samchain/econo-pairs-v1 huggingface dataset:
As documented recently by my MPC colleague Steve Nickell,9 retailers’ margins were compressed in the years around the turn of the century. Since then, they seem to have crushed their costs through measures delivering rapid productivity growth. In part, that appears to have been achieved by disintermediating wholesale distributors, whose margins have continued to fall (Chart 15). At a macro level, the effect was, for a period, to open up a gap between producer output price inflation and retail goods price inflation (Chart 16). In other words, for a while some structural changes in the distribution sector reduced the feed through of demand pressures into retail price inflation. Looking ahead, one downside risk to the MPC’s central projection is that we cannot rule out that this process has further to go. The current conjuncture and policy Monetary regime change, labour market reform, financial innovation, the technological revolution, globalisation – it is a heady combination, which unavoidably adds to the challenge of discriminating between cyclical and structural influences when forming a view on the macroeconomic outlook. But it is equally unavoidable that policymakers must try to do just that. That brings me to the current conjuncture and so to policy. My own take at present is as follows. In my judgment, there is, on balance, most likely a degree of excess demand in the economy. Surveys suggest above-average capacity utilisation.

The policy debate – inside and outside the Bank – has recently refocused on the possibility of some other changes in the way our economy functions. Less than 18 months ago, the Bank’s interest rate was just 3.5%, essentially because the MPC wanted to stimulate private sector domestic spending to offset the effects on aggregate demand of weak net trade, given adverse developments in the world economy. As global conditions recovered, and with a pick up in public sector spending, we were able gradually to withdraw much of that stimulus during 2004 in a series of steps which were widely anticipated and understood across the financial and real economy (Chart 2). With the slack in the economy being absorbed, attention shifted to gauging the degree of demand pressures and their implications for the inflation outlook. In particular, on the basis of some simple statistical relationships, a question has been posed about whether there has been some change in the extent to which demand pressures feed through into wages and prices. Most notably, as discussed in the Bank’s February Inflation Report, the steady falls in unemployment over recent years have not been accompanied by a rising rate of earnings growth (Chart 3). These issues obtained some prominence towards the end of last year when, despite apparently buoyant demand, inflation on the CPI measure fell to 1.1%.
[13] This presents a challenge when considering implications for policy – and highlights the importance of continuing to plug the kinds of capability gaps I discussed earlier. As the results publication sets out, the Bank will engage with firms individually and collectively to help them target their efforts, and share good practices identified in this exercise. Implications for policy I hope it’s clear by this point that the CBES will be a valuable tool for helping us and financial firms to understand the challenges ahead. This exercise is not going to be used to set capital requirements for banks and insurers. But it clearly sheds light on that debate. The CBES results make clear that climate risk is a first-order strategic issue for the firms we regulate. But in my view it is not yet clear that the magnitude of transition costs require a fundamental recalibration of capital requirements for the system. [14] A persistent drag on profitability would be very nasty for firms, but so long as they are able to continue to make sufficient profits to maintain their capital buffers, its impact on safety and soundness might be less material. Had the results of this exercise suggested a fundamental threat to the solvency of these firms, our response would of course have been quite different. Set against that high level view, though, a world with climate change is without doubt riskier than one without.

