samchain/econo-pairs-v1 huggingface dataset:
It goes without saying that these changes in the structure of financial markets, in combination with the emergence of new technological advances, pose a challenge for banks. Particularly so against the current background of low profitability of the banking systems in Europe. The arrival of new technologies has reduced the barriers to entry in certain traditional banking activities, creating the possibility for new competitors to banks, such as the FinTech companies, to access bank customers in a highly dynamic manner for a relatively modest investment outlay9. But the new technologies do not only pose threats for banks, they also offer opportunities for them in terms of potential efficiency gains. One example is the application of artificial intelligence and the systematic use of large databases with real-time information and a high degree of disaggregation (commonly known as big data) for both their commercial business and for regulatory compliance. Apart from the potential efficiency gains for banks and for the financial system as a whole, the application of some of the new technologies in the financial sector could bring other 7  Arce, O., Gimeno, R., and Mayordomo, S. (2017) “Making room for the needy: The effects of the Eurosystem’s Corporate Sector Purchase Programme”, Banco de España Working Paper No. 1743.

The damaging effects of activities such as deforestation, over-fishing and excessive emissions on the environment, have wide-ranging implications not just on the future quality of economic activity, but on the quality of life itself. Progress has been made both in terms of regulations and the increased sensitivity of corporations to their environmental footprint. However, the progress is relatively small and developing economies are particularly vulnerable to being made the choice location for the so-called dirty industries. The pursuit of profit is a powerful motivation for corporate existence and unfortunately, it often leads to short-sighted behaviour. The ongoing Volkswagen scandal is a clear example of this. Again, it reinforces the need for sound government regulation in ensuring that financial decisions taken by corporations are not only good for those corporates but also for society as a whole. Let me now move on to the last part of my speech, which relates to the governance of finance. After all, the availability of finance is a key constraint for economic agents and therefore, a key determinant of economic activity. Governance of finance: anchoring finance in the real economy The need to maintain sound financial governance of financial institutions is best demonstrated through the impact of its absence. The recent crisis is a stark reminder that weak financial governance of financial institutions can result in unsustainable levels of leverage, excessive maturity mismatches and underpricing of risk within the financial system, ultimately leading to widespread wealth destruction and economic dislocation.
As long as the banking system was – or at least appeared to be – sound, as central bankers we did not need to worry too much about what happened elsewhere in the financial system or the condition of the corporate sector or the structure of household balance sheets. But this is no longer true, if it ever was. I have already mentioned the role of the corporate sector in the Asian financial crises of a decade ago. The fact that it was the corporate sector rather than the banking sector that had assumed foreign exchange risk ultimately didn’t matter from the point of financial system stability. The effects were the same – or possibly were greater as the corporate sector was less well able to handle the risks than the banking sector might have been. From a macro prudential policy perspective this means that we must pay attention to conditions in the corporate sector and the soundness of corporate balance sheets. And given that so many banks in Asia have followed those in the rest of the world in looking to develop their consumer credit business, the condition of household finances is also important to understand from a financial system stability perspective. In addition, the experience of the last decade has also taught us that non-bank financial intermediaries matter for the soundness of financial systems. For example, there is plenty of evidence that insurance companies have been major sellers of credit derivatives. This passes credit risk from the banking system to the insurance sector.

