samchain/econo-pairs-v1 huggingface dataset:
The initial foreign currency mismatches in their balance sheets have been reduced are now within the limits provided for in Central Bank rules, and their domestic and foreign liquidity positions have improved. But the banks are operating in the shelter of the capital controls, and looking ahead, questions concerning their size and efficiency remain to some extent unanswered. Many factors have been favourable for us in spite of global headwinds, which were initially reflected in a marked deterioration in terms of trade and are still reflected in a weak economic recovery among our trading partners. Looking back at the three challenges I mentioned a moment ago, we can say in broad terms that the macroeconomic goals have been met thus far. The financial system now stands on much more solid ground. It is primarily in connection with the third challenge, of reintegrating Iceland into international capital markets, that more work needs to be done. But even in this area we have made significant progress. GDP growth, a balanced economy, a Treasury surplus, and the Central Bank’s foreign currency purchases have created good conditions for the liberalisation of the capital controls. The credit ratings of the sovereign and the commercial banks have improved. The sovereign regained access to foreign credit markets some time ago, and the banks have opened a crack in the door. But even though we have made significant progress, the game is not yet won. Debt levels are high, rendering borrowers vulnerable to shocks, and the capital controls are still in place.

We will equally have the opportunity to listen today to Mr. Roberto Peccei’s “The Significance of Limits to Growth for the Work of the Club of Rome”, as well as to the co-authors of the first Report, Dennis Meadows and Jorgen Randers, who will look at the lessons of the first Report nowadays. In the new Report, “2052 – A Global Forecast for the Next Forty Years”, Jorgen Randers underlines the need to use the values or the lessons of the first Report for the future. And actually looking back 40 years, he will look to the next 40 years. We are eager to listen to him to see what the prospects are for the next 40 years. Looking at today’s agenda, I would like to mention the relationship between humankind and nature. We’ll have a special session, where Ernst Ulrich von Weizsäcker will discuss  BIS central bankers’ speeches  1  about “Factor Five: Transforming the Global Economy” and Anders Wijkman about “Bankrupting Nature”. I will also address the topic of transforming the financial and monetary system. I am sure that today’s debate will bring light to our faces and we will find together the best answers to the future of the humankind. I invite the panellists to start the first session. Thank you very much! 2  BIS central bankers’ speeches
In theory, the safety and soundness of a bank should be a key factor for customers in choosing the bank with which they want to entrust their money. Again, in theory a bank with a large capital cushion should (all things being equal) have a competitive edge in gaining customer confidence as compared to other banks with a weaker capital position. This being the case, banks should have an incentive to maintain higher capital levels. However, incentives have become somewhat distorted in more modern times, thanks to formal safety nets extended by deposit protection schemes and informal safety nets characterised by implicit government guarantee arising from the “too big to fail” consideration. 13. In the run up to the Global Financial Crisis, it was common for the big banks to maximise their Return on Equity (RoE) by optimising the level of their capital base and by leveraging up their balance sheets. This resulted in a steady reduction in the levels of capital, and as a result in the loss absorbancy capability, of banks in relation to the size of the risks taken by them on and off balance sheet. Even now, there is still a view amongst some banks that the Basel Accord serves more to indicate “optimal” levels of capital or liquidity rather than the absolute bare minimum standard. Some banks, including a few here in Hong Kong, have argued that the late adoption of Basel III by some advanced economies creates or constitutes an uneven playing field, placing them in a competitively disadvantaged position.

The Basel Committee has done a great deal in upgrading capital and liquidity rules. Under the direction of G20, there is long list of other regulatory reforms, including those dealing with the moral hazard problem arising from “too big to fail” and the risks observed in the OTC derivative markets. Some national authorities have introduced, or plan to introduce, measures that would separate core retail and commercial banking from  BIS central bankers’ speeches  3  investment banking. Although, as I have said, very few people would dispute the need for urgent reforms, there are differences in views on whether the reforms that are underway are indeed adequate or entirely appropriate. 16. I hope that, at tomorrow’s Forum, you will have the opportunity to discuss these and other pertinent issues as we continue seeking to re-evaluate both the nature of risk management and the role of regulation and supervision in the wake of the Global Financial Crisis. Once again let me welcome you all and wish you Bon Appétit! 4  BIS central bankers’ speeches
Your Excellency, distinguished guests, given the menace of the growing trend in drug trafficking in the sub-region, the Bank, under its obligation to comply with all international standards on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), has in collaboration with its partners, reviewed the Anti-Money Laundering Act 2005 to address its inadequacies. The AML/CFT Bill 2009 has been approved by Cabinet and is now awaiting legislative enactment. In the meantime, the Bank is enforcing the current AntiMoney Laundry Act through its Financial Intelligence Unit (FIU). In this regard, the Bank in close collaboration with the Anti Corruption Commission is examining the possibility of signing a Memorandum of Understanding for investigation and prosecution in relation to money laundering and other financial crimes that involve suspicious transactions and politically exposed persons. Oversight of the payments and settlement system Your Excellency, distinguished guests, the Bank, with the support of its development partners, has embarked on modernization of the payments, clearing and settlement systems by implementing A SWIFT FIN Copy Service in April 2010. This will enable the settlement of large value interbank transactions faster and reduce the risk element.

