[PPT] - Financial System Mark Carney Governor of the Bank of England 18 PowerPoint Presentation

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Mark Carney Governor of the Bank of England 18 October 2019

Addressing the Growing Challenges in the International Monetary and Financial System

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Asymmetry at heart of IMFS is growing

…yet network effects mean US $ dominates international trade and finance US share of global economy shrinking…

US developments have large spillovers, even for countries with limited direct exposure

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For EMEs, US $ dominance reduces sustainable capital flows

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1 2 3 4 5 6 1 2 3 4 5 6 1980 1985 1990 1995 2000 2005 2010 2015 Number % of GDP

Number of EME crises (rhs)

Net private capital flows to EMEs (lhs)

Capital flow volatility reduces potential growth and increases risk of crises,

encouraging EMEs to accumulate costly reserves as insurance

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Pipes

Structure of the global financial system

Push factors

Determinants of global financial conditions

Pull factors

Domestic institutional frameworks

A holistic Capital Flows-at-Risk framework: Pull, Push, Pipes

CAPITAL FLOWS-AT- RISK

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Reforms to domestic institutional “pull factors” have substantially increased sustainable capital flows

Probability density Capital flows as a % of GDP

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2 4 6 8 10 12 14 16 18 0.00 0.02 0.04 0.06 0.08 0.10 0.12 Asian Financial Crisis 2008-2018 A B

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Push factors weighed more heavily over the past decade,

ffsetting some of the improvement in pull factors

Probability density Capital flows as a % of GDP

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2 4 6 8 10 12 14 16 18 0.00 0.02 0.04 0.06 0.08 0.10 0.12 Negative push shock B C

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2008-2018

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Structure of IMFS could overwhelm EMEs’ efforts to increase sustainable capital flows

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1 2006 2018 2030a 2030b Capital Flows-at-Risk as a % of GDP Pre-crisis baseline ∆ FX share ∆ Flow composition ∆ Mutual funds Total

Impact of the increasing role of investment funds Impact of the shift towards market-based finance Impact of a higher share of FX-denominated debt in EMs Total 2030 excluding growth in EME external balance sheets 2030 including growth in EME external balance sheets

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IMFS asymmetry increases risks of a global liquidity trap

IMFS structurally lowering global equilibrium interest rate, r*, by:
feeding a global savings glut: EMEs defensively accumulate reserves of safe

US $ assets against backdrop of inadequate and fragmented global financial safety net;

lowering the rate of global potential growth due to less sustainable cross

border flows; and

increasing the downside skew and fattening of the left-hand tail of likely

economic outcomes.

Increasingly integrated world: global r* exerts greater influence on domestic r*.
Strains become more evident when – as recently – US conditions warrant tighter

policy there than elsewhere.

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What then can be done?

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1.0 1.5 2.0 2.5 3.0

1.0
0.5

0.0 0.5 1.0 1.5 2.0 Inflation (%) Excess demand (%) Excess supply (%)

Short term: central banks must play hand they’ve been dealt

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Use full flexibility in flexible inflation targeting

UK monetary policy trade-offs in successive 3-year ahead Inflation Report projections

Preferred trade-off if λ=1 Preferred trade-off if λ=0.1 August 2017 August 2016

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Short term: central banks must play hand they’ve been dealt

Probability density Capital flows as a % of GDP

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2 4 6 8 10 12 14 16 18 0.00 0.02 0.04 0.06 0.08 0.10 0.12 Average macro-prudential stance A B Tighter macro-prudential stance

Macroprudential policy in EMEs can reduce Capital Flows-at-Risk 11

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Medium term: reshuffle the deck – reform current IMFS

Address pull factors in EMEs: Reinforcing monetary stability, including by safeguarding central bank independence Ensuring resilience of domestic financial sector Moderate push factors: Strengthen resilience of banks at the core of the global financial system Make sure investment funds prudently manage leverage and liquidity Fix the pipes of the global system: Reinforcing the Global Financial Safety Net, by ensuring that IMF resources are maintained Further improve IMF surveillance for analysing spillovers and traction to support coordinated actions

EME

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Long term: change the game – move to a multipolar system

Benefits of multiple reserve currencies Diversification: the supply of safe assets increases, lowering the downward pressures on the global equilibrium interest rate Reduced spillovers from the core, including less synchronised trade and financial cycles Easier to manage coordination problems No illusions that IMFS can be reformed overnight

Network effects reinforce dominance of US $
Transition to a new global reserve currency didn’t proceed smoothly in the past and

may not in the future

Doesn’t make sense to swap one reserve currency for another; a multipolar world

deserves multipolar system

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Consider for long term: Synthetic Hegemonic Currency

 Central bank liabilities are safe, already widely-accepted means of payment  Reliable, instantaneous, low cost domestic and international payments  Addresses many of the shortcomings of private sector solutions (privacy, treasury management, trust)  Decision between wholesale (SDR) vs. retail (SHC) must be mindful that usage as medium of exchange has historically driven reserve currency adoption

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Publicly issued basket of central bank digital currencies made widely available to settle

payments and store value

SHC

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