samchain/econo-pairs-v1 huggingface dataset:
Rosanna Costa: Macroprudential policy and the countercyclical buffer Opening remarks by Ms Rosanna Costa, Governor of the Central Bank of Chile, at the workshop "Macroprudential policy and the CCyB", Santiago de Chile, 16 December 2022. *** Good morning. I am pleased to welcome everyone to today's workshop on macroprudential policy and the countercyclical buffer. Thank you for being here, participating and lending your attention to this important topic. We have gathered a great lineup of speakers, who will address a range of timely and important issues on the matter. In the aftermath of the global financial crisis, banking regulators agreed on an updated set of banking regulations aimed at improving the resilience of the global financial system, highlighting among them the role of new buffers intended to help banks build sufficient resources in normal times so that in a period of stress they can absorb losses and avoid a disruptive reduction of lending. The buffers have two objectives (Basel Committee, 2020b): first, to ensure that banks absorb losses in times of stress without breaching their minimum requirements; and second, to keep credit flowing to the real economy in a downturn by lending to creditworthy businesses and households. In December 2010, the Basel Committee on Banking Supervision (BCBS) published the Basel III framework with the global regulatory standards on bank capital adequacy and liquidity, including a countercyclical capital buffer (CCyB). Its primary objective would be to protect the banking sector from periods of excessive aggregate credit growth, often associated with the accumulation of systemic risk.

If we are to believe the cliché, 'regulation' and 'innovation' are incompatible. On the contrary! Regulation without innovation would just be sterile conservatism, while innovation without regulation and financial stability would be devoid of the trust that is the sine qua non of sustainability. So, to accompany you as you eat your lunch, I'm going to combine these two ingredients, first as part of a hearty main course on the lessons of the crises of 2023 (I), followed by a slightly newer and more forward-looking recipe for the digitalisation of currency and payments (II). I. 2023, illustration of the virtues of regulation The events of 2023 have served as a reminder of the fundamental need for a regulatory framework. Page 2 of 6 The first warning came in the banking sector. Despite the shock waves emanating from the United States and then Switzerland, the banking crisis has not affected the euro area or France in particular, even though we remain on our guard. There is a good reason for this solidity: more solid fundamentals, but above all two inseparable pillars - effective regulation, coupled with proactive supervision. Basel III regulations apply in full to all European banks, but only to 13 banks in the United States. Therefore, the priority is not to keep reworking Basel III requirements – and delaying their application – but to apply them everywhere and as quickly as possible. In a nutshell, more Basel III now, rather than some hypothetical delayed Basel IV.
However, to have an impact on the real economy, there must be a way to transmit this signal all the way to the financial activities that determine economic transactions, such as business capital formation, household consumption and savings. The traditional channel is through commercial banks. And now we have another channel through the corporate bond market. This channel is poised to grow more rapidly in the future. The second aspect is that central bank also operates in the government bond market in its conduct of monetary policy. It can sell and buy bonds to pump money in or out of the system, through their open market operations. An efficient, deep and liquid bond market therefore will not only help make the intermediation process competitive and active - but also allow the central bank to transact in the market more effectively. The third aspect is the function of the bond market in managing the capital flows. Emerging market economies when they are successful tend to attract capital inflow very quickly, and in very large quantity. Unfortunately, if things turn bad, the outflow of capital can also be equally quick and in as large a quantity. How can one better manage this volatile capital flow? To some extent, I think the risks can be mitigated with a well functioning bond market.

