Archive for the ‘Speech / Interviews’ Category

Patchy data is a good start – from Kuznets and Clark to supervisors and climate

June 22, 2021

Frank Elderson of ECB in this speech reflects on how unprepared European banks are towards climate change.  The data is still patchy but is work in progress. He points how this is similar to starting the concept of national accounts and then gradually building it:

Supervising and managing climate risks represents a long journey into a new and complex topic for all of us. But progress is possible, as a few banks have already shown. Our efforts to raise the bar for climate risk management and disclosures are motivating some banks to explore climate and environmental risks further and manage them better. And it is important that we share the knowledge we gain and the lessons we learn along this journey.

When thinking of lessons learned, one looks to the past.

So let’s go back almost a century to the 1930s, a time when governments were struggling to pull their economies out of the abyss of the Great Depression.

After experimenting with new tools, it was the development of national accounts by economists like Clark in the United Kingdom and Kuznets in the United States that gave policymakers a first real grip on of how the economy was doing. It was a faulty measure – and remains so to this day – but it was the best possible solution at the time. No, national accounts were not harmonised. And yes, the data were patchy and incomplete at first. But as imperfect a measure as it was, it enabled progress and was a fundamental step towards lifting economies out of the Great Depression.

Fast forward 90 years – and you will find us here, today, facing an even greater challenge than the Great Depression: climate change. We have got better at collecting information on the consequences of climate change. As patchy as those data may be for now, it will enable progress in climate issues too. And in any case, banks do already have access to enough information to start making real progress.

Banking regulation lessons from Jet flights and mail bags

June 15, 2021

Fed Vice Chair for Supervision Randal Quarles draws banking regulation lessons from flights and mail bags:

As many of you know, I am speaking to you from Salt Lake City, which, among its myriad other virtues, was the home of one of the earliest passenger airlines-Western Air Express, which ran its first passenger flight in the spring of 1926: Eight hours in a Douglas M2 between Salt Lake City and Los Angeles, with one stop in Las Vegas for fuel. Two of the first passengers sat on the mail sacks in the back, and those early plane travelers were adventurers in other ways as well. That year there were 12 fatal commercial airplane crashes and that number rose to 59 a year by 1930. That’s not total deaths-that’s fatal crashes, with many people on each plane. Comparing hours flown and number of flights, that would be as if we had 7,000 fatal airplane crashes in a typical year today, with hundreds of thousands dead.

But we did not have 7,000 fatal crashes last year. We had five in the entire world. The year before we had eight. Air travel is famously the safest way to get from point A to point B, as a result of decades of innovation in technology and operating processes. Importantly, however, even as the airline industry was improving safety, it was equally focused on improving efficiency-especially as we moved into the era of jet travel in the 1960s. The eight-hour trip between Salt Lake and Los Angeles now takes an hour and a half even counting all the nosing around on the ground (although an argument can be made that a typical coach seat may not be that much more comfortable than sitting on the mail bags). Yet average fuel burn has been falling every year since 1960 and continues at a strong pace-in the first decade of the 21st century, fuel efficiency on domestic flights increased by another 40 percent. The airlines recognized that the public has a strong interest in safety, but that it also has a strong interest in other values as well. A more efficient airline is easier on the environment, cheaper for the consumer, and a stronger contributor to the overall economy. And, obviously, these continuing improvements in operation have been achievable without any compromise in safety.

I think you can see where I am going with this. In the aftermath of the Great Financial Crisis, the Federal Reserve, the international regulatory community, and the banking industry took action to radically improve the safety of the banking system: new capital and liquidity rules, new stress testing requirements, a new resolution framework. Together, these have greatly strengthened the safety of the financial system. Actual common equity capital ratios for large banks have roughly doubled since the crisis (and are at least six times as great as the pre-crisis requirements).

But in implementing these safety requirements, we did not pay as close attention to efficiency. Yet the public interest in efficiency is also strong, so over the last four years we have comprehensively sought ways to improve the efficiency of the system while maintaining its safety-which is every bit as possible in the financial system as it has been for the airlines. While this has been a broad project, today I want to focus on four examples of measures that illustrate this phenomenon. These measures have enjoyed support across the political spectrum because they have brought measurable benefits to the American people.

