samchain/econo-pairs-v1 huggingface dataset:
Michael C Bonello: Policy challenges beyond the euro Speech by Mr Michael C Bonello, Governor of the Central Bank of Malta, at the Annual Dinner of the Malta Institute of Financial Services, Saint Julian’s, 17 November 2006. *  *  *  I should first of all like to thank you, Mr President, and your Council for the opportunity to share my thoughts once again with such a distinguished audience. Before I do so, however, I would like to commend the Institute of Financial Services (IFS) for its admirable capacity to reinvent itself in response to the changing demands of the marketplace. This year, for example, the Institute has renamed itself as the IFS School of Finance. I have discovered that this apparently cosmetic change has a very significant meaning, in that the Institute in the UK is now empowered to award degrees. IFS Malta, on its part, has extended its reach beyond our shores and is cooperating with the Romanian Banking Institute in the delivery of one of its academic programmes in that soon-to-be EU member country. I am sure all your other guests will join me in wishing you and your Council every success in your continuing efforts to promote higher professional standards in the financial sector. Since Malta joined the EU in 2004, and particularly since the Maltese lira entered ERM II last year, the Central Bank of Malta has been making the case for an early adoption of the euro.

Domestic inputs, particularly labour, must be competitively priced. And since the cost of labour in Malta is relatively high, we must increase the value of output per employee. Once again, the only way forward is through productivity growth. In this regard, there is much room for improvement. The level of productivity has remained roughly unchanged since 2001, while it is projected to increase at an annual rate of only 1% to 2% in 2007 and 2008. For a country that is highly dependent on exports, this is not good enough when many of our competitors are achieving faster productivity growth. Faced with this situation, we would do well to reflect on the experience of others. In France, a recent McKinsey report showed how industrial productivity gains slowed sharply in the last five years, causing the country to miss the opportunity to create an estimated 700,000 jobs. As for the reasons, a report by the Camdessus expert group in 2005 identified two major obstacles to growth: first, not enough people work, and those who do work, do not work long enough, due in part to the introduction of a 35-hour working week; second, the heavy State has become a costly drag on the economy. Malta faces a similar predicament for much the same reasons.
This is not surprising because other countries’ currencies also fluctuate. The krone exchange rate is the price of our currency measured in a foreign currency. Developments in other countries are just as important for the krone as developments in the Norwegian economy. Capital flows freely and flows can change rapidly. This can spill over to exchange rates and interest rates as well as output and employment. The chart shows the effective exchange rate for Norway and a number of other small countries with inflation targeting. Exchange rate fluctuations are approximately the same for Norway, Sweden and Canada, whereas the krone exchange rate fluctuates less than the exchange rate for Australia and New Zealand. Therefore, the krone does not stand out as particularly unstable compared with other countries’ currencies. The forward exchange and options markets have expanded in recent years. A deeper market reduces transaction costs and it is easier to find counterparties. This has provided companies with greater scope for hedging against foreign exchange risk. Instruments that reduce the risks associated with a floating krone are increasingly being used, also in Norway. Hedging against fluctuations in the krone involves costs for businesses. A krone that is stable - but too strong - also entails costs to the economy in the form of low activity. Similarly, a krone that is stable but weak - is a source of high inflation. Petroleum revenues generally provide substantial, but uneven currency inflows into Norway.

The outlook for fortification of the foreign exchange reserves is far less uncertain than before. As a result, there is good reason to re-think the sequencing in the liberalisation strategy with an eye to changed circumstances and market developments, as the Monetary Policy Committee indicated in its August statement. One possibility might be to change the order of events and adopt measures to release pressure from owners of frozen deposits and glacier bonds before lifting controls on long-term obligations. The August 2009 strategy assumed that this particular step would not be taken until after restrictions on long-term obligations had been lifted, at least to some degree. The presence of unstable short-term capital creates a certain risk, however, when the first steps are taken. Another possibility is to hold auctions where non-residents with ISK holdings can exchange them for foreign-denominated bonds that can be traded without restrictions earlier in the timeline than was previously assumed. Still another possibility is the imposition of a gradually declining exit tax, either concurrently or later. One way of releasing frozen ISK assets is to direct them towards domestic long-term investments. Unfortunately, it is difficult at this stage to say with assurance whether, when, how, and in what order these solutions will be adopted. That will be determined in part by the results of the preparatory work currently underway. Foreign owners of frozen short-term assets are not the only parties that must be considered when the capital controls are lifted.
Pension reforms if correctly done can also have a significant impact on financial market development when pension funds are encouraged to act as institutional investors involved on the capital market. Participation of pension funds in the capital market can lead to improved clearing and settlement on the one hand, as well as provide more sensitive price information – resulting in better resource allocation, and increasing the availability of capital for financing development. In some developing countries such as Chile, pension funds facilitated internal resource transfers, enabling the government to service its international debts without extreme fiscal adjustment and avoided the drainage of resources that emanates from foreign debt payments. In addition, the funds provided a source of borrowing that did not require excessively high interest payments. Africa can learn from such experiences and undertake necessary reforms to unlock this kind of resource. Pension funds can therefore offer African countries an alternative source of development finance, provide an avenue for restructuring public finances and for the promotion as well as development of the capital markets. 3  Harvey Morris, ‘African states tap pension funds’, in the Financial Times, 24 October 2007. BIS Review 126/2009  3  (c)  Stock markets  Another important avenue for harnessing resources for the financing of development on the continent is the stock market. Stock markets have grown in number across the globe over the past two decades and emerging and developing country markets have accounted for a significant share of this growth.

