samchain/econo-pairs-v1 huggingface dataset:
BIS central bankers’ speeches  3  Second, we took additional non-standard measures to ensure that our interest rate decisions were transmitted effectively to the broader economy, despite the volatilities in the financial sector. If banks cannot easily access the money market or other sources of finance, they may not extend credit to households and companies, to the detriment of economic growth and employment. At the outset of the crisis in 2007, the ECB reacted immediately to the rapidly worsening liquidity conditions and heightened credit risk, particularly in the interbank markets. When stress in the financial markets re-emerged in the autumn of last year, the Governing Council of the ECB again took a series of measures to enhance the provision of liquidity to the banking system and to actively support lending, notably introducing two very long-term refinancing operations with a maturity of three years, which were conducted in December last year and in February this year. The exceptionally long maturity of these operations gave banks a longer horizon for their liquidity planning. It is also helping them to deleverage in a balanced and orderly manner over the medium term, thereby avoiding “fire sales” of assets and a downscaling of longer-term lending. At the same time, it is crucial that all the crisis measures taken by the ECB to ensure monetary stability in the euro area – the standard and the non-standard – do not create adverse incentives for market participants or unanchor inflationary expectations.

Embedded in this arrangement are also good governance and ethics, together with the upholding of the universal values of justice and fairness provide implicit checks and balances in the system. These very elements of Islamic finance, which are essential features as required by the principles of Shariah, provide an in-built mechanism that enhances the prospects for its soundness and stability. These explicit elements address several of the issues that have surfaced in the conventional financial system during the current crisis, including in particular the breakdown in governance that led to indiscriminate lending, excessive risk taking and irresponsible financial innovations that were motivated by greed and short-term gains. In Islamic finance, the process of innovation and formulation of Islamic financial products and services must also be done carefully and in accordance with Shariah. As it is recognised that unfettered financial innovation can become a major source of instability in the financial system, financial innovation in Islamic finance must have the primary objective of realising benefits to its users, thus incorporating ethical value propositions. The explicit risk sharing element between the financier and customer further ensures that these mutual benefits are well-supported through requirements for necessary information to be provided to the market on the risks borne by Islamic financial institutions. There is also the governance structure in  2  BIS Review 129/2010  place, for example, the need for the establishment of Shariah committees at Islamic financial institutions and Shariah audit.
Finally, the recent experience has shown that the costs associated with the bursting of an asset price bubble can be simply staggering, and that monetary policy cannot be reasonably expected to completely shield the economy from the aftershocks. In particular, research spurred by the crisis – pursued, first and foremost, by Reinhart and Rogoff10 – has shown that, historically, the bursting of asset price bubbles has been associated, most of the time, with deep recessions, slow and drawn-out recoveries, large budget deficits and dramatic build-ups of national debt. II.3. The (supposedly) encompassing role of inflation forecasts  Let me now turn to a third lesson of the crisis, that is, the supposedly encompassing role of inflation forecasts. The dominant presumption among inflation-targeting central banks during the period leading up to the crisis was that the central inflation projection at the desired horizon (typically, two years ahead) represents a sufficient statistic for monetary policy, in the specific sense of encoding all the information which is relevant for its conduct. This position had two logical corollaries: (i) interest rates should be moved in order to bring the central inflation projection in line with the inflation objective at the desired horizon; and (ii) they should react to asset price movements only to the extent that such movements impact upon the inflation projection at the relevant horizon. An important point to stress is that this presumption was never subscribed to within the Euro area.

