samchain/econo-pairs-v1 huggingface dataset:
A little bit of stodginess? Speech given by Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee  Cumbria Chambers of Commerce, Kendal Friday 13 July 2018  1  All speeches are available online at www.bankofengland.co.uk/speeches  “In my view both as a citizen and as a policymaker, a little stodginess at the central bank is entirely 1  appropriate”  Alan Blinder’s 1999 advice to central bankers, quoted above, was not, I am pleased to say in these fitness conscious times, an injunction on the appropriate nutrition for monetary policy makers. Rather, it was advice on how to respond to uncertainty or, to be precise, the need for caution when faced with a particular type of uncertainty – uncertainty about the impact of monetary policy on the key variables in the economy it seeks to influence. But I would like today to look at the case for ‘stodginess’ when faced with uncertainty more generally about possible changes in how the economy works and the ‘model’ of the economy that policymakers necessarily have in their minds. Uncertainty, as I have noted before is the natural environment of monetary policy. There is a large academic literature on the optimal way for policy to deal with different types of uncertainty. But I would like to look at these issues first in the context of my time on the MPC and then in relation UK monetary policy going forward.

Since then the picture in the UK has been clouded by the impact of the Brexit vote. The global picture however does I think provide evidence of the slow healing story. Having grown at rates below pre-crisis norms for the post-crisis period, the world saw an increase in growth rates from around the middle of 2016. That return to stronger growth was broad-based both in that it was true for the whole of the G7 – excluding the UK – and emerging markets in aggregate and that it was driven by a pick-up in investment not just consumption. At the same time, in the US, partly in response to very low levels of unemployment, pay and inflation have risen from subdued 1-2% to rates closer to 2-3% over 2015 to 2018. So is there still a case for any ‘stodginess’ in the approach to monetary policy in the UK? Headline CPI inflation is running at 2.4% above its 2% target. The overshoot, however, is entirely due to imported inflationary pressure. This has come primarily from the post referendum depreciation in sterling plus some more recent pressure from the increase in oil prices. The inflationary pressure from sterling’s depreciation is already passed its peak. In May the MPC forecast that CPI would be at 2.2% by the year end. The MPC’s remit is to keep inflation at target ‘at all times’.
Asia is seeing the payoffs from the financial reforms, institutional development and the strengthening of the financial infrastructure. While financial markets have become more volatile, financial intermediation has not been interrupted. While our starting point is from a position of strength, we must nevertheless draw upon the lessons from the current crisis. The lessons from the crisis must not be lost. This crisis offers Malaysia and other emerging markets an opportunity to steer the future path of development of the financial sector to a stronger and more sustainable path one which avoids the trappings of greed and reckless behaviour that have significantly set back the financial sector in many advanced economies. It would be foolish of us not to take heed of these lessons and leverage on the opportunity to leap forward on a more solid foundation. Despite these developments, going forward, the trend for liberalization will continue as financial integration in the region will intensify. This will mean greater foreign participation in terms of new institutional presence, strategic alliances and greater participation in our financial markets. Efforts to develop further our foreign exchange market will be intensified. Our financial links will also need to extend beyond the region to facilitate economic links with other emerging economies. On the domestic front, financial services to SMEs need to evolve from transactional and lending-based business to a full-service, relationship-based business.

