samchain/econo-pairs-v1 huggingface dataset:
We are focused, given our prudential remit as laid out in our statutory objectives, on the most material risks within firms, spending most time on those that pose the greatest risk to the stability of the UK financial system and the protection of policyholders. In the period since 2008, we have been steadily implementing the post-crisis reforms, both in banking and insurance. This has been a busy time but it is clear to me that this period is now drawing to a close, with the major remaining implementation tasks now narrowed to ring-fencing and bail-in debt. Instead of designing and implementing reforms, the job of supervisors becomes one of guarding them and holding the line. We are living through a vital moment in supervision and today I’d like to talk about three live challenges in turn: Brexit, an uptick in risk appetite and regulatory arbitrage. Brexit  A year ago, the UK voted to leave the EU. Although the negotiation is still in its early stages, changes to the trading relationship between the UK and the EU may require firms to alter their operations and the services they provide. Now that the Government has triggered Article 50, we expect firms with cross-border activities between the UK and the rest of the EU to undertake appropriate contingency planning for the UK’s withdrawal from the EU. I want to make clear that whilst the UK’s withdrawal from the EU will change many things, it does not change the PRA’s statutory objectives.

The statute’s definition of non-financial resources specifically mentions human resources – that will likely include many of you here today – and we have reflected this emphasis in our Senior Managers Regime to give specific responsibilities to key individuals in firms for the implementation of the prudential framework. Whilst we, as supervisors, may identify issues that warrant further investigation, we will not spot everything. Ultimately, it remains the responsibility of senior managers and Boards of Directors to identify and mitigate the risk that firms are not complying with the spirit of the regulation. Indeed, we hold industry to account for its compliance with the Fundamental Rules and Senior (Insurance) Managers Regime, just as much as we hold it to account for its compliance with the detail of our regulations. Solvency II contract boundary. Turning to an insurance example, Solvency II has introduced some changes to the way insurance companies calculate the reserves for their insurance products. In particular, the rules defining the ‘boundary’ of an insurance contract means that firms cannot recognise future premiums on 49 50  Individual Capital Adequacy Assessment 2.1 and Individual Liquidity Adequacy Assessment 2.1 Financial Services and Markets Act 2000, http://www.legislation.gov.uk/uksi/2013/555/article/2/made 22  All speeches are available online at www.bankofengland.co.uk/speeches  22  unit-linked savings policies that do not include any insurance cover or financial guarantee of benefits.
In the United States, these rules were not applicable to SVB, as certain exemptions, introduced in 2019 under the proportionality principle, apply to banks that are considered to be less important, this concept being understood in a broad sense since it includes banks with a balance sheet total of up to USD 250 billion. - The post mortem analyses carried out and published by the FED suggest that, had SVB been subject to these rules, it would not have complied with the short-term liquidity ratio as defined by the Basel Committee. Moreover, SVB's heavy reliance on tech companies' deposits should have alerted its supervisor if the additional monitoring tools required by international standards had been put in place. The same FED analyses estimate that SVB's interest rate risk sensitivity was around 35% before the crisis, well above the 15% alert threshold set out in the international rules and supposed to trigger supervisory action. - Monitoring compliance with regulations calls for strict, intrusive and reactive supervision, which, according to the FED, was not the case. Let me reassure you on one point: the European situation is radically different. The Basel Committee's rules are applied in Europe in their entirety and to all banks. By the way, I would like to add that Europe is in the process of finalising the transposition into European law of the latest reinforcements of the Basel III agreements, ahead of the other major jurisdictions.

