samchain/econo-pairs-v1 huggingface dataset:
Given the large dividends and bonuses paid out by banks historically, distributing in CoCos could increase banks’ capital base materially. Consider UK banks. Imagine that 50% of bonuses had been paid in CoCos rather than cash from 2000 to 2006. By 2007 at the start of the crisis, UK banks’ capital ratios would have been around 1 percentage point higher (Chart 11). Had 50% of dividends in addition been CoCoed, and assuming CoCos counted as Tier 1 capital, capital ratios would have been 3 percentage points higher. That is roughly £ billion, or around the amount of external capital UK banks raised during the crisis. Second, CoCo payouts potentially better align risk-taking incentives among staff and shareholders than cash or even equity payouts. The crisis demonstrated all too visibly some of the downsides of equity-based remuneration. One is the temptation to gamble for resurrection when poised on the brink, given the gambler’s option embedded in equity. A second is the perverse incentive not to seek external equity because of the dilutive impact it might have on managerial wealth. Both of these adverse side-effects were evident at Bear Stearns and Lehman Brothers. Remunerating management in CoCos removes this temptation, in much the same way as would credibly loss-absorbing sub-ordinated debt.21 In peacetime, management is no longer offered the upside of equity, only the downside. The asymmetry of payoffs embedded in peacetime bonus packages – “heads I win, tails society loses” – is neutralised somewhat by paying in CoCos.

Also see “The Riksbank’s inquiry into risks on the Swedish housing market,” 2011, and “Financial imbalances in the monetary policy assessment”, article in the Monetary Policy Report, July 2013. 7  See Andersen, A.L, Duus C. and Lærkholm Jensen T., “Household debt and consumption during the financial crisis: Evidence from Danish micro data”, Working Papers 89, 2014, Danmarks Nationalbank, Dynan, K.,” Is Household Debt Overhang Holding Back Consumption?”, Brookings Papers on Economic Activity, 2012, and Mian, A. Rao, K. and Sufi, A., ”Household Balance Sheets, Consumption, and the Economic Slump”, Quarterly Journal of Economics 128(4), pp. 1687–1726, 2013. 6  BIS central bankers’ speeches  Figure 7 The relationship between indebtedness and the development of consumption among Danish households during the financial crisis Per cent 4  4  2  2  0  0  Change in -2 consumption between 2007 and 2009, in relation -4 to income in 2007  -2  -6  -6  -8  -8  -10  -4  0  50 100 150 200 250 300 350 400 450 500 550 600 650 700 Debt-to-income ratio in 2007  -10  Source: Andersen, A.L, Duus C. and Lærkholm Jensen T., “Household debt and consumption during the financial crisis: Evidence from Danish micro data”, Working Paper, Danmarks Nationalbank. One hypothesis argues that highly indebted households particularly increased their indebtedness before the crisis with the aim of increasing consumption, based on, for example, optimistic expectations.
Moreover, the problems with complex risk management are exacerbated in that perhaps the most important component available to an individual is human capital, with all the forms of risk connected with its management and yield. In addition, households encounter complicated decisions in other aspects of life, of which some have to do with insurance products. As I just said, the financial system has already changed spectacularly and become increasingly sophisticated. But it will not stop there. It may therefore be asked whether banks and other financial institutions will become increasingly consumer oriented in the future, instead of the current focus on products. One advocate of such a development is Robert Merton, a Harvard professor who predicts that financial institutions will split into one group that produces business services and another that is 16 close to consumers and mainly distributes financial services. Banks today often perform both these functions. Merton considers that in such a new consumer-oriented financial system, help is needed to construct well though-out, tailor-made plans for the life cycle that allow for all the potential risks. One type of risk that needs to be considered is stock market fluctuations. Central matters here are, of course, investment horizons, how buying and selling is arranged and the degree of diversification across companies and geographical regions. Another parameter is, as indicated, the life cycle; the possibility of saving for the long run is restricted by how much capital is likely to be needed in the nearer future.

