samchain/econo-pairs-v1 huggingface dataset:
Preparing for the New Accord Let me get into more detail now on what both banks and supervisors will need to do to prepare for the Accord, by describing what we are doing in the United States. I am sure our experience will have parallels in the UK and elsewhere. Challenges for banks To begin with, we have looked to get our arms around where the major firms actually stand in preparing for Basel II, and to pinpoint the major challenges that lie ahead for them as they look towards implementing the advanced approaches to credit and operational risk. Importantly, our dialogue with the banks has focused on where they stand in meeting the minimum standards for entry to, and on-going use of, the IRB approach. Our strong sense is that banks have both the desire and the commitment to continue to develop their internal ratings systems in a manner consistent with the requirements of the IRB framework. The discussions with the industry have, however, highlighted various areas where banks may need to expand their efforts in preparing for implementation. I will offer comments on four areas where more work is needed: a.  the design and structure of rating systems;  b.  the necessary controls to ensure that ratings are accurate and up to date;  2  BIS Review 15/2003  c.  the availability and quality of credit data; and, finally  d.  the overall corporate governance approach  a.

The net value of non-performing loans for the last 12 months decreased by over BGN 660 million. Their share represents 2.66% of the total net value of loans and advances, and their amount is fully covered by the capital surplus above the regulatory requirements and buffers; Profitability, measured by the amount of profit of BGN 1.7 billion, guarantees a return on assets and capital, and is a serious source of internal support for balance sheets if necessary. In this context, the main challenges facing the banking sector to date can be summarised along three lines: the dynamics of the macroeconomic environment, the pro-cyclical behaviour of banks, and the potential risks to their profitability. The macroeconomic environment, as I noted at the beginning, is characterised by high uncertainty and the potential for escalation of risk scenarios. This implies the continuation of stress tests for the banking sector with various hypothetical negative scenarios. The banks' pro-cyclical behaviour is associated with continued credit growth. Under upward credit dynamics, the capacity of borrowers to service their obligations is sometimes overestimated. That is why the supervisory policy will continue to aim at ensuring that credit institutions act conservatively. 3/5  BIS - Central bankers' speeches  The profitability of the banks is put at risk along two lines simultaneously. First, due to the need to set aside additional provisions under a growing probability of non-performing loans; and secondly, due to limitation of the banks' scope to generate income from core activities.
Now, the situation has rather been the opposite: comprehensive lending from the Riksbank, but very limited loan losses on the home market for the banks. How can this be explained? Well – as a reflection of the nature of the crisis. Back then, in the early 1990s, the banks had suffered  2  For example, in the euro area, the price index HICP measures inflation without the effects of changes in mortgage interest expenditure. 2  BIS central bankers’ speeches  loan losses in the commercial property sector, which impacted on profitability in the banking sector and led to a degree of restructuring aimed at maintaining capital adequacy; it was a solvency crisis, rather than a liquidity crisis. This time, in conjunction with the financial crisis, an acute shortage of liquidity instead arose in the banks when the functioning of the capital markets became impaired. A further sign that the financial crisis is behind us is that the Riksbank has now wound up all of the extraordinary measures adopted during the crisis. It was not entirely easy to understand the development of the financial crisis while it was unfolding. Today, however, the view is much clearer. This brings us to the question of where we are today. Where are we now? Strong recovery after the crisis The Swedish economy has recovered very strongly from the financial crisis. The growth of GDP in Sweden is very high from both a historical and an international perspective.