Meeting the challenges of innovation and its dissemination as well as ensuring the labour force’s employability and flexibility, requires that human capital is continuously adjusted to labour market needs through improved education and training, as well as lifelong learning. Europe is still badly in need in Europe to enhance the quality and efficiency of our schools and universities as well as to increase incentives for all relevant parties, including firms and workers to invest in human capital. Before concluding, let me insist on the importance of sound fiscal management in line with the Stability and Growth Pact. Sound public finances are a prerequisite to support longlasting growth of output and employment, as the Spanish experience over the last decade has clearly shown. A complacent attitude related to current buoyant tax revenue that might result in higher expenditure could lead to negative surprises, should the macroeconomic environment turn less favourable. Beyond that, the “quality” of public finances also matters for growth. It is essential to increase public spending efficiency in order to facilitate the reorientation of public expenditure towards productivity-enhancing physical and human capital accumulation. And finally, let me remind you that within our currency union, regional monetary and exchange rate policies are no longer viable options. Flexible and integrated labour and product markets are prerequisites of the utmost importance for the smooth functioning of the  16  In the spring 2006 European Council, Member States announced country-specific targets for R&D expenditure amounting to 2.7% of EU25 GDP by 2010, up from 1.9% in 2006.
The risk of financial imbalances being built up as a result of over-optimism still remains, but is now assessed to comprise less of a threat to the recovery of the economy than was previously thought. Monetary policy considerations Developments over the past months also indicate that the risks of a profound and prolonged international economic slowdown have declined considerably. There are a number of signs that the lowest point has now been reached. One condition for an upturn in international economic activity is that growth in the US economy picks up. Productivity has continued to develop very positively relative to the economic situation, which is a good sign. The fact that American households' demand for consumption has improved since the autumn also indicates that the lowest point has been reached and a turnaround is on the way. The unease that has existed, and which was accentuated after the terrorist attack on 11 September, over the possibility that rapid and perhaps exaggerated adjustments of financial imbalances in the American households' and companies' balance sheets might cause a deeper decline appears, at least  4  BIS Review 18/2002  so far, to have been quite unfounded. Better functioning financial markets as a result of the changes in economic policy and the improvements in regulatory frameworks and supervision that I mentioned earlier may have contributed to this.

The difficult times of past years, during which most institutions showed notable resilience, led many of them to undertake reforms designed to reduce costs, such as the sale of non-strategic assets, and these decisions should now be bearing fruit. The improved situation of financial institutions at the international level seems to be borne out by the favourable outlook for their future performance that agents operating in the markets have. In 2003 this perception was reflected in rising stock market prices, reduced implied volatilities and narrowing risk premia. Spanish deposit institutions, thanks to their sound initial position and the fact that the Spanish economy outperformed the EU average, were less severely hit by the difficulties of past years. They were thus in a position in 2003 to benefit from the favourable international financial situation, from the rebound of the securities markets, and from the continued strong relative performance of the Spanish economy. In particular, Spanish deposit institutions enjoyed higher growth of earnings and profitability in 2003. This allowed the effects of a more competitive environment and low interest rates to be offset by larger business volumes and tighter control of operating expenses. Also, lower doubtful assets allowed bad debt provisioning to be reduced thanks to the smaller need for provisions to the specific fund (partly counteracted by changes in the statistical and general funds), thereby boosting the institutions’ profit and loss accounts. Solvency ratios held steady and default ratios stood at historical lows.
The very high growth figures for productivity during the latter part of the 1990s reflected both the macroeconomic stabilisation, an expansion in the private sector relative to the public sector, and in particular the IT expansion. It is unlikely that the development will continue in the same way in the future. However, we know that productivity growth has been surprisingly high in recent years. Many economists are busy working on the question of which factors lie behind this development. It is clear that, unlike the 1990s, it is not a question of high productivity growth in the IT sector and major investment in IT. One theory that has been put forward is that it may perhaps be explained by delayed effects in other sectors of earlier IT investment; that it has quite simply taken time for companies to adjust and to take advantage of the new technology. It is thus difficult to say anything about the durability of the most recent development. However, there are many indications that the long-term increase in productivity now is higher than it was during the 1980s. The widespread structural changes that took place during the 1990s are also an indication of this. Nor should it be forgotten, that the labour force is better educated today than it was ten years ago, particularly with regard to the percentage of those with a university education. There are studies indicating that the improvement in qualifications has also contributed to the growth in productivity.

