samchain/econo-pairs-v1 huggingface dataset:
I point this out because some of those who developed a sudden interest in the Icelandic economy overlooked the background to the depreciation of the króna so far this year which is important to keep in mind. The Central Bank’s main objective is to contribute to a twelve-month rate of inflation as close as possible to 2½%. For various reasons this target has proved difficult to attain recently. Probably the most important factor has been the structural changes in the mortgage loan market in 2004, with the easing of the Housing Financing Fund’s lending rules and the subsequent entry of commercial banks and savings banks into the market. These changes caused real estate prices and private consumption to surge. In the recent term, house price inflation has accounted for the lion’s share of the increase in the CPI. The Central Bank had hoped that house price inflation would slow down or stop before the króna began to weaken. If housing prices had risen by little or nothing, they could have offset the effects of the eventual depreciation. Regrettably the outcome was as I described, i.e. the króna fell sooner and faster than had been expected, and before real estate price inflation began to come down to a sufficient degree. Inflation will therefore clearly remain some way above target over the months to come. BIS Review 46/2006  1  A necessary economic adjustment lies ahead. One of the chief characteristics of the Icelandic economy is its high degree of flexibility and adaptability.

The reasons are large year-classes approaching retirement age, increased longevity and a lower birth rate. Conditions are quite different in Iceland, where age distribution is changing more slowly than in most countries with similar economies. Iceland’s retirement pension system is based on all working persons saving a proportion of their wages in a fund which is then used to pay their pension. Taxes therefore does not need to be raised even if there is a proportional rise in the number of pensioners. In addition to pension funds, some pensions are paid through the national insurance benefit system and there are also voluntary supplementary pension savings schemes. Iceland’s pension system thereby fulfils what has been considered international best practice in this field [the three-pillar system]. Total assets of Icelandic pension funds were equivalent to 120% of GDP at the end of 2005. No other pension system in the world is on such a strong footing. At the end of 2004, when total assets of Icelandic pension funds corresponded to more than 100% of GDP, the figure for the Netherlands was just over 100% and for the US 80-90%. In the overwhelming number of industrial countries, total assets of pension funds were equivalent to less than 20% of GDP, and the ratio was even lower than 10% in many countries, including Germany, Italy, Belgium, Austria, Sweden and Finland. By comparison, assets of Norway’s Government Pension Fund (Petroleum Fund) last year were equivalent to 60% of GDP.
This has grown from around $ billion in December 2001 to over $ billion in December 2015 (according to IMF statistics). And this growth has been positive each year except for a decline during the last global financial crisis. In the same period, total portfolio investment assets held by investors from the Asia and Pacific region in these same European markets have grown from $ billion to over $ billion.3 Therefore, developments in each of our jurisdiction and region can have a significant spill-over impact on the other. Financial regulators form one important stakeholder group and platforms for dialogue and sharing such as in this forum will be helpful in promoting greater mutual understanding and cooperation. Importance of regulatory cooperation I am sure that everyone in this room will agree on the importance of regulatory exchanges and co-operation. Asia-Pacific jurisdictions including Singapore play host to many European financial institutions which are active and significant participants in our respective financial markets. Such crossborder and cross-region participation have benefitted both regions. For example, the recognition of LCH.Clearnet and the Singapore Exchange Derivatives Clearing by MAS and EU authorities, respectively, provide local market participants and European Financial Institutions a choice of where to clear their transactions. More importantly, the recognition will allow market participants to comply with their respective jurisdiction’s central clearing requirements when they are effected, thus avoiding duplicating or conflicting requirements.

