Friday, June 28, 2013

HSG - 126. Notes on an International Monetary Group Meeting

126. Notes on an International Monetary Group Meeting

I. Exchange Rate Arrangements
A. Proposal for Article IV

II. Gold

A. The United States and France have reached an agreement on gold that will settle the question of whether or not countries may purchase gold sold by the Trust Fund. This agreement, if accepted by other countries, will enable the early establishment of the Trust Fund.

B. This latest agreement is secret for the time being!


Thursday, June 27, 2013

SnB - What is money really about?

A brief introduction to the Swiss National Bank

The contents at a glance

The chapter on Money (page 4 onwards) tells you what money is, why we need it
and where our money comes from. [Money > Uses of money > Barter > Exchange value > Means
of payment > Banknotes > Central banks > Gold reserves]

The chapter on Banks (page 14 onwards) explains what interest is, how banks
increase the supply of money and how the National Bank acts as banker to the
banks. [Commercial banks > Interest > Banks as intermediaries > Increasing the supply of money >
Banking Law > Relationship with the National Bank > Electronic payments]

The chapter on Monetary policy (page 24 onwards) shows how the National Bank
supplies the country with money and why it also influences the money in our pocket.
[Money supply > Inflation, Deflation > Inflation forecast > Management of the money supply > Repo
transactions, Foreign exchange swaps > Monetary policy scenario> Exchange rates > Euro]

The chapter on the SNB (page 36 onwards) describes what sort of organisation
the Swiss National Bank is. [Functions of the SNB > Statutory basis > Independence> Services
provided to the Confederation > Organisation]


SnB - Some TidBits

The world of SnB:

How much does it cost to produce a banknote?
Who set up the first bank?
What is really meant by a "strong" franc?
What sort of professional qualifications do the National Bank's staff have?
Anything else you would like to know?


1/ Some questions and answers on money

4/ Some questions and answers on the National Bank

What sort of professional qualifications do the National Bank's staff have?
Does the National Bank have any competitors?
Who owns the National Bank?
Why does the National Bank have two Head Offices?
Doesn't the independence of the National Bank conflict with Switzerland's democratic principles?
Does the National Bank make a profit every year?
Is it possible to visit the National Bank?
How can I find out more about the National Bank?

SnB - Credit - is the sky the limit?

Jean-Pierre Danthine, Vice-Chairman of the Governing Board of the Swiss National BankICMB, Geneva, 16.04.2013

"Over the past few years, the growth of credit volumes has been significant, with the result that credit volumes relative to gross domestic product (GDP) have reached new historical peaks in Switzerland. Together with persistently increasing real estate prices, this spells out conditions that may lead to subsequent financial instability. How can we understand these recent developments in credit volumes? And can this understanding form a basis for predicting the likely future evolution of this variable in Switzerland?
Clearly the credit-to-GDP ratio cannot grow indefinitely because otherwise the cost of servicing of the debt would end up exhausting the whole of GDP. The recent development must therefore either be viewed as a structural adjustment to a new plateau, or as a cyclical upswing to be followed by a later correction.
Although structural factors can possibly explain a high level of credit-to-GDP in Switzerland in international comparison, they are unlikely to rationalize the most recent upward move in this ratio. By contrast, cyclical drivers appear highly plausible in the current circumstances. Specifically, the long period of ultra-low interest rates feeding into and being reinforced by rising real estate prices, combined with the potential for some behavioral biases, have a higher explanatory power.
The lessons from this analysis are crystal clear. The recent developments in the credit market translate for the Swiss economy into a state of high vulnerability requiring caution and the exercise of responsibility by all concerned. The activation of the countercyclical capital buffer and the adoption of other prudential measures have to be seen in this perspective."


Pg.13 - Domestic credit in SUI: levels - Substantial increase in credit-to-GDP ratio driven by persistent strong credit growth
(Figures 2a and 2b)

Pg.14 - Credit-to-GDP: international comparison
(Figure 3)

pg.15 - Long-term development of credit-to-GDP in Switzerland
(Figure 4)


How to explain increasing credit-to-GDP ratios in general?
• Improved credit access due to structural reduction of supply side constraints (financial liberalization, innovation)
• Structural increase in credit demand (e.g. growth opportunities, cultural changes or demographic shift)
• Extended period of low interest rate
• Overconfidence and misjudgement of borrowers and/or lenders (behavioural biases)


Conclusion: the tide will turn
• Current situation in Switzerland: rather a cyclical than a
structural increase in credit-to-GDP
• Eventually, the tide is likely to turn with credit volumes
significantly undershooting nominal GDP growth

Key question: is a smooth reversal possible?

