• Central Banking Training Course / Seminar Series - Spring 2006
• The IMF’s Big Mac
• Masood Ahmed to head external relations
• Change at Eurotower
• Bernanke on taking office
• Brown bags Greenspan
• Michelle Smith stays at Fed
• Who Is Kevin Warsh?
• Lazear for the CEA
• Fischer’s reshuffle
• Merkel appoints central bank economist
• Islamic bond from Bank Negara
• Suda reappointed
• Call for fresh blood
• Russia not one of us, says Japan
• SARB restructures
• McDonough to Merrill Lynch
• Constancio stays
• Hildebrand to chair G10 deputies
• How to value the bank of Italy?
• Bundesbank reform TUSSLE
• Ministers “Assault” central bankers
• Gieve and take
• Hunt for “radioactive” notes
• Nigeria success story
• Russian minister DEMANDS new payments system
• Serbian deputy dismissed
• Roth to chair BIS
• RBS Reserve Management Trends 2006 – published Monday 13 2006

Central Banking Training Course / Seminar Series - Spring 2006

Join central bankers and supervisiors in an exciting and challenging week of discussions with fellow professionals from around the world.

Six training courses/seminars to be held March 26 - April 6 cover key aspects of the work of central bankers and other officials engaged in making public policy towards financial markets. The theme for this series is on Central Bank Modernisation. For programme details and how to register, please click on the following link: http://www.centralbanking.co.uk/conferences/index.htm

These seminars are again to be held in Cumberland Lodge in Windsor Great Park (a former royal hunting lodge), with rapid access to central London.

Ikuko Hiroe
Conference Director
ihiroe@centralbanking.co.uk

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The IMF’s Big Mac

Is the IMF finally going to accord finance the importance it deserves? Yes, if you believe Rodrigo de Rato, managing director, who has given the green light to the creation of “a center of excellence for all aspects of financial, capital market, and monetary work in the IMF”.

The new department will bring together the work and staff of two major existing departments – on capital markets (ICM) and on monetary and financial systems (MFD). The decision follows an assessment of the Fund’s work in this field by a working group led by Bill McDonough, the former head of the New York Fed. Although it is not thought that McDonough actually recommended the departmental merger, the report, which has not been published, is believed to have been very critical of the Fund’s work in finance.

The Fund has not got round to finding a name for the mega-department yet. Newsmakers suggests the big MAC – Money AND Capital.

Nor has de Rato found anyone to head it. But one name being mentioned is that of fellow Spaniard Jaime Caruana, currently governor of the Bank of Spain and member of the governing council of the ECB, who is currently due to leave those positions in June. That would be a catch as Caruana would be thought to be close to the MD and thus command attention (fear?).

What is really needed is someone with the right combination of intellectual weight and bureaucratic street-fighting skills that is hard to come by. The ideal would be to reassign the responsibilities of the two deputy MDs so that one of them became, in effect, an analogue of a deputy governor for financial stability in a central bank. In fact, the two separate departments could have then continued to exist, but under the oversight of a high profile figure within the Fund. Of course, for this to have worked, it would have needed a similar heavyweight figure at DMD level, but this might have been easier to achieve if the post on offer was a deputy to the MD rather than a "mere" director of a department.

There is probably nobody in the Fund at present quite right for the role. Stefan Ingves, formerly head of the MFD, has already left to become governor of Sweden’s Riksbank, and Gerd Häusler, counsellor and director of ICM, has resigned with effect from July 2006, after five years in the job

The merger will be coordinated by a committee to be chaired by the managing director himself. De Rato has made a good start by acknowledging that financial issues had so far been at the periphery of the Fund’s work:

"The changes I have announced today will put financial issues at the center of the Fund's work and ensure that our financial expertise better serves our 184 country members”

Many will think all this overdue. The IMF has never really understood or liked finance, maybe because its shareholders and clients are finance ministries, which manage taxes rather than money. Hence the nickname – “It’s Mostly Fiscal”. As Lawrence Summers remarked a few years ago, when he was still deputy secretary of the US Treasury: “It has been for too long that IMF could have stood for ‘Its Mostly Fiscal’. In today's world, the preoccupation needs to be much more with helping countries grapple with the challenge of building a sound domestic financial system that can handle international capital”.

