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The third and final task should be to oversee the activities and risks of these banking groups. To set up the EOFS one would, to start with, need to second staff from national supervisors and central banks. Initially the EOFS should probably only have limited powers, namely to collect information and undertake on-sight inspections together with national supervisors. All other powers, such as licensing activities, regulations, interventions and corrective actions would still remain the responsibility of national supervisors. Consequently, the EOFS would act alongside the national authorities producing comprehensive risk analysis of the designated banking groups and based on those analysis give advice on policy actions to the national authorities. In the event of conflicting interests between authorities the EOFS could also act as neutral mediator. Further, a coordinated European supervision of banks and groups with significant crossborder activities would facilitate a more efficient management and resolution of cross-border crises. It would be easier to reach a common assessment of the systemic importance as well as the solvency of the bank or group in question. What I, in content, am proposing is that the EOFS in its embryonic stage would function more like a non-regulatory central bank than a traditional supervisor. The EOFS would conduct macro-prudential oversight and act as an enlightened speaking partner to the supervisory authorities. In my view, it is important that the EOFS is a separate agency with an independent status. The reason is that in order to be successful the EOFS would need a high level of operational independency and integrity.

In order to reap the benefits from economies of scale and scope, Nordea has chosen to concentrate its different functions, such as treasury operations, credit decision-making and risk management to specific centres of competence within the group. It is therefore questionable whether the different entities within the group really are selfcontained, even if they are legally independent subsidiaries. With this structure, it is also less likely that the group as whole can survive a failure of one of its entities. Hence, operationally and in economic terms, Nordea increasingly resembles a bank with a branch structure. A consequence is that the present regulatory structure may be less well-suited for efficient supervision and regulation of the group. A fourth challenge is that the practicalities of supervision and crisis management are greatly complicated as the number of relevant authorities increases. In normal times, this means that the regulatory burden for the financial firms increases. Also, the need for supervisory cooperation increases, which demands new supervisory procedures and the creation of common supervisory cultures. In times of financial crises, sharing information and coordinating action becomes a difficult priority, especially since time is a scarce resource in crises. A fifth challenge is that conflicting national interests emerge as banks become truly crossborder. The national authorities have a national mandate and are responsible to the national government or parliament. They are therefore unlikely to take the full external effect of their actions in other countries into account.

Ardo Hansson: Working together for the good of the EU and Estonia Opening speech by Mr Ardo Hansson, Governor of the Bank of Estonia (Eesti Pank), to the Ragnar Nurkse Lecture for the 95th Anniversary of Eesti Pank, Tallinn, 4 November 2014. * * * Professor Balcerowicz, President of the Riigikogu, Chair of the Supervisory Board of Eesti Pank, Excellencies, Ladies and Gentlemen, Thank you for being here today to mark the 95th anniversary of Eesti Pank and to honour Ragnar Nurkse, the world's best-known economist from Estonia to date. Eesti Pank was founded when the Republic of Estonia was only a year old and Ragnar Nurkse was a model eleven-year-old pupil at the Tallinn Cathedral School. In the words of Juhan Kukk, the Minister of Finance of the time, founding Eesti Pank as the issuer of the national currency and tying the currency to gold showed the same great “bravery and belief in national and economic independence” as engaging in the War of Independence did. Ragnar Nurkse started his studies in the University of Tartu, but he soon moved to continue them in the School of Economics of the University of Edinburgh and later in Vienna. He was recognised in his home country for his work, as is shown by the worried letter that Jüri Jaakson, Governor of Eesti Pank at the time, sent him in spring 1938. Nurkse was working in Geneva at the time for the League of Nations, the forerunner of the United Nations.

Instead, there are many reasons to believe that more stable economic performance over time also leads to conditions that foster high growth and employment. Moreover, a simple comparison of unemployment data between the periods before and after the shift in regime proves rather misleading. This is because of the attempts in the 1970s and 1980s to meet the target of full employment through a policy that was unsustainable in the long run - it was exactly because of this that the change in regime was implemented. As I mentioned earlier, this policy involved Sweden devaluing the krona as soon as we were hit by a cost crisis that resulted in weaker developments in exports and employment in the private sector. The devaluation of the krona restored competitiveness by lowering real wages for a number of years until excessive increases in prices and wages compared with abroad once again eroded the scope that had been created. The other way in which unemployment could be kept down was through a sharp increase in public sector employment. From having comprised 15 per cent of the labour force in 1960, the proportion of the employed accounted for by the public sector rose to just over 30 per cent by the end of the 1980s. So even though jobs were being lost in the private sector, employment held up through increased employment in the public sector. However, neither the decreases in real wages due to the devaluations or the increased public sector employment could solve the problems in the long run.

According to UN estimates 2 , by 2050 Europe's population will have shrunk by more than 70 million, that is by around 10%. In the same period, Asia's and Africa's population will have grown by 1,300 million and more than one billion respectively. This means that we should expect a gradual shift in the centre of gravity of the economic activity from the US and Europe to Asia and Africa. As a matter of fact, numerous estimates have shown that in 2050 the Chinese economy will be 40% larger than that of the US, while India's economy will be similar to the US in terms of GDP measured at purchasing power parity 3 . These trends are also reflected in studies assessing what companies in developing markets will challenge the current global giants based mainly in the US, Europe and Japan. According to Boston Consulting Group, the 100 ‘global challengers’ include 44 Chinese, 21 Indian and 12 Brazilian companies. There are no Polish companies on this list, even though it includes a few companies from Egypt and Turkey 4 , among other countries. In the future, demographic trends will be of greater significance than they used to be in the past, for several reasons. First of all, the population is aging faster in the developed world, yet China will also be affected by this problem due to its one-child policy.

All else equal, the removal of a considerable amount of this risk by the Fed’s purchases would be expected to lower agency MBS rates by lowering this extra return, thereby reducing primary mortgage rates, stimulating demand for housing, and prompting increased refinancing activity. Indeed, 3 See responses to June 2012 Survey of Primary Dealers. 4 For example, see Brainard and Tobin (1968), Vayanos and Vila (2009), Li and Wei (2012), Gagnon et al (2010), Krishnamurthy and Vissing-Jørgensen (2011), and Hancock and Passmore (2011). 2 BIS central bankers’ speeches asset purchases do appear to have a meaningful impact on mortgage markets. For example, in the two days following the announcement of additional agency MBS purchases at the September 2012 FOMC meeting, agency MBS yields declined by roughly 30 basis points and option-adjusted spreads to Treasury securities narrowed by about 25 basis points. Over time, the primary mortgage rate also declined to about 3.3 percent, near its lowest levels on record. Even though the Committee is communicating a monthly pace and composition of purchases, in my opinion, the predominant effect on interest rates from changes in the Federal Reserve’s portfolio holdings comes from the expectations of the total stock of different risks that the Federal Reserve will remove from private investors and the length of time that it will hold these risks.

The challenge is to enhance efficiency and reduce costs, respond to market and regulatory demands and, most of all, gain competitive advantage through innovative products and services. The overall Islamic financial system, comprising financial institutions, markets and the financial infrastructure, has demonstrated its viability and robustness as a form of financial intermediation. Its growing role in mobilising and channelling funds to productive investment activities across borders brings significant benefits to global economy. Building stronger financial markets and greater intermediation through knowledge sharing especially, forms an important part of this process to facilitate greater international and investment flows. Much in the same way that national strategies are developed to remain competitive in the new, knowledge-based economy in a globalised environment, institutions in the public, private or non-profit sectors, have come to recognise that "knowledge" can play an important role in enhancing the effectiveness of their operations. In addition to investments in human capital and leveraging on the role information technology, considerable attention has been devoted to harnessing the explicit and tacit knowledge they posses. Ladies and Gentlemen, I have previously made two references to the New Silk Road. The first was made at the 2nd World Islamic Economic Forum (WIEF) on "Unleashing the Potential of Emerging Markets" in Islamabad, Pakistan in November 2006, while the second reference was during a special address at the Global Islamic Finance Forum - Investors and Issuers Forum in March 2007.

Hoerova and Monnet (2011) view market 6 BIS central bankers’ speeches money market (as demand might not be fully matched by supply) and segmentation in the market between maturities over and below 30 days. At the same time, by reducing liquidity risk, the LCR may lead to lower liquidity risk premia. The overall effect of these two countervailing forces is unclear though. While there could be an overall impact on the difference between short and longer-term rates, to assess the overall impact on the monetary policy transmission, one would need to see whether the transmission from short to longerterm rates would be also affected. However, it remains to be seen whether unsecured lending beyond 30 days will revive after the crisis. As mentioned, this new set of liquidity requirements is expected to have important consequences for limiting solvency risk and encouraging good risk management. In fact, the regulation is expected to bring an overall positive effect on the functioning of the money market by internalising the negative externalities for financial stability and monetary policy, i.e. reducing information asymmetries concerning banks’ liquidity risk exposure and their liquidity risk bearing capacity, creating the conditions for a better functioning of the money market.17 This has to be combined with actions ensuring a proper functioning of the money market (such as oversight of reference rates along the lines recently proposed by the European Commission).

This would have negative consequences for investment, competitiveness, growth and employment in the euro area. So there cannot be any “benign neglect” with respect to the exchange rate. A stable and strong currency contributes to lowering long-term interest rates, which play a crucial role in the financing of the economies in continental Europe. All these reasons point to the need for a strong and stable euro, a currency that will be as credible as the franc, the guilder or the Deutsche Mark. The euro must be, and will be, rock solid. Therefore the exchange rate of the euro, even if not targeted as such, will undoubtedly play an important role as an indicator in the conduct of the single monetary policy. 5 See, for instance, “Money Demand in EU Countries: A Survey”, by F.X. Browne, G. Fagan and J. Henry, EMI Staff Paper n° 7, March 1997. 6 This is different from the current stance in France, where the stability of the exchange rate vis-à-vis the most credible currencies within the ERM is one of the two intermediate targets of monetary policy. BIS Review 112/1997 -4- 1.4. The starting level of key interest rates in the euro area Let me say a few words on another strategic question: what will be the starting level of key interest rates in the euro area thirteen months from now? Futures contracts on short-term interest rates reflect the market’s expectations on this issue.

In the model, the central bank therefore raises its policy rate to curb the rise in inflation and gradually bring it down. The tighter monetary stance, which in this model is represented by an increase in the real interest rate, results in a negative output gap. [10] The extent to which monetary policy should be tightened to achieve a reasonable trade-off depends on the impact of higher prices and costs on consumption and investment. In most New Keynesian models, a cost shock does not affect demand directly. This is because temporary disturbances have little impact on households’ permanent income and because households and firms can borrow and save freely in these models. In practice, however, many households have small financial buffers and limited borrowing capacity. A decline in purchasing power due to a higher interest rate and higher prices will compel these households to reduce consumption. In addition, higher costs can reduce firms’ profits and thereby business investment. Chart: Costs shock – monetary policy trade-offs These effects of a cost shock can be illustrated in a model with different types of households – a so-called TANK model. [11] The model assumes that there are two types of households. One group can spread the effect of a decline in real disposable income on consumption over time, that is to say they can smooth consumption. The other group, called hand-to-mouth households, spends all its disposable income in each period. The cost shock hits the hand-to-mouth households relatively hard, and aggregate demand falls.

BIS central bankers’ speeches 3 Returns important for preservation of real value That brings me to the third criterion for our investment activity – return. I would like to stress that the SNB is not concerned with maximising return for its own sake. Rather, return is inextricably linked to the criterion of security. Our goal is to ensure that the purchasing power of the currency reserves at least is maintained over time. That, in turn, presupposes that the long-term return we earn on our investments is equal to or greater than the average rate of inflation. Bear in mind that we are aiming to preserve real value in Swiss francs, not in local investment currencies. This means that a certain amount of positive return in local currencies is needed, if only to balance out the currency losses incurred in periods when the Swiss franc is appreciating. To improve the long-term relationship between risk and return, government bonds in our portfolio are supplemented by the additional investment categories I have already mentioned. Generally, the potential returns on equities are greater than those on government bonds issued by the major advanced economies. They can therefore make a contribution to preserving the real value of the currency reserves. To be more precise, equities increase the probability of preserving the real value of the currency reserves. This applies, in particular, in view of the current low (or negative) real returns on government bonds in core markets.

The issue is whether this world, however desirable, is realistic. There are some reasons for doubt. Financial system reinvention One of the likely consequences of the crisis, and the resulting regulatory response, is that the financial system will reinvent itself. Financial activity will migrate outside the banking system. And with that move, risk may itself change shape and form. What previously had been credit and maturity mismatch risk on the balance sheet of the banking system may metastasize into market and illiquidity risk on the balance sheets of non-banks. This could have important implications for the stability of the financial system and the broader economy. With more activity outside the banking system, and with the banking system itself better protected, the financial system and economy may become less prone to the low-frequency, high-cost banking crises seen in the past. But that is not the end of the story. Risk, like energy, tends to be conserved not dissipated, to change its composition but not its quantum. So it is possible the financial system may exhibit a new strain of systemic risk – a greater number of higher-frequency, higher-amplitude cyclical fluctuations in asset prices and financial activity, now originating on the balance sheets of mutual funds, insurance 4 BIS central bankers’ speeches companies and pension funds. These cyclical fluctuations could in turn be transmitted to, and mirrored, in greater cyclical instabilities in the wider economy. In this world, it would be very difficult for monetary, regulatory and operational policy to beat an orderly retreat.

At the moment, both total, or headline, inflation and core inflation, which excludes the volatile food and energy prices, have increased but remain below levels consistent with our dual mandate objectives – which most members of the FOMC consider to be 2 percent or a bit less on the personal consumption expenditures measure. Moreover, the rise in commodity prices is likely to put further upward pressure on headline inflation in the coming months. Provided commodity prices level off around current levels, the effect on inflation should be transitory. But we will need to ensure that commodity price pressures do not cause inflation expectations to become unmoored. If that were to occur, it would be more difficult to keep inflation in check. To sum up, economic conditions have improved in the past year. Yet, the recovery is still tenuous. And, we are still far from the mark with regard to the Fed’s dual mandate. In particular, the unemployment rate is much too high. Economic conditions in Puerto Rico Now let me turn to economic conditions in Puerto Rico. In contrast to the situation during my last visit, I am pleased to see signs that the Commonwealth may finally be emerging from this painful recession. Nevertheless, conditions remain difficult for many families. The recession here has been deeper than the downturn on the mainland. By mid-2010, total employment in Puerto Rico had fallen by 13 percent or 138,000 jobs from its peak in 2005.

Last year, some of Puerto Rico’s banks were consolidated and many improved their balance sheets by selling underperforming assets. Both of these steps are likely to produce stronger, healthier institutions more able to make the sound lending decisions that support economic growth. 6 BIS central bankers’ speeches All of these activities, ranging from effective monetary policy and prudent financial regulation to fostering economic literacy and measurement, complement and reinforce each other to help support a strong economy in Puerto Rico. Conclusion To sum up, the mainland economy experienced a pick-up in activity during the second half of 2010 that shows signs of continuing in 2011. The recovery in Puerto Rico has taken longer to get off the ground, but now shows signs of firming. On the mainland and in Puerto Rico, unemployment remains stubbornly high, but many indicators suggest that conditions are in place for stronger employment growth in the coming months. With government and business leaders like yourselves working together to build a better future for Puerto Rico, I am hopeful that we will soon be able to look back at 2010 and see not only the end of the island’s long recession but also the beginning of an era of growth and prosperity for Puerto Rico. Thank you for your kind attention. I would be happy to take a few questions. BIS central bankers’ speeches 7

The structure and condition of the financial system at any given time is determined by historical factors, economic and market conditions, the regulatory environment, technology, and culture and ethics. The Central Bank and the regulatory environment are also part of the financial system. The public sector can affect developments in the financial system through the regulatory framework, through transactions with the system – not least through the Central Bank – and by affecting culture and ethics. At present, the system is shaped by the financial crisis and the responses to it, including the capital controls. It is a relatively homogeneous system dominated by three domestic-oriented banks with similar business models and risk profiles. The capital controls, implementation of international regulations, and more stringent Icelandic regulations on foreign exchange risk all affect the banks. The capital controls will be lifted, but much of the regulatory environment will remain. Risk in the financial system has diminished markedly in recent years as resilience has grown, which can be seen in capital adequacy and funding; furthermore, liquidity relative to the scope of operations is much greater than before the crisis. The three largest commercial banks’ combined capital amounted to 669 b.kr. at the end of 2015. The banks’ equity ratios have risen by nearly a third since 2010, from 21% to 28%. In real terms, their equity has increased by 180 b.kr. over this period. Furthermore, the banks’ foreign exchange imbalances have been reduced, and the regulatory framework prevents excessive risk-taking in foreign currencies.

Jean-Claude Trichet: Lessons from the crisis and steps towards economic stability Keynote speech by Mr Jean-Claude Trichet, President of the European Central Bank (ECB), at the 9th Munich Economic Summit, Munich, 29 April 2010. * * * Sehr geehrter Herr Bundespräsident, lieber Horst Köhler, Sehr geehrter Herr Chrobog, sehr geehrter Professor Sinn, Meine sehr verehrten Damen und Herren, ich danke den Veranstaltern dieser Konferenz recht herzlich für die Einladung. Besonders dankbar bin ich für die Gelegenheit, im Anschluss an meinen langjährigen Freund Horst Köhler sprechen zu dürfen. Wir sind uns über einen langen Zeitraum hinweg in verschiedenen Positionen immer wieder begegnet und haben oft sehr eng zusammengearbeitet. It has always been an enormous pleasure to talk with him and to work with him. Both of us were engaged in the negotiations of the Maastricht Treaty. That is where we met nearly twenty years ago. We were also heavily involved with the handling of the European Monetary System crisis in 1992/93. I remember that episode very well. It was a defining moment not only for the monetary integration of Europe. It remains in our memories as a vivid example of what close and friendly cooperation can do in very exceptional and demanding circumstances. In my remarks today I would first like to reflect on the lessons that I believe we can draw from today’s financial and economic crisis.

Political leadership has support from relatively broad economic and social groups, with more impersonal relationships and hence stronger competition and mobility. The authors argue that the transition between development stages to what they refer to as “the second social revolution”, a somewhat broader concept than the Industrial Revolution that gives weight to, inter alia, the Enlightenment and Modernity, started over 200 years ago, and that it is still underway. In many countries, society has benefited from technological progress but is still captive of the old stage of development of personal power relationships. They point to a clear concurrence between the open-access society and economic prosperity. North Douglass C., Wallis, John Joseph and Weingast, Barry R. (2009) “Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History”, Cambridge University Press. 8 Nation-building is a difficult task if there is no trust in as vital an institution as the police. Johs Andenæs spent the spring semester of 1971 as a visiting fellow at Oxford, taking along his son Ulf, who was my schoolmate. That year, Leszek Kołakowski, one of the past century’s most famous philosophers, was also a visiting fellow at Oxford, and Johs Andenæs and Kołakowski became friends. Although Kołakowski had been one of Marxism’s prominent post-war thinkers, by 1971 he had completely lost faith in the ideals of his youth. His relationship with the same Communist authorities that he had served as an ideologist earlier in his life was becoming increasingly difficult.

Labourers might receive partial payment for their efforts in kind, or at large mills, in scrip that could only be used for purchases in the company store. The monetisation of the economy, based on secure monetary values, severed many of these ties of dependency. With money in their pockets, accepted as legal tender everywhere, the farmer or labourer was able to choose. This is also freedom. Nor did the party receiving payment, e.g. the town merchants to know more about the customer than that he had money in his pocket and could pay for the goods. Eitrheim, Ø. and L.F. Øksendal (forthcoming): On secure monetary values and freedom. 6 BIS central bankers’ speeches In Norway, the aim of shielding the monetary system from the government was already embodied in the Constitution of Norway adopted on 17 May 1814. The drafters of the constitution formulated the following in Article 75(c): “It devolves upon the Storting ... to supervise the monetary affairs of the Realm”. This provision strongly censured the Danish King’s monetary policy during wartime. In future, representatives appointed by citizens, not the Crown, were to have final responsibility for the monetary system.27 The King’s scope for taxation by means of inflation was curtailed. The Storting, which was supposed to meet every third year, was not equipped to assume day-to-day responsibility for the monetary system. “Someone” had to do this on behalf of the Storting. That “someone” became Norges Bank, which was established in 1814.

While the pandemic was raging, it was said again and again that these were unprecedented times. This is true, in that even though plagues have occurred repeatedly throughout human history, there has never before been an attempt to halt the spread of a pandemic with public health measures so wide-ranging that they extinguished the economic and social lives of entire countries. The war in Ukraine, on the other hand, has scores of historical precedents stretching back centuries. And yes, with this conflict, Europe has been set back in time. The economic sanctions that have been imposed on the Russians, like the disease-prevention measures during the pandemic, will leave a trail of aftershocks in their wake and will have broad economic repercussions for Iceland no less than for other countries. Honoured guests: In Adam Smith’s The Wealth of Nations, the magic of free enterprise is considered to lie in the fact that people can communicate through price formation in the markets. In this way, the markets will connect one coast to another, enabling people to work together without knowing one another – or indeed, without necessarily liking one another. It was the exalted invisible hand that harnessed self-interest in the service of the public interest. After two wars in Europe, Western politics was dominated by the conviction that the invisible hand could guarantee peace. (Note Icelanders’ optimism in referring to the former war and the latter war – as though no other world wars are even possible.)

And even though they may have wanted to counteract inflation, they did not have the independence to do so. Furthermore, spiking oil prices were responded to with pay hikes, creating a vicious cycle of rising wages and prices – a typical wage-price spiral. This is why inflation was not brought under control until central banks had been granted independence and explicitly tasked with safeguarding price stability. In Europe, the German central bank led the battle against inflation, and it can be said that other countries tried to bask in the warmth of German credibility by pegging their exchange rates to the Deutschmark. In the Nordic countries, price stability was not ensured before a consensus was reached in the labour market with the so-called Nordic model. So is this where we are today? The lengths to which the world’s largest central banks have gone in quantitative easing over the past decade is cause for concern. They have truly taken on the task of financing government spending by printing money. It will require a Herculean effort to climb out of this slippery slope. The outlook is for many countries’ financing costs to rise significantly thereafter. By the same token, the labour shortages that have developed in the West could create wage pressures and push inflation higher. Honoured guests: It is vitally important that we Icelanders draw accurate conclusions from our own monetary history in the wake of the 1973 oil shock.

In order to have a more accurate picture of the delinquency rate, we calculate the “effective delinquency rate” by excluding this 46 percent of borrowers not in repayment; the result is shown in the right-hand panel of Chart 5. This effective delinquency rate is nearly double the measured delinquency rate, with almost onethird of borrowers in repayment being delinquent on their debt. It is important to note that because of the unique character of student debt, an increasing delinquency rate defined either way does not necessarily imply that a greater percentage of new borrowers are falling behind on repayment. Borrowers who became delinquent in the past and remain so are included in the delinquency rate. Some may also default, which is defined as being more than 270 days past due in the case of federal loans. Because student debt is not generally dischargeable, even in bankruptcy, the delinquency rate may continue to increase even when the percentage of borrowers becoming newly delinquent remains constant. We therefore also computed the proportion of borrowers in repayment who became newly delinquent on a quarterly basis. As shown in Chart 6 in 2005 about 6 percent of nondelinquent borrowers in repayment transitioned into delinquency each quarter, on average. By 2012, that rate had increased to almost 9 percent. This confirms that indeed there was an increasing trend of borrowers becoming newly delinquent over time. Our delinquency numbers may seem higher than those reported elsewhere.

In addition, higher education is an important export industry in which the US holds a significant comparative advantage. This produces a better understanding among foreigners of the US and vice versa. All of these social benefits mean that there is an appropriate role for the public sector in helping to finance higher education. The best policy would align the social and private benefits of attending college, and would find a way to relieve the liquidity and credit constraints that families face. Finally, the best policy would direct scarce educational resources toward those matches between student and institution that are likely to yield the best educational outcomes. The best matches avoid regrettable dropouts or degrees granted with little to show in the way of educational attainment or career prospects, or similar bad outcomes. In considering what the proper public role should be, it’s useful to think about an extreme case. In Europe, higher education has traditionally been essentially 100 percent publicly funded. This result is big subsidies for people – mostly wealthy people – who would have gladly paid for college if they had to. Making college free also means that there will likely be excess demand for the fixed number of seats at high quality institutions. Either this demand has to be rationed, or quality will have to fall. Neither choice is particularly attractive.

Ladies and gentlemen, Non-bank financial institutions are a significant component of the financial sector as their assets constitute a significant proportion of the total financial sector assets in most countries in the region. Similarly, microfinance institutions play a critical role in poverty alleviation and economic empowerment of marginalized communities in our region. As such these institutions are systemically important as they can exacerbate the fragility of the financial system particularly where there is lack of effective regulation. Over the past few years, we have seen a trend where these institutions have increased in numbers in our region; some have been established as part of financial conglomerates while others are on a standalone basis. Sadly, our supervisory and regulatory structures for this sector in the MEFMI region have remained rather incoherent and somewhat underdeveloped to handle the challenges that have been identified with this sector. The trend makes it more important than ever for supervisors in the region to get together and talk about matters of common interest. I am pleased to note that over the past few years, the region has taken a proactive stance towards promoting harmonisation of regulatory and supervisory frameworks and the integration of financial systems. Through MEFMI, SADC, COMESA, the East African Community (EAC) and the West African bloc, member central banks are working together to promote effective supervisory standards geared towards achieving long term goals of financial inclusion and financial stability.

BIS central bankers’ speeches 1 Ladies and gentlemen, I note with gratitude that this workshop is designed to address supervisory standards in the non-bank and microfinance sector through three main themes, namely; i) regulatory structures, ii) international trends and standards, and iii) integration of non-banks into the formal sector. These are all very important and topical issues and allow me to talk a little bit more about one of these themes – the development of regulatory structures. First, while there is a definite role for international standards for regulation of this sector, it is very important that they are implemented in a way that takes into account the individual circumstances of each country. Secondly, the standards we adopt should in the end not impede financial sector inclusion. We need to balance this in order to achieve our overall objective which is a sound and efficient financial system. Ladies and gentlemen, It is important not to assume that supervisory arrangements should be, or can be, the same in every country. They must be tailored to the individual circumstances of each country. As an example, what is appropriate for Namibia may be totally inappropriate for another country like Uganda, and vice versa. However, there are likely to be common characteristics that cut across and can enable us all to learn from each other.

