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Welcome to the Central Bank Insider Archives. We are pleased to be able to provide you with this intimate look at central banking events, policies, and staff. Commentary is updated as available (generally bi-weekly) and archived monthly. The source commentary "Newsmakers" is reprinted at USAGOLD with permission and by courtesy of Central Banking Publications Ltd.

26 September 2000

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-- OPINION --
In a change to the usual format, this week's "Central Bank Newsmakers" will be an opinion of the editor. I would welcome any comments to BWELLER@CENTRALBANKING.CO.UK
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Central bank independence threatened in Indonesia
By Benedict Weller

Bank Indonesia governor, Syahril Sabirin, has been under arrest for three months on the suspicion of being involved in the illegal transfer of central bank money to Bank Bali. But after 90 days of being held with no charge being made, there are rumours that Syahril might soon be released. In fact, it is important to point out that in a country, which recognised "habeas corpus", Syharil could not have been arrested on suspicion at all; he would have had to be either formally charged or released.

Indonesian President Abdurrahman Wahid is the key figure behind this sad story. He is now almost blind and recently has been forced by the Parliament to hand over wide ranging powers to Vice President Megawati Sukarnoputri. Yet he still pursues a personal mission to remove Syahril in a desperate effort to save face and rebuild his public support. Wahid has urged investigators to look for any evidence, which could portray Syahril in a bad light. The key issue is whether he was indeed a principal player in the Bank Bali affair, and was or was not present at meetings where the bailout terms were agreed.

Most of the Indonesian population support the central bank governor. They have ample reason to be sceptical of Wahid's accusations. Wahid had earlier offered the Syahril a perquisite position, such as Ambassador, which is hardly a proper offer if the Governor had been guilty of any serious crime. When this failed, the Governor was threatened with prosecution, then jailed indefinitely.

But even if the Governor regains his freedom, the damage done to Bank Indonesia's independence will take much longer to heal. Bank Indonesia only gained independence from government influence a year ago. In fact, one of the new laws states that the Governor can only be removed by the consent of Parliament not by the President alone. If Syahril returns to the Bank to complete his full four-year term, his independence and personal credibility will have been strengthened by having seen off the president. But when his term ends in 2003, what will be the implications for the independence of the future central bank governor when put under pressure by the president? Wahid's actions have set a dangerous precedent. That is why the IMF raised its concerns with the president.

Central bank independence is critical for economic development in emerging market economies as a way of disciplining governments and maintaining price stability. However, building a consensus among politicians and the public in favour of central bank independence - now so "de rigueur" in Western countries - is still painfully hard to achieve in developing countries. When independence has been achieved - especially in such an economically and politically important country such as Indonesia - it should be nurtured and cherished. The treatment meted out to Syahril raises issues of governance that should concern central bankers everywhere.

I would welcome any comments to BWELLER@CENTRALBANKING.CO.UK

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19 September 2000

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NEWS THIS WEEK
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Roth to be new chairman of SNB
Total international reserves up by 9%
Currency composition of reserves
ECB sells dollars, but not intervention
Gold Medal Bank for Negara Governor
Eight female central bank governors
RBF announces monetary policy relaxation
Bundesbank / BIS conference
"Central Banking and Sustainable Development in 21 Century"
Is the pre-eminent position of central banks under threat?
Debate over foreign reserves
Australian Reserve Bank almost intervened
Evolution of the RBA
National Bank of Ukraine misreported reserves, says IMF
Lady Noakes joins anti-euro campaign
Bank governor pushed to brink of quitting by Brown
Velimir Sonje leaves the Croatian National Bank
South African central bank governor robbed
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CURRENCY CORNER
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Hong Kong challenges counterfeit menace
Iraq prepares to "dump the dollar"
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WEBSITE CORNER
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Bank of Namibia
National Bank of Georgia
Norway's Petroleum Fund
Securrency
RBNZ website "better than ever"
Website awards
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PAPERS OF THE WEEK
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The Zero Bound in an Open Economy
Risk Management in Danmarks Nationalbank
Foreign exchange settlement risk
Interview with Arthur Levitt, US SEC chairman

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BIRTHDAYS
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* Sir Eddie George, Governor of the Bank of England, was 62 years old on September 11. He has been at the Bank ever since he graduated from Cambridge University in 1962. He was knighted this year for services to the economy and he speaks fluent Russian.