It’s a job that’s still to do. But institutional tinkering in itself will not solve the problem. How will all these worthy aspirations improve the policies the Fund recommends to its members?

The real questions will only be answered when the new department starts work. Observers will be watching keenly to see, above all, whether it will wrest any real power over policy decisions from the mighty area departments. Don’t bet on it.
To read a brief summary of this and other recent developments at the IMF, click here

Change at Eurotower

The 18-member governing council of the ECB is changing its character. Soon, few of the original members, appointed in 1999, will remain. There has already been much discussion about whether Germany and its monetarist tradition will lose influence when the great Otmar Issing retires in May – a matter on which leading German commentators are anxious. They focus on the growing influence of countries that are seen as potentially soft on inflation. A recent remark by a new executive director, the Italian Lorenzo Bini Smaghi, that wages in Germany should grow in line with productivity – an innocuous statement, surely – received adverse criticism by German commentators, who seemed to think it was all part of a plot to help Italy out of its troubles by creating inflation in Germany. Unfair, but perhaps suggestive of battles to come.

It has been remarked that several of the new “southern” members are economists who have an American academic background. The new faces include Mario Draghi, 58, who got his PhD at the Massachusetts Institute of Technology, the same as ECB vice president Lucas Papademos. Draghi is also unusual in bringing financial market experience to the ECB having spent three years at Goldman Sachs in London. Bini Smaghi was at the University of Chicago. Jose Manuel Gonzalez Paramo of Spain studied at Columbia University in New York. The intellectual firepower will make them sharp debaters of policy options.

The hopes of the conservatives now rest heavily on the still youthful shoulders of Bundesbank president Axel Weber, 48, a former economics professor with a reassuringly solid European background, and on his well-seasoned fellow countryman Juergen Stark, 57, currently vice-president of the Bundesbank.

Another big question is: how will Jean-Claude Trichet manage his new, perhaps more flexible, but intellectually-demanding council? Some say that circumstances - the new board and Greenspan’s departure – now give Trichet his chance to bestride the world like a colossus, the Julius Caesar of modern central banking. Watch the upcoming reshuffle of ECB portfolios for clues.
 

Bernanke on taking office

The actual words used by Ben Bernanke on taking office as chairman of the Board of Governors of the Federal Reserve are worth reading in full, including his reminder of the mission of the Fed and its relationship with Congress. Newsmakers here reproduces the first few paragraphs. The ceremony was marked by the attendance of President Bush.

“I would like to begin by thanking President Bush for the confidence he has placed in me and for attending this ceremony. Today marks only the third visit of a President to the Federal Reserve. Franklin D. Roosevelt dedicated this building in 1937 and Gerald R. Ford visited in 1975. Mr. President, you do us a great honor.

Members of the President's economic team and the heads of the federal financial regulatory agencies have also joined us this morning. I have greatly enjoyed collaborating with many of you during my time in Washington, and I look forward to working with you in the future. Thank you for coming.

I would like to extend a special welcome to members of Congress. The Federal Reserve was created by Congress in 1913 and entrusted with the power, granted originally to the Congress by the U.S. Constitution, to coin money and regulate the value thereof. Accordingly, it is incumbent on the Federal Reserve to report regularly to, and work closely with, the Congress. I look forward to a strong and constructive relationship with members of both the House and Senate.

Former chairmen Paul Volcker and Alan Greenspan also honor us with their attendance. Their leadership and insight have contributed immeasurably to the strength and stability of our economy. The nation and the world owe a debt of gratitude to these two great Americans.

