January 2019 Vol.10 Ed.1
The 100th issue
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Untitled-1.indd 1 13/09/2018 10:32 Contents 100 January 2019. Vol.10 Ed.1 8 4 ABOUT OMFIF In conversation 5 LEADER 24 JOHN (IANNIS) MOURMOURAS with Danae Kyriakopoulou 6 REVIEW / AGENDA
Cover: The Bulletin at 100 Money matters 6 26 BELOW TREND GROWTH FORECAST FOR 2019 9 PREPARING FOR A NEW ERA Juan Castañeda and Tim Congdon David Marsh
10 FED LESSONS FROM ZERO LOWER BOUND Worldview James Bullard 28 STEERING CAPITAL TOWARDS GREEN FINANCE 11 SCRUTINY OF CENTRAL BANKS LIKELY TO INCREASE Joaquim Levy Daniel Mminele 29 RENMINBI’S GLOBAL RESERVE 12 AN EXERCISE IN JUDGEMENT AND INNOVATION SHARE RISING Mario Marcel Gary Smith 13 ADDRESSING REVERSAL OF FINANCIAL INTEGRATION 30 FED’S POWELL EQUIVOCATES Yannis Stournaras ON RATE RISES 14 WHY WE MUST COMPLETE BANKING UNION Darrell Delamaide Carlos da Silva Costa 31 INSURANCE: AN ANSWER TO FISCAL RISK 15 COPING WITH CHALLENGES OF COMPLEXITY Marcelo Giugale 30 Nestor Espenilla 32 SINGAPORE MODEL FOR AFRICA SOVEREIGN FUNDS Kelvin Tan 16 BUILDING NEXT-GENERATION CUSTODY SERVICES Hani Kablawi 34 NEW ARCHITECTURE OF PAYMENTS SYSTEMS John Velissarios and Ousmène Mandeng 17 PAST, PRESENT AND FUTURE OF CENTRAL BANKING Turalay Kenç 35 CENTRAL BANK GOLD BUYING SOARS Shaokai Fan 18 GREEN MARKET PASSING MILESTONES Frank Scheidig 37 IMPACT INVESTMENT SECTOR AT CRITICAL STAGE 19 LOOKING PAST TRADITIONAL Andy Budden MARKET INDICATORS Peter Zöllner 21 Inquiry 20 TOWARDS UNITED FRONT IN 38 CHART OF THE MONTH: CHINA REDUCES REQUIRED IMPACT INVESTING RESERVES OF MAJOR BANKS TO 11-YEAR LOW Karin Finkelston 38 EURO ENTERS DECISIVE DECADE Danae Kyriakopoulou 2019 Predictions 42 OMFIF ADVISERS NETWORK POLL 21 AN EYE ON THE HORIZON US trade war still likely to deepen, despite truce
OMFIF.ORG JANUARY 2019 BULLETIN 3
BTN_01.19_003_Contents TC.indd 3 10/01/2019 13:48 About OMFIF
Dialogue on world finance and economic policy
THE Offi cial Monetary and Financial Institutions Forum is an independent think tank for central banking, economic policy and public investment – a non-lobbying network for best practice in worldwide public-private sector exchanges. At its heart are Global Public Investors – central banks, sovereign funds and public pension funds – with investable assets of $36tn, equivalent to 45% of world GDP. Promoting gender With offi ces in London and Singapore, OMFIF focuses on global policy and investment themes – particularly in asset management, capital markets and fi nancial supervision/regulation – relating to balance in public- central banks, sovereign funds, pension funds, regulators and treasuries. OMFIF promotes higher private fi nance standards, performance-enhancing public-private sector exchanges and a better understanding of the world economy, in an atmosphere of mutual trust. Gender Balance Index 2019 launch Membership Membership offers insight through two complementary channels – Analysis The presence of women at the top of and Meetings – where members play a prominent role in shaping the traditionally male-dominated public agenda. For more information about OMFIF membership, advertising or and private fi nancial institutions is subscriptions contact membership@omfi f.org benefi cial for both the organisations themselves and the global economy. Boards and executive teams benefi t from the diversity of opinion offered Analysis by gender equality. OMFIF Analysis includes commentaries, charts, reports, summaries of OMFIF is contributing to these trends meetings and The Bulletin. Contributors include in-house experts, advisers by launching the sixth annual Gender network members and representatives of member institutions and academic Balance Index. and offi cial bodies. To submit an article for consideration contact the editorial team at analysis@omfi f.org The launch includes a keynote presentation and panel discussion focusing on public sector initiatives and draws in private sector Meetings experience. OMFIF Meetings take place within central banks and other offi cial Venue: Embassy of Switzerland, institutions and are held under OMFIF Rules. A full list of past and London Date: 7 March 2019 forthcoming meetings is available on www.omfi f.org/meetings. For more information contact meetings@omfi f.org For more information or to register your interest, please visit omfi f.org/meetings OMFIF Advisers Network Sponsored by: The 173-strong OMFIF advisers network, chaired by Meghnad Desai, is made up of experts from around the world representing a range of sectors: monetary policy; political economy; capital markets; and industry and investment. They support the work of OMFIF in a variety of ways, including contributions to the monthly Bulletin, regular Commentaries, seminars and other OMFIF activities. Membership changes annually owing to rotation.
