samchain/econo-pairs-v1 huggingface dataset:
Lars Nyberg: Credit derivatives – risks and opportunities Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at a meeting at StartegiTorget Bank, Finans & Försäkring, Stockholm, 13 March 2007. *  *  *  Let me begin by thanking you for the invitation to come here and speak about the risks and opportunities offered by credit derivatives. Credit derivatives may appear complicated, but the principles as to how they work are essentially simple. They are a type of insurance, nothing else. A person who owns a house runs the risk that the house may burn down. A person lending money runs the risk that the borrower will not pay back the loan. The house-owner usually wants to sign a home insurance policy covering the risk of fire and is happy to pay a premium for this. The bank lending money may correspondingly – although banks are actually specialised in managing credit risk – wish to sign a credit insurance to dispose of the credit risk, wholly or partly. The bank then also has to pay an insurance premium. A credit derivative is quite simply a modern form of credit insurance, adapted for trade in the financial markets. Trade in credit derivatives has expanded enormously in recent years, which of course implies that credit derivatives offer advantages to their users. At the same time, a debate on the potential risks for the financial system has arisen and interest from the supervisory authorities and central banks has increased.

BIS Review 24/2007  Underlying assets The underlying assets largely consist of corporate bonds; these account for around 80 per cent. However, there are other types of credit, such as traditional bank loans and various forms of sovereign debt. The corporate bonds market currently covers more than USD 6,000 billion in global terms. This means that the outstanding volume in credit derivatives is more than twice as large as the total amount of outstanding corporate bonds. The reason for this is that credit risks are resold on the market through new derivative contracts. This is not actually any stranger than insurance companies selling part of their risks by reinsuring themselves, but it may be good to bear this in mind when looking at the statistics. Today, credit risk is priced on thousands of corporate credits through credit derivatives, although most of the trade is still in a few hundred very large companies. Companies in all types of industries and with different credit ratings are traded. Communication, such as the example of TeliaSonera, is one of the most traded sectors, together with the automobile industry and finance. The credit quality of the underlying bonds is generally very high. But appetite is increasing for underlying assets with low credit ratings. The standardised maturities have also increased in number with time and there is a tendency for longer maturities, five to ten years, to be traded more.
We make our decisions after studying the data—lots of data. We look at everything from food and gas prices to retail sales and inventories, from labor costs and employment figures to semiconductor inventories and shipping expenses, and from the demand for goods and services to readings on public health. And we consider more than just numbers on spreadsheets and charts. We also regularly hear 1/4  BIS central bankers' speeches  from business and community leaders who tell us firsthand what is happening in the economy. This occurs both through regular meetings with our Boards of Directors and advisory groups, as well as in ongoing discussions with local leaders. That is why it’s so important for me to make trips like this one—even virtually—so I can meet with leaders to hear their perspectives. For example, earlier today I spoke with officials at the Port Newark–Elizabeth Marine Terminal about supply chains and logistics. And yesterday, I met with groups in North Jersey who are working to bridge the gap in health outcomes and housing—two critically important issues that can affect economic mobility. Despite the disruptions from COVID-19, the overall economy has shown remarkable strength and resilience over the past year. To put this in perspective, the onset of the pandemic in 2020 caused the sharpest U.S. economic contraction since World War II. Since then, we have seen a remarkable turnaround. The economy, measured by real gross domestic product, or GDP, grew about 5-1/2 percent over the course of last year, the fastest pace of growth since 1984.

As we work to help restore balance to the economy and bring down inflation, our actions will always be driven by the data, and we will remain focused on achieving maximum employment and price stability. 1 Board of Governors of the Federal Reserve System, Statement on Longer-Run Goals and Monetary Policy  Strategy, as adopted effective January 24, 2012. 2 See Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC Statement, November  3, 2021; Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC Statement, December 15, 2021; and Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC Statement, January 26, 2022. 3 Board of Governors of the Federal Reserve System, Principles for Reducing the Size of the Federal Reserve's  Balance Sheet, January 26, 2022. 4/4  BIS central bankers' speeches
But this does not mean that the international economy has been inoculated against new, unexpected shocks. Remember that noone predicted the extent and course of the Asian crisis. Neither were the risks that led to last autumn’s international financial turbulence highlighted in advance. Our knowledge of phenomena of this kind is limited. It may be asked whether it will ever be possible to predict such matters accurately. The models with leading indicators that are being tested at present  1  BIS Review 106/1999  tend to be too blunt. They are liable to sound the alarm about things that never occur and miss those that do happen. The picture is bright at present but we know that some countries are in a vulnerable position that can suddenly deteriorate. Stock market prices are notably high, not least in the United States. The existing imbalances in the US economy may have effects in the future. But as the course of such events is genuinely difficult to foresee, central banks have little option but to deal with a new situation if and when it arises. Repo rate too low in a longer perspective After the series of reductions, the repo rate is currently 2.90%. Over a complete business cycle, such a level would probably be too low, even in an economy where inflation expectations have settled down around the targeted rate of 2%. So the present monetary stance can be said to be relatively expansionary.

