samchain/econo-pairs-v1 huggingface dataset:
How do we know, in an uncertain and everchanging world, what precise path of interest rates is necessary to stabilise inflation in the medium term? That raises questions about both what we do and what we say. (a)  What we do: The role of money and the nominal anchor  Let me start with what we do and how we provide an anchor to the price level in the long run. With a paper currency, expectations that the future price level will remain stable are an article of faith. Such expectations are the basis of the trust without which people will not willingly use paper money. They reflect beliefs about how the central bank will react to events. Given our current arrangements, the anchor for expectations of the future price level is the judgement and character of the men and women who currently, and will in the future, serve on the Monetary Policy Committee. That is a crucial difference between money as a standard of value, where its value is determined by the judgement of a group of experts, and the standards of weights and measures, such as the metre, kilo or second, which are based on objective scientific measurement. I hope that one day the Governor of the Bank of England will be regarded as occupying a position similar to that of the Chief Executive of the National Weights and Measures Laboratory.13 For the time being the value of money will depend upon the discretionary judgements of the MPC.

Structural improvements in the labour market are, however, unlikely to explain the full improvement in the stability of inflation and output. They cannot explain the low and stable level of inflation expectations. Changes in the yields on government bonds indicate that investors’ expectations of inflation over the medium-term – and the premium they require to compensate them for the risk of future inflation – have also fallen significantly. Chart 5 shows the sharp fall in expected inflation that resulted from the actual announcement of independence for the Bank of England in 1997. It seems to me likely that the new framework for monetary policy has been a key, though not the only, driver in moving the frontier inwards. By eliminating uncertainty about the inflation target and ensuring that the objective of low and stable inflation is well understood and credible, the change in the framework in 1997 helped to anchor expectations of inflation in the medium term. By doing so, it has made it possible for the MPC to keep inflation closer to target with smaller changes in monetary policy, and hence fluctuations in output, than would otherwise have been the case. The anchoring of inflation expectations has changed the way businesses respond to unexpected shocks. Faced with changes in their costs stemming from, for example, changes in import or energy prices, businesses can respond in two ways, each consistent with the necessary change in employees’ real take-home pay. They can pass those cost changes forwards to prices or backwards to money wages.
6  BIS Review 8/2007  Therefore, continued regulatory vigilance and timely interventions would be necessary to avoid and/or mitigate any harmful effects of all such threats. It should also be noted that a continuing high budget deficit could also pose a formidable challenge in the conduct of monetary policy, as such deficit requires borrowings by the Government from the banking system, making it difficult to maintain the monetary expansion along a pre-determined, tight path. As seen from the case studies of many successful countries, rapid infrastructure development is a strong contributory factor towards achieving sustainable high growth. However, the timely mobilisation of necessary resources for infrastructure development while maintaining budget deficits and debt at reasonable levels would be particularly challenging for a developing country like Sri Lanka. At the same time, maintaining a comfortable and reasonable level of foreign currency reserves in order to be able to mitigate the impacts of external shocks is also a challenging task for any developing country. Needless to say, it is vital to manage the foreign reserves at an appropriate level, while ensuring that the exchange rate fluctuations are within reasonable limits, in order to enhance the confidence in the economy. These and other challenges would need to be faced by our country and it is clear that our policies and actions would have to be so designed in order to deal with, and respond to, such challenges if we are to be successful. 5.

