. how is the inflation tax imposed? governments have appointed either central banks or currency boards as their agents for producing and supplying currency. unlike currency boards which have to maintain a hundred percent reserve of valuable assets ( gold and hard foreign currencies such as dollars, euros or sterling pounds ) for issuing currency, central banks are peculiar animals. they do not have to have a reserve of an equivalent amount and can issue currency simply by making book entries. in other words, they can acquire any asset by assuming a liability on account of the currency they have issued. for instance, if a central bank has to acquire a building, all it has to do is to open its vault and issue the required amount of currency to the seller of the building. after the transaction, the central bank has a building on the asset side of its balance sheet. but, at the same time, on the liability side, there is an equivalent amount representing the currency issue of the bank. governments impose inflation tax on the society by borrowing from central banks. when such borrowings are effected, the government would give the central bank a government security such as a treasury bill. the central bank, in return, permits the government to take away an equivalent amount of currency and spend it to make payments. so, on the asset side of the bank ’ s balance sheet, it has a treasury bill. on the liability side, this asset is matched by a new liability called currency issued by the bank. but, to acquire that asset, the central bank has to spend only a fraction of the face value of the asset enabling it to make a huge profit out of the transaction. central banks ’ lending to governments become highly inflationary on another count. that happens when the commercial banks make use of this currency issued by the central banks as seed money to produce more bank money in the form of deposits. when governments spend the currency borrowed from central banks, such currency finally gets back to commercial banks as deposits of the public. commercial banks, in turn, use such deposits to create more deposits and credit. they create deposits and credit in multiple terms restricted only by the public ’ s preference for currency as against deposits and banks ’ own need for keeping a safe cash reserve to meet public ’ s demand for cash. in sri lanka, commercial banks could create bank money five times higher than the initial amount of currency issued by the central bank. because of this ability to self - produce in multiple terms, ( in sri lanka, that multiplier

transactions ”, 14 october 2014. bis central bankers ’ speeches step in this direction6. while this is an ambitious project and will take some time, i hope we can propose a way forward at the g20 summit in september. finally, we will need to make substantial progress in understanding and assessing interdependencies between ccps and their participants, across the multiple relationships they have with each other. mapping the complex network of these interlinked exposures is crucial from a macroprudential standpoint. this work is currently being carried out by the fsb, and its success will depend on the full and timely availability of data from all jurisdictions involved in the exercise. the information - sharing framework and the methodology being developed for this analysis is a precondition for future work, such as supervisory stress testing. pooling risk in ccps brings benefits for market participants and generates positive externalities for the broader economy – provided that the propagation of risk is well understood and well regulated. as mark twain once said : “ put all your eggs in the one basket and – watch that basket! ” 7. the macroprudential framework for ccps is about making sure that we ’ re watching that basket. i will now hand over to our panellists. see esma report, “ eu - wide ccp stress test 2015 ”, 29 april 2016. “ behold, the fool saith, ‘ put not all thine eggs in the one basket ’ – which is but a manner of saying, ‘ scatter your money and your attention ’ ; but the wise man saith, ‘ put all your eggs in the one basket and – watch that basket! ’ ”, in twain, m., the tragedy of pudd ’ nhead wilson, chapter 15, 1894. bis central bankers ’ speeches