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Basel iii Compliance Professionals Association (BiiiCPA)

Basel iii Compliance Professionals Association (BiiiCPA) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA

Tel: 202-449-9750 Web: www.basel-iii-association.com

Basel iii News, February 2019 Dear members and friends, We have an interesting paper from the BIS, that presents a first analysis of the experience to date with the global systemically important bank (G-SIB) framework, and the methodology for assessing the systemic importance of G-SIBs. Several issues are examined.

We read: “First, we investigate whether G-SIBs and non-G-SIBs have behaved differently since the implementation of the G-SIB framework and if observed differences in behaviour are in accordance with the framework's aims. Next, we ask whether there are regional differences in the behaviour of G-SIBs and non-G-SIBs. The analysis reveals that G-SIBs and non-G-SIBs behave differently; however, both groups are heterogeneous, so that the indicator outcomes are often highly influenced by a few banks.

http://www.basel-iii-association.com/

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Nevertheless, most G-SIBs have reduced their G-SIB scores during the period assessed, changing their balance sheets in ways that are consistent with the G-SIB framework's aims. In contrast, non-G-SIBs have increased their relative G-SIB scores during the same period. Finally, the regional analysis indicates that trends in banks' G-SIB indicators, and the indicators that contribute most to the final G-SIB score, are heterogeneous across countries and regions. While G-SIBs from the euro area, Great Britain (GB) and the United States (US) have reduced their systemic importance for most indicators, Chinese and Japanese G-SIBs have shown relatively positive growth rates for all indicators, and particularly high ones for indicators in the substitutability category.” To read the paper: https://www.bis.org/bcbs/publ/wp34.pdf

https://www.bis.org/bcbs/publ/wp34.pdf

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BIS global liquidity indicators at end-September 2018

The annual growth rate of US dollar credit to non-bank borrowers outside the United States slowed down to 3%, compared with its most recent peak of 7% at end-2017. The outstanding stock stood at $11.5 trillion. In contrast, euro-denominated credit to non-bank borrowers outside the euro area rose by 9% year on year, taking the oustanding stock to €3.2 trillion (equivalent to $3.7 trillion). Euro-denominated credit to non-bank borrowers located in emerging market and developing economies (EMDEs) grew even more strongly, up by 13%.

To read the paper: https://www.bis.org/statistics/gli1901.pdf

https://www.bis.org/statistics/gli1901.pdf

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Distributed ledger technology and large value payments: a global game approach Stephen Morris (Princeton University), Hyun Song Shin (Bank for International Settlements, Economic Adviser and Head of Research of the BIS).

Payment systems built around distributed ledger technology (DLT) operate by maintaining identical copies of the history of payments among the participant nodes in the payment system. Cryptocurrencies are perhaps the best-known example of the application of DLT, but the applicability of the technology is much broader. Payment systems based on DLT are compatible with oversight by the central bank, and several central banks have conducted successful trials of interbank payments. In these trials, payment system participants transfer digital tokens that are redeemable at the central bank and use DLT to transfer them to other system participants. Decentralised consensus is achieved through agreement of a supermajority of the participants (typically 75-80%) who collectively validate payments. Nevertheless, the technology by itself does not overcome the credit needs of the payment system to maintain settlement liquidity.

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In conventional real-time gross settlement (RTGS) payment systems, the value of daily payments can be over 100 times the deposit balance maintained by the system participant at the central bank. As such, incoming payments are recycled into outgoing payments, and credit provided by the central bank supplements private credit from outside the payment system for the smooth functioning of the system as a whole. We examine the liquidity properties of decentralised payment systems in an economic model of payments, in which the cost of credit to finance payments enters explicitly. First, in a two-bank example, we illustrate the conceptual distinction between consensus as distributed knowledge and consensus strong enough to sustain a cooperative outcome. In this example, when the cost of credit exceeds a modest threshold, no amount of exchange of messages can elicit the coordination of payments between the two banks. The example focuses attention on the coordination motives of system participants. The cost of credit turns out to be a key determinant of the equilibrium outcome of the game. We then proceed to examine a general N-bank game and cast the payment problem as a public good contribution game between N banks in a large-value payment system. The public good has two aspects. The first aspect of the public good is the availability of a clean, reconciled ledger that commands agreement from system participants. This part is where the technological innovation can contribute most. The second aspect of the public good is the provision of credit to clients which allows high volume of outgoing payments that sustains the coordination outcome with high flows. We solve for the unique, dominance-solvable equilibrium using global game techniques and provide an exact characterisation of the states of the world at which the coordination outcome is feasible. The solution shows that successful coordination is possible in a decentralised setting, but only within a narrow range of fundamentals.

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The solution is highly sensitive to the cost of credit, and the decentralised equilibrium outcome often fails to reproduce the high-volume payment outcomes that are more normal with central bank balance sheet backing. The slides: https://www.bis.org/speeches/sp190207_slides.pdf

https://www.bis.org/speeches/sp190207_slides.pdf

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Inviting participation - the public's role in stress testing's next chapter Randal K Quarles, Vice Chairman for Supervision of the Board of Governors of the Federal Reserve System, to the Council for Economic Education, New York City.

Thank you, Nan, for that kind introduction, and thank you to President Mester of the Federal Reserve Bank of Cleveland for inviting me to speak this evening. I am honored to be here and to support the mission that you and the Council for Economic Education have worked so hard to advance-that every student in America gets a strong, early start on their financial education. That mission is critical in its own right, but it also reflects the deeply held value of participation-of giving young people the chance to shape not just their own futures, but also the futures of their communities and their country. Because so much of the language of finance is couched in terms of metrics and rationality, we often forget that finance is something we never do alone. It is, by definition, a collaboration, which helps us work together to achieve common goals. The Federal Reserve is no exception. Tonight, I want to briefly discuss the role that participation plays in the Federal Reserve's work and outline one effort to solicit broad participation-an upcoming conference on stress tests, intended to make those tests more open, transparent, and effective. Public institutions exist under a grant of trust from the people they serve, to pursue a specific policy goal. When the public holds an institution accountable for that grant, the institution becomes stronger. The Federal Reserve System we know today emerged through decades of legislation, public consultation, and debate-from the original Federal Reserve Act, which created the Federal Reserve System, to the Banking Act of 1935, which established the modern Federal Open Market Committee

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(FOMC), to the Treasury-Federal Reserve Accord of 1951 (PDF), which ensured the separation of monetary and fiscal policy. These changes made our economy and our country stronger, because they improved the Federal Reserve's ability to accomplish the mission Congress assigned it. Throughout this evolution, a key principle has been that accountability allows the Federal Reserve to be independent-that we are subject to challenge, to counterargument, and to the emergence of new evidence and ideas. For our work to remain legitimate, the public must be able to see, understand, and engage with our efforts; to reaffirm their support when we have earned it; and to offer informed guidance on when to change course. Accountability is only one reason the Federal Reserve relies on public outreach and participation. We also rely on participation for our effectiveness, because the best ideas in finance and economics can, and often do, come from a wide variety of sources. Agencies like the Federal Reserve are a collection of expertise-informed by experience and positioned to turn a broad range of information into policy. But we are not, and cannot be, a monopoly on insight or wisdom. The Federal Reserve recognizes these limits, and the need to invite new ideas, through a variety of initiatives. We seek out a qualified, diverse workforce, and foster an inclusive workplace. We meet frequently with a range of advisory councils, drawing on expertise in banking, modeling, and consumer and community finance. We have increased transparency around our policy process and issued new reports on financial stability and banking supervision and regulation, with new details about our work. And across the Federal Reserve System, our staff publishes a wide range of economic and policy research and plays an active role in academic discourse. Monetary policy itself shows the value of participation and transparency. U.S. monetary policy is the sole responsibility of the Federal Reserve. Yet some of the most important innovations in the field have come from outside the Reserve System. Since 1935, we have decided monetary policy by committee, a structure that has served us well because it is designed to capture different views of a wide and varied national economy.

