henrik auth : cash processing and protection against counterfeiting opening speech by henrik auth, deputy governor of magyar nemzeti bank ( the central bank of hungary ), at the first currency issuance conference at magyar nemzeti bank on cash processing and protection against counterfeiting, budapest, 1 june 2006. * * * ladies and gentlemen, introduction magyar nemzeti bank ( mnb ) is holding a currency issuance conference for the first time. on behalf of the board of directors of mnb, i should like to welcome the invited speakers and participants, and thank all the speakers called upon, and a large number of experts involved or interested in currency issuance for accepting our invitation. among the speakers, i should like to warmly welcome mr. antti heinonen, the director of banknotes at the european central bank, mr. robert juhos, managing director of g4s cash services ltd., mr. tibor pataki, the head of the national counterfeit centre, and mr. barnabas ferenczi, the head of currency circulation, while in the audience i warmly welcome the highly esteemed representatives from hungarian credit institutions, cash in transit companies, magyar posta ltd., the hungarian state treasury, the hungarian banking association, the national police headquarters and mnb. our aim in holding this conference is to further strengthen the dialogue that has been going on for a number of years with market participants, and to further develop our cooperation in cash processing and the fight against counterfeiting by acquainting all of us with experiences and conclusions drawn as well as by discussing opinions. in my speech i wish to elaborate on two issues. – why do we hold the conference now? – what does mnb think about cash processing and protection against counterfeiting? timing this year we are celebrating the 60th anniversary of the introduction of the forint. after the postwar hyperinflation, mnb issued the first series of forint banknotes on 1 august 1946. this series of banknotes, disregarding changing the original design at the beginning of the period, served circulation for over 50 years. the set of denominations altered with the passage of time but the system of security features barely changed. the second series of banknotes was issued by using modern security features between 1997 and 2001. since then mnb has been continually developing the range of security features, the most recent example of which is incorporated in the new thousand

##ving for price stability is not enough : it has to augmented by stability in the financial system. these two goals often conflict, therefore monetary policy alone is not capable of continuously facilitating both of them. additional policy tools are needed. as i said earlier, in small open economies the conflict often manifests in volatile capital flows. a first policy reaction to such a situation often is the introduction of capital controls, just like the ones we currently observe in latin american and asian emerging countries. now, the cesee region may not currently be a target of hot money inflows, but this may change in the future. the use of capital controls is a controversial issue, and excessive reliance on them in the cesee region ( at least in the countries that are already eu members ) is off the cards anyway, as it is against the fundamental eu principle of free capital movement. this leaves macroprudential regulation as a potential policy tool in these countries to mitigate systemic risk, either inherent or stemming from volatile capital flows. macroprudential tools are generally categorized into two types according to their primary aims, which can be ( a ) enhancing systemic resilience or ( b ) leaning against the financial cycle ( reducing procyclicality ). systemic resilience tools are typically microprudential instruments recalibrated for macroprudential purposes. these may include the regulation of various ratios, such as loan - to - value ( ltv ) or payment - to - income ( pti ), or forbidding “ toxic ” products. hungary recently has deployed such tools in order to discourage unhedged fx lending, which proved to be a major source of systemic risk. regulation may be stricter in the case of systemically important ( e. g. too - big - to - fail ) financial institutions. typical examples of countercyclical tools are dynamic provisioning ( e. g. the one in place in spain even before the crisis ) or a countercyclical capital buffer ( e. g. the one proposed in the new basel iii regulatory standards ). similarly to monetary policy, macroprudential policy can be tight or loose. in other words macroprudential policy may be characterised by its stance, just like monetary policy. as i mentioned earlier, an important factor in the effectiveness of macroprudential policies is cross - border consistency. 9 cross - border coordination in the end should boil down to coordination of macroprudential stances. the