samchain/econo-pairs-v1 huggingface dataset:
Zeti Akhtar Aziz: Basel II implementation and the development of Asia's financial system – experiences, challenges and regional cooperation Keynote address by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 4th SEACEN/ABAC/ABA/PECC Public-Private Dialogue for the Asia Pacific Region, Kuala Lumpur, 18 August 2008. *  *  *  It is my pleasure to be here today, to speak on the occasion of this Public-Private Dialogue organised by the SEACEN Centre in collaboration with the APEC Business Advisory Council (ABAC), the Asian Bankers Association (ABA) and the Pacific Economic Cooperation Council (PECC) on the development of Asia's financial systems and the implementation of Basel II. The implementation of Basel II across the Asia Pacific region is occurring at a time of heightened risks, during a time in which our economies and financial systems are confronted with significant challenges and increased uncertainties. As the underpinnings of Basel II are concerned with enhancing the responsiveness to risk by banking institutions, there are enormous expectations that Basel II will stand up to the test of capturing the complexities and the more uncertain direction of risk in the current environment. There is also enormous interest in assessing the pre-emptive capabilities of the framework to anticipate the direction of risk and thus ensure the provision of adequate capital buffers for such risk. The sharing of experience on the implementation of Basel II in this region and the greater engagement between the supervisory and financial communities will provide further insights to these issues.

I am that sure my colleagues around the table would like to share their practical experiences so that we could have a better understanding of the financial market indicators suitable for emerging markets and how we as policy makers can best make use of them. Let me now pass the chair to Mr. Eli Remolona, Head of Economics for Asia and Pacific, BIS. BIS Review 64/2007  1
Specifically, we’ll suppose that people suddenly learn that, three years hence, productivity in the tradable sector is going to start to fall (relative to base). To fix the numbers, we’ll scale the hit so as to produce a material decline in the fair value of the exchange rate – 10%, say. Given the other parameters in the model, this requires an anticipated and overall decline in labour productivity of around 8% in the tradable sector, 5% in the economy as a whole. The results of the 9  simulation are shown in Charts 9(a)-(h) . Because the foreign exchange market fully and correctly anticipates the productivity hit the depreciation occurs immediately and does nothing further when productivity actually falls (9(b)). In the interim, the weaker currency provides a big fillip to the tradable sector. Its sterling profits rise significantly and, for as long as productivity holds up, this encourages a significant expansion in investment, employment and output (the green lines in 9(c),(d) and (g)). This is the “sweet spot” I referred to in the talk I gave about sterling earlier this year. 10  I should emphasise that there’s nothing in this simple model that inhibits the response to this sweet spot. New investments are assumed to be costlessly reversible – firms can easily get out of them once productivity starts to decline – capital and labour can be easily moved from one sector to the other and there’s complete certainty about the timing and scale of that event.

Such interactions tend to amplify the amplitude of the bussiness cycle, thereby heightening the risk to financial stability. This description of procyclicality presupposes the existence of two cycles, namely the business cycle and the financial cycle, that interact and reinforce each other. However, economic and financial decisions underlying the two cycles are not independent. They are inherently linked by the risk-taking behaviour of economic agents: the behaviour which is prone to change in response to incentive, perception of risk, regulation, and new information. It is this change in risk-taking behaviour that explains large swings in investor sentiment, from a period of optimism when risk is disregarded to a period of pessimism when there is no willingness to  BIS Review 160/2009  1  take risk. And it is this change in risk-taking behaviour that underscores the abrupt change in financial behaviour, and in the direction and momentum of economic activities. It follows therefore that procyclicality is a mechanism that encompasses the interactions of at least three reinforcing cycles that move in tandem. They are the business cycle, the financial cycle, and the cycle of risk-taking beheviour represented by fluctuations in asset prices or the asset price cycle. The three cycles are self-reinforcing, and it is the ways the cycles interact with each others that define the amplitude and the momentum of the cyclical flunctuations, as well as risk of a financial crisis. Interactions of the three cycles can be illustrated with reference to a typical boom-bust cycle.
16  13  Campbell et al (2011). 14  This was not estimated in Fujiwara et al (2014), but estimates of the impact of TV on well-being are available in Frey et al (2007). 15  The exact figure is £ from Fujiwara et al (2014). 16  This is for all employee jobs from the ONS Annual Survey of Hours and Earnings. BIS central bankers’ speeches  7  If you multiply that per-person benefit by the 15 million or so regular volunteers, you get a private benefit of volunteering close to £ billion per year. 17 If you added in non-regular volunteers, you would get a larger number still. In other words, adding together private and economic benefits roughly doubles estimates of the value of volunteering, to something perhaps closer to £ billion per year. (b)  Health benefits  The Centre for Mental Health estimates that the economic and social costs of mental health problems are huge. The health and social care costs alone are worth over £ the associated output losses £ and the human costs over £ So anything that improves mental health, even in a small way, can make a big difference to social welfare. Volunteering is typically found to have a positive impact on mental health – for example, by enhancing social integration and engagement. 18 Certainly, that is what volunteers themselves say. Remaining active and socially engaged can be particularly important for older age groups, post-child raising and post-retirement.

