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Centralising decision-making would bypass many of the current obstacles to effective resolution such as the need for cooperation and coordination between multiple authorities. This would in turn lead to quicker decisions and reduce resolution costs, as early action would help to maintain the economic value of the bank in question. Second, an ERA would be more effective in minimising the cost for taxpayers of bank failures. A bank may be “too expensive”, “too complex”, or even “too well-connected” to resolve at the national level, making bail-out the preferred strategy. An ERA, on the other hand, would have the financial, legal and administrative capability as well as the necessary independence to carry out effective resolution. By imposing burden-sharing on shareholders and creditors and by financing residual costs through a European Resolution Fund financed ex ante by all the banks, the ERA could ensure that the private sector bears the primary burden of bank resolution costs. European resolution, similar to what the FDIC does in the US, is not about bail-out of banks by state recapitalisation efforts, but the use of wide bail-in powers to resolve banks with little use of tax-payers money. Third, an ERA is a necessary complement to the single supervisory mechanism. A system where supervision is European but resolution is national creates frictions. The single supervisor may assess that a bank needs to be resolved, but the relevant Member State may be unable to bear the resolution costs or unwilling to resolve a favoured national firm.

The recent reforms to strengthen the euro area fiscal framework – the so-called six-pack and the fiscal compact – are welcome and go in the right direction. But they remain within the logic of the Maastricht Treaty where responsibility for fiscal policies is exclusively in national hands. This creates an inherent credibility problem, as for fiscal frameworks to be fully credible, they have to enforceable. This is impossible without a further and deeper sharing of budgetary sovereignty. This could be achieved by giving European institutions greater competence to effectively compel euro area Member States – in a graduated manner if and when the situation deteriorates – to take the necessary fiscal policy decisions. This would correspond to a further sharing of national sovereignty. But for both weaker and stronger countries, it is in fact an opportunity to regain substantive sovereignty as opposed to formal sovereignty. For the weaker countries, measures that put the soundness of their fiscal policies beyond doubt will allow them to be fully sovereign, in the sense that they can use fiscal policy in its vital economic stabilisation role and take free decisions about taxes or types of expenditure without fear of excessive discipline from financial markets. For the latter, sharing sovereignty at the European level will allow them to effectively protect their domestic economies from spillovers from the rest of the euro area. Moreover, they will no longer be placed into situations where they are de facto forced into taking decisions to avert imminent catastrophe.

2 BIS central bankers’ speeches • Fourth, the range of instruments that allow long-term investment is limited: in many countries, bond, equity and securitisation markets that provide alternative avenues for long-term finance are underdeveloped. If finance is to play its role as an enabler of economic growth, it will be important to develop new avenues for long-term funding. Singapore’s value proposition as a financial centre MAS has been closely studying these trends in global finance and finetuning its strategies to develop Singapore as a premier financial centre. The emerging financial landscape plays to Singapore’s strengths. Singapore’s value proposition in this new landscape rests on four pillars: • smart regulation; • diverse ecosystem; • pan-Asian focus; and • deep talent pool. I will take stock of Singapore’s strengths in each of these four areas and outline how we have refreshed our strategies and approaches. Smart regulation First, smart regulation. Since the global financial crisis, a higher premium has been placed on well-regulated financial centres like Singapore, which set high standards but implement them in a way that makes business sense. MAS has always required banks to meet high prudential standards, exceeding international norms in several areas. During the global financial crisis, this ensured that adequate safeguards were in place and confidence sustained. Post-crisis, our banks are well-placed to meet the new global capital and liquidity standards. Maintaining high standards is compatible with fostering a vibrant financial centre.

The firm had derivative portfolios at a number of CCPs across Europe, the US and Asia. All were auctioned, liquidated or transferred to other clearing participants by the CCPs in weeks, not years. And, with only one minor exception, this was achieved without exhausting the margin collateral the CCPs held. 1 I mention this aspect of the Lehman failure because it illustrates the drivers behind two of the key regulatory reforms we have made as a result of the financial crisis. First, incentivising and where appropriate mandating the greater use of central clearing for derivative transactions. And second, putting in place resolution regimes to ensure banks, particularly large, highly interconnected, wholesale market players, can fail without unleashing the disruption that followed the Lehman insolvency. I want to look today at the progress we have made in the post crisis reforms around derivatives and how we address the risks around the concentration of counterparty risk in CCPs – including what the objectives should be for a resolution regime for CCPs themselves. And I want to look also at the progress we have made, and the next steps we need to make, in putting in place an effective resolution regime for large banks internationally and in the UK. 1 The exception was HK Securities Clearing Corp (HKSCC) which made a loss to the CCP of approx. USD 20 mn, including cost and expenses. HKSCC announced it would claim this from LEH’s estate. Source Norman, P., 2011.

Workers aged 25 to 54 have been particularly prone to dropping out, which suggests that the decline in the unemployment rate may overstate the improvement in labor market conditions. Despite some improvements, the economy continues to operate with significant excess slack. Less than 59 percent of the U.S. working-age population has a job. This is unacceptably low – just about the same share as in late 2009 and well below the levels in 2006 and 2007. Once again, this large amount of slack is putting downward pressure on trend inflation. After a brief run-up during the second quarter of 2011 – reflecting the pass-through from higher commodity prices and supply-chain disruptions – inflation has retreated and may be headed down further. As I noted earlier, it is unlikely that the faster growth experienced in the fourth quarter of 2011 will be matched in the first half of 2012. In addition to the temporary nature of some of the recent improvement, there are significant impediments to a robust recovery that I’ll list briefly. First, global financial and economic conditions may impede faster growth. In particular, growth in the euro area is slowing and a recession may be underway with adverse direct and indirect effects on the U.S. economy. Second, fiscal policy has become more contractionary. Despite the extension of the payroll tax cut, the stance of federal fiscal policy has tightened and employment and spending by state and local governments continues to decline.

We’ve also observed community banks participating with other banks on real estate lending, in part to better manage real estate concentrations. Community banks are also seeking to differentiate themselves from their larger competitors by marketing their more individualized customer service. In regard to liquidity, a number of community bankers have noted the influx in public deposits and the challenges associated with putting these deposits to productive use. Finally, although there has been a material improvement in asset quality over the last several years, it will be important for senior management to continue to be prudent in their underwriting practices and in monitoring any emerging risks in their portfolios. The economy continues to show a strong trajectory, but of course we need to remain alert to any potential slowdown. As Second District community banks grow in line with their national peers, we are encouraged by the increased reliance on core funding and strong asset quality. We will, however, continue to monitor developments that may pose a risk to the safety and soundness of the financial and banking system. Fintech A second major change for community banks—like all banking institutions—is the potential competition from new “fintech” firms. Since 2012 there has been over $ billion in US-based fintech investments including online lending-based platforms, capital markets, and payment and 2 2/4 BIS central bankers' speeches settlement services.2 By offering traditional financial services to customers through new, innovative platforms and channels, these fintech firms pose a challenge to traditional banking business models.

In two reports 6, representatives of the private sector, the European Commission and the European Central Bank presented concrete recommendations on how, for example, regulatory barriers could be broken down. Almost 12 years have now passed since the second report was published and some of these proposals and recommendations have still not been implemented. For example, we still do not have an EU-wide framework for the treatment of interests in securities. Drawing once more on the comparison with the United States, a cross-border securities transaction costs at least ten times as much in Europe as it does in the United States. I think that makes it clear that Europe’s economy has a lot to gain from dismantling the relevant regulatory barriers as part of a capital markets union. 5 At that time with the caveat: “to the extent necessary for the proper functioning of the Common Market”. 6 http://ec.europa.eu/internal_market/financial-markets/docs/clearing/first_giovannini_report_en.pdf. http://ec.europa.eu/internal_market/financial-markets/docs/clearing/second_giovannini_report_en.pdf. 4 BIS central bankers’ speeches In addition to harmonised regulation for securities, we should also seek to implement a harmonised legal framework for crisis management. The Council Regulation on cross-border insolvency proceedings has provided a common regulatory framework governing, for example, jurisdictions and the recognition of court judgements. But within this framework, there are substantial national differences, such as regarding the extent to which various stakeholders are protected in the event of an insolvency. In my view, a single resolution framework for non-banks, i.e.

As with the StabFund, we are convinced that – here too – we must take these risks in order to be able to avert other, even greater risks. Extraordinary times call for extraordinary measures. The financial market crisis has confirmed our belief that the SNB must have a strong capital base and a broad range of monetary policy instrument to ensure its capacity to act at all times. Chart 1. Effective exchange rate for Swiss franc Export-weighted against 24 trading partners, nominal, 1.2007=100 115 112.5 110 107.5 105 102.5 100 97.5 95 2007 2008 2009 Source: SNB Markets Analysis Platform Chart 2. EUR/CHF and exchange rate volatility Implied volatility EUR/CHF 3M EUR/CHF (rhs) % 15 1.65 12.5 1.6 10 1.55 7.5 1.5 5 1.45 2.5 Jul Aug Sep Oct Nov Dec Jan 09 Feb Mar Apr May Jun 1.4 Sources: SNB Markets Analysis Platform, Bloomberg 4 BIS Review 77/2009 Chart 3. Swap spreads Swap spreads Pfandbriefe Swap spreads financial Swap spreads industrial Swap spreads utility bp 300 250 200 150 100 50 0 –50 Jul Aug Sep Oct Nov Dec Jan 09 Feb Mar Apr May Jun Sources: SNB Markets Analysis Platform, Credit Suisse Table 1.

But pure extrapolation from this recent past may not be appropriate due to the possible existence of threshold effects. The persistence of the current inflation shock also entails the serious risk that inflation expectations could become unhinged and that, as a result, our credibility as central bankers could be significantly damaged. It cannot be forgotten that there is a two-way relationship between credibility and effectiveness of monetary policy. Effectiveness depends on the credibility of central banks. But, no less importantly, the credibility of central banks depends critically on the effectiveness of the monetary policy that they have applied. The conduct of monetary policy has also been complicated over the recent period by sharp and abrupt moves in exchange rates, which might signal that the long-awaited correction of global imbalances is not proceeding in as orderly a fashion as we would have hoped. Against this background, the Governing Council is monitoring exchange rate markets closely. And, in this respect, the President of the ECB has repeatedly indicated that excess volatility and disorderly movements of exchange rates are undesirable for economic growth. BIS Review 132/2007 7 In summary, monetary policy is operating in an environment of heightened uncertainty. This is the result of the materialisation of some risks that we have been pointing out for a long time. First, the potential consequences of the turmoil in financial markets, which go beyond a sound reappraisal of risks and a less dynamic economic outlook. Second, renewed inflation pressures associated with the explosion of oil and commodity prices.

Some would say that part of the answer would be to cap particularly retail interest rates charged by banks. Do you see that as part of the answer? This is a long-running debate here. Even though the ECB rate is quite low, when you look across Europe, the mortgage lending rates in Ireland are higher. The ECB has provided a legal opinion on the draft law, and it highlights, in line with the Central Bank of Ireland analysis, that a policy that caps the interest rate runs the risk of having an unintended effect, which is that it will deter entry. The Irish banking system is quite concentrated. Many people would like to see more banks enter to compete and, through competition, lower the rates. If you have a legal approach, where there is a legal regulation capping the interest rate, then the incentive for foreign lenders to come in is less. We have this long-running debate about the contribution of the quite high default risk in Ireland being built into those higher rates. I understand the intent: trying to make housing more affordable is a big issue. But personally, and in terms of the official advice of the ECB, we think capping interest rates is not the advisable way to go. You don’t even see a role for it, say, if you were to consider the housing situation to be an emergency scenario; that it would be a temporary measure given to the central bank? Well, again let me come back to the basics here.

Figure 9 Latin America (*) 2017 growth outlook Headline inflation (annual change, percent) (annual change, percent) 5 5 11 11 4 4 9 9 3 3 7 7 2 2 5 5 1 1 3 3 0 mar.15 Mar.15 0 1 1 mar.16 Mar.16 Argentina mar.17 Mar.17 Brazil Chile 14 Colombia 15 16 Mexico 17 Peru (*) As per responses to Bloomberg survey. Source: Central Bank of Chile. 17 Table 2 International scenario 2015 2016 Mar'17 Report Terms of trade Trading partners' GDP World GDP at PPP World GDP at market ex change rates United States China Eurozone Latin America (excl.

16 Table 1 External scenario (annual change, percent) 2015 GDP Domestic demand Domestic demand (w/o inventory change) Gross fixed capital formation Total consumption Goods and services exports Goods and services imports Current account (% of GDP) Gross national savings (% of GDP) Nominal gross fixed capital formation (% of GDP) 2016 2017 (f) 2018 (f) Mar'17 Report Jun'17 Mar'17 Jun'17 Report Report Report Mar'17 Report Jun'17 Report 2.25-3.25 4.1 2.8 3.0 2.8 2.7 7.2 -2.1 20.5 22.6 2.5-3.5 3.9 2.9 3.0 2.9 3.9 6.6 -1.9 20.3 22.2 2.3 2.0 1.7 -0.8 2.4 -1.8 -2.7 -2.0 21.4 23.6 1.6 1.1 2.0 -0.8 2.8 -0.1 -1.6 -1.4 20.2 23.2 1.6 1.1 2.0 -0.8 2.8 -0.1 -1.6 -1.4 20.2 23.2 1.0-2.0 1.0-1.75 2.3 2.5 1.9 1.8 0.2 -0.9 2.5 2.6 1.6 0.7 4.3 4.3 -0.9 -1.0 20.3 20.2 22.5 22.1 (f) Forecast. Source: Central Bank of Chile.

Moreover, as our population is ageing fast, we should all start to save for retirement now, and I strongly encourage banks to develop and promote more products to satisfy this growing customer segment. There is also a growing class of older people who have too little knowledge or weaker capabilities to manage their own financial wealth after retirement. This is another area that banks can help. For SMEs, which contribute significantly to employment in Thailand, we need to work together to promote their access to funding. This calls for a joint effort between the government, banking sector, and SMEs to improve available information and its flow. In this regard, as bankers, such as guests here today, are close to the SMEs, see their account movements, and provide financial advice you will play a key role here. I believe there are a lot of rooms for banks to provide funding for SMEs, both directly and indirectly, perhaps through more innovative products that can benefit from banks’ own information and more collaboration between banks. Equity financing, including venture capital, for SMEs will also be promoted in our plan. In my opinion, innovation and entrepreneurship of SME, which need supports from banks, is one of the most important drivers for Thailand to overcome the middle-income trap. As for large corporates, Thai conglomerates now operate in multiple countries, and as their businesses grow, they would require more cross-border services to meet their needs.

To that end we have raised required reserve ratios to control the rapid credit expansion by restricting the supply of loanable funds. Another issue we considered is lengthening the maturity of capital inflows. This is important for improving the quality of capital account, limiting maturity mismatches, and avoiding exchange rate misalignments. To this end, we lowered the policy rate and widened the corridor between overnight borrowing and lending rates so as to create some extra volatility in the short-term interest rates. Although it looks quite complicated at first sight, the framework we adopt in spirit is not significantly different from the conventional inflation targeting framework. The only difference is that, previously our policy instrument was the one week repo rate, but now our instrument is a “policy mix”—which consists of a combination of short term interest rates, reserve requirement ratios and interest corridor. We seek to use these instruments in right combination in order to cope with both inflation and macro-financial risks. The monetary policy stance in this framework is not only determined by the path of policy rates, but as a mixture of all policy instruments outlined above. Just like the conventional inflation targeting framework, the policy is forward looking and contingent on the economic outlook. The exact 4 BIS central bankers’ speeches setting of the policy mix depends on the factors affecting price stability and financial stability. Although it is too early to assess the success of these policies, initial impact so far seems promising.

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

Such risks may be particularly relevant in the context of close ownership links between banks and funds. For example, banks in certain circumstances may feel a need to step in to protect their brand. To tackle this issue, the Basel Committee on Banking Supervision (BCBS) has published guidelines on step-in risk that would require banks to self-assess and report their material step-in risk exposures to supervisors, who should have the possibility for supervisory action if deemed necessary.8 We also need to work on the different layers of interconnectedness between ETFs and their counterparties. In our view, the rapid growth of ETFs, coupled with their potential to transmit and amplify risks to financial stability, warrants further evaluation of regulatory action. 9 This may include enhanced rules to limit counterparty risk exposure of ETF investors, and measures that provide more transparency around ETF liquidity provision. The enhanced microprudential framework for the European fund sector is a key element in boosting the resilience of the financial system overall. But the sector’s rising role in shaping the financial cycle, and the potentially systemic nature of its risks, require a more ambitious approach. We should aim at extending the macroprudential framework beyond banks to encompass the asset management sector.10 In particular, we need to equip macroprudential authorities with the necessary tools to address systemic risks both ex ante and ex post. The recent ESRB recommendation to address systemic risks related to liquidity mismatches and leverage in investment funds11 is a crucial step towards this goal.

Closing remarks for the 13th edition of the Regional Seminar on Financial Stability Florin Georgescu, First Deputy Governor of the National Bank of Romania Bucharest, September 13, 2019 Distinguished Guests, Ladies and Gentlemen,  We have reached the end of the 13th edition of the Regional Seminar on Financial Stability and it is my pleasure to provide some closing remarks.  After two days of interesting presentations and intense debates, I will try to summarize some of the ideas presented here.  In this year’s edition of the Financial Stability Seminar, whose topics was “Inclusion and Financial Stability”, we have discussed about: o Financial inclusion and income inequality o Correlation between macroprudential policy and financial inclusion o Access to banking financing o Climate-related risks All these were discussed in the context of financial stability.  Some of the subjects, like macroprudential policy and its effects, were discussed in-depth these days, but also in the previous editions of the seminar. And that’s how it should be. This policy represents a key element in ensuring financial stability.  Macroprudential policy, according to ESRB recommendation, has ”the ultimate objective to contribute to the safeguard of the stability of the financial system as a whole, including by strengthening the resilience of the financial system and decreasing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth”.

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

But despite the uncertainties surrounding DLT’s potential, we want to be prepared for a scenario where market players adopt DLT for wholesale payments and securities settlement. We must ensure that, in such a scenario, central bank money would still retain its role as the settlement asset for wholesale transactions. If, for example, market players start to use DLT for securities settlement but face difficulties using TARGET Services[10], they may turn to alternatives like commercial bank money or stablecoins. This would entail a number of risks, such as central bank money having a reduced role in settlement processes, as well as trading and liquidity becoming fragmented. The result would be payments and securities settlement becoming less safe and less efficient, which would undermine financial stability. The use of stablecoins would magnify these risks. As we have seen in recent months, stablecoins are prone to runs. In other words, they are stable in name only. And allowing them to be fully backed with central bank money would effectively outsource the provision of central bank money to private entities, endangering monetary sovereignty. [11] A shift away from central bank settlement systems would also imply that authorities would lose direct access to settlement data. This could slow the speed of intervention in the event of settlement bottlenecks and impair the analysis of financial stability. The Eurosystem is therefore exploring ways in which market participants who adopt DLT could interact with the TARGET Services to settle the euro cash leg of their transactions in central bank money.

But regardless of the technology used by market participants for their wholesale payments and securities transactions, our goal will always be the same: ensuring that central bank money remains the anchor of stability of the monetary system. 1. Distributed ledger technology (DLT) refers to a family of technologies aiming to solve the problem of reaching a consensus between participating entities, which is required for validating data and updating the distributed ledger, without relying on central coordination. 2. Central bank reserves are liabilities of the central bank owned by commercial banks. They are the most liquid and risk-free asset available in the financial system. 3. The TARGET Services offered by the ECB and the national central banks include TARGET2 for wholesale payments, TARGET2-Securities (T2S) for securities settlement, and TARGET Instant Payment Settlement (TIPS) for instant payments. 4. Panetta, F. (2021), “Central bank digital currencies: a monetary anchor for digital innovation”, speech at the Elcano Royal Institute, Madrid, 5 November. 5. Principle 9 of the Principles for financial market infrastructures, issued by the Committee on Payments and Market Infrastructures and the Technical Committee of the International Organization of Securities Commissions states that “a financial market infrastructure should conduct its money settlements in central bank money, where practical and available”. 6. Post-trade services are the activities (clearing, settlement, custody, asset servicing and reporting) that take place once a trade has been realised, in order to transfer the ownership of the security from the buyer to the seller against the corresponding payment. 7.

8 https://bankunderground.co.uk/2019/04/30/the-great-war-and-the-bank-of-england-as-market-maker-of-last-resort/ 9 https://libertystreeteconomics.newyorkfed.org/2020/08/market-function-purchases-by-the-federal-reserve.html 10 Ie the ability to transact in reasonable size at or close to mid-market prices prevailing prior to the trade – as discussed, eg in https://www.bankofengland.co.uk/financial-stability-paper/2015/the-resilience-of-financial-market-liquidity 5 6 5 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 5 But it wasn’t until 2007, in the foothills of the Global Financial Crisis (GFC), that Willem Buiter and Anne Sibert coined the phrase now widely used for this activity: ‘Market Maker of Last Resort’ (MMLR).11 Buiter and Sibert believed that central banks, acting as MMLR, should be ready to tackle dysfunction in securities markets relevant to monetary or financial stability, by making two way prices to buy and sell those securities, or lending against them. Risk would temporarily be transferred off dealers’ balance sheets, freeing up capacity to return market liquidity to more normal levels.12 In all other respects, they recommended following Bagehot’s principles: ie standing ready to operate at scale, but only at prices, rates and collateral haircuts that would protect public money and avoid moral hazard. Such terms, they believed, would also ensure that the central bank’s financial exposures naturally unwound as market conditions normalised, with purchased assets being sold back to the market, or repo exposures maturing. Many historical central bank operations in securities markets, including some undertaken in the 2008-9 crisis, involved one-way purchases, and hence did not have this self-liquidating feature.

