bank of Zambia, most of its management members of staff, including myself, are graduates of this university and were members of UNZABECA.

Isabel Schnabel: Interview in Die Zeit Interview with Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, in Die Zeit, conducted by Ms Lisa Nienhaus on 16 March 2020 and published on 18 March 2020. * * * Ms Schnabel, where are you speaking from at the moment: your home office? No, I’m in the main building of the European Central Bank in Frankfurt. As the board member responsible for market operations, I need to be on site. But many of us, including other members of the ECB’s Executive Board, are indeed working from home. And I am also keeping at a safe distance from colleagues. Indeed, it would not be good if you were absent from the ECB. Market prices are collapsing, loans are defaulting, firms are threatened by bankruptcy if they don’t get help. Is the virus crisis now turning into a financial crisis? We are living through turbulent times: stock markets are showing exteme volatility, equity prices have fallen dramatically. And the events are gradually being reflected in the data that we receive from the real economy. We know that production in China collapsed in January and February. All that will also have an impact on the banking system, but there is no acute banking crisis at present. We are, however, carefully monitoring the current situation so that we are able to respond swiftly to new developments should that become necessary. Which indicators are you looking at?

Hillman A L and O Swank: (2000): Why political culture should be in lexicon of economics, European Journal of Political Economy, Vol. 16, No.1, pp. 1-4. Kornai, J (2000): What the Change of System From Socialism to Capitalism Does and Does Not Mean. Journal of Economic Perspectives, Vol. 14, No. 1. pp. 27-42. Larosière, J de (1999): Transition Economies. Fifth Dubrovnik Conference on Transition Economies, June 1999. Lucas, R E (1993): Making a Miracle. Econometrica, Vol. 61. No. 2, pp. 251-272. Škreb, M (1998): Economic Transition in Croatia: An Insider’s View. SAIS Review. Vol. XVIII, No. 2., pp. 71-88. Wolf, M (2000): Kicking down growth’s ladder. Financial Times, April 12, p. 15. Wyplosz, C (2000): Ten Years of Transformation: Macroeconomic Lessons. The World Bank. Policy Research Working Paper 2288, February. 9 BIS Review 43/2000

As our economy becomes even more financialised, it is important that banks strike a balance between legitimate profit-seeking goals, and their responsibility to provide the public with full and fair access to financial services. Some banks today are still falling short of expectations to offer basic banking services to the people who only need such services. We have observed poor communications by the front-line staff of such banks on the basic banking products which must be offered by all banks. In some cases, prohibitive conditions are attached to the opening of basic banking accounts in clear violation of Bank Negara Malaysia’s requirements. This must change. In offering basic banking services, banks should also leverage on technological advancement that can support inclusive finance initiatives. These include adopting more innovative delivery channels, leveraging on big data to reach a wider community and to offer suitable products that are priced affordably. Concluding remarks The world as we know it is set to change dramatically just as it had over the last few decades, except that future changes will happen at a much more rapid pace, and in sectors where we least expect it. The ability of banks to adapt will be critical to its relevance. More likely than not, banks that are agile and have absolute clarity on their value proposition for their customer, society and wider economy, will be the ones that will endure. Banking as we know today will no doubt change in form as the future takes shape.

In addition, banks are being offered the opportunity to borrow an unlimited amount of money each week against collateral at three months’ maturity at an interest rate of 0.20 percentage points above the repo rate, which is at zero per cent. In addition to this, the Executive Board has decided that the Riksbank will extend its purchases of securities by up to SEK 300 billion up until December. The Riksbank normally buys government bonds. In these exceptional circumstances, however, it is important to ensure that all major markets continue to function. For this reason, the Riksbank has now also begun to purchase mortgage bonds and will purchase municipal bonds. In the last few days, corporate bonds and commercial paper issued by Swedish non-financial corporations have also been included in the asset-buying programme. These bond purchases increase the access to credit in the economy in general and future purchases of corporate bonds and commercial paper will provide additional support to Swedish companies in particular. Just like the Riksbank’s previous purchases of government bonds, the new purchases will also help to keep monetary policy expansionary and to stimulate activity in the economy. Given the global nature of the crisis, it is also important to ensure that there is access to US dollars (USD) in the Swedish financial system. To strengthen access to one of the most important currencies for Swedish companies, the Riksbank has announced that we will lend up to USD 60 billion.

In short, the hot air is cooling. But some big challenges remain: - On disclosures, to reach the goal of securing a fully consistent, decision useful and forward looking set of metrics requires standard setters to agree on a single framework; for it to be made mandatory; and for corporates to measure, model and disclose; - On instruments, we need to see a further scaling up in the range and depth of tools providing credible incentives for green investment and more effective transparency for investors on performance against climate goals. That will drive broader-based price discrimination between climate-positive and climate-negative assets, which in turn will provide powerful incentives for further adjustment; and - On asset allocation strategies, we need to coalesce more around terminology and approaches, providing a clear and credible choice for clients and investors, on that journey towards full integration. And we need more research on what works and what doesn’t! Many of the actions here are for the financial markets themselves to resolve – and rightly so, because we want the power of markets working to deliver climate change. But there are important priorities for the public authorities too: to ensure externalities are properly internalised, so markets can do their job; to help co-ordinate and set market-wide standards, and where necessary to make them obligatory; and to use our strength and influence as market participants in our own right to drive change, where doing so is consistent with our mandates.

Use of CRA ratings in regulatory regimes We will also need to revise the extent to which we as a regulatory community use rating agency ratings. The official sector can’t express concern – at times indignation – about the performance of rating agencies, valid concerns, and then at the same time continue to build rating agencies ratings umbilically into our regulatory regimes. Over the past few months, I have been chairing a working group of the FSB developing proposals on that, which will go to Ministers and Governors shortly. I think Ministers in Europe are attentive to it as well. Changes in this area will take time and will not be easy, but they are being planned. The underlying purpose of securities markets regulation Going beyond that, the final thing I would say in this area is that the conceptual framework for securities regulation, especially in the USA, has over the past 30 years or more 1 For more information, see the report of the Securities Review Committee (1988), “The Operation and Regulation of the Hong Kong Securities Industry”. BIS Review 145/2010 3 essentially made a distinction between public markets and private markets, public issuance and private issuance. That is basically because it has taken an investor protection approach to securities regulation. The investor protection objective remains valid of course.

