Archive for the ‘Speech / Interviews’ Category

“What is the future of cash in the UK? Less cash but not cashless

April 11, 2019

Sarah John, Chief Cashier of Bank of England (one who signs the banknotes) in this speech looks at this question most central bankers are asking: What is the future of cash?

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How to develop a “financial Eurosystem” post-Brexit?

April 8, 2019

Mr François Villeroy de Galhau, Governor of the Bank of France in this speech reflects on post-Brexit financial Eurosystem.

In earlier speeches Mr Villeroy de Galhau said that post-Brexit, Paris could be shaped as a financial centre. Now he mentions, a polycentric network of financial centres in Europe:

The unfortunate reality is that Brexit leaves us no other choice: we must now reshape the European financial system and develop its autonomy. The euro area can already build on strong assets: an effective monetary Eurosystem, the legal framework for a single financial market and essential components of a Banking Union. However we do not, as yet, have a “financial Eurosystem”, made up of stronger pan-European financial institutions and market infrastructure. Let’s be clear: there will not be a single City for the continent, but rather an integrated polycentric network of financial centres, with specialisations based on areas of expertise. A polycentric system of this nature can function, as illustrated by the United States: New York’s financial centre is favoured by corporate and investment banks, Chicago’s financial centre handles futures, while Boston specialises in asset management.

Hmm.. This is interesting. So what specialities do European financial centres such as Paris, Frankfurt, Amsterdam etc have?

He then discusses the two unions which will help in this polycentric network:

Starting with the Banking Union, its success depends on the completion of a robust resolution mechanism, probably even more than a full common deposit insurance scheme. Regarding the backstop of the Single Resolution Fund, in the interests of financial stability, we should consider extending the maturities on the credit lines. But we will not achieve an effective and profitable Banking Union without cross-border consolidation in Europe: there are still too many roadblocks and not enough cross-border restructuring. Compared to the US market, the European banking sector remains fragmented: the market share of the top 5 European banks amounts to 20%, compared to more than 40% in the US. So we should aim to create a “single banking market”, as recently proposed by Annegret Kramp-Karrenbauer, where genuine pan European banking groups could operate more effectively and better face foreign competition. 

Together with the Banking Union, a genuine Capital Markets Union (CMU) is essential to strengthening financial integration in Europe: we advocated it strongly with Jens Weidmann, President of the Bundesbank, in a joint paper published yesterday, and it will be a key topic of today’s informal Ecofin, thanks to the Romanian Presidency. Despite some recent achievements, progress on this topic is proving difficult and slow. Let us finally move on from a rhetorical consensus in principle to concrete headways, notably on instruments, access to finance for SMEs, and supervision.

In this respect, I welcome the progress achieved on a Pan-European Personal Pension Product (PEPP): this product is portable across member states and offers consumers a wider range of investment opportunities. We should also make progress towards the harmonisation of insolvency regimes. It should facilitate cross-border investment.

One of the most challenging issues of the CMU is to provide cheaper and easier access to equity for SMEs in order to support their growth. Equity financing is a key driver of innovation: it is better suited to the uncertainty and offers long-term returns associated with innovative projects. The euro area is seriously lagging behind in this respect: equity only accounts for 80% of GDP, compared with 122% in the United States.

Despite setbacks. European policymakers keep talking about more and more unions…It is a one-way club membership..

The international role of the euro: down but not out

April 5, 2019

Claudio Borio of BIS in this speech:

Much has been said about the role of the euro in the international monetary and financial system and about the currency’s prospects. And much of it is not particularly encouraging.

Some of what has been said is about the future. Based on the lessons of history, there is a broad consensus on the financial and political preconditions for making that future a bright one.2 One can only conclude from those lessons that the distance to travel is, to put it mildly, considerable. I can hardly add
anything of value to that aspect of the debate.

Some of what has been said has been about the evolution to date. Take the IMF’s tally of the share of official foreign exchange reserves denominated in euros. This shows a sizeable diminution, from about 25% in 2012 to some 20% recently.3 Moreover, the ECB’s composite index of the euro’s international
role paints a similarly unflattering picture.4 One might conclude from all this that the euro has lost clout across the board.

