Archive for the ‘Central Banks / Monetary Policy’ Category

Gradually, we are admitting that banks create money by giving loans and not accepting deposits…

September 21, 2018

After the storm created by Bank of England questioning the inter-mediation role played by banks, other central banks are also waking up. We are usually taught that banks first accept deposits and then lend this money and via the multiplier money is created. But this is wrong. Banks actually first give loans and then this money comes back to the banking system as deposit.

Chris Kent, Assistant Governor of Reserve Bank of Australia also says banks create money via credit and not deposits:



The Yes Bank episode: We clearly want more transparency…

September 20, 2018

How fortunes are changing for RBI. Suddenly, markets have picked up this idea that one lasting legacy of the current regime would be cleaning up Indian banking system. All this while RBI has been telling us all is well with Indian banking system. But now the former Governor says troubles were brewing in early 2000s. So much so far all this analysis and clean-up.

Back to the title of the post. There have been some interesting orders from the central bank where it has refused to extend the tenure of current CEO of Yes Bank. This has been taken as one major decision by the central bank as it is showing mirror to all these revered CEOs of private sector banks.

But then where is the RBI order  for this decision? It is not there on the central bank website. One actually got to know this as Yes Bank informed the Stock exchanges about the RBI decision.  Infact, if one sees the Press Release by Yes Bank, one would be confused as it says the current CEO’s tenure has been extended. It is only when you read other articles you realise that the original plan was to get an extension of 3 years but RBI has only allowed an extension of 4 months till Jan 31, 2019.

Compare this to UK’s FCA which issued this 44 page document  (HT: good friend Pratik) to explain the rationale behind penalising Canara Bank of all banks. 44 page is a bit too much but still one atleast has some idea. Compare this to the information RBI shares on penalising a bank and in Yes Bank case, we know nothing at all.

RBI does a lot of regulation and has a whole history behind it. Even if the current Governor says they do not have enough powers to regulate PSBs, the central still knows much more than us. It should now try and let people understand the rationale behind all these decisions. Analysts should be able to see how the regulation at Private Sector Banks is better than PSBs. Nothing of this sort is known.

Cleaning-up is not just about taking decisions but also telling the people why and how of the clean-up. Over a long run, “the why and how matters” much more as then this process is institutionalised.


What Keynes should have said: Central banks/government should target stock markets

September 20, 2018

Prof Roger Farmer of UCLA has this proposal:

Swedish banknotes will be printed by De La Rue of UK..

September 20, 2018

I had pointed how on one hand Swedes are moving towards digital money but on the other hand are looking for a new banknote supplier. The previous banknote supplier had closed shop in Sweden.

The new contract has gone to De La Rue of UK, the largest manufacturer of banknotes and its technology:

The Riksbank has signed an agreement with the British banknote manufacturer De La Rue on printing Swedish banknotes. The contract is valid for just over three years, with the possibility to extend it for another four years. De La Rue is one of the world’s largest manufacturers of banknotes, with many central banks as customers, including the central banks in the United Kingdom and Iceland. The Swedish banknotes will be manufactured in the United Kingdom.

“We are pleased that it was possible to arrange a new supplier so quickly,” says Ann Fridell, Head of the Analysis and Development of Payments Division. “De La Rue is a well-renowned company with considerable experience and they have been in this branch for 200 years, so it feels secure that they will be printing Swedish banknotes.”

Last spring, the Riksbank gave notice of termination of the contract with the pre-vious supplier, Crane, as the company decided to close the printing works in Tumba and move manufacture to Malta. According to the Riksbank’s require-ments, the notes must be printed in northern or central Europe.

De La Rue would be happy to add Swedish Krona to its list, which is the oldest currency in Europe.

Iceland’s crisis, its successful stabilization program, and the role of the IMF

September 19, 2018

Nice lecture (must read) by Poul M. Thomsen of IMF summing the aftermath of the Iceland crisis.

The lecture is titled as: Ragnarök: Iceland’s Crisis, its Successful Stabilization Program, and the Role of the IMF.  In Norse mythology, Ragnarök is a series of future events, including a great battle, foretold to ultimately result in the death of a number of major figures, the occurrence of various natural disasters, and the subsequent submersion of the world in water.

