samchain/econo-pairs-v1 huggingface dataset:
As a result, at times, such as during the “Little Panic” of August 2007, as well as the “Great Panic” of September-October 2008, the markets for a whole range of asset-backed securities closed completely and investors sought safety in liquid government assets. These pressures are reflected in the spread between measures of bank funding costs and equivalent maturity government debt (Fig. 13). Even when confidence has appeared to be improving, the markets for asset-backed securities have remained dysfunctional. Amplification and propagation While these incentive distortions and information problems help to explain why the crisis happened, they don’t explain why its impact has been so great. Back in 2007, the US Federal Reserve estimated the unexpected losses associated with the sub-prime mortgage market would be of the order of $ billion 7 . Since then, the IMF have progressively raised their estimate of the write-downs on US-originated assets to $ trillion (see Fig. 14), while their current estimate for write-downs across the United States, Europe and Japan stands at $ trillion. Alongside that we are witnessing a sharp and internationally synchronised slowdown in global growth that will probably turn out to have been the sharpest in the postwar period, together with an unprecedented contraction in world trade (Fig. 15). The shortfall in advanced country GDP, relative to potential, alone is projected by the Fund to reach around $ trillion by 2010. How could this come about?

18 documents some similar results from a recent IMF (2008) exercise, showing that the cumulative output loss in outright recessions, as well as in milder slowdowns, on average tends to be almost twice as much if preceded by a financial crisis. The results of Furceri and Mourougane (2009) suggest, moreover, that part of this output loss is permanent; they find that the typical OECD financial crisis knocks around 2% off potential output, which rises to 4% for deep crises. These findings suggest that financial crises can have a material impact on both the dynamics of the business cycle and on the underlying equilibrium growth path. The literature on the “broad credit channel” and the “financial accelerator” points to an amplifying effect of changes in firms’ financial health on their cost of capital. In particular, when borrowers have less collateral they face a higher external finance premium to compensate lenders for the increased monitoring costs (see e.g. Bernanke, Gertler and Gilchrist, 1999). But the quantitative magnitude of the effect in this type of model is usually relatively modest. And the banks in this class of model are simple or non-existent, and any incentive or information problems relate to the borrower, rather than the financial intermediary. Instead, it seems likely that the adequacy of bank capital and the associated phenomenon of financial sector de-leveraging are likely to play a central role. Capital is essential because it is the means by which intermediaries persuade creditors that they will almost surely get their money back.
Fourth, taking a longer term perspective, beyond the current crisis, we need to continue to improve our understanding of monetary policy in a globalized world. What other important ingredients need to be considered when implementing monetary policy or when forecasting growth and inflation ahead? The role of external shocks is likely to become more important and needs to be considered more carefully. We need to find ways to anticipate these shocks including the future financial architecture and improve upon limitations in our foresight and in the forecasting ability of our models. Fifth, the role of policy makers in other countries which will add to these external shocks opens up room for greater policy coordination and cooperation at the international level. Like other previous crises, the current crisis is likely to be followed by discussion about intensive reforms at the international level. We should grab this opportunity to highlight the need for international cooperation in monetary policy in maintaining global financial stability. I don’t need to point out that international cooperation in the area of supervision is far ahead, both in normal times and in time of crisis. In order to secure international cooperation in monetary policy, we need more research and dialogues on how to make early warning and surveillance really work at a global level. In addition, coordination may not be enough; a redesign of global financial architecture may be necessary, and we need to work on this area as well.

