The European Investment Bank (EIB) and the five biggest European national promotional banks met to discuss the progress of existing joint initiatives, such as the Joint Initiative on Circular Economy (JICE), Quick Response — Care for Ukrainian Refugees in Europe, and Fund Marguerite. KfW CEO Stefan Wintels hosted EIB President Werner Hoyer and the other CEOs at the German promotional bank’s Berlin building.
The heads of the respective institutions also exchanged views on the various national and European initiatives for supporting energy sovereignty in Europe.
The leaders attending the meeting were:

Beata Daszynska-Muzyczka, CEO Bank Gospodarstwa Krajowego, BGK – Poland
Dario Scannapieco, CEO CDP Cassa Depositi e Prestiti, CDP – Italy
Laurent Zylberberg, Executive VP Groupe Caisse des Dépôts, CDC – France
Jose Carlos Garcia de Quevedo, CEO, Istituto de Credito Oficial, ICO – Spain
Stefan Wintels, CEO KFW-Bank – Germany
Werner Hoyer, President European Investmentbank (EIB) – EU

€2.9 billion has already been raised for the Quick Response — Care for Ukrainian Refugees in Europe programme launched in Paris this spring. This far exceeds the target of €2 billion.
The Joint Initiative on Circular Economy (JICE) partners reported a total volume of financed projects and programmes of €6.3 billion until the end of 2021. The initiative — launched in Luxembourg in 2019 — supports circular economy projects and programmes in the European Union and has a total volume of €10 billion until 2023.
Compliments of the European Investment Bank – A Member of the EACCNY.The post EIB and the European Union’s largest national promotional banks meet in Berlin to discuss recent initiatives and common challenges in Europe first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Scaling up private capital is crucial to finance vital low-carbon infrastructure projects, particularly in less developed economies
Private climate financing must play a pivotal role as emerging markets and developing economies seek to curb greenhouse gas emissions and contain climate change while coping with its effects.
Estimates vary, but these economies must collectively invest at least $1 trillion in energy infrastructure by 2030 and $3 trillion to $6 trillion across all sectors per year by 2050 to mitigate climate change by substantially reducing greenhouse gas emissions. In addition, a further $140 billion to $300 billion a year by 2030 is needed to adapt to the physical consequences of climate change, such as rising seas and intensifying droughts. This could sharply rise to between $520 billion and $1.75 trillion annually after 2050 depending on how effective climate mitigation measures have been.
Boosting private climate financing quickly is essential, as we detail in an analytical chapter of our latest Global Financial Stability Report. Key solutions include adequate pricing of climate risks, innovative financing instruments, broadening the investor base, expanding the involvement of multilateral development banks and development finance institutions, and strengthening climate information.
Encouragingly, private sustainable finance in emerging market and developing economies rose to a record $250 billion last year. But private finance must at least double by 2030, at a time when investable low-carbon infrastructure projects are often in short supply and funding of the fossil fuel industry has soared since the Paris Agreement.A lack of effective carbon pricing reduces the incentive and ability of investors to channel more funds into climate-beneficial projects, as does a patchy climate information architecture with incomplete climate data, disclosure standards, taxonomies and other alignment approaches.
It’s also unclear whether very large and quickly growing environmental, social, and governance, or ESG, investment flows alone could have a real impact in scaling up private climate finance. In addition to the still-uncertain climate benefits of ESG investing, such scores for companies in emerging market and developing economies are systematically lower than those for advanced counterparts. As a result, ESG-focused investment funds allocate much less to emerging market assets. What’s more, the risks associated with investing in emerging market and developing economy assets are often deemed too high by investors.
Innovative financing instruments can help overcome some of these challenges, together with broadening the investors base to include global banks, investment funds, institutional investors such as insurance companies, impact investors, philanthropic capital, and others.
In larger emerging markets with more-functional bond markets, investment funds—such as the Amundi green bond fund backed by the World Bank’s private-sector financing arm—provide a good example of how to draw in institutional investors such as pension funds. Such funds should be replicated and expanded to incentivize issuers in emerging markets to generate a greater supply of green assets to finance low-carbon projects and attract a wide range on international investors.
For less-developed economies, multilateral development banks will play a key role in financing vital low-carbon infrastructure projects. More climate financing resources should be channeled through such institutions.
An important first step would be to increase their capital base and reconsider approaches to risk appetite via partnerships with the private sector, supported by transparent governance and management oversight.
Multilateral development banks could then make greater use of equity finance—currently only about 1.8 percent of their commitments to climate finance in emerging market and developing economies. And their equity can draw in much larger amounts of private finance, which currently is equal to only about 1.2 times the resources these institutions commit themselves.

An important tool needed to help incentivize private investment is the development of transition taxonomies and other alignment approaches, which identify financial assets that can reduce emissions over time and incentivize firms to transition towards emission reduction goals.
Importantly, they include a focus on innovation in industries like cement, steel, chemicals, and heavy transport that cannot easily cut emissions because of technological and cost constraints. This helps ensure these carbon-intensive industries—those with the greatest potential to reduce greenhouse gas emissions—are not sidelined by investors but rather incentivized to reduce their carbon impact over time.
The IMF is playing an increasingly important role, including through its new Resilience and Sustainability Trust which is intended to provide affordable, long-term financing to help countries build resilience to climate change and other long-term structural challenges. We have pledges totaling $40 billion and staff-level agreements on the first two programs—Barbados and Costa Rica. This trust could catalyze official and private sector investments for climate finance.
The IMF is also promoting the availability of quality climate data and fostering the adoption of disclosure standards and transition taxonomies to create an attractive investment climate.
More broadly, we are helping to strengthen the climate information architecture through the Network for Greening the Financial System and other international bodies to support emerging market and developing economies with climate policies, including carbon pricing. As the move to greater private climate financing takes hold, the Fund will engage partners and promote solutions wherever possible.
Authors:

Torsten Ehlers
Charlotte Gardes-Landolfini
Fabio Natalucci
Ananthakrishnan Prasad

—This blog is based on Chapter 2 of the October 2022 Global Financial Stability Report, “Scaling Up Private Climate Finance in Emerging Market and Developing Economies: Challenges and Opportunities.” The post IMF | How to Scale Up Private Climate Finance in Emerging Economies first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