Companies comment to us that the time and resources needed to win new business and secure contracts has increased sharply in the face of weak demand.7 I’m sure that these mechanisms and many more like them are at work today. But are they sufficiently strong for us to be confident that the likely relationship between growth and inflation would be unusually favourable were demand to increase strongly? Why should these mechanisms be so much more pronounced now than in previous recessions? Wouldn’t most of them have seemed equally important in the past? I find it hard to believe that these types of effects are the entire – or even the main – explanation for the weakness in productivity. What is unusual about this downturn is that it has been associated with a severe and prolonged financial crisis. Several of our banks are still not in a position to lend normally. Many firms have had to economise on working capital as the cost has increased and the availability reduced. The ability of many SMEs to raise finance to fund new investments or business expansion has been constrained. The efficiency with which banks have been able (or willing) to reallocate funds from outdated businesses and sectors towards new and dynamic companies has been stunted.
Ardian Fullani: Economic developments during the second semester of 2004 and expectations for year 2005 Statement by Mr Ardian Fullani, Governor of the Bank of Albania, Tirana, 28 January 2005. *  *  *  The second part of 2004 has generated a larger economic activity, marking a certain general impulse, especially after a relatively quiet start of the year. The acceleration of production growth is reflected almost in all the economy sectors, while the major objectives of the economy have been achieved in conformity with the overall programme of the country's economic and financial development. At international level, this semester coincided with an acceleration of the confirmed tendencies in the first part of the year, especially with regard to US dollar performance and oil price rise. The Fed monetary policy has changed the monetary policy tendency, during this period, through some successive increases of the core interest rate, in attempting to prevent the inflationary pressures in the economy. On the other side, the European Central Bank, considering the inflation performance and the strong pressure against the Euro has deemed unreasonable to change the core interest rate, keeping it at the level of 2 percent for almost a year and half. Annual inflation in December resulted 2.2 percent, while the average annual inflation was only 2.9 percent. The maintenance of inflation within the targeted range was mainly attributed to the stable macroeconomic situation, the control of domestic demand of the economy and monetary indicators stability.

We already acknowledged the benefits from all specific measures implemented during the crisis, but we should be aware of their transitory role and the need to get back to the standard policy tools. Of course, the signs of current recovery are pointing to different stages of the normalization path and therefore, this reversal in the policy settings will differ from country to country. The new threat of deflation in the advanced economies is yet another potential obstacle in this reversal. From this point, that is already a challenging one, the next big challenge will be to return to a solid and sustainable growth. During this crisis, we experienced a lot and we learnt a lot. A number of weaknesses, mainly in the financial and fiscal areas, have been detected and addressed. Anyway, with the first signs of economic recovery, not everything has been fixed yet. There is still a need to repair banks’ balance sheets, to squeeze central banks’ balance sheets, to restore market confidence and to strengthen public debt management. The prolonged period of low interest rates has created a room for fiscal expansion and public debt increase, but the fiscal authorities must be aware that the end of this period is just about to come. The regulatory and institutional reforms undertaken in the last years should contribute to the soundness and stability of the financial systems. What has been done in this field in the last years should be fruitful on a longer horizon.
Today, several Turkish banks are interested in expanding their operations to the Middle East, considering the growth potential in commercial relations and considerable amount of  BIS Review 101/2010  3  liquidity in the region. Besides, the Middle East is one of the world’s fastest growing markets in the banking and capital sector. Islamic finance is yet another venue through which financial links across the countries in the region may be strengthened. The global crisis has given an opportunity to Islamic financial institutions to prove their potential. As their products limit the excessive leverage and the disruptive financial innovations, they have confirmed their products’ advantages to ensure macroeconomic stability. This may lead the way for Islamic financial institutions to further expand and improve. Islamic banks support GDP growth through the use of funds they collect exclusively for the financing of real sector, rather than investing in nonproductive financial assets. This understanding will not only contribute to the potential growth of the Islamic banks, but also help to maintain a sound structure of the financial system. I believe that such a forward-looking and constructive vision will contribute the financial stability to a great extent going forward. One crucial prerequisite for closer commercial links within the region is the existence of strong, efficient and effective payment system. In the last twenty years, rapid technological progress, decrease in restrictions and globalization of financial markets have led to a rise in financial activities and a rapid growth in the volume of domestic and cross-border payments.

