samchain/econo-pairs-v1 huggingface dataset:
Financial crisis management: the role and instruments of central bank policy  Let me start by making two general points concerning the role of central banks in safeguarding financial stability and the instruments that can be employed to this end. The first point is that the role and actions of central banks, in promoting financial stability must be compatible with the policy framework guiding the achievement of the primary objective of price stability. Financial stability and price stability are, in general, complementary goals and conditions that are mutually reinforcing. But there can be occasions when the constellation of shocks affecting the economy and the dynamics of market processes may pose challenges or policy trade-offs for central banks aiming at the preservation of price and the safeguarding of financial stability. The second point concerns the available policy instruments and the actual measures taken by central banks when dealing with the financial crisis: The tools include (i) liquidity provision and management; (ii) the key monetary policy interest rates; and (iii) credit support measures aimed at enhancing the functioning of credit markets. The use of these policy instruments, and the timing of their use, depend on the potential relationship between (i) the prospects for price stability and (ii) the size of financial market stresses and associated systemic risks. It also depends upon the economy’s financial structure. For example, the extent to which the financing of the economy relies on the banking system and on the capital market has implications for the relative reliance on different policy tools.

The ultimate testament to the euro's success, however, was the response of the European citizens, who accepted their new currency rapidly and with enthusiasm, as shown by the swift withdrawal of legacy currencies in the first weeks following the cash changeover. Indeed, the introduction of the euro banknotes and coins proceeded far more smoothly than we had dared to expect, and I should like to take the opportunity today, on behalf of the ECB, to express once again my gratitude to the citizens of Europe and all the other parties involved for their contribution to making the cash changeover a success and for their fruitful collaboration with the Eurosystem over the past years. Review of economic and monetary developments Let me now turn to the review of economic and monetary developments. In the light of the central role of maintaining price stability that the Treaty assigns to monetary policy, I shall start by reporting that annual average HICP inflation in the euro area was 2.5% in 2001. The lagged effects of the increase in import prices in 2000, together with the impact of livestock diseases on unprocessed food prices in 2001, contributed to the increase in annual HICP inflation rates, which peaked at 3.4% in May 2001. Since then, the effects of these factors on the annual inflation rates have gradually disappeared. We are obviously not satisfied with HICP developments in the course of last year.
However, I believe that Asia should press on with its efforts to develop their capital markets in order to complement the banking system and improve the robustness and efficiency of its financial system. Second, as we pursue financial sector development, we will also see more sophisticated products coming to the fore. Market players and regulators alike must refine their understanding of the attendant risks; in particular, how shocks may be transmitted through such products. We must then develop tools to manage such risks. Indeed, much of the recent financial dislocation stemmed from opacity in the distribution and pricing of risks for derivative products. The key lessons include the need to monitor off-balance sheet exposures and to institute better management and supervision of liquidity risks. Addressing these issues will not be easy as we must avoid imposing excessive regulatory burden on market players or stifling financial innovation. Third, as growing inter-dependence is a reality, the central bank, the financial regulator and the guardian of the public purse must work in close coordination. They must also work with key counterparts in other jurisdictions. One key issue which requires particular attention is the establishment of crisis management and resolution frameworks to minimise systemic fallout should financial institutions run into trouble. 2  BIS Review 124/2007  Other challenges to sustained growth Looking ahead, Asia faces other challenges to sustained growth. First, global financial imbalances pose political and economic risks.

However, given that vulnerabilities on these markets are still high, the resilience of the banking system remains crucial. In January 2022, the Federal Council approved the SNB’s proposal to reactivate the countercyclical capital buffer. This buffer will come into effect at the end of September and will contribute to maintaining banking system resilience. Page 1/1
This shows that marginal costs – the costs of an additional unit of Swiss franc liquidity – are relevant for transmission on the interbank market. Although trading activity on the money market remains lower than before the financial crisis, it has revived somewhat. For instance, turnover on the  2  BIS central bankers’ speeches  secured money market, in particular on the Swiss franc repo market, has risen since the introduction of negative interest. As intended, negative interest has been transmitted from the money market to the capital market. The lower interest rates for all maturities have widened the traditional interest rate differential against other countries again somewhat. Previously, they had narrowed substantially. On the money and capital markets, the interest rate differential is now greater than it was without negative interest, in particular for short-term interest rates. Chart 4 shows the path of interest rates for three-month loans on the Swiss franc and euro money markets, together with the differential. The greater interest rate differential helps to ensure that Swiss franc investments are less attractive than investments in euros and other currencies. Moreover, the rise in the interest rate differential has increased the cost of hedging foreign currency positions on the forward exchange market, which is an additional factor dampening Swiss franc demand. Although the interest rate differential has risen, it is still considerably below the long-term average, particularly since interest rates abroad decreased more substantially during the financial crisis than those in Switzerland.