The new framework will feature two objectives – price and financial stability – which, based on standard economic analysis, means that we will need two separate set of instruments to achieve them. Further, based again on standard analysis, the assignment of instruments to objectives ought to be based on the principle of comparative efficiency: monetary policy is the natural instrument for pursuing price stability, whereas macroprudential policies – defined as a set of policies aimed at limiting both excessive credit growth and the build-up of systemic risk within the financial system – will have to take care of preserving financial stability. II.2. Monetary policy and financial stability  During the years leading up to the crisis, the dominant doctrine was that monetary policy should not attempt to lean against bubbles as they inflate by raising interest rates, and it should rather only “mop up” the consequences of their eventual bursting by cutting rates aggressively. There were three main rationales behind such a position. First, it was argued, it is impossible for central banks to identify a bubble in real time: if it were possible, markets would have identified it too, and the bubble would not have developed in the first place since central banks have access to the very same information as market participants. To be sure, this argument did not go unchallenged.
If Sweden is accepted as a member, there would then be a negotiation regarding the Swedish transition process; when membership would occur, what rate the SEK/EUR exchange rate would be fixed at, how long the transition and currency changeover periods would be, etc. To enable a rapid entry process, the Swedish parliament decided back in 1997 that Sweden should maintain the highest possible level of preparedness by continuing technical and practical preparations. The Riksbank has therefore been working together with the financial sector for the past five years on preparing for a possible future membership. This work is led by the SIFS Group (Consultation and Information within the Financial Sector) and the seventh situation report was completed in the autumn and is available for perusal on our website. 4  BIS Review 9/2002  We can conclude that since the euro was introduced as an electronic currency in the euro zone on 1 January 1999, the Swedish financial sector has offered a number of services in euro, e.g. payments, deposit and lending services as well as share trading. However, considerable efforts are still required to prepare the sector for a possible membership. These include extensive work to change over data and accounting systems that are currently set to kronor as the reference currency to euro. This is in order to achieve a properly functioning financial infrastructure in euro from the first day of EMU membership. The most recent situation report describes two transition scenarios; one gradual scenario and one that is termed Big Bang.

The Governors of the Nordic countries have built trust for a long time. This building of trust dates back to the 19th century. Although it is not very widely known, in 1873, Sweden, Denmark and Norway formed a monetary union based on the gold standard. This union was eventually dissolved in 1924. However, I believe that one legacy of the union has been that the Governors of the Nordic Central Banks – adding Iceland and Finland to the group – have continued to meet regularly since then. This tradition of regular meetings has built trust. It has taken some time, but today the trust is there. The Nordic example shows that trust between authorities can be achieved, but that trust takes time to build – so patience is warranted. At the same time, we need to start getting this process going immediately. On a European level, I think that the MoU can enhance crossborder cooperation by increasing harmonisation, regulatory convergence and, not least, by building trust. Consequently, we should continue to fully implement the MoU. We are working on this in the Nordic and Baltic countries and are currently establishing a Nordic-Baltic Voluntary Specific Cooperation Agreement. This may serve as an example and, although it may take some time, I am confident that we can increase trust in Europe as well. BIS Review 118/2009  5  Conclusion In my speech, I have talked about confidence and trust. Confidence is essential for a wellfunctioning financial system.
Compared with other countries it is perhaps above all the changes in fiscal policy that have made Sweden stand out, in spite of the fact that the limits in the fiscal policy framework have been stretched somewhat in recent years –  1/7  inflation targeting is, after all, now conducted in some twenty countries around the world and there also are other reasons than inflation targeting that have contributed to lower price increases globally. The comparatively sound central government finances have been a great strength for our country over the past ten years. In the years ahead demands will rise even further if we are to meet the challenges posed by an ageing population. More surprising, in a positive sense, has perhaps been wage formation. It is not that long ago since Swedish wage formation used to be highlighted in economic circles as a warning to other countries. But with the odd exception wage formation in Sweden since the mid-1990s has worked well from a macroeconomic perspective. I think the fact that the Swedish Trade Union Confederation has said that “the Riksbank is a wage-earner’s best friend” clearly shows that something has happened. Real wages have grown positively in negotiations that have set out from stable inflation expectations (Figure 4). That is not to say that wage formation and the way the labour market functions are perfect. The future is likely to involve even greater requirements for a more productivity-based local or individual wage formation.

