samchain/econo-pairs-v1 huggingface dataset:
One reason for these developments is that net price gains on securities have increased in this period. Bearing in mind that this was a favourable period for securities markets, it will be difficult to maintain the income share from price gains in periods of more normal returns in securities markets. With a slower rise in house and commercial property prices and lower lending growth, combined with a normalisation of loan losses, banks may find it more difficult to maintain the high level of profitability that we have witnessed in recent years. The new capital adequacy rules have had a strong impact on Norwegian banks and will continue to do so in the years ahead. How banks choose to utilise capital freed up as a result of the reduced minimum capital requirements, may have an impact on both competition and structure in the Norwegian banking sector. Freed-up capital may be used to finance lending growth, acquire other institutions or pay back capital to shareholders and other stakeholders. On average, Norwegian banks’ capital adequacy is solid. However, the substantial reduction in minimum capital requirements, even though there are transitional arrangements, also entails some risk that banks will reduce their capital to such an extent that the buffer needed to meet unforeseen events may become smaller than advisable. Banks’ profitability may also depend on the duration and severity of liquidity problems in international financial markets. Although Norwegian banks are probably somewhat less exposed than banks in many other countries, the impact may nonetheless be felt.

Norwegian covered bonds are very different from US CDOs backed by subprime mortgages. The regulations ensure that Norwegian covered bonds are a more transparent and substantially more secure investment alternative. The cover pool in the mortgage credit institutions consists of mortgages with a maximum loan to value ratio of 75 per cent. The loan to value ratio of the cover pool in Norwegian mortgage credit institutions that have so far issued covered bonds is well below this. All holders of covered bonds have the same right to the mortgage credit institution’s cover pool. In other words, there is no tranching as is the case for CDOs backed subprime mortgages. Investors will also have an overview of the risk parameters for mortgages that are part of the cover pool. This means that Norwegian covered bonds are far more transparent with respect to the assets that are the bondholders’ cover than CDOs backed by US subprime mortgages. Another difference between subprime mortgages in the US and Norwegian mortgages is that the regulations relating to the provision of credit are stricter in Norway. Subprime mortgages in the US have been sold through agents and mortgage brokers that have not been subject to federal supervision. In a number of cases, mortgages have been extended to persons with no income. Before Norwegian banks extend a loan, they assess a customer’s debt-servicing capacity. Norwegian banks are also required to advise a customer against taking out a mortgage if they feel that the customer will find it difficult to service the loan.
And when innovation, such as we are now seeing in credit derivatives, takes place in a period of generally favorable economic and financial conditions, we are necessarily left with more uncertainty about how exposures will evolve and markets will function in less favorable circumstances. The past  BIS Review 14/2006  1  several years of exceptionally rapid growth in credit derivatives and the larger role played by nonbank financial institutions, including hedge funds, has occurred in a context of very low realized credit losses, low expectations of future default risk, a high degree of confidence in the financial strength of the major banks and investment banks, relatively strong and significantly more stable economic growth, less concern about the level and volatility in future inflation, and low expected volatility in many asset prices. Even if a substantial part of these changes prove durable, we know less about how these markets will function in conditions of stress, and the most sophisticated tools available for measuring potential losses have less to offer than they will with the benefit of experience with adversity. Several aspects of the present context are worth highlighting. •  The scale of the over-the-counter derivatives markets is very large.