OMFIF.ORG
BTN_01.19_004-005_About_Leader.indd 4 10/01/2019 16:48 Leader
Bankers who fell to earth Offi cial Monetary and Financial Institutions Forum 30 Crown Place, London, EC2A 4EB United Kingdom MFIF was born on a wave of refl ection that the good times couldn’t T: +44 (0)20 3008 5262 F: +44 (0)20 7965 4489 possibly last – because they only recently had come to an end. January www.omfi f.org @OMFIF O 2010, the date of the fi rst of what has now become 100 monthly Bulletins, marked the onset of a long, halting recovery from the fi nancial BOARD David Marsh, Chairman crisis. The world gingerly edged forward, knowing that at each Phil Middleton, Deputy Chairman step it could fall down again. Jai Arya Central banks have become more visible and more Pooma Kimis Edward Longhurst-Pierce vulnerable. The 100th edition recognises the bittersweet John Plender realities of modern central banking. Summing up a view Lauren Roberts in both developed and emerging market economies, Peter Wilkin Daniel Mminele of the South African Reserve Bank ADVISORY COUNCIL 100 writes, ‘Given their expanded role and growing demands Meghnad Desai, Chairman from society, central banks can expect to face more Mark Sobel, US Chairman scrutiny and, in some circumstances, challenges to their Johannes Witteveen, Honorary Chairman Louis de Montpellier, Deputy Chairman independence.’ This matches the fi ndings of a series of OMFIF Frank Scheidig, Deputy Chairman seminars and research pieces over the years; the second decade of the 21st Xiang Songzuo, Deputy Chairman century was the time when central bankers fell to earth. Hani Kablawi, Deputy Chairman Gary Smith, Deputy Chairman Jim Bullard of the St. Louis Federal Reserve writes on the Sisyphean quest Otaviano Canuto, Aslihan Gedik, to restore interest rates to ‘normal’ levels. Two central bankers bearing Robert Johnson,William Keegan, scars from the euro crisis – Yannis Stournaras from Greece and Carlos da John Kornblum, Norman Lamont, Silva Costa from Portugal – dwell on the incomplete business of shoring Kingsley Moghalu, Fabrizio Saccomanni, Niels Thygesen, Ted Truman, up Europe’s single currency. Nestor Espenilla from the Philippines, Mario Marsha Vande Berg, Ben Shenglin, Chair, Marcel from Chile and Turalay Kenç from Turkey summarise lengthy OMFIF Economists Network legacies of upheaval. EDITORIAL TEAM All our long-running themes are covered. We have articles on pensions Danae Kyriakopoulou, Head of Research from Andy Budden of Capital Group, on the rise of the renminbi from Gary Simon Hadley, Head of Production Julian Frazer, Senior Editor Smith of Barings, on sustainable Julie Levy-Abegnoli, Subeditor economics from Joaquim Levy, formerly Bhavin Patel, Economist of the World Bank, on central banks’ Kat Usita, Economist William Coningsby-Brown, Assistant gold-buying from Shaokai Fan of the Production Editor World Gold Council. Karin Finkelston of Darrell Delamaide, US Editor the International Finance Corporation MARKETING writes on impact investing, Hani Chris Ostrowski, Head, Business Development Kablawi of BNY Mellon on custody Stefan Berci, Communications Manager James Fitzgerald, Senior Marketing Executive services, the World Bank’s Marcelo Giugale on insuring emerging market Strictly no photocopying is permitted. It is illegal to economies, and Frank Scheidig of DZ reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the content of this BANK on green bonds. For the 100th publication without the prior consent of the publisher. While every care is taken to provide accurate information, edition we have put on a display of the publisher cannot accept liability for any errors or economics pyrotechnics. Under the omissions. No responsibility will be accepted for any loss occurred by any individual acting or not acting as a result new quarterly format, the next Bulletin #1 of any content in this publication. On any specific matter January 2010 reference should be made to an appropriate adviser. appears in April. We’re sure it will be worth the wait. Company Number: 7032533. ISSN: 2398-4236
OMFIF.ORG JANUARY 2019 BULLETIN 5
BTN_01.19_004-005_About_Leader.indd 5 10/01/2019 16:48 Review
»12 November, Singapore Demystifying digital currencies in 2018 114 Meetings
AS PART of the 201 FinTech Festival in Singapore, OMFIF, in collaboration with the Sim Kee Boon Institute for Financial Economics at Singapore Management niversity, held a high level panel discussion on initial coin offerings, tokens and digital currencies. Speakers included Serey Chea, director general of central banking at the National Bank of Cambodia, Artur Granicki, Cities director of the Polish Financial Supervision Authority, and Antony Lewis, 21 director of research, cash and central bank digital currency strategy at R3.
Spencer joins »28 November, London advisory board World real interest
GRANT SPENCER, former governor of the rate ‘declining’ Reserve Bank of New Zealand, has joined the OMFIF advisory board. He retires from the THE TREND in the world real interest rate has Reserve Bank after lowered by around two percentage points over a 40-year career the past 30-40 years, according to Domenico in high-level Giannone, assistant vice-president at the banking, with Federal Reserve Bank of New York, who roles that included presented his fi ndings on global trends head of strategy in interest rates at an OMFIF meeting and business in London. Topics for debate included development ANZ infl ation targeting in the S, reserves Bank and special management and the unwinding of central adviser to the bank balance sheets since quantitative International easing. Presentation of Giannone’s fi ndings can Monetary Fund. be found at omfi f.org meetings.
6 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_006-007_Review.indd 6 11/01/2019 09:51 Agenda
»20 November, New York Effects of the S mid term
elections on economic policy »Thursday 24 January, New York
OMFIF HELD a discussion with Mark Sobel, Assessing global fi nancial its S chairman. e is a former deputy assistant stability secretary for International Monetary and Financial Policy at the S Treasury and until early 201 Tobias Adrian, director of the IMF’s monetary and capital markets department, outlines current and was S representative at the International potential risks covered in an IMF global fi nancial Monetary Fund. The discussion focused on stability report that investigates whether we are any how the results of the S midterm elections safer years after the fi nancial crisis. impacted the administration’s economic strategy, including fi scal policy, trade, infrastructure and relations with China. »Thursday 31 January, London Outlook for reserve asset management for 2019 A seminar on the outlook for public sector investment management in Europe for 2019, along with economic and fi nancial developments in . It brings together economic experts and asset managers from a public sector background.
»Thursday 7 March, London Launch of the Gender
»10 December, London Balance Index Launch of OMFIF’s sixth annual Gender Balance Index, which tracks the presence of men and women in Balancing the roles of senior positions at central banks and sovereign funds. The launch includes a panel discussion on the role of the ECB women in global public investment institutions. OMFIF DISC SSED the future of European banking with Ignazio »Monday 25 March, London Angeloni, member of the supervisory board of the European Central Developments in the US Bank. The meeting focused on economy how the ECB balances its roles of monitoring the euro area’s banking A City Lecture with Patrick Harker, president of the Federal Reserve Bank of Philadelphia and member sector while stimulating banks to of the Federal Open Market ommittee. The lecture lend more. Topics also included covers macroeconomic developments in the US and the reduction of the level of non- the Fed s monetary policy outlook. performing loans, improvements in banks’ balance sheets and unwinding unconventional monetary policy. For details visit omfif.org/meetings
OMFIF.ORG JANUARY 2019 BULLETIN 7
BTN_01.19_006-007_Review.indd 7 11/01/2019 09:51 Cover story: Bulletin at 100 The Bulletin at 100: Preparing for a new era
David Marsh as it became known in July August 2014 has greatly OMFIF developed. January 2011 saw a special issue on ‘The crisis of the euro’, featuring Michael Butler, a principal promoter of Britain’s ill fated 1 0 ‘hard euro’, advocating a parallel currency for the euro area. We he declared aim of the OMFIF Bulletin, set out in have run editions on China, Japan, North America, Tthe fi rst editorial in January 2010, was ‘to promote Latin America. We have focused on former Fed Chair a dialogue on issues of particular interest for central Janet Yellen, Nigerian President Muhammedu Buhari, banks and sovereign funds, and the community that Japanese Prime Minister Shin o Abe, iaochuan follows them within the fi nancial markets and beyond.’ hou, then governor of the People’s Bank of China, Over 100 issues, with 11 editions a year, we have and Mauricio Macri, president of Argentina. We have lived up to that pledge, extending range, detail and adapted editions to OMFIF meetings taking place in authorship, providing coverage in sectors ranging from individual countries or at specifi c fora. We marked green fi nance to digital currencies, including countries the 0th edition and the fi rst Main Meeting in the S from Norway to New ealand, from Bra il to Burundi. with features on S energy. We devoted the July 201 The fi rst issue presaged many future preoccupations. edition to green fi nance, coinciding with an OMFIF There were articles on S congressional attacks on the symposium at the Bundesbank. Africa was the theme Federal Reserve, threats to central bank independence in September 201 and January 2014, while Asia was John Nug e wrote ‘Central banks are now no longer showcased in October 201 when we launched two beyond the reach of politics’ , reserve currency large reports at the International Monetary Fund diversifi cation and the renminbi. We carried an World Bank meetings in Bali. over optimistic headline, ‘Arab monetary union plan We have made The Bulletin more digital, fl exible, inches closer’, over a piece claiming that the ‘mirage’ colourful and pictorial, particularly under layouts of Gulf monetary unity was becoming more distinct. devised since 201 by Simon adley and Will Meghnad Desai called for a strengthened gold role in Coningsby Brown. We have devised a longer term world money. Paul olcker explained why he wished schedule, aligning the publication with issues that to separate ‘commercial banking activities essential OMFIF is highlighting over years rather than months: to the functioning of our fi nancial system from more Danae Kyriakopoulou and Julian Fra er have played speculative trading oriented capital markets activities a big role in this. We have made The Bulletin home that are not.’ arold James argued that fi nancial to an ever expanding range of authors. We have ‘Balkanisation’ was impeding Europe’s monetary greatly increased regular features ranging from the union requiring continent wide banking supervision Monthly Review to the Advisers’ Poll. Mercifully, and regulation. we have eschewed the dreaded phrase, ‘thought Since the fi rst issue listing only 1 advisory board leadership’. All this prepares us for a new century plus members including stalwarts Darrell Delamaide, era, when OMFIF will publish The Bulletin quarterly, Oscar Lewisohn, Paola Subacchi, Niels Thygesen, emphasising the longer term edge to our work. Makoto tsumi and Ernst Welteke The Bulletin David Marsh is Chairman of OMFIF.