Ultimately, global warming is still limited to 1.8°C by the end of the scenario (2050) relative to pre-industrial levels, but then remains around this level at the end of the century. [8] A ‘no additional action’ (NAA) scenario in which governments around the world fail to enact policy responses to global warming, other than those actions already taken. As a result, global temperature levels continue to increase, reaching 3.3°C higher relative to pre-industrial levels by the end of the scenario. In the scenario this leads to serious environmental impacts, including extreme weather events, destroyed ecosystems and rising sea levels. In some cases these changes are irreversible. While these changes take longer to manifest, they give rise to increasing and irreversible shocks that continue to grow beyond the scenario: UK and global GDP growth are permanently lower and macroeconomic uncertainty increases. Broadly speaking, the first two scenarios focus on risks from the transition to net zero, whereas the third one focuses on physical risks from climate change. And to reiterate a theme I will come back to later, the risks from climate change have been managed by the end of the first two scenarios – whereas in the third they continue to build. CBES headlines The results of the CBES were published today, and I would encourage anyone with an interest in  Page 5  this topic to read them in full.
French banks were affected through several channels: •  First, through their direct exposures to American households in the subprime category or through indirect exposures in portfolios of structured financial instruments, such as residential mortgage backed securities (RMBS) and collateralised debt obligations (CDOs) that are in turn exposed to subprime risks. As was the case for the rest of the banking system in Europe, indirect exposures accounted for much greater amounts than direct exposures and therefore for the  BIS Review 82/2008  1  bulk of the losses; the lessons that this situation holds for more refined risk management need to be learned quickly. •  Secondly, through exposures to securitisation vehicles (conduits or structured investment vehicles) and particularly through liquidity lines, which need to be managed more rigorously going forward. •  Thirdly, through exposures to assets taken back from securitisation vehicles, or even collective investment schemes, that ran into liquidity problems; this type of reintermediation needs to be given more consideration in terms of capital requirements. •  Fourthly, through their exposures to monoline insurers, which insured some products and were themselves hard-hit by the crisis and thus epitomise “wrong-way” counterparty risks, which need to be assessed more carefully. •  Finally, though exposures to leveraged buy-outs, or more generally by credit-riskrelated costs on the most vulnerable companies, which are starting to rise. Consequently, French banks have not escaped the overall slowdown in net banking income growth affecting major international banking groups.

It will reduce the procyclicality of the financial sector. Higher capital requirements are an important component of the new framework. The capital requirements are set in relation to banks’ risk-weighted assets. The risk weights in the calculation are therefore also important for the system’s robustness. This may give rise to challenges, particularly with regard to housing loans. Under Basel III, a bank must set aside about NOK 2.50 for every NOK 100 they lend if the regulation’s standard risk weights for residential mortgages are applied. This is to cover the equity capital and conservation buffer requirements. If the countercyclical buffer has been turned on at maximum, the bank must provide one additional krone for each hundred kroner of loans. However, Basel III also provides banks with the option of full use of internal models for calculating their risk weights. When banks calculate risk weights using internal models, only institution-specific risk is taken into account and not system-wide risk. Norwegian banks that use such models arrive at risk weights that in some cases are a third of the standard weights, and for some Swedish banks that operate in Norway they are even lower. The capital requirements are then reduced correspondingly. In the case of full use of internal models,  4  BIS central bankers’ speeches  these banks will only have to set aside 1 krone for every NOK 100 in residential mortgage loans, even when the countercyclical buffer is fully turned on.
If government indebtedness reaches a sufficiently high level that it triggers a loss of confidence in fiscal sustainability, investors will require additional risk premia to compensate for having to bear greater sovereign credit risk. The resulting rise in sovereign risk premia can be passed through to private sector funding costs, especially if there is doubt about the ability of the public sector to counter adverse disturbances to non-financial and financial sectors. Chart 2 on slide 6 shows how CDS spreads for large banks have become increasingly correlated over the past seven and half months with the sovereign CDS spreads of the countries where these banks have their headquarters. Two snap-shots are shown in the chart: one for 26 November 2009 and the other for 19 May 2010. As can be seen from the chart, between these two dates, as sovereign CDS spreads have risen, so have bank CDS spreads. It is furthermore interesting to note that, in the cases where concerns about fiscal imbalances have been greater, the co-movement has been substantial. The third risk we have identified outside the euro area financial system is the possibility of vulnerabilities being revealed in non-financial corporations’ balance sheets, because of high leverage, low profitability and tight financing conditions. The balance sheet conditions for the euro area non-financial corporate sector have slightly improved since the last issue of the FSR, which has translated into a moderate lowering of the expected write-downs facing euro area banks on their corporate loan portfolios by end–2010.

