samchain/econo-pairs-v1 huggingface dataset:
Lars Heikensten: Reforming a central bank Speech by Mr Lars Heikensten, First Deputy Governor of the Sveriges Riksbank, to the CEPR/SNS Roundtable, Stockholm, 8 June 2001. *  *  *  Thank you for inviting me this evening and for the opportunity of addressing you all. I should like to begin by stressing how much we value the cooperation with CEPR. Creating arenas for an exchange of ideas in Europe is an important task to which CEPR is making a valuable contribution. Today you have been considering a variety of issues and this evening I want to raise yet another, namely how a central bank can be reformed. I do so against the background of the major changes that are currently taking place in our national economies and financial markets. These changes clearly have consequences for the work at central banks. The challenges we in Europe face are particularly great, above all now that EMU is a reality and the single currency imposes new requirements. Work on changes at the Riksbank has been very intensive in recent years and I should like to tell you something about it. What I have to say will no doubt be familiar to many of you in managerial positions in either the private or the public domain. The operations of central banks are really not all that different from those of other enterprises. Issues recur but methods have changed a lot Sveriges Riksbank is the world's oldest central bank. Threadneedle Street's Old Lady is our younger sister.

Liquidity, profitability and capitalisation indicators are at good levels, while the ratio of non-performing loans has trended down. The Bank of Albania has continued to work for the regulation and prudent supervision of the banking system, pursuant to the legal obligations, as well as to sustain its steady development. Also, we have cooperated with: (i)  other public agencies, to improve the legal framework, align regulatory practices, and identify measures for withstanding systemic shocks;  (ii)  international financial institutions, to develop loan restructuring programmes; and,  BIS central bankers’ speeches  1  (iii)  foreign regulatory institutions and parent banking groups operating in Albania, to exchange information. I would like to reiterate that the banking system is solid, liquid and well capitalised for conducting its intermediary function. However, credit growth continues to appear sluggish, due to tight bank lending policies. Maintaining and strengthening banking system soundness is to everyone’s benefit, as this is the only system that, with its funds, may sustain long-term economic growth. Lending is expected to improve slightly during 2015. The Bank of Albania, however, expects an increasingly active role of the banking system in lending and will also take all the needed measures to encourage it. At the conclusion of discussions, the Bank of Albania shares the view that economic policies are performing overall in the right direction.
Our baseline scenario assumes that the course of the pandemic in the coming months will require similar restrictions to those in the early months of the year, but that the gradual administration of vaccinations will enable these restrictions to be lifted during the second half of the year. One key aspect is the forecast path of tourism. Under the baseline scenario, it is assumed that the incompleteness of the vaccination process in the coming quarters will give rise to tourist flows that do not reach a high degree of normalisation until 2022. As to the damage to the productive system,6 until last February the number of active firms had fallen by 3.6% relative to February 2020. This figure was lower than that of the first two years of the previous crisis – 2008 and 2009 – and comparable to 2012, despite the fact that the decline in activity was much greater last year. Behind this reduction is the fall in business start-ups, but not a rise in business deaths, which might be attributable to the support measures adopted, including the moratoria on insolvency procedures. In any event, the future is uncertain, in particular once this support should disappear. The baseline scenario of the projections assumes only moderate destruction of the productive system. There are likewise doubts about the behaviour of household saving,7 which increased significantly last year and has built up largely in bank deposits.

Takaful companies will also be given the flexibility to enter into strategic tie-ups with foreign partners through higher foreign equity limit of up to 70%, to further strengthen resilience and competitiveness. In addition, international Islamic financial institutions can be established to offer the full range of Islamic financial services to residents and non-residents in international currencies. Another further measure announced is the liberalization of legal profession to allow up to five top international law firms with expertise in international Islamic finance to offer legal services in international Islamic finance in Malaysia. Internationalisation of Islamic finance Several factors are important in sustaining the internationalisation of Islamic finance. Firstly, is the development of international Islamic financial markets to enhance the liquidity of the instruments and the risk management capacity of the players. This is important to promoting the efficient functioning of the markets and thus facilitate cross border capital flows thereby strengthening global financial integration. However, it can be observed that in most jurisdictions that have Islamic financial institutions, Islamic money and capital markets remain relatively less developed. Consequently, Islamic banking institutions face the challenge in their day to day management of cash, arising from the lack of a comprehensive Islamic interbank market with highly rated short-term tradable instruments. Without access to such a market, it is difficult for these institutions to manage their short-term liquidity needs in an efficient and effective manner. This would in turn require them to maintain a larger amount of liquidity compared to their conventional counterparts.
And there is evidence that experiencing natural disasters can affect financial risk taking – one study found that CEOs who experienced the extreme downside of natural disasters behaved more conservatively across various corporate policies. Another found that the purchase of earthquake insurance rose after a quake despite the probability of a subsequent large quake falling because stress on the fault line has been relieved. 10  One plausible hypothesis, therefore, is that the current high level of hurdle rates relative to the risk-free rate and lower costs of financing reflect, in part at least, both greater uncertainty – i.e. greater perceived risk – and greater aversion to risk. This higher hurdle rate risk premium is in addition to the higher debt and equity risk premia embodied in the cost of external financing of investment. It may have led to underinvestment more generally, even among those firms that reported that they had invested appropriately. Investment and economic outlook  If this is right, and there is currently an elevated hurdle rate premium driven by uncertainty and greater risk aversion, how persistent will it be? Will it fade over time as memories of the crisis recede? Or if and when risk-free rates begin to rise will hurdle rates move up to reflect the higher premium? This will have important consequences for the rate of investment in the future. In the near term, in the Bank's latest economic forecasts published last week, business investment is expected to remain very weak before picking up.

