Central Banks have a crucial role to play in kick starting growth in the economy in a post-pandemic world. Central banks have been assuming a more active role in the market in recent years, and this is likely to remain the same in the immediate future. It’s in this context that the Asia School of Business is hosting a webinar series titled Conversations on Central Banking.

Held in December 2020, the session focused on building resilience and policy frameworks. The focus was to discuss the increasingly complex and unpredictable environment facing central bankers and financial regulators. Some other factors addressed were the technological, institutional, and geopolitical changes creating new challenges for policymakers.

Here is a recap of all that was discussed during the webinar along with the key takeaways.

Brief introduction to our speakers

We had two distinguished, exceptionally experienced central bankers.

Dr Zeti Akhtar Aziz

Dr Aziz was the 7th governor of Bank Negara Malaysia, Malaysia’s Central Bank, and served 16 years in that position, from 2000 to 2016. She was the first woman at the post. Dr Aziz also played a critical role in successfully managing the 1997-98 Asian financial crisis and was instrumental in the strong economic recovery of the Malaysian economy.

She oversaw the transformation of the Malaysian financial system in the decade that followed, building its resilience. Dr Aziz holds a doctorate in economics from the University of Pennsylvania and is currently the co-chair of the board of governors of ASB in collaboration with MIT Sloan. Further, she has been the PNB group chairperson since 2008.

Paul Tucker

A former governor at the Bank of England, Paul Tucker is a research fellow at the Harvard Kennedy School. He has been the chairman of the systemic risk council for over three decades. He served on the board of the Bank for International Settlements, chairing the then-committee for payments and settlements.

He authored the book Unselected Power published by Princeton University Press, a must-read for anyone concerned with increasing demands placed on central banks for dealing with the multiple challenges facing the global economy today. He is currently working on his next book on international orders and systems. The session was moderated by Hans Genberg, Professor of Economics at the Asia School of Business and the Senior Director of Central Banking and Finance Programs.

Main touchpoints of the discussion

Let’s take a look at the key takeaways from the hour-long discussion and the question-and-answer session.

The emergence of digital platforms and their impact on financial stability

According to Dr.Zeti Aziz, two things affect how well a country survives any economic crisis.

1. The extent to which the country has built resilience and the policy frameworks in place to respond to the crisis. Resilience has to be built and policy frameworks developed well before the crisis happens. For instance, the crisis of 1997-98 helped Malaysia prepare better for the 2008-09 crisis with a more comprehensive toolkit policy in place. Therefore, the country could recover within just a year.
2. The ability to adapt to changing environments. The current environment is highly dynamic, with megatrends affecting and transforming it at every step of the way. Therefore, building resilience and policy frameworks is always unfinished business for a central bank.

It is necessary to be continuously involved in building resilience and recognize that we will be affected by unforeseen developments such as the ongoing COVID-19 pandemic. These events are unpredictable but financial resilience and a comprehensive policy framework can help minimize the impact of damages and aid rapid recovery. After all, resilience is the ability to withstand such developments and rise to the challenge of managing them and emerging stronger.

How countries can build economic resilience

Countries, governments, and regulatory bodies need to build resilience and a robust policy framework to be able to rise to the trials of the pandemic and its consequences. According to Dr. Tucker, it’s particularly relevant that central bankers stop thinking about resilience solely in terms of avoiding financial crises but rather to focus on overall capability building. How can this be enabled?

In the conversation, Dr. Aziz and Dr. Tucker focused on five major areas.

1. Economy

It is crucial to develop economic flexibility rather than being rigid. Further, this economic flexibility will allow us to adjust our resources in one area and diversify our economy to new sources of growth and the latest economic structures. It will help us effectively respond to crises. For example, Asia used to be export-led economies. Today, although exports are still relevant, our growth is driven by domestic demand.

It is true that it was previously driven by investment demand and there were excessive investments with negative consequences. However, now, our economies are driven by consumption demand. Asia is projected to comprise more than 50% of the global markets soon. We will represent 50% of consumption demands in the global economy. Moreover, diversified economies put us in a more resilient position.

2. Infrastructure

Adequate investment into infrastructure is critical. Different kinds of infrastructure are necessary for the functioning of the economy and its connectivity, not only within economic networks but with the rest of the world. When it comes to infrastructure resilience, a point Dr. Tucker raises is the importance of balancing interdependence with overdependence.

In the context of infrastructure, he quoted the example of the lack of emergency equipment and beds in US and European hospitals at the start of the COVID outbreak because of an over reliance on imports of the same, limiting options and capacity in extreme short-term situations. The resilience of financial systems is more relevant to central banks. Asia paid attention to this when building resilience through stronger financial institutions and more developed financial markets.

However, this is an area we are over-concentrated on, being bank-centric and focusing on financial systems. Around 50% of the financing is from the capital market, and in particular, the bond market. Having a resolution mechanism in place, including safety nets, essentially means having deposit insurance in place. It is essential for capital flows, and not only for surveillance purposes.

It helps recognize the potential of instability in the financial institutions and the financial markets. With regards to policy making overall, Dr. Aziz raised the point that both building policies and resilience is always an unfinished work, considering the dynamic global economic environment

The benefits of current Asian central banking efforts include regional integration, collaboration, and cooperation. It is important for surveillance, policies, experience sharing, and capacity building. Other overlooked factors are financial inclusion, raising financial literacy, and greater participation.

3. Strong financial institutions

Dr. Aziz stated that it is crucial to have strong financial institutions, both in the public and the private sector. Further, we need commercial institutions. Note that the governance, institutional competence, capability, and levels of integrity and corruption impact the resilience of any country. It demands efficient use of resources and a better overall economic and financial performance.

4. Identifying areas of vulnerability

Before any crisis, you should address your areas of vulnerabilities, leverage and indebtedness, and deficits, such as the balance of payments or fiscal damage. For example, when the crisis happened, like every other place, the demand for fiscal stimulus and support rose in Indonesia as well. It helped that they had the fiscal rule to respond and deal with areas of inefficiencies, rising inequalities, and yield essentially strong initial conditions.

Dr. Tucker brought in the example of the collapse of the BCCI Bank to underscore the need to identify and address vulnerabilities on your own, as opposed to depending on support after the fact, that may not be forthcoming.

In terms of financial systems, Asia dealt with the COVID-19 crisis from a position of strength. There will be many business closures and a rise in non-performing loans. However, they will come from highly capitalized and profitable financial institutions. This means that banks can absorb this and remain resilient.

5. Having a risk management system

Having a risk management system in place is critical to knowing what can go wrong. The one aspect that we must not forget is that the central banking business is in for the long haul and we should have a long-term horizon. Sustainability is very important. We need to care about the community and the environment as well so that overall resilience is achieved.

Overall, this webinar offered valuable insights to both current and future central banking policymakers. The key takeaways here are manifold, like the need to balance interdependence with overdependence, understanding the impact of bank policy making on the general population and being cognizant of the structural shifts in geopolitics.

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