Conclusion: fasten your seat belts!

• Prolonged period of strong growth in credit and in real
estate prices indicative of financial fragility
• Prudence is key: Adoption of countercyclical capital buffer
and other prudential measures to be seen in this context



Tuesday, June 25, 2013

FSB - Data Gaps Initiative on a common data template for G-SIBs

18 April 2013
The recent financial crisis highlighted major gaps in information on the large globally active financial institutions that play a key role in the international financial system. Prior to the crisis, little consistent information was available on the bilateral linkages between such
institutions, or on their common exposures and liabilities to financial sectors and national markets, information that is needed to identify risk concentrations and the build-up of systemic risks. Therefore, as part of a wider initiative to improve data to support financial stability, the G-20 called on the FSB, in close consultation with the IMF, to convene relevant central banks, national supervisors, and other international financial institutions, to develop a common data template for systemically important global financial institutions. An FSB working group was established to deliver essential improvements to the availability, quality and consistency of data on these major global financial institutions. Please see the October 2011 FSB Consultative Paperfor a detailed recall of the context of the project.
The specific mandate, which addresses recommendation 8 and 9 in the November 2009 joint IMF-FSB Report to the G20 "The Financial Crisis and Information Gaps", includes, to:
  • develop proposals for implementing a new common data template for globally systemic institutions for the purpose of better understanding the exposures of these institutions and provide the authorities with a stronger framework for assessing potential systemic risks. The initial template is for global systemically important banks (G-SIBs).
  • develop proposals for implementing a strong international framework that supports improved collection and sharing of information on global systemically important financial institutions to provide authorities with a clearer view of financial networks and assist them in their supervisory and macro-prudential responsibilities.
The FSB has agreed to develop this framework based on an incremental approach that will be implemented by the national home authorities overseeing G-SIBs (as identified under the latest FSB list) and other large banks.
The FSB announces the successful implementation of the first phase of the initiative (Phase 1) with the start in March 2013 of the harmonized collection and pooling of improved consolidated data on bilateral counterparty credit exposures of major systemic banks, as well as their consolidated aggregated exposures. The latter are to be reported according to the guidelines already implemented in the context of the international banking statistics of the Bank for International Settlements (BIS). These confidential data will be held centrally by an international data hub ("data hub") that will be hosted by the BIS, and reports based on these data will be shared only with national supervisory authorities participating in the network pursuant to a multilateral framework.
Participating authorities have formed a Governance Group to oversee the pooling and sharing of information.
Extensions of the project will be considered in stages to progressively expand and enhance the framework potentially with improved data on bilateral funding dependencies (Phase 2) and consolidated balance sheet (Phase 3).
Following implementation, participating national authorities will take responsibilities to maintain the common data template for G-SIBs and provide further technical support and guidance to reporters...



Thursday, June 20, 2013

FSB - SB Chair Letter sent to the G20 Ministers and Governors

SB Chair Letter sent to the G20 Ministers and Governors

19 April 2013

To G20 Ministers and Central Bank Governors

Progress of Financial Reforms
We have sent for your upcoming meeting reports assessing progress in three key areas of reform to create a more resilient global financial system, one that is better able to support long-term economic and employment growth. They cover:
  • Implementation of the Basel III capital and liquidity requirements, supporting the goal of increasing the resilience of banks and banking systems;
  • Implementation of reforms to resolution regimes, supporting the goal of ending "too big to fail";
  • Implementation of OTC derivatives reforms, supporting the goals of reducing systemic risks and creating continuous core markets.
Although important steps have been taken to strengthen the system, we are only part-way through a multi-year financial reform process, whose successful completion will require our continued cooperation and our sustained focus and effort.  It is especially important that, as we seek to reduce systemic risks from interconnectedness, we strive to maintain an integrated global financial system.
A resilient and global system will provide credit most efficiently and support strong, sustainable and balanced global growth.  We need to continue to re-build confidence in the long-term robustness of the global financial system and resist pressures to ring-fence national markets