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And over the past several decades, the FOMC has greatly increased its own transparency-from postmeeting announcements, to announcing an objective for inflation, to a published survey of economic projections, to postmeeting press conferences (which will now take place after every FOMC meeting). As many of you know, over the course of 2019, we will be reviewing our monetary policy strategy, tools, and communication practices, and we will hold a research conference on the subject with outside speakers, as well as "Fed Listens" events at a number of Reserve Banks, to hear from a broad range of constituencies. But these improvements are more than a simple matter of disclosure. They are an invitation to participate, and a way to provide the public with the means and opportunity to inform our work. This year, we are taking similar steps to improve a cornerstone of our post-crisis rules. Supervisory stress tests offer an independent and valuable lens on the health of the banking system. They offer us a forward-looking measurement of bank capital, a view of common and systemic risks across the banking sector, and a broader understanding of the health of the financial system. The results are valuable for markets, analysts, and ultimately, the participating firms. Ten years have passed since the Federal Reserve conducted its first supervisory stress tests. That initial experiment helped stabilize financial markets and shore up our banking system at a critical and uncertain time. Our challenge now is to preserve the strength of the test, while improving its efficiency, transparency, and integration into the post-crisis regulatory framework. To that end, the stress tests have not remained static. Just in the past several days, the Board acted to suspend stress tests this year for lower-risk firms-generally, those with total assets between $100 billion and $250 billion. That move follows the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The extended cycle provides administrative burden relief for these institutions and recognizes the different risks that they typically pose-especially compared to the largest and most complex firms, whose failure poses the greatest risk to the real economy.

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Even with this change, the stress tests remain a core part of our supervision of these firms. Our experience with this "interim" year will inform the move to a permanently longer testing cycle-a change that would, of course, be subject to a full notice and comment process. Improvements like these are necessary to ensure our supervisory framework evolves from its post-crisis origins to an effective steady state. The question of how best to consolidate the gains from the first 10 years of stress testing deserves the attention and effort of the country's best minds. We should welcome changes and novel ideas, even when they explore stress testing in a new and unfamiliar light. In July, as a forum for such ideas, we will host a public conference focused on the transparency and effectiveness of stress testing. Called Stress Testing: A Discussion and Review, the event will convene panel discussions, drawing on a mix of presenters with industry, academic, and regulatory backgrounds. It will involve written papers, which will be compiled and published to spur further research. We expect the insights from the conference to inform the evolution of our stress-testing framework-and we hope to continue the conversation well after the conference ends. This input is as essential to our work as any public outreach we do. Stress testing provides insight into a dynamic financial system, and our stress-testing process must be dynamic as well. More broadly, the core of the Federal Reserve's independence is a broad consensus around the value and public worth of our mission. The Federal Reserve is the steward and trustee of that mission, but the public is its owner. To serve the public, we must not just allow input, but welcome it; not just permit debate, but foster it; not just allow participation, but treat it as essential to our work. Thank you.

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Banking regulation and the benefits of international cooperation - Basel III and beyond Prof Joachim Wuermeling, Member of the Executive Board of the Deutsche Bundesbank, at the Konrad Adenauer Foundation, Washington DC.

Ladies and gentlemen, Welcome to the "Gold Room" of the Konrad Adenauer Foundation. I am honoured to welcome you all - your attendance today surely makes this lunch a golden opportunity to exchange ideas and perspectives on the future of transatlantic and international cooperation. We are probably all having quite difficult conversations in our jurisdictions at the moment about what transatlantic cooperation - and what international cooperation - can do to achieve a prosperous economy over the coming years and decades. How can cooperation support the goals of prosperity, stability and progress? My personal view is this: our prosperity hinges heavily on the interdependencies of our economies. That's what makes cooperative frameworks that create reliability and trust so important. Take banking regulation as an example - here we have a fairly successful track record of international cooperation: the Basel Committee of Banking Supervision is a semi-formal network of supervisors from currently 28 jurisdictions. Since 1974, regulators in the Committee have been developing international minimum standards and guidelines to harmonise the supervision of internationally active banks. Even though its standards are only non-binding agreements, these are typically implemented in more than 100 countries. During its 45 years of international cooperation, the Basel Committee has achieved a lot:

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- It ensures a clear-cut separation of work and cooperation between home and host supervisors, so that the activity of international banks cannot fall through the cracks.

- It fosters the continuous exchange between supervisors and thereby

helps build mutual trust. - The Basel minimum standards reduce the opportunity for regulatory

arbitrage. - And in the process, they reduce the likelihood of a regulatory race to the

bottom. I like to think of Basel as an example of the value of international cooperation. And as such, the Basel Committee was crucial as a forum to make sure that regulatory reforms after the financial crisis were developed in international accord. The final pieces of this international reform effort were achieved with the Committee finalising the Basel III standard. The Basel III package, which includes reforms developed between 2009 and 2019, will make internationally active banks safer in the future. And yet I would like to bring one sobering fact to your attention: since the Basel Committee started its work, financial crises have not become fewer but more frequent. How can that be? One reason is regulatory loopholes that emerge due to financial innovation - this calls for a confident, strong supervision in the face of new developments that are not covered by international standards. But another source of weakness of the international Basel standards is insufficient implementation. I was recently discussing with my staff the implementation of Basel III in the EU. At some point, the discussion turned to the less than optimal experiences with the previous Basel standards. Some pointed out that the US did not implement the Basel II standard in full, despite having pushed for it in the first place. That led to the question how complete the implementation could be if other jurisdictions simply cherry-picked. But then I saw two colleagues whispering and laughing - and I asked what it was about. One of them, quite reluctantly, explained that it may be true that

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Basel II implementation in the US diverged from what the EU had hoped for - but that it was the EU which had been found to be materially non-compliant with the Basel III standard. The room suddenly fell silent. Finally, someone asked: will it be different this time around? The purpose of this tale is not to blame and shame. My concern is rather to highlight where we are right now in terms of finalising regulatory reform after the financial crisis - and that the system of national implementation does not favour full implementation. So where are we? We are getting closer, we can already make out the finishing line. But the last leg of national implementation is a steep upward climb. Without reaching the last milestone, Basel III would lose dramatically in value in terms of financial stability. What we need is complete implementation, nothing less: all internationally active banks - be they American, European, Asian or from any other region - need to be subject to these minimum standards - otherwise we have failed to achieve a truly international compact. Does this mean that, in future, every community bank should apply internal models to estimate its risk of credit valuation adjustment in derivative positions? Of course not. International cooperation would reach beyond what is sensible. The Basel rules are highly complex and call for big compliance departments - something that is beyond the reach of a community bank business model, for example. That's why smaller institutions which are not internationally active should be subject to less complex rules. And that's why the US and the EU have begun to reduce operationally burdensome rules for such institutions - a path that we are pursuing further, within the Basel Committee as well as in national implementation. However, we should not take this too far. For example, I am concerned about tendencies in both the EU and the US to exclude from key regulations internationally active mid-sized banks. The last crisis erupted not only due to what large banks did, but also because of the activities at mid-sized banks. International cooperation can serve us well. In banking regulation, cooperation can contribute to building a safer banking system. As Basel III

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has been finished by the Basel Committee, the focus will now shift towards evaluation and implementation monitoring. Though, some topics have to be kept on the agenda of the Basel Committee. One example is the regulation of sovereign exposures in times of historically high sovereign debt levels and rising interest rates worldwide. There is a considerable reputational risk for the Basel Committee if it ignored the sovereign risk issue. Furthermore, new risks are emerging and will determine the Basel Agenda. I am thinking of climate risks in banks' balance sheets or risks stemming from crypto assets as well as new players like BigTechs expanding to banking business. Those examples also show that risks and stakeholders can't be grasped within national borders which shows very clearly that there is no alternative to international cooperation. However, international cooperation can only work if national politics are able to overcome the tendencies towards less than full implementation. International cooperation does not cause national responsibility to vanish. Thank you for your attention - I look forward to our discussion.

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Experts from financial supervision, politics and industry took part in the discussions in Bonn BaFin’s first symposium on combating money laundering and terrorist financing

“If anyone in the private sector still believes that combating money laundering is unimportant, they clearly aren’t up-to-date.” With this message, BaFin Chief Executive Director Dr Thorsten Pötzsch opened the first BaFin symposium on combating money laundering and terrorist financing, held in Bonn on 12 December. 500 representatives of banks, insurance companies, public authorities, and associations attended Dr Pötzsch’s opening speech, in which he pointed out that combating money laundering and terrorist financing has significantly grown in importance both in terms of regulation and in terms of public perception. Dr Jens Fürhoff, Director-General of the Prevention of Money Laundering Directorate at BaFin, and Bettina Volprecht, Head of the Internal Communications, Internet and Central Event Management Division at BaFin, acted as hosts for the event, which took place in the German Bundestag’s former plenary chamber at the World Conference Center in Bonn. Dr Jan-Gerrit Iken (Commerzbank AG), Thorsten Höche (Association of German Banks – Bundesverband deutscher Banken), Daniel Thelesklaf (Moneyval – the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism), and Dr Fürhoff took part in the panel discussion on the future direction of money laundering prevention. One interesting observation was that banks are already using artificial intelligence to detect money laundering. BaFin’s new guidelines for the interpretation and application of the German Money Laundering Act were received positively.

