Remarks by Alejandro Díaz de León, Governor of Banco de México,
at the 13th Annual Conference by the Central Reserve Bank of Peru,
the Re-inventing Bretton Woods Committee, and the
InterAmerican Development Bank "The Next Global Financial Cycle in a
Divergent Global Economy, Panel: Central Banking in a New Era?"
July 23, 2021
Introduction
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First, let me thank the organizers of today's conference. It is an
honor to share this panel with my colleagues.
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To address today's panel "Central Banking in a New Era?" I will
make some remarks on four topics: i) monetary policy; ii) financial
stability; iii) payment systems, and iv) climate change.
Challenges for Monetary Policy
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Regarding monetary policy, central banks in emerging economies
face a more complex set of trade-offs than their counterparts in
advanced economies.
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In small, open economies, which supplement domestic savings
with external financial resources, it is essential to preserve a sound
policy mix to foster an orderly adjustment of the economy to
adverse shocks and to attract capital inflows.
•
In these economies, external and idiosyncratic shocks not only
affect the demand side, but also the supply side and financial
markets, which tends to increase policy trade-offs.
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In advanced economies, in the last decades, several structural
factors and demographic trends have induced lower potential GDP
growth, lower inflation, and a lower real neutral interest rate.
•
This has resulted in a sustained trend of low- and below-target
inflation for long periods of time. This allows advanced economies'
central banks to be extremely patient in the wake of higher
inflation.
•
Emerging markets are not in the same position. We have less
policy space, price formation has not been dominated by
chronically low inflation, and inflation expectations have not been
persistently below target. We need to be mindful of a more flexible
and agile price formation process.
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In addition, as we have been recently reminded, emerging market
economies continue to be exposed to different types of adverse
idiosyncratic factors that limit investment, growth, and hamper
development.
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Furthermore, the complex post-pandemic environment poses
significant challenges:
1. The global economy is highly heterogeneous and in uncharted
territory.
2. Fiscal support, mainly in the US, is currently at unprecedented
levels, helping the recovery but adding inflationary pressures.
3. Post pandemic price and wage dynamics are highly uncertain.
4. Recent changes in the monetary policy strategy of both the Fed
and the ECB are untested and could add uncertainty.
5. Several emerging markets are already facing upward inflation
pressures, at a time when output remains below potential. Thus,
the inflation gap is positive, the output gap remains negative,
and financial markets are prone to volatility episodes.
6. Although the shocks that have affected inflation are expected to
be of a transitory nature, given their variety, magnitude, and the
extended time frame in which they have been affecting inflation,
they may pose a risk to the price formation process.
•
Monetary authorities are likely to continue to face difficult trade-
offs.
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Regarding monetary policy instruments, asset purchase programs
are not "over-the-counter" in emerging markets; policy makers
need to be mindful that central bank financing to governments can
fall into a situation of fiscal dominance.
•
Stress tests of fiscal sustainability and availability of sources of
finance are needed to avoid situations that could lead to financial
repression or monetization of fiscal deficits. Unfortunately, Latin
America had many of these painful episodes that caused
incommensurable long-lasting damage.
•
Also, if asset-purchase programs in emerging markets are
perceived as central bank financing of governments, it would exert
pressure on risk premia, the exchange rate and capital outflows,
contrary to the original objective of easing financial conditions.
•
Thus, it is necessary to act prudently and follow a robust policy
approach, contributing to solid macroeconomic fundamentals and
to an orderly adjustment of markets and relative prices.
Challenges for Financial Stability
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Regarding financial stability, the Covid-19 shock has allowed us to
test the internationally agreed regulatory reforms developed as a
response to the Great Financial Crisis of 2008-09.
•
The regulatory framework was enhanced to attain more resilient
financial institutions, and capital and liquidity requirements were
strengthened.
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Even though the current crisis is not over, the regulatory reforms
seem to have worked.
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Technological innovation represents both a challenge and an
opportunity for the financial system.
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We need to make the best use of technology for the benefit of our
societies. This is particularly important for emerging markets,
given that the opportunity to attain more inclusive and deeper
financial systems is greater than in advanced economies.
•
We also need to avoid the growth of an unrestrained shadow tech-
banking system, prone to regulatory arbitrage. We must ensure
that the same risks are treated in the same way regardless of the
provider of the service.
•
Opening to new players and ways of providing financial services
requires aiming for efficiency, effectiveness, and inclusion while
keeping the right checks and balances on all participants.
Challenges for Payment Systems for Central Banks
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The payment systems' landscape is currently facing one of the
deepest changes in history.
