samchain/econo-pairs-v1 huggingface dataset:
Next, I shall review recent evidence of contagion phenomena across European sovereigns. The third part of my speech will deal with how the European Central Bank has responded to these developments; and the fourth part with the ultimate key responsibilities pertaining to domestic fiscal authorities in this area and the need for strengthened governance structures. Financial contagion and public policy Since the writings of Walter Bagehot financial contagion has become an issue that is discussed widely in policy, market and academic research circles.2 Taking a broad  1  W. Bagehot (1873), Lombard Street – A Description of the Money Market, pp. 129ff. Emphases by the speaker. 2  See, for example, the following surveys on the issue: G. Kaufman (1994), “Bank contagion: A review of the theory and evidence”, Journal of Financial Services Research, 7; E.P. Davis (1995), Debt, Financial Fragility and Systemic Risk, Clarendon Press, 2nd ed. ; O. de Bandt and P. Hartmann (2000), “Systemic risk: A survey”, ECB Working Paper, no. 35, November; S. Claessens and K. Forbes (eds., 2001), International Financial Contagion, Kluwer Academic Publishers; ECB (2005), “Financial market contagion”, Financial Stability Review, December; ECB (2009), “The concept of systemic risk”, Financial Stability Review,  BIS central bankers’ speeches  1  perspective embracing different views and studies, contagion could be defined as a situation in which instability in a specific financial market, institution or country is transmitted to one or several other markets, institutions or countries.

A first characteristic of contagion is that the spread of instability would usually not happen without an initial trigger event – which often appears to be a relatively contained event. A second characteristic is that the transmission of instability is in some way abnormal, for example, in terms of its speed, strength or scope. Though spillovers are to be expected in an interconnected financial system, contagion is distinct in that it often reflects a market failure and a dangerously amplified transmission of instability. The underlying market failure consists of the fact that contagion often involves externalities.3 As a result, the private costs of the initial financial market failure, that is the costs to the actor triggering contagion, are lower than the social costs. In the specific case of the sovereign debt crisis in Europe, the trigger could, for example, be that a country in a precarious fiscal situation does not seriously implement the necessary fiscal consolidation measures. This could lead interest rates on this particular country’s government debt to rise and could in turn also constrain economic growth in that country. This is what I call the “private costs” of such behaviour. Although in this case the lack of fiscal discipline is something which is strictly related to one country, this circumstance may still lead volatile financial markets to also lower their expectations about fiscal consolidation efforts in other countries. As a result, those other countries also begin to face costs in terms of significantly increased interest rates on their government debt.
For anyone interested, the details of these reports are available on the website of the BIS. Before turning to capital adequacy issues, I would like to highlight some key elements from two recent papers on sound practice. In July, the Basel Committee issued for comment a report on the management of credit risk. This is a particularly important topic since the major cause of serious banking problems continues to be directly related to poor practices regarding credit risk management. A key focus of the report is on the need for banking organizations to develop an overall business strategy for credit risk that incorporates the tolerance for risk and the level of profitability the bank expects to achieve from incurring various credit risks. A strategic approach to credit risk provides a coherent framework for practices in such areas as credit-granting criteria, credit limits, and credit risk monitoring. The Basel Committee issued a second paper in September that addresses the subject of corporate governance in banking organizations. As you know, corporate governance, especially the role of boards of directors, is of particular interest in this country. More intense competition, rapid change, and increased complexity in many business activities mean that responsible and independent oversight by boards of directors plays a more crucial role in ensuring that the firm’s business strategy is sound and its leadership effective. I am convinced that the need for strong corporate governance is equally great in emerging market countries, where banks and other financial institutions face comparable pressures.