The BIS has been particularly active in providing technical assistance to the Bank of Albania, through workshops and training courses organised by the Institute of Financial Stability, which promotes the international financial stability through information sharing and cooperation in financial system supervision area. During 2006 the Bank of Albania enhanced the mutual relations with the central banks of the region and beyond it. Personally, I have paid official visits to many central banks of the region and Europe, discussing about latest developments in the Albanian economy and further extension of mutual cooperation and technical assistance that these banks can provide to the Bank of Albania. In June the Governor of the Bank of Greece, Mr. Nicholas C. Garganas paid a two-day official visit to Albania. It took place in the light of mutual relations between both institutions, laying special emphasis on sharing of information and experience in banking supervision area. Enhancing relations with central banks of the region reached the peak in the round table of October 2006 held in Tirana, where the governors of the central bans of Rumania, Serbia, Montenegro, Bosnia and Herzegovina and Kosovo discussed about financial stability of the region. In the framework of the Bank of Albania’s objective to benefit from the experience of the central banks of the CEE, recently acceded in the European System of Central Banks (ESCB), during 2006 the cooperation relations with the Central Bank of Poland, National Bank of the Czech Republic and the National Bank of Bulgaria have been intensified.
In the event of a bad state of the world – default by the reference entity in a CDS context – the writers of the insurance suffer a significantly negative payoff, eliminating the apparent alpha earned in good states (Figure 3). This was, in effect, the AIG strategy. AIG is believed to have written around $ trillion of CDS protection. This strategy delivered large apparent “alpha” returns during the disco years. But when the music ceased and true beta was revealed, AIG required state support of around $ These five strategies are the latest incarnation of efforts by the banking system to boost shareholder returns and, whether by accident or design, game the state. For the authorities, it poses a dilemma. Ex-ante, they may well say “never again”. But the ex-post costs of crisis mean such a statement lacks credibility. Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises. And the larger these costs, the lower the credibility of “never again” announcements. This is a doom loop. The “St Petersburg paradox” explains how a gambling strategy which starts small but then doubles-up in the event of a loss can yield positive (indeed, potentially infinite) expected returns. Provided, that is, the gambler has the resources to double-up in the face of a losing streak. The St Petersburg lottery has many similarities with the game played between the state and the banks over the past century or so. The banks have repeatedly doubled-up.

Chart 8: LCFIs’ trading portfolios and financial leverage – 2007  Line of best fit  80 70 Total assets/Tier 1 Capital  UBS 60  Deutsche  SocGen Barclays BNP  50 40  RBS  30  Citi BofA  20  Credit Suisse HSBC JPM  10 0 0.0  0.1  0.2 0.3 0.4 0.5 0.6 T rading assets/total assets  0.7  0.8  Sources: Published accounts and Bank calculations  BIS Review 139/2009  17  Chart 9: Leverage and risk-taking in international banks – 2007 Total Adjuste d Asse ts/Tier 1 Capital 80  4% T 1 capital ratio  70 60  UBS  Deutsche  Credit Suisse  SocGen RBS BNP Citi Barclays  50 40 30  BoA  20 HSBC JPM  10 0  0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Risk We ighted Assets/Total Adjuste d Asse ts Sources: Published accounts and Bank calculations. Notes: These adjustments aim to ensure a common accounting treatment of exposures between US and European banks.
If the exchange rate is actually misaligned from its fundamentals, the intervention will have a better chance to amend the situation, while it will also bring financial benefits. Conversely, if these are fundamental trends, the intervention will have transitory effects at best, at a substantial cost. Since the implementation of the floating regime at the end of the last decade, we have intervened in the foreign exchange market on three occasions. In the current circumstances we have not ruled it out. It is an option we are permanently evaluating. I want to go deeper into the elements that are weighed for this decision. It is always possible to design an intervention of such magnitude that it can affect the evolution of the nominal exchange rate. But this has other consequences on the economy that need consideration. One such consequence is the need to sterilize the monetary effects of the intervention. The money that is issued to buy the dollars must be taken out; otherwise monetary policy would be subordinated to the exchange rate objective, jeopardizing the stability of growth and inflation. This sterilization pressures long-term interest rates upward, which has an impact on activity, while inducing capital inflows that render the intervention ineffective. In turn, the intervention entails high financial costs, because financing the intervention via debt costs more than the returns on the international reserves, except, as I said before, when it is grounded on the expectation of an important correction of the exchange rate misalignment.

