Archive for the ‘Central Banks / Monetary Policy’ Category

Why does money depend on trust?

May 29, 2017

Nice primer from Bank of England. Trust is all there is to money..

Norges Bank develops a video on new banknotes..

May 29, 2017

Interesting video from Norway Central Bank celebrating its new 200 kroner banknote which has its favorite fish- cod – on the note.

200front_viii_specimen

There is some explanation here:

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Here is Copernicus doing monetary economics!

May 29, 2017

Brilliant JP Koning has a superb tweet:

There is more here..

Reserve Bank of India will be utilising Army’s services…

May 23, 2017

An interesting update on how central bank uses armed forces to guard itself:

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Why any modern banking system is necessarily uncompetitive?

May 23, 2017

Interesting post by Cameron Murray, a professional economist on Naked Capitalism blog.

He argues why banks are uncompetitive in today’s system.

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Bundesbank joins Bank of England in saying banks are not financial intermediaries but creators of money…

May 19, 2017

We usually understand banks as financial intermediaries which first collect deposits from surplus units and then pass them as loans  towards deficit units.

In 2014, Bank of England turned this wisdom upside down with their research. They said banks first give loans and then put deposits as liabilities to balance the balance sheet. This had massive implications on the way we thought about banking, monetary transmission and so on. The most important being we need to pay more attention on quality of loans than just mobilising deposits. More on this here.

Now it seems other central banks are catching up to this view.

Bundesbank in its monthly report reviews this literature:

The accommodative non-standard monetary policy measures taken by the Eurosystem in response to the financial and sovereign debt crisis caused the reserves of (commercial) banks in the euro area to increase sharply. In spite of this, the annual growth rate of the monetary aggregate M3 has remained at a moderate level over the past two years, reigniting interest in the connection between the creation of reserves and growth in the broader monetary aggregate.

It suffices to look at the creation of (book) money as a set of straightforward accounting entries to grasp that money and credit are created as the result of complex interactions between banks, non-banks and the central bank. And a bank’s ability to grant loans and create money has nothing to do with whether it already has excess reserves or deposits at its disposal. Instead, various economic and regulatory factors constrain the process of money creation. From the perspective of banks, the creation of money is limited by the need for individual banks to lend profitably and also by micro and macroprudential regulations.

Non-banks’ demand for credit and portfolio behaviour likewise act to curtail the creation of money. The central bank influences the money and credit creation process in normal times through its interest rate policy, which affects the financing and portfolio decisions of banks and non-banks through various transmission channels. Non-standard monetary policy measures, too, have effects on the creation of money and credit. One such unconventional measure, the Eurosystem’s asset purchase programme, differs from interest rate policy in that it directly boosts the supply of reserves. Moreover, purchase programmes structured in this manner have an immediate expansionary impact (originating directly from the asset purchase) on the stock of money held by non-banks, though this effect is dampened in the euro area by the fact that the Eurosystem does not only purchase the assets from domestic non-banks.

There are also indirect effects resulting from the transmission of the purchase programme and its impact on lending and portfolio allocation. Critics point to the banking system’s capacity to create money as one of the main culprits behind destabilising financial cycles and financial crises, hence the long-standing debate about proposals to fully back deposits with central bank money, a move intended to restrict the extent to which the banking sector can create credit. It is not evident, however, that these constraints do indeed make for a financial system that is more stable overall than might in any case be achieved through targeted regulatory action. At the same time, that kind of transition to a new system would risk impairing important functions which the banking system performs for the economy and are crucial for keeping real economic growth on a steady path.

Lots of other details in the publication..

Being realisitic about cash vs digital payments debate

May 19, 2017

Interesting speech by Bank Negara Malaysia’s Deputy Governor – ncik Abdul Rasheed Ghaffour. He speaks on the burning issue of cash vs digital payments.

He says there are three aspects to this debate:

 

As a policy maker, I would think that there are three elements, or the ‘3S’, that we should consider in determining an optimal balance of paper and digital, cash and cashless.