That these distinguished guests have chosen to join us today is a testament to the centrality of this institution to the nation's economic life. Our mission, as set forth by the Congress, is a critical one: to preserve price stability, to foster maximum sustainable growth in output and employment, and to promote a stable and efficient financial system that serves all Americans well and fairly. In his remarks in this building in 1937, President Roosevelt described as our purpose "to gain for all of our people the greatest attainable measure of economic well-being, the largest degree of economic security and stability.”
 

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Brown bags Greenspan

In the clash between David Cameron’s resurgent Tories and Tony Blair’s tired Labour troops, each side is bagging as many trophy names as possible. Gordon Brown, chancellor of the exchequer and would-be prime minister, has been quietly keeping a trump card up his sleeve – (Sir) Alan Greenspan, KBE, no less. Greenspan is to be honorary (unpaid) adviser to the Brown “on issues relating to global economic change”. Now Greenspan, free of the restraints of office, is clearly going to speak out on all kinds of subjects.

Interesting to see if he ever feels able to make public his views on such matters as whether Britain should join the euro – or link to the dollar – or abandon inflation targeting, or strengthen the powers of parliamentary scrutiny over the Bank of England, or whether Brown was right to sell half the gold reserves a few years ago for half the sum they would have fetched today.

One supposes he will lead seminars for Treasury and No 10 officials, and pay an occasional courtesy call on the Bank. Imagine him sitting in on an MPC meeting? “Greenspan debates the future of interest rates with Mervyn King?” That’ll be a shock for the system. Anyway, should all make good material for that book we are promised.

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Who Is Kevin Warsh?

The White House has nominated Randall Kroszner and Kevin Warsh to fill two vacancies on the Federal Reserve’s seven-member board of governors.

Kroszner is an economics professor in the University of Chicago’s graduate school of business and a previous member of the Council of Economic Advisers. No problem there.

But 35-year old Warsh, a lawyer, is a White House side-kick with little experience of economic policy-making and this has sparked criticism:

“Kevin Warsh is not a good idea,” former Fed Vice Chairman Preston Martin told Bloomberg. “If I were on the Senate Banking Committee,” which must approve Fed nominees, “I would vote against him.”

“The Warsh nomination came out of left field,” said Tom Schlesinger, executive director of the Financial Markets Center, a Howardsville, Virginia-based group that monitors the Fed.

If both Warsh and Kroszner are confirmed, Fed-watcher Schlesinger told Blooombergs, “for the first time in recent decades, and maybe the first time ever, the board would include three governors who recently served in the administration that appointed them.” That, he said, “unavoidably make the board a more political cast.”

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Lazear for the CEA

George Bush has picked a business school professor, Edward Lazear, to be the chairman of his Council of Economic Advisers. Lazear teaches at Stanford University's graduate school of business and is a senior fellow at the conservative Hoover Institution. He has previously served as a member of Bush's commission on federal tax reform. If confirmed, he will replace Ben Bernanke.

Fischer’s reshuffle

The two deputy governors of the Bank of Israel, Meir Sokoler and Avia Spivak, will retire from the central bank at the end of the month. The governor of the Bank of Israel, Stanley Fischer, informed the Israeli Minister of Finance of the move earlier this month. According to Israeli law, the government is responsible for the appointment to this position.

The departure of the two deputy governors are the latest in a series of organisation reshuffles, as Fischer seeks to reduce the headcount from the present 800 staff members. As part of the downsizing process, the bank will also offer early retirement packages to veteran employees. Fischer also said that at least two new executives to the central bank will be appointed in the summer.

Other plans include increasing the influence of the research department. Fischer wants to complete reorganisation by the end of the year.

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Merkel appoints central bank economist

German Chancellor Angela Merkel has recruited a Bundesbank economist, Jens Weidmann, to advise her on economic matters. Weidmann has been nominated as head of the "economic, finance and labour market service" within the chancellery. Weidmann is currently deputy chief of the German central bank's economics department and also head of its monetary policy and analysis department. He replaces Thomas Mirow, who has become state secretary to the finance ministry.

