samchain/econo-pairs-v1 huggingface dataset:
The crisis has created a vicious circle between the real, financial and public economies The current European sovereign debt crisis has its origins in the period before 2007. In the absence of a common fiscal policy, budgetary discipline in the euro area should have been safeguarded by the Stability Pact. But, by 2003, it could already be seen that the implementation of the Stability Pact was weak. The financial markets also treated the euro countries as a homogenous block for a long time. Consequently, warning signals in the form of interest rate differentials between countries were absent. When the global financial crisis impacted what were often weakly-capitalised banking systems, and the ability of many countries to support their financial systems became questioned, the crisis became acute. The crisis has often been described as a vicious circle between the real, financial and public economies: weak growth in the economy leads to  2  Goodhart, C & Rochet, J-C (2011): “An evaluation of the Riksbank’s monetary policy and work with financial stability 2005-2010”. 3  Haldane, A (2010): “The $ billion dollar question”. 4  This is reported in, for example, European Banking Federation (2011): “Facts and Figures 2011/2012”. 5  Haldane gives an interval of 90–350 per cent for the global economy, depending on assumptions of the extent of the permanent effects. BIS central bankers’ speeches  5  problems in the banking sector; banking problems generate costs for the state; the public sector has to implement austerity measures to maintain credibility, and this reduces growth.

As the European Central Bank president, Mr. Jean-Claude Trichet has recently underlined “the international interdependencies are too large for purely national or regional rules to be optimal and there is a clear need to strengthen global governance, in particular in the financial field”. In the case of the European Union, the crisis has exposed fundamental weaknesses of the European economy, revealing growing internal imbalances. The functioning of the European  BIS central bankers’ speeches  1  Monetary Union has been under particular stress as the existing surveillance procedures proved to be not comprehensive enough. Therefore, more effective economic governance in the European Union and the euro area is seen as achievable through five main pillars: fiscal discipline, broader economic surveillance, closer coordination, a robust framework for crisis management, stronger institutions and rules-based decision making. At this point, let me say that just recently the European Union has taken important decisions to ensure that Member States coordinate their economic policies more closely. The new economic governance is therefore based on three main responses to the crisis: •  reinforcing the common economic agenda with closer European Union surveillance  •  safeguarding the euro area stability  •  and repairing the financial sector  As a result of these decisions, the EU’s interdependent economies will be better placed to chart a path to growth and job creation. To conclude, I would like to emphasize here that economic governance is a topic that concerns us all.
The broad adoption of financial technology or fintech could dramatically lower the cost of banking services. Not only will this enhance financial inclusion, it could potentially also help mobilise untapped savings, enable more efficient financial transactions, and make credit more readily available and affordable to small businesses. Emerging Asia fares poorly in financial inclusion even among emerging markets. •  Less than 15% of Asian SMEs have bank credit lines, compared to 24% in Latin America and 28% in Eastern Europe. •  In Indonesia, for example, only about one out of every three persons aged 15 and above has an account with a financial institution. Ironically, Emerging Asia’s relative under-development could turn out to be an advantage. The innovative adoption of digital technology by the financial industry is enabling these economies to leapfrog into more advanced channels for providing banking services. •  A growing number of Asian customers, especially in countries like China and India with rapidly developing technology infrastructure, are using mobile banking apps for payments and funds transfers, even before customers in more advanced economies. •  In India, bank accounts can be linked to biometric identity cards issued under the national Aadhaar initiative, enabling millions who otherwise lack the formal documents required to open a bank account to have access to basic banking services. Of course, technological innovations pose threats as well as opportunities to Asian banks. As in the US, a number of fintech entities in Asia are making inroads as lower-cost alternatives to banks.

