samchain/econo-pairs-v1 huggingface dataset:
8  Shortcomings in the TBTF regulations before the crisis Ladies and gentlemen, the global financial crisis has clearly demonstrated that, not least for Switzerland, the ‘too big to fail’ issue is real and the costs and risks for society as a whole are too high for this state of affairs to be simply accepted. 5 6 7 8  Cf. Horton et al. (2009). Cf. Swiss National Bank (2008). Cf. Swiss Federal Council (2011). Share of balance sheet total relative to Swiss and US GDP respectively at end-2017: ZKB 25%; Raiffeisen 34%; UBS 138%; Credit Suisse 112%; JPMorgan Chase 13%; Bank of America 12%. Page 5/14  a) ‘Too big to fail’ issue: recognised but insufficiently addressed by regulation ... Looking back today, it is clear that this issue was underestimated before the crisis – both in general and by the regulators. For instance, before the crisis, neither the international recommendations on banking regulation nor the Swiss regulatory provisions contained anything that explicitly addressed the systemic importance of individual banks and the associated risks. And this despite the fact that people were aware of the issue before the crisis – both in Switzerland and elsewhere. 9 The term ‘too big to fail’ itself already featured in political debate during the 1980s in the US, in the context of difficulties experienced at a number of financial institutions.

6 See Donald Kohn and Brian Sack, Monetary Policy during the Financial Crisis, preliminary discussion draft  presented at the Hutchins Center on Fiscal and Monetary Policy at Brookings and Yale School of Management Program on Financial Stability event, Responding to the Global Financial Crisis: What We Did and Why We Did It, Washington, D.C., September 11–12, 2018. 7 Possible sources to which this lament has been attributed are catalogued here, although its actual provenance  is not known. 8 As part of our analysis of what went wrong in our forecasting before the Great Recession, researchers at the  Federal Reserve and European Central Bank jointly looked at various methods of more directly including highfrequency fluctuations in our forecasting models. The results from this research are reported in Luci Alessi, Eric Ghysels, Luca Onorante, Richard Peach, and Simon Potter, Central Bank Macroeconomic Forecasting during the Global Financial Crisis: The European Central Bank and Federal Reserve Bank of New York Experiences, Federal Reserve Bank of New York Staff Reports, number 680, July 2014. 9 See survey questions and results to the Survey of Primary Dealers and Survey of Markets Participants, Federal  Reserve Bank of New York. 10 Of course, the NBER didn’t actually declare the start of the recession until late November 2008, nearly a year  after it officially began. 11 Estrella and Mishkin’s original paper, updates, related research, and current recession probabilities implied by  the term spread are available on the New York Fed’s Research website.
Two factors played leading roles in that development. The first is the relatively large share of foreign-denominated loans – an average of 20% for households and 70% for businesses. The latter factor is an unusually strong exchange rate pass-through effect, which stems from the magnitude of the exchange rate drop and the lack of confidence that the króna would recover in the near future. As a result, the principal of indexed loans – which constitute about 70% of household debt and 10% of business debt – was written up. As is often the case in severe financial crises that are at the same time country crises, there was a genuine risk of a multi-faceted spiral of currency collapse, inflation, debt crisis, and economic contraction. It was critical to stave off such a vicious cycle, and therefore of vital importance to stabilise the exchange rate. BIS Review 146/2009  1  But this was problematic because of the large amount of capital that had accumulated in Iceland through carry trading during the economic upswing. Current estimates indicate that some 500 b.kr. remain in the Icelandic economy. There was the risk that this money would try to escape through a collapsed foreign exchange market, with unimaginable consequences for the exchange rate. Thus it was quite possible that astronomical interest rates would have been required if exchange rate stability were to be achieved through interest rate policy alone.