The household sector, already an important segment being served by the industry, will see further transformation with the continuing evolution of multi-channel distributions with online channels becoming more popular and increased customer demands for product transparency and overall service levels. We expect to see a re-orientation of processes and incentives towards value over volume, further differentiation in the management of customer-relationships and an increasing focus on technology-driven transformations that are more aligned with business strategies. The outgrowth of these strategies will include an accelerated shift in product offerings towards more comprehensive end-to-end financial solutions and further changes in the traditional roles of physical branches and intermediaries, with greater use of more efficient direct channels and strategic alliances to widen the outreach of financial products and services. In the area of e-payments, the creation of a mobile ecosystem is envisaged, to provide an open and inter-operable platform for all financial institutions, mobile network operators and services providers to offer highly automated and cost-effective mobile payment services. Going forward in this new financial system, the role of boards of financial institutions in determining the risk appetite of their institution, in ensuring that strategies are consistent with that appetite and in overseeing risk management systems will become increasingly critical. Shortcomings in how boards discharged their roles in a number of major international financial institutions were a material contributor to the global financial crisis.
Moreover, no doubt that the available reserves serve as an insurance from the market point of view and make the access to debt financing somewhat easier. In conclusion I would like to say a few words about how to reach the path of strong economic growth amid tough monetary and fiscal policies and prudent build-up of government debt. The matter is the structure of budget expenditure, rather than its volume, and the use of structural reform potential. The external conditions push the economy towards structural changes and balanced structural reforms may accelerate this process and make it less painful. The emphasis should be put on those industries, which turned out to be competitive in the current situation without government support. Only they could become an efficient engine of development amid new reality. As it often happens, the best way to help businesses in the current conditions is not to interfere. The deficit resources of government support should be concentrated on assistance to the most vulnerable population groups, as well as on the development of infrastructure and human capital. BIS central bankers’ speeches  3

If the financial system can be made more resilient, it will be better positioned to withstand the failure of a large and complex firm and continue to provide essential financial services to the real economy. I would highlight three areas of work that are critical to solving the TBTF problem. First, regulators and supervisors are pushing for changes in wholesale funding markets, a source of particular vulnerability during the crisis. This includes reforms to tri-party repo, which are underway, and necessary reforms to the money market mutual fund industry, which are being evaluated by the Securities and Exchange Commission (SEC) and the Financial Stability Oversight Council. Second, the financial market infrastructures are being strengthened to make them more robust to the failure of individual firms. The Committee on Payments and Settlement Systems and the International Organization of Securities Commissions (IOSCO) have published a set of standards for financial market infrastructures called “Principles for Financial Market Infrastructures” that will serve as minimum standards globally. 7  The FDIC’s “single point of entry” framework for implementing this authority envisages establishing a bridge company into which all the operating subsidiaries of the parent company would be transferred. The bridge company would be recapitalized by converting all or some of the parent company’s subordinated and senior unsecured debt into fresh equity in the bridge company. The parent company would be allowed to fail.
The Fed provided liquidity facilities and took many other actions to contain and reduce pressures in financial markets, while the U.S. Treasury supported the banking system and provided cash and incentives to households, businesses, and state and local governments to support spending during 2009. The Fed’s “lender of last resort” interventions – including facilities such as the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), as well as programs such as reciprocal currency agreements – are examples of the rapid application of central banking tenets to the unique challenges we faced as this crisis evolved. Indeed, in many ways, the crisis has underscored why the Federal Reserve was created almost a century ago: to provide a backstop for a banking system prone to runs and financial panics. Where it proved necessary and feasible, the Fed also used its emergency lending authority to forestall the disorderly failure of systemically important institutions. These actions truly were extraordinary – well outside the scope of our normal operations – but our judgment was that not taking those actions would have risked a broader collapse of the financial system and a significantly deeper and more protracted recession. Faced with the choice between these otherwise unpalatable actions and a broader systemic collapse, the Fed, with the full support of the Treasury, invoked its emergency lending authority and prevented the collapse of certain institutions previously considered to have been outside the safety net. Make no mistake: these necessary moves were unprecedented and controversial.