* Lars Heikensten, deputy governor of the Sveriges Riksbank, was 50 years old on September 13. He has a long career as an economist - in academia at Stockholm University; in the Ministry of Finance as chief economist of the National Debt Office; and as a member of the EU monetary committee. He has been deputy governor since 1995.

* Wolfganag Duchatczek, executive director of the Central Bank of Austria in charge of payment systems and information technology, will be 51 years old on September 21. He joined the central bank in 1976.

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NEWS THIS WEEK
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Roth to be new chairman of SNB
September 15

Contrary to expectations, and the recommendation of the central bank council itself, Professor Bruno Gehrig was not appointed the successor to Hans Meyer as the chairman of the Swiss National Bank. Instead, the prize has gone to the French-speaking Jean-Pierre Roth. It is believed to be the first time that the recommendation of the central bank council on the presidency has been set aside by the Government.

When Meyer announced in July that he would retire at the end of this year, cutting short his term, it was clear that the choice lay between Gehrig and Roth. Gehrig, who is 54 years old, has been a member of the three-man governing board with Meyer and Jean-Pierre Roth since 1996.

Gehrig has an accomplished career in central banking, academia and commercial banking. His earlier career was spent as an assistant professor at the Univeristy of Berne. He later moved into banking becoming chief economist of Union Bank of Switzerland. He eventually became head of Securities and Trading at UBS Group in 1989, before leaving UBS to become chief executive officer of Cantrade Private Banking Group (1992-96). Also, from 1992-96 he was Professor of Banking and Finance, St Gallen University; and during the same period he was also a member of the Swiss Banking Commission responsible for banking supervision.

Roth, who is 54 years old too and also started his career as an academic at Geneva University, joined the SNB in 1979 in the Economics section. He became Vice chairman and Head of Department II in 1996. He is also a member of the Board of the International Centre for Banking and Monetary Studies.

It is believed that the decision was made personally by Mr Couchepin, the Swiss finance minister.

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Total international reserves up by 9%
September 15

According to the IMF annual report released on September 15, total international reserves (which include gold) increased by 9% during 1999 and stood at 1.6 trillion SDRs. Developing foreign exchange reserves rose by 12% to SDR 766bn. While developed country reserves rose at the slower rate of 9%, developing countries have steadily increased their share of foreign exchange holdings; at the end of 1999, they held 60% of total foreign exchange reserves.

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Currency composition of reserves
September 15

The IMF annual report also said that the currency composition of foreign exchange reserves has changed gradually but fairly steadily over the last decade, with holdings of dollar reserves rising to 66% from 51% at the start of the decade. In 1999 the euro was the second most important reserve currency, accounting for a 13% share. The share of the euro at the end of 1999 was 2% lower than the end of 1998 combined share of the four euro legacy currencies (DM, FrF, guilder, ecu). Over the 1990s sterling's share has increased marginally from 3% to 4%, while the international use of the Japanese yen has declined marginally.

[Randy's note: The reason for the decline in the euro share of international reserves from 1998 to 1999 is that while the legacy currencies where still independent in 1998, the various European Monetary Union countries held each other's currency in their reserves. But when they all were transformed into euros in 1999, these currencies all became euros, and therefore no longer counted as reserve assets within these EMU banks...because euros would qualify as the nation's own currency at that point! Kinda cool, huh?]

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ECB sells dollars, but "not intervention"
September 14

The ECB has said that from last Thursday and over the next few days, it will sell the EUR 2.5bn in interest which it has accumulated on its foreign exchange reserves since the start of 1999. Once this has been done, the ECB will repatriate interest earnings on a regular basis. Assuming that the ECB's FX reserves will stand at something like EUR 39.5bn once the initial sales have been completed (the EUR 33.5bn which was transferred to the ECB at the start of 1999 adjusted for FX revaluation since then), this implies sales of around EUR 2bn per year. In a statement, Wim Duisenberg said that there was no policy significance in the sales and that it was purely a reserve management exercise aimed at maintaining an appropriate currency mix. The markets thought however that given the timing, with the euro on its back, the move might have been aimed at supporting Europe's ailing currency. Dr Welteke of the Bundesbank said coordinated intervention might be discussed at the G7 summit but was "unlikely".