3/4  BIS central bankers' speeches  It has been said that regulators are pessimists in our DNA and always inclined to worry about things going wrong – and certainly, we cannot ignore the possibility of the failure of key FMIs no matter how remote, and this may occur in FMIs overseas. I started my speech this morning, noting the increasing connectedness between markets. This is true in the ‘life’ of a CCP - and can be true in its ‘death’ too. The failure of an internationally active CCP, that provides critical services in multiple jurisdictions, will have significant cross-border impact. When a CCP fails, its members are inevitably affected. Such members are likely to also have relationships with other financial institutions, or may trade and clear on other trading venues and CCPs. Through these network of interdependencies, the default of a CCP can trigger destabilising effects not only in the home market it serves directly, but outside of it. It is therefore important for authorities of jurisdictions that may be affected by a CCP’s failure to participate in that CCP’s resolution planning. Similar to the establishment of Supervisory Colleges to support ongoing supervisory co-operation, setting up Crisis Management Groups (CMG) for CCPs will allow the cross-border impact to be considered in resolution planning. In a failure situation, when resolution actions are time-sensitive, it may be necessary to limit the size of a CMG to enable efficient and effective discussions. But in normal times, resolution planning can benefit from a broader participation of relevant authorities.
The key difference with previous programmes is that purchases are now conducted in a flexible manner and fluctuations in their distribution will be allowed over time, among jurisdictions and across asset classes, with a view to preventing fragmentation in monetary policy transmission. 1  The volume of purchases initially announced under the PEPP was € billion for the whole of 2020. In June the term was extended up to at least June 2021, and the volume by a further € billion, making for a total of € trillion. The PEPP, together with the new purchases under the Asset Purchase Programme (APP), will increase the portfolio of the Eurosystem’s securities purchase programmes to around € trillion in June 2021. In early October 2020, net purchases of public and private sector assets under the PEPP had already reached € billion since its launch at the end of March, i.e. 42% of the current envelope. Today we can safely say that the PEPP has been clearly successful in curbing financial market deterioration in all euro area countries. This is particularly visible in sovereign yields, which are now close to their pre-crisis levels; but it may also be perceived in other market segments such as that for corporate debt. And, of course, this decline in the cost of sovereign debt has provided policy space for fiscal authorities in all euro area countries, enabling them to take unprecedented measures to sustain the income of households and firms.

In particular, the crisis has already generated an increase in the level of indebtedness of many firms. Thus, it would make sense to assess the possibility of actions to support firms that do not involve an increase in financial obligations, such as, for example, by means of direct assistance or, in some cases through temporary capital injections. 3  Furthermore, for companies that have difficulty meeting their financial obligations, streamlined debt restructuring procedures need to be available to avoid such difficulties leading to the disappearance of heavily indebted firms whose business model is nonetheless viable. And, in parallel, for firms with non-viable business models, an orderly market exit should be available, since this would result in a more efficient allocation of resources. Apart from these short-term actions, an ambitious structural reform agenda is urgently needed, to increase the economy’s potential growth, which was already low before this crisis. And this is also true for European policies. In this case, for example, it is crucial that the European fund be converted into a permanent, common fiscal stabilisation instrument for the euro area. This would allow a joint fiscal response to macroeconomic shocks and provide a larger supply of safe European assets, facilitating the general functioning of financial markets and the specific conduct of monetary policy. Completing the Banking Union is also a priority, with the approval of a fully pooled European Deposit Guarantee Scheme. Further, we must move towards lowering the barriers to a genuine Capital Markets Union.
This increases the possibility that some investors – and issuers, for that matter – misunderstand the riskiness of an instrument. As a consequence, expected return may not appropriately reflect the true risk. When the true risk of an instrument starts to reveal itself, sharp corrections in the market may follow. The recent subprime crisis is one example of how new and complex instruments can give rise to global financial turmoil. Problems stemming from over-optimistic price expectations for the US housing market have spread to investors and financial institutions all over the world. The wide dispersion of the financial turmoil took many of us by surprise. Not to mention where problems turned up; in German Landesbanken, in large investment banks and in Norwegian hydro-electricity-rich municipalities, to name but a few. 1  Ben S. Bernanke (2006): ”Opening remarks” at ”The new economic geography: Effects and policy implications”, A symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming. 2  Alan Greenspan (2007): ”The age of turbulence”, The Penguin Press, New York. 2  BIS Review 14/2008  One lesson from the current financial turmoil is that the expected advantages of securitisation have been somewhat exaggerated. Securitisation was believed to make markets deeper and more liquid and – most importantly – to provide continuous pricing. Recent events have shown that this is not necessarily true for all markets at all times. In times of distress and uncertainty, some financial market segments can cease to function.

