samchain/econo-pairs-v1 huggingface dataset:
Mojmír Hampl: The trilemma of the banking sector Speech by Mr Mojmír Hampl, Vice Governor of the Czech National Bank, at the Czech National Bank and OMFIF Central Bank Meeting “Central banking in Central and Eastern Europe: Policy making, investment and low yields”, Prague, 7 June 2016. *  *  *  Ladies and gentleman, good morning, First of all let me express my gratitude for the kind invitation to speak at this event. My special thanks go to our departing Governor Miroslav Singer and to David Marsh for the energy – I would almost say nuclear energy – he constantly invests in the OMFIF and its events and publications, which has made the OMFIF what it is now. Reading the OMFIF daily commentary has become an almost indispensable part of my working day, I have to say. Looking at the impressive list of distinguished participants at today’s meeting, I intuitively started asking myself: what really unites us? What do we share regardless of whether we come from the east, west, north or south, or here from Prague for that matter? And I am pretty certain that from the financial or monetary point of view there is at least one important thing. In all our countries we have not only central banks, but also commercial banks operating in a system of elastic money, i.e. private banks as entities that also create money. And we all share the same desire.

As we all move forward to strengthen the global financial system, we stand ready to cooperate with African central banks, a critical component of which is building strong relationships of trust and understanding. Our participation in these meetings are an important part of furthering our partnership and we look forward to a more comprehensive and sustained engagement going forward. 2/2  BIS central bankers' speeches
The rapid spread of the pandemic in March 2020 also led to wide, abrupt swings in financial markets. The global composite equity index fell by 20 percent in 22 days. However, markets recovered rapidly, and by the second quarter the GPFG had posted one of its best ever quarterly results. For the year as a whole, the GPFG’s investments posted an overall return of 10.9 percent before management costs. The return was 0.27 percentage point higher than the return on the benchmark index the GPFG’s performance is measured against. The Executive Board is pleased that a solid excess return was achieved in a turbulent year. The positive trend has continued, and the return on the GPFG in the first quarter of 2021 was 4 percent. The GPFG’s performance must be assessed over time. The Executive Board is satisfied that the return over time has also been good. The substantial market fluctuations in 2020 nevertheless serve as a reminder that the return on the GPFG may vary considerably. The GPFG’s equity allocation is the decision that has the greatest impact on the volatility of the fund’s return. The equity allocation is not specifically assessed in this year’s report to the Storting, but the Ministry has proposed a number of changes in the equities selected to be included in the benchmark index. Norges Bank has provided analyses and advice when requested by the Ministry.

Today, I want to talk with you first about the Fed – what we do and why we do it. Then I’ll provide some thoughts about the economic outlook nationally and locally. How the economy performs is important in many ways. At the personal level, for example, it affects your family’s finances and students’ job prospects at graduation time. Collectively, it affects the potential of our nation to confront and deal with the many challenges we face. As always, what I have to say reflects my own views and not necessarily those of the Federal Reserve System or the Federal Open Market Committee, also known as the FOMC. What the New York Fed does By way of introduction, I will briefly review what the New York Fed does and what makes my job so interesting. I am vice chair of the FOMC, which meets eight times a year in Washington to set interest rates and make other decisions about monetary policy. The members of this committee all strive to set policy to advance the mandate given to us by Congress to promote the maximum level of employment consistent with price stability. Sometimes we have different views on the specific policy choice at hand, and you should view this as completely appropriate: these are hard questions – particularly at times like this. In fact, I think we make better decisions as a committee because we don’t all think alike.
One reasons for this is because the LCR scenario is one specific set of liquidity parameters, representing a stress motivated in large part by the experience of the Global Financial Crisis. In normal times, this set of parameters ensures that banks hold sufficient liquidity to weather a range of potential severe stresses. [33] But those same static parameters mean that when a real stress hits – which may look quite different to the stress embodied in the LCR – the LCR can move in counter-intuitive ways, and changes in the LCR are not straightforwardly related to changes in banks’ liquidity position. [34] And ultimately, the LCR is not the only liquidity metric. That’s why when banks face liquidity stress, the PRA considers a much broader range of liquidity information in determining its regulatory response. So a given level of LCR can be consistent with quite different levels of liquidity resilience depending on the nature of a stress – and if the LCR metric is constraining banks’ ability to appropriately draw on their liquid assets, we should consider ways to address that problem. Policy implications The question of how to prudently manage liquid assets in a given stress is no doubt a difficult one, and there are fundamental reasons why banks may be cautious. But the evidence suggests that the way the prudential framework itself is working may be inhibiting banks in appropriately using their liquidity when facing stress.