Today, I would like briefly to question this verdict. My thesis is that the verdict is too categorical – a more nuanced assessment is in order.

I would like to argue that, in some significant but underappreciated respects, the euro’s heft has actually grown in recent years. I shall highlight three aspects: the euro’s influence on global bond markets; its influence on exchange rates globally; and its influence on the “effective pricing“ of commodities, regardless of the currency in which their prices are actually denominated.

Interesting sets of graphs in the speech..

Managing natural resources – lessons from Norway

April 1, 2019

Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway) in this speech outlines :

Norway is a small, open economy, which was transformed by the discovery of oil on our continental shelf almost 50 years ago. Back in 1970, the year after the first discovery, income levels were relatively low compared with other western countries. That picture has changed completely. Today, Norway ranks among the richest countries in the world.

For some countries, natural resource discoveries have been identified as a curse. For Norway, the discovery of oil has been a blessing. We have managed to transform oil and gas resources into real and financial assets. Luck has been supplemented with what I dare to claim is sensible resource management, based on a well-functioning democracy and longstanding and trustworthy institutions.

Key lesson?

Policymakers’ handling of Norway’s newly discovered petroleum wealth got off to a rather bumpy start. During the first 25 years of oil production, Norway experienced two deep recessions. Both downturns were rooted in wildly optimistic income expectations. In the 1970s, public spending surged before oil export revenue started to kick in. Eventually the government had to tighten fiscal policy. In the 1980s, a credit-fuelled consumption boom in the private sector led to necessary cut-backs after the oil price plunge in 1986. The turbulence made clear how vulnerable a small economy is to terms of trade disturbances. Let that part of our history stand as a warning. But lessons were learned, and formed the basis for the framework that was put in place from 1990 and onwards.

During the past 50 years, Norway has experienced how oil prices can change almost overnight in response to international politics, economic disturbances or disruptive technologies. Recently, a new risk factor has emerged. Impacts of global warming are high on the international agenda. Policy measures and shifts in consumption patterns and production methods towards lower emissions will reduce demand for fossil fuels. The change to a more climate-friendly policy may have a considerable impact on petroleum prices.

Looking ahead, Norway must now be prepared for a time when the petroleum industry is no longer expanding, but gradually declining. We will need innovation and growth in other industries to pick up the slack. We have always known that oil and gas activities will be phased out sooner or later. Oil and gas are non-renewable resources. A stricter global climate policy or a green-technological breakthrough may mean that this will occur sooner than foreseen earlier.

In contrast to Norway, Mozambique is at the beginning of its gas era. I hope the lessons from Norway can give you some guidance on your way forward.

One main lesson is that depletable natural resources must be viewed as part of a country’s wealth. Revenues from extracting oil and gas is just a transformation of this wealth and should be managed with a long-term prospective.

At the same time, the development of oil and gas reserves can have valuable spillovers to the rest of the economy. Not only demand from the petroleum industry, but also innovations and technological skills developed in the industry can be of great value to other sectors. The productivity gains to the economy can be more long lasting than the petroleum industry itself.

And never forget: The real test of how a petroleum producing country has managed its fortune, will come when the boom in the petroleum industry ends. Oil and gas resources do not last forever. Emphasis should therefore be given to further development of human capital as the primary source of long-term prosperity and wealth.

Hmm..

Central bank communications in a post-truth world…

March 29, 2019

Not seen an central banker talk about post truth world.

Mr Mugur Isărescu, Governor of the National Bank of Romania. in this speech touches on the topic:

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How Russia’s central bank adopted inflation targeting and let its currency float?

March 22, 2019

Nice interview of Elvira Nabiullina, the governor of the Central Bank of Russia. She is also the first woman to head the central bank.

She discusses how Russia adopted IT in 2014 in wake of crisis and let its currency float as well:

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Interview of Deirdre McCloskey

March 22, 2019

This interview of Prof McCloskey appeared a month earlier:

She says liberalism should not be adopted selectively but comprehensively:

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Changing gears: about cycling and the future of banking

March 18, 2019

Frank Elderson, Executive Director of Supervision at Dutch Central Bank in this speech connects cycling and banking regulation:

When I took up this job as chief supervisor for the Dutch banking sector, summer last year, I realized again how much better shape the Dutch banks are in, than the last time I was actively involved in prudential banking supervision.