Average annual growth of almost 7 percent between 2002 and 2007 faltered in 2008 and turned into a contraction in 2009 as the exports and investment flows dried up considerably due to the global crisis. However, all signs now indicate that the economy has rebounded quickly and is headed towards renewed growth and an improving fiscal balance in 2010. The resilience of the Turkish financial system, combined with our flexible and effective liquidity management framework shaped by the experiences of past crises, has turned out to be considerable assets in managing the recent crisis. As a result, growth forecasts of international institutions for the Turkish economy have been revised upwards repeatedly and reached as much as 7.2 percent, the highest among OECD countries. The crisis and slowly emerging global architecture in its aftermath present major opportunities that have once again highlighted the importance of economic cooperation  2  BIS Review 101/2010  and coordination among countries and economies. In the case of the Middle East this is perhaps best embodied in the multiple synergies in financial integration and joint investment opportunities between Turkey and the Arab world. It is a great pleasure to see that the relations within our region have been strengthening on a solid ground. The strong historical, cultural and social ties among our countries constitute a solid basis to further develop multilateral relations.
Nevertheless, whether or not these reserves prove sufficient will depend on the weather conditions this coming winter, and on Europe’s ability to replace them as and when they are consumed. In short, the inflation pressures we had been experiencing due to the reopening of economies after the pandemic, the supply-side bottlenecks and the higher commodity prices have been exacerbated by the conflict with Russia, leading to extraordinary and persistently high rates. According to Eurostat,2 euro area annual inflation is expected to rise to 10% in September. This means that average inflation during the third quarter stood at 9.3%, a figure somewhat higher than anticipated in the ECB's last forecast exercise (9.1%).3 More importantly, euro area inflation is expected to remain above 9% during the fourth quarter. The rise in energy and food prices is the main factor behind the high levels of inflation in the region. The depreciation of the euro has also contributed to upward price pressures, particularly by increasing the price of commodity imports. Specifically, according to the flash estimate, the price increases over the past year in the energy and food components of the consumer price index stood at 37% and 11%, respectively, in September. These two components account for almost 70% of the increase in consumer prices in the euro area over the past year. Nonetheless, inflationary pressures are also spreading to the less volatile components of the consumer basket. Underlying inflation, which excludes food and energy consumer prices, is expected to hit 4.8% in September.

This is more than double the figure recorded at the beginning of the year (2.3% in January). In this case, certain pandemic-related factors may have facilitated a faster than expected pass-through of inflationary pressures. First, the bottlenecks I referred to earlier, which since 2021 have constrained the supply response to growth in demand. But also the strong demand for home renovation or, more recently, the rapid pace of resumption of activities involving more social contact, after two years of demand constraints.4 Moreover, the labour market has so far performed relatively robustly in Europe, an issue I will come back to later. In this context, and in view of the escalation of the energy conflict with Russia, we expect the inflationary episode in the euro area to be more intense and longer-lasting than we initially thought before the summer. This is reflected in the latest ECB staff forecasts, which, 2  https://ec.europa.eu/eurostat/documents/2995521/14698140/2-30092022-AP-EN.pdf/727d4958-dd57-de9f-996599562e1286bf 3  These projections were published on 8 September, with a data cut-off date of 22 August. 4  Pacce, del Río and Sánchez (2022). The recent performance of underlying inflation in the euro area and in Spain. Analytical Articles, Economic Bulletin, 3/2022, Banco de España. 2  in line with the OECD or Consensus Forecasts, have recently revised their inflation outlook significantly upwards. In particular, the ECB staff projections expect average inflation to reach 8.1% in 2022, before easing to 5.5% in 2023 and 2.3% in 2024.
110 100  9  8  120  60 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20  Quarters since GDP peak  Source: ONS and Bank calculations. The Monetary Policy Committee’s May forecast incorporates some of these uncertainty effects. Our projection for the global economy was for 2016 growth of just 3%, the slowest pace since 2009. Domestically, we expected growth to slow to 2% in 2016, partly as a consequence of an increasing drag from uncertainty. Specifically, in May the Monetary Policy Committee (MPC) estimated that the pick-up in UK economic uncertainty it had recently seen would lower our GDP by around 0.7% after a year. While material, this was less than suggested by past relationships partly because our projections were conditioned, by convention, on a vote to remain in the EU, suggesting uncertainty would fade smartly after the referendum. Even before 23rd June, we observed the growing influence of uncertainty on major economic decisions. Commercial real estate transactions had been cut in half since their peak last year. Residential real estate activity had slowed sharply. Car purchases had gone into reverse. And business investment had fallen for the past two quarters measured. Given otherwise accommodative financial conditions and a solid domestic outlook, it appeared likely that uncertainty related to the referendum played an important role in this deceleration. It now seems plausible that uncertainty could remain elevated for some time, with a more persistent drag on activity than we had previously projected.

