samchain/econo-pairs-v1 huggingface dataset:
Norman Chan: Hong Kong's development as the premier banking hub in Asia Opening remarks by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, at the HKMA Conference for Independent Non-Executive Directors (INEDs), Hong Kong, 16 March 2017. * * * Fellow INEDs, Ladies and Gentlemen, 1. Good morning and a very warm welcome to all of you to the inaugural Annual Conference of INEDs of banks in Hong Kong! Today is a very special day for us because it is the first time in Hong Kong’s banking history that we have gathered in one place over 100 INEDs, which represents 82% of the total INED population of 123. 2. Today is also special because it marks an important milestone of the development of Hong Kong as the premier banking hub in Asia. 3. In case you do not know already, the size of Hong Kong’s banking sector, as measured in the amount of banking assets, has exceeded $ trillion by end of 2016. This equals to 8 times of Hong Kong’s GDP, which is a powerful manifestation of Hong Kong’s position as an international banking centre. Having said that, one of the things that we have learnt from the Global Financial Crisis (GFC) of 2008: Big is not necessarily Beautiful. The bitter lessons of some of the aspiring financial centres such as Ireland and Iceland are clear and brutal reminder of the risks of pursuing fast expansion of the financial sector without giving proper attention to supervision and governance.

Two weeks ago, the HKMA issued a circular to banks providing guidance on the importance of sound governance and good corporate culture and what they should do to promote them. I won’t go into the details now as the main themes of these new guidance circulars will be covered in the Conference later today. 8. Today is going to be a long day for you because the Conference won’t end until 5:45 pm. However, I sincerely hope that by the end of the Conference there will be some takeaways that you will find helpful in your capacity as INEDs of banks. 9. Fellow INEDs, I have talked long enough and now is the time for me to introduce to you our keynote speaker for this Conference. We are honoured and highly privileged to have Mr Andrew Bailey, Chief Executive Officer of the UK Financial Conduct Authority, to fly all the way from London to join us today. Andrew needs no introduction. Before he joined the FCA last year, he was the Deputy Governor in the Bank of England and Chief Executive Officer of the Prudential Regulation Authority from April 2013 until June last year. So Andrew is truly exceptional in the sense that he has been in charge of both the prudential and conduct sides of banking supervision, and is very well-respected internationally. He is therefore uniquely well placed to share with us his experience and insights. Mr Bailey, please. 2/2  BIS central bankers' speeches
Moreover, the possible contribution of the resolution fund in substitution of other creditors may not exceed 5% of the bank’s total liabilities. The draft Directive is, in general terms, satisfactory. Firstly, it establishes a relatively harmonised resolution framework which has been non-existent to date. Secondly, while it was necessary to introduce the above-mentioned “element of flexibility” in order to reach agreement, the room for manoeuvre will be limited. Thirdly, the 8% of total liabilities that will  BIS central bankers’ speeches  3  be subject initially to the bail-in, is liable to be covered relatively comfortably by capital and subordinated debt. Finally, the agreement affords security to deposits. Deposits of over € would only be subject to bail-in once they reach 13% of a bank’s total liabilities and, even then, they might not be affected, given the possibility of funding by the European Stability Mechanism envisaged in the draft Directive. In short, along with the Single Supervisory Mechanism, this greater harmonisation of national resolution regimes is one of the fundamental pillars of the future European Banking Union. To conclude on the treatment of global systemic banks, it will be necessary to create, for each of them, Crisis Management Groups. It is envisaged that these Groups will conduct before 2014 an initial review of the viability of the resolution plans of the systemic banks included in the November 2011 list.

