samchain/econo-pairs-v1 huggingface dataset:
The reason for locating insurance and banking in the PRA is that we have learned during the crisis that our job as prudential supervisors is to ensure that the public and users of financial services, including the corporate sector, can be assured of continuous access to the critical services on which they depend. Let me also make clear at the outset that insurance supervision matters as much to us as bank supervision. The crisis has given us more challenges with banks, but our statutory objectives make clear that our attention must be on both industries. Many financial services may be regarded as critical by their users, but some are distinctive because it is hard for consumers to replace their provider with a substitute without unacceptable cost and loss. Insurers provide critical services to the public in terms of risk transfer and very long-lived savings contracts. This last point draws out that insurance is not a single homogenous industry – general and life insurance are very different activities – and we recognise that in our supervision. It would not be acceptable to the public for their access to risk transfer through, say home or car insurance, or professional indemnity insurance, to name but a few, to be withdrawn in a disruptive and unannounced way. In the same way, savings contracts that are long-lived and provided by life insurers, and are often an individual’s primary pension provision, are critical financial services that are difficult to replace without unacceptable cost.

It is true that in the run-up to the start of the crisis, and for some time thereafter, the FSA mingled insurance and bank supervision in terms of its operating units, but I think that did not work effectively, and the FSA and now the PRA moved to a clear distinction, with insurance supervision headed by Julian Adams. Insurance supervision is a skill of its own, and while our supervisors do move roles between insurance and banking in both directions, we want to ensure that we have groups of truly expert insurance and banking supervisors. Recently, we have taken a further step on insurance supervision by formalising two directorates, for General and Life Insurance, reporting to Julian, and headed by Chris Moulder and Andrew Bulley respectively. Chris and Andrew bring a wealth of experience of insurance supervision and for Chris auditing. Alongside Julian, Chris and Andrew is a policy directorate headed by Paul Sharma who is, I think I can say, a true veteran of insurance supervision. And, I am delighted that Nick Prettejohn has joined the PRA Board. Nick brings extensive insurance expertise to our work as a board. Most important of all, we have a new Governor and Chairman of the PRA Board, Mark Carney.
Facilitating also means helping players in the ecosystem to engage with each other and find solutions without necessarily resorting to regulatory measures. It is in this spirit that we run the ACPR-AMF FinTech Forumand that we have created working groups or task forces in order to make concrete progress on important issues for the ecosystem, such as the access of digital asset service providers to the bank accounts and banking services they need. Admittedly, dialogue does not solve everything, but we very often find that many difficulties can be ironed out through improved dialogue and a better understanding of the practices and technologies used by the various stakeholders. Second objective: experiment. Here I would like to give two different illustrations of this approach. The exploratory workshops conducted by ACPR on the use of artificial intelligence in the financial sector are an example of what experimentation can bring not only to a supervisory authority but also to the entire ecosystem. Indeed, these concrete experiments have enabled the ACPR, based on specific use cases, to examine the code of the algorithms, their intrinsic performance, their integration into operational processes, and their control and governance environment. Drawing on this experiment, in order to share widely the lessons it has learned, the ACPR published astudy last June outlining what the framework for the proper use of these future tools could look like.