Upfront, some humility is needed:

To me, it seems entirely appropriate that I should mark the tenth anniversary of Lehman’s collapse with you here in Iceland, in a country that was one of the first in the path of the financial tsunami that followed.

I will not get into why Iceland had become so vulnerable—why the banking system had been allowed to explode in size relative to the Icelandic economy during a very short period, relying on a funding model of aggressive foreign borrowing. Much has already been said about this, and it is clear that there is ample blame to go around—in Iceland and abroad.

Indeed, if I was to get into this, I would have to admit that we at the IMF also have to be humble. Among several things that we in retrospect might want to have done differently, we had for a while moved Iceland from the standard 12‑month cycle for our surveillance missions to a 24‑month cycle, reflecting a benign view on vulnerabilities. The same was the case for Cyprus, another small country that would soon be engulfed in a deep crisis.

Instead, he focuses on the policies to ease the crisis:


Will ECB issue central bank digital currency?

September 17, 2018

Mr Jonás Fernández, Member of the European Parliament recently posed the CBDC question to ECB.

ECB answered that it is studying CBDC, but currently it is not a feasible option:

There are several reasons why we do not consider issuing a central bank digital currency to be a concrete option for the near future. First, the technologies which could potentially be used to issue a central bank digital currency, such as distributed ledgers, have not yet been thoroughly tested and require substantial further development before they could be used in a central bank context. With regard to the central bank administering individual accounts for households and companies, this would imply that the central bank would enter into competition for retail deposits with the banking sector and lead to potentially substantial operational costs and risks.

In addition, current conditions do not indicate that there is a concrete need to issue a central bank digital currency in the euro area. The demand for euro banknotes continues to grow, and cash remains a popular means of payment.2 Moreover, there is an increasing range of options for digital payments which allow noncash transactions to be completed almost as immediately as cash transactions. This development will be further supported by the TARGET instant payment settlement (TIPS) service, which, as of November 2018, will allow payments to be settled in central bank money 24/7 on a pan-European basis.


It will be really useful if other central banks also adopt this communication policy of ECB. It puts up letters addressed to Parliamentarians on its website, letting people know of the kind of interactions between the two agencies.

Meet Zoran Milosevic: He has currencies of all countries except one

September 13, 2018

Nice story. The one currency missing is the Solomon Islands Dollar.

What the Starbucks App can teach central bankers

September 12, 2018

Nice piece by Mandar Kagade. He gets to basics of economics which says do not regulate prices of any products. The idea behind regulation is to safeguard consumers but usually the opposite happens.

Mandar brings this insight into regulating payment markets. He nicely stitches the story using Starbucks app which he calls a killer app. The app in an interactive fashion helps you earn points while sitting at the cafe which you can then use to buy the coffee.

He then relates the Starbucks experience to central bankers and card schemes…


Central Bank of Pakistan rejects rumors about demonetisation of Rs.5000 banknotes

September 11, 2018

State Bank of Pakistan which is the country’s central bank is under lot of pressure due to slipping economic conditions.

However, with the new government there were rumors of demonetisation of Rs 5000 banknotes. The central bank has squashed these rumors:

Apropos the rumors circulating on social media regarding discontinuation of Rs.5000 banknote, SBP
categorically rejects all such rumors and requests the general public to pay no heed to such

It is further clarified that SBP Act, 1956 clearly defines the roles and responsibilities of different
institutions including SBP for issuance, circulation and demonetization or cancellation of banknotes.
Specifically, section 25 of the Act requires a recommendation of SBP Board of Directors before the
Federal Government makes any decision about the demonetization or cancellation of banknotes.

The SBP Board has not submitted any recommendation for demonetization or discontinuation of Rs.5000
or any other banknote to Federal Government or Cabinet. Further, in case of demonetization of any
bank note, SBP announces the same well in advance and provides ample time to public to change the
currency under demonetization process. SBP places all such announcements on its website and
circulates the same through its social media platforms as well. The public is therefore advised not to
pay heed to any such rumors which are aimed at creating unnecessary hype and anxiety.