8 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_008-009_coverOpener_David.indd 8 11/01/2019 09:52 100
OMFIF.ORG JANUARY 2019 BULLETIN 9
BTN_01.19_008-009_coverOpener_David.indd 9 11/01/2019 09:52 Bulletin at 100
Fed lessons from zero lower bound Next fi nancial crisis may come from outside banking sector
James Bullard We’ve lived through the Great Europe even seeing negative on unconventional monetary Federal Reserve Recession, an era of near ero interest rates. The idea that policy, the focus today is on Bank of St. Louis interest rates, fears that the S this would last for so long far ‘getting back to normal’ that is, would fall into a defl ationary trap beyond ordinary business cycle increasing the Fed’s policy rate in it didn’t and implementation time was a shock to the global line with better economic of unprecedented policies aimed macroeconomic and central conditions and reducing the decade ago, I took on at stopping an ever deepening banking communities. si e of the Fed’s balance sheet, Athe position of president crisis. Through it all, we learned The 200 0 crisis made which had grown under the and chief executive offi cer of some important lessons. people reconsider the quantitative easing programmes. the Federal Reserve Bank of This period underscored how intersection between the Given the uncertainty about what St. Louis one of 12 regional challenging it is to encounter the fi nancial sector and real ‘normal’ is, each of us reserve banks that, together ero lower bound for the Fed’s economy. We have learned to on the Federal Open Market with the board of governors policy rate. It turned out to be a be more keenly attuned to the Committee brings his or her own in Washington, make up the more diffi cult issue than many of fact that fi nancial crises can views on what the appropriate S Federal Reserve System. us appreciated. I had thought it happen and that the modern policy rate path might be. That was 1 April 200 , and was an issue of the 1 30s Great economy is not protected against That diversity of thought and it wasn’t the time for ovial Depression era, but ultimately these shocks. While such crises discourse ultimately yields the congratulations. The S was in the fi nancial crisis changed how are infrequent, they can be best outcome. the throes of a fi nancial crisis, we think about central banking devastating to the economy as a We may not know with the mortgage crisis was already and how a central bank should whole when they do occur. certainty what the future will brewing, and ma or banks were conduct monetary policy at the hold, but being at the forefront of failing. The Federal Reserve ero lower bound. Getting back to normal the ongoing, rigorous debate of was cutting the target for the Moreover, we experienced As any monetary policy maker optimal monetary policy is federal funds rate and debating ultralow policy rates globally would be, I’m focused on where critical. We shouldn’t shy away unconventional stimulus for much longer than anyone we’re going in the years ahead, from discussing new approaches measures. anticipated. Previously, it would where the debate on monetary to control infl ation, debunking These past 10 years have have been surprising to stay at policy will lead us and what the old myths about how the been anything but ordinary. the ero lower bound for more right policy decisions will be in a economy works or discarding than two quarters, much less new era. out of date macroeconomic a year. Yet the S remained In my view, there is not enough theories in favour of new
May 2016 at a near ero policy rate for discussion about where the next narratives with better explanatory Vol. 7 Ed. 5 The Bulletin seven years with Japan and fi nancial crisis may originate. power of the regimes in which we Official monetary and financial institutions ▪ Asset management ▪ Global money and credit It has the potential to come fi nd ourselves. Fed and the election from outside the traditional It’s an exciting time to be Elusive American dream banking sector, as the 200 0 studying this dynamic global Efraim Chalamish on China investment in US ‘We shouldn’t Richard Koo on European self-financing John Mourmouras on negative interest rates crisis arguably did. As a central economy of the 21st century, the Michael Stürmer on the geopolitics of oil shy away from Marsha Vande Berg on stagnating wages discussing new bank, we have an opportunity factors affecting it and what lies to reorient our thinking about ahead. approaches to risks to ensure we set the right James Bullard is President and control infl ation or policy and employ the right level C ief e utive ffi er of t e # 1 discarding out of of oversight to help mitigate or Federal Reserve Bank of St. May 2016 date macroeconomic prevent the potential impacts of Louis. This article was adapted theories.’ future crises. from the St. Louis Fed’s annual If the last decade was focused report.
10 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_010_Bullard.indd 10 10/01/2019 16:33 Scrutiny of central banks likely to increase Greater transparency and accountability to match expanded responsibilities
Daniel lacklustre. Many have argued infl ation, deemed necessary to Institutions must continue to Mminele that successive rounds of QE only create an environment conducive improve the resilience of the South African encouraged risk taking in the to sustainable economic growth. global fi nancial system and guard Reserve Bank fi nancial economy rather than While the future primary role against the erosion of hard-won in the real economy. There does, of central banks and monetary international regulatory reforms however, seem to be consensus policy will remain medium-term while closely monitoring for any few months ago, we marked that QE played a crucial role in price stability, lessons from 2008 unintended consequences and Athe 10-year anniversary of containing the crisis, and that clearly point to the need to give adopting corrective measures. the collapse of Lehman Brothers central banks had little choice broader fi nancial stability more And as ever, appropriate and the start of a grave period for as ‘other policy-makers were prominence. governance and conduct fi nancial markets. For policy paralysed by dysfunctional The rationale for the increased standards must be enforced to makers, the past decade was politics’, as Mohamed El Erian focus on fi nancial stability is strengthen the integrity and characterised by strategies to says in his book The Only Game in informed by the increasing reputation of fi nancial markets deal with the aftermath of the Town: Central Banks, Instability, interdependence of economies, and participants. 200 fi nancial crisis through a and Avoiding the Next Collapse. the interconnectedness in the Given their expanded role and combination of ‘fi refi ghting’ and In Africa, QE produced mixed global fi nancial system, and the growing demands from society, trying to correct the defects that results. The initial strong infl ows systemic nature of risks brought central banks can expect to created the crisis. of capital as part of search-for- about by this kind of integration. face more scrutiny than was Major central banks found yield strategies and favourable Policy-makers will continue to historically the case and, in themselves in unfamiliar fi nancial conditions allowed many grapple with how best to manage some circumstances, challenges territory. They relied increasingly sub-Saharan African countries to the relationship between price to their independence. This on unconventional policies, fi nance their defi cits more easily, and fi nancial stability as well will require higher degrees of the most prominent being leading to a surge in eurodollar as macro- and microprudential transparency to facilitate holding quantitative easing, to boost issuances. But the great exit is policies. them accountable in view of their infl ation, support growth and proving to be a challenge for expanded responsibilities. reduce unemployment. Many many of these countries and those Transparency and integrity Daniel Mminele is Deputy commentators warned at the time non fi nancial corporates that It is said that ‘prediction is very Governor of the South African that the longer central bankers relied too heavily on a cash fl ush diffi cult, especially if it is about Reserve Bank. went down that route, the more system and cheap valuations to the future.’ The next decade is complex the exit would be. increase their leverage but paid likely to see a rate of change not Some countries are still too little attention to structural witnessed before, which will # implementing QE, while others reform and improving their require fi nancial markets and January 2014 are withdrawing such measures. economic and fi nancial resilience. policy making to be agile. The As this ‘great exit’ unfolds and Now they are fi nding it harder and opportunities and threats in central banks pursue monetary more costly to meet their external the wake of rapid technological policy normalisation and look fi nancial obligations. advancement will become more to shrink their balance sheets, Another key feature of the diffi cult to distinguish. debates continue to rage about fi nancial market and policy One key theme that will shape the success, or otherwise, of these making landscape since 2010 the next decade will be the rise unorthodox policies. has been the changing role of of fi nancial technology. This While the global economy central banks. Leading up to the will demand a careful balance emerged from recession in the fi nancial crisis, central banks between not stifl ing innovation fourth quarter of 2009, the focused primarily on achieving while ensuring the safety and pace of growth since has been and maintaining low and stable resilience of fi nancial systems.