Instead it is probably the labour market that should be focused when analysing resource utilisation. Another reason for doing so is that in a price analysis at macro level, the weightiest item in costs is wages: total wage costs are equivalent to over two-thirds of GDP. The level of unemployment, although it has been reduced, is still high, particularly compared with the post-war period up to the early 1990s. Seen from that angle, some might say that the Swedish economy has plenty of unutilised resources. Experience from other European countries has taught us, however, that when an economy has been through a severe shock, as happened in the early 1990s, unemployment tends to stick at a high level, at least for a while. This structural or equilibrium unemployment cannot be reduced by means of expansionary economic policies. Attempts to do so simply lead in the end to a higher inflation trend and probably an economy that functions less efficiently. This is because wage costs tend to adjust upwards as the expansionary policy acts on the economy and higher long-term inflation expectations are established. Viewed in this way, unemployment could be divided into two components, structural and cyclical. If the level of structural unemployment could be identified with some precision, it would be easier to gauge how much room the Swedish economy still has for expansion above its potential growth trend. As always when one turns from theory to practical policy, things immediately become much more difficult.

You have to make do with estimates, which in the nature of things are uncertain and therefore have to be interpreted with caution. Still, the available estimates do suggest that in Sweden the equilibrium level of unemployment rose in the early 1990s and is somewhere in the interval 4.5 to 7.5%, expressed in terms of registered unemployment.1 The OECD also concludes that the level has increased markedly in the 1990s and judges that in Sweden equilibrium unemployment is around 6%.2 Not everyone agrees, however, that equilibrium unemployment is markedly higher than before.3 But even though we cannot be certain about its exact level, an increase is indicated by the fact that 1 2 3 See e.g. Calmfors, L (1995), Will high unemployment in Sweden become persistent?, Swedish Economic Policy Review 2:1. Economic Surveys – Sweden 1999, OECD, Paris. See e.g. Åberg, R (1997), Är stigande jämviktsarbetslöshet huvudproblemet på arbetsmarknaden? (Is rising equilibrium unemployment the principle labour market problem? ), Ekonomisk Debatt 25:1. BIS Review 106/1999 4 otherwise the currently high unemployment would be acting as a strong restraint in wage formation. Instead, the wage level in Sweden is still rising somewhat faster than in our main competitor countries. Considering that the rate of registered unemployment is currently around 6% and thus inside the estimated interval for structural or equilibrium unemployment, this might suggest that the Swedish economy is relatively close to full capacity utilisation.

‘Commodity’ means any goods of a fungible nature that are capable of being delivered, including metals and their ores and alloys, agricultural products, and energy such as electricity; 10 ‘Electronic money token’ or ‘e-money token’ means a type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender; 11 https://eur-lex.europa.eu/legal-content/BG/TXT/HTML/?uri=CELEX:52020PC0594 12 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU 9 5 909/201413. Only an entity authorised under Directive 2014/65/EU or an entity authorised under Regulation (EU) No 909/2014 as a central securities depository may apply for permission to establish a DLT market infrastructure. The Regulation provides that the new regime may only be applied to shares, the issuer of which has a market capitalisation or a tentative market capitalisation of less than EUR 200 million; or convertible bonds, covered bonds, corporate bonds, other public bonds and other bonds, with an issuance size of less than EUR 500 million. Sovereign bonds are explicitly excluded from the scope of this Regulation. 13 Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 6

Any shift in inflation objectives at times of economic stress invites the charge of opportunism: if you are willing to raise inflation objectives from 2% to 4%, then why not 6% or 10%? Such thinking puts at risk the hard-won credibility of the existing monetary policy frameworks. To the extent such shifts are motivated on public finance grounds, they suggest that monetary policy is subordinate to fiscal concerns. And concerns about deflation risks should be addressed by refining the conduct of monetary policy, rather than redefining its objective. In particular, it is crucial that the objective of price stability is pursued symmetrically. Of course, asymmetries may exist in the structure of the economy. Examples include: any lower bound on nominal interest rates; and an aversion to falls in nominal wages. These need to be taken into account in policy making. But this does not imply that monetary policy should demonstrate greater aversion to deflation rather than inflation (or vice versa). An excessive and asymmetric fear of deflation explains in part why interest rates may have been kept “too low for too long” prior to the financial crisis. Pursuing price stability in a symmetric manner would guard against the danger of repeating this mistake. To sum up, I believe that the recent financial crisis has not challenged the principle according to which the goal of monetary policy should be price stability. In practice, this is recognised 7 See: e.g. S.S. Roach (2010).

In Italy, for instance, output fell by more than 5% in 2009, while unemployment peaked at almost 13% in 2014. These figures are alarming, but they tell us little about the people who lost their jobs, their homes and their future. Taking all this suffering into account, the crisis turned into a tragedy. As for its causes, I admit that the story I’ve just told is far too simple. Of course, it was not the failure of a single investment bank that caused all this mayhem. The full story is much longer and much more complex. However, no one can deny that banks played a crucial role. It became obvious that they can pose a huge risk to financial stability and the economy. But at the same it’s an inescapable truth that we need banks. Or, to be more precise, we need the services they provide. Why we need banks Who does an investor turn to when she needs money to start or expand a business, when she needs to hedge risks or wants to acquire another company? Who does a saver turn to when he wants to deposit money? Who does a family turn to when it needs a loan to buy a home? Here in Europe, all of them would most likely turn to a bank. Banks provide a vital service to the economy. Without them, the economy would not work. All this leads us to a crucial question: how can we ensure that banks reliably serve the economy?