30 November 2017  Speech on the 60th Anniversary of the National Association of Specialised Lending Institutions (ASNEF) Luis M. Linde Governor  Good evening everyone. It is a pleasure for me to take part in this celebration of the 60th anniversary of the National Association of Specialised Lending Institutions. As your president, Fernando Casero, has just mentioned, throughout its history your Association has played a very important role in promoting and enhancing consumer lending, which is a key factor in driving economic growth. Indeed, consumer lending has a series of characteristics that make it especially relevant both for the financial system and economic activity. On the one hand, it is highly cyclical and is, therefore, a leading indicator of confidence among both consumers and financial institutions. On the other, it generally leads the way in terms of adaptation to innovation. As is well known, in the past consumer lending played an important part in the expansion of credit cards, and more recently it has been at the forefront of the incorporation of new technologies. In the expansionary phase that began after 2000, consumer lending grew rapidly in Spain, reaching a balance outstanding of € billion in mid-2008. The financial crisis reduced these figures, down to almost half that amount by early 2015. Since then, in keeping with the economic recovery, consumer lending has been very dynamic.
It is one thing to note that such revisions have affected the historical development of the krona. It is quite another to forecast such revisions and to allow this to influence the forecast for the krona. In my view, the assessment of interest rates abroad on which the analysis in the latest Monetary Policy Update was based was largely in line with market expectations. This means that my view of the future development of the krona in December was based on the assumption that the market would not significantly revise its view of interest rates abroad. Housing prices and household indebtedness may lead to financial imbalances Another important but difficult-to-assess factor that we as monetary policy decision-makers have to take a stance on is the rapid increase in housing prices and household indebtedness that we have observed for some time now. I am among those who are somewhat concerned about this situation. The debate on the role of housing prices in monetary policy has been slightly unclear. As I see it, it is not a question of steering housing prices or other asset prices towards a set target. Nor is it a question of trying to puncture a price bubble by means of drastic repo rate increases. Nor do we assess that financial stability is threatened by the build-up of household debt. This can be seen, for example, if you read our latest Financial Stability Report, which was published in December.

For example, an unfavourable scenario in which a burst asset bubble leads to a deflationary situation that is hard to overcome will be assigned greater importance than a high-inflation scenario. Experience from Japan in the 1990s illustrates this. Assessments of this type must be taken into account in the monetary policy decision. The moral of the story is that monetary policy cannot be reduced to a mechanical reading exercise. However well-prepared the material on which monetary policy decisions are based, there will always be complex and important aspects that policymakers must take a stance on. It is important that these aspects are discussed from several different perspectives. This is one reason why we have an Executive Board made up of economists with different backgrounds and expertise. It is beneficial and important for us to conduct a wide-ranging debate on monetary policy at the Riksbank and not just externally. I believe that it leads to better monetary policy decisions. 10  BIS central bankers’ speeches
It suggests a sharp bifurcation in demographic trends in developed and emerging economies. Among advanced countries, an ageing population results in a decline in the middle-aged share, from a peak today of almost 30% to around 25% by 2050. For developing economies the reverse is true, with a continuing rise in the fraction of middle-aged individuals from 20% today to around 25% by 2050. Cross-country correlations suggest a relationship between this prime-saving cohort and saving behaviour. Chart 22 suggest that every 1 percentage point rise in the middle-aged population share raises the national savings rate by around 1.75 percentage points. 5 Taken together with emerging population trends, this suggests some potentially important life-cycle pressures on the global pattern of savings in the period ahead. To bring these pressures to life, Chart 23 projects saving rates in a selection of countries out to 2050 based on population and GDP projections. This is plainly a gross over-simplification. These projections take no account of a whole host of other factors that may push in the other direction, including later retirement dates which may boost saving in countries with an ageing population, and falls in saving rates in emerging countries as the social safety net is widened. But based on demographic and convergence trends alone, saving rates in the BRICS, already high, are projected to continue their ascent.

The purpose of this is that those who have lent money will be forced to a greater extent than they are now to bear the costs of solving a crisis, in order to encourage them to show greater caution when making investment decisions. However, it is also important that the organisations mentioned counteract corruption and work actively to achieve an open democratic culture in the new countries taking part in the globalisation process. The recent globalisation debate has focused on a completely different issue, namely injustices in the distribution of income around the world and many believe that these injustices would be reduced if financial operators were prevented from rapidly moving money to where it provides the highest return. Many people feel that multinational corporations all too casually move their production to the countries that can offer the lowest production costs and this has also come up for debate in Sweden, particularly when Swedish regions have been hard hit by factory closures. The problems mainly concern the trade exchange between rich and poor countries and direct investment by rich countries in poor countries. Swedish history can also provide an illustration here. It has been calculated that the Swedish productive capital stock was 50 per cent higher during 1870 and 1914, through the import of foreign capital, than it would have been without this capital import. Sweden's industrialisation was thereby speeded up and welfare increased.
These have included the change of competition law and the regulatory framework, the reform of the judicial system, and the reform of regulated professions and of the housing market. Finally, programme targets for privatisation were achieved ahead of time. Structural reforms need a long-term commitment As I said at the start of my remarks, an improvement of the underlying prospects for these economies has moved expectations. Perceptions about the sustainability of the recovery path in Portugal, in particular, have been reflected in persistent improvements in confidence and associated reductions in risk premia. Over time the economic and social pay-offs of reforms will be high, in terms of higher wealth and employment. High and sustainable GDP growth will in turn bring about improvements in fiscal positions and sizeable reductions in debt-to-GDP ratios in the medium to long-run, contributing therefore to long-term debt sustainability. However, to reap these benefits implies a long-term commitment. The reform process is a continuum. A reform that has just been legislated does nothing for the citizens of a country, if it is not followed-up with effective implementation. Making sure that reforms transfer from the statute book to the real economy requires painstaking monitoring, as well as a prompt reaction in case outcomes deviate from expectations. When countries exit adjustment programmes, such an orientation will help prove to markets that reforms have been undertaken not only due to external pressure, but also out of a genuine recognition of their benefits.