13  All speeches are available online at www.bankofengland.co.uk/news/speeches  13  This perhaps illustrates that the risk to financial stability from monetary policy may come not so much from the use of monetary policy tools to stimulate demand. Rather, it may come from the risk that in a low for long world monetary policy does not or cannot respond sufficiently vigorously to shocks to avoid macro-economic tail events that would severely stress a less resilient financial sector and more leveraged real economy. Perhaps the most important lesson we learned from the crisis is that financial stability is a necessary condition for macro-economic and monetary stability. Over longer time horizons there is no trade-off between the two.27  But there is also some truth in the converse. Financial stability depends in part on effective demand management. It can be severely tested by macro-economic tail events even when the financial sector itself is not the source of the shock. Policy responses  Taken together, therefore, a low for long world is likely to be a more challenging environment for financial stability. The first and, in my view, most important policy conclusion to draw from this is the need for active and powerful macro-prudential institutions and policy. Effectively used, in relation to both lender and borrower balance sheets, it can constrain risk taking or ensure that higher risk is accompanied by greater resilience.
Well, we do aim to achieve a level playing field. But we do not seek to flatten the landscape. We do take into account country-specific circumstances that warrant specific supervisory treatment. And this is the case not only when we act as macroprudential overseers, but also when we act as microprudential supervisors, in particular when we assess the business models of banks. Here, we are even bound by law to “have full regard to the different types, business models and sizes of credit institutions”.1 We understand the value of diversity, and for good reason. Imagine that all banks had the same uniform business model. What would that do to innovation? What would happen to progress? And, equally importantly, what would it mean for financial stability? If all banks had the same business model they would all be exposed to similar risks. If that model was faulty, or were to be hit by an external shock, all banks would suffer. So, as any risk manager will tell you: diversification pays off. For that reason, we value diversity and account for it. We follow the principle of “same risks, same rules, same supervision” – which also means that different risks have to be treated differently – and we take a proportionate approach to supervising banks. So, the banking union is not at all about centralising power or doing away with diversity.

What are the repercussions that banks are exposed to? The weak economy results in a deterioration in the quality of loan portfolios, and the collapse of stock prices has an adverse effect on profits. Banks not only suffer losses on their own securities portfolios. The stock market slump also has an impact on earnings from commissions and services. Lucrative services in investment banking, such as those in connection with IPOs or mergers, are less and less in demand, and the reluctance on the part of many investors – with the resultant lower turnover – cuts into the income from commission business. In the wake of falling stock prices, profits in asset management are declining as well. This is because a part of the fees and commissions levied on the assets under management is value- or performance-based. This year, the big banks recorded profit setbacks in most areas compared with year-earlier quarters, in some cases even considerable losses. This was especially due to the poorer results from trading for own account and to a decrease in investment banking business (new issues, mergers and acquisitions). Particularly insurance business accounted for these losses. In traditional banking business, notably in retail banking, the big banks recorded satisfactory results, however. The BIS equity ratios disclosed by the big banks clearly exceed the required minimum.
Another point worth noting is that a large majority of the new Riksdag (Sweden’s parliament) backs an agreement that includes safeguarding the value of money as a statutory objective, as well as a more independent status for the Riksbank. The earlier discussion suggests that an understanding of the Riksbank’s actions has also grown among market players, though that does not rule out further improvements. In recent weeks, instrumental rates have been cut in other countries. This is, of course, a reflection of the increased concern about a deeper crisis that leads to lower inflation. There is reason, however, to be rather careful about citing interest rate cuts by other central banks as grounds for similar action by the Riksbank, though this is frequently done in the debate. When making comparisons with the United States, for instance, it should be borne in mind that the initial level of interest rates there is 1.15 percentage points higher. Most observers consider, moreover, that the United States is in a different cyclical phase. When making comparisons with Continental Europe, it is particularly important to consider exchange rates. The present weaker exchange rate represents an appreciable economic stimulus. If the TCW index were to remain at the present level in the coming twenty-four months, it would represent an expansionary effect on the economy that is equivalent to an interest rate cut of something like one or two percentage points. The weeks that have passed since the Riksbank presented the Inflation Report have been dramatic in financial markets.

Subdued inflation expectations and restrained wage demands pointed in the same direction. In view of a weak development of international activity, it was foreseen that full capacity utilisation in the Swedish economy would not be reached until the end of the forecast period, when inflation was assumed to be marginally above the target. This called for a readiness to undertake some cautious tightening of the monetary stance later in the year. At the same time, the spectrum of risks had shifted, with less risk of inflation exceeding its expected path but a continued risk of development being weaker than in the main scenario. In view of the uncertainty, the Riksbank chose to await future developments. •  BIS Review 81/1998  At the beginning of the summer we observed that inflation was following a lower path than we had assumed in the main scenario in March. Weaker import prices were contributing to this but so were other factors. Transitory effects - lower interest rates and changes in indirect taxes and subsidies - were particularly prominent. Moreover, on account of lower wage increases and stronger productivity growth than expected earlier, it seemed that inflation in the longer run would be somewhat lower than the Riksbank had predicted. With the outlook for productivity, it was likely that some surplus capacity would continue to exist during the whole period. -3All in all, inflation prospects one to two years ahead were accordingly more subdued than before and predicted inflation was below the target throughout the forecast period.
The corresponding figures for Italy and Belgium are even more alarming. One way to reduce the dependency burden and increase the labour force is to try to get  4  BIS Review 51/2004  people that are unemployed, sick or in early retirement back to work. Historically, however, the most reliable way to steadily boost the labour force has been immigration, as has been the case in the United States, for example. Experiences and studies also show that people with the most advanced qualifications and best training most often have the greatest incentive to move, partly because the wage differential is bigger and partly because they find linguistic and cultural barriers easier to overcome. So to consolidate the welfare in the old countries, an increase inflow of highly qualified labour from the new member states would be desirable. The question is whether this is not correspondingly a disadvantage to the new member states. They have a somewhat different demographic situation, their dependency burden is lower today, but will later rise sharply and in several countries exceed Italy’s or Sweden's in 20-30 years. There is also a risk that it would be the best-qualified labour that would emigrate first. Meetings in a broader circle Having considered these prospects, I would like to provide an insight into how the enlargement changes the functioning of the EU. The Riksbank participates in a large number of EU committees.

