samchain/econo-pairs-v1 huggingface dataset:
Bandid Nijathaworn: Post-crisis challenges to emerging markets – what are at stake for central banks? Keynote address by Mr Bandid Nijathaworn, Deputy Governor for Monetary Stability of the Bank of Thailand, at the South East Asian Central Banks (SEACEN)/Bank of England Seminar on Macroeconomic and Monetary Policy Management, Brunei Darussalam, 22 March 2010. *  *  *  First, I want to thank SEACEN, the Centre for Central Banking Studies of the Bank of England, and Ministry of Finance, Brunei Darussalam for inviting me to deliver this morning’s keynote address. The SEACEN’s advanced course and seminar have always been an important learning forum for central bankers in Asia to discuss common challenges as well as to share practical experience. So, I very much appreciate the opportunity to be speaking to all of you today. On a personal note, it has also been a few years since I last spoke at this forum, as my responsibility at the Bank of Thailand as a deputy governor up to October last year changed from monetary policy to financial regulation and supervision. This brief tenure of overseeing financial stability, especially managing the financial system at the height of the global financial crisis, has been a valuable experience and makes me appreciate even more the responsibility, the complexity, and the challenge to central banking. And it is a reflection of this experience that I want to share with you this morning, on the post-crisis challenge to emerging economies and what are at stake for central banks.

My address today will focus on three issues. The first is the lessons learned from past crises. The second is the post-crisis environment and their implications for emerging markets. And, the third is the challenge for central banks going forward. First, the lessons learned. Those of you who have been at central banks fifteen years or more will by now have witnessed at least two major financial crises that put the task of central banks in managing the economy under the spotlight. The first is the Asian financial crisis of 1997–98, and the second is the current global financial crisis. Although the two crises share many similarities as well as exhibit important differences, they both have a common origin in globalization and in the inability of the global financial system to deal effectively with the consequences of globalization. In the Asian crisis, the origin was in external imbalance of individual economies, private sector indebtedness, currency mismatch, and a sudden reversal of capital flows. In the current crisis, the origin lay in a large global imbalance, excessive-risk taking by financial institutions, and the accumulation of large systemic risk. In the context of policy, the two crises have produced many useful lessons on what needs to be done to prevent the recurrence of crises. While there is no shortage of lessons learned, having been at the Bank of Thailand through the two crises, my own list of lessons learned comes down to four important lessons. The first is that nobody is above crises.
One example of this is the use of interest rate swaps to manage the interest rate risk in a portfolio of fixed rate loans funded from floating rate deposits. Without modification of the mixed attribute model, such hedges could actually create, not reduce, accounting volatility, because derivatives are required to be marked to market, that is measured at “fair value”, while loans are generally booked at cost. This to me would seem perverse indeed! Another important example arises with the use of credit derivatives as hedges. This has proved difficult more generally to fit into the IAS 39 framework. I should add that the sheer complexity of the hedge accounting rules is also an issue, as the debate in Europe about the treatment of sight deposits and prepayments, and the problems at Fannie Mae and Freddie Mac in the US, well illustrate. We need to ensure that the rules themselves do not result in perverse behaviour as people try to find a way around them. The way forward So where do we go from here? All of the above factors have complicated the debate on IAS 39. And in my view, the only way forward is first to take a few steps back, before work starts on re-engineering the standard. I believe that many of those interested in the debate would be supportive of this approach.

At the macro-economic level, concern has been expressed that greater use of fair values could have a procyclical impact. Banks’ assets might be marked up in booms, as perceived credit risk declined, so boosting banks’ capital base and capacity for further lending. However, for the concerns about intensifying economic cycles to be realised two linkages would need to operate. First, the impact on bank capital would have to increase the volume of bank lending and, second, the increase in bank lending would need to have significant implications for real activity. Neither linkage can be taken for granted, and in any case discretionary policy action, whether monetary or prudential, by the authorities may mitigate any pro-cyclical effects. As I have indicated, we do, however, need to avoid accounting rules which introduce spurious volatility. An example, to which I will return in a moment, is the hedge accounting under IAS 39. The “mixed attribute” model The drawbacks of fair values in some contexts have led to widespread support in the banking industry for retaining the current “mixed attribute” accounting approach. While IAS 39 requires trading instruments, derivatives and many securities to be measured at fair value, bank loans generally continue to be measured at historic cost. However, the debate about IAS 39 has highlighted some difficulties with this mixed approach as it is presently formulated. The area of greatest difficulty has proved to be hedges which straddle the two measurement bases, where so-called hedge accounting comes into play.
While we have seen about 420 Statements on the Global Index, only a small number are from buy-side market participants. At the global level, there is acknowledgement that more can be done to demonstrate to the buy-side community the benefits of the Code, and to articulate more clearly the benefits of adherence. For example, the Code helps the buy-side understand the practices that your counterparties abide by, and helps to inform what you should expect from the relationship, and in turn, who you may want to transact with. The Code also provides a useful opportunity for the buy-side to benchmark your internal processes against global standards of best practices. The GFXC has launched a group that will focus on buy-side outreach to create greater awareness and adoption of the Code. This will not be an effort bound by time, but will be a journey and one which we are committed to. In Singapore, we have seen strong support from buy-side associations and we will continue to encourage Singapore-based buy-side market participants to issue Statements to demonstrate adherence. 12 Second, to continue the existing work on cover and deal which arose in response to the feedback received from the consultation on “last look” practices, and to strengthen FX disclosures. On this front, further work will be done to understand the role that disclosures play in informing market participants how their trade requests are handled in ‘cover and deal’ arrangements.