If each country were to go its own way, the market for the relevant financial instruments would become too fragmented. The ECB welcomes current proposals which foresee the introduction of non-preferred senior debt instruments and a general depositor preference rule. This would further facilitate bail-ins. The second question is: what happens if the Single Resolution Fund runs out of money? What if there’s a major crisis, and the € billion is not enough to cover the losses? Well, in such a situation we would need a common European backstop for the SRF. And we need it quickly, and in any case before 2023, which is when the SRF will reach its target volume. European leaders committed to this when setting up the SRF, and they should stick to their commitment. The backstop could take the form of a direct credit line from the European Stability Mechanism to the SRF. The important thing is that it can provide both solvency and liquidity support. And now to the third and final question: has public support for failing banks really become a thing of the past? “Almost” is the answer to this question. And the rules are now such that any public support for a bank in fact triggers a “failing or likely to fail” decision. There are a few exceptions, however. One of these is known as precautionary recapitalisation. It allows governments to recapitalise banks using public funds. But the scope for this kind of state aid is very narrow.

However, it seems reasonable to also use monetary policy in certain situations when major risks build up in the financial system. A necessary condition here, of course, is that the credibility of the inflation target is not affected and that this happens when other policies to safeguard financial stability do not fully succeed in limiting the risks. This is thus an exceptional case; in most situations, the preventive work to safeguard financial stability falls to policy areas other than monetary policy. Monetary policy and fiscal policy are also interdependent. Stable public finances are necessary for price stability and to avoid fiscal dominance, that is, a situation where fiscal policy "dominates" monetary policy in the sense that it is fiscal policy that determines inflation. The risk of this in Sweden is currently small, partly because we have a fiscal policy framework designed to keep government debt at manageable levels. Fiscal policy also affects the Riksbank's ability to achieve the inflation target in the shorter term. If fiscal policy is expansionary when inflation is too low, and contractionary when inflation is too high, it can help the Riksbank achieve the inflation target more easily. There may also be periods when the fiscal policy conducted makes it more difficult to achieve the inflation target. A tight fiscal policy may 2 [30] have contributed to the Riksbank's problems in bringing up inflation in the aftermath of the global financial crisis. The Riksbank's independence is important for maintaining confidence in the inflation target.

20 [30] However, the interdependence between monetary and fiscal policy is not reflected in the monetary and fiscal policy frameworks. The frameworks are designed so that the two policy areas function independently of each other. The Riksbank has a high degree of autonomy and a mandate that prioritises price stability. The budgetary policy objective of fiscal policy is to ensure that fiscal policy is stable over time, which in practice means that government debt should be sustainable in the long term. This approach is based on the view that fiscal policy has little impact on inflation; that monetary policy has negligible fiscal consequences; and that a fiscal policy mandate that stabilises government debt and budget deficits is sufficient to support the central bank's inflation target.38 Central banks' difficulties in bringing inflation up to target without relatively drastic measures after the financial crisis may indicate that this view has been too simple. A fiscal policy that is expansionary when inflation is too low and contractionary when it is too high makes it easier to achieve the inflation target.39 It may of course be politically easier to conduct an expansionary fiscal policy, but it is important that it is symmetrical so that the national debt does not risk becoming too large.

Singapore as a smart financial centre Singapore needs to position ourselves for this new future too. We have embarked on a national Smart Nation initiative, which seeks to harness info-communication technology, networks and data to support better living, create more opportunities, and support stronger communities. The Government will put in place the infrastructure, policies, ecosystem and capabilities to enable a Smart Nation, but we also need industries and citizens to work with us to explore and experiment with new solutions. And if these solutions can work here, we hope that they can also be relevant to other parts of the world. In line with our national vision to be a Smart Nation, MAS is also seeking to create a Smart Financial Centre, one where technology and innovation are used to increase efficiency, create new opportunities, manage risks better, and improve lives. The MAS will pursue this with the industry on two complementary fronts – a calibrated regulatory approach conducive to innovation while fostering security, twinned with development initiatives to augment the Fintech ecosystem here. • On the regulatory front, financial institutions like yourselves are free to launch new ideas without first seeking MAS’ approval, so long as you are satisfied with your own due diligence. We are also encouraging a “sandbox” approach for you to launch your innovative products within controlled boundaries.

First, the Bank of Thailand will ensure ample liquidity in the system in order to accommodate the economic recovery. As policy normalization by the Fed is imminent, the risk of liquidity withdrawal from Emerging Markets increases. We anticipate limited impact on the overall Thai economy as markets have priced in the Fed’s initial hike. Besides, it is widely expected that the Fed fund rates would rise gradually from then on. As for now, despite the slow economic growth in Thailand, the overall credit to the private sector continues to expand at around 5 per cent. Furthermore, enterprises have issued a sizable amount of corporate bonds, leveraging on lower yields compared to last year. Commercial banks’ liquidity position is stable. All these are indications of favorable domestic financing conditions. Should a sudden reversal scenario occurs, the Bank of Thailand would make sure that liquidity will not become an impediment to economic recovery. The Bank of Thailand will also ensure that “cost of funds” is accommodative to the ongoing recovery. The two pre-emptive cuts in the policy interest rate earlier this year, in response to greater downside risks to growth, have eased domestic cost of funds. In addition, low inflationary pressure gives room for monetary policy to remain accommodative. This would ensure that the overall monetary conditions are conducive to the economic recovery. Nevertheless, we keep a cautious eye on risks to financial stability, especially under the prolonged low interest rate environment. Household debt, although it has stabilized, remains high in relation to GDP.