Wednesday, June 19, 2013

ECB - On the international spillovers of US Quantitative Easing

Working Paper SerieS
NO 1557 / june 2013
On the international spillovers of US Quantitative Easing
Marcel Fratzscher, Marco Lo Duca and Roland Straub

"...Fourth and finally, there is a substantial degree of heterogeneity in the extent that countries’ capital flows and asset prices react to Fed QE measures. In particular EME policy makers may have tried to shield themselves from the described spillover effects, such as through interventions in foreign exchange markets – with FX reserves of many EMEs increasing dramatically between 2009 and 2011 – or by introducing capital controls. We find evidence that countries with better institutions and more active monetary policy have been affected less by Fed policies. By contrast, there is no evidence that having a pegged exchange rate regime or a less open capital account helped countries insulate themselves from QE policy spillovers, conversely, they might have amplified the pro-cyclical impact of Fed policies. This lends further credence to the hypothesis that the portfolio rebalancing effects of Fed QE policies are at least in part explained by risk and a flight-to-safety phenomenon.
The findings of the paper have a number of implications. They support the argument that US unconventional monetary policy measures have affected capital flows to EMEs in a procyclical manner, and have raised asset prices globally and weakened the US dollar. This suggests that there is indeed an important global dimension to and externalities from monetary policy decisions in advanced economies. However, the paper is mute on whether such externalities are overall positive or negative for other economies – as the potentially undesirable effects of these measure on the pro-cyclicality of EME capital flows need to be weighed against potential benefits such as e.g. through higher economic activity and a better financial market functioning in the global economy..."



The Balance of Payments Manual published by the International Monetary Fund provides accounting standards for balance of payments reporting and analysis for many countries. The Bureau of Economic Analysis adheres to this standard...

Friday, June 14, 2013

CRS - How Have Multiple Reserve Currencies Functioned in the Past?

 How Have Multiple Reserve Currencies Functioned in the Past? Why were the Rules-Based Adjustment Indicator and the Substitution Account abandoned in the past?

 Catherine R. Schenk

Prepared for ‘The International Monetary System: old and new debates’, sponsored by the Reinventing Bretton Woods Committee
Paris, December 2010

• Sterling operated as an important secondary reserve currency during the Bretton Woods period, comprising over half of the reserves of 35 economies as late as the 1970s. The competition between sterling, the US dollar and gold was considered destabilising, with portfolio shifts threatening exchange rate stability and international liquidity. This threat prompted collective action to support the role of both the dollar and sterling in the international monetary system while an alternative international reserve asset was debated from 1959-67.
• The effort to replace national currencies as international reserve assets was a failure. The SDR did not achieve this goal, nor did it prolong the pegged exchange rate system as it was intended to do. Instead, both gold and sterling gradually receded in importance as international reserve assets, leaving the dollar dominant by the early 1970s.
• The diversification of reserves by many countries from sterling to the US dollar did not take place naturally in response to market forces. The process was carefully managed by G10 central banks in cooperation with holders of sterling. Three Group Arrangements were signed providing overlapping lines of credit amounting to the equivalent of c. £120 billion today.
• The G10 Group Arrangements to manage the diversification of sterling reserves were agreed in 1966, 1968 and 1977 – they thus persisted despite the devaluation of sterling in 1967, the advent of a supposedly floating exchange rate regime in the early 1970s and a sharp fall in the share of global reserves denominated in sterling.
• During the end of the Bretton Woods period, from 1968-1974, currency competition was eliminated since the UK offered a US dollar value guarantee to countries holding sterling so long as they did not further diversify their reserves. Given high nominal interest rates in London, this guarantee allowed these economies to reap premium real returns on their sterling assets. The credibility of the guarantee was underpinned by the 2nd Group Arrangement from G10 central banks.
• The Group Arrangements provided the UK with a ‘safety net’ of credit from G10 central banks that could be activated if countries began to diversify their reserves away from sterling. They aimed to reduce first mover advantage for diversification and to delay a damaging run on the pound that would prompt a run on the dollar.
• The failure of the SDR to resolve apparent problems in the IMS led to consideration in the early 1970s by the C20 and IMF of a Substitution Account to promote the SDR as a replacement reserve asset for the US dollar. This plan was finally abandoned in 1981. Key obstacles were: burden of risk, use of IMF gold and governance.
• Rather than replacing the US dollar with the SDR, the US Fed and Treasury sought to improve the symmetry of the adjustment process through a rules based system to force countries in persistent surplus to adjust through currency appreciation. These plans were ultimately unsuccessful in the 1970s because of a lack of consensus over governance and implementation but they echo US proposals at the G20 Seoul Meeting in November 2010..."


