samchain/econo-pairs-v1 huggingface dataset:
Jaime Caruana: Basel II - a new approach to banking supervision Remarks of Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the Fourth Annual International Seminar on Policy Challenges for the Financial Sector: “Basel II - the international banking system at the crossroads”, Washington DC, 1 June 2004. *  *  *  It is an honour to be invited to join you, the members of the global supervisory community, at this seminar on the future of banking supervision. I would like to thank our host, Chairman Greenspan, for his warm welcome into the hallowed halls of the Federal Reserve. Likewise, all of us express our gratitude to the World Bank, the International Monetary Fund, and the Federal Reserve for organising this seminar. To ensure rich, lively, and informed discussions, our sponsors have assembled an impressive array of speakers and participants, including senior supervisors, central bankers, and others from over 50 countries, an achievement that demonstrates, for the fourth time, excellence in international and inter-organisational cooperation. Overview of remarks The new capital adequacy framework, or “Basel II,” figures into virtually every discussion today on the outlook for international banking tomorrow. This seminar will tackle its policy implications. They include the new framework’s potential effects on risk management within an individual firm; on competition between firms; on the stability of the financial sector and the future of supervision; and, most broadly, on the long-term growth of the economy.

As I have mentioned before, the medium-term stabilisation of existing government debt levels at around 60% (with inflation at 2%) was consistent with running a headline deficit of around 3% of GDP (see left-hand side figure in slide 4). In the current context, however, the observed prevalence of negative r-g differentials (see the right-hand figure in slide 4) would be consistent with government debt levels stabilising at a higher percentage of output. Given this situation, it is legitimate to ask whether a government debt level above 60% is now the correct figure? The question is not easy to answer, and it will depend on national considerations (the economic fundamentals in the medium-term, the vulnerabilities and resilience of the economy) and, of course, the prevailing financial and monetary conditions. Moreover, the current high levels of government debt evidence the difficulties of transitioning to the medium-term debt anchors. At present, converging towards a debtto-GDP ratio of 60% would require a substantial fiscal effort over a prolonged time frame. Using the historical average values of real growth, inflation and interest rates, the euro area would need to maintain a fiscal surplus of 1.1% of GDP over 20 years in order to reduce the debt ratio to 60% (see left-hand side figure in slide 5). This is substantially higher than the average primary deficit of 0.4% of GDP observed since 1995. For this constant fiscal effort to be at more plausible values, the macroeconomic environment would need to be far more favourable than it has been in recent decades.
This is high compared with the 0.2 achieved by equities and the 0.5 achieved by US bonds since 1994. Admittedly, such aggregate return data need to be interpreted carefully.6 Nonetheless, the available industry databases are useful in identifying broad trends within the hedge fund industry. Hedge funds and market volatility Throughout the last twenty years, it has become conventional wisdom to associate hedge funds with extreme market volatility. The premise is that hedge funds push market prices temporarily away from their equilibrium, either in the short- or the medium-term. The traditional counter-argument sees hedge funds fundamentally as stabilizing market participants who identify arbitrage opportunities, take profits as these inefficiencies get eliminated and provide the market with liquidity. A survey of available analytical work suggests it is difficult to conclude that hedge funds decisively and adversely affect market volatility. This raises the question of whether direct observation of market price action can provide us with additional clues. One area worth examining is the macro and the managed futures segment of the hedge fund industry where recent inflows have been substantial. A number of markets that hedge funds in these strategies are typically engaged in have recently become more liquid as demonstrated, for example, by the increase in turnover and rise in non-commercial positions in the gold and oil futures markets (graphs 3 & 4). Market observations also suggest that many technically driven hedge funds appear to hold similar positions on the basis of trading systems, driven by related trigger points.