OMFIF.ORG JANUARY 2019 BULLETIN 11
BTN_01.19_011_Mminele.indd 11 10/01/2019 15:09 Bulletin at 100
An exercise in judgement and innovation Pioneering monetary policy development in the emerging world
Mario Marcel ability to cushion them If inflation fails to respond to by growing administrative Banco Central through the exchange rate and monetary impulses as predicted datasets and ‘big data’. One de Chile countercyclical policy responses by models, financial imbalances should never forget that data has improved significantly. may build up, fiscal discipline are only one instrument helping As a result, Chile’s monetary may erode and inflation risks to capture economic behaviour. policy framework has proved may be underpriced by markets. From a policy-making fter decades of high useful when facing subsequent This could expose them to perspective, data collection, Ainflation, inflation challenges, including the 2008 reversals with data surprises processing and statistical targeting frameworks have financial crisis, the end of the going forward, transforming methods are a way to produce proved their effectiveness in commodity price boom in 2013- policy-making into a much more evidence for better decision- many emerging economies. 14, and in resisting pressures complex undertaking. making. This has been key in to tighten the monetary policy It has become more difficult Any central bank that controlling price dynamics response to transitory pressures to measure movements of operates in a forward-looking and anchoring expectations from short-term currency prices, as standardised goods environment, dealing with many to target, delivering lower depreciations. account for a smaller share unobservable concepts, has the price and output volatility. In each of the high-volatility of household consumption ultimate responsibility for using Some countries have adopted episodes faced after the compared to services and fast- all the relevant information fully-fledged forward-looking crisis, anchored inflation changing goods. at hand and sharing such inflation targeting regimes expectations, automatic fiscal The advent of the digital information with the public to together with floating exchange stabilisers, foreign exchange economy also poses a major ensure that decisions are easily rates, helping them navigate a hedging and a sound financial challenge to correctly understood. Monetary policy- more turbulent global economy. system have contributed to measuring the value added making is not a bureaucratic This has been complemented provide monetary policy with throughout the wide range procedure, but a powerful with major improvements in sufficient room for manoeuvre. of complex and globalised exercise in judgement. communication, transparency But these factors are not economic activities. Structural Mario Marcel is Governor and accountability. exogenous to macroeconomic changes especially relevant of the Banco Chile pioneered monetary policy. They were nurtured by for emerging countries, like Central de policy innovation in the a consistent policy framework demographic transitions or Chile. emerging world. Banco built and maintained over the lengthened international value # Central de Chile was granted last 20 years. chains, should also encourage January 2017 independence and a price central banks to develop
January 2017 stability mandate nearly 30 Ultimate responsibility appropriate tools to formulate The Bulletin Vol. 8 Ed. 1 years ago and exercised it Inflation dynamics and the way and communicate policy paths Growth, risk, vulnerability swiftly, supported by an early they interact with economic that make forward-looking World shocks and emerging markets version of inflation targets variables are a central challenge inflation targeting work. in the early 1990s. Over time, for policy-makers who have As the economy evolves, the as the financial market has price stability as their core relevance of these tools must deepened the development mandate. We have observed be kept constantly in check. of exchange rate hedging persistently a puzzling The quantity and quality of mechanisms, the central bank behaviour of inflation in many data available to make policy
FOCUS on advisory board 2017 forecasts has overcome fears of floating. developed countries, where decisions may also change Etsuro Honda on Abenomics challenges John Mourmouras on central bank independence Mthuli Ncube on African digital financial services As an open economy, Chile standard approaches have done substantially. Vicky Pryce and Danae Kyriakopoulou on Greek debt Edoardo Reviglio and Marcello Minenna on Italian banks is not immune to external a poor job of predicting price The dominance of regular shocks, but the country’s pressures. economic surveys is challenged
12 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_012_Marcel.indd 12 11/01/2019 09:55 ressing reversa of fi nan ia integration Delay in ad ustments only magnifi es Europe problem
Yannis Stabilisation Function. The risk sharing in the E . In this programme as well as ownership Stournaras new E budgetary tools aim to context, the role of the ESM could mainly by the government but Bank of Greece bolster stability in times of stress be enhanced to support banking also the main opposition parties through investment continuity union with a backstop facility. is key to the ad ustment’s success. and providing incentives for EM should enhance public Third, political solidarity and domestic structural reforms. sector risk sharing by creating greater risk sharing in the euro uch has been done in Nonetheless, the architecture a centralised fi scal stabilisation area to address large asymmetric Mrecent years following of EM is still, in many respects, tool. The Commission’s proposed shocks are of ma or importance. the Greek debt crisis to improve incomplete. Euro area policy European investment stabilisation Pointing fi ngers at countries the functioning of European makers cannot rely solely on ECB function could fi ll this role. Other in diffi culty only propagates economic and monetary union. interventions. It is essential to suggestions involve a European populist voices on all sides. Key initiatives included the ensure that the Commission’s unemployment insurance scheme Fourth, private and public risk provision of intergovernmental macroeconomic imbalances and the issuance of European sharing should be enhanced by loans to Greece, establishment of procedure operates more ‘safe’ bonds. These ideas deserve moving forward with the banking the European Financial Stability symmetrically both for member policy makers’ attention. and capital markets unions and Facility and its successor, the states with external defi cits and With regard to member states, by creating a centralised fi scal European Stability Mechanism for those with external surpluses. national ownership and credible stabilisation tool. To avoid and the creation of the still To date the burden of ad ustment implementation of country moral ha ard, risk sharing incomplete banking union. has fallen, to a large degree, specifi c recommendations is should go together with risk There has been, too, the on member states with current crucial for promoting economic reduction and close economic application of stricter rules account and budget defi cits, such policy coordination and risk policy coordination. Moreover, on banking regulation and as Greece on the eve of the crisis reduction. National policies countries need to improve income supervision, the establishment member states with high current should focus on structural convergence and ensure that of the European Systemic Risk account surpluses could have reforms to improve the fl exibility economic rebalancing operates Board and the development of responded more appropriately. of domestic markets and reduce symmetrically. appropriate macroprudential Since the crisis, policy makers vulnerabilities in the fi nancial Last but not least, a fi nal point instruments to identify and have observed a home bias in sector. This should facilitate the on Greece to bolster investors’ address system wide risks. The investment and a fl ow of euro ad ustment of these economies confi dence in the prospects European Central Bank developed area excess savings towards the to future shocks. They should of the Greek economy and to new monetary policy instruments rest of the world rather than also implement sound pro be able to refi nance maturing to deal with low infl ation within the E . This has led growth fi scal policies that debt on sustainable terms, the and growth, and the Single to a reversal of the previously allow for stabilisation over the government must continue to Supervisory Mechanism assumed achieved fi nancial integration and business cycle and ensure debt implement reforms and avoid responsibility for all systemic income convergence among euro sustainability. reneging on programme related banks in the European nion, area countries. commitments. thus addressing the home bias The priority, in these So i arity in urope The years since the debt issue in supervision. circumstances, must be to Policy makers can draw several crisis have been tremendously More recently the European complete the banking union with key policy messages from the diffi cult for the euro area, but Commission, in view of the a European deposit insurance Greek crisis. First, delaying the European pro ect endures. Multiannual Financial Framework scheme, as well as the capital necessary ad ustments only The fi rming up of EM must be for the period 2021 202 , markets union. This will restore magnifi es the problem, which will policy makers’ priority in the tabled proposals to establish intra European fi nancial fl ows, then have to be addressed later on years to come. a Reform Support Programme improve stability in the banking less favourable terms. Second, the annis Stournaras is overnor and a European Investment sector and promote private proper sequencing of the reform of t e an of ree e.