Average annual growth in business investment in the decade before the crisis was 2.4% and in the 15 years before the crisis it was 3.6%. 2  3  All speeches are available online at www.bankofengland.co.uk/speeches  3  One reason for this weak investment since the crisis has been weak demand. Over a run of years, the rate of investment should adjust to maintain the capital stock at a particular level relative to GDP. If GDP grows more slowly, less investment is required to maintain the capital stock at a desired level relative to GDP. This can lead to a vicious circle in which weak demand leads to lower investment that in turn impairs the productive capacity of the economy. This in turn impairs demand as households and businesses revise down their expectations for future income and profits and so on. So what starts as a demand shock can end up as a supply shock. According to the IMF, this effect probably accounts for some of the weakness in investment in advanced economies. 3  But this is unlikely to be the whole story behind the weakness of investment post crisis. One common and repeated candidate explanation is the lack of finance for productive investment. This is not a new issue; it has very deep roots in the UK. The role of banks in providing finance to businesses for investment has been examined many times since Charles Geach’s day.
To be sure, progress has not been uniform across EMEs, and more work remains in some countries to further strengthen institutional structures. Vulnerabilities remain in several important EMEs, and some have been hit by a sharp adverse turn in their terms of trade due to the recent fall in global commodity prices. Still, the fundamental improvements I’ve cited leave many EMEs better positioned than in the past to weather those times in the cycle when the external environment turns more challenging. Second, during previous Fed tightening cycles EME economic performance has generally been good. During the last three U.S. tightening cycles, EME industrial production growth has been between 7½ and 10 percent over the 12-months from the start of Fed tightening, while EME export volumes have risen 10 to 15 percent. The likely explanation for this favorable record is that Fed tightening generally occurs during periods of strong U.S. economic performance. Recent research from the IMF bears out this hypothesis, finding that higher U.S. interest rates associated with stronger U.S. growth represent a net positive for EMEs. 1 Financial performance of EMEs has been more diverse across Fed policy cycles. The strongest contrast is between the tightening cycle that began in 2004, and the one beginning a decade earlier, in 1994. EME asset prices strengthened considerably during the 2004 cycle, but weakened considerably during the earlier cycle.

Relatively quickly, however, market pressures turned more focused, tightening more severely for countries with clear fundamental vulnerabilities: large current account deficits, a heavy reliance on portfolio inflows and high inflation rates. Markets then responded favorably as EME authorities shifted toward clearer, more consistent policies focused on inflation objectives and external sustainability, and away from policies with conflicting and sometimes competing objectives. A smooth adjustment to Fed normalization this cycle will be more likely if market participants retain this discriminating perspective. None of this is to suggest that the road ahead will necessarily be an easy one. Market participants may focus on vulnerabilities that they might have ignored prior to the taper  1  See “Spillovers from Unwinding Monetary Support in Advanced Economies,” 2014 Spillover Report, Chapter 2. See also, “On the Receiving End: External Financial Conditions and Emerging Market Growth Before, During and After the Global Financial Crisis,” World Economic Outlook, April 2013, Chapter 4. BIS central bankers’ speeches  5  tantrum in 2013, placing an added premium on strong fundamentals, policy coherence and predictability. There will likely be no one right answer for EMEs in managing the trade-offs that come with the changed environment, and the adjustment could sometimes be difficult. With respect to these risks, central banks in general, and the Fed in particular, play an important role. We seek to be good global stewards. As you know, we’ve taken a number of steps to increase transparency and to improve the clarity of our communications.
They have succeeded in carrying out wide-reaching reforms that are compatible with our common European social model, which combines high standards of public service and relatively low levels of inequality – much lower than in the American society. Progress has been made in all four key areas: Enterprise, Employment, Education and Expenditure reduction. And these reforms are delivering results today: in recent years, GDP and employment have grown much faster in those countries. Contrary to preconceptions, France has also demonstrated in the past its capacity to meet the challenge of economic and social reform. In the 1990s, to prepare for the introduction of the euro, France pursued a competitive disinflation policy that proved highly effective. Remember that in the late 1990s, France experienced the highest GDP growth and the weakest inflation rate among European countries, along with a significant fall in its unemployment rate. Today, French reforms are heading in the right direction, [Slide 5] in particular the Tax Credit for Competitiveness and Investment (CICE) and the Responsibility and Solidarity Pact (RSP) which are designed to foster an improvement in the competitiveness of the French economy. We should obviously persevere with more reforms. But progress has also been made with the recent labour law (‘Loi El Khomri’) which, among other things, clarifies the conditions under which firms can carry out dismissals for economic reasons.

