samchain/econo-pairs-v1 huggingface dataset:
But consumer spending appears to be weak, nominal wage growth remains relatively muted and once we strip out the impact of rising commodity prices, output price inflation has been steady. To paraphrase Sherlock Holmes, if expectations have become detached, it is curious that those dogs haven’t barked. So in my view the news on that front has been encouraging. The impact of the credit crunch And of course, we have been balancing that upside risk to inflation from the commodity price shock against a downside risk that the credit crisis would drive down activity too far and push inflation below target in the medium term. And the news on that front remains worrying. The headlines are about the drama on Wall Street but the failure or rescue of even big and well known financial firms matters mainly because of their knock on impact on the wider economy. The last year has brought home once again why central banks have to be concerned with financial stability as well as monetary stability and inflation. For the biggest risk to the financial sector is also the biggest downside risk to the economy: namely that damage to bank balance sheets would lead to tighter credit conditions, lower asset prices, lower consumption and investment and to a severe feedback loop into more losses for banks and so on down a spiral. That feedback is already working to some degree not just in the US but in the UK too.

We will continue to work for the return of calmer financial markets. But we should not rely on that to reverse quickly the broader macroeconomic slowdown that is underway. Indeed there are still risks to the downside and I thought it might be useful to spell out how they feed through the economy and therefore make plain what indicators I will be focusing on in the next few months. BIS Review 114/2008  3  Any contraction in lending to the real economy can amplify the slowdown in demand (Chart 6). Increases in retail lending rates for those who can still get access to credit discourage spending. Increases in credit rationing can have a more dramatic impact. If those households and companies are unable to tap other sources of finance, then their spending will have to fall back in line with income. Spending on high cost durable goods – such as purchases of cars and white goods by households and machines by companies – are likely to be particularly affected. And the contraction in mortgage lending pushes down house prices, further eroding the value of the collateral against which banks’ loans are secured. Tighter credit conditions raise income gearing, forcing households and companies to devote a larger share of their income to servicing debt. And as the impact of those tighter credit conditions bite on the economy, income is likely to be squeezed and that at the same time as real incomes are being affected by higher food and energy prices.
For example, Baker and McArthur ask whether there is a difference in funding costs for US banks either side of the $ billion asset threshold – another $ billion question. 8 They find a significant wedge in costs, which has widened during the crisis. They calculate an annual subsidy for the 18 largest US banks of over $ billion per year. Applying the same method in the UK would give an annual subsidy for the five largest banks of around £ billion. This evidence can provide only a rough guide to systemic scale and cost. But the qualitative picture it paints is clear and consistent. First, measures of the costs of crisis, or the implicit  5  Haldane (2009a). 6  Using the end-year yield on the financial corporates bond index across the ratings spectrum. 7  For example, banks’ retail deposits are excluded but unsecured wholesale borrowing is included. 8  Baker and McArthur (2009). BIS Review 40/2010  3  subsidy from the state, suggest banking pollution is a real and large social problem. Second, those entities perceived to be “too big to fail” appear to account for the lion’s share of this risk pollution. The public policy question, then, is how best to tackle these twin evils. Taxation and prohibition To date, the public policy response has largely focussed on the role of prudential regulation in tackling these problems. Higher buffers of capital and liquid assets are being discussed to address the first problem.