The fact that many people have entered the stock market in a short time is not entirely a good thing. Besides the losses they may incur and thereby run into financial difficulties, there is a risk of the stock market functioning less well because prices bolt from more fundamental levels. An example of this is the IT bubble in recent years. The ease with which firms attract capital in an over-valued market leads to misinvestment which, if it becomes too prevalent, can be harmful for society in general when the economy and the stock market both turn downwards. The behaviour of inexperienced investors is thus a general economic issue. The American study argues that firms, banks and analysts had incentives to talk inexperienced people into investing in new enterprises on grounds that were not entirely sound. Many new technology companies were not generating a profit and had to rely instead on paying for wages and equipment by issuing shares. For this to be feasible, stock markets need to be high. In this sense there were incentives for managements to trim reports and statements about their firm’s future profits. At the same time, analysts and investment banks, with potential earnings from launching share issues, lacked incentives to take a critical look at these reports and statements. Inexperienced investors did not get the assistance and support they needed. As a sign of this, the paper mentioned that in summer 2000 professional analysts were summoned to Washington for a congressional hearing on their market recommendations.
In line with the reforms being rolled out in various European countries, it was moreover decided to extend deposit guarantee coverage from € to € As from 2009, the difficulties in the financial system intensified. In March that year the case of Caja Castilla la Mancha marked a turning point, as it highlighted how necessary new arrangements were to address the restructuring of ailing institutions. Given the constraints on savings banks (duly detailed in the Report), a strategy was adopted between 2009 and 2011 turning on two pillars: to assist the restructuring of the system through voluntary  6/14  mergers and the resolution of less viable institutions; and the strengthening of solvency through the clean-up of institutions’ balance sheets and the shoring up of their capital. As regards the first of these pillars, two measures are worth noting: the creation of the Fund for the Orderly Restructuring of the Banking Sector (FROB), and the reform of the institutional protection scheme (IPS). The FROB was created in June 2009 to support restructuring and voluntary integration processes, including financial support, in the main, through the acquisition of “participaciones preferentes” (preference debt instruments) or, where appropriate, through managing bank interventions. Later, in February 2011, the FROB was reformed following the worsening of the sovereign debt crisis in Europe, which increasingly hampered access by banks from various countries, Spain among them, to the wholesale funding markets, and which had led to the Greek and Irish programmes in May and December 2010.

Are these repeated crises the inevitable result of human nature at work in financial markets, with greed and fear alternating as sentiment swings from irrational optimism to irrational pessimism? Or is it the failure over many years to find the right incentive structure for banking markets? Or is it a mixture of both? I don’t pretend to be able to offer a complete answer to those questions. But I do want to focus on the relationship between the Bank of England and the banks because it helps to explain why crises occur and what we can do about them. Let me start by saying that, although I do think the role of the Bank needs to be enhanced, it would not be right for the Bank to take back banking supervision from the FSA, as some have suggested. We should remember that the period before 1997, when FSA and the “tripartite arrangements” were set up, was not seen at the time as a golden age of official oversight of banks. Before 1997 the relationship between the Treasury and the Bank of England in respect of banking supervision was often fraught. Remember too that the experience which shaped the design of the 1997 settlement was that of idiosyncratic problems in Johnson Matthey, BCCI and Barings, not a system-wide crisis affecting the liquidity of the banking system as a whole. As a result, the tripartite Memorandum of Understanding which underpinned that settlement was not so much faulty as incomplete.
The framework seeks to reduce poverty through three core areas of sustainable economic growth, inclusive social development and good governance. The strategy is a sound one as it does not focus solely on physical infrastructure, i.e. the building of roads, bridges and other “hardware”, but also on the “software” of policy and institutional reform in the public and the private sectors. The Strategic Framework also attaches importance to private sector development, particularly in the fields of finance, banking and corporate governance. The quality of the “software” of a developing economy is precisely what international investors are looking for as they return to Asia. At a time when Asian economies are showing incipient signs of recovery against an improved external environment, international capital flows are triggering back to the region but in a more cautious and discriminate manner than before. Investors are now a lot more selective about who may lend to and where they put their money. International capital flows from OECD markets to Asia, in the form of bank credits, foreign direct investment and portfolio flows, have dropped significantly in the last few years. In the case of bank credits, total flows declined by about $ billion during the 1997-1998 period, although the decline has been at a more moderate pace in the last two years. In the light of this, it is important that the Bank plays a catalytic role in mobilising resources within and outside of the region.