These links need to be studied more rigorously, both at a micro and macro level, as well as across sectors. In this regard, regulation and supervision must aim at minimising regulatory arbitrage. Irrespective of the set-up, or technology, institutions transmitting common types of risks should be treated on the same footing. It is also opportune to formulate a holistic strategy for our financial services sector that takes into account a national risk appetite. One must take stock of the risk/benefit quotient of each subsector, and the lessons learnt thus far, and put it in a long-term context on where to focus going forward. During the year, at the request of the Maltese Government, Malta underwent an IMF Financial Sector Assessment Programme, which is an in-depth assessment of the financial sector. Furthermore, a comprehensive update of the 2015 National Risk Assessment (NRA) was carried out in 2017 and published earlier this year. It identified potential money laundering and terrorism financing threats and vulnerabilities that present risks to Malta's economic and societal stability. The NRA forms the basis of Malta’s National AML/CFT Strategy. In fact, some of the initiatives identified in the NRA are already being implemented. In addition, a Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEVYAL) has just ended a rigorous on-site mission to assess Malta’s standing with international AML/CFT standards. The local authorities are eagerly expecting the final results of these evaluations as they represent a standardised global yardstick against which to benchmark our state of play.
I would like to say that the matters always crucially depended on the competence, potential and the positive political will of those who represent and manifest the people’s sovereignty. It will be so in future, as well. 3) In the globalized world, when it became apparent that the systemic crises exceed the borders of one national jurisdiction easily, the issue of the global financial architecture and the issue of coordination, gain extremely high significance. The new regulatory architecture I spoke about at the beginning, the examples for cooperation of the concerned governments and central banks during this crisis are truly encouraging. However, this path is full of scyllas and haribdas. Many obstacles need to be overcome. The paradigm “think globally, act locally” was and it still is very much manipulated by the local leaders who need the votes of the local voters to be as they like it. This mentality guarantees no financial stability. This path needs a lot of work. VI. Where is the Republic of Macedonia with respect to these trends? Our general policy is to adhere to the suggestions and the recommendations of the Basle Committee. Regarding the modification in the defining of the core capital, the current methodology on determining the banks’ capital adequacy already contains the approach proposed by the Basle Committee as regards to the deductable items.

(Carosio) Although it is possible, he says, to reach an agreement on some of these proposals, in particular on resolution mechanisms, others (e.g. breaking up institutions according to some criterion) would require a broad international political consensus, which seems unlikely at this stage. The second approach would be directed toward seeking additional capital requirement, or a tax, according to the measure for systemic relevance. Taxation seems, according to Carosio, more adequate in a burden-sharing perspective. “The solution, in my judgment”, says Greenspan “that has at least a reasonable chance of reversing the extraordinarily large ‘moral hazard’ that has arisen over the past year is to require banks and possibly all financial intermediaries to hold contingent capital bonds, that is, debt which is automatically converted to equity when equity capital falls below a certain threshold”. “However, should contingent capital bonds prove insufficient, we should allow large institutions to fail, and if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility”. So, he supports the second approach, and in that light is the latest legislation in the USA which is about to be adopted, as well as the proposals in Europe which envisage measures of this kind. Namely, “Restoring American Financial Stability Act”, which was passed in the US Senate on May 20, would impose significant new obligations and restrictions for the SIFIs, envisaging a possibility for the FED to introduce rising strict rules for capital, leverage and liquidity.
These three sources of risk call for different policy actions. The first approach for dealing with asset price misalignments is for authorities to communicate their views on the extent of potential asset price distortions and their consequences for financial stability. These “verbal interventions” are relatively common regarding the exchange rate. I see no reason why we should not use them also for other assets such as bonds and equity, since they are relevant variables from the point of view of macroeconomic and financial stability. Indeed, recent experience has shown that central banks need to be more assertive and communicative about the conduct of financial systems. In our last Financial Stability Report we indicated that evidence pointed to some overvaluation of stock prices in Chile, but we also indicated that financial stability was not threatened by potential corrections, even sharp corrections, in these prices. Of course, making this assessment is not a trivial task – as modeling asset prices is complex – and it is not the role of central banks to communicate continuous assessments of asset prices. For this reason, this kind of communication must be done exceptionally, and in the context of discussing the potential implications of these price developments on current and future  BIS central bankers’ speeches  3  financial stability. In addition, communication must be done in a timely manner, before vulnerabilities build up.

2  BIS central bankers’ speeches  advanced economies recovers more strongly. Therefore, over time some tensions should alleviate, and this depends crucially on a healthy recovery of advanced economies. The cyclical difference between EMEs and advanced economies, with the consequences on expected relative returns and risk, is inducing large gross capital inflows to EMEs. Net capital inflows, however, are well below the levels seen in the early 1990s. Indeed, at this time EMEs are running current account surpluses on average, while in the early 1990s deficit predominated. In the case of Chile, we have not seen net capital inflows yet. But, as the adjustment progresses we should observe rising net capital inflows to EMEs. In addition, large gross capital inflows raise concerns from a financial stability perspective, an issue to which I will turn next. Financial stability and capital inflows We can think of three ways through which unsteady gross inflows may affect financial stability in a country. The first one is that in small and often illiquid markets capital inflows may increase asset prices beyond fundamentals. The problem arises if asset prices respond significantly to inflows, and these inflows stop or revert suddenly. A sharp decline in asset prices affects the balance sheets of local and foreign agents. If, in addition, the financing of asset purchases is highly leveraged, the fall in asset prices may trigger solvency problems, just as those of the subprime crisis.
Policies should be implemented to prohibit any behaviour or relationship that diminishes its quality. This is very often evident in conflicts of interest, connected lending, which is not on an arms length, and preferential treatment to related parties. The independence of directors too is crucial where directors should have the ability to exercise objective judgement, regardless of board structures or ownership structures. Well established corporate governance committees such as the Board Audit Committee which oversees the bank’s internal auditors, with objectivity and independence, should  1/2  comprise of non-executive members of the Board who have the requisite knowledge that is commensurate with the complex nature of the banking institution. Independent, competent and qualified auditors is an essential pre-requisite of good corporate governance which would achieve a number of important objectives. It would ensure timely identification of risks and the publication of financial statements which accurately represent the financial position and performance of the bank. Auditors should understand their duty to the bank and its stakeholders to exercise due professional care in the conduct of audits. In this connection, we have, in the recent past, strengthened the relationship of auditors with the regulator and the company to benefit from each others’ capabilities, expertise and knowledge. Basel II has attempted to capture all these critical aspects into the new accord.