Interpretation and application guidelines The presentation by Tatjana Leonhardt and Golo Trauzettel (BaFin) focused on the guidelines and the new Money Laundering Act. They began by putting the provisions within a national and an international legal context and highlighted the dynamic nature of the guidelines – which are not static but continuously changing.

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They also looked into the regulatory content of the guidelines in detail. For instance, all obliged entities are required to draw up a risk analysis as part of risk management. Money laundering reporting officers, who play a key role, cannot be linked to any other organisational departments or units reporting directly to senior management. In addition, BaFin rigorously scrutinises applications for an exemption from the obligation to appoint a money laundering reporting officer and the appointment of senior management members as money laundering reporting officers. Leonhardt and Trauzettel went on to outline internal safeguards and customer due diligence and record-keeping obligations. Leonhardt concluded by stressing the magnitude of the challenge of finding the right balance between a risk-based approach and the principle of binding provisions while drawing up the interpretation guidelines. Olaf Rachstein (Federal Ministry of Finance – Bundesministerium der Finanzen) described the key points of the 5th Anti-Money Laundering Directive, which EU Member States are required to transpose into national law by 10 January 2020. To read more: https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2018/fa_bj_1812_Fachtagung_Geldwaeschebekaempfung_en.html

https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2018/fa_bj_1812_Fachtagung_Geldwaeschebekaempfung_en.html

https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2018/fa_bj_1812_Fachtagung_Geldwaeschebekaempfung_en.html

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Strengthening the Community Reinvestment Act - what are we learning? Lael Brainard, Member of the Board of Governors of the Federal Reserve System, at the "Research Symposium on the Community Reinvestment Act", hosted by the Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania.

Thank you all for participating in our Research Symposium on the Community Reinvestment Act (CRA). I am happy to have an opportunity to learn from your extensive experience and expertise. At the Federal Reserve, we value the CRA as a critical tool for providing support to low- and moderate income (LMI) families and their communities. And we are interested in strengthening the CRA as it encourages banks to help meet the credit needs of the communities they are chartered to serve. Today's research forum is one part of an extensive outreach effort we are undertaking to gather the best ideas for improving implementation of the Community Reinvestment Act. Over the past four months alone, all 12 of our Reserve Banks have hosted roundtables in locations around the country, from San Francisco to Boston, and from Rapid City to Puerto Rico. The purpose is to hear ideas on improving the CRA regulations from the bankers and community groups that have a stake in the CRA's success. In addition, we held two roundtables at the Federal Reserve Board earlier this week to gather perspectives from national organizations focused on policy topics, such as housing, small business lending, and consumer credit. We have also consulted with our advisory councils to gather their thoughts on CRA reform. We have asked our large and community bank advisory councils, the Federal Advisory Council and the Community Depository Institutions Advisory Council, about their experiences with the CRA and suggestions for improvements. We have also sought community perspectives. At our most recent meeting with our Community Advisory Council, we asked for their recommendations for reform.

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Even though we decided not to join the Office of the Comptroller of the Currency in the publication of its August 2018 Advance Notice of Proposed Rulemaking concerning revisions to the CRA regulations, we have been reviewing the approximately 1,500 comment letters submitted by academics, banks and banking trade associations, community and consumer groups, and citizens. So what have we learned so far from the comment letters we have reviewed and the roundtables we have held? If there is one common thread, it is that support for the Community Reinvestment Act is broad and deep. Commenters across the board applauded the significant volume of CRA loans and investments that have supported LMI households and communities, as well as the benefits households and communities have realized from the CRA's focus on local retail financial services, small business lending, and community development lending, investments, and services. And they asked that the three banking agencies work together toward a joint rulemaking proposal so that CRA policies can be clearly and consistently applied across agencies. Second, there are some good ideas about how to modernize the procedures for setting the area in which the agencies assess a bank's CRA activities while retaining the core focus on place. This is not a simple challenge, and this morning's panel identified some promising solutions to the challenge of modernizing the definition of assessment areas to keep up with changes in banks' business models. I appreciated the panelists' insights on how to balance the importance of place with various business models, including to reflect the extensive use of digital channels and other changes in the banking industry. The public comments we have read so far suggest general agreement that there is a need for an update-but not a complete overhaul-of assessment areas through a balanced package of reforms. We have heard general support for assessment areas that reflect each bank's business model, recognizing that branch-based assessment areas work for many banks but that additional or different assessment areas may be appropriate for others. Third, we have received helpful input on tailoring CRA regulations to banks of different sizes and business models.

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Many of the comments we reviewed expressed support for retaining different performance tests for different types of banks, including the strategic plan option. We also heard this at the regional roundtables, where banker participants ranged from small community banks to large internet-only banks. It was clear that CRA regulations cannot be one-size-fits-all. Fourth, we have heard some good suggestions for ensuring that any modernization of assessment areas should keep in focus the goal of encouraging banks to seek out opportunities in underserved areas, including in this morning's panel on assessment areas. The concern about CRA hotspots and credit deserts was echoed in the comment letters, and several commenters offered helpful suggestions for addressing this problem going forward. And the need to create incentives for CRA capital to reach underserved communities was a theme we heard in our regional roundtables from both bankers and community groups. Fifth, we have received many suggestions about how to increase the consistency and predictability of CRA evaluations and ratings. Although we are still in the process of working through the public's comments, those we have read so far suggest general support for the view that the CRA regulations and examinations would benefit from more clarity, consistency, and predictability. Likewise, there is an openness to expanding the use of metrics that evaluate components of a bank's activity on an assessment area level, while recognizing the importance of also leveraging performance context information, including of a qualitative nature, so that bankers and examiners are able to identify and understand local community needs. The first panel this morning on metrics and evaluating performance also helped further our understanding in this area, with particular focus on the investment behaviors of CRA-motivated banks and on how we might strengthen the CRA to better evaluate a bank's performance in meeting the credit needs of its communities. Sixth, in both comment letters and roundtables, community and consumer groups emphasized the historical context of the CRA as it relates to redlining practices.

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To that end, they strongly supported the CRA retaining a proactive focus on reaching all underserved borrowers, including low-income communities and communities of color. The central thrust of the CRA is to encourage banks to ensure that all creditworthy borrowers have fair access to credit, and, to do so successfully, it has long been recognized that they must guard against discriminatory or unfair and deceptive lending practices. This has been an excellent convening so far, and I want to thank you for sharing your knowledge and insights with us. The Federal Reserve is a research-driven institution, and we want to be sure that we are aware of all the latest research on the effectiveness of the CRA and what the research has to say about potential regulatory improvements. Today's conversation is an opportunity not only to hear from external academic researchers, but also to have a robust conversation with practitioners about how this research might inform the Board's work. This afternoon, I look forward to hearing the conversation on the effectiveness of the CRA, past, present, and future. I have had opportunities to hear directly from stakeholders in a variety of settings, kicking off with a community development visit in Baltimore last April and most recently in Denver, at our first regional roundtable. The Denver roundtable was attended by state member banks and was hosted by the Federal Reserve Bank of Kansas City. I appreciated the robust conversation among knowledgeable individuals whose work touches on the CRA every day. Sitting around a table together provided an opportunity for me to hear community bankers reflect on what has worked well for their communities and what they see as challenges, and to provide thoughtful suggestions on what they think might work best going forward. It was also helpful to be exposed to some differences of views. The best approach to implementing the CRA in today's environment is a complex issue, so I value hearing a wide range of suggestions. In closing, I want to reiterate my own commitment to strengthening the CRA, which is widely shared across the Federal Reserve System. We aim to promote more CRA activity, not less.

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We think that simplifying and clarifying the regulations while strengthening local community engagement will help us accomplish that goal. Thank you for your help in this process.

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FSB publishes Global Monitoring Report on Non-Bank Financial Intermediation 2018

The Global Monitoring Report on Non-Bank Financial Intermediation 2018 presents the results of the FSB’s annual monitoring exercise to assess global trends and risks from non-bank financial intermediation. The annual monitoring exercise is part of the FSB’s policy work to enhance the resilience of non-bank financial intermediation. It focuses on those parts of non-bank financial intermediation that perform economic functions which may give rise to bank-like financial stability risks (i.e. the narrow measure of non-bank financial intermediation).