On balance, despite the ongoing financial turmoil, I would argue that financial integration has had a stabilising influence on the global financial system for the reasons just mentioned. 18 If, however, risk assessment and management is inadequate,  16  See Kose, Prasad and Terrones (2005, 2006). 17  The financial market liquidity indicator is constructed to gauge market tightness, depth and resiliency, and liquidity risk premia. 18  The available empirical evidence on how measured financial openness affected the severity of banking crises is somewhat inconclusive. The finance literature argues for a joint consideration of efficiency and stability issues, see Ferguson et al. (2007), ch. 6.3 for references to the literature. BIS Review 9/2008  7  asset valuation is difficult and highly uncertain, and incentives are distorted, the risks to financial stability could increase. The current financial turmoil provides a clear example of how a shock to a relatively small segment of a national financial market can spread globally across borders and across other markets. As early as 2005, US sub-prime loan delinquencies started to rise. Consequently the value of credit products based on sub-prime mortgages rated lower than AA started falling.
Despite current low rates, I still often hear people say that higher inflation is just around the corner. I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation. Many times, the strongest concerns are expressed by folks who said the same thing back in 2009 and then in 2010 and, well, you get the picture. OK, five years later we still need to carefully assess this very serious question. Let me offer five reasons why I still see the economic environment as pointing to below-target inflation for several years. First, many commentators see rising commodity prices as a harbinger of rising inflation pressures. Certainly, back in 2008 and 2010 there were instances when energy and commodity prices rose to high levels. This put pressure on inflation and also reduced aggregate demand. There is a lot of evidence that these types of relative price increases result in only transitory increases in consumer price levels. 6 At the moment, even these transitory upward pressures are absent, and the current weak state of global demand contributes to downward pressures. Until something unexpected, and frankly positive, happens with the world economy, commodity prices seem like an even more unlikely propellant for strongly rising inflation than they usually would be. Second, some say a classic warning sign of inflation is the enormous size of the Fed’s balance sheet and the greater than $ trillion of excess reserves sitting on commercial banks’ books.

2  BIS Review 48/2001  Now, let me be clear, I agree with those who argue that the single currency – by eliminating exchange risk within the participating countries – can make a significant contribution to increasing the depth and liquidity of financial markets and reducing transactions costs within the Eurozone. And indeed it already has had that effect, particularly in money and bond markets, especially the corporate bond market. It has no doubt also been a factor encouraging the tendency to, mostly national, consolidation as financial institutions prepare for greater competition from other euro-based institutions in their national markets. All of this is very positive for the competitive efficiency of Euro-zone financial systems both nationally and within the Eurozone as a whole. It is in fact one of the two main potential economic benefits of the single currency, the other, of course, being the positive effect of nominal exchange rather certainty within the Eurozone on trade flows of goods and other, non-financial, services and its impact in more efficient resource allocation. It is also the field in which the UK, through London, has been able to make a positive contribution to the development of the Euro even from outside the Eurozone. So I do not at all underestimate the contribution that the euro has made, and is making, to improving the efficiency of the Eurozone financial systems.
There are several arguments for conducting financial stability work in the central bank such as: –  There is a clear link to monetary policy;  –  Central banks usually run the large value payment system which is an important nexus in the financial system;  –  Central banks may provide exceptional liquidity assistance – ELA – to problem banks, but must then understand the implications for the system as such;  Much of the stability work is crisis-oriented – both the precautionary work and that dealing with actual crisis situations. The Riksbank participates in many international fora that promote stronger frameworks to prevent or at least to manage crises. The recent global crisis led to a number of conclusions showing that we need a broader framework in which to analyse financial stability and deal with problem situations. For instance: –  Not only banks will destabilise the system;  –  Systemically-important institutions pose even greater challenges than we thought;  –  Liquidity developments must be closely monitored;  There are clear linkages between submarkets and also between jurisdictions. The experience gained during the crisis leads to some specific challenges for central banks: –  Central banks must maintain a sufficient capacity to provide liquidity to meet sudden needs, but at the same time we must maintain strong incentives to avoid the banks and markets relying on central bank funding rather than approaching their normal channels.

In political terms it would help make the Euro area more than the sum of its parts. Jean Monnet famously declared that “nothing is possible without men, but nothing lasts without institutions.” The mandate of this decision-making institution must be to achieve the strongest, sustainable and balanced growth. II. How we should define concretely the tasks for a Euro area Finance Minister  I see four of them. First, the Minister would be in charge of preparing the euro area-wide collective strategy to fulfill the mandate I just described. It would be essential for the euro area to collectively agree on overall economic policy objectives, and on the division of tasks through the setting of individual performance targets for Member States. Such an agreement could be reached following a two-step process: •  A preparation phase would require assessing: (i) potential growth, with a quantified ambition to raise it; (ii) the euro area output gap; (iii) the sustainable fiscal and external stances for the euro area as a whole, as well as the sustainable distribution of these positions across countries. •  In a decision phase, the euro area Finance Minister would propose a strategy, consisting of the collective objective and – as far as necessary – its country specific translations in terms of reforms and policy stance, bearing in mind of course the rationale for subsidiarity.
16  Figure 13 MPR Corridor (*) (promedio trimestral, porcentaje)  24.II  24.I  23.IV  23.III  23.II  22.IV  23.I  12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0  22.III  22.II  22.I  21.IV  21.II  21.I  21.III  Corredor Jun.22 FTS EES Mar.22 corridor MPR Forward MPR Jun.22 MP meeting  12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0  (*) The corridor is constructed following the methodology in boxes V.1 of March 2020 MP Report and V.3 of March 2022 MP Report. It includes the May Economic Expectations Survey (EES) and the June Financial Traders Survey (FTS) previous to the MP meeting, plus the average smoothed forward curve for the quarter ended on 1 June. This is calculated by extracting the implicit MPR considering the forward curve over the overnight swap curve of up to 2 years, discounting the fixed rates of each maturity to the simple accrual of the overnight index swap (OIS). For the current quarter, the surveys and the forward curve consider the average of daily effective data and are completed with the respective sources  Source: Central Bank of Chile.

