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Chap 02 Central bank .pptx

  2. TOPIC 2: CENTRAL BANKS / ESG a. Understand the organisation, structure, key functions and roles of the Federal Reserve system. b. Understand conventional monetary policies, inflation targeting and asset bubbles. c. Explain term structure of interest rates and stock market theories. d. Discuss the key functions and roles of the Monetary Authority of Singapore (MAS). e. Understand how MAS uses exchange rate policies for inflation targeting. f. Understand ESG and sustainable finance + the impact of ESG on financial institutions g. Know the types of sustainable finance and investment products h. Understand carbon emissions trading exchanges i. Discuss MAS and Singapore’s overall strategy in the ESG efforts
  3. History of Dominant International Currencies
  4. US Dollar most widely used in international trade
  5. 1a. Federal Reserve System a. Organization structure i. Comprised of _____ Federal Reserve Banks representing major cities in U.S. plus Board of Governors located in Washington D.C. ii. Federal Open Market Committee (FOMC) • Comprises of ___ of the twelve presidents of the Federal Reserve Banks, along with the seven members of the Board of Governors Link: FED Link: FOMC
  6. Federal Reserve system Board of Governors of the Federal Reserve System, Washington, D.C. Federal Reserve Bank city See FED NY Street view
  7. 1b. Federal Reserve’s key function 1. Control money supply and credit in the economy (through FOMC). • FOMC (Federal Open Market Committee) formulates and implement ______________of U.S. – money supply & interest rate • determines policy with respect to sale and purchase of ______________________i.e. Treasury bonds (T-Bonds) and Treasury bills (T- Bills), in the open market. • Set the _______ rate, i.e. the rate of interest on loans made by Reserve Banks to depository institutions. FOMC meeting calendar
  8. 2. Supervisory and regulatory role • ________ activities of all FIs operating in U.S. • ________ of financial services offered by FIs 3. Write and implement consumer protect laws 1b. Federal Reserve’s key function
  9. Federal Reserve’s function 4. Services to foreign government and international agencies. • Operating accounts for US$ reserves deposited by foreign government agencies 5. Economic research • Gathers and analyse a wide range of ________ data to monitor health of the economy.
  10. 1c. Services provided by the FED.  Services provided to financial institutions i. Collection and distribution of _____ and ___. ii. Cheque processing – central clearing system. iii. Facilitate wire transfers of funds and ________ nationwide. iv. Automated clearinghouse- useful for recurring transactions, e.g. deposit of payrolls and payment of mortgages and social security.
  11. 1d. Tools of monetary policy a. Three tools used by the Federal Reserve to influence the ______ supply and _______ rates are: i. Discount rate ii. Reserve requirements iii. Open market operations Watch this Video
  12. The Discount Rate
  13. Reserve Requirements
  14. Reserve requirement – Explained
  15. Open Market Operations
  16. Conventional Monetary Policy Tools During _______ times, the Federal Reserve will use the three tools of monetary policy— open market operations, discount lending, and reserve requirements—to control the _____ supply and interest rates, and these are referred to as Conventional Monetary Policy tools.
  17. CONDUCTING MONETARY POLICY The Price Stability Goal Over the past few decades, policy makers throughout the world have become increasingly aware of the social and economic costs of _____ and more concerned with maintaining a stable price level as a goal of _______________ policy.
  18. Other Goals of Monetary Policy a. Five other goals are continually mentioned by central bank officials when they discuss the objectives of monetary policy: 1. ______ employment and output stability 2. Economic growth 3. Stability of financial markets 4. Interest-rate ________ 5. _________ in foreign exchange markets
  19. Inflation Targeting a. Public announcement of medium-term numerical target for inflation b. Institutional commitment to ______ stability as the primary, long-run goal of monetary policy and a commitment to achieve the inflation goal c. Increased transparency of the strategy d. Increased ____________ of the central bank
  20. Asset Bubbles a. Asset-price bubble: pronounced ______ in asset prices that depart from fundamental values, which eventually ________ b. Types of asset-price bubbles i. Credit-driven bubbles (_____ to borrow money) • Subprime financial crisis (ii) Bubbles driven by irrational exuberance
  21. Should Central Banks Respond to Bubbles? a. Strong argument for ____ responding to bubbles driven by irrational exuberance. b. But if the bubbles are due to asset prices and credit increasing rapidly at the same time, the govt may consider some action. c. But in theory, monetary policy should not be used to ______ bubbles.