SBP broadly has similar features as RBI Act whose Section 26 gives RBI Board to cancel bank notes, the powers which were used in Nov 2016.

Interesting to see Pakistan having Rs 5000 notes. Have to figure much does it constitute as currency in circulation?

Exploring the agora and learning some economic history from Greeks…

September 11, 2018

Nothing better than seeing a German visiting Greece and reviewing latter’s economy. Also drawing econ history lessons from Greece which have obviously been forgotten.

Jens Weidmann of Bundesbank does both these tasks in this speech. He first mentions Agora:

Greece is often said to be the cradle of Western civilisation, and rightly so. One could say that the Greeks invented the way we think. Or, in the words of the English poet Percy Shelley: “We are all Greeks. Our laws, our literature, our religion, our arts have their root in Greece.”1 The lasting impact becomes obvious when one considers the many words of Greek origin in our modern-day languages: words like “policy”, “democracy”, “economy”, but also “idea”, “theory” and “dialogue”.

Austrian thinker Karl Popper observed once – and I quote: “The war of ideas is a Greek invention. It is one of the most important inventions ever made. Indeed, the possibility of fighting with words and ideas instead of fighting with swords is the very basis of our civilization, and especially of all its legal and parliamentary institutions.”2

How could this kind of discourse have been invented? A key step may have been that ancient Greeks created a public meeting place in the very heart of the city-state: the “agora”. Here, citizens exchanged views, discussed politics and celebrated cultural events. The best-known example of an ancient agora is situated not far from here.

Just a few years ago, Joachim Gauck, then Federal President of Germany, said in a speech that Europe would need an agora in order to develop a common European civic spirit.3 So this idea of a forum for public discourse is still with us today. And, indeed, a culture of open debate and a lively democracy are hallmarks of present-day Greece.

Yet the ancient agora not only allowed an exchange of views, but, more tangibly, also defined the marketplace of a city (as it still does in modern Greece). Here, merchants and craftsmen sold their products. In this respect, it set an essential foundation for prosperity.

The link between the economic and political spheres also provides the blueprint for my speech this evening. In particular, I am looking forward to sharing some thoughts on the Greek economy and my view on European integration with this distinguished audience.


He then reviews Greek situation which despite some progress has a long way to go. He brings agora back in discussion:

As a matter of fact, European policymakers learned from past mistakes and did things better. However, the achievements seen so far are not enough. There is consensus among experts that additional reforms are needed to further reduce the euro area’s vulnerability to crises. Yet it is not clear which path to choose going forward. For some time now, an intensive debate has been taking place on the future structure of the monetary union. A number of concepts and proposals are on the table. They differ over the weight they each accord to risk sharing and joint liability on the one hand, and to individual responsibility, a rules-based regime and the avoidance of false incentives on the other.

Either way, however, it is crucial for the stability of monetary union that the liability principle is complied with. In a nutshell, it stipulates that whoever decides on an action must also bear the consequences of that decision – by reaping the benefits or suffering any disadvantage or loss. It would be neither fair nor sustainable if decisions could be made at the expense of others. Wrong incentives would be created.

For example, insurance can encourage the policyholder to take on more risks. This is the essence of moral hazard. And again, the ancient Greeks provide us with an illustrative example since they may have been the first to come up with a commercial insurance scheme.

Back then, unpredictable weather conditions and piracy rendered maritime trade a highly dangerous venture. But the ingenious Greeks invented rather complex contracts for a loan which could be used for equipping or repairing a ship and which would not have to be repaid if the ship was lost on its journey. If the ship made a successful return, the creditor received its principal plus massive interest on top, reflecting the risks involved and the insurance premium. However, if the loan exceeded the value of the ship, there was an incentive for the ship-owner to simply keep the loan and make off with it.

Thanks to a speech ascribed to the Athenian orator Demosthenes, we know of a certain Hegestratos.6 He is said to have planned to sink his own ship during the journey – with all passengers and cargo on board. Unfortunately for him, he was caught in the act, jumped overboard and was not seen again. Nevertheless, the incident, which may have been the first case of insurance scam in history, led to a complicated legal dispute between an alleged co-conspirator and a creditor.