All in all, the monetary policy stance suggests a gradual increase of the repo rate towards more normal levels (see Slide 12). This is a precondition for the balanced development of the Swedish economy. As I mentioned two days ago, housing prices and debts among households have increased heavily for a longer time. The rate of increase of household debts has far exceeded the rate of increase of incomes. If this development continues, imbalances may arise in the Swedish economy over the long term. Consequently, in this regards, the normalisation of the repo rate level may also contribute to promoting a stable economic development in the future. Even if the development of Sweden’s economy is favourable, it is naturally not risk-free. What risks can we see at present? Firstly, the krona may appreciate more than we had expected. The assessment we have made is that the krona, to a significant extent, already reflects the high growth rate of GDP and the strong state of public finances, for example. However, I would like to point out that forecasts of exchange rates are always associated with significant uncertainty. It cannot be ruled out that the favourable development of the Swedish economy has led many investors to reappraise their view of investing money in Sweden. So could an excessively strong exchange rate form a problem? Yes, it may form a “problem” in so far as demand for Swedish exports will decrease and inflation may not increase in line with expectations, as imported goods become cheaper.
And if we take action, we will clearly describe what we are doing and why. The Riksbank has close contacts with the Swedish banks and with other financial market agents. Although we do not see any indications of extensive liquidity problems at present, we will continue, as always, to closely follow developments in the financial markets. This is where our responsibility for financial stability also comes in. We have to ensure that the payment system functions in a safe and efficient manner. Part of this work involves regularly analysing developments in the financial market and the financial system’s capacity to withstand any shocks that might arise. We present our analyses regularly; most recently in May this year. We are also involved in shaping the regulatory framework to ensure it is designed to achieve a stable system. In all of our work regarding financial stability we work in close cooperation with other Swedish and international authorities. If the situation were to go so far that more serious liquidity problems nevertheless arose, we have detailed plans for how we can deal with them. If the worst came to the worst, we have the possibility to grant emergency liquidity assistance to the financial institutions under the supervision of Finansinspektionen (the Swedish Financial Supervisory Authority). But we only do so if the institution in question is solvent. Loans are then granted at an interest rate that is higher than the lending rates in our steering interest rate system and only if we see that the Swedish financial system is threatened.

Another objection to central banks publishing their own interest rate forecasts is connected to the functioning of the market. This means that in principle the financial market agents could stop looking for other information if they have access to the central bank’s forecasts for interest rates in the slightly longer term. How the market views economic prospects is normally reflected in the long-term market rates. This source of information could thus be lost and this would impair the functioning of the market. But as I perceive it, there have not been any such signs so far. In addition, I find it very difficult to imagine that the market agents would stop making independent assessments because we are publishing our own view of interest rate developments. They if anyone know that the interest rate path is a forecast and they therefore have strong reasons for continuing to search for information via other channels than the Riksbank. So far it has been clear that we and other market agents have actually had slightly different views regarding how the interest rate will develop in the future. And this is actually a sign that things are as they should be. It is quite natural that forecasters make different judgements, particularly in the slightly longer term. In the long term, there are also more factors than expected monetary policy that have significance for interest rates.
José De Gregorio: Transparency and communications in modern central banking Keynote speech by Mr José De Gregorio, Governor of the Central Bank of Chile, at the 10th Annual General Meeting of the Interamerican Economics and Finance Journalist Association (AIPEF), Santiago, 17 July 2008. *  *  *  It is a pleasure for me to take part in this event and to have the opportunity of highlighting the importance of communications in modern central banking. Journalists play a fundamental role in transmitting our messages to the general public and that is why we are particularly interested in communicating with you and making ourselves understood to the best of our ability. The time when central banks were opaque is gone. Today, transparency is the key to satisfying the demands that democratic societies make on autonomous institutions like central banks and to achieving monetary policy efficiency. So I would like to talk about transparency with a special focus on monetary policy. Why the need for transparency? In recent decades, central banks have become increasingly more transparent. For many reasons, which I will not go into today, they have moved towards a greater degree of autonomy in the conduct of monetary policy. Central banks have been given operational independence and are able to exercise monetary policy using technical criteria with a medium term perspective. Therefore we have the first reason for central banks to be transparent: the legimitimacy required in a democratic regime of an autonomous institution whose decisions have important implications for national welfare.

