Slovenian law passes despite central bank calling it illegal

By Dan Hardie | News | 23 October 2019

New law is latest action in long-running political campaign to penalise central bank over bail-in

Slovenia’s parliament passed a law requiring the central bank to compensate “bailed-in” bondholders and shareholders, despite the central bank warning that it was illegal.

The Bank of Slovenia warned on October 16 that if passed, the law “envisages actions for the Bank of Slovenia that would contravene current Slovenian legislation and international law”. But lawmakers nonetheless voted for the measure by 46 to 34. 

All efforts to pass similar laws have failed in the past, with the European Central Bank playing an important role in blocking them.

The ECB has published a series of legal opinions saying the draft laws would have broken European Union law. The law passed this week seems to bear strong resemblance to the previous draft laws.

It is unclear why the ECB has not yet issued a legal opinion on the matter, but it is possible EU authorities want to have the legality of the new law tested in the European Court of Justice. Previously, the ECJ has ruled that the central bank acted entirely lawfully by bailing-in the bondholders and shareholders.

The Bank of Slovenia did not immediately respond to a request for comment. Slovenian central bank governor Boštjan Vasle has yet to comment publicly on the new law, but has strongly opposed previous attempts to pass similar laws.

This is the latest move in a series of efforts by Slovene politicians to refund bondholders and shareholders of two large commercial banks at the central bank’s expense. The banks were bailed in in 2012 and 2013. Bondholders and shareholders then began a well-organised lobbying effort to demand compensation from the central bank.

The law was drafted by the Slovenian finance ministry. Mateja Vraničar Erman has been the country’s finance minister since September 2016. The previous finance minister resigned in July 2016 in protest at a police raid on the office of the then central bank governor in connection with the bail-in.

A majority of Slovene lawmakers have supported the bondholders’ campaign under successive governments.

The central bank said on October 16 that the law “stipulates that the Bank of Slovenia’s liability is potentially objective, while it is subject to a reversed burden of proof”. The ECB has said in official opinions that similar measures in past draft laws would have made them illegal under EU legislation. 

The central bank told a locally-based reporter for Reuters that it would appeal against the law in Slovenian and European courts.

Some of those bailed in have also placed the central bank under severe pressure. The central bank’s previous governor, Bostjan Jazbec, said he resigned as a result of harassment stemming from the bail-in, including death threats and a police search of his office.

European Central Bank president Mario Draghi officially complained about the police raid on Jazbec’s office and the seizure of computers containing confidential eurozone information. The ECB said it did not receive a satisfactory reply from the Slovene authorities, and a local court rejected its lawsuit against the government’s actions. The European Commission is now taking legal action against the Slovene government over the raid on the central bank.

Facebook not trying to replace central banks, claims Zuckerberg

By Central Banking Newsdesk | News | 23 October 2019

Facebook chief plays down economic impact and says libra can help fight financial crime

Mark Zuckerberg

Libra is designed as a new way to transfer money, not an attempt to supplant central banks and “sovereign” currencies, Mark Zuckerberg argued in testimony to US lawmakers today (October 23).

Speaking to a packed room in Congress, the Facebook chief seemed keen to play down the more radical aspects of the libra project and play up the organisation’s willingness to engage with regulators.

In a prepared statement, Zuckerberg acknowledged concerns over whether libra is intended as a competitor to more traditional forms of money. “I want to be clear: this is not an attempt to create a sovereign currency,” he said. “Like existing online payment systems, it’s a way for people to transfer money.”

In a marked departure from libra’s launch, when backers hinted at a willingness to shake up the market and try to shape regulations in their favour, Zuckerberg stressed how libra is being designed with “economic security and stability in mind”. He added he sees the project as a means to strengthen global defences against money laundering and terrorist financing.

Facebook has drawn a lot of attention over the project, including a lot of hostility. Many have expressed concerns about the firm’s market power and several scandals over its handling of data. The prospect of it having access to customers’ financial data makes many observers nervous, a point Zuckerberg conceded in the hearing.

“I understand we’re not the ideal messenger right now,” he said. “We’ve faced a lot of issues over the past few years, and I’m sure people wish it was anyone but Facebook putting this idea forward.”

Amid ongoing regulatory pressure, Zuckerberg stressed libra is backed by a 21-member coalition, and said Facebook would be stepping back from a leadership role. “By design, we don’t expect to be leading those efforts going forward,” he said. “The Libra Association has been created, has a governance structure in place and will be driving the project from now on.”

