samchain/econo-pairs-v1 huggingface dataset:
So between the mid-1990s and the financial crisis, the UK experienced a very powerful financial cycle – a long build-up of credit to the private sector followed by a sharp correction that has reversed some but not most of the preceding credit growth. There were of course other important elements such as lending overseas and between banks, and some would argue lending to governments. But I want today to focus on credit to the UK private sector, particularly household credit. I want to look at what lay behind the upswing of that cycle, the marked rise of credit to GDP since 1997. This is of more than academic interest. We are back to early 2000s levels of credit  1  See Schularick and Taylor (2012). BIS central bankers’ speeches  1  and debt in the economy. We are now emerging from the post crisis period of credit contraction; in the UK credit slowly began to grow again around 2012. It is now growing at almost the same rate as the economy. So now is a good time to ask: what lay behind the very rapid expansion of credit from the mid1990s to the crisis? Should we expect – or want – credit growth to return to its pre-crisis path, growing more than twice as fast as GDP? This is an important question for the Financial Policy Committee of the Bank of England as it assesses the risks to the stability of the UK financial system – where we are in the so-called “financial cycle”?

This was especially true in the last recession for the more highly indebted households who cut spending substantially than did less indebted households. That is, the distribution of debt also matters. Similar effects were seen in other countries. And there is considerable evidence that recessions that follow debt financed housing booms are worse. The IMF estimate that for each additional 10 percentage point rise in household debt prior to the global financial crisis, the consumption loss (as a percent of pre-crisis trend) was larger by 2.6 percentage points. Other studies have come to similar conclusions.13 Conclusion Since the 1980s the UK has seen a sharp and very material increase in the credit to GDP ratio and in the stock of household debt relative to income. This was particularly pronounced in the 10 year upswing of the last financial cycle when credit grew over twice as fast as GDP. This surge in credit did not finance an economic boom. Indeed, it showed little in the conventional indicators of economic activity. It comprised in the main secured lending to households for housing, driven by house prices rising consistently faster than earnings. The rise in secured debt and the increase in house prices reflected in part structural reductions in interest rates. Many of the forces that pushed down on rates over the period are long lasting and are unlikely to be reversed. To that extent, they have probably raised the sustainable level of credit to GDP.
Basel II, in my view, is fundamentally about better risk management and corporate governance on the part of banks, as well as improved banking supervision and greater transparency. Thereby, it is also about increasing the stability of the global financial system, to the benefit not only of banks, but also consumers and businesses. This is especially critical in markets where banks are the primary source of funding and therefore key drivers of sustainable development. How will Basel II contribute to financial stability? Allow me then to take a few minutes to elaborate on several areas where I believe Basel II will foster financial stability. First, I believe that Basel II is a major step forward in strengthening the incentives for the ongoing improvement of banks’ risk measurement and management systems. The new capital framework is both incentive-based and risk-based. It therefore offers us the opportunity to ensure that supervision and regulation takes a forward-looking view on risk, that it remains up-to-date with sound practices in the industry and that our supervisory framework motivates responsible risk-taking and prudent behaviour in our markets. Improved and more formalised risk management will bring better assessment, better quantification and greater awareness of risks. To the extent that risk assessment and control methods become more formalised and rigorous, this will lessen the likelihood of making bad decisions and will improve riskadjusted pricing policies. It will also contribute to the prompt detection of errors and deviations from targets, allowing banks to implement corrective measures at an early stage.

This is why the Basel Committee has devoted so much effort to developing the so-called Basel II capital framework, which was released in June 2004. The new capital framework is built on three mutually reinforcing pillars. The first pillar aligns minimum capital requirements more closely with banks’ actual underlying risks. The menu-based approach means that qualifying banks may also rely partly on their own measures of those risks, which will help to create economic incentives to improve those measures. In concept the first pillar is similar to the existing “Basel I” capital framework in that it provides a measure of capital relative to risk. What is new are the second and third pillars. The second pillar – supervisory review – allows supervisors to evaluate a bank’s assessment of its own risks and determine whether that assessment seems reasonable. It is not enough for a bank or its supervisors to rely on the calculation of minimum capital under the first pillar. Supervisors should provide an extra set of eyes to verify that the bank understands its risk profile and is sufficiently capitalised against its risks. BIS Review 45/2006  1  The third pillar – market discipline – ensures that the market provides yet another set of eyes. The third pillar is intended to strengthen incentives for prudent risk management. Greater transparency in banks’ financial reporting should allow marketplace participants to better reward well-managed banks and penalise poorly-managed ones.
The citizens of Texas and the Eleventh Federal Reserve District operate under the same monetary policy as do the rest of our fellow Americans. We have the same mortgage rates, pay the same rate of interest on commercial and consumer loans, and earn returns and borrow at the same interest rates as do our brethren in the rest of the country. Which raises an important question: If monetary policy is the same here as everywhere else in the United States, why does Texas outperform the rest? The answer is no doubt complicated by the fact that we are blessed with a comparatively great amount of nature’s gifts, a high concentration of military installations and other “unfair” advantages. But one cannot avoid the conclusion that one of those “unfair” advantages is that we have a Legislature, based here in Austin, that under both Democrat and Republican governors has over time crafted laws and regulations that encourage business expansion and job creation. They have conducted the fiscal affairs of the state so as to maintain confidence in the future. One might draw two lessons here: first, that Germany’s finance minister, Wolfgang Schäuble, is right when he says, “If you want more private demand, you have to take people’s angst away” by having responsible and disciplined fiscal policy;4 and second, that fiscal policy either complements monetary policy or retards its effectiveness as a propellant for job creation.

