Message from the Honourable Governor, Bangladesh Bank

It is a matter of utmost pleasure for me to know that Bangladesh Bank has already arranged two key SEANZA events namely SEANZA Advisors' Meeting and Central Banking Course (CBC) successfully. I am also glad to know that in the CBC a total of 38 officials, including 20 from Bangladesh Bank, from 14 central banks of Asia and Oceania attended the Course. The Course gave due emphasis on four central banking pillars-monetary stability, financial stability, payment system, and other aspects of central banking issues. I believe that that the Course stimulated lively discussion among the participants who, utilising the training exposure, will be able to contribute to their respective institutions.
Today, on 30th August 2014, Governors' Symposium is taking place in Dhaka. I feel honoured to inaugurate the prestigious Symposium on behalf of Bangladesh Bank. I am delighted to welcome the delegates to Bangladesh and to the SEANZA Governors' Symposium 2014. I am glad to present a keynote paper on the main theme of the Symposium "Macroeconomic Environment and Financial Sector Stability: Vulnerabilities and Managing Crises."
Three of the biggest changes in financial systems have been: structural changes in financial markets, improvements in technology and faster innovation, and globalization. While these changes have brought great benefits, such as more rapid flows of funds from savers to investors, they have also presented many new risks and even obstacles. For that reason, the effectiveness of our policy tools, in particular, the strength of the monetary policy transmission mechanism in the changing financial environment needs to be continuously evaluated.
Structural changes, whether domestic or external, can have a significant impact on financial vulnerability. In this perspective, the choice of macroeconomic policy instruments has important implications for financial sector soundness. Indeed, an excessively restrictive macroeconomic policy stance can exacerbate financial sector vulnerability by depressing the level of economic activity and limiting financial access to only the largest and best-connected clients, while a loose policy mix can lead to an overly rapid expansion of domestic credit, distort asset prices or even create an asset price bubble. Large structural fiscal imbalances can place the burden of adjustment on monetary policy and the banking sector, put pressure on the exchange rate, increase overall debt levels and associated vulnerabilities, crowd out credit to the private sector and can severely complicate the achievement of macroeconomic stabilization.
The oversight of individual components of the financial system has some bearing on preserving financial stability, but it is a lesson from the crisis that financial system also needs to be a macroprudential perspective. Moreover, the optimal supervision framework must promote consultation with fiscal authorities in order to ensure the full effectiveness of macroprudential policy measures. This requires cooperation and information-sharing among the authorities involved in macroprudential policy decisions. An effective macroprudential authority, with a clear division of responsibility between central banks, the ministry of finance, market authorities, and banking supervisors, can ensure this cooperation. Central banks should give emphasis to identifying and addressing systemically important banks since they may transmit contagion risk to other banks if any of those banks fail. Especially in a crisis situation, the most important task for the central bank is to maintain public confidence on the banking system and minimize the risks of bank runs or other wholesale dumping of risky assets.
It is the responsibility of central banks to carry out prompt and preemptive actions with the best set of available information for dealing with the rapidly changing financial environment. Inevitably, this information has to come from the banks, and in a useful format for both banks and regulators. Technology can and must deliver us the data, but it cannot make the hard and important decisions for us. Addressing weaknesses in corporate governance, risk management, compliance, and internal controls requires judgment and determination, not equations and formulas. "Virtual banking" can and must coexist with "virtuous banking."
We have all been gradually improving our oversight of the financial system, learning from the lessons of the 1997 and 2008 crises. The best policy mix is timely, contextual selection of market tools, and coordination across agencies. Global financial stability cannot be achieved through prudential policies and market discipline alone. It requires contributions from monetary and fiscal policies as well. However, it has to borne in mind that monetary policy focuses primarily on controlling inflation, while fiscal policy is primarily responsible for sustainable government finance and only secondarily for countercyclical demand management. Proper use of these instruments may help, but cannot guarantee, financial stability. The SEANZA Forum, however, may address the question of how to integrate these policies effectively to build a global financial stability framework.
I hope the SEANZA events in 2014 arranged by Bangladesh Bank will give the member institutions new impetus to extend cooperation among them towards building a stable and prosperous financial system for the whole SEANZA region.


Dr. Atiur Rahman
Governor, Bangladesh Bank