samchain/econo-pairs-v1 huggingface dataset:
Philip H Penn: Enhancing and strengthening banking supervisory capabilities in Pacific countries Opening remarks by Mr Philip H Penn, Acting Governor of the Central Bank of Samoa, at the Pacific Regional Banking Supervision Seminar, Apia, Samoa, 23-25 October 2007. *  *  *  Mr Andrew Milford, Banking Supervision Advisor from the Pacific Financial Technical Assistance Centre; Distinguished Resource Persons; Ms Elizabeth Roberts, Director of the Financial Stability Institute (FSI); Messrs Graham Johnson and Chris Gaskell from the Australian Prudential Regulatory Authority (APRA); Mr Kim Norris, Director, International Advisory Group, OSFI, Canada; Deputy Governors; Participants; Ladies and Gentlemen. As the host for this year’s Regional Seminar and the Annual Meeting of the Association of Financial Supervisors of Pacific Countries (AFSPC), I am very pleased and honored, on behalf of the Governor and Staff of the Central Bank of Samoa, to extend to you all a very warm welcome. We are very happy to see and meet again some familiar faces. And for those of you who are here on your first visit, a special warm welcome to Samoa and we hope you have time to spare to enjoy the Paradise of the Pacific. You have certainly arrived at the time when the streets of Apia are back to normal as compared to a few weeks ago when we experienced unusual busy traffic due to the influx of tourists and overseas sports people, who came to enjoy and participate at the 10th South Pacific Games which we hosted last month.

Thus, today, the received wisdom is that central banks should follow clearly articulated policies aimed at a stable monetary environment. This in turn begs the question of how to define a stable monetary environment. BIS Review 135/1999  2  In Hong Kong, a highly open economy with no capital controls, we focus on stability of the exchange rate, but this regime itself requires a flexible economic structure and a sound banking sector. I believe that Hong Kong possesses those attributes, as demonstrated not least by the adjustment of the past two years, and that the peg remains the appropriate regime for us, but I would be the first to admit that it is may not suit others. From the point of view of investors, it is the stability and credibility of macroeconomic policy as a whole which probably determines, or ought to determine, investment strategy. As experience tells us, it can be a costly mistake to pay attention only to particular parts of the policy regime, such as the exchange rate, without scrutinising the wider context in order to be satisfied that the overall design is credible. And so it is my pleasure to help to launch this conference today, and to welcome those of you from outside Hong Kong. We pride ourselves in being a place which offers not only a wide choice of excellent conference facilities but also, more importantly, the critical mass of financial and ancillary services which issuers and investors require - and which many of you here today contribute to.
Such an approach would have to be designed to limit the moral hazard implications, incorporating strict conditionality. But it can be useful as a means of supporting a country as it takes remedial policy action through bridging finance. The issue of the standstill is, as many of you will know, controversial in the sovereign context, notwithstanding the fact that an informal standstill plays a crucial role in corporate workouts. Voluntary debt rollover agreements with creditors or bond restructurings are, I believe, useful aspects of effective PSI. But historical experience of involuntary sovereign debt standstills, in the form of payments suspensions, has not exactly been encouraging – the process has often been inefficient and inequitable. Nevertheless, there are circumstances in a sovereign debt crisis where the immediate payments relief provided by a standstill may make an important contribution. An example would be where capital flight is pervasive because immediate policy adjustment is insufficient to bring about adequate voluntary private sector refinancing. In these circumstances, a standstill may realise the same advantages as in a corporate workout if it provides breathing space for remedial policy measures to be evaluated and put in place; if it promotes creditor co-ordination and avoids unjustified creditor preference by treating creditors of the same type equitably; and if it provides incentives to both creditors and debtors to reach a voluntary arrangement sooner rather than later.

