samchain/econo-pairs-v1 huggingface dataset:
In fact, this is one of the key innovations of Basel II compared to Basel I. Basel II is about much more than just setting quantitative minimum capital requirements. It is about establishing incentive-based approaches to risk and capital adequacy management, within a framework of three mutually-supporting pillars: minimum capital requirements, supervisory review and transparency. I think that Basel II represents an unparalleled opportunity for banks to improve their business strategies and risk management systems. In my view, the combination of better risk management, a stronger capital structure and improved transparency standards in the banking system could significantly improve the access of emerging economies to financial markets. This raises two additional groups of relevant questions that I will also address later in my presentation: the first group relates to the transition by different jurisdictions to the new framework, and the second to the necessary cooperation between home and host countries to make its implementation more effective and consistent. BIS Review 33/2004  1  Our discussions on all of these topics will bear on the very well chosen title for this event: “the international banking system at the crossroads.” That wonderful image of a “crossroads” suggests two metaphors that we should keep in mind. The most immediate image that the term “crossroads” calls to mind is, of course, a place where four roads meet. It is where a traveller, having followed one road to this point, must reflect to select one of the next three roads to continue a journey.

Jaime Caruana: Basel II - a new approach to banking supervision Remarks of Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the Fourth Annual International Seminar on Policy Challenges for the Financial Sector: “Basel II - the international banking system at the crossroads”, Washington DC, 1 June 2004. *  *  *  It is an honour to be invited to join you, the members of the global supervisory community, at this seminar on the future of banking supervision. I would like to thank our host, Chairman Greenspan, for his warm welcome into the hallowed halls of the Federal Reserve. Likewise, all of us express our gratitude to the World Bank, the International Monetary Fund, and the Federal Reserve for organising this seminar. To ensure rich, lively, and informed discussions, our sponsors have assembled an impressive array of speakers and participants, including senior supervisors, central bankers, and others from over 50 countries, an achievement that demonstrates, for the fourth time, excellence in international and inter-organisational cooperation. Overview of remarks The new capital adequacy framework, or “Basel II,” figures into virtually every discussion today on the outlook for international banking tomorrow. This seminar will tackle its policy implications. They include the new framework’s potential effects on risk management within an individual firm; on competition between firms; on the stability of the financial sector and the future of supervision; and, most broadly, on the long-term growth of the economy.
This type of stress testing also accounts for what implications banks’ reactions would have for the real economy. In other words, macroprudential stress tests consider the adverse credit supply shock that may lead to an amplification of the macroeconomic effects of the global shock, which, in turn, could further damage banks’ balance sheets. By modelling the negative feedback loop between the banking sector and the real economy beyond the first round of shocks, we believe the exercise becomes more realistic. A macroprudential stress test of banks directly supervised by the ECB, using the baseline and adverse scenarios of the recent EBA stress test, confirmed the general resilience of the euro area banking system. Results, however, point to an additional fall in GDP of 1.6% across the euro area, on top of the GDP shocks of the adverse scenario over the three-year horizon. This stress-testing framework can also inform the calibration of macroprudential policies with the 3/6  BIS central bankers' speeches  aim of limiting unintended spillovers to other parts of the financial system or the real economy. In the spirit of pre-emptive macroprudential policy, these exercises can emphasise the need for the timely build-up of capital buffers, which can then be used to absorb losses when risks materialise, before they affect growth and employment. Finally, the stress-testing framework can be used to analyse the spillover effects of the macroprudential policies themselves.9 For instance, another finding of the framework is that capital-constrained banks are more likely to reduce their foreign exposures than their domestic ones.