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Gold Medal for Bank Negara Governor
August 25

Bank Negara governor Datuk Dr Zeti Akhtar Aziz - the only woman in Asia to head a central bank - was awarded the Tun Fatimah Gold Medal in conjunction with the Wanita 2000 celebrations. The award was presented at the Wanita 2000 dinner to celebrate National Women's Day on August 25. Zeti was chosen for her achievements, professionalism and contributions to the national economy. The Queen was the guest-of-honour at the function, which was attended by more than 1,000 guests from non-governmental organisations and the corporate sector.

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Eight female central bank governors
Compiled by Central Banking Publications

Datuk Dr Zeti Akhtar Aziz, Governor, Bank Negara Malaysia
Hanna Gronkiewicz-Waltz, President, National Bank of Poland
Marion Williams, Governor, Central Bank of Barbados
Bodil Nyboe Andersen, Chairwoman, Damarks Nationalbank
Linah Mohohlo, Governor, Bank of Botswana
Cheryl-Ann Lister, Chairwoman, Bermuda Monetary Authority
Dolly Singh, Governor, Bank of Guyana
Maria do Carmo Carvalho, Governor, Central Bank of Sao Tome e Principe

Other prominent female central bankers:

Cathy Mineham, President of Federal Reserve Bank of Boston
Sirkka Hamalainen, Member of the Board, ECB
Sheryl Kennedy, Deputy Governor, Bank of Canada
Gill Marcus, Deputy Governor, South African Reserve Bank
Marcia de Wachter, Deputy Governor, National Bank of Belgium
Tanya Sirivedhin, Deputy Governor, Bank of Thailand
Gertrude Tumpel-Gugerell, Vice Governor, Central Bank of Austria
Wendy Craig, Deputy Governor, Central Bank of Bahamas
Julia Majaha-Jartby, Deputy Governor, Bank of Botswana
Baroness Noakes, Chairman of Nedco, Bank of England
Isabel Strauss-Kahn, Banque de France
Faith Stewart, Division Chief, Bank of Jamaica
Jennifer Nero, Head of Internal Audit, Eastern Caribbean Central Bank
Kee-Tian Teo, Head of Risk Management, Bank Negara Malaysia
Yeo Lian Sim, Assistant Managing Director, Monetary Authority of Singapore
Merlyn Lowther, Chief Cashier, Bank of England
DeAnne Julius, MPC member, Bank of England
Carmen Elena de Aleman, Vice President, Central Bank of El Salavador
Miranda Goeltom, Deputy Governor, Bank Indonesia
Sylvia Piterman, Director of Foreign Currency Department, Bank of Israel
Veronica Bacalu, Vice Governor, National Bank of Moldova
Svetlana Pinzari, Vice Governor, National Bank of Moldova
S. G. Mdluli, Deputy Governor, Central Bank of Swaziland
Amoy Chang Fong, Deputy Governor, Central Bank of Trinidad and Tobago
Karen Johnson, Head of International Relations, Board of Governors, Federal
Reserve

Please email BWELLER@CENTRALBANKING.CO.UK if there have been any major
omissions.

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Reserve Bank of Fiji announces monetary policy relaxation
September 1

On September 1, the Reserve Bank of Fiji announced a relaxation of monetary policy in line with the Bank's assessment that financial pressures have eased and that risks to the economic outlook and to foreign reserves have abated somewhat. Fiji's foreign exchange reserves are currently over $800 million with projections showing reserves still around this comfortable level at year-end. With the outlook for foreign reserves more secure, and underlying inflation pressures subdued, there is now scope for the Bank to start relaxing the measures put in place on May 22.

