samchain/econo-pairs-v1 huggingface dataset:
The insurance premium banks pay for the deposit guarantee bears little relation to the risk the bank takes. In addition, since investors can expect that the authorities will come to the aid of banks in distress, they may be satisfied with a lower return. The result is an underpricing of risk, potentially leading to excessive risk-taking. BIS central bankers’ speeches  1  Low equity ratios reduce loss-absorbing capacity and, at the same time, strengthen the incentive to take risks. While owners cannot lose more than their equity stake, there is a potential for high returns on the equity capital they have invested. Banks’ owners lack incentives to take full account of the risk imposed on creditors. To avoid a situation where banks hold inadequate equity capital, banks are subject to capital requirements. Each bank should hold capital in proportion to its risk exposure. This is the basis of microprudential bank regulation. But even if each individual bank appears to be solid on its own, the banking system as a whole may be vulnerable. Risk in the system has several sources. Externalities between banks are one important source. Banks are exposed to one another and can inflict losses on one another directly. Banks can also inflict substantial losses on one another if they have shared exposures outside of the banking system. This was clearly evident during the financial crisis. When a bank is forced to sell off assets, these assets fall in value.

However, we must not believe that problems in the financial sector can simply be regulated away, and we must not have exaggerated faith in our ability to fine-tune the economy. But an important contribution will be to ensure that those who take financial risks on behalf of others hold more capital. Monetary policy has faced considerable challenges in recent years. We think it is important to learn from history and from the experience of other countries and to apply those lessons in the further development of monetary policy. This is why we are launching a research project, “Flexible inflation targeting: challenges and possibilities”. An important part of the background for this project is the fact that international monetary policy research has often focused on closed economies, with more relevance for large countries such as the US. Our small, open economy presents particular challenges. How does this restrict the room for manoeuvre in monetary policy? And how should monetary policy respond to changes in the terms of trade? The project will include analysis of some of the issues I have mentioned today. There is a need for more research on how financial stability should be taken into account in monetary policy. The project will also draw on the experience we have gained over the past 10–15 years as the Norwegian economy was exposed to a financial crisis and a number of supply-side shocks. Monetary policy communication is also developing. 11  See Bank of England: Monetary policy trade-offs and forward guidance, August 2013.
And I believe that the best way of managing risks is for those concerned, not just the authorities responsible for the maintenance of systemic monetary and financial stability but more importantly also those actually assuming risks, whether as investors or as financial intermediaries, to be alert to them, and to understand that they may have peculiar characteristics. Then there are importantly those innocent parties in society, who are often hard-pressed to make ends meet or struggling to acquire a dwelling place, who could be further disadvantaged if there were monetary and financial instability, should the risks materialise to the extent of causing a shock of systemic dimension. Sub-prime crisis The FIRST such issue is the sub-prime crisis in the United States. The use of the word "crisis" is not an exaggeration on my part, notwithstanding the absence so far of anything approaching a crisis in Hong Kong. It is the word that is increasingly being used in the developed markets and in international finance when talking about the current difficulties in the United States and Europe that originated from sub-prime mortgages. At the risk of oversimplifying something that is really quite complex, let me make a few observations that might help understand what is going on. First, sub-prime mortgages are really mortgages extended to those who are, to put it bluntly and simply, not credit worthy. And as mortgages are assets on the books of the lenders, subprime mortgages are really sub-standard financial assets.

It would probably not relieve pressures for currency appreciation, rising inflation and buoyant asset prices. Seventh, on the so-called reverse double play: the scope is limited. The reverse double play aims at profiting from a long position in Hong Kong stocks by engineering a capital inflow large enough to trigger passive exchange market intervention on our part, which would push interest rates to very low levels and asset prices higher. But interest rate adjustments when the exchange rate hits the strong side of the band are bounded by the floor of 0%, while they might be a lot more dramatic at the weak side, and the sensitivity of stock prices to these different adjustments differs. Herd reaction, which is what most speculative plays aim at, is a lot easier to instigate through the fear factor, when interest rates rocket up, risking a stampede to exit from the market, but a lot more difficult through the greed factor, when interest rates fall, and the rush to buy does not necessarily materialise. Conclusion I hope these answers are clear and the high degree of confidence in and credibility of the linked exchange rate system built up over the past quarter of a century is sustained. This would obviate the need for the type of interest rate adjustments seen earlier in the month and dampen volatility in Hong Kong dollar interest rates around those of the US dollar. Indeed, monetary and financial stability is dependent to a large extent on confidence in and credibility of monetary and financial policies.
A private scheme of that kind would not work, however, if the insurer could not afford to subscribe when the call came; or if investment institutions were unwilling to enter into such commitments on a sufficient scale for the insurance to make a difference to the system’s resilience. Another idea circulating currently 30 is that banks would be required by the authorities to issue hybrid-debt-capital instruments that could be converted when needed into loss-absorbing equity. In one variant, the option to require conversion would lie in the hands of regulators provided a systemic-severity test were passed. Summary and conclusions During the current crisis, the normal functioning of the financial system broke down, with profound effects on credit conditions and on the appropriate monetary policy response. Although I have ranged widely today, I have in fact deliberately not covered the operations employed in some countries to lend directly to firms, effectively by-passing the financial system; or the actions by some central banks, including the Bank of England, to expand the money supply in an environment of near-zero policy rates. Instead, I have focused on the repertoire of instruments directed to supporting, and ideally reviving, the financial system itself: funding liquidity, market liquidity, and solvency.

