samchain/econo-pairs-v1 huggingface dataset:
“Measured” risk-adjusted FISIM is still an improvement on current FISIM. But the value of bank output is still overstated relative to “true” risk-adjusted FISIM. This would be equivalent to second-car hand dealers consistently selling lemons. But a dodgy car-seller would be quickly found out. Mechanical risk is observable. Dealers that persistently mis-price cars would be driven from the market. Buyers might instead then choose to meet online. A banking system that does not accurately assess and price risk is not adding much value to the economy. Buyers and sellers of risk could meet instead in capital markets – as they have, to some extent, following the crisis. But unlike the condition of a car, risk is unobservable. So mis-pricing of risk, and mis-measurement of the services banks provide to the real economy, may persist. This echoes events in the run-up to crisis when market prices systematically under-priced risk for a number of years. Using the market price of risk would have led statisticians systematically to overstate the potential contribution of the financial sector over this period. Attempting to adjust the measurement of bank output for risk by changing the reference rate in FISIM is an improvement on current practices. But it would still fall short of assessing whether the financial sector is pricing risk correctly and hence assessing the true value of the services banks provides to the wider economy. Unless the price of risk can be evaluated, it seems unlikely the contribution of the financial sector to the economy can be measured with accuracy. 3.

The infrastructure must be constructed so that it does not exacerbate any problems that may arise. It needs to be capable of handling external shocks without any danger of collapsing. However, the severe strains that arise from time to time in the payment system tend to be generated not so much by hang-ups in technical and administrative systems as by problems for one or several of the participating banks. Problems for one bank quickly spread to the rest of the payment system and may generate a systemic risk. This risk arises if problems with credit or liquidity prevent bank A from completing its payments to bank B, which thereby has difficulties in paying bank C. Banks B and C are then liable to fail solely because bank A cannot fulfil its commitments. The risk obviously varies with the size of the payments in question; the larger these are, the greater is the potential systemic risk. The occurrence of systemic crisis threatens the whole or parts of the payment system, and if this ceases to function the entire financial system as well as the real economy will be affected. The crisis in Sweden in the early 1990s was associated with large systemic risks. Last autumn the U.S. Federal Reserve perceived considerable systemic risks in the domestic financial market. In neither of these cases, however, was there a full-blown systemic crisis. In the event of a systemic crisis, the payment system needs a large supply of credit.
In the case of households, the credit terms of mortgage loans are much stricter than those observed pre-crisis, and in recent quarters no signs of easing have been perceptible. For example, in the case of the loan-to-price ratio (LTP), there has been a reduction in the weight of more leveraged transactions (with an LTP of over 80%) compared with the crisis years. Moreover, the average LTP is also lower. By way of exception, consumer lending and its attendant bad debts quickened once again in the final quarter to year-on-year rates of 12% and 26%, respectively, slightly raising the NPL ratio of this business segment to 5.6%. And this against the background of the considerable slowdown in private consumption in the economy. In terms of solvency, from June 2018 to June 2019 the CET1 ratio increased by somewhat over 30 bp to stand slightly over 12%. The rise was based essentially on an increase in reserves. This improvement in solvency was concentrated in the biggest institutions which are, precisely, those showing lower levels. Moreover, the bulk of the capital materialises in instruments with the biggest loss-absorption capacity. Compared with the other European countries, Spanish institutions have a top-quality CET 1 capital ratio almost 3 pp below the European average, whereas in terms of the leverage ratio, Spain stands slightly above the same average. It is well-known that this difference in Spain’s relative position in respect of these two solvency measures is due to the fact that the density of risk-weighted assets is higher in Spain.

