samchain/econo-pairs-v1 huggingface dataset:
I could go on, but allow me to focus on just one of the core topics which the banks – and we – have to deal with: non-performing loans, NPLs for short. Most NPLs are legacy issues. European banking supervision has, so to speak, inherited them. It’s a major problem that we have to tackle – or rather, the affected banks have to. For them, the non-performing loans weigh on profits; they require provisioning, and they are a constant drain on banks’ human resources, which could be put to more profitable use. And NPLs undermine trust – to what extent do markets trust a bank with a balance sheet that is considerably impacted by NPLs? In other words, non-performing loans make the affected banks weaker and keep them from lending to the economy. Banks which manage to forcefully address this legacy can focus on the future and attract new investors and new business, instead of forever having to look to the past. These banks can do their job: finance the economy. That makes it imperative to sort out NPLs. And there has been quite some progress on this front. Since 2015, significant banks in the euro area have brought down their non-performing loans by almost € billion; from € billion to € billion. That said, NPLs are still too high in parts of the banking sector. That is why banks have to act. And times could not be better.

2 Financial stability has great significance for monetary policy There is no doubt that financial stability has considerable significance for monetary policy. Monetary policy largely acts via the financial markets and if these function poorly, monetary policy will have less effect on the economy and on inflation. Problems in the banks can also lead to problems in granting credit in general in the economy and thus to lower demand and lower inflationary pressure. But the effects on unemployment, growth and other aspects of the economy can be substantial, even if this does not extend to a full-scale financial crisis. If imbalances linked to credit-granting and asset prices build up that are unsustainable in the long run, there is a risk that the economic downswings will be deeper and more prolonged. 3 Given the links between the areas, there are arguments in favour of monetary policy taking into account risks linked to financial imbalances. This is actually nothing new. Such arguments were put forward even before the financial crisis, although the debate then concerned “bubbles” on the stock market or property market. Some said that monetary policy should react to such sharp rises in asset prices, over and above the impact the upturns have on the prospects for inflation and economic activity.
It is also necessary to take into account the relevance of employment and productivity developments when determining the sustainability of the pension system and, therefore, of the general government balance sheet. This is why it is so important that pension system reform should take place at the same time as structural reforms are adopted to improve the economy’s employment and productivity performance. It is also necessary to be aware that these variables themselves depend on the characteristics of the pension system, which should be geared towards fostering labour participation and worker productivity. We need to remember, moreover, that demographic developments, the ultimate reason for reforming the pension system, will also have effects in many other areas of economic activity over the coming decades, such as long-term growth, the configuration of the labour market, inflation, demand policy transmission and tax revenues.13 That is one more reason why it is necessary for pension system reform to be accompanied by structural reforms in other areas. The pension system reform should be intended to be long-lasting, since it will affect the economic decisions of all the citizens of many generations in relation to consumption, investment, labour supply and savings. Accordingly, it would be highly desirable for the reform to enjoy a broad consensus and to produce stable and transparent rules. 3.5  Next Generation EU  As I indicated earlier, one recent highly significant development was the approval by the European Council in July of the European recovery programmes.

Yves Mersch: Law, money and market – the legal dimension of monetary policy Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, at the Information Club Meeting, Luxembourg, 31 May 2014. *  *  *  Ladies and gentlemen, Thank you very much for inviting me to speak at this event. What I would like to address in my remarks is what went wrong with the governance of the euro area and how to fix it. But as this has been much discussed in the past, I want to come at the question today from a slightly different perspective: that is, to go back to the first principles of what makes a market economy function, and then to look at the situation in the euro area from there. 1. Law, money and the market  A well-functioning free market is a socio-economic construct. It is created by a consistent accord of rules, instruments and institutions. As economies develop, what this accord entails changes. But at the most fundamental level there must be a harmony of law, money and freedom. This is because the rule of law guarantees the freedom of the individual by defining the scope and boundaries of his or her action. And in turn, it is the freedom of the individual that creates the agency and choice which is essential to produce a free market to the benefit of the whole society.
I am confident we have made the right choice as it has produced more security for the stability of both the banking system and the deposits of Albanian citizens. Third, in the recent negotiations with the International Monetary Fund and the World Bank, under the conditionalities of the new arrangement that will be approved today by the IMF Executive Board, we have agreed to include the write off of banks’ loss loans that are provisioned and have no hope of being collected, having no financial effect on the banking system. Amendments are formalised in a draft law that is expected to be passed by the Assembly in the near future. Fourth, the recovery of lending is considered one of the main instruments contributing to improving the level of non-performing loans. I would like to dwell a little longer on this aspect. Despite some optimistic developments in terms of the increased number of credit applications submitted for execution or restructuring, the larger banks, which have considerable potential to lend, are not using properly the measures promoting lending recovery, as opposed to the smaller banks, which appear more active. We believe the main reasons forestalling a more significant effect of these measures are as follows: First, actions taken to boost credit supply need to be complemented by other actions to boost credit demand. The latter remains unstable in the face of sluggish economic growth and weak consumption and investments.

