samchain/econo-pairs-v1 huggingface dataset:
Avoiding Economic Anxiety Speech given by Andy Haldane Chief Economist and Member of the Monetary Policy Committee (MPC)  Cheshire and Warrington LEP Economic Summit Webinar 30 September 2020  The views expressed here are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Jack Meaning and Andre Moreira for their help in preparing the text. I would like to thank Andrew Bailey, Frances Cassidy, Alan Castle, Shiv Chowla, Liam Crowley-Reidy, Jon Cunliffe, Harvey Daniell, Pavandeep Dhami, Simon Hayes, Saurav Kamath, Zaar Khan, Simon Kirby, Nick Mclaren, Becky Maule, Shahid Nazir, Mette Nielsen, Douglas Rendle, Michael Saunders, Michal Stelmach and Jan Vlieghe for their comments. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  Thank you for the invitation to speak at this Cheshire and Warrington Local Enterprise Partnership (LEP) Economic Summit. Through my colleague on the Industrial Strategy Council and former Chair of the LEP, Christine Gaskell, I know the excellent work the LEP does in supporting the local economy and community. That support has never been more important given the risks facing individuals, businesses and communities. Given those risks, I thought I would focus today on the economic outlook in the UK, updated in the light of events since the publication of the Bank’s Monetary Policy Report in August. Plenty has since happened. But one factor has remained the same: the extra-ordinary degree of uncertainty about the economic outlook.

Chart 3: Consumer confidence and spending 10 Percentage change on 19Q4 5 Retail Sales (LHS) 0 -5  Headline Consumer Confidence (RHS)  Percentage point difference on 19Q4  Chart 4: UK Misery Index  10 5  Misery index  16  Forecast  14  0  12  -5  10  -10  -10  -15  -15  8 6 4  2022  2020  2018  2016  2014  2012  2010  2008  0  2006  -25  2004  -25  2  2002  -20  2000  -20  Sources: GfK/EC, ONS. Sources: ONS and Bank calculations  Notes: Headline consumer confidence is based on the  Notes: Index is summation of the unemployment rate and  average of five survey balances: general macroeconomic  inflation rate. Forecast is based on projections in Aug 2020  situation over the past 12 months and expectations for the  Monetary Policy Report. next 12  If the public do have an exaggerated sense of the risks they face, what might be its source? Psychological studies suggest it may reflect behavioural biases inherited from our hunter-gatherer past. Humans tend to over-estimate systematically risks that are systemic or existential to lives and livelihoods.4 This “dread risk” causes excessively cautious behaviour, sometimes with harmful side-effects – as when the exaggerated fear of flying after 9/11 caused more people to drive.5 These exaggerated risk perceptions are often amplified by others’ words and actions. Caution is contagious.
Later, when the financial crisis became one of sovereign debt, and most especially, when it turned systemic in the summer of 2011, the ECB had to approve further non-conventional measures that reinforced its position as intermediary in the distribution of liquidity. It substantially lengthened the horizon of its loans, up to three years, when it injected more than € billion in gross terms in two auctions in December 2011 and February 2012. In sum, the financial crisis compelled central banks to adopt, along with robust monetary policy responses, exceptional measures and an unprecedented expansion in their balance sheets. Central banks have been decisive in preventing, even though not always with total success, the deflationary risks that characterised other major financial crises in the past. Measures in the regulatory and supervisory areas The financial crisis has triggered fundamental changes in the international financial system’s regulatory architecture. Since the first G20 meeting in November 2008 in Washington, work has advanced on many fronts. I shall refer to two in particular. First, the changes in the prudential regulation of solvency, the move from Basel II to Basel III. And second, the progress in what has become known as macroprudential supervision. As we know, the financial crisis especially affected banks and, in particular, certain global systemic banks. The response of international banking regulators has had to be commensurate with the dangers of the crisis and with the cost of the crisis to taxpayers.