In the case of the DWF, we lend securities (gilts) that are eligible in our OMOs, so they can be turned into cash either in the market or via our repo operations. But, in its usual mode of operation, the DWF does not directly affect the Bank’s aggregate supply of reserves. 15 Indirectly, it may even reduce the demand for reserves, as it gives sound banks a source of liquidity insurance separate from holding precautionary balances with the Bank. By contrast, the wider-collateral LTR OMOs do inject reserves. For a given monthly reserves target, that means that, other things being equal, the Bank has to reduce the size of its weekly short-term OMOs, in order to ensure that its net supply of reserves is equal to the target; otherwise overnight rates would sink below the MPC’s policy rate. But when, as during the current crisis, the scale of wider-collateral repos is massively increased, reducing short-term repos to zero is not always enough to achieve our monetary objective. The Bank of England has therefore introduced the sale, via auction, of very short-term Bank of England bills to drain excess (ie above target) reserves from the market. That has enabled us to make a very significant (order of magnitude) discretionary increase in our cash-liquidity insurance without cutting across monetary policy. (In my view that is preferable, on technical and presentational grounds, to draining the market by HMG depositing with the Bank the proceeds of increased Treasury issuance, which could be confused with deficit-financing operations.)
Let us imagine that our households – which we assumed did not amortise at all to begin with – are forced to amortise their loans over a period of 50 years. If the households began to amortise in this way, it would on the one hand initially mean increased expenditure for the households corresponding to between almost 5 and a good 12 per cent of their disposable income. To achieve the same effect with an interest rate increase, the mortgage rate would need to increase by almost 3 percentage points. On the other hand, the amortisations would mean that interest expenditure fell as the loan was paid off. As amortisation is a form of saving, this measure means in the long run that the loan cost falls and that the household improves its balance sheet or financial position. In this example we have assumed that the  19  With a tax deduction of 30 per cent, an interest rate increase of 1.7 percentage points means that the interest after tax increases by 1.2 percentage points. This is as much as abolishing the tax relief would increase costs if the interest rate was 4 per cent to start with. 20  http://www.fi.se/upload/43_Utredningar/20_Rapporter/2011/effekt_bolanetak_delstudie.pdf. BIS central bankers’ speeches  9  households do not have any savings, in practice of course they would also be able to manage changes in amortisation requirements by reducing other saving. Comparisons with the interest rate A relevant comparison is what a direct increase in the interest rate would entail for our households.

Interest rates were more and more determined in the markets, and some measures were taken regarding the supervision of the banking sector. However, before taking the necessary actions for strengthening the domestic financial markets, such as measures for more transparent balance sheets and more careful risk management in the intermediation process, the capital account was liberalized at the end of the 1980s. The Turkish economy with an inefficient banking sector became open to intensive capital movements. In my view, the Turkish economy turned into an open one before it became strong enough to cope with capital movements that would occur in the 90s. The sequencing of reforms for the Turkish economy in general and its financial system in particular should have been set differently. What went wrong in the Turkish economy in the 90s? Policies did not concentrate on ensuring and maintaining macroeconomic stability; different priorities, delayed reforms, loose fiscal policy and accommodative monetary policy led to dynamic instability throughout these years. As a result, inflation climbed to 79 percent on average, budget deficit widened so much that the public sector borrowing requirement reached 15.5 percent of the GNP by 1999, the output growth was very low on average and volatile compared to other emerging markets. So, poor macroeconomic fundamentals and a fully liberalized capital account brought about vulnerability of the economy to external shocks and the Turkish economy faced severe financial crises and turbulences in the 90s. Such an environment had also important implications on the financial system.
By taking firm pre-emptive action, we have shown what the new judgement-led approach to supervision means in practice. It substitutes substance for process and judgement for box-ticking. We need not more but better regulation and, just as with monetary policy, we have changed the way regulatory decisions are made. The PRA announcement tomorrow is another step in dealing with the legacy of the past. It will make our banking system more resilient and better able to support recovery. But it is too soon to say that the job is done. Many of our major lenders will still be highly levered. The levels of capital required by the Vickers reforms, on the one hand, and the Basel standards for large international banks, on the other, mean that there is clearly some way to go before we can claim to have a really well-capitalised banking system. In future, the FPC and the PRA will work together to conduct regular stress tests of our banks, starting in 2014. Those stress tests will I am sure be made public, and banks will be expected to set out their plans for making up any identified shortfall in capital. Managing this process, and the transition to a higher level of capital, will be key tasks for the FPC and PRA in the coming years. Those who argue that requiring higher levels of capital will necessarily restrict lending are wrong. The reverse is true. It is insufficient capital that restricts lending.

