Archive for the ‘Central Banks / Monetary Policy’ Category

Common Chiffchaff: The bird that makes the sound of money!

December 2, 2019

Given this blog focuses so much on things related to money and banking, this piece by Abhishek Gulshan in the Hindu is quite amazing:

Low temperatures in the city gives us bird watchers a cause for great celebration. Bird sightings go up as many winter migrants make their way into Delhi-NCR, keeping all of us on the lookout every day.

One bird to visit the city is the Common Chiffchaff or Phylloscopus collybita, as it’s known scientifically. Phylloscopus’ literally translates to leaf-seeker and ‘collybita’ has been derived from the latin word ‘collybista’, meaning the money-changer, from the sound it makes.

In its breeding time, the song of the bird resembles a two-note high-pitched sharp and rhythmic ‘chiff-chaff-chiff-chaff-chiff-chaff’. In areas where they migrate to, they generally utter a warbling ‘hweet’. The bird has onomatopoeic names in many other languages apart from English, reiterating the significance of its sound. ZilpzapinGerman, Tjiftjaf in Dutch, and siff- saff in Welsh.

Perhaps one of the hawk/dove/owl used to justify positions of central bankers should make space for Chiffchaff. How should a chiffchaff central banker be defined?

How executive greed led to ruin of De La Rue, world’s top banknote printer…

November 29, 2019

De La Rue which prints/provides technology for banknotes is in financial trouble. One would think this would be due to rise in digital transactions. But this is not the case. It is due to executive compensation!

Guardian reports:

De La Rue’s shareholder meeting in June, 48% of votes were cast against the banknote printer’s remuneration report, presumably in protest at the £197,000 bonus awarded to its then chief executive, Martin Sutherland, in his final undistinguished year at the helm. Perhaps the 52% of compliant voters were half asleep. Five months later, the horrible state of De La Rue should be plain even to dozy fund managers.

Debt has soared, borrowing covenants are tight and there is “material uncertainty” over the 200-year-old company’s future if known risks materialise. De La Rue has fallen into a half-year loss of £12.1m. The dividend is being cut from 25p a share to zero, which clearly should have happened before now. The share price, down by almost a quarter on Tuesday, stands at a 21-year low.

The farewell bonus for Sutherland, who finally departed last month, now looks a wretched joke about a licence to print money.

The new chief executive, Clive Vacher, was too polite to aim a direct kick at his predecessors but it wasn’t hard to detect his diagnosis of drift in the boardroom. “The business has experienced an unprecedented level of change with the chairman, CEO, senior independent director and most of the executive team leaving or resigning in the period,” he wrote in the half-year report. “This has led to inconsistency in both quality and speed of execution.”


No lessons learnt..

25 years of independence of Central banks of Mexico and Spain

November 29, 2019

Central Bank Independence seems to be a great deal in Latin American countries. There is a reason why Central bank of Mexico organised a seminar to reflect on the 25 years of its independence.

Pablo Hernández de Cos, Governor of Central Bank of Spain gives a speech at the seminar:

The Banco de España was granted institutional independence in July 1994. So this year, as is also the case for the Banco de México, marks the 25th anniversary of our Law of Autonomy. The independence of the Banco de España came about as part of the European economic integration process. Following the requirements laid down in the Maastricht Treaty, central banks in the European Union were meant to pursue the primary objective of price stability and be vested with a large degree of independence, both political and operational. Participation in the monetary union also entailed a change in the relationship
between Treasury and central bank so as to incorporate the prohibition of monetary financing of government deficits.

Central bank independence was granted with a large degree of legal protection and, as a matter of fact, no country in the European Union can change it at its own discretion. Of course, the independence of the central bank does not mean arbitrariness, as it is well counterbalanced by high transparency and accountability requirements and practices. 

Granting independence to the Banco de España some years before the introduction of the euro as a common currency reflected Spain’s strong ambition to become a founding member of the European Economic and Monetary Union. It was also the result of a firm political conviction as to the benefits of price stability and the advisability of delegating the pursuit of this goal to an independent central bank. Price stability requires a medium-term orientation and the independence of the monetary authority creates credibility by helping to keep inflation expectations anchored while avoiding time inconsistency problems.1 These reasons were particularly compelling for the Spanish economy in light of the previous experience of relatively high inflation.