If we can make it function as a temporary reservoir to store the incoming water, and more slowly releasing it to the various users of fund within the country, at the right pace for absorption - if the market selection process can be made such that only the projects with really viable, economic prospects are granted the fund - and, if the foreign owners of fund can be persuaded to hold the instruments denominated in borrowers’ own currency, thereby shifting the position on the foreign  2  BIS Review 48/2002  exchange risks from the borrowers to the investors, then the bond market can be a safer channel for capital flows than the commercial banks. At this point you may disagree that if foreign investors in bonds want out, they will still sell the bonds, causing the prices to be sharply lower anyway. This is true. But price volatility in the bond market is still better than a run on your banks. Therefore an efficient bond market can help lessen the adverse impact that volatile capital flows may have on the financial institutions. A sound financial system is of course a necessary condition for the conduct of monetary policy. The role of non-bank financial institutions Let me now turn to the non-bank financial institutions. What can be your roles in relation to monetary policy? I can offer four suggestions. Number one, you can make yourself an efficient player in the market. The more efficient the competitors, the better the market is.
First, there are limitations to what one can learn from market intelligence, whether it is done with a survey, through analytical modeling, or market monitoring. The Federal Reserve’s market intelligence-gathering is among the best there is when it comes to breadth, detail, and rigor. For example, we are the only central bank that conducts market surveys directly on balance sheet policy. That said, the 2013 taper tantrum would not have been anticipated based on market surveys conducted at the time, as the median surveyed market participants’ projection for the end of asset purchases was similar to the plan Chairman Bernanke outlined in his announcement.20 In his book “The Courage to Act: A Memoir of the Crisis and Its Aftermath,” Bernanke attributed the failure of surveys to anticipate the taper tantrum to the fact that, at the time, they reached only primary dealer economists, a homogenous and insular group that he felt was unrepresentative of investors generally.21 I think there is truth to this, but I wonder if there is more to the story. We now survey a broad community of investors in addition to the primary dealers in a bid to gather a more diverse and inclusive perspective, partly in response to this concern. While this makes our surveys more robust, since we started doing this we haven’t observed large differences in median responses between the dealers and the buy-side community.

In all options, the Bank of Cyprus will need to create an organisation to manage nonperforming loans. The bank is already moving in this direction, and should it remain as a single entity it is likely that there will still be a dedicated focus on managing the workout of troubled loans. Splitting the Bank of Cyprus into a commercial bank and an asset management/development bank would create a legal and management separation. This – as any other option – has a number of merits and challenges. Two institutions would provide specialisation. The asset management/Development Bank could focus on maximising value through the restructuring of the loan book with no immediate time pressures. It could also act as a specialist bank focussed on real estate and development related activities. The remaining commercial bank could focus on serving the domestic economy. However, a split could be operationally disruptive in the immediate term, even if it was beneficial over time. Substantial progress in the restructuring of the banking system has been made. This has not been easy, and market conditions remain fragile. In determining the way forward any solution should look to meet four objectives; Restoration of Confidence – It is essential that any solution furthers the restoration of confidence. Customers must have confidence in the future of the Bank of Cyprus whether it is one bank or two. As confidence is re-established we can further ease and ultimately lift capital controls. Funded Balance Sheet – The Bank of Cyprus’s reliance on emergency support is well known.
Equation 3 illustrates the relationship between the current account balance as a flow and the net international investment position as a stock. The current account balance in a particular year corresponds to the change in the net international investment position in that year, adjusted for other influencing variables. Or, put another way, the net international investment position consists of the accumulated current account balances over the period. The other influencing variables, besides the current account balance, which can affect the net international investment position include exchange rate movements as well as changes in domestic and foreign asset prices. An appreciation of the local currency usually reduces the net international investment position, irrespective of the current account balance, as foreign assets are mainly denominated in foreign currency, and foreign liabilities in local currency. Since such valuation effects now play a major role, the current account does not offer a complete picture of developments in the net international investment position. Switzerland’s current account After this quick refresher of the relevant interrelationships concerning the current account, let’s look at the development of the current account in Switzerland from a slightly more longterm perspective. Chart 1 shows the annual balances on the current account in Switzerland during the period 1960–2016 as a share of GDP. The current account has been in surplus since the 1980s. The 3 4  Prior to the financial crisis, Switzerland’s current account balance had long been dominated by net investment income. In statistics, deviations from this equation cannot be avoided.

