samchain/econo-pairs-v1 huggingface dataset:
But I also hope to share some lessons learned from when our institutions may have been on opposite sides of the table. I do not aim to break any new ground today. This is, after all, a luncheon. I am worried about your digestion. Instead, I want to offer some high-level reflections. I will then share with you a few of the questions that are on my mind. Let’s begin with some high level observations about the state of play in compliance. The role of compliance within supervised financial institutions has grown dramatically—in size, scope, and relevance. It’s the relevance of compliance that stands out to me. In day-to-day interactions with supervised financial firms, I sense that risk and compliance functions have grown in respect and stature across the financial services industry. That’s a good thing. I am further encouraged by what may be on the horizon for compliance. In the same way that social psychology has altered the fields of economics and other social sciences, compliance is beginning to learn from academic research about human behavior. 1 Again, this is a good thing. I am particularly fond of a description of one method, coined by Cass Sunstein and Richard Thaler: the “nudge.” I believe compliance will, in the near future, supplement an existing framework that restricts poor choices with new ways to encourage good choices. Here is a classic example of the type of change I have in mind.

Since the banks themselves have massive investments in this market, they were obliged to make writedowns which, in some cases, were hefty. There is still uncertainty about the volume of additional bank writedowns that will be needed, so that the situation on the international money markets remains tense. In this crisis, central banks have reacted fast and flexibly in order to secure the supply of liquidity to banks and counter distortions on the money market. By means of various measures, the Swiss National Bank was able to stabilise the three-month Libor within the target range, thereby keeping fluctuations in the relative restrictiveness of monetary policy low by comparison with other countries. However, it is not possible to solve the fundamental problems in the banking sector through the flexible deployment of an expanded range of monetary policy instruments; neither can they be resolved by means of coordinated actions on the part of central banks alone. The banks themselves must make a substantial contribution to solving the problems which triggered the current crisis. In this respect, the most urgent matters are transparency with regard to endangered positions and their valuation, increasing the capital base, and improving risk management and control systems. BIS Review 37/2008  1
The main explanation is perhaps that interest rates abroad were lower than in Sweden. Borrowing in a foreign currency was perceived to be cheaper. While some households and firms may have wondered why and found that the higher Swedish rates were simply a risk premium to cover the possibility of a future devaluation, the consequences of this analysis were generally ignored (a devaluation would have increased the amount of a loan expressed in Swedish kronor, making the burden of repayment heavier). The fixed exchange rate policy was perceived as credible, at least by these borrowers. They were lulled, or lulled themselves, into thinking that the exchange risk, even though it was occasioning higher interest rates than in the rest of the world, would be absorbed by the Riksbank. That meant they could try to benefit from the interest rate differential with impunity. As many of these foreign currency borrowers were players who could not afford loans in Swedish kronor, they had no margin when the liabilities became more costly after the krona’s fall and this accentuated the problems. 3  BIS Review 127/1999  What lessons can we learn? I have now identified three features of the Swedish crisis: rising asset prices, a strong expansion of credit and short-term borrowing in foreign currency. These three factors have in fact preceded almost all the financial crises that have hit various countries in the past decade. This does not apply to last autumn’s turbulence over the Russian suspension of payments and the LTCM hedge-fund problems.

We must also work to mitigate any effects and try to ensure that crises which do occur are not as extensive and economically costly as those we have experienced in recent years. The objective, in other words, must be to combine the necessary regulation and supervision of the markets with the benefits that a well developed financial system can confer. The regulation and supervision of financial firms are necessary for various reasons. But these functions must be carried out in such a way that they do not throttle the potential that can contribute to greater prosperity in the global economy. Conclusion Many countries have deregulated their financial systems in the past two decades. For the first time since the outbreak of World War One, capital is again more or less free to move across national borders. Moreover, major changes in communications and information technology have provided new methods and instruments for risk management. As a result of all this, today the financial system is more extensive and globalised than ever before. This holds even though capital flows relative to GDP were also large at the turn of the nineteenth century. At the time, however, it was other countries that received the flows, which also took a somewhat different form. The rapid pace of financial developments and internationalisation is really a logical consequence of the globalised production of goods and services, with the strong growth of cross-border trade in the world economy. These developments have accentuated the need of new financial solutions for firms and households.
One of these, Terra USD, which had a market capitalisation of around $ has collapsed completely. An algorithmic stablecoin, its mechanism for maintaining its value to the dollar was maintained by algorithmic buying and selling of another crypto-asset, Luna and supplemented by a reserve of Bitcoin. When the price of Luna (and Bitcoin) fell sharply, confidence in Terra’s ability to maintain the peg eroded, leading to a run on the stablecoin and its complete collapse. At this point, another familiar amplifier of financial market stress – contagion – entered the picture. The collapse of Terra put a spotlight on the adequacy of the backing of other stablecoins,  Page 4  particularly the adequacy of the real economy reserve assets backing the largest stablecoin, Tether, which suffered significant outflows and, on several crypto exchanges, broke its peg to the dollar – meaning many coinholders were not able to redeem at par. A further example is the inherent risk that comes with leverage – a familiar one given its role in many financial crises. Leverage is a powerful tool in financial markets, but leveraged positions can greatly amplify losses when asset prices move against investors, driving fire sales of assets and self-reinforcing downward price spirals. In recent years, we have seen the small but growing development of exchanges and other mechanisms in the crypto world, like DeFi platforms, which have given investors – retail and wholesale – the ability to take very highly leveraged positions.

