samchain/econo-pairs-v1 huggingface dataset:
01.09.2020  The impact of the COVID-19 crisis on financial stability Closing address to the seminar “The financial system in the COVID-19 crisis. Challenges and commitments”, Universidad Internacional Menéndez Pelayo, organised by the Spanish Financial Press Association Pablo Hernández de Cos Governor  Good afternoon ladies and gentlemen. It is an honour and a pleasure to participate once again in this summer course organised by the Spanish Financial Press Association. It is clear that the scope of the pandemic and its impact on the world economy are very extensive. Following a 5.2% decrease in Q1, with respect to the previous quarter, Spanish GDP fell by 18.5% in Q2, when the restrictions linked to the state of alert were at their height. These declines represent the greatest contraction in economic activity in our recent history. An improving path has been seen during Q2 and Q3. However, this recovery is incomplete, and uneven across sectors and agents. It is also subject to a high level of uncertainty owing to the doubts as to the course of the pandemic itself, as shown by the fresh outbreaks. It therefore seems clear that some of the pandemic's effects will be long-lasting.

However, there was some cross-regional variation and the indicators of the overvaluation of house prices showed values close to equilibrium.6 It should also be borne in mind that the weight in mortgage lending of highly leveraged transactions has been much lower in the post-2008 period, and that the mortgage loans which survived the global financial crisis have credit conditions that can generally be considered prudent, and are closer to reaching maturity. All these developments better position this sector to withstand the current crisis. In any event, this sector is inevitably also reflecting the impact of the health crisis. Even before this shock, the housing market had entered a phase of gradual slowdown, both in terms of activity and transactions and of prices, after the marked expansion of prior years, once the adverse effects of the financial crisis had been overcome. This outlook was profoundly affected by the declaration of the state of alert due to COVID-19, with a 6  See https://www.bde.es/f/webbde/GAP/Secciones/SalaPrensa/NotasInformativas/20/presbe2020_49en.pdf. 8  particularly sharp slump in transactions in the second half of March and in April. In subsequent months, a gradual, albeit partial, recovery is estimated to have taken place, once the restrictions on movement had been lifted and as the house purchase process gradually began to operate as normal. In effect, the lockdown made it much more difficult to conduct the process of buying or selling a home.
Although the conservative central banker resolves the trade-off between inflation variance and employment variance by opting for more stable inflation, the costs of keeping inflation stable are lower thanks to the reputation earned by the central banker over many years. The second line of theory attempting to prevent inflationary bias was the principalagent approach developed, for example, by Carl Walsh in 1995. In this framework, the government (the principal) contracts the central bank (the agent) to deliver the required rate of inflation and penalises it if it fails. This was the route followed, for example, by New Zealand, which in 1990 became the first country in the world to adopt inflation targeting, followed in 1998 by the Bank of England. These two theoretical approaches define and determine the field for the two main forms of 1/7  BIS central bankers' speeches  central bank independence: goal independence and instrument independence. While Rogoff’s conservative banker can define her own objective function almost without restriction because she enjoys both goal and instrument dependence, a central banker (agent) working for the government (principal), usually represented by the minister of finance, has no freedom to choose the goal and is only free to decide how to achieve the goal set by someone else. Empirical findings The theoretical research was accompanied by empirical studies attempting to prove a causal link between central bank independence and the rate of inflation.