Luis M Linde: Central bank monetary policy, regulatory and supervisory measures Closing remarks by Mr Luis M Linde, Governor of the Bank of Spain, at the V International Banking Conference/Grupo Santander, Madrid, 14 November 2012. *  *  *  Let me first thank Banco Santander, its Chairman Emilio Botín and its Chief Executive Officer, Alfredo Sáez, for inviting me to the closure of this fifth International Banking Conference. The first of these annual conferences was held in 2008. A review of the matters addressed that year, which now seems distant, and those on the agenda today, reveals a high degree of coincidence. We are still in the management of the post-crisis and the economic situation is, in some respects, worse than it was five years ago. It is worse in terms of growth or, at least, growth prospects, and worse in terms of unemployment or stock market capitalisation. The financial crisis, which began in 2007 in the United States and took on a systemic dimension in 2008, following the Lehman Brothers debacle, has confronted the developed countries’ central banks with great challenges. I wish to refer to the central banks’ response in two specific areas. Firstly, in respect of monetary policy. And secondly, in the area of banking regulation and supervision.
Lower than expected revenue collection is likely to challenge the achievement of the targeted budget deficit for 2018. However, the primary balance is expected to record a surplus for the second consecutive year in 2018. This would be only the third time since 1955. Continued fiscal consolidation remains essential to build on the achievements already realised in the fiscal sector and to support the conduct of monetary and exchange rate policies without any fiscal forbearance. As announced in last year’s Road Map, the Central Bank is progressing towards implementing flexible inflation targeting (FIT) as its new monetary policy framework by 2020. We have taken several policy initiatives to facilitate the transition to FIT during 2018. While maintaining appropriate policy coordination 7  with the government, we initiated the drafting of necessary legal amendments to strengthen the mandate of the Central Bank to maintain low inflation, while strengthening its autonomy, transparency and accountability. During 2018, we were also able to implement several policy measures with a view to maintaining a stable financial system with subdued macroprudential concerns, while increasing the resilience of the financial system to global and domestic shocks. In order to strengthen the legal and regulatory framework of the financial institutions, a new Banking Act is being drafted, while also initiating amendments to other legislation related to the financial sector. Resolution actions for distressed companies were taken in the form of imposing stringent regulatory actions such as restriction on business as well as suspension and cancellation of licences.

Initiatives are being taken to resolve remaining distressed companies, as per the provisions of the Finance Business Act (FBA), No.42 of 2011. Licenses of two distressed companies were cancelled and the settlement of the liabilities of existing depositors under the Sri Lanka Deposit Insurance and Liquidity Support Scheme (SLDILSS) is currently underway. Amendments are proposed to the FBA to facilitate expeditious resolution actions in respect of distressed finance companies. During 2018, the Central Bank continued its efforts to strengthen the payment and settlement infrastructure of the country, while developing an efficient national payment and settlement system, which is capable of catering to the growing payment needs of the economy. Let me mention some of these initiatives briefly. Approval has been granted to LankaClear (Pvt) Ltd to implement a National Card Scheme (NCS) under the brand name 'LankaPay' in partnership with an international card scheme. This system was launched 2018 with a licensed commercial bank commencing to issue LankaPay cards. As a result of the emergence of new payment technologies across the globe and the interest shown by local institutions to keep abreast of these technologies, the National Payments Council, which is the consultative 28  committee on payment and settlement systems, appointed two committees to study developments in the Financial Technology (FinTech) sector and Blockchain technology.
Thus, we need to solve the “fairness/subsidy” issue, but do so in a way that ensures that the resulting regime is more stable, resilient and robust. The fairness/subsidy issue There is considerable debate about the size of the funding advantage of large banks that is due to too big to fail and how much this funding advantage creates incentives to become larger and more complex. One reason is that it is difficult to measure the size of these effects. For example, consider funding costs. We can document that larger banks’ unsecured debt funding costs tend to be lower than those for smaller banks. But the funding costs for larger firms across a broad range of industries also tend to be lower than for smaller firms in the same industries. This reflects, in part, the fact that the debt issues of larger firms tend to be more sizeable and more liquid. In addition, larger firms may be more diversified on average and thus less prone to failure, everything else equal. The measurement challenge, then, is to identify what portion of the lower funding costs at the largest financial firms, after accounting for these other factors, is due to a perception among investors that such firms are too big to fail. Despite these measurement difficulties, most of the evidence is consistent with a too big to fail funding advantage in banking.