The improvements in productivity growth in the United States of the past decade have been followed by significant improvements in potential growth and wealth accumulation in many other countries. The scale of investable assets around the globe is very substantial, and this will be an important source of demand for risk assets. The improvements in monetary policy credibility and in financial strength developed over the past few decades mean that policy around the world has more room to adjust to deal with the challenge in the present environment. Nevertheless, the challenges that remain are substantial. The speed and agility with which public policy makers and private financial institutions respond to the continuing pressures in a rapidly evolving environment will determine how quickly and how smoothly market conditions return to normal – and how rapidly the risks to the economic outlook are mitigated. BIS Review 27/2008  7
The industry has also come together in demonstrating their commitment to businesses, in particular halal businesses and enhancing protection for halal businesses to venture into emerging markets. A dedicated RM20.0 billion yearly fund has been allocated by Islamic banks under AIBIM for SMEs including halal businesses. I urge eligible entrepreneurs to take this opportunity to empower their businesses and leverage on this platform in maximising business’ potentials. There is now growing awareness of the concept of halalan-toyyiban – which calls for Shariah compliance to be assessed throughout the entire supply chain of the products including distribution, marketing, and financing. Currently, only 54.1 percent of halal businesses are bankfinanced, and less than a quarter of the financing (21.9 percent) is in the form of Islamic solutions3. Islamic finance offers a variety of solutions through use of wide-range Islamic finance concepts such as sales based, leasing, profit sharing or partnership and many more that enables better fit for businesses’ need. For example, businesses who wish to acquire equipment or commercial vehicles can explore Ijarah contract, which allows businesses to lease equipment or commercial vehicles from an Islamic bank on rental for the usage of equipment during the lease period. The total leased rental, which is fixed throughout the tenure provides businesses with a hedge against future rates movement and provides businesses with an avenue to improve and better manage cash flow. Currently, Islamic finance institutions are rigorously exploring more customised solutions and improving customer experience and journey.

The net banking income of the three leading groups using IFRS grew by only 3.8 per cent in 2007, after rising by 18 per cent in 2006. However, the aggregate net profit under French accounting standards for the French banking system in 2007 reached nearly € billion, making it possible to generate income that is used in part to strengthen the institutions’ financial foundations, thereby contributing to the financial stability of the Paris market. The diversification of French banking groups’ activities has proven to be a strength. Several business lines are showing positive trends, with further gains in retail banking, which posted growth of 9.1 per cent (particularly in foreign operations, with an increase of 22 per cent compared to 2006), and project financing. Retail banking is still a core business for French banks and it played a critical role in stabilising income sources since the beginning of the financial crisis. Origination of new loans for non-financial agents remained high. Proper pricing of risks according to the credit quality of borrowers is therefore a key issue in France’s highly competitive lending market. By contrast, corporate and investment banking activities had a broadly negative impact on earnings, due to the combined effects of asset impairment and falling profits. Losses from asset management vary more significantly from one institution to another. What can we learn from the major banks’ first quarter earnings in 2008?
This is not surprising, for even though the euros (and dollars for that matter) are happily accepted in Swiss shops, cafés, and hotels, the exchange rate is usually unattractive and the change is given in Swiss francs. Shopkeepers and restaurant owners are not in the business of providing financial services, and foreign tourists are still better off changing their euros at banks or using their credit cards. True, Swiss firms use the euro extensively, some do much of their billing in the European currency, and some have even switched their accounting to euros. Some natural hedging takes place as well, although it is not clear how efficient this is. It is noteworthy, however, that some of the largest firms do much of their billing and  2  BIS Review 35/2004  their accounting in dollars, while others quite happily continue to use the Swiss franc. The fact that “euroization” has not taken place should not really surprise us. There have been other examples of small independent currencies surviving in the neighbourhood of much larger monetary zones. The example of the Canadian dollar comes to mind. The loonie has been floating for the past several decades, and it has served Canada rather well. More generally, there is nothing to be gained in having more than one currency for transaction purposes. Much of the double coincidence of wants gets lost if several currencies circulate simultaneously. “Dollarization” only occurs in those countries where hyperinflation threatens.

There were several episodes when the internal stability of the dollar was threatened as well, with U.S. inflation rates in the double digits. The flight into more stable currencies put considerable pressure on these. BIS Review 35/2004  3  Today, the arrival of the euro has changed the landscape in some important respects. First, as the new kid on the block, the euro commands attention and respect. In economic size, the eurozone nearly rivals the United States. There is now an obvious alternative to the dollar as an instrument of portfolio diversification. If investors have doubts about the dollar, there is no longer any need to rush into the Swiss franc, the euro will do just fine. Second, the eurozone, although not quite to the extent of the United States, is a largely closed economy. Movements in the euro are far less devastating than movements of similar magnitude in the Swiss franc or in the German mark. The euro is much more capable than any other currency to take on the role of shock absorber against the U.S. dollar. The eurozone, in some ways, is the large closed economy that the world needed as the counterweight to the U.S. economy. All small open economies, like Switzerland, should benefit from this new international monetary order. There is a third reason why the arrival of the euro has changed the landscape and should fundamentally prove beneficial to the stability of the international monetary system, and that is competition.
In a few moments, I will talk about how this growth abroad also presents an opportunity for Puerto Rico. The firming in economic activity, in short, is due both to natural healing and past and present policy support. In this regard, it is important to emphasize that we at the Federal Reserve have been expecting the economy to strengthen. We provided additional monetary policy stimulus via the asset purchase program to help ensure that the recovery regained momentum. A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking. This is welcome and not a reason to reverse course. Yet, we must not be overly optimistic about the growth outlook. 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. Moreover, in recent weeks we have experienced several shocks from abroad that could have some impact on the economy’s forward momentum, at least in the short term.