I would also like to thank the Co-lead Managers, DZ BANK AG, Hong Kong Branch, ICBC (Asia) and BMO Capital Markets Corp and Co-Managers, ANZ Investment Bank and Commonwealth Bank of Australia, for managing and distributing the issue. I look forward to your continuing support of our Corporation and its debt issuance activities. Thank you. 2 BIS Review 116/2006

Lifting the health restrictions has also resulted in some of the demand for services being released, prompting an acceleration in recreation, hospitality and tourism prices. In addition, changes in practices, such as the rise of working from home, have led to higher spending on household appliances, exerting further pressure on their prices. In the case of the euro area and Spain, analysing the disaggregated data reveals the following stylised facts: 1. The magnitude of the increase in inflation is unprecedented in recent times. In the euro area, August saw the harmonised index of consumer prices (HICP) reach 9.1%. In Spain, it has risen from slightly negative rates at end-2020 to 10.5% in August 2022. For context, to encounter a similar rise we need to go back to 1977. 2. This inflationary episode is characterised by its high persistence. In Spain, inflation has stood above 2% for 16 months. The last time this happened was in 2010-2011. You also have to go back to that period to find such a persistent episode of inflation above 2% in the euro area. 3. In terms of its components, the role of energy stands out. 40% of actual inflation in Spain in August was attributable to electricity (2.3 pp) and other energy (1.9 pp). The percentage is very similar in the euro area (43%). 1 4. The persistence and intensity of the rises in electricity and gas prices have been surprising.1 As a result, they lie behind a highly significant portion of the inflation forecasting errors in recent quarters.

That is the reason why we ourselves are telling all members of the euro area to respect the Stability and Growth Pact. It is the legal framework that we have as a quid pro quo for the fact that we do not have a federal budget and a federal government. And it is economically based on solid ground. Consider the spreads for the refinancing of the various government’s treasuries: they are taking into account the various fiscal policies. Consider the Ricardian effects, the level of confidence or the lack of confidence that you observe in the various constituencies of economic agents, particularly at the level of households: they suggest that there are certain situations where if you do not behave properly you might lose more in terms of confidence than what you are supposed to gain through the additional spending. We also say regularly to the various members of the euro area that they must be aware of the unit labour cost evolution, of the relative competitiveness of the various economies inside the euro area, and inside the single market of the 27 EU members. This is something which is also very important. FT: But of course the Stability and Growth Pact, thanks to the French government, 1997, is still very constricting. Trichet: It is supposed to function so as to prevent the various fiscal policies from loosening during the positive part of the business cycle in order to provide appropriate room for manoeuvre when we are in the downbeat episode of the business cycle.

Supervisors and regulators are required to review the efficiency of banks’ risk management practices and capital allocation methodologies, and empower market participants to make informed judgments on the efficiency of banks. Despite challenges, many researchers suggest that Basel II leads to rising rewards and discipline in banking industry. The indicators are that pay back for getting Basel II right and for looking beyond mere compliance to the real business benefits will be greater than originally anticipated. Encouraging banks to understand and believe that enhanced economic capital framework would be the key to high performance is undoubtedly a regulatory challenge. 17. I believe the deliberations of this seminar will improve our knowledge on ways and means of dealing with regulatory challenges posed by Basel II and operational risk mitigation measures. I wish the seminar a success and thank you all for your attention. 4 BIS Review 88/2005

Here I am using the term in a broader sense, to describe the view that monetary policy is the only tool necessary to stabilise the economy. Friedman advocated the control of money as superior to fiscal measures for stabilising the economy. In Friedman (1948) he argued that financing variations in the government deficit or surplus with monetary expansions or contractions would be stabilising. Later, in Friedman (1960), he advocated a constant growth rate of the money stock as a means to stabilise the economy effectively. Following the experiences of the 1980s, there is today great scepticism that the velocity of money circulation exhibits the kind of stability necessary to make the quantity equation operative as a means of inflation control, although money may still have useful information content as an indicator. As Gerry Bouey said, “We didn’t abandon the monetary aggregates, they abandoned us.” See Friedman, M. 1948. A monetary and fiscal framework for economic stability. American Economic Review 38, 256–64; and Friedman, M. 1960. A Program for Monetary Stability. New York: Fordham University Press. ii Growth in India and China in particular has contributed to a marked fall in the global Gini coefficient, from 0.74 in 1975 to 0.63 in 2010. Niño-Zarazúa, M., Roope, L. and Tarp, F. (2016), “Global Inequality: Relatively Lower, Absolutely Higher,” Review of Income and Wealth, July. iii Reinhart, C. and Rogoff, K. (2009), This Time is Different, Princeton University Press.

In August, the balance of these demand, supply, and exchange rate effects was consistent with the need for additional monetary policy stimulus. These measures are working. For those looking to borrow, credit is widely available. For those with debts, the cost is cheaper. Neither solely due nor totally unrelated to the actions the MPC took in August, growth appears to have been materially better than we had expected in the summer. Households appear to be looking through Brexit-related uncertainties at present. For them, signs of an economic slowdown are notable by their absence. Perceptions of job security remain strong. Wages are growing at around the same modest pace as at the start of the year. Credit is available and competitive. Confidence is solid. 16 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 16 In contrast to developments in the real economy, financial markets have taken a less sanguine view of Brexit prospects. Sterling is currently around 16% lower than its peak a year ago. Partly reflecting this depreciation, measures of inflation expectations have picked up notably. Chart 17: Growth has been increasingly driven by consumption Other Real GDP (oya) Chart 18: Saving rate back to pre-crisis level since around 2013, and consumption rising as a share of employee income Consumption Saving rate 4 Per cent 14 3.5 12 Per cent 3 10 2.5 2 8 1.5 6 1 4 0.5 2 0 Source: ONS and Bank calculations.

27 The Federal Reserve has not, to date, determined the extent to which its supervised firms may engage in cryptocurrency related activities. 28 E.g., Vullo v. OCC 378 F.Supp.3d 271 (May 2019). See also Comptroller’s Licensing Manual Supplement: Considering Charter Applications from Financial Technology Companies. 29 81 Fed. Reg. 83934, 83978-80 (Nov. 22, 2016). 30 A uniform state-law proposal drafted in 2017 that was designed to establish a uniform framework for states to regulate digital currency businesses, such as issuers, exchanges, and custodians, but has not been adopted by any state. Uniform Regulation of Virtual-Currency Businesses Act. 31 Randal K. Quarles, Vice Chair for Supervision, Board of Governors of the Federal Reserve System, Remarks at European Banking Summit: The Financial Stability Board at 10 Years—Looking Back and Looking Ahead (Oct. 3, 2019). 32 Pablo Hernández de Cos, Chairman of the Basel Committee on Banking Supervision (BCBS) and Governor of the Bank of Spain, keynote speech at Euro Finance Week: Financial Technology: The 150-year Revolution (Nov. 19, 2019). 33 See 12 U.S.C. §§ 5323, 5462(6), & 5463.