It is likely that Bundesbank president Axel Weber recommended Jens Weidmann, a specialist in monetary policy, as he is seen as a pragmatist able to adapt to the political dimension of his new office. Weidmann gained experience at the Banque de France, the Central Bank of Rwanda and the IMF. From 1999 to 2003, he was head of the German Council of Economic Experts, before joining the Bundesbank’s economic department.

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Islamic bond from Bank Negara

Malaysia's central bank is to launch a RM400 million (US$107 million) Islamic bond issue, the first in a new series aimed at achieving the country's goal of becoming an Islamic financial hub. The sale of the inaugural one-year Sukuk Ijarah bonds, a new Islamic monetary instrument, will take place on Feb 16 and be followed by subsequent issues ranging from RM100 million to RM200 million. Bank Negara said
the Sukuk Ijarah would add to the diversity of monetary instruments used by the central bank in managing liquidity in the Islamic money market.

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Suda reappointed

Japan's lower house of parliament has approved the reappointment of Miyako Suda, one of the BOJ board's more hawkish members, in a move seen reducing obstacles for the BOJ to end its ultra-easy policy. Bank officials have been lobbying the economy and finance ministries in favour of Ms Suda, who is considered the third most hawkish member of the nine-person board. Ms Suda, whose first five-year term expires at the end of March, has supported an early end to quantitative easing, the policy through which the bank floods the financial system with excess liquidity, although she has recently voted to keep policy unchanged for the time being.

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Call for fresh blood

Nobuyuki Nakahara, a former BoJ board member, was quoted as saying that he and others had strongly opposed Ms Suda’s reappointment, a move he considered “very strange and irregular”. It was important to bring “fresh blood” on to the board to ensure healthy dissension from the bank’s party line. It looks as if he has lost out.

All very strange because only a few days earlier it had been reported that World Bank economist Sawako Takeuchi had been named as the likely replacement for Miyako Suda on the Bank of Japan’s board. Takeuchi, who serves also as a special adviser to the Foreign Ministry, was billed to succeed, the Mainichi Shimbun reported, a usually reliable source which claimed that the Cabinet would formalize the appointment after receiving approval from the ruling parties and Diet.

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SARB restructures

As part of a restructuring process, two key appointments have been announced by the South African Reserve Bank. Dr Johan van den Heever, who was senior deputy head of Research Department, responsible for the financial markets and public finance unit as well as the national economy unit, has taken up his new role as head of the research Department. Ms Disebo Consiglio Moephuli, who is currently the treasurer at the Development Bank of South Africa, has been appointed head of the financial markets department.

Mrs Moephuli holds an MBA in Finance from the Dalhousie University in Canada. Prior to joining the Development Bank of South Africa, where she was deputy treasurer, she was a dealer at Rand Merchant Bank and First National Bank.

Van den Heever and Moephuli succeed Monde Mnyande and Daniel Mminele, respectively, who have been promoted to be executive general managers, as has Errol Kruger, the registrar of banks, and Bertus van Zyl, formerly the advisor to the Governor. Mr Kruger remains the Registrar.

The executive general managers, the deputy governors and the governor constitute the governor's executive committee. The executive general managers report to the deputy governors and are responsible for the overall management, supervision and control of the bank's departments.

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McDonough to Merrill Lynch

William McDonough, former president of the Federal Reserve Bank of New York, has joined Wall Street investment bank Merrill Lynch & Co. as vice chairman and special adviser to the chairman on business development. McDonough said he hopes his personal relationships, built over his long career in business and government, will bring value to the company. He will advise chief executive Stan O'Neal on growing the company's governmental and international businesses.

“One is not dealing with a startup here, when dealing with Merrill Lynch,” McDonough said. “I see my role as enhancing the relationships the firm already has.”

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Constancio stays

Bank of Portugal governor Vitor Constancio will stay on at the central bank for a second five-year Constancio has been governor of the Bank of Portugal since 2000. His current term is due to end in March. Constancio is a former head of the Portuguese Socialist Party, and has previously served as central bank governor from 1985 to 1986.