  22. Should Central Banks Respond to Bubbles? • Macroprudential policy: regulatory policy to affect what is happening in credit markets in the aggregate. • Eg _______ housing loan limits. • Monetary policy: Central banks should not let ___________ bubbles proceed without any reaction if the bubbles are out of control.
  24. The Distinction Between Real and Nominal Interest Rates a. Nominal interest rate makes no allowance for __________ (do recall from your Economics module what is inflation). b. Real interest rate is adjusted for changes in price level so it more accurately reflects the ____ of borrowing. Interest rates affect many aspects of the world: cost of borrowings, investors’ expected returns on investments
  25. Risk Structure of Interest Rates a. Bonds – Long term debt issued by _____ companies b. Different bonds issued by different companies with the same maturity dates have different interest rates due MAINLY to: i. ________ risk ii. Liquidity
  26. Risk Structure of Interest Rates a. Default risk: probability that the issuer of the bond is unable to pay the interest or repay the face value. i. Treasury bonds* are considered default ___ (government can raise taxes). ii. Risk premium: the ______ between the interest rates on bonds with default risk and the interest rates on (same maturity) Treasury bonds iii. * These are bonds issued by governments (eg US Treasury Bonds, Singapore Government Bonds etc). Governments do borrow money to finance the country’s activities.
  27. Risk Structure of Interest Rates b. Liquidity: the relative ease with which an asset (including a bond) can be converted into cash i. ______ of selling a bond ii. ______ of buyers/sellers in a bond market
  28. Term Structure of Interest Rates a. Bonds with identical risk, liquidity, and tax characteristics may have different interest rates because the _____ remaining to maturity is different. b. Yield curve: a plot of the yield on bonds with differing terms to maturity but the ____ risk, liquidity, and tax considerations i. Upward-sloping: long-term rates are above short- term rates ii. Flat: short- and long-term rates are the _______ iii. Inverted: long-term rates are below short-term rates
  29. How the Market Sets Stock Prices While we will learn more about stocks and the stock market, it is good for us to know for now, that stocks represent an ownership in a company. Eg when we buy 100 shares in Singapore Airlines, we are part __________ of the company. a. The price of a stock in the stock market is set by buyers willing to pay the_________ price. b. The market price will be set by the buyer who can take best advantage of the asset. c. Superior information about an asset can _______ its value by reducing its perceived risk.
  30. How the Market Sets Stock Prices d. _______ is important for individuals to value each asset. e. When new information is released about a firm, expectations and prices ________. f. Market participants constantly receive information and revise their expectations, so stock prices change frequently.
  31. How Valuable Are Published Reports by InvestmentAdvisors? a. Information in newspapers and in the published reports of investment advisers is readily available to many market participants and is already reflected in _________ _____. b. Acting on this information will _____ yield abnormally high returns, on average. c. Recommendations from investment advisers cannot help us outperform the general market.
  32. How Valuable Are Published Reports by InvestmentAdvisors? d. A hot tip is probably information already contained in the price of the stock. e. Stock prices respond to announcements only when the information is new and unexpected. f. A “buy and hold” strategy is the most sensible strategy for the ________ investor.
  34. Monetary Authority of Singapore (MAS) Singapore's central bank • ________ and _______ agent for the Ministry of Finance a. Watch this video for the key functions of MAS How MAS contributed to Singapore
  35. MAS functions  Functions: 1. Formulate & implement monetary policies to ensure _____ stability. • Manage Singapore's _______ rate, • Manage _______ in the banking sector. • Issues and purchases __________ securities
  36. MAS functions 2. Ensure the ______ and _______ of the financial sector - Supervisory/regulatory role • oversee all financial institutions in Singapore • Setting reserves and liquidity requirements of banks. 3. Manage and grow the Singapore _____ reserves. 4. ______ currency and coins 5. Promote new areas of financial activities. FinTech (See Fintech festival video: )
  37. MAS Function - Monetary policies 1. Formulate & implement monetary policies a. ______ money supply through use of monetary tools • minimum cash balance requirement (MCB & MLA) • purchase & sale of __________ securities (SGS) b. Maintain an appropriate SGD exchange rate • to manage _______ instead of using interest rate like in the United States.
  38. Maintain an appropriate SGD exchange rate Since 1981, monetary policy in Singapore has been centred on the management of the __________ _______. The primary objective has been to promote _____ stability as a sound basis for sustainable economic growth. The exchange rate represents an ideal intermediate target of monetary policy in the context of the small and open Singapore economy. Relatively controllable through direct interventions in the _______ ______ markets and bears a stable and predictable relationship with price stability.