However, as the ECB points out in its study, there is another aspect to consider in banking consolidation alongside potential cost cuts: the improvement in geographical diversification, from the standpoint both of revenue and of risks borne. I fully share the conclusion of the study. It is true that cross-border mergers offer the advantage of increasing diversification. That no doubt improves resilience at times of stress and shores up revenue in terms of greater stability and recurrence, as was highlighted during the past crisis. In this respect, I believe that the lack of explicit acknowledgement of diversification as a risk-reducing factor may be restricting this type of cross-border integration. Some profound reflection across Europe and internationally may be advisable on the regulatory treatment of diversification, and its potentially beneficial effect on banks’ risk profile. In any event, it should be stressed that mergers are always long and complex processes and, on many occasions, they entail more problems than those initially envisaged. Also, national barriers persist that hamper mergers of banks from different jurisdictions. Persistence of national barriers. Admittedly, despite progress, specific cultural, institutional and regulatory obstacles persist that hamper the creation of a truly European banking market. Reluctance to eliminate these obstacles contributes notably to the ring-fencing of national banks, which restrict or even prevent the free movement of capital or liquidity across the different euro area jurisdictions. In my view, after significantly reducing risks in the financial sector, it is time to do away with national supervisory barriers.
For this to function in practice it is necessary that all actors are willing to share relevant information so that the ESRB can perform its tasks properly. However, sharing information, although simple in theory, often turns out to be difficult in practice. Secondly, the risk assessments and recommendations need to be well-understood and accepted. This will require efficient communication. The issuance of warnings and recommendations is one way to communicate, either in public or in private. So far, there have been press conferences after the General Board’s meetings. Under the ESRB regulations, the ESRB is also required to publish an annual report. This report will be presented by the chair of the ESRB to the European Parliament and the Council in an annual hearing. But there is a clear need to further develop the ESRB communication. This is important, not only to legitimise the work of the ESRB but also to increase public awareness of systemic risk and macro-prudential policy. The ESRB could make a substantial contribution to promoting discussions in this field, both nationally and at the international level. Thirdly, Member States must be willing to accept warnings and recommendations from the ESRB. This may perhaps be the most difficult objective to achieve. Accepting warnings and recommendations may be difficult to accept when there is a political cost. It is therefore vital that the ESRB proves its independence and that it can express its views even when politically inconvenient.

In case of remote payments, such as Internet payments, an additional requirement has been introduced for the so-called dynamic linking. It requires linking each transaction to a specific amount and a particular payee by sending one-time code messages by the payment service providers. The forthcoming review of the PSD 2 will provide a comprehensive assessment of the strong customer authentication impact on the level of payment fraud. New requirements are considered in order to reduce ‘social engineering’ and ‘phishing’ types of fraud, including a requirement to 1/2  BIS central bankers' speeches  match the payee’s name in the payment order with that of the account holder. Special emphasis will be placed on the prevention of instant payment fraud. Electronic identification and certificatebased solutions are explored as means of strong customer authentication. Recently, a special focus has been placed on re-defining and strengthening the oversight of the wider payment ecosystem. Specific steps in this aspect have been taken by the ECB with the draft of a single Eurosystem oversight framework for electronic payment instruments, schemes and arrangements (PISA framework), published last year. PISA framework aims to cover not only the traditional payment schemes and instruments (e.g. payment cards), but also innovative instruments, such as digital payment tokens backed by assets (e.g. stablecoins). Last September the European Commission published a Proposal for a Regulation on Markets in Crypto-assets (MiCA), which is currently under discussion.
For example, we amended the liquidity coverage ratio to take into account unintended consequences under stress on core markets such as commercial paper and to clarify that liquid asset buffers are there to be used in times of stress. We changed the leverage exposure measure, for example by recognising that cash variation margins are effectively pre-settlement payment of the fair value of the derivative. In doing so, we reinforced banks’ incentives to centrally clear their clients’ derivative trades. In other words, we simultaneously reduced bank leverage while increasing the robustness of derivative markets. BIS central bankers’ speeches  3  And we’ve learned about the unintended consequences of prudential capital and retention requirements on the securitisation market. Regulatory changes arguably treat asset-backed securities in ways that appear to be unduly conservative, particularly relative to other forms of long-term funding. Efforts to rebalance these incentives are now a priority. As the Bank of England the ECB have argued, there is a strong case for differentiating between securitisations that are simple, transparent and consistent, and those that are not. The regulatory treatment of those securitisations should reflect their lower risk profile. By making changes, policymakers are applying a mature approach. We’re learning and adjusting. We will continue to do so, in a thoughtful, open, and deliberative fashion. The third element of the new approach is turning our attention to new and emerging vulnerabilities. Work to assess new market developments and co-ordinate responses will become increasingly important as macroprudential risks arise from outside the traditional banking sector.