One single charger for all mobile phones and tablets – beneficial for the environment and for consumers
USB Type-C port will be the new standard for portable devices, offering high-quality charging and data transfers
Buyers will be able to choose whether to purchase a new device with or without a charging device

Following Parliament’s approval, EU consumers will soon be able to use a single charging solution for their electronic devices.
By the end of 2024, all mobile phones, tablets and cameras sold in the EU will have to be equipped with a USB Type-C charging port. From spring 2026, the obligation will extend to laptops. The new law, adopted by plenary on Tuesday with 602 votes in favour, 13 against and 8 abstentions, is part of a broader EU effort to reduce e-waste and to empower consumers to make more sustainable choices.
Under the new rules, consumers will no longer need a different charger every time they purchase a new device, as they will be able to use one single charger for a whole range of small and medium-sized portable electronic devices.
Regardless of their manufacturer, all new mobile phones, tablets, digital cameras, headphones and headsets, handheld videogame consoles and portable speakers, e-readers, keyboards, mice, portable navigation systems, earbuds and laptops that are rechargeable via a wired cable, operating with a power delivery of up to 100 Watts, will have to be equipped with a USB Type-C port.
All devices that support fast charging will now have the same charging speed, allowing users to charge their devices at the same speed with any compatible charger.
Encouraging technological innovation
As wireless charging becomes more prevalent, the European Commission will have to harmonise interoperability requirements by the end of 2024, to avoid having a negative impact on consumers and the environment. This will also get rid of the so-called technological “lock-in” effect, whereby a consumer becomes dependent on a single manufacturer.
Better information and choice for consumers
Dedicated labels will inform consumers about the charging characteristics of new devices, making it easier for them to see whether their existing chargers are compatible. Buyers will also be able to make an informed choice about whether or not to purchase a new charging device with a new product.
These new obligations will lead to more re-use of chargers and will help consumers save up to 250 million euro a year on unnecessary charger purchases. Disposed of and unused chargers account for about 11 000 tonnes of e-waste annually in the EU.
Quote
Parliament’s rapporteur Alex Agius Saliba (S&D, MT) said: “The common charger will finally become a reality in Europe. We have waited more than ten years for these rules, but we can finally leave the current plethora of chargers in the past. This future-proof law allows for the development of innovative charging solutions in the future, and it will benefit everyone – from frustrated consumers to our vulnerable environment. These are difficult times for politics, but we have shown that the EU has not run out of ideas or solutions to improve the lives of millions in Europe and inspire other parts of the world to follow suit”
Press conference
Today, 4 October from 14.30 CEST, the rapporteur will brief journalists on the outcome of the final plenary vote and the next steps. Click here for more information on how to follow.
Next steps
Council will have to formally approve the Directive before it is published in the EU Official Journal. It will enter into force 20 days after publication. Member states will then have 12 months to transpose the rules and 12 months after the transposition period ends to apply them. The new rules would not apply to products placed on the market before the date of application.
Background
In the past decade, Parliament has repeatedly called for the introduction of a common charger. Despite previous efforts to work with industry to bring down the number of mobile chargers, voluntary measures failed to produce concrete results for EU consumers. The legislative proposal was finally tabled by the Commission on 23 September 2021.
Contact:

Yasmina Yakimova, Press Officer | yasmina.yakimova@europarl.europa.eu

Compliments of the European Parliament.The post Long-awaited common charger for mobile devices will be a reality in 2024 first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Mutual funds holding hard-to-sell assets but offering daily redemptions can spark volatility and magnify the impact of shocks, especially in periods of market stress
Mutual funds that allow investors to buy or sell their shares daily are an important component of the financial system, offering investment opportunities to investors and providing financing to companies and governments.
Open-end investment funds, as they are known, have grown significantly in the past two decades, with $41 trillion in assets globally this year. That represents about one-fifth of the nonbank financial sector’s holdings.
These funds may invest in relatively liquid assets such as stocks and government bonds, or in less-frequently-traded securities like corporate bonds. Those with less-liquid holdings, however, have a major potential vulnerability. Investors can sell shares daily at a price set at the end of each trading session, but it may take fund managers several days to sell assets to meet these redemptions, especially when financial markets are volatile.
Such liquidity mismatch can be a big problem for fund managers during periods of outflows because the price paid to investors may not fully reflect all trading costs associated with the assets they sold. Instead, the remaining investors bear those costs, creating an incentive for redeeming shares before others do, which may lead to outflow pressures if market sentiment dims.
Pressures from these investor runs could force funds to sell assets quickly, which would further depress valuations. That in turn would amplify the impact of the initial shock and potentially undermine the stability of the financial system.
Illiquidity and volatility
That’s likely the dynamic we saw at play during the market turmoil at the start of the pandemic, as we write in an analytical chapter of the Global Financial Stability Report. Open-end funds were forced to sell assets amid outflows of about 5 percent of their total net asset value, which topped global financial crisis redemptions a decade and a half earlier.
Consequently, assets such as corporate bonds that were held by open-end funds with less-liquid assets in their portfolios fell more sharply in value than those held by liquid funds. Such dislocations posed a serious risk to financial stability, which were addressed only after central banks intervened by purchasing corporate bonds and taking other actions.
Looking beyond the pandemic-induced market turmoil, our analysis shows that the returns of assets held by relatively illiquid funds are generally more volatile than comparable holdings that are less exposed to these funds—especially in periods of market stress. For example, if liquidity dries up the way it did in March 2020, the volatility of bonds held by these funds could increase by 20 percent.
This is also of concern to emerging market economies. A decline in the liquidity of funds domiciled in advanced economies can have significant cross-border spillover effects and increase the return volatility of emerging market corporate bonds.
Now the resilience of the open-end fund sector may again be tested, this time amid rising interest rates and high economic uncertainty. Outflows from open-end bond funds have increased in recent months, and a sudden, adverse shock like a disorderly tightening of financial conditions could trigger further outflows and amplify stress in asset markets.