Despite that, as we have seen only too clearly, it is next to impossible to stabilise activity in the face of a financial crisis, as indebted households, businesses and intermediaries all seek to de-leverage simultaneously. Moreover, the upswing of the credit cycle is frequently associated with an increase in lending to purchase assets, especially property; that was certainly true on this occasion. If the consequence is an investment or construction boom – as was the case in the United States, Ireland and Spain – the result is a capital overhang that needs to be worked off. There are welfare gains from avoiding such capital misallocation. That leads naturally to my fifth lesson: prevention is better than cure. 5  The marginal funding cost is the three-month Libor plus the average of the five-year CDS premia of the major banks. The corporate loan rate is the three-month Libor plus the average of the spread on sub-investment grade syndicated loans. 6  If no other policies were available, then one might be tempted to conclude that the inflation target should just be higher in normal times, as advocated by Olivier Blanchard, Giovanni Dell’Ariccia and Paolo Mauro (2010). By ignoring the other policies that are available to deal with, and prevent, financial crises, to my mind this is giving up too easily. 6  BIS central bankers’ speeches  But how best to do that? Could a different choice of monetary policies have led to a better outcome?
This framework mainly contains five central elements: The first is the strengthening of the quality and quantity of bank capital, and a harmonisation of the calculation of regulatory capital across jurisdictions. Better and higher bank capital is needed in order to foster the loss-absorbing capacity of banks. To this aim, Basel III increased the minimum common equity Tier 1 (CET1) ratio from 2% to 4.5% of risk weighted assets. The second is the requirement for banks to build-up buffers above the required minimum, particularly when the economy is booming, thereby providing for additional cushions to absorb losses in periods of financial distress.2 In addition, further buffer requirements are foreseen for systemically important financial institutions (SIFIs) as well. The third element is directed to enhance the “risk coverage” of the regulatory framework, providing a more comprehensive treatment of banks’ exposures to complex financial products whose risk to the system has been neglected so far. The fourth element is the adoption of a simple and transparent rule to prevent the excessive reliance on debt by the banking sector. And last, but not least, the new framework intends to improve banks’ resilience to liquidity shocks and to increase market confidence in the liquidity position of banks. The intended improvements in the liquidity position of banks aim at containing the excessive reliance on short-term funding and give incentives to hold safe and liquid assets.

Peter Pang: Promoting and maintaining financial stability in Asia through cross-border co-operation Remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary Authority, at the Hong Kong Monetary Authority – Bank of Thailand Joint Press Conference on the launch of US dollar – Thai Baht PvP link, Hong Kong, 15 July 2013. *  *  *  Deputy Governor, ladies and gentlemen, I would like to thank the Bank of Thailand for co-hosting this press conference with the Hong Kong Monetary Authority (HKMA). It is my great pleasure to join Deputy Governor Mr. Krirk Vanikkul to announce the implementation of the payment-versus-payment (PvP) link between the Thai Baht Real Time Gross Settlement (RTGS) system in Thailand and the US dollar RTGS system in Hong Kong. This PvP link sets another excellent example of central bank cooperation to provide solutions to enhance regional financial stability and to meet market needs. In particular, it will make a significant contribution to addressing the current principal risk in the USD-Thai Baht foreign exchange (FX) transactions that arises from buyers of USD paying Thai Baht in Asian time ahead of receiving US dollar in US time the next day. For technical people in the payment field, this is often referred to as the “Herstatt” risk which brought down the Herstatt Bank in Germany in 1974.
Regulators will need to be alert for pure regulatory arbitrage – seeking to change the form but not the economic substance of transactions in order to lower regulatory requirements. We have already seen, for example, transactions seeking to take credit risk in the form of derivatives rather than loans in order to lower the leverage exposure measure. More legitimately, banks might switch from activities for which risk weights have increased to activities which carry lower risk weights (Chart 2). The leverage ratio will, however, set an effective floor on the ability of banks to improve their capital position by shifting into low riskweighted assets, providing a safeguard against uncertainties around our estimates of risk. Conversely, banks for which the leverage ratio is a binding requirement may have incentives to move into higher risk-weighted activities (Chart 3) but the risk-weighted ratio should limit the extent of any such risk shifting. In this way, the risk-weighted and leverage ratios should complement one another. It will be interesting to see how banks allocate capital in a world  2  2  http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech765.pdf. BIS central bankers’ speeches  where they are subject to multiple capital constraints – risk-weighted, leverage and stresstest-based.

