samchain/econo-pairs-v1 huggingface dataset:
Rodrigo Vergara: The Monetary Policy Report and the Financial Stability Report Presentation by Mr Rodrigo Vergara, Governor of the Central Bank of Chile, before the Finance Commission of the Honorable Senate of the Republic, Santiago de Chile, 3 June 2015. *  *  *  Accompanying charts can be found on the Central Bank of Chile's website. The Monetary Policy Report of June 2015 and the Financial Stability Report of the first half of 2015 can be found at http://www.bcentral.cl. Introduction Mr. President of the Finance Committee of the Senate, Senator Andrés Zaldívar, senators members of this Committee, ladies and gentlemen. Thank you for inviting me to share the vision of the Board of the Central Bank of Chile on recent macroeconomic and financial developments, their prospects and implications for monetary and financial policy making. This vision is contained in detail in the Monetary Policy Report of June 2015 and the Financial Stability Report of the first half of 2015. The macroeconomic scenario shows minor changes with respect to forecasts in March. Annual inflation declined between February and April, but it remains above 4%. Output and demand continue to grow at a moderate pace, and the first quarter was better than expected, but incoming data suggest that the remainder of the year will be somewhat less dynamic than previously estimated. In the global economy, the growth outlook showed no major changes either. The weaker US figures early in the year and the consolidation of better prospects in Europe are worth mentioning.

This was visible in private and public consumption, and in investment in construction and other works, with the resulting increase in growth in construction, trade and some services. However, March figures and incoming indicators suggest that the recovery of  BIS central bankers’ speeches  1  growth in the remainder of the year will be somewhat slower than expected. This is reflected by several indicators, such as retail sales, imports of consumer goods and business and consumer expectations. Particularly worrisome is the possibility of consumer and business confidence remaining in clearly pessimistic territory, a situation that, if not reversed, will hinder the recovery of growth in the second half of the year (figure 3). The evolution of credit also reflects weak private spending. Annual growth of consumer and commercial loans is still bounded, despite the low interest rates. Job creation in the private sector has also been in line with the economic slowdown. Hiring in the most cycle-sensitive sectors, such as manufacturing and construction, post negative y-oy rates of variation, which however have moderated in recent months. Nevertheless, the stronger increase in employment in agriculture and services, especially some linked to the public sector, has led total employment to grow by about 1% annually. The unemployment rate remains low, because the slower employment growth is matched by also slower growth in the labor force (figure 4). Nominal wages continue to grow strongly, slightly more than 7 percent. The empirical evidence suggests that this owes mainly to the indexation to higher past inflation.
No country can simultaneously have high convergence growth, a fixed exchange rate and low macroeconomic imbalances, be they internal or external. In our case, catching up with our wealthier, low-inflation Western peers means a long term tendency for our currency to appreciate. This is hardly consistent with a permanently fixed exchange rate. 4. The paradox of the Eurozone: The Eurozone paradox is that the best possible members of the club are the countries that are so stable themselves in monetary and economic terms that they don’t need “to buy in stability”. Such countries have fewer and fewer reasons to adopt the euro. Conversely, the more a country begs to have the euro, the bigger the problem will be. This explains why almost no one is conducting a euro debate in Sweden, even though it does not have a derogation and many would like to see it in the Eurozone. Canonically, the same goes for us: either we can continue to stabilise ourselves, in which case we don’t need the euro, or we will destabilise ourselves, but in that case we will potentially harm others in the euro club and Eurozone membership will be a hindrance in bad times. 5. There’s no story in our case: The Baltic states took the euro as a geopolitical and security safeguard and paid a huge economic price for permanently fixing their currencies to it. Slovenia wanted to cut itself off from the Western Balkans. Slovakia wanted to seal the reforms of former Prime Minister Mikuláš Dzurinda.