This morning I will talk about economic conditions in the mainland and in Puerto Rico, paying particular attention to the developments since my visit last year and to the role of exports. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. Introduction to the New York Fed By way of introduction, let me start with a synopsis of what the New York Fed is, what we do, and what makes my job so interesting. The New York Fed is part of the Federal Reserve System, America’s central bank, which was created by Congress in 1913. With this act, Congress delegated to the Fed System its constitutional authority to manage the supply of money in the nation’s economy. Congress designed the central bank to be decentralized, representative of all regions of the country – including Puerto Rico and the Virgin Islands – and independent of the political process. The Fed System is comprised of the Board of Governors in Washington, D.C. – a federal agency currently led by Chairman Ben Bernanke – plus 12 regional Reserve Banks that span the country. For example, the district overseen by the New York Fed includes all of New York, the 12 northern counties of New Jersey; Fairfield County, Connecticut; Puerto Rico and the U.S. Virgin Islands. Each Reserve Bank is distinct, with its own charter and a board of directors drawn from its district, but overseen by the Board of Governors.
Markets are also questioning the overall solidity of bank balance sheets in the aftermath of the financial crisis. Therefore, last Thursday the heads of governments of the EU member states agreed that the results of stress tests on their respective banks will be published in the second half of July. This decision can play an important role in fostering market confidence. In the event that these stress tests reveal cases where additional capital is necessary, recapitalization efforts will have to be undertaken swiftly. Institutional investors appear to be underweight in their exposure to European banks. This should prove helpful in lending support to potential capital raising efforts following a credible and transparent stress test exercise. Indeed, one of the reasons investors currently appear to underweight European banking stocks may very well  3  See IMF (2010): World Economic Outlook, April, chapter 1, p. 9. 4  ECB press release, 10 May 2010. BIS Review 87/2010  3  be related to the fact that there is insufficient transparency about bank balance sheet conditions in Europe. Credible stress tests can remedy this problem. Contrary to what some commentators suggest, financial markets also look beyond the shortterm. As a result, Europe’s authorities had to recognize that decisive and comprehensive longer-term fiscal programs are needed to put the EU as a whole on a sound fiscal basis. Equally, individual countries can’t forever live beyond their means.

As long as inflation expectations are unaffected, there is no reason to suppose that the effects on inflation will be permanent. Transitory effects account for inflation target deviations An explicit inflation target has the advantage of enabling us to evaluate how monetary policy is conducted. Consequently the Riksbank cannot implement an asymmetric approach to the inflation target without this being detected. Two curves are presented in the diagram below. One represents CPI inflation and the other is one of the various indicators of underlying inflation, in this case the CPI excluding transitory effects from house mortgage interest costs, changes in indirect taxes and subsidies, and prices of imported goods.1  Actual and underlying inflation 1995 – 1997 12-month change figures, per cent 4  3 CPI 2 "Underlying" inflation 1  0 95  96  97  98  Source: Statistics Sweden and the Riksbank. Note. Underlying inflation is represented here by one of the indicators (UNDINH) used by the Riksbank; it shows the CPI excl. changes in indirect taxes and subsidies, house mortgage interest costs and prices of goods and services that are mainly imported. 1The use of this indicator in the present context does not signify that it is particularly significant or the best approximation of underlying inflation in every case; instead, it happens to be the indicator where all the excluded items had a marked influence on price movements in the period 1995–97.
2  Kohn (2007), Svensson (2011b), and Woodford (2007) explain why forecast targeting is both a better way of conducting policy and a better description of actual policy than following an instrument rule such as the Taylor rule. 3  See Assenmascher-Wesche and Gerlach (2010), Bean (2009), Bean, Paustian, Penalver and Taylor (2010), Bernanke (2010), Dokko, Doyle, Kiley, Kim, Sherlund, Sim, and Van den Heuvel (2009), IMF (2009), and Kohn (2008, 2009). BIS central bankers’ speeches  3  is relevant for the forecast of inflation and resource utilisation, including the conduct of financial-stability policy when appropriate – remains in my view the best-practice monetary policy before, during, and after the financial crisis. Monetary policy and financial-stability policy are different This leads me to the more general question of what the relation between monetary policy and financial stability should be. For instance, it is sometimes said that the objectives of monetary policy should be expanded to include financial stability (Eichengreen, Rajan, and Prasad 2011, and Eichengreen et al. 2011). Such suggestions give the impression that monetary policy and financial stability are the same thing. But they are not. It is important to conceptually distinguish financial-stability policy from monetary policy and avoid conceptual and practical confusion between the two policies. Confusion risks leading to a poorer outcome for both policies and makes it more difficult to hold the policymakers accountable. Trying to use monetary policy to achieve financial stability leads to poorer outcomes for monetary policy and is an ineffective way to achieve and maintain financial stability.