It’s a world that presents us with enormous new possibilities, but also enormous new challenges.” 2 In my presentation here today I will, not surprisingly, take a central banker’s view and ponder the challenges this new world might raise for a central bank trying to achieve both financial and nominal stability. Financial stability The last decade or so, we have witnessed increased financial integration and competition across national borders. The unleashing of international competition in financial markets is a positive development. By spreading and diversifying risk, financial markets have become more efficient and stable. Deeper and more mature markets tend to be better equipped to deal with uncertainty and distress. We have also witnessed the forging of new and ever more complex financial instruments. Increasing the set of available financial instruments creates more complete markets. It enhances the opportunities for households and enterprises to decouple consumption and investment from current income. Investors can take on or load off risks in a more tailored fashion than before and actively manage their exposures and relocate risks to those best equipped to bear them. Yet, the flip side of increased financial integration and diversification is the potential for more widespread contagion if something goes wrong. Furthermore, rapid innovation and increased complexity can make it difficult to assess the real underlying risks of the new instruments. It takes time for borrowers and lenders to learn the true characteristics of new instruments.
It is interesting to note that before the 1990s the predominant view was that a floating exchange rate regime was not suitable for a small open economy. Today, I believe that experience has been exceptionally good among those countries that are targeting inflation. In fact, even some emerging market countries are now building the same kind of regime. In recent years countries such as South Africa, Brazil, the Czech Republic, Poland and Thailand have been inspired to introduce a similar strategy. Consequently inflation targets are now introduced in quite a number of countries. Let me take this opportunity to commend the Governor of the Bank of Thailand and the bank’s staff for the first excellent Inflation Report that was presented in July. The report is very impressive and it has given me quite a few new ideas. The challenge during the 1990s for the inflation targeting countries has been to build a rigorous framework around the new regime. Questions like the choice of rate and index to be targeted, the usefulness of bands around the target and the degree of transparency all needed to be answered. It has also been important to formulate a monetary policy reaction function, that is, to define the balance between inflation variability and output variability. The reason why central banks do not aim for maximum short-term stability in either inflation or output is that attaining only one of the targets would be costly for the economy.

This, in turn, will mobilise more public and private sector investments through co-financing and greatly enhance the support available to developing members. We are also glad to see that governments are working together and making significant steps in promoting infrastructure development. They include, for instance, the establishment of the Asian Infrastructure Investment Bank and the G20 Global Infrastructure Initiative and Global Infrastructure Hub. These initiatives underscore the commitment by governments from within and outside the region to give infrastructure investment a fresh impetus. By bringing new funds and new ways for development assistance, they will serve to complement the existing efforts by ADB in meeting the region’s vast development needs. As highlighted in the theme for this year’s Annual Meeting, fostering cooperation among development partners – existing and new, private and public, national and multilateral – is crucial for reaping synergy and maximising development impact. ADB has a hailed tradition of cooperating with other partners in delivering results. By working together, we believe that ADB and its partners in the region will go a long way in mobilising funds and building the capacity of developing members in delivering high-quality infrastructure projects. As an international financial and business centre in the region, Hong Kong, China has an active role to play in supporting and promoting infrastructure investment in Asia. Corporates, as well as national and multilateral development agencies including ADB and IFC, have been making extensive use of Hong Kong, China’s deep financial markets in raising funds for infrastructure projects.
For example, from 1993 to 2008 the total assets of a sample of what we call global systemically important banks saw a twelve-fold increase (increasing from $ trillion to just over $ trillion). But the capital funding these assets only increased seven-fold, (from $ billion to $ billion). Put differently, the average risk weight declined from 70% to below 40%. The problem was that this reduction did not represent a genuine reduction in risk in the banking system. To take an even more concrete example from my own country: during the past twenty years or so, the risk weights for retail mortgages in the major Swedish banks have decreased from 50% to 35% with the adoption of Basel II (from Basel I) and further, to about 6% when banks themselves were allowed to model risk weights. In equity terms, this means that instead of SEK 17,000 of their own equity to fund a mortgage of 1 million, banks’ models implied that SEK 1,200 was enough.1 In retrospect, it is clear that the decrease in risk weights did not reflect actual risks and banks therefore needed more capital. Furthermore, although it is a historical fact that banks’ problems often start in the form of liquidity constraints, there were no global liquidity regulations for banks prior to the crisis. This meant that banks could rely heavily on very short-term market funding to finance highly illiquid and long-term assets.