There is an economic logic behind this argument, notably with regard to infrastructure. But it ignores the sad reality, which is that no country has sufficient credibility at present to implement this policy effectively. Decades of deficits have created a deep-seated scepticism. The current balance is very fragile and, in this highly volatile environment, any major deviation from the required fiscal path would probably be punished with a sharp rise in interest rates. Fifth assertion: within the banks, we need to separate those activities which serve to finance the economy from those that are purely speculative; and prevent customer deposits or central bank refinancing from being used to fuel dangerous behaviour. The idea  2  BIS central bankers’ speeches  in itself is a sound one. Unfortunately, it has often translated into an absurd cleavage between commercial banks (by that I mean lending banks) and investment banks. In fact, it is not possible to make a clear distinction between “good” lending and “evil” markets. What is important is that all participants in the real economy find the right combination of financing to suit their needs. And for that, nothing can rival the universal banking model which provides a one-stop shop for a full range of banking products. III/- I’d like to look now at my own proposals for how we can reduce the uncertainty surrounding the financial sector.
Durmuş Yilmaz: Financial Stability Report – II Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the presentation of the “Financial Stability Report – II”, Ankara, 13 June 2006. *  *  *  Distinguished Guests, Dear Members of the Press, Last August, we shared with you the first Financial Stability Report, which we consider to be supportive of price stability, our primary objective, and involves a compilation of our studies on the evaluations of financial stability. I am happy to present the second report to you today. I would also like to remind you that this report will be on the Bank’s web page as of today. Today, I would firstly like to focus on the definition and significance of financial stability and central banks’ approaches to the issue. Then I will touch on the duties and powers of the Bank regarding financial stability. Lastly, I would like to emphasize the main points in the Financial Stability Report. Distinguished Guests, Providing a clear definition of financial stability is as difficult as achieving and maintaining it. In a broader sense, financial stability can be defined as the condition of an economy’s mechanisms for pricing, allocating resources and managing financial risks functioning well enough to contribute to the performance of the economy. 1 The European Central Bank defines financial stability as a condition whereby the financial system is able to withstand shocks without impairing the transformation of savings to investment opportunities.

The third step is the resolution of banks, applied by the Bank of Albania in view of the new mandate. Similar to recovery plans, the resolution plans drafted by the Bank of Albania aim to identify the legal and structural obstacles and difficulties with financial resources that banks face, toward resolvability. In this regard, the resolution plans are one of the key instruments to facilitate the Bank of Albania’s resolution implementation. This year in April, the Bank of Albania approved a bylaw that defines the content of resolution plans. Then banks were required to report a broad set of data for drafting these plans, based on the model of the European Banking Authority and we are currently in the process of drafting them. The drafting of the banks resolution plans is complicated, which includes complex and cross-border issues that must be implemented and coordinated within a short period of time. Hence, the resolution planning is an on-going process and a long-term mission to remove obstacles against the possibility for resolution action in banks. This planning does not mean drafting an annual plan that is stored somewhere in some shelf and it is dusted off only when its implementation is necessary; instead, it is the beginning of a long process of restructuring all aspects of the banking business that may hinder this process.
He urged writers to “throw away anything that is false, no matter how much he might love that page or paragraph”. In a similar vein, Malaysia’s microfinance journey has been one of trial and error, as we continuously strived to increase the social and economic impact of microfinance, sometimes working against the tide of popular thinking. This has led to a more nuanced approach to the development of microfinance over time, and an ongoing process of rethinking norms which we may take for granted today. Today, I would like to talk about three perspectives that have shaped the way we approach and implement microfinance in Malaysia. First, technology when used in a clever way, can be of great use. While technological advancements hold great promise for expanding access to financial services for the poor, we need to invest time and resources to understand the factors that affect the poor, and the suitable approach to generate income and create wealth. These insights are what will determine whether technology is central or peripheral to the inclusion agenda. Second, the tradeoffs between financial stability and inclusion requires smart management. A microfinance strategy that focuses largely or wholly on providing credit to the unserved is almost destined to fail, potentially leaving communities worse off from excessive debt burdens. Instead, implementation strategies should ensure that the provision of credit are complemented by the necessary safeguards and financial education.

