samchain/econo-pairs-v1 huggingface dataset:
Why was it so hard to anticipate what would happen if there were losses on large numbers of bonds insured by monoline insurers which had relatively small amounts of capital? One reason why such risks may not be appreciated ex ante is over-reliance on local risk measures such as VaR (Value at Risk) or other historical average correlations, and not enough on severe stress tests over different horizons. For example, in the United States it was widely believed that house prices would not fall significantly nationally (it had never happened after the Great depression in the 1930s). We assert that, if one had stressed bank capital in the US with the explicit assumption that national residential real estate prices could go down 30 to 40%, and in some local markets more, most of the losses for US banks could have been correctly predicted (at least if the complexities of structured credit products were properly assessed6). The collapse of functioning inter-bank money markets and other “runon-the-bank” phenomena obviously added further costs, but the first-order effect was caused by residential house prices falling. The key, however, was to correctly predict what that kind of price drop would do to other market participants, and market structures, as well as to the individual firm. Extreme stress tests have served a crucial purpose after the crisis to re-establish confidence in banks, and might usefully play a wider role in more aspects of on-going bank oversight.

And, above all, it seems to me that this is the wrong question or solution given our current challenges: while the issue at stake here is improving dialogue with a view to achieving concerted and operationally-applicable solutions, I do not believe that anyone really asserts that the optimal way to enhance the future of our financial cooperation is to alter the composition of the 24- or 25-strong IMF Executive Board by 3 or 4 members. Nevertheless, I consider that a number of principles should guide this desired reform: governance today should be adapted to a multipolar financial world. While all members should be represented in proportion to their involvement and responsibilities, more than the complex calculations of quotas and voting rules, we should fundamentally focus on the functioning and mandate of the IMF. In this respect, senior officials should be appointed strictly on the basis of their expertise and the IMF’s mandate should be expanded. Focusing on exchange rate developments alone is no longer sufficient, and if the IMF is to be able to contribute to ensuring international financial stability, it must pay greater attention to capital account developments. Furthermore, this contribution cannot simply be a matter of complying with a rigid and uniform body of rules. It must take account, in a balanced manner, not only of each country’s level of development but also the systemic risk that it constitutes within the global financial system.
In view of these developments and considering that the amendments to the General Banking Law announced this year by the Ministry of Finance will include a review of the solvency requirements, making them gradually converge to the new Basel III capital standards, it is important that the banks strengthen their capital levels, for example by adjusting their profit reinvestment policies. The stress tests that we perform for each Financial Stability Report indicate that our capital levels are adequate to absorb the occurrence of a severe stress scenario. This scenario has similar characteristics to the one evaluated in the previous FSR, as it considers a fall in GDP in the short term and slower growth in the medium term. Output would stand at –4.5 percent annually during the most critical quarter and would then converge to a growth rate of 1.4 percent by the end of 2017. This is intended to replicate past financial fragility episodes of importance. The results of these stress tests show that the banking system’s position is adequate to deal with a severe stress scenario. They mark a downturn from the past FSR, mainly because of a lower level of initial capitalization and profitability, affected by reduced operating margins consistent with the evolution of the business cycle (figure 16). Let me close with some final thoughts. Final thoughts The economic situation has become more complex, especially in emerging markets. The terms of trade have fallen more than expected and financial conditions have tightened.

In view of the requirement for growth of Islamic financial transactions to be linked to real economic sectors, salient issues on stronger corporate governance and more efficient human resource management are discussed in a pre-concluding chapter of the book. Renowned industry practitioners and academicians have contributed to the book, providing deep insights, perspectives and views that are supported by practical experiences which will be invaluable to those who wish to understand the critical regulatory issues in Islamic finance. Contributions by the two respected co-editors who have extensive knowledge on the subject and are internationally recognised for their academic publications on Islamic finance, completes the book as an indispensable reference for all. It is hoped that in addressing the implications of the recent global financial crisis on the regulation of Islamic financial services, this book will provide further clarity and understanding on the multi-dimensional goals of policymakers and regulators in ensuring that the resilience of the Islamic financial system and its core tennets are aligned with the evolving global regulatory developments. Let me take this opportunity to congratulate the two co-editors for their invaluable contribution in enriching the body of authoritative information on the regulation of Islamic finance. Thank you. 2  BIS central bankers’ speeches
One can briefly say that the first area concerns monetary policy sometimes having unexpected effects, the second concerns it having much less effect than normal and the third concerns monetary policy receiving support from, but sometimes possibly also being counteracted by, measures that are primarily aimed at maintaining financial stability. I will run through these areas one by one and explain in more detail what I mean. But first I would like to clarify something. The fact that I am raising these issues should not be interpreted as my trying to make a point about how the world looks with certainty. Although some of the ideas are in line with my own reasoning in the monetary policy discussion, others are relevant from a more general perspective. These are simply issues I think are of current interest and which I believe will be discussed in the coming period. BIS Review 164/2010  1  Can expansionary monetary policy increase risk taking in the economy? A central component in the financial crisis was what has sometimes been called a North Atlantic property bubble. 1 In the United States and a number of other countries, such as Ireland, Spain and the United Kingdom, property prices had increased substantially over a number of years, accompanied by a large expansion in credit. Property prices then fell drastically in the crisis. There is no individual explanation for this development – it is due to a number of interacting factors.

