samchain/econo-pairs-v1 huggingface dataset:
First of all, when talking about liquidity, it is important to clarify that, in the field of central banking and monetary policy, there are at least four distinct definitions of liquidity – each with its own implications for policy-making. The first relates to “central bank liquidity”, which is provided to the money market in order to steer short-term interest rates. The second refers to the general “monetary policy stance”, as summarised by the level of policy interest rates. The third relates to “financial market” liquidity, which is defined as the ease with which large volumes of financial securities can be traded, without affecting the market price. The fourth refers to “ monetary liquidity”, which is defined in quantitative terms on the basis of monetary and financial aggregates. While all are important – indeed key – to monetary policy-making in the current environment of strong money and credit growth at the global level, I deem it necessary to say a few words on this last type of liquidity. I think you would agree that it is difficult to precisely measure global monetary liquidity. There seems to be no universally accepted definition of it among economists. Several measures have been suggested and they all differ in many respects. They can be based on different monetary and credit aggregates; they may vary according to geographical coverage; and finally, they can be constructed using different types of aggregation. Even more challenging is diagnosing at what point global monetary liquidity becomes excessive.

The flow of funds into the US was re-exported to the advanced economies, especially through the growing securitisation markets, and helped finance the rapid increases in house prices in the UK (Chart 2) and many other countries. And that internationalisation of markets was reflected also in the build up in our banks of portfolios of AAA-rated securities which offered a slightly better yield than traditional bonds and many of which were based on sub-prime assets. BIS Review 145/2008  1  So when losses emerged in sub-prime market, they not only hit US banks but ricocheted through the international financial system. Much of the commentary has focused on the structured credit losses in banks’ trading books and treasuries and they have certainly been large. But equally as important was the impact on the liability side of balance sheets. Banks had not only expanded their balance sheets too far, they had in the process become reliant on wholesale funding markets which had not been tested in a downturn. In the UK, the gap between customer lending and deposits moved from zero at the turn of the century to over £ billion in 2008 H1 (Chart 3). That proved a structural weakness when investors realised that the AAA label concealed substantial and uncertain risks and withdrew from the securitisation markets. Just as the origins of the crisis lay in global imbalances its effects are also global.
Altogether, the statistics indicate that the level of economic activity has improved in recent months after being weaker than expected at the end of last year. I believe that this indicates that the assessment of economic activity in Sweden that we made in the Inflation Report still largely holds true. As regards the labour market, it was noted in the Inflation Report that there had been an improvement and that there is a lot to indicate that employment will continue to increase in future. Since the Inflation Report, the number of employed has developed largely as we estimated in February. The supply of labour has at the same time increased slightly more than expected. The information received does not change the overall assessment that there has been a gradual improvement in the labour market situation, however. Our assessment in the Inflation Report was that inflation would increase in future although at a moderate rate. Recently, energy prices have increased more than expected. Electricity prices have gone up while the rising oil price has led to higher prices for petrol and heating oil. Overall, this has contributed to inflation being higher than forecast in the Inflation Report. In March, UND1X inflation increased to 1.2 per cent per year while CPI increased by 1.1 per cent. The outcome was 0.3 percentage points higher than forecast in the Inflation Report (for both CPI and UND1X).

The market may also have a different view from the Riksbank of how monetary policy will react to economic disturbances of various kinds. But we can express in different ways our assessments of policy as reflected in implied forward rates and in this way clarify our view in relation to that of the market. This also enables us to influence market expectations more directly in the short term. Let me illustrate this by some examples: In connection with the Inflation Report in October last year, we said that we thought that the implied forward rate path on that occasion gave rise to reasonable inflation developments in the coming years. Consequently, no great changes occurred in market expectations when we published the report (see Figure 2). In connection with the December report, we considered that the market was correct in anticipating an increase in the repo rate at the beginning of 2006 but that the rise might be a bit quicker in the winter and spring than that reflected by the path of implied forward rates. When the monetary policy decision was announced, the market reacted consistently this time as well by the implied forward rate path shifting in a way that reflected the expected interest rate increases taking place earlier (see Figure 3).
Although a weaker exchange rate contributes to boosting exports, the effects are limited if international demand is low. At the same time, a weak krona provides higher imported inflation. We are expecting the exchange rate to strengthen in the slightly longer term, but to remain weak until the most acute stage of the crisis is over. To summarise in brief, we are assuming that the financial crisis will in various ways make the wheels of the economy turn much more slowly. Growth is expected to slow down both in Sweden and abroad. Our forecast is that the increase in GDP in Sweden, Europe and the United States will remain around zero next year, but recover in 2010 and 2011. The labour market, resource utilisation and inflation In that the financial crisis aggravates the ongoing economic downturn, we are assuming that the labour market will show weaker development and that inflation will be lower than we forecast at the beginning of September. Resource utilisation in the economy is still at a  6  BIS Review 138/2008  slightly higher level than normal. However, we are assuming that it will fall rapidly and be somewhat lower than normal over the coming years. Inflation is still high at the beginning of the forecast period. But during next year we are expecting it to fall rapidly. Opinion polls also indicate that inflation is expected to be lower in the future. Our assessment is that inflation will be below two per cent in 2009.