1 And third stress testing, to assess capital against the impact of macro-economic scenarios of current concern to policymakers, in the UK modelled partly using firms’ internal models and  1  http://www.bankofengland.co.uk/financialstability/Documents/fpc/fs_lrr.pdf. BIS central bankers’ speeches  1  partly our models. The results of our first concurrent stress tests of major UK banks and building societies will be announced next month. The new bank capital framework will cause banks to hold significantly more capital than the pre-crisis regime. Major UK bank capital requirements and buffers have increased around seven-fold once you take account of tougher definitions of capital, regulatory adjustments to asset valuations and higher risk weights as well as the more obvious increases in headline ratio requirements and buffers. But, to use the language of micro-economics, this significant change in regulatory capital requirements – the “relative prices” of different risks – will lead to substitution as well as income effects. Over time, banks will adjust their portfolios to changed capital requirements. The overall extent to which banks are better capitalised and the financial system is more stable will depend on the scale and nature of these adjustments. Any substitution effects are likely to be stronger if regulation is introduced inconsistently across countries. It is important that we continue to seek consistency in implementing internationally-agreed standards. One adjustment may be a shift in activity from banks to non-banks. That could be beneficial for financial stability: for example, where long-term market-based finance provides an alternative to bank credit.
Moreover, Brookhaven Labs and Cold Spring Harbor Laboratory, as well as a fine array of academic institutions, provide a strong foundation for the island’s tech sector and business sector more broadly. The recent move to create stronger ties between the business community, research labs and SUNY (State University of New York) is a welcome development. It has the potential to help leverage the island’s existing assets to enhance the prospects for economic development. Conclusion To sum up, the incoming data on the U.S. economy has been a bit more upbeat of late, suggesting that the recovery may be getting better established. But, while these developments are certainly encouraging, it is far too soon to conclude that we are out of the woods in terms of generating a strong, sustainable recovery. On the inflation front, the yearover-year rate of consumer price inflation has slowed in recent months, and despite the recent rise of gasoline prices, we expect inflation to moderate further in 2012. Looking ahead, the key challenge for the Long Island economy will be to continue to prepare its residents for the best jobs being created here. Expanding educational access and opportunity and the skills that go along with it will go a long way to broadening participation in the economy to all residents and bolstering Long Island in the future. Thank you for your kind attention. I would be happy to take a few questions. 4  For more information, see the New York Fed’s consumer credit panel. BIS central bankers’ speeches  5