As IMF Managing Director Kristalina Georgieva said in a speech last year, “policymakers worked together to make banks safer after the global financial crisis—now we must do the same for investment funds.”
How should those risks be curbed?
As we write in the chapter, asset volatility induced by open-end funds can be reduced if funds pass on transaction costs to redeeming investors. For example, a practice known as swing pricing allows funds to adjust their end-of-day price downward when facing outflows. This reduces the incentive for investors to redeem before others. Doing so eases outflow pressures faced by funds in times of stress, and the likelihood of forced asset sales.
But while swing pricing—and similar tools such as antidilution levies, which pass on transaction costs to redeeming investors by charging a fee—can help mitigate financial stability risks, they must be appropriately calibrated to do so, and that’s not the case right now.
The adjustments that funds can make to the end-of-day prices—known as swing factors—are often capped at insufficient levels, especially in times of market stress. Policymakers therefore need to provide guidance on how to calibrate these tools and monitor their implementation.
For funds holding very illiquid assets, such as real estate, calibrating swing-pricing or similar tools may be difficult even in normal times. In these cases, alternative policies should be considered, like limiting the frequency of investor redemptions. Such policies may also be suitable for funds based in jurisdictions where swing pricing cannot be implemented for operational reasons.
Policymakers should also consider tighter monitoring of liquidity management practices by supervisors and requiring additional disclosures by open-end funds to better assess vulnerabilities. Furthermore, encouraging more trading through central clearinghouses and making bond trades more transparent could help boost liquidity. These actions would reduce risks from liquidity mismatches in open-end funds and make markets more robust in times of stress.
Authors:

Fabio Natalucci
Mahvash S. Qureshi
Felix Suntheim

Compliments of the IMF.The post IMF | How Illiquid Open-End Funds Can Amplify Shocks and Destabilize Asset Prices first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Global Financial Stability Considerations for Monetary Policy in a High-Inflation Environment by Vice Chair Lael Brainard at “Financial Stability Considerations for Monetary Policy,” a research conference organized by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York, New York, New York |
I want to start by thanking Anna Kovner, Rochelle Edge, and Bill Bassett for organizing this conference. The current global environment highlights the importance of having strong analytic and empirical foundations to understand financial stability considerations for monetary policy, and the research presented today will help strengthen those foundations.1 The global environment of high inflation and rising interest rates highlights the importance of paying attention to financial stability considerations for monetary policy. As monetary policy tightens globally to combat high inflation, it is important to consider how cross-border spillovers and spillbacks might interact with financial vulnerabilities.
Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out. In August, CPI (consumer price index) inflation on a 12-month basis was 8.3 percent in the United States, 9.9 percent in the United Kingdom, 9.8 percent in Sweden, 9.1 percent in the euro area, 8.7 percent in Mexico, 7.0 percent in Canada, and 5.7 percent in Korea.
Central banks facing high inflation are tightening monetary policy rapidly to damp demand and bring it into alignment with supply, which is constrained in a variety of sectors. The process of resolving imbalances will be easier the more supply improves in markets for commodities, labor, and key intermediate inputs, as is generally expected, but there is a risk that supply disruptions could be prolonged or aggravated by Russia’s war against Ukraine, COVID‑19 lockdowns in China, or weather disruptions. Russia’s war against Ukraine has generated spikes in prices for energy, food, and agricultural inputs. Most recently, inflation in Europe was pushed higher by Russia’s cessation of natural gas deliveries through the Nord Stream 1 pipeline, creating hardships for households and risking disruptions for some industries in the affected countries. China’s COVID lockdown policy could also lead to supply disruptions if cases again increase. Separately, weather conditions in several areas, including China, Europe, and the United States, are exacerbating price pressures through disruptions to agriculture, shipping, and utilities.
Many central banks around the world have pivoted monetary policy strongly in order to maintain anchored expectations and forestall second-round effects from high inflation becoming embedded in wage and price setting. In the United States, the Federal Reserve has increased the federal funds rate target range by 300 basis points in the past seven months—a rapid pace by historical standards—and the Federal Open Market Committee’s most recent Summary of Economic Projections indicates additional increases through the end of this year and into next year. In addition, beginning this month, balance sheet shrinkage accelerated to its maximum rate of up to $60 billion in Treasury securities per month, and up to $35 billion in agency mortgage-backed securities per month. Broader U.S. financial conditions have tightened rapidly: The 10-year Treasury yield has risen more than 200 basis points since the beginning of the year and is near its highest level in over a decade at 3.8 percent.
At a global level, monetary policy tightening is also proceeding at a rapid pace by historical standards. Including the Federal Reserve, nine central banks in advanced economies accounting for half of global GDP have raised rates by 125 basis points or more in the past six months.2 Global financial conditions have likewise tightened. Yields on 10-year sovereign debt in the United States, Canada, the United Kingdom, and the largest euro area economies are higher year to date between 170 and 350 basis points.
It will take some time for the global tightening to have its full effect in many sectors. While the effect on financial conditions tends to be immediate or even anticipatory, the effects on activity and price setting in different sectors may occur with a lag, with highly interest-sensitive sectors such as housing adjusting quickly and less rate-sensitive sectors such as consumer spending on services adjusting more slowly.
In addition to the domestic effects from domestic tightening, there are cross-border effects of tightening through both trade and financial channels. U.S. monetary policy tightening reduces U.S. demand for foreign products, thus amplifying the effects of monetary tightening by foreign central banks. The same is true in reverse: Tightening in large jurisdictions abroad amplifies U.S. tightening by damping foreign demand for U.S. products.
Tightening in financial conditions similarly spills over to financial conditions elsewhere, which amplifies the tightening effects. These spillovers across jurisdictions are present for decreases in the size of the central bank balance sheet as well as for increases in the policy rate.3 Some estimates suggest that the spillovers of monetary policy surprises between more tightly linked advanced economies such as the United States and Europe could be about half the size of the own-country effect when measured in terms of relative changes in local currency bond yields.4
In contrast, spillovers through exchange rate channels tend to go in opposite directions. The Federal Reserve’s broad nominal U.S. dollar index has appreciated over 10 percent year to date.5 On balance, dollar appreciation tends to reduce import prices in the United States. But in some other jurisdictions, the corresponding currency depreciation may contribute to inflationary pressures and require additional tightening to offset.
We are attentive to financial vulnerabilities that could be exacerbated by the advent of additional adverse shocks. For instance, in countries where sovereign or corporate debt levels are high, higher interest rates could increase debt-servicing burdens and concerns about debt sustainability, which could be exacerbated by currency depreciation. An increase in risk premiums could kick off deleveraging dynamics as financial intermediaries de-risk. And shallow liquidity in some markets could become an amplification channel in the event of further adverse shocks.
For some emerging economies, high interest rates in combination with weaker demand in advanced economies could increase capital outflow pressures, particularly commodity importers facing higher commodity prices and weaker exchange rates. And these pressures would be particularly challenging for borrowers with currency mismatches between their assets and liabilities.
This is especially true at times when fiscal, macroprudential, and monetary buffers are more limited. Fiscal and monetary policy were both supportive in response to the pandemic, and both were naturally expected to reverse course as the recovery gathered steam. But the advent of the war has led to a significant hit to real incomes from large price increases in energy and other commodities in some of the most severely affected economies.
With respect to macroprudential buffers, nearly all of the jurisdictions that built countercyclical capital buffers before the pandemic released those buffers at the outset of the pandemic, and the buffers have not been fully replenished so far. A European Central Bank analysis concluded that the release of capital buffers increased headroom for banks relative to not only their regulatory thresholds, but also their internal risk controls, and enabled banks to continue providing credit to households and businesses.6
And of course, monetary policy is focused on restoring price stability in a high-inflation environment. As the program’s first research paper illustrates, in circumstances in which macroprudential policy cannot on its own eliminate the amplification of shocks through financial vulnerabilities, in a low-inflation environment, monetary policy has been relatively more accommodative than would be prescribed by a conventional monetary policy rule in order to reduce the likelihood of adverse output and employment outcomes.7 But in a high-inflation environment, monetary policy is restrictive to restore price stability and maintain anchored inflation expectations.
The Federal Reserve’s policy deliberations are informed by analysis of how U.S. developments may affect the global financial system and how foreign developments in turn affect the U.S. economic outlook and risks to the financial system. We engage in frequent and transparent communications with monetary policy officials from other countries about the evolution of the outlook in each economy and the implications for policy. We meet regularly not only with monetary policy officials from different countries, but also with fiscal and financial stability officials in a variety of international settings, which helps us to take into account cross-border spillovers and financial vulnerabilities in our respective forecasts, risk scenarios, and policy deliberations.8
High inflation imposes significant hardships by eroding purchasing power, especially for those households that spend the greatest share of their incomes on essentials like food, housing, and transportation.9 Following a period where a combination of high demand and a lengthy sequence of adverse supply shocks to goods, labor, and commodities drove inflation to multidecade highs, monetary policymakers are taking a risk-management posture to guard against risks of longer-term inflation expectations moving above target, which would make it more difficult to bring inflation down.
In the modal outlook, monetary policy tightening to temper demand, in combination with improvements in supply, is expected to reduce demand–supply imbalances and reduce inflation over time.10 The real yield curve is now in solidly positive territory at all but the very shortest maturities, and with the additional tightening and deceleration in inflation that is expected over coming quarters, the entire real curve will soon move into positive territory.
It will take time for the full effect of tighter financial conditions to work through different sectors and to bring inflation down. Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely. We also recognize that risks may become more two sided at some point. Uncertainty is currently high, and there are a range of estimates around the appropriate destination of the target range for the cycle. Proceeding deliberately and in a data-dependent manner will enable us to learn how economic activity and inflation are adjusting to the cumulative tightening and to update our assessments of the level of the policy rate that will need to be maintained for some time to bring inflation back to 2 percent.
Compliments of the U.S. Federal Reserve.