  39. Maintain an appropriate SGD exchange rate Features of Singapore’s exchange rate system First, the Singapore dollar is managed against a basket of currencies of our ______ trading partners and competitors. The various currencies are assigned weights in accordance with the importance of the country to Singapore’s trading relations with the rest of the world. Composition of the basket is revised periodically to take into account changes in ______ patterns.
  40. Maintain an appropriate SGD exchange rate Features of Singapore’s exchange rate system Second, MAS operates a ________ float regime for the Singapore dollar. Trade weighted exchange rate is allowed to fluctuate within a policy band, the level and direction of which is announced __________________ to the market. The band provides a mechanism to accommodate short- term fluctuations in the foreign exchange markets and flexibility in managing the exchange rate.
  41. Maintain an appropriate SGD exchange rate Features of Singapore’s exchange rate system Third, the exchange rate policy band is periodically reviewed to ensure that it remains consistent with underlying ___________of the economy. Important to continually assess the path of the exchange rate in order to avoid a misalignment in the currency value. The length of the policy review cycle is typically ___ months. Information is shared with the public.
  42. Maintain an appropriate SGD exchange rate Features of Singapore’s exchange rate system Fourth, the choice of the exchange rate as the intermediate target of monetary policy implies that MAS gives up control over _______interest rates (and _______ ________). Interest rates in Singapore are largely determined by foreign interest rates and expectations of the future movements of Singapore dollar. Singapore Dollar interest rates have typically been ______ US interest rates and reflect market expectations of a trend appreciation of the Singapore dollar over time.
  43. Maintain an appropriate SGD exchange rate Features of Singapore’s exchange rate system Is it effective? Over the past twenty plus years, domestic inflation has been relatively ___. As a result of the long record of low inflation, expectations of price stability in Singapore have become more entrenched over the years. The exchange rate system has also helped to mitigate the adverse effects of short-term _____, while at the same time ensuring that the exchange rate remains aligned with economic conditions and fundamentals. The success of the system owes much to the strong economic fundamentals of Singapore. These include _____ fiscal policy, flexible product and factor markets, sound financial system, and robust domestic corporate sector.
  44. MAS Regulatory functions • Financial industry regulator • MAS conducts onsite _________ (bank’s premises) to assess bank’s operations in terms of asset quality, internal control systems & risk management.
  45. Services provided by MAS to FIs a. Acts as banker to financial institutions i. banks maintain accounts with MAS to hold cash balances (MCB & MLA) to satisfy _____________ ____________. ii. Lender of last resort b. Clearing of local bank cheques (Slowly Extinct) c. Services to foreign international financial institutions eg. IMF & World Bank
  46. MAS Regulatory functions d) Issue banking licences (We will look at this next week) e) Administration of : • Banking Act, • Finance Companies Act, • Insurance Act, • Securities & Futures Act, • Financial Advisers Act
  47. MAS Regulatory functions Regulatory approach is based on Basel Accord’s Capital Framework i. Basel Accord ( we will come back to this at the end of today’s class) To ensure banks have _______ ______for the risk the bank exposes itself to through its lending and investment practices.  Goal: to help protect the international financial system from the problems that might arise should a major bank or a series of banks collapse link: BCBS link: Basel II
  48. MAS Functions – Market development a. Promote new areas of financial activities i. Financial Technologies (FinTech) ii. Assets management iii. Risk management iv. Financial planning b. Raise the profile of Singapore as an international financial centre i. Member of IMF ii. Setting up international committees iii. Hosting global meetings, such as World Bank meeting in 2006
  49. Basel Accords a. The Basel Accords is a set of recommendations for regulations in the banking industry.—Basel I, Basel II and Basel III— issued by the Basel Committee on Banking Supervision (BCBS). b. The BCBS maintains its secretariat at the Bank for International Settlements (BIS) in Basel, Switzerland.
  50. Bank Of International Settlement (BIS) a. An organisation owned by its member-central banks. • G-20 major economies plus H.K. & SG b. Located in Switzerland c. Main role - setting ________ ________requirements by prescribing minimum level of capital/asset ratio for central banks, d. Defines Tier 1 and Tier 2 capital.
