samchain/econo-pairs-v1 huggingface dataset:
This filtering of good news, and accentuation of the bad, is a familiar pattern of human behaviour at times of stress and uncertainty. Psychologists call it “catastrophizing” – discounting the best and fixating on the worst, whatever the balance of risks. It is a well-known problem among people suffering anxiety or depression. Economy-wide, the result has been collective dread risk, fanned by contagious pessimism. There is some evidence of a detachment from fundamentals in the behaviour of financial markets too. Chart 6 plot the responsiveness of various financial prices (interest rates, equities and the exchange rate) to macro-economic news in the two years period to the Covid crisis and during this year. Pre-Covid, all three market prices were sensitive to macro news. Since Covid, this relationship has disappeared. Financial markets, recently, have detached from economic fundamentals. 9  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  9  Charts 6 Financial market sensitivity to economic news 3 year sterling interest rates  Sterling ERI  FTSE All-Share  Source: Bloomberg Finance L.P., Reuters Tick data from Refinitiv and Bank calculations. The Role of Policy There is another reason why people may, at present, have an exaggerated sense of anxiety. The risks they face (to health, jobs and Brexit) are perceived to be beyond their control. It is well-known that events perceived to be uncontrollable add to anxiety.

In other words, consumption has fully recovered more than a year earlier than the Bank expected as recently as August. Large-ticket purchases, such as cars and houses, are also back to around pre-Covid levels. Against a backdrop of more than 40,000 Covid-related deaths, an extra 1 million people unemployed and perhaps a quarter of the workforce having faced a cut in their incomes, the speed and scale of this recovery in consumption is, I think, fairly remarkable. It suggests considerable resilience on the part of consumers in the face of adversity. It also indicates considerable flexibility in both how and on what they spend. On the how, UK consumers have (perhaps unsurprisingly) switched from the High Street online to meet their spending needs. Online spending has jumped from 20% to almost 27% of overall spending during the course of this year, peaking at a third of all spending in May. It seems probable some of this switch online will endure into the future. Online habits tend to persist. On the what, there have been notable switches in expenditure patterns in the face of new working and socialising patterns (Table 1). According to data from Visa, on average this year spending on hotels and accommodation is down by over 40% and on travel by over 35%. By contrast, spending on households goods is up 8% and food spending is up by over 25%. Home production and home consumption has surged to counterbalance the effects of reduced time and money spent away from the home.
6  Knut Wicksell (1907): “The Influence of the Rate of Interest on Prices”, Economic Journal, XVII (1907), pages 213-220. BIS Review 10/2005  9

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Any significant increase in net external leverage or a recurrence of entrenched macroeconomic imbalances on the back of the large investment projects could weaken Iceland’s creditworthiness. These were the main points highlighted by Standard & Poor’s and there is every reason to take them seriously. Of course it is crucial for the Republic to enjoy a good credit rating. It is important for the Treasury’s access to markets and investors, and for its credit terms. Iceland’s sovereign rating also represents the ceiling for ratings of Icelandic banks and other rated institutions. Favourable ratings are vital for the banks’ expansion abroad and for their growing need for easy access to foreign credit. Thus the Treasury and the banks share an interest in Iceland being able to maintain its good credit rating. Ladies and Gentlemen As I mentioned earlier, the Central Bank raised its policy interest rate by 0.25 percentage points last week. The Bank has thereby raised its policy rate by 3.7 percentage points since its first hike in May last year. These measures reflect the Central Bank’s view that, given the current economic situation and the scenario two to three years ahead, it is much more effective to ensure a sufficiently tight stance in good time rather than to wait and take action later. Belated measures to tighten the monetary stance entail a risk of higher inflation afterwards, and thereby a far greater risk for the financial system, businesses and households.