I don’t think any of us want to return to the Great Inflation of the 1970s. Inflation also tends to become more variable at high levels, making it more difficult for both businesses and households to plan ahead and make financial decisions. By keeping inflation low and stable, we contribute to maintaining economic activity and employment at a high level. 2/3  BIS central bankers' speeches  High and variable inflation rates also have distributional implications. As an unexpected rise in prices will not automatically be followed by an increase in wages and benefits, the result will be a reduction in purchasing power, particularly for those with low incomes and small margins. Norges Bank cannot influence international commodity prices or water reservoir levels. Inflation caused by these factors is beyond our control. But we can take steps to prevent inflation from becoming entrenched. Higher interest rates have the effect of reducing demand for both labour and goods and services, thereby pushing down wage and price inflation. In addition, higher interest rates can contribute to strengthening the krone, which can in turn curb the rise in prices for imported goods. Chart: Household debt has increased As the policy rate is raised, residential mortgage rates will rise. Norwegian households are highly leveraged. Over the past 30 years, household debt as a percentage of disposable income has doubled. With higher debt, increased interest rates will have a stronger impact on household budgets and, combined with the high level of inflation, will curb growth in household consumption ahead.
Under the CRF, the SNB can also conduct additional refinancing transactions in order to supply the banking system with further liquidity if required. As I mentioned, the SNB’s new refinancing facility operates in conjunction with the federal government’s guarantees for corporate loans. So how does this approach work? Page 1/2  Berne, 25 March 2020 Thomas Jordan  News conference  In a stressed situation like the one we are facing, the risk of companies defaulting on loans increases. At the same time, the banks are seeking to hold higher levels of liquidity. These two factors can lead to a credit shortage, even though demand for credit is rising sharply. The Confederation’s loan guarantees and the SNB’s refinancing facility can unblock the system and get credit flowing again. As the banks have all the necessary client relationships, the loans will find their way to the companies that need them. The approach is simple, effective and makes use of existing structures. Bank lending will play a crucial role in Switzerland’s economic development, especially in the coming weeks and months. The new CRF is intended to support banks in these efforts, as is the raising of the exemption threshold for the negative interest rate announced by the SNB last week. Furthermore, after consulting with FINMA, the SNB has submitted a proposal to the Federal Council requesting that the countercyclical capital buffer for mortgage loans on residential real estate be deactivated. This integrated package of measures gives banks maximum latitude for lending.

Market-making dealers have not been able to allocate much capital to holding inventories of bonds and hence the market is still not functioning as well as it might. This was one reason why, in January this year, the Bank introduced operations to sell as well as to buy bonds. Further market evolution may be needed to overcome this illiquidity. One possible way forward would be more trading on exchanges. It will be interesting to see whether the recent listing of bonds on the LSE in retail-size amounts is successful. Secured commercial paper and supply chain finance The Bank also considered intervening in other markets such as secured commercial paper (SCP), supply chain finance, syndicated loans and more broadly in ABS markets, as set out in the Chancellor’s original letter to the Bank. 7 Taking secured commercial paper first, this is a form of asset-backed commercial paper (ABCP) based on a bundle of relatively short-term loans to a variety of borrowers. Due to over-collateralisation, the security might be investment grade even if the underlying borrowers are not. By catalysing this market, smaller or lower-rated-firms could gain  6  The difference in price between a cash bond and the Credit Default Swap can be interpreted as a measure of the liquidity premium in cash bonds. 7  The Bank also made provision to buy securities issued under the Credit Guarantee Scheme, using the same format as for its corporate bond purchases. To date, it has not been deemed necessary to activate this facility.
Of course this process becomes even more difficult if a lot more countries are involved. However, I believe that issues like this will continue to arise in the period ahead, unless globalisation declines and the trend is towards more protectionism. Every new crisis will give impetus to the debate, and perhaps resistance will eventually be overcome. and finance ministers, see Palais-Royal Initiative (2011), “Reform of the International Monetary System: A Cooperative Approach for the Twenty First Century”. BIS central bankers’ speeches  7