At the same time, the Facebook chief pushed back at doubters. He played up the “risks of not innovating”, casting libra as an opportunity for the US to take the lead on financial innovation – an area that China has dominated to date.

“Libra will be backed mostly by dollars and I believe it will extend America’s financial leadership as well as our democratic values and oversight around the world,” he said.

Democratic party representative Maxine Waters, chair of the House of Representatives financial services committee, was unmoved. “It appears you aggressively expand the size of your company and are willing to step on or over anyone, including your competitors, women, people of colour, your own users and even our democracy to get what you want,” she said.

Ranking Republican committee member Patrick McHenry gave Zuckerberg a warmer welcome. He too emphasised the possible risks from new technology, but argued this should not be used as a means of bringing in poorly designed regulations.

Stronger micro-prudential oversight needed on climate change – Mexican deputy

By Central Banking Newsdesk | Speech | 23 October 2019

Financial firms should incorporate environmental scenario analysis into their decision-making process

Central banks need to develop stronger micro-prudential tools to contribute to tackle climate change, said the deputy governor of the Bank of Mexico, Javier Guzmán Calafell.

In a speech in Washington, DC, during the annual conference of the International Monetary Fund, Calafell stressed these actions are essential to foster sustainable capital markets.

“Central banks and other financial authorities ought to undertake a continuous and careful evaluation and monitoring of the risks for individual financial institutions,” he said. Supervisors must be vigilant to risks “deriving from their exposure to assets, projects, entities and/or income streams that are directly affected by climate-related developments.”

Calafell acknowledged these efforts are “only in its early stages”. The Mexican official stressed it was still necessary to make sure financial institutions add environmental scenario analysis into their decision-making processes.

Firms should develop more “active disclosure of data on the environmental sources of risk”. And regulators need to acquire a better understanding of these risks and the tools needed to face them.

The deputy governor called for solid international co-operation to address these deficiencies. “It is important to raise awareness and help develop the sense of commonality required to achieve greater adherence to a collective strategy,” said Calafell. “To this end, sustained collaboration among all relevant parties geared towards capacity-building and knowledge-sharing is essential.”

Fed paper looks at US spillovers to foreign government debt yields

By Central Banking Newsdesk | Research | 23 October 2019

Fed has “economically large” impact on some dollar-denominated bond yields, researchers find

Foreign dollar-denominated sovereign debt is “highly responsive” to Federal Reserve monetary policy, a paper published by the Federal Reserve finds.

Simon Gilchrist, Vivian Yue and Egon Zakrajsek measure how yields on foreign government debt issued in dollars respond to US unconventional and conventional policy surprises. The researchers use daily secondary market prices of dollar-denominated sovereign bonds issued by almost 80 countries, including both advanced and emerging market economies.

The researchers use this method “to abstract from the policy-induced movements in exchange rates and, thus, more cleanly identify the transmission of US monetary policy to the international bond market”.

They find that changes in short-term rates have an “economically large and statistically significant” impact on credit spreads of sovereign bonds issued by countries with a speculative-grade credit rating.

By contrast, for investment grade governments, credit spreads are left unchanged by surprise shifts in Fed rates. “That is, sovereign bond yields for low-risk countries are estimated to decline by about as much as the yields on comparable-maturity US Treasury securities,” they write.  

The pass-through of unconventional policy surprises does not affect sovereign credit spreads in either speculative or investment grade bonds, they find.

The results suggest that unconventional policies have less of an impact on repricing of risk in global financial markets than short-term rate changes, the authors say.

Pay biases shrinking but still significant, says Haldane

By Central Banking Newsdesk | Speech | 23 October 2019

BoE chief economist digs into the factors behind gender pay gaps

Andrew Haldane

Bias remains an important explanation for the ongoing sizeable gender pay gap in the UK, Bank of England chief economist Andy Haldane said on October 21.

Haldane presented research that seeks to unpack the myriad causes driving differences in pay. He and co-authors Zahid Amadxarif, Marilena Angeli and Gabija Zemaityte split the pay gap into factors such as tenure in a job, age, qualifications, job type and sector, with the remaining “unaccounted for” gap reflecting what Haldane called “gender pay bias”.

In the UK, this bias has “shrunk somewhat” over the past 20 years, but it remains “significant”, Haldane told a conference on gender and inequality organised by the BoE, Federal Reserve and European Central Bank. Bias accounts for a roughly 10% premium paid on average to male workers in the UK for doing equivalent work to women. The overall pay gap is about 22%.