BIS central bankers’ speeches  7  With supervision by WAMI and funding from the African Development Bank (AfDB), the following payments system reforms are at various stages of implementation:   The infrastructure of the Bank is being upgraded to state-of-the art IP-based data communication networks, supported by a reliable uninterrupted power supply;    The state of preparedness of the commercial banks for connectivity to BSL in a bid to ensure the efficiency of the payments system is in the process of being reviewed;    The payments system components of core banking application, automated cheque processing (ACP), automated clearing house (ACH), real time gross settlement and scriptless security settlement are currently being deployed;    The proposed deployment, by a private company, of fibre optic for connectivity between the commercial banks and the Bank of Sierra Leone is in progress. Financial Inclusion for poverty reduction and growth promotion Your Excellency, distinguished ladies and gentlemen, the Bank seeks in its operations to go beyond monetary policy to promote poverty reduction, create employment and growth through enhancing access to finance in the rural areas which constitute a significant proportion of the economy. The Bank welcomes the growth in the number of microfinance institutions (MFIs), Financial Services Associations (FSAs), the opening of new branches of banks and the introduction of mobile banking in a move to improve rural financial intermediation. As the number of these institutions increases, the challenge would be to effectively supervise and regulate them.
4  All speeches are available online at www.bankofengland.co.uk/speeches  4  The City has long been a leader in financial innovation from the development of the eurobond market in the 1960s through to becoming the Western hub for renminbi and rupee businesses, and Europe’s premier centres for Islamic and green finance. London also has the most vibrant FinTech centre with revenues of £ billion and employment of over 61,000, both of which are growing rapidly. 7  Alongside these benefits for the UK, Europe, and the world, there are risks – risks that first and foremost are borne by the UK. The UK financial system is almost ten times GDP, and is arguably the most sophisticated and complex in the world. Large complex financial institutions and major wholesale financial markets are inherently risky. Left unattended, these risks can easily spill over and damage the domestic real economy. Openness and interconnectedness mean shocks from abroad quickly reach our shores. This is particularly true for risks from the euro area given the tightness of our trade and financial linkages. Equally, these tight linkages mean that others rely on us to maintain high standards of resilience and to share relevant information openly and cooperatively. In short, hosting the leading international financial sector brings immense responsibilities alongside great prosperity. The Bank of England’s primary responsibility is to protect our domestic real economy, and to ensure that finance serves it rather than the other way around.

We allow third country branching, under certain conditions outlined in our 2014 Supervisory Statement. 11  The key factors which have determined the  PRA’s stance towards non-EEA branches are the equivalence of the supervisory regime of the home state, and arrangements for resolution. Second, information sharing is fundamental. Even if two countries have exactly the same set of rules, if they cannot share information on the financial positions of different entities within a global financial group, they cannot clearly gauge and manage the risks that the firm may be running on a consolidated basis. We have seen a few examples of the value of such cooperation in recent years. The FSB and Basel Committee have developed a number of guidelines on information sharing, which have helped foster trust, cooperation and enhanced dialogue between international regulators. These include supervisory and crisis management colleges and supervisory assessments. The EU has further enshrined  10  A global code for the foreign exchange market, put together with support from central banks, will be launched in May as the first globally consistent code of conduct for these markets. 11 ‘Supervising international banks: the Prudential Regulation Authority’s approach to branch supervision’, SS10/14, available at http://www.bankofengland.co.uk/pra/Documents/publications/ss/2014/ss1014.pdf. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  these practices through legislative requirements in the CRR and BRRD for supervisors and resolution authorities respectively. The Bank is a staunch supporter of these mechanisms.
I don’t have any great ideas on how to address this, but it is a problem that needs to be fixed. •  Collateral and haircuts. When volatility rises and that leads to increased haircuts, the result can be a vicious cycle of forced asset sales, higher volatility and still higher haircuts. •  Compensation tied to short-term revenue generation, rather than long-term profitability over the cycle. This causes risk-takers to take on too much risk because they are compensated on the upside. This extends the boom. Incentives Incentives may be very important in determining whether we have a system that is dampening rather than amplifying. I think bad outcomes are not just about bad luck, they are also about bad incentives. The problem with incentives may be due to faulty compensation schemes, poor risk management or the fact that participants do not bear the full costs of their actions. One problem that we had in the U.S. banking system over the past year was a reluctance of banks to raise sufficient capital to be able to withstand bad states of nature. They didn’t want to do this because this might unnecessarily dilute their shareholders. As a result, many banks did not hold sufficient capital and market participants knew this. This led to tighter financial and credit conditions, which made the bad state of the world more likely. This is an example of both bad incentives and an amplifying mechanism.