Filename: schenk.pdf

Thursday, June 13, 2013


Edited by Tsvetan Manchev, Doctor in Economics

Foreign reserves3 include gold and/or other central bank assets which come entirely within its control and are easy to trade on international financial markets. According to the Fifth Edition of the IMF’s Balance of Payments Manual “reserve assets consist of those external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes”.4
The IMF description is clear on the role and significance of reserves, and on the motives for owning and using them. Except in special and closely defined circumstances, the monetary authorities in the definition are national governments and central banks. Depending on organizational and legal arrangements, the government and central bank may either manage their portions of foreign reserves independently, or have them managed by one or the other on behalf of the nation. World practice tends to favor central banks as managers of these reserves and, as the law stands, Bulgaria is no exception. Hence our definition treats foreign reserves as a central bank province.
Another important element of the proposed BNB definition, in line with the IMF one, is the necessity to hold reserves in foreign exchange and foreign financial assets which are easy to trade on international financial markets. Ease of trading implies that assets and currencies are quoted at all times, enabling transaction immediacy with no significant departures from current market quotes.

Easily traded instruments (assets and currency) broadly fulfill these criteria:
• the country 5 which issues “international currency” has to have a stable financial and political system imparting confidence in the currency;
• the issuing country’s financial markets have to be well developed and integrated into world financial markets;
• the currency must be recognized as internationally stable and suitable for use as a means of storing value;
• the issuing country must have a large share of world trade, or the currency must be widely used as a means of exchange in international transactions.

3 We use ‘foreign reserves’ or ‘reserves’ for brevity instead of ‘international reserves’.
4 Balance of Payments Manual, Fifth Edition, the International Monetary Fund, 1993, p. 97.


"...Financial history offers as few grounds for simple assessments of foreign reserve management as it does examples of more successful central banks. Interventions in support of an exchange rate or of other monetary policies appear appropriate only in the short term. Pragmatic thinking puts them alongside other mon- etary policy levers, with success dependent on their combined use. Alan Greenspan*12 states the general principle that foreign reserves should be kept in currencies seen as stronger than the local one. The proof by default is that the Fed has used gold as a foreign reserve for a lengthy period. Whenever the dollar has weakened, the Fed has boosted the shares of yen and marks (euro)..."

*12 Greenspan, A. Currency Reserves and Debt: Remarks before The World Bank Conference on Recent Trends in Reserves Management, Washington, D.C., April 1999.


Chapter Five, from pg.80
BNB Policy in Managing Monetary Gold
[Mrt: with respect to gold and credit risk aspect]


"...The second instrument, deposits denominated in physical gold, is
deposited (as if it were cash) with highly-rated private commercial
banks abroad for fixed terms, yielding interest on maturity dates. The
deposits are usually negotiated on the London interbank bullion mar-
ket, with delivery and settlement in Bank of England vaults. At the end
of 2005, 609,000ozt were thus invested: 51 per cent of the Bank’s
monetary gold. During substantial market fluctuations such as that
since October 2007, operations with gold deposits are temporarily
suspended and the metal is stored at the Bank of England due to
tighter credit risk constraints....
...The third instrument, into which some 7 per cent of BNB gold was
invested between 2003 and 2007, are debt securities denominated in
gold. These are issued by international financial institutions and some
highly-rated private foreign banks. Essentially, they entail an uncon-
ditional obligation to pay the principal in physical gold at maturity*94,
plus fixed coupons payable semiannually. For the gold-denominated
bonds into which the BNB has invested, the coupon has been pay-
able in US dollars. Periodic coupon payments yield a modest interest
income (usually under 1 per cent) against the assumption of a mod-
est credit risk exposure. Interest on gold deposits is traditionally very
low and reflects expectations of market price evolution and gold fu-
tures prices. The BNB assumes a credit risk exposure to the securi-
ties’ issuers who are typically supranational financial institutions with
the highest investment grade rating..."

*94 According to London Good Delivery Standard.