Data quality is less good than for frequent volunteering, but ONS estimate this could add a further £ The ONS have recently put out an estimate of the total value of informal volunteering in 2012. It is nearly as significant as formal Informal volunteering (not through volunteering, and its contribution is organisations) estimated at £ (both frequent and infrequent). You need to make assumptions here about the role of capital, and the level of productivity in volunteer jobs. Based on rough calculations that treat volunteer jobs Official estimates only measure the value of labour inputs to volunteering, not the outputs. like labour-intensive service industries, the current method could be understating “output” by perhaps a quarter. But this is very uncertain. Hard to know whether volunteers perform in It could be that volunteers are less the same way as paid workers (whose productive than experienced workers in wages are used as a proxy for volunteer some jobs. But they might be more output) enthusiastic. 1.25*(18.6 + 1.7 + 23.9) -> gives you around Potential higher estimate (very uncertain) £ as a possible alternative estimate. Infrequent volunteering (less than once per month)  Source: Bank and Pro Bono Economics calculations. 24  BIS central bankers’ speeches  Figure 11: Survey responses for volunteering regularly  Source: 2006/07 Helping Out survey.
The most effective thing that policymakers and market participants can do in what is a necessarily uncertain world is to work to ensure that the shock absorbers are strong relative to the range of potential economic and financial outcomes. Thank you. 4  BIS Review 49/2007

As a result, markets should work better to reward prudent and profitable performance, and appropriately penalise risky and poor performance. This is positive both for financial stability and the efficient allocation of economic resources. Improving alignment between business units and financial management Bank Negara Malaysia also expects IFRS 17 to be a key catalyst for insurers to review, if not overhaul, business processes across the organisation. This will be driven by at least three factors. First, the need for business units to capture broader and more granular information required for financial reporting. Second, changes in the way performance is measured under the new standard. And third, increased opportunities for institutions to differentiate themselves from the competition, helped by a more integrated view of performance. These considerations will have wide implications for insurers’ organisation structures, data capture, infrastructure and systems, 2/5  BIS central bankers' speeches  risk management, and product design and development. At present, many insurers are operating on multiple, fragmented legacy systems – including largely separate systems supporting the finance, investment and actuarial functions. Systems for regulatory reporting and compliance are also often separate in a number of institutions. As insurers begin to prepare for the reporting of insurance liabilities under the new regime, IFRS 17 will create both a need and the opportunity for insurers to strategically re-think information flows across the organisation – not only to improve efficiencies in financial reporting and mitigate operational risks, but also to capture synergies that will improve business and compliance outcomes.
The second is that the calculation of the rule – or policy reaction function – is extraordinarily complex. Moreover, these two problems interact, in that the complexity of the decision rule is increased enormously when the possibility of learning about the true model is introduced. So although policy rules offer important insights they do not provide a practical guide to decision-making, and it is useful to examine more deeply why that is the case. No economist can point to a particular model, and in honesty say “that is how the world works”. A crucial difference between economic and, say, meteorological analysis is that in economics there are no natural constants, not even for the natural rate of unemployment. Our understanding of the economy is incomplete and constantly evolving, sometimes in small steps, sometimes in big leaps. The stock of knowledge is not static. So any monetary policy rule that is judged to be optimal today is likely to be superseded by a new and improved version tomorrow. In other words, there is no time-invariant policy reaction function which could describe the policy intentions of a central bank. Rather, monetary policy in practice is characterised by a continuous process of learning embedded, in the case of the Bank of England, in the rounds of meetings and forecasts that are the daily life of the Monetary Policy Committee.