There are a number of other, similarly key, requirements in the guidance which I will not detail here – for example the need for a responsible and accountable legal entity behind the operation and for governance arrangements which allow for timely human intervention, ensuring that expert judgement and decision making is available to deal with unforeseen circumstances. The guidance also provides considerations for what should be considered systemically important in this context, though I should note that all payment systems are encouraged to observe the PFMI. The point is that in this one area of the financial system, systemic payments, we are engaged in the work to deliver “same risk, same regulatory outcome”. Stablecoins used primarily for payment are just one element of the crypto- ecosystem. For the ‘same risk, same regulatory outcome’ approach to be effective, it needs to be carried forward across international standards and those standards need to be incorporated into domestic regulatory regimes. Similar work is also in train in other areas. The Basel Committee on Banking Standards is in the process of issuing guidance on the prudential treatment of cryptoassets held by banks[6]. IOSCO is looking at the application of the standards for investor protection and market integrity across cryptoassets, exchanges and platforms for lending and trading[7]. These international standard setting bodies are working closely together on stablecoins to ensure we understand how we treat  Page 7  similar risks in different regulatory regimes and how the regimes might interact with each other.
If the risk of significant damage to growth from these financial market pressures is attenuated and if global growth remains strong and drives a continuing rise in energy and commodity prices, then inflation may not moderate as much as we anticipate. If the medium term outlook for inflation deteriorates significantly, the FOMC will move with appropriate speed and force to address this risk. This requires a fine balance. The principal challenge for policy is to provide an adequate degree of insurance against the downside risks that still confront the economy as a whole, without adding to concerns about inflation over the medium term. We cannot know with confidence today what level of the short-term real funds rate will be consistent with our objectives of sustainable growth and low inflation, but if turbulent financial conditions and the associated downside risks to growth persist, monetary policy may have to remain accommodative for some time. Liquidity provision Although concerns about credit quality are at the root of the current problems in financial markets, a substantial impairment in market liquidity conditions can exacerbate and prolong the adjustment in credit conditions. To mitigate this risk, we have taken a series of actions to help reduce the risk that market liquidity conditions exacerbate the adjustment process in credit markets.

And yet policy plays an important role in determining the dimensions of financial booms, and policy helps determine the ability of the financial system and the economy to adjust to its aftermath. We need to undertake a broad set of changes to address the vulnerabilities in our financial system revealed by this crisis. Just as a long list of factors contributed to the trauma, there is no single reform that offers the promise of sufficient change. The Presidents Working Group on Financial Markets and the Financial Stability Forum, which bring together policymakers and regulators from the major financial centers around the world, are in the process of outlining a comprehensive framework of reforms. Many of these recommendations will focus on changes to the mortgage finance market, the ratings process for ABS and structured credit products more broadly, regulatory and accounting treatment of these instruments and special purpose financing vehicles, the disclosure requirements on instruments and institutions, and other dimensions of the securitization process. I want to conclude with a few comments on some of the broader policy questions we face in designing these reforms. Regulatory reform and simplification The regulations that affect incentives in the U.S. financial system have evolved into a very complex and uneven framework, with substantial opportunities for arbitrage, large gaps in coverage, significant inefficiencies, and large differences in the degree of oversight and restraint upon institutions that engage in very similar economic activities.
Even if our economies are slowing down, no recession lies on the horizon. Some lessons so far for the euro area The crisis is clearly not over and all the consequences of accumulated financial imbalances have not unravelled yet. However, after more than seven months, I think it is already possible to take stock of what we have learnt so far. My concluding remarks will draw tentative lessons along three main lines. 1. As regards liquidity management first, it should be emphasized that close cooperation between central banks, and notably between the ECB and the Fed has been crucial for dampening the effects of the protracted confidence crisis that has frozen up international money markets. Our coordinated actions with the Fed and other major central banks, notably to provide euro area resident banks with US dollars under swap agreements with the Fed, have clearly demonstrated our determination to act collectively to restore normal liquidity conditions in the interbank markets. Enhancing swift and complete information exchanges between central banks, and also between central banks and supervisors is certainly a continuing priority. I have to say that the French model of bank supervision, where the supervisors are inside the central bank, has shown once more its advantages in the current context. 2. As regards monetary policy, I want to stress that even a flexible policy – as inspired by risk management considerations à la Miskin – can only be implemented if needed when inflation expectations remain appropriately anchored to the central bank’s objective.