The public authorities cannot afford to ignore such dysfunction if it reaches a scale that threatens financial stability. But equally we cannot rely on central bank medicine of the scale and duration seen in 2020 every time we see an inflammation. The costs, in terms of bloated public sector balance sheets and mispriced private sector risks, will be too high. And the policy actions needed to secure monetary and financial stability may not always be as well aligned as they have been during the current crisis. If financial markets are to support the increasing reliance placed on them safely, we must do more to reduce the scale of inherent vulnerabilities ex ante, and build better-targeted tools for dealing with financial instability caused by market dysfunction ex post. And that, in turn, requires work in three separate but self-reinforcing areas – as illustrated in Chart 2. 3 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 3 Chart 2: Strengthening market functioning Step 1: reforms to strengthen the resilience of private non-bank financial institutions to liquidity shocks Step 2: strengthened market-wide infrastructure Step 3: Better targeted central bank backstops Step 1 – ensuring that non-banks active in financial markets are more resilient to future liquidity shocks – is under way, co-ordinated by the Financial Stability Board.2 If successful, this should both reduce the likelihood of instability arising in the first place, and improve the private sector’s ability to deal with it, if it does occur.

Rodrigo Vergara: Chile's September 2016 Monetary Policy Report Presentation by Mr Rodrigo Vergara, Governor of the Central Bank of Chile, of the Monetary Policy Report before the Honorable Senate of the Republic, Santiago de Chile, 7 September 2016. * * * The Monetary Policy Report of September 2016 can be found at www.bcentral.cl Introduction Mr. President of the Senate, Mr. Ricardo Lagos-Weber, honorable senators, ladies, gentlemen, I thank you for inviting the Board of the Central Bank of Chile to present our Monetary Policy Report. As it does in September each year, this issue coincides with the Central Bank’s Report to the Senate, presenting our vision of the recent macroeconomic and financial developments in Chile and abroad, together with prospects and implications for monetary policy conduct. After more than two years above the tolerance range, last July the CPI’s annual inflation descended to 4%. The baseline scenario that I will be sharing with you in a minute assumes, as do private expectations, that it will continue to approach the 3% target in the coming months, to close the year at 3.5%. Why has it been so high for so long? We can blame it on the significant depreciation of our peso, driven by the much needed readjustment of an economy confronted with the end of the commodity price supercycle, the end of a very pronounced cycle of mining investment, and a domestic weakening associated with a decrease in the country’s capacity for long-term growth.

Prasarn Trairatvorakul: “The Role of the Central Bank in Driving Thailand’s Sustainable Growth” Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, before the Thai Forum, New York, 8 October 2014. * * * Ladies and gentlemen, Thailand has undergone much change this year, and the usual visitors from abroad may have chosen, understandably, to watch developments from afar. It is thus my sincere pleasure to bring some of Thailand to your very doorstep. The country is now at an important junture. Political uncertainty has subsided and some promising government plans have taken place. Therefore there is no better time for domestic and international investors alike to capitalize on the new wave of growth. Thailand’s immediate challenge is to restore growth to its potential. For much of the past seven years, we have been experiencing sub-par growth rates. As the economy now wakes up from its third contraction since 2008, it is time to focus on Thailand’s avenues for restoring normal growth again. How can an economy rebound from a contraction back to growth? Part of the answer lies in the economy’s strong fundamentals, and the Bank of Thailand, as the central bank, plays a part in safeguarding them as attested by quick rebounds of the Thai economy after the Great Recession in 2008 and the Thai floods in 2011. In addition, as caretaker of the country’s banking system, the Bank of Thailand also fosters development of the financial system to bring about growth.

Thus, not every stage in the development of the crisis will be recapitulated, or every step and detail in its resolution. Nor have I tried to reflect every nuance in the public debate, in the reports from parliamentary commissions and in research papers on the subject3. The views I put forward are my own and have been deliberately sharpened to promote discussion. The most important characteristics of the resolution of the Norwegian crisis can be summarized as follows: • The banks’ own collective guarantee funds handled the problems in the banking sector before the crisis became systemic. • No blanket guarantee for the banks’ debts was provided by the government. • No regulatory forebearance. • No liquidity support to banks whose solvency was in doubt. • A clear and transparent division of responsibility between the political authorities, the supervisory authority and the central bank was established early on. • Government support was contingent on strict requirements being met, e.g. existing shareholders accepting a write-down to cover losses to the extent possible. • No micro-management of the banks. • Measures taken to prevent supported banks exploiting the situation vis-à-vis non-supported banks. • No asset management companies or “bad banks”. I shall comment on each of these issues, but before doing this let me briefly mention the background for the crisis: 1 Source: Sandal (2004). 2 Source: Kane and Klingebiel (2002) and Norges Bank.

Gent Sejko: Bank of Albania’s engagement in financial education Address by Mr Gent Sejko, Governor of the Bank of Albania, at the opening ceremony of the Money Week 12-18 March 2018, Tirana, 12 March 2018. * * * Dear Mr Pedrazzi, Dear students, teachers and friends of the Global Week, Like in previous years, I have the pleasure to welcome you today to our central building, and thank you for your participation in the Money Week 2018. This is a special year as it marks a decade of Bank of Albania’s engagement in financial education, which meaningfully started with a Memorandum of Cooperation signed with the Ministry of Education. Over these years, financial education and financial inclusion have increasingly held a significant place in our work, in designing and implementing numerous educational projects. They are dedicated to different age groups, and consist of a variety of initiatives ranging from training and brochures to the high school elective module “Personal Finance in Your Hands”, the educational package for the elementary schools and the Albanian Money app. Moreover, the Museum of the Bank of Albania, our utmost effort in this regard, offers/provides a multifunctional space, where visitors may not only learn more about the monetary history in Albania and the central bank, but also deepen their financial literacy and expand their financial awareness. As a result of all these valuable experiences, we have been able to participate with dignity in the Money Week, which, in 2018, is celebrated in more than 135 countries.

Chart 6: Change in firm-level productivity dispersion since 2001 Services (indexed) Manufacturing (indexed) Index, 0=2001 Denmark Finland France Italy Japan Norway New Zealand UK 2001 2003 2005 Index, 0=2001 0.7 0.6 0.5 0.4 0.3 0.2 2007 2009 2011 2013 0.7 Denmark Finland France Italy Japan Norway New Zealand UK 0.6 0.5 0.4 0.3 0.2 0.1 0.1 0.0 0.0 -0.1 -0.1 -0.2 2015 2001 2003 2005 Year 2007 2009 2011 2013 -0.2 2015 Year Sources: OECD and Berlingieri, Blanchenay and Criscuolo (2017); ONS Research Database and Bank calculations. Notes: Chart show log difference between 90th and 10th percentiles indexed to zero in 2001. UK data only available from 2002, so UK base year = 2002. 30 All speeches are available online at www.bankofengland.co.uk/speeches 30 Chart 7: UK, Germany and France firm-level productivity (data for 2013) Percentage of firms 12 Expected value of productivity in country UK 10 Germany 8 France 6 4 2 0 -220 -200 -180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200 Productivity (difference from expected value as a percentage of peer group median) Sources: McKinsey and Orbis (2013). Notes: Data kindly provided by McKinsey Global Institute.

In relation to GDP, bank financing of companies is around half that in Germany. The UK’s national development bank (the British Business Bank) has assets that are a small fraction of its German counterpart (KfW) (Table 7). There are plans to increase the capacity of the British Business Bank, but that would still leave it significantly smaller than KfW relative to GDP. In sum, the UK’s long tail problem is largely a diffusion rather than innovation problem. And this problem seems to have its roots in transfer barriers – barriers to transferring technology, know-how, people and financing – from the UK’s thriving hubs to its striving spokes. Stronger, longer spokes are needed to reach the long tail. The Bank of England and Monetary Policy 48 49 Bank of England (2016) discusses the measurement and financing of “productive investment” in the UK. Belsham and Rattan (2017). 16 All speeches are available online at www.bankofengland.co.uk/speeches 16 Since its inception, the Bank of England’s role has been to secure stability in prices and the financial system. Historical experience illustrates these are essential ingredients for investment and innovation by companies and for rising productivity, pay and living standards in the economy. 50 By achieving its statutory objectives of price and financial stability, the Bank of England provides one of the necessary foundations for productivity.

Whatever the precise portfolio investment limits for the insurance funds, MAS will take the governance and deployment of these insurance funds into consideration, when assessing whether the banking group has de facto control of an investee company, and thus whether an investment meets the portfolio investment criteria for the banking group. Time frame and potential impact The separation of the financial and non-financial activities will be a major change for the banking groups. There will be significant corporate restructuring and divestment of assets. We must do this in an orderly manner, over a reasonable period. There is no reason to force a fire sale, which would weaken the banks and diminish confidence, and would be against the interests of shareholders and depositors. Local banks will be given three years to complete the restructuring and comply with the new requirements. The three years will commence from the passage of the relevant legislation, which should take place by the end of the year. MAS will work with the banks on a phasing and schedule, so that the restructuring and divestments can take place in an orderly manner and be completed within the three-year deadline. Tax treatment for divestment The divestment of non-permitted assets will have significant tax implications. In order to avoid uncertainty as to how IRAS will treat these transactions, and to minimise the tax impact on the banks of changes which have been mandated by MAS, the Government has decided on a set of one-off administrative concessions to facilitate this exercise.

Therefore, in the present exercise MAS will allow the principal shareholders to continue owning indirect stakes in the banking groups through the non-financial entities that they control. MAS will review this arrangement later. Management To avoid conflicts of interest, the management of the financial entities should be separate from the management of its non-financial affiliates. There should be no sharing of executive directors and management staff, such as the chief financial officer and chief operating officer. On the board of directors of a regulated financial entity, a majority of the directors should not be holding directorships on the boards of the non-financial affiliates as well. Name-sharing Mixed conglomerates usually leverage on common brand building. Many of the non-financial affiliates of local banks share the name of their parent banks. Financial and non-financial entities alike have built up goodwill in the brand name over the years. But reputational and contagion risks can result from sharing of names and corporate badges between the bank and its non-bank affiliates. Where an unregulated entity sharing a name fails or falls into disrepute, the public may attribute its problems to the bank, causing a bank run. MAS will therefore disallow the sharing of names and logos between the financial and non-financial entities. We are considering amending the Banking Act, to prevent the use of names or acronyms by companies that may confuse the public, or give the impression that a company is related to or associated with any Singapore-incorporated bank.

"2 The Federal Open Market Committee lowered the target range for the federal funds rate to 0 to ¼ percent3 and increased purchases of Treasury securities and agency mortgage-backed securities. The Board of Governors created new dollar liquidity arrangements with central banks, reflecting the global nature of the pandemic and its economic disruption.4 Together with other Federal banking agencies, the Board issued regulatory relief and guidance to banks encouraging them to meet the changing needs of customers,5 to use their capital and liquidity buffers to facilitate lending,6 and to access the discount window.7 Perhaps most prominently, the Fed has used its emergency powers in Section 13 of the Federal Reserve Act to establish programs and facilities to keep the economy running.8 The Board of Governors created the Primary Dealer Credit Facility,9 the Commercial Paper Funding Facility,10 and the Money Market Liquidity Facility to provide relief for critical wholesale markets.11 Another facility supports lending to small businesses via the Small Business Administration's Paycheck Protection Program.12 Two commercial credit facilities provide liquidity for corporate bonds.13 The Term Asset-Backed Securities Loan Facility supports the markets for student loans, auto loans, and credit card loans.14 The Municipal Liquidity Facility helps state and local governments and agencies close revenue gaps.15 And facilities specifically targeting "Main Street"16 help sustain retail businesses and may expand to assist nonprofit institutions.17 For the last several months, implementing the Board of Governors' relief initiatives has been the priority of the New York Fed and our sister Reserve Banks.

And the Fed regulates and supervises financial institutions so that, each and together, they safely match savers and borrowers in the real economy. I sometimes think that theories or expectations of central banking depart from reality. This may be unavoidable. The best theories are simple. The reality of central banking is complicated. The Fed is a complex entity governed by numerous statutes that have changed many times in the last 100 years—and are still changing. The Federal Reserve is not just a concept. It is a creation of Congress. Its job is what Congress tells it to do—to adhere as closely as possible to the will of Congress. Of course, Congress's instructions sometimes leave room for interpretation and discretion. For example, Section 13(3) of the Federal Reserve Act allows the Board of Governors to provide credit during "unusual and exigent circumstances." What are those? And how do we know when circumstances cease to be unusual and exigent? Theories can help resolve these ambiguities and guide the judgment of policymakers. Other times, Congress is clear, but its instructions do not fit neatly into theories of central banking. In designing its Section 13(3) facilities, the Board of Governors coordinated its policy decisions with the Department of the Treasury. This was required by law.

I would like to draw your attention to the following issues: í first, the euro area will have to face up a number of challenges to confirm its initial success; í second, the success of the euro will make a contribution towards encouraging a balanced international monetary situation. I believe that in the current overall economic situation, the success of the euro will help not only Europe but also the rest of the world which will benefit from European prosperity and growth as part of a healthy world economy. This would help facilitate the current accounts adjustments of the countries affected by the crisis. The success of the euro will be complete if a number of challenges are taken up A few years ago, it was necessary to convince a great deal of sceptic people that the euro was a viable project. Many of them pointed to its presumed contradictions and its alleged inconsistencies: for example, the impossibility of achieving an efficient policy mix without a political federation; the impossibility of avoiding some “asymmetric shocks”; the lack of sufficient flexibility of the economy and real mobility of the labour force in the European countries, etc. The result was that the euro would never exist! BIS Review 81/1999 4 These criticisms proved wrong as to the introduction of the euro. But they are useful to help answer the question of what are the conditions for ensuring that the euro is a complete success.

And the euro will also encourage “cross fertilisation” of best practices through stronger co ordination of member states policies in areas such as labour markets, education and training, job creation incentives, effective welfare safety nets, etc. In this sense, the euro – which is in itself a major structural reform- must, and will certainly, bring about other structural reforms. í The fourth condition is that all economic leaders in Europe must be clearsighted with regard to the crucial matter of competitiveness. Pre-euro economic policy meant in particular monitoring trade balances, the balance of payments and the foreign exchange and interest rate markets. Economic leaders thus received constant and to a large extent real time feedback on key indicators affecting national economic performance and could react accordingly. These indicators remain on the euro-wide level: this is why the mutual surveillance of fiscal and economic policies provided for by the Treaty is so important. But they have disappeared at the national level with the advent of the euro, whilst the. rules of a market economy continue to apply to each economy participating in the euro zone. Jobs are created by consumers when they choose the goods and services they feel are the best value for money. Businessmen allocate these jobs to different possible locations in different countries according to the relative competitive advantages of these locations. Therefore the leaders of each national economy must monitor competitiveness through indicators such as unit production costs, tax and regulatory frameworks and so forth. This is even more important than before.

Will the long-term liquidity constraint, the NSFR, eventually be abandoned? We will work on it again as of next year. Should the Solvency II standards for insurers also be delayed? We have a particular problem concerning long-term business lines (i.e. life insurance, civil liability, construction). Designed before the crisis, this system of standards, which adjusts portfolio assets according to their market value, is not suited to a highly volatile environment like the one we have seen for the past five years. We need therefore to ask again the fundamental question: are the basic assumptions underlying Solvency II correct? And we need to seek to reduce volatility by getting closer to economic reality. Here again, we should not set rules too quickly the impact of which may be very great but has not been fully assessed in times of crisis. I think that it would be fruitful to try out several different technical solutions over a number of years before laying down the final rules. In any event, I recommend that French insurers continue with their preparations in order to be ready technically in 2014 as if the standards were going to enter into force as scheduled. Is the programme of job cuts that you have just announced for the Banque de France sufficient when compared with staff levels at other central banks? I find the accusations about the supposedly excessive staff levels at the Banque de France exasperating.

GDP fell about 5 per cent and unemployment rocketed from levels around 2–3 per cent to two-digit figures. After a series of heavy attacks, the Swedish krona was left to float in 1992. The fixed exchange rate regime was replaced by a return to price stability as the policy objective, now in the form of a 2 per cent inflation target. Since 1999, price stability is enshrined in law and the Riksbank is more independent in the pursuit of this goal. While low inflation is admittedly not an ultimate goal for economic policy in general, it is an important prerequisite for generating growth that is stable and high. History clearly demonstrates that a high and fluctuating rate of inflation is incompatible with a permanent improvement in standards of living. A commitment to price stability is therefore one of the foundation stones of any economic policy that aims for rising prosperity and high employment. BIS Review 81/2001 3 The years since the policy realignment have been successful. But this is not only because stabilisation policy is now being conducted differently, with a clear focus on price stability and a balanced budget. It is also a result of all the measures that were introduced around the turn of the 1980s to improve the workings of the economy. These included the deregulation of capital markets, “the tax reform of the century”, a realignment of housing policy and so on.

Norges Bank recommends that the maximum limit for the loan-to-value ratio be set at 85 percent as a regulatory requirement, but that banks are also permitted to extend a certain proportion of loans with a loan-to-value ratio higher than 85 percent. Such quotas for new loans that exceed the regulatory limit are commonly referred to as speed limits. Norges Bank recommends that the tightened requirements for principal repayments for loans with high loan-to-value ratios and for debt servicing be set out in the form of guidelines rather than in the form regulations. The prudent lending requirements strengthen the robustness of banks and households and should be regarded as a permanent structural measure. Let me conclude by turning back to the present situation and challenges for the Norwegian economy. Oil prices have nearly halved since last summer. So far, the effects on the mainland economy have been relatively small. Nevertheless, the Norwegian economy must now adapt to lower demand from the oil sector and lower oil revenues. BIS central bankers’ speeches 3 The shift to an oil-driven economy with a high wage capacity was a comfortable journey. The journey forward, where the oil service industry must downscale and other trade-exposed industries must grow, will be more challenging. The point of departure for coping with the period of restructuring we are now facing is favourable. We have economic policy leeway. Inflation expectations are firmly anchored and the krone exchange rate is functioning as a stabiliser.

Luis M Linde: Profile of Professor Nicholas Bloom – winner of the XII Germán Bernácer Prize Opening remarks by Mr Luis M Linde, Governor of the Bank of Spain, at the XII Germán Bernácer Prize Ceremony, Madrid, 24 September 2013. * * * Ladies and Gentlemen It is a great pleasure for me to introduce this award ceremony for the 12th Germán Bernácer Prize. First of all, let me once again thank the organizers and sponsors of the Prize. They have established an excellent programme to support economic research in the fields of macroeconomics, monetary policy, and financial economics. This is the 10th time that the Bernácer Prize award ceremony has taken place at the Banco de España. The continued support and backing of this initiative of the Observatory of the European Central Bank by the Banco de España is justified by its conviction of the importance of macroeconomic research, insofar as it concerns the functions to be performed by the European System of Central Banks. By recognizing the relevance of a prize like this, which has been awarded, in every instance, on the basis of academic excellence, the Banco de España reaffirms its commitment to economic research. As many of you know, this Prize commemorates a distinguished Spanish macroeconomist who worked at the Banco de España, as director of its Research Department, during the 1930s. Despite the isolation of the Spanish economics profession at that time, Germán Bernácer obtained substantial international recognition for his research contributions.

The main risk is that inflation expectations stay elevated for a long time. The longer the price growth rate remains high, even if fuelled by temporary factors, the more considerable this risk is. We could already observe this over the recent three months. As regards external conditions, proinflationary risks persist as well. In the first place, they are associated with prices for energy commodities and other commodities. The damper mechanisms protect the domestic market against fluctuations of global prices for commodities. However, an increase in foreign producers’ costs might also affect inflation in Russia. For instance, this happens when we import foreign equipment and vehicles made of more expensive metals. Disinflationary risks are mostly associated with the fact that producer costs might decrease as fast as they have risen. We have recently observed a multifold increase in prices for container shipments. This has pushed up cargo delivery costs worldwide. However, this growth has stopped by the moment. Possibly, even if prices do not decline to pre-pandemic levels, they might adjust downwards considerably closer to their initial level of this year, and later on this will translate into product prices. Another important disinflationary factor is still recovery prospects in outbound tourism. I should focus on the anti-pandemic restrictions that are currently introduced. Last spring, we believed that restrictions would cause a slump in demand, that is, provoke disinflationary risks. This is exactly what happened in the second quarter of 2020.

We have also increased the forecast range of the annual average key rate for the next year by 1.3 percentage points, as compared to July. Considering such policy, inflation will decline to 4.0–4.5% next year. I will now speak of the economic situation. Except oil production subject to the OPEC+ cuts, the economy generally bounced back to its long-term growth trends in the second quarter and even exceeded them in a number of industries. Growth slowed down in the third quarter, which is evidence that the recovery had completed. It should be noted that the third quarter GDP was affected by a decrease in harvest and the worsened epizootic situation. Excluding agriculture, we estimate that GDP growth quarter-on-quarter was positive. Consumer demand remains the main contributor to the growth. One-time payments to households also supported consumption. The surveyed companies expect a further expansion of demand. According to the data on GDP for the second quarter and recent statistics for the third quarter, gross fixed capital formation also grows fast this year, and even faster than we assumed in our July forecast. The oil industry is a large sector where there is still a substantial space for the recovery growth. The OPEC+ is gradually easing the oil production cuts. Furthermore, the environment in the global markets of energy commodities has improved considerably. We have raised the forecast oil price for 2021 and 2022, specifically to 70 and 65 US dollars per barrel, respectively. I will now briefly talk of the situation in the labour market.

Øystein Olsen: Economic perspectives Address by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), to the Supervisory Council of Norges Bank and invited guests, Oslo, 16 February 2012. * * * Demanding time for Europe “The year started without much hope, and it had to be expected that the pressure on business and industry would intensify, but however dim the prospects might have appeared, the outcome was darker than anyone had imagined. I need not enumerate the successive collapses that spread from country to country.” This was the opening of the annual address delivered by Norges Bank Director Nicolai Rygg 80 years ago. Britain had abandoned the gold standard and one country after the other, including Norway, followed suit. Interest rates had increased. Financial markets were turbulent. Although the tremors were on a greater scale in the 1930s, Nicolai Rygg’s description could serve as an apt retrospective today as well. In the course of the past two years we have seen economic problems spread across debt-laden countries in Europe. Greece was the first country to experience a financial collapse. The Greek government had to resort to external financial assistance in spring 2010, followed by Ireland and Portugal. The turbulence spread further in autumn last year. Interest rates on public debt rose markedly for Spain and Italy and thereafter Belgium and France. Several euro area countries are now struggling with soaring public debt and weak competitiveness in addition to restructuring and public budget cuts.