  51. Assets Liabilities Owners’ Equity
  52. z Environmental, Social and Governance (ESG) and Sustainable Finance
  53. z What is ESG?  An evaluation of a firm’s collective conscientiousness for social and environmental factors.  A score that is compiled from data collected surrounding specific metrics related to intangible assets within the enterprise. It could be considered a form of corporate social credit score. Intangible assets are increasing in percentage terms of future enterprises’ valuations.  Banks are using ESG to value their clients plus their own intangible asset values. The ultimate objective is to measure efforts related to _________ and societal impact of a company or ________.  In less than 20 years, the ESG movement has grown from a corporate social responsibility initiative launched by the United Nations into a global phenomenon representing more than US$30 trillion in assets under management.  In the year 2019 alone, US$17.67 billion flowed into ESG-linked products.  Sustainable finance is another name for the practice of integrating environmental, social and governance (ESG) criteria into ________ _______ to bring about sustainable development outcomes, including mitigating and adapting to the adverse effects of climate change.
  54. z Embedding ESG into Financial Institutions  Regulators, oversight authorities and policy makers are more vocal about the need for greater adoption of ESG.  They recognize that moving towards a low-carbon economy will create _________ complexities.  Banks may be ill-prepared for the types of prudential and conduct risks that could arise:  direct risks (i.e. the ________ impact of climate change on assets)  transition risks (i.e. the challenges inherent in a wholesale move towards a ____-carbon economy).  Investors will also be ramping up pressure on banks - due to the increasing recognition that ESG factors and climate change are material risks that must be managed.  Investors also want to ensure they can continue to earn a return on their investment.  ESG-related funds are starting to outperform overall markets. E.g. MSCI World ESG Leaders Index can outperform the regular MSCI, 70 percent of ESG-linked investment funds can ___________ their peers.
  55. z Embedding ESG into Financial Institutions  Banks are also starting to feel pressure from their customers and the public.  Consumers want to transact with banks that reflects their views and beliefs younger generations, are increasingly choosing banks based on their ESG credentials.  Many banks are hence moving down the path towards greener finance. Eg Goldman Sachs, announced they would spend US$750 billion on sustainable finance over the next decade. Bank of America has pledged US$300 billion to __________ i__________. Virtually every large global bank has made some sort of commitment — both financial and otherwise.  New products are continually being developed and commercialized.  Wealth managers are moving towards ESG-informed ________;  Retail banks are creating new sustainable banking and investing products and services, such as green home-improvement loans, carbon neutral banking and sustainable investment funds.  Capital markets are moving towards ‘green underwriting’. Many bank customers (commercial and retail) can now choose from a variety of ESG-linked funds, bonds and assets.
  56. z Sustainable Finance  A sustainable financial centre is a financial marketplace:  contributes to sustainable development and _______ ______ in economic, environmental and social terms.  ensures and improves economic _______, prosperity, and economic competitiveness, while contributing to protecting and restoring ecological systems, and enhancing cultural diversity and social well-being.  Examples of activities that fall under the heading of sustainable finance:  sustainable funds, green bonds, ______ investing, microfinance, credits for sustainable projects etc
  57. z Sustainable Finance Instruments  Loan financing instruments that cater to ESG efforts:  Green Bonds: for climate, sustainability and environmental projects  Sustainability Bonds: for combination of green and _______ projects  Social Bonds: for social projects with clear _________________ benefits  Green Loans: for smaller / medium companies’ investments in environmentally beneficial projects  Sustainability-linked loans: for smaller / medium companies’ investments in sustainable or social projects
  58. z Carbon Emissions Trading  Emission trading (ETS) for carbon dioxide (CO2) and other greenhouse gases (GHG) is a form of carbon __________.  To limit climate change by creating a market with limited allowances for emissions.  A carbon price is the payment allowance to emit these gases. The more a firm emits, the more it needs to pay to acquire this emissions limits from ETS.  Can _________ demand for fossil fuels  Spur investments into low carbon sources of ___________ such as wind power and photovoltaics.
  59. z Carbon Emissions Trading  How ETS works?  Sets a __________ total limit on the emissions produced by all participating emitters.  Prices automatically adjust to this limit.  A country or a company having more emissions can purchase the ____ to emit more. The entity having fewer emissions sells the right to emit carbon to other entities.  Hence, the entities with most cost-effective carbon reduction methods would benefit.
  60. z Carbon Emissions Trading  Many such exchanges have opened all over the world:  China National Carbon Trading Scheme – ________ in the world  European Climate Exchange  European Union Emissions Trading Scheme  USA + many Asian countries
  61. z Carbon Emissions Trading  Singapore is a _________ trading and ________ hub suitable to be a centre for sustainability and international carbon trading marketplace.  Climate Impact X (CIX) – SGX / DBS / Standard Chartered / Temasek Holdings  To develop a global exchange and marketplace for high-quality carbon credits, supporting organisations on their carbon reduction efforts.  Two key digital platforms:  (1) Carbon Exchange - enables buyers and suppliers to trade _______ volumes of high-quality credits. The exchange will cater primarily to large-scale buyers, corporations and institutional investors.  (2) Project Marketplace - for buying high-quality carbon credits ______ from specific projects. The Marketplace will be ideal for customised purchases.