Central bankers as explorers/navigators such as Vasco Da Gama, Columbus…

November 29, 2019

Klaas Knot of Dutch Central Bank in this speech:

We are drawing closer to the end of the year in which the ECB has been celebrating its twentieth anniversary. Typically, this type of event leads one to look back and reflect on the lessons learnt over time. And to evaluate how the lessons learnt can be taken on board in future endeavors. Indeed, the year has seen many conferences and papers dedicated to the tale of the ECB’s first two decades. For European central bankers, the second of these two decades has been particularly challenging.

In the last decade, the ECB has been navigating uncharted waters with unconventional monetary policy, just like Magellan, Sir Francis Drake and Columbus. We were not without compass, nor without a clearly set course. But nevertheless, the waters we navigated were new to us. No maps were available. And, again like those famous explorers, we were vigilant, alert and prudent. Now that we seem to have reached a harbor of some sort, and a new captain is aboard, we should consider charting the unchartered. We should draw maps of the coasts we discovered. We should mark where the sea monsters live. We should be the cartographers of unconventional monetary policy.


Not sure many would agree to this comparison!

What drives interest rates? Central bank policy rates or something else?

November 29, 2019

Òscar Jordà and Alan M. Taylor in this short paper look at evidence from Japan, Germany, the United Kingdom, and the United States.

People generally attribute a great deal of discretion to a central bank’s ability to set interest rates. This might be an overstatement. Our analysis suggests that most of the variation in interest rates can be explained by conditions beyond the central bank’s control: the aging of the population, declining rates of productivity growth, and other slow-moving factors known to affect the neutral rate of interest globally and domestically. From this perspective, fears that policy stances are increasingly diverging across advanced economies and that this divergence may have adverse consequences for the international financial system may be overblown.


Central Bank of Ukraine being attacked by a oligarch and the central bank chooses to respond

November 28, 2019

This blog has pointed to several attacks on Ukraine central bank and even its retired Governor.

The Central Bank Board responds to the continued attacks:


Ensuring exorbitant privilege of US Dollar: The real challenge for USD is not Libra but Chinese CBDC

November 26, 2019

Ken Rogoff in this Proj Synd piece:

Just as technology has disrupted media, politics, and business, it is on the verge of disrupting America’s ability to leverage faith in its currency to pursue its broader national interests. The real challenge for the United States isn’t Facebook’s proposed Libra; it’s government-backed digital currencies like the one planned by China.

He says US govt can still work around Libra/Bitcoin and so on. But cannot do anything against Chinese CBDC:

America’s deep and liquid markets, its strong institutions, and the rule of law will trump Chinese efforts to achieve currency dominance for a long time to come. China’s burdensome capital controls, its limits on foreign holdings of bonds and equities, and the general opaqueness of its financial system leave the renminbi many decades away from supplanting the dollar in the legal global economy.

Control over the underground economy, however, is another matter entirely. The global underground economy, consisting mainly of tax evasion and criminal activities, but also terrorism, is much smaller than the legal economy (perhaps one-fifth the size), but it is still highly consequential. The issue here is not so much whose currency is dominant, but how to minimize adverse effects. And a widely used, state-backed Chinese digital currency could certainly have an impact, especially in areas where China’s interests do not coincide with those of the West.

A US-regulated digital currency could in principle be required to be traceable by US authorities, so that if North Korea were to use it to hire Russian nuclear scientists, or Iran were to use it to finance terrorist activity, they would run a high risk of being caught, and potentially even blocked. If, however, the digital currency were run out of China, the US would have far fewer levers to pull. Western regulators could ultimately ban the use of China’s digital currency, but that wouldn’t stop it from being used in large parts of Africa, Latin America, and Asia, which in turn could engender some underground demand even in the US and Europe.