For a more detailed analysis, see Banco de España (2020), “Recent developments in the most important Latin American banking systems for Spanish banks”, Box 2, “Report on the Latin American economy. Second half of 2020”, Analytical Articles, Economic Bulletin, 4/2020. 8 For a stress test analysis of the 61 largest banks in Latin America, see Annex 4 of the IMF’s Regional Economic Outlook (2020), Pandemic Persistence Clouds the Recovery. 9 See A. Werner, A. Ivanova and T. Komatsuzaki (2021), Latin America and Caribbean’s Winding Road to Recovery, IMF blog. 5  First, in addition to the human cost in lives, the effects on poverty and income distribution have been very severe.10 Indeed, during 2019, bouts of political tensions and social unrest in several countries, partly related to this situation, fuelled economic uncertainty; this in a region where numerous elections are due to take place in the coming quarters. A second challenge is that posed by shrinking fiscal space following the increase in government debt in the region during 2020, positioning it as the emerging region with the highest government debt-to-GDP ratio and, where debt refinancing is concerned, leaving it highly vulnerable to changes in investor sentiment. Against this background, monetary policy is supported by the accommodative policies of the main developed economies and by low inflationary pressures.
Third, the Bank should not take decisions that discriminate between different companies and sectors. There may well be  BIS central bankers’ speeches  3  good reasons for discriminating in some circumstances but that is a decision properly reserved to elected politicians. By buying gilts we leave the private sector to decide in which directions the money we create should percolate through the economy. Any positive impact of asset purchases will benefit all companies, large and small, through its impact on overall demand. Our programme of gilt purchases has helped large companies to reduce their reliance on the banking system and obtain finance directly from equity and corporate bond markets. In fact, the majority of Britain’s largest companies can borrow more cheaply in capital markets than the average of the largest six banks. Smaller and medium-sized companies (SMEs), however, are constrained to borrow through the banking system. And there is special concern about their ability to obtain credit – I share that concern based on my experience of meeting many such firms during visits to all parts of the United Kingdom and hearing reports from the Bank’s regional agents. We have made this point repeatedly at hearings of the Treasury Committee in Parliament. Over the past year the stock of SME borrowing has shrunk by around £ billion or 5%.

Another possibility is a shortage of high-quality safe assets,10 with countries like China accumulating reserves particularly in the form of US Treasuries. That in turn will also have increased the demand for substitutes, including the government debt of other advanced economies. But recent events in the euro area have highlighted the fact that the debt of  8  For instance, if an employer is putting aside an additional 15% of the wage bill to cover accumulating pension liabilities and the price of buying a given stream of future income rises by 20%, then he would now need to put aside an additional 3% of the wage bill to meet those obligations. 9  See Ben Bernanke (2005), “The Global Saving Glut and the US Current Account Deficit”, Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia, 10 March. 10  See Ricardo Caballero, Emmanuel Farhi and Pierre-Olivier Gourinchas (2008), “An Equilibrium Model of Global Imbalances and Low Interest Rates”, American Economic Review, pp.358–393. BIS central bankers’ speeches  5  some sovereigns is not as safe as market participants thought. That has led to increased demand for the debt of those sovereigns that are still regarded as safe, including that of the United Kingdom. How long such a “safe-haven discount” persists depends not only on what happens in this country but also what happens abroad: the demand for one country’s bonds as a safe haven depends in part on how risky those of other countries are thought to be.
Global policy Globalisation creates the conditions for increased growth and welfare, but entails greater risks in terms of the threat to the environment, access to strategic commodities, security and a growing mutual dependence. Globalisation must therefore be matched by cooperation between countries and regions. It is my conviction that we will need an increasingly international political cooperation to be able to manage the downside of globalisation and to reduce the economic gaps in the world. With regard to the risks related to global imbalances, there is an organisation that was given the role, back when it started more than 60 years ago, of monitoring global financial and economic stability: the International Monetary Fund (IMF), which was formed to provide temporary balance of payments support to its 45 western member countries. 11 Since then there have been major changes in the world economy. The number of IMF member countries has increased to 184, the fixed exchange rate system has collapsed and worldwide capital markets have been established. The IMF’s lending has declined from approximately USD 60 billion in 2003 to around USD 20 billion in 2006, which also entails a major reduction in the income that has so far financed the organisation's activities. At present, there are intensive discussions within the IMF and its member countries as to how the organisation should be reformed in order to better meet the needs and problems of a new age.