Fast-forward more than 2,300 years, the Maastricht framework was based on a clear understanding of the liability principle. Member states would remain autonomous in terms of their economic and fiscal policies. The flip-side then was the “no bail-out” clause. Both actions and liability were located at the national level and, thus, aligned.

Today, many Europeans call for greater risk sharing. If such a joint liability were established, corresponding sovereignty rights would need to be transferred to the European level, too. Otherwise, the set-up could contribute to a possible resurgence of unsound developments. However, my impression is that the willingness to cede sovereignty rights to Brussels is rather limited in most of the euro area member states. For the time being, therefore, reforms must fit within the existing Maastricht framework.

But that does not wholly rule out elements of joint liability. I concede, for example, that a common deposit insurance could contribute to a more stable financial system, as it would reduce the risk of bank runs.

However, the balance between actions and liability requires that risks that arose under national responsibility cannot be mutualised. They would have to be reduced before the scheme is established. If not, a common deposit insurance would lead to a redistribution of inherited risks.

Hmmm.. Nice way to link history with current developments.

The cool new Australia $50 banknote who feature a woman and her speech on the note…

September 10, 2018

Last week, RBA announced the new design for AUD 50 note going in circulation.

Philip Lowe, Governor of the central bank, explained key features in his speech. It not just has a prominent woman on the note but also an extract from her speech:

we are currently upgrading Australia’s banknotes. I am pleased to be able to announce that the new $50 note will be released on 18 October. We are proud to have a prominent West Australian on this note – Edith Cowan – as well as the Aboriginal writer and inventor David Unaipon. The redesigned $50 note celebrates the fact that Edith Cowan was the very first female member of an Australian Parliament. The microtext on the note will include an extract from her first speech to the Western Australian Parliament. When the note is released, those of you with great eyesight might be able to read this microtext without a microscope. But for those who will struggle to read it, I would like to quote a little from the text. In 1921 Edith Cowan said:

I stand here to-day in the unique position of being the first woman in an Australian Parliament- If men and women can work for the same state side by side and represent all the different sections of the community- I cannot doubt that we should do very much better work in the community than was ever done before.

Nearly one hundred years on, this sentiment is just as relevant as it was back in 1921. We are proud to have this text on the new $50 note and to recognise Edith Cowan’s achievement. The note will also have a seating plan of today’s Western Australian Legislative Assembly. It will also recognise Edith Cowan’s lifelong advocacy of women. Western Australia’s official bird emblem – the iconic black swan – will also appear on the note a number of times. If the note is tilted you will be able to see the colour of the swan change and its wings move. So I am sure that people here in Western Australia will feel a great affinity for the note and enjoy spending it.

More details here along with pictures of the note. How they come up with amazing colour combinations is quite something…

Should we care about central bank profits?

September 7, 2018

Francesco Papadia has this interesting post on central bank profits:

Central banks are not profit-maximising institutions; their objectives are rather of macroeconomic nature. The European Central Bank’s overriding objective is price stability. Nevertheless, there are three good reasons to conclude that it is preferable for central banks to achieve profits rather than to record losses.
First, taxpayers endow central banks with large amounts of resources and one should be worried if this amount of resources did not produce any income. In a way, the efficient use by the central bank of the financial resources with which it is endowed is as relevant as the efficient use of the human resources at its disposal.

Second, financial strength could affect the ability of monetary authorities to fulfil their mandates. In particular there is the fear that a central bank incurring systematic losses and ending up with negative capital would find it difficult to effectively pursue its macroeconomic objective.
Third, profitable operations might be an indication that central banks are implementing the right policies: to achieve profits the central bank must purchase assets when they are undervalued and sell when they are overvalued, thus stabilising their prices.

Overall, the Eurosystem has so far respected the principle of it being better to realise profits than losses. The accounts of the ECB, indeed of the entire Eurosystem, show that it generates a fairly stable profit flow. Monetary operations, ie refinancing operations, and securities purchases contribute substantially to these profits.

