Concerns have been raised that central bank and regulatory policies in the aftermath of the global financial crisis have contributed to inequality, having favored the rich and large financial institutions while leaving the poor worse off. This session will focus on the importance of central banks and regulators recognizing their crucial roles in supporting inclusive growth. After introductory remarks by Mr. Lipton, the panel discussion will zoom in on the interplay between financial services and inequality. The event will address key questions, such as: Do the individual benefits of wider access to financial services translate to the aggregate level? How can we limit the risk that financial deepening will exacerbate inequality? Can central bank and regulatory policies be fine-tuned to better support inclusive growth—for example, How can we ensure that financial institutions take small deposits and hold productive assets, such as loans to start-ups and technologically innovative businesses?
Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department, IMF
Tobias Adrian is the Financial Counsellor and Director of the Monetary and Capital Markets Department of the International Monetary Fund. Prior to joining the IMF, he was a Senior Vice President of the Federal Reserve Bank of New York and the Associate Director of the Research and Statistics Group.
David Lipton, First Deputy Managing Director, IMF
Mr. David Lipton has been First Deputy Managing Director of the International Monetary Fund in 2011. Before coming to the Fund, he was Special Assistant to the President and Senior Director for International Economic Affairs at the White House. Previously, he served as Under Secretary for International Affairs at the U.S. Treasury.
Sharon Donnery, Deputy Governor, Central Bank of Ireland
Sharon Donnery is the Deputy Governor of Central Bank of Ireland. She served as Director of Credit Institutions Supervision at the Central Bank of Ireland and is a Registrar of Credit Unions. She has worked with the central bank since 1996 when she joined as an economist. She was Head of Consumer Information and subsequently Head of Consumer Protection at Credit Unions. She was also vice-chair of the EBA’s Standing Committee on Consumer Protection and Financial Innovation.
Patrick Njoroge, Governor of Central Bank of Kenya
Patrick Njoroge is the Governor of Central Bank of Kenya. Prior to joining the Central Bank, he had a career, spanning 20 years, at the International Monetary Fund (IMF). At the IMF, he was advisor to the IMF Deputy Managing Director. He also served as Deputy Division Chief in the IMF’s Finance Department and IMF Mission Chief for the Commonwealth of Dominica. Prior to joining the IMF, he worked in Kenya as an economist at the Ministry of Finance and as a planning officer at the Ministry of Planning.
Karen Shaw Petrou, Managing Partner, Federal Financial Analytics.
Karen Shaw Petrou is co-founder and Managing Partner of Federal Financial Analytics, Inc., a privately-held company, providing since 1985 has provided analytical and advisory services on legislative, regulatory, and public-policy issues affecting financial services companies in the U.S. and abroad.
Perry Warjiyo
Perry Warjiyo is Deputy Governor of the Bank Indonesia. He began at Bank Indonesia (BI) in 1984, focusing particularly in economic research and monetary policy, foreign exchange management, international relations and organizational transformation. From 2007–09, he was the Executive Director at the IMF, representing the South-East Asia Voting Group. In early 2013, he was appointed Assistant Governor of BI in the area of international and monetary policy, before being appointed Deputy Governor in April 2013.
Concerns have been raised that central bank and regulatory policies having favored the rich and large financial institutions, contributing to inequality. The session focused on the crucial roles of central banks and regulators in supporting inclusive growth, and on the interplay between financial services and inequality.
Key Points:
- Impact of wider access to financial services. Lipton noted that more than 2 billion people worldwide remain unbanked. Small businesses cite access to credit as one of the main constraints on growth, resulting into higher levels of unemployment. Fund research shows that greater financial inclusion translates into a 2 to 3 percentage points difference in economic growth. Notwithstanding, the rapid evolution of banking to enhance financial inclusion presents new risks, particularly when access to credit expands without proper regulation and supervision.
- Central banks’ role in financial deepening and reducing inequality. Donnery underscored that while issues related to wealth and income inequality are outside the central banks’ explicit mandate, distribution considerations are an important aspect of monetary policy. Delivery of price and financial stability mandates is particularly important for low-income households that hold a greater part of their wealth in cash and are more severely affected in a crisis. Njoroge agreed, underscoring the importance of central bank involvement, particularly to ensure financial stability. For African countries, central banks have played an active role in supporting solutions to improve financial inclusion, with the recognition that these solutions can in turn have significant consequences for monetary policy.
- Innovation and financial inclusion. Njoroge noted that in Africa, regulators adopted a test and learn approach to innovations in financial inclusion, first understanding the risks, then mitigating them where necessary. Laws to govern these activities where only introduced many years later, after incorporating lessons learned. This has had a significant impact on financial inclusion and growth over the last 10 years. Kenya’s efforts are now focused on the 25 percent of persons still excluded from the financial system, down from 75 percent in 2005, and the introduction of new products to improve financial inclusion.
- Fine-tuning policy to incentivize financial institutions. Shaw Petrou highlighted the need to address the unintended consequences of policy on inequality. Factors such as ultra-low interest rates and the new capital requirements limit returns and encourage switching to other activities, such as wealth management. In the United States, persistent low interest rates have cost savers $2.2 trillion since the financial crisis, underscoring the need for not only fiscal policy but also monetary policy action. Donnery added, however, that it is also important to consider the positive impact of low interest rates on younger, less wealthy, more indebted households. Warjiyo noted that in Indonesia, the central bank plays an active role in issues of financial inclusions, including by setting floors on bank credit to small and medium-size enterprises (SMEs).
- Balancing financial inclusion and financial stability objectives. Donnery highlighted the important role of SME’s in growth, and the significant role of bank based finance in the euro area, which makes SMEs more vulnerable to problems in the banking sector. Non-performing loans (NPLs) in the euro area banks have at the same time reduced lending and increased lending rates for SMEs. Greater lending to SMEs has been encouraged by lower capital charges on SME lending and the establishment of central credit registers. The capital markets union in Europe aims to help deepen financial markets and reduce reliance on bank financing.
- Role of Islamic finance. Warjiyo highlighted the growing role of Islamic finance in funding not just government projects but also firms. This has had a positive effect on financial inclusion on previously underbanked Muslim communities.
Quotes:
“The countries with the biggest gaps in access to the financial system also tend to have the lowest supervisory quality. Investing in high quality supervision can pay big dividends as financial inclusion expands.” David Lipton, First Deputy Managing Director, IMF
“If people are confident in the financial system, it will allow them to make decisions on investments and assets, and that also impacts overall growth.” Sharon Donnery, Deputy Governor, Central Bank of Ireland
“(Central banks) cannot be all things to everybody. They cannot just take the issue of inclusive growth and make it a part of their mandate, but definitely there are connection with financial stability.” Patrick Njoroge, Governor of Central Bank of Kenya
“The question of widening income and wealth distribution does not only have implications for financial stability and economic growth, it has consequences for political stability.” Karen Shaw Petrou, Managing Partner, Federal Financial Analytics
“How can central banks conduct monetary policy if the majority of people do not have access to the financial system.” Perry Warjiyo, Deputy Governor, Bank Indonesia
“The debate on whether central bank and regulators have a role to play in inclusive growth goes hand in hand with pursuing the primary mandates of promoting monetary and financial stability.” Tobias Adrian, Financial Counselor and Director, IMF