It is a fact that today, most central banks are granted significant independence. This holds also for the SNB, which, by law, is functionally, institutionally and financially independent, as well as with regard to personnel issues, from the Federal Council, the Federal Assembly and any other body. 4 There are compelling reasons for this delegation of monetary policy power to an independent central bank: It is a fact both in theory and practice that an independent central bank better fulfils its mandate, namely, ensuring price stability and thereby contributing to sustained economic developments, than a central bank that is under the influence of political interest groups. However, a further important fact in this regard is that the SNB’s independence is far from unlimited. First, our independence is not an end in itself. It applies only to the pursuit of a clearly specified mandate. This mandate is defined in the political realm. It is stipulated in article 99 of the Federal Constitution and set out in detail in the National Bank Act. 5 Second, independence goes hand in hand with accountability. With the privilege and duty of conducting an independent monetary policy comes a particular responsibility. As bearer of this responsibility, the SNB is accountable to the Federal Council, the Federal Assembly and the public for the decisions it takes, the means it chooses and the results it achieves. The precise scope of this accountability is also clearly defined in the National Bank Act. 6 Yet having a sound legal framework in place is clearly not enough.

All I can say is that I am encouraged by the close cooperation between the Bank and the FSA which I am confident we can build upon, enabling us to withstand the strain when the first pink elephant is sighted! The Standing Committee of the Treasury, Bank and FSA has met each month over the past couple of years. Cross-membership of our respective Bank and FSA boards is firmly established. Howard and I meet regularly together. And most fundamentally our respective staff are in more or less continuous contact at working level - it is a culture that we must continue to work together to maintain. To be honest I have felt as closely in touch with significant developments, even in the banking sector, as I did before and perhaps better informed about developments in the financial system more widely. In part this is because, without day by day responsibility for banking supervision, particularly its consumer protection dimension, the Bank has been able to refocus on and develop its wider oversight role, focusing particularly on strengthening the market infrastructure, intensifying our surveillance and crisis management, both nationally and internationally. I think perhaps you can get the flavour of our broader focus if you look at our half-yearly publication the Financial Stability Review. The next edition is due out in a fortnight or so, and I’m sure that my office would be happy to make it available to you for a small commission - or you can download it free from our website.

Our third core purpose - the promotion of the efficiency and effectiveness of the financial system in serving the interests of the wider economy - was more unusual for a central bank, but arose from a long-standing tradition of catalytic involvement in the development of our financial system, including, in its international dimension in particular, encouragement of the role of the City. These three core purposes have been essentially carried over into the new statutory framework introduced through the Bank of England Act of 1998. There are certainly some very important changes in the more precise nature of the Bank’s role. In relation to monetary stability, the Bank, through its new Monetary Policy Committee, now has independent responsibility for the operation of monetary policy and for achieving consistently low inflation as defined by the Chancellor. And in relation to financial stability, responsibility for banking supervision has passed from the Bank to Howard at the FSA - which helps to explain why I have retained more of my hair ... than ... I might otherwise have done! But, notwithstanding these important changes, our core purposes remain. The Memorandum of Understanding between the Treasury, the Bank and the FSA, in particular defines our respective responsibilities in relation to financial stability and provides a structure for the necessary close cooperation between us. In the terms of the MOU the Bank is responsible for the overall stability of the financial system as a whole.

According to employment by economic activity, as at the 3rd quarter of 2007, of the total occupation, women accounted for 35% and 26%, respectively, in agriculture and manufacturing. During 2003-2007 of the estimated worker contracts abroad, on average, 65% have been females. Although there has been some impact following the removal of export quotas for garments BIS Review 40/2008 1 under the multi-fiber agreement in 2005, the important point is that, in terms of employment, the female labour force has not suffered significantly. Women’s contribution to growth has been much more significant in the recent decades, given their enhanced involvement as garment and apparel factory workers, domestic helpers in the Middle East and other destinations, and tea plantation workers. In terms of foreign exchange inflows during 2007, garments and apparel have accounted for USD 3.3mn, worker remittances for USD 2.5mn and tea exports for USD 1.0mn. Around 80% of exports have been dependent largely on the fortunes of the garments industry in which over 90 per cent of employees are women. The 3 export processing zones, i.e. Katunayake, Biyagama and Koggala, the increasing number of industrial estates located in the different parts of the country, and around 150 rural garment factories, provide employment opportunities for young women between 18-30 years. Although precise statistics are not available to indicate the participation of women or their contribution to enhance foreign exchange inflows, undoubtedly, women’s contribution has been very significant.

However, even after several rounds of discussions, the program has not got off the ground as yet. Recent initiatives taken by the Central Bank and the banking and financial sector As in India, banks and financial institutions in Sri Lanka, at the grass root levels, have been advised to engage in basic banking with “no frills”, or to entertain minimum balances and reduce charges where possible to enhance access to finance and financial inclusion. The recent efforts taken by the Central Bank of Sri Lanka as well as some banking institutions have enhanced access to finance and financial inclusion. They are: • 10% mandatory credit to agriculture by banking sector; • Agency banking through mobile phones: Permission has been granted to commercial banks to provide facilities using telecommunication services to appoint a number of agents to enable on the spot banking facilities such as depositing and BIS Review 40/2008 7 withdrawing money and receiving remittances abroad through these agents located throughout the country; • Upgrading of post offices to provide banking and financial services: The HSBC Bank has established links with post offices which are considered to be grass root financial institutions and providing access to finance in terms of drawing their pensions, monthly allowances and, where possible, remittances from abroad.