Macro costs and micro benefits: The Eurozone has so far failed to make its member states wealthier quicker (the non-euro EU states are constantly growing faster on average) or to make them converge structurally. Rather, one could argue that the opposite is true. A truly strong measurable result of the euro is lower and less volatile inflation. This is hard to see as a bonus for our country, where we are consistently achieving the same objective with our own currency. The oft-mentioned bonus of lower interest rates due to the euro does not apply to us either. We have long known what it’s like to live with rates below the Eurozone level. Likewise, it’s hard to believe that the euro will deepen our trade relations with the euro countries given that we are one of the few countries enjoying not only growing trade, but also a constantly rising trade surplus with Germany. The euro has micro benefits at firm level, but unfortunately they come with the aforementioned macro costs. The latter are constantly rising and their final size and structure are impossible to quantify. Besides the known contribution to the stability funds, they include mandatory participation in the banking union, which is another unfinished structure. For a country of our type, currency arrangement and monetary history, joining the Eurozone is generally an extremely tough question. It was ever thus, but it is currently all the more so.
To sum up, our gates are open to those of you seeking a career at home. And even if you do not intend to pursue a career in Romania, there are other ways of collaboration. For instance, the NBR has been supporting the Annual Scientific Conference of Romanian Academic Economists Abroad (ERMAS), in partnership with major Romanian universities. A recent personal experience, during a trip I took to Washington DC, confirmed the interest that many Romanian experts abroad share in staying in touch with their home country. There are more than 60 Romanian economists working for the World Bank, the IMF or the Fed. I have met around half of them and I saw how keen they were to learn not only about the Romanian economy, but also about changes in the society. Many were even eager to engage themselves in various cooperation projects with those working back home in their respective fields of activity. I truly found their enthusiasm and readiness refreshing! Although idealism is not a trait one would usually associate with people my age, I confess that whenever I am addressing Romanians who are studying or have studied in the West, I cannot help but make the parallel with the revolutionaries of 1848, who engineered the rapid transformation of the Romanian society and created the modern state almost from scratch.

The evolution of the IT sector is part of a wider process of sectoral shifts in the domestic economy, visible across several emerging markets: the services sector gaining ground to the detriment of agriculture and industry, whose roles have been diminishing. Likewise, industry has also shown structural shifts, i.e. the lower share of energy and labour-intensive sectors in favour of increasingly technology-intensive industries. With the risk of touching on a delicate topic these days, given the location of this conference, I have to mention that EU membership has played a major role in Romania’s development. And I am not saying that only because I was the head of the Government that started the EU accession talks back in 2000. Across the years, there were a lot of discussions with regard to Romania’s readiness for EU accession. Even Romano Prodi, the head of the European Commission at the time, warned me on several occasions that we were not ready for accession, not only from an economic and social point of view, but also in terms of people’s mentality, which was not fully aligned with European values after four decades of communism. I was well aware of that, but I also knew that it was imperative to have a target date, that would act as a catalyst for the much needed reforms. Indeed, much of the catching-up progress was obtained during the pre-accession years, as real GDP grew on average by more than 6 percent per year between 2000 and 2007.
An important part of the process regarding macroprudential policy in Sweden is a close cooperation between Finansinspektionen, the Government, the Riksbank and the Swedish National Debt Office, with regard to the analysis of current issues. These four are also represented on the Financial Stability Council, which meets regularly to discuss issues of financial stability and how financial imbalances can be counteracted. I believe that it is much more important that there is actually someone who is responsible for the macroprudential policy tools and prepared to take action, than that this is perfectly coordinated with monetary policy. My hope is that the discussions in the Financial Stability Council will lead to the decision that need to be made actually being made – and being made in time. This will probably at times involve decisions that are politically uncomfortable, and have direct consequences for people’s wallets. This makes considerable demands with regard to integrity and independence – not just in the formal sense – of those who are to make the decisions. Does monetary policy need to help? There is an intensive international discussion on whether monetary policy can be separated completely from the stabilisation of the financial cycle, or whether it may in certain situations  10  See Jonsson and Moran (2013).

