Foreword by the editors

Foreword by the editors

Mihály Patai, Deputy Governor, Magyar Nemzeti Bank Marcell Horváth, Executive Director for International Relations, Magyar Nemzeti Bank

There is an urgent need to strengthen regional cooperation amongst the Eurasian countries in light of the geopolitical and economic events that have occurred in the past year. Global climate change has also recently become an increasingly difficult issue, making the development and implementation of many innovative, intelligent and ecologically beneficial solutions crucial. In addition, the coronavirus pandemic has given a further boost to digitalisation. Rapid change puts both society and central banks to the test for adaptability, especially considering the multifaceted role central banks play in economic and social terms. Newly emerging challenges necessitate new types of reactions and solutions. In this volume, the Magyar Nemzeti Bank (MNB) compiles some of the most remarkable, innovative solutions in the fields relevant to central banks, presenting research on digitalisation, sustainability and green finance, as well as analyses of central banks’ international relations and their social responsibilities in the 21st century. The central bank of Hungary is dedicated to innovation and strives to be at the forefront of the current, rapid digital transformation, whilst simultaneously undertaking an exceptional and diversified role from a social point of view. As the first central bank of the European Union with a green mandate, its clearly-defined objective is to reduce the global uncertainties triggered by climate change and to direct economic resources toward industries with lower emissions, considerably enhancing the sustainable wellbeing of future generations. The MNB, like other central banks,

is actively investigating how the relationship between central banks and society can be redefined as well as what kind of “postpandemic consensus” can be reached to renew the central bank mandate based on the three-fold primacy of independence, price stability and inflation targeting. This main objective of volume of studies is to demonstrate how the sustainability approach can be successfully incorporated into central banks’ operations, in order to make the financial system greener and more sustainable and to contribute to the public good to a large extent. The breadth of the MNB’s international network and the success of the Budapest Eurasia Forum event series is highlighted by the fact that the volume was published for the second consecutive year in 2022, this time with the participation of highly knowledgeable experts on the subject of central bank innovation. It presents leading central bank practices in relation to sustainability and green finance, digitalisation and central banks’ growing social responsibility, and provides a broad overview of the significance of these institutions in the 21st century. The studies also offer a professional basis for the continuous development of innovative central bank approaches, which can represent the next milestone in cooperation between the countries of the Eurasian region. We briefly summarise below the specific topics covered by these valuable studies, which are the focus of many professional discussions due to their unquestionable importance and relevance. The introductory study in the volume is by Flóra Balázs and Barnabás Virág (MNB). In light of the drastic transformation of central banking and monetary policy in the last two decades, the authors of the study discuss the targeted measures taken by the MNB to support economic recovery and growth. Starting from 2013, the central bank of Hungary achieved a monetary policy turnaround by introducing innovative programmes that fostered stability and economic growth. The paper takes stock of these measures, presenting the Bank’s initial market-stabilising steps, followed by its additional targeted measures. This set of

initiatives provides central banks with an excellent model of how to stimulate the economy with targeted, cutting-edge instruments, while at the same time maintaining price stability as the primary goal. The first chapter discusses sustainability and green finance, starting with a study by experts at the Banque de France, Alexandre Gautier, Anne Mongodin and Benjamin Bonnin. The paper aims to give a better understanding of the sustainability strategy of the central bank of France. The Banque de France was the first Eurosystem central bank to adopt a responsible investment charter in March 2018 and has implemented this in the portfolios for which it exercises full responsibility for the investment strategy. Within this framework, the bank must meet several commitments in order to comply with its strategy. The Banque de France’s responsible investment strategy involves monitoring and steering the climate-related physical and transition risks to which the asset portfolios are exposed. The responsible investment strategy is integrated more broadly in the governance and discussion bodies set up within the Banque de France to accompany the growing importance of sustainable finance considerations. As part of this, a Responsible Investment Steering Committee was formed in 2020. The Banque de France intends to enhance the social and societal components of its responsible investment approach. In 2021, the bond purchase programme was expanded to include social and sustainable bonds in order to strengthen the strategy’s social component. The bank will maintain these efforts by investing in funds and projects with a social impact, in addition to thematic investments aimed at fighting global warming and protecting biodiversity. The following paper is written by Csaba Kandrács, Donát Kim and Balázs Sárvári, from the MNB. Their joint work sheds more light on Hungary’s recent progress in the area of green finance, highlighting the most significant achievements in the quest for climate change, such as the MNB’s sustainability programmes,