That is enough to offset a reduction in GDP of some 1.5%10 – three times the Bank’s estimate of the hit from the direct effects of the tariffs implemented so far (Table 1). Indeed, the scale of market moves suggests a shock to US and Chinese business confidence and investment analogous to what has happened in the UK (Table 3). Table 3: A significant confidence shock could lower US GDP by more than 1½ % Change in level of GDP (%) US China Euro area UK World (PPP-weighted) Severe shock to business confidence in the US and China -1.8 -1.8 -0.7 -0.7 -0.9 Direct trade effects if all measures are implemented -2.1 -1.2 -0.6 -0.4 -0.8 Total -3.9 -3.0 -1.3 -1.1 -1.7 See sources and notes to Table 1. 8 Currently a sample of over 7,000 companies. More details on the Panel are available at https://www.bankofengland.co.uk/statistics/research-datasets. 9 Similarly, in the Deloitte Survey of CFOs, 54% of respondents rated the level of uncertainty as high or very high in 2019 Q1, up from 25% in 2018 Q2. 10 This assumes a multiplier of 1 – that is, a 1 percentage point fall in the federal funds rate boosts US GDP by 1%.

The Bank of Albania judges that in the period ahead, inflationary pressures along the time horizon of monetary policy stance will remain relatively high, but their intensity will decrease during the year. In the following, I will analyse in detail the factors determining inflation developments and related risks. During the first months of 2011, global economic activity continued to grow, although the signals coming from confidence indicators suggest that risks associated with these positive developments are in place. Global inflationary pressures have increased as a consequence of a higher demand and persistent supply-side shocks. In advanced economies, fiscal consolidation and public debt reduction remain the major concerns, whereas inflation pickup has decreased the space for monetary stimulus. In advanced economies, the positive global demand momentum has led to increased aggregate demand, while the upward inflationary pressures have made the central banks respond by tightening the monetary policy. In financial markets, the public balance health has determined the yield performance in several countries, while the political tensions have elevated the demand for safer instruments. The outlook remains highly uncertain, as a consequence of higher global prices, fiscal consolidation in some euro-area countries and less space for fiscal and monetary stimulus. Returning to Albanian economy, the latest data on 2011 Q1, obtained from business confidence surveys, the performance of external trade activity, and monetary and fiscal indicators, support the continued recovery of the domestic economic activity, primarily due to positive contribution of production sector. External demand and fiscal stimulus are factors of major influence on this growth.

Low but gradually rising inflation Inflation in Sweden has been low for a long period of time and we devoted extra space to this fact in the July report.1 It is not so strange that inflation has been low, given the Swedish economy’s dependence on global economic activity. One of the main reasons is that prices of Swedish import goods have been low. This is largely due to global economic activity being weak and having affected global export prices, but the stronger Swedish krona has also 1 A more detailed analysis of the development of inflation is included in the article “The development of costs and inflation” in the Riksbank’s Monetary Policy Report published in July 2013. 2 BIS central bankers’ speeches contributed. Another reason is that companies have not raised their prices to the same extent as their costs have increased. The low price mark-ups are partly due to demand being lower than normal and to the considerable uncertainty over international developments. In July we assessed that inflationary pressures would gradually increase over the coming years, as Sweden and other countries recover. This means that CPIF inflation is expected to reach 2 per cent in 2015. CPI inflation is expected to be higher than the target of 2 per cent at the end of the forecast period, which is due to mortgage rates rising when the repo rate starts to increase as the economy improves. Let me describe in more detail the factors expected to contribute to the upturn in inflation.

Pillar 2 recognises that national supervisors may have different ways of entering into such discussions and provides flexibility to accommodate those differences. At the same time, Pillar 2 will ensure that supervisors share insight 2 BIS Review 42/2003 into their approaches with others and will foster a better understanding among supervisors and bankers about the differences in national regulatory practices. Over time, discussions among supervisors will undoubtedly improve our understanding of each other’s processes and promote information sharing and cooperation among regulatory agencies. Consequently, Pillar 2 should help us to reduce the supervisory burden on globally active banking organisations and foster more consistent supervisory approaches and practices across national borders. This corresponds directly to the mandate of the Committee’s Accord Implementation Group, or “AIG”. The AIG was set up at the end of 2001 under the Chairmanship of Nick Le Pan of the Canadian Office of the Superintendent of Financial Institutions, and Vice-Chair of the Committee. The group comprises high-level supervisors from member countries, who share planned approaches to implementation. The intention is that this exchange of information should enhance the consistent application of the New Accord and thereby promote a level playing field - which we all agree is an important objective. In this sense, the AIG has a practical focus, while policy issues remain the responsibility of the Committee itself. Home / host implementation issues on a world-wide basis. This brings me to the second topic on my list, which is home/host implementation issues.

Mary will say a lot more about this in her keynote address, so let me highlight briefly some of what MAS has been doing on this front. MAS has conducted a stocktake of culture and conduct practices across selected financial institutions. Our supervisors had extensive one-on-one conversations with not just the management of these financial institutions but staff across the ranks. These conversations allowed our supervisors to gain insights on the staff’s perceptions of culture and their level of risk awareness. They helped us develop a keener sense of: whether the tone-from-the-top echoed from the bottom; and whether the organisational values plastered on the walls of the board room were practised on the ground. What have we found? Culture and conduct practices are uneven in the industry. Many financial institutions still struggle to articulate the conduct risks they face. Many are only starting to develop tools and indicators to obtain a holistic, cross-functional view of the culture within their organisation. What’s next? MAS with the banks have set up a steering group to identify emerging trends in conduct and behaviour as well as share best practices in “getting the culture right”. MAS has also set up a small behavioural sciences unit to build up our capabilities in this 4/5 BIS central bankers' speeches area and support our supervisors with methodologies to get a better understanding of culture and conduct issues in the institutions they supervise. Let me conclude. Financial institutions have restored their capital, but not public trust.

Anita Angelovska Bezhoska: The Republic of Macedonia has accessed the highest statistical data dissemination standard of the IMF - SDDS Plus Address by Ms Anita Angelovska Bezhoska, Governor of the National Bank of the Republic of Macedonia, at the event marking the adherence of the Republic of Macedonia to the IMF’s Special Data Dissemination Standard (SDDS) Plus, Skopje, 1 February 2019. * * * Dear ladies and gentlemen, It is my great pleasure that the idea which at the national level was initiated by the National Bank of the Republic of Macedonia several years ago, and accepted and actively supported by the State Statistical Office and the Ministry of Finance, today is already a reality. On 28 January this year, the Republic of Macedonia officially became a member of the highest statistical standard of the International Monetary Fund – SDDS Plus. We have jointly succeeded our country to become part of an international data dissemination initiative, which so far included only seventeen countries, including the United States, Canada, France, Germany, Austria, Italy, Sweden, Japan... The Republic of Macedonia is the eighteenth country in the world, the second from Southeast Europe, and the first among the countries of the region that are still not members of the European Union. This successful project is a clear confirmation of the commitment of the three institutions for the continuous upgrading of national statistics and their harmonization with the latest, highest international statistical standards. What actually does this standard represent?

Sargent and Wallace (1981), Leeper (1991), Bianchi and Melosi (2018)) examine the implications for monetary policy of an exogenous and unsustainable path for fiscal policy; another (e.g. Dixit and Lambertini (2003)) considers the strategic interaction between the two when the monetary authority has more conservative objectives for output and inflation than the fiscal authority. There may, of course, be gains to co-ordination even if both authorities recognise the same social welfare function but are assigned different parts of it, particularly when commitment is not possible for either, but the most severe problems nonetheless result from explicit disagreements. 5 All speeches are available online at www.bankofengland.co.uk/speeches 5 the period before the crisis than afterwards8. And the same is true of the actual level of Bank Rate. Unsurprisingly, given the importance of movements in credit supply in driving the economy, first up and then down, the two instruments would’ve moved in the same direction. Chart 2: Period of low interest rates has Chart 3: UK inflation was relatively low in the coincided with weak growth in lending, asset pre-crisis period prices Sources: Bank of England, Nationwide, Halifax/IHS Markit, Thomson Reuters Datastream, Office for National Statistics, and Bank calculations. Equity prices are for an index of UK-focused equities. Nominal variables are transformed to real using the consumption deflator. Data are for the decade to/from 2007 Q3. Source: Office for National Statistics. That’s not to say there was no tension at all between the two objectives prior to the crisis.

According to a report from the U.S. Department of Labor’s Bureau of Labor Statistics, the median tenure of workers ages 25 to 34 is only three years – less than a third of the tenure among people aged 55 to 64 years old. 1 And, according a Future Workplace “Multiple Generations@Work” survey, 91 percent of “millennials” (that is, a person born between 1977 and 1997) expect to stay in a job for less than three years. Job-hopping can speed career advancement. Getting a promotion in the process of changing jobs allows employees to avoid the “dues paying” that can keep workers in a painfully slow rise up the corporate ladder. Job hopping can also lead to greater job fulfillment. A 2012 survey by Net Impact 2 found that 88 percent of all workers considered “positive culture” important or essential to their dream job, and 86 percent said the same for work they found “interesting.” The same survey found that millennials are the least satisfied in their careers. I also recognize that firms are no longer just competing with others in the financial sector for talent. With skills that can be adapted across multiple industries, the talent pool that was once specialized for financial firms is now spread thin. This puts pressure on the firms and gives talented workers the advantage of being selective in their roles. They demand more from hiring managers and sense other opportunities out there if they’re not satisfied.

This reflects trends that point to smaller household sizes; the young moving out from family homes earlier, including to take jobs in urban cities; and an ageing population preferring to remain in their homes than move in with their adult children. Such demand pressures have been further compounded by income levels that have not increased in tandem with the increase in house prices. All told, the shortage in affordable housing based on 2014 data is estimated at 960,000 units. This could rise to one million units by 2020 if further measures are not taken to increase supply of affordable houses and improve affordability. Financing measures implemented by the Bank along with fiscal measures by the Government between 2010 and 2013 did in fact achieve this to a certain degree. House price growth has 1/4 BIS central bankers' speeches since moderated to 5.5%, closer to income growth, following measures taken to dampen speculative activities in the housing market and manage high household debt levels. Lending standards that are more aligned with the level of income have also encouraged private developers to shift their focus to the more affordable segments which should help improve supply conditions. Approval rates for housing loans by the banking sector remain high at 74%, with more than 60% of the new housing loans extended for house purchases below RM500,000. Loan rejection rates for houses in the affordable segment have actually been on a declining trend, falling by 18% since 2012.

This underscores an important truth. Housing is not just about putting a roof over our heads, nor is it only a personal or financial issue. Assuring housing stability helps ensure that households can meet other basic needs and establish roots that build stronger communities. The challenges facing affordable housing are also complex and call for multiple stakeholders to work together to find solutions that will deliver desirable outcomes over the long term. It therefore has much broader socio-economic dimensions that concerns all of us. It is firstly crucial to frame the issue of affordable housing correctly. Fundamentally, the issue is one of a large and growing mismatch between demand and supply, owing to significant changes in our housing markets and demographic shifts. Prior to 2012, investor purchases of multiple homes increased very sharply, crowding out first-time homebuyers and pushing up prices of homes across the board in preferred locations. At its peak, the growth in housing loans taken out to buy second and third homes exceeded 15%. This excludes cash purchases. This in turn drove a higher concentration of new supply in higher priced segments, further widening the demand-supply gap for affordable homes. By 2012, annual house price growth had risen above 11%, almost four times the 10-year average house price growth between 2000 and 2009. Demand for affordable homes has also increased rapidly from the higher rate of net new household formation.

The first is the pressure that strong growth in Asia and other rapidly growing emerging market economies is placing on the markets for energy and other natural resources. We have already seen this pressure reflected in a strong upward move in global energy and commodity prices since the early 2000s, as Chart 5 shows. After a brief respite during the financial crisis, this upward pressure on energy and commodity prices has resumed as the world economy has bounced back from recession. The oil price is back above $ and while there has been a modest correction in commodity prices over the past month, this seems likely to be a short-term pause in the upward trend rather than a fundamental readjustment. Chart 5 – Real oil and commodity prices since 1980 Deflated by US consumer price index; 2000=100 S&P GSCI Agriculture and Livestock index 350 S&P GSCI Industrial Metals index 300 Brent crude spot price 250 200 150 100 50 0 1980 1985 1990 1995 2000 2005 2010 . Source: IMF and Thompson Datastream It is no coincidence that this upward pressure began to emerge in the early 2000s and has continued for the best part of a decade now. The rapid growth we have seen in Asia and other emerging market and developing economies has been very resource-hungry. The effects of this can be seen in the pattern of global energy consumption, shown in Chart 6.

Caleb M Fundanga: Bringing banking facilities closer to the people in Zambia Speech by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the official opening of the Stanbic Bank Matero Branch, Matero, Lusaka, 2 February 2005. * * * • Your Excellency, the South African High Commissioner to Zambia, Mr. Mzwandile Masala • Honourable Chance Kabaghe, MP - Matero Constituency • Your Worship the Deputy Mayor of Lusaka • The Town Clerk, Lusaka City Council • Stanbic Africa Regional Director, Mr. Robert Mbugua • Representative of Stanbic Africa Retail, Mr. Lincoln Mali • Managing Director of Stanbic Bank Zambia, Mr. Larry Kalala • Distinguished Invited Guests • Ladies and Gentlemen. I feel extremely honoured to have been invited to officiate at this important occasion to mark the official opening of the Stanbic Bank Matero Branch. Sometime last year, Stanbic Bank management informed me that they would be opening two new branches, namely the Arcades Branch and the Matero branch, and asked me to choose which one I would prefer to officiate at. Without much hesitation, I choose to officiate at the opening of the Matero Branch. The reason was very simple. For those of you that are familiar with the development of the city of Lusaka, you will recall that Matero compound is one of the oldest communities in Lusaka.

6 BIS Review 16/2005 Chart 1: Absolute changes in quarterly inflation Percentage points 6.0 RPI 5.0 Consumption deflator 4.0 3.0 2.0 1.0 0.0 1960 1965 1970 1975 1980 1985 1990 1995 2000 S ource: Bank of England and O NS Table 1: Average absolute changes in quarterly inflation and GDP growth RPI 1960-1979 Consumption Deflator 1.10 0.76 1960-1972 0.83 0.57 1973-1979 1.58 1.11 1.19 0.79 0.59 0.34 1980-1992 1993-2004 GDP growth 1.45 1.18 1.93 0.69 0.34 Table 2: RPI inflation persistence 1947-1972 1972-1992 1992-2004 BIS Review 16/2005 0.56 0.91 -0.05 7 Chart 2: Bank of England repo rate and two-week forward curves Per cent 6.5 6.0 Outturns 5.5 Nov 03 IR 5.0 Feb 05 IR 4.5 4.0 3.5 3.0 2000 2001 2002 2003 2004 2005 2006 Source: Bank of England Chart 3: Earnings growth and unemployment Average earnings in Q4 (percentage change on a year earlier) 30.0 1971 - 79 25.0 1980 - 89 1980 20.0 1990 - 99 1990 1971 15.0 2000 - 2004 10.0 2000 5.0 0.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 LFS unemployment rate in Q1 (per cent of workforce) 8 BIS Review 16/2005 Diagram 1: Inflation process Labour costs Output prices Demand pressures Imports (directly consumed) Other costs Distribution sector CPI inflation Chart 4: Inflation expectations Per cent 8.0 6.0 Inde x-linke d gilts 4.0 2.0 Cons e nsus 0.0 1989 1992 1995 1998 2001 2004 Source: Consensus and Bank calculations.

Against this backdrop, the facing of the economic activity contraction at a global level remains an open issue. The Euro area economy is already experiencing an economic slowdown. Euro area GDP contracted in the third quarter while the unemployment rate reached 7.8 percent in November 2008. The U.S. economy showed quite similar features. The further contraction of economic activity – owing to the deterioration of financial indicators in the U.S. corporate and household balance sheets, mirrored in lower consumption spending and reduced aggregate investment – drove the unemployment rate to reach 7.2 percent. Monetary and financial stimuli managed by central banks and the ministries of finance have helped to bolster confidence and relieve pressure on the financial institutions. Against this backdrop, the “resilience” shown by emerging countries is displaying the first signs of weakening. In contrast to the first half of 2008, the latest data attest to the moderation of economic growth rates in the majority of these countries. The channels through which the slowdown in advanced economies has affected the emerging countries differ depending on their development characteristics. China and India have been severely hit by the slowdown in exports; Russia had hard times owing to the slump in raw material prices in the global market, while East European countries have been impacted by the tightening of funding conditions on a global level.

Meanwhile, we are in the process of negotiating with National Bank of Bosnia and Herzegovina, National Bank of Serbia, etc. I estimate that regional co-operation is an important forerunner of the integration process of the region with the rest of Europe; therefore I will not stop working to encourage a regional co-operation of high standards among the financial systems of Balkan countries. I hope that you share the same opinion with me, because only in this way, our region will be more credible and efficient to have its European dream. On the other hand, a developed and financially integrated region will be more attractive for foreign strategic investors, opening up the path toward regional development projects, particularly infrastructure ones where region’s banks might be the financing and co-financing ones. Further on I would like to give you an overview on some different issues of importance for the future of the Albanian banking system. In diverse meetings organised by the Bank of Albania with the banking community and other actors on relevant opportunities, a range of problems were highlighted and evidenced of which I think there is still room for a joint commitment, of both the Bank of Albania and, of course, the banking system. In my capacity of Governor of the Bank of Albania I would like to ensure the banking community that the institution I govern is open for an institutionalised co-operation with the banking system by channeling it through the Albanian Association of Banks.

These developments will push up inflation and imply that the policy rate must be set higher than we envisaged earlier for inflation to return to target. Price stability is essential for a well-functioning economy. High inflation is weakening household purchasing power, and lower-income households with the smallest margins are being hit hardest. Borrowers are facing higher interest rates on top of high inflation, and many will be coping with tighter budgets. But by raising the policy rate, we are helping to bring down inflation, which is in everyone's interest. Chart 3 Turbulence in international banking markets In recent weeks, problems at certain US and Swiss banks have led to large movements in global financial markets. Equity markets have fallen, and risk premiums in money and bond markets have increased a little. Expectations for both Norwegian and international policy rates have declined markedly. 1/3 BIS - Central bankers' speeches We are not seeing any signs of liquidity problems for Norwegian banks. Norwegian banks are profitable, well capitalised and well positioned to cope with losses and market stress. Households and firms appear to have ample access to credit. We are closely monitoring developments and we are always prepared to take the measures required to safeguard financial stability if needed. Let me say a little more about the economic outlook and our assessments. Chart 4 Persistently high Inflation among trading partners Inflation is also high among our trading partners, although it has recently moderated a bit. Labour markets are tight.

Prominent among the measures that have been announced or that are pending approval or final design include occupational pension schemes, a review of maximum social security contribution bases and maximum pensions, a new contribution system for self-employed workers, and a review of the reference period for calculating the regulatory base. In recent years, the Banco de España has, in various documents and reports, set out certain principles that should govern the pension reform. First, once the level of benefits the system should provide has been established at the political level, it is crucial that the strategy be rounded off by setting revenue levels and other system parameters (e.g. the retirement age) to ensure the system’s funding. As part of this strategy, it would also be desirable to strengthen the link between contributions made and benefits received – ensuring a sufficient level for the most vulnerable households –, and to analyse the consequences of the reforms envisaged in terms of redistribution and intergenerational equity, to ensure that any adjustments to the system do not fall disproportionately on specific population groups, such as the retired population or future cohorts of workers. The system should also be made more transparent and easier to plan for, to offer greater certainty to the population and facilitate decision-making as regards saving, work and retirement. In this respect, automatic adjustment mechanisms could possibly be introduced, to adapt certain system parameters to changes in demographic and economic dynamics.

We will then have detailed data on GDP for the third quarter, preliminary data on the balance of payments for the entire 2019, as well as current economic statistics for December and first data on inflation in January. We will adjust our mid-term forecast based on this information. Winding up, I would like to get back to the signal of our future actions. We have said today that we will consider the necessity of a further key rate reduction in the first half of 2020. Noting that, after similar signals in the past, it was twice that we cut the key rate already at the next meeting, namely in October and today, and anticipating your clarifying questions, I would like to point out the following. This wording means that we still see room for a slight decrease in the key rate. But both in February and at the next meetings we will comprehensively assess the reasonableness and relevance of such a decision taking into account the entire range of new data that will be available by that time. Our signal does not imply that we will necessarily lower the key rate in February or in the first half of 2020. A further key rate cut will become possible only if our analysis confirms that this is needed to bring inflation back to the Bank of Russia’s 4% target. 3/3 BIS central bankers' speeches

But even making an adjustment for that, the rise in inflation breakevens is significant. Of course, if inflation at long horizons is not generally expected to increase as the forward rates at face value might indicate, why don’t some other investors with different risk appetites sell short the overpriced index-linked bond? One answer may be that there are significant market frictions. For example, trading long-horizon forward inflation requires an investment period of many years, over which market volatility must be endured, and most speculative players have significantly shorter investment horizons. Second, transaction costs (bid-offer) are typically higher in index-linked than conventional instruments, partly because the risks in holding inventory are not predictable and are not easily hedged. 2 It may be that, against the background of more volatile realised inflation over the past year the rise in breakeven inflation rates reflects an increase in inflation risk premia, the compensation required to bear unexpected changes in future inflation. And the marginal buyers of index-linked bonds (typically insurance companies and pension funds) have become more willing to pay a premium for these assets because they better match their liabilities. Rather like entering into an insurance contract, these investors may be willing to pay a higher price for index-linked securities because the payoffs may be received in states of the world when they are most valued.

The Bank of Albania is an active supporter of financial and economic integration, considering it as one of the most important pillars to release the potential of the economy and boost its resilience to shocks. 3. On the Memorandum All the above, underlines the great importance of our economic and financial cooperation with Turkey. This cooperation imposes even us – the policy makers – to intensify the exchange of information and opinions, and seek to promote the finding of common solutions to common challenges. In this spirit, the Bank of Albania and the Central Bank of the Republic of Turkey are signing today this Memorandum of Cooperation, which may be well considered as the coronation of the insofar cooperation, as well as of our efforts to continue with drafting the relevant institutional framework for clarifying the operational cooperation protocols, in a series of central bank fields. This memorandum elevates the relations between our two countries to a new dimension. It confirms the will to elevate the level of cooperation and consolidate the ties between the two countries, providing for both institutions the necessary space for the intensification of mutual exchange of information and expertise in various fields of central banking, such as: supervision, financial stability, research, and financial education, and the regular dialogue at technical and political level. It is an important step for obtaining maximum benefits from the positive effects of integration and minimising the negative ones.

4. Similar platforms have proliferated around the world, but the trade finance gulf continues to widen. According to the Asian Development Bank, about 10% of global trade suffer from the trade financing gap.1 To put this into perspective, the value of the gap amounted to USD $ trillion in 2020, marking a 15% increase from just two years before. SMEs, in particular, accounted for an alarming 40% of rejected trade finance requests. These figures illustrated that global efforts are nowhere near enough, and we should all rethink why the gap is continuing to widen, and how to make our efforts as effective as possible. 5. A recent report published with the support of Fung Business Intelligence suggested a possible reason: the various digital trade finance platforms mostly work independently and do not synergise with each other, resulting in what we call digital islands. It is as if we are all putting our heads down and concentrating on developing our own platforms, forgetting that it is equally important for the platforms to communicate and work with each other. As suggested in the report, interoperation between the platforms could help to further modernise the global trade finance ecosystem and close the gap. 6. The Commercial Data Interchange, also known as CDI, which the HKMA is building, is precisely designed with enhancing interoperability in mind. By way of introduction, CDI aims to enhance the sharing of commercial data. Currently, every time a bank wants to connect to a data provider, it has to set up a new, separate connection.

Eddie Yue: Connecting the digital islands - next steps in trade finance Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the roundtable on “The Future of Trade Finance: Opportunities for Hong Kong, Asia and the World”, co-organised by the University of Hong Kong (HKU) Asia Global Institute & International Chamber of Commerce, Hong Kong, 26 January 2022. * * * 1. Good afternoon everyone. Thank you, Dr Fung, for inviting me to speak, and the HKMA is very pleased to support today’s event. It would have been a pleasure to meet you all in person, but I am thankful that this event could go ahead as planned. 2. Today’s topic is the future of trade finance, and I believe we all agree that, to elevate global trade finance to the next level, the recurring pain points of the existing trade finance system need to be fixed. The issues—including a paper-based system that is inefficient, prone to fraud and human error—have been discussed many times; so I believe by now, we all have a basic understanding of the problems. Indeed, various stakeholders, including the HKMA, have been attempting to solve the pain points by using emerging technologies. 3. For example, in 2018, the HKMA facilitated the launch of eTradeConnect, which is a blockchain-based platform that aims to digitise paper based documents and automate the trade finance process. The platform was subsequently connected to a similar platform built by the People’s Bank of China to facilitate cross-boundary trade finance processes.

I will conclude by returning to my starting point, to the importance and the scarcity of time in dealing with a troubled financial firm. The important role time plays at a failing firm The seeds of any financial failure are generally planted years earlier. The cycle is familiar to us all – in good times, most business strategies thrive. Financial institutions commence an BIS Review 140/2010 1 activity that has high initial marginal returns; over time the activity attracts more competition, pricing goes down and risk appetite goes up. Overexpansion leads to an inevitable correction, with the losses incurred testifying to the long-term unsuccessful nature of the strategy. U.S. banking, securities and finance companies in the early 1990s experienced the late stage of just such a cycle in which commercial real estate and leveraged buyout lending overexpanded. The result was that many large financial institutions had to be merged into others or unwound. Banking supervisors responded to these problems by requiring banks with large, problematic exposures to implement a three-part program. First, the bank comprehensively identified its problem loans and assigned them to workout specialists. Second, the bank developed and executed a capital plan and strengthened its liquidity. Third and essential to raising new capital, the bank developed a new business plan demonstrating its ability to return to profitability. This program worked, in large part because it was applied timely enough. Stylized facts about time’s role on the value of a failing firm created urgency in implementing the program.

Consumption and private sector investments were weak, whereas foreign demand continued to slow down, given the economic situation in our trading partner countries. The private agents’ uncertainty about the future was reflected in low propensity to spend and weak credit demand. This uncertainty prevented the transmission of the monetary stimulus to the economy. Moreover, banking system conservative policies maintained the lending standards tight, and prevented the normal functioning of the monetary policy transmission mechanism. Against this backdrop, economic and financial stability of the country was preserved. Private agents’ expectations on inflation were anchored around Bank of Albania’s target, showing a good perception of monetary policy signals, and effective communication of the Bank of Albania. The banking system remains sound and well capitalised with ample liquidity to ensure the return of financial intermediation to adequate levels, in spite of credit qualityrelated problems. Average annual inflation continued the decelerating trend in the third quarter, settling at 1.5%. The profile of inflation was determined almost entirely by the contribution of inflation from prices of agricultural products. Beyond the seasonal effect related to satisfying demand with domestic agricultural produce, these prices fell thanks to the drop in import prices for processed foodstuff in the countries of origin. Prices of other consumer goods categories provided low contribution to headline inflation, hence offsetting each other. Low inflation rates, especially in the long-term component, point to the presence of the negative output gap.