If actual and potential output coincide so that the output gap is closed, inflation is in line with the Riksbank’s target of 2 per cent, assuming that there is confidence in the policy conducted. This means at the same time that the size of potential growth affects the scope for conducting monetary policy. The higher the long-term sustainable growth rate, the higher the actual growth rate can be without resource utilisation becoming so high that inflation takes off and the Riksbank is forced to intervene to subdue demand. This reasoning is of necessity somewhat simplified. In actual fact, temporary shocks to inflation can occur that lead to inflation not being on target, despite the fact that actual and potential output are at the same level. However, in this case, inflation is in practice probably close to the target, so a more realistic description is therefore that the target on average is met when the output gap is closed. Moreover, monetary policy affects demand with some lag. Consequently, the Riksbank adjusts the interest rate in accordance with forecasts of inflation a couple of years ahead. During this period shocks can of course occur in the economy that couldn’t be foreseen at the time of the forecast. We therefore attempt to avoid excessive fluctuations in the economy by gradually bringing inflation back towards the target. Thus, in the short term, the Riksbank can affect output and employment by adjusting the interest rate, thereby stimulating or cooling down economic activity.
Transparency and disclosure are the institutional solution to this problem. Even if a central bank is independent in the conduct of monetary policy, it must be accountable to government. We must be measured on our performance, but also on our assessments and decisions. This requires transparency. The need for transparency therefore depends on the monetary policy regime. Internationally, there is also a tendency for inflation-targeting central banks to be more transparent than countries with a fixed exchange rate regime. 19 Transparency about Norges Bank’s activity is required by law. When the Storting (Norwegian parliament) amended §100 on the freedom of expression in the Constitution, the freedom of information principle was enshrined in the Constitution. 20 This was the first time this article had been amended since 1814. The legislative amendments were partly based on the proposals of the Freedom of Expression Commission, which was headed by Professor Francis Sejersted. 21 In addition, Norges Bank is subject to a transparency requirement in the Freedom of Information Act and the Act on Norges Bank and the Monetary System. 22 In some areas, we are even more transparent than what is required by law. Norges Bank’s Monetary Policy Report includes a thorough account of our assessments of economic developments and interest rate setting. As mentioned in the introduction, we even publish a forecast for our future interest rate decisions. After each monetary policy meeting, a press conference is held where we explain the interest rate decision and answer questions from journalists.

Alan Blinder, former vice chairman of the Federal Reserve and now professor at Princeton University, argues that “a central bank that speaks with a cacophony of voices may, in effect, have no voice at all”. 29 There is also another argument in favour of unanimous decisions. Central banks are important social institutions, which should not be too closely linked to individuals but have a  27  See Alan S. Blinder (2007): “Monetary policy by committee: Why and how?”, in European Journal of Political Economy, 23, no. 1, pp. 106-127 and Alan S. Blinder (2008): “On the design of monetary policy committees”, Norges Bank Working Paper, 2008/6. 28  The Executive Board at Norges Bank consists of seven members, appointed by the King in Council. The Governor and Deputy Governor serve as chairman and deputy chairman, respectively, of the Executive Board. They are appointed to full-time positions for a term of six years. The other five members are appointed for four-year terms and are not employees of Norges Bank. 29  Alan S. Blinder (2007): “Monetary policy by committee: Why and how?”, in European Journal of Political Economy, 23, no. 1, p. 114. BIS Review 140/2009  7  public identity. The institution and its mandate should take precedence over the individuals who occupy positions for limited periods. 30 There is no formula for deciding which system is best. Each system has its strengths and weaknesses. Detailed meeting minutes ensure accountability among committee members. This may give rise to good incentives.
The Federal Reserve exists to serve Main Street, not Wall Street. The dual mandate objectives established by Congress – full employment and price stability – are clear on this point. There is no mention of Wall Street. At the same time, it is broadly recognized that without a well-functioning financial system it would be difficult, if not impossible, for the Federal Reserve to achieve those objectives. The Federal Reserve has evolved considerably since its inception in 1913. This evolution has been informed by lessons from past financial crises. The goal has been to make the Federal Reserve even more effective in carrying out its mission. This process of learning from experience is as critical for institutions as it as individuals. To paraphrase Winston Churchill: People always make mistakes, but only wise ones learn from their mistakes. Thank you for your kind attention. I would be happy to take a few questions. 20  8  In the case of the European Central Bank, the member national central banks are involved in policy implementation. BIS central bankers’ speeches