After an assessment has been thoroughly debated in the Committee, the final assessment becomes public.7 The assessments, and the publication of the results, have proved to be a powerful tool. To date, more than 200 adjustments have been made by member jurisdictions in response to findings raised by the assessment teams. In addition, the process has also generated a positive feedback loop, meaning that the lessons learnt from assessments are used to improve and clarify the standards. So far, the assessments have concentrated on the capital framework, but from 2015 onwards the scope of this work will widen further to include the implementation of the liquidity coverage ratio and the SIB-requirements. However, for the new, stricter requirements to bring the benefits we are aiming for, it is important that they be properly reflected, not only in national legislation, but also at the level of individual banks. To use an analogy of car safety, if we are now providing banks with air bags, in the form of higher capital requirements, it is important that those air bags are actually activated in case of an accident. For this to happen, the sensors need to be functioning and well-calibrated. For banks, this means that risk weights need to signal appropriately the risks that individual banks actually face. This aspect is captured in the Committee’s thematic assessments. To put it simply, in these assessments we examined whether the banks’ risk-weighted assets could be trusted.
The provision of liquidity had the desired effect of reducing strains in markets, narrowing the dispersion of rates, and keeping the federal funds rate within the target range.5 Moving to more recent events, in March of this year the global spread of the pandemic led to a rapid and massive movement of funds around the world as investors sought to protect themselves from the highly uncertain and darkening economic outlook. These flows threatened to overwhelm the financial system and resulted in intense strain and disruption in short-term funding markets and markets for Treasury securities and agency mortgage-backed securities.6 Measures of market functioning deteriorated to levels near, or in some cases worse than, those we saw at the peak of the 2008 global financial crisis.7 In response to the extraordinary volatility and signs of market disruption caused by the pandemic, the Federal Reserve greatly expanded its repo operations and decisively and immediately began purchasing enormous quantities of U.S. Treasury securities and agency mortgage-backed securities. Our approach was to deliver a rapid and overwhelming response that would give assurance to market participants that liquidity would be there in the coming days and months. These actions, combined with the introduction of emergency lending facilities to provide liquidity to funding and credit markets, proved successful.

As a result our trade balance with the rest of the world has deteriorated – by some 1¼% of total GDP between 1997 and 1998; employment in manufacturing has fallen by around 2% since the beginning of last year; and business confidence fell sharply to levels last seen in the depths of recession – until it stabilised following interest rate cuts in the autumn, albeit to levels which are almost twice as high as those in the Eurozone. Now you could be forgiven if you thought that all that was me describing the UK economy to an audience in Birmingham, England. In fact it is what my counterpart, Alan Greenspan, might well have said if he were addressing his fellow Americans this evening in Birmingham, Alabama, on the ‘Goldilocks’ economy of the United States! I tease you in this way to make  1  BIS Review 56/1999  the serious point that we are not alone in facing substantial imbalance within an economy that is performing reasonably well in overall terms. In the case of the United Kingdom – and I’m being serious now – the facts are that the economy as a whole has grown consistently for 27 consecutive quarters – though I admit that during the last six months it was a ‘damned close run thing’ – at an average annual rate of 2.9%, which is well above its long-term trend rate of around 2¼%.
An outline: trade-off between target fulfilment in the short and long term Last year the Riksbank published an article with an outline for how financial imbalances can be included in the monetary policy deliberations.10 The point of departure was that a central bank now needs to have a more long-run focus than was traditionally the case. The reasoning leads to the conclusion that monetary policy should be regarded as a trade-off between target attainment in the coming years, that is, the period for which central banks normally make forecasts, and target attainment in the longer run, beyond the forecast horizon.11 The idea is that a monetary policy that solely focuses on target attainment a couple of years ahead could miss the fact that financial imbalances are building up, which risk leading to very poor macroeconomic outcomes in the longer run. So according to this outline, central banks need to balance target attainment in the shorter run against target attainment in the longer run.12 Inflation target still the foundation, but may take longer to attain The first important thing to note is that this trade-off does not mean throwing away the inflation target. Attaining the inflation target thus remains the foundation for monetary policy.13 However, one consequence of conducting a policy that tries to counteract financial 10  Sveriges Riksbank (2013).

This is an idea I have considerable sympathy for in principle, and I shall try to explain why in my speech today. Lessons from the crisis: price stability is not enough to prevent financial imbalances The foundation for the monetary policy strategy we use today is the changeover in monetary policy in the early 1990s, when some central banks began to switch to explicit inflation targets. This turned out to be an effective way of anchoring inflation expectations and in this way attaining price stability. Inflation targeting became the standard for central banks. The way the policy was implemented could differ slightly, but on the whole there was agreement on the fundamental principles. A credible inflation target also creates some scope for monetary policy to stabilise the real economy. Monetary policy could therefore be flexible and focus on attaining a good balance between on the one hand price stability and on the other hand the stability of the real economy, a couple of years ahead. There was also a consensus – sometimes referred to as the “Jackson Hole consensus” – that monetary policy would not try to counteract rapid increases in asset prices or credit growth.2 I shall return to this shortly. The long period of relatively stable inflation and robust growth – “the Great Moderation” – that preceded the financial crisis was considered to be proof that the chosen monetary policy strategy functioned well.