Lastly, Patricia Mosser, now a Senior Research Scholar here at SIPA, used to work at the New York Fed, and a number of Banque de France staff have had the privilege of working with her over the years. So, Patricia, allow me to thank you warmly for organising this lecture on the ECB’s monetary policy and the resilience of the Eurozone. In Europe, the euro construction process is pretty well-known, while the ECB monetary policy is often debated. In the United States, it may be the reverse: the monetary policy is often better understood than the euro construction process. Thus I will deal successively with both issues before turning to the future and a call for action in Europe. 1. The euro has strong foundations. Political foundations As you know, the single currency was officially launched with the Maastricht Treaty in 1992 and introduced in 1999. But Maastricht and the euro are naturally part of a broader history: the history of Europe, and its singular achievement of making the transition from war to peace. As early as 1946, Josef Müller, who was a leading figure in the German resistance to the Nazis and the founder of the Bavarian CSU, acknowledged that “we need[ed] a European currency, because countries that share a currency will never be at war”. The euro has indeed provided us with a strong symbol of unity among European nations.

The Bank of England is responsible for operation of the SRR (with the exception of Temporary Public Ownership, where the Treasury is responsible). The Bank will consult the FSA and Treasury before selecting the SRR tool to be used, and we need to obtain the agreement of the Treasury to the implications of the chosen tool for the use of public funds. Also, the Bank can make recommendations to the FSA when it feels that the SRR should be triggered, though as I have said, the decision is for the FSA. Finally the Financial Services Compensation Scheme (FSCS) plays an important role in the resolution process. This would be very obvious if an actual payout of depositors was chosen and the FSCS would work very closely with the administrator. They also have a prior role in assessing whether payout is feasible in a reasonable time. But the FSCS can also be requested to contribute to the cost of other forms of resolution up to the net amount it would have failed to recover in insolvency if there was an actual payout. This approach can be used, for example, where there has been a transfer of deposits – and the FSCS can provide BIS Review 157/2009 3 a suitable deposit to contribute to the immediate cost to the authorities. The FSCS does not however operate a pre-funded scheme in which money is available on call to provide such a substitute deposit.

The imbalance within the economy which these figures reflect - notably the continuing imbalance between the internationally-exposed companies and sectors, which are having a really rough time, and the domestically-orientated sectors which are doing much better - is certainly not ideal. The continuing imbalance is not without risks. On the one side, we may find it increasingly difficult to offset the negative impact of the global slowdown in the face of increasing domestic private sector debt; and if the slowdown in the UK spreads beyond manufacturing to the services sectors it may cause unemployment to rise which in turn could slow the growth of consumer spending. But, on the other side, we may find it difficult to moderate the growth of domestic demand when the international environment improves. There is no doubt that if we could simply redraw the map, we would opt for stronger external demand and weaker consumption growth. That would represent a more sustainable balance within our economy. Sadly that is a choice that we are not immediately free to make. Doing what we can to encourage domestic demand growth to compensate for the global economic weakness is certainly preferable to an unnecessary slowdown in the economy as a whole. And that is the path we must for the time being continue to pursue. 2 BIS Review 85/2001 So what then are the prospects?

As you discussed this morning, there are a range of new rules and regulations being considered to enhance the regulation of the U.S. operations of foreign banks. Beyond these new rules, though, we are continuing to press ahead to make substantive enhancements to how we carry out supervision of the largest global firms doing business in the U.S. These enhancements largely follow along the work that we are doing to enhance overall supervision of all the firms that we supervise, so they shouldn’t be a surprise to you. These enhancements, many of which reflect lessons we learned through the financial crisis, include deepening our engagement with senior managers, including business line owners and directors of firms; developing a better understanding of firm strategy, revenue and business drivers and vulnerabilities; enhancing our focus on resilience and ensuring that buffers are strong – including stronger capital, liquidity, collateral management and contingency planning, to name a few; and increasing our attention on risk culture and risk appetite within the firms we supervise. BIS central bankers’ speeches 1 What I offer today is two-fold. First, I will identify three things that you – as global firms with a U.S. presence – can do to help remove impediments to our understanding the operations we are supervising and to make it easier to get our jobs done. This should also make it easier for you to understand and follow the rules that are set out for global firms.

From 2006 to 2010, the share of prime purchase loans going to borrowers with sub-625 credit scores fell from 8.5 to 3.5 percent. At the same time, the share of prime purchase loans going to borrowers with scores above 750 rose from about 35 percent to about 41 percent. While I am certainly not advocating going back to the loose lending standards of, say, 2006, I think we should be aware of how changes in the distribution have implications for the housing recovery. In particular, I would suggest that current lending standards are another reason the housing sector’s role in the recovery is likely to be weaker than usual. In addition to the challenge of availability of credit to borrowers with low credit ratings, housing has another issue. Both the homeowner and rental vacancy rates are quite high, as shown in Figure 10 – although there has been recent improvement in these rates, and hopefully the trend is now downward. High vacancy rates, of course, place downward pressure on home prices and rental rates, and serve as another headwind to a housing recovery. So again, all in all and despite some improvement in factors fundamental to a housing recovery, I expect that housing will not provide as much support to this recovery as it has in previous ones. But now I’d like to turn to the second question, and perhaps leave you feeling a bit less discouraged when we’re through.

The Riksbank uses a broad approach in its analysis of resource utilisation and describes a number of indicators in its reports, such as measures based on surveys of companies and on “gaps”, for instance the GDP gap and the number of hours worked gap, where the trend or normal level is calculated according to some method.3 The Riksbank weighs together these 3 See, for instance, the article “The stabilisation of the real economy and measures of resource utilisation”, Material for Assessing Monetary Policy 2010, Sveriges Riksbank. BIS central bankers’ speeches 3 indicators and makes an overall assessment of the current level of resource utilisation. The assessment is qualitative and can be expressed as resource utilisation being “higher than normal”, “normal” or “lower than normal”. A qualitative assessment regarding how resource utilisation will develop during the forecast period is also provided. This can be expressed, for instance, as “resource utilisation will rise and be close to normal at the end of the forecast period”. Although we publish forecasts for different gaps in our reports, we do not make a quantitative forecast that reflects the overall assessment of how resource utilisation will develop. One alternative would be for the Riksbank to simply decide to use one particular measure of resource utilisation as a starting point when setting the interest rate. But we have chosen not to do this. For instance, the difficulties in estimating what is a “normal level” for resource utilisation indicate it may be risky to commit oneself to any specific method.

China is now a key part of both global and regional supply chains for the production of low-cost manufactured goods. China now produces 80% of the world’s photocopiers, 50% of the world’s textiles and 50% of the world’s computers. These developments will tap the labour of hundreds of millions of people who were previously effectively outside the global market place. They are also triggering urbanisation – and infrastructure investment – on a scale, and at a rate, which makes our own Industrial Revolution look sedate, even puny. The Chinese Government expects 300 million people to migrate from the countryside to urban areas over the next 20 years. China had no motorways in 1988, now it has 41,000 kms, second only to the US. It is adding the equivalent of the UK’s total power generating capacity every year. Beijing alone plans to build 15 new metro lines by 2020, to create a network larger than the London Underground. No surprise, then, that China consumed 50% of the world’s cement last year. Third, and more tentatively, there seems to have been an increase in the international mobility of labour. This is the area where the continuing, largely political, barriers to free movement are most apparent, and where, partly in consequence, it is hardest to assemble reliable information.

When it comes to the costs of the expansionary monetary policy, there is also a risk that losses will arise on the Riksbank’s balance sheet as a result of the bond purchases. In pure accounting terms, the bond portfolio will be booked at market value. This means that the value of the portfolio will vary as interest rates change. The cost of funding the holdings will therefore increase when short-term interest rates eventually rise. If the Riksbank were to suffer a loss, however, it would not entail any particular problem, but it would lead to the surplus we pay to the state every year declining. There will thus be less money for the Swedish Treasury. We have nevertheless chosen to take these measures to emphasise that we want to safeguard the role of the inflation target as nominal anchor for price-setting and wage formation. Moreover, we have said that if more is required to get inflation to rise towards the target, we will do more. And we are prepared to do so with force. 2012 and Christensen, J. H. E. and Krogstrup, S. “Swiss Unconventional Monetary Policy: Lessons for the Transmission of Quantitative Easing”, Federal Reserve Bank of San Francisco Working Paper 2014–18. BIS central bankers’ speeches 11 Concluding reflections In my speech today I have tried to describe current monetary policy from an historical perspective. I hope that you have gained a deeper understanding of current monetary policy.

The prevailing international view during the great moderation was that financial crises could best be managed by monetary policy when they arose – this view has been described as the “Jackson-Hole consensus”. Another description of this view is that crises are managed by “mopping up afterwards”. This did not mean that there were no differing opinions, but as you know the advocates of these different views were talking to deaf ears. 11 However, the most recent financial crisis illustrates with great clarity the size of the costs of “mopping up afterwards”. In this context, it should be pointed out that the Riksbank warned about developments in the Swedish housing market long before the financial crisis. 12 This was in turn connected to the fact that we in Sweden had not in every aspect learnt our lessons from the 1990s crisis. One can say that the new stabilisation policy framework had given us control over public debt and inflation, but that there was no natural limit for indebtedness in the private sector. This led to the substantial increase in housing prices and household indebtedness we have seen – with a few brief intermissions – since the middle of the 1990s. The experiences of the global financial crisis have also led to extensive international regulatory work and to many countries now establishing new organisational structure and tools within what is known as macroprudential policy.

They must provide the tools for first responders to react quickly and investigate the source and impact of breaches, compromises and incidents. Most essentially, there is a need to balance the right mix of investments across prevention, detection and response capabilities vis-à-vis an organisation’s risk appetite. Not only are new and advanced tools needed to supplement existing protection solutions, but also new skills and culture need to be developed within existing security teams and the larger organization, more so within the ambit of digital financial services whereby regulatory compliance plays a major role in cybersecurity. 2/3 BIS central bankers' speeches Regulatory compliance does not equal cybersecurity Regulations are designed to protect organisations, clients, and consumers against the potentially devastating consequences of cyber-attacks. Regulatory requirements for financial institutions have undeniably become tougher, and organisations are continuously burdened by the need to interpret what a fragmented global regulatory landscape means for their operations. Financial institution often find themselves chasing regulatory compliance, rather than leading independent security planning. Regulatory compliance by itself is not cybersecurity. When new cybersecurity requirements or frameworks are published, organisations must first determine their current security state and identify gaps. If routine testing and remediation are conducted, being compliant or meeting regulations should be easier to achieve. Of course, some parties will want or need to go above and beyond regulations. Too often, however, organisations find themselves in reactive mode.

More worryingly, we have seen major cyberattacks occurring globally which caused disruptions to essential financial services and destroy savings or financial assets that the underbanked depend on. Financial institutions are not only prime targets for cyberattacks but bear tremendous fiduciary and legal, regulatory, and compliance responsibility to protect customer data and privacy. Safeguarding trust in the formal financial system is now particularly important for the newly included grassroots. In financial services, the push for digital innovation, disruptive technologies, delivery of more personalized customer experiences, and seamless access to consumers for more inclusion continuously introduces new threats. Forrester Research calls this dynamic an “epic” battle between privacy and digital innovation, and predicted that by 2020 financial services and insurance companies expect to generate the biggest portion of their total sales from digital products, services, or items sold online. Alongside this drive toward digital business, many organisations rely on legacy IT systems that are expensive to maintain and susceptible to more vulnerabilities, greatly compounding the cybersecurity challenge. Importance of cybersecurity The current chairman, president and CEO of IBM, Ginni Rometty had described cybercrime as “the greatest threat to every profession, every industry, every company in the world.” While cybersecurity used to be considered an issue primarily for the IT folks, these days it is an agenda item for the entire C-Suite. What has really changed? It is not just the frequency of media reports on cybersecurity breaches. If anything, these are merely symptomatic of a larger shift underway.

So the concept of bail-in after all the equity holders and the subordinated debt holders have been wiped out, could involve the transformation of senior debt into equity or semi-equity in a going concern bank. In such a case, it is a very good and important concept. To my mind, bail-in should be part of the extra powers given to the supervisor. That is the only way we can reassure investors that it will be used only when it is absolutely needed to avoid a bankruptcy. That means that ultimately it is in the interests of senior bondholders to know that they won’t be penalised just because it’s beneficial for other stakeholders, but because it can’t be avoided. This is why it is essential that this power should be in the hands of the supervisor. But bail-in needs to apply to the whole of the senior debt. I’m not completely convinced that there is merit in having specific bail-inable instruments like CoCos. This is because either it makes the basis of the bail-in very restricted and may not be sufficient in many instances so that in the end you may need recourse to a second layer. Or, if it is a big amount, it can be extremely costly because of the specific risk, and therefore it may be better in that event to move directly to equity.

In any case, the fact that bail-in is now on the table and can be used by the supervisor will probably be one of the reasons why the banks will be tempted to increase their capital base regularly over time, to demonstrate to the buyers of senior debt that they are sufficiently protected. It will also be a strong incentive for banks to limit and control their risks and clearly communicate to the market how they do so. EUROWEEK: Has all this done enough to break the pernicious and highly damaging loop between sovereign and bank risk that was so central to the crisis? Or is that loop one that is simply impossible to break? Noyer: I think we have reduced that risk. The work is not totally finished. We need to continue in the direction we have taken. But to my mind there were three decisive moves that have addressed the problem of this feedback loop. One was the action that was taken on the consolidation of public finances, because if you have stronger government finances then of course the risk for banks is reduced. The second was moving decisively on the banks’ capital bases, because clearly if you have stronger banks then the risk for governments is lower. And finally, the decision to move to a banking union starts with supervision and then allows us to advance to the second and third steps which will have to be a resolution scheme and a resolution authority and finally a euro area deposit guarantee scheme.

As the digital asset ecosystem grows, it will be natural for linkages between the traditional banking system and digital assets to grow. There is risk of contagion to financial markets through exposures of financial institutions to digital assets. MAS is working closely with other regulators to design a prudential framework for banks’ exposures to digital assets. This framework will provide banks with clarity on how to measure the risks of their digital asset exposures, and maintain adequate capital to address these risks. This will reduce risks of spillovers into the traditional banking system. INNOVATION AND REGULATION HAND-IN-HAND Singapore wants to be a hub for innovative and responsible digital asset activities that enhance efficiency and create economic value. The development strategy and regulatory approach for digital assets that I have described go hand-in-hand towards achieving this. Innovation and regulation are not incapable of co-existing. We do not split the difference by being less stringent in our regulation or being less facilitative of innovation. MAS’ development strategy makes Singapore one of the most conducive and facilitative jurisdictions for digital assets. At the same time, MAS’ evolving regulatory approach makes Singapore one of the most comprehensive in managing the risks of digital assets, and among the strictest in areas like discouraging retail investments in cryptocurrencies. I hope this presentation has made clear that MAS’ facilitative posture on digital asset activities and restrictive stance on cryptocurrency speculation are not contradictory.

Tokenisation allows the assets to be traded securely and seamlessly without the need for intermediaries. There are already interesting applications in Singapore of tokenisation of both financial and real assets. UOB Bank has piloted the issuance of a $ million digital bond on Marketnode’s servicing platform that facilitates a seamless workflow. OCBC Bank has partnered with MetaVerse Green Exchange to develop green financing products using tokenised carbon credits to help companies offset their carbon emissions. MAS itself has launched an initiative – called Project Guardian – to explore the potential of tokenised real economy and financial assets. The first industry pilot, led by DBS Bank, JP Morgan, SBI Group and Marketnode, will explore the institutional trading of tokenised bonds and deposits to improve efficiency and liquidity in wholesale funding markets. ENABLE DIGITAL CURRENCY CONNECTIVITY A digital asset ecosystem needs a medium of exchange to facilitate transactions – three popular candidates are cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs). How does MAS view each of them? MAS regards cryptocurrencies as unsuitable for use as money and as highly hazardous for retail investors. Cryptocurrencies lack the three fundamental qualities of money: medium of exchange, store of value, and unit of account. As I mentioned earlier, cryptocurrencies serve a useful function within a blockchain network – to reward the participants who help to validate and maintain the record of transactions on the distributed ledger. But outside a blockchain network, cryptocurrencies serve no useful function except as a vehicle for speculation.

One example is that it seems to be possible to reach the target with a sufficiently powerful expansionary policy. One reservation here, of course, is that we still cannot be certain that inflation will really remain around the target, even if this is what the Riksbank expects. Another reservation is that neither is it obvious what part the Phillips curve has played in the rise of inflation in Sweden so far. Increased resource utilisation has certainly gone hand in hand with rising inflation, but we have also seen that wage increases have so far been surprisingly modest given the economic situation. In that sense, it is too early to say whether Sweden's experiences suggest that the Phillips curve is continuing to work like usual. But our experiences nevertheless suggest that central banks’ inflation targets are fully possible to reach. And the recent, relatively rapid increases in service prices are, after all, a sign that some form of Phillips curve is active (see Figure 5). There has been quite a lively international debate on the Phillips curve recently – about its slope and even about its existence. 15 Personally, I take a fairly agnostic view of it. I see it as a mostly qualitative relationship between resource utilisation and inflation that does not say much more than that high resource utilisation sooner or later tends to lead to prices and wages rising more rapidly and that low resource utilisation leads to them rising more slowly.

As Kenneth Arrow, Nobel Laureate in Economics, said about his four-year experience as a weather officer in the US during World War II, “one thing I learned from meteorology is that being an actual science was no guarantee of exactness”. Economics may or may not be an actual science, but it certainly suffers when trying to predict the future. There are at least three explanations for this unpredictability that are common to economics and other scientific disciplines. First, assigning probabilities is particularly difficult for infrequent high-impact events such as financial crises, tsunamis, or climate change, for which there are few precedents. Because the samples of such events are so small, as we learn about these processes our assessment of their likelihood will change, possibly sharply. Second, even systems that are deterministic rather than stochastic can be very unpredictable. Small differences in starting conditions can imply very different outcomes. Weather systems display chaotic dynamics, so that small initial forecast errors may lead to large revisions to the forecast further out. Economists, in contrast, often rely on simple linear models, but with additive stochastic errors. In modelling any phenomenon there is a choice, and among the experts in the area often a live debate, about whether it is more useful to use deterministic but chaotic or stochastic models. 1 But the motivation in both cases is to bring out the importance of unpredictability. Another feature that hinders predictability is that a priori indistinguishable shocks can have very different effects in some systems.

Andrew G Haldane: On microscopes and telescopes Speech by Mr Andrew G Haldane, Executive Director and Chief Economist of the Bank of England, at the Lorentz centre workshop on socio-economic complexity, Leiden, Netherlands, 27 March 2015. * * * The views are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Thibaud de Barman, Lucy Canham, Chiranjit Chakraborty, Jeremy Franklin, Rashmi Harimohan, John Hill, Bradley Hudd, Ben Kempley, Lu Liu, Katie Low, Anna Jernova, Carsten Jung, Damien Lynch, Yaacov Mutnikas, Tobi Neumann, Paul Robinson and David Ronicle for their assistance in preparing the text. I would also like to thank Stephen Burgess, Oliver Burrows, Pavel Chichkanov, Nicholas Fawcett, Bob Hills, Ronan Hodge, Glenn Hoggarth, Catrin Jones, Vas Madouros and Simon Whitaker for their comments and contributions. Accompanying charts and the table can be found on the Bank of England’s website. At least since the financial crisis, there has been increasing interest in using complexity theory to make sense of the dynamics of economic and financial systems (Newman (2011), Arthur (2014)). Particular attention has focussed on the use of network theory to understand the non-linear behaviour of the financial system in situations of stress (Gai and Kapadia (2011), Haldane and May (2011), Gai, Haldane and Kapadia (2011)). The language of complexity theory – tipping points, feedback, discontinuities, fat tails – has entered the financial and regulatory lexicon.

Where they exist, that’s 2017-19 Average consistent with the current pattern of forward prices, 350 300 250 as you can see from both Chart 1, for wholesale 200 gas, and Chart 12 for shipping costs. (For what it’s 150 worth, the spot price of shipping containers, plotted 100 as the red line in Chart 10, has actually declined in 50 recent weeks, down nearly 30% from its peak in mid-September.) It’s therefore quite possible that, in a couple of years, the contribution of some of these items to UK inflation will be not only smaller but negative. Sources: Baltic Exchange and Bank calculations. Panamax is a sub-index covering mid-sized vessels travelling on 5 of the 23 shipping routes of the full index. It co-moves closely with the overall Baltic Exchange Dry Index. Having said all that, there’s no doubt that the path of these global goods prices is highly uncertain. Even if it’s still the right judgement that recent inflation rates are “transitory”, in the sense I defined earlier, that doesn’t mean our central forecasts are an inevitability. In the last Monetary Policy Report the MPC produced two forecasts for inflation, one in which gas prices followed the full path priced into financial markets, and therefore fell steeply throughout the next three years, another in which they stabilised at a relatively high level.

Two sources of potential stress should, however, be mentioned. First, a slowdown in the economy which, though unlikely, is still conceivable - could have negative repercussions on the quality of loan portfolios and on stockmarket prices. Second, in the more likely event of a sustained economic upswing, a sharper-than-expected rise in interest rates could also worsen the quality of loan portfolios by increasing the interest burden on households and companies more than expected. Analysis of the various scenarios suggests that sufficient capital is available in the Swiss banking sector to withstand even a substantial deterioration in the economic or stockmarket climate or a sharp rise in interest rates. Nevertheless, some banks have announced that they now have an increased appetite for risk. A general rise in risk acceptance would render the banking sector more sensitive to deteriorations in the macroeconomic or stockmarket environment. System oversight At the media conference in December last year, I reported in detail on the background to system oversight, i.e. the oversight of payment and securities settlement systems. Today I am limiting myself given the recent publication of the Financial Stability Report - to a briefing on the current situation. The day on which the new National Bank Act took effect - 1 May 2004 - also saw the entry into force of the new National Bank Ordinance. Among other things, the Ordinance contains the implementation provisions for system oversight.