Others have suggested that standstills create moral hazard and alter debtor incentives in the process by undermining the primacy of debt contracts. But, as I have noted before, a well-designed framework for sovereign debt workouts, involving a voluntary standstill where that is thought to be helpful, might be no more likely to provide perverse incentives for sovereign debtors to default than insolvency law does for corporate debtors. But it would have to be clear that the standstill option would be used sparingly and in tightly-defined circumstances; otherwise, it could be self-defeating. Having highlighted all these common themes, I could be accused of wearing rose-tinted spectacles if I did not also acknowledge that there are important distinguishing features between sovereign and corporate workouts. Unlike a company, a sovereign, of course, cannot be liquidated. Public policy approaches to crisis management recognise that there is an argument for sovereign debt restructuring in cases where the crisis arises from poor performance and policy. In such cases, as more generally, crisis management will involve a careful combination of official finance, policy adjustment by the debtor and PSI. This is rather different to the corporate case, where the creditors might well decide to liquidate, rather than restructure, a company whose problems arose solely from poor management. The lack of a corresponding insolvency law back-up in the sovereign case might mean that the incentives to repay are weaker, and that the moral hazard effect inducing a voluntary default is more common, than in the corporate case.
Looking ahead, I hope that you will bear with me if I become a little philosophical. All knowledgeable observers of Hungarian history, ancient as well as contemporary, agree that Hungarians possess the very rare ability to pull back at the last minute BIS Review 16/1997  -3-  from the brink of disaster or at least to extricate themselves from a seemingly hopeless situation. They unfortunately also note that once the Hungarians have done so, they miss the opportunity offered by their own success to carry out policies with a long-term perspective in mind. I do hope that history will not repeat itself. Admittedly, any further decline in the average living standard would be unacceptable. The standard of living should be allowed to begin to rise - but only to the extent that this does not upset the basic balance of the economy again. At the same time, the reduction in inflation must continue at a pace which puts the attainment of single-digit inflation in sight. You must break out - downwards - of the 18 to 35% range. And, last but not least, the country will have to begin to tackle earnestly the major structural problems related to the pension, health care, education and social security systems. These are daunting challenges. Two reminders may help when tackling them.

Thank you very much. BIS central bankers’ speeches  7
Having made a conservative estimate of the loss, it must be absorbed by the firm’s capital structure, respecting the ranking of priority that would apply in liquidation. So you start by writing off the equity to the extent that that is needed. If the loss is bigger than the equity, you also write off the subordinated debt. If there is still some loss left, then you write down the claims of uninsured, unsecured creditors in one way or another; the scope of this would need to be made clear in the statutory framework for resolutions. The loss is then covered. But it is still necessary to recapitalise to the bank, so you convert some of the residual claims of the unsecured, uninsured creditors into equity. How much? Whatever the microprudential regulatory authority concludes is needed to provide adequate capitalisation for the bank or dealer going forward. 2  BIS Review 144/2010  This is a technique that will work only in circumstances where the size of the loss could be estimated in the run up to the resolution and where the underlying franchise of the business remains basically viable. But it has the promise of being able to take an essentially viable business with a toxic part, write-off the toxic part and reconstruct the capital structure of the bank or dealer so as to be able to maintain the business as a going concern.

The issue was not capital raising as in the SCAP, but instead how fast should they continue to build their capital. What’s prudent? This translated into an evaluation about the amount of capital that they could prudently pay out via dividends and/or share buybacks. Fourth, with respect to the distribution requests, we were not calculating the amount of capital that the banks can distribute. Instead, we were making an “up” or “down” decision per their requests. Either we “objected” or we “did not object.” We want banks to have good capital planning processes and make intelligent decisions with respect to capital. We don’t want to determine their capital actions or what their distributions should be. They need to be able to do this. Fifth, with respect to disclosure, this decision was left to individual firms. In some cases, banks disclosed whether we objected or not to their plans for distributions, while in other cases they simply announced their intention with regard to future capital distributions. So what have been the lessons from our stress test exercises? One key issue during the financial crisis was the unwillingness of banks to proactively raise capital so they would be better prepared to withstand a “bad state of the world” scenario should that transpire. Banks didn’t want to do this for two reasons. First, capital raises might signal that they were, in fact, weak. Second, the capital raises would be dilutive.
The most obvious answer is to look at the stated rationale and motivation associated with the policy change. For example, the analysis by the Basel Committee on the long-term economic impact of stronger capital and liquidity requirements accepted the potential costs of higher loan spreads and reduced output levels, so this can be viewed as movement to the left along a frontier. It is also useful to think carefully about the expected impacts—both desired and undesired—and make ex ante predictions. What is the likely behavioral response? How might the balance sheet and the income statement change? What might financial markets reflect? At the risk of taking this simple framework too far, let’s think about what might happen to market indicators in each of two scenarios—a movement toward the frontier that makes policy more efficient and movement along the frontier toward a less conservative policy stance. If the former is really an elimination of inefficient constraints (move from C to B, for example), one might expect equity prices and Sharpe ratios to rise, while CDS spreads or bonds ratings are flat as opportunities expand and risk doesn’t increase. By contrast, in a movement along the curve, say from A to B, one might expect equity prices to rise as intermediation opportunities increase, while CDS spreads and ratings deteriorate as risk increases. One might expect to see measures of increased distress in some states of the world over time.