As a result, credit risk perception by banks remains considerable; Second, in spite of a better reflection of the key interest rate cut in the last quarter of 2013, the credit price (including other related costs) is considered still relatively high. For that 2  BIS central bankers’ speeches  reason, banks need to cut the credit price down, having better control of their operational costs, especially foreign currency funding costs. Third, credit restructuring should be conceived as a broader process of deep restructuring of the activity of borrowing businesses. Each non-performing loan should be seen as a new opportunity. Our approach should extend to the micro level, according to the motto: door to door and case by case. From the bank’s perspective, this would mean that credit restructuring is not merely a rescheduling of credit instalments in agreement with the businesses, but an in-depth analysis to assess the possibilities of its future existence in the market and acknowledge on time the loss of a part or full credit value. Fourth, infrastructure and legal practice concerning collateral execution remains subject to adaptation to the new situation. Fifth, it may be necessary to allow longer time to see the effect of the measures taken until now, and other measures that should further address the above-listed problems. Despite the existing problems listed above, the Bank of Albania believes that the circumstances are better for banks to be more active in this year in tackling non-performing loans.
Safeguarding progress does not mean defending all aspects of reform at all costs. The FSB is now assessing what is working as intended and addressing any inefficiencies or unintended consequences. The results of its first two evaluations – on the interaction of derivatives reforms and bank capital measures as  14  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  14  well as the impact of G20 reforms on financing of infrastructure investment – will be reported to G20 Leaders in Buenos Aires next month. We need to tailor not taper. It is critical that the process of evaluation and adjustment does not compromise overall system resilience. Addressing emerging vulnerabilities means having the foresight to anticipate new risks from cyber to CCPs, from accountability to asset management. And it means having the discipline to build an anti-fragile system that is robust to the risks we do not anticipate. We will not abolish crises (which have their roots in changes to the real economy and irreducible uncertainty). But we can reduce their frequency and lessen their impact. By resisting the three lies of finance and by voicing truths seldom told, we can build True Finance to better serve our citizens in bad times as well as good.

More fundamentally, the main risks to the inflation outlook stem from potential second-round effects in wage and price-setting behaviour triggered by ongoing oil price rises. In this respect, it is essential that the social partners continue to meet their responsibilities. Against this background, we will continue to monitor inflation expectations very closely. Particular vigilance is required in order to ensure that longer-term inflation expectations remain well-anchored in the euro area. Turning to the monetary analysis, money and credit have continued to grow robustly in the euro area over the last few months, mainly driven by the prevailing low level of interest rates. In particular, the growth of mortgage borrowing remains very strong. In this context, price dynamics in housing markets need to be monitored closely. The liquidity situation in the euro area remains ample by all plausible measures, indicating risks to price stability over medium to longer horizons. In conclusion, oil price developments have again led to upward revisions of inflation projections for the year ahead. At the same time, medium-term domestic inflationary pressures still remain contained, while the balance of risks to the baseline inflation scenario is tilted to the upside. Cross-checking the economic analysis with the monetary analysis confirms the need for particular vigilance in order to keep medium-term inflation expectations firmly anchored at levels consistent with price stability. By achieving this, monetary policy is making a significant contribution towards economic growth and job creation in the euro area.
Economic players simply count, with good reason, on the Riksbank acting if signs of rising inflation were to appear. In such a world, overall price formation centres above all on the level of economic activity. The improved credibility is thus a further factor that may have contributed to a level of inflation that is lower despite relatively strong growth. At the same time, the Riksbank has the major responsibility of keeping a close eye on the more long-term inflation expectations in order to maintain the credibility that has been built up in recent years. Demand assessments difficult A question that naturally has to be included in the assessments is whether the stronger growth of demand we have experienced, not least this year, will last. An important matter to bear in mind in this context is that as long as the monetary stance is expansionary, demand growth will normally be above its sustainable level. But some restrictive effect has, of course, already started to come from the higher bond rates in recent months. BIS Review 92/1999  4  However, both the Swedish and the international economy can be exposed to unforeseen shocks. We need to remember that no one foresaw either the extent or the course of the crisis in Asia. Neither was attention drawn at an early stage to the risks behind last autumn’s international financial unrest. Our knowledge about phenomena of this type is still limited. It may be asked whether we shall ever be capable of making definite predictions in this field.