Caleb M Fundanga: Zambia’s Financial Sector Development Plan Welcome remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the Financial Sector Development Plan (FSDP) Phase II Consultative Meeting, Lusaka, 20 October 2009. * • • • • • • * * The Honourable Minister of Finance and National Planning; The FSDP Steering Committee Chairman & Secretary to the Treasury; Co-operating partners; Chief Executive Officers and Representatives from Banks and Non Bank Financial Institutions; Distinguished Invited Guests; Ladies and Gentlemen. It gives me great pleasure, on behalf of the Bank of Zambia, to welcome you all to the Financial Sector Development Plan (FSDP) Phase II Stakeholders’ Consultative Meeting. Honourable Minister, this very important forum is a demonstration of the recognition, by Government and various stakeholders, of the strategic importance of the financial sector to the country’s development and poverty reduction efforts. Distinguished invited guests, there are a number of strategies currently being implemented by both the private and public sectors to make the financial sector more inclusive, thereby increasing the benefits for the average citizen to participate in the formal economy. The Financial Sector Development Plan is one such Government initiative. The FSDP was aimed at realising the vision of a financial system that is sound, stable and market-based and one that supports efficient resource mobilisation necessary for economic diversification and sustainable growth. Ladies and Gentlemen, various countries have established specific programmes to strengthen their financial sectors.

10 Neild (1964) and the National Economic Development Office (1965) used questionnaire-based evidence. A large proportion of firms in the sample claimed to use a pay-back criterion and of these the modal pay-back period was 3–5 years. Census evidence from this period indicated that the average useful lifespan of machines was over 15 years. The distribution of plant and equipment lives in Dean and Irwin (1964) implied a mean economic life of 34 years. 11 Sumner (1974) reaches similar conclusions. 2 BIS central bankers’ speeches mid-1970s, it was doused by a torrent of papers testing – and typically failing to reject – the efficient markets hypothesis. This new wave swamped empirical finance for the better part of a decade. In the late 1970s and early 1980s, the efficient markets paradigm appeared all-conquering as a description of asset price movements in practice.12 Research on the inefficiencies of capital markets became something of a backwater. The voting machine appeared to be delivering outcomes both democratic and socially beneficial. But beginning in the 1980s, a whole sequence of “puzzles” in empirical finance began to emerge. These were puzzles only in the sense of being deviations from efficient markets.

Short-termism estimates which are statistically significantly below unity (at the 5% confidence level) are shown in red. The simple average of x across the 20-year period is very close to one (0.9935). On the face of it, this does not suggest that short-termism has been a particular problem among this crosssection of firms. Chart 4 Chart 5 Short termism estimates over time Industry estimates Source: Bank of England. Source: Bank of England. Notes: Bars show the estimated x parameter for regressions for the UK and US pooled data. Estimates where the 95% confidence interval spans 1 are coloured grey. Notes: Bars show the industry estimates for the sample split into (1) 1985–1994, and (2) 1995–2004 for each industry. S&P and FTSE industry classifications were used. Bars are coloured based on the significance of the estimates at the 5% level. But this masks some important within-period variation. In 13 of the 20 years, x is lower than 1. And in 9 of these years, x is statistically significantly below unity. Moreover, there is evidence of a rising tide of myopia: 8 of these 9 years occur in the final decade of the sample. To illustrate, Table 5 shows point estimates of x over two decadal sub-samples (1985–1994 and 1995–2004) and over the full sample. Estimates are significantly below unity in the second sub-sample, but not the first.

Since the introduction of the QDII scheme, about $ billion worth of investment quotas have been granted up to September 2010. It is likely that a significant portion of these moneys is managed out of Hong Kong. In fact, over 40 Mainland companies providing fund management, securities and futures, insurance, and other services have already established a presence in Hong Kong to manage the funds flowing out of the Mainland and engage in fund advisory businesses. We expect the process of financial liberalisation in Mainland China to be a gradual and controllable one, as it has always been. It is however important to note that this process has begun and Hong Kong is bound to be a key destination as well as the management hub for the expected gradual increase in portfolio flows from Mainland China. This is a trend that financial services providers should not ignore in their business planning process. The wider external use of the RMB Now, let me move on to the second important trend: the wider external use of the RMB. Since the global financial crisis, Mainland China has taken steps to promote a greater use of RMB outside the Mainland. The rationale behind this policy move is easily understandable. At present, much of the cross-border trade and investment between the Mainland and other jurisdictions are conducted in US dollars.

Today I will highlight two aspects that I believe are key drivers for Hong Kong’s growth in the next few years. The first is the gradual financial liberalisation in Mainland China and the second is the wider external use of the renminbi (RMB). The gradual financial liberalisation in mainland China In the gradual financial liberalisation process in Mainland China, we can observe three key patterns: inflows being de-regulated before outflows, direct investment flows being liberalised before portfolio investment flows, and collective investment schemes being relaxed before individual investors. Specifically, during the early stages of Mainland China’s reform process, in the late 1970s and early 1980s, only Foreign Direct Investment (FDI) was encouraged. Hong Kong has been the largest source of FDI for the Mainland, accounting for more than half of the total amount in 2009. In the opposite direction, Mainland China’s Overseas Direct Investment (ODI) has also been liberalised gradually over the years. Hong Kong has been the largest recipient of ODI flows from the Mainland. At present, about 60% of ODI from the Mainland has gone to Hong Kong or via Hong Kong to other places. The significant share of Hong Kong in Mainland’s FDI and ODI underscores the unique role of Hong Kong as a gateway for foreign enterprises to access the Mainland market, while at the same time being a springboard for Mainland institutions to gain exposure to international markets. With respect to portfolio investment flows, market attention has been focusing on portfolio flows from advanced economies towards Mainland China.

Case Study 5: The establishment of the Deposit Insurance Scheme Let me now illustrate yet another example of harmonization. This is in relation to the establishment of the Deposit Insurance Fund and Scheme. My colleagues at the Central Bank have told me that discussions in connection with the setting up of a Deposit Insurance Scheme had been taking place at various times, over the past two decades! However, there was no consensus reached on a suitable mechanism, 10 BIS central bankers’ speeches particularly because the large initial capital that was required for the establishment of such a scheme, could not be allocated by the Government for many years due to the intense pressure upon the need to allocate funds for other more pressing needs of the state. Nevertheless, it was considered vital that such a fund and a scheme should be established, and hence an innovative method had to be structured, without placing an additional burden upon the Government coffers. In 2010 too, internal discussions were once again taking place with regard to the possible setting up of a Deposit Insurance Fund. At that time, we noted that the abandoned properties of the banks, which constituted the dormant account balances of over 10 years, had risen to a sizeable amount, and according to the law, those funds had to be placed by the banks with the Government for safe keeping.

In order to address this situation, one of the objectives in the Sixth BIS central bankers’ speeches 1 National Development Plan is to enhance the capacity of women to participate in national development”. 1 The Report further states that “due to weak economic position such as lack of collateral required by most financial institutions, most women, especially the rural women, are unable to access investment capital to engage in business and other economic activities as individuals”. Access to affordable financial services – especially credit and insurance – enhances livelihood opportunities and empowers women and other marginalized groups to take charge of their lives as well as improve their social and economic equity. This is why financial inclusion is considered to be critical for achieving inclusive growth and poverty reduction. What do we mean by financial inclusion Women’s financial inclusion has been described as “a state in which women as individual, members of households and entrepreneurs, have access to the full range of financial products and services from convenient responsible formal service providers, offered effectively, responsibly and sustainably and at a reasonable cost to clients” These products include payments, savings, credit, insurance and pensions. The Finscope survey of 2005 and 2009 showed that access to financial services in Zambia has been low with results indicating only a marginal increase from 33.7% in 2005 to 37.3% in 2009. This signifies that further efforts are required.

But others are also arising as a result of this crisis. The globalisation of production The crisis has highlighted some of the vulnerabilities associated with globalisation and the risks arising from protectionism. Set against this, Spain should play a leading role in defence of a global trade model, based on multilateral rules and free competition. Let us not forget that Spain has increased its external openness very significantly, which is essential for our growth but also makes us more sensitive to any reversal in international trade. Digitalisation 9 The crisis might also accelerate the ongoing digitalisation of the economy. It has demonstrated the possibilities of remote working, whose use in Spain was limited prior to this crisis. Developing teleworking will mean its positive aspects must be boosted and its shortcomings mitigated. In particular, there is evidence that, if the right conditions are not in place, remote working productivity might be lower than that involving workplace attendance. Training policies are thus needed enabling the employment opportunities arising as a result of the more intense use of teleworking to be harnessed. Headway in e-commerce during the lockdown, building on its extraordinary growth in recent years, might step up in the future. In that case, it will be essential to understand its implications in terms of business competition and price dynamics, and, if it were necessary, to pursue measures minimising any potential adverse effects. 4.8.

Following the shutdown, a second phase now ensues in which the economy is gradually beginning to recover, in step with the lockdown-easing measures. Some key characteristics mark this second phase. First, uncertainty remains very high. There are still many unknowns as to how the disease will unfold. This uncertainty will adversely affect consumption and investment decisions and international trade. Second, minimising the risk of a second wave of the disease will mean retaining certain restrictions and health safety measures for some time. These circumstances will have a bearing on normal economic activity and will unevenly affect the different productive sectors. Third, we will also be able to see in this phase to what extent, despite the economic policy measures applied, the crisis is causing more lasting damage to different sectors, firms and population groups. Finally, signs are emerging that the pandemic may cause some structural changes, although these are difficult to define at present. In this second phase, the economic policy response must combine two objectives: to support the recovery (which advises not withdrawing the support measures prematurely, as that would increase the risk of economic growth enduring more lasting harm); and to help the economy adjust to the post-pandemic scenario. 1 This extraordinarily complex setting also necessitates the definition of a reform agenda aimed at tackling our economy’s structural challenges, which have become more pressing with the crisis. Lastly, nor should we forget that, after the pandemic, we will have our highest level of public debt in many decades.

The key policy rate is set with a view to keeping inflation close to 2.5 percent over time without triggering excessive fluctuations in output and employment. Monetary policy also seeks to be robust and take into account the risk that financial imbalances in the economy build up. Even though the objectives differ, both of these instruments work through banks’ responses. The level of the countercyclical buffer may therefore affect the conduct of monetary policy. Increased buffer requirements may induce banks to increase their lending margins or restrict access to credit in other ways. Tighter lending growth curbs economic activity and inflation. This suggests, in isolation, a lower key policy rate. Other developments in the economy may amplify or dampen this effect. Although increasing lending margins in isolation point towards a lower key policy rate, a period of strong economic expansion, with prospects for high inflation and a risk of a build-up of financial imbalances, might indicate that the key policy rate should be raised while at the same time tightening capital requirements for banks. Conversely, in a sharp downturn with higher bank losses, it may be appropriate to reduce both the key policy rate and the countercyclical buffer. Chart: Credit cycles and business cycles in Norway Having more economic policy instruments available can make it easier to achieve several objectives at the same time. But the countercyclical capital buffer is not a new stabilisation policy instrument on par with monetary policy.

Ardian Fullani: Recent developments in the Albanian banking system Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at a meeting organised by Raiffeisen Bank with business representatives and its major clients, Tirana, 14 June 2011. * * * Dear Minister of Finances, Dear Mr. Lennkh and Mr. Hodell, Dear Mr. Canacaris, Dear Ladies and Gentlemen, Today’s meeting organised by the Raiffeisen Bank with the business community is very significant. Firstly, it shows a well-defined strategy of the Raiffeisen group to increase its market share in Albania through dialogue with business partners. Secondly, such forums serve also as a platform to generate development ideas and projects of national, and why not, regional importance. Thirdly, I think that today’s meeting is indicative of the maturity and rising awareness of the banking system and the business community. Personally, I would wish that such meetings be intensified in the future: they should also be more structured, oriented towards a constructive debate, and involve the entire system and all sectors of the economy. In short, banks and businesses need to sit together for the best. Dear Ladies and Gentlemen, We are in mid-2011 now, which is a complex year in terms of its challenges for objective reasons owing to the international financial dynamics of the past 3–4 years. Whilst our economy has posted positive growth, it continues to operate below its potential. The international setting is filled with uncertainty for a group of advanced economies, while agricultural products and raw materials prices remain high.

As president Trichet explained in the press conference following the April policy meeting, there were arguments on both sides. We took the decision not to rewiden the interest rate corridor to its normal size at the April meeting. However, going forward, I would argue in favour of normalising the width of the corridor sooner rather than later. In my view, it is increasingly harder to justify the non-standard width of the corridor as time goes by. I don’t think there is any mechanical link between the decision as to when to phase out specific non-standard measures that have been introduced during the crisis. Q. On bond buying programme. What is your point of view with Greece, Ireland and Portugal being in the hands of the EU and IMF? Does it give rise to the need for the ECB to intervene? It is increasingly hard to justify the continuation of the SMP in light of the fact that it was introduced in order to alleviate some of the dysfunction in the monetary policy transmission mechanism in some markets, and I do not think that those conditions hold at the moment to the same extent. Q. Do you think it should be stopped completely or just be there in case the need arises again? The mere presence of the programme, even if no purchases at all are made for a very long time, can be a stabilising force in the markets in case additional tensions appear on the horizon.

We have seen a spike in borrowing costs in past few days. Do you believe that this debate about restructuring can become a selffulfilling prophecy? In the case of a euro area member state, and Greece is a euro area member state, talk of restructuring cannot become a self-fulfilling prophecy in the same sense that could have been the case for other countries that are not part of the European Union. The reason for that is very simple; in the European Union a member state can count on political support and solidarity from other member states. It would take a political decision against supporting a member state in need in order to force a restructuring in the sense you describe. So in my view, to the extent the Greek government continues to implement the programme of structural reforms that it is implementing right now, and to the extent that it recognises that a restructuring would be undesirable and unnecessary, then restructuring can be avoided so long as the Greek government enjoys the support of other member states in the European Union. Under these circumstances the support from other member states is critical. BIS central bankers’ speeches 3 Q. Greece is expected to go back to the markets next year. Do you think this could still happen or do you think there is a need to extend the programme? I think this will be evaluated as time goes by.

Two priority areas: That evolving regulatory approach is underpinning our approach to two pieces of policy I know are of keen interest to BSA building society members – Basel 3.1 and our Strong and Simple regime for smaller firms. 13 UK Deposit Takers Supervision: 2023 priorities (bankofengland.co.uk) 14 The regulatory foundations of international competitiveness and growth − speech by Vicky Saporta | Bank of England Bank of England Page 7 Basel 3.1 In keeping with what I have set out, the PRA’s proposed approach to the Basel 3.1 standards15 maintains high levels of resilience and is aligned with international standards that we helped shape. The standards constitute a comprehensive package of measures that make significant changes to the way firms calculate risk-weighted assets for the purposes of calculating risk-based capital ratios. The proposed changes will make firms’ capital ratios more consistent and comparable. But we also need to make sure that the new rules work effectively, and in line with our objectives, both for banks and building societies. That is why we stressed in our recent Basel 3.1 CP that it was very much an open consultation and that we welcomed evidencebased analysis and feedback to help shape our final rules. Input from both the BSA and its members is core to that, and we are grateful for the feedback you have collectively and individually given.

Private consumption has been enhanced by wage growth and a low unemployment rate. However, it must be noted that while consumption of non-durables and services has remained relatively stable, durable goods consumption has recovered, partly due to the appreciation of the peso during the last year, and the necessary replenishment of inventories following several years of weak growth and even contraction. Something similar is observed with gross fixed capital formation in machinery and equipment. Excluding the purchase of non-regular transport machinery, this component of investment has improved in recent months. 8. In our baseline scenario, gross fixed capital formation will experience a slightly positive growth in 2017, after three consecutive years of contraction. A key factor in the negative figures we have seen the last few years is the end of the mining investment cycle, which reached its peak in 2012. More recently the deterioration of housing construction has added, as the boom triggered by tax incentives finished and a modification of loan-to-value norms reduced home sales. Going forward, our forecasts rely on an increase in non-mining and non-residential investment (mainly machinery and equipment). While mining investment will eventually return to positive territory during 2018, the gradual adjustment in residential investment is expected to continue during the following quarters (figure 5).

The credibility of the inflation target must be preserved The Riksbank has been criticised for explicitly using the policy rate for a short period after the global financial crisis to try to counteract the build-up of financial imbalances.32 For a few years after the outbreak of the global financial crisis, the Riksbank and other forecasters were able to observe that inflation had not risen in the way they had expected; from 2010 until the middle of 2014 inflation had been steadily below target. Long-term inflation expectations had also started to fall and there was a risk that the role of the inflation target as a benchmark for price and wage formation would be weakened. In other words, the credibility of the inflation target was being lost. Critics of the Riksbank's monetary policy said that this was because monetary policy had "leaned against the wind". More recently, the criticism has tended to be the opposite and focused on the Riksbank's expansionary policy in the years after this, when inflation was below the target. The Riksbank has then been criticised for monetary policy having focused too much on inflation, being too expansionary and leading to the build-up of imbalances. When the Riksbank takes financial stability into account in its monetary policy decisions, this can mean that the target horizon is shifted, and then it is not surprising that both inflation and inflation expectations can be affected. This need not be a problem as long as it applies for a shorter period of time.

Banks are important Banks are of fundamental importance to the national economy; without them, households and businesses would struggle to make payments. Virtually all payments today depend on various services provided by banks. Without banks, households and firms would also find it difficult to borrow and manage their financial risks. Traditional theory often talks about the three key functions of banks: first, to intermediate payments; second, to allocate credit in the economy, thereby transforming liquid deposits into illiquid loans; and third, to facilitate risk management by households and firms. A well-functioning banking system is therefore a key driver of economic growth. Since the liberalisation of the financial markets in the 1980s, the financial sector has also become more efficient and this has contributed to increasing welfare in many countries, not least in Sweden. At the same time, the risks have increased as the financial sector has grown.3 The unease we have seen during the spring emphasises what I noted earlier, that monetary policy and financial stability are interdependent. I will return to monetary policy shortly, but given the developments during the spring, it is natural to start with the bank problems we have seen and what they mean. Banking involves risks What happened in the United States and Switzerland in March shows once again that banks' activities pose risks to the whole economy. This is nothing new. The risk of bank runs is well known. Such events have occurred many times in history.

Safeguarding the credibility of this goal is crucial for monetary policy to be an effective tool that not only succeeds in keeping inflation low and stable but also helps to reduce the volatility of output and employment. Now I would like to take a look at recent macroeconomic developments and their implications for the conduct of monetary policy. From the high inflation to the great recession In the early part of the past decade we enjoyed relative quiet in the macroeconomic front. Inflation moderated across the world and the economies resumed their trend growth rates. There were some tensions here and there in the region, a mild recession in the U.S. when the tech bubble burst, but the years were generally calm. However, towards 2007–2008 we were hit by an unusual price shock in foodstuffs and oil that triggered a significant increase in inflation around the world (figure 2). In Chile, this shock was visible only in the inflation of foods and fuels because core inflation was contained (figure 3). The Bank hardened monetary policy, but the unusual transmission of said prices to the rest of the economy caused inflation to deviate largely from the target. Several reasons explain the unusual propagation of this inflationary shock to other prices. The economy was operating with narrow or even negative output gaps. The cost pressure this generated combined with the effects of the oil price increase on the cost of electricity (figure 4). Meanwhile, as the crisis incubated, the exchange rate depreciated.

The weakening of the US currency resulted in a further decrease in the dollar’s share of foreign currency reserves. Recently, in an effort to prevent the dollar’s share from dropping too low and with a view to rebalancing, we bought dollars again on a number of occasions. Furthermore, as part of the 2004 strategy, the proportion of government bonds was also reduced in favour of other borrowers’ bonds. The required minimum rating for bond investments was lowered from A2 to BBB, thus covering the entire “investment grade” range. Corporate bonds have now also been added to the National Bank’s investment universe, albeit only those of foreign companies. Currently, roughly 4% of both foreign currency reserves and free assets are invested in corporate bonds. The credit quality of all our investments is still very high. Borrowers with the top rating AAA account for over 70% of the investments. Close to 20% bear the AA rating. The remaining investments have an A or a BBB. The average residual maturity (duration) of all bonds held by the National Bank was kept at 4-5 years. The first investments in equities issued exclusively by foreign companies will be made at the beginning of 2005. The addition of equities and corporate bonds is likely to improve the degree of diversification of the investments and will contribute to the achievement of slightly higher returns in the medium term. The main difference between the investment structures of foreign currency reserves and free assets is their currency profile.

Descending safely: Life after Libor ‐ speech by Andrew Bailey | Bank of England Page 3 While it is always the right choice to install the safety net to break your fall in the form of fallbacks, this shouldn’t be seen as a substitute for pre-emptive action, ensuring a sure footing on the descent. Active transition ahead of LIBOR cessation remains an important part of easing the gradient of that descent – it ensures contractual certainty and allows borrowers, lenders, issuers and investors to retain economic control over their contracts. GBP bond markets are again leading the way, as we have seen over 50 bonds with a value of around £ billion actively transitioned from GBP Libor to SONIA. [8] Where tough legacy contracts are able to take advantage of that safety net, for example in the form of the proposed synthetic Libor we should be clear that this a temporary solution. [9] Supervisory engagement will continue after the end of this year to ensure regulated firms continue to manage that rump and move those exposures onto robust alternatives where that is possible. As those facilities re-new, in most case they should move to the most robust rate available, where we expect the most liquidity to be – in sterling that will be SONIA compounded in arrears. The use of forward looking term risk-free rates Let me now turn to the critical element of any journey – the destination. The reference rates the market transitions to are important choices.