It is hard to see beyond one of two ways of interpreting this statement, 2/4 BIS central bankers' speeches neither of which stands up to much scrutiny. The first interpretation is that the rules should not change in the future, and to do so would be unwelcome. This is unrealistic, dangerous and inconsistent with practice. As the world around us changes, so must the rules to accommodate these changes. As evidence of this, look at what the authorities have had to do in response to Covid and the shock that created for financial markets. The EU is almost constantly revising, or contemplating revising its own rules, and that’s a good thing. So, I dismiss this argument. The second argument is that UK rules should not change independently of those in the EU. I am being careful to phrase this point. It’s not that UK rules might change independently – the equivalence process provides for re-assessment of such decisions, so this should not be a problem. So, it must be the stronger form that they should not change independently. But that is rule-taking pure and simple. It is not acceptable when UK rules govern a system 10 times the size of the UK GDP and is not the test up to now to assess equivalence. It’s worth considering why we would choose to change the rules. First, it would be rare to say the least if such rules turn out always to work perfectly first time and thus need no amendment.

Thomas Jordan: The significance of academic research and teaching for the Swiss model for success Summary of a speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the Dies academicus, University of Bern, Bern, 1 December 2018. * * * The complete speech can be found in German on the Swiss National Bank's website (www.snb.ch). The success of Switzerland in recent decades has largely been driven by the strong performance of its education system, which is crucial for economic prosperity, social cohesion and equality of opportunity overall. The Swiss National Bank (SNB), too, sets great store by a good education system, including universities that can hold their own against international competition. Many of the staff recruited by the SNB are destined for roles in which a university degree is a prerequisite. In addition, the SNB maintains close ties with the academic world, so that the latest related research findings can be incorporated into monetary policy decision-making. The competition of ideas stimulates and creates incentives for higher-quality monetary policy. This pursuit of excellence in academic education should not just be aimed at research, however; it should also target teaching. Experience has shown that foundation courses have a lasting effect on students' attitudes to certain topics. Teaching lays the basis for subsequent academic specialisation and career choice. As role models, professors carry a heavy responsibility.

Mark Carney: Three truths for finance Remarks by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the Harvard Club UK Southwark Cathedral dinner, London, 21 September 2015. * * * I am grateful to Ben Nelson and Iain de Weymarn for their assistance in preparing these remarks. “All England is an American shrine, full of rich records of the makers of their nation.”1 None more so than glorious St Saviour’s – Southwark Cathedral – a few minutes south of the river from here. Its connection with Harvard makes it something of an American Mecca. For at St Saviour’s was baptised a Southwark butcher’s son who became benefactor to the university that would bear his name. John Harvard would doubtless be delighted with what has become of the 320 volumes and £ he bequeathed to posterity: a college founded for the avoidance of leaving “an illiterate ministry to the churches, when our present ministers shall lie in the dust”. From that bequest sprung one of the world’s leading universities. A community dedicated to its motto: Veritas – truth; the pursuit of truth in the sciences, humanities, even economics. Truth to create a better world. But recall Pilate’s question that has echoed down through the centuries from the pulpits of Southwark Cathedral to Memorial Church, “Truth? What is truth?” Indeed, upon arriving at Harvard, students and visitors are confronted with a curious truth, or rather, three untruths.

In the case of Japan, monetary policy can end the deflation that has characterized the economy since the late 1990s, but can do little to infuse 2 BIS central bankers’ speeches long-run expansion unless it is accompanied by fiscal policy that implements structural change. But the biggest problem the U.S. confronts is homegrown: political failure in Washington to act on the key issues holding the recovery hostage. Fiscal and regulatory uncertainty is a powerful deterrent to business investment. Going back to the earliest days of the current recovery, my business contacts have regularly complained of the fog of uncertainty emanating from Washington. They have consistently cited fiscal and regulatory uncertainty as major impediments to capital investment and expanding payrolls. Uncertainty comes in many forms. In some cases it is major legislation such as the health care reform or financial regulation as in the Dodd Frank [Wall Street Reform and Consumer Protection] Act. Fiscal issues have regularly constrained the recovery – the debt ceiling debacle in summer 2011, the last-minute resolution of the fiscal cliff in December 2012, the brute force sequester of 2013 and so on. Most vexing is not knowing how businesses will be taxed or how the federal government will shape future spending. This makes budgeting and planning capital outlays and payrolls into the future an uncertain process.

Set up in 1952 under the auspices of the Banco de México and with the support of six other founding central banks (the central banks of Chile, Colombia, Cuba, Ecuador, Guatemala and Honduras), CEMLA has for seven decades promoted debate over, and a better understanding of, important monetary and financial matters for the region’s monetary authorities, and helped share best practices in the different areas of central banking among all of its associate members. CEMLA currently has 31 associate members and 20 collaborating members, and has established itself as the foremost institution in Latin American central banking. The Banco de España has worked closely with CEMLA since joining as a collaborating member in 1965. After participating in CEMLA’s governing bodies in an observer capacity for two decades, last year the Banco de España became an associate member, thus reinforcing its commitment to the organisation. Allow me to share with you now, in these opening remarks, a few brief thoughts on the need to reinforce multilateral cooperation in the current geopolitical context to which I have just referred. Russia’s attack on Ukraine is taking an appalling toll in terms of lives, destruction and displaced persons. Of course, it is also having an economic impact, one that is putting our responsiveness to the test. The war broke out at an already delicate juncture for the world economy, with the various regions emerging from the pandemic at different speeds and amid much uncertainty, inflationary tensions and global production chain disruptions.

This can only be agreed under the veil of ignorance,8 i.e. under the expectation that participating economies, in their diversity, have comparable strengths and weaknesses. And that is why such a new social contract can only happen at the end of a new convergence process. As to which level which budgetary responsibilities are allocated, and how they are matched by appropriate democratic arrangements, I believe this is ultimately a political decision. It should emanate from a political process, and I note that other federations with more developed forms of political union such as Switzerland or the United States have found very different answers to this question. Further integration within the euro area raises the difficult issue of the relationship with the “outs”. Adequate safeguards have to ensure full consistency with the Single Market, which is the European Union’s most valuable achievement. However, while such safeguards will have a bearing on the design of euro area integration, they cannot change its direction. The biggest threat to the Single Market is not euro area integration: it would be euro area stagnation.9 Conclusion Ladies and gentlemen, The triathlon competitions here in Vouliagmeni ended a decade ago. The challenge of making EMU work is far from over. In fact, we are now just out of the water. Let’s get ready for the bike race and not forget about the running that will come later. Many thanks for your attention, and I am now looking forward to our debate.