Central banking independence in times of shifting societal concerns

June 3, 2021

ECB’s Isabel Schabel in this speech discusses how high inflation in 1970s led to independent central banks. The challenges facing central banks today are different. How central banks respond to these challenges will be crucial to their existence and retaining independence:

The challenges central banks are facing today are fundamentally different from the ones that were relevant when they gained broad political independence. Inflation is less of a concern to many people, in large part reflecting the achievements of central banks over time.

As a result, expectations towards central banks have changed. Many call for central banks to have a more active role in tackling wider societal challenges, climate change in particular. Such shifts in preferences coincide with a broad distrust of far-reaching and complex monetary policy measures taken by central banks in recent years to protect the economy from a perilous spiral of falling prices and wages.

In this environment, the demands on central bank communication are enormous. Independent central banks have a duty to respond to the concerns of the public and to carefully evaluate whether and how they may be able, within their mandate, to respond to these concerns. Accountability is the quid pro quo of independence.

The ECB is doing this diligently as part of its ongoing monetary policy strategy review. We are analysing the effects and side effects of our unconventional monetary policy instruments in depth. And we are exploring if and how, within our mandate, we can contribute to the broader objectives of the Union, including by taking measures that will help accelerate the transition towards a more sustainable economy, while firmly adhering to our primary objective of price stability.

Of course the question is wide open whether central banks should work towards achieving these social goals.

Tyler Cowen interviews Mark Carney: Why a trend of recruiting central bankers from other countries?

May 28, 2021

Wide raging interview of Mark Carney in typical Tyler Cowen style. Lots of insights with wit thrown in between.

COWEN: Now, this — yourself through Stanley Fischer — as you know, there’s a trend of recruiting central bankers from other countries. So far, it seems it’s worked quite well. But what are the limits of this process of recruiting leaders in government from abroad? You wouldn’t name someone to run the Department of Defense who is from another country, right?


COWEN: What’s the margin where that doesn’t work anymore?

CARNEY: Well, candidly, I think it was a relatively unique set of circumstances when I was put in place. The UK had had a very bad financial crisis. We had a new central bank, in other words; the powers had been tripled, it had been doubled in size. There’s an opportunity to bring an outsider in, in order to help try to make that work. I don’t know. I’m a little hard pressed to see the set of circumstances where it would be immediately obvious to bring an outsider back in again.

My answer is there have been examples. The governor of the Bank of Ireland, for example, is a third example: Gabriel Makhlouf, head president. But it’s very much the exception as opposed to the rule. It relies heavily on the technocratic nature of the role.

COWEN: Are there classes of decisions where such a head should recuse himself or herself, or would just feel hesitant — very risky decisions or extending foreign lines of credit, which the Fed of course has done a lot, or exchange rate policy?

CARNEY: No. I think if you take these roles, you have to be able to take every decision no matter how small or how large. I never felt any circumstance where either I didn’t have adequate information or, God forbid, that I was somehow conflicted in my loyalties that it would have influenced the decision.

Thinking about public and private money

May 27, 2021

Jon Cunliffe of Bank of England in this speech takes one through some foundational issues about money:

In the UK, the Bank of England – a public institution– has been issuing money to the public for over 300 years. Its banknotes, carrying the famous “I promise to pay the bearer” pledge are carried in millions of wallets and purses and used millions of times every day by the public to make transactions.

These notes and coins are denominated in Pounds Sterling, the currency of the UK. It is the Bank of England, on behalf of the state, that is charged with ensuring the stable value of the currency by keeping inflation at its 2% target.

Public money for general use in the UK is only available in the form of physical cash. It is highly visible, trusted and, indeed, is probably the image that many people in this country have in their mind when they picture money.

However, the majority of the money held and used by people in the UK today is not physical ‘public money’, issued by the state, but digital private money’ issued by commercial banks. Around 95% of the funds people hold that can be used to make payments are now held as bank deposits rather than cash. In everyday use, only 23% of payments pre pandemic were made using public money in the form of cash, down from close to 60% a decade earlier.

his private money is not a claim on the state or backed with the resources of the state. It is not covered by that familiar Bank of England promise to ‘pay the bearer’.