And while they may remove the reliance on expert judgement, they veneer over the fundamental challenges of thin and incomplete markets through the extrapolation of data. The ability of such rates to maintain representativeness through periods of stress remains a challenge to which we have not seen adequate answers. Developments in sterling markets So what is the position in sterling markets? Back in 2017, a reformed SONIA rate was recommended by the Working Group on Sterling Risk-Free Reference Rates (RFRWG) as the alternative risk-free reference rate to sterling Descending safely: Life after Libor ‐ speech by Andrew Bailey | Bank of England Page 2 Libor. This was in my view a good choice reflecting the liquid and active markets upon which it is based. This makes it inherently more robust. Since then, the RFRWG and UK authorities have co-operated on recommending a series of industry milestones to build liquidity in SONIA. These milestones have been positioned ahead of the cessation of sterling Libor at the end of this year. We don’t apologise for this – it is focussing attention, and providing a clear roadmap to support the development of deep and liquid markets in robust alternatives to Libor and facilitating a smooth transition. In line with the RFRWG milestones, alternatives to GBP Libor should have been offered to borrowers since the start of October last year.

But as far as other durables are concerned, the pace of new buying has meant that the stock of them, relative to income, has been rising and is now significantly above average. This suggests that the current pace is unlikely to be maintained indefinitely (there are only so many cars and cookers you need). Chart 10. Shipping congestion has intensified in recent months though cost down a bit 80 Dollars (thousands) Days 75 70 Chart 11. In the UK, recovery of consumer-facing services output suggests demand is rotating back, but some sectors lag behind Per cent change on 2019Q4 20 Average number of days (lhs) 18 Average freight rate (rhs) 16 14 65 12 60 10 55 8 6 50 Retail goods Hotels and restaurants Travel 4 45 40 Nov 18 2 Nov 19 Nov 20 Nov 21 Average number of days: end-to-end (factory to warehouse) shipments between China and the US. Average freight rate: shipments from China/East Asia to North America West Coast. Sources: Freightos.com and Freightos Baltic Index. Jan 20 Jun 20 Nov 20 Apr 21 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80 -90 -100 Sep 21 ‘Retail goods’ series is retail sales in volumes. The other series are output measures. Sources: ONS and Bank calculations.

Dec 19 Jun 20 Dec 20 80 Jun 21 Sources: OECD Quarterly National Accounts, IMF World Economic Outlook and Bank calculations. Across the advanced economies in aggregate, spending on services in first quarter of the year was 5% lower than at the end of 2019; spending on goods was 5% higher (Chart 7). Shifts in demand happen all the time and, as long as supply can shift in response, they needn’t have any impact at the macro-economic level. But this one was far larger, more widespread and occurred much faster than most. And, far from shifting in response, and meeting that extra demand, the pandemic meant the global supply of goods was actively impaired. Local lockdowns affected production in many Asian countries and effective capacity in shipping and other forms of transport was also hit. Earlier this year my own guess was that these things would visibly start to reverse by the end of it. Because they were caused by the pandemic it was reasonable to expect the shifts in demand to reverse, and the problems in supply chains to abate, as vaccinations took effect. As yet it’s clear that hasn’t happened to the degree that I, at least, expected. Shipping costs remained very high throughout the autumn; as we’ve seen, energy (and particularly gas) prices took a huge lurch upwards; at the retail level there is no sign yet of any deceleration in goods prices.

Svein Gjedrem: Inflation targeting Address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the seminar on foreign exchange policy issues arranged by the Association of Economists, Gausdal, 31 January 2003. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 22 January and on previous speeches. Please note that the text below may differ slightly from the actual presentation. * * * The Norwegian economy exhibited strong growth from 1993 until 1998. This recovery brought the economy out of recession into a period of high economic activity. Mainland GPD and consumer prices Percentage change on previous year 6 6 5 5 Mainland GDP 4 4 Consumer prices 3 3 2 2 1 1 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Statistics Norway SG Gausdal 31.01.03 Growth in the mainland economy in the 1990s averaged over 3 per cent. Inflation was low and stable at around 2½ per cent annually, while it was higher than 8 per cent in the 1980s.

Developing as an invoicing currency, for instance in energy markets or in the context of free trade agreements, would be important steps to gain a global role.viii Indeed, it would create the need to store euros for future trades, and consequently lead to the development of a full range of euro-based financial tools. 3. Safeguarding cross-border payments by technological advances in international financial infrastructures The euro area should remain on the frontier for cross-border payments, including the G20 agenda adopted in October 2021. The G20 roadmap for 2027 has indeed committed to bring profound improvements in this area including in setting ambitious targets on costs, speed, and accessibility of cross-border payments. But the challenge for all the stakeholders, central banks, regulators as well as the private sector, is to deliver and ultimately meet the expectations Page 7 sur 7 of end-users. This remains a strategic priority for the Banque de France, which in parallel has paved the way for a more prospective solution: namely a wholesale CBDC that could be issued by the Eurosystem, deploying experiments such as the Jura project of cross border wholesale payments in coordination with the BIS and the Swiss National Bank. ** In the 1960s, US Secretary of Treasury Henry Fowler warned that "Providing reserves and exchanges for the whole world is too much for one country and one currency to bear." ix To Fowler, we answer: “We in the euro area are happy to help.” I thank you for your attention and I wish you a good forum.

1.1 External environment and financial conditions The forecasts are produced drawing on information that characterises the context of the Spanish economy (in particular regarding the international environment and monetary and financial conditions) (see Table 1). According to these assumptions, the expected course of activity in and imports from the main geographical areas with which Spain trades were revised downwards over the course of 2018. The resulting growth rates for Spain’s export markets in 2019 were estimated at slightly over 3%, a similar rate to that forecast for 2018, but significantly lower than that observed in 2017. The price of oil per barrel is expected to stand below $ on average in 2019, 6% less than in 2018. Finally, I should stress that borrowing conditions for households and firms are expected to remain easy. Allow me to go into greater detail on some of the above. Regarding the international environment, the world economy admittedly ended 2018 maintaining a broadly expansionary course. But the signs of an across-the-board slowdown are evident, albeit more marked in some regions than in others. Largely, this is in response to the partial materialisation of certain focal points of uncertainty, assailing the world economy since early last year. These include most notably the trade tensions between the United States and China, the uncertainty over the terms of the United Kingdom’s withdrawal from the European Union (EU) and some tightening of global financial conditions.

Zeti Akhtar Aziz: Developing a strong and dynamic SME sector Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Launch of SME Credit Bureau, Kuala Lumpur, 16 April 2009. * * * Introduction It is my pleasure to be here this morning to speak at the launch of the SME Credit Bureau. The development of a strong and dynamic SME sector is a priority on our national agenda to promote a vibrant and active SME sector that will contribute towards generating a sustainable and balanced economic growth. Malaysia has therefore adopted an aggressive SME development programme to strengthen the viability and capacity of the SMEs to increase their contribution to high quality growth of the economy. Over the recent five years, the SMEs contribution to economic growth has increased. Indeed, the SME contribution to economic growth in the manufacturing sector has increased from 6% of real gross domestic product in 2001 to 8.4% in 2005. The overall SME contribution to the gross domestic product has increased to 32% while 19% of total exports are by SMEs. Experience has shown in several of the developed countries, that SMEs contribute to at least half of the gross domestic product. Benchmarked against this, there is clearly a significant potential for SMEs in Malaysia to increase their contribution to the economy. Economic outlook and policy response The year 2009 is likely to be a difficult year for businesses.

One obvious concern would be if a prime broker or clearing bank was paralysed, including for reasons unconnected to its activity in fast markets – say because of a cyber attack. I think it is fair to say that our understanding of how market functioning would respond in such a scenario – i.e. one in which a number of, in particular high-frequency, liquidity providers were denied market access – remains relatively limited. If there is a common theme across all three of my examples, it is the limits of our understanding. None of the points I have raised with regard to market resilience are wholly new. We at the Bank are following developments in the structure of these markets and their implications for financial stability closely, 19 including through discussions within the Bank’s Financial Policy Committee (FPC). And as regulator both of many participants in electronic markets and some of those markets themselves, the Financial Conduct 19 See, for example, Shafik, M (2015), ‘Dealing with change: liquidity in evolving market structures’ and the analysis of the sterling flash crash in box 3 of the Financial Stability Review, November 2016 (pages 39-41). 8 All speeches are available online at www.bankofengland.co.uk/speeches 8 Authority (FCA) too has remained deeply engaged and responsive to those developments which fall under its purview. 20 Likewise, in none of these cases have I argued that there is a risk flashing red that requires an immediate response.

Ladies and Gentlemen, The adoption of a principle-based regulatory approach will provide banking institutions with greater flexibility in deciding on strategic options in a more competitive environment. As the banking industry grows at an accelerating pace, there are common areas where collective efforts by the industry will not only bring benefits to the financial sector but also to the overall economy. In this regard, there is an increasing trend among developed countries such as the United Kingdom, Canada, and Australia, where the bankers associations have an important role in spearheading initiatives to promote high standards of ethical code of market conduct to meet consumers' rising expectations and demands. The bankers associations have increasingly assumed the role as a focal point for consultation with not only the regulatory authorities, but also by the other stakeholders on policies affecting the financial sector. In this respect, such associations have played an important complementary role to the regulatory authorities' efforts in promoting a more progressive, dynamic and resilient banking system. In addition, banking associations in these countries have also acted as the voice for the industry in articulating the position of their members to promote the interests of the industry. In Malaysia, there are several areas of common interest to the industry which the associations can spearhead. It is, therefore, to the benefit of the industry to reassess the role of the associations with respect to taking forward common initiatives and interests of the industry.

Rodrigo Vergara: Chile – economic outlook Speech by Mr Rodrigo Vergara, Governor of the Central Bank of Chile, at seminars held during the Annual Meeting of the Inter American Development Bank, Montevideo, Uruguay, 12 March 2012. * * * I thank Luis Oscar Herrera, Enrique Orellana and Tatiana Vargas for helpful comments. I would like to thank you for inviting me to present our views on Chile’s economic situation at this Conference. These last years have been particularly challenging for policymakers worldwide. Periodically we must make decisions in an uncertain environment, weighing the costs and risks of alternative scenarios. For this reason, we welcome opportunities for meetings and discussions such as this, as they allow us to communicate our views in greater detail, as well as to hear other opinions. A better understanding of our decisions strengthens the effectiveness of our policies. More than four years have elapsed since the onset of the financial crisis that triggered the Great Recession. Nonetheless, we are still handling its legacy, experiencing periodic episodes of financial stress that will likely continue for some time. The situation in the Eurozone is complex, due to the interaction among fiscal, financial and macroeconomic vulnerabilities. From a historical viewpoint, growth perspectives for developed countries are weak. The outlook for emerging economies is noticeably better, although we are witnessing a slowdown whose pace is difficult to assess, particularly for China.

But, whatever may be the reasons behind these failures, the challenge that we now face is as to how to manage risks optimally in this even more challenging environment, knowing that the opinions provided by the rating agencies may not be too accurate, after all. 5. Let me now highlight another couple of recent developments. One such development is the greater significance of the sovereign wealth funds in the context of the phenomenal rise in reserves in non-Western countries. In the midst of the recent sub prime crisis, these funds have injected significant amounts of long term funds to the large ailing institutions to resurrect them or to prevent them from continuing with poor financial health. In that sense, the sovereign funds have acted as an immensely useful stabilizing force during the financial crisis. However, the injection of such funds has been received with mixed feelings in the geo-political context. I would think the debate on this development is just beginning and it would be useful for all of us to carefully watch the movement of this issue in time to come. Another important development in reserve management is the extensive use of external fund managers. External fund managers are being increasingly engaged by central banks, as many central banks are yet to acquire the technical skills and competencies required to manage the new asset classes that are developing in these dynamic market conditions.

Changes in the nature of financial intermediation have also played a role in improving the overall resilience and performance of the U.S. financial system that was evident in this latest period of economic recession and financial stress. Four different types of changes are particularly important. • Innovation in financial technology continues to expand the opportunities for financial institutions to separate and distribute, and to manage and hedge, different types of risk. • The increasingly greater role played by the capital markets in the financial intermediation process relative to banks - both relative to the past and compared with most other major economies - has improved the capacity of our system to handle stress. Loans and securities held by commercial banks today account for less than 20 percent of overall U.S. credit market debt, roughly two--thirds of their 1975 levels. • The increases in the sophistication of risk management techniques and enhancements to risk management processes have delivered substantial improvements in how banks and other financial institutions actually manage risk in practice. Banks, for example, have aligned their pricing of credit products much more closely with credit risk. • The increased scale of cross-border financial intermediation, the growing role of securitized financial instruments in those overall flows, and the growth in the size and breadth of financial institutions with global operations may also mean that, as shocks are transmitted more rapidly, they are diffused more broadly. These are positive developments, and they are likely to be enduring.

The rate of economic growth outside the United States is also looking better. Although there are pockets of weakness and potential sources of vulnerability, the overall rate of global growth has accelerated significantly and looks as if it’s now running at the strongest levels in four years. The broad measures of U.S. consumer price inflation are very low. Inflation expectations as reflected in surveys and in the Treasury inflation-protected securities, although higher than current rates, still suggest an outlook of very modest future price increases. Deflation risks worldwide appear to have diminished, and there are some signs of accelerating price increases in some economies. Overall, however, despite the sharp increases in energy and commodity prices, the inflation outlook globally appears quite benign. At the core of the U.S. economic experience of the past decade is a significant and sustained acceleration in productivity growth. This offers the prospect of more rapid growth in income over time, both for the United States and for the rest of the world. In the economics profession, there is a debate about whether we are in the midst of a secular trend characterized by lower GDP volatility and general price stability, which some have called the “great moderation.” As important as the question of the extent of this moderation in macroeconomic volatility is the debate over its source. It’s undoubtedly the result of a combination of factors, including better economic policy, innovation and globalization, plus simple good fortune in the form of smaller shocks.

Further, non-standard measures – most recently, the Outright Monetary Transactions (OMTs) – have significantly contributed to an improved euro area financing environment, mainly stemming from an improvement in financial market sentiment and an alleviation of vulnerabilities affecting the supply of bank credit to firms and households. In addition, the OMTs announcement has helped to narrow sovereign spreads and to restore investor confidence. However, the ECB’s (non-standard) measures can only be temporary solutions. Most importantly, market participants have to continue their efforts to facilitate the transition to a less central-bank reliant, more market-based financial system, for which the ECB’s measures, as well as the recent progress concerning the Single Supervisory Mechanism, have hopefully laid the foundations. One market segment that suffered considerably during the financial crisis was the market for asset-backed securities (ABSs), the revival of which I consider essential for the provision of finance to the corporate sector. Given the restricted funding sources and elevated bank funding needs, a trend towards more disintermediation from larger corporate issuers has been observed in recent years, and this trend will most likely continue. By contrast, small and medium-sized enterprises (SMEs) are more dependent on their respective domestic banking sectors and are subject to tighter credit conditions than larger firms that have greater access to global financial markets. The question arises as to how these restrictions could be overcome. A reopening of the ABS market may be one way of enhancing funding conditions for SMEs.

The ECB also provided an opinion on the MiFID II proposal.5 As you know, the MiFID II proposal extends pre- and post-trade transparency requirements from equity instruments (MiFID I) to additional asset classes such as bonds, structured finance products, derivatives admitted to trading or traded on a regulated market, a multilateral trading facility or an organised trading facility and derivatives considered eligible for central clearing. The aim is to enhance price formation and to support the evaluation process of such instruments. The requirements cover pre-trade transparency – i.e. the provision of quotes and market depth to market participants ahead of a trade – and post-trade transparency – i.e. the timely publication of the prices and volumes upon trade execution. These mandatory transparency requirements represent a major change, especially for the fixed income market. For brevity, I will only address the issue of post-trade transparency. As we have known since the publication of the seminal work of the Austrian economist and philosopher Friedrich Hayek, prices reveal information that is dispersed among the numerous individual members of an economy. As a consequence, market outcomes are directly influenced by the time and degree to which prices and volumes are disclosed to the public. In reality, different markets are subject to different transparency regimes and disclosure requirements, which are a consequence of the existing heterogeneity among both financial assets and market participants.

Greater emphasis and clarity are needed as to the purposes and limits of public intervention, and the extent to which those interests warrant different degrees, modes, and timing of public and private sector involvement, depending on the particular country and circumstances. In this way all parties will be better placed to understand current developments and how the international community might react to future strains. The argument against standstills There are of course other points of view. I would note that some have suggested that perhaps we should go in a different direction, that we should seek to build time back in by calling a time out. In particular, it has been suggested that an early recourse to comprehensive payment standstills (suspensions of debt service perhaps amplified or reinforced by capital controls) would increase the manageability of crises and enhance predictability. My reading of the record convinces me that trying to freeze market processes would do the opposite. I would like to share with you my thinking on this point. • The desire for certainty and control which seems to underlie standstill proposals is understandable, as it offers the promise of using less public money, and seemingly entails less risk that creditors will be bailed out for poor credit decisions. But the control and manageability that might result may be more seeming than real. • For one, a perceived disposition to preemptively lock the door seems likely to send investors heading for the exits all that much sooner.

Of course at the Banque de France we are all the more impressed by the reactions and the demonstrations since we suffered a loss ourselves … … Bernard Maris, the economist and journalist, was one of your board members. C.N. Yes, it was a horrible shock for us. Bernard Maris was a man of culture and tolerance, a free spirit and he was murdered because of his ideas. It is a huge loss for all of us. Do you see any economic consequences from these attacks? C.N. I do not think they will have significant economic consequences. Before the attacks everybody was looking towards Greece. Could the elections of the 25th trigger a new round of crises in the euro area? C.N. In my view the risks of a crisis for the euro area are much lower than a few years ago. Greece has clearly taken a path of reforms and restoration of its competitiveness. It is in the interest of Greece to continue following that path and to benefit from an accelerated improvement in their recovery. The second point is that we have built many significant defences against the risk of crisis and destabilisation in Europe. What is the scope for a more lenient policy in Greece or even for debt restructuring? C.N. We all know that the debt level of Greece is very high. The programme of the Troika foresaw a decrease in the debt ratio in the years to come.

Paul Tucker: A perspective on recent monetary and financial system developments Speech by Mr Paul Tucker, Executive Director and Member of the Monetary Policy Committee of the Bank of England, at Merrill Lynch Conference “A perspective on recent monetary and financial system developments”, London, 26 April 2007. * * * Global monetary and financial stability The past year or so has been marked by resilience in both the global economy and the international financial system. World growth has been robust. On average, headline inflation across the industrialised world has remained contained. Capital markets have, so far, weathered the gradual withdrawal of monetary accommodation in much of the G7, and also a series of specific disturbances, without destabilising spillovers. In short, the world has enjoyed a further period of monetary and financial stability. Against that background, banks and dealers have posted fairly remarkable profits, accumulating more capital resources; and the (risk-unadjusted) returns of the fund sector – and so probably for most of you here today – have been healthy. There are, for sure, wrinkles in this picture, including here in the UK. But overall it is probably not what most commentators would have expected given that oil prices have more than doubled over recent years. For financial markets, it has surely been important that such a large cost shock has not led to a pronounced rise in global inflation, dislodging medium-term inflation expectations, and so prompting industrialised country monetary authorities to slam on the brakes.

Thirdly, if we “no longer know where the risk is”, that implies that it has been dispersed beyond the regulated sector. One might think that was a Good Thing. To take an extreme scenario, if risks were widely and evenly distributed across savings institutions internationally, a very nasty shock causing a sharp fall in asset markets would not obviously destabilise the financial system. It would obviously have macroeconomic consequences, by depleting household wealth and raising the cost of capital for firms. Other things being equal, central banks could respond by adopting an easier path for interest rates than otherwise, in order to maintain aggregate demand broadly in line with aggregate supply, with the objective of keeping inflation in line with explicit or implicit targets. Although the original shock may be nasty, the response would be the routine use of the routine instrument: the price of central bank money. There is no question of a so-called Greenspan (or any other kind of) “put” here; the focus would be not asset prices, but the outlook for spending in the economy and so inflation. This is obviously rather different from a similarly nasty shock producing severe disorder in a banking system that was carrying unduly concentrated exposures of some kind. For a central banker, banks matter because their liabilities are used as money, they are at the centre of the payments system, and they carry an associated asset/liability maturity mismatch. 6 Banking system distress is therefore typically characterised by a liquidity run.

Once deposit interest rates began to vary with market rates, the demands for M1 and M2 - the primary guides to monetary policy - became unstable. So, by the early 1980s, the Fed had de-emphasized M1. And by the mid-1980s, M2 had met the same fate. In the 1990s, we continued to establish annual ranges for these aggregates, as we were required to do by law, but they played almost no role in our deliberations. The legal requirement to set ranges expired this year, and in late June we decided to stop setting ranges. This step was taken with some reluctance, because using interest rates as the main policy tool does pose well-known dangers. But in the absence of reliable monetary aggregates, the Fed has operated reasonably well in an environment of significant ongoing financial deregulation and sizable financial shocks. Let me give you some examples. In terms of deregulation, barriers to interstate banking were eliminated, and recently a new financial modernization law allowed depositories to expand into activities like insurance and investment banking. In terms of shocks, we dealt first with the so-called credit crunch in the late 1980s - which was due in part to the collapse of many savings and loans - then with the turmoil set off by the Asian currency crisis in 1997-98, and finally with the unexpected runup in equity values in the second half of 1990s.

Preventative mitigation is obviously very important, but having impact tolerance means acknowledging that disruptive events will happen, and that firms need to be able to recover within their set tolerance. I’m talking about planning for scenarios that are severe but plausible – we expect firms to be resilient against a wide range of scenarios, but not against Armageddon. I think it likely that the ordering of these impact tolerances between firms and the PRA will often be the opposite way round from capital. On capital, inserting the public interest means that as a general matter we will require firms to hold more capital than they would if left to their own devices – hence, a battleground. For operational resilience, a firm is likely to experience significant private costs – for instance, impact on their profits or damage to their brand – before their safety and soundness is at risk. The exception to this may be a subset of operations whose failure might pose a systemic risk to financial stability. But in most cases, I think interests are likely to be aligned – we all just need to get better at managing this set of risks, as some recent events have illustrated all too painfully. In this context, I will expand briefly on the PRA’s particular focus in this important area. Our general statutory objective is safety and soundness, with policyholder protection on the insurance side and a secondary objective to facilitate competition.

