E5 - Monetary Policy, Central Banking, and the Supply of Money and CreditReturn

The author analyzes the development of the Czech banking sector over the past ten years, focusing on selected assets and liabilities to assess the liquidity and solvency situation and development. Banks did not have any more serious problems even in the years of economic downturn 2009 and 2012-2013, they did not need assistance from the central bank or from the state. A potential and paradoxical problem may be the high level of free reserves at the central bank. It is a risk-free and highly liquid asset, but also a low-yielding asset. This also leads to virtually nil state of bank lending from the central bank. The main reason for the dramatic growth of reserves was foreign exchange intervention against the koruna. Banks as a whole are also solvent, the average capital adequacy considerably exceeds the level of minimum requirements. Severe financial crises are not connected with the Czech banking system in the analyzed period.

The fundamental equilibrium of the FX rate was significantly impacted by interventions of the Czech national bank. This article focuses on intervention influence on option valuation EURCZK currency pair as an underlying asset in years 2013-2017. We describe and quantify the prices of aforementioned FX options applying different approaches for historical and implied volatility estimation. Applying the implied volatility, we calibrate the jump diffusion model which provides the description of magnitude and direction of jumps in the underlying asset price. Mainly to ensure better comparability of the data for volatility and model estimation, both pre-intervention and post-intervention data were used. Estimated parameters show, that markets in 2013 did not trust the Czech economy and expected jump depreciation of the Czech crown. In 2014 and 2015 markets expected no major deviations from the exchange rate commitment and, therefore, only depreciation was expected. From 2016 onwards markets adjusted expectations in line with the exit from exchange rate commitment and hence expected appreciation. Due to high volumes of speculative capital and large short sales of the Czech crown markets again expected depreciation.

Natural response to the financial crisis is mostly increased regulation. This was happened in history, as well as in the global financial crisis today. The reasons for this usually lie in the fact that the one of the main considered direct causes of the crisis is insufficient or incorrect regulation or only way to prevent certain problems just seems to be regulation. This paper reflects whether the new regulatory measures introduced in response to the causes and effects of the global financial crisis (increase capitalization of banks, regulation of minimum bank liquidity, regulation of rating agencies, deep transparency of OTC derivatives, in particular and settlement of OTC trades through a central counterparty) can effectively prevent similar problems in the future. The author believes that further deepening of detailed regulation is not the way that can ensure a stable banks and entire financial system in the longer term. On the contrary, he considers as much more promising way the so-called macroprudential regulation, which would be of course gradually putting even greater emphasis on individual institutions own responsibility.

In recent years, as a result of the financial crisis, several proposals have been put forward to restore some role for gold in the monetary system. In particular, there has been a proposal to employ gold as a nominal anchor or asset for the exchange rates between the most important and tradable currencies in the world. This suggestion, along with alternatives is analyzed in the article. The author describes different historical systems of money, the gold standard and, using concrete figures, the potential role of gold in backing-up issued money. It is the author's conviction that the role of gold in the monetary system inevitably belongs to history.