Number of work permits in the UK, Ireland and Sweden issued to citizens of new Member States following the EU accession In thousands UK *  Ireland**  Sweden***  Total  In % of workforce †  Lithuania  44.72  26.37  0.37  71.46  4.4  Latvia  23.03  12.94  0.16  36.14  3.2  Estonia  4.68  3.39  0.36  8.43  1.3  Poland  204.90  70.14  2.16  277.20  1.6  Czech Republic  20.01  6.39  0.07  26.47  0.5  Hungary  10.35  3.83  0.20  14.37  0.3  Slovakia  36.36  10.93  0.09  47.38  1.8  *Source: Accession Monitoring Reports, http://www.ind.homeoffice.gov.uk. The data include the period between May 2004 and December 2005. NBP calculations. **Source: Skills needs in the Irish economy: The role of migration, A submission by the Expert Group on Future Skills Needs and Forfás to the Minister for Enterprise, Trade & Employment, http://www.skillsireland.ie. The data include the period between May 2004 and August 2005. ***Source: Migracje specjalistów wysokiej klasy w kontekście członkostwa Polski w Unii Europejskiej. Centre for Migration Research, Warsaw University. The data include the period between May 2004 and December 2004. †Workforce – people of 15 and more years of age in Q1, 2004. 10  HSBC “The Great Migration. How China’s 200 million new workers will change the economy forever”, HSBC Global Research, October 2005.
For if risk is spread more broadly, shocks should be absorbed with less trauma. Moreover, the system as a whole may be less vulnerable to distortions introduced by the moral hazard associated with the access that banks have to the safety net. A second issue we need to consider stems from the complexity of the new credit instruments, the challenges they present in terms of valuation and risk measurement and their short history of experience in times of stress. Even the most sophisticated participants in the markets for these instruments find the risk management challenges associated with these instruments daunting. This raises the prospect of unanticipated losses. Default rates are harder to predict where there has been a substantial change in the financial attributes of borrowers. The prices of instruments may not respond as expected to a given change in losses or in the value of the assets underlying these instruments. Hedging strategies may prove to be less effective than expected. Similarly rated instruments can behave very differently in stress events. The response of prices and volatility to the downgrades in the automobile sector in the spring of 2005 and the recent experience in subprime mortgages and related asset-backed securities and credit derivatives illustrate different types of surprises faced by the participants in these markets. They are a reminder of the dimensions of uncertainty that exist about the shape of the distribution of potential returns. This is particularly true of what we might call the adverse tail, or the negative extreme.

•  Fourth, lack of anti-money laundering practices in a bank may also affect it’s relationships with correspondent banks because reputable international banks would not want to be associated with banks that do not practice basic anti-money laundering techniques, and therefore be a threaten to their own operations. •  Fifth, money laundering compromises the corporate governance structure of banks. This is an area of concern especially among the small banks when it comes to deposit mobilisation and customer selection. Mr Chairman, the increasing integration of financial systems means that money launderers can now make use of the financial system to hide the proceeds of the illegal activities easily. Launderers are now able to quickly move illicit money between national jurisdictions, therefore complicating the task of tracing and confiscating these assets. Further, differences in money laundering legislation and in the implementation of international standards such as, know your customer regulations, customer identification and secrecy laws have led to regulatory arbitrage. This has worked to the advantage of money launderers because they can move the proceeds of their activities to less regulated territories where there are lax laws. Therefore, to avoid launderers from taking advantage of the weaknesses in the application of international law, many governments have decided to co-operate in order to combat money laundering. In this regard, the most notable international initiatives/responses to money laundering include: •  First, the Financial Action Task Force (FATF).
In fact, it is hard to find another episode where the developed world suffered a severe recession that was not magnified in developing countries. This is especially relevant in Latin America (figure 2). The developed economies face a different scenario. They are having important doubts about whether their fiscal situation will be sustainable. Large expansions of fiscal expenditure before the crisis and the implementation of unprecedented stimulus packages to cope with it threw their debt levels very high. Today they have no further room to continue increasing public spending and, even worse, they need to make substantial adjustments that are difficult to implement in such a weak economic situation. The cases of the United States and Japan are good examples. Add to this what is happening in peripheral European economies, the adjustments that are needed and the financial tensions this creates. What the founders of the euro had in mind early on was that the economies in Europe, particularly in the south, would adopt sound macroeconomic policies following in the steps of Germany. Nonetheless, it seems that some economies, such as Greece, only took advantage of the low risk premiums, over-borrowing and creating a deficit way bigger than set forth in the Stability and Growth Pact. The consequence was extreme financial vulnerability that is proving very difficult to resolve today. For the time being, risks seem to be well contained, but the lack of credibility of the markets has resulted in some agents speculating with the possibility of some member country being discharged from the Eurozone.