1. I want to thank Kurt Lewis and Shaghil Ahmed of the Federal Reserve Board for their assistance on these remarks. These views are my own and do not necessarily reflect those of the Federal Reserve Board or the Federal Open Market Committee. Return to text

2. The central banks of the United States, the United Kingdom, Canada, the euro area, Australia, New Zealand, Norway, Sweden, and Switzerland together account for 49 percent of nominal global GDP measured in dollars at market exchange rates. Each of these central banks has raised its policy rate by at least 125 basis points in the past six months. Return to text

3. See Lael Brainard (2015), “Unconventional Monetary Policy and Cross-Border Spillovers,” speech delivered at “Unconventional Monetary and Exchange Rate Policies,” 16th International Monetary Fund Jacques Polak Research Conference, Washington, November 6; and Lael Brainard (2017), “Cross-Border Spillovers of Balance Sheet Normalization,” speech delivered at the National Bureau of Economic Research’s Monetary Economics Summer Institute, Cambridge, Mass., July 13. Return to text

4. A paper based on data between 2005 and 2017 found that about half of the reaction in German domestic yields spills over to U.S. yields following ECB announcements, which was nearly identical to the spillover from U.S. yields to German bund yields measured following Federal Open Market Committee announcements. See Stephanie E. Curcuru, Michiel De Pooter, and George Eckerd (2018), “Measuring Monetary Policy Spillovers between U.S. and German Bond Yields,” International Finance Discussion Papers 1226 (Washington: Board of Governors of the Federal Reserve System, April). Return to text

5. The Federal Reserve’s broad trade-weighted dollar index is based on 26 currencies of major U.S. trading partners. It is published in Statistical Release H.10, “Foreign Exchange Rates,” available on the Board’s website at https://www.federalreserve.gov/releases/h10/current/default.htm. Return to text

6. These findings were part of a box in the ECB’s May 2022 Financial Stability Review titled “Transmission and Effectiveness of Capital-Based Macroprudential Policies.” See European Central Bank (2022), Financial Stability Review (Frankfurt: ECB, May), pp. 93–95. The countercyclical buffer has not been activated in the United States. Return to text

7. See Tobias Adrian and Fernando Duarte (2016), “Financial Vulnerability and Monetary Policy (PDF),” Staff Reports 804 (New York: Federal Reserve Bank of New York, December; revised November 2020). Return to text

8. See Richard H. Clarida (2021), “Perspectives on Global Monetary Policy Coordination, Cooperation, and Correlation,” speech delivered at the “Macroeconomic Policy and Global Economic Recovery” 2021 Asia Economic Policy Conference, sponsored by the Federal Reserve Bank of San Francisco Center for Pacific Basin Studies, San Francisco (via webcast), November 19. Return to text