I attributed this in significant part to prudent fiscal and regulatory policy, underscoring that this not only facilitates job and overall economic expansion in Texas, but is the underpinning of confidence. I would suggest that  7  See the FOMC’s /20120125c.htm. 8  “Prosperity at Risk: Findings of Harvard Business School’s Survey on U.S. Competitiveness,” by Michael E. Porter and Jan W. Rivkin, Harvard University, January 2012. 6  BIS central bankers’ speeches  statement,  Jan.  25,  2012,  www.federalreserve.gov/newsevents/press/monetary  now is the time for prudent fiscal policy to be enacted by a Congress that on both sides of the aisle has for far too long, under both Republican and Democratic presidents, been shamefully negligent of its responsibility. Today marks the 1,009th day without an agreedupon federal government budget. The Congress has found it easier to not agree on a budget than to go about correcting fiscal imbalances that drive the nation’s growing indebtedness. Our political leaders’ misfeasance exacerbates the “angst” that inhibits the confidence of consumers and job-creating businesses. My staff has found a wonderful sketch on YouTube that might best illustrate the behavior of Congress. Here it is: http://www.youtube.com/watch?v=Li0no7O9zmE. That sketch says it all. The Fed, the nation’s monetary authority, has clearly articulated its longer-run goal and policy strategy and has conducted itself with integrity by responding to the needs of the economy. In contrast, the fiscal authorities have conducted themselves with impunity: Their only long-term strategy is to pass the bill to our children and grandchildren.
4  Let me highlight some avenues of research that I consider relevant in this context. First, the well-known equity-efficiency trade-off of taxation has given rise to a fruitful literature on the mechanisms driving the behavioural response of taxpayers and the size of such reactions. 5  While the initial focus of this literature relied on labour supply responses , some recent contributions have emphasised the 6  importance of accounting for additional mechanisms, such as tax avoidance or rent-seeking activities by top earners. For example, one such contribution finds that the incentive to bargain for more compensation in an environment of low top tax rates drives the bulk of the behavioural reaction of  4  See “Taxation. Stuck in the past”, The Economist, 11th August 2018. In this regard, it is worth noting that the early empirical literature found a very large elasticity of taxable income with respect to the marginal net-of-tax rate, while the subsequent research, part of it based on non-US experiences, has lowered this number to around 0.05 and 0.4; see Saez, E., J. Slemrod, and S. H. Giertz (2012): “The elasticity of taxable income with respect to marginal tax rates: A critical review,” Journal of Economic Literature, 50 (1), pp. 3-50; and Kleven, H. J., and E. A. Schultz (2014): “Estimating taxable income responses using Danish tax reforms”, American Economic Journal: Economic Policy,6 (4), pp.