This point is not trivial. Research has shown that people who have experienced low returns throughout their lives, like the “Depression Babies” of the 1930s, report lower willingness to take financial risk, are less likely to participate in the stock market, invest a lower fraction of their assets in equities, and are more pessimistic about future returns.8 Today, uncertainty has meant an inchoate sense of economic insecurity for many people despite generalised economic prosperity. Across the advanced economies, employment appears less secure, wages more subdued, and inequality more pronounced. And its precautionary effects can mean spending is deferred because there is often a real option value to waiting.9 Firms delay investment decisions. Investors seek safe returns. Households put off buying durables. The common thread is that any economic decision that requires finance, has a sunk cost, or an uncertain payoff, is affected. While the effect on output is clearly negative, the effect on inflation is ambiguous. Uncertainty’s stultifying effects weigh on employment and aggregate demand, creating disinflationary pressures, while the freeze in resource reallocation can hold back productivity and aggregate supply, creating inflationary pressures.10 11 Higher uncertainty can also mean investment responds more sluggishly to demand stimulus.12  7  See Broadbent (2014) for a further discussion of disaster risk and what it means for safe rates. Broadbent, B (2014), “Monetary policy, asset prices and distribution”, Bank of England. See also Barro, R (2009), “Rare disasters, asset prices, and welfare costs”, American Economic Review, 99(1).
It is impossible for the Bank of England to set separate interest rates for Aberdeen and Aberystwyth, Belfast and Birmingham. A central bank, by definition, cannot be local. Or can it? I would argue that not only is this feasible but essential. I have spoken previously about the “twin deficit” problem facing central banks: the deficit in public understanding and the deficit in public trust.56 Boosting this understanding, and restoring trust, among the public is among the most pressing issues facing central banks. Reconnecting communities with institutions helps strengthen Rajan’s Third Pillar. But how is this best done? The public’s understanding of the economy and policy is enhanced when messages are relevant to their lives and locality. 57 A central bank’s understanding of the economy is enhanced if it can tap into the lived, local experiences of companies and citizens making up the economy. And a better mutual understanding between communities and central banks would, in turn, help build trust between them. Constructing a Third Pillar shrinks the twin deficits of public trust and understanding. This is not a new point. Despite being headquartered in London since 1694, the Bank of England has had a regional presence for much of its history. After the UK banking crisis of 1825, the Bank set up a network of 15 regional branches to provide commercial banking facilities.58 Though their purpose was operational, it quickly became clear that the intelligence gathered by the Bank’s branches could help in understanding the economy.

Two colleagues at the Bank, Fergus Cumming and Al Firrell, have recently used a database on all mortgages granted in the UK since 2005 to explore house-moving patterns.42 The results are preliminary, but let me share some of the early findings to demonstrate what might be feasible. Chart 19 plots the frequency of house moves at different distances in 2018. The modal distance of a house move is less than 10km. This is twice as likely as the second most popular distance – 10-20km. In other words, a gravity (distance) model of house moves fits the data, with around one-third of all house moves within 50km. Most house moves are local. Most, but by no means all. The median move is a little below 100km, the mean 130km. There is a longer tail of long-distance house moves than I would have predicted. 42  Although this may sound simple, it involves a complex matching algorithm to identify housing chains, similar to Chakraborty, Gimpelewicz and Uluc (2017). 31  All speeches are available online at www.bankofengland.co.uk/speeches  31  Chart 19: Distribution of house moves by distance (mortgage-to-mortgage movers in 2018)  Sources: Product Sales Database and Bank calculations. Part of the explanation lies in regional and demographic differences. People outside London and the  South-East – for example, in Scotland – are much more likely to move greater distances (Chart 20). Older people (over 46) are more likely to move larger distances than younger people (under 33) (Chart 21).