9. See Lael Brainard (2022), “Variation in the Inflation Experiences of Households,” speech delivered at the Spring 2022 Institute Research Conference, Opportunity and Inclusive Growth Institute, Federal Reserve Bank of Minneapolis, Minneapolis (via webcast), April 5. Return to text

10. See, for example, the year-to-date improvement in the Federal Reserve Bank of New York’s Global Supply Chain Pressure Index, available on the Bank’s website at https://www.newyorkfed.org/research/policy/gscpi#/interactive. Return to text
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Remarks by Luis de Guindos, Vice-President of the ECB, at a panel at the conference “Future of Central Banking” organised by Lietuvos bankas and the Bank for International Settlements | Frankfurt am Main, 29 September 2022 |
I am very pleased to participate in this conference to mark the centenary of Lietuvos bankas. Building on the ECB’s recent strategy review and our reflections on the policy mix, I will outline my views on the interplay between monetary, macroprudential and fiscal policy.
Academic research points to the need for monetary and fiscal policy to work together in times of crisis. This runs contrary to previous wisdom suggesting fiscal policy should mainly support economic outcomes by playing the role of an “automatic stabiliser.” For example, in recessions, government expenditure would automatically increase and tax revenue would automatically decrease. It has become evident that strong, discretionary countercyclical fiscal policy is needed in a crisis. Furthermore, research shows fiscal policy is particularly effective close to the lower bound of interest rates. In this way, fiscal policy not only effectively stabilises the economy, but also contributes to the ECB’s objective of maintaining price stability. Structural fiscal policy[1] could also help raise the natural or equilibrium real rate of interest[2]. This rate of interest has been falling in recent decades and has made the pursuit of price stability much more challenging for central banks. Complementarity between monetary and fiscal policy was greatly effective following a long period of too low inflation. But how is this interaction in an inflationary environment? Or more generally, how does the level of inflation affect the fiscal-monetary policy mix?
Macroprudential policy addresses risks to financial stability. Our strategy review acknowledges that financial stability is a necessary condition for price stability. With an impaired transmission mechanism in times of financial turmoil, maintaining price stability is not possible. At the same time, monetary policy itself can have implications for financial stability. Accommodative monetary policy can reduce credit risk and prevent debt deflation. But it could also trigger excessive risk taking or encourage higher leverage in the financial system. In times of monetary policy tightening, the converse arguments apply.
We therefore decided to implement a new integrated analytical framework, which takes financial stability considerations explicitly into account in our monetary policy decisions. Our focus is threefold: detecting impairments to the transmission mechanism, such as fragmentation risk, monitoring a possible build-up of financial imbalances, and identifying how far macroprudential policy addresses financial imbalances.
Let me summarise how I see the complementarities between fiscal and macroprudential policies with monetary policy:

Fiscal and macroprudential policy should be the first lines of defence for economic stabilisation and fostering financial stability, respectively. This leaves monetary policy to focus exclusively on price stability.

The importance of both fiscal and macroprudential policy has recently increased. Fiscal policy became more important because of its role in times of crises, and its enhanced effectiveness at the lower bound. Macroprudential policy became more relevant given its capacity to contain the potential side effects of monetary policy – both in the accommodative and tightening phases.

Both fiscal and macroprudential policy need to be strongly countercyclical: this entails building up “buffers” during good times[3] for use in bad times.[4] While sovereign debt must be sustainable to be used countercyclically, macroprudential capital buffers need to first be built up so that they can be released when risks materialise.

In the Economic and Monetary Union (EMU), both fiscal and macroprudential policy can be targeted at the country, sector or industry level. They can therefore account for heterogeneity within EMU by alleviating the occasional one-size-fits-all problem.