7  All speeches are available online at www.bankofengland.co.uk/news/speeches  7  For example, micro data studies from the UK, US, Denmark and Norway have all found statistically significant correlations between higher levels of household debt and the size of consumption cuts in a shock.13 And macro studies have also found correlation between rapid credit growth and the severity of downturns.14  But new studies have also sought to deepen the knowledge base. In particular, they have looked at why more highly indebted households cut consumption in response to shocks – the channels through which the observed association is working. For example, there could be debt financed ‘over-consumption’ prior to a downturn that is then cut back when expectations adjust to reality or credit becomes unavailable. This channel might work directly through unsecured consumer borrowing or through mortgage financed borrowing to consume. Alternatively, there are channels through which higher levels of debt constrain household budgets without appealing to ‘over-consumption’: some indebted households may be unable to consume as much as they would like in a downturn because they do not have a sufficient buffer of liquid savings and find themselves unable to access additional credit when they need it the most. This situation is more likely when falls in house prices reduce the value of the borrower’s collateral. The situation is also likely to be exacerbated if the downturn is accompanied by rising uncertainty. The combination of rising uncertainty and credit constraints would tend to lead to further reductions in spending as households build precautionary buffers.
For example, how would you feel after a ransomware attack, if you find out that your backed-up data is intact but it will take months and millions of dollars to restore? Or, if your first corrective action is the wrong solution and makes the problem worse? It takes time and resources to develop the tools, procedures, and skills to accurately diagnose causes, contain the immediate threat, and implement a long-term solution. Will you be satisfied with the performance of your corrective controls when you need them? There’s also a bias towards automated controls that is not always well considered. Both manual and automated controls have a place in a control system. While machines are better than people at repetitive tasks with clear decision criteria, people are better than machines (for now) at tasks that are ambiguous and require judgment and flexibility. When you automate controls, are you preserving the knowledge and skills of staff who need to understand the system well enough to solve problems when automation fails? So, we’ve seen how controls are part of a dynamic system in an environment of uncertainty. We can’t know whether our controls are sufficient unless we look at the behavior of the control system as a whole. And, we can’t achieve our desired outcomes unless we design for them.10  Conclusions Today, I’ve highlighted two challenges to resilience: organizational silos and the complexity of control.

1/5  BIS central bankers' speeches  Take the case of a vendor that provides critical services and is on the brink of bankruptcy. Are credit risk analysts, operational risk and business continuity professionals, and the business affected working together to share information, insights, and potential responses? Or, are silos preventing information from getting to the right people at the right time to prepare and act? Risk silos can result in siloed decisions, and looking at risks one by one is incoherent. We could drive operational risk to zero by having no operations (I guess we can all go home early), but then strategic risk rises to infinity. Since most meaningful decisions involve balancing risks, to get to the right decision, we need a risk picture that covers all relevant risk types and engages all relevant risk experts. Similarly, real world vulnerabilities do not have to conform themselves to a particular risk type. Think about weaknesses in identity and access management. This is a driver for risks ranging from cyber, to compliance, to operations, and more. This is also a type of risk that can’t be mitigated solely through technical controls put in place by information security experts; that is, a siloed risk response is insufficient. So, stronger collaboration and coordination across risk disciplines is one solution to the negative effects of risk silos. Another specific pain point created by risk silos is the flourishing, and perhaps overgrowth, of risk assessments. Most organizations have many risk reviews: often a different review for each type of risk.
Developing alternatives to Libor and similar benchmarks and encouraging their use has been a key priority of the international financial community since the Financial Stability Board, chaired by the Governor, published its report on interest rate benchmark reform in 2014. But the importance of this work has grown as it has become apparent that transactions underlying Libor are at best scarce. Resulting concerns about the 9  All speeches are available online at www.bankofengland.co.uk/speeches  9  medium-term sustainability of Libor, set out in a speech by Andrew Bailey in the summer, highlight the need 5  for a transition away from Libor to alternative benchmarks. As we move to the next phase of benchmark reform work – a broad-based transition to SONIA – it is clear that active engagement will be needed from participants across all relevant sectors and markets. As a result, the Bank and FCA are currently finalising plans to broaden the mandate and membership of the Sterling Risk Free Rate Working Group. The second ongoing initiative I would like to draw attention to is the renewal of RTGS - which is the means by which central bank reserves are transferred between banks big and small, and settles around £ of transactions per day.