The IMF’s Chief of Mission at that time asked me to meet “in six eyes”: mine two and their four. He suggested a devaluation of at least 20%. I told him that I will answer tomorrow. The next day I told him that we will discuss again in autumn during his next visit. The situation calmed during the summer. We started purchasing foreign currency, and the favorable situation continued. Nobody ever opened this issue again. They gave up. The second moment was the closing of Makedonska Banka and forcing few other shareholders to abandon the banking business. It was a very erratic experience. They played extremely unfairly. They were developing and managed to develop dirty plots. They also threatened. They made a mistake. The decisions we believed in were unchangeable. We cleaned the banking sector from shareholders who were not eligible, on any ground. We fixed several weak points in the system thanks to our decisiveness and integrity. And, as to the organizers of dirty campaigns, you know the information. The third, extremely dramatic moment was the end of 2008 and the first half of 2009: the global recession. In that period we spent 500 millions of Euros defending the exchange rate – one third of their total level. We had to try our hardest, otherwise we were about to face an economic disaster. We were criticized for undertaking measures contrary to those undertaken by developed economies. They failed to see that such comparisons will not wash.
It is important to take advantage of the conditions in place so that the wage moderation begun in the first half of the year may take root in the coming quarters, and so that ailing companies may maintain employment and ensure their survival by drawing on the new avenues of flexibility offered to them, through negotiations with their workers. The austerity measures adopted in the public sector, which include wage cuts, will help bring about the adjustments the private sector needs to entrench its competitiveness. On top of wage restraint in those companies that need it to restore competitiveness, there should be genuine productivity gains based on greater efficiency, since so far their expansionary behaviour chiefly reflects the severity of the employment adjustment. A further key ingredient to ensure gains in structural competitiveness is the continuation of the current low-inflation scenario once the recovery firms. The return of the core inflation rate to its low level before the VAT rise, once the base effects are stripped out in the second half of next year, would be a good indicator that cost- and price-setting processes are moving in the right direction and are capable of surviving comfortably within an area of price stability. The absence of indexation clauses in wage bargaining for 2011, as stipulated in the agreement in force, will help prevent the rise in VAT from exerting second-round and inflation-inertia effects.

In Spain’s case, the stress tests covered virtually its entire financial system and were conducted in great detail and with a high degree of transparency, providing extensive information on exposure to the principal asset classes. The results showed the system as a whole to be sound, whereby their publication undoubtedly contributed to dispelling the doubts over our financial system. The final piece in the far-reaching reform of the financial system has been the savings bank legislation approved by this House. In opening up savings banks to private capital, the legislation will not only allow savings banks to move ahead without having to request  2  BIS Review 129/2010  assistance from taxpayers, but it will also enable them to meet the demanding capital requirements set under the new international financial regulation known as Basel III. In the budgetary domain, the government reinforced and accelerated the implementation of the fiscal consolidation programme which, in compliance with Community commitments, it had announced in January. To this end, it approved a new raft of measures on 20 May entailing spending cuts of somewhat over € billion to be made between 2010 and 2011 (around 1.5% of GDP), on top of the previously approved spending cuts and tax rises. The new deficit target path was thus set at 9.3% of GDP in 2010, 6% in 2011, 4.4% in 2012 and 3% of GDP in 2013, which would steady the public debt ratio at a level slightly below 75% of GDP as from 2012.
Experience has taught me that every decision-making body needs a sheltered area away from the public where things may be imperfectly stated and seemingly irrefutable truths may be called into question. If such a sheltered domain is abolished, this will, in my view, have a negative effect on negotiating practices and the quality of decisions. Optimisation of ex ante transparency is, by its very nature, more critical. A clear and open commitment to a monetary policy goal is of central importance. Thus the central bank must state explicitly what it means by price stability, and it must also communicate how it assesses the long-term development of the target figure. Both elements serve to enhance - or even facilitate - the predictability of its policy and to reduce uncertainties. Conversely, it must be accepted in monetary policy that the precise way to the goal is fraught with considerable uncertainties and that therefore too much ex ante transparency can easily become counterproductive. In the context of our concept this applies in particular to the interest rate path to be followed. If a target range for the money market rate is published at a particular point in time, this steering intention remains valid “for the time being”. It is quite understandable that market participants should wish to know more: how long the interest rate target is to remain valid, and what interest rate steps are likely to follow. What they would prefer above all else is information on the planned interest rate path for several quarters.