It is not clear to me to what extent the general public understand this distinction between public and private money – or even that for most of the time they are using private money. I am not aware of any surveys or research that address this question.

I have, over the years sometimes asked the question of those I have met. Such an approach is statistically reprehensible of course and one certainly shouldn’t base policy on it. But for what it is worth, the answers suggest that people are generally unaware of the distinction between private and public money.

So should it matter if the Bank of England issues digital public money?

The question – and it is not just a question for central banks -is: does it matter if the public cannot access public money they can use in their everyday lives?

The current mix of public and private money in the UK is the result of history rather than some informed policy decision and some might argue, generally available public money is becoming an anachronism. Given we have the credible public authority framework for private money I described earlier, why should the state need to be involved in the issue of money to the public in competition with the private sector? The state does not directly provide electricity or water to the public in the UK anymore? Why should it provide money?

These are important questions that should not be brushed aside. Any decision that the state should issue a new form of digital money to its citizens cannot rest simply on the fact that the role in society of public money is declining. It must rest on an assessment of the benefits of ensuring available and useable public money and the costs and risks of letting it disappear.

Such an assessment has not yet been done in the UK and no decision has been taken to introduce a public digital money – or to use its technical name, a Central Bank Digital Currency or CBDC.

Introduction of a CBDC would be a very major public project which would have material implications for the financial sector, many parts of the economy and for society more broadly.

The Bank of England, like many other central banks, has been exploring these issues in recent years. We published a discussion paper last year with an illustrative model of a general purpose public digital currency. We will shortly publish another discussion paper on some of the public policy issues generated by new forms of digital money.


Impact of expansionary monetary policy: Swedes have hidden wealth

May 3, 2021

Sweden central bank Deputy Governor Henry Ohlsson in this speech defends the expansionary monetary policy:

For several years, the Riksbank has conducted very expansionary monetary policy to bring inflation closer to the target.

Expansionary monetary policy leads to several different effects. It causes asset prices to rise and thus makes asset-owners wealthier. As the wealth is unevenly distributed among households, the income from it, capital income, will also be unevenly distributed.

At the same time, however, unemployment decreases when monetary policy is expansionary. This makes labour income more even than it otherwise would have been. “The effects on capital income and labour income thus counteract each other and it is therefore difficult to say what effect the expansionary policy has on the distribution of total income”, Henry Ohlsson pointed out.

But this does not prevent wealth from being more unevenly distributed when asset prices rise. In Sweden, however, the effect is mitigated by the fact that a comparatively large share of the wealth is in collective pension funds. This means that more people benefit from increases in wealth than if these funds did not exist. In many other countries, these funds do not exist. “In other words, this hidden wealth is an aspect to consider when discussing the distributional effects of expansionary monetary policy,” Henry Ohlsson concluded.


Who owns the SNB’s profits and how are they distributed?

April 30, 2021

Thomas J. Jordan of Swiss National Bank in this speech discusses how the central bank generates and distributes its profits. SNB is different as it shares profits with Cantons/States:

The profits generated by the SNB and the distributions it makes were the subject of discussion in Switzerland long before the coronavirus pandemic broke out. There was already heated debate on this more than 100 years ago, as the rules governing the distribution of profits were one of the most contentious issues in the run-up to the creation of the SNB. The cantonal banks had to cede the right to issue banknotes to the newly established central bank, and the cantons wanted compensation in return.

The fundamental question of how the profits generated by the SNB were to be distributed already had to be addressed back then. The following principles were set: the profits should first be used to build up the SNB’s equity capital and pay a modest dividend to shareholders; and any remaining profit would go to the public sector, with at least two-thirds accruing to the cantons. While this still essentially applies today, the modalities regarding distributions and building up equity capital have been adjusted over time. I will look at the current solution in more detail presently.