This conclusion is confirmed by measuring the financial results of past purchases of foreign exchange and more recent purchases of securities from a mark-to-market perspective, instead of an accounting perspective. In the specific case of the Public Sector Purchase Programme (PSPP) this was because the coupons on the securities more than offset the capital losses: overall the Eurosystem has bought securities under the PSPP programme at prices higher than current ones.
The considerations that might justify purchase operations, like the PSPP or other similar interventions, are very complex and require careful judgement. Once their macroeconomic desirability is established, however, the ECB has the necessary financial strength to implement them safely.


Korea Minting and Security Printing Corporation to Craft Chips for Seoul Casino

September 6, 2018

Apart from counterfeiting banknotes, one has to worry about counterfeiting casino chips.

South Korea’s Minting and Security Printing Corporation has been asked to make the casino chips as well:

South Korea’s Minting and Security Printing Corporation has agreed to create new chips for Grand Korea Leisure, the state-run entity operating the Seven Luck casino in Seoul. The state-owned corporation is responsible for printing and minting banknotes and coins as well as government documents of different nature.

Seven Luck is one of South Korea’s foreigners-only casinos. As mentioned above, the property is located in the capital of the Asian country. Under a memorandum of understanding, penned earlier today, South Korea’s state mint will use its technology to craft new chips for the gambling venue.

The move comes in a bid for the casino to prevent forgery and the use of fake chips by patrons. Each casino owns its unique set of chips used by its players. However, there have been multiple incidents of players smuggling fake chips and trying to exchange those for real money.

Korea Minting and Security Printing Corporation and Grand Korea Leisure said in today’s memorandum of understanding that the gaming facility’s new chips will incorporate innovative three-dimensional security technology and sensitive materials that would aim to prevent any attempts for forgery and other illegal activities from being carried out at the gaming floor. The state mint uses similar technology when crafting regular currency.

It is currency of the casino after all 🙂

The Casino found some people had managed to fake the chipsL

The four arrested individuals were found to be part of an international crime gang. The chips they used were believed to have been manufactured in China. At a first glance they were quite the same as the authentic ones used at the casino, police found. However, upon closer examination, the fake chips were found to have been a bit lighter than the ones used by the casino. During its operation, police seized 3,700 chips, each of them of KRW1 million denomination. The attempted fraud was first spotted and reported by one of the cashiers at the casino.

Brilliant, This is how we figured fake coins as well..



Role of Hajj in the introduction of Saudi banknotes

September 5, 2018

Religion goes a long way to explain money and banking.

It was interesting to read this piece (HT: JP Koning) which points how Haj pilgrimage led to introduction of Saudi banknotes (a piece on Haj and globalisation as well):

The riyal became the currency of Saudi Arabia since it was founded in 1932. Before that the currency was being used only in the Hijaz region. The first Saudi currency bearing the name of the country, which was smaller and lighter than its predecessor, was minted in silver in 1935.

The Saudi Arabian Monetary Authority (SAMA), the second-oldest central bank in the Arab world, was created in 1952 to develop and unite the Saudi monetary system. Given the fast-paced growth of the economy and increasing revenues, King Abdul Aziz was aware that it was not realistic to continue using metal coins and there was a need for a more practical form of currency. In particular, piles of silver Saudi riyals were a heavy burden for pilgrims to carry with them during Hajj seasons.

In 1953, the king took a courageous decision to issue the first Saudi banknotes. They were known as “pilgrims’ receipts,” each worth 10 silver riyals.
The first batch of 5 million were printed in Arabic, Persian, English, Urdu, Turkish and Malayan. Pilgrims welcomed the new paper currency and it quickly became widely accepted throughout the Kingdom.

Its success encouraged confidence among Saudi traders and citizens. However, pilgrims started to collect the receipts as souvenirs and gifts to take back to their home countries, which prompted the Ministry of Finance and Economy to ban commercial use of them overseas. The acceptance and popularity of the receipts persuaded SAMA to re-issue them in 1954, with the addition of a new 5 riyal denomination, which was followed by 1 riyal pilgrims’ receipt in 1956.
SAMA realized that citizens and pilgrims were happy for the old metal coins to be replaced with the paper notes, so they decided to keep using it after Hajj, rather than returning to the old currency.