How is the central bank to arrive at an interest rate increase that is appropriate in its timing as well as its size? A large, abrupt increase might lead to demand being curbed too early and too much, along with the risk of inflation falling below the price stability target of 2%1. That is naturally not desirable. Which brings me to the second question: What rate of GDP growth can the Swedish economy sustain without inflation taking off? How strongly can the Swedish economy grow? In situations involving rapid changes, there is a tendency to affix labels such as the new economy. The logical implication is the existence of an old economy that works less well. I find this misleading. There have been periods in Sweden’s economic history when the economy performed exceedingly well; one example is the 1950s and 1960s. There have also been periods that were less successful, for instance the 1970s and 1980s. The concept of a new economy might be apposite if the comparison is confined to the present and the preceding decade. There are signs that the Swedish economy is functioning better in the 1990s than it did in the 1980s. But what does this concept actually stand for? One of the many interpretations of the new economy is that long-term growth’s trajectory has shifted upwards on account of a better productivity trend. For a given input of the production factors labour and capital, the economy is able to sustain higher overall growth.
BIS Review 116/2006  5  One important difference between the two hedge funds was how much they had borrowed in relation to their capital. The debt/equity ratio at LTCM was between 25 and 30, while that at Amaranth was around 5. A further problem for LTCM was that the fund was partly involved in very complex positions on the derivatives market that were difficult to close. Many other funds and banks held the same types of positions. Amaranth, on the other hand, was largely alone in its part of the market – most others had no positions, or contrary positions, in energy derivatives. This made settlement easier, if not cheaper. A further explanation is probably that Amaranth’s losses occurred under very favourable economic and financial circumstances, where the market had good access to capital. This was far from the case when LTCM tried to settle its positions in the midst of the Russia crisis. Under more strained conditions, perhaps the sequence of events for Amaranth would have been entirely different and the risks to the financial system much greater. However, the fact that the financial system could manage the problems in Amaranth may also imply that it has become more resilient. The markets have demonstrated that they can manage a number of major strains in recent years, both macroeconomic shocks and unexpected market events, without any tangible effect on their functioning. The banks’ management of risk and their collateral requirements do appear to be stricter than they were in 1998.

As I see it,  3  See “Hedge Funds Regulation in Europe – A comparative study”, European fund and asset management association, November 2005 and “The regulation and distribution of hedge funds in Europe – Changes and challenges”, Pricewaterhousecoopers, June 2005. 4  In Italy the minimum limit for investment is EUR 500 000, in Ireland it is EUR 250 000 and in Spain it is EUR 50 000. 6  BIS Review 116/2006  such regulation could result in liquidity disappearing from the markets where the hedge funds operate just when it is needed most. Increased disclosure of funds’ risks, on the other hand, could help the market to function efficiently. If the hedge funds’ risk positions can be assessed externally, market discipline ought to improve. I consider that both LTCM and Amaranth are good examples that transparency rather than regulation is the problem. As I have already mentioned, LTCM was a very large fund and at the same time had heavy loans. The fact that the banks concerned accepted such a high level of indebtedness is in itself remarkable – one explanation was probably confidence in the prominent figures behind LTCM, who included Robert Merton and Myron Scholes. However, the banks did not have any overview of the fund’s size and total risk position. In their own interest, they should have required greater disclosure, and the authorities should have required this of the banks. With regard to the positions in Amaranth, there are similar questions.
Banks and other financial institutions drastically reduced their exposure to the risks that they had imprudently accumulated during the phase of financial euphoria. Financial intermediation and loans to companies were curtailed in the wake of a forceful process of “deleveraging”. This was the point when important spillovers of the financial crisis set in. We saw the almost immediate spillover from the financial sector to the real economy. The credit squeeze and loss of confidence started to take a toll on the real economy, and a negative feedback loop developed between the financial sector and the real economy, and has since become a major feature of economic and financial developments. Almost simultaneously, the crisis that originated in the advanced economies spilled over to the emerging market economies. Since the fourth quarter of 2008, virtually all economies – both those of the industrialised countries and the emerging markets – have faced synchronised business cycles. Since half a year, we are facing a highly synchronised global economic downturn. The ECB’s response to the financial crisis Turning to the ECB’s response to the crisis, let me first insist that none of my remarks should be interpreted in terms of the future course of monetary policy. I stick rigorously to what I have said during my last press conference. We are indeed in the one-week “purdah period” before the next meeting of the Governing Council. Since the start of the financial turmoil, central banks around the globe face unprecedented challenges.