And add-ons to these capital and liquidity buffers for institutions posing the greatest systemic risk are being discussed to address the second. 9 In essence, this is a taxation solution to the systemic risk pollution problem. 10 There is a second approach. On 21 January 2010, US President Barack Obama proposed placing formal restrictions on the business activities and scale of US banks. Others have made complementary proposals for structural reform of banking. 11 Typically, these involve separation of bank activities, either across business lines or geographies. In essence, this is the prohibition solution to the systemic pollution problem. This sets the scene for a great debate. It is not a new one. The taxation versus prohibition question crops up repeatedly in public choice economics. For centuries it has been central to the international trade debate on the use of quotas versus subsidies. During this century, it has become central to the debate on appropriate policies to curtail carbon emissions. 12 In making these choices, economists have often drawn on Martin Weitzman’s classic public goods framework from the early 1970s. 13 Under this framework, the optimal amount of pollution control is found by equating the marginal social benefits of pollution-control and the marginal private costs of this control. With no uncertainty about either costs or benefits, a policymaker would be indifferent between taxation and restrictions when striking this cost/benefit balance. In the real world, there is considerable uncertainty about both costs and benefits. Weitzman’s framework tells us how to choose between pollution-control instruments in this setting.
Mortgages were amortised to a greater extent a few decades ago, at the same time as inflation automatically reduced the real debt ratio. I believe that more amortisation may be needed, especially in the current situation with low and stable inflation. However, before the authorities impose amortisation requirements it may be worth reviewing other aspects of the provision of loans. One example may be how different amortisation alternatives are presented to the borrowers. Another may be to demand that the borrowers have the financial scope to amortise their loans at a certain rate. The important thing is to restore an amortisation culture so that the households’ margins are safeguarded and the economy is protected. The Riksbank focuses on these issues because we wish to safeguard the Swedish financial system. All our analysis and all our measures aim to reduce the risk of Sweden incurring major economic costs when the banking sector gets into trouble. As a complement, Sweden also needs to put a clear framework for macroprudential policy in place. The global financial crisis demonstrated the need to complement traditional financial supervision – micro supervision – which focuses on risks in individual institutions, with supervision that focuses on the risks in the financial system as a whole. In January, the Financial Crisis Commission presented an interim report which proposed how responsibility for macroprudential policy could be allocated in Sweden. We will therefore need to consider the Riksbank's stance on this issue.

Similarly, crises that are preceded by a credit and housing boom tend to be longer and more severe than other economic crises.1 A fall in housing prices may lead households to save rather than consume in order to compensate for the fact that the value of their homes has fallen. If many households behave in this way, this may weaken economic activity, increase unemployment and create loan losses in the banks' lending to companies. This, for example, is what has happened in our neighbouring country Denmark in recent years. What we can note is that the credit conditions for mortgages changed in the early 2000s. Interest-only mortgages became increasingly common at the same time as the loan-to-value ratios increased. The banks also began to fund mortgages by issuing so-called covered  1  See Claessens, S., A, Kose, and M, Terrones (2011), “Financial Cycles: What? How? When?”, IMF Working Paper. CEPR Discussion Paper, NO.8379. BIS central bankers’ speeches  3  bonds on the financial markets to an increasing extent. Easy access to inexpensive funding in combination with a high demand for mortgages led to rapid credit growth. Now, the debts of the Swedish households are high in both historical and international terms. Although the rate of credit growth has slowed down and loan-to-value ratios have fallen – the mortgage cap introduced in 2010 has probably contributed to this – there are still structural weaknesses on the Swedish mortgage market.
It has not been about the reliability and security of commercial bank money as it has become more dominant in the economy. It is interesting to observe that in the eighteenth and nineteenth century there was a similar shift from state money, in the form of coins, to private money, in the form of banknotes, which in those days were bearer claims issued by private banks. That eventually generated a very different reaction, with the result that private banks in most countries were banned from issuing bank notes. 4  And I think that the lack a similar reaction to the increasing use of private money at the end of the last century was in principle the right one. Unlike in the nineteenth century, commercial banks operate under public regulation and with a guarantee of retail bank deposits.5 While banks create the bulk of money in the economy, the overall supply is controlled by the Bank of England through monetary policy. In such a framework, there is the necessary assurance, albeit indirect, about the robustness and reliability of commercial bank money: that is, of the claims we all hold on the banks that are licenced to take deposits and that provide our transactional bank accounts. I have said that this was the right reaction ‘in principle’. In practice, we discovered in the great financial crisis that the prudential controls on banks that took deposits and the deposit guarantee scheme were not strong enough.