By contrast, a policy change designed to increase efficiency might not come with those undesirable outcomes. In practice, however, it can be difficult to differentiate among drivers of policy change due to measurement and assessment challenges, the potentially long impact horizon, and different views from a social and private perspective. I’ll turn now to describe this efficiency framework and then discuss some of the practical issues. Policy Efficiency As a point of departure, I’ll begin with an idea that I expect is familiar to most of you. Standard finance theory suggests that investors face a trade-off between risk and return that outlines the set of feasible options across portfolios. An investor can choose a portfolio with higher expected returns and higher risk, or a portfolio with lower expected returns and lower risk. I think there is a useful analogy for supervisory and regulatory policy. On one hand, the official sector cares about the provision of financial services such as credit, deposit-taking, payments, and risk transfer, where effective intermediation supports economic growth and consumer wellbeing. This is the basic function of the financial sector and can be thought of as the return on banking. On the other hand, the official sector also cares about reducing disruption in the provision of those services and broader financial stability risks. It is only a decade since the financial crisis in 2008–2009 that imposed such an enormous social cost on the U.S. economy, so those risks remain salient for many of us.
The established players also have an advantage in that their relationship with the customers gives rise to a certain lock-in effect, that is changing from one service supplier to another, for example from one bank to another, may entail certain costs for the customer. It may be the case that the local branch of the new bank is further from the customer’s home, the legal terms and conditions governing the payment services may be different, the customer service centre may be slower, the personnel may be less friendly and so on. Getting private individuals to change their bank has proved to be much more difficult than expected. The new alternative service must be better than the existing payment service by a broad margin in order to make changing from one service provider to another an attractive prospect. This affects what innovators will be able to charge for their new services, and thus reduces their incentives to launch such services. However, despite such difficulties, there are examples of very successful launches of innovative payment methods. One such example is the introduction of M-PESA in Kenya in 2007. M-PESA is a mobile payment service based on SMS and was launched by the leading mobile operator, Safaricom. One of the points here is that a large part of the population had mobile phones but not bank accounts. The mobile operator thus had a large, well-established circle of customers and thus an advantage.

On the other hand, it is in general not much more expensive to produce a large number of payments than a small number of payments due to the benefits provided by economies of scale. However, it takes some time before a new system can reap these benefits. The costs for building, manning and maintaining such a technical system are rather high and it is only when the system is in place that costs begin to fall. Then the cost of processing an additional payment is almost zero. The average cost of making a payment thus falls as the number of payments increases. The price per transaction that the producer can charge without running at a loss is therefore low. Already established payment services that handle large volumes of payments therefore have a cost advantage. The larger the volume the established service has, the greater is its advantage. The situation for a new service is exactly the opposite. At least initially, a new service will have a small number of payments to distribute the fixed costs between. In order not to price itself out of the market, the new service will have to run at a loss until it has achieved a sufficiently high volume. A new service thus has a significant cost disadvantage compared with an established service. Second, a new system has to compete against the so-called network effects. The classic example of a network effect is telephony. Being the first person to have a telephone offers no advantages.
Instead, it requires the monetary base, defined in the case of Hong Kong as the amount of Hong Kong dollar bank notes issued and the Hong Kong dollar clearing balance of the banking system held with the Hong Kong Monetary Authority (HKMA), to be fully backed by US dollars at a fixed exchange rate16. In other words, 14 Article 111 of the Basic Law provides, among other things, that “the Hong Kong dollar, as the legal tender in the Hong  Kong Special Administrative Region, shall continue to circulate”. 15 As a matter of fact, in the fourteen and a half years since the Hong Kong dollar’s link was established in October 1983, the  RMB has depreciated by a total 76% against the US dollar. 1616 Insofar as the banknotes are concerned, since the inception of the linked exchange rate system in October 1983, the issue  and redemption of bank notes, through the note issuing banks, are required to be made against US dollars at the fixed exchange rate of $ to $ However, at the time when the linked exchange rate system was introduced, there was no institutional arrangement whereby banks in Hong Kong maintained clearing accounts with the currency board.