11  Mervyn King, the former governor of the Bank of England, has used a closely-related means of illustrating why monetary policy should give consideration to financial imbalances, where he instead uses the so-called Taylor curve – a curve that illustrates a central bank’s trade-off between stabilising inflation around an inflation target and stabilising the real economy (GDP, unemployment, employment and so on) around a long-run sustainable level. See King (2012). 12  This reasoning is thus based on the notion that risks linked to financial imbalances can be taken into consideration in monetary policy by incorporating their effects in the longer-run forecasts for inflation and the real economy (for instance, measured in terms of GDP). There are also arguments in favour of the central bank having the stabilisation of financial imbalances as an explicit objective for monetary policy. The financial frictions that give rise to the imbalances could, for instance, entail welfare costs for society, over and above the effects on inflation and GDP, which the central bank may have reason to counteract directly, see for instance, Cúrdia and Woodford (2009). Monetary policy would then have three factors to weigh against one another: stabilisation of inflation around the target, stabilisation of GDP around a sustainable level and stabilisation of some relevant measure of financial imbalances. Regardless of the theoretical argument, this way of including financial imbalances in the deliberations could have practical benefits, for instance by reducing the need to incorporate the risks in the forecasts for inflation and GDP.
Environmental protection  Due to the high dependence of rural communities on common property, it is necessary for local governments to implement environmental policies in order to protect the rights of the poor, who are the most affected when the quality of the environment worsens. Data from villages in Zimbabwe estimate the proportion of household income from common property as high as 40% (Dasgupta, 2002). A number of environmental protection campaigns are currently being executed in several African countries. One such campaign is the National Soil Fertility Action Plan, which is currently being prepared in 23 countries. In addition to this development, 15 National Action Plans have been submitted within the United Nations Convention to Combat Desertification (UNCCD). Natural resources need to be maintained in order to provide a livelihood to largely communal rural communities, which for the most part depend on forests, and other open natural resources for their survival. It has been shown that in Tanzania the poor derive as much as half of their cash incomes from the sale of forest products, such as charcoal, honey, firewood and wild fruits (UNDP 2003). This is true for most Sub-Saharan African countries In addition, most methods used to purify minerals such as gold by most small-scale rural people involve pollution of rivers with toxic chemicals. Regional institutions in Africa have worked towards the implementation of development programmes aimed at reducing pressure on natural resources in the various areas of the continent.

The total population of Africa is projected to reach 1,941 million by the year 2050, from approximately 885 million in 2004 (Ashford, 2004). According to statistics collected by UN-Habitat 2002 and UN 2002, they indicate that out of a world total of 923,986 thousand urban slum dwellers, 869,918 thousand (94.1%) were from developing countries, with Africa accounting for 187,563 thousand or 20% (UNDP, 2003). It is important for local governments to ensure adequate planning policies in order to accommodate the predicted rising population. Local governments must also ensure the implementation of effective policies meant to regulate the activities arising from globalisation on the African economy such as the expansion in the number of urban industries, and the need for land for cultivating commercial crops, as well as to support the need for increased areas of subsistence farming. Another fundamental aspect that needs urgent attention is the issue of collecting more accurate data on environmental pollution and degradation and related statistics on the environment. Items such as farming methods employed, the pace of clearing of land for settlements, and charcoal burning, are presently not included in existing statistics. Appropriate measurements will provide a more precise indicator of the weight and quantitative value of negative environmental externalities on economic development in Africa. Chinese policy makers have now adopted the use of “green GDP” (The Economist, August 21st 2004), which takes into account the environmental costs on economic development.
For example, a million U.S. dollars, made up solely of $ bills, would form a stack measuring approximately 43 inches or 109 centimeters in height and weighing 22 pounds or about 10 kilos. Consequently, currency is inconvenient to use, especially for those who seek to make large investments or payments. Second, currency is subject to theft, requiring a big investment in security and insurance. Third, recounting currency every time it is moved or transferred between people entails time and expense. Finally, currency is subject to degradation, accident, fire, counterfeiting, and other mishaps. Because currency is costly to invest in, then we could refine the proposition we stated earlier to say that a person would invest a dollar in an account or bond that promises to pay back less than a dollar so long as the person could not preserve more of his or her initial wealth by investing in currency, net of its costs. So one might suggest that it is the negative net return on currency that establishes the lower bound to interest rates – zero is only a rough approximation. This formulation is sharper, certainly, but it may also be too blunt for the following reason. Notice that the costs of handling currency vary by the size of the investment one is considering.

These questions of credit analysis and risk control are an integral part of the current work of the Basle Committee on credit risk management. The starting point for that work is a paper describing the framework for traditional credit risk management by banks. That framework can then be used to consider how changes in the financial markets affect the credit process. In addition to the issues I’ve described, this work will look at the impact of other developments such as credit risk models, credit derivatives and securitization. One goal of this work is to identify areas of risk management which are improving, and those which may need strengthening, especially potential problems in the internal controls that prevent and detect breakdowns in risk control. The second question, how the larger role of capital markets activities is affecting liquidity risk, also involves a reconsideration of the guidance the Basle Committee developed a decade ago. The recent market turmoil has been especially hard on emerging market banks which funded domestic currency assets with unhedged foreign currency liabilities. The liquidity risk of concentrations on the asset side of the balance sheet has a different significance when assets are sold not only to raise cash but also to conduct portfolio management, which assumes generally liquid markets. Moreover, we are seeing new liquidity needs arising from the changed funding practices of customers.
In connection with the expansionary cycle of the world economy, and also with the depreciated dollar, prices of copper, oil and derivatives – especially gasoline – are picking up again. The rise in commodities’ prices has now spread to foods. For the year 2008, projections from Consensus Forecast foresee global growth similar to that of 2007 but with a rebound in the U.S. and a slight deceleration in the euro zone and in emerging economies, influenced by the process of monetary normalization implemented to keep inflation under control. Such a favorable global scenario may continue longer, but it can also deteriorate if a number of latent risks materialize. The most important ones facing the world economy are: (1) a deeper deceleration in the U.S. as a result of a stronger adjustment in the housing sector that ends up shocking the rest of the economy and the world; (2) an acceleration of inflation because of supply-side shocks in a global economy with little output gaps, which generates a  2  BIS Review 87/2007  sudden and large increase in the monetary policy rates of industrial economies, especially the U.S. and the euro zone; (3) an unforeseen sharp increase in risk premiums and a liquidity shortage affecting asset prices and world activity as a result of an unexpected increase in inflation in the developed world or a shock in financial markets, at a time when risk premiums are in unusually low levels.