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Hildebrand to chair G10 deputies

Philipp Hildebrand, a member of the Swiss National Bank's governing board, has been appointed chairman of the Deputies of the Group of Ten on Monday 23 January. Hildebrand succeeds Sir Andrew Large, formerly of the Bank of England, who retired last month. Hildebrand is a member of the Working Party 3 at the Organisation for Economic Cooperation and Development (OECD) and regularly participates in the meetings at the Bank for International Settlements (BIS). He has had extensive experience in hedge fund management, banking, capital markets and international relations, and holds a DPhil from Oxford.

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How to value the bank of Italy?

Recent little local difficulties may have temporarily sullied the brand name of the Bank of Italy but it remains an extremely valuable institution – not just for its unique part of Italy’s history but more particularly in crude financial terms. It has a large balance sheet and like all central banks should be inherently profitable. But exactly what is it worth?

This is something that will have to be worked out within the next three years at most. This is the time that the new law gives for the full “nationalization” of the bank – transfer of ownership of the remaining private shareholdings to the State. The trouble is, the Italian State can hardly afford to pay anything like its full value. This would increase the budget deficit so much as to put out of the question any remote chance that Italy might one day come back within the Maastricht criterion for budget deficits.

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Bundesbank reform TUSSLE

The German government is considering plans to reduce the size of the Bundesbank's staff with cuts that go beyond a current round of planned reductions. Confirming a report in Der Spiegel magazine, the ministry said deputy finance minister Barbara Hendricks sent a letter to a member of parliament for the opposition Free Democrats saying further cuts at the central bank were being examined. The magazine said that the central bank had eliminated 2,500 jobs to 12,500 in the last three years and plans to reduce that number further to 11,000 by 2007.

"It can be assumed that -- even beyond 2007 -- there will be a further need for adjustments," Hendricks wrote to FDP deputy Volker Wissing. Der Spiegel said it was the first time that a government official had confirmed deeper staff cuts.

The Finance Ministry is insisting that structural changes at the Bundesbank would be necessary beyond 2007. Moreover, under the proposals – described as “draconian” by Axel Weber – bonuses to Bundesbank officials would be cut from 19 per cent of basic wages to 5 per cent, or zero for some workers.

What is ridiculous, say Europe’s central bankers, is the idea that just because monetary policy is now made centrally in Frankfurt, then the old central banks have nothing left to do in their national capitals with their staff of 50,000. What an absurd notion…

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Ministers “Assault” central bankers

Some suspect this is all part of a concerted assault on central bank pay, pensions, perks and prerogatives (the four p’s) by Europe’s finance ministers. Central bankers, like judges, have traditionally been well looked after in the material aspects of life, just so they are all above suspicion as guardians of fiscal and monetary rectitude. It helps that they can print money if needed. Nothing quite gets finance ministers and their permanent staff, who lead relatively Spartan lives (as befits guardians of public expenditure), so hot under the collar as the assumption by central bankers that their creature comforts are all part of the divine ordering of the universe.

Interesting to see if all the civil servants busy migrating from Europe’s treasuries to central banks keep their Spartan habits. Somehow, one suspects they will in time recognize that central bankers are very special creatures after all, fully deserving of special treatment and worth just that extra 20%-30% (index-linked of course) more than those fellows at the treasury down the road.

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Gieve and take

One of these migrants is Sir John Gieve, long-time UK Treasury official and a new deputy governor at the Bank of England . At a recent meeting of a parliamentary select committee, Sir John had to field a number of questions over the common feeling that the UK Treasury may be tightening its grip on the central bank. Would his appointment undermine the Bank of England’s reputation for independence? After all, the chancellor of the exchequer appoints four members as “independent experts” to the nine-member strong rate-setting monetary policy committee (MPC). In addition, both the two deputy governors, Rachel Lomax and now Gieve, had careers in the Treasury prior to joining the central bank.

One MP wanted to know whether the bank was becoming “the City branch of the Treasury”. Another (Conservative MP Michael Fallon) sarcastically asked whether the MPC was becoming a "retirement home for Treasury mandarins".