OMFIF.ORG JANUARY 2019 BULLETIN 13
BTN_01.19_013_Stournaras.indd 13 10/01/2019 14:11 Bulletin at 100
Why we must complete banking union Financial stability threats would hit citizens’ trust
Carlos da provision of liquidity in bank opportunity to reflect on the compliance with the principle Silva Costa resolution – which jeopardises many achievements of Europe’s of central responsibility for Banco de its fundamental benefits. crisis management set-up and financial stability. In this Portugal As we progressed along the draw some preliminary lessons context, it is necessary to find road, new and bigger hurdles from the current (incomplete) ways to ensure and safeguard emerged. Policy-makers focused architecture. this basic principle within ollowing the 2008 crisis, excessively on ‘risk reduction banking union. It is also essential Freforms were needed in v. risk sharing’ and lost Looking ahead to determine which coordination Europe’s financial sector. The sight of the banking union’s With the benefit of hindsight, and convergence mechanisms establishment of the single overall objectives. we should reflect on the need to between territorial regulatory rulebook and the launch of the strengthen the SSM’s decision- and supervisory authorities European Union’s banking union Incomplete setup making process, the need to draw can be established between with its rules and institutions In this incomplete setup, banks a line clearly between regulatory the banking union and the constitute a commendable are ‘European in life but national powers and supervisory oversight, remaining EU member states. success in this regard. in death’. Supervisory and and ensuring the application One should not underestimate The banking union is currently resolution decisions are mostly of the principle of EU ‘financial how much has been achieved in based on two pillars: the Single taken at the European level, stability responsibility, regulatory recent years. Nevertheless, the Supervisory Mechanism and but the ensuing consequences responsibility and supervisory foundations of Europe’s financial Single Resolution Mechanism. still lie with taxpayers at the responsibility’. architecture are still not However, since these were put national level. This may have a Strengthening the decision- sufficiently robust to withstand in place, the political will to potentially serious impact on making process of the SSM the impact of a future crisis. This complete the banking union national budgets, as the ultimate would ensure shared ownership should be a priority for policy- has waned. guarantor of financial stability of problems and decisions, makers and relevant institutions. The banking union is missing remains national. encouraging a broader vision on Decisive political will to move critical elements – a fully-fledged In view of the mismatch the implications of the SSM’s forward with the completion of European deposit insurance between European oversight and decisions on financial stability. the banking union is required. In scheme, a backstop to the national liability, the different This could be achieved through the absence of this will, Europe Single Resolution Fund and the stakeholders’ objectives and the establishment of intermediate must revisit its existing rules interests are unaligned. committees similar to those of the to safeguard financial stability. It is important to consider who ECB’s monetary policy function. This is in the best interests of its
MAASTRICHT OMFIF EDITION is actually looking after The separation of supervisory people as few things can be more OMFIF BULLETIN 7.2.12 GlobalOfficial MonetaryInsight on and Official Monetary and Financial Institutions Financial Institutions Forum February 2012 financial stability. functions from regulatory ones destructive to citizens’ trust Europe’s hopeless capitalism Two-tier monetary union might be the answer Four years after the SSM is necessary for the political in European institutions than Meghnad Desai, Chairman, Advisory Board
rom summit to summit, the euro area of fiscal authority inside their states. may then rescue Portugal and Spain Fcrisis stumbles on. The talk may be Yet they are still saddled with fiscal as well from the shackles of the euro became operational, much has legitimation of regulatory threats to financial stability. of growth but the pact is about zero responsibility. area; and maybe Ireland could simply deficits. Despite all the talk of creating get lucky. jobs for the young, the euro area offers It’s not difficult to work out how they its people hopeless capitalism for the may react. There is every incentive It defies imagination that, when so foreseeable future. Each country is for the weaker countries to break the much economics has been taught in our been accomplished. Danièle standards. The overlap of Carlos da Silva Costa is left on its own to achieve a balanced pact. Greece could seek to do better schools and universities, budget deficits budget. All the help they are promised by leaving the euro, reneging on all its are not defined properly in cyclically- is a Gauleiter from outside. debts, and taking the hit of not being adjusted terms or confined to structural able to borrow for some years. deficits. There is no attempt to plot a The weaker brethren in the South get feasible path for deficits down from the Nouy, the former chair of the regulatory and supervisory Governor of the Banco de 20 years of austerity as the prize for In return it would depreciate its high level now to zero in a credible staying in the single currency. They face currency and recover within five years. fashion. The contradictions stretch to an unsavoury combination of hectoring That would better than the hopeless Christine Lagarde, the IMF managing from the outside, and deprivation prospect currently on offer. Contagion director. (continued on page 4 ...) Supervisory Board (2014-18), territories guarantees Portugal. OMFIF commemorates 20th anniversary of Maastricht signing with Schröder dinner The 20th anniversary of the signing of the Maastricht treaty on 7 February 1992 is being commemorated with a dinner in London where the principal guest is Gerhard Schröder, the former German chancellor who was in office when the single currency was introduced in 1999. Also featuring in the February must be praised for her decisive 2012 Bulletin are the views of three protagonists at the Maastricht summit, Norman Lamont, Ruud # Lubbers and Wim Kok. SEE MAASTRICHT TTREATREATY 20 YEARS ON, P.6,7,23. February 2012 Contents Hungarian hubris contribution to this success. Good emerging markets outlookPeter Eerdmans 3 IMF victory sends waves ‘One should not underestimate how much has Why dollar will firm Michael Kaimakliotis 5 The memory of Maastricht Roel Janssen 6 A special correspondent Europe is bigger than the euro Norman Lamont 7 Her perseverance was essential he trial of strength between Hungary and the international The elusiveness of money Erik Holm 8 Tfinancial community over the status of the National Bank In defence of seriousness David Marsh 10 of Hungary has ended in a landmark victory for the forces of been achieved in recent years. Nevertheless, the central bank independence, sending an important signal around Archive Insight: Franco-German tension in the air 13 the world. Hungary’s climb-down from hubris demonstrates to establish the mechanism’s Transparency raises new questions Darrell Delamaide 14 governments that require help from the International Monetary Fund and other official lenders have to conform to acceptable Italy and Spain making progress 16 standards of political and economic behaviour. Heading for Bernanke bubble Stefan Bielmeier 17 foundations of Europe’s fi nancial architecture OMFIF Advisory Board 18 Hungary’s maverick prime minister Viktor Orban has spent the credibility. New Year trying to win back trust from the IMF and European Vickers comes to Europe Michael Lafferty 20 Union after his ‘anti-austerity, anti-IMF’ policies threatened to Looking at separation Dirk Schoenmaker 21 cut off much-needed official funding. An encounter at Annabel's Frederick Hopson 22 Orban’s centre-right Fidesz party won power in 2010, gaining are still not suffi ciently robust to withstand the Pearls of wisdom on euro road 23 As Andrea Enria takes over two-thirds of parliamentary seats and rewriting the constitution Cameron's invented 'veto' victory William Keegan 24 in a way that the EU said infringed democratic freedoms and EU laws. (continued on page 4 ...) www.om f.org 1 Nouy’s mandate, now is a good impact of a future crisis.’