The Code’s content reflects good practices where clarity is needed, and applies to all wholesale market participants, including sell-side, buy-side, trading platforms and other market infrastructure. The Code incorporates the principle of proportionality, given the diverse nature of market participants. The Code is now owned and maintained by the local Foreign Exchange Committees (or FXCs), through the Global Foreign Exchange Committee (or the GFXC). The GFXC is chaired by Mr Simon Potter, Executive Vice President of the Federal Reserve Bank of New York, and has two newly appointed Co-Vice Chairs from the private sector – Mr Adrian Boehler, Global Co-Head of FX Local Markets & Commodity Derivatives at BNP Paribas, and Mr Akira Hoshino, Managing Director and Head of Global Markets Trading at MUFG Bank. FX Global Code: A Look Back 5 Since the launch of the Code, we have been fully committed to promoting adherence in our respective markets by market participants, from both sell- and buy-sides, to the Code. One year on, the GFXC has done a “stock-take” of our achievements, and I will share some of these with you today. 6 First, on awareness and commitment to the Code. On this front, the GFXC, together with the FXCs in each jurisdiction, has made good progress. A key part of the Code is the Statement of Commitment. This is a single, common basis by which each market participant can demonstrate that it commits to adhere to the Code.
Default rates for consumer finance ABS and SME collateralised loan obligations have also remained low, well below 1%, throughout the worst financial and economic crisis we have experienced. As regards covered bonds, credit quality is ensured by a double recourse (on the underlying assets and on the issuer), which is in fact comparable with the double protection that exists in our standard repo operations. Overall, the decisions announced last week were taken with a view to underpinning the firm anchoring of medium to long-term inflation expectations, in line with our aim of maintaining inflation rates below, but close to, 2%. We expect the two purchase programmes to effectively complement the TLTROs in enhancing the functioning of the monetary policy transmission and in providing further monetary accommodation given that we have now reached the lower bound. The newly decided measures, together with the TLTROs, will have a sizeable impact on our balance sheet, which is expected to move towards the dimensions it used to have at the beginning of 2012, and the Governing Council stands ready to take further action if needed, in compliance with its mandate to maintain price stability. Conclusion Ladies and gentlemen, it is time for me to conclude. My bottom line is also my starting line. Investment is rightly said to be today’s demand and tomorrow’s supply. Yet investment in Europe is falling short. If we don’t manage to get investment going again, we will weaken the economy in the short run and undermine its prospects in the long run.