  62. z Monetary Authority of Singapore  Singapore's financial sector can play a useful role in catalysing sustainable and green finance in the region. MAS is taking active steps to promote sustainable financing in our financial sector, including  (i) _______ financial institutions to consider ESG criteria in decision making processes,  (ii) support the adoption of industry _______ standards and guidelines,  (iii) encourage industry-led capacity building efforts in this area,  (iv) develop the green bond market in Singapore and  (v) ______ with local stakeholders and international counterparts to distil best practices.
  63. z  Key Facts  US$200 billion per year is the estimated green investment needed in ASEAN till ________  >80% of top asset managers in Singapore are already United Nations Principles for Responsible Investments (“UN PRI”) signatories  57 Investment organisations expressing support for the Singapore Stewardship Principles (“SSP”)
  64. z
  65. z TOPIC 2: CENTRAL BANKS and ESG a. Understand the organisation, structure, key functions and roles of the Federal Reserve system. b. Understand conventional monetary policies, inflation targeting and asset bubbles. c. Explain term structure of interest rates and stock market theories. d. Discuss the key functions and roles of the Monetary Authority of Singapore (MAS). e. Understand how MAS uses exchange rate policies for inflation targeting. f. Understand ESG and sustainable finance + the impact of ESG on financial institutions g. Know the types of sustainable finance and investment products h. Understand carbon emissions trading exchanges i. Discuss MAS and Singapore’s overall strategy in the ESG efforts
  66. Reference  Financial Markets & Institution 6th edition- chp 4 • Saunders & Cornett 

Notas del editor

  1. To understand why we are looking at USA central bank, it is good to understand why USD become dominant and why international investors track USA Fed reserve so closely. All finance professionals watch US closely at Economic indicators and Federal reserve monetary policy. US IS a british colony! After ww2 , pearl habour, they won the war.
  2. USD is widely used Note that Yuan is on the rise too
  3. The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals.
  4. For street view of FED, go to IE browser see saved link under FMI Google street view
  5. The term "monetary policy" refers to the actions undertaken by a central bank, to influence the money supply and the cost of money and credit (interest rate) to help promote national economic goals. The FOMC meets eight regularly scheduled meetings per year to reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.
  6. All depository institutions that are subject to reserve requirements (EXPLAIN – set aside money that you cannot touch in event of default) set by the Federal Reserve--including commercial banks, mutual savings banks, savings and loan associations, and credit unions--have access to the discount window.
  7. All depository institutions that are subject to reserve requirements set by the Federal Reserve--including commercial banks, mutual savings banks, savings and loan associations, and credit unions--have access to the discount window.
  8. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. I have 2 videos to explain what is monetary policy and the 3 tools. We will look at it again during tutorial.
  9. So typically it’s the most expensive form to borrow
  10. Fed buy Bonds (Securities) means more money in the system, lower interest rate (Interbank borrowing = fed funds rate) / Selling of securities (Bonds) less money supply as investors buy,
  11. Previously was Thurman now Minister for finance is Heng swee Keat
  12. Reserves requirements – we will look at this next week. MCB – Minimum Cash Balances MLA – Minimum Liquid Assets
  13. Next week we will look at it: Banking licenses for Commercial banks( Full, Wholesale and offshore) and Merchant Banks (Investment banks)
  14. Make sure the bank is strong enough to withstand any crisis. Risks to banks as there is possibility that the borrower cannot repay! The Basel Committee on Banking Supervision (BCBS)[1] is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974. Singapore is a member of the BCBS. Basel II objective at: Ensuring that capital allocation is more risk sensitive; Enhance disclosure requirements which will allow market participants to assess the capital adequacy of an institution; Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques; Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.
  15. We will see this video shortly
  16. Further discuss next week.
  17. BIS’s Capital adequacy reqmt for CB - the capital/asset ratio of central banks to be above a prescribed minimum international standard, for the protection of all central banks involved.
  18. Next week lectures will be online and the videos will be made available this evening. Tutorials as per normal.
  19. We will look at Fed reserve today then MAS. Why USA federal reserve?