The technical analysis assesses the recent trend of the indicators, their current status and also their expected behaviour in the coming quarters consistent with the macroeconomic forecasts prepared quarterly by the Banco de España. The forward-looking analysis is particularly relevant in this context since, in the event of the CCyB being activated, banks have 12 months to comply with the requirement. According to these indicators, the credit cycle continues to show values below the activation thresholds (having regard to the credit-to-GDP gap, which remains below its long-term trend value), although it is progressively converging on the long-term equilibrium level. In fact, forecasts as to how it will trend in the coming years indicate that this indicator will turn positive towards 2021 Q1 and might exceed the activation threshold in 2021 Q2. Some complementary quantitative indicators are along the same lines. This is particularly the case for credit intensity, which shows the weight of the change in credit relative to GDP, and the overvaluation of house prices currently show values close to equilibrium, with an upward trend that is forecast to continue over the next two years. Non-financial privatesector debt service, for its part, has maintained the reduction that marked its path at the start of the global financial crisis. Foreseeably, this reduction will continue, albeit more moderately so over the coming two years, given that the process of debt reduction has eased significantly and interest rates have less margin for further cuts.
The Bank announced last year it will also make an adjustment to its approach to setting Pillar 2A add-ons to banks’ capital requirements in order to ensure the regulatory framework is proportionate to all lenders, thereby supporting effective competition, whilst not compromising on safety and soundness. 25  The adjustment allows supervisors to reduce Pillar 2A add-ons for banks which use the Standardised Approach for credit risk to reflect how risk weights under this approach tend to be higher than the risk weights determined using internal models at other banks for some types of assets. This is particularly the case for UK mortgages (Chart 7). Another part of the regulatory framework to which we have made adjustments is the Senior Managers and Certification Regime. We recognised following the implementation of the regime in 2016 that not all individuals that should be were in scope of the regime. In particular, the regime did not include a specific senior management function or responsibility related to areas such as operational continuity and operational resilience, including resilience to cyber risk. This omission was inconsistent with the Bank’s growing emphasis on these areas, as highlighted earlier. In response a new function – the Chief Operations function – has been added to the regime to ensure there is clear and appropriate accountability for operational continuity and resilience. 26  Identifying dynamic adjustments  We are doing two things to enable us to identify aspects of regulation that might need adjustment.

The peer group includes Barclays, Cooperative Banking Group, HSBC, Lloyds Banking Group, Nationwide, RBS and Santander UK. (d) From 2018, Basel III Tier 1 capital ratios reflect IFRS 9 transitional arrangements as agreed in European law. (e) Series begins at end-2007. Chart 2: UK banks’ holdings of liquid assets Liquidity Buffer  (a)(b)(c)(d)(e)  LCR HQLA  £ 800 750 700 650 600 550 500 450 400 350 300  2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: PRA regulatory returns (a) UK liquidity consolidation groups for major 7 UK banks. (b) DLG consolidation is applied to Barclays, HSBC, Lloyds, RBS and Santander UK, whilst solo UK entities are shown for Nationwide and Standard Chartered. (c) Liquidity buffer refers to the liquidity held under the ILG regime, which is reported weekly until at least July 2019. (d) LCR HQLA refers to high quality liquid assets under the EU Delegated Act (reported monthly since October 2015). (e) Definition of liquid assets is broader under the LCR. 17  All speeches are available online at www.bankofengland.co.uk/speeches  17  Chart 3: Modelling errors in market risk (10 years of data)  (a)(b)(c)  Variance Squared bias MSPE  4.50E-05 4.00E-05 3.50E-05 3.00E-05 2.50E-05 2.00E-05 1.50E-05 1.00E-05 5.00E-06 0.00E+00 1  2  3  4  5  Past days modelled Source: Hinterschweiger, Neumann, and Saporta (2018), ‘Risk sensitivity and risk shifting in banking regulation’, Bank of England Financial Stability Paper No.44 (a) True model is number 3.
Under the current conditions, the key tools for emerging markets for adaptation and mitigation are likely to be:  BIS Review 97/2008  3  First, is CDM, which presently offers clarity up to 2012. CDM provides core demand for carbon credit that forms the core primary market and allows secondary and derivatives market to grow. Second, is the insurance market that offers products for risk mitigation. Third, is the investment fund market that bridges carbon credit buyers (which is CDM driven) and sellers in emerging markets. Many countries have set up such funds, but less so in the context of emerging markets’ own funds. And fourth, is the direct lending by financial institutions in emerging markets to promote energy-efficient projects and companies. Response to climate change in emerging markets, therefore, can be judged in the deployment of these four tools. Currently, the efforts remain scattered. Promoting the use of these instruments will be key for building momentum in adaptation and mitigation. At this time, however, there are many problems in emerging markets that remain to be tackled. For example, in the case of CDM, existing practical problems include the absence of key global infrastructure beyond 2012, lack of legal recognition of carbon credits as tradable securities or assets, lack of knowledge and awareness including the high search cost for identifying sellers and matching trades, and the need to set up a supportive “Guarantee Fund” to help banks share risk on lending to CDM-projects.