2 General aspects of the European regulations The European Union, as reflected in the FSB’s second Peer Review on Resolution Regimes published in 2016, is one of the jurisdictions where the Key Attributes have been most rigorously implemented. Allow me to highlight some of the main features. First, the regulations consider resolution as an alternative mechanism to ordinary insolvency procedures in the mercantile realm, applicable to banks only in specific circumstances pertaining to the public interest. In particular, resolution shall only be applicable to those banks whose failure may generate risks to financial stability, given that they perform critical functions. Second, the use of public funds to support vulnerable institutions is severely restricted. The contribution of any form of State aid – except that received in connection with a stress test – is understood to be a symptom of the institution’s non-viability and, therefore, it may precipitate resolution or, where appropriate, the liquidation in mercantile terms of the institution. Once the institution has been declared in resolution, the regulations require a bail-in for creditors. The ensuing assumption of losses must exceed a minimum amount equivalent to 8% of the bank’s liabilities as a prerequisite for attaining access to public funds, which includes the Single Resolution Fund. Lastly, so as to be able to carry out the bail-in, all institutions liable to be subject to resolution, i.e.

All told, institutions should be mindful that the new resolution framework will require those banks that exceed a certain size and are liable to generate systemic risk to ensure that their balance sheet structure allows their resolution at the expense, essentially, of their shareholders and creditors. They should, therefore, ensure that their business model is compatible with the issuance of loss-absorbing instruments on the capital markets and that their income statements allow for the remuneration of the supplementary risk that the new resolution regime entails for holders of bank debt. It thus seems likely that several institutions will face objective difficulties adjusting to the recently established resolution framework. These new regulations, therefore, contribute to reinforcing the perception of excess capacity in the sector and, foreseeably, they will contribute to promoting a change in the industry structure that will correct such excess by means of consolidation processes giving rise to banks more capable of comfortably complying with the new demands. The supervisor’s role essentially consists of setting in 9/10 place the means needed for this seemingly inevitable adjustment process to unfold in as orderly a fashion as possible. 10/10

Now it includes 38 of 91 eligible funds inspected by the Bank of Russia. Many funds had to improve the quality of their assets to enter the system. Furthermore, actuarial industry has been launched in compliance with the law; today we have a bit more than 100 actuaries. They are active and it is an important segment of the financial market established last year. We have almost stamped out unscrupulous depositories which provided bogus excerpts on available securities. We implemented our function of a megaregulator which allowed us to make cross-checks and reveal such situations immediately. We took measures under the project “Clean Register”. BIS central bankers’ speeches 3 We have developed and are implementing the road map on electronic communication in the financial market. Electronic communication decreases companies’ costs and ultimately the price of services for consumers, provides adequate financial inclusion to avoid having dependence on actual branches. New digital technologies quickly transform the financial sector. We have established a special technology and innovation task force at the Bank of Russia which is to study technological trends in the field of finance, and to timely reveal the areas requiring regulatory and supervisory changes. We seek to avoid hampering the development of new, more efficient and userfriendly technological solutions, but prevent accumulation of risks capable of mitigating consumer right protection. Last year we established a Centre for Cyber-attack Monitoring and Response in the Financial Sector (FinCERT), which provides, among other things, methodological assistance in ensuring the highest possible cyber-protection to market participants.

We always cooperate with the market in financial technologies and innovations. Thereby, in 2015, we held the first forum on innovative financial technologies; it was in demand with businesses and we are going to hold it again in autumn. We have established an institution of bond programmes. The development of debt instruments is extremely important for our financial market, because it is the best instrument for large companies, while banks should be more focused on lending to small and medium-sized businesses. In 2015, we laid foundations for the development of a national rating industry, and the new legislation allows us to expect that a really respectable and professional rating industry will be built in our country. Now about the national payment system. In 2015, operations and clearing centre of the NPCS was launched. It processes all operations made in Russia through cards of international payment systems. The transfer of payments into Russia was implemented in a very short period due to external risks but its implementation was of high technological quality in line with international standards. In the end of the last year a pilot issue of national payment system cards Mir was implemented. The cards are already issued by banks of the Crimea (and accepted throughout the Crimea) and some other banks. The mass issue of the cards is to start in the second half of the year. Besides, we have improved the system of Bank of Russia financial messaging system, a SWIFT counterpart.

Based on the analysis of these channels, the direct effects of the war on Spanish foreign trade are expected to be moderate, as its bilateral trade flows with Russia are relatively limited. Nevertheless, the indirect effects may be significant. Spain’s share of energy products imported from Russia is admittedly relatively small (6% of the total in 2019) and lower than that of countries such as Germany and Italy (17% and 22%, respectively). However, its high dependence on external energy sources and the impact of the war on energy prices on the international markets have already triggered a major negative shock to our international purchasing power. Given the crucial role of these commodities in production processes and the limited capacity in the short term to substitute these energy inputs from Russia, a hypothetical interruption of the supply of energy products from Russia to Europe would have a significant impact on activity and inflation in the euro area. That impact would be more pronounced in the economies that are more dependent on Russian gas, with the consequent indirect effects on the Spanish economy. The war has also adversely affected uncertainty, as shown by the fact that the decline in household confidence in March, after the conflict broke out, was the largest in the time series. 6 Consequently, a delay in the gradual recovery that was under way in the Spanish economy should be expected.

These short and medium-term challenges must not allow us to overlook the need to address the structural challenges that the banking sector was already facing before the onset of the pandemic and the Russian invasion of Ukraine. In particular, the need for capacity adjustment, as well as the growing competition from technology firms and the potential negative effects associated with climate risks. Lastly, crypto-assets, which are digital representations of value and rights based on distributed ledger technology, are an area of financial innovation that is growing fast. Despite their potential for offering lower transaction costs, greater interoperability and greater competition, and although they are still small and their degree of interconnectedness with the more traditional financial markets is still limited, their rapid development poses significant risks if it is not conducted safely within a regulatory framework that will mitigate the potential risks. These notably include market, liquidity, operational, reputational and, above all, conduct risks vis-à-vis users owing to the lack of transparency and regulation in this field. Bear in mind that an upscale in these markets could pose systemic risks. Therefore, as a matter of urgency and in coordination with the international community, a regulatory framework should be designed that allows us to mitigate and supervise these risks. Conclusion I will finish by recalling that the Spanish economy is immersed in a highly uncertain environment, the structural challenges ahead are enormous, and that the fact that these challenges are closely interconnected signifies that a comprehensive strategy of ambitious and lasting reforms is required.

At the same time, business start-ups remain at a record level, at over 400,000 excluding microentrepreneurs. Similarly, we do not have any general concerns about the reimbursement of SGLs. Since February 2022, we have received 671 requests, covering less than 0.1% of the total number of SGLs. Of the EUR 143 billion that have helped close to 700,000 businesses, EUR 46 billion have already been repaid. And today, over 95% of businesses are repaying their SGL correctly. The Banque de France's Credit Mediation remains mobilised in each of your départements to address the most difficult cases, within the framework of the "local agreement" renewed for 2023. Regarding households, growth in housing loans still amounted to +5.3% in December (and +5.1% in January) in the context of a gradual rise in the average rate, which then stood at 2.05%,2 compared with 2.9% on average in the euro area and 3.5% in Germany. In France, housing credit remains the cheapest, 1 2 Business failures | Banque de France (banque-france.fr) Excl. fees and insurance; Loans to individuals — December 2022, Banque de France, 3 February 2023 Page 4 sur 5 most abundant and safest in Europe - with 97% of outstanding loans at fixed rates. Source: ECB Of course, we have come out of the years of exceptionally easy credit. Nevertheless, the financing needs of the real economy are still largely met, thanks to the soundness of French banks.

Spreads and volatility have also been lower for longer, although there is some market discrimination between agents and between emerging market economies (EMEs), as well as periodic spikes in volatility, especially recently. Next, why are inflation or interest rates so low and how does this impact policy? First puzzle: inflation remains low in countries where unemployment is close to the NAIRU, like the USA, or where the output gap has been sharply reduced, like Germany; this may imply that the Phillips curve has a lower slope too. Yet, various studies by the IMF or the BDF show that, even if slopes have tended to flatten since the early 1990s, there has been no clear-cut change over the last years. BIS central bankers’ speeches 1 There are two possible explanations. The benign one is that transitory disinflationary shocks, e.g. due to commodity prices, temporarily shift the Phillips curve downwards. The worrying one would be a disanchoring of long-term inflation expectations, threatening the objective of price stability; such a disanchoring is suggested by the surprising correlation between spot oil prices and market expectations derived from inflation-linked swaps up to 5 years in 5 years. People can reasonably differ in their interpretation; hence the scope for healthy policy debates. As regards low policy or market rates, these are mainly seen as reflecting lower equilibrium, or neutral, interest rates. This leads us to the second puzzle: does the lower neutral interest rate result from cyclical or structural factors?

Banks must integrate customer protection in the risk appetite framework and in the three lines of defence. Of course, as with all cultural change, to be successfully implemented, it must begin at senior management level. In order to be able to develop and implement this new culture, it is essential for the governing bodies to be committed and actively involved in aspects such as the design and governance of the products sold by banks, as well as in training and changes to incentive mechanisms for sales staff. Credit standards: ability to pay vs. value of collateral. Apart from the strengthening of transparency and protection of customers, I would like to mention an aspect of the law which seems to me especially significant from a supervisory viewpoint. Specifically, the law requires lenders to assess the solvency of potential borrowers, sureties and guarantors in depth before entering into loan agreements. This quires them to evaluate, among other matters, their employment situation, present and future income, assets, available savings, and any other fixed expenditure or commitment they may have already assumed. Of course, as a supervisor I fully agree with all these requirements, which are absolutely necessary and obvious. However it is somewhat disheartening to have to see them specifically mentioned in legislation. The text of this law shows that on many occasions institutions relaxed their standards and basic principles excessively, in order to carry on lending. That does not say much for us supervisors either, since we did not react sufficiently to the weakness of credit standards.

In the academic literature, some have suggested that the central bank can increase economic stability or reduce the negative effects of slow price adjustment by stabilising an index with fewer prices and weights other than those in the consumer price index.3 Prices that adjust slowly should have a relatively higher weight than prices that change quickly. Prices for goods and services where labour costs are a major component often adjust slowly.4 Labour costs are very important in these indices not only because they change slowly but also because they react to cyclical movements and are seldom exposed to extraordinary disturbances. 3 See Aoki, Kosuke (2001), “Optimal Monetary Policy Responses to Relative Price Changes,” Journal of Monetary Economics, Vol. 48, pp. 55-80, Arrazola Maria and José de Hevia (2002), “An Alternative Measure of Core Inflation,” Economics letters, Vol. 75, pp. 69-73, Mankiw, Gregory and Ricardo Reis (2003),“What Measure of Inflation Should a Central Bank Target?” Journal of the European Economic Association, Vol. 1, pp. 1058-1086, and Woodford, Michael (2003), Interest & Prices – Foundations of a Theory of Monetary Policy, Princeton University Press. 4 Angeloni, Ignazio, Luc Aucremanne, Michael Ehrmann, Jordi Gali, Andy Levin and Frank Smets (2004), “Inflation Persistence in the Euro Area: Preliminary Summary of Findings”, presented at the ECB’s conference on inflation persistence in the euro area, Frankfurt am Main , 10-11 December 2004. BIS Review 43/2005 3 Another topic currently of interest to academic research is whether a price level target may be better than an inflation target.

In our forthcoming report for 2021, which will be published in the next few weeks, we have sought to build on last year’s content to provide additional context and analysis. In March last year, I outlined our intention to assess ways that our holdings of corporate bonds could be adjusted to take the climate impact of issuers into account whilst still meeting our monetary policy objectives.9 Last month we set out in a Discussion Paper our proposals for ‘greening’ our Corporate Bond Purchase Scheme (CBPS).10 There is no template for a comprehensive framework for greening an asset portfolio held for monetary policy purposes. We know that outreach and engagement is See The Bank of England’s climate-related financial disclosure 2020, Bank of England, June 2020 See Appointment of Andrew Bailey as Governor of the Bank of England, March 2020 10 See ‘It’s not easy being green – but that shouldn’t stop us: how central banks can use their monetary policy portfolios to support orderly transition to net zero’ speech by Andrew Hauser and Options for greening the Bank of England’s Corporate Bond Purchase Scheme, Bank of England, May 2021 8 9 5 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 5 critical in getting this right, and so are currently seeking feedback on our proposed framework. We are keen to hear from a range of experts and stakeholders over the coming weeks to inform our next steps. The need for us to act in this space was clear and unambiguous.

In addition, this year COP26 has an ambitious agenda that spans all of the areas that I have spoken about today – in particular establishing a better understanding of best practice, and fostering greater technical cooperation. The Glasgow Financial Alliance for Net Zero (GFANZ)12 initiative will do this by bringing together over 160 firms (responsible for assets in excess of $ trillion) for the first time. Such technical collaboration and cooperation is no less important among central banks and supervisors. The NGFS with the scope of its membership is key to that exchange of knowledge. The Bank has widely shared what we have learnt and we will continue to do so.13 The creation of the Central Banks’ and Supervisors’ Climate Training Alliance (CTA) will also further support technical cooperation and assistance on climate risks. Let me conclude. In spite of the Covid-19 pandemic, central banks have continued to make progress in responding to climate change, but we know there is still work to be done. The next stage of our journey will require us to deepen our analysis, evolve our approaches and further our collaboration. The coming year will be critical for all of us on this journey – in allowing us to better convert climate change risks into something that we can tackle for real. 12 13 See New Financial Alliance for Net Zero Emissions Launches, UNFCCC, April 2021 See Centre for Central Banking Studies, Bank of England 7 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 7

For the first time in two years the median price for houses has fallen, according to Swedbank’s Boindex. Moreover, the rate of increase in household borrowing from mortgage institutions is now slightly lower than it was in the spring. Of course, it is impossible to draw any far-reaching conclusions solely on the basis of these observations. However, we will make a thorough assessment of the situation later in the autumn when we publish our twice-yearly Financial Stability Report. Summary and conclusion Let me briefly summarise my message today. • We have raised the repo rate four times this year and my assessment is that it is reasonable to assume that further increases will be necessary. This will ensure that inflation is close to the target and that developments in the real economy are balanced. • Our focus is on the inflation target and the central aim is, as before, to anchor inflation expectations in the economy around this target. When we formulate our monetary policy we also give consideration to the way the rest of the economy is developing. You can read more about this in our recently published strategy document “Monetary policy in Sweden”, which can be ordered from our Communications Secretariat. It can also be downloaded from our website and is available in both Swedish and English. • The social partners can sign new agreements based on the assumption that the Riksbank’s inflation target stands firm.

Judging from the surveys we make of inflation expectations, monetary policy in this respect has a very high level of credibility. • The Riksbank also has the task of safeguarding financial stability. We see no problems with regard to financial stability at present. The fact that we emphasise developments in house prices and indebtedness does not concern financial stability. It is because we are concerned over how future inflation and growth might be affected by a possible sudden correction in house prices. Finally, I would like to stress that the monetary policy framework has functioned well. This is indicated in particular by the fact that inflation expectations are firmly anchored around two per cent. There are no signs in the financial markets that monetary policy is regarded as unclear. However, this does not mean we can rest on our laurels. We have one of the most open and transparent central banks in the world and we wish this to continue. The Riksbank’s forecasts assume, as I mentioned earlier, that the repo rate will develop in line with market expectations. I have raised the question of possibly going one stage further and instead reporting the Riksbank’s own forecast of interest rate developments, as they do in, for instance, Norway and New Zealand. Personally, I see it as quite natural that we should make forecasts of repo rate developments in the same way that we forecast a number of other variables.

Subsidiarisation of systemically-important foreign banks Local banks are required to maintain a minimum of $ in paid-up capital and meet MAS' capital adequacy ratio requirements to ensure that they have adequate resources to support and expand their operations. MAS’ requirement of a minimum of 8 percent Tier I capital and 12 percent Tier I plus Tier II capital exceeds the international standards set by the Basel Capital Accord. However, QFBs and foreign banks can operate as branches, and accept retail deposits without any paid-up capital in Singapore. This has led local banks to complain that the playing field was tilted against them. It was tenable in the past when individual foreign banks had a small share of the domestic market and we placed greater reliance on the home supervisor. But as we open up further, we need to make sure that the prudential safeguards that apply to foreign banks are commensurate with their increased role in the retail deposit market. MAS is considering requiring systemically-important foreign banks with a large retail presence to subsidiarise their operations in Singapore. This means that the foreign bank will have to incorporate in Singapore and meet MAS' minimum paid-up capital of $ as well as MAS’ CAR requirements. Subsidiarisation will provide greater clarity and certainty in supervision. A subsidiary is a separate legal entity from the parent. It will have its own assets and will have to maintain its own capital.

Local banks' upgrading and consolidation Since the first liberalisation package was announced, the local banks have made progress in building up their capabilities. They have generally strengthened their management teams, and invested heavily in infrastructure to provide banking services more efficiently, especially via electronic channels. They have improved their customer relationship management systems, which will allow more effective data mining of their customer databases and cross-selling of multi-sector products. Local banks have also been seeking opportunities and expanding their presence in the region. An important and more visible sign that local banks are gearing up for competition is of course the process of consolidation that is underway. The opening gambit was made on 12 June when OCBC announced that it was making a voluntary general offer for Keppel Capital Holdings which owns Keppel TatLee Bank. Ten days later, DBS made an unsolicited bid for OUB. And just three hours ago, UOB made a competing bid after reaching agreement with the controlling shareholders of OUB. All the local banks are now busy reassessing their positions. It is likely that a new configuration will quickly crystallise. MAS views this as a very positive development for the banking industry, and more importantly for Singapore. If the consolidation is well executed, a stronger group of local banks will emerge, able to hold their own domestically, provide Singaporeans with better services, and compete in the region. Let me elaborate. The importance of consolidation Economies of scale have become critical in banking today.

Paul Tucker: A few remarks on current monetary policy in a rebalancing economy Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at The Joint 1900/City Club Lunch, London, 22 November 2011. * * * The outlook for economic activity has deteriorated over the past few months. The MPC has responded with a further round of quantitative easing to underpin demand, and so reduce the chance of inflation undershooting our target in the medium term. Monetary credibility: accommodating the price level shocks Our ability to provide and sustain that stimulus depends absolutely on the credibility of our commitment to the 2% inflation target. If our credibility were to slip and medium-term inflation expectations were to rise, we would have to run with a tighter monetary stance than otherwise in order to put the genie back into the bottle. The Committee’s most important judgment over the past year or so has, accordingly, been that the elevated rate of inflation, now about 5%, is temporary. We have had conviction in that judgment because of the observable upward impulses to the price level from sterling’s depreciation, the VAT increase, and the rise in commodity prices. There is occasionally a rather odd debate about whether the MPC could have avoided the consequent increase in inflation. Big picture, the answer is that we could have done, but we chose not to. We have, in effect, accommodated something like half of the cumulative impulse to the price level.

I do not think it is coincidence that arguably the two most significant monetary policy decisions taken over the past year – the decision to reduce Bank Rate by 1.5 percentage points in November and the announcement in February that the Committee had sought approval to use the Asset Purchase Facility to conduct large scale asset purchases – occurred in months when the Inflation Report was published. The quarterly forecast round provides an opportunity for the Committee to reassess thoroughly its view of the economic outlook. This view is then explained and communicated via the Inflation Report and in particular through the projections for GDP growth and inflation contained in the Report. In both November and February, the judgement of the Committee was that, without further substantial easing in monetary policy, there was a significant risk of a large and persistent undershoot of the inflation target. Given the transparency of these judgements and the clarity of the target, it would have been courageous not to have taken the decisions we did. The inflation target is symmetric. Likewise, the discipline it imposes on the MPC is symmetric. The inflation target has been instrumental in ensuring that monetary policy has responded boldly and decisively to the events that have unfolded since the autumn. And, when the time comes, the clarity and transparency of the inflation targeting framework will ensure that the Committee takes the right decisions on the way back up, however courageous or unpopular those decisions might appear.

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

In the two years since, the severe global health and economic crisis faced by the world has brought these trends into even sharper focus. For example, the pandemic has highlighted and deepened long-standing vulnerabilities in Malaysia and many places around the world. These include the fragile state of social protection systems, under-investments in health and infrastructure, and the need to improve our education system. As a result, vulnerable groups bore much of the economic, social and health cost of the pandemic and they continue to be at risk. This will affect economic and social resilience and thus not only our prospects to recover and bounce back from the pandemic, but also to deal with other existential challenges further ahead, like those in the environment and climate. On the bright side, the pandemic has demonstrated the power and potential of finance to address the pressing problems of our time. The financial system has been resilient, with the ability to provide critical support to households and businesses during the difficult times. Digital financial services like electronic payments have made it easy for people and businesses to continue making transactions in a low touch setting, with even greater ease. The financial sector has also stepped up to provide various forms of relief to customers over the last two years, such as by giving borrowers breathing space and helping them get back on their feet while ensuring that depositors’ interests are not jeopardised.

Karolina Ekholm: Why Swedish monetary policy needs to be more expansionary Speech by Ms Karolina Ekholm, Deputy Governor of the Sveriges Riksbank, at Almega (employer and trade organisation for the Swedish service sector), Stockholm, 15 November 2013. * * * The views expressed in this speech are my own and are not necessarily shared by the other members of the Executive Board of the Riksbank. I would like to thank Björn Andersson who has helped in writing the speech. Accompanying charts can be found at the end of the speech. Interest in central banks and monetary policy has been greater than normal since the financial crisis. Here in Sweden, much of this interest has concerned the disagreement among the Executive Board on the level of the interest rate, where I have been one of those who has consistently voted for a more expansionary monetary policy. I have mostly voted for a repo rate that is 0.25 percentage points lower and a repo-rate path that rises more slowly. One might of course think that the difference between this and the repo rate and repo-rate path decided on is so slight that it would not have any effect on the outcome. However, behind this apparently marginal difference in the view of what the repo rate should be is a fundamental difference in the view of the role of the central bank and the route monetary policy should take in the new economic landscape emerging in the wake of the financial crisis.

Lending to households and companies Annual percentage change Note. Lending to households and companies according to financial market statistics. Source: Statistics Sweden. Figure 4. Annual change in the major banks’ lending Per cent and contributions in percentage points 25 25 Swedish mortgages Other lending to Swedish customers 20 20 Lending abroad 15 15 10 10 5 5 0 0 -5 -5 -10 -10 05 06 07 08 09 10 11 12 13 kv 3 Note. The coloured fields show how the different types of lending have changed in relation to the major banks’ total lending to the general public. No consideration is given to change in exchange rates. Sources: Bank reports, Statistics Sweden and the Riksbank. 12 BIS central bankers’ speeches Figure 5. Inflation expectations one, two and five years ahead, all participants Per cent Sources: TNS SIFO Prospera and Statistics Sweden. BIS central bankers’ speeches 13

The European Central Bank can also be said to target inflation in practice, without a formal commitment. Broadly speaking, all these central banks have a similar approach. Inflation targeting requires careful preparation of forecasts for economic aggregates – not least inflation – a high degree of central bank transparency and effective instruments and transmission channels for policy measures. Iceland moved onto an inflation target under fairly difficult conditions. The króna had weakened substantially and was close to the lower tolerance limits when the new policy was adopted. It then depreciated rapidly in spring 2001. The consequence was a surge in inflation, which peaked at around 9½% at the beginning of 2002. Subsequently it declined sharply, not least on account of the tight monetary stance, and the 2½% target was attained later the same year. For some time inflation remained below or around target, but since the first half of 2005 it has overshot, and was well above target for a while. The various reasons BIS Review 111/2007 1 for this development have been described in detail in recent Central Bank publications and I shall not elaborate them upon over and above the causes I have already mentioned. In order to attain its inflation target, the Central Bank has a single instrument: the policy interest rate. The policy rate applies to Central Bank facilities for financial companies and its impact is transmitted through them into the economy.

The Central Bank has pointed out how the small amount of outstanding Treasury bonds in the market hinders policy rate changes from being transmitted with the necessary weight. Price formation in the bond market is imperfect. The Bank has aired the idea that the Treasury should issue bonds with the explicit purpose of maintaining an active bond market. Of course, such a suggestion must be qualified by the fact that the Treasury is on the verge of eliminating its net debt and has no need to borrow. The Central Bank’s standpoint, however, is that given the significance of domestic capital markets, the importance of facilitating the impact of monetary policy measures and long-term strategies for Treasury funding, it is in the Treasury’s interest to maintain a smooth bond market, even though it has no direct funding requirement. One example of Treasury issuance on such principles is Norway, which has had even less need to borrow than the Icelandic government. Claims have been heard that the Central Bank’s monetary policy is either impotent or wrong, and that the Icelandic króna is the root of macroeconomic instability. The Central Bank has pointed out that one consequence of globalisation and Iceland’s integration with global capital markets, coupled with the exceptionally intense upswing experienced in recent years, has been that the transmission mechanism of monetary policy has altered. In this climate, the impact is transmitted with greater force to the exchange rate, and only later to domestic demand, as I mentioned earlier.

12 The new committee for financial stability at the Bank of England will take responsibility for decisions on macrostability, but not traditional supervisory issues, which will also be moved to the Bank of England. The new committee partly consists of the same people as the monetary policy committee. 12 BIS central bankers’ speeches the krona’s exchange rate if necessary. However, it has not been used for this purpose since 2001, and, when it was used, the results were unfavourable. The financial crisis made abundantly clear that the foreign currency reserve was also needed to provide the banks with liquidity in foreign currency in the event of a crisis. This is a matter of the central bank’s fundamental function as lender of last resort. As I mentioned earlier, it can no longer be seen as only concerning liquidity in kronor. Of the four major banks’ lending to the public of about SEK 7 000 billion, about SEK 2 500 billion was funded with securities issued in foreign currencies, of which about half had times to maturity of less than one year. The Riksbank’s gold and foreign currency reserve was not enough to meet the need for dollars that arose during the crisis. This amounted to about SEK 200 billion and was invested in various currencies and different types of asset. During the autumn of 2008, our lending in dollars peaked at about SEK 250 billion.