The convergence works in both directions: research informs the policy work and policy work generates research questions. The end result is that our economists have the ability to be both highly respected in their disciplines from a research perspective, and also to make a significant contribution to policy development and implementation. There is an excellent value proposition both for the Bank and the economists that work here, as indicated by the publication record of our economists and their contribution to policy initiatives. Let me give you some more concrete examples of what our economists have worked on or are currently working on. I will focus on three broad buckets: prudential policy and financial stability; monetary and macroeconomic policy; and microeconomic and regional economic policy. Prudential policy and financial stability New York Fed economists, inside and outside our Research Group, provided substantial assistance to the design and development of the numerous emergency lender of last resort facilities implemented during the financial crisis. This was done in conjunction with the Board of Governors, but the contributions from the New York Fed were critical because of our unique vantage point with respect to operational implementation, financial markets, and financial market infrastructures. In a different vein, New York Fed economists assisted in designing, developing, and implementing supervisory stress testing, including the annual Comprehensive and Capital Analysis and Review (CCAR) supervisory stress tests. The New York Fed’s economists perspectives and measurements on how downturns affect bank portfolio values was crucial to the design of these tests.
A non-exhaustive list of microeconomic factors includes: the incentive to shift loans off banks’ balance sheets to avoid capital requirements; the reduced incentive for care in the origination of loans, when those loans are then securitised; the distorted incentives facing ratings agencies; pay packages encouraging the pursuit of short-term returns and the adoption of trading positions with the characteristic of a deeply out-of-the-money option; and the moral hazard arising from financial institutions that are too big or too systemically important to fail, together with inadequate supervision of the same. On top of that, the crisis exposed previously unappreciated informational deficiencies created by the underlying complexity of some asset-backed securities and the high degree of interconnectedness of financial institutions. Potential macroeconomic factors include the international payments imbalances, and the side effects of the Great Moderation, as well as monetary policy. In our view, it would be a mistake to assign a key role to any of these factors in isolation. On their own, none can surely explain the worst financial crisis in eighty years. But together they constituted a potent cocktail. Monetary policy makers would therefore be remiss if they did not re-examine their own decisions in the lead-up to the crisis and strive to learn the lessons for the future conduct of policy. In the normal course of events, looser monetary policy boosts asset prices, as lower policy rates are usually associated with somewhat lower longer-term interest rates too.

Abstracting from the scope for other policies to boost demand, Williams puts the cost to the United States of this constraint on policy rates at around $ trillion of foregone output over 2009–2012. 12  BIS Review 111/2010  Some might be tempted, therefore, to argue that a modest increase in target inflation rates from the current norm of around 2 per cent is called for. There are, however, potential costs associated with accepting higher average inflation. First, while the costs from perfectly anticipated inflation might seem likely to be modest, the academic literature suggests that may not be the case. Moreover, there is a well documented empirical relationship between the level and the volatility of inflation, and unexpected movements in inflation are more likely to generate resource misallocation and the capricious redistribution of income and wealth. There is, therefore, a risk that even a modest increase in the target of a few percentage points could lead to a corresponding increase in inflation volatility and associated welfare losses. Second, unlike in most macroeconomic models, expectations formation is not costless. A bonus from low and stable inflation is that economic agents do not have to expend much effort in predicting inflation; the simple heuristic that inflation is a constant – or even that prices are stable – will suffice (Brazier et al., 2008). That is particularly valuable for households, who are likely to be relatively less informed.
It is not unlikely that the current investigation of the banks’ failure will reveal weaknesses in areas such as asset quality and governance, in addition to the more obvious flaws in their business model and risk management. Moreover, the estimated recovery ratios from the banks’ estates have given rise to questions about both the quality of their financial reporting and the reliability of their financial ratios as indicators of financial strength. But it was the banks’ difficulties in refinancing their foreign assets that catalysed the crash. Then, because of their size, the Icelandic Government was unable to rescue them in their time of need. Those working in the financial sector at the time will long remember the panic that ensued when US investment bank Lehman Brothers failed in mid-September 2008. All confidence and trust vanished. Financial undertakings tried to protect their equity and hoarded liquid assets as much as they possibly could. They resorted to measures that appeared sensible from the perspective of individual businesses but had devastating consequences for the system as a whole. When everyone is hoarding cash, a liquidity shortage will ensue. When no financial undertaking is willing to lend to any other, even the staunchest of them could end up in difficulties. This resulted in closure of credit lines and massive margin calls. Assets that were sold to raise liquidity, other than the very safest, were put on fire sales. Financial markets all over the world were close to freezing solid, and premia of all types rose to record heights.