The inflation accumulated between March and April —3.3 percentage points— was significantly more than we projected in the March Report. When broken down, the surprise shows that over 90% of it came from higher-thanexpected increases in the prices of foods, energy, and other volatile components (figure 2). Inflation expectations two years out are still above 3% annually, although the biggest increases are seen in the shorter-term measures. At one year, the median of the surveys to economists (EES) and financial specialists (FTS) place inflation at 6.2% and 6.8%, respectively, which compare with 5.3% and 7.4% last Mach. For the end of the monetary policy horizon, prospects show no big changes with respect to the March Report, remaining above 3%. The expectations implicit in financial asset prices have also risen further, but these increases have been concentrated on the one-year horizon. The inflation expectations of businesses have also increased. Both the Central Bank's Survey of Price Determinants and Expectations (EDEP) and the IMCE indicate that firms expect inflation to be close to 8% in a year's time. Moreover, almost 80% of the firms surveyed under the May Business Perceptions Report expect inflation to be well above what is considered to be normal over the next twelve months. (figure 3). Data for early 2022 show that the economy has already entered an adjustment phase, with a slight decline from the high levels it reached last year.
14 A key variable here is the interest rate level: If current and anticipated rates are comparably low, loans tend to be taken out for projects which would not be profitable or not be financed at higher rates. Furthermore, lenders in such an  11  Uncertainty regarding the stability of individual banks can also result in banks no longer lending to one another, thereby mutually aggravating their difficulties and leading to even more restrictive lending practices. 12 Other aspects based on rational considerations that I did not examine further here and which can also lead to excessive borrowing or lending are (misplaced) incentives of an institutional, regulatory and fiscal nature, and the emergence of innovative financial products. 13 Cf. Kindleberger and Aliber (2005). 14 Cf. Jorda et al. (2016). Page 7/16  environment often take higher risks in order to achieve return and growth targets despite the low interest rates. Other key drivers for the increase in credit are movements in prices of assets such as shares and real estate. Rising prices for these assets and growing credit volume often go hand in hand and are mutually reinforcing. This applies to the real estate market in particular, since real estate is almost always part-financed by loans. Two mechanisms are at work here: First, rising asset prices produce ‘wealth effects’ in households. Households become richer and thus more creditworthy. This has a positive impact on household demand for loans. At the same time, rising asset prices translate into higher-value collateral for households to use.

During this crisis, the precipitate rise in liquidity premia and fall in asset prices may have called into question the viability of many banks had their assets been fair-valued. Consider again the banking book of UK banks on a mark to market basis. Chart 7 shows the loss of value on this book, which would have peaked at over £ billion during the early months of 2009. The total capital resources of UK banks at that time were around £ billion. In other words, the UK banking system in aggregate would have been technically insolvent on a mark to market basis. The recent recovery in asset prices has been almost as remarkable as the preceding fall. It has meant UK banks were back in the black within a matter of months.   “Liquidity and fire-sales”  The act of marking to market may itself have a bearing on asset price dynamics. This arises because of its potential effects on banks’ behaviour. If swings in perceived solvency cause banks to sell assets, these fire-sales may themselves add to downward pressures on asset prices. Under mark to market, these pressures are felt by all institutions, not just the seller. In effect, fire-sales by one firm have negative externalities for all others. And as other banks adjust their own balance sheets in response, there is a risk the downward dynamic is perpetuated. 18  8  Khan (2009).