Chart 6 Wage growth on the rise Wage growth is rising and reached the highest level seen in over a decade last year, turning out higher than we had expected. This can be ascribed in large part to a tight labour market and improved profitability in some business sectors. The social partners expect wage growth to rise further this year, and expectations have increased in recent months. Wage growth is projected to be around 5 percent this year,  2/3  BIS - Central bankers' speeches  which is higher than we projected in December. While wage growth did not keep pace with price growth last year, we expect wage inflation to be slightly higher than price inflation this year. Higher wage growth means higher business costs, which will likely also contribute to sustaining inflation. Figure 7. Further rate rise most likely in May It is our responsibility to ensure that inflation falls to 2 percent. At the same time, we will avoid raising the policy rate beyond that needed to curb inflation. There is considerable uncertainty about future economic developments, but we will most likely raise the policy rate again in May, followed by a further rise to around 3.5 percent in summer. This could mean an increase in the residential mortgage rate to between 4½ and 5 percent. Chart 8 Prospects for lower inflation and somewhat higher unemployment In our current projections, inflation falls back towards 2 percent over the next years.
Instead, the FOMC’s approach promotes the use of the federal funds rate as the active monetary policy instrument—an instrument with which it has much greater experience, likely helping to minimize the risk of an error in the early and still-vulnerable stages of the economy’s recovery.40 Running down the balance sheet passively, in a gradual and predictable manner, once normalization of short-term interest rates is well underway puts the balance sheet’s normalization in the background. The stock view of central bank purchase programs holds that given an expected path of the portfolio, the pace of actual changes in the portfolio should have little direct effect on asset prices. Assuming markets anticipate a gradual unwind in the portfolio, asset prices would adjust gradually over time. Nevertheless, central banks may wish to mitigate any possible risk that flow effects associated with overly fast flows of securities into private hands interfere with monetary policy implementation or disrupt market functioning. A conservative feature in the Fed’s approach is therefore a one-year transition period during which gradually rising redemption caps are phased in, thus allowing financial markets and the U.S. Treasury time to adjust to the Fed’s declining market presence. These design features likely enhance overall program effectiveness. However, this outcome is traded off against a more rapid achievement of balance sheet normalization—something some policymakers might hold as a desirable objective. For example, they might see a smaller balance sheet as one that offers greater capacity for using asset purchases more fully again in the future.

This is to supplement the central banks’ instruments in such a way that – alongside the maintenance of price stability – central banks can also make a greater contribution to financial stability than they have done in the past. The specific tools being referred to here are the macroprudential instruments that have attracted increasing interest in recent years, and that have been introduced in many countries. Such instruments can be used in a supplementary manner, as required. In the case of Switzerland, the SNB has a statutory mandate to pursue a monetary policy serving the interests of the country as a whole, to ensure price stability and in so doing, to take due account of the development of the economy. Within this primary framework, it also has the task of contributing to the stability of the financial system. There is no contradiction between these tasks if target hierarchy is observed. As far as financial stability is concerned, the SNB works closely together with the Swiss Financial Market Supervisory Authority and the Federal Department of Finance to create a regulatory environment that promotes stability. The SNB concentrates on the macroeconomic and macroprudential aspects of regulation. For the macroprudential tasks, a new instrument was created this year – the countercyclical capital buffer. According to the relevant regulation, this buffer can be activated by the Federal Council following a proposal by the SNB.
The protection of existing or the creation of additional market failures, although inefficient on the whole, can be a profitable activity for an individual or for a single group of participants in a financial system. Therefore market imperfections once identified and addressed with appropriate measures are likely to permanently change their form and place and to challenge even the best of existing institutional arrangements time and again. A third imperfection that may affect a financial system is an unsatisfactory level of competition. When saying this I do not refer to perfect competition as described in textbooks but rather have in mind market contestability. Contestability excludes undue pricing power by market participants, the existence of collusion among market participants and barriers to entry. You will certainly agree with me when I say that there is no guaranty or a kind of “natural law” that leads markets to organise themselves according to the requirements of contestability. The free play of market forces is the exception rather than the rule. Economic agents individually benefit from rule bending. In addition, and this is of particular relevance in clearing and settlement, the presence of high fixed costs constitute relevant barriers to entry. From experience we know that these barriers reduce competition or eliminate it all together. In extreme cases we speak of a “natural monopoly” which call for regulation by public authorities. Market imperfections such as asymmetric information, negative externalities or limited competition have shaped the evolution of financial systems everywhere.