Michael Held: Keynote remarks at Union of Arab Banks’ anticorruption conference Keynote remarks (delivered via video conference) by Mr Michael Held, Executive Vice President and General Counsel of the Federal Reserve Bank of New York, at the Union of Arab Banks' Conference on Anti-Bribery Corruption, the Sixth European Union Anti-Money Laundering Directive, and the Anti-Money Laundering Act of 2020, 3 February 2022. * * * As prepared for delivery It is a pleasure to be with you virtually for this important Conference. I am thrilled to be able to share a digital stage with my distinguished colleagues – Liz Rosenberg, the Assistant Secretary for Terrorist Financing and Financial Crimes at the U.S. Treasury Department, and Dr. Fahad Ibrahim Alshathri, the Deputy Governor for Supervision at the Saudi Central Bank. I also want to thank my friend Wissam Fattouh and the Union of Arab Banks for the invitation to be part of this timely event. Before I start my remarks, I want you to know that the comments are my own and may not necessarily represent the views of the Federal Reserve Bank of New York or the Federal Reserve System. Like my colleagues and our respective institutions, I have serious concerns about corruption, kleptocracy and international bribery schemes. The Federal Reserve System supports the U.S. government’s actions to limit those activities through prosecutions and sanctions.
Lastly, we need to make progress towards an economic governance of the euro area; in France, we spoke of “economic government”. This progress is essential, regardless of whether or not the United Kingdom remains in the European Union; naturally, I would like it to stay in. This is not a purely institutional question; it is not about “more Brussels” but very concretely about more growth and employment. Indeed, economists estimate that the current lack of coordination of national economic policies has cost Europeans between two and five percentage points of GDP since 2011. Naturally, contrary to the case of monetary policy, the aim is not to fully integrate all of our economic policies at the European level, but to achieve a “full coordination” of fiscal and structural policies. For this, we need to have shared economic goals, and a true “collective strategy” for the euro area, in which each country has a role to play to improve everyone’s situation. This requires trust, in particular between France and Germany, based on a clear pact: national reforms and (not or) European coordination. This full coordination also rests on the setting up of a strong and legitimate European institution: a euro area Finance Minister backed by a European Treasury system and subject to greater democratic accountability. This Finance Minister would be charged with defining the collective strategy, supervising its decentralised implementation by Member States and managing crisis management tools. Going forward, he/she could also be in charge of a common budget.

The new comprehensive package of measures that we adopted on 10 March 2016 reflects two main objectives: first, to return to inflation rates below, but close to, 2% over the medium term. This is not the case at present since inflation stood at –0.2% in the euro area in February, taking account of the sharp decline in oil prices, but it should return to positive territory in the second half of 2016. The other objective is to bolster the financing of the real economy and to protect it from the pressures related to market volatility. The new series of targeted refinancing operations extension of the asset purchase programme, for its part, will be of particular benefit to large French corporations. We are convinced that these additional measures will deliver concrete results, as did the successive measures we have implemented since June 2014. The latter have indeed boosted lending to businesses, while lowering the cost of credit, and made a 0.3% contribution to French growth in 2015, or even 0.4% according to INSEE. This represents about 80,000 additional jobs for the economy. We are therefore consistent in our objective, and ready to act using the right instruments. But we also remain vigilant as to the possible risks that our monetary policy could generate.
Secondly, a deposit-taking institution is leveraged, even if it does not fund itself in wholesale markets: retail deposits are debt. So banks’ capital adequacy can quickly be imperilled by a fall in asset prices. In that sense, the “liquidity” and “solvency” explanations of the current crisis are inseparable. Especially in a world in which banks’ trading portfolios are marked to market, a drying up of liquidity in markets brings about a fall in asset prices, and so a depletion of banks’ net worth. All that underlines just why our predecessors placed such great weight on official interventions to maintain the safety and soundness of banks. 7 If anyone doubted it, this crisis underlines how problems of funding liquidity, asset-market liquidity and solvency are intertwined. And those dimensions of a systemic crisis map into the authorities’ capability, in principle, to be a Lender of Last Resort; a Market Maker of Last Resort; and a provider of Capital of Last Resort. Central bank provision of liquidity insurance, and LOLR Bagehot’s famous dictum, in Lombard Street, was that, to avert panic, central banks should lend early and freely (ie without limit), to solvent firms, against good collateral, and at “high rates”.