They have at their disposal a second policy lever of direct relevance for investment, namely fiscal policy. Companies will only invest in the future when there is confidence and certainty about the future, about the medium-term fiscal path, and ultimately about taxes. We need a consistent and credible application of the Stability and Growth Pact across time and across countries. Within the existing framework, governments can find space to support productive investment, and achieve a more growth-friendly composition of fiscal policies by lowering the tax burden and reducing unproductive current expenditures. In parallel, it may be useful to have a discussion on the overall fiscal stance of the euro area with the view to raising public investment where there is fiscal space to do so. In this regard, there is also a complementary role to play at European level in supporting the rebound in private investment. I therefore welcome the € billion package announced by the incoming Commission President two months ago. The role of monetary policy Let me finally say a few words on the contribution of monetary policy. We successfully fought the confidence crisis in the euro that raised interest rates to abnormal levels. We provided the euro area banking system with unprecedented funding. We have continuously lowered our policy rates. Now we have reached the lower bound. To ensure that this very accommodative monetary policy stance is transmitted to the real economy across the euro area in an equal manner, we have also deployed a number of non-standard tools.
The case of some Asian countries, whose governance record is a far cry from the accepted blue print, but have posted impressive and sustained growth, has been cited as part of the contrary evidence. Against this background, it is proposed that further research is needed to provide a definitive position on the matter. The possibility is expressed that though governance and poverty reduction may be correlated, the direction of causation may not be so clear. Further, it is claimed that governance is a multi-dimensional concept and provides an avenue for intrusion into virtually every aspect of state functioning. It thus essentially compromises sovereignty in decision-making, and transfers accountability of government from its own citizens to the donor community. Given the imprecision of the meaning and instability of the concept, approaches to its measurement run into difficulties and yield results of doubtful validity and reliability. Yet these measurements have become the basis for further conditionality in aid distribution and the introduction of selectivity in determining aid recipients. With the wide-spread inclusion of governance criteria in aid conditionality, there is a measure of stress imposed on recipient countries, which generally lack the capacity to pursue the wide range of reforms required, the urgency of some of which have been called into question by some informed observers. Some critics see a more sinister dimension in the governance discourse, claiming that the whole purpose of the approach is to create in the developing countries the state-market relationships typical of Western neo-liberal systems.

It is a fundamental priority of the HKMA to ensure that the community can have full confidence in the system. 15. Confidence in our banks is also key to the functioning of our economy and society. And our work in this area in the last 10 years has affected all of you here today. 16. I think the most high-profile example is the loan-to-value ratio and debt-serving ratio limits on property mortgage loans. The last 10 years have seen strongly rising property prices, and competition between banks has been fierce. To some observers, including home-buyers, mortgage caps seem like a nuisance and make it harder to buy a property. But to the HKMA, it is an important matter of credit risk management and the stability of the banking system. We call these measures “counter-cyclical macroprudential”. And it would be highly irresponsible of us if we did not impose these limits. 17. This is also the case with Mainland-related lending. You all know the ways we have stepped up our supervisory efforts in this area, to ensure credit underwriting standards and risk management. As with property lending, the basic principle is “prevention is better than cure”. To take one example, we are collecting granular data from banks more frequently, to help identify emerging risks. As with mortgage caps, this might not please everyone – but it serves the wider public interest. 18. More generally, we have been implementing Basel III.
Through 2006 and into 2007, inflation was lower than expected, but output and employment were higher than expected. Norges Bank has increased its key policy rate by 1½ percentage points in six increments over the past 12 months. By way of introduction, I will take a closer look at the assessments underlying the interest rate decisions. Monetary policy in Norway is oriented towards low and stable inflation. The operational target of monetary policy is annual consumer price inflation of approximately 2½ per cent over time. The objective of low and stable inflation provides the economy with a nominal anchor. In a small, open and decentralised market economy like Norway, and with our particular industry structure, cyclical fluctuations will occur in periods. When economic agents are confident that inflation will be low and stable over time, the interest rate can also be set with a view to dampening fluctuations to some extent. BIS Review 47/2007  1  In Norway, inflation fell sharply as from the latter half of the 1980s. As a 10-year average, inflation is now 2.1 per cent, which is somewhat lower than, but fairly close the target of 2.5 per cent. Annual variability in inflation is considerably lower than in the 1970s and 1980s. Consumer prices vary from one month to the next, partly reflecting wide variations in electricity prices.

It is still uncertain whether inflation will increase rapidly or whether it will only gradually near the target of 2½ per cent. Unemployment has fallen sharply in the past few quarters. The rate of decline and level of unemployment are reminiscent of two previous cyclical peaks, the one in the mid-1980s and the other that started in the late-1990s and continued into this decade. Both expansions culminated in a sharp rise in wage and cost inflation. While a high level of net inward migration has increased the supply of labour, there have also been large flows out of the labour market into various benefit schemes. Sickness absence is at a high level and a rising share of the working-age population is on disability benefit or rehabilitation schemes. Many choose to retire under contractual early retirement schemes at the age of 62, and these numbers will probably increase in the coming years. In Norway, close to 600 000 persons among the working-age population are on benefit and retirement schemes. This accounts for 25 per cent of the labour force. 8  BIS Review 47/2007  It may seem that household saving has fallen markedly in Norway in recent periods. Saving was negative in the latter half of 2006, and probably during the first quarter of 2007, for the first time since the mid-1980s. Housing investment in the household sector as a whole is thereby fully debt-financed. A favourable economic climate and government surpluses may have created a sense of security that is influencing household saving.
Personally, I think there is good reason to merge the Riksbank and Finansinspektionen.8 Firstly, a merger of the Riksbank and Finansinspektionen would give us an authority capable of acting more forcefully to safeguard the stability of the financial system. Under the present system, the Riksbank can only issue recommendations, while Finansinspektionen can issue regulations and general guidelines. Through a merger, the recommendations that the Riksbank issues in its Financial Stability Reports, which have no binding effect, could instead be formulated as binding regulations.9 Secondly, and more importantly, there must be cyclical tools in the new regulations taking form, such as capital requirements varying over time. Both these and interest rate decisions influence the expansion of credit and thus growth and inflation. If these new tools are to be handled by Finansinspektionen, this would give us, in practice, two central banks, one subject to the government and the other independent of political bodies. A merger would allow us to avoid having two central banks which, under unfortunate circumstances, could be pulled in different directions. Thirdly, there is the matter of macroeconomic expertise. As I mentioned earlier, both macroeconomic expertise and knowledge of the financial system are needed to manage systemic risks. Supervisory authorities are traditionally focused on monitoring individual institutions and do not normally have the former type of expertise to any great extent.