Problems at the British Steel plant in the town have put at risk the jobs of 5,000 workers and a further 20,000 in its supply chain.1 Hopefully, a new buyer can be found and jobs in the town and beyond can be assured. This is the latest chapter in what has been a long and sometimes painful story for the UK steel industry recently. It has been a recurrent theme of my visits around the UK, including in Redcar and Port Talbot. The loss of signature industries can leave lasting social and economic scars – jobs lost, families disrupted, communities decimated. It is a pattern we see repeated across many industries in many advanced economies. It has been a key cause of the disaffection and disconnection felt by many and a potent polarising force in our politics, policies and societies. This polarisation is also a potent force shaping the fortunes of our economies, as I will go on to discuss. The travails of the steel industry lead me neatly to the issue I want to discuss today – jobs and pay. In the UK recently, this has been a good news/bad news story. The good news has been the new jobs created – the best jobs recovery in the UK since at least the Second World War. The bad news has been the subdued performance of pay over much of that period – the weakest pay performance the UK has experienced since at least the Boer War.
Whenever there are difficult issues, outside reviews of the Bank’s performance will be conducted, publicly released and acted upon. Looking ahead The Bank welcomes such scrutiny of our activities, including open debate about the cumulative impact of reform on the functioning of markets. In particular, while the core of the system has been made more resilient, the combination of new prudential requirements on dealers and structural changes in markets has reduced market depth and increased potential volatility. This process likely has further to run, particularly as the normalisation of global monetary conditions edges closer. Firms and regulators should be alert to these developments, including their consequences for investment funds that offer daily liquidity while investing in securities that only appear liquid. To be clear, more expensive liquidity is a price well worth paying for making the core of the system more robust. Removing public subsidies is absolutely necessary for real markets to exist. Volatility characterises such real markets and much of the pre-crisis market making capacity among dealers was ephemeral. However, the possibility of sharp, unpredictable changes in market liquidity poses a clear risk to financial stability, particularly when some  3  See, inter alia, the Record of the FPC meeting held on 20th November 2013, which summarises the outcome of joint work with the FCA on “snap-back” risk; Bank of England (2014), “Stress testing the UK banking system: 2014 results”, December; Bank of England (2014), “The Financial Policy Committee’s review of the leverage ratio”, October.

Mark Carney: Building real markets for the good of the people Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House, London, 10 June 2015. *  *  *  I am grateful to Ben Nelson, Iain de Weymarn, Nicola Anderson, Alex Brazier, Andrew Hauser, Chris Salmon and Tim Taylor for their assistance in preparing this speech and accompanying Open Forum document. My Lord Mayor, Lady Mayoress, Chancellor, Ladies and Gentlemen. Almost 350 years ago, the Great Fire destroyed the City of London and rendered 100,000 people homeless. It took half a century to rebuild. The legacy of the Great Fire endures, including such Wren masterpieces as St Paul’s and his twenty-five other steeples that survive today within the City’s precincts. But the Fire’s legacy is not limited to how the City looks, it extends to what the City does. The blaze led Nicholas Barbon to establish the first insurance company, an innovation to fulfil a social need: the sharing of risk. Public authorities complemented private initiative. There was a Royal Proclamation that set standards for wider roads and houses built from brick and stone instead of timber. And Parliament passed the Parish Pump Act to prevent “mischiefs that may happen by fire” by establishing fire brigades and improving water supply.
It puts all three into equilibrium, in terms of savings and investment, current and future labour employed, current and future preferred leisure, etc. If monetary policy does not in broad terms “respect” the evolution of the real interest rate, it can create imbalances one way or the other. If you go too high above the real interest rate and the actual real interest rate is above the natural one, you create recessions, unemployment, falling investment and declining asset prices. And if you go lower or substantially below the equilibrium interest rate, you create overheating, excessive debt and rapidly increasing asset prices. Even more importantly, moving the statutory interest rate has fundamental effects on the financial sector. The financial sector is a time-transforming sector – every second, it transforms the present into the future (short-term liabilities into long-term assets – typically done by banks) or vice versa (long-term liabilities into short-term assets – typically done by insurance or pension companies). Whenever you take the policy rate above the equilibrium interest rate, you create a problem out of what happened in the financial sector in the past. Whenever you go substantially below, you create problems in the future. I have chosen non-performing loans as an example that is, I believe, quite easy to understand. If you substantially increase rates now, many projects from the past become unviable and non2/5  BIS central bankers' speeches  performing. If you go substantially below, many of the currently new projects will become unviable in the future when rates return to equilibrium.