Conversely, the second worry is that broadening central banks’ responsibilities could undermine their core monetary policy function. In the pursuit of its financial stability mandate, a central bank could be drawn into politically contentious areas such as housing policy and income inequality. Greater coordination with fiscal policy could also cause the central bank to be pressured into monetary financing or even fiscal dominance. On a general level, combining monetary policy and financial stability may bring back the time inconsistency problem, which is exactly why central banks were granted independence in the first place. The post-GFC situation of central banks can be summed up as follows. The fiscal consolidation and only partial structural reforms undertaken by many governments made central banks more or less the only game in town. And as economies weren’t running satisfactorily, this game wasn’t cast in a good light. The long period of exceptionally low nominal and real interest rates spurred an intensive examination of the possible consequences. These include growing indebtedness, overvalued asset prices, underestimated risks, misallocated loans and resources, and lower productivity. However, it will take a long time to properly assess the impacts of other unconventional instruments. To quote Charles Goodhart: “Central bank independence was nice while it lasted, but it owed a great deal to the supporting conditions that enabled it to achieve such great success in its early years. Rest in peace.”  The rebirth of the fiscal-monetary mix?
The reduction of the requirements for liquid assets by banks may be carried out without infringing the stability of the system, since their level is generally higher than that of international standards and of banks in the region. Moreover, given that banks operating in the country have their origin mainly in Europe, this reduction may take place under the conditions of declining risk premia in European financial markets. However, it will be  4  BIS central bankers’ speeches  monitored and implemented according to each bank’s risk profile. This means that though the reduction may be general, the level of liquid assets requested by currency and in total may be different in different banks. Change in the risk coefficients of the investment structure will take place, so that banks’ capital better supports the shifting of their resources toward lending. More specifically, we propose significant increase in risk coefficients that are used for calculating the banks’ capital, for new flows of bank investments with non-residents. This increase in risk coefficients may take place also for part of bank investment stock with non-residents, taking into consideration: •  Regulatory requirements for liquid assets;  •  Adequate coverage of bank liabilities to non-residents; and  •  The time needed so that this shift does not cause any operational overburden to banks. On the other hand, risk coefficients may decrease in banks for the amount of new credit added to the existing stock, for a certain period of time.

Also, they are increasingly active in the restructuring the credit to businesses. Nevertheless, both sides have complaints related to each other. The businesses complain that banks are tight fisted, and often banks’ lending does not correspond with the businesses activity cycle. On the other hand, banks claim that businesses submit unreliable projects for crediting, and deficient financial information for decision making. The Bank of Albania is confident that the relationship between business and banks will develop to the benefit of both parties, if they: •  Enhance their understanding of the activity profile, market conditions and regulatory requirements, which determine the activity of each of them;  •  Enter into cooperation agreements, based on transparent, comprehensive and professional information;  •  Act proactively to detect situations in which this agreement should be reviewed, to improve the possibilities to settle liabilities against each-other. The measures that Bank of Albania proposes today support the need for a closer relationship between banks and business, in the current economic situation in Albania. They expand the banks’ room for a greater flexibility in the process of credit restructuring. However, banks would not finance unsuccessful businesses; neither would they lend to businesses that do not supply transparent and complete information. A closer relationship also implies that, in their analysis, banks need to utilise more effectively the available information about existing and new borrowers, which may be generated by such sources as the Credit Registry.
But this can be partly or wholly offset if households and businesses lack confidence in the long-term fiscal outlook for our nation. It would be greatly beneficial if the Administration and Congress could more effectively work together to craft a coherent fiscal policy. As I see it, this would consist of two elements – continued near-term fiscal support to underpin economic activity and long-term fiscal consolidation to ensure debt sustainability. Without action in Washington, fiscal policy will turn sharply restrictive in 2012 – exerting a direct drag on real GDP growth of more than one percentage point. At the same time, the long-term path under current policy is unsustainable. It should be possible, even in a time of sharp ideological differences, to agree on some common pro-growth principles: support for demand today made possible by credible longterm fiscal consolidation, and a mix of fiscal adjustments that are supportive of future growth. This would involve making an appropriate distinction between outlays that support current consumption versus outlays that lift the economy’s long-run potential such as investment in infrastructure, research and human capital – similarly, between taxes that inhibit work and investment versus those that are more neutral in their impact. Broadening the tax base and making tax system simpler might also be helpful. Progress on the fiscal front would have an important ancillary benefit – a demonstration that Washington can put aside partisan interests and step up to the challenges our nation faces would boost household and business confidence.