A consistent implementation of this policy, with an inflation target, clarifies the rules of the game for wage formation. High wage increases are liable to boost inflation, which necessitates higher interest rates. The inflationary consequences of the wage increases can be modified if productivity growth is good, as has been the case in recent years. But at least a part of this productivity growth is achieved at the expense of jobs; this is one aspect of the process whereby higher labour costs generate stronger rationalisation and maybe also an increased capital input. In this way, too, and not just because the higher interest rates directly affect demand and employment, a rapid wage rise is liable to endanger jobs. Against this background, the outcome of the latest wage negotiations is better than in earlier years. Agreements for the next three years have been concluded at levels around 3 per cent a year. It has been said that this takes wage drift into account but that is probably not entirely the case. Instead one should no doubt count on wage drift averaging around 1 per cent. The average annual wage outcome in the period 1998–2000 would then be 3.5 to 4 per cent. This does still represent some downward shift in the rate of wage increases, which in turn assists the Riksbank’s task of ensuring low inflation. All else equal, we can allow ourselves a somewhat lower level of interest rates and a somewhat stronger growth of demand.
Banking liberalisation The second example of our measured liberalisation approach is the opening of our retail banking sector, with simultaneous steps to help strengthen local Singapore banks. Our starting position was different from most countries. Foreign banks (mostly British) dominated the Singapore banking system when we gained independence. For three decades, the Government has protected the local banks, especially in the retail business, to enable them to expand their market share. We believed that strong and well-managed local banks, with a significant share of the home market, were critical to the resilience and stability of our financial system. We wanted to be sure that in a crisis, we could count on major institutions whose long term interests were aligned with the Singapore economy. We still hold this view. Like banks in other Asian countries, most of our local banks started as family banks, and are still run by their controlling shareholders. But strict supervision enabled them to grow into sound, wellcapitalised institutions, free of the problems of improper and imprudent lending to related companies. By Asian standards, the local banks were exceptionally well run. But compared to the best international banks, they lagged in many areas: size, technology, expertise, range and quality of service, and shareholders’ returns. We could not afford to let Singapore banks fall behind, or deprive the rest of our economy of worldclass financial services. In any case, because of globalisation and cross-border competition, a protectionist policy was becoming less and less tenable.

Moving forward, a better policy calibration is needed in order to weather these structural changes and banks should put in place arrangements for restructuring the debt of those firms that can be saved, while facilitating the orderly exit of those firms that are unlikely to succeed in the postpandemic economy. The uncertainties remain extremely high and further delays in the economic recovery will put more pressure on the public resources and complicate the trade-offs in their reallocation. However, I would like to end on a more optimistic note and say that we do hope for a swift 1/2  BIS central bankers' speeches  recovery as we continue to do our part in curbing the effects of the pandemic. With these in mind, I wish Ms Laura Valderrama success with her presentation on the results of the analysis of corporate vulnerabilities and a very fruitful discussion to all the panelists and guests. Mr Kammer you have the floor. 2/2  BIS central bankers' speeches
Despite this less-than-ideal starting position, the Bank ultimately embraced the provision of liquidity to the system over the course of the crisis, with the expressed aim of reducing the costs of disruption to critical financial services. This came about via an alphabet soup of schemes, including DWF, ECTR, ELTR, FLS, ILTR, and SLS. 3 Common to all was a  2  See Plenderleith (2012) for details of episodes of lender of last resort since 1973. 3  More information about these schemes is available on the Bank’s website: http://www.bankofengland.co.uk. BIS central bankers’ speeches  3  recognition that to achieve its aim, the Bank needed to provide liquidity against a wider range of collateral, to a wider range of counterparties, for a longer term. Two other innovations are noteworthy. •  First, in some circumstances the Bank lent in a currency other than sterling – a first for our liquidity insurance operations. 4  •  Second, the Bank acted as a market maker of last resort in the sterling corporate funding markets – making small targeted purchases and sales of commercial paper and corporate bonds. 5  Many of these changes were made in the heat of the crisis. And since the 2012 Winters and Plenderleith Reviews 6 much effort has been exerted in hardwiring them into our operating framework to make it clear to market participants how we would act in future.