See the Federal Reserve Bank of New York’s report and accompanying data file, “Projections for the SOMA Portfolio and Net Income (July 2017).” 15 These liabilities include Federal Reserve notes (U.S. dollar paper currency), the U.S. Treasury’s General  Account, deposits held by designated financial market utilities and government-sponsored enterprises, and reverse repos conducted with foreign and international account holders. On average, these line items summed to over $ billion in 2017, on top of more than $ trillion in Federal Reserve notes. Fed liabilities are discussed more thoroughly in Lorie Logan, “Implementing Monetary Policy: Perspective from the Open Market Trading Desk,” remarks before the Money Marketeers of New York University, New York City, May 18, 2017. 16 It is worth noting that the size and structure of Fed’s securities portfolio and the role the portfolio played have  undergone substantial shifts at various times over the course of the Fed’s history, reflecting changes in policy implementation imperatives. See Meryam Bukhari et al, “The SOMA Portfolio through Time,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 12, 2013. 17 Throughout this discussion, I focus on forward guidance and use of the central bank’s balance sheet (through  large-scale purchases of additional assets and reinvestment policies, but not funding for lending programs) as possible tools. U.S. policymakers have shown little appetite to pursue negative nominal interest rates, although that is another unconventional tool used by several central banks in recent years.
Statistics give a picture of rapid-fire growth over a very short period (see graph). From 2003 to 2007, the banks’ total assets grew from less than two times Iceland’s GDP to almost nine times. Right before their collapse, total assets amounted to eleven times GDP. Over 40% of total assets were in foreign subsidiaries, 60% of total lending was to non-residents, and 60% of income was from foreign sources. Over two-thirds of lending and over three-quarters of deposits were denominated in foreign currency, notably in pounds sterling. Around 85% of the banks’ foreign lending was in Europe, with half in the Nordic countries, a third in the United Kingdom, and a tenth in the Benelux countries. Currency composition of deposits 2007  Banks' balance sheet expansion and leverage % of GDP  Total assets/Equity  1000  18  Other; 14% ISK; 22%  900 17  800 700  16  600 500  15  400 14  300 200  13  100  EUR; 16%  GBP; 45% USD; 3%  0  12 2003  2004  2005  Total assets (left axis)  2006  2007  2008  Leverage ratio (right axis)  Consolidated accounts of three largest commercial banks. 2008 data is end‐June. Deposits to customers. From the largest commercial banks' consolidated accounts. Source: Central Bank of Iceland. Source: Commercial banks' annual reports, Central Bank of Iceland.