Due to their specificities, stablecoins are a novelty in tune with some markets’ needs. In the context of the economy’s digitalisation, the past decades have shown how Fintechs as well as Bigtechs have aimed at taking advantage of the latest advances in web-based technologies, notably blockchain, to provide new payment credit and investment services. Often, they propose to achieve this through the creation of various new assets (coins, tokens, stablecoins, with or without smart contracts). We all have in mind the first generation of crypto-assets such as Bitcoin and Ethereum, initially designed to be instruments of exchange in the digital world but suffering from a number of limitations, not least severe price volatility and a lack of guarantee of their convertibility and security. A second generation is emerging in the form of « stablecoins », such as the JP Morgan Coin, UBS’s Utility Settlement Coin or Facebook’s Libra. They share many of the features of crypto-assets but seek to stabilise the price of the “coin” by various means. They might therefore be more capable of contributing to the enhancement of payment systems, with a potentially global reach, especially those sponsored by large technology or financial firms. In the retail market, stablecoin-based solutions seek to address evolving consumer preferences towards instantaneous, continuous, and standardized payments, as consumers become ever more mobile.
Much attention will also be required, in the fullness of time, to make sure that the financial systems through which financial intermediation takes place are robust so that the benefits of financial liberalization could be maximized and the associated risks could be minimized and prudently managed. 3. As a financial services centre which operates with a highly liberal regime, Hong Kong has important roles to play in all this. There is not enough time to go into details here on this occasion, so I shall just identify three general areas for your consideration. 4. The first area concerns financial intermediation within individual economies, in other words, the channelling of domestic savings into domestic investments. Here Hong Kong, at this stage at least, largely only plays an advisory role. The less liberalized financial systems in this region are very much dominated by domestic financial institutions, particularly in the banking market. Further, domestic politics and a desire to protect domestic financial institutions from undue competition are such that liberalization to admit foreign financial institutions to take part in domestic financial intermediation would only proceed at a pace dictated by these considerations. For example, it will, I think, take some time and patience for Hong Kong-based banks to gain a physical presence in the mainland of China, be allowed access to renminbi banking business and command a significant share of that business. 5.

Let me elaborate on where these challenges may come from. It is a well-known fact that the size of the banking sector in most post-communist acceding countries still remains far below the EU average. In the acceding countries, bank credit to the domestic private sector typically has a ratio of 30 to 40 percent of GDP, while the EU average is around 100 percent of GDP. This difference is to a large extent natural, reflecting the lower GDP levels of the acceding countries, their history, and the recent weaknesses in their legal and institutional environments. Nevertheless, it is quite likely that this legacy of the past will be overcome in the foreseeable future. The driving force might be the real convergence process. And perhaps more importantly, the acceding countries can capitalise on their reform achievements of recent years. Despite differences in their reform strategies and numerous transitional difficulties, most acceding countries have achieved great progress in building their financial systems. Their banking sectors are now mostly stabilised, privatised, and typically dominated by foreign ownership. Moreover, the acceding countries have also achieved considerable improvements in the functioning of their general legal and institutional frameworks. BIS Review 8/2004  1  Recent empirical studies by the IMF have shown that there might be scope for substantial convergence in bank credit in the acceding countries with EU levels. In some cases and in some periods, the real credit growth might reach as much as 30 percent a year, or even more.
As one example of that, the Open University has recently made available on-line a set of three modules for helping adults better understand  38  G30 Working Group (2015). 39  New City Agenda (2014). 40  See BIS (2012). BIS central bankers’ speeches  9  financial matters and, ultimately, make better financial choices. 41 Charities like Citizens Advice are also doing fantastic work in this area. Of course, part of the reason so many members of the public find finance difficult is because it is difficult – and, sometimes at least, it is made deliberately so. There is plenty of evidence, including from the financial crisis, of financial products being made more complex than was necessary and consumers being charged a premium for buying them. 42 This damaging cycle persists because of the difficulties consumers understandably face when trying to compare these products. To give a personal example, I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions. Conversations with countless experts and independent financial advisors have confirmed for me only one thing – that they have no clue either. That is a desperately poor basis for sound financial planning. This problem is one which, if anything, is becoming more acute over time. More of the risk associated with financial decisions is these days being shouldered, not by the state or companies, but by individuals. Take pensions.