Most of all, they are stoking fears of a fall in the purchasing power of money, paradoxically at a time when inflation (the key measure of the purchasing power) in developed countries is lower on average than it has been for years! Put simply, we have been warning about the risk of flooding for so long that we are now unable to explain that drought can be just as big a problem and that at times of drought you have to water the garden, not keep draining it dry. If the hosepipes are blocked, moreover, you have to use other means to supply the plants with water. If we do not succeed here, we central bankers will have great difficulty being credible in the future. 4/5  BIS central bankers' speeches  Literature: Holston, K., Laubach, T., & Williams, John C. (2016): “Measuring the natural rate of interest: International trends and determinants,” Working Paper Series 2016–11, Federal Reserve Bank of San Francisco. 5/5  BIS central bankers' speeches
And the impact of so-called Quantitative Easing (QE) is also likely to be different across cohorts of society. 3 Understanding the differential impact of monetary policy across these sectors is important in general, as well as for gauging whether policy is working through its intended channels. Fourth, and perhaps most important of all, the distribution of outcomes across different groups can matter greatly for the well-being even of the economy as a whole. To see that, consider a simple example. Imagine the economy comprises two regions, one with income of 10, the other with income of 90. Now imagine income falls by 5 in region one but rises by 10 in region two. At least as measured by GDP, the economy and society as a whole is 5% better off. But is it? The income of the already-rich has risen by just over 10%, while the income of the already-poor has fallen by 50%. Does the former really swamp the latter when it comes to the well-being of society? There are grounds for doubt. Empirical studies show that every extra pound of income or wealth yields less satisfaction than the last. A millionaire values a £ lottery win less than someone on the living wage. For economists, this goes by the name “diminishing marginal utility”. Yes, I know we should get out more. If they are sufficiently unevenly distributed, income losses by the poor may more than offset gains by the rich in a social welfare sense, even if not in a GDP sense.

This helps explain the uneven pattern of wealth gains by age since the crisis, as older cohorts are more likely to be owner-occupiers. Taken together, then, the rising cost of rents, and the rising share of renters, appears to have caused a further erosion of some households’ income since the crisis, particularly renters, the poor and the young. For those cohorts, rising housing costs are likely to have contributed to the sense of this being an invisible recovery. Whose recovery? To a significant extent, those owning their own home. The social jigsaw So far, we have looked at relatively standard measures of economic health and wealth, the staple diet of economists like me. But there are now many studies showing that objective measures of economic health and wealth do not always correspond well with individuals’ subjective sense of well-being and fulfilment. 11 Let me give a simple example to bring this point home. The highest per capita income region in the UK is London, where the average person earned £ per year in 2014. At the bottom of the per capita income league table was Northern Ireland, where the average person earned £ per year in 2014. Yet when it comes to measures of life satisfaction, the tables are completely turned. London ranks at the bottom of the regional league table of happiness, while Northern Ireland occupies (by some distance) pole position.
So how do we create a better and more sustainable structure for the financial markets both nationally and globally? I do not have the perfect answers to all of these questions. I doubt that anyone has. But I shall spend the next 20 minutes trying to answer them to the best of my ability. And I hope this will provide a good basis for the coming hearing. Monetary policy and the economic situation The downturn in the world economy has been very rapid and severe – in this way the worst in many decades. Sweden is an export-dependent economy and has been hit hard partly because of this. It will take time before the economy is back at the same level as prior to the crisis. But now we have come so far that the recovery has begun. One important component to which I shall also return is that the conditions on the financial markets have improved. Several indicators are also showing that confidence in the future among both companies and  BIS Review 138/2009  1  households has become much stronger, an important factor in the economic recovery (Figure 1). Figure 1.

But this should be compensated to some extent by the banks becoming more secure and thus a fall in risk premiums on loans to banks. Although our calculations show that the costs of the new regulations are limited, it is unavoidably the case that stricter regulation entails various forms of cost. It is in the nature of the regulation. The important thing is that these costs are seen in relation to the gains in the form of a more stable bank system. And there is no doubt that the gains are substantial, after what the world has gone through since the financial crisis began. Here I refer to the severe economic downturn I mentioned at the start. But it is nevertheless important not to tighten the screws too much. This would mean that the banks only wanted to lend money to the most secure customers and investments. A lot of good investments would be missed. A lot of people would be unable to buy homes. Longterm economic growth would be slowed down and our total welfare would decline. We must quite simply ensure we do not put a spanner in the works so the banks reduce their lending too much. When I first worked at the Riksbank, in the 1970s and 1980s, the credit market was severely regulated and this is not a situation we should wish to return to. Nor should we ignore the fact that banks have an ability to circumvent regulations and make use of loopholes in the law.
6  The model, developed by the economist Robert Barro, and based on an earlier idea by Rietz, allows for the effects of one-sided tail risk – the potential for macroeconomic “disasters” – as well as more conventional, two-sided uncertainty (Barro (2009)). The downside skew to growth reduces the risk-free interest rate and pushes up the required return on risky assets. I used this model to speculate about the causes of low investment in a speech a couple of years ago (Broadbent (2012)). BIS central bankers’ speeches  5  simulates a 1%-point decline in expected future growth). They also return less from that point on. Qualitatively, increases in uncertainty have similar effects – they reduce equilibrium interest rates and depress equity prices (Charts 6(c) and 6(d)). But their sizes are rather different. Changes in two-sided uncertainty don’t do that much (6(c)); by contrast, small rises in the perceived chance of very bad economic events can have powerful effects on the risk-free interest rate.7 Intuitively, this makes sense: an asset whose payouts are immune to such disasters are valuable. Even if that downside risk rises by only a little, people are prepared to pay quite a bit more for – and to tolerate lower returns on – the “safe haven” of government debt. And I think it’s plausible, at least, that an increasingly negative skew to global growth expectations might help to explain the divergence between equity and bond yields in Chart 2.