The intuition we think is that the lowest value note should be sorted most often, and the highest value note least often. The reason for this order is that the lowest value note will be nearest to a pure transactional instrument, and the highest value note nearest to a pure store of  BIS Review 162/2009  7  value instrument. As the chart indicates, the intuition holds for all denominations except the £ On average, at £ note passes through a cash centre for sorting nine times a year, a £ four and a half times, and a £ just under once a year. But the £ has seen a decline from five times a year in the mid-1990s to one and a half times a year now. This goes a long way to explain the problem we have with the £ We need to see more dispensed so that they are less scarce and therefore they return to cash centres for sorting more often. In the last few years we have had some success in increasing the total number of £ in circulation. The overall value of £ in circulation had been stuck at around £ since the early 1990s. In the last two years it has risen to £ But the evidence from turnover indicates that we have a lot more to do. Recently, we have therefore run two pilot schemes.
This was Sweden’s experience with the combination of a currency peg and deteriorating public finances in 1991-1992. But now there is another danger. Given that the target of imminent euro adoption is gone, and the large euro area nations do not provide real leadership on fiscal soundness, there is less incentive for some of the new member states to stick to the consolidation of their public finances. This is especially obvious for Hungary, where the deficit was 7.5 per cent in 2005 and is, according to present plans, expected to increase to around 10% this year. For Poland and the Czech Republic the deficits will stay at the present level of around 3% in the coming two years. Whether in the old or new member states, there is an additional problem, as we are entering a period of intensifying structural changes. Old industrial patterns in Europe are being changed when confronted with both the boost to productivity from IT and globalisation and enlargement, all of which supports this process. These trends will eventually help productivity and growth in Europe to start catching up with the US again. But in the short term the structural changes will lead to higher frictional unemployment as old industries are more rapidly replaced by new ones. In addition, the recent downturn never led to a dramatic increase in unemployment or a dramatic decrease in employment in the euro area; hence, the upturn is probably also less likely to lead to rapid job creation.

Where we draw the line within that for being in scope of this initial first step of the strong and simple framework will impact the extent of simplification we can achieve while maintaining strong standards. There is also the risk that simplifying requirements for smaller firms could increase barriers to growth, if the step up to the next level of our framework is too big. That being said, we could in the long run move to a graduated approach that covers all nonsystemic firms. Under such a regime the complexity of the framework would grow 2/5  BIS central bankers' speeches  commensurately with the size and complexity of a firm’s activities, minimising potentially steep barriers to growth. This is in fact the long-term vision we have outlined in our paper. But doing this will take time and, rather than delaying the roll-out of a simpler framework for everyone, we thought a better approach would be to do this step-by-step. One possible first step is to start with the smallest firms that would benefit the most from a radically simpler regime – but, as with all the trade-offs in our paper, this is something we would welcome views on. We also need to consider the position of foreign banks that operate in the UK. Internationally active firms will continue to be in scope of international standards; likewise, it may be appropriate for subsidiaries of international groups to stick with the international standards. But we have an open mind on this.
BIS Review 43/2007  7  The differences in social models across European countries are likely to persist, precisely because the underlying values and preferences are different. What policy-makers can, and should, do is to learn from each other and from the different practices and experiences, assess what works and what does not, and then adapt the most promising ideas about economic institutions and regulations to the local conditions and the prevailing economic cultures. This is in fact a great advantage of the European Union’s unique cooperative framework. It can make possible what is neatly encapsulated in the title of a paper by Tito Boeri (2002): “Let Social Policy Models Compete and Europe Will Win”. VI. Price stability: the role of the institutional framework for central banks and fiscal policy  As stated at the outset, a country’s economic performance pertains to both economic growth and stability. Macroeconomic stability includes, inter alia, first and foremost price stability, which ensures that a currency keeps its purchasing power and retains the trust of the people. It also includes a stable financial system as well as prudent and sustainable fiscal policies. Also for this aspect of economic performance, the central proposition I have emphasised in the context of the presented conceptual framework remains intact: institutions matter and the social values of economic agents are embodied in appropriately designed institutions.

Compared with our June staff projections, the outlook has improved for 2021 and is broadly unchanged for 2022 and 2023. Inflation Inflation increased to 3.0 per cent in August. We expect inflation to rise further this autumn but to decline next year. This temporary upswing in inflation mainly reflects the strong increase in oil prices since around the middle of last year, the reversal of the temporary VAT reduction in Germany, delayed summer sales in 2020 and cost pressures that stem from temporary shortages of materials and equipment. In the course of 2022 these factors should ease or will fall out of the year-on-year inflation calculation. Underlying inflation pressures have edged up. As the economy recovers further, and supported by our monetary policy measures, we expect underlying inflation to rise over the medium term. This increase is expected to be only gradual, since it will take time for the economy to return to operating at full capacity, and therefore wages are expected to grow only moderately. Measures of longer-term inflation expectations have continued to increase, but these remain some distance from our two per cent target. The new staff projections foresee annual inflation at 2.2 per cent in 2021, 1.7 per cent in 2022 and 1.5 per cent in 2023, being revised up compared with the previous projections in June. Inflation excluding food and energy price inflation is projected to average 1.3 per cent in 2021, 1.4 per cent in 2022 and 1.5 per cent in 2023, also being revised up from the June projections.