The reason why the dividend payments to shareholders are limited, and why the profit distributions accrue to the confederation and the cantons, is that the SNB’s profits are not the result of how its share capital is used. Instead they stem much more from its monopoly on
issuing legal tender. The SNB generally incurs only minor costs in issuing banknotes and handling sight deposits, since manufacturing notes costs only a fraction of their nominal value and sight deposits ordinarily do not bear interest. Conversely, the SNB for its part mostly does
achieve a positive return on the assets it receives in exchange for the banknotes and sight deposits. The SNB thus generates profits on average over the long term. However, against the backdrop of very low yields and high upward pressure on the Swiss franc, it cannot be taken for granted that the SNB will achieve a profit. I will come back to this point in due course.


From master masons to information architects: how standards can transform reporting

April 26, 2021

Superb speech by Gareth Ramsay of Bank of England. He points how open standards help whether one looks at designing cathedrals or data systems:

 I want to begin by talking about cathedrals.

The great cathedrals of Europe were built in the Middle Ages by teams of skilled stone masons.

To get the dimensions of the building right, it is said that each team would use measures based around the body of the master mason: his foot, his stride, his arm, and so on. And so a local standard was born.

Those standards were designed with one specific use in mind – the construction of that cathedral. And very useful they were, too. But they were closed systems – the foot and the yard used to build one cathedral were different from those used to build another. And this was not just an English peculiarity: across the channel, a foot length in Strasbourg was 295 mm, a foot in Paris was 325 mm, but a foot in Bordeaux was a relative whopper at 344 mm.

Of course people came to understand the great benefits of enforcing universal, common standards. In part for maintaining the cathedrals themselves, so that new, replacement stones could be sourced that would fit snugly between their neighbours. But the benefits of universal measurement standards could be applied a long way beyond the niche discipline of cathedral building.

Now some of you may think that today’s financial system is not perfectly comparable to the glorious gothic cathedrals of the Middle Ages.

But like those cathedrals, many of the data systems underpinning today’s financial firms and markets were built with narrow reference to their own needs, by their own master masons – their CIOs and systems architects. They too were closed systems. Each needed to be able to record, track and manipulate its data. Its data points needed to fit snugly alongside each other. But the design of each system often paid little attention – understandably – to any broader public good. In this speech, I want to talk about whether there are wider public benefits that might flow from standardising these data labels, and set out a way forward to reap those benefits collectively.

So let me turn from mediaeval architecture to data.


Hong Kong to study General Purpose CBDC

March 25, 2021

Howard Lee Deputy Chief Executive of the HKMA in this speech at BIS innovation summit:

As with many other central banks working on this subject, we are yet to make a decision as to whether general purpose CBDCs will be issued. Indeed, designing a CBDC requires balancing manifold considerations, ranging from consumer needs to policy and technological considerations, against various potential risks.  This could involve difficult trade-off in decision-making.

Therefore, we will study the benefits and challenges of different architectures for the distribution of general purpose CBDCs through commercial banks/payment service providers in our upcoming general purpose CBDC project, called Project Aurum. Specifically we will look into 2 architectural models, namely the hybrid CBDC and private CBDC-backed stablecoins.  In parallel, we are working with the People’s Bank of China on a technical pilot testing of using e-CNY for cross-border retail payments in Hong Kong.  We are extremely excited about these initiatives on CBDCs on multiple fronts, and I would be very happy to share more findings with you all as we make further progress

Further HKMA is going through its own digi transformation:

We in the HKMA are no different, and are now on a multi-year digitalization journey. This is a huge undertaking, as it involves not only substantial financial investment, but also human resources inputs at all levels.  More importantly, if we were to fully reap the benefits of digitalization, many long established processes would have to be changed or even abolished.  As the existing procedures are usually based on dated legacy systems and manual processes, appropriate use of innovative technologies such as artificial intelligence, cloud platforms and APIs can surely help refine supervisory processes.    

For example, our granular data reporting (GDR) which started in 2019 seeks to collect transactional level data from banks, instead of template based aggregate data in the past. This has enabled us to discover insights and trends in a timely manner and conduct advanced analyses through slicing and dicing the data collected.  But this is only possible with very fundamental changes in the way we analyse the risks of banks, with new people, new organizational structure, new IT systems as well as continued experimentation by colleagues with different skills and expertise.       

One thing we have learnt is that the prerequisite for such a digitalization journey is to have strong commitment by all colleagues from top to bottom, and for everyone to have the mindset for embracing changes. Although we are already seeing some concrete positive outcomes from our digitalization project, we are still at the early stage of this long journey.  I would love to hear the experience of other central banks and regulators at this or other forum.