You see, I was leading the DNB team responsible for supervising ABN Amro back in 2006. I remember going to the Zuidas by bike, parking it right in front of that huge entrance of the ABN Amro building – which wasn’t allowed by the way. That solitary black bicycle, against the sheer backdrop of one of the tallest sky-scrapers of Amsterdam at that time, in a way that bicycle formed an early example of transparent supervision: since everybody knew it was my bike, every time they saw it they knew the supervisor was in the building.

Of course, it’s a story with a tragic undertone. The years 2006 and 2007 have a fateful ring to them. We were witnessing the tearing apart of the largest bank in the Netherlands. Less than a year after the consortium took over ABN Amro, on a sunny day people were leaving the Lehman head offices
carrying cardboard boxes. The rest is history.

How totally different to the picture we observe today! Today I see a banking sector that has weathered the storm, and has emerged stronger. Smaller perhaps, but more resilient, more focused and better capitalized.

Hmm.. It is quite transparent really, Usually, the banks do not want any sign whatsoever of a regulator parking their vehicles at their offices . It could lead to a signal that bank is under trouble and build expecations for a run..

Then he points to three challenges ahead for banks and their supervisors:

  • Anti-Money Laundering and Countering Financing of Terrorism
  • restoring trust in banking sector
  • forward looking risk management

He concludes by looking at ECB’s Single Supervisory mechanism:

Of course, and this is perhaps one of the greatest changes of all over the past twelve years, we are not going about this alone. Today, if you are entering your head offices, you may see not one bicycle, but two. Or a whole lot, if an on-site inspection is taking place. (Actually, this is a figure of speech. We have not yet completely succeeded in transferring our love for cycling to all our good colleagues within the SSM.)

Because I am talking about the SSM of course. I think the SSM has been a great improvement in the way we exercise supervision. If I only think back at the situation we were in, back in 2012, when the European Council’s decision about the banking union was taken. And in November 2013 the SSM was
formally established.It is hard to believe how much progress we’ve made in just a few years.

Many highly qualified staff had to be recruited. A complete supervisory framework had to be designed and be made operational, incorporating the best elements of each nation’s approach to supervision. And a close collaborative relationship with national supervisory authorities developed. It was an
astounding achievement, and the ECB deserves much credit for this.

We are now in a transitional phase. A phase in which the banking union is steadily taking shape, and the SSM is consolidating into a truly harmonized European supervisor. Based on past experience, I look forward to this new phase with confidence and I am eager to take part in it. That’s how we are continuing, safeguarding a sound banking sector in the interest of depositors and a prosperous economy.

Only one last thing: I would love to see more supervisors taking the bicycle when moving around in Frankfurt…

Typical Dutch ending..

How Singapore manages its forex reserves?

March 14, 2019

Ravi Menon, head of Monetary Authority of Singapore in this nice speech:

Singapore has official foreign reserves (OFR) of almost US$300 billion. 

  • In absolute terms, this is the eleventh highest stock of OFR in the world. 
  • As a percentage of GDP and on a per capita basis, it is the third highest in the world.
  • Singapore’s OFR sit on the balance sheet of the Monetary Authority of Singapore (MAS), the central bank and integrated financial regulator.

Besides the OFR, there are two other pots of national reserves in Singapore:

  • The Government of Singapore Investment Corporation (GIC), a fund management company, manages on behalf of the Singapore Government a diverse portfolio of foreign assets – well in excess of US$100 billion.
  • Temasek Holdings, an investment company wholly owned by the Singapore Government, holds equity stakes in a variety of domestic and foreign corporates, amounting to more than US$200 billion.

This morning, let me try to answer three questions:

  • What role do the reserves play?
  • How are the reserves accumulated and managed?
  • How are the OFR managed?

 

Ten Years of Research – What Have We Learnt Since the Financial Crisis? (Australia edition)

March 8, 2019

Nice speech by John Simon, Head of Economic Research at RBA:

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History and future of fixed income markets (in UK)..