Goodhart and Tsomocos (2007). BIS Review 37/2008  1  open-market operations that we have conducted so far in the euro area (they include in particular targeted ELA to an illiquid credit institution). 2 To make my point more explicit, let me briefly recall a standard result by William Poole (1970), which implies that, when demand for central bank money is uncertain, it is optimal to stabilise the short-term interest rate, letting money supply adjust endogenously. That is precisely what has happened in the euro area over the last few quarters. Indeed, the bulk of liquidity injections since last August has merely been an attempt to align the timing and maturity of liquidity supply with changing demand within the reserve maintenance periods, in order to stabilize the very short-term interest rate on the interbank market. Of course, this is always a difficult task, since the increase in the precautionary demand for liquidity altered the behaviour of banks and rendered the forecasting models we use to calculate the benchmark need for liquidity less effective, at least temporarily. However, since the Eurosystem acted as a price-taker during these liquidity injections, it is obvious that the interest rates at which these fine-tuning and longer-term operations were settled had no information content for the monetary policy stance.
And if this were nevertheless to happen, the consequences would probably only be a gradual strengthening of the problems I already see with the current low inflation. The risk that we would face a prolonged period of deflation is partly linked to the view of what monetary policy can achieve. I sometimes see an overly pessimistic attitude to the Riksbank’s ability to influence Swedish inflation rate. Let me discuss this question in conclusion. Monetary policy determines the inflation rate Central banks often talk about the so-called transmission mechanism, that is, how a change in the policy rate affects different aspects of the economy and ultimately the rate of inflation. But how well does this transmission actually work? Does a small open economy like Sweden need to adapt to monetary policy and price trends abroad? Has the transmission mechanism been damaged or weakened by the financial crisis? BIS central bankers’ speeches  9  My perspective on these questions is perhaps rather split. It is clear – and has been so for a long time – that we do not completely understand how the transmission mechanism works. The description we give is simplified and partly based on theories and hypotheses that have not been completely verified by data. But at the same time, empirical studies and practical experience show that the policy rate is a useful tool for influencing economic activity and the inflation rate. It is of course true that a small open economy like Sweden is dependent on developments abroad.