Executive summary Non-bank financing is a valuable alternative to bank financing for many firms and households, fostering competition in the supply of financing and supporting economic activity. However, non-bank financing may also become a source of systemic risk, both directly and through its interconnectedness with the banking system, if it involves activities that are typically performed by banks, such as maturity/liquidity transformation and the creation of leverage. To assess global trends and risks in non-bank financial intermediation, the Financial Stability Board (FSB) has been conducting an annual monitoring exercise since 2011. With the 2018 Report, the FSB moves away from the term “shadow banking” and adopts “nonbank financial intermediation” (hereafter NBFI), to emphasise the forward-looking aspect of the FSB’s work. This change in terminology does not affect either the substance or the coverage of the monitoring exercise. This Report presents the results of the FSB’s eighth annual monitoring exercise. It covers data up to end-2017 from 29 jurisdictions, which together represent over 80% of global GDP. As in previous years, this Report compares the size and trends of financial sectors in aggregate and across jurisdictions based primarily on sectoral balance sheet data.

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The Report then focuses on those parts of NBFI that may pose bank-like financial stability risks (hereafter the “narrow measure”). Non-bank financial entities are included in the narrow measure if they perform one of the FSB’s five economic functions. This assessment is conducted on a conservative basis, reflecting the assumption that policy measures or risk management tools are not exercised (ie on a pre-mitigant basis). To read the paper: http://www.fsb.org/wp-content/uploads/P040219.pdf

http://www.fsb.org/wp-content/uploads/P040219.pdf

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Demographic Changes and Macroeconomic Challenges Keynote Speech at the G20 Symposium in Tokyo Haruhiko Kuroda, Governor of the Bank of Japan

Introduction I would like to express my sincere gratitude to G20 finance and central bank deputies and distinguished academics from around the world for attending this G20 Symposium organized by the Bank of Japan and the Ministry of Finance of Japan. This year, Japan assumes the G20 presidency for the first time. It is my great pleasure to co-host this symposium as one of the kick-off events of Japan's G20 presidency. When considering the relationship between demographic changes and economic developments, the work of Malthus naturally comes to mind. In the late 18th century, Malthus argued that the means of substance, particularly agricultural production, would limit population growth. Later, for some time, the population issue remained a minor topic in economics. However, as economic growth theory regained its central role in economics, the relationship between population and economic developments attracted increased attention once again. Furthermore, policy makers and the business community have increasingly been interested in the impact of demographic changes on the economy, as advanced and some emerging economies have experienced, or are expected to experience, declining and aging populations. In Japan, the working age population peaked in 1995 and the total population in 2008, and both have been declining since then. The share of the elderly population in the total population was 10 percent in 1985, but this increased to 28 percent in 2017. Among the G20 members, Japan is the most affected by the population issue. While some emerging economies in the G20 are now seeing an

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increase in their young-age labor force, these countries will also face the aging problem sooner or later. I believe it is important for G20 members to learn from each other's demographic conditions, institutional settings, and policy responses. Such mutual learning would be beneficial for the member countries when conducting policy management in the future. This is one of the reasons why we chose aging as one of the G20 agenda items this year. As is obvious from the discussions this morning -- and this will no doubt be confirmed this afternoon -- there are a number of issues to be considered when tackling the demographic problem. I assume that staff members in charge of this symposium have had much difficulty in framing discussion with a focus on critical issues, since there are so many different angles from which they can even begin approaching this problem. As I cannot touch upon all the issues in a limited time, I would like to concentrate on three basic questions here.

I. Impact on the Macroeconomy The first question is: "Does an aging and declining population hinder economic growth?" Many people might intuitively answer "yes." However, given the impact technological innovation can have, for example, the answer could be "yes" or "no." As policy makers, we are obliged to pursue appropriate policy measures so that the answer can become "no." Needless to say, an aging and declining population leads to a decrease in the labor force population and puts downward pressure on economic growth from the supply side. In addition, a simple back-of-the-envelope calculation suggests that per capita growth would be lower. This is because the reduced production of a declining labor force is shared with an increasing proportion of retired elderly people. If pessimism about future economic growth prevails, not only future but also present demand could be stifled as people are discouraged from current investment and consumption.

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An aging and declining population, however, does not necessarily push down macroeconomic and per capita growth rates. Based on growth accounting, the economic growth of a country is affected not only by demographic changes but also by capital accumulation and changes in total factor productivity. Even though demographic changes have a negative impact on economic growth, economic growth could be stimulated by promoting capital accumulation and innovation. In fact, we have seen recently in Japan how active investment in equipment and software has been substituting for human labor amid a declining labor force. There have been major innovations in areas such as AI and IoT, and in drug developments to tackle serious diseases. In order to promote such innovations, it is important to provide the best possible education for young people, and for middle-aged and elderly people to have access to recurrent educational opportunities. This will lead to increased labor productivity across all generations and to improvements in macroeconomic growth and per capita living standards. Changes in demography could encourage changes in a country's industrial structure. As aging proceeds, demand for labor-intensive services such as health care will increase. In Japan, the labor share of medical and care services in 2002 was about 7 percent, but it increased to about 12 percent in 2017. As a population ages and declines, the labor force also declines and labor market conditions in the medical and care service industries become very tight. Appropriate policy measures must be implemented to promote smooth labor movement between industries and to encourage innovation so that more people can receive proper medical and care services. Since demographic changes have an impact on a country's saving and investment patterns, they will also affect international capital flows and current account developments. Savings will generally decline as the working-age population declines and the elderly population increases.

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This is because the working-age population is likely to accumulate savings from a life-cycle perspective, while the elderly population is likely to dissave accumulated assets. However, the longevity of elderly people has also increased, due to advances in medical technology. Therefore, we must not simply assume that all elderly people dissave their assets. If the elderly assume that their life expectancy will be much longer than before, they could hesitate to dissave and choose to continue working in order to save more in the early stages of their elderly lives. Saving patterns may differ from country to country due to differences in social security systems. Regarding investment patterns, a country with an increasing working-age population tends to have abundant investment opportunities with higher growth potentials. However, there could be differences in investment developments among aging countries due to advances in innovation. To read more: http://www.boj.or.jp/en/announcements/press/koen_2019/data/ko190117b.pdf

http://www.boj.or.jp/en/announcements/press/koen_2019/data/ko190117b.pdf

http://www.boj.or.jp/en/announcements/press/koen_2019/data/ko190117b.pdf

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Debt dynamics Ben Broadbent, Deputy Governor for Monetary Policy of the Bank of England, at the London Business School, London.

Introduction and summary In mid-2007, as the first cracks in the financial system began to appear, some of the most indebted households in the developed world were not in the US or the UK but in the Netherlands. Average mortgage debt was almost twice average annual income. Yet over the following few years, there were almost no defaults on Dutch mortgages and associated losses for the lending banks were minimal (Chart 1).

In the UK, where households were less heavily indebted, mortgage losses were somewhat higher though still comparatively low. It was in the US – of the three, the country with the least mortgage debt – where rates of negative equity and ultimate default were by far the most severe.

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So at least among this mini-sample of three, prior levels of debt were not a good guide to the scale of the subsequent distress in the mortgage market (Chart 1). What did a little better as an advance warning signal was the prior growth rate of mortgage debt (Chart 2). The ordering, at least, is in line with post-crisis defaults in the three countries. To read more: https://www.bis.org/review/r190123a.pdf

https://www.bis.org/review/r190123a.pdf

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Brexit - implications for UK branches of German banks Prof Joachim Wuermeling, Member of the Executive Board of the Deutsche Bundesbank, at the Embassy of the Federal Republic of Germany, London

1 Introduction Ladies and gentlemen, From the perspective of a bank and from my perspective as a banking supervisor, the future regime under which banks and companies in general will operate after 29 March 2019 remains unclear. And whether we like it or not, a hard Brexit has become increasingly likely.

2 Implications of UK branches becoming third country branches This means that - given what we know at the moment - UK branches of German banks (and SSM banks in general) will need to become third country branches. Certainly, the PRA's temporary permissions regime buys time. Nevertheless, there is no alternative to conversion into third country branches. The PRA has already received some applications for third country branch authorisation in the UK. For German banks, unlike other SSM banks, there is no formal requirement for the home supervisor to approve a third country branch. However, given the aim of establishing a level playing field among all current and future SSM banks, you should expect the SSM to address certain requirements via other supervisory measures where necessary to ensure that the future set-up of the new third country branches is in line with SSM expectations. This means that the SSM will not accept empty shells, neither from incoming nor from outgoing banks. A third country branch will not be allowed to perform central functions for its SSM-domiciled group. And any outsourcing must not hamper the efficient and effective supervision of SSM entities.