At the presentation of the last report on financial stability, we expressed our conviction that the financial system needs to be made more resilient to possible shocks. This is all the more valid if we consider the hundreds of billions of taxpayers’ money that had to be spent worldwide on stabilising the financial system over the past few months. The focus is on the need for improvement in the “shock absorbers”: capital and liquidity. The crisis has shown that the current regulation in these areas is no longer sufficient in the case of the big banks. Their level of capital is inadequate when set in relation to their risks. In the area of liquidity, events have occurred that were not taken into account in any of the big banks’ scenarios. The reform of the capital adequacy regulation for big banks, drawn up by the SFBC with the support of the SNB, represents an important step in the right direction – for the area of capital. It specifies an increase in risk-weighted capital together with the introduction of a leverage ratio. The leverage ratio is a supplementary instrument and does not call into question the principle of risk-sensitivity with regard to the capital regulation. An essential constituent of the reform are countercyclical mechanisms whereby, in good times, banks are required to considerably exceed the minimum requirements for capital and the leverage ratio. This ensures that a buffer is created to absorb losses during crises.
The decision adopted by the monetary authority of Switzerland took into account the fact that the floor – implemented in September 2011, when the Swiss franc was substantially overvalued against the euro – had become increasingly difficult to keep in place given the quantitative easing initiated by the European Central Bank and the significant capital inflows into Switzerland. The CHF appreciation against the leu was inevitable, even if the domestic currency had a relatively stable evolution against the reference currency (euro). The literature refers to the Swiss franc as a safe haven currency. Owing to the small size of the local financial market, against the background of foreign capital inflows, the Swiss franc tends to strengthen significantly versus other currencies in times of turmoil on international markets. The measures the National Bank of Romania can take in order to influence the exchange rate of the domestic currency against the Swiss franc are limited. The CHF/RON exchange rate is set indirectly. The euro is Romania’s reference currency on the FX market, given the intensity of the country’s trade with euro area states, the EU membership and Romania’s intention to adopt the euro in the future. The EUR/RON exchange rate is the result of the foreign currency demand and supply generated by trade and financial flows, while the CHF/RON exchange rate is determined indirectly depending on the EUR/RON and EUR/CHF exchange rates.

We can only achieve this if the case for financial stability is well understood. There is a very clear parallel here with monetary policy. The success of monetary policy is founded on public acceptance of the benefits of sustained low inflation. That did not come easily, as the experiences of the 1970s taught. But once that public acceptance and interest started to become embedded, the task of monetary policy became easier – not easy, but easier. In this important sense, no such policy making apparatus can be independent of the will and interest of the public. And nor is the task of ensuring public acceptance ever finished. Monetary policy has demonstrated that a firmly established and lasting institutional framework for policy making is a necessity. But exactly what is the public interest in financial stability? This can be a harder question to answer than for monetary policy, because financial stability cannot be so readily summarised in a statistical series. There is a temptation to generalise that you certainly know it when it isn’t there. I think there are at least four things that the public should want as part of the overall stability of the financial system. First, that they can have confidence in the safety and soundness of the institutions that hold their money and savings and write policies to protect  BIS Review 121/2010  1  them against risks. Second, that those institutions have the capacity to undertake the stable and sound provision of financial services to the economy, including of course lending.
When Norges Bank had finished collecting the silver tax around 1820, the Bank’s silver holdings came to somewhat more than 50 grams per inhabitant, which is the equivalent of about one silver spoon. The value of the Fund has just recently exceeded NOK 5 trillion, or about NOK 1 million per inhabitant. It is the political authorities – the Government and the Storting – that define the investment framework for the Fund. Norges Bank is charged with the operational management of the Fund and ensuring compliance with the guidelines. Within the framework established by the Ministry of Finance, Norges Bank shall aim to achieve the highest possible return. The investment management function has to a large extent been delegated from Norges Bank’s Executive Board to Norges Bank Investment Management – or NBIM. Chart 8: Cumulative value of the Government Pension Fund Global (GPFG) The Fund’s results have been favourable. Since 1998, the cumulative return on the Fund has been close to NOK 1 800 billion, which is more than a third of the Fund’s total value. So far, our nation has earned a solid return on its investments. Chart 9: Real return on the GPFG and estimated spending High returns in recent years have contributed to an average annual real return since start-up of close to 4 percent, while the spending of petroleum revenues over the fiscal budget accounts for a smaller percentage of the Fund than earlier.