There is as yet rather limited empirical research on the risk-taking channel, but some papers on the subject have now begun to appear. The studies are based on data from the eurozone and the United States, as well as other countries. They appear on the whole to support the theory that low policy rates lead to the banks taking greater risks. 5 Well worth more research… My personal view is that the risk-taking channel is definitely an interesting line, well worth further research. Our knowledge of the monetary policy transmission mechanisms is far from complete and the way that monetary policy affects the banks’ risk taking is something we need to learn more about. I also believe it would be useful to broaden the question and try to find out if low interest rates for a long period of time can lead to an increase in risk propensity in society as a whole – among households, companies and other participants in the economy – and not just among banks. So far, research in this field has been even scarcer. 6 As I see it, an increased risk propensity among households could be an equally strong driving force behind a rise in property prices as greater risk taking by the banks. …but not so easy to do in practice It is of course difficult to predict today what the conclusions eventually will be and what implications they may have for monetary policy.
The banks’ investment companies had also done so to a great extent. The buyers of the investment companies’ certificates are usually risk averse investors who are choosing between buying short government securities and corporate certificates. When it became clear, or even when there was reason to suspect, that subprime loans were among the investment companies' assets, the demand for certificates fell drastically. Investors instead chose to buy short government securities, which meant that interest rates on these fell. One could say that the investment companies suffered a classic bank run. The parent banks were now forced to fulfil the liquidity guarantees they had made earlier. At the end of July the German bank IKB announced that it had suffered major losses through an investment company that had invested in subprime loans. Some weeks later another German bank, Sachsen Landesbank, experienced similar problems. 1  See also the Committee on the Global Financial System (2006): “Housing Finance in the Global Financial Market”, CGFS papers, No 26. 2  Subprime loans comprised an estimated 13 per cent of the total mortgage stock in the United States in 2006. BIS Review 136/2007  3  The banks then began to hoard liquidity and distrust spread throughout the bank system. Banks that had investment companies did not want to lend money as they might need it themselves to meet their own guarantee obligations. Even banks without investment companies were unwilling to lend money as it was uncertain where in the bank system the credit risk was actually located.

But then they receive everything that is left. The advantage with prioritising the payments in this way is that one can sell the tranches to investors with different risk appetites. Those with a high risk appetite can buy the higher risk tranches, while more cautious investors, such as insurance companies and pension funds, can buy the tranches that are assessed to have the lowest credit risk. But although there are advantages to packaging together securitised loans in a CDO, there are also disadvantages. One disadvantage is that it is expensive, time-consuming and difficult to assess the credit risk in the different tranches. The underlying assets may be of a heterogeneous nature. Moreover, there are products where a CDO is repackaged and in turn included as a component in another CDO, which will of course make it more difficult to gain an overview of the risk content. The credit risk in the structured products is often assessed  BIS Review 136/2007  1  by the credit rating agencies, which also rate the different tranches, at least the more senior ones. The credit rating agencies thus play an important role with regard to the structured products. Pricing is another problem. Tailor-made products are not in general subject to regular trading and price listings are rare. One is often reduced to employing mathematical models, which are based on estimated default frequencies for various credits, given the development previously observed.
While Asia was preoccupied with its problems, globalisation of financial markets proceeded apace, spurred on by deregulation and technology. With the internet, markets are becoming borderless. Banks, insurance firms, and now securities exchanges are facing cut-throat competition, and going through a worldwide wave of mergers and consolidation. Singapore has to keep up with these global trends to remain a sound yet dynamic financial centre. For many years, we had regulated our financial sector tightly. We insisted on high standards of integrity and competence. We sought to protect investors, especially retail investors, by circumscribing what they could be allowed to invest in. We protected local banks and stockbrokers from foreign competition, in order to build up dependable Singaporean players. We sought to minimise risk wherever possible, and accepted the trade off for a less vibrant and innovative industry. This approach had worked, and proved its worth in the crisis. But going forward, it no longer suffices. In the new environment, we need to take a bolder, less dirigiste approach. We should regulate with a lighter touch, accept more calculated risks, and give the industry more room to innovate. We need to liberalise and allow greater competition. We will not abandon the high standards of integrity and sound financial management which we have built up. But our attitude to supervising risk must change. 6  Before the crisis, NPLs were 3% of loans. During the crisis, NPLs rose only to about 12%, most of which was on account of lending to the region.