In France, the ACPR is mobilised to support innovation, as demonstrated by the creation of the Fintech Innovation Unit and the Fintech Forum with the French financial markets authority. Within this Fintech Forum, we work closely with other public authorities to promote the development of Fintechs and Insurtechs in France. A year ago, the ACPR authorised the first fully digital insurance company in the health sector, the Insurtech “Alan”. In the case of insurers, the digital revolution starts with a complete overhaul of customer relationships and user habits. But it goes further than that. In the digital revolution, the insurance sector can bring stability and protection – it is this that has always been the raison d’être of insurance. I’d like to underline two topics that I think are essential: cyber-insurance and big data. Coverage against cyber-risk, first, is a very real concern that affects all companies – both small and large – as cyber-attacks are becoming increasingly frequent and costly: in 2016, cyber-attacks were estimated to cost businesses about USD 450 billion a year at the global level, 3/4  BIS central bankers' speeches  according to a report by Lloyd’s and Cyence. Despite these threats, the cyber-insurance market is still underdeveloped. Insurers can and should take inspiration from their own experiences in tackling cyber-risk, and use it to develop a more mature European cyber-insurance offering. The second subject I’d like to focus on is personal data and big data.
That is because oversight is shared by several different entities, and the power to implement macroprudential tools is constrained. Another challenge is the diverse structure of the U.S. financial system, in which non-banks and capital markets play a substantial role in credit intermediation. Although the Financial Stability Oversight Council (FSOC) could conceivably play a greater role here, whether it will be able to do so effectively remains uncertain. Another issue that needs attention is the ability to resolve large, complex financial firms that operate on a global basis. The framework of requiring such firms to hold a large buffer of debt that could be converted into equity at the time of non-viability is an important step forward. But, the task of operationalizing this on a global basis in a way that is fully credible to these firms’ customers and counterparties has not been completed. Achieving clarity about the roles and responsibilities of home and host country authorities is still a work in progress. The Federal Reserve’s lack of authority to lend to a major securities dealer that gets into difficulty is another outstanding issue. The Dodd-Frank Act narrowed the Federal Reserve’s authority under Section 13(3) of the Federal Reserve Act. No longer can the Federal Reserve lend to an individual securities firm or non-bank financial intermediary. Such authority may not be as necessary now that the Federal Deposit Insurance Corporation (FDIC) has the power to lend under Title II of the Dodd-Frank Act and firms are required to have sufficient resources to support their resolution plans.

Market-making serves an important function, and it is important that trading desks can intervene and buy during flash crashes or sell during flash surges. Permitting this could provide greater liquidity and stability to financial markets. I would also exempt smaller banking institutions from the Volcker rule since they rarely, if ever, engage in proprietary trading. Do no harm Many speculate that Congress will make changes to the Dodd-Frank Act. If the scope is confined mainly to small bank relief and adjusting how the Volcker rule is applied, I have no objection. But, because the Dodd-Frank Act addresses many of the key lessons of the crisis, I think it appropriate that changes be made carefully—with a paring knife, rather than with a meat cleaver. Here, I would underscore the importance of preserving higher capital and liquidity requirements for systemically important banks; Title VII, which mandates the central clearing of standardized OTC derivatives; and Title VIII, which gives the Federal Reserve an oversight role for financial market utilities that are systemically important, and which helps promote more uniform risk management standards. While Title II gives the FDIC the authority to resolve a large, complex financial firm by converting its debt into equity and establishing a new holding company, I do not think this is necessarily the only way to have a viable resolution regime. However, if Title II were to be eliminated, then the Bankruptcy Code would need to be bolstered.
This is a prerequisite for maintaining confidence in the credibility of governments’ fiscal targets. Positive effects on confidence can compensate for the reduction in demand stemming from fiscal consolidation, when fiscal adjustment strategies are perceived as credible, ambitious and focused on the expenditure side. The conditions for such positive effects are particularly favourable in the current environment of macroeconomic uncertainty. In order to support the process of fiscal consolidation, to underpin the proper functioning of the euro area and to strengthen the prospects for higher sustainable growth, the pursuit of far-reaching structural reforms is essential. Major reforms are particularly needed in those countries that have experienced competitiveness losses in the past or that are suffering from high fiscal and external deficits. Measures should ensure a wage bargaining process that allows wages to adjust flexibly and appropriately to the unemployment situation and losses in competitiveness. Reforms to strengthen productivity growth would further support the adjustment process of these economies. We are now at your disposal for questions. BIS Review 113/2010  3

In a 2009 report on the crisis, the OECD observed that “corporate governance routines did not serve their purpose to safeguard against excessive risk taking”. A crucial shortcoming in many cases was the corporate culture within financial institutions. It is therefore no surprise that “weaknesses in risk culture are often considered a root cause of the global financial crisis”. We all know too well how loans were systematically sold to people who were clearly unable to repay. Lenders operated on a legal, but ethically questionable, originate-to-distribute business model – this saw the risks associated with sub-prime mortgages being repackaged and sold off to unsuspecting third parties. Another sobering example of the link between culture and crisis comes from a finding of the Financial Crisis Inquiry Commission in the United States on Lehman Brothers. The Chief Risk Officer was stripped of her role after raising red flags on risks, in the face of intense competition from other investment banks. As we all know, the bank went on taking much more risk that it could reasonably manage – and the rest, is history. While the global financial crisis has inspired much conversation about ethics and culture, these issues are by no means new. Throughout the 2000s, an estimated 45 million payment protection insurance (PPI) policies worth around £ billion were widely mis-sold to customers in the UK. Many people did not even know that they were buying a PPI policy.