CENTRAL BANKS

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

History of Dominant International Currencies

US Dollar most widely used in
international trade

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

Federal Reserve system
Board of Governors of the Federal Reserve
System, Washington, D.C.
Federal Reserve Bank city
See FED NY Street view

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

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

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.

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.

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

The Discount Rate

Reserve Requirements

Reserve requirement – Explained

Open Market Operations

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.

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.

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

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

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

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.

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.

INTEREST RATES

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

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

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.

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

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

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.

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.

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.

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.

MONETARYAUTHORITY OF SINGAPORE

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
http://youtu.be/zOBad8sA7lc

MAS functions
 Functions:
1. Formulate & implement monetary policies to
ensure _____ stability.
• Manage Singapore's _______ rate,
• Manage _______ in the banking sector.
• Issues and purchases __________ securities

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:
https://www.youtube.com/watch?v=KsVFqu-jK3g )

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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

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

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.

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.

Assets
Liabilities
Owners’ Equity

z
Environmental, Social
and Governance
(ESG) and
Sustainable Finance

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.

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.

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.

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

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

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.

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.

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

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.

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.

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”)

z

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

Reference
 Financial Markets & Institution 6th edition-
chp 4
• Saunders & Cornett
 www.mas.gov.sg