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Not all SSM banks are currently fully compliant with the SSM's respective supervisory expectations. In particular, all banks must ensure that they have relocated sufficient staff to the EU27 entities. EU business must be booked from within the EU27. This will require significant asset transfers in several cases. Sufficient trading and risk-management staff as well as technical infrastructure are needed on site at the EU27 entities to ensure adequate risk management.

3 Split of responsibilities between PRA and SSM Making the transition from the EU28 to the EU27 as smooth as possible for the financial sector will require close cooperation between the SSM and the PRA. The details of such a split of responsibilities are currently being negotiated. I am convinced that London will remain an important financial centre after Brexit, and I have no doubt that the financial ties between London and the EU27 will remain strong - all of you will work to ensure that. Close cooperation and a continued dialogue between the supervisory authorities will therefore be necessary, especially in times of crisis. I believe that the SSM and the PRA should ensure information sharing and reciprocal consultation while respecting independent supervisory decision making in each jurisdiction. Now I'm sure you are wondering what a split of responsibilities would mean for UK branches of German (and other SSM) banks. The truth is: we can't really tell just yet. We'll have to wait for the final outcome of the negotiations between supervisory authorities. As I have said, these negotiations are already under way, and I am optimistic that they will be concluded soon. Overall, our goal must be to achieve an adequate level of information sharing and joint supervisory work that does not lead to an increased workload for all parties involved. Certainly, it will not be possible to develop a one-size-fits-all solution. The agreement on a split of responsibilities will need to leave room for accommodating specific cases. On the basis of the agreement, the PRA plans to process applications for third country branches.

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4 Conclusion Ladies and gentlemen, In the short run, the temporary permissions regime will mitigate the outcome of a possible hard Brexit. Nevertheless, thorough preparations by financial institutions are necessary. What happens in the long run depends on how Brexit re-shapes the European financial system. Where does all this leave us? In a way, you could simply say: uncertainty continues. But we should not forget that we have made quite some progress since the referendum in June 2016. At that time, Brexit and its potential repercussions were essentially a black box. Since then, both financial institutions and supervisors have put tremendous effort into better understanding and preparing for every possible outcome. And while some tasks are yet to be completed, most banks are well advanced in their preparations.

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Risks to banks - from inside and out Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the 14th Asia-Pacific High-level meeting on Banking Supervision, Sydney

Ladies and gentlemen, It is a pleasure to be here today! And not only because it allows me to escape the cold German winter, but also because this meeting allows us to share views from opposite ends of the world - views from Asia and Australia and views from Europe. The crisis has shown how important it is to do just that. How important it is to be aware of what's going on elsewhere, of how closely markets and market participants are interconnected. After all, a crisis that breaks out on one side of the globe can quickly spread to the other. So, being aware is one thing. But the crisis forced us to go further; it forced us to join forces - not only in overcoming problems as they arose, but also in revamping the regulatory and supervisory framework afterwards. This happened at the global level - Basel III - and at the regional level. In Europe, policymakers went further than anywhere else. At the height of the crisis, they decided to set up a banking union. The first step was to take banking supervision from the national to the European level. So, in 2014, the ECB became responsible for supervising banks in the euro area. Has this worked out? I still remember that, back in 2014, I heard quite a few critical voices. Not everyone believed that European banking supervision would actually work. Four years later, this has changed. European banking supervision has been set up, it is running smoothly, and it contributes to making banks safer and sounder. But it was quite some job, I can tell you. I remember the early days, when we were just a handful of people sitting in a half-deserted building in Frankfurt.

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I remember how we began to hire staff - around 1,000 - for the ECB, and how we began to bring together the supervisors in national authorities, supporting them in adopting the new European supervisory approach. I remember the comprehensive assessment we carried out on the banks that we would later supervise. We were like a start-up; we still are, in fact. We are constantly innovating, learning and growing together as a European team of supervisors. And this European aspect is crucial. As European supervisors, we can take a higher vantage point; we can see and act across borders. As a national supervisor at the Federal Financial Supervisory Authority and the Deutsche Bundesbank, I supervised 20 large banks - all from Germany. In the SSM, we supervise around 120 large banks from across the euro area. You can imagine the greater depth of insight that we gain. We benchmark all these banks against their peers; by comparing them we can more easily spot new trends, new risks and new vulnerabilities. We can clearly distinguish the nodes and links of the European banking sector. And see what works and what doesn't - both on the banking and the supervision side. Let me give you just one example. It's no secret that European banks have a profitability problem. In analysing this problem, we benefited a great deal from our cross-country perspective. We could identify a number of banks that constantly outperform their peers, and we could assess the factors behind their success. This would not have been possible if we had looked only at a national sample of banks. But now that I have lavishly praised the concept of European banking supervision, let's turn to the banks and the risks they face.

Risks from the outside - the economy, geopolitics and technology And there are plenty of risks. Plenty of risks that interact in complicated ways. So, for brevity's sake, I won't address all the risks that exist but will focus on just a few. I will start with one of the issues that has, unfortunately, become a hallmark of the euro area banking sector: non-performing loans, or NPLs. In early 2015, significant institutions in the euro area held almost €1 trillion worth of bad loans on their balance sheets and the aggregate NPL ratio stood at 7.5% on average.

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This average, however, masks big differences: NPL ratios ranged from around 1.5% in Luxembourg to more than 45% in Greece. The banks therefore had a heavy burden to carry. After all, NPLs require special care and so tie up management resources. They also pose a higher risk of losses, require provisions, tie up capital and affect lending. Their effect on lending is what makes NPLs a problem that reaches beyond the banks. The euro area economy mostly relies on banks as a source of credit - much more so than many other economies. This is particularly true for small and medium-sized enterprises, which form the backbone of the economy. In the EU, SMEs account for more than 50% of value added and more than 60% of employment. Altogether, 99% of all enterprises are small and medium-sized. The three most important sources of financing for SMEs are bank loans, leasing and credit lines. So they do rely heavily on banks. This makes them somewhat vulnerable. In crises, banks tend to charge higher premiums when lending to SMEs. And, as an ECB study shows, this premium is in turn partly driven by the amount of NPLs on a bank's balance sheet. The more NPLs a bank holds, the less it lends to the economy. So, it was clear from the start that NPLs were not just a problem for banks and their supervisors. Other national and European authorities had to act as well. As for us supervisors, dealing with NPLs is a core task! We benefited from our European point of view, from being free of national traditions. We drew, for instance, on the experience of countries such as Ireland which had already successfully dealt with NPLs. And we were able to compare and draw lessons from the different legal and judicial environments in 19 countries. Building on all these insights, we developed a harmonised European supervisory approach for tackling NPLs. This was not easy, though, as we met with considerable pushback. But we nevertheless moved ahead. After first taking stock, we pursued a two-pronged approach from 2015 onwards: first, directly addressing legacy NPLs; second, preventing new NPLs from piling up. On this basis, we devised a harmonised approach that rests on three pillars. The first pillar is qualitative guidance to banks on how to develop and implement strategies to reduce NPLs. These strategies should contain targets for reducing NPLs at the portfolio level over a three-year horizon.

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But our guidance simply outlines best practices in devising the strategies and lists tools for implementing them. As no two banks are alike, each bank needs to pursue an individual strategy and meet individual reduction targets. It goes without saying that we diligently monitor their progress. The second pillar is a quantitative addendum to this guidance, in which we specify our supervisory expectations for the provisioning of new NPLs. These expectations depend on the extent to which NPLs are secured. For fully unsecured exposures and unsecured parts of partially secured exposures, we expect banks to achieve 100% coverage within two years after a loan has been classified as non-performing. For secured NPLs, the limit is seven years. The third pillar is a framework to address the stock of NPLs. Within this framework, we formulate, for each bank, our expectations regarding the provisioning of legacy NPLs, bearing in mind the general expectations on provisions that I just outlined. Our assessment of each bank's implementation of our qualitative and quantitative guidance is part of our bank-specific Supervisory Review and Evaluation Process, or SREP for short. At the same time, an action plan to tackle NPLs was developed at the political level. This plan set out the need for action in three areas: first, banking supervision; second, insolvency and debt recovery frameworks; and third, secondary markets for distressed debt. And since 2015, we have made real progress in bringing down the level of NPLs. The volume of NPLs has declined by almost €400 billion since that year. The average NPL ratio now stands at just over 4%, around €600 billion in absolute terms. So things are improving significantly, but there is still some way to go. NPLs are among the biggest challenges facing banks in the euro area; it is essential that banks complete the clean-up of their balance sheets as long as the sun is shining. But banks and supervisors cannot focus solely on the past, on legacy assets. We must also look to the future and watch out for the risks that are still beyond the horizon or just appearing on the horizon. While I have just praised the banking union as a major step towards a united Europe, one country is about to take a step in the opposite direction. Brexit is about to happen - or so it seems.