I trust that in taking part in the competition you have been able to find out more about what we do at the ECB, why we do it, and how our monetary policy works. It seems obvious that you should know what we do at the ECB or what people do in their national central banks. But as a matter of fact, if you do polls, you would be surprised by the amount of confusion that people have. For example, lots of people, about one-third, think that central banks are like other banks, that they are by and large not very different from what other banks do. Now, you will be the selected category that will know that the ECB is a central bank and that central banks are different from banks. And even more importantly, through this exercise, you actually got to have, at a very young age, a European perspective. You understood what is still really missing from lots of people, who still think in terms of national borders. It is very important, of course, but it is not the only reality that we are living through. In fact, the European perspective becomes much more important as time passes. Why is that? Well, because there are many challenges that are in fact supranational by their very nature. That is to say, you can’t really respond to these challenges, and you can’t really address the problems at national level if they are supranational.
Following the joint meeting of the ASEAN+3 Finance Ministers and Central Bank Governors in May this year, a press statement was released on their common position with respect to both macroprudential measures and capital flow management measures. I quote: “…deepening global financial integration …require MPPs and CFMs that counter increases in financial stability risks from changes in macroeconomic policies in countries with major currencies.” Beyond the resilience of policy frameworks, my third and final point has to do with the resilience of domestic fundamentals. Firstly, having a diversified, flexible and competitive economy is a key strength in dealing with instability from the external sector, whether it is in the real economy or in the financial system. Secondly, having a strong and resilient financial system is an important source of strength against vulnerabilities rising from living in an integrated world. In the period after the onset of the financial crisis in the AEs, many Asian economies have been able to sustain growth because their financial systems were healthy and were able to finance and support domestic economic activity even as growth in the AEs disappeared. A deeper and more diversified financial system can also help to intermediate capital inflows in a less distortionary manner. In the post-crisis period, we have been pleased that the depth of the financial markets in Malaysia and the presence of large institutional players have contributed to stability in the domestic financial markets, even in the face of significant volatility in foreign portfolio flows.

Let me focus on some of the implications of global economic and financial integration for central banks. What does globalization change and what does it not change? What complications does it introduce and what challenges does it ease? This is a vast and complicated topic, but I want to touch on some of the key issues. In passing, let me note Federal Reserve Vice Chairman Don Kohn’s recent assessment of what we know about the impact of globalization on short-run inflation dynamics in the United States and elsewhere. He noted that the evidence so far on these questions is “far from conclusive” but for the most part it suggests that to date the effects have been gradual and limited. There are, however, some important things we know about how economic integration affects the context in which central banks operate. For example, Harvard economist Ken Rogoff and others have pointed out that to the extent that globalization increases the degree of competition, it can reduce the “inflationary bias” or, to put it differently, it can strengthen the anti-inflation credibility of a central bank. By inducing greater price flexibility, competition lowers the short-run gains to output from an unanticipated inflation, and thus permanently reduces the incentives for a central bank to try to exploit those gains. The improved credibility of the central bank’s commitment to keep inflation low and stable should, in turn, allow it to deliver better inflation outcomes with fewer short-run costs to economic growth and employment.
As the European Central Bank president, Mr. Jean-Claude Trichet has recently underlined “the international interdependencies are too large for purely national or regional rules to be optimal and there is a clear need to strengthen global governance, in particular in the financial field”. In the case of the European Union, the crisis has exposed fundamental weaknesses of the European economy, revealing growing internal imbalances. The functioning of the European  BIS central bankers’ speeches  1  Monetary Union has been under particular stress as the existing surveillance procedures proved to be not comprehensive enough. Therefore, more effective economic governance in the European Union and the euro area is seen as achievable through five main pillars: fiscal discipline, broader economic surveillance, closer coordination, a robust framework for crisis management, stronger institutions and rules-based decision making. At this point, let me say that just recently the European Union has taken important decisions to ensure that Member States coordinate their economic policies more closely. The new economic governance is therefore based on three main responses to the crisis: •  reinforcing the common economic agenda with closer European Union surveillance  •  safeguarding the euro area stability  •  and repairing the financial sector  As a result of these decisions, the EU’s interdependent economies will be better placed to chart a path to growth and job creation. To conclude, I would like to emphasize here that economic governance is a topic that concerns us all.

Now let me touch briefly on risk management in Turkey’s banking sector. From the risk management standpoint, we are well supplied with well-developed methods for managing risk and supervising the risks that we do accept. As to the financial standing of Turkey’s banking sector, Turkish banks have achieved a level of financial and institutional development not to be underestimated. But besides these strengths, there are various threats to the well-being of the Turkish banking sector which should be mentioned. Turkish banks, are mostly exposed to credit risk, liquidity risk, interest rate risk, and foreign exchange risk. This is true even when there is no global crisis or macroeconomic risks stemming from political uncertainty. I should mention that all these different kinds of risk have been thoroughly monitored by the supervisory authorities, who put preventive measures in place before the effects of any problems that were found could threaten financial stability. Under this regulatory system, the banks must submit annual, quarterly, BIS Review 41/1999  4  and even daily financial data to the Central Bank and the Treasury. And besides frequent financial evaluations of banks by off-site examiners, on-site examinations are conducted to verify the accuracy and reliability of the data reported and clarify any special issues found during off-site examinations. Let me conclude my remarks by underlining once again how important it is to assess, manage, and reduce financial risks to ensure a sound financial system.