This means that he is also included in the Steering Committee that prepares the General Board’s meetings and monitors the ESRB’s current work, and in the Advisory Scientific Committee, which is the other advisory body. BIS central bankers’ speeches 7 continued financial stability work is formed by stress tests of the banks. During the financial crisis, both the US and European authorities implemented and reported such stress tests. Their aims were to increase transparency concerning the banks’ risks, to increase confidence in the sector, and to push the banks into increasing their capital bases. The next European stress test will be reported this June. The Swedish regulations for the financial sector need to be strengthened The Swedish regulations for the financial sector also need to be strengthened. Consequently, the Executive Board and General Council of the Riksbank have, in a communication to the Riksdag, urged the Riksdag to assign the government to carry out a thorough review of the regulations.7 The starting point for this is that we need a cohesive and effective regulatory framework that allows us to better prevent and manage crises in the future. Firstly, the mandates and roles of the authorities involved are unclear. As the regulations are currently written, responsibility for financial stability is shared by the government, Finansinspektionen, the Riksbank and the Swedish National Debt Office. But it is not specified sufficiently clearly who is to do what or how the exchange of information and knowledge is to take place.

But it would gradually be brought back to low levels, so that we were equipped for the next war. A big question in the modern world is what level of government debt/GDP would be needed by countries in economic peacetime if societies wished them to be able to offset economic disasters. The immediate focus is on addressing “structural” budget deficits, with a view to stabilising debt/GDP. But there will be longer-term choices about the level of the debt itself. Those are choices for decades rather than for a Parliament. And they are not choices for central bankers. But I would say this from my own vantage point. The higher the steady-state level of debt society chooses, the more resilient our financial system would need to be. 13 For example, see Bean C R (2009), “Some Lessons for Monetary Policy from the Recent Financial Turmoil”, remarks at Conference on Globalisation, Inflation and Monetary Policy, Istanbul, 22 November, 2009 and Tucker P M W (2006), “Reflections on operating inflation targeting”, at the Graduate School of Business, University of Chicago, 25 May, 2006, pp. 4. BIS Review 21/2010 9 Conclusion The title I was given for my remarks today was “Inflation, growth and stability: balancing the Bank of England’s economic priorities”. Our priority as central bankers remains the same: stability. Price stability, as encapsulated in our inflation target, is a necessary precondition for sustainable growth in output and for maintaining “full employment”. That is no less true today than before the current downturn.

In most countries central banks play an important role in financial stability. Because of their monetary policy function, central banks have an indepth knowledge of the financial system. They are independent anchors for monetary stability. They also have a clear interest in financial stability because of its beneficial impact on the macroeconomic environment. And, last but not least, central banks are the ultimate source of liquidity. For all these reasons, central banks often have an explicit mandate in the area of financial stability. But typically this mandate is formulated in very general terms, and it would have been written before growing recognition of the key role of macro-prudential oversight. Financial stability is not and cannot be exclusively an issue for central banks, namely the ECB and the European System of Central Banks. It must be shared with micro-prudential supervisors. They have a key role, because stable institutions are an essential and necessary condition for achieving financial stability. This is also the reason why the ESRB and the ESAs will form together a European System of Financial Supervision (ESFS). So in the analysis of systemic risk, the three ESAs will also have an important role to play, both on their own and within the ESRB. In collaboration with the ESRB, they will develop a set of indicators to identify and measure systemic risk. On their own, they will further draw up guidelines and recommendations for individual financial institutions to take account of the systemic risk they pose.

Yesterday we learnt that inflation in May rose to 3.3%. In line with our remit, I sent an open letter to the Chancellor. As I said in my letter, inflation is set to increase further over the next few months. Oil prices have doubled since the beginning of last year, and, in real terms, are now as high as they were in the 1970s. And further sharp increases in domestic gas and electricity prices are probably on their way. So what should the Monetary Policy Committee do in the face of this rise in inflation? The immediate cause of the current pickup in inflation is increases in food and energy prices relative to other prices. They are caused by the pressure of demand on the supply of food and energy in the world as a whole. Part of that pressure may well reflect expansionary monetary policy in the world as a whole. But the rise in commodity prices cannot, by itself, generate sustained inflation in the United Kingdom unless we allow it to. We will not. So although inflation in the UK will rise in the short term, inflation will then fall back. That means that the rate of increase of other prices and domestic costs, notably pay, must remain low. The MPC does not take that for granted. Surveys – including our own – indicate that expectations of inflation have risen, meaning that inflation is likely to have some tendency to persist.

Consequently, this policy can only be effective if the authority responsible for defining and implementing is credible. The conjunction of a clear, overriding objective of price stability (which has been explicitly laid down in the statute of the ECB), with well-established institutional independence ensures the continuity of the monetary policy decisions made by the authorities. • Secondly, the emergence of a globalised market has quite naturally led to new developments in monetary policy instruments. Interest-rate instruments have gained in importance to the detriment of quantitative and regulatory instruments. Third consequence: renewed set of risks to the stability of financial systems First of all, it is worth noting that financial liberalisation did not eliminate the occurrence of financial crisis. The development of new financial instruments, increasingly mobile and rapid capital flows, and faster reactions on the part of the players have rendered markets more volatile. Moreover, stock market prices and interest rates in the various financial centres have become closely correlated due to increased arbitraging between currencies and financial products and the spread of disintermediated financing.

This is the focus of the related field of “behavioural economics” and the work of the Nobel laureate Robert Schillervi. Page 7 of 14 To respect the mandate entrusted to us under the Treaties, one thing remains certain: in the face of the too-low level of inflation caused by the cooling of the economy since the end of 2018, it is our duty to maintain an accommodative monetary policy to support economic activity. In September last year, the ECB thus announced a package of measures, the most innovative of which is the reinforcement of its forward guidance which gives visibility as to the future path of short-term rates. However, at our December meeting we noted the first signs of an economic stabilisation, consisting in a relative reduction in trade-related uncertainties. If this stabilisation is confirmed, it would need to be followed by a stabilisation in monetary policy. Put another way, the low point observed in growth justifies rates that are “low for longer”, but not, at the present time, “lower for longer”. II. Low rates: what are the effects? 2.1 Effective policies to support inflation and the economy While these accommodative monetary policies are justified by their causes, are they also effective in terms of their impact? Here too, we need to take stock, both on an overall level and for each category of economic agent. From a macroeconomic perspective, low rates and, more broadly, accommodative policies, have indeed lent support to the economy.

In the near term, the euro area should continue to benefit from a recovery in exports, the significant macroeconomic stimulus under way and the measures taken so far to restore the functioning of the financial system. In addition, the inventory cycle is expected to contribute positively. However, uncertainty remains high and the persistent volatility in incoming data warrants a cautious interpretation of available information. Overall, the recovery is expected to be rather uneven, given the temporary nature of some of the supporting factors and the ongoing balance sheet correction in the financial and non-financial sectors of the economy, both inside and outside the euro area. This assessment is broadly in line with the September 2009 ECB staff macroeconomic projections for the euro area. According to these projections, average annual real GDP growth will range between -4.4% and -3.8% in 2009 and between -0.5% and +0.9% in 2010. Compared with the June 2009 Eurosystem staff macroeconomic projections, this implies an upward revision of the ranges for both 2009 and 2010, reflecting mainly the recent, more BIS Review 102/2009 1 positive developments and information. Forecasts by international organisations are broadly in line with the September 2009 ECB staff projections. In the view of the Governing Council, the risks to this outlook remain broadly balanced. On the upside, there may be stronger than anticipated effects stemming from the extensive macroeconomic stimulus being provided and from other policy measures taken.

The algorithms of automatic trading have rules embedded in their code such that quotes are immediately pulled if there is a severe market liquidity event. Moreover, the algorithms often have automatic rules that activate circuit breakers or socalled “kill switches” should the aggregate notional risk on a firm’s book exceed programmed limits. On 15 January, the algorithms acted quickly to pull the so-called “streaming prices” when liquidity in the reference market for these prices dried up. Where this did not happen simultaneously, it resulted in large open positions being accumulated by the banks, quite literally within seconds, as an overwhelming balance of client sell orders were automatically executed. Once pre-determined risk accumulation limits had been breached the algorithms instantaneously shut down. Whilst each algorithm, operating independently, may well have been quite prudently calibrated to protect the bank from building an exposure that exceeded its risk appetite, collectively, the impact on market liquidity was akin, albeit temporarily, to a cascading failure across a power grid. As a consequence, the foreign exchange market reverted to human voice orders as the substitute for automated trading. There were therefore outcomes that appear not to have been expected. So, at the risk of quoting Shakespeare inappropriately, all was well that ended (reasonably) well, but the risk that this would not be the outcome is too great to ignore. In summary, there is good evidence that financial market conditions have evolved in ways that reduce the likelihood of continuous market liquidity in all states.

Heng Swee Keat: Dealing with the implications of the crisis and implementing policy reforms Keynote address by Mr Heng Swee Keat, Managing Director of the Monetary Authority of Singapore, at the Opening of EDHEC-Risk Institute, Asia, Singapore, 21 January 2011. * * * His Excellency Olivier Caron Ambassador of France to Singapore Mr Richard Simonin Chairman, EDHEC International Advisory Board Mr Olivier Oger Dean, EDHEC Business School Professor Noel Amenc Director, EDHEC-Risk Institute Associate Professor Frederic Ducoulombier Director, EDHEC-Risk Institute, Asia Ladies and gentlemen Introduction 1. Good morning. I am very pleased to join you today at the grand opening of EDHECRisk Institute’s Asian centre in Singapore. Key observations from the crisis 2. The financial crisis has fundamentally changed the way we perceive and manage risks and uncertainty. Assumptions and models that had been taken for granted are being challenged, and new developments are changing the risk landscape. Let me share three observations about risks. 3. First, the growing complexity and interconnectedness within the financial system, and between the financial and economic systems have multiplied risks significantly. There are now many more potential sources of failures and the transmission of shocks from one market to another have become faster and more unpredictable. 4. Prior to the crisis, financial and capital intermediation had increasingly shifted to relatively unregulated non-bank financial institutions. Complex securitisation structures and off-balance vehicles that were thought to disperse risks led instead to concentration of risks and excessive leverage.

These fora, where finance ministers, central bank governors, and financial regulators meet regularly with each other and with their private sector counterparts, have achieved an important voice in the global financial community in recent years. In the area of banking supervision, EMEAP – comprising ASEAN 5, China, Japan, Korea, Hong Kong, plus Australia and New Zealand – has representatives in the various BIS committees and working group, which set the international standards for financial regulations. In fact, Thailand currently represents the EMEAP group in the Accord Implementation Group. Through such avenues, the authorities in Asia Pacific region have and will continue to influence the evolution of the global standards. The goal is to ensure that these standards are suitable to the context of our economies and financial systems, based on feedbacks and dialogues with our regional banks. Ladies and Gentlemen, We all agree that the challenges for Asian economies and Asian banks are higher going forward. To ensure financial and economic stability to support long-term growth, the authorities need to foster closer policy coordination among regulators, domestically and internationally, as well as having continuous dialogue with market participants. Where possible, closer regional cooperation in the areas of surveillance and financing should be promoted further. Domestically, greater macroeconomic policy flexibility hinges on augmenting monetary and fiscal policies with financial policies that mitigate contagion risks in financial markets. In any case, a policy should be implemented carefully, avoiding overreaction that could increase distortion and instability in the economic and financial systems.

A rational domestic demand and import policies will be required (with a 5.3% rise in imports, given the oil price growth), in order to keep the current account deficit at about 6.5% of GDP (EUR 3 billion), the same as in the current year. Of course, this implies a continuation of heavy dependence on foreign sources of financing in 2010. (2) Given stagnation in direct and portfolio investments (EUR 2.1 billion in 2009 vs. EUR 2.3 billion in 2010), this would mean that: − the current account deficit will have to be financed by foreign borrowing; − the external debt-to-GDP ratio will increase from 83% last year and about 93% in 2009, to about 100%, which is feasible, but will certainly not improve the country’s credit rating, and the question is to what extent the global downward trend in interest rates can carry over to this country. This is all too important, as we know that in 2010: (3) − total debt repayments (EUR 8.3 billion in principal and EUR 1.4 billion in interest) will amount to EUR 9.6 billion (EUR 10.8 billion in 2009); and − total utilisation of foreign sources of financing will stand at EUR 12.6 billion (13.5 billion in 2009). The anticipated fiscal deficit reduction, in terms of consolidated general government (including HAC), from HRK 15 billion to HRK 12.1 billion, i.e.

So, have we done enough in terms of financial inclusion? 14. The pandemic has taught us that we must deepen our commitment to financial inclusion. And we should try to weave that into our financial development objectives going forward. In fact, our ability to enhance the financial inclusion role can be helped hugely by technology. With technology, our banking system can provide a more equitable and fairer access to banking services for all. 15. And this brings me to the second role the financial system can play – to build a smarter financial system. Let me share with you an example of how a smarter financial system can help promote financial inclusion. For a long time, SMEs have found it difficult to obtain bank financing without collateral, because banks lack reliable and timely financial data to assess the repayment ability of SMEs. 16. We believe that the introduction of the Commercial Data Interchange can help address this long-standing pain point. This next-generation financial data infrastructure can facilitate banks’ access to customers’ commercial data with their consent. With such data, banks can apply advanced data analytical tools for credit risk assessment. This could allow corporates, especially SMEs, without sufficient collateral or credit history to borrow more quickly, easily and at a lower cost. It is a win-win situation as this will also enhance banks’ risk management capability and unleash new business opportunities. 17. So, we strongly encourage banks, large or small, to embrace digital transformation to provide fair and efficient financial services to customers.

HKMA, as both a banking regulator and market facilitator, has the role of creating a conducive environment for this to happen. Therefore, we have launched a new Fintech 2025 strategy recently and will work hand in hand with the industry along this fintech journey. 18. Of course, we are mindful that technology can be a double-edged sword. If done properly, technology can enhance financial inclusion. But there are always risks. For example, the improper use of artificial intelligence and machine learning may lead to biased outcomes and even exclusion. Ill-constructed “model-based” lending could unfairly discriminate against some SMEs. And from a conduct risk perspective, customers could be advised to invest in products not in their best interests. Therefore, it is necessary to properly manage such risks and ensure fairness in the algorithms through rigorous validation and testing. 19. In other words, building a smarter financial system is not just about how much technology content we inject into it. What is more important is whether the outcome for customers is more inclusive and efficient, and whether banks can better manage the risks involved. 20. If we look at another key development priority pursued by the HKMA – Green and Sustainable 2/4 BIS central bankers' speeches Finance – similar financial exclusion concerns could also arise. It is important that when we gear towards a greener financial system, we should also have financial inclusion in mind. This is the third role of the financial system that I want to talk about. 21.

Norges Bank has recently estimated a relation for house prices. The model contains effects of the housing stock, the unemployment rate, banks’ lending rates after tax, total wage income in the economy and an indicator of household expectations concerning their own financial situation and the Norwegian economy. In the work on the relation, we did not find any evidence to suggest that migration or demographic conditions have strong direct effects on house prices. However, demographic changes may affect prices indirectly by affecting overall wage income in the economy. The estimated relation provides a good explanation of house price developments in recent years. High wage income has pushed up house prices. The contribution from interest rate changes has also been high in the last two years but has diminished somewhat recently. In the model, interest rate changes have a strong short-term effect. House prices in Norway have risen substantially since 1995. House prices have also risen rapidly in many other countries. The IMF has expressed concern that house prices may be too high in relation to fundamentals in some countries. In Norway, there have been signs recently of a slower rise in house prices. The seasonally adjusted, monthly rise has been low since November 2004, but it edged up again in April. On the other hand, the time it takes to sell a dwelling has declined further, whereas the number of dwellings sold remains high. Housing starts increased substantially in 2004 as a result of high house prices, low interest rates and a favourable economic outlook.

Switzerland’s only major drawback is the fact that it is a lightweight in the geopolitical arena, which makes it almost impossible for it to defend itself against protectionist tendencies and discriminatory measures taken by big countries. The Swiss government must therefore take a strong stand on behalf of free trade, while also ensuring that the private sector operates within the best possible framework for its further development. Ultimately, our future welfare depends on the vitality of the private sector, not on any state intervention. BIS Review 166/2009 1

Let me elaborate a bit more on these three themes: the need for an encompassing and integrated set of data, the achievements of, and outlook for, euro area statistics and the ECB’s framework for analysing this information. Monetary policy and the need for an encompassing and integrated set of data If we lived in the world of macroeconomic textbooks, a few simple models with a limited set of variables would be a sufficient basis for monetary policy-making and the statistical requirements could be kept to a minimum. As we all know, the real world is much more complex and, therefore, information needs are much more elaborated. In such a world, a rich and integrated set of data is needed because macroeconomic models, synthetic indicators and unconnected statistical indicators are often too rough a guide to the current and likely future development of the economy. As mentioned before, central banks have to take decisions under conditions of constant uncertainty. The economy is never at rest. A multitude of disturbances of diverse nature affect the economy all the time: financial shocks, demand shocks, supply shocks etc., and these cannot easily be distinguished in real time, let alone foreseen. In their attempts to identify disturbances and track how they spread through the economy, central banks are assisted by models. But too often, existing models are not sufficiently sophisticated instruments to identify shocks. For one thing, their focus may be too narrow, in a way that makes them BIS Review 67/2004 1 unduly selective.

Less than a decade ago, we did not even have the statistical requirements for the Monetary Union, let alone the statistics themselves for the euro area. Today, euro area statistics compare favourably with those of other major countries in many respects. A concrete example is the monthly balance of payments for the euro area and the availability of a timely, flash estimate of the euro area Harmonised 2 BIS Review 67/2004 Index of Consumer Prices (HICP). Moreover, the ECB compiles an elaborate and timely set of monthly statistics on monetary developments in the euro area and interest rates. Statistical preparations had to start early, due to the long lead times involved. On average, it takes around 18 months from inception to delivery of a new set of statistics that involves the collection of additional information from economic agents. While there is still room for improvement, which I will explain later on, I feel confident that the ECB has now at its disposal a solid set of statistics of sufficient quality for the conduct of monetary policy. Let me share with you some of the success factors and ‘lessons to learn’ from this development process. First and foremost, the achievements have been possible thanks to the intensive and fruitful cooperation and coordination with other statistical agencies.

In others, the fiscal position is strong enough to stabilize the debt dynamics, but provides little buffer against adverse shocks, and very little room for fiscal policy to help cushion the effects of such a shock. 2 BIS Review 37/2004 • Important challenges remain in the financial area as well. In many countries, large public sector debt burdens have left banking systems highly exposed to the sovereign, constraining authorities’ room for maneuver. There are also problems in banks’ corporate and consumer loan books, and a number of banking systems also have a large share of foreign currency denominated liabilities, in some cases held by non-residents. • The durability of recent improvements in external positions, which reflect weak domestic demand in many countries, is also open to question. As domestic demand strengthens, external balances could move into deficit again, which in some cases will reintroduce a greater external risk. • And in many cases, the financial exposure of the IMF and the multilateral development banks is already high. These balance sheet challenges took a long time to develop, and they will take a long time to reverse. They are the legacy of years of past fiscal decisions, magnified by the impact of crises on growth, the exchange rate, and the financial sector. They leave an exacting set of policy challenges.

We assess the models banks use to measure risk and the scenarios used to stress test exposures, but the banks have the responsibility for designing and running the risk management infrastructure. By looking across a broad range of world class financial institutions, we have a good sense of the evolving frontier of best practice in risk management which we can then use to help benchmark other institutions and pull common practice closer to that frontier. For a number of reasons, this can’t be the model for the Fund’s relationships with its members. But it provides an interesting prism in thinking about surveillance. The Fund has explored a number of ideas to strengthen the surveillance framework. One of the most promising is to establish a process with more frequent, published staff assessments of performance against a medium-term framework designed by the member country. That assessment could convey a 4 BIS Review 37/2004 clear judgement about the degree of progress being made in reducing vulnerabilities, improving resilience, and strengthening the structural underpinnings of growth. Analysis of public and external debt trends, benchmarked against sustainability and vulnerability thresholds, and stress tests for relevant shocks could play a key role in this process. There are compelling arguments for combining such a framework with contingent access to Fund resources. Surveillance today does not provide a meaningful check on ex ante policies, and resources are only made available when the financial need is acute.

Further details including transcripts of the oral evidence sessions are available on the Committee’s website. As set out most recently by Andrew Bailey in his 2020 Jackson Hole speech and accompanying paper. The supporting paper for Andrew Bailey’s Jackson Hole speech, mentioned above, gives a good overview of the evidence for the UK, as does Box B of the IEO report, while the 2019 BIS Committee on the Global Financial System report on unconventional monetary policy tools summarises the cross country evidence, as does Ben Bernanke’s 2020 AEA Presidential Lecture. 18 The Bank has actively contributed to work on this topic, with a notable contribution, for example, by Bunn, P, Pugh, A and Yeates, C (2018) "The distributional impact of monetary policy easing in the UK between 2008 and 2014." 15 16 17 9 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 9 Figure 5: Stylised QE transmission mechanism Taken from the supporting paper for Andrew Bailey’s Jackson Hole speech.

Tarisa Watanagase: Prospects and challenges for the Thai economy in 2010 Dinner talk by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the British Chamber of Commerce, Bangkok, 30 November 2009. * * * Distinguished Guests, Ladies and Gentlemen, First of all, I would like to thank the British Chamber of Commerce for inviting me to be here tonight. It is my pleasure to join you once again at this prominent annual gathering. Last year we had a fruitful discussion on “What determines the future of the Thai economy”. If you may recall, I imparted on the audience some words of wisdom for all policymakers, which is to smooth short-term pain, and to achieve long-term gain. Last year’s speech took care of the latter part, in which the key message was a call for collective efforts to raise the economy’s potential output in order to achieve sustainable long-run prosperity. We, however, did not spend much time on the former part as we were yet to witness the complete fallout from the collapse of Lehman Brothers. Today, we all know that our get-together last September was at the onset of the greatest economic contraction over the last 60 years. The collapse of Lehman Brothers on Sep 15, 2008 created a gigantic shockwave in the world financial markets with its ripples subsequently evolving into an economic tsunami that wiped out so much economic wellbeing all over the world.

Fernando Restoy: European banking sector – situation and challenges Speech by Mr Fernando Restoy, Deputy Governor of the Bank of Spain, based on the address delivered at the UIMP seminar “¿Qué hemos aprendido de la crisis?” (“What have we learned from the crisis?”), organised by the APIE (Association of Economics Journalists), Madrid, 17 June 2016. * * * Thank you, Miguel Ángel, for your introduction. As you know, it is a pleasure to be here once again in Santander, participating in the closure of the seminar organised by the APIE (Association of Economics Journalists) at the Menéndez Pelayo International University (UIMP). As always, I greatly appreciate having been invited to what has become a traditional event on the calendar. Some days back in the course of a meeting, a renowned economics practitioner told me how complex it can be for interested citizens to obtain a well-founded view of the situation of the Spanish banking system. This struck me as a very appropriate remark. Despite the extensive work by the Banco de España and other public and private agencies to compile and disseminate information and analysis on banks, it is not always easy to gain proper insight into the sector as a whole. That is why I would like to take the opportunity today to offer an in-depth analysis of the situation and outlook for Spanish and European financial institutions in the context of the Single Supervisory Mechanism (SSM).

The existence of more banks with a pan-European outlook would amount to a private national risk pooling mechanism that would help weaken the link between the macroeconomic risks existing in each country and the stability of its banking system, adding robustness to the monetary and banking union. It is therefore important to identify and attempt to eliminate those obstacles that continue to hinder such banking consolidation in Europe, in spite of the establishment of the banking union. In particular, we must consider whether regulation and supervisory practices tend to unduly penalise geographical diversification of a bank’s business. It would also be desirable to ascertain whether the current structure of the industry in various countries, characterised by the existence of numerous banks that are not listed public companies and that maintain strong links with national business sectors, hampers the participation of foreign competitors, whether directly or through acquisitions. All told, in the short or medium term it is likely that the need to continue reducing costs will encourage bank mergers and acquisitions within each country in order to harness potential economies of scale. In the largest European countries, there would seem to be room for more consolidation. In fact, in many countries the level of concentration in the industry, as measured by the Herfindahl-Hirschman index, is below that which might be considered to pose a possible threat to competition (see Chart 8).

In such a situation the EU member states have a “common interest” in discussing how confidence in economic policy can be enhanced. During the spring there has been a discussion in Sweden about the exchange rate tendency in connection with the move to Stage Three of EMU. What will happen if, for instance, companies adopt the euro as their unit of account? The Riksbank has underscored that it does not see any strong reasons for large currency outflows on account of the monetary union. And if such outflows were to occur and the krona suddenly weakened, we consider that countervailing forces would act in financial markets. The value of a currency is determined by numerous factors, of which the most important is confidence in the country’s economic policy. The general trend towards internationalisation in recent years has entailed relatively large currency outflows due to portfolio diversification among resident investors. But at the same time the krona has displayed an appreciating trend as growing confidence in economic policy generated a compensatory currency inflow. All in all, conditions for a stable exchange rate between the krona and the single currency should be good. There are many indications that the European Central Bank will define a price stability target that resembles Sweden’s. Similar inflation trends, together with confidence in economic policy as a whole, should result not only in stable nominal and real exchange rates between the euro and the krona but also in conditions for a reasonable valuation of the krona.

And, where there are coordination issues we will stand ready to assist the market in solving them. What we are asking from you is to engage with the Working Group. As I’ve already said, we are under no illusions that transition will be easy. That is why it is so important that you help identify the challenges and opportunities of adopting SONIA more broadly. The Working Group has produced a paper which seeks your input on a number of specific questions. Please do respond. 6 All speeches are available online at www.bankofengland.co.uk/speeches 6 It also invites participation in the work of the Group over coming months. Please do get involved in shaping the future of sterling markets – starting from now. I am looking forward to hearing your thoughts this morning. 7 All speeches are available online at www.bankofengland.co.uk/speeches 7

Banks have liabilities to one another due to loans and securities trading, or BIS Review 58/2003 1 because they participate in the payment system. Contagion effects can also arise if other economic players suspect that there are connections between the banks. Banks can then encounter difficulties, even if the original suspicions were completely unfounded. Given this, the work on financial stability may be undertaken along three main strands. The first concerns the rules and regulations that set the bounds for the operations of financial institutions, notably banks. The second is the continuous surveillance of the system that is performed by the supervisory authority as well as by the central bank. Thirdly, there is the management of crises, since, unfortunately, we must assume that crises may occur and we must be prepared to handle them. I will discuss these three strands in turn, concentrating on the last two. 1. Regulatory framework First, of course, financial stability rests on a legal structure, which establishes the bounds for the operations of financial institutions. The parliament is responsible for legislation on financial operations, while the supervisory authority issues more detailed instructions. In many countries, including Sweden, the experiences of the 1990s have paved the way for a thorough review of the legal structure of the financial sector. In this context, it is worth noting that laws and regulations today to a great extent are developed through international negotiations such as in the Basel Committee and, for us in Europe, the EU.