One might well ask why existing cryptocurrencies such as Bitcoin cannot already perform this function. To an extremely limited extent, they do. But regulators worldwide have huge incentives to rein in cryptocurrencies by sharply proscribing their use in banks and retail establishments. Such restrictions make existing cryptocurrencies highly illiquid and ultimately greatly limit their fundamental underlying value. Not so for a Chinese-backed digital renminbi that could readily be spent in one of the world’s two largest economies. True, when China announces its new digital currency, it will almost surely be “permissioned”: a central clearing house will in principle allow the Chinese government to see anything and everything. But the US will not.

Keynes and Fiscal Federalism in India: History, Ideology and Practice

November 26, 2019

RBI organises 4 memorial lectures:

NK Singh delivered the 17th LK Jha Memorial lecture.

It is interesting and odd how all of these lectures have been given by scholars and policymakers based elsewhere. All these years, there has not been a single lecture from an academic/policymaker based in India.

N.K. Singh happens to be the first speaker in these lectures who is currently serving as the chair of the 15th Finance Commission. Not surprisingly, Mr Singh chooses to speaks on fiscal federalism (Sharing of financial resources between Central Government, State Governments and Local governments). Fiscal federalism has become an important topic of late given the late addition to its terms of reference.

At the end of his lecture, Mr Singh quotes Keynes which sums up the evolution of fiscal federalism in India:

In the context of remark that markets may remain irrational longer than I can remain solvent, John Maynard Keynes is reported to have remarked that when facts and circumstances change, I change my mind – what do you do?

The facts and circumstances on Fiscal Federalism have changed. Time to change our mind.

The lecture points to some of these changes. Read the whole thing…


History of Islamic Banking in Pakistan

November 25, 2019

Interesting bit of banking history of a different kind.

Steps for Islamization of banking and financial system of Pakistan were started in 1977-78. Pakistan was among the three countries in the world that had been trying to implement interest free banking at comprehensive/national level. But as it was a mammoth task, the switchover plan was implemented in phases. The Islamization measures included the elimination of interest from the operations of specialized financial institutions including HBFC, ICP and NIT in July 1979 and that of the commercial banks during January 1981 to June 1985.

The legal framework of Pakistan’s financial and corporate system was amended on June 26, 1980 to permit issuance of a new interest-free instrument of corporate financing named Participation Term Certificate (PTC). An Ordinance was promulgated to allow the establishment of Mudaraba companies and floatation of Mudaraba certificates for raising risk based capital. Amendments were also made in the Banking Companies Ordinance, 1962 (The BCO, 1962) and related laws to include provision of bank finance through PLS, mark-up in prices, leasing and hire purchase.

Separate Interest-free counters started operating in all the nationalized commercial banks, and one foreign bank (Bank of Oman) on January 1, 1981 to mobilize deposits on profit and loss sharing basis. Regarding investment of these funds, bankers were instructed to provide financial accommodation for Government commodity operations on the basis of sale on deferred payment with a mark-up on purchase price. Export bills were to be accommodated on exchange rate differential basis.

In March, 1981 financing of import and inland bills and that of the then Rice Export Corporation of Pakistan, Cotton Export Corporation and the Trading Corporation of Pakistan were shifted to mark-up basis. Simultaneously, necessary amendments were made in the related laws permitting the State Bank to provide finance against Participation Term Certificates and also extend advances against promissory notes supported by PTCs and Mudaraba Certificates. From July 1, 1982 banks were allowed to provide finance for meeting the working capital needs of trade and industry on a selective basis under the technique of Musharaka.

As from April 1, 1985 all finances to all entities including individuals began to be made in one of the specified interest-free modes. From July 1, 1985, all commercial banking in Pak Rupees was made interestfree. From that date, no bank in Pakistan was allowed to accept any interest-bearing deposits and all existing deposits in a bank were treated to be on the basis of profit and loss sharing. Deposits in current accounts continued to be accepted but no interest or share in profit or loss was allowed to these accounts. However, foreign currency deposits in Pakistan and on-lending of foreign loans continued as before.