File name: pub_np_internmonreserves_en-4.pdf

Monday, June 10, 2013

ECB - JS - Lessons from 1971 for Europe and the world in light of past and present experience

The future of the international monetary system: Lessons from 1971 for Europe and the world in light of past and present experience

Speech by Jürgen Stark, Member of the Executive Board of the ECB,
organised by the Official Monetary and Financial Institutions Forum,
London, 11 May 2011

One of the most significant innovations in the international monetary system, in this respect, has been the G20 Framework for Strong, Sustainable and Balanced Growth, launched at the Pittsburgh Summit in September 2009. Its aim is precisely to ensure the mutual compatibility of domestic policies and to monitor the progress of needed domestic structural reforms. G20 members review each others’ policy actions and frameworks in order to grasp the combined effect of policies on the global economy. The G20 then explores the scope for improving the global outcome by defining the necessary policy measures to make adjustments where possible..."


Friday, June 7, 2013

Bruegel - Towards a revival of the international monetary discussion?


Agnès Bénassy-Quéré and Jean Pisani-Ferry, 2009

"1. Introduction: is the monetary system to blame for the crisis?
2. A short history of recent international monetary discussions
3. What is to be expected from an international monetary regime?
4. What’s wrong with the current non-system?
5. Ways out: assessing the proposals"


Wednesday, June 5, 2013

AEI - Speech given by Mr. Francois-Xavier Ortoli, Vice-President of the Commission of the European Communities, at the Conference "European Banking" organized by The Financial Times. Amsterdam, 10 December 1980.

Speech given by Mr. Francois-Xavier Ortoli, Vice-President of the Commission of the European Communities, at the Conference "European Banking" organized by The Financial Times. Amsterdam, 10 December 1980.

Ortoli, Francois-Xavier. (1980) Speech given by Mr. Francois-Xavier Ortoli, Vice-President of the Commission of the European Communities, at the Conference "European Banking" organized by The Financial Times. Amsterdam, 10 December 1980. [EU Speech]

BIS - Statistical release: OTC derivatives statistics at end-December 2012

Statistical release: OTC derivatives statistics at end-December 2012
Monetary and Economic Department
May 2013

"...Equity-linked and commodity derivatives
For equity-linked derivatives, notional amounts outstanding were almost unchanged at $6.3 trillion at the end of 2012, after a 6% expansion in the first half of 2012 (Table 1). An increase in forwards and swaps almost offset the 5% decline in outstanding options. Market values of equity-linked contracts slipped another 6% in the second half of 2012, to $605 billion; this was more than accounted for by the drop registered for options (–10%).
Amounts outstanding of commodity derivatives fell 14% from $3 trillion to $2.6 trillion, although market values contracted by substantially less (–8%), implying that the remaining contracts increased in average value (Table 1). Notional amounts outstanding on gold declined to $486 billion. While gross market values on gold and other commodity contracts had both fallen by almost 20% in the first half of the year, in the second half the slide in the value of gold contracts was relatively bigger (–15%) than that in other commodity contracts (–7%)..."


Tuesday, June 4, 2013

YY - China’s Flawed Balance-of-Payments Position

China’s Flawed Balance-of-Payments Position -
Yu Yongding -

"...The value of China’s assets as future claims on real resources has already been diluted by dollar depreciation, and calls in the US for inflating away America’s debt burden portend a further decline. Moreover, while China may have profited from the rise in government-bond prices over the last few years, prices have been inflated artificially by expansionary monetary policy in advanced countries, which implies that the bubble could burst. Whether through inflation or collapsing government-bond prices, China will suffer significant capital losses on its foreign assets, further damaging its investment-income balance..."


FRBNY - Agreements Used by the Federal Reserve Bank of New York in Reserve Asset Investment and Monetary Policy

Agreements Used by the Federal Reserve Bank of New York in Reserve Asset Investment and Monetary Policy
Thomas C. Baxter, Jr.1
Robert B. Toomey

 "...Some central banks (most significantly those of Portugal, Yugoslavia, and Malaysia) experienced material losses after the failure of Drexel. These central banks had used Drexel as their agent in attempts to generate return on holdings in gold. When Drexel collapsed, these central banks, just as other market participants that had dealings with Drexel, were forced to participate in the insolvency wind-up of Drexel and eventually received back significantly less than their invested principal...."