The turnaround of the profitability of the LCBGs in 2009 is also attributable to a remarkable recovery of net trading revenue in the second quarter of 2009, which was more or less sustained throughout the year and in early 2010, despite a progressive lowering of market volatility, a tightening of bid-ask spreads and a stalling of the recovery in financial markets. Finally, income from fees and commissions has continued to produce a stable revenue flow for euro area LCBGs, and even increasing somewhat in the late 2009 and early 2010, boosted in particular by revenues from underwriting government and non-financial corporate sector debt securities issuances. Looking ahead, although their financial performance has much improved, the challenges facing euro area LCBGs remain considerable. The central scenario is one of subdued banking sector profitability in the short to medium term for a variety of reasons. First, the recovery in the financial markets that has taken place in late 2009 has lowered the ECB estimates of banks’ cumulative mark-to-market losses on holdings of securities throughout the entire period of the financial turmoil. However, the new estimate in the current FSR indicates that the potential cumulative write-downs on securities and loans for the euro area banking sector for the period 2007 to 2010 is EUR 515 billion, which is lower than the estimate published in the December 2009 FSR.
This has enhanced our understanding of the commercial environment and invigorated our organisation. Just as MAS has gained from such insider insight, industry too needs its share of talent. Through the mixing of talent between the public and private sectors, industry will also come to understand the intent and thinking behind MAS’ policies and actions. Over time, this will lead to a healthier and more constructive relationship where MAS and industry together work toward developing Singapore as a world-class financial centre. Enhance market discipline Fourth, we need to continue to enhance market discipline. The easy part is to establish and enforce the right rules for disclosure and corporate governance. Getting companies to internalise and abide by the spirit of tighter rules will take longer, though our standards of disclosure are already quite good compared to other countries. The most difficult part will  BIS Review 62/2002  7  be enhancing consumer education and awareness, without which, as I noted earlier, disclosure and caveat emptor cannot work. We do not need to convert the entire population into Chartered Financial Analysts. But we must help the public to understand basic finance and investment concepts, and to make effective use of the information that is available. They also need to understand that investing is for the long term and should be based on fundamental analysis. This requires a collective effort on the part of MAS, industry bodies and consumer groups.

At the same time, the European experience could serve as a reference point for assessing the policy requirements and operational aspects of a process of regional integration, possibly including exchange rate and monetary policy co-operation. Finally, the European experience shows that a process of regional integration can and should be without prejudice to the broader process of globalisation or to multilateral co-operation within the current institutional framework of the international monetary and financial system. 2  BIS Review 1/2001
To this effect, Europe-wide measures are crucial, even if they do not take the most appropriate form for optimal efficiency, as would have been the case, for example, of a permanent macroeconomic stabilisation instrument depending on the common budget. That said, in the absence of such an instrument, the European recovery fund may fulfil this function in a reasonably adequate manner in the coming years. However, harnessing the maximum potential of these funds poses a huge challenge. The first difficulty lies in the need to develop the capacity to set in place a number of new high value-added projects that do not supplant those that would have been carried out had the European funds not been available. In addition, these projects require prompt execution, to permit a more robust economic recovery once the pandemic has been overcome. Indeed, this is the Government’s declared intention: to use these European funds as promptly as possible as a catalyst for structural transformation. Nevertheless, it is fair to acknowledge the huge challenge that the swift implementation of a potentially very large number of projects will entail for the existing structures. The projects executed under these programmes must be concentrated on areas such as digitalisation, the fight against climate change or improving human capital. Their effects on economic growth potential will depend, above all, on the projects to be executed being selected in accordance with a carefully designed structural reform plan.

As I have said in other contexts, one challenge in a rules-based regime is that the pace of rulemaking is not always commensurate with the pace of rule breaking.6 Complying with minimum legal thresholds may not be sufficient in all circumstances to appropriately mitigate risk to your firm or the payment system.7 Technology has greatly expanded access to the payment system. Many of us— everyday consumers, that is—effect payments not only directly through our banks, but also through various “fintech” intermediaries. There is much good in this, but technology is not riskfree. The creative development and application of technology can create opportunities to improve the payment system. Technology also creates new opportunities to compromise that system. Take, for example, the nascent challenge presented by the development of digital currencies. The New York State Attorney General’s office estimates that more than 1,800 virtual currencies are exchanged around the world.8 Many digital currencies use distributed ledger technologies, which can help institutions achieve efficiencies in customer due diligence programs. Distributed ledgers also promote traceability, which in theory assists law enforcement. That said, the use of private exchanges for these digital currencies may facilitate anonymity, which tends to help the bad guys. My concerns, however, are less about the technological frontier, and more about well-established risks to the payment system. Recent press reports about financial crimes involving 1MDB, Danske Bank, Swedbank, and, yes, Bangladesh Bank make no mention of fancy new digital currencies.
And links have become both fatter and more frequent, increasing roughly 6-fold. The network has become markedly more dense and complex. And what is true between countries is also likely to have been true between institutions within countries. Second, the international financial network exhibits a long-tail. Measures of skew and kurtosis suggest significant asymmetry in the network’s degree distribution. Global finance appears to comprise a relatively small number of financial hubs with multiple spokes. Third, the average path length of the international financial network has also shrunk over the past twenty years. Between the largest nation states, there are fewer than 1.4 degrees of separation. Were the network extended beyond the 18 countries in the sample, the evolution of this “small world” property would be clearer still. So based on evidence from a sampled international financial network, the past twenty years have resulted in a financial system with high and rising degrees of interconnection, a longtailed degree distribution and small world properties. That is an unholy trinity. From a stability perspective, it translates into a robust-yet-fragile system, susceptible to a loss of confidence in the key financial hubs and with rapid international transmission of disturbances. That is not the worst description of financial events over the past decade – and in particular over the past 18 months. (b)  Feedback and stability  In epidemiology, the impact of a disease depends crucially on such structural parameters as the mortality rate once infected and the transmission rate across agents. 14 The first is largely fixed and biological.

