The COVID-19 crisis has been most challenging for emerging-market economies, those that least needed a new challenge as they were vulnerable before the crisis began. Liquidity support from central banks is crucial, but their help is often not in the hard currency required. The guardian of global financial stability, the IMF, will need more support from its members to fulfill its role as the true lender of last resort.
The warning not to put all your eggs in one basket may apply to policymakers’ exclusive focus on boosting the demand side of economies. Monetary policies, in particular, are fixated on promoting growth in demand. But is the supply side of the equation being ignored in the process? Is this one-sided approach most likely to prosper the economies that are subjected to it, or is a change of focus needed?
Central banks, guardians of financial systems, consider multiple factors when determining policy; today, as countries suffer the effects of severe weather, central banks feel impelled to include the risks associated with climate change. Groups such as the Network for Greening the Financial System, which unites central banks to address climate-change financial risks and aids the private sector toward achieving a more sustainable future, allow central banks to pool their resources to combat this threat.
The stewardship responsibility of today’s bank has become more complicated in the light of climate change. Not only does a bank need to be cognizant of its responsibility to safeguard customer finances but also the future of the planet on which we all live. Green finance is an ever more significant influence on the decisions made by bankers determined to reconnect with the needs of society in more ways than just financial.
You could be excused for thinking that financial inclusion is a given. In reality, however, this is far from the truth. As illustrated by a recent report by the World Bank, 1.7 billion adults across the world are ‘unbanked’, meaning they do not possess a bank account or have access to formal finance. This situation is not confined to just one part of the world. Whether you live in a developed country or developing region, the unbanked can be found. For example, just 14 percent of adults in the Middle East hold a bank account.
The Reserve Bank of New Zealand (RBNZ) regulates banks operating in the country to ensure a safe and efficient domestic financial system, but a high percentage of bank assets that fall under its domain are foreign owned, leading to the challenge of compliance with the bank’s home regulations and New Zealand’s, as its host. However, foreign-owned banks can and do thrive in New Zealand’s soundly maintained financial sector.
As economic conditions return to “normal” in the industrial world, policy interest rates will inevitably rise from zero to “normal”—but not necessarily in Latin America and the Caribbean. Central banks in LAC will need to tailor their monetary-policy decisions to tackle the three-pronged challenge of currency depreciation, higher inflation and deceleration in economic activity, as capital flies away from emerging markets.
It cannot be denied that we learn from mistakes of the past, and so the 2007-08 financial crisis is a lesson that keeps on giving. Ten years later, most banks are in stronger positions, but only because the crisis has changed all the rules on liquidity provision and has led to much tighter relationships between central banks, governments, funding markets and financial institutions.
To say that a central bank is influential in determining the course of national markets and economies would be a serious understatement. But behind the central bank’s more obvious monetary policy lies its collateral policy, a hidden but key contributor to its overall, far-reaching financial impact. What exactly are collateral frameworks, and what do they really do?
Central banks saw their reputations peak when they were perceived as saviors of the world after the financial-market crisis. As a consequence, expectations for their power to manage economies became exaggerated, while at the same time, they were overburdened with new responsibilities—especially true for the ECB. But support for the independence of central banks is on a declining trend.