The high degree of interconnectedness across the financial system has a number of implications. First, supervision must not just be vertical – firm by firm, or region by region, but also horizontal – looking broadly across banks, securities firms, markets and geographies. Second, this means that supervisory practices need to be revamped. They need to be coordinated and multi-disciplinary. I think the U.S. Treasury is right in proposing a systemic risk regulator as part of their regulatory reform plan. But, we shouldn’t kid ourselves about how difficult this will be to execute. You will need a flexible and dynamic governance process to be able to identify the important elements of systemic risk, to elevate those concerns to the appropriate level and then to act on those concerns in a timely manner. It will take the right people, with the right skill sets, operating in a system with the right culture and legal framework. I don’t believe creating this oversight process will be an easy task. Consider, for example, subprime lending. There were obvious excesses in terms of underwriting standards, product design and risk management. But addressing those issues during the boom would have required the supervisor to absorb attacks that reining in some of these practices would make it more difficult for some low- and moderate-income households to become homeowners for the first time. System dynamics In thinking about interconnectedness, we also need to focus on system dynamics. By system dynamics, I mean how the different parts of the system interact.
In the summer of 2013, the MPC provided guidance about the future path of monetary policy. This guidance was aimed explicitly at reducing uncertainty among households and companies, with simple and clear language about the future path of policy. It was accompanied by a communications plan focussed on the general public, including TV interviews and a published document. 43  Shiller (1997). Quoted in Thompson (2016). Sapienza and Zingales (2013). 46 See Haldane (2016). 44 45  11  All speeches are available online at www.bankofengland.co.uk/speeches  11  The Bank conducted a survey after the guidance had been issued, with the aim of assessing its impact on the general public. This painted a mixed picture. The Bank’s message got through to around 75% of companies, but only around one-fifth of households. Moreover, even among those households who heard the guidance, as many felt less confident as more confident about the economy (Table 2). In the US and the euro area, surveys have found a similar lack of understanding of central bank actions. They have also identified where these understanding problems are most acute. In the US, survey respondents with lower incomes or without a college degree are less likely to understand monetary policy. 47  In the euro area, a Dutch survey found respondents with higher education or income were more likely to answer questions about the ECB’s monetary policy correctly. 48  This is a puzzle.

In the case of non-financial corporations, the subdued levels of production and trade, as well as the ongoing uncertainty surrounding the business outlook, continue to dampen firms’ demand for bank financing, a tendency which is likely to prevail in the coming months. In this respect, it is worthwhile to note that the growth of loans to enterprises typically only picks up with some lag compared with the cycle in economic activity. At the same time, the ongoing improvement in financing conditions should support the demand for credit in the period ahead. Against the background of highly demanding challenges, banks should take appropriate measures to strengthen further their capital bases and, where necessary, take full advantage of government measures to support the financial sector, particularly as regards recapitalisation. To sum up, the current rates remain appropriate. The incoming information and analyses that have become available since our meeting in early October have confirmed our expectations. While annual HICP inflation was -0.1% in October, according to Eurostat’s flash estimate, it is expected to turn positive again in the coming months and to remain at moderately positive rates over the policy-relevant horizon. At the same time, the latest information continues to signal an improvement in economic activity in the second half of this year. The Governing Council expects the euro area economy in 2010 to recover at a gradual pace, recognising that the outlook remains subject to high uncertainty.
Given that the livelihoods of millions of pensioners depend on getting this right, we think we need to recognise this uncertainty – by deducting a bit more from what can be counted as capital up-front to allow for it. I should be clear that this isn’t just the view of a prudential regulator – any sensible financial market participant will demand some buffer of safety (or ‘credit risk premium’) when potential losses are uncertain, and it is odd that the EU’s MA construct does not explicitly address this. [5] Second: wrong asset, wrong risk. Under the rules we have inherited from the EU, the amount of future losses firms are required to expect on their assets is based on the historical performance of corporate and government bonds. At the time the rules were negotiated these assets accounted  Page 6  for the very large bulk of insurers’ investments, so this made sense – but as insurers invest more in other sorts of assets, there is an obvious risk that those assets’ future performance will diverge from the benchmarks used in the rules. For example, it is reasonable to question whether the losses which might arise from investments in a commercial real estate loan today will be the same as those experienced on corporate bonds in the past – even if they have the same credit rating.