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Bundesbank / BIS conference
September 28/29

The Deutsche Bundesbank and Bank for International Settlements are jointly holding a 2 day conference in Frankfurt on "Recent Developments in Financial Systems and their Challenge for Economic Policy: a European perspective". The list of highly distinguished speakers includes Ernst Welteke (Bundesbank), Jean-Claude Trichet (Banque de France), William White (BIS), Werner Seifert (Deustche Borse), Alexandre Lamfalussy (EU "Wiseman"), Tommaso Padoa-Schioppa (ECB), Jurgen Stark (Bundesbank), David Folkerts-Landau (Deutsche Bank), Otmar Issing (ECB), Charles Goodhart (LSE), Jose de Molina (Bank of Spain), Andrew Crockett (BIS) and Michael Mussa (IMF). To obtain more information and an invitation see http://www.bundesbank.de

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"Central Banking and Sustainable Development in 21 Century"
28-30 August

From 28 to 30 August Bank Negara Malaysia (BNM) organised a high level conference aimed at discussing issues and challenges facing central banks and policymakers in the twenty-first century. The conference was organised to commemorate the establishment of the Tun Ismail Ali Chair in Monetary and Financial Economics at the University of Malaya. The Chair is being set-up by BNM in honour of the late Tun Ismail Mohamed Ali, the first Malaysian Governor of BNM.

The late Tun Ismail was the Governor of BNM from 1962-1980, during which he established a tradition of integrity, efficiency and excellence that set the foundation for BNM to become a premier institution in the country. During his tenure at Bank Negara, Tun Ismail was instrumental in building the strong foundation of the financial sector. Tun Ismail was well respected and highly regarded internationally, particularly among the central banking community.

The intensification of globalisation process and rapid advancement of technology in the twenty first century poses new challenges to central bankers and policy makers. In this regard, the conference aimed to provide a forum to discuss current issues pertaining to central banking and sustainable economic development, the two areas that Tun Ismail had made significant contribution during his lifetime. BNM conference brought together central bankers, regulators and well-known academicians to discuss these issues.

Prominent speakers included:

* His Excellency Dr. Supachai Panitchpakdi, Thailand's Deputy Prime Minister and Minister of Commerce, and Director-General Designate of the World Trade Organisation;
* Central Bank Governors of Indonesia, China, Taipei and Malaysia;
* Member of the Policy Board, Bank of Japan;
* Former Central Bank Governors of Australia and the Philippines;
* Professor Robert Mundell, the 1999 Nobel Laureate;
* Chairmen of Hong Kong Securities and Futures Commission and Malaysia's Securities Commission;
* Sir Alan Walters, Vice Chairman of the AIG International Limited;
* Professor Joseph Stiglitz, the former Chief Economist of the World Bank;
and
*Professor Jeffrey Sachs and Professor Dani Rodrik of Harvard University.

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Is the pre-eminent position of central banks under threat?

At the annual symposium of central bankers organised by the Federal Reserve Bank of Kansas City in Jackson Hole, there was a debate about the continuation of global economic integration and the increasing size of capital flows and the implications for central banks. Michael Mussa, the director of research at the IMF, argued that the risk of a return to isolationism was small. But Alan Greenspan, the chairman of the Federal Reserve, was less cheery: if global growth were to stall, protectionism might well return.

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Debate over foreign reserves

At Jackson Hole, there was also a general agreement that countries must opt for either fully fixed exchange rates or floating rates, but avoid a halfway house of a managed exchange rate. It was then pointed out: if central banks are not supposed to intervene, why do they have huge reserves? However, for all the debate this subject generated at the conference, this is not a new subject.

[Randy's note: This is such an easy concept to grasp, why do they struggle with it? Simple thought reveals that because a national central bank can typically print national currency at will, it is only the reserve assets that have domestic and international bargaining power in the event that confidence is lost in the national currency. The simple concept is that the reserve assets (foreign exchange and GOLD best of all) represent the meaningful savings account of the nation's government. And the lesson to be learned is: if your own currency is of dubious merit for use in this meaningful "savings account", then the same can be said of other national currency. That is what makes gold the best reserve asset of them all.]

Despite seeming consensus about the "uselessness of reserves", central banks continue to accumulate foreign exchange as can be seen in the latest IMF annual report - and this is not just in developing countries, but also developed. The ECB is discussing intervention - and putting its toe in the water (see above note). At a seminar held by Central Banking, it was argued that the essential purpose of reserves is to provide confidence - to provide confidence in the external value of the currency, to provide confidence in a country's credit rating, and to preserve the central bank's reputation and esteem as a major player in the financial markets. Reserves are not just there for intervention purposes. Politics also play its part. Also, more countries see reserves as a fund for future generations, like the Norwegian Petroleum Fund or the secretive GSIC in Singapore.