The United States has an extraordinarily flexible economy with a strong entrepreneurial bias that generates new opportunities, jobs and income. Our higher education system is second to none and the country remains a magnet for talented people around the world. The United States has better demographics than most developed countries and some very impressive institutions – such as the U.S. Army – that provide a pathway upward for all based on merit regardless of background. America’s place in a fast-adapting world economy and the prosperity and economic strength of our nation will depend upon the choices we make. In this fundamental sense our economic destiny is in our own hands. Let’s get at it. Thank you for your kind attention. I would be happy to take a few questions. BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11
In the debates we have had within the MPC over the past year, there appear to be four key areas where these differences of judgement arise, and which – so far at least – have led me to a different conclusion on monetary policy from the majority on the Committee. These are not new issues in that they have featured throughout my time on the MPC and in many earlier debates on UK monetary policy. But the current economic situation has brought them into sharper focus. Issue 1: The powerful influence of the global economy The first of these key issues I would highlight is the way in which the MPC takes into account the powerful influence of global economic trends and their impact on the UK economy. The way in which the global economy affects the economic outlook for the UK has been a major theme of my speeches and interviews since my very earliest days on the MPC. The UK economy is very open to international trade, with imports and exports combined accounting for over 60% of GDP. We are also the second most important global economy after the US in terms of flows of international direct investment. The UK is home to one of the most important global financial centres in the world – London.

In any event, the preamble to Law 11/2015 establishes that these arrangements for the allocation of functions should be assessed once – within two years – the implementation of the restructuring plans currently under way has been completed, in light of the experience acquired, with a view to achieving greater efficiency. 4  BIS central bankers’ speeches  All told, as regards the organisation of the traditional supervisory functions, namely solvency, conduct and investor protection, Spain retains a sectoral approach which, as indicated earlier, was abandoned some time back by our peers. Hence, the Banco de España retains supervisory competencies for the solvency of credit institutions and also for their conduct, as regards the marketing and selling of loan and deposit products. The CNMV, meanwhile, in addition to overseeing the functioning of markets, supervises the solvency and conduct of investment firms and other capital market intermediaries (such as investment fund management companies), and the commercialization of financial products classified as securities. Finally, the Directorate General for Insurance and Pension Funds oversees the solvency and conduct of companies in the insurance sector, along with the operations of pension funds and their management companies. These authorities also manage enquiries and claims services in their respective areas and are empowered to issue reports on disputes between the different institutions and their customers, although, as you know, such reports are not binding.
In the short term, the present situation, marked by the necessary increase in interest rates and the high uncertainty regarding growth and inflation projections, means that banks face significant risks in different balance sheet segments. At the net interest income level, the substantial improvements recorded by some banks cannot be considered long-lasting and it is reasonable to believe that, as the higher interest rate environment persists, their funding costs will likely rise further. The increase in the cost of funding may accelerate for banks, driven by the gradual reduction in Eurosystem liquidity facilities, and their increased cost, and the developments seen in deposits, with depositors seeking better remunerated financial instruments and part of the savings buffers accumulated during the pandemic having been depleted. The continuation and/or heightening of the recent tensions in the global banking sector could also contribute to this increase. 6  Moreover, the value of fixed income financial exposures (e.g. bonds, especially those with longer maturities) has declined. In addition, credit quality, which remains highly resilient, may ultimately weaken as inflation and rising interest rates erode real disposable income. This would drive up provisioning and reduce income generation capacity. In this respect, although the debt levels of non-financial corporations and households have fallen considerably since the global financial crisis,15 debt-servicing costs are climbing sharply as interest rates rise.

The increase in sovereign spreads has elevated debt at risk for vulnerable EMDEs, including those in our constituency.  The high food and fuel prices have had a clear disproportionate impact on poorer countries and vulnerable populations in all countries, and the two overlapping crises have worsened poverty significantly in the developing economies since 2020, with food insecurity emerging as a new major challenge in low-income countries. In this regard, strong global initiatives are needed to address food insecurity, reduce poverty worldwide and alleviate the risks of social unrest that is already evident. The IMF would need to do its part as it did during the COVID pandemic. The IMF’s proposed Food Shock Window could play a useful role if the facility is more accessible, and its terms and conditions are less restrictive.  The adverse effects of climate change, to which no country is immune, continue to wreak havoc in all parts of the world. Most recently, the flooding in Pakistan, a member of our constituency, has created an unprecedented humanitarian catastrophe, a major health crisis, with initial damage assessed at 10-15 percent of GDP. We have to recognize and collectively address the existing highly inequitable system, where countries with negligible carbon footprints bear the burden of negative externalities of climate change. I stop here.
UNDIX inflation, which excludes indirect taxes, subsidies and interest expenditure, is judged to be 1.8% one year ahead and 2.1% after two years. (Figure 5). The Riksbank also attempts to identify any risks of developments that differ from the path in our main scenario. This time round we saw somewhat greater risks of inflation being above the target than below. The main reason for this is the uncertainty about how the stronger growth will affect the labour market and wages. To this I want to add another evident risk—that the price of oil does not fall back as we ave envisaged. An oil price around $ in the coming years would lift inflation 0.1-0.2 percentage points above the main scenario. On the downside the main risk is a more marked slowdown in the US economy. Lower trade-off between growth and inflation? Now I want to touch on a matter that has been prominent in the debate after the publication of the Inflation Report. How will inflation be affected by the higher growth we foresee? The attention accorded to this question is only natural, for several reasons. The Riksbank now counts on growth that is clearly higher than we expected in June but has not made much of an upward revision to its assessment of inflation. Moreover, good growth is foreseen by virtually all observers and the consequences of this for inflation are therefore a central concern for everyone. But no one has the answer and that is what usually fuels a lively discussion.