“In other words, around half of the gender pay gap is difficult to justify on fundamental grounds, consistent at least with some significant degree of gender pay ‘bias’,” Haldane said.

The BoE chief economist noted that even the “explained” part of the pay gap might reflect undesirable societal factors, if, for example, women faced barriers to education or if certain job types were still male-dominated.

Dutch pension funds hit by low interest rates, says DNB

By Central Banking Newsdesk | News | 23 October 2019

Today, 63% of funding ratios are below the statutory minimum

The financial position of pension funds in the Netherlands continued to worsen in the third quarter of the year, mainly due to falling interest rates, says the Netherlands Bank (DNB).

The average funding ratio declined by almost three percentage points over the last quarter to 98.1%, according to DNB data published on October 22. This ratio reflects funds’ financial position, expressing the relationship between available assets and liabilities.

The Dutch pension system combines a state-funded pay-as-you-go system, through which current workers finance the pensions of retirees, and private pension funds that aim to complement the public pension. These funds carry out active asset allocation strategies that are very much influenced by international financial conditions.

Currently, five main funds manage the bulk of the Netherlands’ private pension schemes. According to the DNB, total claims on the entire private system rose by €70 billion ($78 billion) to €1.55 trillion last quarter. The rapid growth in retirees and the low-yield financial environment may cut the size of future pensions for workers in the country.

The Netherlands’ main fund, ABP, illustrates this challenging situation. It is the fund used mostly by people working in the public sector, mainly the government and education sectors. “As many as one in six people in the Netherlands now receive or will receive a pension in the future from ABP,” says the fund. Three million people are active participants in the fund, out of a total population in the country of just over 17 million.

The fund’s 2018 annual report shows its portfolio is mostly invested in fixed-income securities and equities. Last year, its investments totalled €449 billion. ABP allocated 36% of its portfolio to fixed-income securities, or €162 billion. The fund allocated 34.6% (€155.6 billion) to equities, 11.5% (€52 billion) to real estate, 7% (€31.4 billion) to derivatives and over 10% of its portfolio, (€48.4 billion) to other unspecified assets.

This asset allocation yielded a return of –2.3%, says the report.

This was partly the result of “developments in financial markets and falling interest rates in the fourth quarter of 2018”, it says. “As a result, we do not expect to be able to increase pensions in the coming years and the chance that we have to lower our pensions from 2021 has increased again,” adds the report.

Some observers in the Netherlands link these bleak forecasts to the ultra-loose monetary policy implemented by the European Central Bank in its efforts to boost inflation. Negative deposit rates and quantitative easing have lowered rates across financial markets.

In fixed-income assets, sovereign bond yields remain at record lows. For instance, Germany’s 30-year bund yields were recorded at barely 0.11% earlier today (October 23). The yield on the 30-year Dutch bond is similarly at 0.11%. Lower yields dent the returns of holders of these assets, including pension funds.

This partly explains the resistance with which Dutch officials greeted the latest ECB stimulus package, unveiled by president Mario Draghi on September 12. The ECB reduced the deposit rate to –0.5% and announced the indefinite resumption of net asset purchases at a monthly rate of €20 billion from November 1.

The ECB had interrupted the previous round of purchases in December 2018. In September, the ECB’s holdings of the asset purchase programme amounted to €2.54 trillion.

In a rare statement following the ECB policy decision, DNB governor Klaas Knot said: “This broad package of measures, in particular restarting the APP [asset purchase programme], is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness.”

Bank of Canada picks MindBridge for AI fraud detection trial

By Daniel Hinge | News | 23 October 2019

Trial under central bank’s ‘Pivot’ scheme will test artificial intelligence for payment fraud detection

The Bank of Canada is working with MindBridge, an artificial intelligence analytics firm, in the hope of finding new ways to detect payments fraud.

MindBridge was chosen to take on the “challenge” in the next round of the central bank’s partnerships in innovation and technology programme (Pivot). Pivot sees central bank staff collaborating with third parties, particularly fintech firms, to trial innovative ideas for short periods.

MindBridge will have just a few months to demonstrate whether its AI platform can improve on the central bank’s existing systems for spotting payments fraud.

“In addition to the various rules-based tools we have already implemented, we want to see if artificial intelligence and machine learning can further enhance the protection of payments,” the central bank says on its website.