What will the default rate be once demand growth slows? What is the appropriate correlation rate in terms of the loss experience across the different subprime and Alt-A mortgage pools that should be used in assessing the value of collateralized debt obligations? How are such correlations likely to differ in the boom versus in the bust? This uncertainty means that policymakers can never be sure about the existence, size or persistence of an incipient asset bubble. As a result, this task of dealing proactively with bubbles will be very difficult! So what should the policymaker do? I think the first step is for the policymaker to work hard to investigate what is generating the sharp rise in prices for the asset in question. Sustained price increases are a symptom of changes in demand and supply. The policymaker needs to develop a perspective about whether these demand and supply changes are realistically sustainable to the extent implied by market prices. In particular, carefully analyzing the assumptions that underpin sustained increases in asset prices – which might be symptoms of a bubble – and considering the risk that these assumptions might be wrong is important. Also, looking carefully at the dynamics of the system on which the beliefs are based may be useful. In particular, are the dynamics of the system reinforcing or dampening? If the dynamics are reinforcing, then there is greater likelihood of an asset bubble.

A key question for the future is this: do notification and memo-posting suffice, so that funds actually move at discrete times in the day, as they do in the UK, or do funds need to move in near real time as well? 2 BIS central bankers’ speeches In the near term, we in the Federal Reserve continue to work to reduce the time required to complete payments and deliver payments-related information in the channels in which the Fed operates. The debate to be had by the industry is whether our existing payments mechanisms can meet the needs of the future or we need to embark upon designing a next generation payment instrument. We welcome your voice in that debate. Let’s turn our focus to end-to-end efficiency in the payments system. Innovation is occurring in closer proximity to end-users, at points between payment providers and their customers, and between merchants and consumers. Enhancing efficiency will mean moving business-tobusiness (B2B) and person-to-person (P2P) payments from paper to electronics, and bringing down the end-to-end cost of initiating and receiving payments. Efforts will continue by Internet/Web vendors to create customer-facing technologies to help users initiate payments. Here’s where mobile and handheld innovations may play a large role. In what form, and when, growth occurs will depend on when alternatives offer the speed, convenience, simplicity and other advantages that drive broad adoption.

With the introduction of the Stock and Bond Connects, the cross-boundary infrastructure linkages between the clearing houses of the two markets have become the critical foundation on which cross-boundary transactions can be efficiently cleared and settled. The Central Moneymarkets Unit (CMU) operated by the HKMA is now linked to the Mainland central securities depositories (CSDs) on the one hand and the international CSDs (ICSDs) on the other. We have embarked on a multi-year enhancement programme to modernise the system to enable CMU to perform all functions required of an ICSD. Operating window will be expanded; a wider spectrum of corporate action services will be offered; and the system will enable the CMU to directly provide collateralised lending and FX services to nonbank participants. 19. Apart from these three factors, i.e. liquidity, product and infrastructure, which are essential to building a vibrant RMB offshore market in Hong Kong, I should add that supervisory collaboration is also important in this gradual opening-up process. Many of the initiatives to promote the international use of RMB will involve the opening up of the Mainland’s capital accounts. This must be done in a gradual and risk-controlled manner, which is why you often see quota and eligibility criteria in the initial stage of the Connect schemes. This kind of risk-control features requires the close collaboration between the HKMA and our Mainland counterparts. Through such collaboration, we seek to ensure that Hong Kong is a safe and reliable platform to take forward these new cross-boundary initiatives. 20.

I find relevant what Agustín Carstens, General Manager of the BIS, said in his lecture held at the London School of Economics in May 2019: “The textbook version of the inflation targeting framework, which prescribes pursuing inflation stability with floating exchange rates through adjustments of a short-term interest rate, is obviously too narrow for EME central banks. In particular, the financial channel of the exchange rate gives rise to difficult trade-offs for monetary policy, while at the same time complicating the conduct of monetary policy by weakening its transmission. EME central banks have risen to this challenge through their innovative use of additional policy instruments. They have turned to FX intervention to deal directly with the financial channel or insure against undesired exchange rate swings, and to other non-orthodox balance sheet policies as well as macroprudential tools to deal with specific imbalances or vulnerabilities in a targeted way.” Not only that I share his view, but I have to say that, in Romania, we started practicing what he speaks about now even before the outbreak of the global crisis. We resorted to forex interventions in order to mitigate the exchange rate volatility and we took prudential measures to contain excessive growth of credit (of forex lending in particular). The IMF mentioned the NBR as being among “the pioneers” of what was later referred to as “macroprudential instruments".

Even though changes in the krone exchange rate do not influence the GPFG’s international purchasing power, the fall in the fund’s value may have been perceived as less dramatic as a result. Equity markets have not always rebounded after a steep decline as rapidly as after the 2008 financial crisis. The chart shows developments in a global equity index in the period after the dotcom crash in 2000. From the peak in winter 2000 to the trough in winter 2003, equity prices plunged at the fastest pace since the early 1930s. Fluctuations in the krone exchange rate amplified the fall in the GPFG’s value measured in NOK. The value of the GPFG at the beginning of 2003 was 30 percent lower than assumed in the National Budget for 2002. Investors buying equities in Japan’s equity market at the end of 1989 experienced even more dramatic developments. The market fell and stayed there. The value of the shares traded on the Tokyo Stock Exchange is still no higher than the 1989 levels. From being the largest in the world in 1990, accounting for almost 40 percent of global market capitalisation, Japan’s equity market now accounts for less than ten percent. However, it is important to remember that these developments apply to only one country. Global equity markets in general have shown completely different developments since 1989. 2/6 BIS central bankers' speeches What can we learn from these crises? The first lesson is that crises will occur.

Arnór Sighvatsson: The logic behind the capital account liberalisation strategy Speech by Mr Arnór Sighvatsson, Deputy Governor of the Central Bank of Iceland, at a meeting of the Iceland Chamber of Commerce, Reykjavík, 15 December 2011. * * * Ladies and gentlemen On 25 March 2011, the Central Bank published a capital account liberalisation strategy allowing for removal of the capital controls in two phases. Phase I would focus on channelling unstable króna assets, particularly those held by non-residents, into the hands of investors willing to take a long-term exposure on the króna. In Phase II, other controls would be lifted. The strategy is relatively terse as regards Phase II, as a number of things could change before it can be launched. As a consequence, Phase II will be drafted in greater detail at a later stage. Therefore, in my presentation today, I will focus on Phase I and attempt to explain why the individual steps within it are being taken in the order specified in the strategy. The main problem the strategy is attempting to solve is lack of confidence: in the domestic economy, the currency, and the Government’s capacity to service its debt. Confidence between individuals and between firms, domestic and foreign alike, is a precious commodity whose true value is only realised when lost. The reason confidence plays such a vital role in the mechanics of the economy is that each party’s confidence depends on the confidence of all the others.

Our assessment is that the probability of this type of scenario is small at present, but that if it were to occur, the negative effects on the economy would be substantial. Given our inflation forecast and after taking into account other factors, the Executive Board’s assessment is that it is reasonable to continue gradually raising the interest rate. At the same time, it is important to emphasise that we are easing up on the accelerator, not putting on the brakes. Monetary policy is still expansionary, which is clear from a historical comparison of repo rate levels (diagram 4). Even in an international comparison, it is clear that Sweden’s key rate is still very low. The link between interest rate decisions, house prices and household debts There have recently been claims that the Riksbank’s decision to raise the repo rate was largely because we have been concerned over house prices and increased household indebtedness. This is not the case. I would like to argue that the decisions to raise the interest rate now and in January are primarily justified on the traditional basis of inflation prospects two years ahead. Inflation has been assessed as being close to the target level a couple of years ahead, given gradual increases in the repo rate. We have therefore chosen to raise the repo rate. Our monetary policy considerations have of course taken into account considerations related to risks linked with house prices and the build-up of household debt. House prices affect demand through households' decisions regarding saving and consumption.

Given the effects of monetary policy normally assumed, the difference in inflation and employment would have been marginal. For monetary policy to bring inflation much closer to the target level, a radically different policy would have been necessary. For instance, the Riksbank would probably have needed to cut the repo rate quickly and substantially a couple of years ago rather than making the gradual cuts that were implemented. It would have been difficult to justify this type of monetary policy given the view of economic prospects at that time. It is also clear that the monetary policy that was conducted has had a strong expansionary effect on the economy. For instance, GDP growth has been high. The expansionary monetary policy has also been evident in the rapid credit expansion in the household sector and the price increases in the housing market. It is doubtful whether it would have been wise to reinforce this development with even more expansionary monetary policy. Unfortunately, the strong growth has not resulted in a corresponding recovery in employment. On the contrary, the labour market has developed more weakly than might have been expected from a historical perspective, given the high GDP growth. To some extent this reflects the unexpectedly high BIS Review 12/2006 5 productivity growth. However, a reasonable explanation is that there are also problems in the labour market that are not cyclical. This is something that should be resolved by other means than monetary policy.

f. We expect insurers to have effective risk management and governance, including independent risk and internal audit functions; and boards with a majority of independent non-executive directors, for both insurance groups and significant insurance companies within those groups. g. Insurers must disclose their financial position regularly in some detail, based on market prices for assets and liabilities as far as possible. Our regime, however, is not seeking to eliminate all risk (or achieve the stability of the graveyard). Provided insurers match their assets and liabilities, the Solvency II Matching Adjustment insulates them from movements in the market price of assets backing annuity liabilities to which they are not 4 All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx 4 exposed as buy-and-hold investors. They are also able to bring forward into day-one profits any returns on these assets in excess of what is required to compensate for the risk of credit default and downgrade. That adds up to a powerful incentive to invest in long-term assets yielding good risk-adjusted returns. Since the introduction of Solvency II, UK insurers have responded by diversifying out of government and corporate bonds into direct investments in infrastructure finance, commercial real estate lending and equity release mortgages (Chart 3). The infrastructure investments, for example, include renewable energy, hospitals, student accommodation, social housing and railway rolling stock leasing (Chart 4).

Dear ladies and gentlemen, Safe and efficient fulfilment of the economy’s need for money, in terms of value and structure, and guaranteeing the confidence of the public in our currency, which is one of our main responsibilities, have been at the core of our efforts in preparing this new series. Therefore, I am very honoured to unveil today, for the first time, for the eyes of the public, this new series of banknotes. As the Governor of the Bank of Albania, through this symbolic signing, I open the doors for the first two banknotes of the new series to start their journey and circulate in the Albanian economy. In the hope that the new banknotes will be welcomed by the public, let me now present to you their design. I would also like to call on the public to handle banknotes with due care, in order to preserve their durability, quality and integrity. From 30 September 2019, the banknotes of the new series 200 lek and 5000 lek will be legal tender in the Republic of Albania and will be used as means of payment, alongside the existing banknotes. 2/2 BIS central bankers' speeches

These foreign currency sales lead to a reduction in sight deposits. We will also sell foreign currency in the future if this is appropriate from a monetary policy perspective. Conversely, we also Page 6/8 Zurich, 22 June 2023 Thomas Jordan, Martin Schlegel and Andréa M. Maechler News conference remain willing to buy foreign currency in the event of excessive appreciation pressure on the Swiss franc. Charts Chart 1 Table Page 7/8 Zurich, 22 June 2023 Thomas Jordan, Martin Schlegel and Andréa M. Maechler News conference Chart 2 Chart 3 Page 8/8

It is often said, even by supposedly responsible people, that the tools used by central banks all over the world to combat inflation will not work here in Iceland, not least because of the way globalisation treats small currencies like the króna, and because of how many investors, through the shelter afforded by globalisation, have the means to avoid the Central Bank’s thumbscrews. The cannons on Iceland’s coast guard cruisers were no weapons of mass destruction, and the difference in size between Thór and Aegir, on the one hand, and the British navy, on the other, was horrific, but we managed nonetheless. Of course, a reference to the Cod Wars is merely a metaphorical one, and I use it more or less in jest, as it doesn’t fully apply to the current situation. But the comparison between the Central Bank of Iceland’s tools and those of other central banks, which enjoy the relative security of a large currency, is worth examining. In the past few months, though, large currencies have not been protected from tremors, shocks, and even wide fluctuation. For example, the euro has appreciated by more than 70% from its weakest point against the US dollar, an enormous change in a relatively short period of time. The Icelandic króna has not been nearly so volatile despite all of the shocks it has had to tolerate. A volatile króna in a turbulent season tends to indicate that the króna is effective as a currency, and not the reverse.

I would also like to welcome Mr. Emil Stavrev, Deputy Division Chief, and Mr. Mariusz Jarmuzek, Senior Economist, both of them from the IMF European Department, who have contributed extensively to the report under debate today. Now, returning to the main topic: The National Bank of Romania has always valued the Regional Economic Outlook Report as it gave us a full and unbiased image of where we stand as compared to our peer countries. It has helped us to better understand the macroeconomic developments in our region and the interconnectedness/connections between our economies. The current report marks a turning point in our post-crisis economic history: We should take advantage of the improved economic context to focus on structural reforms needed to accelerate the real convergence and to raise Romania’s economic capacity in the long run. We need to preserve competitiveness and enhance the quality of public expenditure. We are all glad to see the global economy back on track and the European recovery strengthening. These results are even more encouraging, if we think back to 2010, in the aftermath of the crisis, when economists and policymakers started to really doubt our economies ever returning to business as usual. At that time it was believed that the new normal would come with secular stagnation, low interest rates and low inflation. Romania has secured a record growth of 8.6% in 2017/Q3. Nevertheless, we need to moderate our enthusiasm.

Finally, under the Title II resolution regime, the businesses and the franchise value of the subsidiary-level customer relationships will be maintained relative to a traditional bankruptcy proceeding, which in the past has often led to the liquidation of the bankrupt entity. As we saw in the case of Lehman Brothers, for financial firms, bankruptcy can destroy considerable value. This isn’t an argument against Title II resolution. Dodd-Frank’s addition of Title II to the resolution toolkit was an important advance to regulators’ ability to mitigate financial instability. But we must recognize that Title II by itself it is not sufficient to eliminate the advantages of being perceived as too big to undergo ordinary bankruptcy at the holding company level. Moreover, even with a viable Title II resolution regime in place, we must recognize that there still will be disruption to the financial system when a large firm fails. This suggests to me that while a Title II single point of entry resolution is a very useful tool that we should continue to develop, we should view it as more preferable to prevent the failure of the SIFI in the first place. In this regard, I think we have made considerable progress by raising capital and liquidity requirements for large, complex firms.

First, collective decision-making appears to give more weight to the better and less weight to the worse committee members, as judged by their scores when playing the game as individuals, than would be implied by taking the mean of individual performance. The best player had some influence on the decisions of the group of which they were a member. And the impact of the worst player was offset by majority voting. In other words, the median score of the players in the individual rounds was significantly above the mean, implying that the average was being pulled down by a minority of relatively bad players. Second, there was also evidence from the experiments consistent with the hypothesis that committees enable all members to improve their performance by sharing information and learning from each other. And it was striking that the performance of committees was on average somewhat better than that of the performance of the single best player on the committee when playing alone. So in terms of group decisions, it appears that the whole is different from - and generally better than - the sum of its parts. Producing the perfect design of a committee structure that would make the best decisions is a task with no simple answer. But the MPC embodies several features that seem desirable. First, there is a clear objective given to the Committee from outside, in this case by the government. Second, the members are chosen for their technical ability.

Over the next two years, the current process of disclosure by the users of capital, reaction by the suppliers of capital, and adjustment of these standards will be critical to ensure that the TCFD standards are as comparable, efficient and as decision-useful as possible. Risk management With better information, the frontier will be to upgrade risk management and optimise returns. As the supervisor of the world’s fourth largest insurance industry, the Bank of England knows that general insurers and reinsurers are on the front line of managing the physical risks from climate change. Insurers have responded by developing their modelling and forecasting capabilities, improving exposure management, and adapting coverage and pricing. In the process, insurers have learned that yesterday’s tail risk is closer to today’s central scenario. And leading insurers also understand that the breadth, magnitude, and foreseeable nature of climate risks— mean the biggest challenge will be to assess the resilience of firms’ strategies to transition risks. That’s why, the Bank of England just set out our supervisory expectations for banks and insurers regarding their governance, risk management, strategic resilience and disclosure of climate-related financial risks. 8 All speeches are available online at www.bankofengland.co.uk/news/speeches 8 And in June the Bank announced that we will be the first supervisor to stress test our financial system for resilience against different climate transition pathways: ranging from early and orderly to late and disruptive.

BIS Review 16/2004 3 Simultaneously with the need to contribute to the promotion of economic convergence within the EMU parameters, our central banks are engaged in the task of integrating themselves into the European System of Central Banks (ESCB). The challenge here is multifaceted in that it involves infrastructural and organisational changes that profoundly affect not only the central bank and the financial markets, but also the players in those markets. The technical aspects of ESCB membership represent a special challenge for small acceding countries like Malta. The domestic financial markets in most of our countries are small and less liquid that those of existing EU members, and typically less sophisticated. And yet, upon membership we will be expected to function on the same level as the long-standing and, in most cases, larger members of the System. Ensuring that the transition takes place with the least possible disruption has entailed a comprehensive reform of institutions and operating systems. For example, a real time gross settlement payment system (RTGS) has been put in place instead of the existing payment infrastructure. The standards of the securities settlement system have been upgraded to a fully ESCB-compliant ‘delivery versus payment’ system, which ensures the risk-free transfer of collateral and, where necessary, of securities. Cross-border payment systems have been adapted to ensure that they meet today’s ‘straight through processing’ standards. Similarly, with regard to statistics there has been an overhaul of methodologies and databases.

It is indispensable that households with minimum income to access and benefit the basic banking products, such as current accounts. The Bank of Albania, through legal and institutional changes has provided the possibility that households benefit these basic financial products at a low or no cost at all. As a result, cheaper and swifter alternatives, which compete with the existing financial products, will be available. At the same time, companies that will enter into these new markets will have better possibilities of profit. Education is the sole costs to know and benefit from these products. In this regard, the Bank of Albania remains the main actor for the spread and implementation of the national financial education and inclusion strategies. In this framework, the Bank of Albania is working with national and international important partners, the World Bank and EBRD. Their long experience shows that the correction and reduction of social and economic disparities is a difficult commitment, which takes time. Nevertheless, enhancing financial literacy, by spreading knowledges such are: budget drafting; its effective management; knowing risks and avoiding wrong investments; may affect the mitigation of wounds that these turbulences brings into the life of poor people, and of course to everyone; to the whole society and population and the financial situation that the moment brings about. Turning back to the launching of the Global Money Week 2022, I am glad to see the ever increasing interest of youths, their teachers and professors in our educational activities.

Timber has steadily found new applications in Borregaard’s products, such as building materials, biofuels and medicine – with timber always as the main raw material.5 Norway’s industry structure is in flux. In the past decades, the manufacturing industry has continued to decline (Chart 8), reflecting increased automation and relocation abroad. Increased prosperity has generated more demand for both private and public services. Employment has shifted towards the service sector. 3 Blomgren, A. et al (2015) “Industribyggerne 2015” [Industry builders 2015]. IRIS Report 2015/031 (Norwegian only). 4 World Bank “Ease of doing business index”. https://data.worldbank.org/indicator/IC.BUS.EASE.XQ. 5 Throughout its history, Borregaard has had various owners and names. See eg Bergh, T. and E. Lange (1989) Foredlet virke – Historien om Borregaard 1889–1989 [Processed timber – The story of Borregaard]. Ad Notam forlag AS, Oslo (Norwegian only), and www.borregaard.no for more information. 10 NORGES BANK Chart 8 Employment shifts towards services. Annual average change in number of employed in the period 1980 – 2018. Percent ECONOMIC PERSPECTIVES 14 FEBRUARY 2019 Public services Private services Construction Manufacturing Agriculture, forestry and mining –3 –2 –1 0 1 2 3 Sources: Stastistics Norway and Norges Bank The service industry has reaped gains in the form of increased productivity through restructuring and adoption of new technology. The banking industry was among the first to do so. The distributive trade sector has grown in recent decades without any notable increase in employment (Chart 9).

Contributing factors to the current situation in repo market Let me now review some medium to long-term trends contributing to the current situation in the repo market, affecting both the supply and demand of collateral. It should first be noted that the repo market has seen a reduction in its role for funding, also due to the excess liquidity injected and the securities absorption implied by APP. On the supply side, the availability of high-quality collateral is inevitably pro-cyclical. From a pure economic view point, the financial crisis, its length, rising debt levels and rating downgrades to sovereigns reduced the amount of available assets that are considered ‘safe’, particularly for non-banks (although regulators treat all sovereigns as risk-free). This is most easily visible in the current clustering of GC collateral rates by country of issuer, which was largely absent prior to the crisis. On the demand side, the evolution of prudential regulation has affected the repo market. A number of features, which have in principle been known since the reform of Basel III in 2010, are still being phased in and directly affect banks’ participation in the repo markets, particularly the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). A third measure – the leverage ratio – is now subject to reporting requirements, but there is not as yet an agreed international regulatory standard. The LCR requires banks to hold sufficient high-quality liquid assets (HQLA) to cover projected net cash outflows.

No doubt the details will take some time to work out. We might be tempted in Hong Kong to respond that we have demonstrated clearly this last year that we already have the ability to maintain banking stability. The measures being contemplated internationally are designed for repairing and renovating banking systems that have effectively collapsed: some of the measures may indeed be going too far. Therefore, we might conclude that we do not need to consider them for Hong Kong. Such an attitude would, I think, be a mistake. As an international financial centre, Hong Kong must adopt international standards and best practices. We have to move with the times, although that does not of course mean we have to blindly implement everything in an inflexible, straightjacket manner. Hong Kong is, in fact, in a good position to adopt and participate in the various measures now under consideration by the G20, the Financial Stability Board and its Standing Committees, and other international agencies. Our voice may not be so loud or strong as that of the larger economies, but we still have a responsibility to speak up, to seek to ensure that what comes out of the international forums is balanced, and realistic for local and regional conditions. The increasing participation by Asian economies, including Hong Kong, in these international forums is a good sign that the rest of the world is paying attention to, and ready to learn from, the experiences of this region.