After all, collectively these enhancements to our current regime may not solve another important problem evident within some large financial institutions – the apparent lack of respect for law,  6  BIS central bankers’ speeches  regulation and the public trust. There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed. Tough enforcement and high penalties will certainly help focus management’s attention on this issue. But I am also hopeful that ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry. One alternative strategy for dealing with too big to fail is to reduce the size of large banks by imposing size limits. While I understand the motivation, it is important to recognize that imposing size limitations might not be a very efficient means of making the financial system more stable. First, it could sacrifice some socially beneficial economies of scale and scope, especially to the global clients of large financial institutions, depending on how the size limits were implemented. Second, the resulting benefits in terms of reducing systemic risk might be quite small.
7  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  7  Chart 1: Since 2010 we have seen a significant fall in mortgage spreads, particularly at higher LTVs Quoted 2-year 75% LTV spreads over risk-free rate  Quoted 2-year 90% LTV spreads over risk-free rate Percentage points  Percentage points  7  7  6  6  5  5  4  4  Spread  Spread  Risk-free rate  Risk-free rate  3  2y 75% LTV  3  2  2  1  1  0  0  2y 90% LTV  Source: Bank of England, MoneyFacts Notes: Risk-free rate is defined as 2 year overnight indexed swap (OIS)  Chart 2: We have observed a marked shift in the share of new mortgages at high LTV by building societies Major UK Lenders: share of new mortgages at high LTV  Building Societies: share of new mortgages at high LTV  35%  35%  30%  30%  25%  25%  20%  20% 85 ≤ LTV < 90  85 ≤ LTV < 90  90 ≤ LTV < 95 15%  LTV ≥ 95  90 ≤ LTV < 95 15%  10%  10%  5%  5%  0%  LTV ≥ 95  0% 2015  2016  2017  2018  2015  2016  2017  2018  Source: FCA Product Sales Database Notes: ‘Major UK Lenders’ include the large UK Banks and Nationwide.

There is also the opportunity to list the sukuk on Bursa Malaysia, the Malaysian bourse, which has emerged as the largest exchange for sukuk listing in the world. This gives the listed sukuks greater profiling, visibility and transparency in the global bond market. Collaboration in issuance of sukuk would indeed benefit Turkey, as Turkey’s aggressive diversification of its industrial base and services sectors will require huge financing needs that could be partially met through the Islamic financial markets. Large infrastructure projects such as building the Bosphorus shipping canal, the new railway lines and highways might require funding via issuing sovereign sukuk as an alternative source of funding. The extensive privatisation in basic industry –transportation, communication and banking – would also offer the corporates and alternative source of financing that is competitive and innovative. Secondly, in promoting cross-border financial activities, the Turkish financial community could network with Malaysian-based investors, and practitioners to facilitate more business opportunities. Malaysia has diverse domestic and international players that engage in international currency business. There are now 150 entities in Malaysia’s Islamic financial system which offer a wide spectrum of Islamic products and services. There are also more than 150 funds in Malaysia including real estate investment funds (REITs) and ETFs that practise ethical investments. These entities have the capabilities to structure funds for investment abroad, including into the emerging markets. Additionally, there are opportunities for ethical investments as more than 80% of equities listed on the Malaysian stock exchange are shariah compliant.
They usually refer to the financial crisis and developments in other countries as a warning example of how badly things can go if one allows debt to build up and housing prices to rise. They then express concern for Swedish household sector debt and say – without mentioning the research that has shown that monetary policy has very little effect on housing prices and debt – that a higher repo rate is necessary to prevent developments similar to those in the countries that were hit hardest in the financial crisis. Sometimes one adds an argument that basically states that even if we cannot see any immediate threats in Sweden at present, this does not mean that they do not exist. In many of the countries where things have gone very badly, people did not see the risks, they say, so not seeing a risk doesn’t mean there isn’t one – a variation of the argument that “this time is (not) different”.12 Let me emphasise that I certainly do not mean that risks linked to high indebtedness should be ignored. In the light of events in recent years I find it difficult to imagine that anyone would fail to agree that governments, legislators and financial supervisory authorities should do everything in their power to prevent and limit the consequences of future crises. But I nevertheless feel that the argument that household debt entails major risks and needs to be addressed must be substantiated in a sufficiently convincing manner.