The MindBridge AI platform is primarily used by certified public accountants to crunch through large quantities of data during the audit process. The firm has also worked with the Bank of England and Payments Canada on proofs of concept.

Key to the firm’s platform is an “ensemble” of different AI techniques, including supervised and unsupervised learning, as well as machine learning augmented by human intervention, Jim Fagan, vice-president for corporate development, tells Central Banking.

“The approach uses an ensemble rather than one specific method, combined with rules and statistical methods, machine learning and AI techniques with everything working together to identify risk or anomalies within those datasets,” he says.

The firm will have to move quickly as it will be expected to show results by around the end of this year. Its platform was already tested on anomaly detection as part of a proof of concept in the Bank of England’s Fintech Accelerator, so it should require relatively minimal adaptation.

“MindBridge’s tool demonstrated it can usefully detect anomalies in datasets,” the BoE said at the end of that project. “Its user interface is intuitive and presented the data visually, allowing the user to explore a time series of each variable, whilst comparing the result to the industry average.”

Jim Fagan

AI is often accused of being a “black box”. An AI algorithm can quickly fit a model to what is often a very large dataset, but it can be hard for users to see what is driving the result. That can be a key drawback for AI in a policy-making setting, but Fagan says MindBridge works hard to make the results interpretable.

“We go to great lengths to make AI explainable, to make the results available to a typical business user who is not a scientist, so they are visually explainable through an intuitive web interface,” he says.

MindBridge hopes it will not only uncover anomalies for the Bank of Canada, but also highlight unexpected insights into the data.

“Success would be demonstrated on two levels by using AI to analyse payments,” says Fagan. “First at the transactional layer to identify anomalous data and, secondly, through pattern-based insights across the whole dataset, additional value and views into what’s going on.”

Video Q&A: Joakim Wiener, SkySparc

By SkySparc | Advertisement | 23 October 2019

Central Banking met with Joakim Wiener, chief executive at SkySparc, at the FinTech & RegTech Global Awards in Singapore to discuss the challenges faced by central banks and public sector financial institutions, and how technology is helping central banks manage systems, process automation and data management. Wiener also explains how Skysparc can assist central banks now and into the future.

DNB paper examines global data on ‘prop trading’

By Central Banking Newsdesk | Research | 22 October 2019

Proprietary trading in securities is linked to decreased loan supply, researchers say

A working paper published by the Netherlands Bank examines whether commercial banks use the support they get from central banks to increase securities trading on their own account.

In Credit Supply: Are there negative spillovers from banks’ proprietary trading? Michael Kurza and Stefanie Kleimeierb use a global sample of 132 major banks from 2003 to 2016. They find that the banks’ “proprietary trading” in securities “is indeed associated with decreased loan supply”.

The authors note that after the onset of the global financial crisis, policy-makers were concerned that commercial banks would use central bank funding and government guarantees “to fund securities trading instead of lending to the real economy”. Their findings, the authors say, suggest that “policy makers’ concerns are only partly justified”.

These effects are stronger for domestic lending markets, during periods of financial crisis, and in countries that have deeper financial markets, the authors find. But they also find that banks’ proprietary trading leaves corporate capital expenditures and employment growth unaffected.

BdF paper uses professional forecasts to improve BVAR model

By Central Banking Newsdesk | Research | 22 October 2019

Authors use “entropic tilting and soft conditioning” to incorporate survey data into model

A working paper published by the Banque de France looks at ways to improve statistical modelling of the eurozone by using the forecasts of professional market-watchers.

In Bayesian VAR forecasts, survey information and structural change in the auro area, Gergely Ganics and Florens Odendahl use data from the European Central Bank’s survey of professional forecasters. They use “entropic tilting and soft conditioning” to incorporate this information into a Bayesian vector autoregression, or BVAR, model.

They then make conditional forecasts which they do not restrict at any specific quarterly horizon, Instead, they plot their possible paths over several horizons. The authors say they do this “as the survey information comes in the form of one- and two-year-ahead expectations”.  

 “The resulting conditional forecasts significantly improve the plain BVAR point and density forecasts,” the authors say. “Besides improving the accuracy of the variable that we target, the spillover effects to ‘other-than-targeted’ variables are relevant in size and statistically significant.”

The authors find that the baseline BVAR model “exhibits an upward bias for GDP growth after the financial crisis”. The authors say their results “provide evidence that survey forecasts can help mitigate the effects of structural breaks on the forecasting performance of a popular macroeconometric model”.