There is among the Nordic countries an acceptance on the positive long term net effects on productivity, growth and employment. Globalization creates opportunities for new jobs. • The reason for the positive view on globalisation in the Nordic countries might be a broader social security net and public policy that help people who lose their jobs due to trade as well as technology. Training and education improve employability and reasonable replacement ratios in unemployment benefit and other social benefits can mitigate the negative short-term effects of globalization. These are all fiscal or structural policy issues, outside the scope of monetary policy, but still important in a global perspective. • To summarize: Globalisation and technology are strong forces that rapidly shape the world. Policymaking is needed to facilitate the changes that ensue for individuals, companies, the public sector and countries as a whole. In that policymaking, I want to stress that each and every policy area should do what it does best to make good contributions when the changes are being managed. • Thank you! -------------------------------- References • Alvaredo, F., A. B. Atkinson, T. Piketty, and E. Saez (2013), “The Top 1 Percent in International and Historical Perspective”, Journal of Economic Perspectives Volume 27, Number 3, 2013. • Bivens, J., (2015), “Gauging the Impact of the FED on Inequality During the Great Recession”, Hutchins Center on Fiscal and Monetary Policy at Brookings, Working Paper 12, June 2015. • Coibion, O., Y. Gorodnichenko, L. Kueng, J. Silvia, (2017), “Innocent Bystanders?

It is not part of our mandate. This is more effectively done by fiscal policy. I don’t believe any other central bank specifically takes this into account either. • But going forward, the Swedish parliamentary committee on finance has asked the Riksbank to evaluate the distributional effects of the expansionary monetary policy in recent years. So this is an area we are working on now and will continue to do so. • As the theme of this conference is “reshaping globalisation” I would like to end by adding some words about my views on the global perspective on equality and the possible explanations for increased inequality in many developed economies during recent decades. As I have said, the contribution from monetary policy to equality should in my view in general be minor. • I do not think you can talk about globalisation without also talking about technology. Some argue that increased inequality in many countries is due to the latest technological progress having been skills biased, resulting in a rise in the skill premium and the decline of some labour market institutions in advanced economies, emerging markets and developing countries 4.

In its turn, that would drive economic growth and drag down inflationary pressure inflicted by wage growth. Thereby, there is a set of structural measures which are not only important for the economic growth, but also may have a positive impact on inflation and, consequently, rate reduction in the economy. I would like to dedicate the second part of my statement to development of banking regulation and supervision and announce some important changes the Bank of Russia intends to introduce shortly. Let me begin with banking system challenges, the global developments affecting the Russian financial system and requiring new solutions. All over the world, the banking sector is going through a serious transformation in the aftermath of the latest global crisis: regulation has been tightened; capital burden has increased, making banks in many countries unattractive for investments. Despite soft monetary policies in the leading economies, the banking system is wary of boosting lending. Disproportionate regulation made parallel banking, including asset management, more attractive. Thereby, banks transfer risks to other market participants, though it is not always clear. Moreover, if banks give up certain activities following the new regulation, it may result in a loss of liquidity, among other things, in such an important sector as bond market. As a result, possibilities of bond offering shrink and the market becomes more volatile and exposed to shocks. Another challenge for the banking sector is a rapid fintech evolution that transforms relations between customers and financial institutions. New players (e.g., retailers) launch financial products and services.

I urge the industry to come together and focus on the long term benefits, and give its full support to initiatives such as ISM’s Fraud Intelligence System, and collaborate on other innovations such as the electronic reporting of motor accidents to bring the cost of insurance closer to its “true cost”. Such collective effort is critical to make insurance and takaful accessible to many, and to promote its sustainability over the long term. Individual insurers should also adopt the longer term view and invest in innovation. Much more can still be done by insurers that are part of global insurance groups to bring new technologies, product designs and process improvements into the Malaysian market. The undue focus on short term profitability driven at the group level have often come at the expense of certain market segments being underserved and customers being denied best value for money. Foreign insurers need to contribute more to justify their presence in the Malaysian market. Thirdly, insurers and takaful operators need to cultivate and continuously affirm society’s trust in the industry. Insurance and takaful products have become more complex with the result that most consumers do not fully understand what they have purchased. A larger number of players chasing the same pool of customers, result in intense competition that gives rise to poor sales practices. Pressure to improve underwriting results by controlling claims costs can also have unintended effects on the consumer experience.

We believe improving our credit provision infrastructure in this way can improve credit allocation and support firms to get the credit they need to grow, primarily by reducing information asymmetry between the creditor and the lender. Typically in the UK, it is only an SME’s bank that has ready access to the data needed to price a loan. This makes it difficult for firms to shop around and get the best rate. Our approach 4 All speeches are available online at www.bankofengland.co.uk/news/speeches 4 prioritises using technology to more accurately and competitively identify creditworthy borrowers, as a means to increasing aggregate credit flowing to SMEs. Open to changing the way we work My third theme is the importance of the Bank of England being open to changing the way we work. Of course, it is not just the private sector who should be embracing change. We, as central banks, need to reflect on our own way of working. In particular, if we are going to regulate the digital economy effectively we will need to equip ourselves with appropriate digital tools. Central Banks ingest and analyse huge volumes of data in the course of our regulatory activity. This is necessary for our surveillance, but comes at a cost to the firms we regulate. The bill for regulatory reporting in the UK is estimated at between £ and £ a year. We want to leverage modern technology so that the way we collect and analyse data becomes cheaper, faster, and more effective.