14 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_014_Costa.indd 14 10/01/2019 14:20 Coping with challenges of complexity Looking backward and forward to carve clear path for the future
Nestor has become increasingly on its legacy of excellence by consumer protection agenda to Espenilla interconnected. Such safeguarding price and fi nancial guarantee no one is left behind Bangko Sentral integration can facilitate greater stability with greater vigour. in terms of meaningful access to ng Pilipinas incorporation of information, It has responded to infl ation fi nancial services. The BSP has leading to more effi cient pricing pressures with proactive policy set its sights on leveraging the of assets. owever, it can also actions to help temper infl ation digitalisation of the fi nancial he start of a new year is a amplify the transmission of risks. The bank continues system as a primary platform for Tgood time for refl ection. negative shocks and lead to to fi ne tune its execution of its fi nancial inclusion agenda. It People have different approaches excess volatility across fi nancial monetary and fi nancial policies. is collaborating closely with the to introspection. Some look back markets. Third, complexity is It has implemented an interest banking industry to establish on the year that was, while others increasingly an economic and rate corridor system, which is a safe, reliable and affordable look forward to the possibilities fi nancial reality across the expected to aid development retail payment system through of the year ahead. I tend to refl ect world. Two powerful forces are of domestic capital markets the implementation of the by seeing both sides. driving this. One is the fourth by fostering active liquidity Philippines’ National Retail It is critical for decision industrial revolution, which management by banks and Payment System. These measures makers to look back and use is transforming how people encouraging greater reliance should help provide everyone the lessons from the past to inform relate with one another. Take on the use of market friendly opportunity to reap the benefi ts policy actions. At the same time, for instance advances in digital instruments. of the country’s economic policies must be responsive and fi nance and fi ntech. While some growth. anticipate new challenges going solutions have great promise to Rethinking frameworks In responding to the emerging forward. unleash higher productivity and The bank has been rethinking challenges of our time we cannot The economic landscape effi ciency, the velocity at which its frameworks to consider afford to simply either look back has changed in the last 10 these innovations are evolving emerging trends and tipping or look forward. We must see years. First, the markets do could also be disruptive for points. The BSP has increased both sides if we are to carve a not always get it right. Before the banking system. Another its focus on inclusive growth and clear path into the future. the 200 fi nancial crisis, key factor is the prevalence of integrated fi nancial inclusion Nestor Espenilla is Governor policy makers accepted the political issues shaking up the into its organisational ob ectives. of the Bangko Sentral ng idea of an effi cient and rational policy environment. Income The bank is committed to Pilipinas. market. owever, as Andrew inequality, which has fuelled the advancing its fi nancial inclusion, Lo, director of the Laboratory rise of populist sentiment, has led fi nancial education, and for Financial Engineering at to a retreat from multilateralism. # the Massachusetts Institute This adds further uncertainty September 2017 of Technology, pointed out, and complicates the conduct of ‘Income inequality, the crisis revealed painfully policy. which has fuelled that sometimes the so the rise of populist called ‘wisdom of the crowd’ Looking forward can be overwhelmed by the All of these changes require sentiment, has led ‘madness of the mob’. Markets, policy makers to look forward to a retreat from left unfettered, could lead and anticipate emerging multilateralism. This to signifi cant asset price challenges. At the Bangko adds further uncertainty misalignments, which could Sentral ng Pilipinas BSP , and complicates the have destabilising effects on the this approach is enshrined economy. in the ‘Continuity Plus Plus’ conduct of policy.’ Second, the global economy agenda. The BSP is building
OMFIF.ORG JANUARY 2019 BULLETIN 15
BTN_01.19_015_Espenilla.indd 15 11/01/2019 09:56 Bulletin at 100
Building next-generation custody services Full upgrade required if sector is to stand the test of time
Hani Kablawi in the structure of the asset platforms with the data and making. A comprehensive BNY Mellon management industry and the applications of partners and approach to servicing clients products it offers. There is more third parties, custodians can around the world relies on the concentration, and index-based provide clients with deeper seamless supply of custody passive investment vehicles insights to result in operational enabled services, such as have come to the fore. With the effi ciency and strategic collateral management, transfer he fi rst 100 issues of The prospect of industry disruption advantage. The next generation agency and fund accounting. TBulletin have covered from fi nancial technology of custody services involves a fascinating period for the companies and internet giants, sending information through Addressing risks fi nancial services industry. The asset managers are working application programming It will take time to roll past decade has seen sweeping hard to offer the speed and interfaces and widgets for both out the next generation of regulatory reforms and higher personalisation their clients have core and non core custody custody services. Building an compliance burdens. Tougher come to expect in so many areas services. Moreover, as fi nancial infrastructure fi t for the next capital and leverage rules were of their digital lives. institutions seek to leverage new 10 years involves a signifi cant introduced. The sector grappled sources of data, custodians will investment in technology. with persistently low yields Full upgrade needed become aggregated data service But this is not simply about and margins. Technological Custody providers like BNY providers. improving client services. It is innovation led to new sources Mellon have evolved in response The third way in which also about ensuring the risks of competition. This was all to the demand from investors custody services will develop inherent in the global custody underpinned by an uncertain and investment managers for relates to asset classes. chain are addressed. These risks geopolitical and macroeconomic new services and capabilities. But Custodians play a critical role are not static as last year’s outlook. subtle changes may no longer be in ensuring that investors can paper from the International During this time, there have enough. The asset management access a broad range of assets Securities Services Association been signifi cant developments industry requires a full upgrade securely and cost effectively. points out, custody has become to the next generation of custody Investors ad ust their asset signifi cantly more complicated, services to remain relevant for mix to achieve higher returns, as fi nancial markets themselves the next 10 years. manage risks or comply with have developed in both size and # The next generation of regulations. In doing so they complexity. This trend is likely to October 2017 custody services will be deployed seek new, often less-standardised continue. in four ways. The fi rst is the assets, including new asset types To ensure a robust global provision of self-service tools such as cryptocurrencies. investment infrastructure, to allow investors to consume The fourth area of custodians must be able to information, intelligence and enhancement is global access. A develop a reliable, adaptable and insight when and how it suits fundamental role of custodians is sustainable platform to meet them. Investors require bespoke to supply infrastructure and local the changing demands of the tools that provide greater expertise to ensure clients can fi nancial services industry over visibility across the entire post access markets and operate on a the next decade. trade value chain on a timely and worldwide scale. Investors must Hani Kablawi is CEO Global responsive basis, along with the be prepared to shift their focus at Asset Servicing and Chairman ability to integrate those tools short notice. Custodians bridge of EMEA, BNY Mellon. The within their own systems. the gap between local and global, views expressed herein are The second is the enrichment and provide transparency within those of the author only and and aggregation of data. By an enterprise-wide structure may not re e t t e vie s of combining data on their own to support informed decision- BNY Mellon.