The annual growth rate of credit to the private sector climbed further in December 2021, albeit visibly more slowly, reaching 14.8 percent from 14.6 percent in November, solely due to the component in local currency. Leu-denominated loans saw their annual dynamics accelerate further in 2021, to 19.6 percent in December from 19.0 percent in November, also backed by government programs, with their share in total thus widening to 72.4 percent. Nowadays, as many other EU member states, Romania is preoccupied by the geopolitical and energy situation and their considerable impact on inflation. Inflationary shocks on the energy components of the consumption basket hit repeatedly throughout second half of 2021. These were partly offset by a government support scheme, in effect from November 2021. Nevertheless, the energy component still accounted for more than half of the overall annual inflation rate by the end of 2021. It is a fact now that approximately 85 percent of the CPI has root in the energy price surge. Therefore, the inflation expectations on the 1-year horizon have risen sharply, reflecting current developments. The positioning of the 2-year ahead expectations close to the target variation band suggests that the anchoring mechanism is still in place. However, specific measure to address energy situation is a need. Uncertainties continue to stem from the evolution of the pandemic as well, given the current wave, triggered by the more contagious Omicron variant of the coronavirus although the variant seems to be less virulent.

The major dealers and the buy-side investors are making substantial investments in improving the process around the credit derivatives market. The overall strategy outlined in the public letter signed by the 14 major market participants on March 10, 2006, offers the prospect of a more automated confirmation and settlement process, with significantly less operational risk than has existed in these markets since their inception. Looking beyond the specific objectives for reducing confirmation times and backlogs, we hope to see agreement over the next several months on a new ISDA® protocol for net physical settlement in the event of default and progress toward adoption of emerging utilities for centralizing certain processing and information functions that can facilitate netting and matching of payments and collateral. Alongside these improvements in what we call infrastructure, this is a moment where it is important to see more care and attention and greater conservatism applied to the discipline of risk management. This is most critical in the areas that are hardest to do well. The challenges seem most exacting in the firms’ abilities to capture the exposure of the institution to stress scenarios that lie outside the range of recent experience, and to set exposure limits and calibrate margin and credit terms accordingly. The challenges here are magnified by the changes I described earlier, including the rapid growth in complex structure products with imbedded leverage, uncertainty about liquidity in many instruments in less-benign financial conditions and other features of the present environment.

The balance between innovation and resilience that has characterized the U.S. financial system in recent years has played an important role in the improved performance of the U.S. economy. We all have a strong interest in preserving this balance. Thank you. BIS Review 28/2006 3

• We also want to partner with financial institutions to create a working environment that is conducive to accommodate changes, be it in life-cycles or lifestyles, so that employees can manage demands better, both at work and from home. It is heartening to note that many financial institutions are offering flexible work arrangements, including flexible working hours, telecommuting and teleconferencing, as well as mentors, who can lend a helping hand, providing that needed uplift and moral support. 1 These are done under the Finance Associate Management Scheme (FAMS) and the International Postings Programme (iPOST). 2 BIS central bankers’ speeches 12. Our collaborative efforts in developing talent in the financial sector will allow individuals opportunities to continually develop themselves and chart their own career progression, from students to mid-career professionals to leaders within the sector. Working hand-in-hand with FWA 13. Our efforts will be more effective and achieve greater success with the help of industry professionals like yourselves. Given the strong network FWA has established, you are well placed to play an important role in ensuring equal opportunity for all. I would like to touch on three areas in which I see tremendous potential to harness the collective experience and wisdom of the FWA. 14.

The legacy of those losses has likely limited the banking sector’s ability to extend new loans during this expansion, as banks acted in a highly precautionary way to accrue capital that had been depleted as well as to add to their previous capital levels. The need for banks to repair their balance sheets following the financial crisis contributed to the far slower growth of outstanding bank loans during this expansion when compared to previous long expansions. Real outstanding loans to businesses, which are dominated by bank loans, declined more in this recovery than in previous recoveries (Figure 4). On the household side, real outstanding residential mortgages, which are largely originated by banks, have declined through most of this expansion while they grew steadily in previous expansions (Figure 5). Consumer credit has risen at a modest rate in this recovery – comparable to that of the last cycle (Figure 6). This category includes auto loans, credit cards and other consumer debts that are mainly originated by banks. But it also includes student loans where the federal government is the dominant lender. Student loans have risen robustly during this expansion, and have driven much of the rise of overall consumer credit. We will have much more to say about them later in today’s briefing. The U.S. financial system relies more heavily on capital markets than other advanced economies. Bonds and other negotiable debt instruments are an important source of funding to credit-worthy corporations.

Before delving into the mechanics, let me touch upon why Swiss franc money market interest rates are in negative territory in the first place. The role of the global low interest rate environment For almost six years now, money market rates in Switzerland have been negative, largely due to the international economic environment. Interest rates on investments denominated in Swiss francs are usually lower than those on investments denominated in other currencies. As a result, Switzerland has traditionally experienced a negative ‘interest rate differential’ versus other currencies. On the one hand, this is due to the fact that inflation in Switzerland has generally been lower than in other countries. On the other, both domestic and foreign investors regard Swiss-franc denominated investments as particularly safe, reflecting the franc’s traditional status as a safe haven in times of heightened international uncertainty. Over longer time periods, investors have therefore been willing to accept a lower return on investments denominated in Swiss francs. Over the past three decades, interest rate levels have fallen markedly around the world. Chart 2 shows that the yields on 10-year government bonds issued by advanced economies – illustrated here by Switzerland (in red), Germany (in blue), the UK (in orange) and the US (in green) – have been on a downward trajectory since the early 1990s. Nominal interest rates have fallen in part because many central banks successfully managed to tackle the high rates of inflation that prevailed during the 1970s and 1980s.

The coronavirus crisis generated significant turbulence in financial markets when it surfaced in February and March. The leading central banks eased their monetary policy stance, and many made use of the standing US dollar swap lines to enhance the provision of global US dollar liquidity. Investor sentiment improved substantially beginning in late March on the back of large-scale fiscal and monetary support programmes launched in many countries, including Switzerland. Bolstered by these programmes and the eventual relaxation of public health policy restrictions, financial markets continued their recovery until late summer, and economic activity also picked up considerably. However, developments in recent days and weeks have made it clear that the coronavirus crisis is not over and that uncertainty remains high. In Switzerland, the SNB has repeatedly reaffirmed its expansionary monetary policy. In so doing, it has made an important contribution in terms of immediate crisis management. Some of the instruments the SNB has marshalled to manage the coronavirus crisis are well known. The negative interest rate on banks’ sight deposits held at the SNB and our willingness to intervene more strongly in the foreign exchange market help counter upward pressure on the Swiss franc. Taken together, these measures have helped shield Switzerland’s economy from additional strains that might otherwise have been exerted by foreign exchange markets, including further downward pressure on inflation. Other instruments are new or have had to be reactivated. One of the new instruments is the SNB’s COVID-19 refinancing facility (CRF).

5 The real exchange rate shock is likely to push down on domestic demand but should increase export supply. 4 BIS central bankers’ speeches disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output”.6 In other words, if shocks drive inflation sufficiently away from the target, the MPC are allowed to choose how quickly to return inflation to 2% and should explain such policy decisions via the open letter system. I have often been asked whether or not changes to the target, or the remit, or to CPI itself would help us to set policy. The answer is a clear no. Of course, the Government can decide to change these things if it wants to, but that wouldn’t magic away the problem. The unfortunate and difficult truth is that the shocks that have hit the economy recently have not been caused by monetary conditions. They are real economy shocks which make us individually and collectively worse off – we have to pay more tax, we have to pay more, in real terms, for petrol, gas, electricity and imported goods or services. The choice that monetary policymakers face is how much of these relative price shocks should be accommodated by a higher level of prices, and how much should be accommodated by a squeeze on nominal wages (and higher unemployment).

It goes without saying that Hong Kong, as a major financial centre, will comply with international regulatory standards. Implementing Basel III has been complex, and it has involved extensive consultation exercises. As with much of our work, your feedback and cooperation have been invaluable in this process. 19. Despite all our precautions, we can never totally rule out the possibility that an institution might have a crisis. I think it is true to say that Hong Kong is as well-prepared, if not better, than any centre in Asia. One reason is the Financial Institutions (Resolution) Ordinance, which came into effect in 2017. This is not something most of the community thinks about. But I am confident that we have the tools to handle a bank failure in a way that best serves the overall interests of stakeholders, including the taxpayer. 20. Our regulatory work has not hindered banks from exploring new opportunities and adapting to change. During the last 10 years, we have seen the volume and complexity of offshore Renminbi business increase significantly. We have also embraced – as a regulator and as an organization – the need to address climate and environmental risk through green and sustainable banking, responsible investment and capacity building in green finance. And then there is the fast-changing use of technology – which I will mention later. 21. So overall, I am pleased to say that our banking sector today is safe and resilient – probably more so than at any time in Hong Kong’s history.

There are two cyber threats which the financial sector needs to pay keen attention to. The first is ransomware attacks where the modus operandi has become more threatening. In addition to corrupting a victim’s data using crypto-ransomware, attackers are now exfiltrating information from their victims. 6/9 BIS central bankers' speeches MAS has asked financial institutions to review the adequacy of their internal IT controls, as well as incident response and business continuity plans to fend against the latest ransomware threats. Second, cyber criminals are targeting major third-party IT vendors to amplify the coverage of their attacks. The cyber attack on Solarwinds is a powerful illustration of the increased sophistication and persistence of cyber criminals. They are now attacking supply chains to infiltrate the networks and systems of multiple entities. MAS has exhorted financial institutions to exercise strong oversight of arrangements with third party service providers, to ensure system resilience and maintain data confidentiality. FINANCIAL SECTOR PERFORMANCE Let me now provide an update on the financial sector. In 2020, the financial services sector 9 grew by 5.1% even as the overall economy contracted. In the first half of this year, we estimate the sector grew by about 6%. Growth has been broad-based across the financial services sector. The banking industry has been supported by strong fee income growth. The insurance industry expanded strongly on the back of robust demand for single-premium life insurance products. The payments industry grew significantly as adoption of e-payments gained traction with businesses and individuals moving towards online transactions.

However, as long as the rules of the game prize short-term gain over long-term earnings stability, the temptation to cheat by 4 BIS Review 50/2002 manipulating the market will remain strong. Reforms cannot remove risk from investment, but firms can do more to promote transparency and ensure that their risks are properly disclosed. It is thus vital for firms - not just politicians and the public - to determine if there are weaknesses in legislation or regulation so that they too can correct and begin their part of the process of rebuilding investor confidence. But the present challenges are not only those of better regulation. The global economy is also facing a crisis of confidence, which interferes with investment decisions and dampens activity. Against this international backdrop, we have reacted swiftly to the changing winds that bring new risks to the domestic economy. The latest reductions in the target range are aimed at injecting further monetary stimulus in our economy. These actions are undertaken with an eye on keeping price stability in check. This is the best contribution the Swiss National Bank can make to restore confidence in the economy and promote a strong and sustainable recovery. BIS Review 50/2002 5

The BIS central bankers’ speeches 11 economic relationships are illustrated here by a simple New Keynesian model, which you will become more familiar with in the course of your studies.10 NEMO is an empirical model, that is to say it is estimated on Norwegian data. In order to see how monetary policy works in NEMO, we have increased the interest rate to the same extent as in the VAR models. As indicated by the red line in the chart, NEMO provides a description of monetary policy that is broadly consistent with that derived from the VAR models,11 in spite of the different principles on which the models are based. Overall, it appears that a one percentage point increase in the interest rate dampens output growth by about ½ percentage point and inflation by around ¼ percentage point. The effect of the interest rate increase on GDP reaches its maximum after about one year, while the maximum effect on inflation occurs with a lag of close to two years. 10 See Alstadheim, Ragna et.al (2010), “Monetary Policy Analysis in Practice”, Norges Bank Staff Memo 11/2010 11 The estimation is based on a one percentage point increase in the interest rate, followed by a gradual reduction in line with the response pattern in the model 12 BIS central bankers’ speeches The Monetary Policy Report, which Norges Bank publishes three times a year, includes a discussion of key trends and an analysis of the interest rate path ahead.

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 ten years time, we may therefore know whether “global imbalances” and “low risk premia” were resolved with or without stress; and we may be better informed on whether the changes in the structure of our financial markets help or hinder the preservation of stability. A benign outcome would be more likely if the industry were to maintain its efforts on improving ex ante measures to handle stress. Managers of hedge funds and other modern investment vehicles, as well as banks, have a clear stake in that work. Annex: Vehicles CDO: Collateralised debt obligation. Typically, a structured finance product where a SPV issues notes backed by, or referenced to, a portfolio of underlying assets. The notes issued are tranched by seniority into senior, mezzanine and equity. The underlying assets could be corporate bonds, loans or structured finance securities (such as mortgage-backed securities or notes issued by other CDOs), and they might be owned either directly or synthetically via credit default swaps. CDO squared. A CDO invested in CDO tranches, typically mezzanine tranches of synthetic CDOs. CDPC: Credit Derivative Product Companies. A highly-rated limited purpose company, with permanent capital, that sells credit protection on individual names or synthetic CDO tranches. CDPCs differ from monolines in that they write protection only via credit default swaps. They are in some respects akin to synthetic banks. Closed-end fund. An investment company that issues shares to investors and invests the proceeds in a pool of assets typically stocks and/or bonds.

It has provided the platform needed going forward to restrain inflation pressures, and to maintain anchored inflation expectations, at a time when, understandably, there is public debate about the outlook given that CPI inflation rose above 3% for the first time, triggering an open letter from the Governor, on behalf of the Committee, to the Chancellor. Looking ahead, my votes, and my approach to communicating our monetary strategy, will depend on balancing the medium-term prospect for demand pressures alongside uncertainties about supply conditions and near-term inflation expectations caused by volatility in energy costs. This will entail making judgments about a whole range of influences, including whether or not residual slack in the labour market might in time, given robust business investment, help to ease capacity constraints; whether or not competitive conditions amongst retailers will dampen the feed through of accelerating producer prices into consumer prices; and, most crucially of all, whether wage bargainers and price setters recognise the absolute determination of the Committee to maintain price stability. Risks to the global capital markets If anchored inflation expectations have so far been maintained, here and elsewhere, two other risks in, and for, the global financial environment continue to preoccupy commentators: current account imbalances; and compressed risk premia, together with an apparently high risk appetite, in credit markets. There are, I would suggest, some interesting contrasts between these two risks, which – following the Bank’s Financial Stability Report – I shall call “global imbalances” and “low risk premia”.

On the contrary, I think that appropriate fiscal retrenchment in countries that need it is part of growth enhancement, because sustainable public finances makes a difference in terms of improving confidence of households, enterprises, investors and savers, which is decisive to foster growth and job creation. WSJ: Does the U.S. have it wrong? It is engaging in even more fiscal stimulus. TRICHET: It’s not for me to give a lecture to other advanced economies. We have our own responsibilities. In our own case we strongly believe that fiscal soundness is confidenceenhancing and therefore part of a growth-enhancing strategy. WSJ: In your recent ECB press conference you made repeated references to the July 2008 rate hike and said the ECB is never pre-committed not to move interest rates. Were your remarks over-interpreted as hawkish? TRICHET: I have nothing to add to what I have said last Thursday (ECB press conference on 13 January). You have to place my remarks in the context of the first 12 years of the euro, during which we delivered price stability in line with our definition: less than 2%, close to 2%. When you look at the yearly average since the setting up of the euro it is 1.97%, better than had been done in any such period of time in the previous 50 years. You don’t get this result by chance. We are profoundly attached to our mandate.

That being said all central banks, in periods like this where you have inflationary threats that are coming from commodities, have to go through the hump and be very careful that there are no second-round effects. This is what we are doing. WSJ: When you hiked rates in 2008 there were signs of those second-round effects. Do you see evidence they are starting to take hold in Germany or elsewhere? TRICHET: At this stage, we do not see this. And everybody knows we would not let secondround effects materialize. We will continue to deliver price stability. WSJ: Could the ECB raise interest rates while still maintaining nonstandard measures including unlimited loans to banks? TRICHET: It is our doctrine since the beginning of the turbulence that interest rates on the one hand and non-standard measures on the other hand are decoupled. We design the monetary policy stance; we decide interest rates to deliver price stability in the medium term. Non-standard measures are there to help restoring a better functioning of monetary policy transmission. We are disconnecting both measures. We can move interest rates on the one hand, and we can move non-standard measures on the other hand independently. WSJ: Euro member states are working on comprehensive measures to address the debt crisis. What elements should be in that package? TRICHET: These decisions are the responsibility of governments. We have in particular a very strong message, which is that we need a “quantum leap” in the strengthening of governance of economic and fiscal policies.

The fact that unrest in a market, in this case the mortgage market, spread rapidly to other markets should not surprise anyone who follows financial events in the world. However, on the whole hedge funds have fared well and played a positive role In an efficient market where competition is permitted there will always exist companies who fail in their strategies and default. There are always winners and losers in the financial markets. This time, for example, the winners have been the hedge funds with a short position in the subprime sector, that is, those who have sold securities with subprime content that they have not owned. After the price fall they have been able to acquire the assets at a significantly lower price than they sold them at and have thus earned substantial amounts of money. The losers have had opposite positions or just had strategies in the stock market that did not work. In those instances where individual hedge funds have experienced problems, this has not spread to the financial system overall. As a group, hedge funds have overcome the turmoil relatively well. Indices of the hedge funds’ return fell a few points in August but in September hedge funds as a group once again showed a positive return. During the whole of 2007, the hedge funds have performed better than share indices generally.

5 The reason for this is partly that the hedge funds have not to any great extent been exposed to the subprime sector and partly that they were flexible and could rapidly close positions where they lost money. In addition, the hedge funds generally seem to have had a stabilising role in the financial markets. In some cases hedge funds have had considerable liquidity, seen the large fall in prices as an opportunity, and taken advantage of this to go in as a buyer. In this way they have contributed to, rather than consumed liquidity. It does not appear as though the hedge funds have played a specifically negative role during the turmoil we have seen to date. Nor have the hedge funds triggered it. 4 For instance, see Khandani and Lo (November 2007) “What happened to the Quants in August 2007?”, http://ssrn.com/abstract=1015987. 5 The two indices of hedge funds’ return, the HFRX Global Index and the HFRI Composite, showed an upswing of 4.2 per cent and 10.4 per cent respectively in 2007. For example, this can be compared with the S&P 500 index which rose by 3.5 per cent. BIS Review 11/2008 3 Some reflections on events There are always experiences to reflect upon when unrest arises in the financial markets. It is already possible in this crisis to point at certain weaknesses that have come into focus. Firstly, we have had a clear reminder as to how events can turn suddenly and unpredictably.

In connection with international risk factors, we placed emphasis on the uncertainty surrounding international economic conditions and the concern about the low risk premia in financial markets. I think it is fair to say that developments have borne us out here. Other risk factors were related to the vulnerability of Norwegian bank customers, lower interest margins for banks and the new capital adequacy rules. Uncertainty surrounding developments in international economic conditions and financial markets There has recently been considerable turbulence in international financial markets. Could this have a substantial impact on Norwegian financial markets and could it have serious consequences for growth and employment in Norway? Let us look at the reasons for the turbulence and how it has spread. The source of the turbulence can be found in the US housing market and particularly in the subprime mortgage market. In addition, this type of loan is frequently offered at a low rate of interest with small repayments in the first years of the loan term and a higher interest rate later. Mortgages with this structure involve gambling on a rise in house prices. If house prices rise, borrowers’ collateral will increase in value, allowing the mortgage to be refinanced on better terms. Or the borrower can turn around and sell the dwelling at a profit. This is what happened for a period, but then house price inflation slowed, partly as a result of tighter monetary policy.

Credit premia also increased for other fixed income instruments, such as conventional mortgage bonds, corporate bonds and loans to emerging markets, from summer 2007, although on a far more moderate scale than for subprime-backed securities. In the last half of July, the turbulence spread to other financial market segments. The risk premium required by investors rose, and equity prices fell sharply. The contagion was due to uncertainty as to the risk subprime-backed financial products represented for the financial system, and to a lack of information about who had invested in such products. Conduits and Structured Investment Vehicles (SIVs) were among the investor groups investing in the financial products based on subprime mortgages. As a rule, these investment companies were wholly or partially owned by banks. They invested in assets with a high rating, such as the senior tranche in subprime-backed securities. These investments were debt-financed, primarily in the short-term money market through asset-backed commercial paper (ABCP). High ratings on these assets gave investment companies favourable funding rates. Due to the turbulence in the subprime market, interest rates for ABCP have risen sharply and maturities have been reduced. The flow of money to investment companies through money markets has dried up. Banks have to a large extent had to finance the investment companies themselves. However, this increases banks’ liquidity requirements. There have been examples of banks that did not have the capacity to finance their investment companies.

And, to the extent the Bank’s actions were influential, the financing costs of high-emissions firms should rise, sending a powerful wakeup call. But indiscriminate ‘portfolio decarbonisation’ of this kind cannot be the best strategy for investors like the Bank seeking to incentivise economy-wide transition to net zero, for two key reasons: 15 MPC Remit statement and letter and FPC Remit letter | Bank of England 7 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 7  First, the high-emissions firms whose bonds we would be selling are the ones we most need to be at the vanguard of emissions reduction. But selling their bonds doesn’t destroy them as assets, it simply transfers them to other investors. And if investors seeking to incentivise transition are all decarbonising, those left holding the bonds are by definition going to be those with a weaker commitment to net zero;  Second, simply selling anything with a high carbon footprint penalises those with strong and credible emissions reductions plans just as much as it does those with no such plans. The net effect therefore is likely to be to reduce, not increase, economy-wide incentives to reach net zero.16 And our end state portfolio, consisting exclusively of firms with low and stable emissions, would by definition play little material role in driving future emissions reduction. I draw two conclusions from this. First, engagement beats disengagement.

