NEWSMAKERS - CENTRAL BANKERS IN THE NEWS

Central Banking Publications

-- 12 February 2007 --

Newsmakers deals with aspects of central banking that are frequently neglected. Daily coverage of general central banking developments is available to subscribers through our website http://www.centralbanknews.com

****************************************************************************************

REACH FOR THE SKY

Flushed with pride at the opening of the Bank of Mauritius’s new headquarters, the governor, Rameswurlall Basant Roi, took the opportunity to regale his audience with a description of the building’s state-of-the-art accoutrements and uncompromising security devices.

“A particular feature of the building is the wide range of special security provisions, which I am prohibited from disclosing in detail,” he breathlessly revealed.

“Suffice it to say that once you get inside the building your picture is taken without your knowledge,” yet this was not enough – the governor continued.

The photograph was just for starters: “Your body weight is automatically recorded at both entry and exit points.”

And should you get any ideas: “Sensitive areas of the building are resistant to explosives, guns and thermic lances.”

And don’t even think about running: “Mantraps and proximity card access form part of the security system.”

There is nowhere to hide: “Cameras shower the ins and outs of the building. Movements of individuals and objects are monitored closely at a Control Room.”

Work began on the 98-metre edifice in 2000, the governor noted, and the bill for construction was $57m. The commodious building has 14 stories plus basements for the all-important vault and is designed for a staff of 445, compared today’s 263. Eleven thousand cubic metres of concrete was pored – “twice the amount ordinarily used,” Basant Roi beamed.

The central bank’s redoubtable new building has certainly made an impression on the skyline of Port Louis, capital of the idyllic island. Its height threatened to interfere with air traffic, the governor noted, so: “To free air space for the construction of the building to proceed, a new navigation sector light system was installed for the Mauritius Port Authority,” at the central bank’s expense.

“The air space is now free and anybody planning to erect a high-rise building in the formerly restricted four degrees sight band should have no problem to obtain permit from the Port Authority.”


A VERY ODD REPORT

The report of the “eminent persons” on the financing of the IMF is really a very odd document. The authors seems blissfully unaware of the irony of many of their positions and views.

Listen to this from the press conference given by the chairman, Sir Andrew Crockett:

“And another curious feature of the income model is that when the world economy is not doing well and the Fund has to lend in crisis situations, it is well furnished with resources. When the Fund is successful in stabilizing the global economy, then it is short of resources.”

Er, excuse me, but isn’t that just as it should be? Shouldn’t the Fund slim down when the world economy is doing well? Otherwise its budget will grow in fat years and grow even faster in lean years. Unless, of course, that is the purpose of the exercise.

Anybody think the Fund should learn to keep its expenditure within its income? Sadly, this is beyond the scope of the report. Though "discussions" are promised.

“I want to say that it was not an exercise for the Committee to look at the expenditure side of the Fund's income position.”

Then there is the irony of Crockett, chief door-opener for a big Wall Street firm, engaged in asset management for central banks, chairing a committee asked to consider whether the IMF should set up an asset management division for central banks in competition with the private sector. (No prizes for guessing the answer!)

Finally there is the delicious irony of the committee looking with a touch of desperation to the Fund’s gold holdings to rescue the finances of an institution that has spent the past 30 years saying gold has no useful role in the system and that it should be replaced by the Fund’s own asset, the SDR!


CAN GOVERNMENTS FORCE THE FUND TO REFORM?

Another report out in the last couple of weeks looks to governments to force reform on the Fund. The report , entitled “The International Monetary System, the IMF and the G20: A Great Transformation in the Making?”, in fact claims that a critical mass of governments agree on the essential features of such a reform. One of the report’s editors, Marc Uzan, executive director, Reinventing Bretton Woods Committee, said: “The big questions that policy-makers are grappling with today – from the persistence of large global imbalances, to the huge accumulation of reserves in surplus countries, to the day-to-day functioning of the IMF – can no longer be viewed through the traditional prism of the G7 vis-à-vis the rest of the world.”

The big question is whether the United States will side with the reformers – this time, you never know, it just might do so.


CENTRAL BANK PROFITS WARNING

Profits at the People’s Bank of China caused a bit of a stir recently. When a central bank nets $29 billion, a figure larger than those of Citigroup and Bank of America, people take notice. Indeed, China’s central bank was crowned “the world’s most profitable bank” by The Economist, a London-based weekly, for trouncing Wall St’s finest.

Alas! Those urbane inhabitants of St James’s appear to have overlooked the small matter of America’s own central bank, the Federal Reserve System. With its profit of just over $34 billion in 2006, the Fed knocks the People’s Bank into a cocked hat.

How did it divvy up its takings? It found some small change, $877 billion, for its member banks, it bolstered its capital and pension reserve to the tune of $4.8 billion, all of which left the not inconsiderable sum of $28.547 billion as a payment to the US Treasury. Not bad business.

So the Fed is more profitable, and also has a  much less risk balance sheet. Both central banks have predominantly the same source of income: interest on US government securities. This is fine for the Fed as its liabilities are denominated in dollars too.