A bank’s own assessment of its capital needs, coupled with the regulator’s assessment of the adequacy of capital, which would encompass all other aspects of its operations, apart from credit, would ensure adequate capital to insulate the bank against its risk exposure. After all, managing risk is fast becoming the single most important issue for the regulators as well as for the institutions that are regulated. Therefore, Basel II is good news and we can only benefit mutually from its adoption. A roadmap is therefore already drawn up and we hope we can all commence our journey down this road to reach our goal of a safe and sound banking system resulting in financial stability which is what we all aspire. As you are all aware, our banking community is in the process of adopting the standardized approach within Basel II by 2007. However, the major challenge faced by the banks in the next few years, are the IT, skills development and training that are required to implement the more advanced approach which relies heavily on quantitative techniques. It is imperative, therefore, that banks start getting ready for this eventuality sooner, than later. Basel II should not be looked at as an exercise in compliance but as an impetus to more efficient risk management across the banking sector. Its benefits would be seen in the ability of the financial system, to promote sustainable economic growth which would be beneficial to the banks, the central bank and to the consumers of banking business.
Moreover, the relatively close co-movement between finished manufactured goods import prices and consumer goods prices (excluding energy and food) over the past two years is suggestive of relatively high and rapid pass-through (Chart 2). The faster adjustment of prices relative to that implied by the evidence from the Great Stability may partly reflect the fact that much of that evidence for the UK is based on the  2  For example, see Section 4 and the box on pages 48-49 of the August 2010 Inflation Report, Fisher (2010) and Sentance (2009). 3  Much of the recent analysis of exchange rate pass-through is based on evidence taken from the Great Stability period (see for example Campa and Goldberg (2006) and Ihrig, Marazzi and Rothenberg (2006)). The results from these studies pick up the average lag structure of the past, and are sensitive to the window in which exchange rate effects are identified. It may be that the lag structure following sterling’s depreciation was quicker. To the extent that businesses adjusted more quickly, pass-through in the current period might appear larger than suggested by the econometric techniques used in previous studies, when in fact the adjustment was only faster. BIS Review 122/2010  3  behaviour of prices following sterling’s appreciation in 1996. It is quite possible that those businesses whose margins were squeezed following the recent exchange rate depreciation responded more quickly than they did to the increase in margins associated with the mid1990s appreciation.

The third factor emphasised by this type of pricing model is the mark-up over costs included in the final selling price which governs the return firms make on capital. As I will discuss later, there is some evidence to suggest that movements in this mark-up have been different in this recession than in previous ones. The final set of factors determining pricing decisions are expectations of future costs and prices. Most companies change prices infrequently and as such their pricing decisions today are based on expectations about how their costs and their competitors’ prices are likely to vary in the future. Similarly, pay awards are likely to be affected by firms’ and employees’ expectations of future inflation. I will use this broad framework to consider why inflation has been above the 2% target for much of the past four years and why inflation was higher than expected for much of this period. Price level shocks It is not difficult to find factors that have pushed up inflation over the past few years. The economy has been hit by a series of large price level shocks – to oil and other commodity prices, to VAT and to the sterling exchange rate – which have raised companies’ costs and  1  The key intuition of this model is based on work such as that by Marshall (1920), Chamberlin (1933), Spence (1976) and Salop (1979), among many others who contributed to this now well established literature. 2  BIS Review 122/2010  put upward pressure on prices.