These have, inter alia, (i) reintroduced prudential filters to neutralise the effect of the change in the value of public debt on capital; (ii) allowed reserves at central banks to be excluded from the leverage ratio calculation; (iv) incorporated a favourable provisioning treatment for exposures with public guarantees; (v) brought forward the entry into force of certain measures, such as the supporting factor for SMEs and the new prudential treatment of software; and (v) allowed market model overshootings to be ignored, given the volatility arising from the COVID crisis. 5  As regards the usability of buffers, the BCBS, the European Banking Authority (EBA) and the SSM have in various statements referred to the objective pursued with the introduction of liquidity and capital buffers in Basel III, reiterating that such buffers may be used appropriately to support the economy in a situation like the current one. Also, the message has been conveyed that supervisors will allow sufficient time for these buffers to be replenished. At the same time, the BCBS and the EBA have published technical guidelines on the prudential treatment of guarantees and moratoria, clarifying that the flexibility required by the current health situation must not be at the expense of the prudence needed when recognising and provisioning for non-performing loans.
In Australia, for example, this adjustment had already begun at the end of 2012 with the postponement of investment projects in iron or coal. Peru and Chile saw their adjustments in the second half of 2013. On the financial side, the normalization of international financial conditions has resulted in greater market volatility in emerging economies, together with higher risk premiums and capital outflows, plus a depreciation of their currencies against the U.S. dollar. In Chile, unlike past episodes, the effects on domestic financial markets have been bounded. The long-term rates have fallen while the money market has operated smoothly, and the risk premium is close to or only marginally above its levels of a while back. The exchange rate has absorbed the shock to terms of trade and the tightening of international financial conditions. Actually, the depreciation of the Chilean peso is among the highest in emerging economies. From a year ago, the currency has depreciated around 17% against the U.S. dollar, and the real exchange rate (RER) did by about 15%. This depreciation of the currency, in any case, is a desired effect, since it means an adjustment of relative prices and thus contributes to rebalance the sources of growth across economic sectors. In fact this is consistent with the macroeconomic framework that Chile has in place. Short- and long-term interest rates have declined while the currency has depreciated. In this scenario, inflation in Chile has returned to near 3% and medium-term expectations are in line with the target.

Some time ago, when we had more rigid exchange rate systems, less adapted to cope with external shocks, when confronted with tighter external financial conditions, we needed to fight against the depreciation of currency to avoid destabilizing balance sheet and inflationary effects. We had to tighten monetary policy to reduce the speed of private capital outflows and sold massive amounts of foreign reserves to contain the depreciation of the currency. Most experiences ended badly. Final remarks The changes we are seeing in the world economy are part of the development that comes in the footsteps of the global financial crisis. The time has come for the recovery of developed economies, and therefore, the extraordinary monetary stimulus packages they brought about in the past must be withdrawn. By historical standards, the global financial conditions we faced in the past few years were very good, but we knew that sooner or later they would end. This is a healthy development. What is important is where this new situation will find us, as economies that managed to keep strong fundamentals and prevented macroeconomic imbalances from building up, or on the opposite lane. How costly a moving toward a “more normal” world will be for each of our countries will depend on how wisely we have administered our economies during the good times. In Chile, the policy framework that has been in place during the recent decades, has given us more tools to help the economy to accommodate the effects of changes in the external environment.
The coast is not completely clear – the healing process in the aftermath of the crisis takes time and there are still several areas of vulnerability and weakness. In particular, housing activity remains unusually weak and home prices have begun to soften again in many parts of the country. State and local government finances remain under stress, and this is likely to lead to further spending cuts, tax increases, or job losses in this sector that will offset at least a part of the federal fiscal stimulus. And we cannot rule out the possibility of further shocks from abroad. For example, higher oil prices cut into household purchasing power, and the situation in the Middle East and Africa remains uncertain and dynamic. Also, we cannot ignore the risks stemming from the longer-term fiscal challenges that we face in the United States. But in the near-term, the most immediate domestic problems may recede rather than become more prevalent. On the housing side, stronger job growth should lead to more household formation. For example, more young people will be able to move out of their parents’ homes when they get jobs. This trend should provide more support to housing demand. And anxieties about the large overhang of unsold homes represented by the foreclosure pipeline may overstate the magnitude of the excess supply of housing. Families that have lost their homes through foreclosures are likely to seek new homes as their income permits, even though many may re-enter the housing market as renters rather than buyers.

