amando m tetangco, jr : convergence in a divergent world speech by mr amando m tetangco, jr, governor of bangko sentral ng pilipinas ( the central bank of the philippines ), at the aci phils - fmap - ihap - mart - toap joint general assembly, makati, 23 september 2014. * * * introduction last time i addressed your general assembly, i did a little “ word association ” game with you. i don ’ t know how many of you recall that, but i did that last year to highlight the fact that often, the same words we hear have different meanings to us. often, this is so because of our individual “ positions ” in the market. in other words, that adage “ where we stand depends on where we sit ” is very true among you. last time, i highlighted the bsp ’ s desire to get everyone on the same page, wherein the same words would mean the same thing. because clearly that ideal situation of common understanding makes for more effective and efficient bsp policy implementation. this year, i will not do that game anymore. rather, let me focus on just two words. can anyone hazard a guess as to what these two words would be? any guesses? the first word the first word is divergence. i chose this word because of late, it has become quite an important word that describes some of the remarkable features of the current global economic environment. first. divergence in the growth paths among major economies. we have seen that in the us there continues to be a sprinkling / sputtering of positive economic indicators, while both the eu and japan are still struggling for their economic growths to gain traction. second. divergence between the current growth path of emerging market economies and the previous forecasts for the growth path of these economies. eme growth has broadly slowed down from the earlier anticipated growth trajectories. together, these two “ divergences ” have important implications for the speed and manner of global growth rebalancing and policy normalization. third. divergence in the monetary policy stances among the aes. major central banks ’ policy rates have remained at historic lows. but while the fed has kept the phrase “ considerable length of time ” in its statement, it raised its expectations on the future path of the target rate ( i. e., those infamous dots ). it also reiterated its

, in my view, the most immediate and significant challenge facing emu is to reinforce the integration of both banking systems and capital markets. reinforcing the banking union when the euro was launched, there was actually an expectation that many banks would become truly european, providing retail services across the whole euro area. the reality is quite different. 6 / 11 cross - border consolidation remains very limited and most firms and households in the euro area remain largely dependent on their domestic banking systems to maintain investment and smooth consumption profiles. although no formal barriers to foreign banks exist, relevant distortions arise from stillsignificant specificities in banking regulations across countries. some of the existing savings banks, government - owned banks or regional banks in the eu are protected by national legislations hampering incentives to compete or effectively sheltering them from competition. moreover, regulation fails to fully acknowledge the benefits generally arising from geographical diversification in a single market. we also need to address the current deadlock on the third pillar of the banking union, the european deposit insurance scheme ( edis ). some experts argue that this third element may not be essential once we have in place a stringent resolution framework with homogeneous bail - in requirements ; but in my view, it remains crucial to make edis a reality. such a scheme would have a strong impact on trust and contribute to increased risksharing, insofar as it is designed as a fully fledged mutualised edis. contributions to edis taking into account bank - specific risks could limit the risk of permanent crosssubsidisation and would also help deal with the sovereign - bank nexus. this would contribute to reducing the link between national governments and banks and preventing destabilising cross - border flights to safety in the event of difficulties. moving towards a capital markets union the other key initiative to increase the integration of europe ’ s financial markets and to facilitate risk - sharing capacity in emu is the capital markets union project. the project aims at providing firms with the same funding opportunities, and households with the same saving opportunities, irrespective of the member state in which they are located. 7 / 11 however, inconsistent regulations, as well as varying market practices and industry standards across eu countries, prove to be key impediments in developing a truly pan - european capital market. as a result, country savings and investments are still highly correlated, a fact known as the feldstein - horioka puzzle. this correlation has subsided over time in the case