The inter-bank market, traditionally the most liquid and efficient of all markets, has experienced serious dislocation, while equity markets were relatively unscathed. The spreading of defiant expectations from the subprime US market to other segments, other institutions and other regions has been unexpected, asymmetric and disconnected from the magnitude of the initial shock. It invites us to revisit our reading of globalisation and contagion in the light of current events. The ongoing financial globalisation is underpinned by three main drivers, each of them strengthening the two others. The first driver, and probably the strongest, is financial innovation. Supported by technological progress, financial innovation has fostered the emergence of new financial products and services, resulting in more complete financial markets. Thanks to advances in financial technology, it is now possible to break up the risk of an asset into its constituent parts and to recombine them as wished, to fit a specific investor’s risk profile. The emergence of derivatives, combined with the appropriate mathematical tools to price them, has greatly expanded the range of tradable risks, opening up new and vast horizons for hedging strategies. Financial institutions are able to actively manage their exposures and reallocate certain risks to those players that are most able to bear them. Overall, investors are more willing to invest across borders, knowing that they can reach an improved riskreturn trade-off. Simultaneously, economies are becoming more open financially, especially in the emerging world. The growth of international capital flows is the consequence both of domestic policies and global factors.
In pondering the issue of financial governance at the individual and household level, I am reminded of Leo Tolstoy’s infamous quote from Anna Karenina, “All happy families are alike; each unhappy family is unhappy in its own way.” There are indeed numerous causes of unhappiness, but being confronted with the consequences of bad financial decisions made in the past must surely be a common cause of much unhappiness among many families. This issue is especially pertinent in the current environment of prolonged low interest rates. Sound financial decisions are needed to ensure that households do not live beyond their means and accumulate excessive debt. This is essential to ensure the sustainable growth in consumption, rather than having debt-fuelled consumption binges followed by prolonged slumps. It is these types of considerations that have made Bank Negara Malaysia maintain a level of interest rates that we believe balances between supporting the economy and discouraging excessive risk taking. This has been supplemented with other policy tools, including macroprudential policies, to manage risks within the financial system and economy. Therefore, it is not only national governments themselves that must practice sound financial governance, they must also promote it as a key priority within the society and not create incentives that lead to unsustainable financial behaviour among economic agents. Turning now to the corporate sector, at the surface, corporate financial governance appears to have ample checks and balances. Management is accountable to boards and boards are accountable to shareholders.