This approach, sometimes called ‘market neutrality’, has obvious attractions for central banks charged with setting monetary policy for the economy as a whole. But it has quite a striking implication for the carbon footprint of the CBPS portfolio. Chart 5 compares the proportion of the CBPS held in each sector with the contribution of that sectoral holding to the total carbon footprint of the portfolio. And you can immediately see that some sectors – notably the utilities: electricity, water and gas – contribute more to the CBPS’ carbon footprint than their portfolio share might suggest. Others by contrast contribute substantially less – eg the consumer, communications, property and finance sectors. 12 A full set of eligibility criteria can be found here: https://www.bankofengland.co.uk/markets/market-notices/2016/asset-purchasefacility-corporate-bond-purchase-scheme-market-notice-september-2016. Financial risks on the CBPS, like the Asset Purchase Facility as a whole, are indemnified by HM Treasury. 5 All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice 5 Chart 5: CBPS sectoral composition and carbon footprint13 There are at least two reasons for this apparent bias. The first is that – for reasons unrelated to emissions – investment grade corporate bond issuance tends to be better suited to companies with big fixed long-term capital investment needs (and on average larger carbon footprints). By contrast, smaller companies (with on average lower carbon footprints) are more likely to rely on funding from banks or other sources. Debt issuance therefore tends to be skewed towards sectors with higher carbon footprints, relative to their shares of GDP.

The results from a study of the IMF (REO – Europe, November 2019) on a sample of EA 15+3 and the NMSs reveals “that all these factors suggest that it is unlikely that the recent increase in wage growth will meaningfully spur inflation in the near term”. These findings support the need for monetary policy in many European countries to remain accommodative for a longer period, but at the same time being vigilant as the “prolonged period of accommodative financial conditions may have created an environment conducive to greater risk taking”. Inflation in the region has been above the average compared with the inflation in the euro area, reflecting the convergence process, the greater exposure to shocks in primary commodities prices, and country specific factors. Yet, the overall inflation dynamics mimics the one in the euro area, given the tight trade linkages. The average headline inflation rate in the CESEE region in 2003 – 2012 period averaged around 4%, while the euro area inflation gravitated around 2%. In the last six years, a suppression of inflation rate was visible across the board, and in both regions (CESEE and euro area) it averaged around 1%. Some reversal to 2% is observed in the last two years, but it is debated how sustainable the pickup in prices is. Very similar is the pattern of the core inflation, which started decelerating in 2013, averaging around 1%, with converging dynamics in the CESEE and the euro area.

These measures were efficient, at least to some extent. Although sometimes circumvented by banks, they have managed to slow down forex credit growth, providing a wise solution to the problems faced at that time by our economy. Back then, we referred to them as unorthodox monetary policy measures, but after the crisis, the IMF mentioned the National Bank of Romania as being among “the pioneers” of what later became “macroprudential instruments”. After the EU entry, the actual membership in this “convergence club” has fueled and enhanced 3/5 BIS central bankers' speeches the catching-up process. Being in the EU meant free exchange of goods and services, along with the free movement of capital and labor, which increased trade, foreign direct investment, and migration flows, for the benefit of economic growth in our country. Moreover, in the long run, EU membership fostered convergence through investments from European funds. Romania has certainly come a long way in terms of economic convergence, with growth resuming and gaining momentum after the global economic crisis: its GDP per capita as a share in the EU average (based on PPS) more than doubled from 30.6 percent in 2003 to 62.7 percent in 2017. The advance was the fastest within the group of peer countries that recorded similar trends: for instance, Bulgaria went from 32.4 to 49.3 percent, while Hungary, the Czech Republic and Poland, which started from a more advanced level, added between 7 and 22 percentage points to the same indicator during 2003–2017.

Mr. Chairman, a dispassionate comparison of the conditions prevailing in 2006 and 2013 tells us that our economy has made an unprecedented transformation over the past 7 years, with strong economic growth, and stable macro-economic conditions. Harmonization of monetary and fiscal policies – case studies The discussion point that then arises is, as to what factors, processes and conditions contributed to this current level of growth and stability. Of course, we are all aware that many factors contributed to the current state of affairs of the country, and those could be the subject of, maybe 50 other Orations! But, for today’s discussion, let us confine ourselves 6 BIS central bankers’ speeches to examining the background of some significant initiatives that would have influenced the current state of the economy, and to understand how the present day outcomes were supported and/or impacted by the harmonization of the Fiscal and Monetary policies. One striking feature in the implementation of Monetary and Fiscal policy over the past 7 years, has been that both institutions, MoF and CB have been taking a keen and enduring interest in both monetary and fiscal policies. We realized that a “blame game” would be of no value to the country or to the stakeholders, and that it was absolutely vital that we should deliver on both fronts simultaneously.

While I firmly believe it is up to history to judge as to whether I have been successful or not in discharging my responsibilities as Governor, I also believe that even at this late stage, it may be useful for those critics to reflect on the profile BIS central bankers’ speeches 13 that John Exter had in mind for the position of Governor when drafting the MLA, and then perhaps consider, whether or not, I fitted the envisaged profile! In that background, I am inclined to believe that the education, training, and professional skills imparted by the Institute of Chartered Accountants of Sri Lanka, had a major role in my being appointed to this pivotal position as the Governor of the Central Bank of Sri Lanka. Therefore, please permit me to officially and publicly thank the Institute of Chartered Accountants of Sri Lanka for the tremendous impact that the Institute has had on my academic and professional career, in addition to the singular honour you bestowed on me this evening, by inviting me to deliver this prestigious Oration. Conclusion – running between the wickets! Mr. Chairman, let me now conclude, with a little story. About 6 months ago, a journalist friend asked me to explain the official relationship between the Governor and the Secretary, Treasury. In response, I gave him a long lecture for about half an hour, like what I have done today! While listening to me, I could see that he was quite restless, and somewhat bored.

The intention was to gradually withdraw from the multiple policy rate setup in order to improve the effectiveness of monetary policy and enhance policy predictability. We were able to stick to our plan until the end of the year, even after the currency pressures increased after the US elections. In fact, our interest rate hike in November was the first conventional interest rate response since 2008. However, the situation in early January necessitated an alternative approach. We have witnessed price movements in the FX market which could not be justified by economic fundamentals. The volatility increased sharply, which could be detrimental for both price and financial stability. The response to this unprecedented episode had to be swift, strong, and targeted. Given the significant downside risks to the economic activity and the credit supply, we decided to implement a monetary tightening which would strongly address the direct cause of the problem, with less significant implications on the real side of the economy. To this end, we have tightened the liquidity supply and induced a sharp increase in the short term interest rates at the interbank market. Moreover, to further strengthen our control on the short-end of the yield curve, we have devised a new tool which is practically equivalent to a currency swap. This facility not only sets a benchmark for the price formation in the FX market but also supplies temporary FX liquidity to the market when needed.

They can also resort to undrawn amounts on their credit lines with financial institutions, to new borrowing, such as new bank loans and debt issuances, to divestments, or to new capital contributions from their members. This list of sources of liquidity for firms highlights the important role of economic policy measures in alleviating the effects of the crisis on the business sector. At the European level, the powerful monetary policy response from the European Central Bank (ECB) has proved essential for facilitating the financing of all European firms against this backdrop of high uncertainty, heading off financial fragmentation problems like those experienced as a result of the last crisis. Besides the approval of a new, very large asset purchase programme, this response has included the provision of liquidity to financial institutions under very favourable conditions providing they meet certain business lending targets. In Spain, the public guarantee programmes for loans to firms, which are managed by the Official Credit Institute (ICO)2 and have reduced the risk taken on by banks when lending in such uncertain circumstances, have been crucial, as have the measures to allow for more flexibility in temporary layoffs and short-time work arrangements (ERTE by their Spanish abbreviation) and the payment deferrals on certain tax obligations, among other measures. 2 ICO COVID-19 Guarantee Facility, approved through Royal Decree-Law 8/2020 of 17 March 2020.

Heng Swee Keat: Financial developments in Singapore Opening remarks by Mr Heng Swee Keat, Managing Director of the Monetary Authority of Singapore, at the press conference on the Monetary Authority of Singapore’s Annual Report 2009/10, Singapore, 29 July 2010. * * * Strong recovery from the recession 1. The Singapore economy has recovered strongly from the recession. Five quarters since GDP reached a trough, Singapore’s output has exceeded its pre-crisis peak by 13.3%. The rapid climb from the trough can be traced to several inter-related factors. In particular, the domestic economy had been lifted by the cyclical upturn in global trade and financial market conditions since early 2009, supported by inventory restocking and unprecedented policy stimuli in the major economies. Given its openness and competitiveness, Singapore was in an especially strong position to benefit from these global forces through our externally-oriented sectors. In addition, investments made in the earlier years were completed in time to tap onto the global upturn. These investments introduced new activities in Singapore’s economic landscape, including high-end manufacturing and tourism services, and strengthened the competitiveness of our existing industries. 2. Global markets also recovered strongly after March as the financial system stabilised and investor confidence recovered. Taking into account translation effects stemming from the stronger Singapore dollar, interest and dividend income, as well as gains in the valuation of assets, MAS recorded a net profit of $ billion during the financial year. 3. Looking forward, considerable risks remain in the global economy and the global financial system.

On market conduct, MAS has issued two consultation papers on the sale of listed and unlisted investment products, to strengthen safeguards for retail customers and enhance MAS’ regulatory powers. We will be issuing our response to the feedback received in 2H2010. Proposals which do not require legislative amendments will be implemented first. Financial institutions will be expected to adopt the remaining proposals even before legislative implementation as good practice in conducting business with their customers. 14. MAS also issued the Guidelines on Fair Dealing last year. The Guidelines stress the responsibilities of the Board and Senior Management of financial institutions to set the corporate culture and direction to deliver fair dealing outcomes to customers. Over the last year, MAS has written to CEOs and Boards of major financial institutions to emphasise our expectations. We have noted increasing awareness among financial institutions of the importance of dealing fairly with customers. Going forward, MAS will continue to engage the Board and Senior Management of financial institutions, and assess their implementation of the Guidelines through off-site and on-site supervision. Financial institutions are also expected to conduct their own mystery shopping, while MAS’ mystery shopping exercise will serve as an independent check and benchmark practices across financial institutions. 15. In strengthening our regulatory and supervisory regimes, MAS will continue to maintain our balanced and consultative approach. We remain focused on achieving good regulatory outcomes that are appropriate to Singapore and seek to promote sustainable development of the financial sector. 16.

Insuring against shocks The drivers of international reserve accumulation in emerging economies were originally related purely to crisis-insurance motives, in the context of widespread pegging to the US dollar. In the wake of the financial crises of the late 1990s, when their official reserves were quickly depleted, emerging economies rapidly rebuilt their foreign assets in order to stave off further speculative attacks, and be able to better absorb the shocks of sudden stops in capital inflows. These countries were understandably eager to protect themselves from the dire macroeconomic consequences of crises like the one they had just experienced. Such self-insurance was also meant to limit future dependence on a bail-out from the international community. Even for countries that were not directly affected by the crisis, these motives probably played a central role, to the extent that some degree of capital account liberalisation may already have been foreseen at the time. Over the years, however, the persistence of large trade and current account surpluses has resulted in an unprecedented accumulation of official reserves. A deterrent against speculative attacks One approach that has also been contemplated by the literature is to acknowledge that, to some extent, the probability of a speculative attack may be substantially lowered by the reserve accumulation policy. As a matter of fact, the very limited impact of recent financial turbulence on emerging market currencies may to some extent vindicate the precautionary benefits of reserve assets.

Of course, one could argue that central banks are doing their job in taking over foreign exchange positions: naturally, holding foreign assets would expose private agents to currency risk exposure, and in that respect the public holding of foreign assets may be seen as relieving domestic agents from that risk. However, this reasoning raises two objections: - as taxpayers, domestic private agents are still indirectly exposed to the realisation of the large currency risk that public managers of foreign assets bear, which entails fiscal costs; - if the capital account regime had not resulted in the public sector management of these savings in the form of foreign assets, in principle, corporates (and possibly households) would have directly invested their savings in financial instruments of their choice abroad. More realistically, they would probably have unwound their currency exposures and saved in domestic assets. In the absence of official intervention, the exchange rate would have adjusted. However, the fact remains that foreign reserve holdings belong to the nation that has accumulated these assets, hence indirectly to private domestic agents (admittedly including future generations). The public intermediation of these savings naturally leads us to the question of the appropriate manner in which to manage such large holdings. The management of international reserves The facts High current account surpluses mechanically reflect an excess of domestic (private or public) savings, which must be invested abroad. But in East Asia and commodity-exporting countries, these accumulated excess savings appear to be largely held by sovereigns.

This point becomes clear if we consider for a moment their basic purposes: • To provide reasonable assurance that the bank’s and its customers’ assets are safeguarded, that its information is timely and reliable, and that errors and irregularities are discovered and corrected promptly; • To promote the bank’s operational efficiency; and, • To ensure compliance with managerial policies, laws, regulations and sound fiduciary principles. With these purposes in mind, it is clear that the long-term success of any banking organization depends on the effectiveness of its internal control apparatus. And never has this been more true than today. As the activities of commercial banks have become increasingly diverse and complex, internal controls have become critically important to the sound and successful execution of banks’ strategic objectives. I want to stress this point as strongly as I can. As a former commercial banker myself, I know there is a powerful temptation for management to focus its attention and resources on the front office – those areas and individuals that generate profits for the institution. But if something goes wrong in the back office, it can quickly become the most important aspect of a bank’s operations. We’ve seen this time BIS Review 75/2000 4 and time again. It is essential that sufficient resources, staff and managerial attention are devoted to the back office and internal audit functions. Firmly rooted on the foundation of good corporate governance and rigorous internal controls is the central importance of effective risk management.

William J McDonough: The review of the Capital Accord Remarks by William J McDonough, President and Chief Executive Officer of the Federal Reserve Bank of New York, before the Eleventh International Conference of Banking Supervisors, held in Basel, 20-21 September 2000. * * * I am greatly honored to be here as Chairman of the Basel Committee on Banking Supervision. I’d like to begin by thanking the Swiss National Bank, Kurt Hauri and the Swiss Federal Banking Commission, and Andrew Crockett and the BIS for organizing and hosting this important conference. They’ve done a wonderful job, for which I know we’re all very grateful. It is also a great pleasure to be with you under such dramatically different circumstances than when we last gathered together. Just two years ago, turbulence in the financial markets around the world had affected, in one way or another, the banking systems of virtually every nation, and bank supervisors were struggling to preserve confidence and stability. Today, of course, the global financial situation is much more stable and the outlook is very favorable. In the United States, we continue to enjoy the longest economic expansion in our nation’s history, and, following passage of financial modernization legislation, banks and other financial institutions now enjoy unprecedented strategic opportunities. In Europe, following monetary union in January of 1999, the banking industry, along with other corporate sectors, is becoming more efficient and competitive as economic and political reforms have sharpened the focus on shareholder value.

At the end of their working life, the funds available are an additional source of retirement income. The virtue of these systems is that they do not deter worker mobility. This is so in Austria because, by not forgoing their "established rights", it is workers themselves who manage the accumulated resources during periods in which they are unemployed. Also, this arrangement offers protection to all workers, even those whose previous terms of employment have been short-lived. In Denmark, the choice was of a system which firmly supports the unemployed (with substantial unemployment subsidies and intensive training programmes) in a setting in which, however, firing costs are very low. Just as 50 years ago the external sector crisis obliged Spain to change its trade protection policy, the current, serious unemployment crisis should lead us to examine what we can change in our labour market, given what other countries have done with very favourable results. Admittedly, this is nothing new, since the Banco de España has reiterated in its annual reports, at least in the past 10 years, the need for such reform. What is new is that reform has now become absolutely vital; otherwise, when we emerge from the current crisis, and in the absence of the instruments that were used in the past, we will be liable to grow far below what we did in previous decades. The reform of labour institutions is a pressing task, since the short-run effects on hiring are absolutely necessary in the current circumstances.

Øystein Olsen: The conduct of monetary policy Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament), Oslo, 21 May 2013. * * * Please note that the text below may differ from the actual presentation. I would like to thank the Chairman of the Committee and thank you for this opportunity to report on the conduct of monetary policy in connection with the Storting’s deliberations on the Government’s Financial Markets Report. My statement here today is based on the Bank’s Annual Report, but also on the Executive Board’s assessments for the period to the most recent monetary policy meeting and new information. When I was here last year, the key policy rate had been reduced by 0.25 percentage point to 1.5 percent in March. The key policy rate has since been kept unchanged. The key policy rate is low because inflation is low and because external interest rates are at very low levels. The year 2012 was characterised by weak growth among Norway’s trading partners and turbulence in financial markets. Uncertainty about global economic developments, particularly in Europe, was high. Key rates in many countries were close to zero, and both the European Central Bank (ECB) and the Federal Reserve announced that key rates would be kept low for a long period. Economic developments in many advanced economies remained weak into 2013.

In addition, much of our region was spared the worst effects of the non-prime mortgage boom and bust. There was generally lower penetration of nonprime loans into our housing markets, and in general, our region shows better performance, with fewer delinquencies and foreclosures. This pattern was particularly true across Upstate New York. However, as can be seen on the New York Fed’s U.S. Credit Conditions maps, there are significant pockets of housing distress around the greater New York City metro area, especially in communities in the Bronx, Dutchess County and Long Island. Indeed, we recently documented the severity of problems on Long Island in our Facts and Trends publication. Moreover, New Jersey had non-prime mortgage activity closer to the national average and now has more delinquencies and foreclosures than is the case for much of the region. As the uneven pattern of nonprime lending suggests, the region is hardly uniform. The housing section fared better in Upstate New York than it did in much of the region during the 4 BIS Review 137/2010 recession. In fact, the housing boom and bust largely bypassed Upstate New York, where construction activity is a relatively small part of the overall economy. Relative to Upstate New York, most areas in downstate New York and northern New Jersey more closely tracked the national cycle. Sales activity and home prices ramped up during the housing boom, but then dropped sharply. More recently – over the past year – home sales and prices in the region have followed different paths.

I am pleased to note that private-sector jobs have continued to grow moderately across much of the region in the past few months, just as they have in the nation. Growth in private-sector jobs – which is not affected directly by hires and layoffs from the decennial census – signals that, on balance, firms are expanding their workforces to meet their business needs. While state and local government job cuts have also reduced total employment, the fact that the private sector is creating jobs is a good sign and necessary for a sustainable recovery. The number of private-sector jobs has increased in and around New York City, in northern New Jersey and in some parts of Upstate New York. The latest job market report for New York shows a continuation of the generally rising trend of employment in the state at a pace that roughly matches the nationwide growth rate. In New York City, employment has expanded at rates substantially above the nation. Since we last met, employment in New Jersey has expanded, and while that growth has been quite modest, it is an encouraging sign. In Puerto Rico, employment reports continue to give mixed signals, showing a see-saw pattern that has yet to add up to a strong rebound. Despite these employment gains, unemployment in the region remains painfully high. In August, New York City’s and New Jersey’s rates were very close to the national jobless rate of 9.6 percent.

As has been widely discussed in the academic literature, one of the most important channels is the portfolio balance channel.5 This theory relies on the premise that financial assets are imperfect substitutes in investors’ portfolios, and, as a result, a rise in the demand for a particular financial asset relative to its supply – reflecting the Federal Reserve’s asset purchase programs, for example – will increase its price and reduce its yield. After selling that asset to the Federal Reserve, investors may rebalance their portfolios by investing in other assets, raising the prices of those assets, lowering their yields, and easing overall financial conditions. The Federal Reserve’s asset purchase programs were designed to remove risk from the portfolios of private investors. For example, Treasury and agency MBS purchases remove duration risk, thereby lowering longer-term interest rates and reducing private sector borrowing costs. Furthermore, agency MBS purchases also remove prepayment risk in the market. Since homeowners can prepay their mortgage at any time, MBS investors do not know when they will receive their cash flows. Investors generally demand an extra return to bear this risk, which is incorporated into MBS yields and in part passed along to borrowers. The removal of a considerable amount of this risk by the Fed’s purchases would be expected to lower MBS rates by lowering this extra return, thereby reducing primary mortgage rates, stimulating demand for housing and prompting increased refinancing activity.

14 Selling dollar rolls when concerns arise about the availability of certain TBA contracts is conceptually similar to making SOMA Treasury holdings available to the market through our securities lending program. One key difference is that the Desk offers settled Treasury holdings to the market through its securities lending program, whereas the Desk only rolls unsettled MBS holdings. BIS central bankers’ speeches 5 directive, with the goal of supporting a stronger economic recovery in the context of price stability. References Fleming, Michael (2000). “The Benchmark U.S. Treasury Market: Recent Performance and Possible Alternatives.” Federal Reserve Bank of New York Economic Policy Review, Vol. 6, no. 1 (April): 129–45. Fleming, Michael (2002). “Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings.” Journal of Money, Credit, and Banking, Vol. 34, no. 3 (August): 707–35. Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack (2010). “Large-Scale Asset Purchases by the Federal Reserve: Did They Work?” Federal Reserve Bank of New York Staff Reports, no. 441, March. Hancock, Diana, and Wayne Passmore (2011). “Did the Federal Reserve's MBS Purchase Program Lower Mortgage Rates?” Journal of Monetary Economics, Vol. 58 (July): 498–514. Krishnamurthy, Arvind, and Annette Vissing-Jorgensen (2011). “The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy.” Brookings Papers on Economic Activity, no. 2: 215–65. Li, Canlin, and Min Wei (2012). “Term Structure Modelling with Supply Factors and the Federal Reserve’s Large Scale Asset Purchase Programs.” Finance and Economics Discussion Series 2012–37. Washington: Board of Governors of the Federal Reserve System, May.