The aim, as I have said, is to enable the bank’s critical economic functions to continue, without taxpayer support, while it is being resolved. A great deal has been achieved. 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  We now have agreed international standards covering the design of resolution regimes, the amount of ‘bail-inable’ resources banks must hold, and agreement with industry participants to ‘stay’ termination rights by counterparties in derivative and repo transactions if resolution is in train. Alongside this we also have international guidance on how to ensure continuity of access to FMIs as well as on the mechanics of executing a bail-in. The UK now has in place a comprehensive and effective bank resolution regime that implements the EU’s Bank Recovery and Resolution Directive (BRRD) and the international standards. The Bank of England has been established as the UK’s resolution authority with a wide range of powers to ‘bail in’ shareholders and creditors of failed banks. The biggest UK banks have begun to issue bail-inable debt at scale and are well on their way to meeting the target for loss absorbing resources in resolution. 7  Key policies and guidance to firms have been issued, notably on operational continuity and on the internal distribution of loss absorbing resources. Last October the Bank, with the publication of the Purple Book, the Bank set out in detail its approach to resolution and how it would tackle a failing bank.
Apart from a short period early in this decade, when Iceland was at an entirely different point in the business cycle than it is now, the Central Bank’s interest rates are at their lowest since the early 1990s, when they became an important monetary policy instrument. We must therefore consider realistically whether we can expect further reduction of interest rates without an outright slack in the economy. Developments in Central Bank rates over the coming term will be determined by economic developments, which could be in either direction. When we met a year ago for the Bank’s Annual Meeting, the vast majority of the capital controls had just been lifted. As expected, exchange rate volatility increased afterwards. But that volatility proved temporary, and short-term fluctuations in the exchange rate subsided markedly in the latter half of the year. In recent months, short-term volatility has actually been limited in historical and international context. The Central Bank has not intervened in the foreign exchange market in recent months, supporting the conclusion that this reduced volatility is due to improved balance in capital flows. According to currently available forecasts, GDP growth is set to remain robust and the domestic economy will experience a “soft” landing. The outlook is uncertain, however, and various risks could materialise, not only in Iceland but also abroad, where uncertainty is considerable at present. In addition, it is important that there is considerable scope for interest rates and large foreign exchange reserves to respond to adverse developments.

One of the main reasons for reduced demand pressures in the economy is that GDP growth has subsided after peaking in 2016 and is now approaching its longterm trend rate. The slowdown in GDP growth reflects weaker export growth, as the tourism boom cannot be expected to continue at the pace seen in the recent past. Furthermore, the improvement in terms of trade has slowed down considerably. This means that the effects of the positive shocks that enabled us to grow rapidly and simultaneously keep inflation low are tapering off. The appreciation of the króna played a major role in the economy’s adjustment to these shocks. However, the Bank intervened in the foreign exchange market and imposed a special reserve requirement (SRR) on capital inflows to prevent the  Thórarinn G. Pétursson (2018), „Disinflation and improved anchoring of long-term inflation expectations: The Icelandic experience“, Central Bank of Iceland Working Paper no. 77. This improved performance of monetary policy is also discussed in detail in Central Bank Special Publication no. 11, entitled “Monetary policy based on inflation targeting: experience since 2001 and post-crisis changes”. See: www.sedlabanki.is 1  1  króna from overshooting. Now, however, a significant additional rise in the real exchange rate would be risky. Interest rates in Iceland are currently low in historical context, particularly in view of the business cycle position. With one short-lived exception, indexed Treasury bond rates have never been lower, and indexed mortgage lending rates are also at a historical low.
Positive developments in the external sector of the economy, primarily owing to expansion of exports and foreign currency inflows from the Eurobond, contributed to the generation of contained pressures in the foreign exchange market. From the macroeconomic viewpoint,  2  BIS central bankers’ speeches  relative exchange rate stability during the year reflected a new equilibrium in foreign currency demand and supply. In sectorial terms, the Albanian economy development relied chiefly on growth of industry and services sectors, while construction sector continued to contract in 2010. Industry and services sectors benefited, to a great extent, respectively, from foreign demand and structural shift of the domestic demand to short-term consumption goods. In the short- and mid-term horizon, both sectors are expected to remain the main supporting pillars of the Albanian economy. Agriculture, the other important sector of the Albanian economy, marked a positive performance in 2010. Even so, based on the broader concentration of the country’s population and the great potential for development, the increase in this sector’s productivity remains a long-term priority. Money and financial markets Monetary developments in the past year were in line with the performance of the real sector of the economy, reflecting simultaneously the fully restored confidence in the financial system, improved supply and demand ratios in the financial markets and prudent liquidity management policy of the Bank of Albania. Expansion of monetary stock by 10.6% on average complied with the economy’s demand for money and did not trigger any inflationary tendencies in the economy.

D.  Concluding remarks  To date the European Union faces several complicated but well-known economic policy problems from the recent past. Estonia as the future EU member state must take this into account. It is not enough to be able to overcome challenges on the WAY to the European Union. We must become equal partners to other European states, be able and willing to participate in the discussions on the monetary and fiscal policy issues, perceive Estonia in Europe and Europe in Estonia. Today the European Economic and Monetary Union within which 12 states have adopted the single currency, offers a historic chance to create a truly strong, flexible and efficient economic area. I believe that potentials of the single currency will be exploited in the best possible way. It would serve the interests of the current as well as future member states and the whole of Europe. BIS Review 51/2002  7