I actually suspect that this number may understate the economy’s forward momentum. That is because real GDP growth in the quarter was held back by a sharp slowing in the pace of inventory accumulation. In my view, the revival in demand, production and confidence  2  BIS central bankers’ speeches  strongly suggests that we may be much closer to establishing a virtuous circle that will support stronger growth. What I have in mind is a cycle in which rising household and business demand generate more rapid income and employment growth, which in turn bolsters confidence and leads to further increases in spending. The only major missing piece of the puzzle is the absence of strong payroll job growth. We will need to see sustained strong employment growth in order to be certain that this virtuous circle has become firmly established. With respect to the labor market, last Friday’s report helps resolve some conflicting signals. On one hand, the unemployment rate has fallen sharply over the past three months, dropping to 8.9 percent from 9.8 percent two months earlier. On the other hand, payroll employment gains had been very modest and were not consistent with a sustained drop in the unemployment rate. Last Friday we learned that the economy added 192,000 jobs in February, and estimates of previous job growth were adjusted upward modestly. Particularly encouraging is the growth of manufacturing jobs. Over the past year we have added factory jobs at the fastest pace since the 1990s.
But global finance, however measured, has grown much, much faster. Stock market capitalisation and turnover surged by 153% and 282% respectively. Foreign exchange turnover more than doubled during this period, and has now grown to roughly 70 times of merchandise trade. You have seen the consequences of this disproportionate growth of international finance in many parts of the world, in Latin America, in Asia, in Russia, in Central Europe, and in South Africa, where the associated volatility of capital flows posed serious problems. Even in the US, where the largest markets in the world operate in what must be the most favourable economic environment seen for many decades, the destabilising potential of international finance was brought home by LTCM. Let me hasten to point out here that the rapid development of international finance is not necessarily a bad thing. Indeed, the phenomenon has been one important factor contributing to increasing global prosperity. Much of the Asian miracle as we know it, during the long period of prosperity before the financial turmoil broke out in July 1997, was brought about by financial liberalisation. The crucially important process of financial intermediation, in which savings are channelled into productive investment, has been made a lot more efficient. Money is no longer stored under mattresses, but is, through placements with banks, and investments in debt and equity and their ever-proliferating derivatives, put to productive use farming land, building homes, manufacturing goods and providing services.

This means a greater regulatory burden for all and greater inconvenience to market participants, and possibly implications for the legal and institutional arrangements for regulation. Fourth, this approach may involve tighter rules for the markets. The critics may again say that this will further erode market freedom. But should we be so dogmatic? In any case, it is all a matter of degree. In the end, it is the public interest that counts. Is there, for example, anything wrong in restrictions against the holding of large dominating positions in any particular market, or against the taking of market moving activities? The purpose of a market is price discovery. There is no objection for buying low and selling high, and I would wish anybody who is attempting that the best of luck. But there is no legitimate reason for anybody to be operating in a market in a manner that has the sole aim of moving the price in order to make a profit. Tighter rules aside, it is interesting, and indeed slightly worrying, to note that stronger forms of restrictions and controls have been gaining currency among some monetary authorities or regulators in the past two years. These range from restrictions on domestic credit to some forms of exchange controls. This response is quite understandable and may be a reflection of the failure of the international financial architecture to accommodate the needs of small markets. But it is also regrettable, given the enormous benefit that international capital has brought to the region.
Another relatively low-hanging fruit would be a common stabilisation fund equivalent to 1 to 2% of euro area GDP, which could provide us with a proper macroeconomic stabilisation capacity. I note that this largely converges with the Commission’s proposal to create a macroeconomic stabilisation function for the euro area. This common stabilisation fund would be used under efficient rules – but not conditional to an adjustment program, contrary to the ESM – to support, through loans, Member States’ counter-cyclical policies when they are faced with asymmetric economic shocks. The fund itself would be financed by borrowing. To definitely succeed in this ambition, the euro area will need a common keystone: an institution that fosters confidence. Because, as Tommaso Padoa-Schioppa put it: “ complete and systematic consistency of [national] policies achieved without any institutional infrastructure is a dream"8. This is why the new French President has proposed creating a euro area “finance minister”, which probably requires modifying the existing Treaties. This finance minister would embody and bring to fruition the shared commitment of our Member States. As I also mentioned this idea before9, let me share some personal views on the issue.

The global economic recovery might also be delayed reaching the region, increasing the likelihood that the crisis may cause more persistent economic effects. Despite this difficult situation, remittances have proven pandemic-proof1 and have behaved countercyclically in most of the region’s countries, assuming a more important role as a source of external financing. This subject is crucial to Spain, since it is the second-ranked issuer country of remittances to Latin America. Some of the topics we will address today (such as the growing importance of digital money remittances, the role of fiscal stimulus measures in the resilience of remittances and the function of the informal economy) are key to understanding the behaviour of the flow of remittances in this crisis. Undoubtedly, today’s event will allow us to better understand these developments and – I hope – 1/2  BIS central bankers' speeches  to draw some useful conclusions on how to tackle them from the central bank standpoint. Thank you for your attention. Remittances barely fell by 1.6% in 2020, compared with their 4.8% decline during the 2008 financial crisis. 2/2  BIS central bankers' speeches