Reading the speech one just gets a strong feeling that central bank speeches in future are going to be quite different as well. So much tech jargon one needs to figure and understand.


Lessons from History, Policy for Today

March 9, 2021

Mary Daly, President of San Francosco Fed in this article takes cue from an art gallery at Ireland:

In February of last year, right before COVID-19 hit our shores, I was in Ireland. Walking around Dublin one day, I happened upon a converted warehouse with artists selling their work. One of the artists had a wall of beautifully colored, tiny framed prints. Each one was etched with the phrase “History Will Repeat Itself” followed by an arrow pointing to the future. It seemed a pessimistic, almost fatalistic view, so I asked him if he had painted his prophecy or his fear. He answered, somewhat gruffly, “Both.”

As an unrelenting optimist, I saw something different in his work—the potential for agency. For people and institutions to learn from the past and use those lessons to shape a better future.


The tale of the three stabilities: price stability, financial stability and economic stability

March 4, 2021

Governor François Villeroy de Galhau of Banque De France in this speech:


Modern challenges for the modern central bank: perspectives from the Bank of England

February 9, 2021

Andrew Bailey of Bank of England draws lessons from the central bank’s recent history:

It is a great pleasure to participate in the LSE German Symposium, and congratulations to the organisers for such an interesting programme. I want to take the opportunity today to step back a little and offer some thoughts on the context and framework of monetary policy.

It is fast approaching twenty five years since the UK decisively changed its monetary policy framework and embraced the idea of an independent central bank with a mandate to maintain price stability in the form of an inflation target. Now, 25 years may not seem long in the broad sweep of history, but the history of UK monetary regimes points to a quarter of a century representing a relatively long-established one. Long may it last, because it has been successful, and it has delivered the much desired price stability.

But the context in which policy is made does not stand still. The first decade of the MPC was with hindsight very benign – the impact of demand shocks to the economy was small, and supply shocks were typically in a favourable direction. The next decade and more has been quite different, with much larger shocks – a mix of both demand shocks and more adverse supply shocks. This period has included a global financial crisis, a global pandemic, and in the UK the decision to leave the European Union.

Monetary policy has had to adapt to this world of larger shocks, in an environment where the trend to sustained lower equilibrium interest rates around the world has made the so-called effective lower bound a very pertinent issue. As a first observation, therefore, the task of monetary policy has moved from being a choice (albeit not an easy one) on a single dimension (the official interest rate) to a more multi-dimensional choice which also involves decisions on which tools to use, and which tools to develop – have “in the box” – for possible future use should the need arise. There are important issues of substance here. Close to the lower bound, the transmission of policy tends to be less effective – not redundant or worthless, but nonetheless less effective. But this does not make monetary policy pointless or unnecessary.

Did the current crisis change our way of economic thinking?

December 22, 2020

Robert Holzmann, Governor of Oesterreichische Nationalbank (Austrian Central Bank) in this speech:

It is too early to judge whether the COVID-19 crisis will have a lasting impact on economic policymaking. Yet, the crisis has certainly put a spotlight on the powerful effects that economic policy can have. The direct macroeconomic support observed during the past six months has been impressive.

Let me elaborate on one issue in this context, which will be addressed tomorrow in more detail: the view on globalization and the attitude toward global value chains. The COVID-19 crisis led to a marked increase in the demand for specific goods, e.g. health products and IT equipment. These goods are produced in highly organized global value chains. Yet, at the same time, the crisis also led to interruptions in these supply chains due to restrictions in transport and labor mobility. This situation has been exacerbated by export bans and quantity restrictions. World Trade Organization (WTO) estimates suggest that around 20% of global exports of protective clothing and 17% of disinfectant exports were affected.

In light of these examples, does the crisis call for a different view on global value chains? The COVID-19 crisis may not be a “game changer” in this respect, but it will reinforce a trend that has been observed for quite some time. The expansion of global value chains has been slowing since the mid-2000s, and this trend has been intensified by the global financial crisis.