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Australian Reserve Bank almost intervened
Early September

The Australian central bank revealed that it almost intervened to prop up the currency in April and May this year. The Reserve Bank says it was so concerned about the slide in the currency during April and May it was getting ready to step into the markets to defend the dollar. In April and May, the dollar fell from a high of 61 US cents to bottom at 56.45.

The disclosure has come in the central bank's annual report which was published this month. The Reserve Bank intervenes infrequently, only when there is clear evidence of currency overshooting. The last substantial intervention was on several occasions in 1998.

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Evolution of the RBA
Early September

In the Reserve Bank annual report there is also an excellent article on "The Evolving Structure of the RBA" over the last 40 years, with particular emphasis on the last 15 years. During this latter period, even though the Bank has continued to expand in terms of the size of its balance sheet, it has contracted markedly in terms of the number of staff. Staff numbers reached a peak in 1983 of 3,186 employees. By June 2000, that figure has fallen to 807. The key to understanding the dramatic fall, one has to look at the restructuring of the RBA's goals and mission (it is no longer responsible for banking supervision) and its reduced involvement in "Business Services" (transactional banking, registry operations and issue and processing of currency notes).

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National Bank of Ukraine misreported reserves, says IMF

PricewaterhouseCoopers released their third report on the National Bank of Ukraine http://www.imf.org/external/np/sec/nb/2000/nb0076.htm The report raised no significant issues in addition to those discussed in the first two reports. At an executive board meeting following the publication of the final report, the IMF finds that the Ukrainian National Bank misrepresented its international reserves and considers circumstances and proposes measures to prevent recurrences. See: http://www.imf.org/external/np/sec/nb/2000/nb0077.htm

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Lady Noakes joins anti-euro campaign

The Bank of England's top non-executive director has joined the anti-euro campaign. Lady Noakes was one of 300 business leaders who signed a double page advertisement in the Financial Times saying 'No' to the single currency.

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Velimir Sonje leaves the Croatian National Bank
September 1

Following a successful career at the Croatian National Bank, Velimir Sonje, executive director responsible for research and statistics, is pursuing a career in the private sector. He left on September 1 and is a candidate to become a Board Member of Raiffeisenbank Austria d.d. Zagreb.

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CURRENCY CORNER
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Hong Kong challenges counterfeit menace
September 6

The Hong Kong Monetary Authority is facing the threat of a surge of $1000 counterfeit banknotes circulating throughout its territory. According to a CNN report, the HKMA have moved to combat the flood of counterfeit $1000 notes by allowing the note issuing banks of the Hong Kong & Shanghai Banking Corporation, the Standard Chartered Bank and the Bank of China to replace existing banknotes within three to six months in its battle against counterfeit currency.

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Iraq prepares to "dump the dollar"
September 18

The government of Iraq have revealed that it is preparing to replace the dollar as a means of payment in overseas transactions. It is thought that the government may begin to use the euro for foreign transactions.

For more information on notes and coin news, see London Banknote and Monetary Reseach Centre http://www.lbmrc.co.uk

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WEBSITE CORNER
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Bank of Namibia

The Bank of Namibia has launched its new website at http://www.bon.com.na The site contains relevant information about the Bank, it's publications and the services it offers. For information on the website, please contact Texan Nehoya, senior IT manager Texan.Nehoya@bon.com.na

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National Bank of Georgia

An excellent website just launched by the National Bank of Georgia. It is very clearly presented and easy to navigate. Not many central banks are left to get on the internet. The Central Bank of Libya is also launching its website in the near future. Setting up an easy-to-read website is a great step forward in central bank transparency and a very important part of external communications strategy (see Rod Carr's statement below).

For more information see website at http://www.nbg.gov.ge Or email Mr Lobzhanidze at webmaster@nbg.gov.ge

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Norway's Petroleum Fund

The Petroleum Fund which has roughly $35bn of assets (which will rise to $45bn if the current oil price is sustained) has a new updated website. See http://www.norges-bank.no/english/

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Securency

Securency - a joint venture between the Reserve Bank of Australia and UCB Films - has recently set up its website at http://www.securency.com.au

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"RBNZ website better than ever"

The New Zealand Reserve Bank has redesigned and improved its website (http://www.rbnz.govt.nz). Deputy Governor Rod Carr said: "As well as the site having a new look and feel, visitors to the site will be able to access the data and information much more easily. The RBNZ aims to be as transparent as it can be in what it does. Our website is one of the most important ways we have to communicate with New Zealanders and interested people offshore."