Many people have recently criticised the Riksbank’s communication for being unclear, with some claiming that it has sometimes been difficult to understand exactly why some decisions have been taken and why they have been judged to be better than the alternatives.1 What I intend to do here today is to provide my view of where the main divisions are and to describe how I came to the conclusions that I hold. I believe and hope that this review of the arguments can straighten out some potential questions and that it will form a good basis for continued discussions. Differences in views regarding monetary policy and what it can achieve Let me start by pointing out that lack of agreement among a monetary policy committee is not a problem in itself. The actual purpose of having a group of individuals decide on monetary policy is to create the right conditions for better decisions; it is namely so that groups tend to make better decisions than individual decision-makers. This is partly because the members’ experiences and skills are pooled and partly because the group acts as an insurance against the particular preferences of one individual being able to govern monetary policy; it means there are ”checks and balances”. The fact that different members make slightly different assessments and reach different conclusions is thus not so remarkable.
My speech this morning, therefore, provides an opportunity to signal the Bank’s support for INSOL’s mission to take a leadership role in international insolvency and credit issues and to bring about greater international co-operation among the main players. The growing interest by a number of international organisations in the design of orderly and effective corporate insolvency regimes, and in the encouragement of greater co-operation in cross-border corporate insolvencies, suggests you have been successful in that objective. I think this has been greatly assisted by the important work which the INSOL Lenders Group has been co-ordinating in developing a set of principles governing corporate workouts at the pre-insolvency stage. But corporate workouts represent just one strand in financial restructurings more generally. There are two others I want to cover; and these are, first, restructurings of financial institutions, including banks, and, second, sovereign debt workouts. Indeed, in many instances, restructurings in the corporate sector will need to proceed in tandem with those in the financial and sovereign sectors. I would argue that, in all three cases, a collective approach by the different participants in the private and public sectors, and effective co-ordination among creditors and debtors, should help to preserve value. So I would like to consider today the extent to which these differing approaches raise common themes, and also whether there are distinguishing features which could affect the interactions between the three strands.

There are two aspects to this: we recognise that life insurers can be an important source of long-term, stable financing for corporates, infrastructure and mortgages – this is an important function that we want to see maintained; but we also must consider the wider financial stability angles, avoiding undue influence on the asset allocation behaviour of insurers. Solvency II should not materially drive investment decision making except in so far as it helps to make certain that insurers fully understand the risks that they take. The Prudent Person Principle will seek to ensure that the industry understands and is capable of managing its investment risks. Specifically, insurers must be able to demonstrate that they can properly identify, measure, monitor, manage, control and report on their investment risks and not place reliance upon information provided by third parties. Investment choices should be made in the best interest of policy holders and beneficiaries. Those running a business are best placed to make business decisions. That being said, the PRA does have the benefit of perspective. The PRA has the ability to look across the industry and can also draw upon the expertise of specialists working across the different areas of the Bank of England. Whilst on the subject of the role of management, we understand that there has been some uncertainty around our expectations of the non-executive director role for firms that have internal risk models. Non-executive board members need not be technical experts in risk modelling.
Going forward, the financing requirements for economic development are envisaged to be massive, particularly for emerging and developing economies in the Asian and Middle Eastern regions that are seeking huge amounts of capital to fund new infrastructure and to support economic development. Given the sheer size of these projects, equity and government budgets cannot be the only source of financing for this next phase of economic growth and industrialisation in our regions. The sukuk market has become a potentially important new source of funding for such long term projects. In the recent decade, a total of $ billion of infrastructure sukuk has been issued by more than 10 different countries. In Asia, it is estimated that a funding of $ trillion is required until 2020 for infrastructure projects, while the funding requirements in the Middle East are estimated to be $ trillion over the same period. Developing economies in Africa have also already begun its entry into  BIS central bankers’ speeches  1  the sukuk market for such infrastructure financing with some having put in place the legal groundwork for such sukuk issuances. However, low sovereign ratings have limited the ability of certain high-growth developing countries to source such funding, despite being rich in natural resources. Countries that are rich in natural resources may however, pledge these resources for such issuance. Funding may thus be secured arising from the securitisation of such assets.

However, this was more than offset by increases in Government deposits with MAS and our borrowings from the money market, again due to the diversification of our money market instruments from mainly swaps to include money market borrowings and repos. Income & expenditure statement For the financial year ended 31 March 2000, MAS made profits of $ billion (net of provisions), a decrease of 38% or $ billion compared with the previous year. The lower return was due mainly to translation losses, as the Singapore dollar strengthened against major foreign currencies such as the US dollar and euro during the financial year. The organisation To support MAS’ expanded roles and functions in building a central bank of excellence, we have taken steps to strengthen our human resources. Over the last two years, we have increased our headcount by 30%. Of these, a substantial number were early- and mid-career officers from a wide range of professional and academic backgrounds. The increase in mid-career employees has encouraged greater diversity in perspectives and views within the organisation as we address the increasingly complex issues in monetary policy and financial sector supervision and development. MAS will continue to build up our internal capabilities and human resources, and actively consult the industry participants in our efforts to meet the challenges in the coming year. 3  BIS Review 62/2000