Notes from an inter-planetary monetary anthropologist

November 25, 2019

Fascinating post from a fascinating monetary economics blogger JP Koning:

My work as an inter-planetary monetary anthropologist has brought me to dozens of different planets to study their monetary systems. The monetary system of the most recent planet that I visited, the planet of Zed in the Xv2 galaxy, falls into the same classification as the systems on Vigil X and Earth (which I last visited in 1998 and, according to other anthropologists, hasn’t changed much).

As on Earth, markets on Zed tend to lie towards the free end of the spectrum. Zedians can own property. And property rights are enforced. Zedians often put their savings in institutions much like banks and earn interest. Banks in turn lend to individuals and business.


Should Bulgaria abandon its Currency Board and join the Euro?

November 25, 2019

Prof Steve Hanke , has been a long time advocate of currency boards.

In this paper, he along with Todor Tanev argue that Bulgaria should not abandon its currency board…


Does the Lack of Financial Stability Impair the Transmission of Monetary Policy?

November 25, 2019

Viral Acharya, Björn Imbierowicz, Sascha Steffen and Daniel Teichmann in this new NBER paper:

We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the period from January 2006 to June 2010. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks for maturities beyond one year, even as it lowers deposit spreads for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, capital expenditures and employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank-lending channel and the central bank’s lender-of-last-resort function.


Bnk of Slovenia vs Slovenian government

November 22, 2019

Slovenian central bank has long been fighting a battle against its own government.

The government believes that the central bank should pay for the banking losses since 2013. The central bank has been fighting this belief for a while.

Recently, the government passed a law which pushes the losses on the central bank. The central bank has objected to the law. Here is the translation:

After voting again on the Law on the Procedure for the Judicial Protection of Former Holders of  Qualified Liabilities of Banks in the National Assembly of the Bank of Slovenia, we regret that the essential positions of the Bank of Slovenia and similar positions of other institutions  were not taken into account.

The adopted law is contrary to the Slovenian legislation and international law  governing the operation of the central bank. The law is controversial primarily in terms of the ban on monetary financing and financial independence.  

These are fundamental principles for the operation of central banks in the euro area.  The law places the Bank of Slovenia in an extremely subordinate position, which is a precedent for both Slovenia and the EU,  as the strict responsibility of a public institution for its operation is unique.

Namely, the draft law stipulates that the Bank of Slovenia is liable for a potentially objective decision,  with the burden of proof reversed. However, the Bank of Slovenia must pay a lump sum compensation to individuals,  irrespective of liability.

Heat is on..

Canada’s banking system and its resilience

November 22, 2019

Canada has a long history of financial/banking stability compared to most other nations.

In this recent speech, Carolina Wilkins, DG at Bank of Canada  points how the system will remain stable despite the worst possible adverse shocks:

Canadian banks are part of a global banking system that is more solid than it was a decade ago. Globally active banks are holding over US$2 trillion more capital than they were at the beginning of 2011, when the phase-in of the post-crisis reforms began. This translates to a 7-percentage point increase in their Tier 1 capital ratio.11  The leverage limits and new liquidity regulations also make these banks more resilient.12

Canada has implemented new measures to further strengthen our banking system. For example, Canada’s prudential regulator, the Office of the Superintendent of Financial Institutions (OSFI), increased the required amount of capital that Canada’s big banks have to hold to protect themselves against financial-system vulnerabilities. Canada introduced a bail-in regime to ensure that investors—not taxpayers—would take the brunt of the financial burden in the unlikely event that a big bank were to fail. Also, OSFI asked many smaller, single-business-line banks to reduce their reliance on short-term brokered funding, which can be flightier in stressful situations.

The Bank of Canada, along with OSFI, evaluates these safeguards by conducting stress tests on the major banks. Given that the idea is to plan for the worst, it’s important to study extreme scenarios. The most recent test was in the context of the International Monetary Fund (IMF)’s Financial System Stability Assessment of Canada, published in June.13 

The scenario used was worse than anything seen in Canada in recent decades. There’s a recession that lasts two years, the unemployment rate increases by 6 percentage points, and house prices fall by 40 percent.14 Clearly this would be very difficult for people if it were to materialize. That said, this test found that our banks could withstand even this kind of severe, system-wide shock. This says to me that efforts to increase resilience in the banking system have been worthwhile, because they would help prevent a bad situation from becoming even worse.