I also have a direct set of prescribed responsibilities under the Bank’s application to itself of the Senior Managers Regime – a framework developed to improve accountability at the top of financial services firms. As a key part of that accountability, over the coming years I look forward to giving many talks and speeches such as this one to set out the thinking behind decisions and their delivery across the full range of my and the Bank’s responsibilities. The Bank has quite rightly placed emphasis on the role of communication as a policy tool in its Vision 2020 strategy; describing our work to as diverse a range of people as possible. Of course I start this new role at an interesting point in time. It is nearly 17 months since the UK voted to leave the EU, and just over 16 months until that decision takes effect in March 2019. In the period since the referendum we have learned that while Brexit was at one level a binary decision, there are many potential outcomes, and paths to those outcomes. Perhaps reflecting this multidimensionality, uncertainty about Brexit seems to be increasing rather than diminishing over time (Slide 1). In the Bank’s Decision Maker Panel Survey (which is run jointly with Nottingham University), the share of firms who placed Brexit among the top sources of uncertainty rose from 35% in a survey taken in September 2016 to 40% in August this year.
The first check stems from public supervisory powers: a characteristic common to all financial systems is the existence of prudential supervision. The second stems from minor shareholders and bank creditors (either holders of ordinary or subordinated debt, or mere depositors), who exert scrutiny in what we know as market discipline. I am sure that these arrangements sound familiar to you: they are the three pillars of the New Capital Accord, or Basel II. But the great worth of Basel II is precisely the acknowledgement that these three levels are part of the structure which, since the very inception of financial systems, has promoted sound banking systems. The three Pillars reflect well-known aspects of the workings of financial and banking systems over many years. And there lies the merit of Basel II. It has been able to identify these three elements and  4  BIS Review 31/2003  to integrate them so as to achieve regulation which is more closely aligned to the management of banks and which, therefore, is more efficient. Let me conclude my remarks by raising the issue of corporate governance and transparency in deposit institutions, including savings banks. One could argue against paying much attention to corporate governance in savings banks, based on the lack of a shareholder structure. I do not agree. First, we should never forget that the issue of corporate governance is related not just to the minority shareholder issue, but also to that of companies raising resources from capital markets.

It is only through operating properly as business concerns, basing their management on professional criteria relating to economic and financial rationale, that savings banks can continue creating value for society and for their regions. Let me turn now for a moment to the Spanish experience. Our “cajas de ahorros” are also very old financial institutions and our story has been a successful one. When I explain the characteristics of the Spanish financial system, and in particular the prominent role of savings banks, some of my foreign counterparts ask about potential problems of fragility and inefficiency and my answer is always the same. Not only are they neither fragile nor inefficient, but they are also as profitable as their banking counterparts, and they are increasing their market share year after year. They are a major contributor to making the Spanish banking sector an efficient and competitive one. I earlier drew a distinction between macro and micro efficiency. Savings banks in Spain have made significant contributions to the macroeconomic efficiency of our system. In bolstering efficiency at firm level, certain factors, which I shall now refer to, should be given particular consideration by savings banks. Any management action geared to cost-rationalisation should pass a careful and thorough cost/benefit analysis so that certain elements of their long-term strategy or their risk profile should not deteriorate. Let me mention a few of these elements. Investment in new technologies Efforts to improve efficiency must be compatible with the challenges posed by new technologies.
We are also looking into how to better capture risks associated with banks’ trading book positions in credit derivatives and highly structured and complex products. The AIG has established a working group that is following up on the Committee’s July 2005 trading book guidance. This working group, in consultation with the industry, is in the process of identifying possible principles for the implementation of so-called incremental default risk charge for trading book capital, and will be exploring other issues related to the measurement and modelling of risk in the trading book. And work is also going on outside the auspices of the Basel Committee. Many of you are probably aware that the Federal Reserve Bank of New York and the UK Financial Services Authority, in conjunction with other supervisors of major credit derivative dealers, have encouraged the industry to focus greater attention on sound risk management practices and the infrastructure of the credit derivatives markets by improving controls around assignments, reducing confirmation backlogs and increasing the use of electronic matching platforms. Other supervisors are reviewing bank stress testing practices and potential risks arising from banks’ private equity activities and exposures to hedge funds. The Basel Committee supports these efforts, and members will continue to keep each other informed on the results of their reviews. Private sector initiatives The public good of financial stability is not just of interest to supervisors and public authorities, but also to the financial sector.