It would therefore be impossible for the Eurosystem to conduct a successful policy by mechanistically following a simple rule whereby policy decisions are closely linked to a few indicator variables or to a central inflation projection at a particular point in time. Two key features of the ECB’s communication with the public and the markets are our Monthly Bulletins and the monthly press conferences. The latter usually directly follow the first Governing Council meeting of each month. By these means we publicly conduct a detailed review of current monetary, financial and other economic developments in the euro area against the background of the strategy. This aims at illustrating the application of the strategy in practice, guiding market expectations. Although the strategy is complex, we generally try to end with an overall assessment which summarises the opinion of the Council on the future situation. The press conference provides prompt information in an even-handed way, and it offers the opportunity for immediate two-way communication. As far as I am aware, no other central bank regularly communicates with the public in such a prompt and open manner immediately after its monetary policy meetings. We are convinced that this contributes to reducing uncertainty in the markets and thus gives important and clear guidance, also with regard to short-term policy moves. In this respect, one should recognise that the ECB is facing a completely new environment.
According to this hypothesis emerging and developing countries are unable to borrow abroad in their own currencies reflecting lower degrees of portfolio diversification at the global level to emerging currency denominated investments. Needless to say, borrowing in foreign currencies creates currency mismatch problem – increases in the cost of debt-servicing of foreign currency – denominated external obligations in cases of real exchange rate depreciation. The cost is measured in terms of the reduced purchasing power of domestic output over foreign claims following the depreciation. The original sin indicator depicted in Figure 5 shows that original sin level is much below that of the 1990s despite its rise since the beginning of 2012. BIS central bankers’ speeches  3  In other words, EMEs’ share of obligations in foreign currencies is well below those observed in the 1990s.7 Bailing out banks during the above mentioned EME financial crises put heavy burden on government budgets of EMEs. It was well-understood that banking sector plays a systemic role. In order to avoid bailout costs and disturbances to the intermediation of loans to real economy EMEs overhauled their banking sector regulatory and supervisory systems. These reforms tried to ensure that banks hold adequate capitals to be resilient to shocks and, in general, run their businesses in a prudent way. Figure 6 shows that leverage ratios measured as (risk unweighted) capital divided by total assets, on average, stayed above the average levels of the 1980’s and 1990’s and also the average ratio of advanced economy banks.

If a deregulation stems from political decisions that could not be predicted, or its effects on inflation are calculated to disappear in less than one to two years, it will not elicit a reaction from the Riksbank as long as the rule of action is adhered to. The situation is different, however, if the economy goes through a series of deregulations or the price effects of a single deregulation continue for several years. This may lead to inflation being below the target more permanently, which in turn ought to lead, according to the rule of action, to a downward adjustment of the instrumental rate. The stimulus from monetary policy acts through the usual channels. So all else equal, one can expect a fall in market interest rates, rising share prices, a stronger expansion of credit and so on. General demand rises, employment moves up, unemployment falls and the inflation target is fulfilled. When the price effects have waned, there is a risk, if nothing else intervenes, of inflation rising above the target. To counter this, monetary policy responds by gradually increasing the instrumental rate again. Market interest rates move up, share prices fall and the growth of credit slackens. In other words, the customary transmission mechanism now works in the opposite direction, leading to some fall in production and employment as well as in resource utilisation. Another component of the process is the higher inflation’s limiting effect on household real income, just as the lower inflation benefited household income.