The banks and the card industry can help by intensifying their efforts to protect customers against unauthorised transactions. One element of this may be to accelerate the phase-out of magnetic strips and replace them with chips or similar technology. The requirement that all card terminals and ATMs should use chips is a good first step as skimming and the use of stolen cards constitute more than half of all the cases of card fraud in Sweden today. 7 It is important that the customers feel that paying with cards that contain chips is simple and convenient. A uniform standard for how cards should be placed in card terminals can save time and reduce the risk of customers leaving cards behind after purchases have been made. The principle should be the same as for cars: Irrespective of the make of car, we know where the accelerator and the brake pedals are placed! Better reporting of the number of frauds and how much they cost the card industry would also be desirable. It is after all the cardholders that ultimately have to foot the bill and it is reasonable to expect that all the relevant information should be available to them. Such an approach would also increase the cardholders’ confidence in the cards. In France there is a forum for representatives of the authorities and the card industry. They work to inform customers, shop owners, car issuers and other authorities about the security levels in the various card systems.

If the uncertainty applies to the long-term inflation expectations or to the lower bound of the policy rate, one should act more aggressively. There is thus an on the one hand case where one should act less aggressively and an on the other hand case when one should act more aggressively. In other words, when it comes to monetary policy it can be an advantage to be a two-handed economist. Conclusion and summary Let me conclude by summarising my main messages today. Firstly, long-term trends play an important role in monetary policy. There are above all two trends that are of special significance; the long-term real interest rate and the long-term sustainable level of resource utilisation. The long-term real interest rate abroad has shown a falling trend for a long time and this is one reason why interest rates in Sweden and many other countries are unusually low. Secondly, the period following the financial crisis was special in Sweden in several ways, but also so in other parts of the world. Both inflation and wage increases have been lower than expected, at the same time as resource utilisation has on average been largely normal and the central banks’ policy rates have been low. Commonly recurring explanations for the low and slow development in prices and wages are globalisation and digitalisation.

The latter approach is called “certainty equivalence” in academic research and is a good policy only under fairly restrictive assumptions of how the economy functions. It is therefore probably less useful as guidance in policy-making. Moreover, the central banks’ actual behaviour and communication indicate that uncertainty plays an important role in the monetary policy decisions. 21 See Greenspan (2003). 20 [24] A more useful approach is probably William Brainard’s insight that monetary policy should be conducted more cautiously when there is considerable uncertainty over its impact. 22 Brainard’s uncertainty principle is based on the insight that central banks’ actions can affect the uncertainty in the economy. If, for instance, a central bank were to act more forcefully to try to attain its inflation target more promptly – in a scenario where there is great uncertainty over the impact of monetary policy – there is a risk that it would instead miss the target by a wide margin. By acting forcefully, the central bank contributes to greater variations in inflation and also to greater uncertainty in general. To avoid this, the central bank should act more cautiously. This uncertainty principal is often referred to by central banks and can be one reason why central banks, who want to avoid making major mistakes in all circumstances, are sometimes perceived as “sluggish” in their behaviour. One of my themes today has been long-term trends. When such trends change, it often takes a long time before one notes the change and this can moreover be difficult to assess.

The dilution of investment yields has reinforced risks for the industry such as a serious lapse risk if interest rates were to rise abruptly, financial losses for insurers who guarantee high technical rates compared to financial returns, or risks related to insufficient cost coverage. Among this quick review of the most salient characteristics of the environment in which insurers have been operating I would like to add that climate change risk has now become a reality and although insurers usually know how to deal with climate risks, including in extreme events, it is more than likely that further adjustments will be needed. Against this backdrop, French insurance companies have reacted in three main ways: lowering of paid interest rates in life insurance, development of alternative investment strategies and adaptation of their traditional business model including an increased business diversification. As a result, for instance, unit-linked liabilities are increasing, and the profit-sharing payments for euro-denominated contracts are decreasing. However, I note that these payments remain significantly higher for mutual undertakings: they amounted to 2.3% last year while the French average is lower, and the reserves for deferred profit sharing have been strongly reinforced and amount to approximately 6% of mathematical reserves at YE 2017, which is 50% higher than the French average.

Regarding the International Capital Standard, which aims to develop an international capital standard in order to be able to establish a comparable basis in terms of prudential requirements for all international groups, recent progress was made in Kuala Lumpur in November 2017 which should lead to, by the end of 2019, a version called “ICS 2.0” that will be used as a reference in international supervision Colleges, for a transitory period of five years. During this timeframe, each internationally active insurance group will have to ensure a compulsory and confidential five-year monitoring period based on the ICS, after which this standard is expected to become effective. Now, I will turn to IFRS17: it would be unreasonable to apply the new IFRS17 accounting framework right now. Given the obvious issue of timing, it is quite welcome that the IASB reopened the discussion and that the application of this standard has now been postponed by one year. This will primarily give us time to reach an agreement on identifying groups of loss-making contracts. We also want to bring the discussion on the 4 treatment of reinsurance contracts held to a satisfactory conclusion. At this point, there is too much room for interpretation in the standard, which could interfere with the comparability and consistent application across countries. In Europe, the current “hot topic” is the forthcoming Solvency 2 review. This review must include a full and objective assessment of the framework that has now been in place for three years.

In the Annales, he wrote: “The destruction of private wealth precipitated the fall of rank and reputation. At last, the emperor interposed his aid by distributing throughout the banks a hundred million sesterces, and allowing freedom to borrow without interest for three years, provided the borrower gave security to the State in land to double the amount. Credit was thus restored, and gradually private lenders were found.” 1 Replace “emperor” with “governments and central banks”, “sesterces” with “dollars” or “euro”, “security” with “collateral”: this two thousand year old quotation could sound surprisingly familiar. Yet, even though two thousand years have passed, with many financial debacles in between, I think it is fair to say that we entered the current crisis less than ideally prepared. First, we had to improvise with an economic interpretation of the causes that led to those unprecedented market disruptions. The dramatic fall in confidence revealed a source of risk that macroeconomists had not modelled carefully and that had not even been considered relevant by most theorists of finance. Now, the concept of “systemic risk” is almost common knowledge. Second, we had thought that the financial system would act as a shock absorber. Portfolio theory had demonstrated that the dispersion of individual risks would attenuate aggregate risk. But the mispricing of risk multiplied exposures, and the assumption of similar risks by market participants increased the potential for contagion. In the event, we learned that dispersion does not necessarily mean effective diversification.

Federal and State funding of subsidized higher education is heavily reliant on tax revenues and competes with other forms of public spending, and within education budgets competes with pre-school, elementary and secondary education spending. During the recession we saw severe revenue declines at the federal and state levels. Being highly credit constrained, with university subsidies being part of operating budgets which must be funded with current tax revenues, many states cut planned education funding while allowing public universities to increase tuition levels. This in turn contributed to a significant shift of education cost to students and parents. In research conducted at the New York Fed, we found that since 2007 those states with the largest funding cuts also had the highest tuition increases, with an average annual tuition growth rate of 3.4 percent. As shown in Chart 2, this compares to an annual average tuition growth rate of 1.7 percent during the 2007–2010 period for all other states combined. That is, we observe an economically meaningful relationship between public funding and public institution tuition changes since 2007. Higher tuition has forced many students to take on larger student loans. Student debt and tuition increases were not limited to public institutions. Research conducted at the NYFed found that over the same period there was even larger tuition and student loan growth at forprofit institutions. [Chart 3] Despite larger average support through Pell grants, with tuition 1 National Center for Educational Statistics, 2012. “Digest of Education Statistics”. 2 College Board, 2013.

The system’s rules and procedures should enable participants to have a clear understanding of the system’s impact on each of the financial risks they incur though participation in it. VII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing. VIII. The system should provide a means of making payments which is practical for its users and efficient for the economy. 13. ECB proposal for core principles for retail systems IX. The system should have objective and publicly disclosed X. criteria for participation, which permit fair and open access. The system’s governance arrangements should be effective, accountable and transaparent. In addition, this principle should also be fulfilled: IV. The system should provide prompt final settlement on the day of value, preferably during the day, and at a minimum at the end of the day. The Act relating to Financial Agreements and the Payment Systems Act ensure that Norway has a modern, comprehensive legal framework for payment services. The Payment Systems Act has also contributed to removing banks’ legal risk linked to participation in the payment system. Therefore, the Norwegian retail payment system should satisfy the principle of a well-founded legal basis. Earlier today, I concluded that settlement risk in the Norwegian payment systems was very limited. I believe we can also say that the financial risk has been publicly disclosed and is understood.

While there are around 15 million unemployed workers, there are also around 9 million workers who are working part time for economic reasons (as opposed to their own choice), and around 1.3 million “discouraged” workers who want a job but who are not currently actively looking for work – and therefore are not counted as unemployed. As firms decide to increase their total hours, some of this additional labor demand will take the form of firms restoring part-time workers to full-time status – an action that does not reduce the unemployment rate. In addition, as conditions begin to improve in the labor market, discouraged workers may decide to reenter the labor force and to renew their search for a job. This reentry pushes up the measured unemployment rate until these reentrants find new employment. As the recession ended, consumption growth returned to positive, supported by improvement in disposable income growth and a leveling off of the household saving rate (Chart 20). Household wealth began to recover as equity markets improved and the deterioration in house prices abated, supported in part by demand created by the housing tax credit programs (Chart 21). As conditions in financial markets improved, banks ceased tightening their lending standards (Chart 22). Lending activity stopped contracting, and credit became more readily available for large firms that had access to the credit markets (Chart 23). Midway through 2010, however, questions started to arise as to whether the economy was entering a “soft-patch” or heading toward a “double-dip” recession.

The last turmoil in the global and domestic financial markets has been a concrete proof of this fact. Thus, the dedollarization is not a straightforward process. As a clear evidence of this, the findings of Reinhart and her friends 13 show that only two countries, Israel and Poland, out of a total of 85 countries managed to achieve large and lasting declines in domestic dollarization. Accordingly, we can say that dedollarization is a difficult and long lasting process that is very much related with the macroeconomic stability and proper incentives. Hence, what we should do first is to continue with the current sound macroeconomic policies and structural reforms in a decisive way. Second, in order to start dedollarization, an active dedollarization strategy such as the so-called “carrot and stick approach” in the literature, which consists of regulations that will encourage the use of the Turkish currency, should be planned. However, as Ize and Levy-Yeyati 14 suggest, before launching an overly ambitious policy agenda, we should make all the necessary researches to understand the roots, risks and costs of dollarization and the implications of policy reforms made against it. I think, this conference provides a big opportunity for all of us to share our opinions and experiences and to enlighten our way of dedollarization. Distinguished Participants, I would like to conclude my words by repeating that I am very glad to welcome such distinguished economists from all over the world. I am sure that we have a lot to draw on the experiences of each other.

Coordination problems arise because there are incentives for countries to free-ride or to undercut one another. [31] In these instances, deeper modes of cooperation are essential to align countries’ interests. The EU has thus far employed two methods of governance to facilitate cooperation. In some cases, we have invested common institutions with executive power – such as the Commission for trade policy or the ECB for monetary policy. In others, executive power remains with national governments, with cooperation through common rules, such as the framework for fiscal and structural policies. These areas of economic policy were considered too specific to the situation of individual countries to be entrusted to a common body. It was felt that the only possible form of governance was for countries to exercise national sovereignty, thereby respecting their own specific set of circumstances. A rules-based approach was seen to be the only solution that was consistent with this vision. But it is worthwhile to reflect on how successful this choice has been. For the cases where executive power has been invested with institutions, most would agree that the institutions have performed relatively well. Trade policy has been effective in opening up access to new markets: the EU has in place 36 free trade agreements, compared with 20 for the United States. [32] Monetary policy has successfully fulfilled its mandate. But for the areas that use a rules-based approach, some shortcomings have been revealed.

Chart 1 Tariffs and Global Value Chain Participation2 (Value added weighted average over countries and sectors percent) 50 6 5.5 45 5 4.5 40 4 35 3.5 3 30 2.5 Average GVC participation 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 2 1995 25 Average tariffs (right scale) Source: Source: IMF, WEO April 2019 Global external imbalances have been at the forefront in the macro - discussions and risk assessments. One of the first steps when scrutinizing external positions and imbalances is the current account position. Current account imbalances can be healthy or a sign of 2 Chart extracted from the IMF WEO, April 2019. 2 macroeconomic and financial stress. In many cases, current account imbalances can be entirely appropriate, even necessary. For instance in converging economies, with vast investment opportunities, they benefit from foreign funding, and can afford to accumulate debts (by running current account deficits), provided they can repay them out of future income. Sometimes, however, external imbalances can point to macroeconomic and financial stress. Economies that accumulate external liabilities on too large scale may become vulnerable to sudden stops in capital flows that force abrupt cuts in spending–making financial crises more likely.

GDP growth and GDP components contributions (p.p.)

Zeti Akhtar Aziz: Extending the boundaries in the new financial landscape Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 10th Malaysian Banking, Finance & Insurance Summit: "Liberalisation and Consolidation of Malaysian Banking & Finance Sector: Enhancing Competitiveness & Resilience of Our Economy", Kuala Lumpur, 9 June 2006. * * * This decade has become one of the most dynamic periods in the development of our financial sector. We have seen the dramatic transformation of the financial structure to becoming increasingly more diversified, the industries becoming more consolidated and rationalized, and the system becoming more internationally integrated. We have also seen the financial system transition into a more competitive environment in which the institutional arrangements are more deregulated and liberalised. The financial infrastructure has also evolved with fundamental changes to support this transformation. Finally, the regulatory and supervisory approaches have also advanced to becoming more principled and risk-based to improve the functioning and stability of the financial system. The financial transformation has taken place in an environment of economic stability. Malaysia 's economic performance has been characterized by sustained high quality growth and stable fundamentals. The underlying growth in the Malaysian economy has been solid. Malaysia has benefited from both the favourable external environment and the strong domestic demand. Malaysia has also benefited from the globalization of production with the geographical relocation of the production chain by an increasing number of both multi-national and local corporations across the Asian region.

The Monetary Policy Statement (MPS) remains the key monetary policy communication tool of the central bank to provide the rationale for monetary policy decisions. Given the pronounced changes in the economy and the significant changes taking place in the financial sector, the industry would essentially need to respond to the new challenges arising from: i. Greater linkages, integration and interdependence between nations. This trend is likely to intensify as more countries embark on initiatives to promote closer regional economic and financial integration, to enhance their level of economic performance. ii. The challenge of intensified competitive pressures, arising not only from changes in the financial environment, the technological advancements and financial reforms but also the entry of new players, including the non-traditional competitors such as non-financial services. iii. Consumers are increasingly confronted with a wide range of new and innovative products and services that are delivered via new and more efficient delivery channels. As consumers are becoming increasingly demanding and financially sophisticated, greater emphasis needs to be given to the provision of the variety and quality products and services at competitive prices through the most effective channels. Banking institutions need to anticipate and rapidly respond to these new demands and expectations. iv. Policymakers are also confronted by the challenge of maintaining overall financial stability whilst at the same time, promoting efficiency in the financial system. Balancing the trade-offs arising from meeting these objectives will be necessary to determine the best course of action.

For instance, in some countries the central bank is responsible for bank supervision, while in others this is the task of a special financial supervisory 4 BIS Review 24/2003 authority. Countries also differ with respect to the private sector's involvement in fulfilling certain objectives. In some countries the private sector provides services that in other countries are provided by the central bank. Here, I believe that more empirical work could be done. The BIS has a natural role to play in this respect, and that was also the reason that I first contacted the BIS when I got the idea for this workshop. I also believe that more comparisons could be made within the European System of Central Banks to help us all improve our efficiency levels. Final remarks Let me conclude by referring back to my opening remarks. Questions of efficiency have been at the top of our agenda for a long period of time, and there are good reasons for central banks to pay extra attention to their costs. It is true that central banks provide public goods and that minimising costs is therefore not always the best solution. However, we should be aware that the pressure to at-tain efficiency is weak, as central banks are protected from competition. Private enterprises that compete with each other are forced to be efficient and profitable in order to stay in business and satisfy their shareholders. Central banks generally lack such pressure.

That said, much work still lies ahead to stimulate new intermediation mechanisms in order to diversify the funding of the economy when a single channel, such as the banking system, cannot adequately satisfy demand. The financing of small and medium-sized firms in the euro area is a case in point. In this regard, our new ABS purchase programme in the Eurosystem clearly aims to stimulate this nascent market in order to broaden the sources of 2 BIS central bankers’ speeches funding of medium-sized corporates that do not yet enjoy direct access to financial markets and to free space in banks’ balance sheets for financing the smaller SME’s . In an increasingly globalized world, the third session will try to reconcile central banking policy autonomy with international capital flows. Professor Hélène Rey will revisit her groundbreaking conjecture that, in spite of flexible exchange rates, the Mundell trilemma may actually boil down to a dilemma because of the Global Financial Cycle. True, globalization does not necessarily imply that spillovers cannot be limited. As an illustration, let me take the euro area: since our business cycle differs from that of the USA, the Eurosystem has been able to disconnect the whole yield curve from the expected rise in US interest rates. But the euro area is a large economy. By contrast, some emerging market economies (EMEs) have learnt the painful way how capital flows can destabilize their domestic financial systems.

It is time for the industry to come together and make a more significant impact through wellplanned investments in product design, risk management and to support consumer education in retirement planning solutions. Third, catastrophic events in Asia Pacific is rising. The region is also confronted by an increasing frequency and severity of catastrophic events. Eight of the 10 countries in the world with the highest annual natural catastrophe losses as a percentage of GDP are located in Asia. Over the last 20 years, natural catastrophe losses suffered by Asia accounted for almost half of the world’s estimated economic losses from natural disasters, yet only 7.6 per cent of such economic losses in Asia were insured compared to 67 per cent in the United States for example. These significant protection gaps that are prevalent across most of Asia and expose the vulnerability of the population and economies of the region to hardship due to loss of lives and damage to properties following a catastrophic event. The poor are most severely affected. While some countries have implemented disaster-risk insurance schemes or provide Government assistance to alleviate such losses, others continue to be exposed. In response to this challenge, more is being done among developing economies, including under public-private sector partnerships, to develop and increase access to affordable micro protection plans as a means of helping millions of people cope in the most difficult times.

Strategies to seize opportunities in the new horizon Allow me now to turn to some of the key strategic imperatives for the industry going forward. 2 BIS central bankers’ speeches First and foremost is the building of strategic and quality human capital. Human capital can be likened to the indispensable crew that you need for your ship to sail. Shortage of quality talent is one of the most important risks facing organisations globally today and the insurance industry is no exception. The Malaysian Insurance Institute, like many other insurance training institutes around the world, ought to expand investments in personnel with the relevant skills and knowledge in particular the ability to adapt and innovate. In today’s environment, training needs to be continuously changed, in some cases overhauled, to maintain its quality and relevance. Central to this is the industry’s collaboration with and support for training institutes. The experience of practitioners who are experts in their field would enrich training programmer considerably. In this regard, the Bank welcomes the efforts of the industry and the Malaysian Insurance Institute to build bridges with academia through practical collaborations that aim to create a ready pool of productive talent. New approaches and programmes could be tailored against proven methodology implemented by some graduate schools. On the part of Bank Negara Malaysia, the recently established Financial Sector Talent Council is collaborating closely with key members of the financial industry to identify issues surrounding talent gaps and formulate innovative proposals to address such gaps.

From April they should be able to start buying assets from banks, including foreclosed assets and NPLs which have completed court process and awaiting receivership. This should help to further speed up NPL reduction. Ladies and gentlemen, Let me now turn to the main topic of my talk today, the role and responsibility of bank directors. First of all, I would like to emphasize that bank directors play a crucial role not only to the individual institution, but the directorship carries with it accountability and responsibility for the stability of the economic and financial system of the country. This broad accountability arises from the central role played by banks in the process of financial intermediation and payments system of the country. Therefore, financial institution soundness and efficiency are of utmost importance, as financial system stability depends crucially on the public confidence. Financial weakness or improper business conduct in one bank could affect the general confidence and stability of the entire financial system, thus causing systemic risk. In light of this, bank directors must carry out their duty in overseeing that sound, proper, efficient, and progressive business practices develop in their individual banks. They must at the same time uphold their accountability for the preservation of the public interest through contributing to safeguarding economic and financial stability. Thus, bank directorship carries with it accountability not only to shareholders, but also to depositors, clients, and other stakeholders in society at large.

Tenth, and final point, the success of the bank depends not only on strategy and policy direction set by the Board, but also on the capability of senior management to take on those policies and implement them. Thus, the Board must give high priority to recruiting and retaining quality senior management, including work capability, experience and vision to carry out the task. But most importantly, he or she must be of high moral integrity. The greatest weight is given to the personal attribute of high integrity because senior bank management are continually surrounded by wealth and the temptation for huge financial gains through improper conduct. Ethic is the personal inner compass that prevents the individual from taking the wrong turn and fall into the trap of exploiting conflict of interest. It would also help the individual to stand up against such conduct by others in the bank, even those of higher ranks. Such personal ethic will also help the individual to stand up to pressures from those in position of power in the country as well as those who represent such powers who have infiltrated the operation of the bank. Such moral leadership will provide an example to bank employees to uphold the high working principle thereby helping to safeguard long-term growth of the bank. Ladies and gentlemen, I have no intention of “preaching to the Pope”. I wanted merely to share an understanding on the role and responsibility of bank directors, and convey to you the Bank of Thailand’s expectation from your directorship role.

However, not least because of experiences in recent history, it is widely acknowledged that the stabilisation of aggregate demand through changes in public spending is not an easy task. Preferably, policy makers should refrain from fine-tuning, not least against the backdrop of inside and outside lags that distort the timing of such policies. It is far more important to ensure that the government budget is balanced over the course of a business cycle. Over the last couple of decades, monetary policy has been geared towards price stability, thereby also indirectly contributing to stabilising demand. Given the success in regaining price stability, Uganda being one of many examples, it seems sensible to take a closer look at the guiding principles that have been important factors in making this possible. Using inflation targeting regimes by independent central banks as a special case, four advantages of this strategy can be singled out as illustrated in a recent study (Schmidt-Hebbel and Mishkin, 2006). First, the nominal anchor should be based on the institutional set-up and not on individual policy makers, this to ensure consistency. Second, a credible commitment as just described produces stable expectations of a continued focus on the long-run. Third, transparency reduces uncertainty about the tools and goals of monetary policy. Finally, without a target, a lack of accountability might undermine the central bank’s independence.

BIS central bankers’ speeches 13 The Bank’s Monetary Policy Report also presents alternative scenarios for the Norwegian economy. If developments are broadly in line with expectations, economic agents can expect that the interest rate will be set in line with that projected by Norges Bank. If conditions change, as was the case in August, Norges Bank will naturally adapt the monetary policy stance in the light of new economic prospects. Through summer, dramatic falls on stock exchanges and political unrest made the headlines. There are now prospects of lower economic growth in many countries. In both the US and many countries in Europe, public debt is high and fiscal deficits are substantial. At the same time, measures to reduce the deficit in the short term will also dampen activity. Some economists fear a renewed economic setback in the US and the financial markets are characterised by turbulence and uncertainty. The US and EU authorities are facing demanding decision-making processes. In the US, the political parties and the people are divided in their views on taxation and the exercise of central government authority, reflected for example in the absence of measures to strengthen central government revenues. The debt problems in the EU are being aggravated by the lack of a similar coordination of fiscal policy to support the European monetary union. Government finances in many of the countries now experiencing problems have been weaker than required under the EU’s own rules for several years. Measures have been put in place.

In 1990, shortly after the fall of communism, I became Governor of the National Bank of Romania, having to put into practice the transition from a monobank-type system to a two-tier system, while the country’s economy was going through major changes from the ruinous central planning to a market economy. As a matter of fact, in retrospect, I can say that my entire career has spanned several decades marked by truly ground-breaking policy and paradigm shifts. Some of the recent ones, such as quantitative easing and close to zero or even negative monetary policy rates, would have been inconceivable even a few years (not decades) before they occurred! The experience acquired through the years, both as a researcher and as governor, makes me reluctant to engage in speculations on the future of central banking in 10 or 20 years’ time, particularly at the current juncture when the global economy is in a state of flux. Nevertheless, there are a few old and new things about central banking which I believe will continue to be relevant in the future. I would start by pointing out that, in the extremely complex post-crisis economic and financial environment, the mission of a central bank cannot be simple. There are so many transformations going on right now, after the global crisis not only invalidated certain elements of mainstream economics, but also changed the order of priorities on policymakers’ agenda.

The key questions here are related to amount and velocity -- that is, (1) how would digital bills or notes, or digital coins, be represented on the books of a bank or depository institution; and (2) how many times would this electronic coin or bill circulate in the general economy without somehow being processed and recorded by a bank? In this regard, the October 1996 Bank for International Settlements report “Implications for Central Banks of the Development of Electronic Money” states “E-money could lead to shifts in the velocity of money which might temporarily reduce the usefulness of the monetary aggregates, especially narrower ones, for countries that rely on them as targets or indicators.” In a June 1996 speech before a cyber-payments conference, Governor Edward Kelley of the Board of Governors stated that, with respect to a bank’s liabilities incurred through issuing stored-value cards, such liabilities should be included in the statistical reports that banks must currently submit to the Board of Governors.3 It is difficult to argue that bank liabilities resulting from the issuance of electronic “coins” or electronic “bills and notes” should be reported any differently. A more problematic question arises when considering the matter of nonbank issuance of electronic coins or bills. Currently, the largest nonbank issuers of travelers checks are not required, but do volunteer to the Fed, the outstanding balances of their travelers checks, so that this information can be statistically recorded and reported in United States monetary aggregates by the Fed.

As a result, an inflationary bias may be generated. This inflationary bias is ultimately anticipated and incorporated into agents’ expectations, and, therefore, into price-setting and wage bargaining. The upshot is higher inflation without hardly improving the level of output and employment in the economy. This means monetary policy loses its effectiveness and the commitments to price stability cease to be credible. 2/9 Figure 1 INFLATION RATES 1970-1994 25 1994-1998 % 5 20 4 15 3 10 2 5 1 0 70 72 74 76 78 80 82 84 86 88 90 92 94 EURO AREA % 0 94 95 96 97 98 SPAIN The independence of the Banco de España, along with the new monetary policy framework based on direct inflation targets, was decisive in bringing inflation down and in fulfilling the Maastricht requirements in a short period of time.2 In this regard, the Spanish experience in relation to EMU accession meant a qualitative leap forward in terms of credibility, communication and transparency, which facilitated the anchoring of inflation expectations to a new regime of price stability, providing a focal point for collective wage bargaining, the setting of regulated prices, etc. The task of taming inflation did not fall entirely on the shoulders of the Banco de España, as Spain showed a strong and credible political will to lower inflation that helped bring about the anchoring role of the whole European institutional setting.