Also, an increasing number of banks are recognizing climate change risk in response to investor and other stakeholder initiatives. Judging from this evidence, while the response of financial institutions is positive, it is still very much in an early stage. And in the case of Asia, the progress is even more limited. The main supplier of carbon credits in CDM is China, while the rest of Asia lags behind. In Asia, the engagement of financial institutions on climate change is scattered and not yet a momentum. The progress is hampered partly by inadequate supporting framework that includes lack of clear policy and incentive as well as information. Let me now discuss some of the current problems in Asia and the prospects for the financial system in emerging markets, especially in Asia, to become more engaged with the issue. Given limited progress so far, the challenge is how to engage the financial system in emerging markets more extensively on climate change. In moving this issue forward, a critical role has to be played by policy, especially on the role of incentive and the development of tools that can facilitate the response to climate change. On incentive, a good starting point is to discuss the principles that would be important in guiding the design of policy, which in my view, four key principles stand out. First, the role of the states and policy are critical to ensure that the global rule of the market is clear and continuous beyond 2012.
A key aspect to underline is that a potential CBDC could coexist perfectly well with physical cash, which serves an important role and for which -at least in the euro area- there is still strong demand.1 In other words, traditional cash and a CBDC might be natural partners, rather than potential substitutes for each other as they are often presented. However, before taking any major decision on the issue of a CBDC, several important questions need to be answered: What precise complementary roles would cash, bank accounts and digital coins play? Should central banks focus on securing a sound regulation that offers appropriate safeguards and leave the private sector to come up with viable alternatives? Or should we ensure the provision of a safe asset by issuing a CBDC? As you can see, when faced with a case of practical use, even one as apparently simple as this, embracing the opportunities that new technologies offer is not always crystal clear. What’s more, when approaching this topic in more detail, many questions and far-reaching implications arise, thus suggesting the need to tread cautiously in unknown territory. I refer to the myriads of design and operational aspects, such as whether this “new digital cash” should preserve all the features of traditional banknotes and coins (for instance, anonymity), or whether some of the key processes such as Know Your Customer or compliance with AML requirements should remain in the hands of the private sector for efficiency reasons.

Behind this favorable response of the Chilean economy lies a macroeconomic policy framework able to pursue an effective reaction, and a regulatory scheme supporting the high resilience of the domestic financial system. In Chile the monetary policy framework consists of a flexible inflation-targeting regime with a floating exchange rate. This framework has allowed us to respond efficiently to external shocks keeping inflation expectations anchored. Before the Asian Crisis of 1998, we had a managed exchange rate and we had capital controls in place to allow monetary policy independence to manage inflation in a context of abundant capital inflows. Indeed, we experienced a costly adjustment to that episode, and this was fueled in part by financial stability concerns that called against an exchange rate adjustment. But once the harder times had passed, the exchange rate was allowed to float freely, facilitating not only the external adjustment against shocks but also improving the incentives for private agents to properly hedge their foreign currency operations. The deep-rooted credibility of our Central Bank has also facilitated the conduct of monetary policy with a floating exchange rate system. The fact that the market understands that the Central Bank pursues a goal for inflation at a 24-month horizon means that the exchange rate pass-through to inflation is relatively low, indeed the lowest in the region. This can be illustrated with the reluctance of the Central Bank to tighten monetary policy in 2015 despite a 49 percent devaluation in 2014-2016, and without affecting 24-months-ahead inflation expectations, which remained anchored at the target level.
Compensation rate and percentage of people with fixed-term employment contracts, before and after the financial crisis (A) Compensation rates (b) Fixed-term employment contracts 90  Low income Average 2001-2007 and 2010-2018 Average income Average 2001-2007 and 2010-2018  80  18  90 18 80  17  17  16  16  15  15  70  70  60  60  50  50  40  40 14  Average 2000-2007 and 2010-2018  01  04  07  10  13  16  00  04  08  12  16  14  Note. Per cent of wage replaced after preliminary tax for medium and low income earners during three months of unemployment and number of fixed-term employment contracts as a percentage of the total number of employees. Sources: The OECD, Statistics Sweden and own calculations  Changes on the labour market may have contributed to lower prices and wages The period following the financial crisis was a challenge, from a monetary policy perspective. Inflation has on many occasions been lower than expected and even below the target. On average, inflation measured in terms of the CPIF has been around 0.3 percentage points lower after the financial crisis than before, see Figure 3a. But it is not only inflation that has been lower than expected, wages have also been lower. Wage increases have been around 1.1 percentage points lower after the financial crisis, see Figure 3b.