Today we are once again in a situation where such bank support authorities are being established in many parts of the world, including Sweden. We are also facing a period of poorer economic activity. But this time the situation is very different for Sweden. Experience and measures have given resilience The anxiety that has had a stranglehold on the financial markets since the end of September comes from outside this time, not from problems in the Swedish bank sector. Swedish banks have on the whole shown much more responsible credit granting, both compared with the years following credit deregulation and compared with parts of the US mortgage market. The banks have good capital buffers and can manage substantial loan losses, even if they are nevertheless affected by the general mood of distrust on the market. We are also much better equipped in many ways to meet an economic downturn than we were at the beginning of the 1990s. I am thinking here of the effects of the changeover in monetary and fiscal policy after the crisis, and the fact that we now have sound public finances and a substantial surplus on the current account. Although a small, open economy like Sweden’s is never immune to what is happening in the world economy, and particularly to an international financial crisis, we learnt a lot from the difficult years in the 1990s. This applies to the banks as well as to the supervisory authorities and the political system.
But there is more to be done, and it is a long-term project. It is also necessary to drive home the point that bank directors’ role is not only to maximise short-term profits; as the system is currently structured, bank directors are also guardians of public goods as represented by joint financial market infrastructure. The third is financial literacy. A number of studies show that increased financial literacy enhances financial market stability, monetary policy transmission, and understanding of monetary policy actions. This is why the Central Bank has participated in and supported the preparation and implementation of Financial Literacy Week in recent years and intends to continue doing so. It so happens that Financial Literacy Week is underway right now. The fourth topic is discussion of what type of financial system we need and want as we emerge from the aftermath of the financial crisis. That includes the international aspect of the system, the scope of the system, and whether we need to shelter our infrastructure even more from risk-taking than we have already done with recent and planned reforms, including forthcoming legislation on insolvency and winding-up of financial institutions. In this context, there are other options available than the complete separation of commercial banking from investment banking. After important steps concerning capital account liberalisation are complete, which will be soon, there will be opportunities to say more about these topics and others. And now I have come to the conclusion of my speech today.

But transmission through the exchange rate channel is uncertain and volatile, as the exchange rate is also an asset price that fluctuates with speculative capital flows and can deviate from equilibrium over time, only to correct quite suddenly. Unless the financial system is that much better protected, this process can interact negatively with financial stability, as was the case in Iceland during the financial crisis. This is at the heart of the problem faced by small countries that pursue independent monetary policy and permit unrestricted capital flows simultaneously. The problem can be solved by adapting monetary policy to that prevailing in large countries even though it is not suited to domestic conditions, or by placing restrictions on cross-border capital flows, particularly those related to carry trade. The need for such restrictions is likely to surface earlier and more strongly in countries with shallow financial markets. But capital flow management measures that aim to restrict both carry trade and destabilising capital movements cannot be used as the first line of defence in the fight against inflation and macroeconomic imbalances, except under extraordinary circumstances. Such instruments will have adverse side effects and could push international obligations to their limits. But some sort of tools must be available for use if the need arises. In general, the first line of defence must be conventional management of the monetary-fiscal policy mix, supported by structural reforms and sound economic incentives.
There is of course much to be done in understanding the complex interdependencies and concentrations, and how these might impact on financial stability. So we need data and market intelligence in this area. And we need to improve our ability to make exante judgements about the possible behaviour of both investors and intermediaries, as well as the potential depth of markets. Equally we need to be sure we would have relevant information and understanding of markets and agents should problems arise. BIS Review 36/2005  5  c)  Infrastructure (Including Payment Systems)  Focus is also important in the field of payment, clearing and settlement systems. Historically payment systems were primarily domestic entities, but as markets have become more globalised so too has the underlying infrastructure. This has helped to enhance efficiency, but leads also to added network or “single point of failure” risks. As 9/11 showed, when problems arise in this area liquidity injection may be needed to prevent market or institutional failure, and risks of instability to the financial system could mount swiftly. This brings us to one of our “must dos” – oversight of payment systems. Based on adequate data and understanding we work here on: enhancing interoperability, strengthening risk management, strengthening business continuity resilience, and improving governance. d)  International Architecture  International architecture and emerging markets exposures are a broad arena where there are particular risks and complexities which lead us to look at it separately.