16 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_016_Kablawi.indd 16 10/01/2019 14:29 Past, present and future of central banking Autonomy critical to overcoming fi nancial repression and digital disruption
Turalay Kenç So what differentiates money defl ationary and infl ationary and surveillance. However, it is University of and banking from economics? outcomes. This involves safe to say that digitalisation Cambridge The answer is related to the averting fi nancial crises and will probably facilitate the magic of fi at money, the money designing corrective policies for emergence of a cashless society. multiplying alchemy of banking the negative consequences of Policy-makers will welcome this, and associated paradoxical crises. Hence, the lesson to draw as it will remove the zero-lower f the almost 400 years of developments. from the 200 fi nancial crisis is bound on negative interest rates Icentral banking history that fi nancial stability should and hence make monetary policy reveals anything, it is that the Power of optimism be central bankers’ guiding more effective in the aftermath functions of these institutions Whenever an optimistic view of principle. of fi nancial crises. are fl uid and will continue to the future starts to take hold of The alchemy of fractional evolve in the future. society, a credit boom facilitated Digital revolution reserve banking and systemic Even over the last 10 years, by easy money and credit The digital age, characterised risk associated with debt the state of central banking policies often unfolds. by artifi cial intelligence, fi nancing will continue to has changed signifi cantly. The The power of optimism distributed ledgers and big data, challenge central bankers as view of a Chinese central banker chiefl y determines the extent poses considerable challenges they look to implement an quoted by Mervyn King, the of the episode. The expanded to central banks. These optimal mix of interest rate former governor of the Bank of credit volume is likely to lower technological advances have policy and macroprudential England (2003-13), in his book fi nancial market volatility in the potential to change demand regulation. The End of Alchemy points the economy, leading to the for cash (and even central bank In addition, when a central out the real reason behind this so-called volatility paradox that money), credit intermediation, bank oversees both price and development. ‘low measured volatility is most fi nancial regulation and market fi nancial stability, monetary The Chinese policy maker said risky’. In such cases, the central volatility. policy may be abused to reduce to King in 2011, ‘We in China bank of the country either The emergence of anonymous the government sector’s real digital currencies such as debt burden following a fi scal bitcoin may lead to currency stimulus package. Such fi nancial substitution problems similar repression was observed in both ‘It is safe to say that digitalisation will probably to deposit and liability the US and UK following the facilitate the emergence of a cashless society. dollarisation in some developing second world war until the early Policy-makers will welcome this, as it will remove countries, where people prefer 1980s. the zero-lower bound on negative interest rates the currencies of foreign The emergence of private and hence make monetary policy more effective in countries with lower infl ation digital money and the need to and interest rates to domestic avoid fi nancial repressions mean the aftermath of fi nancial crises.’ money and credit as a unit of central bank independence is account, store of value and of paramount importance if denominator in liabilities. countries around the world are to have learned a good deal from does not have the mandate to Similarly, the rise of machine overcome economic disruption in the West about how competition intervene and hence prevent learning in fi nance may the years to come. and a market economy support a possible crisis, or simply heighten risk and uncertainty in Turalay Kenç is Pembroke industrialisation and create engages in crisis and aggregate fi nancial markets. Visiting Professor of Finance higher living standards… We demand management. It remains to be seen whether at the University of Cambridge want to emulate that… But I The goal of central banking is the digital revolution will have and former Deputy Governor don’t think you’ve quite got the to protect the purchasing power a positive or negative impact on of the Central Bank of the hang of money and banking yet.’ of fi at money by allaying both fi nancial regulation, supervision Republic of Turkey.
OMFIF.ORG JANUARY 2019 BULLETIN 17
BTN_01.19_017_Kenc.indd 17 11/01/2019 09:56 Bulletin at 100
Green market passing milestones Sustainable fi nance no longer ust a virtue, but an absolutely necessity
Frank wellbeing. It does not value Those fi nancing needs are addition to sustainable bonds, Scheidig other essentials like security too vast to go through a ‘central sustainable loans also have D BANK or environmental and social pot’. Public investment alone great potential for facilitating quality. People must realise is not nearly enough. The the transition to a sustainable that sustainable development sustainable funding gap can future. The relatively nascent and economic success are only be met by signifi cantly green loan market already en years ago, sustainable inseparably linked. increasing private sector passed a signifi cant milestone Tfi nance was in its infancy Countries need a new and participation with the help of when the Green Loan Principles, and specialised equity sustainable growth model with the capital markets. Investors a framework for green lending, investors were responsible for different pillars economic, are beginning to recognise this, were introduced by the Loan driving socially responsible environmental, social and and sustainable investing is on Market Association in March investments. With new governance. That is why, as the rise. 201 . issuances of around 00m in early as eight years ago, D Over the last 10 years, capital 200 , sustainable bonds were BANK developed a unique EESG ‘Green goes rainbow’ markets have followed the right a niche market. Around that analysis and rating methodology With an estimated volume of path to support the sustainable time, only a few sovereign and to facilitate sustainable stock more than 100tn, the global transformation of the world supranational institutions and bond picking. fi xed income market bears economy. But much is still to be were acting as pioneers. Building a sustainable huge potential for facilitating done. It is important to fi nd a These included the European economy cannot be achieved the transition to a sustainable common language in sustainable Investment Bank, which issued without the participation future. Sustainable bonds stand fi nance, and policy makers must its fi rst climate awareness bond of capital markets. Two out as one of the most promising make progress on international in 200 , or the World Bank, examples illustrate this. investment vehicles to support standards and defi nitions. which issued its fi rst green bond First, the Organisation for the transition towards a The arrival of the European in 200 . Economic Co operation and sustainable economy. Commission’s action plan on The world has changed in Development estimates global In 201 the green bond fi nancing sustainable growth the intervening years. There infrastructure requires .3tn market topped the 100bn arrived in March 201 was is a growing perception in per year in investment to be in mark. According to D BANK’s warmly welcomed in this regard. developed economies that the line with the ob ectives set in sustainable investment But legislators must not lose current economic model, which the 201 Paris climate change research, it has the potential the balance between individual rose out of the assumption of agreement. Second, achieving to exceed 200bn by end 201 . decisions and regulatory plentiful supply and measures the nited Nations’ sustainable In addition, our researchers requirements. When it comes success only in terms of development goals by 2030 have observed that ‘green is to regulation there is only on economic growth, is no longer will require between tn tn going rainbow’, as issuers worthwhile formula ‘As much as adequate. Economic growth in annual investment across and investors move beyond necessary, as little as possible.’ is an incomplete indicator of various sectors and industries. the purely environmental All these examples perspective. Green bonds, which demonstrate that sustainable focus primarily on environment development propelled by capital ‘There is a growing perception in developed and climate related matters, are markets is no longer ust a virtue, being oined by ‘blue’ bonds for but an absolute necessity. economies that the current economic model, which maritime and other social issues. Frank Scheidig is Deputy rose out of the assumption of plentiful supply All such ESG bond issuance is on Chairman of the OMFIF and measures success only in terms of economic the rise. Advisory Board and Global growth, is no longer adequate.’ Sustainable fi nance is a Head of Senior Executive rapidly developing market. In Banking at DZ BANK.