Security
The first consideration is security. Counterfeiting is as old as money itself. However, cash has become more secure in recent years. In Malaysia, the amount of counterfeits discovered reduced by 25% in the past year. The currency industry is continuing to make good progress in enhancing security features. I am particularly pleased to note the recent efforts to make such features intuitive – so that the man on the street is likely to notice when something is amiss

The security challenge will not disappear by going cashless. The latest being the recent Ransomware attack. Cyber risk remains a real threat that must be managed. Significant efforts have been made to strengthen resilience against cyberattacks. The banking and payments systems industry has made this a key priority in recent years. However, cybersecurity is ultimately a shared responsibility between the provider and the consumer. Even the most robust systems can be breached if consumers do not exercise adequate caution or are deceived by fraudsters. In this regard, consumer education plays an important role in keeping cashless payments secure.

In addition, cash is also a choice payment instrument for illicit activities. Unlike digital transactions which almost always leave a trail to the parties, payments in cash are anonymous. In his recent book, The Curse of Cash, Kenneth Rogoff points out a very sobering reality – the amount of US Dollars in circulation outside of banks suggests that each American should have around USD4,200 in their wallet. This is not the case. According to him, most of this money is used to hide transactions.

However, this alone does not warrant moving away from cash entirely. Rogoff himself acknowledges this, and proposes the solution of eliminating large denomination notes – such as the United States’ hundred dollar bill. The logic is simple. With the next largest bill being USD50, such a move would immediately make it twice as cumbersome to hoard and pass around suitcases of cash. This is in fact a policy call which Malaysia has made, when we phased out the RM1000 and RM500 notes in 1999. At the same time, the case for removing large denominations becomes weaker as each year goes by. This is because the effect of inflation plays a similar role in making cash transactions more difficult for illegal activities.

Social cost
The second element for consideration is the social cost imposed by the form of currency chosen. On the surface, cash may appear to be costless. Consumers do not have to worry about subscription fees and exorbitant interest rates lying in wait. Retailers are not required to pay fees to accept cash, and so need not pass on any servicing charges to the consumer. There is no need for banks and merchants to invest in and maintain sophisticated software and hardware to support digital payments.

However, cash does not come cheap. Money needs to be printed and minted, and then transported, counted and guarded – several times over. Each step here poses a significant cost to various actors within the economy. Central banks have to deal with the rising cost of producing secure and durable money. Storing and moving money around under tight security can be expensive for both commercial banks and retail businesses. This does not yet account for the losses relating to under-reported taxes which is directly enabled by a cash economy – a cost borne by society as a whole. A 2005 study estimated this figure to be USD100 billion annually in the United States alone

The task of calculating the relative total cost of cash and cashless payments is a difficult one. Apart from the methodological challenges, the findings for each study are also likely to differ according to the nuances of each country. Nonetheless it is a worthwhile endeavour. Policy makers around the world have made positive progress in this area, and I believe we will see more efforts on this front in the coming years.

This leads to another dimension of the social cost consideration, which is the impact on financial inclusion. Millions of people live in rural areas globally, with little or no access to the modern infrastructures necessary to facilitate cashless solutions. The availability of cash is therefore paramount in ensuring that they continue to be seamlessly included in the financial system. At the same time, the success of mobile payments operator M-Pesa in rural Kenya has demonstrated that cashless alternatives can in fact be a means to promote financial inclusion for the unbanked. Here in Malaysia, where mobile banking transactions have tripled in the past year, there is potential to leverage the high mobile penetration rate to improve financial inclusion.

Stability
The third element is stability. The ability to make retail payments reliable is crucial for the effectiveness of the financial system. As discussed earlier, we have come a long way in developing a reliable way of transacting electronically – through solutions such as credit cards, mobile transfers and prepaid balances. Central banks are now carefully monitoring newer developments, particularly digital currencies based on the use of a distributed ledger. Digital currencies have tended to be volatile and subject to speculative hoarding. This raises the potential for runs on the digital currency, triggered for instance by a loss of confidence in the currency itself or a third party provider like an exchange. This risk is likely to be augmented where the digital currency is not backed by an issuer, and where there is no lender of last resort function. If digital currencies are widely used, such a shock could have systemic repercussions. At the same time, some of these concerns may be addressed if the digital currencies used are issued by a central bank. Many policymakers are studying this option.