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The official date for the United Kingdom to leave the European Union is 29 March 2019. As of today, however, it is still unclear how this will happen - if it happens at all. The worst scenario would be a Brexit without any agreement between the United Kingdom and the EU on their future relationship. Despite all the uncertainty, one thing is clear: Brexit will change the shape of the European banking sector. In the first place, the large number of banks that are located in the United Kingdom and do business in the EU will have to find new ways of accessing the European market after Brexit. And this is relevant for us supervisors, of course. Over the past two years, we have clearly set out what we expect from banks relocating to the euro area. We have published information on our website; we have talked about the issue in interviews and speeches; and we have had intense discussions directly with the banks. We have urged and pushed them to prepare for all potential outcomes of the political process. At present, most banks relocating to the euro area have made reasonable progress in preparing their move. But it's not just banks located in the United Kingdom that will be hit by Brexit. Euro area banks rely, for instance, very much on central counterparties, or CCPs, in the United Kingdom to clear derivatives. With Brexit, they might lose access to these services, and this might disrupt their business and the markets, and in turn threaten financial stability. The European Commission has acknowledged the problem and plans to take temporary measures to preserve access. While this is certainly good news, it is merely a stopgap. There is no time to relax; there is just a little more time to prepare. Now, Brexit at least offers an opportunity to think about CCPs and concentration risk in more general terms. The market for clearing is highly concentrated. While I do see the benefits in terms of efficiency, I also see the risks. And this is something we definitely need to discuss. I have now focused on two challenges that are more or less European: NPLs and Brexit. There are, of course, many more challenges, and these affect banks not only in Europe but worldwide. There are geopolitical uncertainties, for instance. It seems that nationalism and, thus, protectionism, is on the rise. In the long run this will hurt the

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economy and everyone will be worse off, including those who appear to benefit from protectionist measures at first glance; the current trade tensions are a case in point. Then there are financial market risks. Interest rates are low and liquidity is still abundant and cheap, but these conditions will not last forever; there is the risk of a snapback in markets. At the same time, technological progress might change the business of banking and the structure of the sector. This could be an opportunity; but it may also be a risk if banks fail to adapt.

Risks from the inside - governance, culture and ethics Ladies and gentlemen, banks have to deal with many risks these days. And while it seems that the risks have grown, it should be clear that risks are an inherent part of a bank's business. In fact, what distinguishes a good bank from a bad bank is how it deals with risk. And in this regard, the enemy all too often comes from within. After all, banks are managed by people. And people make mistakes from time to time; they are often biased when taking decisions under uncertainty and some people have skewed ethics. The result can be bad risk management or even outright misconduct. Neither is acceptable and each can damage the reputation of a bank, drive away its customers and diminish its capital. Each can bring down a bank and harm others. For policymakers, issues of misconduct can bring additional challenges. Money laundering is a good example. Recent cases have shown that it often reaches across borders and requires different authorities to act. In Europe, national authorities are in charge of anti-money laundering, AML for short. The ECB has no AML mandate, but as European banking supervisors we also have to take relevant risks into account. We do so, for instance, when we assess acquisitions of qualifying holdings, or when we assess whether banks' managers are fit for their jobs. Prompted by the recent scandals, European policymakers have now taken several initiatives, one of their aims being to strengthen the cooperation between national AML authorities and European banking supervisors. For instance, new European legislation provides that the ECB and national AML authorities exchange relevant information.

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To better integrate findings from national AML authorities in prudential supervision, ECB Banking Supervision is setting up an AML coordination function which will have three main roles: to handle interactions with national AML authorities, raise supervisors' awareness about money laundering risks in banks, and be a centre of expertise on prudential AML topics. But AML is just one example. More generally, good governance, with the right checks and balances in place, can keep such problems from emerging. Governance has been neglected by regulators and supervisors for far too long. I see it as a crucial topic for the years to come. For European banking supervision, governance is a key issue - and has been from the very beginning. The quality of a bank's governance is one of the four pillars of our SREP. How could we judge a bank to be safe and sound without assessing its governance framework? As part of our SREP, we also assess the banks' risk appetite frameworks, their RAFs. We look at whether banks are fully integrating the policies, processes, controls, systems and procedures set out in their RAF into their decision-making processes and their risk management. We also assess whether their RAF is aligned with their business plans, strategies, capital planning and remuneration schemes. Easier said than done, as I'm sure you know. We do not look at banks in isolation. As I just mentioned, benchmarking is a key supervisory tool. We carry out horizontal analyses on a host of issues, including governance, which was the subject of a thematic review we published in 2016. However, all of this is still work in progress - for supervisors and for banks. That banks are not yet where they should be becomes clear when we look at the recent scandals in the headlines: money laundering, tax evasion, manipulation of rates and prices - you are no doubt familiar with these cases. They are not confined to a single region, nor to a single bank. While good governance can take banks a long way in behaving responsibly, we have to dig deeper. Ultimately, ethical behaviour is either helped or hindered by a bank's culture. So we do not want to see a culture that tolerates misconduct or even encourages it. But it is not in a supervisor's power to shape a bank's culture. Ultimately, the onus is on the banks and their stakeholders to bring about a cultural shift.

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The first step is to understand that staying in business for the long term is more important than ramping up profits in the short term. In that sense, a good reputation is worth more than a dodgy deal - no matter how much profit that deal promises. Shareholders, too, should focus more on the sustainability of a bank's business model, and thus their investment, and less on receiving as high a dividend as possible in the short run. This understanding is only the first step. The culture of a bank is shaped both ways, top-down and bottom-up. The management of a bank plays an important role in setting the tone and defining expected behaviour. But this is not enough. When it comes to culture, action speaks louder than words. Staff will take the behaviour of management as a cue of what is acceptable and what not. Managers have to lead not only by words but by example. Incentives are another important point. Staff will know which behaviour earns them a bonus or gets them promoted. That's why European banking supervisors assess remuneration schemes, including the extent to which integrity matters in promotions. More generally, integrity is one of the five criteria we apply when conducting fit and proper assessments of potential bank managers. And this is key. Culture tends to be self-perpetuating, because people with certain values tend to hire people who hold the same values. Breaking this cycle is difficult, but necessary. But simply hiring people with different values and perspectives will not suffice. They then must be encouraged to speak up - to call foul when necessary. Here, we supervisors can help again. The ECB has set up a breach-reporting mechanism through which whistle-blowers can share information with us. Last year, we received more than 120 reports, an increase of about 40% from 2017. So, there are things that can be done, but we should not expect miracles. Culture is a sticky thing that tends to change very slowly. I am sure it will keep us busy for some time to come.

Conclusion Ladies and gentlemen,

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This is it; this is how the banking world looks from a European point of view. Banks have become more resilient over the past years, but they still face a number of risks and challenges. Some of these risks and challenges are indeed European, but some are global in scope. And a number of risks are universal in the sense that they emerge from within a bank: weak governance, bad risk management, unethical behaviour. So plenty of work lies ahead for banks and supervisors. But for now, I am looking forward to listening to you, and to discussing our thoughts and ideas. Thank you for your attention.

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On the importance of real estate statistics Peter Praet, Member of the Executive Board of the European Central Bank, at the International Conference on Real Estate Statistics, Luxembourg.

I am very pleased to open this session of the International Conference on Real Estate Statistics, which was organised by Eurostat in close cooperation with the ECB. The quality of real estate statistics is an issue not just of relevance to statisticians, but increasingly to policymakers, too. The real estate market has been shown to be a key transmitter of shocks in advanced economies - and, by and large, the real estate market in the euro area as a whole is no different.