While the 1988 Accord was a milestone achievement, its simple risk-weighting scheme has had difficulty incorporating innovations in the way banks today manage and mitigate credit risks. More fundamentally, the 1988 Accord does not adequately differentiate among degrees of credit risk. As a result, banks have had incentives to take on higher risk exposures within each of the Accord’s broad risk categories. Banks have also tended to engage in transactions that lower capital requirements without reducing economic risk. The effect of these developments has been to erode the significance of the Basel ratios as an indicator of a financial institution’s capital adequacy, particularly for the large, internationally active institutions which were the original targets of the Accord. To address these shortcomings in the 1988 Accord, the Basel Committee proposes two primary approaches: (1) a standardized approach that ties risk weightings to external credit assessments such as credit ratings, and (2) an internal ratings-based approach that would begin by mapping internal risk ratings into standardized risk weightings but might eventually evolve into something closer to the full use of credit risk models. Each approach treats the trade-off between simplicity versus accuracy somewhat differently and thus one or the other is likely to be relevant to banks with different levels of sophistication. Importantly, both proposed approaches attempt to introduce greater risk sensitivity into the minimum capital standards.
The expansionary fiscal policy provided the economic activity with the necessary impulse over the course of the year; however it was also accompanied by higher public debt and upward pressures on Government T-bill yields. The deepening of budget deficit resulted in substantial public debt increase, which as at year-end 2009 accounted for about 59.5 percent of GDP. The Bank of Albania encourages measures to reduce the budget deficit and public debt in the medium run. Lower budget deficit and public debt levels will provide more room in accessing of funds from the private sector and boost confidence in Albania’s macroeconomic stability. In addition, these measures will help to create appropriate conditions for attracting foreign capital in the form of private loans or foreign direct investment. BIS Review 78/2010  3  1.3  Monetary developments and financial markets  Financial intermediation in economy was conditioned by the contraction of financial resources, wavering of confidence in financial institutions and the decline of demand for banking loans in 2009. At the end of March, deposits fell to 55 percent of GDP compared to 63 percent in September 2008. The withdrawal of deposits during the first quarter of the year brought about the slowdown of money growth in economy. Banking activity recovered slowly during the following three quarters. Money supply grew by an average of 6 percent this year or about twice less than the previous year.

The total capital ratio remained adequate, above the EU average, but the capital reserve shrank once with the marking to market, because of the fast-paced interest rate rise. Asset quality continued to improve, with the non-performing loan ratio falling to European levels and the NPL coverage by provisions staying at significantly higher levels than the European average; profitability increased. Yet, Romania's banking sector faces a number of vulnerabilities: (i) expectations on a higher risk of default on private sector loans amid worsening macroeconomic conditions, the uncertainty about future developments, and growing debt service due to higher interest rates, (ii) the close link between the banking sector and the government sector, and (iii) the polarization of credit institutions by size. The slowdown in lending, which started in the second semester of 2022, was also due to the rise in financing costs amid the tightening of both monetary policy stance and  2/3  BIS - Central bankers' speeches  credit standards. In the second quarter of 2022, banks tightened credit standards for loans to non-financial corporations and to households, and were expected to continue to do so in the third quarter of 2022. The prolonged energy crisis, the heightened geopolitical tensions and the mounting uncertainty about the economic outlook prompted banks to reassess the level of risk. In respect with challenges raised by climate change and energy efficiency, as of May 2022, the NBR started collecting information on green loans from banks.
And when risk taking increases, it must not be at the expense of the resilience of lenders to any future downturn in the economy. They must remain capable of serving in the bad times, as well as the good. Our annual stress test provides the basis for checking that but, in this environment, more regular check-ups are needed too. That’s why (as we said in the Record of our March meeting) we intend to “re-consider the adequacy [of capital levels] in June, with a focus on the evolution of domestic risk appetite.” We’ll keep standards up with the risks that are being taken. Alongside that, we must also keep up with the third macro trend: a fundamental re-shaping of the system. 9  In part due to regulatory efforts to level playing fields, banking is becoming more competitive. Smaller banks are taking market share. In the past 12 months, smaller banks – that account less than a fifth of the outstanding stock of household lending – have delivered half the new lending to UK households (see chart 5). Their newfound importance in the supply of credit means that, even though they are individually small, their collective risk taking has increasing relevance to the whole economy. Collectively at least, smaller banks must – like their bigger cousins – have the resilience to withstand economic bad times. That trend to greater competition should continue as Payment Services reforms and Open Banking come into play.