Fernando Restoy: Forging a new financial system – reforms outstanding and ongoing Opening address by Mr Fernando Restoy, Deputy Governor of the Bank of Spain, at a conference at Complutense University of Madrid, Madrid, 27 October 2014. *  *  *  Let me first thank the organisers, in particular professor Carmen Alonso Ledesma, a fellow sufferer on the Banco de España Governing Council, for their kind invitation to participate in this conference. Looking at the programme, the topics to be discussed in the various papers and roundtables, and the expertise of the speakers, I harbour no doubts that this conference will prove enormously useful in enriching the knowledge of all those present about the reforms undertaken and the challenges still pending for the financial system. A good number of these reforms and challenges are linked to the flaws identified in the functioning of the sector as a result of the international financial crisis that broke in 2007. In particular, the crisis has highlighted considerable structural shortcomings – which led to an incorrect evaluation and management of key risks by financial institutions – and major limitations to the prevailing crisis-prevention and management systems. In the euro area, as you know, the perverse link between the vulnerability of the credit sector and the weakness of public finances precipitated an institutional crisis which jeopardised the very continuity of the Monetary Union. The consequences of the financial crisis have been very adverse.
The situation may be different, however, if growth is boosted by a combination of higher public investment and structural reforms creating incentives for higher private investment, which will induce a rise in permanent income. This could be a major confidence boost to the economy  11  See Cœuré, B. (2015), “Paradigm lost: Rethinking international adjustments”, Egon and Joan von Kashnitz Lecture, Clausen Center for International Business and Policy, Berkeley, 21 November. 12  See Carcea, M.C., Ciriaci, D., Cuerpo, C., Lorenzani, D. and Pontuch, P. (2015), “The economic impact of rescue and recovery frameworks in the EU”, EC Discussion Paper, No 004, September. 13  See https://www.bundesbank.de/Redaktion/EN/Reden/2014/2014_03_17_weidmann.html. 14  This line of thinking has been formalised in a recent paper by Olivier Blanchard and co-authors which looks at the effect of higher government spending and inflation in core countries on those in the periphery. They find that, in normal times, the benefits for periphery countries are minimal as terms-of-trade gains are offset by the central bank raising rates. In a liquidity trap situation, however, the effects are markedly different. Crucially, if monetary policy is expected to not raise rates for a couple of years or more – as it is the case today – the stimulus for the periphery can be large. See Blanchard, O., Erceg, C.J. and Lindé, J. (2015), “Jump starting the euro area recovery: would a rise in core fiscal spending help the periphery? “, NBER WP 21426.

But in an uncertain world, France appears as a rather stable country, seen from the resilience of its economy, the strength of its financial sector, as well as the solidity of its political institutions. 3/3  BIS central bankers' speeches
The Bank of England now has extensive powers as a micro supervisor of individual firms and a macro supervisor of the financial system as a whole. Parliament has set objectives for both – primarily, safety and soundness for the PRA,  4  BIS central bankers’ speeches  and the resilience of the system for the FPC. But unlike in monetary policy, we do not have a quantified target – and, to be clear, we do not think that that would be possible. To have such power with limited transparency would be uncomfortable. If nothing else, it would leave the Bank in a position where supervision was of interest only when it obviously goes wrong. We need to engage society – public, Parliament – in debates about the resilience of the financial system and how we are supervising it in the good times as well as in bad times. The FPC and PRA have already taken various steps to help with this – the six-monthly Financial Stability Review, the published Record of FPC policy meetings, the Committee’s statement on the use of its directive powers, the PRA’s Approach document and annual report, and so on. But stress testing can provide a quantum leap in transparency and accountability. For example, the FPC will need to be able to defend its choice of stress against questions and criticisms that the scenarios are too extreme or not tough enough. That will implicitly be a healthy debate about objectives.

The Bank of England – Financial Policy Committee and Prudential Regulation Authority – believe that a regime of concurrent stress testing of banks is an important part of the answer. Following a recommendation from the FPC earlier in the year, the Bank has today published a Discussion Paper setting out plans, to be implemented progressively over a number of years, for just such a stress-testing regime for the United Kingdom. In broad terms, each year the FPC would design a (set of) common scenario(s) that it judges the banking system needs to be able to survive; the PRA would apply those scenarios to the major banks, dealers and building societies, alongside more firm-specific scenarios; drawing on analysis from across the whole institution, Bank staff would analyse capital adequacy under stress drawing on a range of models, including firms’ own models. The results would inform judgments by the FPC and the PRA Board on whether remedial measures were needed. In some degree, both the stress scenarios and the results would be published. That very brief summary leaves a lot of questions unanswered, but suffice to say that we believe that a stress-testing regime can enhance the quality of the Bank’s macro and micro prudential supervision and, over time, underpin confidence in the banking system. In addition, I believe that a stress-testing regime will be very important for another reason: accountability to the public via Parliament.
A few days ago, on 7 February, we celebrated the thirtieth birthday of the European Union and of the Maastricht Treaty. I was personally present during the signature of this Treaty, which promoted “the strengthening of economic and monetary union, ultimately including a single currency”. We have successfully established a monetary Eurosystem, however a real financial Eurosystem must now develop. Let me therefore share some proposals on the Banking Union and the Capital Markets Union (CMU), which are the two cornerstones for such a financial Eurosystem. We are all aware the Banking Union is for 19 countries, and tomorrow 21, while the CMU is for 27. But allow me to mix them today with a common core – the euro area – and a common purpose – the right funding of our economies. I will quote two thriller books today. You may rightly think of The postman always rings twice: Andrea Enria and myself already conveyed this message quite plainly regarding the Banking Union during the last Eurofi session in September. You may also think that these projects are more or less stuck. It is true that there has been deadlock and I will list the bad reasons for this. But there are also good reasons why we can break this deadlock now and give the projects of Banking Union and CMU new momentum (I). I will then describe the new possible steps for the Banking Union (II) and the CMU (III). I.