So far, however, we cannot speak of a shortening or even dismantling of global value chains. After all, the rather swift revival of global value chains following the easing of restrictions has demonstrated their stability and their potential for supporting the recovery. Certainly, the current crisis holds some lessons: to promote not only efficient, but also robust and resilient global value chains in the future. For example, the build-up of safety stocks for essential goods could provide for sufficient buffers even though it requires a careful balancing of benefits and costs. Upstream bottlenecks should be identified and avoided by broadening the supplier base. Governments can support the smooth functioning of global value chains by facilitating the smooth flow of goods and
services and by supporting substitutability of inputs through harmonizing norms and standards.

World keeps going in circles. There was thinking that we do not need to create buffers due to heightened globalisation and ready supplies. The recent disruptions has again reinforced the need to build buffers.

The Eye of Providence: Thoughts on the Evolution of Bank Supervision

December 21, 2020

Federal Reserve recently organised a conference on bank supervision (lots of papers here).

Federal Reserve Vice Chair for Supervision Randal K. Quarles delivers a speech in the conference:

In many respects, the focus of today’s conference on bank supervision, rather than regulation, and the relatively recent efflorescence of scholarly attention to that topic, are welcome new developments. In other respects, however, the question of the proper scope of bank supervision is not a new topic at all. In going through some family papers recently, I came across this cri de coeur from one Elton Hall, president of a small bank in Victor, Idaho, as quoted in the Teton Valley News in November, 1921:

The government has so governed [my] bank that [I] no longer knew who owned it. I am inspected, examined and re-examined, informed, required, restrained, and commanded. . . . I am supposed to be an inexhaustible supply of money . . . , and because I will not sell all I have and go out and beg, borrow, or steal money to give away, I have been cussed, discussed, boycotted, talked to, talked about, lied to, lied about, held up, hung up, robbed and nearly drained, and the only reason I am clinging to life is to see what in hell is coming off next.

Were Mr. Hall transported to the District of Columbia in 2020, he would immediately realize that he had clearly had no idea what was “coming off next” if he had thought he was over-imposed upon in Idaho’s Teton Valley in the winter of 1921. But before the bankers in the congregation become too inclined to commiserate with him, I should note that the reason I know anything about Mr. Hall, and the reason his quote is among those family papers, is because his bank failed not so many years thereafter, as did nearly half the small banks in the country between 1920 and 1930. Mr. Hall’s bank on the western slope of the Tetons was acquired by a visionary young banker from Utah by the name of Marriner Eccles. This was during the Roaring ’20s, well before the Great Depression and the Banking Crisis of 1933. Before the evolution of modern supervisory practices, bank failures were extremely common, even in boom times.

So, how should we think about this new, yet very old, question? I’d like to begin as many of you have today, by focusing first on regulation—as a way of throwing into relief some key issues that are both important and hard about its cousin supervision.


Central bankers of the future

December 16, 2020

Agustín Carstens, General Manager of the BIS in this speech looks at central bankers of future:

What if a time-travelling central banker from yesteryear woke up today in a BIS meeting of central bankers? And – after somebody had explained to her why everyone was wearing a mask – what would she think of the topics being discussed? Especially, how amazed would she be at the way tech is driving big changes in finance and central banking? My guess is that she would pick out four or five major themes. Perhaps along these lines.

First, everyone wants to get hold of as much information as possible. And the more data you have, the better. In our modern market economy, the data are distributed around the world. As the costs of data storage have fallen, the global volume of data has surged. Trade-offs are everywhere. Consumers give out their data for a better or a free service, for example. But do they understand what they are giving up? Do we need to sacrifice privacy if we want more efficiency and innovation? Can we ensure privacy while making sure that policymakers get the information they need to ensure the integrity of the system?

Second, money can be – and is being – turned into pure information. Payments are being integrated with digital communications, and private companies are asking, “If it is so easy to send a TikTok video around the world, why isn’t it just as easy to send money?” This is bringing new challenges to how we think of money, and to the role of central banks.

Third, while private companies offer a dizzying array of payment options and financial services, issues of competition loom large. Regulators want banks and other companies to play fair, in other words keep a “level playing field”. But in a complex and globalised world with national regulators and regulatory structures built for traditional business models, how do we ensure this in practice?