The importance of real estate markets for euro area stability Residential real estate (RRE) is the main component of euro area household wealth. Housing accounts for around 50% of asset holdings and is largely financed through borrowing, with mortgages making up 85% of household liabilities. The corollary is a tight linkage between RRE prices and the balance sheets of the euro area banking sector. Mortgage loans account for between 40% and 90% of total lending by euro area banks to households across EU countries. Falls in prices therefore affect the euro area business cycle through two main channels. First, by reducing households' net wealth, which has decelerator effects on consumption, and weakening banks' balance sheets through the decline in collateral and property values (the asset valuation channel); and second, by increasing the riskiness of households and of construction firms, prompting banks to tighten their lending standards (the credit risk channel).

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ECB analysis finds that housing market variables in the euro area have predictive power for future prolonged contractions. The effects of RRE bubbles on financial stability are also well known. More than two-thirds of the past 46 systemic banking crises were preceded by boom-bust patterns in house prices. And recessions coinciding with house price busts have been found to yield a cumulative loss in GDP that is around three times greater than in recessions without such busts. Developments in the commercial real estate (CRE) sector are also relevant for the business cycle and, even more so, for financial stability. Price collapses in CRE markets have played a central role in a number of recent financial crises, such as those in the Nordic countries and the United States in the early 1990s, in some Asian economies in the late 1990s, and in some EU countries during the global financial crisis. CRE lending is less significant in terms of volume than RRE lending in the euro area, but it still makes up between 20% and 50% of total bank lending to corporates. And historically, losses on banks' CRE exposures during crises have often been higher than losses on their RRE exposures, despite those exposures being lower. This is because most CRE loans are arranged on a non-recourse basis, coupled with the fact that CRE property is much less liquid than RRE property. So it is highly important for policymakers to have a good overview of the real estate market. In order to mitigate the build-up of systemic risks and calibrate policy responses, policymakers need to be able to understand the underlying factors driving both fundamental and non-fundamental real estate prices, the dynamics of lending underlying price growth, the level and evolution of household indebtedness and the quality of banks' mortgage loan portfolios. While this mostly applies to macroprudential policies, it also applies to monetary policy, particularly in respect of the RRE sector. It is essential for us to be able to distinguish clearly between country-specific developments in real estate markets that warrant responses from macroprudential authorities, and area-wide developments that might, in some circumstances, warrant a monetary policy response.

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And this distinction is especially important in a low interest rate environment.

The need for higher-quality real estate statistics in the EU However, in the wake of the great financial crisis, most advanced economies realised that significant data gaps were severely hampering their ability to monitor developments in real estate markets. This led to the G20 Data Gaps initiative, which recommended improvements in both RRE and CRE statistics. But in the euro area, statistical challenges remain in both areas. For RRE markets, the quality and granularity of price data is relatively good. The main challenge lies in the availability of harmonised and granular data on lending standards for RRE. At present, only average figures are available for most countries: information on the distribution of lending standards is still scarce and does not break down the borrowing population by relevant segments, such as first-time buyers, buy-to-let buyers or owner-occupiers. And the definitions of lending standards across EU countries' indicators are still not adequately harmonised. For CRE markets, statistical gaps are more pervasive, with even the available price data not being of sufficient quality. A study by the ECB and Eurostat concluded that only nine EU countries have their own commercial property price statistics, six more obtain them from private sources, and 13 EU countries have no price data at all. Where CRE statistics from official sources are available, they are not derived using a harmonised methodology. There is similarly patchy coverage in statistics for rent indices and rent yields, vacancy rates, transaction numbers and values, and to a lesser extent, construction starts and construction completions. As a result, policymakers are often forced to rely on non-data information sources, such as surveys or market participants' reports. Data on the financial system's exposures to commercial real estate have comparable shortcomings, while information on lending standards is very limited.

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Closing these data gaps would offer several advantages for policymakers. First, it would enhance the ability of macroprudential authorities to assess systemic risks ex-ante. For RRE, more granular data on lending standards would enable the identification of risks that may be building up in the tail of the distribution, risks that are typically hidden by average figures - for example, loans with high debt-to-income (DTI), debt-service-to-income (DSTI) or loan-to-value (LTV) ratios. In the CRE segment, wider data coverage would provide a clearer picture of market developments and improve the assessment of potential vulnerabilities. Data on rent indices and rent yields for CRE, for example, would help indicate whether a given price level reflects realised returns, or inflated expectations of future returns. Details on vacancy rates and building permits would help in assessing property supply and demand. And transaction numbers and values could serve as an indicator of market liquidity, conveying information on potential market overheating or on vulnerability to fire sales should banks or investors have to quickly recover their positions. More complete CRE data would also help inform monetary policymakers of the impact of the policy stance on CRE markets. Decomposing the rental yield into the risk-free rate and the risk premium can help in identifying whether price developments reflect fundamentals. A highly compressed or negative spread between yields and the risk-free rate can indicate an overvalued property market. Second, harmonising key definitions and concepts would facilitate cross-country comparisons of emerging risks and of the prudential policy stance. For example, at present the definition of income in the denominator in DTI and DSTI ratios supplied to the ECB is not homogeneous: some countries base these ratios on net income and others on gross income. Using a gross income concept leads to lower levels of DTI or DSTI than using a net income concept. Another example is that valuation methodologies for RRE and CRE are not aligned, with Germany and Austria using a long-term sustainable value

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concept and others using true market value. Developments in valuations across countries are therefore not comparable. The third benefit from higher-quality real estate statistics would be for policy implementation. Greater granularity in RRE data would help in calibrating macroprudential policies and tailoring them to specific segments of the borrowing population. At present, most countries rely on qualitative methods for policy calibration, as the lack of granular data on lending standards prevents them from using more sophisticated quantitative methods. For the CRE sector, improved data coverage would enable policymakers to identify local price bubbles before they enter into national data. That would in turn facilitate region-specific policy guidance, such as the introduction of lending limits on commercial property in a specific city. Finally, more complete data would improve ex post assessments of policy effectiveness. Once macroprudential policies are introduced, it is far more difficult to monitor their impact on the target variables if only aggregate data are available. In addition, more granular information on the distribution of credit standards would allow policymakers to assess whether policies are effective in curbing tail risks.

Closing the gaps in real estate statistics Work is now under way to close the gaps in real estate statistics. In 2016, the ESRB published a Recommendation laying the foundations for improving the availability and comparability of data on real estate markets in the EU. The Recommendation on closing real estate data gaps provides detailed definitions of the indicators needed to monitor real estate sectors across countries, and sets data requirements in terms of granularity and frequency. It includes a specific requirement for the European supervisory authorities to disclose annually aggregated information on the exposure to real estate markets of the entities under their supervision. The need for detailed data on real estate markets for prudential purposes was also recognised by the Economic and Financial Affairs Council in 2017.

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That said, statisticians in Europe - and further afield - still need to resolve a number of technical issues in terms of methodology and data sources. In line with the division of responsibilities at the European level, this work is being led by the ECB in the field of financial variables and by Eurostat for the physical market variables. The two institutions are cooperating closely on the topic and we are confident that they will make good progress. Real estate data is not merely a technical issue. The availability of these data could have profound consequences for macroprudential and monetary policymaking and so for all euro area citizens. It is therefore an opportune time for statisticians and other stakeholders to meet to discuss these issues and I trust this conference will help move the debate forward.

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International hacker-for-hire jailed for cyberattacks on Liberian telecommunications provider

A British cyber criminal has been jailed for conducting attacks that disrupted a Liberian telecommunications provider, resulting in losses estimated at tens of millions of US dollars. Daniel Kaye pleaded guilty in December 2018 to creating and using a botnet and possessing criminal property. He was sentenced to 2 years and 8 months following an investigation led by the NCA’s National Cyber Crime Unit. Kaye began carrying out intermittent DDoS on the Liberian telecommunications provider Lonestar MTN in October 2015 using rented botnets and stressor. He was hired by a senior official at Cellcom, a rival Liberian network provider, and paid a monthly retainer. From September 2016, Kaye used his own Mirai botnet, made up of a network of infected Dahua security cameras, to carry out consistent attacks on Lonestar. In November 2016, the traffic from Kaye’s botnet was so high in volume that it disabled internet access across Liberia. The attacks had a direct and significant impact on Lonestar’s ability to provide services to its customers, resulting in revenue loss of tens of millions in US dollars as customers left the network. A European Arrest Warrant was issued for Kaye and when he returned to the UK in February 2017, he was arrested by NCA officers.

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World Economic Forum Annual Meeting

You may visit: https://www.weforum.org/events/world-economic-forum-annual-meeting

https://www.weforum.org/events/world-economic-forum-annual-meeting

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Hearing of the Committee on Economic and Monetary Affairs of the European Parliament Introductory statement by Mr Mario Draghi, President of the European Central Bank, at the ECON committee of the European Parliament, Brussels.