It is also encouraging to note that the report makes a similar positive assessment for a group of reforms undertaken by the Albanian government and other authorities in the area of market liberalisation, privatisations, energy sector and infrastructure. 1/2  BIS central bankers' speeches  Looking ahead, the report assesses objectively the global macroeconomic environment as overall favourable. The nature and origin of capital flows toward the transition economies is immune from the adverse effects from the Brexit or increase in interest rates in the US economy. For the Central and Southeastern Europe, during 2017, the economy is expected to grow faster, driven by domestic factors and a slight and stable improvement of the economic situation in foreign trading partners. The main risks relate to the performance of commodity prices, and in particular to geopolitical and global economic developments. The deepening social inequality is an issue of particular concern that has been present across the board in transition countries. The report evidences that inequality in the economy, in terms of opportunities and financial inclusion, has been expanding, contributing negatively to economic welfare in transition countries. Finding solutions is a difficult challenge, with financial education and financial inclusion considered as tools for addressing this issue successfully. I would like to take advantage of this opportunity to emphasise that the Bank of Albania and the banking system are paying particular attention to these two topics.
The second error to avoid is to tackle the effects deriving from a supply shock, like that connected to the increase in the oil price, with policies to stimulate demand. If the increase in oil price and other commodities is protracted, anticyclical policies simply postpone the adjustment by several months, making it more expensive. From the first oil shock – in the mid-1970s – it is possible to gain very clear insights that ought not to be forgotten. The comparison between the experience of Germany, which avoided using monetary and fiscal policy to compensate for the loss in purchasing power caused by the increase in oil price, and that of Italy, which instead sought to stimulate domestic demand is illuminating. The German economy and that of other countries which followed the same path emerged stronger from that difficult phase of adjustment than countries like Italy which followed the illusions of Keynesianism and only engineered a higher inflation rate. 1 The depreciation of the exchange rate did not allow to increase market share on a sustainable basis. Italy is still paying for that error, with a public debt above 100% of GDP and a debt burden that weighs heavily on taxpayers. The third error that history invites us not to repeat is to put up protectionist barriers to stop or impede the economic and financial integration under way at global level. Experience shows that such measures damage economic growth and tend to worsen crises. The 1929 crisis  1  See Figures 1-4 in the Annex.

Firms, including Italian ones, which have restructured and are exposed to international competition have become more productive, have started to regain market share, have improved their productivity and started to pay their employees higher wages. By contrast, firms which are protected from competition and benefit from having a monopoly or from national or local restrictions on trade, and perhaps even benefit from state aid tend to pass their higher costs onto consumers. I don’t need to tell you that there are some Italian firms which are flourishing without state aid, while others don’t have real growth opportunities and continue to be a burden on taxpayers because they receive support from the public sector. Finally, protection from international competition means higher prices, as quotas and tariffs are a form of taxation. This weakens consumers’ purchasing power, and particular affects the poor. There is really no need to favour price increases in these times of higher inflationary pressures. The fourth mistake that needs to be avoided is to intervene in financial markets without considering the perverse incentives that may result from these actions. Whatever measure aimed at supporting financial institutions in distress due to market turbulence should not allow those who have made mistakes to avoid paying the price for them. Should this happen, they would be tempted to do the same thing again. The measures taken in recent months by central banks, including the ECB, aimed at supporting market liquidity but, at the same time, not to relieve investors from solvency risks, go in this direction.
Hence, the first choice which Exter had to make was whether to retain the currency board system or go for a central banking system. In a way, he did not have much choice in this regard, because his mandate was “to report on the organization and the functions of a Reserve Bank for Ceylon….” If he preferred a currency board, he should not have accepted the assignment. However, like a true professional, he compared and contrasted the two systems before he made his recommendation in favor of a central bank. The report demonstrates that his recommendation was out of conviction rather than the performance of a mere duty. His choice of a central bank for Ceylon in preference to the continuation of even a reformed currency board system was made on the basis of strong economic arguments. BIS Review 92/2007  1  1. The higher credit needs of a growing economy: Currency boards which are restrained by the need for maintaining a 100 % foreign reserve backing for the currency cannot supply enough liquidity to meet trade and other requirements unless the country continues to experience a huge balance of payments surplus year after year. Exter argued that it was not only impossible, but also undesirable to have such a surplus. Impossible because a country cannot continue to maintain a competitive edge over its competitors. Undesirable because freezing foreign reserves does not help the country to attain higher growth or welfare. 2.