By contrast, liabilities of the People’s Bank, both cash and interest-bearing paper, are issued in its currency, the renminbi. This makes for precarious profitability. Were the renminbi to appreciate against the dollar, as many think it will, then on a mark-to-market basis China’s central bank will face huge losses on its trillion-dollar horde.

A 3% rise in the renminbi, Stephen Green of Standard Chartered calculates, would lead to losses of Rmb240 billion, around $30 billion. As the People’s Bank only officially holds Rmb22 in capital: “that threatens technical insolvency,” Green notes.

China’s central bank may not be the most profitable in the world, and it does look to be the most risky.


CHINA’S NEW FUND

Following a recommendation by the Development Research Centre of the State Council, the Chinese government seems set to reorganise the central bank's investment arm, China Huijin Investment, into a sovereign wealth fund, which will buy and invest a portion of the foreign exchange reserves, using funds raised from the issue of renminbi-denominated bonds.

Reports suggest that the new agency will probably manage one-fifth of the country's $1.07 trillion in reserves as part of a shake-up that will divide responsibility for the stockpile among three bodies. The new organisation would have $210 billion to invest in stocks and bonds and buy stakes in international banks and multinational companies operating in key sectors. Possibly to be named the State Foreign Exchange Investment Corp., it would report directly to the State Council, China's cabinet, the report said. The State Administration of Foreign Exchange (SAFE), an arm of the central bank, would retain about $700 billion.


ITO SLAMS BOJ COMMUNICATIONS

Takatoshi Ito, the prominent Japanese economist and a private-sector member of the Prime Minister’s Council on Economic and Fiscal Policy, said last week that the Bank of Japan has not been doing a good job in communicating with the market. But the central bank should also be left to vote on monetary policy without government interference, hetold Reuters.

“The Bank of Japan should make independent decisions on how to conduct monetary policy, so the government should not make requests to the Bank of Japan on the timing of interest rate hikes or cuts,” Ito told Reuters.

“But that does not mean the central bank can do whatever it wants. It should clearly explain what kind of policy goals it has and how it aims to achieve them so that markets can move on expectations,” he added.

“The situation we saw during the week before the January meeting was not good. It was not good for the government or the Bank of Japan. It was not good for Japan.”


MERVYN KING LOOKS TO OUTSIDERS

What is it like for a governor to vote one way and for most of his own staff to vote another way? Ask Mervyn King. The Bank of England's monetary policy committee voted 5-4 in favour of the surprise rate hike on 11 January. But Rachel Lomax, a deputy governor, was joined by the Bank’s chief economist, Charlie Bean, and by the central bank's executive director of markets, Paul Tucker, in opposing a change in rates. Mervyn got his way only through the support of his faithful knight, Sir John Gieve, who is the deputy governor for financial stability, and three external members.

The majority, which included Mervyn King, believed there was already sufficient evidence to justify a rate hike to 5.25% and saw no compelling reason to delay.

At the following meeting, on 7 February, rates were left unchanged despite strong evidence of inflationary pressures and a rampant housing book. Outsiders found it hard to believe that the governor thought enough had been done.


Click here to read the minutes
http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2007/mpc0701.pdf
 

CORONER REPORTS ON WALTON’S SUDDEN DEATH

David Walton, a former member of the Bank’s monetary policy committee, was killed by a rare flesh-eating bug, a coroner's officer report has shown. Walton died suddenly on 21 June last year with no explanation given for his death. Paul Boak, of the coroner's officer in Cheltenham, England, said he died from the bacterial infection necrotising fasciitis. He had suffered from leukemia, a cancer-like disease of the white blood cells, some years before.


NEW CFO FOR NORWAY FUND

Espen Klitzing has been appointed chief financial officer at Norges Bank Investment Management, and deputy to the CEO, Knut N. Kjær. Most recently, Klitzing was Chief Executive Officer of Petrojarl ASA. The government pension fund, managed by the Norges Bank, is the largest pension fund in Europe.

 
CANDIDATES FOR CENTRAL BANK OF RUSSIA BOARD

Sergei Ignatyev, chairman of the Central Bank of Russia, submitted late last week to the State Duma two candidates for the central bank’s  board of directors, Mikhail Sukhov and Alexei Simanovsky. Sukhov is the director of the licensing and financial recovery department, and Simanovsky is the director of the banking regulation and supervision department. By law, only current employees of the CBR can be appointed members of its board of directors.  If the State Duma approves the appointments of Sukhov and Simanovsky, there will still be one vacant seat on the board.


Gennady Melikyan had been appointed first deputy chairman responsible for banking supervision, according to a statement posted on the bank's website. A former deputy chairman of state savings bank Sberbank, Melikyan had previously reported to Kozlov at the central bank and took over as head of the bank's supervisory committee after his murder.