Not everyone wants to be steeped in fan charts; modelling and stress testing. Yet the decisions we take impact every UK citizen. How can they rely on us – the dreaded experts? Of course, trust can be built through a track record, but it can also be grounded in familiarity. People trust vi  individuals, places and things that they know. Reflecting the diversity of the people we serve can reduce misperceptions that we are experts making esoteric decisions in an ivory tower for the benefit of others. Moreover, diverse decision-making bodies typically have greater political support and enjoy greater public trust. vii  They also tend to achieve better policy outcomes through better understanding of community needs  and more effective dialogue with the wider population. viii  Better decision making, innovation and adaptability  Homogenous groups that pay insufficient attention to minority views are vulnerable to biases, groupthink and over optimism. They are more likely to be influenced by the way information is presented (framing); and to stick with under-performing projects because of prior investments. ix  3  All speeches are available online at www.bankofengland.co.uk/speeches  3  Diverse groups can overcome these ills as they are more inclined to consider novel ideas and challenge each other, enabling them to infer cause and effect and to solve problems better. Diverse teams are also better able to adapt to changes and are more resilient.
We are working hard to build a diverse workforce because we believe it will allow us to build trust with the people we serve, and help us to make better decisions. We are striving to create a workforce that reflects the diversity of the society we serve, and we think diversity and inclusion go hand in hand. In order to achieve this, we have several initiatives in place that address various areas of diversity and inclusion. This year we renewed our diversity targets, set for the end-February 2028. These include the proportion of staff we want to be of a Black, Asian and Minority Ethnic background, and female, at various levels. We also considered how we expand our public commitments beyond gender and ethnicity. Our ultimate aim is also to work towards ensuring appropriate representation for other protected characteristics, such as disability and sexual orientation. At this point, as with many other organisations, we do not feel there is sufficient data available internally to support this and are working to address this over the next few years. This is an issue we have also noted in many other organisations in the financial sector, where data on the progress on diversity and inclusion across the sector is fairly limited. Firms have been recently contacted about participating in the pilot survey on diversity and inclusion.

The nature and speed of change pose some opportunities for smaller firms that are not weighed down by massive infrastructure and can be nimble in decision making; but there are also a number of threats from the bewildering investment choices, the costs of investment and the ongoing need to adapt. Mutuals face particularly difficult decisions as you are essentially investing your members’ (past, current and future) money and will be highly aware of the potential damage caused by delays and cost overruns; and balancing the need to invest to meet the needs of today’s and tomorrow’s customers with the the risks to the firm’s future if investment doesn’t pay off. It is also important to note that maintaining technology can come with high fixed costs alongside the people associated with supporting that technology. Gaining relevant technical expertise at Board and senior management is one option that some firms determined to make the most of the right technological advances take. Pooling expertise or outsoucing – subject to tight and expert oversight – are other options. Organisational transformation projects are always difficult to achieve in a fast-paced environment. Firms, faced with declining demand for their current services and lacking the resources to invest in new services, may take the path to merge. For Friendly Societies, this could be achieved through a Part Eight transfer. The PRA currently has an open consultation on Insurance business transfers, CP16/211, which welcomes comments and feedback until 28 October.
8  The trigger for statutory resolution would be, broadly, that the conditions for the group being authorised as a bank or dealer were no longer met and there was no reasonable prospect of repair. It should be underlined that what is described here is nothing to do with so-called ‘contractual bailin’, which has been a source of confusing distraction over the past year or so. ‘Contractual bailin’ typically refers to bonds that convert into equity or write down under a trigger establishes purely in the contract documentation. But if the trigger is the firm’s capital ratio dipping below a high threshold, the bond is in fact for recovery not for handling abject distress. If, at the other end of the spectrum, the trigger is falling below a low capital ratio, there can be no assurance that the firm would survive in the markets long enough for the bond to be triggered before the firm had to go into statutory resolution. And if the suggestion were that the contractual trigger should give the regulators discretion, most Resolution Authorities would want to avoid writing down or converting bonds outside the statutory resolution process, since that provides protections for creditors, and gives the RA protections and powers for the achievement of a clear statutory objective established by the legislature. Bailin is not about a specific type of bond – a so-called ‘bailin bond’ – but about the application of a statutory resolution power to bonds of any kind within a statutory resolution.