The possible need for speedy assistance necessitates that a central bank must have internal procedures for managing requests for liquidity support and doing so very rapidly. To accomplish this, central banks need to have a detailed crisis plan that can be put in place within very short notice. The crisis plan should include the following types of information: Organisational structure •  A division of responsibilities for analysis, information, decision-making, etc. •  Staffing requirements for different tasks, with substitutes. Analysis plan •  A description of the information necessary to make a decision about whether or not a systemic crisis may occur. •  Necessary information about systemically important individual banks. Information strategy •  A plan for informing and coordinating information and decisions with the other domestic agencies involved in the crisis. •  A plan for informing authorities in other countries about the situation. •  A plan for communicating with the financial markets. •  A plan for spreading information to the public and media (ex ante and ex post transparency). Plan for implementing ELA •  A clear description of the routines which must be followed and the legal requirements which must be met for ELA. Legal procedures, for example contracts, for lending against other collateral than what is normally eligible •  An inventory of the instruments available for implementing ELA. •  Guidelines for acceptable collateral and appropriate haircuts.
The first, and most obvious one, is between the robustness and resilience of the financial system, on the one hand, and its profitability, on the other. With hindsight, it may be that parts of the returns achieved by the financial industry in the last decade have resulted from too big a tolerance of tail risk. Conversely, one can theoretically increase, almost to a maximum, the resilience of the financial system to extreme events by piling up strong liquidity and capital cushions in all its components. Of course, since capital and liquidity are costly, the economic viability of such a system would be open to question. BIS Review 151/2008  3  A second trade-off appears between risk sensitiveness and financial volatility. We are increasingly expecting our prudential and accounting regimes to reflect precisely, at any moment in time, the level of risk embedded in every financial instrument. This does make sense: prudential requirements, in particular, should be tailored to the risk attached to specific activities. But financial systems are naturally procyclical. Risk – and risk appetite – move up and down with the economic cycle. It is an open question then, whether financial regulation does or not contribute to creating additional feedback loops in an already complex system, thus reinforcing the probability of extreme events. Finally a trade-off appears between financial innovation and product standardization. Many economic activities are exposed to extreme risk, which (almost) never materialise.

The benefits in terms of increased transparency and better risk management are very significant. Those same changes, however, may contribute to create new amplification mechanisms inside the financial system. This is referred to as a "procyclicality" issue, by which we usually mean the tendency of financial system to accentuate fluctuations in real and financial variables around their trend. But amplification can also create persistence if the system is path dependant. We may thus have to broaden our definition of procyclicality, looking not only at fluctuations around a trend but also at changes in the trend itself, which would move the equilibrium of markets and prices and potentially create extreme events. A very subtle question arises, which would deserve both theoretical and empirical investigation in this context: when do cyclical fluctuations degenerate into a more fundamental and permanent deviation and what could be done to prevent it? Rating By essence, the rating process is discontinuous. Changes in ratings therefore create non linear effects in the dynamics of financial markets. Those effects are stronger when there are a limited number of rating agencies with the same behaviour and methodologies. For that reason, we need to consider whether both our supervisory processes and market practices do not rely too much on rating. Such "hardwiring" of ratings in our financial infrastructure may amplify small and localised discontinuities, thus creating the possibility for more extreme events. 2  BIS Review 151/2008  Understanding the current crisis Arguably, one major problem underpinning the current crisis is the pricing of risk.
That policing can be achieved through penal interest rates. But we can see no monetary policy issue in relation to intra-day credit. The extension of sterling intra-day liquidity in our present domestic RTGS system is of no interest to, and never considered in the context of, monetary policy decisions. The same holds for all other countries. Indeed we could go further and say that denying even-handed access to TARGET through out central banks will negate one of the main purposes of the whole exercise, to reduce the risk inherent in systems in which banks are exposed to each other for a period of hours. Banks would find other ways round the restriction which would be more risky. So central banks across Europe will have scored an own goal. We shall need to look carefully at this issue as we move towards 1999. If restrictions were to be applied to out central banks which made TARGET unattractive to banks in London, thereby encouraging them to use less secure cross-border mechanisms for euro payments, then we shall need to think about the other options we could adopt. One possible option might be to develop our own euro RTGS arrangements to allow quick, efficient and safe euro payments within the UK which would not rely on access to intra-day credit from the euro area. We would prefer a pan-European solution which, we strongly believe, would be in the interests of the EU as a whole in the long run. But one thing is clear.

Safe, efficient and competitive payment and settlement systems must be available in our own marketplace, and they will be. London has huge advantages as a strong and competitive financial centre in or out BIS Review 1/1997  -6-  of EMU. We are confident that those advantages will remain. The fact that more and more banks are centring their foreign exchange, corporate finance and investment business in London suggests that they share our confidence in the future of London. In these matters it always seems to me to be best to take one’s cue from ‘revealed preferences’ - where financial institutions choose to base themselves, taking account of all the uncertainties. Those revealed preferences remain strongly in London’s favour. The preparations for EMU are now hotting up. All over Europe, Boy Scouts are packing their rucksacks with the kit they will need for this determined assault on what, in deference to its German roots, we should perhaps call the Magic Mountain, with apologies to Thomas Mann. The Magic Mountain is perhaps a more tactful title to choose than The Confessions of Felix Krull, Confidence Man, or Death in Venice, as some others in London might suggest. I hope that this morning I have given you some insights into what we think should be in the central banker’s rucksack, and how the United Kingdom will assess its own preparedness next year, when the time comes. BIS Review 1/1997