the development of the Climate Risk Matrix to measure climate exposures, the performance of a long-term climate stress test for the first time in Central and Eastern Europe, and the publication of the MNB’s Green Recommendation in 2020, which aims to reduce climate risk in the banking sector. Additionally, the central bank of Hungary places a great deal of emphasis on research and educational activities in the field of sustainable finance. In keeping with this, the MNB maintains a strong focus on innovative research and training programmes built on partnerships with prestigious universities that offer interdisciplinary knowledge. The paper by Asel Nurakhmetova and Milana Takhanova, from the Astana International Financial Centre Green Finance Centre (AIFC GFC), provides an overview of the current state and scale of the green finance system in Kazakhstan. In recent years, the country has introduced regulatory and legislative measures, including conceptual frameworks for green finance, government financial incentives and ESG reporting. With the help of these comprehensive measures, Nur-Sultan was included in the Top 50 financial centres and held the Number 1 position in Eastern Europe and Central Asia in the Global Green Finance Index, compiled by the Z/Yen Group, the City of London’s leading commercial think-tank. Although there are some constraints to the drastic scaling-up of green finance instruments, such as the maturity of the national capital market or low liquidity, banks can become the main drivers of ESG development in the coming years. As climate change is a global challenge that no single player can solve alone, Kazakhstan is actively cooperating with international players such as the European Bank for Reconstruction and Development (EBRD), the International Bank for Reconstruction and Development (IBRD), the Asian Development Bank (ADB) and the Islamic Development Bank (IDB), among others, in order to green the financial system and create a sustainable economy. The paper by Nóra Anna Sándor, Patrik Tischler and Orsolya Vida (MNB) provides an overview of the green initiatives and

programmes launched in 2021 by central banks in Europe, Asia and the Americas, as well as by international organisations. There is now a broad consensus among central banks that they must deal with the greatest challenge of the 21st century, which is anthropogenic climate change, and they thus have taken important steps towards the creation of a sustainable world. The institutions’ policy toolkit can basically be grouped into the following categories: 1) green loan programmes; 2) investment support; 3) creation of taxonomy systems; 4) creation of new organisational units related to climate change; 5) research activity; 6) publications; 7) organisation of conferences and knowledge sharing; and 8) capacity development. There is an emerging trend in Europe, Asia and the Americas regarding the incorporation of sustainability aspects into central banks’ operational work in order to create a greener future. Thanks to its numerous sustainability programmes, the Magyar Nemzeti Bank has become one of the greenest central bank; its initiatives are covered by the paper by Kandrács, Kim and Sárvári in this volume. The second chapter of the volume moves to the topic of digitalisation. The paper by Changchun Mu (People’s Bank of China, PBoC) argues that while consumer privacy protection is considered crucial in the era of digitalisation, preventing risks such as money laundering, the financing of terrorism and tax evasion remains a priority. To keep up with the digital economy’s growing demand for privacy protection, the PBoC introduced “managed anonymity” as one of the design features of its central bank digital currency (CBDC), the e-CNY. The study highlights several remarkable efforts by the PBoC to ensure consumer privacy while mitigating the risk of crime. The paper shows that the design of the e-CNY must reflect a delicate balance between privacy protection and risk prevention, one which will continue to be refined going forward. Three experts from the MNB – Bálint Danóczy, László Kajdi and Péter Sajtos – argue that due to the speed of digital innovation in