It speaks volumes that the Group has focused its work in recent years on effective governance, the role of supervision, and on conduct and culture. Each of the four remaining panels will address one aspect of the multidimensional nature of cultural change. • In the first panel, we will hear about engagement with employees – especially those who are skeptical of the benefits or practicality of reform. • In the second panel, we will discuss accountability – not only in the sense of being “held accountable,” but also in the broader sense of promoting responsibility and stewardship. I am particularly interested in designing incentives – both the carrot and the stick – that yield conduct aligned with the public purposes of banking. • The third panel will focus on skill development – particularly on recruiting and training as levers for sustained cultural change. • And the last panel will focus on leadership and industry collaboration. A prime element of leadership, within a firm and across the industry, is character – behavior anchored in values consistent with the public’s legitimate expectation of trustworthiness. Our keynote speaker today is Christine Lagarde, the managing director of the International Monetary Fund. Christine Lagarde has been outspoken in her view that “financial leaders [must] take values as seriously as valuation, culture as seriously as capital.” 9 This makes abundant sense to me – culture and capital each promote financial stability. Thank you for joining us.

Other drivers of the turmoil included regulation and bank internal risk management limits, as well as concentrated reserve holdings (with a few banks holding large amounts of reserves). Despite the lack of contagion to the euro area in this episode, it is a relevant lesson to consider for future euro area monetary policy normalisation (while bearing in mind that concentration of reserves in the United States is structurally higher than in the euro area). [19] History can provide an interesting perspective and the paper by Anderson, Chang and Copeland (2020) featured in this conference examines the effects of central bank liquidity provision during the 1918 Influenza Pandemic; see Anderson, H., Chang, J.-W. and Copeland, A. (2020), “The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Influenza Pandemic”, Working Paper. [20] For a model in which the distribution of excess liquidity among banks matters for the money market dynamics see Afonso, A., Armenter, R. and Lester, B. (2019), “A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow,” Review of Economic Dynamics 33, pp. 177-204. [21] For an analysis of scarcity effects see Arrata, W., Nguyen, B., Rahmouni-Rousseau, I. and Vari, M. (2019), “The Scarcity Effect of Quantitative Easing on Repo Rates: Evidence from the Euro Area”, Journal of Financial Economics, 137(3), pp. 837-856; and Corradin, https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp201123~8d9573b1b1.en.html 6/7 24/11/2020 Shifting tides in euro area money markets: from the global financial crisis to the COVID-19 pandemic S., and Maddaloni, A.

Hamad Al-Sayari: Islamic banking prudential standards Speech by His Excellency Hamad Al-Sayari, Governor of the Saudi Arabian Monetary Agency, to the “Symposium on Islamic Banking Prudential Standards”, Institute of Banking, Riyadh, 15 January 2007. * * * Ladies and Gentlemen, It gives me a great pleasure to address this honorable and distinguished attendance at this important symposium on “Islamic Banking Prudential Standards” organized by the Institute of Banking (IOB) in cooperation with the Islamic Financial Services Board (IFSB). The issue of Shari’a (Islamic Law) compliant banking is increasingly drawing attention of those concerned with financial stability, including international financial institutions such as the IMF, World Bank (WB), development banks, Basel Committee on Banking Supervision as well as supervisory authorities in the countries where Islamic banks operate. This is the result of rapid growth in the volume and scope of Islamic services offered in many countries. Those entities have shown a great interest in the growth and expansion of finance business compliant with the principle of avoiding interest and its impact and implications with respect to world markets and the global economic system. Currently, Shari’a compliant banking transactions have spread in most countries of the world through banks that totally comply with Shari’a or through Shari’a compliant windows offering all services, investment and commercial activities, leasing, investment funds and joint liability products. The Kingdom has been a forerunner country in supporting and encouraging Saudi banks to offer such products required by the Saudi market.

On this score, our experience has been fairly positive with a high level of residential construction in recent years. The tax system should treat investment in residential property neutrally and on a par with other investments. Several official studies in recent decades 7 – from Sekse to Skauge – have shown that the tax system favours residential property consumption and investment. This leads to overinvestment in residential property, displacing other types of investment. At the same time, the tax system makes it more advantageous to own a home instead of renting. Through the years, the tax on the advantage of homeownership has been gradually reduced. In 2005, it was removed. Tax deductibility of debt interest was maintained. In practice, this implies a housing investment subsidy. Homeowners benefit from an income deduction for expenses for income acquisition, but do not pay taxes on the income. In central areas where available sites are scarce, the tax advantage will result in a higher level of house prices. A more neutral taxation of residential property – for example as proposed by the Skauge Commission in 2003 – would also have a stabilising effect on the price level in the housing market. A tax that is based more on market values will increase when house values rise and fall when house values decline. This will curb the willingness to pay when purchasing homes during upturns and sustain it during downturns. The exemption for residential property tax is a source of more unstable house prices and credit cycles.

Rules or practices in Norway that diverge from other countries will influence the competitiveness of Norwegian-owned bank and is in practice hardly feasible. 12 Other countries will be of the same mind. It is therefore easy, particularly in an upturn, to be drawn into a negative spiral that culminates in a least common multiplier for capital requirements. It is my view that it is important to strengthen cooperation in this area, particularly between Nordic finance ministries and supervisory authorities. We must aim at a common approach to preventing systemic risk. 13 Nordic cooperation is already extensive, but primarily focuses on crisis management of a potential crisis in cross-border banks. Crisis simulation exercises with the participation of finance ministries, supervisory authorities and central banks – 15 participants from 5 countries 14 – illustrate that interests may easily conflict and that coordination is very 9 See Ordonez, M.F. “Speech by the Governor. 2008 International Monetary Conference – Central bankers panel, Banco de Espana, 2008. 10 See article in Financial Times, 4 June 2008, “ A party pooper’s guide to financial stability”. 11 See Kashyap, A.K., R. Rajan and J.C. Stein, “Rethinking Capital Regulation”, 2008. www.kansascityfed.org. 12 In 2006, the Financial Supervisory Authority of Norway recommended that the highest loan-to-value ratio for home mortgages with the lowest risk weight using the standardised approach under Basel II be lowered from 80 to 75 per cent of sound mortgage lending value. The Ministry of Finance did not follow the recommendation.