The obvious counter-argument is that despite recent inflows, no hedge fund segment is large enough to materially affect price action in today’s vast global market place. This argument may be too simplistic for two reasons: First, hedge funds across different strategy segments are often involved in similar trades. Second, it is not sufficient to evaluate the potential impact of various segments of the hedge fund industry by looking at the nominal size of the invested capital base. Market information, as well as survey data, suggests that the managed futures segment, for example, is significantly more leveraged than the overall hedge fund industry. As a result, the capital deployed in a number of hedge fund segments can exceed by a wide margin what is suggested by the various providers of flow data. Merely considering the nominal asset base of a hedge fund strategy may significantly underestimate its potential impact. Leverage is therefore an important issue in any assessment of how hedge funds affect overall market conditions. Hedge funds and leverage In the aftermath of the 1998 LTCM crisis, the use of leverage by hedge funds was one of the central points in a wide range of industry and policy discussions. The basic premise was a simple one: The use of leverage is an important investment tool for hedge funds in their quest to generate absolute returns commensurate with their fee structure. At the same time, leverage can magnify market risk, credit risk and liquidity risk.
The long term: mobility and prosperity Although much of the debate necessarily focuses on the short term, the key issues are those that concern the long run. On the one hand, how can the new member states catch up sustainably on the EU average in terms of prosperity and productivity? On the other hand, how can the “old” EU countries benefit from the enlarged EU in order to boost growth, which in many cases has left much to be desired? 2  BIS Review 51/2004  Firstly, let me point out where we stand today. According to the EU’s statistical agency, Eurostat, the purchasing power adjusted GDP per capita of the eight new eastern and central European member states ranges from 77.3 per cent of the EU average in Slovenia to 42.6 per cent in Latvia. The richer new member states - Slovenia, the Czech Republic and Hungary - are in terms of purchasing power closer to the EU average than Spain and Portugal were when they joined in 1986 (Slovenia is actually on a par with Portugal and Greece today). The other countries are all just under the relative level that Portugal had in 1986. Sometimes the GDP curves are extended up to the beginning of the 1990s and the fall in output that followed the liberation from communism. These figures are in many ways misleading, however. Firstly, there was considerable manipulation of statistics under the dictatorship, making correct data difficult to reconstruct.

Caleb M Fundanga: Access to finance – corporate governance and sustainability Opening remarks by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the official opening of the Microfinance and Small to Medium Enterprises Conference on “Access to Finance: Corporate Governance and Sustainability”, Lusaka, 17 June 2008. *  *  *  • Honourable Felix Mutati, MP – Minister of Commerce, Trade and Industry; • Mr Michael Mundashi – Non-Executive Director Standard Chartered Bank; • Mrs Mizinga Melu – Managing Director Standard Chartered Bank • Mr Prashant Thakker – Global Head of Microfinance Institutions of Standard CharteredBank • Distinguished Guests, Ladies and Gentlemen I am honoured to have this opportunity to make keynote remarks at this conference on Microfinance Institutions and Small to Medium Enterprises organised by Standard Chartered Bank, whose theme is “Access to Finance: Corporate Governance and Sustainability”. I wish to extend a warm welcome to all participants, particularly those that have travelled from outside the country. I hope that you will find time to see some of the tourist spots of Lusaka and experience the warm hospitality that Zambia has to offer. Distinguished Guests, following the liberalisation of the Zambian economy in the early 1990’s, the number of small- and medium-scale enterprises (SMEs) has increased significantly as the Government divested from running business in the economy to pave way for increased participation of the private sector.
Contacts in the regional network in Central Norway believe that a rise in retail trade and household services is contributing somewhat to growth in the region, as is the case in the rest of the country. Growth now appears to be strong enough to hold up the level of employment. Manufacturing output increased slightly in the previous quarter. There is continued growth in retail trade. 1  Gjelsvik, M and T. Høyvarde Clausen. (2003). Verdiskapingsevnen i norske storbyregioner. Rapport 2003/144. Rogalandsforskning. BIS Review 50/2003  7  The construction industry continues to report some growth in Central Norway. Increased activity in rural districts has reduced the previous differences between urban and rural areas. House sales are on the increase and there has been an appreciable rise in house prices. A rise in the number of new orders in manufacturing and the construction industry is generating expectations that growth will continue. Most markets report intensified competition. This is partly a result of a rise in imports in some industries and increased capacity in retail trade. Margins are being reduced. In Central Norway, as in the rest of the country, lower interest rates have contributed to more positive expectations concerning future developments. There are wide regional variations in unemployment. At the end of October, 3.9 per cent of the labour force in Central Norway was registered as unemployed. This is slightly higher than the national average of 3.8 per cent.