– https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp191112_1~f304b47e14.en.html 3/9 Mechanism (SSM) in 2014, the Banco de España’s supervisory role was integrated into a new institutional framework with the European Central Bank at its core. I will come back to this function later on. Some lessons on central bank independence Let me share with you some reflections about central bank independence nowadays. This will be in the form of five lessons which, in my view, should be kept in mind when thinking about central bank independence, particularly at the current juncture of seemingly tamed inflation but with difficulties in achieving price stability objectives in some advanced economies. 1. Institutional settings matter First, I would state that independence, to be effective, must rest on a robust legal and institutional framework. Independence must be formally recognised in all of its relevant dimensions: namely, at the institutional, functional, personal and financial levels. This is the case in the euro area, where the Maastricht Treaty4 provided the appropriate framework; but unfortunately it is not the case in other regions, thus making the task of central banks much more complicated. 2. The need to deliver Second, the main reason for central bank independence is a utilitarian one: independence is an instrument to enhance effectiveness in order to achieve agreed objectives in the general interest, such as price or financial stability. The social value of central bank independence is thus inextricably linked to the effectiveness of its policies.

Hughes, P and White, E (2010), ’The Space Shuttle Challenger disaster: A classic example of Groupthink’, Ethics & Critical Thinking Journal, Vol. 2010, Issue 3, pp. 63. Iaryczower, M, Lewis, G and Shum, M (2013) ‘To elect or to appoint? bias, information, and responsiveness of bureaucrats and politicians’. Journal of Public Economics 97, 230–244. IMF (2013), ‘Key aspects of macroprudential policy’, available at: http://www.imf.org/ external/np/pp/eng/2013/061013b.pdf. Janis, I (1972), ‘Victims of groupthink: A psychological study of foreign policy decisions and fiascos’, Boston: Houghton Mifflin Company. 14 BIS central bankers’ speeches Janis, I (1982), ‘Groupthink: A psychological study of policy decisions and fiascos’, Boston: Houghton Mifflin Company. Jensen, M and Meckling, W (1976), ‘Theory of the firm: Managerial behavior, agency costs and ownership structure’, Journal of Financial Economics, Volume 3, Issue 4, pp. 305–360. Kahneman, D (2011), ISBN 978–0374275631. ‘Thinking Fast and Slow’, Farrar, Straus & Giroux, Kahneman, D and Tversky, A (1979), ‘Prospect Theory: An Analysis of Decisions Under Risk’, Econometrica 47, Chart 10 shows the fan chart for inflation from the Bank’s most recent inflation report, pp 313–327. Kaplan, A (1964), ‘The Conduct of Inquiry: Methodology for Behavioral Science’, Transaction Publishers. King, M (2010), ‘The MPC ten years on’, lecture to the Society of Business Economists. Available at: http://www.bis.org/review/r070507a.pdf. King, M (2013), ‘Monetary policy: many targets, many instruments. Where do we stand?’, Speech given at the IMF Conference on ‘Rethinking Macro Policy II: First steps and early lessons’. Available at: http://www.bankofengland.co.uk/publications/Documents/speeches/ 2013/speech649.pdf.

This responsibility rests with the Prudential Regulation Authority (PRA) at the Bank, specifically its Board. The PRA Board also comprises both Bank insiders and outsiders. 40 So in a nutshell, for the first 300 years of its history the Bank of England operated as an agent of government. In the subsequent 20 years, its degree of policy discretion has been transformed. It now comprises monetary, macro-prudential and micro-prudential policy – a “3M” regime. The Bank’s span of responsibilities may well be unique, at least among advanced economy central banks. Though there are differences in detail, there are also striking elements of institutional similarity in the decision-making architecture for monetary, macro-prudential and microprudential policy, as carried out by the MPC, FPC and PRA respectively. Let me mention four features in particular: (a) Goal dependence: The policy objectives of all three policy committees are set in statute by Parliament, reflecting the attitudes of the electorate at large. In the language of economics, the 3M regime thus exhibits “goal-dependence”. 41 Though different in detail, these objectives share some similarities. For example, the MPC and FPC have a unique primary objective, augmented with a common secondary objective. 42 (b) Instrument independence: The policy instruments of the three policy committees are delegated, through statute, to them. In other words, the settings of these instruments on a day-to-day basis are for the Bank of England’s policy committees, subject to meeting the Parliamentary-set target. The 3M regime thus exhibits “instrument-independence”.

As I have mentioned earlier while talking about global risks, forecasts for our largest trade partner, the European Union, suggest that it would take a long time for foreign demand to return to pre-crisis levels. 4 BIS Review 79/2010 Industrial production has been increasing moderately since March 2009. According to the latest Business Tendency Survey conducted by the CBT, the moderate recovery in orders both from domestic and foreign markets continues. On the expectations side, there is improvement both in the real sector and consumer confidence indices. Nevertheless, the stillweak foreign demand and the fact that Turkey’s exports predominantly rely on products that are susceptible to cyclical developments are retarding a rebound in industrial production. Uncertainties regarding aggregate demand urge firms operating in the manufacturing industry to take a cautious stance and to be more reluctant about inventory building compared to the periods of strong growth. The biggest headache for Turkey, unemployment, assumed a slight recovery trend in the third quarter of 2009 as the economy started to generate employment opportunities again. Industrial employment, which is the sector that is most severely affected by the crisis and became the main driver of contraction in non-farm employment, started to recover at a moderate pace. The services and construction sector supported non-farm employment as well. Despite the recent partial recovery, the unemployment rate is still quite high compared to the pre-crisis period. This high unemployment rate curbs the consumption demand as well.

In their meeting in Busan earlier this month, Finance Ministers and Central Bank Governors of the G20 have “acknowledged a need for national, regional and multilateral efforts to deal with capital volatility”. A Financial Safety Net Experts Group has been set up to work on the issue. The reform of financial regulation The financial crisis as taught us some very hard lessons. While there are many causes to the crisis, it is clear that it forces us to reconsider the way we regulate and supervise the financial system. That is what we have been doing since the November 2008 G20 meeting. We entered this crisis with many unregulated entities playing a major role in the financial system. There were, therefore, huge “black holes”, including what has been called a “shadow banking system” where most of the excesses of securitisation took place. The G20 has fostered coordinated efforts by industrialized and emerging countries alike to bring most important financial actors under the umbrella of supervision, with rating agencies and hedge funds receiving a larger degree of attention. Beyond these actors, the G20 and the Financial Stability Board (FSB) in particular have been instrumental in efforts aimed at enlarging the scope of financial regulation to make sure that the systemic importance and interconnectedness of institutions, markets, instruments no longer escape our vigilance. Naturally, the necessary reform of OTC derivatives markets has gained traction and the G20 has set a very clear roadmap on these matters.

Figure 4 Price of electricity (annual change, percent) 60 60 50 50 40 40 30 30 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 05 06 07 08 09 10 11 Source: National Statistics Institute (INE). 8 BIS central bankers’ speeches Figure 5 Output growth (quarterly change, percent) Chile (*) World 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 05 07 09 11 2 2 1 1 0 0 -1 -1 -2 -2 05 07 09 11 GDP Domestic demand Domestic demand w/o inventory change Figure 6 Growth forecasts for the year 2009 (1) (annual change, percent) 8 8 5.9 6 6 4 4 2 2 0 0 -2 -1.7 -4 -2 -1.7 -4 -4.7 -6 Chile Dev. economies (2) Latin America Emerging Asia Emerging -5.2 -6 Europe (1) Consensus forecasts from January 2008 to December 2009. For emerging Asia, forecasts are available as from March 2008. Black bars show actual growth in 2009.

It’s easy to think of the Fed as just setting interest rates, and of course that’s a major part of what we do. But we do so in order to achieve two goals set by Congress: maximum employment and price stability. In Fed-speak it’s called the dual mandate. There are serious debates taking place amongst economists and policymakers about what maximum employment actually looks like, and they probably deserve another speech of their own. But I promised not to deluge you with numbers, so I’ll focus on a few highlights. The unemployment rate last year averaged just under 4 percent, the lowest such annual figure since 1969. The latest jobs numbers also showed very strong growth, with over 2.6 million jobs added last year. The ongoing strength in the labor market has led to encouraging gains in wages. No matter how you cut it, the labor market is strong, consistent with our maximum employment goal. When we say price stability, our goal is to keep inflation around 2 percent.1 Those of you who are of my generation will remember the runaway inflation of the 1970s and early 1980s. Obviously that’s something we must avoid repeating. But the challenge of more recent years actually hasn’t been too high inflation. Instead, it’s been inflation that’s persistently too low. Over the past decade, inflation has more often than not come in below our goal. But things are looking better.

The loans were often sold on to other financial institutions packaged together with other assets, until it was finally difficult to know which financial institutions were exposed to the impaired loans. When the uncertainty spread, it had unexpectedly large effects and repercussions on the entire world economy. Financial crises took place in several countries in the euro area and in the United Kingdom. The world's central banks reacted by implementing powerful measures – a lesson learnt from earlier crises is that the reactions of central banks are decisive for the sequence of events. Many say, for instance, that one of the reasons why the 1930s crisis in the United States became so serious was that the Federal Reserve’s monetary policy was too tight. Although it is difficult to distinguish the purpose of different measures, we can say that the financial crisis roughly entails three different types of problem for the central banks: liquidity problems, problems with market functioning and difficulties managing an unusually deep recession. In addition, a long line of solvency problems arose. The fact that different central banks, to some extent, chose different measures during the phases of the crisis reflects which problems needed to be counteracted at different points in time. Central banks offered liquidity during the crisis The acute liquidity problems arose when unease spread and various actors began to question their counterparts’ creditworthiness. This led to many financial agents having problems obtaining short-term market financing.

See Söderberg (2018) for a description of the development of means of payment. 2 [25] rates, where a small number of central banks in practice conducted monetary policy for the entire world and thus ‘lent’ their credibility. 2 In Sweden, this system of fixed exchange rates did not function so well and this led to several major devaluations. The larger central banks also lost credibility for various reasons and the global economy underwent a period of high inflation in the 1970s and 1980s. Independent central bank with inflation target replaces gold The global developments over the past 30 years have entailed major changes to the monetary policy landscape, not least in Sweden. During the 1980s, work began in the leading countries of the world economy on rebuilding the confidence in monetary policy that had been lost in the 1970s. 3 At the beginning of the 1990s, Sweden experienced a severe financial crisis following the rapid winding up of several decades of hard regulation of the financial markets. During the crisis, there was strong pressure to devaluate and the defence of the fixed exchange rate finally became untenable. When the Riksbank abandoned the fixed exchange rate, monetary policy sought a new way to promote price stability, and Sweden joined the global trend of reinforcing the credibility of monetary policy. The answer became a more independent Riksbank with an explicit inflation target, and Sweden became one of the first countries in the world to try this new path.

In our forthcoming report for 2021, which will be published in the next few weeks, we have sought to build on last year’s content to provide additional context and analysis. In March last year, I outlined our intention to assess ways that our holdings of corporate bonds could be adjusted to take the climate impact of issuers into account whilst still meeting our monetary policy objectives.9 Last month we set out in a Discussion Paper our proposals for ‘greening’ our Corporate Bond Purchase Scheme (CBPS).10 There is no template for a comprehensive framework for greening an asset portfolio held for monetary policy purposes. We know that outreach and engagement is See The Bank of England’s climate-related financial disclosure 2020, Bank of England, June 2020 See Appointment of Andrew Bailey as Governor of the Bank of England, March 2020 10 See ‘It’s not easy being green – but that shouldn’t stop us: how central banks can use their monetary policy portfolios to support orderly transition to net zero’ speech by Andrew Hauser and Options for greening the Bank of England’s Corporate Bond Purchase Scheme, Bank of England, May 2021 8 9 5 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 5 critical in getting this right, and so are currently seeking feedback on our proposed framework. We are keen to hear from a range of experts and stakeholders over the coming weeks to inform our next steps. The need for us to act in this space was clear and unambiguous.

EBRD’s involvement in two very important initiatives, namely the Local Currency and Local Capital Market Initiative and the Vienna Initiative, has been essential for Romania and the region. I am closely following the evolution of the EBRD. I believe that it finds itself at a cross-road, as the world has been changing rapidly due to the remarkable achievements of the past century: the IT revolution, artificial intelligence, the technological progress and so on. EBRD, as other financial institutions, ought to adapt itself to this new environment and try to respond wisely and appropriately. In this respect, I think that EBRD has to continue its work in the countries for which the Bank was initially created, as transition gaps still exist. We all need to share our experience with the new countries of operations, adjusting our knowledge to new challenging environments. We need to remain open minded and ready to tackle further challenges in this multidimensional environment. EBRD needsto be ready to share, when and if its help is required. Together with the other institutions of European Union, the European Commission, the EIB Group, as well as the national development agencies of the member states, we all have a duty to help/assist the less fortunate. However, as expansion is a “hot topic” today in the EBRD, should it be considered by the shareholders in the future, it needs to be calibrated with a strong and decisive intervention in the current countries of operations, to remove as much as possible the transition gaps.

The euro area has also shown some improvement recently, with positive growth rates in some countries as early as in the second quarter. The latest figures suggest that economic activity may be expected to show positive growth rates across the area in the third quarter. That said, the upcoming recovery will be slow, meaning that quite some time will elapse before pre-crisis output levels are restored. BIS Review 151/2009 1 Public finances have worsened considerably in the euro area owing both to the operation of the automatic stabilisers, which have responded to the cyclical downturn, and to the discretionary measures adopted to boost demand and the action taken to support the financial system. The financial crisis and the decline in activity have severely affected some European credit institutions, which have come to depend largely on public-sector support and which are immersed in a process of adjustment that may have repercussions for their ability to effectively channel funds in the future. On the inflation front, we have continued to witness year-on-year declines in consumer prices in the euro area, due above all to notably lower oil prices than a year ago. Most forecasts suggest positive inflation rates will resume in the area in the coming months, as the comparison effects with the levels reached by commodity prices twelve months back cease to apply.

Yet although the decline in residential demand has been very abrupt, lower interest rates and the fall in house prices have placed affordability indicators at more moderate levels, which is helping to stabilise real estate purchases in recent months. In the case of lending to the private sector, we have witnessed increasingly negligible and even negative growth rates, and this pattern will probably prevail over the coming quarters. These developments in lending have a most significant cyclical component, accentuated by 2 BIS Review 151/2009 the tension on international financial markets. After the strong increase in household and corporate debt ratios in the previous upturn, it was inevitable these ratios would fall to improve the financial position of households and firms, and to assist in the resumption of a sustainable path of spending. The strong adjustment in spending is also bringing about a sharp reduction in the external deficit which, after posting a figure close to 10% of GDP in 2007, may be below 5% of GDP in 2009. The adjustment is based, above all, on the decline in imports and on lower commodities prices; accordingly, for this correction to firm when demand picks up, a more substantial contribution by exports will be needed and, in this connection, our export base and the productivity of our companies must continue to be strengthened. In terms of inflation, we are also seeing a significant correction, as there has been a negative inflation differential with the euro area for almost a year.

Goodhart, C (2010), “How should we regulate the financial sector?”, Future of Finance and the Theory That Underpins It. Haldane, A G (2009), Small Lessons from a Big Crisis, available at http://www.bankofengland.co.uk/publications/speeches/2009/speech397.pdf Haldane, A G (2010), The $ Billion Question, available at http://www.bankofengland.co.uk/publications/speeches/2010/speech433.pdf Kay, J (2009), Narrow Banking: The Reform of Banking Regulation, Centre for the Study of Financial Innovation. Large, A (2010), Systemic Policy and Financial Stability: A Framework for Delivery, Centre for the Study of Financial Innovation. Mink, R (2008), An Enhanced Methodology of Compiling Financial Intermediation Services Indirectly Measured (FISIM), paper presented at OECD Working Party on National Accounts, Paris, 14–16 October 2008, available at $ Mitchell, B R (1988), British Historical Statistics, Cambridge University Press. BIS Review 95/2010 15 Office of Fair Trading (2008), Personal Current Accounts in the UK – An OFT Market Study, available at http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005.pdf O’Mahony, M and Marcel P T (2009), “Output, Input and Productivity Measures at the Industry Level: the EU KLEMS Database”, Economic Journal 119(538), pp. 374–403. Oulton, N and Srinivasan, S (2005), “Productivity growth in UK industries, 1970–2000: structural change and the role of ICT”, Bank of England Working Paper Series No. 259. Philippon, T (2008), “The Evolution of the US Financial Industry from 1860 to 2007: Theory and Evidence”, available at http://pages.stern.nyu.edu/~tphilipp/papers/finsize.pdf. Philippon, T and Reshef, A (2009), “Wages and Human Capital in the U.S. Financial Industry: 1909–2006”, NBER Working Paper Series No. 14644.

In associated guidelines, a number of such services are identified including:  Taking, managing and transferring deposits;  Providing flexible payment mechanisms such as debit cards;  Making loans or other investments; and  Offering financial advice or other business services. FISIM is estimated for loans and deposits only. The calculation is based on the difference between the effective rates of interest (payable and receivable) and a “reference” rate of interest, multiplied by the stock of outstanding balances. According to SNA guidelines, “this reference rate represents the pure cost of borrowing funds – that is, a rate from which the risk premium has been eliminated to the greatest extent possible, and that does not include any intermediation services”. 2 For example, a £ loan with a 9% interest receivable and a 4% reference rate gives current price FISIM on the loan = £ x (9%–4%) = £ And for a £ deposit with a 3% interest payable and a 4% reference rate, this gives current price FISIM on the deposit = £ x (4%–3%) = £ Overall, estimated current price FISIM accounts for a significant share of gross output of the banking sector (Chart 7). Estimating a real measure of FISIM is fraught with both conceptual and computational difficulties. In the earlier example of the second-hand car dealer, statisticians can use the number of cars sold as an indicator of the volume of gross output. But the conceptual equivalent for financial intermediation is not clear.

On this run of history, the global flow of funds could become an increasingly powerful generator of global financial instabilities. In that event, pressures could mount on policymakers to protect against the rising tide of capital flow-induced instability, including through capital restrictions and macro-prudential measures. Some of these measures, if not unthinkable, would have been frowned on as recently as a decade ago. When Malaysia imposed restrictions on capital movements in 1998, it was castigated by the international community. And when the Hong Kong authorities intervened in their stock market in the same year, many international policymakers blew a raspberry. What a difference a decade makes. What a difference a crisis in advanced economies makes. Ideological aversion to throwing grit in the wheels of international finance appears, if not to have disappeared, then to have moderated. Where once it was raspberries, today’s policymakers are blowing kisses. Capital restrictions and macro-prudential policies have entered the policy bloodstream, if not yet the mainstream. The debate today is how best to integrate such tools into established macroeconomic policy frameworks. The issues here are thorny ones. They include:  Should capital restrictions be used by emerging markets as a last resort once conventional macroeconomic policies have been exhausted? Or should they instead play a supporting role in all seasons, to avert excessive capital surges and accompanying fluctuations in financial activity? And what guidelines, if any, should apply to the policies of advanced countries as the source of such capital surges?

A reduction in those capital market frictions would tend to lower the asset market spillover costs of the BFSP problem.  Finally, what guideposts should be provided by the international community in tackling the BFSP problem? The IMF recently began to explore such a framework (IMF (2011)). This raises a set of key questions about global financial governance. Are global financial network externalities sufficiently large to justify the international community imposing rules of the financial road? And how much driver discretion should instead be left to nation states which ultimately may bear the costs of the BFSP problem? These are big public policy questions. They are by no means new ones. If the quantitative experiments presented here are even roughly right, these questions may assume a new urgency in the period ahead. The BFSP problem is real. It may be rising. The result would be growing waves of global financial exuberance, punctuated by crashing capital busts. This roller-coaster has the potential to leave some nation states feeling queasy. They may even wish to get off. What is at stake may be more than just the future stability of the international financial system. References Barro, R J and Sala-i-Martin, X (1992), “Convergence”, Journal of Political Economy, Vol. 100 (2) pages 223–251. Dornbusch, R, Goldfajn, I and Valdés, R (1995), “Currency Crises and Collapses”, Brookings Papers on Economic Activity, Vol. 26(2), pages 219–294. French, K R and Poterba, J M (1991), “Investor Diversification and International Equity Markets”, American Economic Review, Vol. 81 (2), pages 222–226.

Hall has pointed out that a tighter household borrowing constraint can help explain the depth and persistence of the most recent recession in the U.S.2 Mian and Sufi observe that unemployment is much higher in counties across the U.S. where households were more debt constrained by the fall in the price of housing.3 Their finding provides further support for the hypothesis that it is the especially debt-constrained households that are under the greatest pressure to reduce current consumption. Given the effect that sudden reductions in borrowing capacity are expected to have on broader economic activity, it is then encouraging to see that, at least at the aggregate level, households are increasing their borrowing. This suggests that the forced cuts in spending caused by declines in borrowing capacity are becoming less of a major concern for households. I’d now like to turn to some of the empirical analysis that can help explain both the decline in aggregate U.S. borrowing after 2008 and the subsequent turnaround of this trend in 2013. First, as we now know all too well – and as seen in Chart 2 (House Prices Peaked and Fell Precipitously), house prices in the U.S. rose at steadily increasing rates from 2000 through 2006, followed by an approximately 31 percent reversal that persisted through 2011. That 1 See Gauti B. Eggertsson and Paul Krugman (2012), “Debt, Deleveraging, and the Liquidity Trap: A FisherMinsky-Koo Approach,” Quarterly Journal of Economics, 1469–1513. 2 See Robert E. Hall (2011), ‘‘The Long Slump,’’ American Economic Review 102, 431–69.

Clearly, these losses generally produce second-round effects, mainly through reputational damage that tends to affect the financial sector as a whole, rather than individual institutions. As is currently the case, these losses tend to rise, precisely, in the aftermath of crises, where some of the questionable commercial practices are exposed. Banks are hit by these losses at a time when customers, shareholders and public stakeholders are questioning their business model, precisely because of this risk. Consequently, the upshot could be a clear procyclical effect. In a nutshell, we must acknowledge that non-financial risk presents certain features that can exacerbate or compound the effect of a crisis. It is also very hard to estimate and, unlike traditional risks, cannot be eliminated; at best, it may be mitigated. This would be the key question for today: what can we do to mitigate non-financial risk to the maximum extent? In my view, the mitigation of non-financial risk is linked to the quality of internal procedures, IT systems, governance structure or compliance function of a bank. In other words, it is not so much about what banks should do, but how they should do it. Naturally, enhancing governance, compliance or IT systems is not easy. It generally involves additional spending that adds pressure to the already beleaguered profitability of the sector. Understandably, some firms see spending in these areas as an additional cost. I believe it is more appropriate to see improvements in IT or governance as long-term investments.

Eddie Yue: Investment in infrastructure is crucial to Asia’s growth Statement by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority and Head of the Delegation of Hong Kong, for the 46th Asian Development Bank Annual Meeting, Delhi, 4 May 2013. * * * I would like to thank the Government of India for hosting the 46th Annual Meeting of the Asian Development Bank (ADB). I wish to take this opportunity to pay tribute to Mr Haruhiko Kuroda for his excellent work in leading ADB for more than eight years. We welcome the appointment of Mr Takehiko Nakao as the new President of ADB, and look forward to continue working closely with the Bank under his leadership in furthering the development of the region. Global economic sentiment has improved since the beginning of this year. The announcement of further accommodative monetary easing by major advanced economies has reduced tail risks and stabilised financial markets. But while the accommodative monetary policy will help authorities buy time to solve the problem, it is by no means a substitute for medium-term fiscal consolidation and structural reforms that are required for the economy to regain competitiveness and return to a sustainable path. Looking ahead, economic adjustments and deleveraging in both the public and private sectors are set to continue in the advanced economies, and regional economies will increasingly have to look to themselves for new sources of growth.

Factors like certainty in government’s sector development plan, clarity in publicprivate partnership (PPP) framework, conducive legal, regulatory and institutional environment, and capacity to develop and implement projects are key to attracting private sector investors. ADB has an important role to play in capacity building, and through its interventions, catalyse reforms and assist governments to develop an environment conducive for private sector investment. Given the high degree of perceived risk of long-term infrastructure projects, public sector support is often needed to catalyse private sector investment. Provision of credit enhancements and guarantees as well as PPP are common modalities of public sector support, and more work should be done to find new and effective ways to catalyse private sector investments. We are glad to see ADB’s expanded efforts in mobilising private sector BIS central bankers’ speeches 1 investment under Strategy 2020. With the support of ADB, the ASEAN Infrastructure Fund (AIF) established by ASEAN is expected to help mobilise private capital as well as the region’s foreign exchange reserves for financing infrastructure projects in the ASEAN economies. While the AIF is newly set up and more time is needed to observe the effectiveness of this model, the AIF represents a meaningful attempt by regional governments to cooperate and find new ways to mobilise public and private savings of the region to finance Asia’s own infrastructure needs. We encourage further efforts in this regard, and ADB, with its expertise and resources, is best placed to support such efforts.

Lars Heikensten: Challenges for the Swedish fixed income market Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, at the RäntEvent, Modern Museum, Stockholm, 8 May 2001. * * * The Swedish fixed income market has undergone a fantastic development over the past 20 years. This refers to both the volumes traded and the level of sophistication. However, the journey here has by no means been a simple one. At times, both profitability and activity have been quite low. Today the market is facing new challenges. Profitability appears to have fallen and with it both the number of players and the volumes traded. The risks are now also covered to a greater extent by Swedish players trading in, for instance, the German market. The Swedish fixed income market has thus lost ground, relative to other countries. It also appears to have lagged behind in the sense of technology. A year or so ago there was an attempt to introduce a new instrument, a Swedish fixed income future, with the aim of increasing the market's powers of attraction. This attempt did not live up to expectations, however. Today we are gathered here partly because of a new initiative, a platform for electronic fixed income trading. Let me start by saying a few words about the way I see the role of the Riksbank in this context. Our fundamental objectives are to safeguard price stability and promote a safe and efficient payment system.