The interest rate influences inflation indirectly via domestic demand for goods and services and via its effect on the exchange rate. When interest rates rise, it becomes more profitable for households to save, and consumption will therefore be postponed. Similarly, borrowing becomes more expensive, and investment will decline as a result. Lower demand then curbs the rise in prices and wages. Higher interest rates make it more attractive to invest in NOK and borrow in foreign currency. Therefore, higher interest rates normally lead to an appreciation of the krone. This makes imported goods cheaper. In addition, a stronger krone reduces activity, profitability and the ability to pay in the internationally exposed sector. Major economies such as the US, Germany and France are struggling with stagnation and fears of recession. Sluggish developments have led many countries to set very low interest rates in an attempt to stimulate growth. The business cycles in Norway and other countries have been desynchronised. While the turnaround abroad took place two years ago, the Norwegian economy continued to show a high level of activity. Towards the end of the upturn, the economy was facing labour shortages, higher wage growth and a sharp increase in household consumption and debt. Interest rates had to be kept at a high level in  BIS Review 23/2003  1  Norway. This led to a widening of the interest rate differential against other countries. The main explanation for the wide interest rate differential is that interest rates abroad are at a historically low level.
This is not surprising, for even though the euros (and dollars for that matter) are happily accepted in Swiss shops, cafés, and hotels, the exchange rate is usually unattractive and the change is given in Swiss francs. Shopkeepers and restaurant owners are not in the business of providing financial services, and foreign tourists are still better off changing their euros at banks or using their credit cards. True, Swiss firms use the euro extensively, some do much of their billing in the European currency, and some have even switched their accounting to euros. Some natural hedging takes place as well, although it is not clear how efficient this is. It is noteworthy, however, that some of the largest firms do much of their billing and  2  BIS Review 35/2004  their accounting in dollars, while others quite happily continue to use the Swiss franc. The fact that “euroization” has not taken place should not really surprise us. There have been other examples of small independent currencies surviving in the neighbourhood of much larger monetary zones. The example of the Canadian dollar comes to mind. The loonie has been floating for the past several decades, and it has served Canada rather well. More generally, there is nothing to be gained in having more than one currency for transaction purposes. Much of the double coincidence of wants gets lost if several currencies circulate simultaneously. “Dollarization” only occurs in those countries where hyperinflation threatens.

In response, the international community has strengthened considerably the frameworks for anti-money laundering (AML) and counter financing of terrorism (CFT) and exchange of information on tax-related crimes. These developments will have implications for the wealth management industry globally. MAS is fully committed to safeguarding the integrity and reputation of Singapore as a clean financial centre:   One, we have a strong legal and regulatory framework on AML and CFT, in line with international standards.   Two, we have a rigorous regime of supervision to monitor compliance by financial institutions.   Three, we will strengthen cross-border co-operation to fight trans-national financial crime.   Four, we will step up vigilance against suspicious flows of funds arising from external developments. Let me give you an update on what MAS has done and will do in each of these areas. A robust legal and regulatory framework Singapore has a robust regulatory framework on AML/CFT. The key legislation is the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, or CDSA. The CDSA makes it a crime to engage in the money laundering of benefits from a total of 417 so-called predicate offences, ranging from criminal breach of trust, to dealing with property of terrorist and market manipulation. The CDSA makes the reporting of suspicious transactions mandatory for all persons who become aware of such transactions in the course of their work. MAS gives force to the CDSA by requiring all financial institutions in Singapore to have in place an effective AML/CFT framework.