In particular, we needed to bear in mind that the euro area’s financial system is predominantly bank-based. Take the structures of private credit outstanding as an example: recourse to banks makes up more than 70% of non-equity external finance in the euro area. By comparison, in the US the equivalent proportion is only around 30%. This reflects the fact that the US financial system is primarily market-based. In the euro area, guaranteeing steady access to credit for households and companies largely means preserving the viability of the banking system. Banks play such a dominant role in our economy that it was appropriate to focus our non-standard measures on the banking sector. This profound contrast in financial and economic structures explains the different responses by central banks to the crisis as exemplified by the approaches of the ECB and the Federal Reserve System of the US. We rely on different channels as regards the transmission of our policy action. But these variations do not reflect conflicting views on fundamental principles or objectives. On the contrary: given the different structures, the approaches need to be different to achieve the same objective. Thus, I would strongly argue that central banks around the world are united in purpose. As I indicated before, the remarks I just made on the ECB’s response to the crisis did not contain any message concerning future monetary policy, and should not be interpreted as containing any such message.
As a crucial counterpart, policy-makers are in the process of establishing the Single Resolution Mechanism, which should enable quick and efficient resolution of ailing banks without permanent recourse to taxpayer funds. Together, these new institutions will fundamentally strengthen transparency, stability and incentive-compatibility in the financial sector. In a primarily bank-based financial system like the euro area’s, these features are crucial, not only for the functioning of the financial system per se, but also for the conduct of monetary policy. This is because, with an impaired bank lending channel, monetary policy may lose its handle on the real economy and ultimately inflation. At the same time, given the persistent downside risks to price stability, monetary accommodation was a necessary ingredient in the crisis response. How has monetary policy contributed? Accordingly, since I last spoke at this venue, the ECB’s Governing Council has taken further decisive steps to engineer a monetary policy stance that is commensurate with the subdued medium-term inflation outlook. These steps included a sequence of further rate cuts, accompanied since July 2013 by explicit communication that we expect the key ECB interest rates to remain at current or lower levels for an extended period of time. But standard monetary policy in the form of rate cuts and the accompanying communication were not enough to ensure an appropriate monetary policy stance. In fact, given unwarranted fears of a euro area break-up, monetary policy transmission became severely impaired – to the extent that the financial market dislocations jeopardised our ability to deliver on our price stability mandate.

“And it builds on an established monetary policy doctrine that has gained prominence not least through its successful adherence by the Bundesbank for several decades”, Mr Draghi says. “Namely that the central bank should be endowed with a clear price stability mandate and, within this mandate, should be allowed – in fact obliged – to use its instruments in full independence to deliver price stability.” *** Ladies and Gentlemen, It is a great pleasure to speak to you tonight. When I last spoke at an event organised by the Bundesbank, in March 2012, the euro area stood at a crossroads. One direction pointed to continued malaise, with various vulnerabilities threatening to undo the benefits of economic, financial and even monetary integration. The other direction pointed to gradual repair, with ambitious reform efforts removing the key obstacles to economic stability and growth. The euro area has chosen the latter path. And today, we are seeing first signs that this decision is paying off. At the same time, challenges remain and continued reform efforts are needed to ensure that the recovery proves sustainable. Against this background, let me first elaborate on what I think are the key milestones achieved so far and then address what are the key challenges for the ECB in the coming months. What have we achieved so far? The euro area reform agenda has consisted of two pillars. One is to restore fiscal sustainability and economic competitiveness at country level.