It is equally important to avoid an inflation rate that is too low, as it is to avoid an inflation rate that is too high. BIS Review 74/2001  3  A change in interest rates is not expected to have an immediate effect on inflation. Our analyses 1 indicate that a substantial share of the effects of a change in interest rates will occur within two years. Two years is thus a reasonable time horizon for achieving the inflation target of 2½ per cent. Hence, the key rate is set with a view to achieving an inflation rate of 2½ per cent two years ahead. In some situations, where unexpected events lead to an inflation rate that is too high, it may be appropriate to apply a longer time horizon than two years. For example, reducing inflation to 2½ per cent within this time horizon may be associated with unnecessary real economic costs. A precondition for applying a longer time horizon is that there is clear evidence of strong confidence in low and stable inflation over time on the part of economic agents. Gradually, as we gain experience with setting interest rates according to an inflation target, the possibilities for placing emphasis on stability in the real economy will probably increase. Low and stable inflation is a necessary precondition for stability in the foreign exchange and financial market and the property market.
The manufacturing sector, however,  BIS Review 117/2006  3  has recently seen high productivity gains and some stabilisation of unit labour costs relative to the euro area countries. Turning to inflation, we have seen two very different trajectories in 2006. In the first half of the year, price increases were very high, driven by labour costs and by widening margins, but especially by higher oil prices. The 12-month rate of increase of the CPI held at close to 4% until July, with a differential in relation to the euro area that at one point was 1.8 percentage points (pp), above the average differential observed since 1999. However, the decline in oil prices that began in August has swiftly passed through to prices in the Spanish economy. As a result, the CPI rate stood at 2.5% in October, 1.4 pp below the July rate. That enabled the differential with the euro area countries to be cut by 1 pp, to slightly below the average in recent years. The improvement in underlying inflation was, however, very limited, and this variable is holding at a rate of close to 3%. Admittedly, 2006 may possibly close with a growth rate somewhat higher than that of the previous year. But the outlook for 2007 points to a slight slowdown in GDP growth, as part of a continuation of the patterns in recent quarters I have described to you.

BIS Review 38/1997  -7-  Diagram 3a  Real w ages and em ployed persons, EU and U SA, 1970-97 Index 1970=100 EU  170  USA  170  170  160  160  150  150  140  140  130  130  130  120  120  120  110  110  110  100  100  100  90  90  90  80  80  80  160  R e a l wa ges  150 140 130  E m ploy m ent  120  70  72  74  76  78  80  82  84  86  88  90  92  94  96  98  170 160 150  E m ploy m ent  140  110  R e a l wa ges  100 90 80  70  72  74  76  78  80  82  84  86  88  90  92  94  96  98  S ource : O E CD  As shown in Diagram 3a, since 1970 the average real wage in the United States has risen by a total of 15 per cent but by as much as 60 per cent in the EU area. The change in employment, as I mentioned earlier, has been the opposite.
Sunil Mendis: Risk management in Sri Lankan banks in the changing environment Inaugural address by Mr Sunil Mendis, Governor of the Central Bank of Sri Lanka, at the CRISILSLBA seminar on risk management in Sri Lankan banks in the changing environment, Colombo, 15-16 November 2004. *  *  *  Good morning ladies and gentlemen, Let me first thank the SLBA (Sri Lanka Banks Association) and the representatives from CRISIL India (Credit Rating Information Services of India Ltd) for the initiative taken to organize this Seminar on a very important aspect of banking business - risk management. As we all know, risk management in banking is a continuous process of planning, organizing and controlling a bank’s assets and liabilities, their volumes, maturities, rates and yields. This is the most simple definition that I can think of. However, its implications on banking business are what we concern ourselves with, especially from the regulatory point of view. In the context of Sri Lankan banks at least, of the major risks confronting financial institutions, credit risk remains the predominant or core risk. Risktaking is part and parcel of banking. The highly leveraged nature of banking business itself illustrates the risk exposure level of banks. Therefore, what is important is how we manage these risks, how we measure and price risk and above all what measures we take to mitigate these risks.