Concluding remarks Let me conclude, starting with a quote from the monetary economist and economic historian Charles Goodhart who back in 2008 used a metaphor that describes well the conundrum we face with liquidity buffers that are not used:[35] “The weary traveller who arrives at the railway station late at night, and, to his delight, sees a taxi there who could take him to his distant destination. He hails the taxi, but the taxi driver replies that he cannot take him, since local bylaws require that there must always be one taxi standing ready at the station.” In the context of impediments to liquid asset usability, the issues go beyond local bylaws: low internal risk appetites to let regulatory ratios fall hardwired in banks’ behaviours, market stigma amplified by stringent spot disclosures of volatile ratios, uncertainty about the eventual size of the shock. At the same time the benefits of liquidity regulation are also clear. Banks entered the Covid-19 crisis with strong liquidity – providers of funding to banks did not express any doubt on this front. To understand better the issues and to encourage debate for potential solutions the Bank and the PRA published a Discussion Paper on 31 March this year. [36] I look forward to your engagement. Many thanks to Marzio Bassanin and Artur Kotlicki for help in preparing this speech.
With regards to the extent to which financial stability conditions should be incorporated into monetary policy decision, one prominent view is that financial stability should be addressed mainly by macroprudential tools, and that, if effectively deployed, macroprudential tools can free up monetary policy to focus on price and output stabilization objectives. While this might hold true in some advanced economies, operationalizing macroprudential tools in practice—especially in emerging markets—has proved challenging. Limited experiences and complex interactions among various policy tools make calibrating macroprudential measures extremely difficult, not to mention the risk that these tools might inadvertently push some activities outside of the regulatory umbrella into shadow banking. My view, therefore, is that macroprudential tools are complements, rather than substitutes, for the broader monetary policy stance. Ladies and gentlemen, The three factors I have mentioned—inflationary pressure, growth, and financial stability—are factors that the MPC consistently looks at when deliberating monetary policy’s transition under the flexible inflation targeting framework. But before I make my concluding remarks, I would like to mention that when we are confident that economic growth is close to its potential and inflation will remain within our target range, the MPC can take a longer view. And this is when policy space should be taken into consideration. Two considerations are at play. First, history has taught us that a period of prolonged economic expansion comes with asset price bubbles and market correction and recession. A gradual, anticipated, movement in the policy rate reduces the risk and the size of such outcome.

12  December  Figure 5 Real annual contributions to gross fixed capital formation GFCF (*) (percentage points)  16  16  12  12  8  8  4  4  0  0  -4  -4  -8  -8  -12  -12  -16  -16 09  10 11 Housing  12  13 Other  14  15  16 Mining  17  18 19 20 Non-mining  (*) For 2017 mining investment is estimated using information available from companies' uniform coded statistical report FECU. Housing investment uses household investment figures in the National Accounts by institutional sector. The GFCF component "Other" is treated as a residue. To report forecasts for 2018, 2019 and 2020, Central Bank forecasting models and sectoral sources are used, including the Corporation of Capital Goods' investment plans and survey. Source: Central Bank of Chile.
But this does not imply that there is some magical threshold defining “acceptable” and “unacceptable” rates of earnings growth. In the short run, the link between earnings growth and inflation is complicated by a whole host of factors, including exchange rate movements, cyclical variations in productivity and profit margins, irregular bonus payments, and one-off adjustments to tax rates and other “wedge” effects. It is true that given the UK’s historical levels of annual productivity growth of around 2% and the inflation target of 22%, it would be a cause for concern to the MPC if average earnings increased by much more – or much less – than 4.5% a year over a prolonged period without there being a corresponding change in trend productivity growth. That is not because the Committee has a view about the appropriate level of pay awards. It is not our job to second-guess what businesses should or should not pay their employees. Nor is it because we think earnings growth causes inflation – inflation is a monetary phenomenon. Rather it is because sustained earnings growth much above or below these rates may indicate that the level of utilisation in the labour market has reached a level inconsistent with the inflation target. The June meeting of the MPC drew particular attention to the rise in headline earnings growth as measured by the Average Earnings Index. But that should be viewed against a background of increasing concern about the tightness of the labour market.