The Riksbank’s picture of what this could mean for inflation is partly based on empirical studies that have been presented in earlier Inflation Reports. These results likewise suggest that the economy is somewhat less inflation prone, though the picture should not be over-interpreted. In a world with low and stable inflation, it is conceivable that wage demands may be formulated differently. A given level of real wages can be attained with considerably smaller nominal wage increases and perhaps with greater precision. Another factor that is often mentioned in the discussion is the concept of a new economy, that is to say, how the trade-off between growth and inflation may have been modified by increased global competition and information technology. This theme has been stimulated not least by the example of the United States, where high growth has been achieved year after year without boosting inflation; but that is a topic for a separate address. Today I shall simply make two points. One is that effects of this type can enable the economy to cope with higher resource utilisation without an acceleration of inflation, that they can raise potential growth or they can lower the inflation propensity. Thus, the so-called new economy can conceivably affect the inflation assessment in the ways I discussed earlier. The other point is that demonstrating effects of this type on inflation empirically is presumably even more difficult in Sweden than it is in the United States.
(vi)  According to the new operational structure, overnight interest rates are mainly expected to fluctuate between the Central Bank borrowing interest rate and the interest rate of the liquidity facility submitted to primary dealer banks during the day. However, under normal conditions while determining the amounts of the auctions for repo and reverse repo auctions with a one-week maturity, the Central Bank, will endeavor to prevent both excessive fluctuation of the ISE Repo-Reverse Repo Market overnight interest rates, which is an indicator of secondary money market interest rates, and systematical formation of the said rates significantly below or above the repo auction interest rates. Additionally, with a view to preventing fluctuations in overnight interest rates and enhancing the flexibility of the banks’ liquidity management, the Central Bank may consider options like narrowing the interest rate band of the Late Liquidity Window on the due date of keeping required reserve ratios and allowing the banks to keep a certain amount of the required  14  BIS Review 3/2009  reserves in the following period or rendering the excess amounts to be effective for the following period. In cases where the liquidity shortage in the market increases and becomes permanent, the funding of the liquidity shortage only by repo auctions with a one-week maturity may have adverse effects on longer-term interest rates and the credit mechanism.

These shocks, of which some have prolonged impacts, caused inflation to exceed the targets during this period (Chart 1). Chart 1. Inflation developments in Turkey between 2002-2008  (*) November inflation rate was used for 2008. Source: TURKSTAT and CBT. BIS Review 3/2009  1  The first serious shock to the inflation-targeting regime in Turkey arose upon a time when international capital conditions changed to the disadvantage of developing countries and capital outflow was experienced in many countries including Turkey, from May 2006 onwards. In this period, depreciation of the New Turkish Lira (TRY) around 30 percent and the lack of confidence created by financial turbulence combined with sharp increases in food prices due to drought led inflation rates increase and inflation expectations exceed the targets considerably. In order to avoid any permanent effect on pricing behaviors, the Central Bank tightened monetary policy significantly and took a series of additional policy measures. These measures varied from suspending foreign exchange buying auctions to several arrangements regarding TRY and foreign exchange liquidity. Even though the gap between inflation expectations and inflation targets widened following fluctuations, inflation and inflation expectations were to a great extent brought under control, owing to the measures taken. In the period covering 2007 and onwards, the main factors impeding the disinflation process were sharp increases in oil and other commodity prices in the international markets along with adjustments in administered/directed prices.