These grew more serious in the 1990s, but they continued to be masked by generally sound macroeconomic conditions and investor confidence in a sustained Asian boom. However, the sudden onset of the crisis cannot be explained without appreciating the panic-prone and panic-inducing behaviour of international financial markets. Fortunately for most of Asia, the crisis, though severe, was short. The Russian default and LTCM debacle in the fall of 1998 were a turning point. The G7 countries, led by the US Federal Reserve, lowered interest rates promptly and decisively. While this lowering was motivated by domestic considerations, there was also a collective sense of concern over the weak state of the global economy. In the event, it helped restore liquidity and confidence to global financial markets. Now nearly all the Asian countries are recovering, though in different ways and to varying degrees. Post-crisis caution After this near-death experience, it is not surprising that countries are re-examining their belief in the global economic system. What lessons have countries learnt? 1  IMF News Brief 97/19, 8 October 1997. BIS Review 76/2000  2  Firstly, unlike previous crises, the crisis was due mainly to a run on the capital accounts. Thus, there was no reason to rethink the merits of free international trade and investments. These fuelled the last Asian boom, and are crucial if countries are to get their economies growing again. The most open of the Asian economies – Hong Kong and Singapore – were among the least badly affected by the crisis.
Spain has made relatively more progress than other euro area countries in reducing the volume of non-performing loans built up during the crisis. Moreover, economic growth – albeit at lower rates – can be expected to continue to help to gradually reduce them over the next few years. Despite these improvements, the level of unproductive assets of Spanish banks (especially those related to business in Spain) remains relatively high and above precrisis levels. 3/11  Reducing unproductive assets continues to be a challenge for the industry, requiring banks to strengthen the application of active management policies to their impaired assets. In this respect, the agreements to sell troubled asset portfolios announced over the past year will accelerate the reduction of future NPL ratios more than initially estimated solely on the basis of the cyclical improvement in the economy and the experience of previous credit cycles. In order to address this challenge, which most other European banks also face, the European economic and supervisory authorities have taken initiatives to accelerate the reduction of NPLs. In particular, the European Commission announced a package of measures in March this year, which included a proposal to review the capital requirement regulations and an NPL provisioning schedule. Correcting the high level of impaired assets is key for two basic reasons. First, because the balance-sheet clean-up will improve banks’ profitability and solvency. That is to say, it will free up resources currently devoted to financing unproductive assets and allow them to be used to finance new lending.