So the recent political agreement on an implementation period is welcome. There was always going to be an interlude between political agreement and legal certainty. So authorities here have done what our mandate to keep the system capable to serving the economy implies. Regulatory underpinning has been given to the political agreement. European firms can assume they’ll be able to operate in – and serve clients in – the UK, much as they do now, until the end of 2020. 5  5  See update on the regulatory approach to preparations for EU withdrawal, 28 March 2018, at https://www.bankofengland.co.uk/news/2018/march/update-on-the-regulatory-approach-to-preparations-for-eu-withdrawal 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  And that commitment is backstopped. The UK government has committed to legislate, if necessary, to allow European firms to operate and serve end users in the UK temporarily after Brexit. The economy of the UK, at least, can be confident that – whatever happens – it can access financial services as it does now. But still more action is needed because existing contracts could be disrupted. Uncleared over-the-counter derivative contracts, with a notional value of £ trillion, could be affected. That’s around a quarter of derivative contracts entered into by parties in both the UK and EU. Novation of contracts on that scale risks disruption, particularly if it were to take place in a short time frame. As with the flow of new services, a backstop would have benefit. It would need two parts.
José de Gregorio: What does society expect from the financial sector? Panel discussion remarks by Mr José de Gregorio, Universidad de Chile and former Governor of the Central Bank of Chile following the Per Jacobsson Lecture by Dr YV Reddy, 24 June 2012, Basel, Switzerland. *  *  *  I would like to thank the BIS for the invitation to participate in this panel, which makes us look at financial markets from a new perspective. As policymakers, we are used to talking about how the financial system must operate in order to fulfill its goals without threatening financial stability or imposing costs at the aggregate level. In recent years, the discussion has focused on how to avoid excessive procyclicality, contagion, moral hazard, and other important policy concerns. As economists, we have been trying to explain the misbehavior of financial systems, and we are still searching for answers. Although we may have some ideas, the policy implications are not straightforward, but the answers cannot wait. Policy design needs answers as soon as possible, and delays may cause well intentioned policies to be poorly implemented. But what society really demands from financial systems is quite difficult to define. Society is a collection of actors, with different interests and different needs. People want access to the financial system at fair conditions. Therefore it is useful to think of society as everyone who is not related directly to the financial industry or policymaking.

Inflation expectations may be sensitive to a large but temporary shock that moved inflation outside the range within which it has remained for some years. With their belief in stability jolted, households’ inflation expectations might move by much more than was justified by the temporary nature of the shock. That would make it more difficult for the central bank to bring inflation back to target. The moral of this particular story is that it may be risky to infer from the observation that inflation expectations are stable that all is well. There will be times when large and persistent shocks occur, and it would be unwise to count on inflation expectations remaining stable when actual inflation starts to deviate substantially from its recent range. So those are the three lessons that I have learnt from Alan: (i) a recognition that economics is not a set of doctrines but a way of thinking; (ii) the importance of using qualitative and quantitative information from a range of sources; (iii) there are a small number of fundamental objectives that are crucial and which we can judge by the Greenspan yardstick of whether we have freed businesses and households from the burden of expending resources to deal with unnecessary policy volatility. Alan’s departure from the central banking scene will deprive us of a source of wisdom, inspiration and leadership. To be sure, Alan’s words, whether spoken or written, will surely still reach us from the sidelines.
On the whole, the turnover in the retail trade appears to have increased prior to the changeover, which is connected with an increased use of cash during the same period. Many consumers have quite simply chosen to consume extra during the late autumn of 2001 to use up their national banknotes and coins. The rapidity of the changeover appears to have simplified it for the retailers, as the period of using two different currencies was relatively short. In Sweden, the retail trade is already represented in the SIFS group (Consultation and Information with the Financial Sector), which is led by the Riksbank and as the preparations for a cash changeover proceed, we will certainly have reason for closer contact. The rapid changeover to the euro has had the result that the need for transportation and storage of both euro and national currencies has increased and become more concentrated than estimated. It is above all the national currencies that have created storage problems for the retailers and banks, as return transport of these has had to wait until sufficient amounts of euro have been distributed in the market. Despite this type of problem, the speed with which the euro was introduced has meant that there have been calls in many countries to shorten the cash changeover period, which has lasted between one and two months.