What I’d like to offer in my remarks today are some steps I see as necessary for institutions navigating in this new environment to begin to address the concerns I’ve outlined above. And, I’ll close with a couple of issues that remain on my “insomnia” list that will continue to warrant increased efforts in the coming year. What will it take for firms to navigate in this new environment? Addressing the weaknesses I’d like to start first with a fundamental observation: we need to focus first on fixing what was so obviously broken. The new sets of rules and regulations, whether global or local, were designed to address the very weaknesses that led to bad outcomes during the financial crisis: low levels and quality of capital; insufficient liquidity; fundamental weaknesses in a range of risk management practices; poor management information and reporting systems; complex structures and systems that couldn’t be quickly taken apart; and the list goes on. We know we need a more resilient system that is able to withstand a wider range of stresses, as well as provide buffers when firms do falter. And, importantly, we need to do this to restore confidence in the financial system. The new rules and regulations are intended to address the known weaknesses, and before we can talk about whether the global business model is viable or how to operate more efficiently within the constraints imposed, the basic underpinnings of a strong and resilient financial system need to be in place and functioning.
In other words, liquidity under stress is likely to prove less resilient. This is because one extreme event, one flood or drought on the Nile, is more likely to be followed by a second, a  18  This finding can be given a variety of behavioural interpretations, including persistence in gaps in the limit order book (Bouchard et al (2009)). Empirical support for this hypothesis is found in Easley et al (2011a). 19  Andrew Lo’s “adaptive market hypothesis” is a more recent manifestation of essentially the same story. 20  Equation (1) holds asymptotically in expectation for large T and for a broad range of statistical processes (see Peters (1994) and Qian and Rasheed (2004)). 8  BIS central bankers’ speeches  third and a fourth. Reorganising that greater risk, market makers’ insurance premium will rise accordingly. This is the HFT inventory problem. But the information problem for HFT market-makers in situations of stress is in many ways even more acute. Price dynamics are the fruits of trader interaction or, more accurately, algorithmic interaction. These interactions will be close to impossible for an individual trader to observe or understand. This algorithmic risk is not new. In 2003, a US trading firm became insolvent in 16 seconds when an employee inadvertently turned an algorithm on. It took the company 47 minutes to realise it had gone bust. 21 Since then, things have stepped up several gears.

Finally, I wish you a productive and fruitful time here at the HKMA Fintech Day, and trust that you will benefit from today’s rich plenary and parallel sessions. 21. Thank you very much. 4/4  BIS central bankers' speeches
In the last year, we have commented on market participants’ interest rate expectations. The fifth characteristic is that central banks in inflation-targeting countries must be accountable in different ways for the results of their monetary policy. Inflation targeting is transparent. This allows for a regular follow-up and assessment of the interest rate setting. Norges Bank’s Annual Report with a discussion of the conduct of monetary policy is sent to the Ministry of Finance for submission to the King and communication to the Storting. The Government’s  5  See Svensson, Lars E.O. (1999), “Price Level Targeting vs Inflation Targeting: A Free Lunch?” Journal of Money, Credit and Banking, Vol. 31, pp. 277-295, and Vestin,David (203), “Price-level versus Inflation Targeting” forthcoming in Journal of Monetary Economics. 6  See Fracasso, Andrea., Hans Genberg and Charles. Wyplosz (2003), “How do Central Banks Write? An Evaluation of Inflation Reports by Inflation Targeting Central Banks, Geneva Reports on the World Economy, Special Report 2. 4  BIS Review 43/2005  evaluations are presented in the annual Credit Report. As governor of Norges Bank, I appear at an open hearing in the Storting’s Standing Committee on Finance and Economic Affairs as part of the Committee’s deliberations on the Government’s Credit Report. In addition, Norges Bank Watch sends an independent professional evaluation of monetary policy to the Ministry of Finance. In many countries, the central bank governor must appear before parliament and answer questions.

As an example, the HKMA and our peer authorities in the region have adopted fintech sandbox 3/4  BIS central bankers' speeches  regimes, which are effectively testing grounds with a well-defined scope and a clear timeline. The authorities do not generally stipulate an exhaustive list of regulatory requirements in these sandboxes; rather, the products are to be developed flexibly, and requirements would be evaluated during the process. Coordination among regulators has also already begun as the Global Financial Innovation Network (GFIN) is now inviting applications for cross-border testing of financial innovations. That said, while providing a conducive environment to support innovation, central banks and regulators would have to strike a good balance with its other functions in consumer protection and financial stability, especially as the new and innovative services grow in scale or become widely adopted. Cross-border coordination is also required to address potential arbitrage across jurisdictions, given the much wider reach of fintech products and services. Derivatives markets, on the other hand, have a much longer history. The regulatory framework should therefore be informed by history, and lessons from the global financial crisis must not be forgotten. Regulators need to guard against the problems that plagued derivatives markets before the crisis: namely, the overuse of leverage, excessive interconnectedness, and opacity. I don’t need to “preach to the choir” on the tremendous efforts exerted by regulators and market participants internationally to solve these problems.