That was what Mr. Agustín Carstens, General Manager of the Bank for International Settlements (BIS) shared in his press interview on the occasion of his first visit to Vietnam from September 20 to 22, 2023 since Vietnam’s official accession to the BIS. Below is the summary of Mr. Carstens’ interview.
What is your assessment of the global economy now? How worried should we be on inflation, particularly the last mile challenge of combating inflation globally and also in Asia?
The world economy has appeared resilient recent few months as disinflation continued. That said, differences across countries have become more marked. In some parts of the world, more costly financing and relatively weak trade have weighed on the outlook. But emerging market economies, particularly in Asia, have held up well. They tightened policy appropriately in the face of higher inflation and deployed other policy tools where necessary. This bolstered their exchange rates and reinforced the credibility of their monetary policy frameworks, helping them withstand the spillovers from higher interest rates in advanced economies.
Thanks in part to the forceful and synchronized monetary tightening by central banks, inflation has come down from its mid-2022 peak. It continues to abate in recent months but remains high in most jurisdictions. Rising commodity prices and the possibility of wage-price spirals emerging in some advanced economies remain key risks.
The story in Asia is somewhat brighter. Inflation is generally at or close to target in most of the economies, while China is somewhat an outlier with inflation close to zero. For central banks, the task is clear. They need to restore price stability. A shift to a high-inflation regime would impose enormous costs to the society and the economy. No one would benefit. Higher inflation will not boost real wages. It will not deliver growth. It will not bolster financial stability.
Many central banks have communicated as such and stated that the fight against inflation is not over. So we should not let our guard down.
How to balance between price stability and financial stability is a long-standing issue for central banks. The banking turmoil earlier this year in the US and Europe is a wakeup call for many central banks and regulators in Asia. What is your advice for Asian central banks, including the SBV, to strike the right balance?
Trust in the financial system requires stable and solvent financial institutions. This is why central banks and prudential regulators are tasked with monitoring financial stability and setting rules that safeguard the financial system.
These banking failures earlier this year have reminded us of the value of these safeguards. Although the primary responsibility for the safety and solvency of banks remains with the managers of the institutions involved, they underline the need for an effective supervisory regime and mechanisms for timely intervention to prevent the failure of individual institutions from destabilising the whole system. They also again underscored the importance of implementing the outstanding Basel III standards which sets a framework to build the resilience of banks to weather shocks.
Swift intervention by public authorities, particularly central banks, mitigated the impact of the turmoil. Longer-term, the already implemented Basel III reforms which have been applied to large banks around the word helped shield the global banking system and real economy from a more severe banking crisis.
The importance of banks' risk management practice and governance arrangements is the first and most important source of financial and operational resilience.
Strong and effective supervision is important in overseeing the safety and soundness of banks. It is critical that supervisors act early and effectively to identify and promptly correct weaknesses in bank practices.
A prudent and robust regulatory framework to safeguard financial stability is also critically important.
In Asia, financial systems have been generally resilient. This can be credited to the efforts by Asian policymakers to strengthen their macro-financial policy frameworks, particularly after the Asian Financial Crisis, and deploying them nimbly when situations warrant.
I am also aware of efforts underway in the region to bolster the resilience of the financial system further to prepare for rainy days. The BIS is committed to support such efforts in the region, including through committees it hosts.
The BIS has been a pioneer in digital innovation under your leadership in the past few years, with the setup of Innovation Hub Centres around the world, including in Asia. How do you see the role of technologies in transforming the financial systems and banks more specifically? What is your advice to countries like Vietnam in terms of reaping the benefits of technologies?
Technology-driven innovation in financial services is accelerating and will have major consequences for central banks and the global financial system.
It is fair to say that technological innovation more generally and big techs specifically have the potential to enhance efficiency in finance and promote financial inclusion. One BIS study pointed to the fact that thanks to technologies, India took 8 years to achieve a level of financial inclusion that it would otherwise have taken 47 years to achieve had it relied on traditional growth processes.
In the meantime, we should also recognize that if not properly regulated, they could harm competition and privacy protection.
More broadly, I think, central banks are at the centre of developments that are transforming the financial sector and the wider economy, from the nature of money, to the payment system and financial regulation.
They therefore need to upgrade their tools and instruments to respond to these transformations.
To reap the greatest benefits of innovation in money and payments, we must think big.
Around the world, central banks are exploring how to give money new capabilities. The BIS is supporting much of this work, as it incubates projects and catalyses new ideas in the world of central banking. This includes work on central bank digital currencies at both wholesale and retail levels, as well as fast payment systems and their interlinkages across borders. We are also experimenting with the tokenisation of different assets, including tokenised deposits.
To fully realise the transformative potential of these new financial technologies, there is great promise in developing the idea of a "unified ledger" with a common programming environment which I advocated for in Singapore earlier this year.
While it is still early days for us to put the concrete details onto the blueprint for the future monetary system, I think we have a solid basis to start with, given the various work we have been doing over the past few years, including through our Innovation Hub Centres around the world.
I know that digital innovation and its effects on the financial system and banking landscape in Vietnam is high on the agenda of the State Bank of Vietnam (SBV). The SBV has been exploring a virtual currency since 2021 and more recently joined the regional payment connectivity initiative that aims to develop faster, cheaper, more transparent, and more inclusive cross-border payments among Southeast Asian nations.
The BIS is happy to work with the SBV on these efforts, including through some of the projects undertaken by the two Asia-based BIS Innovation Hub centres.
This is your first visit to Vietnam after the SBV joined the BIS in January 2021. What is your advice to the SBV on how best to benefit from its membership at the BIS?
I am very pleased to be able to visit Vietnam this year, my first since the State Bank of Vietnam joined the BIS in early 2021. I had hoped to visit earlier, but the pandemic prevented me from doing so.
The SBV has become an increasingly active and important member of the BIS community in the past two years, including taking part in our meetings in Basel and Asia. We have hosted SBV staff in our Asian Office in Hong Kong as secondees. I also had the pleasure of meeting again with Governor Hong when she visited Basel in June this year.
As the world’s oldest international financial organization, the BIS’ mission is to support central banks' pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks.
More specifically, we serve as a forum for dialogue and broad international cooperation among the central banks, so regular participation in the BIS meetings, particularly at the governor level, is important for central banks to exchange views, forge a common understanding, and decide on common actions to the extent possible.
The BIS also serves as the secretariat for various global standard setters for the international financial system, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, just to name a few. Active involvement and participation in these committees helps central banks and other financial authorities in the implementation of global regulatory standards and sound supervisory practices.
In the past few years, the BIS has stepped up efforts in the area of innovation and knowledge-sharing. The BIS Innovation Hub Centres provide a platform for responsible innovation, and we work closely and collaboratively with members to explore the technological innovation that is rapidly transforming the financial landscape. In this regard, I am heartened to know that the SBV and our Innovation Hub Centres have been exploring opportunities for joint innovation and partnership, including in the area of linking fast payment systems across borders in the region. We look forward to more collaboration in this area in the period ahead.