At this time, given better growth prospects for emerging markets in the near-term, there could be a resurgence of strong capital flows to emerging markets once the current global crisis subsides. As large capital inflows are known to be one of the key contributing factors of many financial crises in the past, preparing the economic and financial system to effectively intermediate it and manage the associated risk to maintain financial stability, will be the first and foremost challenge for SEACEN regulators and  2  BIS Review 96/2009  policymakers. In the past, what happened was that, in response to the strong capital inflows and abundant liquidity, banks tended to relax their underwriting standards, which gave rise to the formation of asset price bubbles. Therefore, going forward, risk management of banks must continue to be strengthened and regulators must be prepared to use macro-prudential measures proactively as necessary to reduce such risk. This means credit standards and bank capital rules must remain vigilant regardless of the abundance of liquidity. Second, the issue of procyclicality has gained the attention of regulators and the banking industry for quite some time in the context of Basel II. Since then, especially at the start of this crisis when credit crunch has slowed economic activities, a number of proposals have been put forward to deal with this issue. So far, the debate remains open.
And it’s been my experience, having worked both as a regulator for 18 years and similar quantities, in the private sector, especially, 10 years at a major international back, that the loan officers of those institutions knew far more about the risks involved and the people to whom they lent money, than I saw even our best regulators at the Fed capable of doing. So the problem here is something which looked to be a very solid edifice, and indeed, a critical pillar to market competition and free markets, did break down.’ See the preliminary transcript of the 23 October 2008 meeting of the House Oversight and Government Reform Committee on The Role of Federal Regulators in the Financial Crisis.

At this critical juncture in the Asian recovery process, I think it is worth reviewing just how important a stable banking and financial system is to the health and vitality of any market economy - and particularly emerging market economies - and the crucial role that supervision plays in achieving and preserving financial stability. Indeed, effective supervision represents a crucial cornerstone of financial stability, both locally and globally. It is also clear that, given the accelerating pace of change and innovation in the financial services industry, our notion of supervision must encompass discipline applied by the marketplace, as well as official supervision. With these thoughts in mind, and noting the critical role banks play in a market economy, in my remarks today I will discuss the nature and form of an effective supervisory framework for the 21st century, addressing the role to be played by banks themselves, the broader marketplace and official supervisors. On the subject of official supervision, I will address the Basel Committee’s Core Principles for Effective Supervision, and then conclude with a discussion of the Committee’s major initiative to revise and refine the 1988 Capital Accord. Banks’ role in a market economy Let me first discuss the crucial role banks play in a market economy. While specific arrangements may vary from country to country reflecting differences in history, custom and culture, the basic principles are common to nearly all market economies.
As people try to move out of cash deposits and into typically higher yielding assets, QE will reduce liquidity and term premia, push up a range of asset prices and bring down interest rates at a wide range of maturities. All of that will benefit borrowers, increase wealth and help to stimulate nominal demand. Injecting money is actually not so different from cutting its price (Bank Rate). There are some very important caveats however and I will focus on three. First, monetary stimulus works by giving an incentive to businesses and households to spend now rather than in the future. That creates only a temporary boost to growth. To carry on influencing growth, the stimulus needs to get ever larger. But we know that ultimately, the sustainable growth rate in the economy depends not on monetary conditions but on real factors. I shall return to this point later. Second, and relatedly, a monetary injection can create extra nominal demand for goods and services, but the precise split between real growth and price inflation is unfortunately out of our control. Taking these two points together, the creation of extra  5  I will leave aside the issuance of banknotes, the quantity of which passively reflects demand by the public.

Market participants – and indeed the general public – will learn about the authorities’ behaviour and shape their own  10  For more information, see “The Corporate Sector and the Bank of England’s Asset Purchases” available at: http://www.bankofengland.co.uk/publications/Pages/speeches/2010/423.aspx  BIS central bankers’ speeches  5  accordingly. Moral hazard is one aspect of this – that can lead to market participants taking more risky actions because of the perceived backstop provided by the central bank. More generally, communications strategies can be a positive part of the toolkit, in particular by giving out information about the central bank’s monetary policy “reaction function”. For the most part it is helpful for markets to be able to predict what the central bank will do. That way one can often hope to generate the desired responses with less severe policy actions than otherwise. Credibility matters. For example, if people believe that inflation will be 2% in the medium term, and act accordingly, it is much more likely that inflation will stay close to 2% in practice without big swings in monetary policy. Keeping inflation under control is much more costly for the economy if expectations become de-anchored from the official target. But how explicit do we need to be about our forward plans? This is a very live policy debate.