Thus, both fiscal and macroprudential policy can support monetary policy in its aim to achieve price stability. In the same way, successful monetary policy supports economic stabilisation and financial stability. All three policies have the potential to be mutually complementary in their respective fields of responsibility.
The recent pandemic crisis and the current challenges of soaring energy and commodity prices coupled with high overall inflation have underlined the case for these policy complementarities. The successful interplay between accommodative monetary policy, fiscal support measures and prudential relief safeguarded the real economy and the financial system across the euro area during the pandemic crisis. It succeeded in protecting nominal incomes, thereby supporting a fast recovery of demand when our economies reopened.
Subsequently, to combat steadily rising inflation, in December 2021 we started normalising our monetary policy by announcing the end of our asset purchases, in tandem with targeted fiscal measures aimed at mitigating the hardship of soaring prices for the most vulnerable households and firms. The scope and nature of fiscal measures needs to be different now than it was at the height of the pandemic, following a long period of too low inflation. Fiscal policy should not stoke inflation. It needs to be temporary and tailored to the most vulnerable households and businesses, who are being hardest hit by high inflation.
The Transmission Protection Instrument (TPI) was introduced in July 2022. It aims to ensure that the monetary policy stance is transmitted smoothly across all euro area countries. The TPI therefore supports price stability while safeguarding financial stability by addressing unwarranted, disorderly market dynamics. At the same time, certain euro area countries are applying macroprudential policy for a targeted build-up of resilience. This targeted build-up of capital buffers and the application of borrower-based measures takes into account heterogeneous cyclical developments across countries and sectors in the euro area. It fine-tunes the overall policy mix and complements the single monetary policy in support of overall financial stability across the euro area.
Despite the overall good resilience of the euro area banking sector, certain countries have in recent years seen a build-up of financial vulnerabilities, notably related to residential real estate prices and growing household and firm indebtedness. Some further careful and targeted tightening of macroprudential policy would be beneficial in selected countries at present. Given the deteriorated outlook for economic growth, some countries might benefit from further increasing the resilience of their financial sectors before credit risks start materialising. This includes for example taking measures to preserve capital in the banking sector which could then be used to absorb losses. Lithuania has been active in applying a comprehensive set of macroprudential policies to address current vulnerabilities. This year, authorities have activated a sectoral systemic risk buffer of 2% on residential real estate exposures and have tightened the loan-to-value limit for second and subsequent housing loans to 70%. Of course, the benefits of further policy action across countries, would need to be evaluated against the risk of procyclical effects, which is becoming more likely as the economic outlook worsens.
Let me conclude. Policy interaction has been a critical element for navigating the pandemic. Complementary actions of fiscal, macroprudential and monetary policy, in their respective fields of responsibility, continue to be essential in dealing with the current inflation shock and financial system imbalances.
In the current challenging macro-financial environment, macroprudential buffers contribute to preserving and strengthening banking sector resilience. Hence, I very much welcome that some national authorities – in close collaboration with the ECB – currently assess the extent to which there is merit in implementing additional macroprudential measures. The macroprudential policy response should consider the current near-term headwinds to economic growth since policy tightening should not result in an unintended tightening of credit conditions.
Interactions between monetary and macroprudential policy become even more pronounced in a monetary union where monetary policy, by definition, will be focusing on area-wide economic and financial conditions. In fact, macroprudential policy targeting imbalances building up at national level within the monetary union can help to achieve better policy outcomes in terms of price and financial stability.
Compliments of the European Central Bank.
Footnotes:
1. An important example of such structural fiscal policy is the Next Generation EU (NGEU) programme, with a strong focus on the green transition comprising an expected €401 billion to be invested in euro area countries (around 3.3% of 2021 euro area GDP) over 2021-27, See also Bańkowski et al. (2022), “The economic impact of Next Generation EU: a euro area perspective” Occasional Paper Series, No 291, European Central Bank.
2. This is the rate of interest where monetary policy is neither accommodative nor tightening and where the economy is operating at its potential output.
3. Before the pandemic, the countercyclical capital buffer in the euro area accounted for only 0.2% of the capital stock. See also De Guindos, L. (2019) ”Macroprudential policy after the COVID-19 pandemic”, panel contribution at the Banque de France / Sciences Po Financial Stability Review Conference “Is macroprudential policy resilient to the pandemic?”, 1 March.
4. Estimates for energy-related fiscal support by euro area countries were at 0.8% of GDP for 2022 in July this year and may further rise depending on global developments. See also European Central Bank (2022), Economic Bulletin, Issue 5, Box 7: “Euro area fiscal policy to the war in Ukraine and its macroeconomic impact”, footnote 3.The post ECB | Policy mix of the future: the role of monetary, fiscal and macroprudential policies first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Keynote speech by Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at De Nederlandsche Bank/Official Monetary and Financial Institutions Forum conference on “Moving beyond climate: integrating biodiversity into financial markets” at Artis Zoo in Amsterdam
The translation of the full Latin name of Artis Zoo, founded back in 1838 as “Natura Artis Magistra”, is “Nature is the teacher of the arts”. Today, nature has something to say to all of us: it is hurting. And we are responsible for that hurt. Human activities are behind the decline in natural capital, the reduced capacity to provide ecosystem services and the loss of biodiversity.[1] What’s more, we are putting at risk more than half of global GDP. Around €40 trillion of global income relies on nature.
This means that nature-related risks, including those associated with biodiversity loss, could have significant macroeconomic implications. Failure to account for, mitigate and adapt to these implications is a source of risk for individual financial institutions and for financial stability. In a nutshell, this forms part of our mandate, as acknowledged by the NGFS in its statement on nature-related risks released in March 2022. The final report by the NGFS/INSPIRE joint Study Group referred to in this statement carefully explains how environmental degradation will expose financial institutions to physical and transition risks in a way that is very similar to climate change.
In spite of this, we have to admit that central banks, supervisors, regulators and international standard setting bodies have so far made less progress in integrating environmental risks than climate-related risks. Although the analytical framework for climate-related risks is largely applicable to environmental risks, the latter come with their own unique features and challenges. For example, biodiversity does not have an unequivocal metric like carbon dioxide equivalents, which figure prominently in climate discussions. We therefore need to look at many more metrics, such as nitrogen, phosphorus and carbon dioxide. Let me emphasise “look at more”, not “look away”.
Since we have explicitly recognised the materiality of nature-related financial risks, it is no longer a matter of principle that the work on environmental risks is less advanced than the work on climate. It is a matter of putting it into practice. And it is clear that we can no longer drag out feet with putting-it-into-practice. Here an important contribution will be made by the new NGFS task force on nature-related risks that will be led by Saskia de Vries from De Nederlandsche Bank and Sylvie Goulard from the Banque de France. Both representatives from institutions that have done pioneering work on nature-related risks.[2]
At the ECB the work on environmental risks is already starting to take shape in our banking supervision. In 2020 we published our guide on our supervisory expectations for the risk management of C&E risks.[3] Indeed, C-and-E: climate-related and environmental risks. In this guide, we explicitly recognised that environmental factors related to the loss of ecosystem services, such as water stress, biodiversity loss and resource scarcity have also been shown to drive financial risk. We therefore expect banks to evaluate all environmental risk-related information beyond just climate risks to ensure that their risk management is all encompassing.
When we asked banks last year to evaluate their own risk management practices in relation to our expectations, we found that some of them had already started to identify and manage risks beyond those that are just climate-related. However, very few banks back then had actually begun to implement these practices and we made them aware of this gap with regards to our supervisory expectations.
As part of this year’s thematic review on climate-related and environmental risks, we followed up on these points, focusing on banks’ assessments of the materiality of environmental risks and on their risk management frameworks. Our preliminary results show that many banks have by now made an initial assessment of their environmental risk exposures. We also see that banks are using the “climate risk playbook” to develop their approach to environmental risk. They map out physical and transition risk drivers and typically start by excluding some activities to avoid financing those that have an excessive environmental impact. Banks also integrate these risks into their due diligence processes to collect information and gain a better understanding of how their clients might be affected. Besides these qualitative approaches, several institutions are leading the way in quantifying the risks and impacts through the use of biodiversity footprinting exercises and the development of approaches for biodiversity scores.
We welcome this progress and will use the opportunity to share the best practices we have identified when we will soon publish the results of the thematic review. At the same time, we will reiterate that all banks must ultimately comply with all of our supervisory expectations on C&E risks by the end of 2024 at the latest.
With respect to our monetary policy, the ECB is currently fully on track implementing the climate action plan that we committed to when we introduced our new monetary policy strategy in the summer of last year. To give you a concrete example, last week we announced the details of how we intend to gradually decarbonise our corporate bond holdings, starting on next Monday, in line with the goals of the Paris Agreement. At the same time, it is important to remember that our climate action plan is not an aim in itself but rather a means for us to deliver on our mandate. That’s why the Governing Council announced in July that it would regularly review the measures proposed in its action plan to assess whether they are still fit for purpose, and continue to support the decarbonisation path towards reaching the goals under the Paris Agreement, as well as the EU climate neutrality objectives. And not only this. Something that is clearly relevant for us and this conference is that we will adapt these measures if necessary to address other environmental risks within our mandate.
Expressing a readiness to look beyond climate-related risks and address environmental risks is an important initial step that I invite all relevant stakeholders to take. That applies to central banks, supervisors, regulators and international standard setting bodies. Even if the current focus of the ongoing work is still on climate-related risks, our ever-evolving understanding of the materiality of environmental risks and their transmission channels implies that these risks ultimately need to be taken into consideration in everything we do.
Let me conclude.
For the first time in 75 years the Artis Groote Museum – where this conference is held – reopened its doors this spring. The theme of the museum is that everything is connected: plants, animals, microbes and human beings, all in a precious but delicate harmony. Economics and finance are no different. Taken together, households, firms, governments and financial institutions form a similarly precious – and at times delicate – equilibrium. Our analysis, assessment and policy actions should reflect the fact that nature and the economy are equally interconnected and interdependent. In line with a central theme of the landmark Dasgupta Review on the economics of biodiversity that “humanity is embedded in nature”.[4]
Back to “Natura artis magistra”. Nature isn’t just the teacher of the arts, it is also the teacher of finance. One may be inclined to paraphrase: “natura finis magistra”.[5] In fact, nature makes finance thrive. This is what ultimately needs to become fully embedded in the work of central banks, supervisors, regulators and international standard setting bodies, within their mandate. Because nature-related risks are part of our mandate.
Thank you for your attention.
Compliments of the European Central Bank.
Footnotes:
1. University of Cambridge Institute for Sustainability Leadership (2021), Handbook for nature-related financial risks: key concepts and a framework for identification, March.
2. De Nederlandsche Bank (2020), Indebted to nature: Exploring biodiversity risks for the Dutch financial sector, June; De Nederlandsche Bank (2019), Values at risk? Sustainability risks and goals in the Dutch financial sector; and Banque de France (2021), “A silent spring for the financial system? Exploring biodiversity – Related financial risks in France”, Working Paper Series, No 826, August.
3. ECB (2020), Guide on climate-related and environmental risks – Supervisory expectations relating to risk management and disclosure, November.
4. Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta Review, HM Treasury, London, February.
5. The word “finance” originates from the Latin “finis” meaning “limit” or “end” and was first used in its current context in French in the sense of settling debt.The post ECB | Natura finis magistra – acknowledging nature-related risks to make finance thrive first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