In June 1961, Saudi banknotes were issued for the first time, in denominations of 1, 5, 10, 50 and 100 riyals. As a result, the pilgrims’ receipt was phased out in 1965.


RBI too issued both notes for circulation in Gulf region and special notes for Haj pilgrims.

Some rare coins of India

September 5, 2018

Nice pieces in Live History India.

In Prized coins, we get a glimpse of gold coin during Samudra Gupta and Jahnagir eras and so on. The pictures are fascinating.

In rare coins of Republic India, there is this interesting 50 paisa coin which was cancelled. It had marks on the coin to cancel the coin just like we do for bank cheques. I also learnt that we have something called pattern coins which are template designs and only once approved are issued as legal tender.



Real and Imagined Constraints on Euro Area Monetary Policy

September 4, 2018

Patrick Honohan, former Governor of Ireland Central Bank (2009-15) and part of ECB’s monetary policy structure in this paper reviews ECB policy.

He says ECB’s reluctance to act early in the crisis was due to the seperation principle: Interest rate for price stability and other measures for financial stability:

Although the European Central Bank (ECB) has been pursuing an aggressively expansionary policy since 2012, previously the ECB was behind the curve in lowering interest rates and making asset purchases to combat the prolonged euro area recession. This paper argues that part of the delay can be attributed to the multi-country nature of the euro area. Over-interpreting the limitations of the ECB’s statutory mandate, some ECB decision makers were wary of being accused of circumventing the prohibition on monetary financing by intervening in the market of the debt of weaker governments.

Some were also mesmerized by the relatively strong performance of the German economy in the crisis and attributed the slower post-crisis recovery of most other member states to national policy failures that should not be offset by euro area monetary policy. All of this was exacerbated by the ECB’s adoption of and (at least until 2011) adherence to a seductive but analytically flawed “separation principle,” which misled some of its decision makers into overestimating the adequacy of the monetary expansion that was being applied. The ECB’s toolbox is indeed somewhat limited by its statute, reflecting multi-country considerations, but abandonment of the separation principle should help ensure a more effective, holistic approach to monetary policy design in the future.

Interesting review of ECB policies…

The Notgeld (Emergency) notes of World War I

September 4, 2018

Superb story in Times of India.

Prof A S Loiwal of MS Baroda University has this collection of Notgeld (meaning Emergency) notes issued in Germany during WW-I. Always fascinating to read about the currency notes issued in specific situations…

Protecting the forex reserve of South Africa Reserve Bank from the shareholders..

September 3, 2018

South Africa Reserve Bank, being a shareholder bank, is in all kinds of trouble:

South Africa’s Lesetja Kganyago has a fight on his hands to protect the central bank’s $50 billion of reserves.

More than eight months after the ruling African National Congress decided that the South African Reserve Bank should be state-owned, like most other central banks, the governor said his main concern remains to protect the regulator’s independence and mandate. But also at risk may be billions of dollars in reserves and a legal brawl that could last for years.

While the 97 year-old Reserve Bank’s shares are only worth about 20 million rand ($1.4 million) based on the current share price, some shareholders have argued the bank’s assets belong to them and they should be compensated for that when the government nationalizes the institution, according to Kganyago. Eight percent of its 770 owners are foreigners, so steps to nationalize could be challenged using bilateral investment treaties or end in international arbitration.

“This is not a fight I want to be busy with,” Kganyago said in an interview in his 32nd floor office in the capital, Pretoria. “There is sufficient emerging-market turmoil that keeps me busy. I should not be wasting my time on this thing.”


State Government Market Borrowings in India – Issues and Prospects

September 3, 2018

Nice speech by Mr BP Kanungo of RBI.

He reviews the market borrowings in India by State Governments.


The sudden reversal of fortunes on views over RBI’s independence…

September 3, 2018

The current RBI Governor must be surprised to read the constant change of opinions over his tenure.


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