These developments, however, have raised various issues related to the requirements for bank openness, customer security, transparency and trust in the payment services market as well as consumer rights protection. Consequently, the regulators have to adopt appropriate legislative framework that supports digitalization, innovation and competition, but also take care of security and protection. In this context, it can be noticed that the European Union is a global leader in this domain. By revising the Payment Services Directive (PSD2), the European Union enables stronger competition and 1/3  BIS central bankers' speeches  innovation by allowing entrance of FinTech payment service providers that will eventually lead to greater choice and better prices for consumers, it will fosters cyber resilience of the payment service providers as well as enhance protection of payment services users. In this way, the European Union created a sound legal framework for digitalized payments landscape that enhances the integration of the single payment. At the same time, it sets an example for other countries around the world how to support digitalization trends by balancing between innovation and competition, on the one hand, and security and protection, on the other hand. The new regulatory framework implies that banks will no longer only be competing against banks, but everyone offering financial services, i.e. the customers will be able to create a set of providers of different financial services instead of relining on one bank for all services.
Allow me to point out that the tightening of capital regulations and the introduction of a leverage ratio that occurred at the end of 2008 were not aimed at reducing the systemic importance of the big banks to an acceptable level. These measures were much more a response to regulatory shortcomings revealed by the recent crisis, which were insufficiently conservative backing of risk with capital (particularly in the trading book) and the lack of a countercyclical component in capital requirements. As regards more stringent liquidity requirements for systemically important banks, specific measures have already been implemented. The liquidity requirements have been thoroughly revised by FINMA and the SNB in collaboration with the big banks, and will come into effect at the end of this month. The final key measure, which is aimed at organisational structure, is also important. The organisation and legal structure of systemically important banks must be adapted to ensure  BIS Review 85/2010  3  that an orderly liquidation is possible should it become necessary. In particular, it must be possible for systemically important functions to be maintained without the bank as a whole having to be rescued. Clearly, this is not easy to achieve. The implementation of this measure must take into account the challenges posed by the considerable complexity and cross-border activities of the big banks. It must be credible and robust – both operationally and legally. An unworkable approach in this area could have fatal consequences in the next crisis.

It is the commission’s assessment that in their current form and size, the big banks are clearly systemically important. The commission of experts published its interim report at the end of April. The “too big to fail” issue is to be addressed through a package of key measures encompassing special requirements for systemically important banks in the areas of capital, liquidity and organisational structure. These key measures are compatible with the approach discussed by the Financial Stability Board. Besides those proposed by the commission of experts, other measures being considered at the international level include the breaking-up of big banks, the prohibition of certain activities such as proprietary trading, and the taxation of balance sheets and transactions. The SNB fully supports the proposals put forward by the commission of experts to date. The overall direction is correct. What is important now are the details of the measures. Our position is clear. It is essential that capital requirements be significantly increased and that they rise in line with the degree of systemic importance of a bank. This is the only way to ensure that the banks internalise the risks which, until now, they have been able to pass on to the general public, to some extent. Moreover, progressive capital requirements should create an incentive for banks to reduce their systemic importance, with its associated risk potential.
But monetary policy needs to be forward looking, so that does not add up to a compelling case for a change in monetary policy. The question is how has the growth and inflation outlook changed as a result. In my experience, recoveries have momentum. While growth might not be totally steady and even across sectors, as recovery progresses, various mechanisms begin to operate which can give it added momentum. Pressure on existing capacity grows, causing companies to dust off their investment plans. Supply chains tighten and firms start to re-stock. Memories of the uncertainty created by the shocks that generated the recession fades and confidence recovers. The labour market stabilises and unemployment should eventually start to fall, improving job prospects. These things happen over a period of time, so from month to month not much change may be perceptible. But looking back over a longer period, improvement is clear. In my view, this is the process that has been underway for the last year, and this process of gradual healing and recovery is likely to continue in the absence of big negative shocks which could derail growth. Given our experience over the last few years, we should certainly worry about future major shocks from the international economy. But the big downside worries resulting from the financial crisis which were present a year ago have receded, in my assessment. And the response of monetary policy has played a part in that process – though it has not been the only factor at work.

Andrew Sentance: UK monetary policy – how long should “The song remain the same”? Speech by Mr Andrew Sentance, Member of the Monetary Policy Committee of the Bank of England, to the Thames Valley Chamber of Commerce Group, Reading, 13 July 2010. *  *  *  I would like to thank Michael Hume, Tomasz Wieladek and Abi Hughes for research assistance and I am also grateful for helpful comments from other colleagues. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Monetary Policy Committee. It is a great pleasure to be speaking to a business audience here in Reading, in the heart of the Thames Valley. This is an extremely successful economic region – with the highest GDP per head in the United Kingdom outside central London and the 14th most prosperous region in the whole of the European Union. 1 This track record of economic success reflects a concentration of high-tech and knowledge-based industries, particularly in the information and communications technologies sector. The Thames Valley economy also benefits from good transport links to London, other parts of the UK and international connections via Heathrow Airport, which is still Europe’s biggest aviation hub in terms of passenger numbers. It is not surprising, therefore, that a number of recent reports have highlighted the growth potential of this region in the current recovery.