March 1, 2019

Nice speech by Rohan Churm, Head of Foreign Exchange Division of Bank of England.\

The United Kingdom is home to one of the oldest financial centres in the world. Starting from within the
confines of London’s square mile – The Square Mile – but now spread widely around the country, the
United Kingdom has also become one of the world’s leading financial centres. In doing so it has been
central to centuries of innovation and evolution in the financial system.

The Bank of England’s first foray into fixed income markets came at its inception, in 1694, when it raised
£1.2m over 12 days, in order to lend to the government. This was an innovative way for the government of
the time to fund a war effort. But the original Royal Charter explained that the Bank was founded to
‘promote the public Good and Benefit of our People’. That aspect of the Bank’s mission has remained
timeless, even as the financial system has radically changed. That the Bank today can deliver its mission is
testament to how it has also innovated and evolved alongside financial markets and their participants.

If it feels like financial market participants must constantly adapt in order to thrive, then it would be helpful to
know we are not alone in this experience. It brings to mind the ‘Red Queen hypothesis’, which arose as the
academic field of evolutionary biology drew on the literature of Lewis Carroll. This idea was originally
proposed by US academic Leigh Van Valen. It posits that organisms that survive in a constantly changing
environment have themselves adapted and evolved. In Lewis Carroll’s book ‘Through the Looking Glass’,
the Red Queen warns Alice that it “takes all the running you can do, to keep in the same place. If you want
to get somewhere else, you must run at least twice as fast as that.” No doubt some of you can identify with
that as you consider how the City has changed over your careers, arguably innovating more rapidly than
ever before.

The Bank of England innovated in 1725 with the introduction of printed bank notes – moving away from the
handwritten ones.1 In the 19th century its lender-of-last-resort operations were novel and groundbreaking.
More recently, operational independence to set monetary policy and the new responsibilities for
macro-prudential regulation have significantly changed the shape of the Bank.

As we meet today at the London Stock Exchange (LSE) it is worth reflecting on how exchanges have
evolved. Not least because the LSE now has 14,500 listed debt securities and is hosting a fixed income
forum! When the Bank was founded in the 17th century stockbrokers would meet in the coffee houses of
Change Alley in order to exchange information and strike trades. Prices were first transmitted via the electric
telegraph in 1830. Today, in many markets algorithms ‘meet’ in a server centre to trade within fractions of a
second. Despite this, coffee shops are thriving.

He points that automation has been limited in debt markets:

at their core, FX and equities markets are based on homogenous instruments. As one moves towards
related but potentially bespoke products, such as FX and equity options, trading is far less automated.
The logic applies to fixed income markets, where bespoke aspects to bonds are often a central feature. A
typical large bank may have more than one thousand unique debt instruments associated with it, varying
across currency, coupons, maturity dates, optionality, and seniority, to name some dimensions. This
compares to ultimately only one equity claim.

This feature of fixed income markets is not a bug. It reflects product innovation that allows debt instruments
to suit the preferences and constraints of the investor, which ultimately lowers costs for the borrower. But it
does reduce liquidity. Most obviously, for any given amount of debt, more debt instruments means smaller
sized individual issues available to trade in the market. The bespoke characteristics also lead to market
segmentation as any individual investor may only be willing to buy a subset of bonds from a given issuer.
And from a practical perspective, investing in automated trading, with potentially bespoke programming, is
less likely to be worth it for small and unique issues with non-standard characteristics.

This means that fixed income markets remain somewhat slower.

Saying that, electronic trading is now a very standard part of fixed income markets. Automated trading has
also increased markedly, in particular in standardised or liquid instruments such as government bond futures
or on-the-run US treasuries.

Electronic trading is also increasing for corporate bonds. Our market intelligence suggests that around 50%
of all gross notional in the European corporate bond market is now being traded electronically. This has been
helped by the electronification of the corporate bond ecosystem, including the pre-trade, execution and the
post-trade phase of the trade lifecycle. And we have also seen growth of electronic trading platforms,
serving the dealer-to-dealer, dealer-to-client, and all-to-all segments.

Also discusses what next for Fixed income markets…

How the great fire of London created the insurance industry…(and moving towards a creative economy)

February 25, 2019

As usual good speech by Andy Haldane of Bank of England.