One of the roles of the Parliamentary Special Investigative Commission is to compile information on these topics and present an analysis of them. The Central Bank neither has the capacity nor the will to front-run that analysis. The Bank will probably need to revise its operational practices in these areas in view of experience and the Commission’s findings, as will other supervisory institutions. In addition, the Bank will soon review its precautionary rules, such as those pertaining to financial institutions’ liquidity and foreign exchange balance, in light of recent events. Various elements of payment intermediation and settlement will also be reviewed in the near future, with the aim of promoting financial stability more effectively. Because of the uncertainty still surrounding assets, capitalisation, and ownership of Icelandic financial undertakings, it is difficult to assess the main risks in Iceland’s financial system at this time. However, those risks are clearly related to asset quality, on the one hand, and foreign exchange and indexation mismatches, on the other. For this reason, among others, it is important that financial institutions maintain capital adequacy ratios well above the statutory minimum in the near future. At present, deposits form the backbone of the banks’ funding, as foreign investment in Iceland and access to global credit markets are limited. Lifting the capital controls entails a certain risk, partly because it involves liberalising capital flows while the ownership structure of the banks is still being clarified.
As we explained at the time of the forward guidance announcement, a rise in the yields on long term bonds is consistent with our commitment to price stability and supporting the recovery. Market interest rates at terms of 2–5 years have also risen recently. The date at which the markets expect the first increase in Bank Rate has moved in from the end of 2015 to mid2015. One possible explanation is that markets think that unemployment will come down to 7% more quickly than we do. Since the aim of our policy is to secure recovery as quickly as possible, that would be welcome. But policy is built not on hope, but on expectation. And we estimate there is only a 1 in 3 chance of unemployment coming down that quickly (Chart 1).4 Furthermore, thinking unemployment will come down faster than we expect isn’t enough to believe interest rates will rise soon. As I said earlier, the 7% threshold is a staging post to assess the economy. Nobody should assume that it is a trigger for raising rates. Another possible explanation is that the increase in shorter-term yields, like the move in long yields, reflects changing expectations of US monetary policy. But the US recovery is much further advanced than that in the UK.

Instead we are focussed on doing what we can to reduce uncertainty and build resilience so that the recovery can be sustained despite the inevitable shocks ahead. We are removing uncertainty with our guidance that interest rates will stay low at least until unemployment has fallen. That will boost demand. By repairing the balance sheets of banks we are putting them in a position to support the real economy. That will promote investment. And by standing ready to use the range of other tools at our disposal, we can help to avoid sowing the seeds of the next crisis. In these ways, the Bank of England is helping the British economy over the threshold and into strong, sustainable and balanced recovery. Thank you. BIS central bankers’ speeches  7  8  BIS central bankers’ speeches
So far as foreign banks operating in Hong Kong are concerned, Hong Kong political risk largely seems to have disappeared as an issue. We have seen no exodus of banks from Hong Kong; rather, we have seen an increased appetite among the foreign banks to take on long-term HK dollar assets, including residential mortgage loans and syndicated credits. Although the margin on these have come down significantly over the last year, they are still attractive compared with the margins available to foreign banks in their home countries. The importance of international regulatory standards We do not anticipate any radical changes in Hong Kong’s system of banking supervision after 1997, nor in its attitude to the entry of foreign banks. No doubt, however, these will evolve in line with trends in global regulation. This reflects the guiding principle of our supervision in Hong Kong which is to follow international standards. There are a number of practical reasons for wanting to do so. First, it is in keeping with Hong Kong’s role as an international financial centre. Reputable foreign banks will only want to do business in a market where the rules of the game are familiar and credible. Their home supervisors will certainly feel the same way. There is thus absolutely no advantage for centres such as Hong Kong to compete on laxity or to market themselves as places where dubious transactions can be conducted and concealed.