 
FRENKEL LASHES OUT

Alexey Frenkel, charged with ordering the killing of  central banker Andrey Kozlov, has released his third open letter, again accusing central bank officials of gross corruption. In his third open letter Frenkel, who denies the charges, accuses central bank officials of lobbying for the interests of four bank groups, Russian media report. He also alleges that officials at the Russian parliament, police, army and courts help the banks in their murky dealings. Alexey Frenkel released his first open letter on 19 January, alleging rampant corruption in the central bank and flaws in regulations on withdrawing operating licenses.
 

SINGLE CURRENCY PLAN POSTPONED

The introduction of a single currency in Belarus and Russia will be postponed indefinitely, the chairman of the National Bank of Belarus, Pyotr Prakapovich, said at a news conference in Minsk on 31 January.

"We have always said that the single currency introduction is the final stage of integration after the establishment of a single economic and customs space. Certainly, the latest actions by our colleagues have resulted in the fact that the single currency introduction has been postponed indefinitely," Prakapovich said.

He stressed once again that the introduction of the single currency is unrealistic until the single customs and economic space and equal conditions for business entities and the population have been created. "Therefore, it is difficult to say today how long it will take to achieve these results. Time will show," he concluded.
 

SURANYI TO RETURN?

Zsigmond Járai’s term as president of Hungary’s central bank expires on 2 March and the list of potential candidates to replace him has narrowed. The field is now down to three: György Surányi, a former central bank president, Éva Várhegyi, a researcher who sits on the bank's supervisory board and Zoltán Bodnár, Surányi's one-time deputy, Magyar Hírlap reported without citing sources.

Hungary's government is proposing an amendment to the country's central bank act to increase the independence of monetary-policy makers, a spokesman at the Finance Ministry has said. The government has approved the legislation, drawn up by the Finance Ministry in accordance with the central bank and reviewed by the European Central Bank, said Ferenc Pichler, a spokesman at the ministry. The bill will go to parliament for approval “soon,” he added.
 

PARLIAMENT REJECTS GASPARI

Slovenia’s president Janez Drnovsek has defended his decision to nominate Mitja Gaspari for a second term as central bank governor. "His contribution to the development of the Slovenian financial system is great," Drnovsek told POP TV on 28 January. However, Gaspari’s nomination was rejected by the parliament.


DODGE STILL HAVING FUN

Bank of Canada governor David Dodge has said he will speak with the board in June about whether or not to seek a second term as governor. “Sure, it's still fun,'' he said, when asked if he was enjoying his job, without saying if he wants to stay on.

Dodge's first seven-year mandate as governor of the Bank of Canada ends 1 February 2008. The central bank's board of directors appoints governors with the approval of federal cabinet ministers including Jim Flaherty, the finance minister. Dodge's reappointment should be “automatic” if he asks for one, according to one economist quoted in the press.


GEORGE CHOU MOVES UP

George Chou, long-time director-general of the foreign exchange department, is to be deputy governor of the Central Bank of China. Chou will fill the vacancy left by deputy governor Liang Fa-chin, who will retire on 15 February after serving a five-year term, according to local press reports.

Chou has worked in the central bank's economic research department and its foreign exchange department. He also served as the bank's chief at its London representative office. In 1998, Chou became the head of the central bank's foreign exchange department, helping Perng Fai-nan, the governor, implement a policy to stabilise the currency market.


RBNZ PROMOTES SPENCER

Grant Spencer, assistant governor and head of economics at the Reserve Bank of New Zealand, will move to become head of financial stability. He will be in charge of  banking regulation, foreign reserves management, market operations and liquidity management. This move follows the resignation of Adrian Orr as deputy governor, who will be taking up a position as CEO of the Guardians of the New Zealand Superannuation Fund.

Another RBNZ official, Steve Anderson, has been appointed to the International Monetary Fund's (IMF) External Audit Committee. The committee has general oversight responsibilities for the external auditing of the Fund, the related financial reporting practices, and the system of internal controls.


WARNING SIGNALS FLASH FOR GOVERNORS

Episodes of political instability, parliamentary and/or presidential elections, and high inflation all tend to cut the career life expectancy of a sitting central bank governor, according to a new paper, “When is a central bank governor fired?”, from the University of Groningen. The research uses a new data set on the term in office of central bank governors in 137 countries covering the period 1970-2004 to estimate a model for the chance that a central bank governor is replaced.

Click here to read the Working Paper “When is a central bank governor fired? Evidence based on a new data set”
http://form.sgvs2007.ch/user_files/%5B74%5D%20Jan-Egbert_Sturm.pdf

*****************************************************************
Previous issues of Newsmakers can be found at http://www.centralbanking.co.uk/newsmakers/index.htm
*****************************************************************

HOW TO SUBSCRIBE / UNSUBSCRIBE

Go to web page http://www.centralbanking.co.uk/list.htm

Or send an email to mailinglist@centralbanking.co.uk with the words SUBSCRIBE NEWSMAKERS in the body of the text. To unsubscribe put UNSUBSCRIBE NEWSMAKERS in the body of the text.

Alternatively, send an email to ejohn@centralbanking.co.uk with your request.


DISCLAIMER OF WARRANTY

Central Banking Publications Ltd assumes no responsibility for errors or omissions in these materials.