This reasonably entails the costs of doing business of the same size being higher and the relationships between players being closer. This carries a risk, particularly in times of uncertainty, of affecting the functioning of the market. The inclination to take on risks then declines and with few players and problems with trading situations, the market has occasionally almost come to a standstill. As you know, there are differing opinions as to whether this type of problem can be solved or alleviated with the aid of electronic trading. I do not intend to become involved in that discussion. Part of the positive effects of electronic trading that I mentioned earlier on a more general level will probably be smaller in a market like the Swedish one than on a larger market. Of course, even in terms of direct operating costs, the savings will be less when calculated in kronor. At the same time, it is clear that electronic trading will involve new opportunities. Above all, we hope that it will bring about an increased interest from both Swedish and foreign players in being active and doing business on the Swedish market. How this turns out will undoubtedly depend on the actions of those in the system from the start. If they choose to limit entry or make it more difficult for new players, there is a risk that the socioeconomic gains with the new platform will not be very great. Settlement is important Allow me to conclude with a few words on business settlement.

If we want our children to have peace, I am calling on all of you to act too.

When shocks to money demand are large, expressing the stance of monetary policy in terms of an interest rate – in other words, as a price rather than as a quantity – can help to insulate the wider economy and price developments from the volatility that those demand shocks induce in monetary quantities. This insight had long been embedded in central bank practice, with short-term interest rates being the operational instrument of monetary policy. And it is now central to the canonical model of monetary policy outlined in Woodford’s magnum opus Interest and Prices, which both captures and has catalysed the large and still growing literature on interest rate rules for monetary policy. Three questions: Past, present and future While I will revisit some of these arguments in what follows, you should not expect much innovation from me on those dimensions. But, two decades on, a number of new questions have emerged, which I do hope to address. Page 4 Past: What are the lessons of the past twenty years? A natural focus is to explore how we should think about the expansion of central bank balance sheets via quantitative easing (QE) and other mechanisms. In Lord King’s article, discussion of QE is limited to the case of Japan and treated as something of an anachronism.

Warwick Economics Summit – 4 February 2022 Twenty years later… and twenty years ahead Speech by François Villeroy de Galhau, Governor of the Banque de France Press contact: Mark Deen ([email protected]) Page 1 sur 9 Ladies and Gentlemen, I am delighted to be with you today, though I would have preferred to actually come to Warwick and your world-renowned University. And I am deeply honoured to offer today, with this speech, the very first of the Persaud Lectures, launched this year by Professor Avinash Persaud – none other than the son of Professor the Honourable Bishdonat Persaud. I borrowed my title from the famous French writer Alexandre Dumas: Twenty Years Later was his sequel to the Three Musketeers. January 1st marked 20 years since the introduction of the euro as cash. And if central banking isn’t quite as much fun as the tales of d’Artagnan and his friends, our young currency has had a few adventures and it is worth drawing some lessons from them. I will then turn to the next twenty years and the two main transformations facing Europe. Before I plunge into this longer view, allow me to say a few words about the European Central Bank’s latest monetary policy decision as set out by ECB President Christine Lagarde. Yesterday, in the face of increasing uncertainty on inflation, our key word was « more than ever » optionality.

We nevertheless have reasons to cheer: in 2021 around EUR 100 billion were invested in the European technology ecosystem, almost three times the previous record of 2020, with around 100 new unicornsi. Furthermore, although technologies have not yet shown their full potential in terms of productivity, we may be at a turning point with the latest advances in artificial intelligence, biotechnologies or telework-related reorganisations - after a lag which corresponds to the process of appropriating these technologies by the economic fabric (investment, training, etc.). Page 7 sur 9 These disruptions are also reflected in the monetary, financial and payments spheres – which we scrutinise as central banks and supervisors –, where digitalisation is bringing about a triple revolution – and it is far from over: (i) First, the arrival of new players: new actors born from the tech world – Fintechs and Bigtechs – are challenging historical players with radically new approaches to financial services and at present much less regulation; (ii) Second, the emergence of new assets: crypto-assets from the blockchain universe in the form of tokens: they will never according to me be credible as “crypto-currencies”, but could be used as settlement means – think of stablecoins for instance; (iii) Lastly, the emergence of decentralised market infrastructures: new technologies tend to reduce the use of proven centralised settlement systems. These revolutions offer the potential for increased market efficiency while reducing costs and time.

Svante Öberg: The financial crisis and wage formation Speech by Mr Svante Öberg, First Deputy Governor of the Sveriges Riksbank, at the National Mediation Office, Stockholm, 29 January 2010. * * * Why is the Riksbank interested in wage formation? Wage formation and monetary policy are interrelated. The development of wages affects inflation and inflation affects the development of wages. The target for monetary policy is to maintain a low and stable level of inflation. This job is made easier if wage formation works well. Consequently, it is important for the Riksbank to follow this year’s comprehensive wage bargaining rounds. I will not make any recommendations to the social partners regarding the outcome of this year’s collective bargaining. Instead, I will describe the economic setting for this collective bargaining. This may seem to be an extremely subtle distinction, but it is an important one, nevertheless. We make no normative pronouncements regarding which rate of wage increase may be most appropriate. However, considering the drawn-out recovery and the weak labour market, the scope for wage increases seems to be highly restricted. I would also like to make two points during this introduction. Firstly: I will not be reporting any new view of economic developments beyond that presented in the monetary policy update of 16 December, although a few figures will be updated with the latest statistics. Secondly: The assessments and valuations I make here are not necessarily shared by all of my colleagues on the Executive Board of the Riksbank.

4/7 In any event, the improvement in the Spanish banking system has allowed it to support the economic recovery and job creation seen in recent years through a more efficient allocation of credit to businesses and industries. The paradigm shift in bank resolution This transformation of the Spanish financial sector has occurred in parallel with a farreaching review at international level of the regulatory and supervisory frameworks for financial institutions. The aim has been to increase the resilience of the banking system and to reduce the impact of financial crises on the economy, with a wave of reforms, the last phase of which was completed in December 2017 by the Basel Committee on Banking Supervision and will be implemented progressively over the coming years. In Europe, these reforms have been accompanied by very significant institutional changes, in particular, creation of the banking union. And one of the pillars of the banking union is the Single Resolution Mechanism. As regards bank resolution, these reforms have in fact generated a paradigm shift, as a result of the high cost of the global financial crisis for the public sector in numerous advanced countries. The paradigm shift consists in moving from a bail-out to a bail-in system of bank resolution, that is to say, from rescue or recapitalisation using public funds to rescue using private funds, belonging to the bank itself, through the use of capital, hybrid instruments and, where applicable, the most subordinated debt.

I think it is helpful to recall why so many central banks, regulatory agencies, and commercial banks have devoted their best resources to ensuring the success of the New Accord. The existing Accord, as you know, was already considered a milestone in banking regulation. It offered the first internationally accepted “yardstick” for capital adequacy and a simple measure of risk. It had received praise for reversing a downward trend in bank capital levels and for serving as a benchmark measure of a bank’s financial health around the world. But the 1988 Accord was a blunt instrument that quickly fell behind the times. Advances in technology, in banking products, and in risk management changed the way that leading banks measure and manage their risks. By the mid-1990’s, bankers and supervisors agreed that the original Accord no longer offered the largest and most sophisticated organisations a meaningful measure of risk. Under the leadership of William McDonough, former President of the Federal Reserve Bank of New York and my predecessor as chairman of the Basel Committee, the Committee seized the opportunity to achieve more than a simple update of the capital requirements. Bill brought tireless energy to the project and convinced industry leaders, bank supervisors, and central bankers that we should pursue a far greater objective that would incorporate market discipline and also encourage advances in risk management across the industry.

Some have argued that output gaps and prices retain their historical association if the right measure of “output gap” is compared to prices that are responsive to it. But then, what is a “correct measure” of the output gap, given that this is a not directly observable variable? In recent months, the Fed has been underscoring that some key structural variables for monetary policy, like the output gap itself, the neutral interest rate and natural unemployment are estimated with considerable uncertainty and may have shifted in recent years. We will hear about measurement challenges and structural parameters across this conference. Inflation dynamics in emerging countries As we hold these discussions in an emerging country, it is also important to note some differences with the advanced world concerning price dynamics and monetary policy. For one, average inflation in emerging economies has been traditionally higher and more volatile than in advanced countries. This keeps our countries generally far from the risk of deflation, but has also contributed to the buildup of indexation mechanisms and more volatile inflation expectations, which may make inflation targeting more difficult. Also, in many emerging countries, the domestic economy is relatively small compared to foreign trade, and pass-through from the exchange rate to prices is a much more relevant determinant of short term inflation. The larger size of the informal sector also tends to weaken the relationship between wages and prices.

But even for that it has been decided not to give details of the voting. Q: To avoid the vote being interpreted in terms of the country of origin of each Council member? A: Personally, I would be in favour of publishing all the details, since governors are independent and should vote in the interest of the euro area, but I realise that there are also very good reasons for not doing so. Q. Might there be resignations from the Council like in 2010 and 2011 when the programmes to purchase public debt were approved? A: At that time the euro area was under great pressure due to the severity of the crisis. There was a risk of a euro break-up and the ECB was facing very difficult decisions in this respect. We are not in a comparable situation today. We have a low growth, low inflation and little credit. They represent major challenges, but are part of the normal monetary policy debate. I see no big differences among governors when it comes to analysing the situation. The discussion on Thursday was focused more on whether it was advisable to wait for more data before reacting. But I don’t see any substantive differences at this point in time. Q: Draghi has called on governments to go for fiscal expansion and reforms – it sounded almost like a desperate plea. A: Mario Draghi’s speech at Jackson Hole in August and the conclusions of the Governing Council last Thursday reflect the seriousness of the situation.

So, the only way to ensure debt sustainability is to raise productivity, invest and increase the employment rate, and this implies structural reforms. Q: None of these factors are present. There is hardly any growth, investment or jobs. A: I am aware that the situation is still very difficult in Spain and that the Spanish people have suffered a lot in the process of reducing imbalances and implementing reforms. However, they can rest assured that Spain has turned the corner, and that the outlook is once again improving. This will encourage firms to invest and to start recruiting again, not only Spanish firms but also foreign ones. In a way, Spain can stand as an example not only for other countries that have been hit by the crisis, but for other large countries at Europe’s core, that have not been so active in reforming their economies. Spain is an example of how, through reforms, it is possible to redress imbalances and get out of the doldrums. Q: Which reforms are urgent? A: It depends on the country. The European Commission has already issued so-called “country specific recommendations”. The worrying thing, as the Commission acknowledges, is that these recommendations are too rarely followed. It would be preferable if countries took them seriously and felt collectively committed. In the case of Spain, my personal view is that much remains to be done to support the young people and help find jobs. They are the future.

Another example is the Netherlands which, like Sweden, is normally characterised as a small, open economy. Even there, worrying signals similar to those in the Swedish and American economies can be perceived. The improved economic activity has led to falling unemployment and rising asset prices. During the last two years, total lending has risen at an annual rate of around 15%. In the Netherlands too, a large part of this rise in lending can be explained by rising prices, especially house prices. Dutch house prices rose on average 15.8% during 1999. As a comparison, it can be mentioned that Swedish house prices rose by approximately 8% during the same period (prices for tenant-owned apartments rose to a considerably higher extent, however). In the Netherlands, household indebtedness in relation to GDP has traditionally been low, but has risen dramatically in recent years and today amounts to almost 45% of GDP. If we compare the developments in Sweden, the USA and the Netherlands, we see Dutch property prices have risen considerably faster than Swedish and American prices both in real and nominal terms. In this context, the development in Sweden appears to be less sensational. What can the Riksbank do if the build-up of risk increases? An increasing level of indebtedness in the economy, combined with rising asset prices, involves greater vulnerability to changes in the macroeconomic environment, i.e. growing risks. The obvious question then, is what the authorities can do to prevent such a build-up of risk.

An increase in the repo rate would in this case contribute both to counteracting incipient inflation tendencies and to reducing the risk of financial imbalances, through a dampening effect on demand for credit and on asset prices. 5 BIS Review 50/2000

It is clear that richer economies and stable societies tend to have stronger and more stable institutions. It is, therefore, my belief that our region should not subscribe to an ‘organic model’ of institutional growth. By ‘organic’, I mean a growth model where institutions catch up to economic development, and tend more to ensure a certain level of prosperity rather than instigate it. To the contrary, I believe institutions and policies should lead the growth and development processes. In this context, our task as policy makers is to define goals, to identify impediments, and to undertake the required countermeasures. This, in essence, is the role of leadership. Let me illustrate my point with just a few examples of the challenges facing us as a region: First, problems with the business environment, including corruption and informality, rank high on the list of growth impediments, both in Albania and in the region. Second, our economic and financial stability should be further enhanced, in order to increase our resilience to shocks and to decrease our financing costs. Third, it is becoming increasingly clear that our financial systems have become over-reliant on banks. Looking ahead, we should rely more on capital markets in order to finance 1/3 BIS central bankers' speeches domestic growth. Fourth, a common complaint frequently heard from potential foreign investors is the limited attractiveness of small and fragmented markets. While partly incorrect, we should do more to increase our trade and infrastructure integration.

Gent Sejko: Future Balkans - towards a global inclusion Speech by Mr Gent Sejko, Governor of the Bank of Albania, at the Tirana Economic Forum "Future Balkans: Towards a global inclusion" Leadership, Institutions and Policies Convergence 2017-2020, Tirana, 24 January 2018. * * * Your Excellency Mr President, Your Excellency Deputy Prime Minister of Albania, Your Excellency Deputy Prime Minister of Kosovo, Honourable Minister of Finance and Economy, My fellow Colleagues and Honourable Participants, It is a pleasure for me to participate at this Conference, convened to discuss on the importance of regional integration, which should be promoted by a forward-looking leadership and supported by the policies convergence. I believe that the dialogue that focuses on sharing our vision for the future, the convergence of perspectives about the challenges ahead of us, and identifying the objectives and drafting agendas for joint action, will be a fruitful dialogue to all of us. Policy convergence, both within and between countries, promotes efficiency and minimizes negative spill-overs. The role of institutions in the growth and development Institutions are the backbone of any modern society, in as much as they generate and implement laws, regulations and policies of development, thus laying out the rules of the game in a market economy. From a broader perspective, these rules should provide for a stable and transparent environment, thus enabling a predictable and long-term decision-making process. They should promote fair competition and equality of opportunities, and they should engender fairness and social cohesion.

Some may not adequately address recent changes in the global economy—such as the rise of digital trade—and may need to be refreshed. And, important trade barriers still remain that should be addressed. In particular, from a U.S. perspective, the access of U.S. firms to some foreign markets and the protection of intellectual property rights are issues that deserve close attention. But, in addressing these issues, we should take care to preserve the vital benefits of trade to higher standards of living in both advanced and emerging market economies. Our focus should be on further strengthening an open trade regime, and, as appropriate, amending and improving these agreements. 1/8 BIS central bankers' speeches The Pace of Globalization To begin, let me briefly describe the pace of globalization as a reminder of what is at stake. Global economic integration has increased dramatically in recent decades. Trade in goods and services, for example, has grown from nearly 40 percent of global GDP in 1990 to 54 percent in 2016. Over the same period, the stock of foreign direct investment has increased from roughly 10 percent of global GDP to 36 percent. Put simply, national economies and financial systems have become more integrated and interdependent.2 This rapid growth in trade reflects falling trade barriers, declining transport costs, and improved information and communication technology. These trends have enabled the development of complex global supply chains that allow companies to manage their production more efficiently.

But, at a broader level, the momentum behind global trade reform has clearly waned in recent years. This has occurred even though there are a number of areas that would benefit from further reform, such as agriculture and services. That momentum needs to be rekindled and reaffirmed. Although advanced economies historically have tended to lead the way, it is important that large emerging market countries now play a greater role. This is appropriate given their growing prominence in the global economy. There are many approaches to dealing with the costs of globalization, but protectionism is a dead end. Trade restrictions address the symptoms and not the underlying problems, and they introduce other costs and distortions. While such measures might generate a temporary boost to growth from greater domestic production and consumption, these would likely be offset by a range of other costs. Over time, such measures would retard productivity growth and thereby shrink the economic pie. As an illustration, import substitution models that were pursued by many emerging market economies following the Second World War eventually led to poorer economic outcomes. Such was the experience in Brazil, which helped trigger the reforms of the early 1990s. 4/8 BIS central bankers' speeches In assessing the benefits and costs of trade, it is important to understand that a nation’s trade balance reflects much more than its trade policy. Just as important are the country’s saving and investment spending proclivities, which are affected by many factors, including tax and fiscal policies.

9 All speeches are available online at www.bankofengland.co.uk/news/speeches 9 The results show that the highly indebted tail has become a little smaller over since 2015. At the same time, the average debt level of the mass of the distribution has increased (Chart 3). If we draw on the literature on the links between debt and consumption cuts I mentioned earlier, and apply those coefficients to these stock distributions, we find that the two effects broadly offset each other. We can therefore I think conclude that the vulnerability from indebtedness has not changed markedly since 2014 – the increase in vulnerability that the FPC sought to prevent happening has not happened. Chart 3. Estimated LTI distribution of the outstanding owner-occupier mortgages (a) Chart 4. Estimated LTI distribution of the outstanding owner-occupier mortgages – with and without FPC policy(a) Sources: FCA Product Sales Database, British Household Panel Survey (1991-2008)/ Understanding Society (2009-13) and Bank calculations. (a) The 2015 H1 distribution of stock LTI ratios is based on loan-level data containing outstanding loan values and borrower income at origination. Incomes are updated to 2015 H1 using panel data quantile regressions. The 2018 H2 distribution combines the 2015 H1 data on the stock of mortgages with loan-level data on the subsequent flow of new lending, also updated to 2018 H2. See Levina et al (2019) for methodology Sources: FCA Product Sales Database, British Household Panel Survey (1991-2008)/ Understanding Society (2009-13) and Bank calculations.

0 100 200 300 10 8 6 4 2 0 -2 -4 -6 -8 -10 400 Household debt to income in 2007, per cent Sources: Flodén, M (2014) and OECD National Accounts. (a) Change in consumption is adjusted for the pre-crisis change in total debt, the level of total debt and the current account balance. See Flodén, M (2014), ‘Did household debt matter in the Great Recession?’ available at www.martinfloden.net/files/hhdebt_supplement_2014.pdf. Our aim was to guard against an upside risk. In 2014 the Bank’s Monetary Policy Committee’s central forecast was that in the medium term house price inflation would fall back and rise broadly in line with 9 The 2014 stress test was based on a scenario, in which house prices fell by 35% and unemployment increased to 12%. Cumulative losses on mortgages over 2009 to 2013 were very small, at around 0.3% of outstanding balances – compared to around 25% for consumer credit. They were somewhat higher in the early 1990s, when unemployment rose higher than in the crisis. 11 Bunn and Rostom (2014). 10 6 All speeches are available online at www.bankofengland.co.uk/news/speeches 6 nominal incomes. If that were to happen, we expected the impact of the FPC’s borrower-based policies to be small. But while this was the central case, the FPC judged that there was a material upside risk of mortgage borrowing growing more rapidly and house prices increasing faster relative to earnings.

The list goes on. Yet, based on a recent survey report by GlobeScan, only one third of the private sector 2/5 BIS central bankers' speeches respondents reflected on SDGs in setting long-term sustainability strategies for their organisations. This should concern us. In 2015, 15 years after the Millennium Development Goals were adopted, the United Nations itself conceded that the Millennium Development Goals, despite propelling significant progress, fell short for many people. So a different approach was taken for the SDGs. One that was more encompassing and inclusive. Five million people from 88 countries shared their deepest, most pressing concerns and aspirations to create the SDGs. These aspirations would ring hollow without the dedication and commitment of those with the influence and position to make a difference. For the financial sector, this needs to go beyond the cursory initiatives that have generally been associated with “corporate social responsibilities”. Greater progress by financial institutions to more fully embrace sustainable principles in their business strategies will play an important catalytic role in delivering the SDGs. Among other things, it would provide a stronger focus on needs-based selling, increase financial resources that are directed at economic activities that promote sustainable goals, and encourage support for businesses to adopt sustainable practices. Looking beyond remittances Turning more specifically to remittances which is the focus of this Forum, more can and should be done to amplify the developmental impact of remittances.

This Forum seeks to address not just the question of facilitating transfers more efficiently, but how to make such transfers go further and do more to meet today’s most pressing global challenges – from access to healthcare and education, equal economic opportunity for all, to protection of the environment. Without addressing these challenges, economic freedom would remain an elusive dream for 1/5 BIS central bankers' speeches many. This Forum will cover a broad range of issues – not all of which will have clear solutions. But we will most certainly learn more, understand better and hopefully, be able to determine what our next steps must be. With that in view, let me take this opportunity to offer some brief reflections on what those steps might be. Reinvigorating financial services to drive the SDGs First, we need to do more to reinvigorate financial services to drive the United Nations Sustainable Development Goals (SDGs). Many countries in this region, including Malaysia, have made important progress in the adoption of the SDGs under the national development agenda. Certainly, Malaysia has had a long-standing commitment to the pursuit of sustainable and inclusive growth. Malaysia’s national economic development policies adopted since more than four decades ago reflect many of the SDGs. Like many central banks in this region, financial inclusion is an important priority of Bank Negara Malaysia – one that is in fact legislated as a mandate of the central bank, which is actually not all that common in many countries.

In fact, if the – basically fiscal – measures implemented by governments are sufficiently successful the role of regulators and supervisors should largely be to ensure that financial institutions properly incorporate the impact of such measures into their risk analysis. That said, many of the models used by institutions to evaluate risks are based on historical data, which, by their very nature, will take a long time to incorporate the changes that occur. Stress tests may be very helpful here and supervisors could develop action guidelines as a reference for institutions. The role of central banks and monetary policy 14 For example, the evidence we have clearly shows that the worsening of the financial position of a solvent borrower may lead to insolvency, while its improvement, by definition, simply means that the borrower remains solvent. Thus, the solvency of the system as a whole may deteriorate even though the aggregate economic situation does not change, if the financial situation of some borrowers worsens and this is offset by an improvement in that of others. 6 The general public currently have rather high expectations regarding the role that central banks can play. An example of this is the press conference held following the meeting of the Governing Council of the European Central Bank in March. In her answers to journalists questions, President Lagarde mentioned “climate change” up to ten times.

Thank you very much for your attention. 8

Particular attention should be paid to abrupt repricing moves in risky asset prices, in the wake of rising interest rates. This situation could put some non-bank financial actors in difficulty, especially the ones using leverage, as illustrated by the Archegos’ default at the end of March 2021. Likewise, given the role played by Russia and Ukraine in the supply of energy and more widely some commodities, rising prices and volatility in commodities markets have led to a major increase in the magnitude of margin calls for derivatives, in particular for energy and agricultural products. Such margin calls have generated liquidity strains for commodity market participants, which require strong vigilance notably to ensure that any possible default should remain idiosyncratic and does not develop into a systemic chain. The banking sector has proved resilient so far and has contributed to soften and not amplify shocks. Given the uncertainties about the macroeconomic and macrofinancial outlook, it is important that banks’ capacity to absorb shocks is maintained going forward and possibly strengthened. Hence the relevance of a timely, fair and definitive implementation of the Basel 3 accord. With the Basel III agreements in 2017, we indeed reached thebest possible agreement to promote financial stability at the international level. With the publication last October of the Commission’s proposal for a new banking package to implement it, the European Union made a decisive and very balanced step.

By way of conclusion, let me say that there is currently no shortage of challenges. However, the reforms introduced in the regulation and the efforts made by banks to enhance their resilience over the last decade have borne fruits and the European banking system has demonstrated with the Covid crisis not only its ability to withstand enormous shocks but also its ability to support public authorities efforts to overcome difficulties to the benefit of the European people. This is a major positive development. While this is not the time for complacency, this development should collectively encourage us to maintain our attention and efforts and to address the current and forthcoming challenges with both confidence and determination. 4/4 BIS central bankers' speeches

The ECB is purchasing bonds in the market to stimulate activity and boost inflation, but has now begun to reduce the pace of its purchases. The policy rate in Sweden is also negative, with the latest reduction made in February 2016. The Swedish 1/4 BIS central bankers' speeches Riksbank’s forecast indicates that the first policy rate increase will occur next year. Chart: Oil prices Oil prices gradually rose through 2016 and have in recent months hovered around USD 50 per barrel. Futures prices indicate that oil prices will remain close to today’s level in the years ahead. Oil prices have almost doubled since reaching their lowest level in early 2016, but are nonetheless less than half the level recorded before the steep fall in oil prices in summer 2014. Petroleum investment has declined markedly compared with the 2013 level. Lower oil industry demand has affected the wider economy. Last year, growth in mainland GDP was at its lowest since the financial crisis. Chart: Unemployment Unemployment increased through 2015 and to some extent in 2016, particularly in southern and western Norway. So far this year, the labour market has improved and unemployment has fallen. Monetary policy supports the necessary restructuring of the Norwegian economy. The key policy rate is low and the krone depreciated in pace with the fall in oil prices. Combined with moderate wage settlements, the krone depreciation has contributed to a marked decline in relative labour costs, strengthening the position of Norwegian firms exposed to international competition.

Øystein Olsen: The conduct of monetary policy Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), before the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament), Oslo, 15 May 2017. * * * Accompanying slides Thank you for the opportunity to report on the conduct of monetary policy. My introduction here today is based on Norges Bank’s Annual Report for 2016 and our monetary policy assessments up to the monetary policy meeting earlier this month. Monetary policy in Norway is oriented towards keeping inflation low and stable. The operational target is consumer price inflation of close to 2.5 percent over time. Monetary policy is at the same time flexible in that our interest rate setting also takes developments in output and employment into consideration. The key policy rate was lowered to 0.5 percent in March 2016 and has since been kept unchanged. The key policy rate is low because interest rates abroad are low, while capacity utilisation in the Norwegian economy is below a normal level and the forces driving inflation are moderate. Low growth and the risk of deflation in the global economy have brought down interest rates among Norway’s trading partners to a very low level. Chart: Global and trading partner GDP Growth in the global economy has gradually slowed in recent years and was in 2016 at its lowest since the financial crisis. The slowdown reflects more moderate growth in China and stagnation in some other important emerging economies.

It is crucial for long-term financial stability that those who make long-run debt commitments are fully aware of this reality and that they plan accordingly. What about inflation risk? Personally, I do not share the view that the current period of central bank activism will be followed by a resurgence of inflation. First, contrary to common assertions, persistent - as opposed to unanticipated - inflation is limited in its capacity to reduce sovereign debt burdens. Second, the low levels of inflation we are currently experiencing are the result of improved monetary policy, combined with a general acknowledgement that inflation does not buy durable economic performance. Neither of these factors are affected by recent events. We can therefore anticipate that, with current or enhanced levels of understanding of monetary mechanisms, and central bankers’ continued preference for price stability, future inflation levels will resemble those of the last 20 years. References Bernanke, Ben S. 2005. The Global Savings Glut and the U.S. Current Account Deficit. Remarks at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia. 10 March 2005. Borio, C., and P. Disyatat. 2011. “Global imbalances and the financial crisis: link or no link?” Bank of International Settlements. Working Paper No. 346. May 2011. Gagnon, J., Raskin, M., Remache, J. and Sack, B. 2010. “Large-scale asset purchases by the Federal Reserve: did they work?” Federal Reserve Bank of New York Staff Report No. 441. IMF. 2005. Building Institutions. World Economic Outlook (International Monetary Fund). September 2005. Joyce, Michael, Ana Lasaosa, Ibrahim Stevens and Matthew Tong. 2010.