Mr Chairman, Honourable members of the Economic and Monetary Affairs Committee, Ladies and gentlemen, It is a pleasure to be back at the European Parliament and to appear before your Committee. I am happy that you have chosen the euro project and its achievements over the past 20 years as the topic for our discussion today. I will start on the substance without further ado, discussing in turn the internal and external dimensions of the euro area. I will then argue that, building on what we have already achieved, our duty today is to continue to make progress in ensuring that all of the euro's benefits are realised in full.

The euro's internal dimension The euro was introduced to deepen the Single Market and safeguard its integrity. It continued the European project of reducing cross-border barriers through common endeavours and common policies. It followed the spirit that was already imbued in the Schuman declaration in 1950: building Europe "through concrete achievements". As a result, our economies are now integrated to a point that was unimaginable not so long ago. The euro was designed to be a trusted and stable currency. And the euro has indeed provided two decades of price stability, thereby upholding people's

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confidence in the value of their savings. Stable prices also facilitated firm investment and the creation of new jobs. Today, there are 20 million more Europeans in employment than 20 years ago in the 19 countries that currently make up the euro area. And since the creation of the euro, the labour force participation rate has risen from 59% to 67%, its highest level ever. The two decades in which the euro has existed have been exceptional. The first decade was the culmination of a 30-year period of macroeconomic stability, also known as the Great Moderation. Inflation averaged close to 2% and the ECB ensured price stability mainly by adjusting its key interest rates. The second decade produced the worst economic and financial crisis since the Great Depression. As I had the opportunity to discuss at length in my remarks at the Parliament's plenary debate two weeks ago, as a response to the crisis we had to deploy new instruments to safeguard the effectiveness of our monetary policy and stabilise the euro area economy. Thanks to the collective efforts of all European citizens, the euro area has emerged from this crisis. The results of their and their representatives' determination have been tangible: 22 consecutive quarters of economic growth, the unemployment rate at its lowest level since October 2008, and wages and incomes on the rise. However, over the past few months, incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors. The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment. At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. This supports our confidence in the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus remains essential to support the further build-up of domestic price pressures and headline inflation developments over the medium term.

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This will be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council's inflation aim in a sustained manner.

The euro's external dimension The benefits of the euro have not been limited to the European internal dimension. Standing together within the Economic and Monetary Union (EMU) allowed us to retain sovereignty that would otherwise be lost by individual countries in a highly integrated world economy. As already envisaged at the time of its creation, the euro symbolises the unity of a European continent that is better able to exert global influence. Our togetherness in the EMU gives us "a greater say in international negotiation" and enhances our "capacity to influence economic relations" - to quote the Delors Report. Over the past 20 years, the euro has become the second most important currency in the international monetary system. Somewhere between 20% and 40% of global foreign reserves, foreign exchange transactions, international debt and international trade transactions are denominated in euro. And over 50 countries or territories use or link their currency to the euro. This global standing brings benefits. For one, it lowers the transaction costs of trading internationally, making euro area firms more competitive. It also adds breadth and liquidity to euro area financial markets, allowing domestic and international investors to allocate economic resources more efficiently. And it lowers the cost of global capital market financing for euro area borrowers, including corporations, financial institutions and public entities, thus benefiting firms, households and taxpayers. Of course, the international role of the euro also brings challenges, such as greater exposure to global foreign financial developments and potential changes to the monetary policy transmission process. The international benefits of sharing a currency go beyond the monetary sphere.

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In a world with deep economic and financial interlinkages, international cooperation is essential and we can more effectively promote European ideas and interests by speaking together. Indeed, the euro area's voice has been crucial in strengthening the international financial regulatory framework after the global financial crisis. Today, the Single Supervisory Mechanism is the largest banking supervisor globally and successfully contributes to shaping the international supervisory framework. Since the global financial and euro area debt crises, however, the euro's international role seems to have gradually eroded. While its importance as the currency of invoice for international trade transactions has remained broadly stable, its role in global foreign reserves and global debt markets has declined. This decline is a symptom of the fault lines in EMU exposed by the crises. Concerns about the resilience of the EMU architecture and about financial fragmentation underpinned this erosion. Indeed, stability, financial depth and liquidity are among the key determinants of an international currency. European policymakers are now paying closer attention and various calls have been made in recent months for the euro to assume a stronger international role. The Euro Summit of December 2018 encouraged work to be taken forward to this end. The international role of the euro is supported by the pursuit of sound economic policies in the euro area and a deeper and more complete EMU. And this requires further efforts along the path of deeper integration.

Completing the Economic and Monetary Union The past 20 years have revealed beyond doubt how challenging ensuring economic prosperity and stability can be. This was true both inside and outside the euro area. Nonetheless, these years also demonstrated that such a shared challenge is best faced collectively. To realise in full the benefits of the euro, we need to have the same components that made the euro a reality in 1999.

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On the one hand, we need national reforms to promote sustainable economic convergence. Under any monetary system, higher growth potential can only be achieved through continuous reform efforts. As the convergence process is primarily driven by structural factors, this is a key responsibility of Member States. On the other hand, Europe can make a difference by supporting and facilitating such reform efforts. Our togetherness represents a unique competitive advantage, and we should capitalise on this. First, we can build on the synergies between EMU and the Single Market. The Single Market is indeed one of the most powerful tools we have to unlock the mechanisms that will raise productivity. In particular, a genuine capital markets union (CMU) would not only ease and diversify access to funds for households and firms, thus fostering investment and innovation. It would also enable risk diversification and thus compensate for temporary drops in activity locally - the so called private risk-sharing -, thereby reinforcing the overall resilience of EMU. Second, it is essential to complete the projects that we initiated during the crisis, namely the banking union. Together with CMU, a complete banking union would deliver meaningful private risk sharing that is currently lacking in the euro area in comparison to the US. But private risk sharing, to be effective, needs to be supported by other policies. We should thus rekindle trust in our economic and fiscal framework, by making it more effective in ensuring sound policy making at national level. These actions can also be further supported at the European level by the recent decisions to launch an instrument for convergence and competitiveness for the euro area. To tackle future cyclical crises, the two layers of protection against shocks - the diversification of risk through the private financial system on the one hand, and public countercyclical support through fiscal instruments at the national and European levels on the other - need to interact in a complete and efficient manner.

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Achieving these reforms is not idealistic, nor utopian if we work together. And at the Euro Summit in December, leaders renewed their political commitment to strengthen EMU. If we want to realise in full the benefits of the euro, we need to capitalise on this commitment and translate it into concrete policy actions.

Conclusion Mr Chairman, Honourable members of the Economic and Monetary Affairs Committee, I have used the word "together" several times today. As this is the last time that we will be together in this legislative term, let me add a few words to you personally. I would like to thank you all for the role that this Committee has played over the past years. In my first hearing here, I remember saying that was my first exercise in democratic accountability with the European Parliament and how grateful I was for it. Many more would follow and you effectively ensured that the ECB would be accountable and therefore could legitimately be independent in carrying out its monetary policy. But I am also grateful for the support that this Committee always expressed for the actions of the ECB, a sincere support because it built on the voice of European citizens and an important support that helped the ECB through the many difficult times of the past years. As co-legislators your role was also essential in delivering reforms that further strengthened our Union. This Committee, and the European Parliament more generally, has been in my experience an attentive interpreter of the demands of European citizens. It is only by doing so that the trust in the legitimacy of the EU's institutions and policies is built, making it possible to achieve a more effective and inclusive Union. As I have argued elsewhere, citizens demand, and Parliament may help in achieving, a "more perfect Union".

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A Union that will continue providing its citizens with physical and economic security, while also promoting the values of an open, democratic and peaceful society. Thank you for your attention. I am now at your disposal for questions.

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Seminar on Innovation for Inclusive Development Tokyo, Japan, Sponsored by the Ministry of Finance of Japan, the World Bank Group and the Asian Development Bank

We have very important presentations at the G20 symposium at Chinzanso, Tokyo, Japan.

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To read more: https://www.g20fukuoka2019.mof.go.jp/ja/meetings/pdf/20190116_1.pdf https://www.g20fukuoka2019.mof.go.jp/en/meetings/20190117.html

https://www.g20fukuoka2019.mof.go.jp/ja/meetings/pdf/20190116_1.pdf

https://www.g20fukuoka2019.mof.go.jp/en/meetings/20190117.html

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