Cross-border problems in resolving different subsidiaries or branches can also be sidestepped.6 Any reorganistion of the operating companies to address the underlying causes of the group’s failure can be made in an orderly fashion after the solvency position has been stabilised via the bailin. Multiple-Point-of-Entry Resolution Multiple-point-of-entry resolution is what it says on the tin. Rather than resolving the group as a single whole, it would be split up into its parts. That is quite probably appealing for those global groups comprising a bundle of regional, on-the-ground commercial and retail banks, operated as separate businesses financially in distinct legal structures but with shared operational and central services. 6  4  See FDIC and Bank of England (2012), Resolving Globally Active, Systemically Important Financial Institutions. BIS central bankers’ speeches  Of course, just saying ‘break up the group along regional lines’ does not amount to a resolution strategy. What happens to those regional parts? Healthy parts might be sold or be maintained as a residual group shorn of their distressed sister companies. Those distressed parts would need to be resolved, either via P&A or via bailin of the local subsidiary (if it had issued bonds to the market). I want to stress that last point because ‘bailin’ as a resolution tool should not become synonymous with top-down SPE resolutions: an MPE resolution could involve the bailin resolution-tool being applied to some parts of the group.
In the recent health crisis, our banking sector was also able to meet businesses’ financing and cash flow needs, and to contribute very actively to the roll-out of support measures decided by the government and the European Central Bank. The issue that needs to be addressed for the future is that of the “hybridisation” of these traditional players and “disruptive” players, rather than the replacement of one by the other. In the upcoming reshuffling of cards, there is therefore room for cooperation as a key factor of development. At this point, I feel I must mention the future role of Big Techs. I will not dwell on this issue, on which the Banque de France has expressed itself on many occasions. I will simply make the observation that the entry of Big Techs into the European financial sector has, so far, been neither rapid nor dramatic. However, thanks to their technological mastery, their interest in the financial sector and their huge customer base, Big Techs are key players in future transformations. Regulators must naturally take this into account. 2/4  BIS central bankers' speeches  I would like to mention one last area of future developments: that of good practices. These are essential for maintaining confidence, but they are often slower to implement than the innovations themselves. We, as supervisors, have a role to play here. Beyond simply setting “rules” and monitoring their implementation, we can contribute to the implementation of “sound” practices in new business models.

I have on many occasions, at monetary policy meetings and in speeches, put forward the view that policy rate adjustments should normally be made gradually as a result of the uncertainty connected to forecasts and economic statistics. The well-known economists Orphanides and Williams say in an essay that this uncertainty indicates that one should not allow monetary policy to be influenced by contradictory information and statistics that are constantly revised. 10 Instead, one should normally allow monetary policy to change gradually. This limits the impact of contradictory information and statistics that are often revised. Former Federal Reserve Chairman, Alan Greenspan, said “Uncertainty is not just an important feature of the monetary landscape; it is the defining characteristic of that landscape.” I can only agree with him. 10  Orphanides, Athanasios and John C. Williams, “Robust Monetary Policy Rules with Unknown Natural Rates”, Brooking Papers on Economic Activity (2002), pp. 63–118. BIS central bankers’ speeches  9