Financial technology: the 150-year revolution

November 22, 2019

Pablo Hernández de Cos Chairman of the Basel Committee on Banking Supervision and Governor of the Bank of Spain gives this nice speech.

The past few years have seen growing interest in technology-driven innovation in financial services.


Yet finance and technology have a long and symbiotic relationship. Finance has always shaped technological developments. For example, the Industrial Revolution was facilitated by the provision of capital provided by financial intermediaries in the 18th and 19th centuries.  And technology has been used in finance for over 150 years. As Douglas Arner of the University of Hong Kong and his colleagues have catalogued, one can think of three waves of technological disruptions in finance.4 The first wave of technology (“fintech 1.0”) was prompted by the completion of the first transatlantic telegraph cable in 1866 and saw finance gradually shift from analogue to digital.

This was followed by a second wave of technological innovations in financial services, starting with the advent of the automated teller machine
(ATM) in 1967 (“fintech 2.0”). Fast forward and we are now witnessing a third wave of increasing technological pervasiveness in finance, coupled with the emergence of new actors and channels for the provision of finance (“fintech 3.0”).

So when put in a historical context, fintech is not necessarily a new phenomenon or an abrupt Kuhnian transformation.5 What’s more, the recent burst of activity in the fintech space has inevitably raised questions about whether we have reached “peak fintech”, only for it to be followed by a steep trough of disillusionment as part of a hype cycle (Graph 5).6 Some have asked whether we are spectators at an “innovation theatre” that “promotes the impression of innovation and the future value that it brings” with concrete tangible improvements.7 And, more generally, regardless of the advancements made in technology, the role of human judgment is an essential element in banking and supervision.


There are 5 scenarios for banks in future:

  • Better Bank
  • New Bank
  • Distributed Bank
  • Relegated Bank
  • Disintermediated Bank

Read the speech for more details…

Should RBI have a Deputy Governor based outside Mumbai?

November 21, 2019

RBNZ recently instituted a new DG position based out of Auckland.

I review this interesting development and ask whether RBI should do the same?

Designing Central Bank Digital Currencies

November 21, 2019

IMF econs Itai Agur, Anil Ari and Giovanni Dell’Ariccia in this paper explore designing CBDCs:

We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank’s tradeoff.


What startups can learn from flea markets about competition, customers?

November 20, 2019

Nice piece by Utkarsh Amitabh founder of Network Capital in Mint.

Some things books can never teach. I was reminded of this valuable lesson during a recent visit to Dubai’s Global Village. Designed like a flea market, the village brings together sellers and merchants from 90 countries. During the three hours I spent walking around, manufacturers and artisans tried to sell me everything under the sun—from Yemeni honey and Egyptian perfumes to Bosnian kebabs and Irani rugs.

I was amazed by their negotiation skills and sales techniques. Without any business training, these artisans had mastered storytelling and learnt the art of connecting with customers of different age groups and cultures. The more time I spent interacting with the artisans/entrepreneurs, the more I realized that startups can learn valuable lessons from flea markets.

The first thought that crossed my mind was finding talent. I wondered: What if these artisans were to sell software products instead of soaps and oils? What if startups were to hire them as frontline salespeople or customer success managers?

Takeways: Selling skills, cost efficiency, knowing your customers.

Not just start-ups but we all students of economics have so much to learn from the so called flea markets. You see so much of economics happening live…

Cashless Bank Branches in Canada

November 19, 2019

Interesting short paper by Walter Engert and Ben Fung of Bank of Canada.

Cashless or tellerless bank branches have proliferated in several countries in recent years. In a cashless bank branch, teller or counter services such as cash withdrawals, deposits and cheque-cashing are not available. These services are instead provided via automatic teller machines. This note discusses the development of tellerless bank branches in Canada and analyzes the potential implications for cash demand.

Some Canadian banks are moving towards branchless banking:


How important is it for a nation to have a payment system?

November 19, 2019

Nice speech by Mr Jon Nicolaisen, Deputy Governor of Norges Bank.


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