For some, gentrification conjures images of fancy coffee shops and high-priced fashion boutiques. But the reality can be heartbreaking. Families who’ve lived in a home for generations are driven out, communities break up, and the social fabric of a neighborhood is irreparably damaged. We seek growth that enables everyone to fulfill their economic potential. We want enterprise that supports communities, and communities that have the tools to flourish through investment. This is good for families, good for communities, and good for the economy. Of course, you don’t need me to tell you this. You face the challenges of inequitable growth every day through your work. And that’s why I’d like to talk about the role we can play to support you create a New York City that benefits every part of the community. When I think about our work at the New York Fed, both today and going forward, it boils down to three things: We connect organizations with data and research to amplify the power of their work, we convene stakeholders to share experiences and best practices, and we are a catalyst for initiatives and approaches that help tackle some of the most complex challenges confronting our communities. Connect Some of our greatest assets are our data, analysis, and research. And I don’t say that only because I am an economist by training! Data is at its best when it leads to meaningful action.
Due to the changed international environment, however, which we are unable to influence, we have no choice but to adjust to a leaner period, whether we like it or not. Monetary policy of the SNB With the end of the minimum exchange rate, the SNB has now returned to interest rate management. However, this does not mean that we have reverted to business as usual for monetary policy. In December last year, the SNB introduced an interest rate of –0.25%, to be charged on sight deposit account balances held by banks and other financial market participants at the SNB. On 15 January – concurrently with the discontinuation of the minimum exchange rate – we lowered this interest rate again, to –0.75%. This lowering of the interest rate makes it substantially more expensive to hold Swiss francs compared to  BIS central bankers’ speeches  3  other currencies. Over time it is intended to cushion the impact of the discontinuation of the minimum exchange rate and counter a tightening of monetary conditions. Discontinuing the minimum exchange rate does not mean that the SNB will stop paying attention to foreign exchange market developments. We will continue to take account of the exchange rate situation in formulating our monetary policy in future. Following the discontinuation of the minimum exchange rate, the Swiss franc initially appreciated sharply against all currencies. The appreciation diminished somewhat in the following weeks.

Only one merger has taken place so far, between DBS and POSBank. But I know that all the banks are alive to the competitive trends, and are continually reassessing their position. It is a dynamic situation, and the present configuration is unlikely to be permanent. Regulatory cooperation and harmonisation The second dimension of financial integration is the trend towards greater regulatory cooperation and harmonisation. Starting in the 1980's, a series of international fora were created for regulators and policymakers to share experiences, cooperate with one another, and harmonise regulations and  2  BIS Review 45/2001  policies. Among the multilateral initiatives, the efforts of the Basle Committee and IOSCO are probably the best known. The Basle Capital Accord of 1988 helped to increase the capital held by internationally active banks, and to create a more level playing field for banks under different regulators. The new Basle standards now being finalised will remedy the weaknesses of the 1988 Accord, and enable banks to set aside capital in accordance with the riskiness of their assets. IOSCO has provided securities regulators globally with a useful platform to exchange views and enhance cooperation on issues relating to the regulation of the securities markets. It has developed a common set of objectives and principles of securities regulation, which enhance mutual understanding among securities regulators and commissioners. IOSCO has also been actively involved in promulgating standards of public disclosure, and facilitated cross-border capital raising and listings. The Asian crisis has added impetus to the harmonisation of regulatory standards.
The Riksbank’s objectives and means have been influenced by developments in society Figure 1 illustrates inflation in Sweden over the past 140 years and the exchange rate regimes we have had during this period. Something that becomes clear is that even if we have now become used to a flexible exchange rate, over a long period of time a fixed exchange rate has been much more common. However, from time to time socioeconomic developments in general have led to the prevailing monetary policy regime being reconsidered. 1 As you know, Sweden has not introduced the euro as currency, but on the other hand we were part of a Scandinavian currency union between 1873 and 1924. 2 This began a period with different varieties of fixed exchange rate, which – with the exception of the First World War and a brief period in the 1930s – came to last until 1992. During 1931–1937 the Riksbank worked with a price stability target, for some years this was also combined with a fixed exchange rate. It would take another 50 years until we introduced a price stability target again. 1  This also applies to the central bank’s mandate in a broader sense. See Georgsson, M, Vredin, A. and Åsberg-Sommar, P., “The modern central bank’s mandate and the discussion following the financial crisis” Economic Review 2015:1, Sveriges Riksbank. 2  This cooperation largely came to a halt in connection with the outbreak of the First World War ten years earlier.

The real failure of economists was that too much energy was devoted to forecasting – to trying to assess whether economies would turn down – and not enough was spent analysing the question of “well, what if they do; how bad could it be?” And as a result, the financial system was unprepared. It was not a failure of economics. It was a failure to apply economics to the right question. Without economics, the answers to “how bad could it be?” relied all too often on recent historical precedent; on this time being different. 11  And, even more dangerously, they relied on market measures of risk; indicators that – as recent work at here the LSE Systemic Risk Centre shows – often point to risks being at their lowest when risks are actually at their highest. 12  The Financial Policy Committee’s mandate is to break free of the shackles of forecasting, to free us from trying to predict if the economy will turn down, and to apply economic analysis to the question of how bad it could be if it did. 13  The re-focussing of economic research since the crisis has supported us in that. It has  established, for example, how far: 14  Recessions that follow credit booms are typically deeper and longer-lasting than others ; 15  Over-indebted borrowers contract aggregate demand as they deleverage ;  While they have high levels of debt, households are vulnerable to the unexpected.