Macroprudential policy is especially important in a country like Spain, which belongs to a monetary union and a banking union, since – as we have seen in the past – the financial and business cycles of the various countries that make up the currency are not always harmonised with those of the euro area as a whole. Considering that the euro area has a common monetary policy and supervisory policy and that there is limited scope for fiscal policy measures, macro-prudential policy has a fundamental role to play in addressing the credit cycle. I will now move on to institutions’ adaptation to the other components of the international regulatory reform such as stricter requirements for own funds and liquid assets, and other requirements under the new resolution legislation. These regulatory changes were agreed at international level in response to the shortcomings that became apparent when the financial crisis broke out ten years ago now. Their aim is to boost banking systems’ resilience to adverse shocks, and to minimise the cost to taxpayers in the event of resolution. In other words, they seek to reduce the likelihood of future financial crises, and if they do happen, reduce their impact on society. 7/11  The first phase of the reforms, agreed between 2010 and 2011, focused, among other things, on strengthening the quantity and quality of banks’ capital and introducing new liquidity requirements and limits on credit concentration. Almost all of these requirements will have come into force by the end of 2019.
20  Woodford M. “For not only do expectations about policy matter, but (…) very little else matters.” – Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, 2003. BIS Review 42/2006  3  been followed recently by the Norgesbank 21 . At first (since 2003) the Norwegian MPC published its monetary policy intentions only for the next four months in the form of an interest rate forecast interval. Last November it went further and started publishing a forecast for interest rates three years ahead in the form of a central forecast (with two alternative scenarios) along with a fanchart). These bold steps made New Zealanders and Norwegians push the frontier of central banking ahead and set a new benchmark for inflation targeters 22 . Are we ready to follow? In 2000 Mahadeva and Sterne measured central banks transparency 23 . Back then the Polish central bank was below the average among inflation targeters. However since then the NBP has made considerable progress. Major changes to communication have been introduced such as publication of inflation forecasts, modification of inflation reports and decision statements in order to make them more forward-looking. Łyziak et al. have applied the Mahadeva-Sterne and Eijffinger–Geraats indices to assess current transparency of the NBP and showed that it has markedly improved 24 . Nevertheless, we are not resting complacently. There are still ways to go and things to learn.

But that is rarely possible in practice, other than perhaps a very short distance ahead. 8  See Woodford (2012). 9  See Carney (2012). 4  BIS central bankers’ speeches  The difficulty of utilising this particular policy channel is probably not a great issue in normal times. But it looms larger when policy is constrained by the zero lower bound on interest rates. In such circumstances – and assuming that alternative policies, such as quantitative easing, are unavailable or ineffective – an ability to exploit this policy-expectations channel becomes much more valuable, as the commitment to hold policy loose in the future feeds back onto aggregate demand today by reducing expected future real interest rates. This comes about both through a low future nominal interest rate and a higher future rate of inflation because policy is held “loose for long”. The intent of such a loose-for-long strategy is in some ways similar to quantitative easing, as both reduce interest rates further down the yield curve. But the former does so by changing the path of risk-free rates at the near end of the yield curve, while the latter operates mainly through variations in the term premium further out along the yield curve brought about by changes in relative asset supplies. Moreover, the loose-for-long approach partly works by raising future inflation, which is not an objective of quantitative easing.
2 The rapid growth of hedge funds in the West End is the latest example of the innovation that this cluster of financial skills has produced. You know something must be happening when the Mayor of New York commissions a review of the threat London poses to New York’s position. London’s recent growth certainly has a cyclical element but it also reflects two more structural changes – the removal of barriers to international capital movements and the advances in information technology. These have led to a growing role for international capital markets compared to national banking and to a growing concentration of those markets in a few hubs among which London and New York are dominant. And this finance revolution is still underway. It is far more advanced in the US than in Europe and in Europe than in Asia. In the absence of disasters therefore London, as the preeminent centre outside the US, can look forward to a long period of fast growth and expect its share of the UK economy to increase. This evening I want to discuss the implications of that trend for the UK economy and for economic policy. On the first, is London a goose laying golden eggs for the rest of the country or is it more of a cuckoo in the nest? On the second, how does the growth of London and financial markets generally impact on the Bank’s core functions of setting monetary policy and maintaining financial stability.

Chart 9 compares the 90th, 95th, and 99th percentile with the median and shows that the main change is at the top. If we break that top percentile down further, we see a more dramatic widening. This is not just true of the City or of the UK. The average CEO in the UK earns around 100 times more than the average worker but there is an even wider gap in the US, with the average pay of CEOs over 250 times that of the average worker in 2005, having risen from around 100 times in 1995. In 1999 Eddie George likened the change in the City since Big Bang to Wimbledon. 4 The UK still prospered by providing the venue even though most of the players were foreign. Today I think the Premiership may provide an even better analogy. That is partly because foreigners now own an increasing number of the venues as well as supplying many of the players. That is a striking illustration of Britain’s openness to foreign ownership which sets it some way apart from most other countries both in Europe and America. But it is also because both the City and the Premiership have become the centres of global industries with a dramatic impact on revenues and on earnings. One of my first footballing heroes was Johnny Haynes, the David Beckham of his day as a passer of a football.