The low outcomes have surprised not only the Riksbank, but also many other analysts. But despite inflation and wage increases being lower than expected, resource utilisation – measured as a shortage of labour – has not been unusually low. It has on average been at around the same levels as prior to the financial crisis, see Figure 3c. Monetary policy has in turn been expansionary, with a policy rate that has on average been just over 2.5 percentage points lower after the financial crisis than before it, see Figure 3d. In addition, there have been large purchases of government bonds to make monetary policy even more expansionary. 9 See Kjellberg (2018). 6 [24]  Figure 3. Inflation, nominal wages, labour shortages and the policy rate in Sweden, before and after the financial crisis (a) CPIF (b) Nominal wages 4  4 5  3  3  2  2  1  1  0  0  -1  03  06  09  12  4  4  3  3  2  2 Average 2000-2007 and 2010-2018  Average 2000-2007 and 2010-2018 00  5  15  (c) Labour shortages  18  -1 1  00  03  06  09  12  15  18  1  (d) Policy rate  Note. (a) Annual percentage change, (b) annual percentage change, wages according to short-term wage statistics (c) per cent, (d) per cent.
(2011), "Risk off" 9  8  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  8  To help gauge the role played by these factors, we can consider the historic relationship between house prices and fundamentals and how this relationship might have evolved in the decade since the crisis11. The blue line in Chart 6 shows how we might have expected mortgage debt to evolve following the crisis, based on the historic relationship between mortgage lending and fundamentals such as the housing stock and incomes. This shows underlying demand falling in the immediate post-crisis period. This reflects weaker fundamentals. And to the extent that households’ beliefs are shaped by recent trends – and there is good reason to believe that is the case - weaker expectations will be captured in weaker demand. This fall in demand could also reflect credit conditions. In the years immediately following the crisis Bank Rate remained close to zero, but the interest rate spreads over Bank Rate charged by banks and building societies, for new mortgages, were high. This meant that interest rates on new mortgage did not fall with Bank Rate. But, as is shown in Chart 7, from 2013 onwards, mortgage spreads fell and the cost of mortgage credit dropped to well below pre-GFC level. 11  I have borrowed this thought experiment from Geoff Meen. It makes a number of simplifying assumptions, notably that there would not be feedback from higher demand into house prices in the counterfactual in which credit is unconstrained.

Jon Cunliffe: Regulatory reform and returns in banking Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at Chatham House, London, 20 October 2014. *  *  *  On 13 October 2008 – just over 6 years ago – the UK government injected nearly £ of public funds to stabilise Royal Bank Scotland and Lloyds Banking Group. Parts of both banking groups had started the year in a precarious position, with swollen, highly levered balance sheets and a reliance on short-term wholesale funding. By October, losses had left them dangerously undercapitalised. Absent a resolution regime for dealing with failing banks, and given the importance of these two banks to domestic lending, the government was left with no choice but to inject public funds, bailing out the banks’ creditors. In the intervening 6 years the landscape of banking has changed beyond recognition. Some of this is due to a very different approach to regulation and supervision. Some is due to a very different commercial environment. And most important, there has been a sea change in public attitudes towards banking and bankers. Bankers should not expect to be popular. But the outburst of public anger that accompanied the crisis and its very painful and protracted impact on the real economy – families and jobs – has not abated much. The latest polls put public trust in bankers at nearly the bottom of the class – only marginally above politicians.
We are focussed on the impact of very low interest rates staying with us for a protracted time, and when I say this I am offering no view whatsoever on the likely course of monetary policy. Likewise, we want to know that the prudential position of firms also captures the possible impact of an unexpected upward shift in the slope of the yield curve, and again I am offering no view on monetary policy. My third example is different: we are watching the range of possible outcomes on flood insurance in this country for their prudential implications. Judgment in supervision is not, however, without its challenges when it comes to the practice of supervision. There are two large challenges I see. First, we have to balance the use of  4  BIS central bankers’ speeches  sensible judgement against the risk of creating undue uncertainty in our behaviour which damages your ability to do business. This is not easy I accept. It requires us almost constantly to check and test our judgements against a framework of reasonable predictability. Also, it requires a greater degree of transparency from us to you, and I think from both of us to the public and investors. This is important to ensure that we can both be held to account for applying judgement in a way that is consistent with the pursuit of our objectives. I am conscious that achieving accountability in insurance supervision in the current environment is challenging because all the focus is on the banks.

And, we are putting more emphasis on senior level contact in the new approach. We want to deliver key messages very clearly to senior management and boards, and we want to know how your governance works in practice. I will give one example of this approach in recent months, returning to Solvency II. It was clear to me by the end of last summer that we were facing a long delay in the directive on top of a bill that, as I have said, was indefensible and ever rising. We have had extensive contact with chief executives and the Association of British Insurers in recent months, with the overarching objective that this cannot go on. I think we have reached a sensible conclusion which at least makes the best of where we find ourselves. Where possible and sensible we will use the work done on Solvency II to date to bolster our existing ICAS regime, though I should stress that we are quite comfortable with the core of ICAS and believe that we can use it as the framework to build the PRA approach until such time as Solvency II appears. I hope that this change of approach both alleviates the costs and helps to create a less pressured environment in which we can seek to obtain a better framework for prudential supervision of insurers in the future than would otherwise be the case. There is too much at stake for the industry and the economy to compromise on this objective.