And if they materialised to any very significant extent, the resulting tensions could be serious, because alternative mechanisms - such as labour migration or fiscal redistribution through a central budget - which help to mitigate sectoral or regional disparities in the national context - are less developed at the Eurozone level. Some commentators point to the present inflationary pressures in Ireland as an example of the problems that could arise where the single monetary policy is easier than the national situation might require - though I am not sure how far one can sensibly generalise from the Irish experience. It is equally possible to envisage circumstances in which the single monetary policy is too restrictive for some countries. The fact that the UK did not join in the first wave of EMU was a disappointment to some people, including to some of our European partners - but it was also a considerable relief to them - we would certainly have complicated the task of the ECB in setting its single monetary policy. And from our own perspective, if we had joined EMU from the start - and had Eurozone interest rates over the past eighteen months or so, it is very difficult to envisage how we would have avoided an inflationary boom in the UK. It is true that, to the extent that the present imbalance within our economy reflects sterling’s appreciation against the euro, we would have been protected against that.
But more importantly, gathering and processing this information is costly. There is no incentive for the various investors to incur these costs if they believe that others will do it and thus ensure the efficiency of the market. When banks are engaged in financial intermediation, they gather and process the information concerning their borrowers through their customer relations. Bank intermediation is therefore a means of overcoming the problems of the asymmetry of information and its accessibility. However, on a securitised market, where borrowers are directly in contact with lenders, this solution does not exist. The rating system is an answer to the problem, as it enables all players to have access to simple, clear and concise information on the credit risk attached to the various classes and categories of financial instruments. The rating activity has expanded in parallel with that of bond markets. All major issuers are now rated by one or more rating agencies. For them it is a sine qua non condition for widening their investor base. The rating system goes hand in hand with the development of large liquid, deep and international markets. It is a precondition and a tool for ensuring the smooth functioning of these markets. Securitisation, as we know it today, and which underpins national and international financial activity, would be impossible without these ratings. A further step was made with the expansion of structured products. The role of rating agencies now extends well beyond that of mere information providers.

If one of the riskier tranches is affected by a default, the value (and the rating) of the other tranches will also be affected by contagion, through the decrease in their subordination level. Of all asset classes, CDOs are those whose rating is the least stable over time. To give just one extreme example, a AAA-rated CPDO was recently downgraded by nine notches in one day. For investors, a AAA rating has traditionally been associated with a stable investment. It is now evident that there are stable AAAs and less stable AAAs, which considerably reduces the clarity of ratings. It would have been simpler to adopt a specific metric for structured products and, by doing so, many misunderstandings that were responsible for the current turmoil could have been avoided. Avenues for the future Hopefully these thoughts will open up some avenues for the future. I believe that there are two symmetrical pitfalls to be avoided. The first would be to continue as before, with a few minor changes to the existing system. The turmoil observed over the past three months, and its potential impact on the real economy, are too important. Furthermore, the rating process will inevitably play a key role in the implementation of Basel II. This will involve a more refined assessment of risk, in particular through the promotion of internal models, and greater use of external ratings. The second mistake would be to rush into the regulation of rating agencies. We cannot rule out that, at some stage, such regulation may become necessary.
Execution needs to be well-sequenced and tightly coordinated. I would like to share three key pillars that can support a smooth transition: Preparing early at the individual firm-level Coordinating well at the industry-level Communicating clearly and effectively at the customer-level 16 First, at the individual firm-level, both banks and corporates must be ready to carry out this transition. This includes identifying risk exposures, putting in place appropriate contractual fallbacks, ensuring systems readiness, understanding the features of new SORA products, and ultimately, transacting in these products. Indeed, we have seen some early wins. MAS is encouraged by the success of our three local banks in completing SORA commercial loans9 with early adopters such as CapitaLand and Wilmar. We are also heartened that OCBC had launched a retail mortgage loan, while DBS had launched a business property loan, both referencing the compounded SORA rates published by MAS. Riding on these successful  pilots, we hope to see more banks start originating new SORA loans across the broader industry. Against this, MAS will be stepping up supervisory engagement to ensure banks are well prepared for the transition. MAS had conveyed its supervisory expectation of banks through a regulatory survey conducted earlier in the year, on the progress of banks’ preparations for the transition. This engagement will continue and will include elements such as systems readiness, legacy transition plans, and pace of adherence to industry guidance established by the SC-STS.