Going back to your question about Japan, all of this is very much with the intent of avoiding the situation of deflation that Japan had from the mid-1990s to about 2013. That was a very costly episode to have and we are intent on making sure inflation goes back to target in order to avoid that situation. What would you say to the criticism – and it’s been quite loud in some eurozone countries – that the ECB has been deaf to some of the side effects of its policies, say, in particular towards savers and pensioners? At any time when the interest rate goes down, it clearly has a different effect on those who have a mortgage and those who have a lot of debt — governments and corporates — than it does on those households that are maybe saving for retirement, those who are accumulating funds and pension funds. That has always been true. Monetary policy has different effects on savers and debtors. What is true at the moment is that this episode has been going on for years now. We have had very low interest rates for a long time and that does have implications for the financial system and for these groups. Going back to the previous question, if we did not pursue these policies then the medium-term scenario would be worse. If inflation gets worse, if it gets lower, if it gets locked in at a low rate, then the prospects for interest rates recovering in the future would be less.
That means that less conservative haircuts would sometimes be required to support a given level of borrowing. That will benefit counterparties as well as deliver risk management benefits to the Bank. The Bank will also require the data to be made available to investors and other market professionals, so that they will be able to undertake their own risk analysis. That should deliver longer-term benefit to the financial system as a whole – standardising, simplifying and publicising the data should all reduce the mechanical reliance on third party judgments and  8  The counterparty can meet the margin call by either providing more collateral, substituting some of the existing collateral with higher quality assets which receive a smaller haircut, or returning some of the lent funds. 9  The aim would be for the Bank’s risk tolerance to be broadly the same for loans as for a securitisation of those same loans, so as not to provide incentives to submit one form of collateral over the other. BIS central bankers’ speeches  7  models, and hence reduce “single points of failure” within the ABS market (although it will be up to market participants to make best use of these changes). Other policy issues on the agenda There are some big issues facing the Bank and its collateral management going forward. The immediate challenge is to wind down the SLS to its conclusion in January 2012.

And all the narrow collateral previously eligible will remain permissible under the new regime as either narrow or wider collateral. 6  Of course any drawdown is predicated on the counterparty being expected to remain solvent. 7  This is in line with new FSB principles aimed at reducing the extent to which ratings are “hard-wired” into financial contracts. BIS central bankers’ speeches  5  Chart 3 Metrics of sovereign credit risk, market liquidity and size(a) US France Germany Netherlands Canada UK Italy Spain Belgium Austria Australia Sweden Denmark Finland Norway  5 yr CDS premia  300 250 200 150 100 50 0 -1  0 -50  1  2  3  4  5  6  7  10yr bond bid-offer spread (bps)  (a) The size of the bubbles is representative of the total amount of sovereign debt outstanding (in sterling terms). Ireland and Portugal are not shown, as their respective bubbles lie significantly to the north-east of the other countries identified in the Chart. Bubbles for Cyprus, Japan, Luxemburg, New Zealand, Slovenia and Switzerland are also not shown for clarity (although they are accepted as wider collateral). Data as at 11 April. Valuation The Bank’s valuation of collateral plays a key role in protecting the Bank against loss in the event of a counterparty default. Where available, the Bank uses market prices to value a security.
Chart 4: Pre-crisis euro-area output gaps(a) Per cent of potential GDP 7 Revisions between 2007 and 2013 Current estimate  6 5 4 3 2 1 0  France  Germany  Ireland  Italy  Portugal  Spain  Source: International Monetary Fund World Economic Outlook, April 2007 and April 2013. (a) Data sourced from April 2007 and April 2013 IMF estimates of the output gap for each country in 2007. 8  BIS central bankers’ speeches  Chart 5: Spreads of 10-year sovereign bonds over Bunds Percentage points 7 Euro launch  6 5  Italy  4  Spain  3 2 1 0 -1 1995  1997  1999  2001  2003  2005  2007  2009  2011  2013  Source: Bloomberg. Chart 6: Domestic demand and GDP Indices: 2000 = 100 140 Domestic demand  GDP  Germany  Germany  Spain  Spain  130 120 110 100 90 80 70  1991  1993  1995  1997  1999  2001  2003  2005  2007  2009  2011  Source: Eurostat. BIS central bankers’ speeches  9  Chart 7: Nominal unit labour costs Indices: 2000 = 100 160 Tradables(a) Germany  Non-tradables Germany Spain  150 140  Spain  130 120 110 100 90 80 70 60  2002  2000  2004  2006  2008  2010  2012  Sources: Thomson Reuters Datastream and Bank calculations.