Second, the temporary improvement in the terms of trade that followed the rise in sterling in 1996 reduced the wedge between the real consumption wage – which is of relevance to employees and which reflects a mix of both domestic and imported inflation components – and the real product wage – which is of relevance to employers and which reflects the prices only of domestically produced goods. That reduction in the wedge is likely to have reduced the pressure on nominal wage growth for any given level of unemployment. So it is quite possible to believe that the NAIRU has fallen even if the natural rate has not. But this is likely to be temporary. As the impact of sterling’s appreciation on wages and prices wears off, the NAIRU will, other things being equal, rise towards the natural rate. But other more BIS Review 103/1998  –5–  lasting changes may reduce the natural rate (and hence the NAIRU). For example, a range of government policies, including changes to the Jobseekers Allowance, the New Deal and the new Working Families Tax Credit, have increased incentives to work. The National Minimum Wage works in the opposite direction. Assessing the impact of these structural factors on the natural rate is no easier than calculating the effect of macroeconomic shocks on the NAIRU. But it is useful to distinguish the two concepts, not least because they can move quite differently in the short run. Enough of this theory, some of which may appear largely semantic.
For example, automated marketmaking might allow an investor to instantaneously transact in a security at a visible price, with the market maker then able to immediately offset the risk by automatically hedging the exposure. Electronic and automated trading has also introduced risks to the Treasury market, as it has with other markets. For example, in the case of automated or high-frequency trading, firms must have sufficient internal controls to handle erroneous data and prevent malfunctioning algorithms. Considering that automated trading firms may hold limited amounts of capital given their minimal levels of net long or short exposure, some firms may be particularly vulnerable in the event of such an error. We have already seen some of these risks manifest themselves in foreign exchange and equity markets, where electronic trading is even more common. Further study is required to understand the particular nature of such risks in the Treasury market and the implications that may exist for other institutions, particularly since many automated trading firms are not direct netting members of FICC. Automated trading has also raised questions on issues related to fairness and market behavior. For example, there is likely some dispersion across firms with respect to the speed at which they can transact, which in turn could lead to dispersion in the quality of execution that market makers and end-investors are able to achieve. This is an important topic for examination and reflection, but it is also worth remembering that a varied level of technological access has long been a feature of competitive financial markets.

As I will explain later, the Treasury Market Practices Group has updated its best practices to emphasize the importance of supporting market liquidity as well as avoiding automated trading strategies that create a false impression of market price, depth, or liquidity. In conjunction with those best practices, the TMPG also released a white paper on automated trading that reviews several categories of associated risk, including operational risk, potential systemic counterparty risk, market manipulation risk, and transmission risk. October 15 Let me now turn to the unusual events of October 15. On that day, Treasury yields exhibited extreme volatility, with the benchmark ten-year yield trading in a range of about 35 basis points between the market open and close. This included a sharp decline in yields following the U.S. retail sales report at 8:30 ET that morning, and a highly unusual round-trip in yields just after 9:33 a.m. At that time, the ten-year yield fell about 15 basis points in a five-minute period, before nearly fully retracing that move in roughly the same increment of time. That very short “event window” was a remarkable occurrence in one of the world’s most liquid markets, and likely reflected a unique dynamic on what was already an unusual day. Indeed, the net change on the session as a whole was less than 10 basis points – a small fraction of the extraordinary intraday range that we are still discussing today (see the chart).
It can be seen in events in the gilt market I described earlier. The concentrated and correlated nature of pooled LDI funds’ exposures meant that their forced selling behaviour represented a sudden and profound shift in supply-demand dynamics. Indeed the self-reinforcing spiral it led to meant that around £ billion of pooled LDI funds[10] threatened the £ trillion traded gilt market, which itself acts as the foundation of the UK financial system, underlying around £ trillion of lending to the real economy through wider credit markets. [11] As such, it was a timely reminder that large concentrated exposures and correlated behaviours can strain market functioning so much that financial stability can be threatened. The counterparty channel  Now let’s turn to the counterparty channel ‒ where leverage increases the risk of an entity’s default and so brings losses for their counterparties, threatening the resilience of systemically important firms and so the real economy. Margins are at the core of bank and CCP toolkits for managing these counterparty risks. They are essential to stop cascading counterparty losses around the system broadly. But margins will only be adequate if counterparty credit risks can themselves be adequately assessed. And assessing the risk of a leveraged institution can be challenging ‒ perhaps because its exposures are in the form of synthetic or “hidden” leverage or because its exposures are more concentrated or correlated than the counterparty is able to understand.