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Advances in technology and innovation have challenged domestic
and cross-border payments, thus entailing critical tradeoffs for
policymakers.
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It is of outmost importance for central banks to assess how new
technologies may contribute to their mandate of providing money
to our societies and to developing payment systems as public
goods that contribute to facilitate fast, low-cost, and scalable
payment alternatives for a broad range of users.
•
Since the origins of fiduciary money, authorities have not faced a
challenge where private digital payment solutions could induce a
significant currency substitution.
•
History has numerous examples where the generalized use of
private money without a lender-of-last resort, combined with
inadequate institutions and external or internal shocks resulted in
an economic crisis, affecting social welfare significantly.
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Virtual assets are not to be used as legal tender to meet financial
obligations or as currency, but rather treated as "commercial
goods" for all legal purposes.
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Crypto-assets or tokens could have some medium of exchange
properties, but they grossly fail as a store of value, unit of account,
and as a fully acceptable and efficient payment instrument.
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Thus, private crypto-assets hungry for seigniorage returns should
not consolidate as acceptable barter-tokens.
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The proposals involving Central Bank Digital Currencies (CBDCs)
emerge as means to protect the financial system and consumers
from the risks and suboptimal outcomes of crypto-assets and
lightly regulated stable coins.
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It is imperative for central banks to address this challenge in the
short-term to preserve the public goods they provide in the
provision of currency. This requires the central bank provision of
digital payment alternatives to households and firms properly
supported on policies focused on preserving the currencies' value
and on fostering their sound intermediation in the financial system.
•
Realizing the benefits of CBDCs and digital payments comes
along with the implicit requirement to foster public payments'
infrastructure, including new domestic and cross-border payment
services.
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The inclusion of new participants in digital financial ecosystems
(Bigtechs and Fintechs), which vary significantly in size and
availability of resources, raises considerable long-term issues, and
we clearly need to avoid them through the following public policy
anchors:
1. Same risk / same regulation.
2. Interoperability and neutrality.
3. No kingmakers, to avoid that entities extend the former's
market power and concentration to financial markets.
4. Business continuity with large foreign providers, since the
failure of a payment service provider could have substantial
spillovers.
5. Addressing jurisdictional gaps, to ensure an effective
monitoring of financial services' activities and an efficient
cooperation between regulators across jurisdictions.
6. Client protection, in particular for the use of financial data.
7. Cybersecurity.
•
Developing this public infrastructure should be at the top of the
local and international agenda since payment systems are
inherent to central banks as a key element in their role of providing
money.
Sustainability and Climate Change
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Finally, other exogenous challenges have gained relevance. In
particular, climate-related risks, which are global in nature.
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The financial system could play an important role in aligning
incentives and setting the ground for the internalization of climate-
related externalities.
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The role of central banks on climate-related financial risks is
precisely to foster such alignment of incentives. We should make
use of the existent international coordination frameworks to tackle
climate risks.
•
Also, climate risks imply material financial risks affecting all
countries and sectors. Just as we carefully and continuously
monitor traditional financial risks, material risks related to climate
change must be integrated into the risk-management routine
performed by financial institutions and supervisors.
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Open emerging market economies are highly vulnerable to
external shocks related to climate policies. These shocks can be
caused by carbon pricing policies, tariffs, and fiscal policies.
Recent proposals to establish minimum carbon prices must
consider per capita income and carbon intensity.
•
International organizations such as the Network of Central Banks
and Supervisors for Greening the Financial System (NGFS) and
the Financial Stability Board (FSB) have contributed to launch a
coordinated agenda to improve the resilience of our economies
and prepare the financial system to manage these risks.
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The initiative of the International Financial Reporting Standards
(IFRS) foundation to prepare minimum disclosure standards in
conjunction with the Task Force on Climate Related Financial
Disclosures (TCFD) will help to raise awareness among financial
institutions and non-financial companies, so that blind spots in the
efforts to promote financial stability and in the transition to a low-
carbon economy can be avoided.
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Traditional regulatory instruments, such as capital requirements,
may not be adequate to address these new risks. We must
encourage forward-looking methodologies, such as stress tests.
The NGFS scenarios provide a good starting point.
Final considerations
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Despite the stronger economic recovery expected in 2021, the
pandemic has left important economic challenges.
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Our societies and economies face multiple scars and pressing
concerns. Policy space is more limited and idiosyncratic social and
structural challenges hamper development and constrain decision
making.
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The magnitude of the challenges that central banks face cannot
be overstated. We need to recognize the urgency to work
creatively and cooperate effectively, in order to attain a broad
shared vision of the future and the roadmap to attain it.