Chart 11 provides an assessment, drawing on IMF analysis, of the evolution of structural deficits and surpluses for two alternative scenarios, with the red dashed line corresponding to an assumption that supply impairment in the advanced economies as a result of the crisis is minimal (and therefore output gaps are correspondingly large), whereas the blue dashed line – which corresponds to the IMF’s central case – assumes a relatively high degree of supply impairment (and therefore substantially smaller output gaps). In the former case, the bulk of the post-crisis narrowing in imbalances is attributed to cyclical factors, whereas in the latter they are attributed to structural factors. Clearly, depending how one reads the data, one can arrive at a different conclusion. An alternative way into this is to look at what has happened to relative prices, rather than quantities. A natural counterpart of a rotation in demand from the advanced to the emerging world should be a fall in the real exchange rates of the former and a rise in those of the latter. By increasing the profitability in deficit countries of producing internationally tradable goods and services relative to that of non-tradables, that should facilitate the necessary shift of resources between sectors. The opposite is true for the emerging economies. Chart 12 shows such a shift has taken place since before the crisis, with both sterling and the dollar depreciating in real terms, and the renminbi appreciating.
Our focus is on the macro prudential; on ensuring the financial system serves the wider economy in bad times as well as good. And risks in markets do not translate automatically into risks to that. So our objective is not to protect investors from ups and downs in financial markets or to target some level for asset prices. The objective is to protect the wider economy from disruption if market risks materialise. The nature of corporate finance has shifted decisively in the past decade. Since the crisis, nearly all of the increase in debt of companies in the UK can be accounted for by bond issuance. The scale of business borrowing through markets is now on a par with their borrowing from banks. This shift in the balance of corporate finance should be positive for stability. A more diverse system can be a safer system. Bond finance has been the spare tyre that kept credit flowing while the banking system was punctured after the crisis. So these markets are clearly delivering for the economy. But conditions could develop in which they have the potential to disrupt: 1  If debt levels of companies, particularly banks, were to come to rely on stretched credit markets and those markets were then to adjust. Or if credit markets were to prove lacking in resilience so that they amplified any market adjustment, driving overshooting and tightening conditions for businesses.

5  All speeches are available online at www.bankofengland.co.uk/speeches  5  With returns on a range of assets so low by historical standards, any signs that risks have declined and traditionally higher yielding assets are safer are tempting. And anyone looking for confirmation of such a bias can find it in recent performance. With low corporate default rates and low market volatility, portfolios of corporate bonds have outperformed cash and sovereign bonds (slide 8). But of course we know from the small print that the past is not always a good guide the future. So, as the Bank of England’s Financial Policy Committee stated in March: “…there are material risks associated with interest rate volatility. The principle risks are in debt markets.” 6  But are these a risk to the wider economy? It’s reassuring that easy conditions in markets have not led the corporate sector to take on an unusually high level of leverage. As a multiple of earnings, corporate debt in this country is around its long term average level. Nevertheless, developments in corporate debt bear close scrutiny, because we cannot take for granted that it will stay this way. The United States, where corporate debt levels have been testing previous highs, shows this to be more than a hypothetical possibility. The UK’s largest companies – those with access to capital markets – report that credit has become easily available. 7  Corporate debt in the UK has been growing at a not insignificant annual rate of 6.2%.
In some cases, the extreme private sector solution – winding-down of the troubled institution – would probably be the preferred approach. The Law on Credit Institutions together with the Bankruptcy Act provides central bank and other authorities with all necessary powers for closing down the business and letting trustees to take care of the practical aspects. The Deposit Insurance Fund will immediately reimburse all depositors within legal limits. BIS Review 63/2001  3  Of course, in other situation, different approach must be taken and a strict adherence to the former rule is not feasible. Nevertheless, the initial response would still be the private solution. One option would be the central bank to take the lead as an honest broker and bring together all private and official parties concerned. Ideally, that would result in design of ad hoc private solution in a form of merger, acquisition or emergency support. The role of central bank would effectively be the application of moral suasion, without committing public funds. However, one can and should not wholly dismiss the need for direct public intervention should it become necessary. What will be different in our case is that in case of serious trouble, the dividing line between liquidity support and capital injection would be rather blurred or these operations may even take place simultaneously, after writing down capital of the troubled institution. The need for very close coordination between the central bank, the government and supervisors is characteristic feature of this approach.

V.  Safety nets: crisis resolution  In free market economy, no policy and no supervision can prevent the possibility of financial distress in any particular financial institution. What the public policy can do is to minimize the likelihood of systemic crisis. Crisis resolution is the key to avoid systemic disturbance. As we know, the ultimate policy choice for the authorities is to find the balance between the public sector and private sector solution from the one hand and between the pre-determined schedule and ad hoc approach from the other hand. Estonia's currency board regime sets for Bank of Estonia clear and strict limits that exclude several options available for the authorities in many other countries. By limiting the money supply to net foreign assets of the central bank, the room for emergency liquidity support is very limited. Therefore, in our case, the private sector solution is preferable and particular modalities of crisis resolution will depend very much on the circumstances. At this point, I would like to refer back to previous parts of my speech and underline that this particular approach rests upon a few strong fundamentals. Continuous analysis of financial system developments and early warning indicators, importance of strong owners and sound risk management in banks, high liquidity and capital requirements – these basic principles are a necessity for us. By combining the principles just mentioned, we can now describe a few hypothetical crisis resolution situations in Estonian financial system.