Once confidence had been shattered, the markets responded with brutal speed and force. Monetary authorities without a record of institutional independence and without a sufficiently clear mandate for price stability did not have the experience or credibility needed to restore confidence quickly. The crises helped bring about a fundamental reassessment of the merits of fixed but adjustable exchange rate regimes, regimes that try to exist somewhere in the middle between the opposite extremes of irrevocably fixed and purely floating. The new consensus, which you can now see in policy choices across emerging markets, is that the soft middle is fundamentally untenable for an economy that is open to cross-border capital flows. With the limited exceptions of those cases where full monetary union or a currency board is optimal, or where a fixed exchange rate can provide a nominal anchor for a disinflation strategy, the general view now is that flexible exchange rate regimes make more sense for emerging market economies. Exchange rate flexibility offers the advantage of allowing monetary policy to be directed at sustaining price stability, which in turn offers a better prospect of sustained growth. Changes in fundamental factors such as productivity growth and inevitable shocks to demand and supply require changes in relative prices, both domestically and internationally. A flexible exchange rate makes it easier for relative prices to move rapidly and effectively in the appropriate direction and so generally eases the cost of adjustment.
Milesi-Ferretti (2010), “The cross-country incidence of the global crisis”, CEPR Discussion Paper, No. 7954. 2  See H. S. Shin (2012), “Global banking glut and loan risk premium”, mimeo, Princeton. 3  See V. Acharya and P. Schnabl (2012), “Do global banks spread global imbalances? The case of assetbacked commercial paper during the financial Crisis of 2007-09“, NBER Working Paper, No. 16079. 4  See V. Acharya, P. Schnabl and I. Drechsler, “A tale of two overhangs: The nexus of financial sector and sovereign credit risks”, 15 April 2012. 2  BIS central bankers’ speeches  financing in foreign currency of long-term investments (maturity mismatch) and insufficient prudential standards leading to excessive risk taking and rent seeking behaviour. Unfortunately the warnings were not taken seriously until the issues and risks materialised first with the depreciation of the Thai baht in July 1997. Perhaps we have not learnt enough from the past! As growing financial market tensions made the financing of these deficits ever more difficult, the last and most unexpected layer of the iceberg – namely the so-called “redenomination risk”, the possibility of a break-up of the euro area – came to the surface in the middle of last year. By that time, the sovereign spread of high-yield euro area countries relative to other euro area countries had widened to an exceptional extent, hardly justified by fundamentals and fundamentally incompatible with a well-functioning monetary union.

The Member State concerned will have to prepare a corrective action plan with a roadmap and the deadlines for implementing adequate measures. Note that this process may end up in sanctions up to 0.1% of GDP, in case of non-compliance by the affected Member State. The procedure for identifying and correcting macroeconomic imbalances is very important and addresses a concern that the ECB has voiced repeatedly in the European context. Also in this case it will be important to implement it fully, while being aware of the unavoidable difficulties, also of an analytical nature, of identifying relevant imbalances ex ante. Macro-prudential policies. Turning to macro-prudential policies, in line with other jurisdictions the EU has equipped itself with a body whose task is to recommend actions to reduce systemic risk in the EU financial sector, the European Systemic Risk Board (ESRB), which is closely associated with the ECB. While the ESRB cannot take direct action, its advice and recommendations carry great weight. In addition, the Single Supervisory Mechanism (SSM) – which I am about to describe in a moment – will assign micro-prudential powers to the ECB for the banking sector of those countries which adhere to the SSM. The ESRB will remain responsible for macro-prudential issues in the EU as a whole and for the whole financial sector (i.e. beyond banks). Financial market union. Let me now turn to plans to establish a financial market union in the euro area.
6  Firms have taken advantage of the improvement in financing conditions in both bank lending markets and fixed-income markets and have resorted to debt to cover part of their higher liquidity needs. The year-on-year growth rate of debt increased from 1.3% in February to 6.2% in May. Since then, there has been some deceleration and the latest figure, for August, shows a year-on-year rate of 4.2%. The breakdown by instrument shows that the bulk of new debt has been in the form of bank lending extended by domestic banks. The public loan guarantee programme seems to have played an important role in improving firms’ access to bank loans. Up to end-September, the programme was used to extend loans to 541,000 firms and self-employed workers to the tune of more than EUR 102 billion. 62% of this amount has been granted to SMEs, 31% to large firms and the remaining 7% to the self-employed. More granular data, available until June, show that 46% of new lending to firms between March and June was extended under the public loan guarantee programme. As expected, 7  the use of public guarantees was particularly high among firms facing potentially more difficult access to external funding at the current juncture, such as SMEs, riskier firms and firms belonging to sectors more exposed to the shock, with a share of guaranteed loans relative to total loans of 64%, 65% and 60 %, respectively.

I look forward to comments from Robert and Catherine and the audience. Thank you once again for having me here today. 3/3  BIS central bankers' speeches