And fourth, as we have become more dependent on digital technologies, we are also more vulnerable to their failure (“cyber risk”). While crime – and warfare – have bedevilled all ages, they have now moved to the digital realm. And the financial sector, which central banks supervise, is a particularly common target. Especially in 2020 as we are all working from home.


The fox and the hedgehog: preparing in a world of high risk and high uncertainty

December 15, 2020

Charlotte Gerken of Bank of England in this useful speech again quotes from the animal world:

Good morning. Thank you to Insurance ERM for inviting me to speak at your conference. When I told a colleague I had been asked to give a talk on responses to risk, he told me: “the fox knows many things; the hedgehog knows one important thing.”

I was curious to learn more: this idea came from a fragment of text by an Ancient Greek poet Archilochus of Paros; it inspired Isaiah Berlin’s 1953 essay on Tolstoy’s view of history; and has been used in Jim Collins’s book From Good to Great. What it boils down to is a way of thinking, one that guides how you prepare for and respond to risk: the fox looking at every eventuality; the hedgehog’s one big idea being to curl into a ball and wait for the peril to pass. I’m left with the image of the fox hopping about and getting ever more frustrated as it schemes how to get at the hedgehog.

Today I will take a look at some of the tactical steps we have taken around the financial markets and macro-economic impact of Covid-19 on insurers. And go on to more strategic responses to this and other structural changes, focussing on developments in stress testing and scenario analysis.

There have been times this year when it’s been hard to resist the temptation to react to unfolding events with the hedgehog’s one big idea. Unfortunately, there have been few places where curling up in a ball would not have left you in the path of a massive juggernaut.

Deploying our fox brain we have learned many things and responded tactically to the varying ways the financial markets, macro-economic, and business operational impacts from Covid-19 are affecting us.

In finance, the ‘Greeks’ have become synonymous with the inner workings of models for pricing derivatives – a fox-like activity if ever there was one. But thanks to that off the cuff remark by a colleague, I have learned that at least one Greek has much more to tell us about ways of thinking about risk. The detailed, fox-like analysis of individual risks and threats and how to respond to them is essential. And it is just as important to step back and ask ourselves, does all that industry add up to an effective defence against what the world could throw at us? Neither the fox nor the hedgehog has a monopoly on wisdom: as we look forward to 2021, the PRA is determined to learn from these and no doubt from other more exotic creatures.


The EU’s first anti-fraud prosecutor reflects on the challenges of tackling transnational crime

December 8, 2020

Project EU is not just about monetary, banking and capital markets union but several other unions at work. They have set up a pan-EU anti fraud prosectuion team and Romania’s Laura Codruta Kövesi is heading the unit.

In this interview in IMF’s F&D Magazine, Laura discusses her role:

Laura Codruta Kövesi is no stranger to fighting corruption. After becoming Romania’s youngest and first woman prosecutor-general, she served as head of the National Anti-Corruption Directorate from 2013 to 2018. Her tenacity and fearlessness soon opened a new door. Kövesi now serves as the European Union’s first anti-fraud prosecutor in charge of the new European Public Prosecutor’s Office (EPPO), based in Luxembourg, which will investigate, prosecute, and bring judgment for crimes against the EU budget. These crimes can include fraud, corruption, organized crime, and cross-border value-added tax (VAT) crimes exceeding €10 million.

Previously, only national prosecutors across EU member states could tackle such criminality, but they lacked jurisdiction beyond their borders. Other institutions, such as Europol or the EU anti-fraud office OLAF, had no legal authority to act. The European Commission reports that €140 billion in VAT revenue was lost in 2018 to fraud and evasion, predicting that number to increase to €164 billion in 2020 as a result of the pandemic.

Can the EPPO successfully tackle transnational crime? F&D’s Rahim Kanani interviewed Kövesi to find out.

F&D: What is the single most important lesson you bring to this new role from your experience in Romania?

LK: My experience with Romania’s National Anti-Corruption Directorate is proof that nobody is above the law and that the law can be applied equally to everyone, regardless of their position in society. We were able to not only raise awareness about the seriousness of corruption and how it impacts people’s lives, but we were also able to show that Romanian institutions can work efficiently and legally to defeat it. It is not an unsolvable problem.