That has included work on the specific issues of leverage and liquidity of LDI strategies, which was assessed with a stress simulation in 2018, and which led to further close work with the Pensions Regulator and the Financial Conduct Authority[14] to enhance understanding of financial stability risks, enhance monitoring and inform further work. The vulnerabilities in market-based finance that the FPC had articulated were exposed in dramatic fashion in the ‘dash for cash’ in the early stages of the Covid pandemic. [15] That gave additional momentum to this work. And there has been some progress in recent years, on the regulation and monitoring of the non-bank sector[16], particularly relating to liquidity mismatches in MMFs and OEFs. [17] The international community has made less progress in addressing the risks from non-bank leverage. The international nature of leveraged investors requires a firm response by the global regulatory community to assess those risks and develop policy solutions. And the UK’s recent experience is a timely reminder of the risks here. So in the final minutes I will zone in on the actions relevant to this issue. Let’s start with transparency, where it is vital that regulatory authorities have sight of leverage building up in the system, and what that means for resilience. That requires better regulatory disclosures for non-banks and investment in monitoring capabilities. The Bank has access to transaction-level data from regulatory datasets[18] which we use to monitor the build-up of systemic risks stemming from leverage in the non-bank system.
…and here at home Sweden has also been affected by the turbulence in the financial markets, albeit to a much lesser extent than, for instance, the United Kingdom, Germany and the United States. The fact that Sweden has been affected despite not being, as it were, involved in the problems that started the unrest is not so remarkable. We are a part of the global financial system and not an isolated northern outpost. The Riksbank governs the short-term rate that applies for one day, the so-called overnight rate, and this has remained stable around the repo rate. In brief, the Riksbank’s method of steering interest rates has worked well. But the interbank rates with slightly longer durations have risen, although not as much as in some parts of the world. This is primarily a question of different effects from the uncertainty in the financial markets, such as rising risk premiums. On the whole, the Swedish financial system and the interbank market have nevertheless functioned well. 6  BIS Review 106/2007  What is the role of the Riksbank? What does the Riksbank do when there is unrest in the money market? One of the most important tasks is to continue to ensure that the economy develops in a stable manner. We have to conduct our monetary policy so that we attain the inflation target of 2 per cent. Where possible, when the price stability objective allows scope for this, we should also ensure that production and employment develop in a balanced manner.

Swedish banks must not take this possibility for granted and thus take unnecessary risks. Here there is a link to our ambition to be open and clear. An open attitude sets limits and shows the game rules. We have clearly described how we view our role as “lender of last resort”, for instance, in our Financial Stability Report. 3 By being open about how we manage emergency liquidity assistance we reduce the risk that a situation may unnecessarily arise  3  Financial Stability Report 2003:2  BIS Review 106/2007  7  where we are forced to provide assistance. It also reduces the risk that we will be forced to provide support when this is not appropriate. Giving the right information at the right time and in the right way is important. It is particularly important in times when uncertainty is increasing. I hope that I have managed to communicate today not only the principles that have guided us with regard to our external communication in recent years, but also our picture of the recent situation. I also hope that I have succeeded in communicating that our ambition is to clearly report what we do and why. Thank you! 8  BIS Review 106/2007