We wanted to present together the eighth package of sanctions. Last week, Russia has escalated the invasion of Ukraine to a new level. The sham referenda organised in the territories that Russia occupied are an illegal attempt to grab land and to change international borders by force. The mobilisation and Putin’s threat to use nuclear weapons are further steps on the escalation path.
We do not accept the sham referenda nor any kind of annexation in Ukraine. And we are determined to make the Kremlin pay for this further escalation. So today, we are together proposing a new package of biting sanctions against Russia.
The first part concerns the listing of individuals and entities that will be presented by the HR/VP, Josep Borrell, in a moment.
I want to focus on the second part of these sanctions that will further restrict trade. By that, we isolate and hit Russia’s economy even more. So we propose sweeping new import bans on Russian products. This will keep Russian products out of the European market and deprive Russia of an additional EUR 7 billion in revenues. We are also proposing to extend the list of products that cannot be exported to Russia anymore. The aim is here to deprive the Kremlin’s military complex of key technologies. For example, this includes additional aviation items, or electronic components and specific chemical substances. These new export bans will additionally weaken Russia’s economic base and will weaken its capacity to modernise. We will also propose additional bans on providing European services to Russia, and a prohibition for EU nationals to sit on governing bodies of Russian state-owned enterprises. Russia should not benefit from European knowledge and expertise.
The third complex is concerning Russian oil. As you know, Russia is using the profits from the sale of fossil fuels to finance its war. Concerning Russian oil, you might recall that we have already agreed to ban seaborne Russian crude oil in the European Union as of 5 December. But we also know that certain developing countries still need some Russian oil supplies, but at low prices. Thus, the G7 has agreed in principle to introduce a price cap on Russian oil for third countries. This oil price cap will help reduce Russia’s revenues on the one hand and it will keep global energy markets stable on the other hand. Today, in this package, here, we are laying the legal basis for this oil price cap.
And my last point that I want to focus on is: We are stepping up our efforts to crack down on circumvention of sanctions. Here, we are adding a new category. In this category, we will be able to list individuals if they circumvent our sanctions. So for example, if they buy goods in the European Union, bring them to third countries and then to Russia, this would be a circumvention of our sanctions, and those individuals could be listed. I think this will have a major deterring effect. Our sanctions have hit Putin’s system hard. They have made it more difficult for him to sustain the war. And we are increasing our efforts here and moving forward.
Compliments of the European Commission.The post Press statement by President von der Leyen on a new package of restrictive measures against Russia first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Today, the Commission calls on Member States to modernise their minimum income schemes as part of the ongoing pledge to reduce poverty and social exclusion in Europe. The proposed Council Recommendation on adequate minimum income ensuring active inclusion sets out how Member States can modernise their minimum income schemes to make them more effective, lifting people out of poverty, while promoting the labour market integration of those who can work.
Minimum income is cash payments that help households who need it to bridge the gap to a certain income level to pay the bills and live a life in dignity. They are particularly important in times of economic downturns, helping to cushion drops in household income for people most in need, thereby contributing to sustainable and inclusive growth. They are generally complemented with in-kind benefits giving access to services and targeted incentives to access the labour market. In this way, minimum income schemes are not a passive tool but act as a springboard to improve inclusion and employment prospects. Well-designed minimum income schemes strike a balance between alleviating poverty, incentivising work and maintaining sustainable budgetary costs.
Minimum income and social safety nets must incorporate sufficient incentives and support for beneficiaries who can work to reintegrate in the labour market. Their design should therefore also help to fully realise the potential of the green and digital transitions by supporting labour market transitions and active participation of disadvantaged people.
The social and economic advantages of adequate and targeted social safety nets became even more important during the lockdowns linked to the COVID-19 pandemic. Adequate minimum income is highly relevant in the current context of rising energy prices and inflation following Russia’s invasion of Ukraine as income measures can be targeted to specifically benefit vulnerable groups.
The proposal will help achieve the EU’s 2030 social targets to reduce the number of people at risk of poverty of exclusion by at least 15 million people as set in the European Pillar of Social Rights Action Plan. It will also help Member States reach the goal that at least 78% of the population aged 20 to 64 should be in employment.
Executive Vice-President for an Economy that Works for People, Valdis Dombrovskis, said: “Social protection systems help to reduce social inequalities and differences. They ensure a dignified life for those who cannot work – and for those who can, encourage them back to a job. At a time when many people are struggling to make ends meet, it will be important this autumn for Member States to modernise their social safety nets with an active inclusion approach to help those most in need. This is how we can fight poverty and social exclusion, and help more people into work during this challenging period.”
Commissioner for Jobs and Social Rights, Nicolas Schmit, said: “Today, more than one in five people in the EU are at risk of poverty and social exclusion. Minimum income schemes exist in all Member States, but analysis shows that they are not always adequate, reach all those in need, or motivate people to return to the labour market. Against a backdrop of soaring living costs and uncertainty, we must ensure our safety nets are up to the task. We should pay particular attention to getting young people back into work also through income support, so they do not get trapped in a vicious cycle of exclusion.”
Well-designed social safety nets to help people in need
While minimum income exists in all Member States, their adequacy, reach, and effectiveness in supporting people vary significantly.
Today’s proposal for a Council Recommendation offers clear guidance to Member States on how to ensure that their minimum income schemes are effective in fighting poverty and promoting active inclusion in society and labour markets.
Member States are recommended to:

Improve the adequacy of income support:

Set the level of level of income support through a transparent and robust methodology.
While safeguarding incentives to work, ensure income support gradually reflects a range of adequacy criteria. Member States should achieve the adequate level of income support by the end of 2030 at the latest, while safeguarding the sustainability of public finances.

Annually review and adjust where necessary the level of income support.

Improve the coverage and take-up of minimum income:

Eligibility criteria should be transparent and non-discriminatory. For instance, to promote gender equality and economic independence, especially for women and young adults, Member States should facilitate the receipt of income support per person, instead of per household, without necessarily increasing the overall level of benefits per household. In addition, further measures are needed to ensure the take-up of minimum income by single-parent households, predominantly headed by women.
Application procedures should be accessible, simplified and accompanied by user-friendly information.
The decision on a minimum income application should be issued within 30 days from its submission, with the possibility of reviewing this decision.
Minimum income schemes should be responsive to socio-economic crises, for instance by introducing additional flexibility regarding eligibility.

Improve access to inclusive labour markets:

Activation measures should provide sufficient incentives to (re)enter the labour market, with particular attention to helping young adults.
Minimum income schemes should help people to find a job and keep it, for instance through inclusive education and training as well as (post)placement and mentoring support.
It should be possible to combine income support with earnings from work for shorter periods, for instance during probation or traineeships.

Improve access to enabling and essential services:

Beneficiaries should have effective access to quality enabling services, such as (health)care, training and education. Social inclusion services like counselling and coaching should be available to those in need.
In addition, beneficiaries should have continuous effective access to essential services, such as energy.

Promote individualised support:

Member States should carry-out an individual, multi-dimensional needs assessment to identify barriers that beneficiaries face for social inclusion and/or employment and the support needed to tackle them.
On this basis, no later than three months from accessing minimum income, beneficiaries should receive an inclusion plan defining joint objectives, a timeline and a tailored support package to reach this.

Increase the effectiveness of governance of social safety nets at EU, national, regional and local level, as well as monitoring and reporting mechanisms.

EU funding is available to support Member States in improving their minimum income schemes and social infrastructure through reforms and investments.
Better impact assessments for fair policies
Today, the Commission also presents a Communication on better assessing the distributional impact of Member States’ reforms. It offers guidance on how to better target policies in a transparent way, making sure that they contribute to addressing existing inequalities and taking into account the impact on different geographical areas and population groups, like women, children and low-income households. The Communication covers guidance on the policy areas, tools, indicators, timing, data and dissemination of the assessment. The guidance presented today is also relevant for Member States when designing their minimum income schemes.
Next steps
The Commission proposal for a Council Recommendation on adequate minimum income ensuring active inclusion will be discussed by Member States with a view to adoption by the Council. Once adopted, Member States should report to the Commission every three years on their progress on implementation. The Commission will also monitor progress in implementing this Recommendation in the context of the European Semester. The proposed instrument – a Council Recommendation – gives Member States enough leeway to determine how to best achieve the objectives of this initiative, taking into account their specific circumstances.
Background
Over one in five persons – or 94.5 million people in total – were at risk of poverty or social exclusion in the EU in 2021. Social safety nets play a key role in supporting these people and helping them to (re)enter the labour market if they can. However, more effective social protection systems are needed, with around 20% of jobless people at risk of poverty not being eligible to receive any income support and estimates of around 30% to 50% of the eligible population not taking up minimum income support.
The European Pillar of Social Rights includes principle 14 on the right to adequate minimum income. To promote social inclusion and employment and ensure that no one is left behind, the Commission has presented many additional initiatives, which complement today’s proposal. This includes the proposal for a Directive on adequate minimum wages to ensure that work pays for a decent living; the European Child Guarantee to give children free and effective access to key services; and the European Care Strategy to improve the situation especially of women and people in the care sector. The Commission Recommendation for Effective Active Support to Employment (EASE) offers guidance on active labour market policies, including upskilling and reskilling. The Council Recommendation on ensuring a fair transition towards climate neutrality, sets out specific guidance to implement policies for a fair transition, with particular attention to vulnerable households. Finally, the Commission proposal for a Regulation on an emergency intervention to address high energy prices seeks to address the dramatic energy price increases by reducing consumption and sharing the exceptional profits of energy producers with those who need help the most.
Compliments of the European Commission.The post Minimum income: more effective support needed to fight poverty and promote employment first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.