This time around, the US strongly increased fiscal expenditure and borrowing, which was used to finance the purchase of overpriced housing. As we now know, and warned insistently before the crisis burst, this mix was bound to lead to severe adjustments, sooner or later. High terms of trade, capital inflows and growth rates have resulted in exchange rate appreciations in most emerging and oil-exporting economies (figure 5). In real terms, the current level of the exchange rate is at its lowest in the past decade in most emerging economies (figure 6). Vigorous economic growth in these economies means also strong currencies, while the opposite is true in developed countries. As I said before, the high indebtedness of developed economies holds back domestic demand growth. Meanwhile, in emerging economies domestic demand growth is thwarted by constraints in domestic supply, which require redirecting purchases towards imported goods. The adjustment of the global economy calls for a change in demand composition, and the exchange rate adjustments works in that direction. It is logical to expect that once the developed economies recover their strength, their currencies will follow suit. The transition may take some time, however. Although the adjustment is good for the world economy, it entails tensions that may require exceptional policies. Thus, several emerging economies, Chile included, have taken action to moderate the exchange rate adjustment.
BIS central bankers’ speeches  3  Finally, the household finance section contains time series of expected household income growth, expected household spending growth, changes in the amount of taxes that households expect to pay, as well as perceived credit availability – both relative to one year ago and looking ahead to one year from now. As Chart 5 indicates, household income growth expectations declined slightly to 2.3 percent in May, but remained in the middle of the narrow band (2.0 – 2.6) observed over the last twelve months. On the other hand, perceptions of credit availability continued to improve slightly in May, as shown in Chart 6. For most of our charts, the website gives additional demographic detail, breaking down each time series by income, education, age, numeracy, and region of the country. Further, for our main measures (inflation, home price changes, and earnings growth) we also report the time series of forecast uncertainty. One interesting finding – consistent with our prior research – is that forecast uncertainty about inflation is significantly higher for low education, low income, low numeracy respondents. These findings can be seen in Chart 7. Summary of past research Let me now briefly describe some of the basic research we have carried out through our consumer surveys. We have focused on two broad questions to date. First, we have investigated the connection between inflation expectations and behavior in a financially incentivized investment field experiment. In this study, survey respondents were asked for their inflation expectations.

Through another field experiment embedded in our American Life Panel survey modules, we have examined how respondents update their expectations after receiving information about either past food price inflation or future inflation forecasts by professional forecasters. Before the information treatment, and again after the provision of information, respondents were asked for their inflation expectations. We also asked for respondents’ priors about the information that was provided, to see whether those who have larger perception gaps are more likely to update their expectations, and if they would do so by a larger amount. We found that respondents revise their expectations in the direction predicted by theory after receiving new information. Further, the extent of revisions is correlated with the size of their perception gaps. Finally, respondents are more receptive to the new information when the uncertainty expressed in their baseline expectations is greater. All three findings are consistent with rational, Bayesian updating of expectations. Moving beyond average effects, we also found that our information treatment leads to a significant decline in the cross-sectional dispersion of inflation expectations, and causes the 4  BIS central bankers’ speeches  distribution of inflation expectations to converge toward its center – particularly for those who had high baseline expectations and were less informed ex ante. In fact, average revised expectations were nearer to actual realized CPI inflation as a result of our intervention.