For instance, in Austria and Spain some shops have refused to accept schillings and pesetas, despite the fact that these were still legal tender, as it was considered unnecessary to have two parallel cash desks when the changeover was more or less complete. This is a question that must be considered carefully with regard to Sweden. I know that the retail trade would like to see the shortest possible cash changeover period and experiences from the current EMU members indicate that two months may be on the long side. However, there is a risk that an introduction of the euro might not occur as rapidly in Sweden at a later date, as the currency would no longer be exciting news and the general public would already have access to the banknotes and coins from other countries. Of course, it is also possible that the Swedish people, as soon as the exchange rate is irrevocably fixed, will begin exchanging krona for euro and there will be unofficial use of euros. In this case, the changeover could be implemented in a very short space of time. It would also mean that the foreign exchange offices would play an important role in the cash changeover in Sweden. This question is one to which the Riksbank will return within the co-operation with the SIFS group. One subject that often arose in the debate prior to the cash changeover was that surreptitious price rises could be made in the translation from national currencies to the euro, which would create inflationary pressure.
If the Swedish payment system were to become dominated by private crypto-currencies or by something other than Swedish kronor, domestic monetary policy would be marginalised. The ongoing Riksbank Inquiry has examined the matter of cash in a so-called fast track and a few proposals on access to cash services have been produced. This could contribute to slowing down the trend of decreasing cash usage. However, there are indications that that the latter is mainly a consequence of reduced demand for cash. 30 I hope that the Riksbank Inquiry, in its final report, will put forward further proposals for the long term protection of Swedish kronor issued by the Riksbank, whichever form these may take, physical or digital. New legislation,  30 For an analysis of this development, see “Times are changing and so are payment patterns”. Guibourg, G. and Erlandsson, F. Economic Commentary No. 6 2018. Sveriges Riksbank. 12 [15]  strengthening the protection for Swedish kronor, should be technologically neutral to allow for a future totally dominated by electronic money. I would like to be clear that, as yet, we are only at the start of the analysis of the e-krona. Last autumn, we presented a few preliminary conclusions and, at the end of this year, we will decide whether and, if so, how we will proceed with the next stage of the project. Neither are we alone in the central banking world in considering this.

Norman T L Chan: Remarks for TraHK 10th Anniversary Remarks by Mr Norman T L Chan, SBS, JP, Chief Executive of the Hong Kong Monetary Authority, at the TraHK 10th Anniversary Gathering Celebration/Reception, Hong Kong, 12 November 2009. *  *  *  Good afternoon ladies and gentlemen. I am delighted to be here today on the 10th anniversary of the listing of the Tracker Fund of Hong Kong and to see so many familiar faces from the original project team. Thank you State Street for organizing this timely get-together. A decade has come and gone since we created Tracker. We’ve seen another crisis and a whole raft of intervention measures by governments, some of which are of unprecedented scale. Now the focus is turning to "exit strategies" and, looking back ten years' on, I think we can all take some collective pride in having been part of one of the most innovative, and dare I say elegant, exit strategies. The strategy, of course, was to dispose of the stocks acquired by the Government in the stock market operations of the summer of 1998 with minimal disruption to the market. This was by no means a small task – but together we rose to the challenge with an exit strategy that saw us launch the first ETF in Asia ex-Japan, in a public offering which turned out to be the largest in Asia ex-Japan at the time of launch, raising $ billion from over 180,000 retail investors and institutions.
On that basis, the euro-area would have no reason -- and certainly no right under European legislation -- to seek to act in any discriminatory way. Indeed, it would be economically damaging to both sides if it were to do so. I have no serious concerns on this score. Assuming, as I do, a continuing responsible and constructive relationship -- which, as I say, would clearly be in our mutual interest -- it seems to me that some of the concerns that are occasionally expressed, for example, about the possible loss to the UK of internationally mobile investment, are exaggerated. I would suppose that, in the future as in the past, investment will be located wherever it is expected to earn the highest return -- indeed I would suppose that shareholders would insist that this be the case. And while exchange rate uncertainty may be a factor in such decisions, it is not at all clear that it is likely to be the decisive factor very often, when set, for example, against the whole range of supply-side influences, including labour market flexibility. Similarly, in relation to concerns about the future of the huge UK financial services industry, the reality is that financial activity will be carried on wherever it can be carried on most conveniently, efficiently and profitably. And in this case, too, the question of whether or not the UK is part of the single currency is unlikely to be decisive.

In Sweden and many other countries, the old idea, in the 1950s and 1960s, that a trade-off exists between inflation and unemployment resulted in an increasingly high level of trend inflation. When the drawbacks of active economic policies of this type became apparent, people in general and their representatives also feared the other extreme - a monetary policy that consistently aimed at keeping inflation as low as possible. Some countries, of which Sweden is one, are basically averse to deflation. So a regime whereby monetary policy has a systematic, long-term commitment to keeping inflation at a predetermined level of 2 per cent, neither more nor less, represents what many people perceive as a balanced approach to avoiding deflation as well as inflation. This has made it easier to establish the legitimacy of the regime in the public mind. Some relevant issues for a practitioner Let me now turn to some matters which a practitioner finds important and which will also be touched upon during the coming two days. BIS Review 58/1998  -3-  One issue concerns the indicator of inflation that is appropriate to use as an explicit target. The practical considerations in this respect are complex and are currently being debated in Sweden. The consumer price index has the advantage of being familiar to a wide public. Besides measuring trend inflation, however, it also gives information about price fluctuations that stem from transitory supply-side shocks, for example changes in indirect taxes and interest costs.