It allows insurance companies to recognise as capital  Page 4  up-front a part of the income they expect to earn on their assets in the future, but only as long as they can show that the cashflows they expect to receive from those assets closely match the payments they have undertaken to make to their insurance policyholders (hence “matching” adjustment). This is therefore most relevant for the annuity business, where insurance companies promise to pay individuals’ pensions far into the future. You might ask why the regulator favours such an arrangement, which is not common in other bits of regulation, when perhaps it would be more prudent to make insurance companies wait until those returns (for instance, interest payments on corporate bonds) are actually paid to them before recognising them as capital which could be paid out to shareholders. The reason is that we think it protects policyholders if insurance companies are incentivised to invest in assets which will produce cash at the right time, so that insurance companies are not scrabbling around for the right assets when they have to make payments to pensioners in the future. [2] However, you would be right to think that if we allow such an arrangement we must operate it with a very high degree of confidence that those future returns will in fact materialise – in other words that insurance companies do not recognise up-front returns which then later don’t show up. Second, why does the MA matter? For me there are two reasons.
For our part, one important gauge of that credibility is expected inflation in financial  Chart 14: Financial-market measures of inflation expectations have been stable  markets. Were there a serious concern that inflation would drift away from target, whether because of higher levels of debt or for any other reason, you’d expect to see it reflected in higher “breakeven rates” in gilts markets (i.e. the difference in the yields on conventional and indexed debt). Thus far that has not happened (Chart 14). Come what may, the MPC will respond to  Sources: Bloomberg Finance L.P, TradeWeb and Bank calculations. economic events as they unfold to ensure, in line with our remit, that the stability of inflation is maintained. Thank you. 21  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  21  References Bailey, A. 2020. “Bank of England is not doing ‘monetary financing’”. Financial Times, 5 April 2020. Barro, R. J. 1987. “Government spending, interest rates, prices, and budget deficits in the United Kingdom, 1701-1918”. Journal of Monetary Economics, Vol. 20, pp. 221-247. Blanchard, O. 2019. “Public debt and low interest rates”. The American Economic Review, Vol. 109, No. 4, pp. 1197-1229. Boivin, J., Kiley, M. T. and Mishkin, F. S. 2010. “How has the monetary transmission mechanism evolved over time?” Handbook of Monetary Economics, Vol. 3, Chapter 8, pp 369–422, Elsevier. Bordo, M. D. and Kydland, F. 1995. “The gold standard as a rule; an essay in exploration”. Explorations in Economic History, Vol. 32, No. 4, pp. 423-464.

Or is there “fiscal dominance” over the central bank, which is then forced to subordinate its own objectives to those of the fiscal authority? Because they naturally respond to the economic cycle, looking at the instruments of policy on their own (fiscal and monetary measures) doesn’t really help you that much in distinguishing one situation from the other. A better method might simply be to look directly at the institutional arrangements themselves (are monetary and fiscal policies determined by independent agencies? how is that independence safeguarded?). As this is ultimately a question of ends rather than means, a better measure still is the behaviour of objectives of policy. If inflation rises materially above its target, and if it tends to do so in particular when the public finances are under strain, that may be evidence of “fiscal dominance”. If, on the  1  See https://www.bankofengland.co.uk/research/bank-of-england-agenda-for-research. 2  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  2  other hand, easier monetary policy is necessary simply to stabilise inflation, and succeeds in doing so, it’s hard to see how it can qualify as “monetary finance”, no matter how the fiscal balance is behaving2. That’s not to say the fiscal position is wholly irrelevant because higher inflation may help – if only to a degree, and at a wider economic cost – in easing fiscal constraints. Very high levels of debt could therefore test those institutional arrangements.