If importers expect a price change to be temporary, they will no doubt be more prone to absorb the exchange rate fluctuations in their profit margins. That this may have been the case is indicated by some preliminary studies. BIS Review 75/2001  5  •  Generally increased confidence in the low-inflation regime may also have tended to reduce the exchange rate’s pass-through to inflation. More stable expectations about future inflation should make prices less volatile. •  During the 1990s, moreover, competition in the Swedish economy has generally increased, for instance as a consequence of EU membership, continued tariff cuts, the reduction of other barriers to trade and deregulation of the domestic economy. Increased IT trade and the advent of new low-cost producers have had a similar effect. Although such changes are of the one-off type, in the past decade they have affected a series of markets and thereby presumably had a more protracted effect on the aggregate price level. Fig 2. Exchange rate impact on consumer prices 0.20  0.20  0.15  0.15  0.10  0.10 Recursive estimations of TCW coefficients lagged 3 quarters  Jan-01  Jan-00  Jan-99  Jan-98  Jan-97  Jan-96  Jan-95  Jan-94  Jan-93  Jan-92  Jan-91  Jan-90  Jan-89  Jan-88  Jan-87  0.00 Jan-86  0.00 Jan-85  0.05  Jan-84  0.05  Source: The Riksbank  The conclusion from all this is that the pass-through from the exchange rate to consumer prices has probably decreased.
And risk that gets measured can get managed, by you and by us. These measures aren’t a panacea. They can’t guarantee occupancy rates or rents for you. But had they been used to guide your decisions and our policy, they would have made a real difference in the run-up to the crisis. In fact, the last commercial real estate cycle could have been severely curbed and loss rates for some banks dramatically reduced. So your industry really does deserve great credit for taking the lead in developing the answers. Now – when you most feel like celebrating – is the time to start applying them. Resilience in the future If we continue to work together there is a real prospect of nurturing a market that keeps up with the cycles of human nature. But nature will fight back. The drivers of cycles will evolve. History may rhyme, but it rarely repeats. Just look in this cycle at the rapid inflows of finance to commercial property from retail investors in open-ended funds. More than 6% of the stock of commercial real estate finance is now held in these funds, and is growing rapidly. Now, a shift in finance, from bank debt to fund equity can be good for stability. It’s one part of the broader inflow of equity in this cycle, which is helping to keep gearing down as prices rise. But it’s not risk free. Fund investors offered redemption at short notice can create problems if prompted to herd to the exit.

In the 2008 crisis, we saw redemptions from property funds reach more than one half of assets under management. Many of you saw the consequences – firesales of assets, magnifying the market downturn. Open-ended property funds now have 80% more assets under management than they did on the eve of the crisis. So the growing importance of funds offering short notice redemption and investing not just in property but in other potentially illiquid markets too, is a focus of regulators in the UK and internationally. The Bank of England, along with the FCA, is looking closely at the ways these funds might contribute to broader instability. And it’s in part thanks to working closely with you that we’re alert to this. By working together, our nurturing of resilience can keep up with nature’s inevitable fight back. We can together create an environment that gives you the best chance of success. Whether you succeed will be down to you. But one thing is for sure. Your success is important to everyone. For its part, the Bank of England is committed to ensuring the financial system serves you – the real economy. That’s why, here at Guildhall, in 23 days’ time, we’re hosting an Open Forum to bring together policymakers, financial market users, academics, and wider society. The aim is to chart the way for financial markets so that they serve their users and contribute to prosperity. 4  BIS central bankers’ speeches  You can sign up on our website. Please do.