Implications of Ultra-Low and Negative Interest

Rates For Monetary Policy and Macro-prudential

Policy in Asia

Panel remarks at the ADB Institute 19th Annual

Conference
Hans Genberg
The SEACEN Centre
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian
Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI
does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use.
Terminology used may not necessarily be consistent with ADB official terms.

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 The Message

1.The external environment is challenging

2.Central Banks in Asia have come a long way
since the AFC, and they are well equipped to
navigate the troubled waters
3.They still need to be vigilant, however,
especially in the regulatory area

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 A treacherous environment

Low interest rates in major financial centers Capital

inflows in search of yield
Expected tightening in the US, continued
accommodation in Europe and Japan jittery
markets and volatile capital flows
Potential economic slowdown and financial instability
in China
Uncertain trade and fiscal policies in the US

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Illustration 1: External Borrowing by Non-
Financial Corporates

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Next: Somewhat
less worrying in
Smaller Emerging
Asia

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Res_PH
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Illustration 2: Jittery Financial Markets

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Jittery Financial Markets

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Are Central Banks Well Prepared? Yes, but..
Eighteen years since the AFC
Good policies and some good luck
Asia early adopters of macroprudential and capital account
management policies
Hands off approach to capital-account and financial market regulation was
questioned
Have macroprudential policies worked?
Real estate loans in Hong Kong (yes), Credit growth in a panel of EMEs in Asia
(yes)
Financial Stability (?)
Potential side effects
Risk migration, weakening central bank independence
Some challenges remain

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 Eighteen years since the
Asian Financial Crisis
Good policies
Greater exchange rates flexibility
Strengthening of regulatory and monetary policy institutions
Restraint in the liberalization of financial markets inter alia by
making use of what now is being referred to as
macroprudential and capital account management policies

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The Use of Macro-prudential Policies. Source: Zhang and Zoli (2014)

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The Use of Capital Flow Management Policies. Source: Zhang and Zoli (2014)

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Some tightening of capital controls .

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 and
reduction in
foreign
currency
debt since
the AFC

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 Eighteen years since the
Asian Financial Crisis
Good luck?
Relatively less developed financial markets implied
less reliance on exotic financial products and hence
less exposure to the type of assets that became toxic
in the Great Financial Crisis (GFC)

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 Have macroprudential policies worked?
Hong Kong (D. He, Macroprudential policies: implementation and
interactions, Banque de France Financial Stability Review No. 18 April
2014)
Extensive use of limits on LTV ratios for mortgages
Reduction in LTVs policies were at least partially binding
Reduction in NPL ratios
S. Kim and A. Mehotra BIS Working Papers No 533: Panel of EMEs in Asia.
VAR methodology
Macroprudential policies have an effect on credit growth
Macroprudential policies also affect output and inflation dynamics
Singapore as an example where macroprudential policies have been used
to achieve macroeconomic stability
What about the effect on financial stability?

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 Potential side effects
Risk migration
Shadow banking (developers offering mortgages in Hong Kong)
Whack-a-mole effect more generally

Weakening of central bank independence

Macroprudential measures have a fiscal component. Hence there is
more coordination with fiscal authorities. Will this constrain central
banks also in their purely monetary policy operations?

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http://www.seacen.org/journal.php

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 Concluding Remarks
Asia is highly integrated into the international financial system
and hence exposed to risks
Policy frameworks have been strengthened
Less defensive about unorthodox central bank policy strategies
Macroprudential and capital flow management policies
Interventions in the foreign exchange market
NB. Coordination between the policies is necessary
Challenges for banking regulators

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 Unfinished business for regulators and
supervisors
M. Zamorski and M. Lee, Enhancing Bank Supervision in Asia: Lessons Learned
from the Financial Crisis, ADB Working Paper No. 443)

Ensure that the countrys legal and regulatory

frameworks support domestic and cross border
supervisory cooperation and information exchange
Ensure that the organizations supervisory culture and
training approach develops examiners ability to
understand bank strategy and risk-taking rather than
simply assess compliance; and
Ensure that well-defined crisis management and
resolution plans, including cross border resolution plans,
are in place.

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