In addition to facilitating payments, cash has been a powerful instrument for central banks to build trust and credibility with the public. The notes issued by central banks provide us with a direct and tangible link to the people – making it a key branding tool. Trust and confidence in the central bank are crucial for us to effectively deliver our mandate. This dynamic is augmented in jurisdictions like Malaysia, where the central bank is responsible for promoting both monetary and financial stability. If we were to go completely cashless, central banks might lose this traditional means of maintaining a strong brand.

Hmm..

Despite all the criticism, RBI Board still remains empty..

May 18, 2017

It is really puzzling. Despite much criticism on role of RBI Board in recent demonetisation, the board still remains empty.

Just to reiterate, the decision to demonetise the notes was taken by RBI Board. RBI Board comprises 21 members but just 10 were appointed on the eve of demonetisation. Out of the 10, only 8 were present to take a decision as momentous as this one. Imagine any Corporate Board taking a decision at that kind of magnitude with around 40% Board members being present.

So, on 8-Nov-2016 table looked like this:

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When silver ended as a unit of account…

May 18, 2017

Superb note by Ricardo Fernholz, Kris Mitchener, Marc Weidenmier. It is based on a bigger paper here.

They show how silver declined and ended as a unit of account. Moreover, it had sharp mpact on agricultural commodities:

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Denmark issues a tender to outsource printing of banknotes…

May 17, 2017

This blog had earlier pointed how Denmark has outsourced minting of its coins to Finland. The post also mentioned that Denmark will also be outsourcing printing of banknotes.

No agreement has yet been concluded with a supplier of banknotes. Danmarks Nationalbank has just published a timeline for the forthcoming tender for banknotes, and a supplier is expected to be found in early 2018.

Now Denmark Central Bank has issued a tender and a timeline for the same:

Danmarks Nationalbank has decided to discontinue internal printing/production of banknotes by the end of 2016. Like a number of other central banks, Danmarks Nationalbank will outsource this function to an external supplier. Danmarks Nationalbank will still be the issuing authority of banknotes in Denmark and will retain its expertise within banknote design and quality.

It is with great pleasure to announce that today, Monday 15 May 2017, Danmarks Nationalbank has initiated a competitive procedure with negotiation by sending a Contract Notice to the Tenders Electronics Daily (TED).

Danmarks Nationalbank expects the Contract Notice providing access to the procurement documents to be published within the next few days.  

Expected timeframe:

Dispatch of contract notice:                                                                                15 May 2017
Timelimit for request for participation:                                                              15 June 2017
Invitation to tender:                                                                                             1 September 2017
Timelimit for first indicative offer:                                                                       3 October 2017
Timelimit for best and final offer:                                                                        8 January 2018
Signing of contract:                                                                                            16 February 2018
Expected delivery of the first final batch of banknotes (one denomination): mid-2019

Interested banknote suppliers are invited to sign up for Danmarks Nationalbank’s news service for further news.

Will be interesting to see who gets the tender..

New government in Gambia fires the central bank chief

May 11, 2017

Interesting times for central bankers. After Barbados, Ukraine and Ghana, another central banker is fired. Though reasons for each are different.

The latest is from Gambia. This reason is more straight forward. A new government comes to power and fires the existing team:

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Lessons from Government intervention in Nigeria

May 10, 2017

An interesting account from Feyi Fawehinmi who is an accountant.

He points how interventions from Central Bank of Nigeria and the Government have benefited the two Palm oil producers in Nigeria. They have made more profits while producing less, employing less thanks to the bank which does not allow foreign competition in palm oil.

Lessons:

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ECB member admits to lobbying for abolishing cash…

May 9, 2017

It does not get clearer than this. Yves Mersh who just a few days ago argued why cash still matters in Europe. makes another speech.

He makes a case for how various players are lobbying for abolition of cash:

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Lessons on ethical investments from Norway’s Pension Fund Global

May 5, 2017

Speech from  Mr Øystein Olsen, Governor of the Norges Bank:

Norges Bank aims to be at the forefront of global efforts in the area of responsible investment. Responsible investment is an integral part of the investment strategy and includes the exclusion of companies on an ethical basis. In 2016, the Ministry of Finance, at the request of the Storting, introduced two new criteria for ethics-based exclusions: a climate criterion and a coal criterion. Norges Bank has conducted extensive research to collect data and perform analyses to identify the companies that fall under the coal criterion. Based on the results, the Executive Board decided to exclude 69 companies and place 13 companies under observation in 2016. On the advice of the Council on Ethics, the Board also decided to exclude a further eight companies and place one company under observation, while the exclusion of one company was revoked. The exchange of information and division of responsibilities between Norges Bank and the Council on Ethics functions smoothly.