Ensuring that Banks Continue to Serve the Real Economy While the effect of regulatory reforms on the broader economy has so far been benign, regulators must continue to pay close attention to the cumulative effects of various reforms and seek to minimise adverse consequences for the real economy. Let me highlight two areas that bear close watching: •  First, profitability in the banking sector. •  Second, distribution of credit to key segments of the economy. BIS central bankers’ speeches  3  Bank Profitability is Important for Bank Stability Let me start with bank profitability. Regulators are not in the business of ensuring profits for banks. But we have an interest in the profitability of banks for two reasons. First, banks need to be profitable in order to be strong. •  Retained earnings are one of the major sources of equity, which is in turn the highest quality capital held by banks. •  Healthy capital buffers in turn improve the resilience of banks against losses. Second, banks need to be profitable in order to be able to support the real economy. •  Banks have to earn a decent return on their credit intermediation role. •  A study by the Bank for International Settlements shows that banks with high capital ratios at the start of the Basel III process and strong profitability in the post-crisis years have tended to expand their lending more.
As the activities of commercial banks have become increasingly diverse and complex, internal controls have become critically important to the sound and successful execution of banks’ strategic objectives. I want to stress this point as strongly as I can. As a former commercial banker myself, I know there is a powerful temptation for management to focus its attention and resources on the front office - those areas and individuals that generate profits for the institution. But if something goes wrong in the back office, it can quickly become the most important aspect of a bank’s operations. It is essential that sufficient resources, staff and managerial attention are devoted to the back office and internal audit functions. Firmly rooted on the foundation of good corporate governance and rigorous internal controls is the central importance of effective risk management. As I mentioned earlier, banking by its very nature is a business of taking calculated risks. If they didn’t take risks, banks could not perform their essential functions in a market economy. But sound banking also entails the prudent management of those unavoidable risks. Each banking institution must have in place the technical systems and management processes necessary to identify the risks associated with its activities - lending and otherwise - and to effectively measure, monitor and control those risks.

The flexibility of credit and liquidity that banks provide - stemming from this unique capacity to create transaction account liabilities - is vital to the smooth development and growth of market-based economies. Other essential functions This money-creating capacity also enables banks to perform other essential functions. For example, banks serve as the primary and back-up source of liquidity for other classes of institutions, financial and non-financial. Even in advanced financial systems, the capital markets rely heavily on the banking system to meet day-to-day cash flow needs and to provide standby financing facilities. In addition, the banking system is the mechanism, or transmission belt, by which the policies of the central bank regarding money and credit creation are implemented, and the pace of economic activity determined. Simply stated, without an effectively functioning banking system for encouraging, collecting and deploying society’s savings, providing the means for quick and reliable payment, and performing these other essential functions I’ve just mentioned, there would be little hope for any economy to mobilize the real resources necessary for economic growth and stability. If money and credit are the lifeblood of a market economy - and they are - the banking system is its beating heart. Public confidence - the key to intermediation But banks’ ability to collect and mobilize society’s savings by attracting deposits is only half of the story. Their ability to retain those deposits is just as critical. This may seem an obvious point, but the retention side of the banking equation is too often forgotten or overlooked.