Our goal is to promote a safe, sound, and stable banking and financial system that supports the growth and stability of the U.S. economy, and we will continue to strive to meet these responsibilities. Thank you very much for your attention this afternoon. I’d be happy to take some questions. 4  6  Forming the Next Generation of Bankers: The Future of Business Education and Ethics, Michael Strine, March 22, 2016. BIS central bankers’ speeches
And in terms of confidence effects, it would be a mistake to underestimate the resilience of the American people in the face of adversity. Either way I can assure you that the monetary authorities around the world are actively co-operating to minimise the immediate damage, and that they will certainly be monitoring - continuously and very closely - the emerging evidence of more lasting effects. They will react to that evidence in the light of the likely impact on their own situation. The US slowdown came at a particularly bad time for Japan. Japan was already suffering from a combination of weak domestic demand - particularly consumer demand - and supply-side constraints reflecting pressures on the banking system, heavily burdened with non-performing loans, as well as an acknowledged need for restructuring parts of the non-financial sector. Japan has pretty well exhausted the scope for macro-economic stimulus. Successive fiscal packages focussed on public works, and a sustained period of attempted monetary expansion, at near-zero interest rates in the face of deflation, have failed to overcome a high rate of precautionary saving by an ageing population facing an uncertain economic future. The policy emphasis of the new Japanese administration appears to have shifted towards firmer action to bring about supply-side reform in the belief that this will help to engender greater business and consumer confidence.

The Fintech Hub together with the FCA have just conducted the first survey of regulated firms’ applications of AI. The survey aims to establish a consistent picture of the state of deployment and readiness within financial services. This includes understanding how advanced firms are in their deployment of AI and what specific business lines they are applying it to. Deepening our understanding will help us work out where policy can support the safe and productive deployment of AI in finance. Conclusion My time today only allows me to give a partial picture of the Bank’s work on fintech. Even so, I hope the examples I have given have illustrated the breadth and depth of our commitment to enabling innovation, empowering competition and embracing fintech in a safe and effective way, as well as the role of the Bank’s Fintech Hub in driving that. 11  See https://www2.deloitte.com/content/dam/Deloitte/cn/Documents/technology/deloitte-cn-tech-ai-and-you-en-170801.pdf See https://www.sas.com/content/dam/SAS/documents/marketing-whitepapers-ebooks/third-party-whitepapers/en/artificialintelligence-banking-risk-management-110277.pdf 12  5  All speeches are available online at www.bankofengland.co.uk/speeches  5
Just as important, prices from liquid markets are valuable information, which can help market participants to allocate resources and manage risk more efficiently. If they work well, markets in credit risk transfer have the potential to enhance financial stability and efficiency by ensuring that exposures to shocks are diffused throughout the system, with no single player excessively exposed. Unfortunately, however, where there is innovation, there are generally questions and I have three. My first is a concern about lack of transparency. These markets mean that a bank need no longer remain exposed to its main customers but can rapidly take on large exposures to other credits without any new borrowing by the underlying entities. This could make it more difficult for creditors, shareholders and regulators to assess risk. From the point of view of financial stability, the concern is that these instruments might equally be used to concentrate risk as to disperse it. Careful monitoring and management of counterparty risk exposures by firms is an important market mechanism to limit this risk. But any individual firm does not know how much total exposure a counterparty has to a particular credit through its transactions with other market participants. These concerns underline the importance of the disclosure elements of the new Basel proposals intended to promote market discipline - I have more to say on the Basel package in a moment.

The probable continuation of the current upswing on the mortgage and real estate markets means that risks to financial stability are likely to remain in the spotlight. Containing these risks will continue to require the participation and support of all market players: the authorities, the lenders, and the borrowers. Thank you for your attention.