F&D: What are the main challenges to establishing an effective EU prosecutor’s office?

LK: We’re building this office from scratch, so there is much work to be done to get our administrative, budget, and legislative guidelines in order. There is no precedent for such an office, as we have to harmonize the work of prosecutors from 22 different member states. They are working in different judiciaries with different procedural rules, and we have to find common ground.

The second challenge, once we’re operational, is to be efficient, act independently, and win the trust of the citizens—which we can only win by being effective in our efforts and by proving that the law is applied equally to everyone.

Project EU is a good place to think about building institutions from the scratch..

Gearing up for new and evolving jobs in financial services

December 7, 2020

Ravi Menon, Managing Director, Monetary Authority of Singapore in this speech discusses about the new finance jobs being created in Singapore. Clearly becoming more technology oriented:


Bank of England’s liquidity facility for Islamic banks to start in 2021

December 3, 2020

Andrew Hauser of Bank of England in this speech speak about the role of Islamic finance.

It’s a privilege to be with you today to talk about the Bank of England’s work on Islamic finance – and to announce the launch date for our new Shari’ah compliant non-interest based deposit facility, the first such account from a Western central bank. The facility, in which deposits from Islamic banks will be backed by a return-generating fund of high quality Shari’ah compliant assets, will further strengthen the United Kingdom’s role as the leading international financial centre for Islamic finance outside the Muslim world. But it also goes deeper – because the core principles of Islamic finance are strikingly well suited to responding to some of the biggest challenges we will all face in rebuilding our economy once Covid has passed.

Prioritising equity-like risk-sharing over debt. Factoring ethical and environmental considerations into investment decisions. And embracing innovative financial solutions beyond traditional banking. And that lies four square within the Bank of England’s mission to promote the good of the people of the United Kingdom, Muslim and non-Muslim alike.

The new Islamic finance banks facility will be available from Q1 2021.

Today, after a long and comprehensive process, I’m pleased to announce that the Alternative Liquidity Facility will be open for business from the first quarter of 2021. The new facility will provide UK Islamic banks (and indeed any other UK banks with formal restrictions on engaging in interest-based activity) with greater flexibility in meeting HQLA requirements, enabling them to hold  a reserves-like asset in a non-interest based environment.

The ALF will be structured as a wakalah or fund-based facility: a commonly used model in Islamic finance (Chart 4). In simple terms, that means that participant deposits will be backed by a fund of assets, the return from which, net of hedging and operational costs, will be passed back to depositors in lieu of interest.

The strengths of this model include its relative simplicity – conceptually and practically – and its flexibility to accommodate future changes in what is a still fast-developing market. The ALF will grow as the UK Islamic bank sector grows. And it will be well placed to exploit the growing diversification of available HQLA-eligible sukuk assets.  


What Has Central Bank Independence Ever Done for Us?

December 1, 2020

Andy Haldane in this speech summarizes the views on central bank independence so far:

This year has seen central bank balance sheets expand further. Global QE now stands at around $17 trillion and is set to rise further. For some, this has blurred the distinction between monetary and fiscal policies to an even greater extent than in the past. It has also intensified the debates and concerns around central bank independence expressed at the Bank’s conference three years ago.

Against that background, now is an opportune moment to ask some questions, and assemble some evidence, on the case for central bank independence. How has it affected monetary and financial stability? What challenges does it face at present? And how might it evolve in future?

Those are the aims of this lecture. I start with some definitions of central bank independence, which is a multi-faceted and often misunderstood concept. I then discuss some of the theory and evidence on the role of central bank independence in supporting monetary and financial stability, as well as its links with fiscal policy. I will conclude with brief thoughts on central bank independence looking forward. As a central banker, you might expect me to extoll the virtues of central bank independence.

Spoiler alert, I will not disappoint. As best evidence can tell, central bank independence has delivered “twin-wins” for price and financial stability: low inflation and stable banks at no cost to the economy’s output or efficiency. Equally, this is a challenging time for the economy and for central banks. They will need to adapt to these new challenges to boost public understanding of, and maintain democratic legitimacy in, central banks. 


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