miroslav singer : regulatory earthquake welcoming remarks by mr miroslav singer, governor of the czech national bank, at the basel consultative group workshop on the impacts of basel iii on emerging market and smaller economies, czech national bank, prague, 26 august 2013. * * * dear participants of the basel consultative group workshop, ladies and gentlemen, let me warmly welcome you to the czech national bank, which is proud to host this workshop on the impacts of basel iii on emerging market and smaller economies. i am very glad that my institution is involved in this workstream because i believe it is important for emerging economies not to be merely passive recipients of the regulatory “ earthquake ” in the banking industry which is spreading from advanced countries. emerging economies should not and cannot blindly adopt new regulatory measures, as their financial markets have their own specific features. what is a priority for regulators in the most developed economies may not be a priority for regulators in emerging economies. on the other hand, the proposed measures within the basel iii framework may have unintended consequences for these countries, so it is worthwhile either to be prepared for them or to try to mitigate them if they are negative. let me start by underlining what i consider to be the two fundamental difficulties of the current regulatory push. the first one is of a general nature, while the second lies in differences in the relationship between the size of the financial sector and the size of the real economy in the most developed economies and the emerging ones. as to the general difficulty, i strongly believe that the world is becoming more fundamentally uncertain. alignment and coordination of regulatory tools and policies can only take us so far. there is no guarantee that rules and harmonisation will produce the right outcome, that the new rules will be significantly better than previous ones, or that in the fundamentally highly uncertain world the “ right ” set of rules exists at all. therefore, it is surprising to me that we are so focused on the design of the, hopefully, right set of rules and often also on limiting the space for their diversification. after all, diversification is a tried and tested strategy for dealing with fundamental uncertainties. the push for harmonisation at the expense of space for diversification is leading individual sovereigns to take a different approach, namely, that of insulation and buffering. this itself is not such a bad thing. after all, taking as a benchmark the maritime world, in which the rules of shipbuilding are fundamentally clearer, more certain and more effective than the current

i want to make. even if a central bank is actually independent from the government, it cannot over the long term act in direct contradiction to the preferences of society. for example, if the population is not averse to modest inflation, the central bank will have a hard time imposing an ultra - low - inflation environment, with all the associated costs and benefits, over the long run. the experience of the czech national bank, perhaps, serves as a case in point, although in the opposite direction. in general, czechs despise inflation, and the central bank needs to explain repeatedly why it uses the worldwide standard of a 2 % inflation target instead of targeting literal stability of the cpi level, or 0 % inflation. already many decades before the era of independent monetary policy, in the early 1920s, czechoslovakia pursued a strategy of deliberately strengthening the national currency. this policy resulted in deep deflation, in strong contrast to the hyperinflations seen at that time in neighboring countries ( austria, germany, hungary, and poland ; see sargent, 1982 ). so, it comes as no surprise that the czech national bank is rarely applauded for cutting interest 1 / 2 bis central bankers'speeches rates, while hikes are often welcomed by a majority of the population. an important publicrelations test arose for the bank in 2013, when interest rate cuts proved insufficient to return inflation to the target. inspired partly by one distinguished member of today ’ s panel, the czech national bank adopted an exchange rate commitment to keep the currency from appreciating. the commitment was terminated a year ago. since then, studies by the imf and academics alike have pointed to large benefits of the policy in terms of reducing unemployment, lifting gdp growth, and preventing deflation. within two years after the commitment ’ s enactment, the czech republic – at least in part thanks to the commitment – turned from a de facto sick man of europe to one of the fastest - growing economies with the lowest unemployment rate in the entire eu. when i attend conferences and seminars at other central banks, my foreign colleagues often assume that such a policy must have been tremendously popular. indeed, the economics behind it is straightforward, and the resulting boost to peoples ’ wages is hard to deny. in spite of that, the exchange rate commitment caused the sharpest ever deterioration of public confidence in the czech national bank : from around 75 % to around 50 %. confidence only recovered after the commitment was terminated. these were precisely the times