Ivan Iskrov: Conflicts and complementarities between monetary and
macroprudential policies
Opening speech by Mr Ivan Iskrov, Governor of the Bulgarian National Bank, before the
International Conference on the Occasion of the 15th Anniversary of the Introduction of the
Currency Board Arrangements in Bulgaria "Conflicts and Complementarities between
Monetary and Macroprudential Policies", organised by the Bulgarian National Bank, Sofia,
5-6 July 2012.
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Dear ladies and gentlemen,
It is my pleasure to be here today with you and to open this conference under the topic
"Conflicts and complementarities between monetary and macroprudential policies". These
issues have been discussed extensively in recent years by policymakers, financial market
players and academicians alike. The ongoing financial and sovereign debt crisis has sparked
a need to reassess the existing economic governance structure and to come up with options
for better policies. And one of the key aspects of this debate is about the optimal mix of
policies, which is precisely the topic of our conference.
The BNB has decided to organise this conference because there is a big interest nowadays
in the way monetary and macroprudential policies interact or, according to some, could be
even in conflict.
Since these issues to a great extent relate to the role and responsibilities of the central
banks, the timing of this conference conveniently coincides with the 15th anniversary of the
introduction of the currency board arrangements in Bulgaria. This is an opportunity for us to
discuss the success of Bulgaria's monetary policy regime in the broader context of the
lessons from the current crisis. The speakers and discussants from the BNB today and
tomorrow will share the knowledge we have acquired, based on our rich institutional
experience.
The experience of the Bulgarian central bank is unique. We are one of very few central
banks in the world which have both practiced "conventional" monetary policy (involving
setting of policy rates and conducting open market operations) and then operated a currency
board after that. We have had a track record, during the last two decades, of monetary policy
under two remarkably contrasting regimes. Thus our legacy is very different from that of the
other similar monetary policy regimes in Europe (such as Estonia, Lithuania, or Bosnia and
Herzegovina), where the currency boards were adopted by newly-established central banks
in newly-independent states as a means of bringing confidence in a new national currency,
promoting political emancipation and national identity. That was not our case, however.
The currency board arrangements were introduced in Bulgaria exactly 15 years ago with the
very same motivation that stays behind the current reform agenda in the euro area. We did it
in order to achieve a much more efficient macroeconomic management and to bring in
credibility in the whole policymaking process. Furthermore, the case of Bulgaria
demonstrates the importance of maintaining wide consensus among politicians and the
society at large, on the key principles of economic policy.
The currency board arrangements are not just another monetary policy regime. They are a
"frame of mind", a way to view and tackle the economic, political and social processes. Some
Western analysts and researchers fail to understand this. But I am sure the contributions by
my colleagues from the BNB will clearly illustrate during this conference that the currency
board is something more than just a monetary policy regime.
Following a dramatic banking and financial crisis in 1996-1997, the economy was stabilised
by the introduction of the currency board arrangements, in combination with the strong fiscal
discipline, the liberalisation and privatisation of the Bulgarian economy, and the use of a
broad range of macroprudential instruments.
The current global crisis is not the first one successfully weathered by the Bulgarian
economy. In only two decades we have endured the Asian crisis, the Russian Crisis, the
"dotcom bubble" burst, the U.S. subprime crisis and the failure of Lehman Brothers, before
the euro area financial and sovereign debt crisis came in. But the recent crisis has served as
perhaps the biggest "litmus test" for the optimality of our monetary policy regime.
We believe that a small open economy, which is not rich in certain commodities or natural
resources, cannot succeed in pursuing the so-called independent monetary policy. All these
issues will be elaborated today by deputy governor Hristov who will share our experience
with you during the afternoon session of this conference.
Dear colleagues,
No monetary policy regime per se is universally superior, however. This is where the need
for an optimal policy mix, which relates to the topic of this conference, can be illustrated by
the case of Bulgaria again.
Fiscal policy must play a vital buffer and corrective role in a small open economy. The same
is valid for an economy with a fixed exchange rate. While the importance of fiscal discipline is
only now being acknowledged in some parts of the euro area, the philosophy of constant
fiscal vigilance has been guiding the policymakers in Bulgaria since 1997. But even fiscal
discipline is not enough for the overall macroeconomic stability. The reason for this is the fact
that there has always been, and there will always be, a strong interconnection between the
state of the public finances and the quality of the banks' balance sheets.
Because of that, following a deep financial and banking crisis in the mid-1990s, Bulgaria
adopted one of the most conservative supervisory standards and practices in Europe. What
is more, they have been persistently implemented in a countercyclical fashion, both before
and during the crisis.
As deputy governor Simeonov will detail later at this conference, the BNB has mastered and
tested successfully a long list of both "macro" and "micro" bank supervision instruments. In
the "good" times, the BNB insisted on the build-up of capital and liquidity buffers,
discouraging banks from excessive asset growth and risk-taking. But since the end of 2008,
the BNB focused on the capital and liquidity relief for banks while also allowing them to ease
lending.
As a result of these conservative and countercyclical policies of the BNB, and the rather
prudent behaviour of the banks themselves, today Bulgaria manifests a very stable banking
sector, with outstanding capital adequacy and liquidity ratios. Four years after the Lehman
Brothers collapse, the banking system of Bulgaria remains one of the few in the EU where no
single bank needed to be rescued or supported with taxpayers' or central bank money.
Merging the monetary and macropdudential mandates (including banking supervision) under
the auspices of the central banks is currently being implemented in some of the "older"
EU Member States. The macroprudential oversight of the financial system is being
introduced only recently at the EU level. While these new concepts are now being embraced
by central bankers and politicians worldwide, the simultaneous pursuit of both monetary and
banking stability, from a true macroprudential perspective, has been the order of the day for
the BNB for more than a decade now.
Through our own painful experience with a crisis in 1996-1997, we became fully aware of
the systemic importance of the financial system. Thus a key element behind the success of
the overall policy mix in Bulgaria is that our central bank is entrusted with the tasks and
responsibilities to regulate and supervise the banks in the country, with the goal of ensuring
the stability of the banking system.
Only three days ago, the capital markets provided the latest proof of the efficiency of the
macroeconomic policies in Bulgaria and the resilience of our economy in the face of such a
severe global crisis. Bulgaria's global issue of 5-year euro-denominated bonds, marking our
country's return to the international bond markets after a decade, was a great success. The
international investors' orders oversubscribed the offered amount more than 6 times. Their
strong interest has resulted in a very low annual yield of 4.436%. At present, only the
highest-rated EU Member States can afford to pay a lower price for borrowing on the private
capital markets.
To conclude, we have achieved monetary and banking stability in Bulgaria during the last
15 years. They have been bolstered by the synergies of monetary and macroprudential
mandates (including banking supervision) within the central bank, complemented by the
prudent fiscal policies of several consecutive governments since 1997. The
BNB representatives will be eager to discuss our knowledge today and tomorrow, while also
looking forward to learning about the experiences of the other countries represented at this
conference.
I wish you a most fruitful exchange of views and ideas.
Thank you very much for your attention.