However, today marks not an end, but a beginning. In just over a week the Single Supervisory Mechanism will become fully operational, and the immediate future poses challenges of the first order both for supervisors, involving the adaptation of our structures and functioning to the needs of the new European mechanism, and for banks. I would not like to conclude without thanking the whole team at the Banco de España, which has been working for months in collaboration with the European Central Bank, the banks and the audit firms to successfully see through this complex exercise. And, naturally, I would also like to extend my thanks to the teams at all of the banks which, for months, have devoted their best technical capabilities to this end. Thank you very much for your interest and for being here today. 4  BIS central bankers’ speeches
Such influences can be changes in indirect taxes and subsidies or the price of oil. To the extent that such changes only have an initial direct effect on the price level but are not deemed to influence the future rate of inflation, they should not precipitate interest rate adjustments. A special case of the temporary effects is what happens when the Riksbank changes its policy and raises or lowers the instrumental rates. This affects the interest costs of housing, thereby influencing the CPI. Hence, interest rate changes can make it more difficult to reach the price stability objective in the short run. The CPI has varied significantly more than the various measures of underlying inflation that the Riksbank produces (Figure 5). One example is 1996, when interest rates were reduced rapidly. The CPI then fell much more than the underlying inflation, which was due to a reduction of the interest costs for housing. In this way, annual inflation ended up somewhat below the one per cent lower limit of the tolerance interval. At the same time, all indicators of underlying inflation show that it has edged downwards and has recently kept relatively stable in the interval of 1-1.5 per cent. The problem of temporary influences can be managed in different ways: 1. One possibility is to clearly specify in advance which deviations from the CPI are acceptable. This is the method used in New Zealand. It could lead to greater transparency.

We also believe that central banks and supervisors must play their part as, in the long run, climate stability is one of the main determinants of financial stability, which is their mandate. This is a shared conviction. At the One Planet Summit in Paris in December 2017, the Banque de France, with the support of other central banks and supervisors, launched the Network for Greening the Financial System (NGFS), which now comprises some 30 central banks, supervisors and international organisations, including four Asian members, and will certainly attract more in the coming years. *** Let me now conclude by quoting Nassim Nicholas Taleb, the famous author of The Black Swan. He once wrote that uncertainties can be like the wind which “extinguishes a candle and energises fire”, and added the following: “You want to use them, not hide from them. You want to be the fire and wish for the wind”. My wish is that the ongoing uncertainties will become the wind that deepens our bilateral and multilateral cooperation. On that hopeful note, I wish you a very Happy New Year and for the time being an inspiring and fruitful conference. 3/3  BIS central bankers' speeches
Each country is also to allow continuous monitoring of its government finances by the other EU countries. A government budget deficit is normally not to exceed 3 per cent of GDP, though there is room for certain exemptions. If a country in the euro area does have a budget deficit above 3 per cent and this cannot be explained by factors that are exceptional and temporary, sanctions are to be imposed. EU countries outside the euro area are not liable to sanctions, however; they are only included in the monitoring provisions of the Pact. The task of establishing price stability in the euro area will be facilitated if low inflation in the area is also promoted by fiscal policies. The importance of fiscal policy lies both in creating sustainable government finances, which contribute to the general credibility of economic policy, and in countering tendencies to excessive price pressure in the economy. In that the single monetary policy is to be constructed in relation to the overall situation in the euro area, more will be required of fiscal policy in the context of national stabilisation policy - fiscal instruments will still be available for stabilising national economic trends. But this in turn does presuppose that there is room for manoeuvre in the national budgets. Partly on this account, the Stability and Growth Pact’s medium-term objective of a government budget balance or surplus is reasonable and it is highly important that the countries meet this undertaking.

Or it could be that the spare capacity is exerting little downward pressure, because businesses with limited access to credit are unwilling to run the risk of reducing their cash flow by cutting prices in order to boost market share. Moreover, even though pay growth has been muted, unit wage costs have nevertheless risen quite sharply because businesses have held onto skilled labour through the recession, rather than lay it off. So the firmness in underlying prices may just be the flipside of the better-than-expected labour market outturns. Despite these uncertainties, it seems likely that the margin of spare capacity will be sufficient to pull inflation back towards the 2% target from its present elevated level, as the near-term effects of the restoration in VAT and sterling’s past depreciation work through. Our latest projections, contained in the February Inflation Report, are shown in Chart 9. The risks of inflation being above or below the target are roughly balanced by the end of the forecast horizon. It should, I hope, be clear from my remarks that, although a recovery of sorts may have commenced, there are still considerable doubts about its strength and durability and about the accompanying path of inflation. The road ahead is likely to be bumpy and there is still the risk of further adverse shocks.