Hmm..

Is modern central banking an elaborate waste of time?

May 5, 2017

Anantha Nageshwaran is one of those rare columnists who hits hard through his columns. (His Mint column is titled as Bare Talk but should be Bold Talk).

He points me to his recent post which hits modern central banks out of the park (in response to my post):

With all their self-importance, modern central banking (has been in the service of financial markets. It takes care of their post-central banking career, speaking engagements and book contracts.

In reality, they should be ensuring financial stability and hence, economic stability. If they do, they would be hurting the financial services industry and its short-term fortunes, profits and executive compensation. Buddies would not be buddies anymore. Friendships formed in Universities would be in vain.  They won’t help to secure chunky speaking fees.

So, in the name of the economy, of labour, central bankers of advanced nations (with Federal Reserve being the principal villain) continue to serve the most unproductive and predatory capitalists – the financial markets and the financial services industry!

This blog had labelled this coterie with central bank at its head as Finocracy a few months ago.

It is incredible how deep the nexus of elites of financial world.

RBI releasing a new Rs 10 coin to commemorate 125 years of National Archives of India..(should promote its own archives as well)

May 3, 2017

Just missed this. Indian central bank announced release of 2 coins to commemorate 2 anniversaries.

I would stick to the National Archives as it is really rare to see celebration of such an important institution yet a highly ignored one. We hardly care anymore for such institutions which play a silent role storing and maintaining historic records. They remain invaluable for researchers yet hardly get any mention anywhere.

So, really nice to see new Rs 10 coins being issued for the occasion:

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Eurosystem’s Target2 balances again aiding deficit countries?

May 3, 2017

There was a time when Target2 balances were seen as the reasons which kept Eurozone going. These are balances which National Central banks of Eurozone countries adjust with ECB. At ESB level these balances net out to zero but there are wide inter-country differences. Like we saw earlier that Germany’s Bundesbank had surplus balances against ECB but likes of Greece had negative balances. Earlier these differences in balances were seen as a result of capital flight. Gradually things improved and these balances declined. See more about the mechanics in my paper here.

It seems that these Target2 balances are again rising, though fir different reasons.

Mishtalk blog quotes from the BIS quarterly review (this is indeed complicated stuff):

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Why Europe still needs cash…

May 3, 2017

Yves Merschodf European Central Bank argues why Europe still needs cash.

He says there are 3 camps which argue for digital payments. However, their arguments are off the curve:

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Central Bank Legal Frameworks in the Aftermath of the Global Financial Crisis

May 2, 2017

Perhaps one of the more important papers on central banking.

There is a lot of research on how and whether central bank objective functions have changed or the independence. But there is hardly any research on the most important thing that drives central banks at the first place: Their legislation, saw in India’s demonetisation how central bank law is so crucial to understanding monetary affairs.

It is written by Ashraf Khan of IMF and looks at how central bank legislations have changed post the financial crisis.

Drawing on the 2016 update of the IMF’s Central Bank Legislation Database, this paper examines differences in central bank legal frameworks before and after the Global Financial Crisis. Examples from select countries show that many central bank laws have undergone changes in objectives, decision-making, accountability, and data collection. A wider cross-country survey illustrates the common occurrence of price stability in central bank objectives, and varying practices in defining financial stability, “independence” versus “autonomy,” and who within a central bank determines monetary policy. The highlighted facts illustrate the uses of the database and could be a starting point for further analyses.

Even small changes in the central bank legislation should be keenly watched. There is usually a larger political economy game at play behind these small changes and the intent is much larger than initially thought. Moreover, the impact may be seen many years later as we see in case of Section 7 (1) in RBI Act.

Thus, instead of just focusing on usual literature on inflation/employment or central bank independence, we should look at the legislation and the changes.

Central Banks’ obsession with price stability leads to economic instability

May 2, 2017

Frank Shotsak warns against the price stability obsession, He says in all this thinking behind inflation obsession, we ignore distributional aspects of monetary policy.

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