Mr. Yam gives a keynote address on the Hong Kong dollar link Keynote address by the Chief Executive of the Hong Kong Monetary Authority, Mr. Joseph Yam, at the Hong Kong Trade Development Council, Financial Roadshow in Tokyo on 3/3/98. Introduction 1. I am honoured to be delivering the keynote address of this Financial Roadshow of Hong Kong. I shall, as you are aware, be talking about the Hong Kong dollar link. The Hong Kong dollar has been linked to the US dollar at a fixed exchange rate since October 1983. Notwithstanding what must be the worst financial turmoil in the history of Asia in recent months, and an abundance of events which might have undermined confidence on the Hong Kong dollar in the past fourteen and a half years of the existence of the fixed link, the exchange rate has remained very stable. Indeed, the Hong Kong dollar is one of the two major currencies in the Asian region that have not been affected by the recent tidal wave of devaluations, the other being the renminbi (RMB) of the Mainland of China. Furthermore, it is the only freely convertible currency in the region that has survived the turmoil unscathed. 2. There has been much scepticism expressed on the Hong Kong dollar’s link with the US dollar over the years and in particular in the past few months when one after another the Asian currencies tumbled.
Stefan Ingves: What is a useful central bank? Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the Norges Bank Symposium, Oslo, 18 November 2010. *  *  *  Thank you for inviting me to this event in the honour of my colleague of many years, Mr Svein Gjedrem. The programme of the symposium raises several highly-relevant issues for central bankers. In my presentation, I would like to talk about crisis as a momentum for change, both in what we do and how we do it. I will start from the Swedish banking crisis of the 1990s and its implications for the development of the Riksbank. I will then proceed by looking at the present situation and what conclusions we and other central banks may need to draw from the recent global financial crisis. My focus will be on nexus between monetary policy, financial stability and macro-prudential regulation. In common with all leaders, central bank managers face the fundamental issues of ”Where are we going?” and ”How do we get there”? As in most other sectors, central banking experiences changes over time and, also as in other sectors, the momentum for change is never stronger than in the aftermath of a crisis. Today, I would like to illustrate this by describing the Riksbank's thinking after our previous crisis, the changes this led to, and how we should use the current momentum for change (that is following the latest global crisis) to create a useful central bank in the period ahead.

But even with stricter regulation and supervision in place, this will not necessarily exclude monetary policy from having some role to play in the prevention of a financial crisis. Both instruments have their own advantages and disadvantages. I believe that one of the challenges for the future is to find an appropriate mix between monetary policy on the one hand, and regulation and supervision combined with macroprudential surveillance on the other. Let me elaborate on these points. Monetary policy may naturally play some role in the prevention of financial crisis. After all, the policy rate affects the cost of credit, as regulation does. Simply put, the banks’ lending rate can be described as a function of the central bank’s policy rate plus an interest rate margin or spread. The interest rate margin is a function of the compensation charged by the banks for administrative costs and capital costs, risk premiums and the banks’ profit margins. More stringent regulations will entail increased costs for the banks, and the interest rate margin and the lending rate will thus increase, as it will when the policy rate is increased. In this sense monetary policy and financial regulation are clearly intertwined. Thus, a central banker must always keep in mind that the increased use of regulatory tools will inevitably affect monetary policy in different ways.
And we also benefit from our broader view when we analyse horizontal issues. A lack of profitability is one of these issues. Here, we can pool insights from a large sample of banks, and this improves our analysis. And it’s the same with other issues, such as governance, cyber risks and the use of internal models. These models in particular are notoriously difficult to supervise, so a broad yet in-depth knowledge of industry standards and practices comes in handy. But it’s not just that we benefit from a broader view. We also benefit from a broader set of views. Supervisors from across Europe work together day in day out, pooling their knowledge and their different experiences. And at the end of the day, it is the ECB’s Supervisory Board and its Governing Council that take decisions. In other words, each decision reflects the views and opinions of 26 national supervisors from 19 countries. There is less room for national bias and less room for supervisory capture. Finally, we benefit from economies of scale when it comes to employing specialists for certain topics. If you supervise just a handful of banks, it might not be efficient to have specialists for each and every topic. But if you supervise the 118 largest banks in the euro area, it does become efficient. This is another huge advantage of European banking supervision. In short, supervising banks at the European level takes us a long way towards making banks safer and sounder.

Microprudential policy, which addresses risks in individual banks, interacts with macroprudential policy, which aims to address risks in the whole system. In both micro- and macroprudential policy, the national and European levels must work in tandem. And in the banking union, they do. While it is the national authorities that take decisions in the first place, it is the ECB that assesses these decisions. And if it sees a need to take stronger measures, it can do so; it can “top up”, as we say. For this to happen, the ECB’s Governing Council would act on a proposal from the Supervisory Board. So, the Supervisory Board is again strongly involved. In addition, the Supervisory Board and the Governing Council meet regularly to discuss macroprudential issues. Again, everything is done to avoid a situation where a Member State disagrees with a decision taken by the Governing Council. Now, in order to work together, we must apply common standards and approaches. As I have already said, I see such harmonisation as a major benefit of the banking union. It helps to level 5/7  BIS central bankers' speeches  the playing field, and it ensures strong and consistent supervision. But I know that some see this from a different angle. They feel that harmonisation is more of a threat than a benefit. They fear that it will lead to a uniform banking sector, which leaves no room for diversity – either for banks, or in terms of supervision and regulation.