Deepening and broadening our talent pool will be a continuing challenge for the financial sector and for MAS. MAS and industry players have taken steps together to address this. The Institute of Banking and Finance had been re-organised to better meet the needs of the industry as a financial training intermediary. It will also serve as a platform for the industry to provide regular feedback on manpower needs and issues. The industry has established the Financial Industry Competency Standards Committee, which will develop internationally aligned competency benchmarks for the whole financial industry. MAS is also working with specific industries to address their human resource needs through a manpower conversion scheme. This scheme will help mobilize, train and channel resources to support growth areas quickly. MAS will work with financial institutions to build and upgrade talent in the financial sector workforce. Singapore has always welcomed talented individuals to live and work here. They have contributed much to the vibrancy of our financial sector. Singapore must remain open to talent and continue to be a conducive environment to work and live in, so that we can continue to attract talent here, and also retain able Singaporeans. Conclusion MAS is committed to the vision of Singapore as a leading global financial sector, one which is competitive, fosters enterprise and innovation, and maintains high regulatory standards. We have made steady progress toward this goal and must continue to do so.
So the message has to be not one like "we think it’s too risky to extend more credit to this sector” but instead more like “have you thought about the entire range of relevant risks in extending more credit and are your underwriting criteria in line with the riskier environment?" It’s important in publishing a financial stability report to present its findings as a range of possible outcomes which the private sector can then be encouraged to factor into its own risk management practices. Stress tests and scenario analysis provide the intellectual backbone for financial stability reports. Stress testing, in particular, has come a long way in recent years. The HKMA’s requirements on stress testing by banks have been in place for some time. Our Supervisory Policy Manual Module on Stress Testing, issued in early 2003, requires banks to have in place a stress-testing programme and to integrate stress testing into their risk management processes. For our own internal purposes we also conduct stress tests by applying a range of shocks to the supervisory data that is reported to us. These shocks take into account various adverse movements in banks’ liquidity, interest rate and market risk positions. However, the techniques of stress testing are rapidly evolving and are becoming increasingly more sophisticated. The first generation of stress tests simply took a variable and subjected it to a shock. It was basically just a matter of saying "let’s see what happens to capital if NPL’s go to 20 percent."

As long as the banking system was – or at least appeared to be – sound, as central bankers we did not need to worry too much about what happened elsewhere in the financial system or the condition of the corporate sector or the structure of household balance sheets. But this is no longer true, if it ever was. I have already mentioned the role of the corporate sector in the Asian financial crises of a decade ago. The fact that it was the corporate sector rather than the banking sector that had assumed foreign exchange risk ultimately didn’t matter from the point of financial system stability. The effects were the same – or possibly were greater as the corporate sector was less well able to handle the risks than the banking sector might have been. From a macro prudential policy perspective this means that we must pay attention to conditions in the corporate sector and the soundness of corporate balance sheets. And given that so many banks in Asia have followed those in the rest of the world in looking to develop their consumer credit business, the condition of household finances is also important to understand from a financial system stability perspective. In addition, the experience of the last decade has also taught us that non-bank financial intermediaries matter for the soundness of financial systems. For example, there is plenty of evidence that insurance companies have been major sellers of credit derivatives. This passes credit risk from the banking system to the insurance sector.
This feel-good factor is adding momentum to the UK housing market. Businesses, too, have rediscovered their mojo. Surveys of output intentions are close to record highs. Quarterly employment growth is running at its fastest rate since the series began. Surveys of skills shortages point to the possibility of upwards, if localised, wage pressures. Output growth in 2014 Q1 is nearly 1% higher, and unemployment rate close to 1 percentage point lower, than the Bank expected last August. If history is any guide, these errors tend to be positively correlated, upside as well as down. Yet at the same time, the inflationary risks posed by such a scenario should not be overstated. As output and unemployment have surprised on the upside by 1%, average wages and inflation have surprised by the same amount on the downside. Real wage growth has been positive in only six months in the past six years. And inflation expectations remain well anchored to the inflation target. Inflationary ghosts are hard to find. A third uncertainty concerns the financial side of the economy. Global appetite for risk is, at present, voracious. Measures of financial market uncertainty are at or below pre-crisis levels across a range of asset classes. Many asset prices have rocketed and spreads plummeted. Two years ago, yields on Italian and Spanish debt were around five percentage points above US Treasuries. Today, they are 30–40 basis points below. Yields on corporate bonds, both high and low grade, are close to all-time lows.