the financial sector, central banks need to engage actively with market participants and should be frontrunners in encouraging digital transformation. The authors convincingly demonstrate that the MNB has taken several steps in this regard: the Instant Payment System, the Innovation Hub and Regulatory Sandbox, the Digital Student Safe and the Money Museum App are pioneering initiatives which help the MNB to gain first-hand experience in digital innovation, among other purposes. The next study in the chapter is by Jungphil Park of Bank of Korea (BOK). The author shares the experiences and lessons learnt during the first phase of the implementation of the BOK’s strategic plan for digital innovation. In 2020, marking the 70th anniversary of its foundation, the BOK embarked on digital innovation as a strategic goal of its Mid- and Long-term Strategic Plan (BOK2030). The strategic plan reviewed the Bank’s internal and external environmental factors and set out a 10-year vision and strategic goals. Reflecting on this challenging process, the paper shares the lessons the Bank has learned over the past two years with the aim of inspiring other central banks on their journey toward digital transformation.

The last study of the second chapter is a joint work by experts from the Bank for International Settlements Innovation Hub (BISIH) Singapore Centre and the MNB. On behalf of the BISIH, Andrew McCormack and Benjamin Lee contributed their expertise to the study, while Péter Fáykiss, Ádám Nyikes and Anikó Szombati were the MNB authors. In line with the efforts to find potential solutions to the challenges of cross-border payments, the authors examine the role of CBDCs in resolving issues in crossborder payments and introduce Project Dunbar – including its motivations, challenges, participants, scope and workstreams – and the lessons learned from the project so far, both generally and from the MNB’s perspective as an observer. Additionally, the joint paper also discusses other international initiatives in which the MNB participates such as the Global Financial Innovation Network.

Beginning with the paper of three MNB colleagues, Marcell Horváth, Veronika Mikes and Zsófia Gulyás, the third chapter in the volume discusses central banks’ role in international relations, education and support for culture. Their study highlights key examples of two rapidly evolving areas of central banking operations – international cooperation and social responsibility – and also shows how the MNB has successfully adapted to the changing global environment caused by today’s major megatrends and challenges, including the rise of Asian economies, the need for sustainable and innovative solutions, progress in digitalisation and geopolitical issues, amongst other things. According to the authors, central bank initiatives that were once seen as unconventional and even criticised are now the norm adopted by the most prestigious institutions, and their previously straightforward and unambiguous roles have expanded significantly. The next study, written jointly by Burkhard Balz and Erich Keller from the Deutsche Bundesbank and the University of Applied Sciences of the Deutsche Bundesbank, examines the difficulties faced by the Deutsche Bundesbank’s University of Applied Sciences, as well as public sector institutions of higher education in general, in the wake of the coronavirus pandemic and the shifting demands of the labour market brought on by the acceleration of digitalisation and demographic changes in particular. The institution must adjust to the new environment created by today’s challenges, the authors conclude, especially taking into account the decline in applicant volume, the reduction in mobility opportunities and its effects, as well as the rising demand for sustainability. The provision of high-quality training, opportunities for professional growth and encouragement for junior staff are crucial components in resolving these challenges. In the last, but not least, paper of the volume, Ana Rita Canavarro, Bruno Proença, Cláudia Ferreira, and Isabel Gameiro from the Banco de Portugal argue that, due to the 2008 financial crisis,

central banks started to use more complex monetary policy instruments, including the concept of financial education. In partnership with the government and public organisations in Portugal, the National Council of Financial Supervisors developed a National Plan for Financial Education to improve public financial literacy. The Banco de Portugal established a holistic strategy to engage in educational activities via different communication channels, including the Money Museum, which deals with the subject of money, its history, representation in society, relationships with individuals and the tasks and responsibilities of a central bank. Using digital and innovative educational resources, the Money Museum has proven to be a highly effective tool for financial education and received positive feedback from the target audience. We sincerely hope that these brief summaries appropriately illustrate the relevance and variety of the topics in the volume and have captured readers’ interest. From a professional standpoint, we are confident that each study accurately and thoroughly reflects on the most recent and pressing issues facing central banking, encouraging further research on the topics while fulfilling the role of a valuable and inspirational source focused on the countries of the Eurasian region.

Budapest, October 2022.