"It's not for me to criticise the way I've been appointed but of course there are other ways of doing it," said Sir John. He pointed out that members of the MPC are held individually accountable for their respective voting histories. He argued that individual accountability and the transparency with which the Bank goes about its business, creates a “tremendous constraint” on outside influences. Not quite answering the question, but it got him through – after all the committee has no power to veto appointments.

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Hunt for “radioactive” notes

Kazakhstan is currently hunting for dozens of "radioactive dollars" circulating in the country's financial system. The Kazakh central bank has told financial institutions that the radiation level of the US dollar notes was 100 times above normal. A Kazakh citizen brought them into the country in November, it said.

"(The dollars) pose a direct threat to people's health," said the letter, quoted by Reuters on Wednesday.

Officials called on banks and exchange bureaus to increase efforts to find the notes by checking the serial numbers. It was not clear how the money, nearly $4,000 in 100-dollar and 50-dollar bills, got contaminated.

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Nigeria success story

In the statement accompanying its BB minus long-term credit rating for Nigeria, the rating agency Fitch has applauded policymakers’ “strong commitment to economic reform”, including “measures to rationalise the banking system” implemented by the Central Bank of Nigeria.

The rating – the first ever by a major credit rating agency for Nigeria – puts the oil-rich country’s debt on par with that of Turkey and Brazil, and was accompanied by “stable” outlook. The central bank is widely perceived to be a driving force behind many of the reforms mentioned by Fitch.

The most dramatic of these has been in the banking sector, where the central bank has implemented an extensive reform programme since July 2004. According to Charles Soludo, governor of the Central Bank of Nigeria, “the main thrust” of the programme was the increase in minimum capital requirements to N25 billion (US$ 200 million). At the completion of the first phase of the programme at the end of 2005, 25 banks had met this requirement. “The program has thus far been very successful,” Soludo said in a speech earlier this month.

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Russian minister DEMANDS new payments system

German Gref, Russia’s economy and trade minister has complained about the slow pace of progress made by the central bank in introducing an online payment system. It must be done within one year, he said. This is needed to support development of the bond market. The next stage will involve working out all issues concerned with bonds and bank payments, he said. The main problem is the fact that the central bank still does not have an online payment system, he said. Gref said this issue was first raised in 2001 and said he was perplexed "why the central bank isn't working on this problem. We've been talking about this problem for four years and for now talk still remains just that - talk."

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Serbian deputy dismissed

The National Bank of Serbia on Monday 16 January dismissed a deputy governor who was arrested last week for allegedly taking a bribe. The bank's Council said in a statement it was relieving Dejan Simic of his duties "to remove any suspicion that this case could influence the functioning of the Central Bank of Serbia."

In the statement issued after the council session, the bank's top body also said its move did not prejudge the outcome of the investigation against Simic. Simic is accused of accepting a €100,000 ($120,000) bribe to reinstate the license of a blacklisted bank, a charge that he denies. Simic's lawyers claim he was framed.

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Roth to chair BIS

Jean-Pierre Roth, chairman of the governing board of the Swiss National Bank, is to chair the BIS for three years, commencing on 1 March 2006. Roth will succeed Nout Wellink, who has served as chairman of the board and president of the bank since March 2002. Wellink is stepping down after overseeing changes to the bank’s statutes, enhancing the governance of the BIS and the transparency of its structure.

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RBS Reserve Management Trends 2006 – published Monday 13 2006

Central Banking Publications’ annual survey of central bank reserve management, including a new survey of central bank reserve managers responsible for reserves worth $1.9 trillion, is available for electronic download from Monday February 13 2006.

In addition to a survey of 56 central banks, this 150 page book contains independent analysis of recent trends in reserve management including specialised articles by many of the leading experts in this field.

“An important contribution to the literature on reserve management”

For more information and to find out how to order and access, follow this link:

RBS Reserve Management Trends 2006
http://www.centralbanking.co.uk/publications/books/rmt06.htm

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