What a relief, one might think, that we consumers don't have to pay for all this. But who is it that has to pay? Because someone ultimately has to bear the costs. It is easy to initially assume that it is the retail trade and the banks that benevolently pay for payments. But it is not that simple. The merchants need to have their costs covered; otherwise they will not be able to run their businesses. And the same applies to the banks. The costs of all payments therefore gradually arise as the markups on the prices of the goods and services we buy. Milk and vegetables may become a little more expensive in the shop and the interest on our deposits at the bank may be a little lower than would otherwise have been the case. It is thus we consumers and bank customers who ultimately pay the costs of all payments. But we do not see them. We are therefore led to believe that they do not exist – or that someone is paying them. Shouldn’t the actual costs be visible? Is this a good system? Normally, we want to be able to see what various goods and services cost. The price helps us decide how much we will buy. We do not have any such price signals regarding the different methods of payment. The real prices are hidden. And this raises the question: If we knew what it actually costs, would we change our method of payment?
11  But to set a higher requirement if we have doubts about: the home  resolution strategy, the availability of a surplus at the top of the group or a lack of reciprocity in MREL-setting in other jurisdictions (that is others all set at the 90% end of the range). We expect to say more about surplus MREL and the form it should be held in to be readily available when we come to finalise our internal MREL policy next year. Another important objective for us in setting policy on internal MREL is to avoid any distortion in the sequence of loss absorption between operating companies (OpCo) and the group holding company (HoldCo). We require UK banks to issue external MREL out of their HoldCos, structurally subordinated to liabilities at the OpCo. The issuance proceeds are then onlent to the OpCo as internal MREL broadly mirroring their external form, for example: Tier 2 could be onlent as Tier 2, AT1 as AT1 and senior debt out of HoldCo would be downstreamed as an internal debt instrument sitting senior to capital instruments but junior to operating liabilities in the OpCo. We need to be sure that as losses are incurred in the operating company they are absorbed in an order that follows the OpCo creditor hierarchy and does not bypass certain instruments.

We want debt investors to be able to price risk effectively by being clear about where they rank in the creditor hierarchy and to give them confidence that we can stick to the hierarchy in applying losses and that we will not be picking winners and losers within a class. Counting as MREL senior debt issued out of operating companies without subordination looks like a recipe for undermining that confidence. (b) Bail-in execution We also want to be clear as a resolution authority how we will conduct the resolution in a way that preserves value and distributes it fairly, ensuring no creditor worse off protections are met. To that end, we have thought hard about the valuation capabilities we need firms to have so that we can value losses and recapitalisation needs in an effective and timely way. We have just consulted on a set of principle level 12  requirements and expect to finalise policy in this space in the next few months. We believe that the bail-in valuation for a large cross-border firm is not something that can be fixed over a weekend. Valuation on that timetable will inevitably tend to overshoot on the estimation of losses, not least because a significant driver of the valuation will be the reorganisation that follows the bail-in and the restructuring costs and disposal valuations associated with that.
The review did not result in a broad revision of the powers and mandate of the ESAs, nor in a strengthening of the European perspective in the ESAs governance. Ultimately, the growth and integration of capital markets need to be reflected in the EU’s supervisory set-up. Reaping the synergies between CMU and banking union This brings me to my last point: we should take advantage of the synergies between CMU and banking union. More efficient markets could complement banking union by offering ways to mobilise EU savings to finance young and innovative firms. Fostering equity investment by addressing the debt-equity bias would support the development of an equity culture and increase households’ return on their savings, for example. It could furthermore enhance financial stability through the reduction of leverage in the corporate system. At the same time removing barriers to the functioning of crossborder debt markets would facilitate a smooth allocation of the savings surplus across the euro area. Creating an EU playing field in terms of insolvency regimes, taxation and supervision would support both the objectives of CMU and the banking union. In fact, strong cross-border banks and cross-border ownership of assets would reduce the risk of disruptive capital flight in crisis times, while also reducing the bank-sovereign nexus. To achieve CMU and banking union, we should also look at controversial issues such as the need for a European safe asset. There is no other currency union in existence in which regional debt is considered to be the safe asset.

Addressing this gap would support the banking and capital markets by creating a homogeneous product of a high quality and significant size that could become a benchmark for investors. If designed in a way that doesn’t undermine incentives for sound national fiscal policies, a safe asset would help to mitigate the bank-sovereign nexus, reduce cross-border safe-haven flows and improve financial integration, thereby also enhancing the effectiveness of our monetary policy. And, last but not least, this would contribute to enhancing the attractiveness of European capital markets and ultimately support the international role of the euro. Promoting European responses to achieve CMU Let me conclude with two messages. First, convincing investors and companies to venture outside their borders requires certainty and homogeneity on the regulatory conditions that apply abroad. This means that the core aspects of national policies need to be further harmonised and implemented in a consistent way to support the integration of capital and banking markets. Banks and capital markets should complement each other in channelling savings for productive uses and fostering investment in innovative firms. Second, moving towards CMU and banking union should also reflect the ambition we have shown in our supervisory and regulatory set-up. It should support a coherent European response to new challenges such as Brexit and the development of non-bank finance. And it should not shy away from addressing gaps in our regulatory and institutional framework.