The key to his speech is that humans have managed to be very creative in response to the several challenges posed to them. The same approach is needed to the challenges posed by the 4th industrial revolution.

He points how humans reacted creatively to the Great Fire in London. There were 3 responses:

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Impact of Brexit on Ireland and Germany’s banks having UK branches

February 18, 2019

Two interesting speeches as Europe tries to look at hard Brexit.

Lane as Ireland faces the deepest concerns due to Brexit. He looks at both macro risks and financial stability risks:

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It’s always a mistake to underestimate the strength of the European project..

February 13, 2019

Benoit  Coeuve, member of ECB in this interview on the European project:

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How will we transition to a LIBOR free world?

February 12, 2019

Nice speech by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA of UK.

There is now wide recognition that LIBOR will come to an end. Thanks to the agreement reached with 20 panel banks to continue submitting until end 2021, LIBOR is not expected to cease before that point. But, when I spoke at the International Swaps and Derivatives Association’s (ISDA’s) annual Europe conference in September last year, on this same stage, an audience poll found just over 50% thought LIBOR would stop before end-2022. Today, I would like to explore in a bit more detail not whether LIBOR will end, but how it will end.

This has important implications for contractual design. It is relevant in particular to how ’fallback‘ language in outstanding contracts that continue to reference LIBOR will and should work. Understanding the way in which the end of LIBOR will play out is key to choosing the right trigger point for moving to a new or replacement ‘fallback‘ rate.  

It will be quite something to forget LIBOR in our minds as well…

How central bank boards/committees are different from private ones?

February 12, 2019

A nice speech by outgoing Bank of England’s FPC (not MPC) external member: Martin Taylor.

He speaks about how central bank boards/committees are different from the ones in private sector. He also discusses several others things:

  • Role of FPC
  • Role of external members vis a vis internal members
  • central bank independence
  • central bank neutrality: he rightly says that central banks should strive to be neutral but should not be neutered in the process
  • Brexit

On the differences between private board and public ones:

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Interview of PC Mohanan member National Statistics Commission: On Controversies around India’s unemployment data..

February 11, 2019

PC Mohanan gives a no holds barred interview on Indian unemployment report and many other things:

India’s statistics minister Sadananda Gowda told Parliament last week that reports of the unemployment rate touching 6.1% in the NSSO survey is fake. Having headed the survey, how do you react?

I personally cannot agree. The NITI Aayog (a government think tank) was the first to say that it’s a draft report. Once I approve it, how is it a draft report? The NITI Aayog CEO (Amitabh Kant) gave some reason why this is not comparable, which is also misleading. When we approve a report, I am not going to give a figure which is not comparable with the other ones. Second, the concept of employment and unemployment are universally accepted. International Labour Organization prescribes the standards, we all follow it.

The government also keeps talking about collecting and processing the quarterly data from July to December 2018. Do you expect this to be much different from the annual survey’s findings?

I don’t expect much variation between the annual data and the quarterly data. All Western countries produce quarterly employment data. We have quarterly data on GDP, but no employment data. So, under a new system, we thought we will make an attempt to produce quarterly employment data. But in rural areas, quarter-to-quarter changes will hardly be any. So we thought, let’s try for the urban area at first. It is kind of a trial, for one or two years we will see. The annual reports are based on a first visit, the quarterly will depend on the second or third visit. They are two different surveys—in the sense that the quarterly reports you are readying are only for urban areas, whereas this 2017-18 NSSO survey is rural plus urban. In India, you don’t expect too many changes in annual employment from the quarter. Here we don’t give people unemployment allowance or security. And many of the people employed are in the government sector. So, quarter to quarter changes may not be that much and the annual data will have no relation with the quarterly.

He shares some wisdom on unemployment numbers. It is not as bad as we think:

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Charting a course for the Financial Stability Board

February 11, 2019

Randal Quarles, Vice Chairman for Supervision at Federal Reserve gives a useful speech:

Let me begin with the principle of engagement, and let me lay the groundwork for this discussion by reviewing the way the FSB was established and its mandate, to see how we can continue to fulfill that mandate going forward. As we all know, the FSB was born out of the crucible of the 2007-09 Global Financial Crisis–a crisis that demonstrated in the starkest possible way the importance of global financial stability to the well-being of families and businesses around the world. In the months following the peak of the crisis, the world was struggling with financial market turmoil, and the resultant macroeconomic effects were felt by people everywhere around the world. It was clear that the response to this crisis needed to be global, and the G7 and G10, without any emerging market representation, were not the right bodies to organize a global response.