1  The Scandinavian Journal, 1799, in The travel diaries of Thomas Robert Malthus, edited by Patricia James, Cambridge University Press (1966). 2  See Norges Bank Working Paper 23/2013, Contributions to a history of prices in Norway: Monthly price indices, 1777–1920, by Jan Tore Klovland. BIS central bankers’ speeches  1  The Storting delegated the task of supervising the monetary system to Norges Bank, which was established in 1816. The king would no longer have the authority to print money at will. At its inception, Norges Bank’s head office was located in Trondheim, a twelve-day journey from the government in Christiania, and even farther from Stockholm3, giving the central bank a geographical – and not just formal – distance from the government authorities. The value of money would be guaranteed by a stock of silver and a silver tax was introduced. But establishing confidence would take many years. The banknotes that were printed were not fully redeemable in silver until 1842. Since then, the value of Norway’s currency has been fairly stable for long periods, but we have also experienced periods of deflation, high inflation and waning confidence. The lesson has been the same every time: restoring confidence comes with a cost. Much has happened since 1814. Norway no longer lags behind other western economies. Inflation is low and stable. We have established a clear division of responsibility for economic policy and well developed institutions founded on the Constitution written at Eidsvoll 200 years ago.
On the whole, however, we can say, according to our estimates, banks are in good shape. There is a recorded profit, that has continued into this year. One of the factors for it is the increased lending, business growth, profitable business, and lower reserves. This is despite our easing, and we carried our easing on reserves, and expected that in 2021 we would see an increase in the demand for the creation of such reserves. But firstly, not all banks made use of the easing. This brought about a sense of comfort that such easing could be used, but banks took a very responsible approach to creating reserves last year. A lot of banks created reserves. And secondly, we can see that the economy is recovering, and even the level of default that banks expected is now lower. Let’s hope that the economy will continue to develop. But profit itself is a source of further capital growth, a further growth in lending. This is also a positive factor. I would like to touch on in a little more detail the steps we will take in terms of regulation in order, on the one hand, to preserve the stability of the banking system, and, on the other hand, to stimulate the flow of resources into the economy. We now consider it important to pay special attention to the risks banks and their clients face because a “recovering” economy after a pandemic may be more sensitive to these risks than one in calm times.

Behavioral risk refers to behaviors within an organization that could potentially lead to negative business outcomes.3 In such organizations, behavioral risk is not effectively mitigated or even considered, and the stated values of the firm are not reflected in the actions and norms of the organization’s members. Group think is prevalent and employees do not speak freely, or are ignored, when they have concerns about the way their group is doing business. The letter of the law may be followed but not the spirit, with illegal activities only coming to light when discovered by authorities. “Conduct” is viewed as something that is only the responsibility of the compliance department through a set of rules and controls. The outcomes stemming from high behavioral 1/5  BIS central bankers' speeches  risk reduce cultural capital, damage the firm and the trustworthiness of the industry over time. In an organization with a high level of cultural capital, on the other hand, behavioral risk is low. Employees refrain from taking excessive risks and they are unafraid of – and rewarded for – raising issues up the management chain. When they speak up, they believe the organization will take them seriously with meaningful responses. The organization recognizes and rewards employees who understand and internalize the expectations of laws and regulations, and do not view compliance as a checklist. In organizations with a high level of cultural capital, an important factor in advancing to senior leadership is role-modeling behavior consistent with a firm’s values, assumptions and behavioral norms.