Even for the natural sciences, dealing with physical constants and fixed laws of motion, the voyage of discovery can sometimes be a lengthy one. It took a century before estimates of the speed of light had converged to its true value. For much of this period, not only were best-estimates biased but the estimated confidence intervals around them often did not encompass the true value.6 Modelling complex, adaptive, socio-economic systems would make these estimation problems pale by significance. It is for these reasons that the Bank is also investing in its research capacity. For example, in our quarterly Inflation Report the Bank now shows alternative scenarios for inflation and output under different assumptions about how the world works. Alongside this, the Bank is putting greater effort into developing a pluralist set of approaches to model-building, drawing on other disciplines. Operating in the corridor In time, these investments in data and research will narrow the corridor of uncertainty. But for now, the key public policy question is what to do when operating in it? Rocket-scientists, of the real rather than metaphorical kind, have a clear answer to this question: avoid really bad outcomes.7 This is sometimes called a “minimax” strategy – the aim being to minimise the chances of the maximum possible loss. It is the policymakers’ equivalent of the Hippocratic oath – “do no harm”. So what, then, are these avoidable-at-all-cost scenarios? Let me consider three from a potentially long list.
The latest Financial Stability Report, published in May 2022, includes simulations of the impact on institutions of a scenario in which some of the current risks materialise. Specifically, the scenario assumed additional energy price increases and more persistent bottlenecks in global trade, generating fresh upturns in inflation and a further tightening of monetary policy, alongside a deterioration in agents’ confidence and greater risk aversion. These were very severe stressed scenarios, since they entailed cumulative deviations from the baseline GDP growth in 2022 and 2023 of between 2.8% and 5.4%. The results show that the sum of the different transmission channels in these stressed scenarios would generate a negative impact on bank solvency of between 1.8 pp and 3 pp for Spanish banks as a whole. By component, while net interest income would increase, the worsening of the credit quality of loans to the private sector would lead to greater losses. 5  Moreover, the simulated interest rate hike entails a slight reduction in the value of bond holdings on banks’ balance sheets. There is nonetheless some heterogeneity across banks, owing to differences in factors such as the weight of short-term and/or variable-rate lending, the accounting classification of debt securities, their international presence or the extent of their lending under the ICO programme.

Nonetheless, the most recent data could suggest a change in trend in this market stemming from the macro-financial setting that I have described. Specifically, housing transactions contracted in July, which is significant given that this month usually has a positive seasonal component. Also, house prices ceased to accelerate in Q2, posting growth similar to the first three months of the year. In any event, we will have to wait for new information to assess this behaviour more accurately, meaning we will need to keep a close eye on this market. As for the public sector, fiscal policy has clearly played a key role since the outset of the pandemic to soften its impact on household and corporate income, thus avoiding more persistent negative effects. The corollary of this has been a significant increase in public debt relative to GDP, which was already high before the pandemic. This high government indebtedness and the likewise high structural budget deficit evidently represent vulnerabilities when faced with a tightening of financing conditions, as is the case at present, and reduce fiscal policy headroom to respond to future shocks. Mitigating factors include most notably the higher-than-initially-forecast reduction in public deficit in 2022 and the significant lengthening of the average government debt maturity in Spain, which stands at more than eight years and delays the impact of interest rate increases on the public debt burden. In any event, Spain’s annual public sector financing requirements stand at high levels, around 20 pp of GDP.