But this transition period will be part of the second phase of the negotiations and there will be no certainty about it until at least this autumn. Up to now, the EU and the UK are following different strategies and even use a different wording to refer to this transition period, “implementation period” being the term used by the UK. More specifically, the UK has welcomed the agreement on the transition period and has sent out the message that nothing will change up to the end of the “implementation period”. Further, to transmit certainty to institutions operating in the UK, it has committed to bring forward legislation, if necessary, to create temporary permissions in the “unlikely” event that the withdrawal agreement is not ratified. The EU has a more prudent stance and recalls that nothing is agreed until everything is agreed. In fact, legal certainty will only come with the ratification of the Withdrawal Agreement by all sides involved in the negotiations. In this context of uncertainty, within the SSM framework, banks are considered to be responsible for taking the necessary steps to obtain all authorisations required for them to carry out their activities in a timely manner to make sure that they can continue to serve their customers after 30 March 2019. They are expected to present credible Brexit plans and to use the possible transition period to implement their plans, not to delay planning. It is acknowledged that adapting to a scenario where the UK becomes a third country is challenging.
Of course, it would lead to changes, over time, in the capital structure of investment banking operations. Proper transitional periods would be needed. I suggest that it is worth debating. Maybe there is a fatal flaw. We should certainly search for the flaws. But if we do not find a way of resolving massive and complex trading books, the regulation of the business would probably have to be fiercer than otherwise in order to crush the probability of failure. Resolution is a way of coping with failure. Key voices are the nonbank financial sector and the corporate treasurers who finance the banking system. What would they get out of it? They might benefit from avoiding the risk that the authorities choose to liquidate a LCFI they had thought was too big to fail, with the depletion of value that entails; think of Lehman. They would, in effect, be trading off losses in one part of their portfolio against the prospect of protecting the rest of their investments from the fallout of a credit crunch that would follow the disorderly demise of a distressed LCFI. The cross-border dimension The other big issue is how to handle the resolution of internationally active banks. This is a challenge even for fairly vanilla commercial banking groups. There has been a Basel Concordat on how home and host authorities should co-operate in supervising international banks since 1975. It was updated in 1983 and 1992 to take account of group-level consolidated supervision following the failures of Banco Ambrosiano and then BCCI.

A full and consistent implementation of the euro area’s existing fiscal and macroeconomic surveillance  2  BIS central bankers’ speeches  framework is key to bringing down high public debt ratios, to raising potential growth and to increasing the euro area’s resilience to shocks. We are now at your disposal for questions. BIS central bankers’ speeches  3
It may seem as though competition and efficiency will only increase as digitalisation increases. But the payment market is distinguished by positive network effects. This means that when new users connect to a payment solution, there is increased benefit for all participants. This means that the market could ultimately be dominated by one or a couple of large companies that attain  8 It is of course also important to have a stable fiscal policy to ensure there is confidence in the currency. 5 [35]  monopoly status. It is therefore important that the state takes responsibility and regulates the market, but as new products are positive for consumers, the state also needs to implement measures to benefit competition and innovation. 9 These new types of company that have begun competing on the payment market often have as business concept to gather and analyse data, which means they can offer cheap services. This so-called FinTech sector has grown rapidly and is now challenging the banks. In general, increased competition is positive, as it leads to lower prices for companies and customers. However, it is important that the same rules apply to all players on the market, and that the legislation also stays apace of the emergence of new phenomena, which can be difficult to classify and to scrutinise. Sometimes the changes on the payment market occur very quickly. In China, it didn’t take long before companies like Alipay and WeChat Pay had taken a dominant position. This is where network effects come in.

We lent amounts to Swedish banks corresponding to just over 9 per cent of GDP, a measure that was intended to ensure that the financial system stabilised to allow us to conduct monetary policy and contribute to production and employment not falling as heavily as in the wake of the financial crisis. The new act means we would need to determine the main purpose of these measures, and the conditions and procedures differ, depending on the purpose. Was what we did mainly monetary policy or financial stability? Are the measures we implemented during the coronavirus pandemic mostly monetary policy or financial stability policy? In our world they are of course both, as our two core activities are two sides of the same coin. As I described earlier, the financial markets are developing rapidly, and needs are thus changing over time. It is difficult to predict how the next crisis will look, or what measures might then be needed. The fact that we have been able to take action during the pandemic is because the current legislation gives us opportunity to do so. Handling the global financial crisis 2008-2009 and the current pandemic, and also future events, requires the right tools and a flexible mandate. This is made more difficult by the proposal for a new Sveriges Riksbank Act. The proposal also limits the Riksbank’s possibilities to both build up and use its foreign exchange reserves. This is problematic, as the Swedish financial system is strongly dependent on short-term market financing, largely in foreign currencies.