So summing up, as with the Concordat, a country’s prudential regime could be judged as complying with the Core Principles even though it does not ensure that the distribution of capital across a banking group leaves its individual entities adequately capitalised. Finally, the Capital Accord7 – now in its third incarnation – applies to banking groups on a consolidated basis (or at a sub-consolidated basis for different tiers of a group). The Accord gives jurisdictions an option to apply capital requirements on a solo-basis to individual legal entities as an alternative to applying the requirements to consolidated groups of legal entities8, but there is no requirement to exercise that option. Again, then, there is no hard rule that ensures a sensible distribution of capital across individual entities within a group. If you cannot fit all that together, you can be excused! Here’s an attempt to make sense of it. There appears to be a disconnect between the Concordat (consolidated supervision); the Core Principles (both consolidated and solo perspective recognised as important, but no mandated solo capital requirements); and the Capital Accord (consolidated and sub-consolidated, with solo subject to deductions allowed but not required). Or, put another way, each of the three BCBS documents does an important job but none of them addresses the distribution of capital across a group. That is a gap. Do not assume that this is a theoretical point. It is one reason there have been attempts by regulators to shore up the financial soundness of local subsidiaries during the crisis.
In part, this is out of simple self-interest, since the international effects of Fed policies can spill back onto the U.S. economy and financial markets. In part, too, it reflects a sense of special responsibility we have given the dollar’s role as the international reserve currency. We are and will remain attentive to the risk that the onset of Fed policy normalization could bring a new round of market pressures on EMEs. Yet I think there are good reasons to think that this adjustment will prove manageable and not be very disruptive. First, many EMEs appear to be better equipped today to handle the Fed’s prospective exit from its exceptional policy accommodation than they were during past tightening cycles. This reflects the fundamental reforms that EMEs have put in place over the past 15 years, as well as the hard lessons learned from past periods of market stress. Among the positives are: •  The absence of pegged exchange rate regimes that often came undone violently during periods of acute stress;  •  Improved debt service ratios and generally moderate external debt levels;  •  Larger foreign exchange reserve cushions;  •  Clearer and more coherent monetary policy frameworks, supporting what are now generally low to moderate inflation rates;  •  Generally improved fiscal discipline; and  4  BIS central bankers’ speeches  •  Better capitalized banking systems, supported by strengthened regulatory and supervisory frameworks.

The twelve-month change of the total PCE deflator was just 0.3 percent in February, with the core PCE deflator at just 1.4 percent. Despite these low readings, my expectation is that inflation will begin to firm later this year. Importantly, most of the impact from the decline in energy prices that has weighed down overall inflation is likely over. Although the appreciation of the dollar may cause some further softness in import prices, the continued decline in resource slack as the economy expands should push in the opposite direction. We are already seeing some firming in rent inflation as rental vacancy rates have returned to more normal levels and employment and income growth have strengthened. Longer-term household inflation expectations have been well maintained through this period of very low inflation as shown in our Survey of Consumer Expectations. This should reinforce the effect of a higher level of overall resource utilization in slowly pushing inflation back towards the FOMC’s 2 percent objective. Monetary policy As the FOMC has consistently communicated, decisions on monetary policy, such as the timing of lift-off will, depend on how the economic outlook evolves – in particular with respect to the labor market and inflation. As I have discussed, the labor market has improved substantially over the past few years and I expect to see inflation begin to firm later this year.
Let me start with labor income, which for most households is the dominant source of household income. As one would expect, differences in labor income across individuals of a given age tend to increase as people get older. Some of this is due to education and occupation choices – and how they impact income growth―and some is due to various events that individuals face in their working lives. Unemployment risk is an example of an adverse development that can substantially affect people’s careers and labor income during their lifetime. Over the period from 1976 to 2015, the overall unemployment rate averaged around 6.5 percent, but unemployment varied substantially across regions and across worker backgrounds. Unemployment was especially high for workers with lower earnings, a group that tends to have little savings to draw upon. Looking across demographic groups, younger workers, less-educated workers and those in manual occupations, as well as workers who identify as Black or Hispanic, experienced significantly higher average unemployment rates when compared to older and college-educated workers. These stark differences across demographic groups in terms of levels of unemployment are also evident in terms of how unemployment changed over business cycles, including the Great Recession. While the overall unemployment rate increased from 5 percent in December 2007 to 10 percent in October 2009, it increased substantially more for workers with lower earnings. In other words, looking at the national unemployment rate tells only part of the story of the labor market experiences for different groups of individuals.

Understanding this diversity is critical to better understanding the health of the labor market and the overall economy, and is important for informing policy. Now let’s turn to housing. Macroeconomists focus on aggregate residential construction as a measure of how the housing sector is contributing to overall economic growth. It is important to note, however, that housing market experiences vary substantially across individuals in ways not reflected in the aggregate construction data. For example, the type of housing units typically occupied by low-income households saw higher-than-average rent inflation from 2009 to 2011. Much of this difference appears to be due to contrasting ways that additions to the housing stock enter into different segments of the housing market. For households in the highest income quintile, new construction more than accounts for the net increase in housing  BIS central bankers’ speeches  1  units, which in turn tends to hold down rent increases for these households. However, as one moves down the income distribution, new construction represents a smaller share of the net increase in housing units. For households in the lowest income quintile, additions to rental supply come more from units that with age have depreciated and are no longer rented by higher income households. These supply additions tend to have higher rents than existing units rented by low-income households, thus putting upward pressure on rental costs.