18 BULLETIN JANUARY 2019 OMFIF.ORG
BTN_01.19_018_Scheidig.indd 18 10/01/2019 14:30 Looking past traditional market indicators Social issues gaining infl uence on fi nancial markets
Peter Zöllner of the population, and prevent human development. Sovereign rates, exchange rates and credit Bank for the wealth inequality gap from investors are being encouraged exposures. It will also be about International widening. to turn to sustainable investing gauging the consequences of Settlements This social inequality for example, by incorporating model risk. Any mistakes in has fueled opposition to environmental, social and implementing or understanding globalisation, free trade and governance criteria when new fi nancial models and hen refl ecting on changes human mobility, and renewed choosing their assets. These technology could lead to poor Win fi nancial markets over focus on austerity. This defi es the themes, after all, are closely decision making, fi nancial and the last decade, it is tempting long standing global economic connected to the management of reputational damage and shocks simply to look back on the events and political system, and with international reserve portfolios to fi nancial stability. and policies unchained since it, underlying policy. But such and sovereign funds. the 200 fi nancial crisis. These sentiment is also challenging the In addition, technology’s The years to come include the introduction of offi cials who work to preserve infl uence on the lives of fi nancial Throughout the last decade, unconventional monetary policy, and foster economic growth and market participants continues central banks have been macroprudential instruments to expand markedly. Buying and instrumental in shaping and negative interest rates, selling are more automatised fi nancial markets, owing to the the European sovereign debt ‘Social inequality has and convenient than ever before. extraordinary efforts they put in crisis and, more recently, the fueled opposition to Electronic and high frequency place to mitigate the effects of beginning of monetary policy globalisation, free trade trading, rules based funds, the fi nancial crisis. normalisation. An innumerable and human mobility, robo advisers and crypto assets In the years to come and as array of events has shaken up and renewed focus on are among the many examples monetary policy normalises investors monitoring markets challenging incumbent banking other long term, non fi nancial around the world. austerity. This defi es the business models. Policy makers concerns will probably be the owever, in the current long standing global are starting to ponder if the focus of the world around us and, economic and political economic and political macroeconomic indicators as a consequence, affect fi nancial landscape, it is necessary to look system, and with it, currently in place, like infl ation analysis and policy making. It is beyond market indicators and underlying policy.’ rates, refl ect these structural worth paying close attention to intraday monitors. Analysts must changes. how sovereign investors adapt focus on the big picture and on Those working in regulation, to their changing environment. the long term, non fi nancial supervision and risk Enhanced knowledge of issues that not only affect management must embrace geopolitical themes, social goals, fi nancial markets, but which innovation to pre empt risks demographics and technology will impact people’s day to day associated with new technologies will be key in the fi ght to activities for years to come. while simultaneously reaping preserve the long withstanding The social pressure that the benefi ts. Sovereign investors paradigms of political and led to events such as the K’s must prevent cybersecurity economic integration. decision to withdraw from the breaches, face fi nancial market Peter Zöllner is Head of the European nion, as well as fl ash crashes and avoid falling Banking Department at election outcomes in the S prey to procyclical trading the Bank for International and Europe, accumulated over algorithms. Their fi nancial Settlements. The views many years. Policy makers market analysis will not only be expressed here are his own should ask themselves what about estimating risk premiums and not necessarily those of they can do to provide better adequately and calculating the Bank for International living standards for the ma ority # the hedging costs of interest Settlements. November 2017
OMFIF.ORG JANUARY 2019 BULLETIN 19
BTN_01.19_019_Zöllner.indd 19 11/01/2019 09:57 Bulletin at 100
Towards united front in impact investing Adopting IFC Principles will help defi ne impact investment standards
Karin Finkelston standards (‘Operational integrate impact considerations report will map out the size International Principles for Impact into investment decisions and potential of the impact Finance Management’), in close throughout the investment investing market, identify the Corporation partnership with the fi nance life cycle: strategy, origination different players and investment industry. With regard to impact and structuring, portfolio strategies, and explain the mpact investment was still and return, IFC is one of the management, exit, and analytical underpinnings of Iconsidered a niche market in original impact investors, independent verifi cation. these principles. It will show 2010, when green bonds were in with 62 years of experience. These principles will help avoid how IFC applies the principles their infancy and the notion of Furthermore, it is the largest potential ‘impact washing’ – a with its anticipated impact incorporating environmental, impact investor, with $57bn in its key concern, which investors measurement and monitoring social and governance themes portfolio under management. raised during the development of impact management system. in asset allocations was far from the Principles. Investors must get behind the mainstream. Today, the market Industry partnership It is important before investing principles and sign on to them is at a critical infl ection point. IFC and other development to defi ne what impact is if we want to attract more funds A growing number of investors fi nance institutions have been intended, set up targets, monitor for impact. Now is the time to – including a new generation investing for impact for many performance, take corrective show a unifi ed front and work of younger investors – are years, and now a much wider action if things go wrong and collectively towards meeting looking to align their investment range of private investors are report the results at the end. It the SDGs. strategies to the United Nations interested in this dimension. is critical to get the principles A common and agreed Sustainable Development Goals, IFC has contributed to right, and thus IFC consulted approach to managing to achieve positive outcomes the Equator and Green Bond widely to obtain additional input investments for impact will for society alongside fi nancial Principles. Using this experience, on the draft. benefi t all in the industry. returns. it worked with market players The fi nal principles and Karin Finkelston is It is important to seize this to create standards for impact the fi rst set of signatories will International Finance momentum to scale up the investment. The IFC worked be announced at the World Corporation Vice-President, market rapidly from its current in partnership with a core Bank Group’s spring meetings Partnerships, Communication $228bn size. Institutional group of asset managers, asset in April 2019, where it will and Outreach. investors hold trillions in assets owners, and development publish a report surveying the under management globally. If fi nance institutions to work on impact investing market. This a fraction of this pool of money a set of draft principles. These # can be tapped, the market for refl ect emerging best practices June 2018 impact investment could grow by drawing on the accumulated
‘A growing number of June 2018 exponentially. experience of IFC, its peer Vol.9 Ed.6