As such, the Heads of State and Government of the G20 called for the Financial Stability Forum (FSF), a relatively small and unmuscular group, to expand its membership and to strengthen its institutional framework. The result was the Financial Stability Board, which was designed as a mechanism for national authorities, global standards-setting bodies, and international authorities to identify and address vulnerabilities in the global financial system and to develop stronger regulatory and supervisory policies to create a more resilient global financial system. This new group is more representative of the interconnected global economy and financial system and can more effectively mobilize to promote global financial stability than anything that existed before. Whereas the FSF included only 11 jurisdictions (all of which were advanced economies), the FSB includes 24 jurisdictions and 73 representatives, which include all the members of the G20 and of which 10 are emerging market economies.

In fostering global financial stability, the actions of the FSB have the potential to affect the global economy and financial system in important ways. Success in promoting global financial stability should benefit everybody, through more sustainable and stronger economic growth. At the same time, financial stability policy will also affect institutions and markets beyond the FSB’s membership. Recognizing the wide-reaching effects of its work, the FSB must seek input from a broad range of stakeholders, each of whom brings a different perspective to the issues under consideration. While we are directly accountable to the G20, we are, through the G20, accountable to all of the people affected by our actions. In my view, that means we must engage in genuine, substantial dialogue with all of these stakeholders, to a greater and more effective degree than we have in the past.

He is also the chair of FSB now.

Central banking and Beatles: What is the connection?

February 6, 2019

Interesting speech by Jens Weidmann of Bundesbank. He points how Beatles gave their last performance 5 years ago:

It was on 30 January 1969, to be precise. What I would give to have been strolling down London’s Savile Row during my lunch break on what was, like today, a chilly Thursday. Passers-by could hardly believe their ears. Music was blaring from the rooftop of house number 3. But it wasn’t just any old music – it was the Beatles, and they were playing live1.  

By this point in their career, the Beatles hadn’t given a live concert for more than two years, having decided to concentrate on their work in the studio. Recordings for the Fab Four’s latest LP, which would later be released under the title Let It Be, were being videotaped, and the highlight of the documentary was to be a live concert at a spectacular location. But the band ended up simply performing a concert on the roof of their headquarters.

What no-one suspected at the time was that it would be the last time the Beatles ever performed live. 50 years ago, then, saw the end of a musical era that we still hold dear today. And that’s why the Beatles will pop up at various points during my speech here today. 

He discusses outlook for German economy and how it can be improved. Then talks about the monetary union and draws analogies from musical bands:

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Moving over hawks/doves/owls, central bankers should be more like foxes…

February 4, 2019

There is this interesting discussion on whether someone should be a hedgehog (knows one thing really well) or a fox (knows several things).

In this speech Olis Rehn, head of Finland Central Bank says central bankers should move away from being hedgehogs (price stability) to being foxes (knowing several things):

Central bankers are often labelled as either hawks or doves. I don’t see this as a very useful classification. It is almost a caricature of one-eyed dogmatism, not fitting to any serious central banker that I know of.

Instead, a more relevant distinction was made by the philosopher Isaiah Berlin, who divided policymakers to foxes and hedgehogs: “the fox knows many things and the hedgehog knows one big thing”.  

In monetary policy, pursuing the price stability objective with long-term consistency and resolve calls for the central banker to develop a personality of the hedgehog.

But monetary policy is not a mechanical exercise that can be done in a social vacuum. A strategic sense of the interplay between the economy and politics, the markets and the media is also essential – knowing when to play offensive, when to hold on to defence, and how to combine the two. By being aware of the big picture, and capable to navigate in uncertain seas, central bankers should be foxes, as well.

So, monetary policy must always take into account the analysis of the prevailing situation in the real economy, in enterprises and the society at large, recognizing its challenges and how they relate to the commitment and responsibility that central banks have for monetary stability.

Hmm..


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