Since the risk weights given to such unsecured advances exceed even 100 percent, it is necessary for the Central Bank to plan for a higher level of reserves than the minimum 15 percent. The Central Bank management, having taken this prudential requirement into account, has decided, as a part of the Bank’s modernization program, to raise the reserve level up to 100 percent of the domestic assets of the Bank. This is being continued by the Bank since 2003 and the reserve level today stands closer to 100 percent. However, it would be prudential to revisit even this percentage today in terms of its adequacy in view of the level of ever rising unsecured provisional advances and Exter’s warning that the profits earned by inflating the economy should not be distributed. The build up of reserves by the Central Bank to be equal to its domestic assets has another monetary dimension. On the liability side of Bank’s Balance Sheet, it has liabilities on account of currency issue and demand deposits maintained by commercial banks. These liabilities are known as monetary liabilities, since they constitute the reserve money of the system. All other liabilities, including the capital and reserves, are, therefore, called nonmonetary liabilities. When reserves are built-up to be equal to the Bank’s domestic liabilities, its monetary liabilities would vary exactly in accordance with the movement of the Bank’s net foreign assets.
Judgement is applied when responding to shocks, and a specific reaction function will only provide a simplified representation of the central bank reaction pattern. Regular information about policy intentions is therefore necessary for the public to learn and revise their expectations. This is also the rationale for forward guidance. In theory, forward guidance may also work as a commitment device and help the central bank stabilise the economy in a more efficient way. 4 The merits of this are debated, and it may be most relevant in a situation where the interest rate has reached a lower bound. Forward guidance about how the central bank plans to reach its targets may nevertheless help establish confidence among agents that the objectives will actually be achieved. Forward guidance may thereby indirectly make an inflation target more credible, and thus contribute to anchoring inflation expectations. For forward guidance to work as intended, there are some preconditions. First, economic agents must indeed understand the announced reaction pattern. A second, and related issue, is that the conditionality of the guidance must be understood. A commonly raised concern is that the public might perceive the guidance as unconditional promises rather than conditional statements. Yet another requirement is that the guidance must affect the agents’ expectations. I will address these issues in more detail when I discuss our experience of forward guidance in Norway. Many central banks started to provide some kind of forward guidance in the late 1990s.

I would particularly like to thank Saba Alam and Will Dowson for their help in preparing this speech. I have received helpful comments from Andrew Bailey, Fabrizio Cadamagnani, Alan Castle, Swati Dhingra, Jonathan Haskel, Neil Kisserli, Catherine Mann, Martin Seneca and Fergal Shortall, for which I am most grateful. 8/8  BIS - Central bankers' speeches
Between 2002 and 2010, 85% of total employment growth in the EU was attributable to SMEs, and SMEs have a much higher employment growth rate (1% annually) than large enterprises (0.5% a year). And within the SME class, most employment growth takes place within young firms9, for whom external financing is particularly important as they cannot draw much on internal funds. Recent research from the US has shown that these firms also tend to be more sensitive to changes in investment opportunities.10 So what is the solution here? There are many schemes underway in Europe to address this problem that I will not try and cover today. But one unifying theme that I see as critical is to better match the needs of SMEs with the funds of non-bank investors, thus providing more diversification for SMEs. One way in which non-banks provide this diversification is in terms of counter-cyclical access to credit. When banks contract credit, less risk-averse investors such as private debt funds or peer-to-peer lenders can fill the gap and thus help smooth the credit cycle. Another way is in terms of maturities. While regulatory changes have made commercial banks less willing to make long-term loans, some large institutional investors – for example pension funds and insurance companies – need assets with maturities and returns that match their liability profiles. SME lending can provide this, especially while long-term safe assets exhibit low rates of return.

On the other hand, if what we are seeing is the beginning of a structural shift from bank to non-bank financial intermediation, we have to keep a close eye on the potential risks that might be building up. Indeed, there may be little long-term value in shifting risk from a highly regulated sector to a lightly regulated one, particularly if more and more lending is taken up entities that fall outside the regulatory reach. Conclusion Let me conclude. My message today is simple: the euro area financial system has been hit by a major shock, which few of us foresaw, but through good policy choices it is possible to steer this development towards a positive outcome, while avoiding unintended negative consequences. And looking at the developments across the euro area today, in my view the right choices are being made. Banks are already strengthening their capital as a result of the comprehensive assessment. The European supervisor will be fully operational in November this year. From next year we will start building up a single fund for European bank resolution. And initiatives are underway to strengthen access to finance for SMEs, especially through securitisation. For Asia, there is every reason to be confident that the euro area is addressing the structural problems in its financial system, which should in turn support more sustainable growth in Europe and for the world economy.