The arrangement will be phased out in the course of autumn. Norges Bank eased its collateral requirements to facilitate banks’ borrowing access in the central bank. That will be reversed. Moreover, we have earlier announced that Norges Bank will reduce the share of banks’ access to loans from the central bank backed by bank bond collateral. The interest rate is now extraordinarily low. The Executive Board considered raising the key policy rate at the monetary policy meeting on 23 September, but decided to leave it unchanged. Norges Bank has previously noted that if developments continue as expected, it may be appropriate to increase the key policy rate earlier than projected in the June Monetary Policy Report. 3. The financial crisis and economic policy – lessons  In Norway, there is a division of roles in economic policy. Wage formation, the tax system and economic regulation should contribute to well functioning markets and promote the efficient use of labour and other real economic resources. The government budget – growth in public spending – influences the real exchange rate and the size of the internationally exposed business sector in the long term. The fiscal rule enhances the predictability of petroleum revenue spending in the Norwegian economy even when the budget is actively used from one year to the next to stabilise economic developments and even when the automatic stabilisers are allowed to operate. A smooth phasing in of petroleum revenues dampen krone fluctuations and reduce the risk of abrupt and major shifts between internationally exposed and sheltered industries.
As Asia’s infrastructure is still at an early stage of development, we have an opportunity to harmonise practices while making the changes needed to respond to emerging global regulatory reforms. It is heartening to note that Asian regulators are working closely on OTC derivatives regulations. A good example was the joint letter from Singapore, Hong Kong and Australia to the US CFTC, expressing our concerns on the extra-territorial application of the US rules. II. Harnessing technology to transform Asia’s financial infrastructure in a gamechanging fashion  21. Regulators everywhere are confronted with highly connected global markets. Collecting and managing information is now a core competence in itself, for effective surveillance of the financial markets. Similarly, market participants are making greater use of technology in risk management – performing complex portfolio valuation and mitigating risks such as through intra-day margining at CCPs, and often across global books and in multiple time zones and jurisdictions. Moving collateral across markets swiftly and efficiently is also now a core competence. 22. Besides risk management, technology can be useful in developing liquidity in Asian markets. It can bring greater pricing efficiency and transparency, as we are seeing in the US and EU financial markets as trading moves to electronic platforms. 23. In Asia, there is room for our financial markets to embrace greater “electronification” of trading, notwithstanding our smaller markets.

Asia is certainly not free from risks, and there is much work ahead to preserve and improve sovereign ratings. But no one can assume that the recent rebalancing of risk assessments vis-à-vis the advanced economies is temporary. 9 What this continuing shift in global funds also means, however, is that there is critical need to add depth and breadth to Asian financial markets. It will not be possible to absorb a greater share of global savings without developing this depth and breadth in markets, and a robust market infrastructure. Otherwise, both global and Asian capital flows within the region will lead to recurrent bubbles, whether in equities, property markets or currencies, rather than find their way to the most productive investments in Asia’s economies. 10. Asia’s financial markets have grown significantly over the past decade. But the capital markets, and especially for bonds and securitised debts, remain small in relation to Asia’s GDP. Further, the region’s financial markets are still relatively small and fragmented. 11. There is by the same virtue, great potential to develop Asian financial markets and enable them to play a stronger role in promoting balanced and sustainable growth. 12. We will have to push ahead with reforms at two levels to develop these financial markets. Gradual and progressive financial liberalisation can bring about more liquid and broader domestic financial markets. It will also help spur domestic demand by households, and provide smaller enterprises with better access to capital in several Asian economies.