“The financial market impact of quantitative easing.” Bank of England Working Paper No. 393. July 2010, revised August 2010. Krogstrup, Signe. 2012. “The effects of the SNB’s liquidity expansion on asset prices at the zero lower bound.” SNB Internal Note. February 2012. Krogstrup, Signe, Samuel Reynard and Barbara Sutter. 2012. “Liquidity Effects of Quantitative Easing on Long-term Interest Rates.” SNB Working Paper. January 2012. (forthcoming). Taylor, John B. 2009. Competing Explanations: A Global Savings Glut. pp. 6–7. BIS central bankers’ speeches 5 6 BIS central bankers’ speeches BIS central bankers’ speeches 7 8 BIS central bankers’ speeches BIS central bankers’ speeches 9 10 BIS central bankers’ speeches BIS central bankers’ speeches 11

The crisis and response Of course these are anything but normal times. The financial crisis that broke in mid-2007 and intensified dramatically following the failure of Lehman Brothers has been among the most virulent ever. And it was followed by the longest and one of the deepest recessions since World War II, called by many the “Great Recession.” The Fed responded aggressively and creatively in an effort to pursue our dual mandate. Our actions fell into two broad buckets. First, we took steps to supply liquidity to the financial system, so that financial markets could continue to function properly and to enable households and businesses to maintain access to credit. Carrying out an age-old central banking role, we loaned funds to financial firms, secured against their high-quality collateral. Traditionally, such loans were only made to depository institutions, such as banks. Of course, the modern U.S. financial system includes many lenders that are not banks. These companies and markets provide vital financing for credit card loans, short-term business needs and many other activities. Many years ago, Congress gave the Fed the emergency authority to lend to nonbanks in “unusual and exigent circumstances.” During the crisis – in order to limit damage to the wider economy – we exercised this authority to lend to a wide variety of financial firms and markets. A handful of times, we made the difficult decision to make emergency loans to prevent the disorderly failure of particular firms.

Since June 2009, economic activity has grown – but not robustly. 2 BIS Review 141/2010 In recent months, the momentum has slowed. After rising at a 3.25 percent annual rate during the second half of 2009, real gross domestic product growth has slowed. With demand growth barely keeping pace with firms’ ability to increase productivity, job creation has been too weak to significantly reduce unemployment, which stands today at 9.6 percent. And, as is typical in such circumstances of considerable slack, the rate of inflation has declined. Why are we experiencing this soft patch now? There are several reasons:  In its first year, this recovery – as is typical – benefited from firms replenishing their inventories. But this effect is now petering out.  The growth impulse from the 2009 fiscal stimulus package is beginning to wane.  The usual hand-off from inventory-led growth to private final demand is not yet fully established. Instead, we have ongoing sluggishness in two key sectors that have led past recoveries: consumer spending and housing. The slow recovery of consumer spending and housing in the face of very substantial monetary and fiscal stimulus reflects the painful unwinding of the dynamics at work during the expansion that preceded it. Beginning around 2003, underwriting standards for residential mortgages were significantly relaxed, leading to a sharp rise in household borrowing and in home prices.

I hope you will see from our response to the TSC that we at the PRA – right up to and including the Prudential Regulation Committee – have been putting a lot of effort into this package of reforms, which are needed in order to make Solvency II work better in the UK. But we haven’t done this in a regulatory ivory tower. We have always engaged closely with industry – through our membership on various ABI working groups, our frequent meetings with firms and our close analysis of comments we receive through public consultations. However, we acknowledge that the challenge of Solvency II implementation may have crowded out space to engage with the industry and stakeholders on other strategic issues. We have therefore decided to go further, and with Martin Gilbert’s agreement we are launching an insurance sub-committee of our Practitioner Panel in order to free up more space for discussion focussed on insurance issues. 6 Based on Solvency II data, as at end 2016. 8 All speeches are available online at www.bankofengland.co.uk/speeches 8 It’s important that we get insurance regulation right. At this juncture, that means two things in particular. First, the TSC has rightly highlighted aspects of Solvency II which are not working well. We are taking forward reforms to address those issues at a good pace.

Many of its customers, aged 75 and over, had invested their life savings into these products but were left with significantly reduced retirement income. Ten years later, the Government agreed to pay compensation amounting to £ billion. But many policyholders and their families suffered over the decade when their fate remained uncertain, and some of those affected were no longer alive to benefit personally from the compensation. Another way to think about this is to consider the importance, at a human level, of what insurance companies do – and therefore, how we would feel about it if an insurer couldn’t make good on its promises. Much of this is about the everyday business of work, family and home, and I have spent some time this year with policyholders to remind myself of this. The most striking thing about talking to a group of policyholders is simply the vast range of insurance needs people have, from burst pipes to with-profits funds. One is also 1 Based on ABI data, as at end 2016. 3 All speeches are available online at www.bankofengland.co.uk/speeches 3 struck by how complex people find insurance, and some of the different experiences that can arise. One person I spoke to had a really excellent experience with a UK home insurer. Another’s family had been injured in a motorway pile-up, and was having terrible difficulty trying to find out if the non-UK insurer of the driver who had hit them is or is not solvent.

But we certainly asked ourselves whether that would be all the stronger because of the liquid nature of this extra wealth. Asking the question is one thing, answering it accurately another. It’s obviously possible that we got that judgement wrong and under-estimated the significance of these extra deposits. However, in my view it’s quite hard to argue that this could account for much of the subsequent upside surprise in inflation. First, consumption growth – and that of aggregate demand – turned out to be weaker, not stronger, than the MPC (and many other forecasters) had anticipated. It was also weaker than the prediction of a simple, money-driven model. The orange line in Chart 4 (reprinted from the introduction) plots the forecast values of an empirical “consumption function”, estimated on data up to the end of 2019, that looks a bit like equation [1] but includes an additional term in household Page 24 deposits (effectively splitting the “W” term into monetary and non-monetary assets). In principle this would allow for any additional impetus provided by the liquid nature of the extra wealth that households had accumulated during the pandemic. Yet the MPC’s forecast in the May 2021 Monetary Policy Report was stronger than this model’s prediction. And the actual out-turn was weaker than both. This might be for any number of reasons. One thing that might help to explain the shortfall is that the “excess deposits” seemed to be skewed towards those – older and betteroff households – less likely to be credit constrained.

For example, while it may capture some important aspects of how asset purchases work it’s not really an accurate representation of how the conventional policy rate is set. That’s fine for today, as I’m focusing more on QE. But one should at least be aware that the monetary authority needn’t vary the supply of reserves in order to change its policy rate[7]. Second, the downward slope of the MD line was often justified, in the textbook account, by the assumption that reserves don’t pay interest. This would mean that any rise in bond yields is bound to make central bank money comparatively less attractive to hold. These days, however, reserves do pay interest (at the official central-bank rate). As a result, central bank money and government debt – the two sides of the QE transaction – are closer substitutes than they otherwise would be. This has the effect of making the downward slope of the MD line less pronounced. Third, the model – the way it was often taught in the textbooks, at least – glosses over the distinction between “narrow” and “broad” money. For the wider economy it’s clearly the second that matters. Firms and households don’t have deposits at the central bank – for them, “money” is Page 13 what they hold in their commercial bank accounts. But, as conveyed to students, IS-LM elides the two, assuming that the one is just a multiple of the other[8].

Norges Bank considers it important, therefore, that payment services are organised in a way that enables the market to find efficient solutions for production and use of such services. In this presentation, I will focus on retail payment systems. BIS Review 66/2002 1 Criteria for assessing efficiency We place emphasis on four elements when assessing the efficiency of the retail payment system. 2. Efficiency in retail payments depends on • Access to appropriate payment instruments • Direct pricing of all payment services • Exploitation of economies of scale and network externalities • Competition in the supply of payment services It is important that both corporate and retail customers have access to payment instruments that cover their needs in all payment situations. Customers must feel confident that payments reach the correct payee at the correct time. This in turn requires a high level of operating reliability in the electronic payment systems and correct processing of paper-based payment instruments. The security experienced by customers in connection with different payment instruments has an impact on the use of the instruments and thus also on the public’s perception of whether the service range is acceptable. Prices tell customers something about the value of the product or service and the costs associated with procuring the product. This affects customer preferences. Prices which reflect the relative costs of producing different payments services provide important incentives for selecting the services that satisfy their needs at the lowest possible cost.

In Norway, the Banks' Standardisation Office establishes the standards for payment services. The Banks' Payment and Central Clearing House (BBS) and EDB Fellesdata produce most of the payment services in Norway. In some areas, the two companies produce different kinds of services, while in other areas, they compete in the same market. This solution exploits economies of scale in the development and production of payment services. 6 BIS Review 66/2002 Reduction of risk in the payment systems Risks in payment systems have received increased attention in the 1990s, both internationally and here in Norway. An average of NOK 160-170 billion is settled in Norges Bank’s Settlement System every day. In addition, a number of banks settle transactions in Union Bank of Norway and Den norske Bank. If a bank is incapable of timely settlement, the settlement systems may be a source of financial instability. The settlement systems may also contribute to spreading liquidity and solvency problems. The Committee on Payment and Settlement Systems (CPSS) in the Bank for International Settlements (BIS) has established 10 core principles with which all systemically important settlement systems must comply in order to limit risk in the payment system. Norges Bank's assessments indicate that all the important bank-operated settlement systems in Norway that have been authorised, i.e. the systems operated by Union Bank of Norway, Den norske Bank, NICS (Norwegian Interbank Clearing System) satisfy these 10 core principles. 10.

This may affect the formation of monetary policy. The risk of conflicts between the inflation target and the need for exchange rate stability is sometimes emphasised in discussions. For several reasons I do not believe we need to be particularly concerned about that. For one thing, ERM2 participation is not an ordinary system of fixed exchange rates but the preliminary stage of acceding to a monetary union in which exchange rates are irrevocably locked. So currency unrest during this period should really only occur in the event of uncertainty about Sweden's EMU participation on account of problems either in Sweden or in EMU. Note that these risks are not really economic but political. Presumably they would also be extremely small in a situation where accession to ERM2 has been preceded by political agreement both in Sweden and in the rest of the European Union. Moreover, currency risks arise as a rule when economic policy is out of step with the fixed exchange rate. If Swedish monetary policy before and during the ERM2 period is focused on price stability and economic policy in other respects is also in line with the direction in the monetary union, the risks of a currency crisis would no doubt be even smaller. Furthermore, the ERM2 period will presumably be comparatively short and directly connected with Sweden's subsequent full participation in the monetary union. If the Swedish economy is in step with the euro area on accession to EMR2, the probability of any serious imbalances having time to arise is therefore small.

6 BIS Review 65/2002 If Sweden joins ERM2, the responsibility for maintaining economic balance rests essentially with the Government and the Riksdag. In the event of a referendum next autumn resulting in a majority for Swedish entry into the EMU, followed by entry to ERM2, the fiscal policy that is already being established this autumn will be highly important. However this may, the Riksbank should do what it can to contribute to price stability being maintained also in ERM2. Under these circumstances there are grounds for continuing to make forecasts, publish Inflation Reports and set the repo rate in much the same way as at present. Neither do I see any reasons for altering the inflation target. But the room for manoeuvre in monetary policy would rapidly narrow as entry to full monetary union approaches. At the same time, exchange rate stability in ERM2 is important but the potential risks of conflicts between price and exchange-rate stability during this short period should not be exaggerated. It is natural that the central rate in ERM2 will be the conversion rate in the changeover to the monetary union and this reduces the scope for speculation. The objective of monetary policy in Sweden as well as the euro area is price stability. Moreover, the process for EMU entry by other countries was calm even though the circumstances in a number of cases were more difficult than they look like being in Sweden's case. BIS Review 65/2002 7

Modeling socalled pre-provision net revenue (PPNR) was one of the innovations introduced in the SCAP and represented one of the key challenges in that exercise – and, I will argue, is a continuing challenge today. Given the choice to model net income and regulatory capital ratios, another set of design choices concerns the horizon over which net income is calculated and how cumulative changes in net income over this horizon are incorporated into regulatory capital ratios. The SCAP assumed a two-year forward horizon, while the subsequent CCAR and DFAST stress tests have assumed a 9-quarter forward horizon.6 Other supervisory stress test regimes have made different assumptions – for instance, the European stress tests use a three-year forward horizon.7 An 2/8 BIS central bankers' speeches alternative choice would be to project losses and income over the full lifetime of a bank’s loans and other assets. Estimating lifetime losses on particular fixed portfolios of loans and securities was arguably the prevalent approach during the financial crisis period.8 But in a stress testing context, the lifetime loss approach presents practical difficulties given the varying maturities of different types of assets, as well as the greater uncertainty inherent in more distant future points. At the time of the SCAP, we judged that a two-year horizon was long enough to capture significant losses while remaining within what could reasonably be projected conditional on the macroeconomic scenario.9 Closely related to the scenario horizon question is how cumulative losses and revenues are incorporated to calculate post-stress capital ratios.

Jean-Pierre Danthine: Calmer waters after the storm? Speech by Mr Jean-Pierre Danthine, Member of the Governing Board of the Swiss National Bank, at the Money Market Event, Zurich, 18 March 2010. * I. * * Looking back We are emerging from a financial and economic crisis of major proportions. The extent of value destruction during the last two and a half years may well match the losses registered during the Great Depression. The lessons we will draw from this historical episode should leave us wiser. They will alter, in some fundamental ways, our understanding of finance and macroeconomics and hopefully, as well, the behaviour of economic participants – with a better designed economic system. Today I will begin by looking back and reviewing some of the main events that have occurred since the last Money Market Event which happened to coincide with the turning point of the financial crisis. I will then look forward and describe how the SNB perceives the immediate future. Finally I will briefly address two of the most pressing challenges confronting us – exiting from unconventional monetary policy measures and rethinking financial regulation. Let me turn my attention to where it all started, that is, the US real estate sector. During a long period of low interest rates, low risk premia, subdued volatilities and general economic optimism, US house prices increased in an unprecedented wave to the end of 2006, at which point the bubble burst.

At the same time as monetary policy is aimed at attaining the inflation target, it is also supposed to “support the objectives of general economic policy for the purpose of attaining sustainable growth and a high level of employment”. The Riksbank does this by not merely striving to stabilise inflation around the inflation target, but also striving to stabilise the real economy, that is, production and employment. The Riksbank thus conducts what is known as flexible inflation targeting. Flexible here means that the Riksbank does not focus solely on inflation. To be rather more concrete, one might say that every time we make a decision we try to find a forecast path for the repo rate that means monetary will be, as we say, well-balanced. This means that we try to find an appropriate balance between stabilising inflation around the inflation target and stabilising the real economy. One way of illustrating this balance is to say that the deviations arising during the forecast period between, on one hand, inflation and the inflation target, and, on the other, the real economy and a trend, may not become too great. …and in theory It is common in the literature to describe flexible inflation targeting as the central bank minimising a loss function that is a weighted sum of a measure of the variation in inflation and the variation in the real economy.

But if we look ahead, it is likely that the picture will be further complicated by the changes that will follow in the wake of the financial crisis. What I am mainly thinking about here is the increased focus on macroprudential policies. After the financial crisis we have learnt two main lessons. The first is that the central banks’ interest rate-setting must take into account financial stability to a greater degree. The second is that we need new regulation in the financial market that focuses on systemic risk. But the macroprudential policies may have effects that are in many ways similar to the effects of monetary policy – particularly if the tools are varied over time. This increased interaction between monetary policy and macroprudential policies is another circumstance that means that the connections between the simple theoretical framework and practical monetary policy become twisted. Of course, it is not the case that monetary policy and regulation were two entirely independent policy areas prior to the crisis and that after the crisis they will be fully integrated. But I nevertheless believe that monetary policy and regulation will come closer to one another in the future. When I was here a year ago, I spoke at length on how monetary policy can contribute to maintaining financial stability and how different types of regulations can affect monetary policy and its transmission mechanism. I will not go into this again today.

The Riksbank has therefore on three different occasions (in July, September and October) BIS Review 160/2009 5 offered loans of up to SEK 100 billion with a maturity of almost one year and at a fixed interest rate, to contribute to bringing down the interest rates households and companies have to pay. On the first two occasions the loan amount was fully subscribed, but on the most recent occasion the amount borrowed was SEK 95 billion. By setting interest rates on Riksbank Certificates and fine-tuning – and as we will come to shortly – setting interest rates on the Riksbank's loans to the banks, the Riksbank has been able to steer the short-term rate throughout the crisis. To summarise, monetary policy has been aimed at keeping inflation close to the target and at the same time dampening the fall in economic activity during the financial crisis. The repo rate has been quickly cut to an extremely low level. The steering of the short-term rates has functioned well throughout the crisis. The normal aim of only steering the shortest interest rate has been supplemented with lending to the banks at longer maturities to be able to also influence interest rates further out on the curve. This means that monetary policy approaches questions regarding financial stability, which I will now discuss. Financial stability Financial stability is the Riksbank’s other main task. Put simply, it is a question of ensuring that the financial system is stable and that the payment system functions.

For the Swiss mortgage market, there is currently only a small risk of a credit crunch. On the one hand, there have been no widespread excesses on the Swiss property and mortgage markets recently, which makes it unlikely that banks’ appetite for risk will decline to any great degree. On the other hand, opportunities for loan refinancing in Switzerland remain strong. The structure of mortgage lending in Switzerland is quite varied, and for banks the “Pfandbrief” mortgage bond is a refinancing tool that provides continuing strong opportunities for loan refinancing, and has experienced something of a renaissance since the financial crisis. As such, the already muted outlook for the Swiss economy is unlikely to suffer any additional impact from a credit crunch on the property market. BIS Review 107/2008 1

Combined with the growth differential the Spanish economy still enjoys, this has allowed Spanish institutions to negotiate the difficulties thrown up last year with a limited impact on their earnings, and this despite the difficulties in Latin American markets. In turn, historically low default levels in the domestic market, despite the strong expansion of credit in recent years, and the strength of own funds mean that, on the financial side, there are no constraints on the process of economic recovery. In this setting, rising to the challenge of a complex international financial situation underscores the importance for institutions of continuing to strive to improve the efficiency and solvency of our system. They must apply greater rigour to the analysis, extension and monitoring of credit transactions and BIS Review 31/2003 7 make recovery procedures more flexible. The heightened competition in the Spanish banking industry, with the subsequent benefits in terms of efficiency for borrowers and depositors, will - combined with historically low interest rates - require of banks a major drive to cut costs so as to increase efficiency. The challenges posed by the current cyclical juncture should not see us forget other more structural and medium-term challenges affecting financial institutions and, specifically, banks, savings banks and co-operatives. Given the far-reaching consequences for banking, such challenges include most notably the New Capital Accord and the implementation of International Accounting Standards (IAS). It should be clear that these new regulatory aspects go beyond a mere alteration of laws, decrees or Banco de España circulars.

The consolidated entity is expected to deliver a range of benefits, including:    Strategic leadership that is forward looking and proactive, with an enhanced ability to identify the challenges and risks of tomorrow and prepare for them today; Higher standards of governance and risk management, with an improved ability to leverage best practices across the schemes. As an example, a variety of access models have evolved in schemes over the years, and the NPSO is now in a great position to look across the schemes and consider which models deliver the best outcomes and risk management; and The development and delivery of a best in class New Payments Architecture. The NPSO is also set up to be a leader in the field of retail payments. And the Bank is now their counterpart in the UK wholesale payments space, following the move to direct delivery of CHAPS, the UK’s high value 3 payment system (HVPS) in November of last year. Collectively, these developments should lead to a considerable step change in risk management expertise, standards, and capabilities across the entirety of UK payments. As an example of the two organisations working together to bring such change to the payments industry across wholesale and retail, the NPSO and the Bank recently launched a joint consultation on ISO 20022. 4 This move towards harmonised messaging standards will enable the transportation of richer payments data, improved compatibility and therefore redirection across payment schemes, and new opportunities for collaboration and product development.

Ladies and Gentlemen, The financial sector in our region has now reached a new stage of development. Over the years, the role of the financial system has evolved, facilitating the various stages of development and growth. Increasingly, the financial services industry is also becoming a source of growth, especially as several countries in the region are moving towards a knowledge-based and services-led economy. In the process, the dynamic changes taking place are also being driven by technological advances and an increasingly competitive environment. As financial restructuring and reforms progress to a more advanced stage, financial institutions are also moving on to make the necessary adjustments to become more productive, innovative, and strategically more focused. Efforts are now focused not only on the creation of a sound and resilient financial sector but towards institutional development and capacity building of the financial sector to elevate it to a higher level of performance, efficiency and excellence. This represents an important BIS Review 46/2003 1 phase in the development of the financial sector as highlighted in our 10-year Financial Sector Master Plan that was released almost three years ago. It represents an important development prior to moving towards a more deregulated and liberalised environment. In this context, we are envisaging forward-looking financial institutions that will be able to face the challenges of financial liberalisation and globalisation as we progress into our next stage of development.

Binghamton, on the other hand, has really been struggling with no signs yet of any meaningful recovery. Meanwhile, Northern New Jersey’s economy had been growing fairly steadily until this past winter when activity softened, probably due at least in part to the unusually harsh weather. Now that spring is finally upon us, we hope to see economic conditions improve more significantly. What kinds of jobs have been created during the recovery? Let me turn to the topic of today’s press briefing: how the types of jobs in the region have changed over the last business cycle. Firms often change the way they utilize workers and the mix of skills they employ during recessions and recoveries. The weakening demand during recessions forces firms to look for new ways to be more efficient to cope with hard times. These adjustments do not affect all workers equally. Indeed, it’s what we typically think of as middle-skilled workers – for example, construction workers, machine operators and administrative support personnel – that are hardest hit during recessions. Further, a feature of the Great Recession and indeed the prior two recessions, is that the middle-skill jobs that were lost don’t all come back during the recoveries that follow. Instead, job opportunities have tended to shift toward higher- and lower-skilled workers. As we’ll show, these same trends have played out in our region. While there’s been a good number of both higher-skill and lower-skill jobs created in the region during the recovery, opportunities for middle-skilled workers have continued to shrink.

In 2008, the Bank of Zambia issued banking licences to 5 new banks to operate in Zambia. As at 31 May 2011, Institutions under Bank of Zambia supervision as at 31 May 2011 were:  18 commercial banks,  10 leasing finance companies,  3 building societies,  51 bureaux de change,  1 savings and credit bank,  1 development finance institution,  26 microfinance institutions (MFIs) and  1 credit reference bureau (CRB). The sector has also recorded tremendous growth in business with growth witnessed in various innovative activities carried out by the banks in order to meet the needs of increasing number of customers. Some of the innovations include:  An increase in automated teller machines (ATMs) including deposit taking ATMs;  E-banking;  Telephone banking services; BIS central bankers’ speeches 3  In-store banking services – banks can provide some banking services within the premises of stores;  Mobile top-up services – banks can sell airtime on behalf of mobile phone providers through ATMs;  Truck-banking services – the model entails engagement of agents for provision of cash-in/cash-out transactions for clients where banks have no footprint;  Bancassurance – banks can sell insurance products on behalf of insurance companies; and  Introduction of Visa debit and credit cards.

In this sense, I am convinced that in order to deliver a successful roadmap for the potential issuance of a digital euro, we must establish a certain set of priorities upfront. Allow me to be a bit more precise in this respect. To start with, I believe we should deepen the current standing of our work. This means not just promoting a wide-ranging exchange of views within the Eurosystem and with other European authorities and institutions, but also engaging other relevant stakeholders in our discussions, including the private sector and academia. In my view, it is this active dialogue that will help us understand the full range of implications of a CBDC and the minimum requirements that a euro-denominated CBDC should meet. Furthermore, as I mentioned earlier, I believe we need to place a strong emphasis on developing a rigorous experimentation agenda that will help us make informed policy decisions about the different design options. This entails identifying the key questions that remain open and need to be further analysed by means of hands-on experience, and formulating the corresponding concrete testing proposals. And we must bear in mind that private agents could be instrumental for the ultimate success of this exercise, so it is important that we make sure to count them in early on. Lastly, international cooperation with other central banks needs to remain high on the agenda, to identify best practice, avoid unnecessary fragmentation and help achieve 2 According to Boar et al.

Another approach involves discussing and developing proposals for regulatory floors of different kinds, for example risk-weight floors like the one we have for mortgages in Sweden today or floors that cover the total capital requirement that is also in place today. Finally, it is a 4 BIS central bankers’ speeches question of tightening up supervision and improving transparency concerning risk weights. It is probable that the assessment of the banks risk weights will be broadened and eventually become a permanent part of the undertakings of the Basel Committee. As in the case of the leverage ratio, there are those that claim that these measures will reduce the banks’ incentives to effectively manage their own risks. However, in my opinion it is question of avoiding a regulatory framework that gives the banks incentives to use their own models with the aim of reducing their risk weights and their capital requirements more than can be justified by the risks in their operations. It is important to find solutions to this problem as it will otherwise be difficult to restore the credibility of the frameworks and thus of the banks. Basel III is also relevant to the Swedish banking system Once Basel III is in place around the globe, the safety margins in the global financial system will be greater than previously.

This means that downside risks for household income and debt- 2 BIS Review 75/2010 servicing capacity are likely to persist and that banks could face losses for some time, although there are important differences across countries. However, on a more positive note, there are signs that the past sharp falls in house prices, together with low interest rates, have improved housing affordability. This appears to explain, at least in part, the recent turnaround in the extension of new loans to households for house purchases, shown in the Chart 4 on slide 8, although substantial differences in these patterns remain across Member States. III. Main risks identified within the euro area financial system Let me now turn to the three main risks that we have identified within the euro area financial system. The first is the possibility of a setback to the recent recovery of bank profitability. After the sizeable net losses, which were endured by around half of the euro area large and complex banking groups (LCBGs) in late 2008, many of them returned to modest profitability during 2009. Moreover, as shown in the left-side of Chart 5 on slide 10, banks’ financial performances strengthened further in the first quarter of 2010 and all LCBGs which have reported financial results so far have shown a positive return on equity. The same pattern can be seen as regards the return on assets. The leverage ratios of LCBGs have remained broadly constant after a sharp decline in the first quarter of 2009.