Visitors will find:
· a search engine and better layout of information
· one-click links to most used statistics
· all publications
· comprehensive record of all speeches and news releases
· wealth of information on monetary policy, currency, banking system, payment system etc

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Website awards

In a tactful move, Lombard Street Research will be awarding its annual "Best central bank website award" to the European Central Bank (http://www.ecb.int). They will be having a party at their offices on Tuesday 19 September when they will present the award to a member of the ECB research department. Email james.higgo@lombard-st.co.uk

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PAPERS OF THE WEEK
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The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap
By Lars Svensson (Lars.Svensson@iies.su.se)

A very interesting paper by Professor Svensson going against the grain of traditional theories of the cause and solution of Japan's economic difficulties. It was presented at the Bank of Japan's 9th international conference, "The Role of Monetary Policy under Low Inflation: Deflationary Shocks and Their Policy Responses," Tokyo, July 3-4, 2000).

Professor Svensson says Krugman's proposal of setting an inflation target is unworkable unless public and market expectations are convinced that the Bank of Japan will start printing money. Instead Professor Svensson advocates a much more subtle strategy: a price-level target path, a devaluation of the currency and an exchange-rate peg, which is later abandoned in favour of price-level or inflation targeting when the price-level target is reached. This will jump-start the economy, says Professor Svensson, by a real depreciation of the domestic currency, a lower long real interest rate, and increased inflation expectations. The abandonment of the exchange-rate peg and shift to price-level or inflation targeting will avoid the risk of overheating.

[Randy's note: "Mrs. Jones, thanks to our quick action your husband is no longer suffering from his illness. Our medicine has killed him."]

To see the excellent paper, click on http://www.iies.su.se/leosven/papers/bojabs.htm

For other Bank of Japan discussion papers see http://www.boj.or.jp/en/ronbun/dps00.htm

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Risk Management in Danmarks Nationalbank
By Ib Hansen (ibh@nationalbanken.dk)
& Christian Olgaard

This article describes how the Nationalbank manages its financial market risks. The article includes figures for interest rate-, FX- and credit exposure and risk measures such as VAR and stress tests. The Nationalbank aims to be transparent and open about the risks the bank is faces with and how they are handled.

The Nationalbank had kr. 42 billion in net capital at the end of 1999 and core earnings of kr. 3 billion. The article shows that the banks credit risk is described as very modest. The maximum loss on interest and exchange rates (excluding krone/euro movement) is only kr. 3.5 billion in 19 out of 20 years, so of no source of concern.

The article says that stress scenarios result in major losses, but do not pose a serious threat to the bank's net capital. In the most extreme and very unlikely of the scenarios described the loss amounts to approximately 40% of the bank's net capital. For comparison, in 1994, when the Nationalbank's dollar exposure was considerably greater than today, the capital loss amounted to 30% of the net capital. The overall conclusion is that the Nationalbank is exposed to a fairly moderate market risk and that the total risk profile can be characterised as prudent.

Role for gold in diversification of risk

Interestingly, the authors note that when gold is included in historical Value-at-Risk calculations, the VaR decreases slightly (from kr. 5.2bn to kr. 5.0bn - 95% and one year time horizon). This is despite the fact that gold individually has the highest market risk. The authors say that the "calculations reflect a low correlation between the price of gold (in kroner) and the price of other financial assets. In other words, that gold contributes less to risk than would appear at first sight."

Email Ib Hansen or me at BWELLER@CENTRALBANKING.CO.UK for copies of the paper.

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Foreign exchange settlement risk

The Basel Committee on Banking Supervision just issued a revised version of its guidance for supervisors on managing the settlement risk arising from foreign exchange transactions. The guidance was elaborated in close cooperation with the CPSS, in particular the CPSS subgroup on foreign exchange settlement risk. A draft document had been available for public comment since June 1999, and the final document is now also available from the BIS website at http://www.bis.org/publ/bcbs73.htm

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Interview with Arthur Levitt, US SEC chairman
By Gary Stern, President of the Federal Reserve Bank of Minneapolis
http://www.minneapolisfed.org/pubs/region/00-09/levitt.html

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