samchain/econo-pairs-v1 huggingface dataset:
Speech  Embargo 31 August 2021, 6.15 pm  Mortgage and real estate markets: Current developments pose risks to financial stability University of Lucerne  Fritz Zurbrügg Vice Chairman of the Governing Board * Swiss National Bank Lucerne, 31 August 2021 © Swiss National Bank, Berne, 2021 (speech given in German)  *  The speaker would like to thank Jacqueline Thomet for her support in preparing this speech. He also thanks Toni Beutler, Robert Bichsel, Maja Ganarin and Martin Straub, as well as the SNB Language Services. Page 1/12  Ladies and Gentlemen “House prices hit record highs”, “Swiss mortgage rates sinking again” 1 – these Swiss newspaper headlines from recent months show that developments on the mortgage and real estate markets are currently a topic of hot debate. These markets have undisputedly been highly dynamic over the past years in Switzerland and most recently also in many other advanced economies. Average prices of single-family houses and privately owned apartments, for example, have risen by over 80% in this country over the last 15 years. Similar growth can be observed in the volume of mortgage lending at Swiss banks (cf. slide 1). In the prevailing low interest rate environment, mortgage rates have never been so attractive. The Swiss National Bank monitors these developments very closely, since contributing to financial stability is part of its mandate. The mortgage and real estate markets play a key role in the banking sector and are thus of great importance to overall financial stability.

Besides the SNB, the Swiss Financial Market Supervisory Authority (FINMA) and the Federal Council also contribute to financial stability in Switzerland. Whereas FINMA is responsible for supervising individual financial institutions, the SNB monitors developments in the banking sector from the perspective of the system as a whole, i.e. from a macroprudential point of view. The Federal Council for its part is responsible for regulatory matters, for example regarding the amount of capital and liquidity reserves that banks must hold. In line with international developments, the SNB’s role and its macroprudential instruments have changed substantially over the past 15 years. The global financial crisis made it painfully clear that we need to become better at identifying and understanding risks to the system as a whole, and that we need to develop suitable instruments to make us better at averting the build-up of such risks. Such systemic risks can be structural or cyclical in nature. Structural risks include the ‘too big to fail’ issue, the fact that the failure of a single financial institution can suffice to endanger the financial system. Cyclical systemic risks, by contrast, arise when various financial players undertake the same actions simultaneously, excessively heightening financial upswings or exacerbating downturns, and thereby threaten financial stability. Almost exactly three years ago, I gave a speech here at the University of Lucerne in which I highlighted the structural ‘too big to fail’ issue and the measures taken to keep it in check.
Economic and financial pride had come before a momentous fall. Nemesis had duly followed hubris. 2 It was the coldest of comforts that this cognitive lapse was shared by the whole economic and policy-making profession. Clinical diagnoses of this failure will continue for some time. Was this an example of the intoxicating effect of power, the anaesthetising effect of success, or the humbling effect of uncertainty? I do not know. But if nothing else, this episode underlines the importance of cognitive constraints on decision-making when assessing the robustness of policy. Over recent years, there has been a huge amount of research on how human decisionmaking is affected by various cognitive biases. 3 Behavioural economics, the fusion of psychology and economics, has come of age. There has also been a huge amount of research over many years on central bank decision-making. 4 Yet the link between the two – the psychology of central banking – has to date been largely unexplored territory. 5 I want to engage in a little amateur psychology by beginning to explore that terrain. Psychology tells us that behavioural biases, because they are neurologically hard-wired, are often difficult to detect: they are unconscious biases. Simply recognising the cognitive constraints on decision-making is thus a first step towards making policy robust to them. So too is institutional design.

Indeed, I wish to argue that the evolution of central bank policy frameworks over recent years can be seen as an attempt to make them robust to  1  It was a term first popularised by Ben Bernanke, then-Chairman of the US Federal Reserve Board (Bernanke (2004)). 2  In Greek mythology, Nemesis was the spirit of divine retribution against those who succumb to hubris (arrogance before the Gods). The term hubris now typically refers to a loss of contact with reality and an overestimation of one's own competence, accomplishments or capabilities. 3  Loewenstein et al (2008), Kahneman (2011), Mischel (2014), Urminsky and Zauberman (2014). 4  Blinder (2004), Reis (2013) and Friedman and Schwartz (1963). 5  There are some obvious exceptions in research on monetary policy decision-making, discussed below. Sibert (2006) also discusses the topic of “Central bank psychology”. BIS central bankers’ speeches  1  psychological biases. I want to illustrate that by reference to the Bank of England’s policy framework. And, based on that analysis, I want to suggest some areas where a further evolutionary “nudge” in those frameworks might be warranted. 6 Behavioural biases in practice The literature on behavioural economics has sky-rocketed over recent years. 7 This identifies a long list of cognitive ticks that can affect human decision-making. All of these are likely to affect policy decision-making to some degree. But from that potentially very long list, let me highlight four biases which may pose a particular policy-making challenge.
And due to under-investment there is evidence of bottlenecks in the refinery arena which will take time to be rectified. So supply constraints too are for the time being a real possibility. The November 2005 Inflation Report explained that the oil futures curve indicated in early November that the oil spot price would remain around current levels for the next few years. However, there was considerable uncertainty around this. The Report cited illustrative estimates that market participants thought there was a one in four chance that oil prices would be $ per barrel higher or lower in six months time. This is a significant increase from February 2004, when the probability of such a change was thought to be less than one in fifty [Chart 2]. Chart 2: Market beliefs about oil prices six months ahead (a)  Source: Bank of England, November 2005 Inflation Report This shows that although the central case has oil prices essentially flat over the forecast horizon there is still a possibility we will see prices above those of today at some date, with corresponding significance for monetary policy. In the UK it is difficult to say with certainty what proportion of the last year’s rise in CPI inflation (that is from 1.1% in September 2004 to 2.5% in September 2005) was due to oil. But estimates suggest that up to around half the pick up can be explained by oil. The key issue for me is the possible impact of oil prices on inflation expectations.

Oil You will not be surprised that the increases in the oil price have featured highly in many recent MPC discussions. We have observed the significant increase in demand for petroleum products, particularly from China and the USA. But did you realise that China’s average annual consumption of oil is currently almost two barrels per capita per year, but Brazil’s is about 4 barrels, and the USA’s just over 25? Depending on the assumptions one makes, it seems to me to be plausible, despite efficiency gains and possible replacement of oil by other sources such as nuclear power, that China with its growth rate of 9% per annum will reach Brazil’s per capita level in just over 15 or so years. And with its population of 1.3 billion that could mean an additional demand of some 3.5-4 billion barrels per annum roughly equivalent to the 2004 production of Saudi Arabia or around 13% of global production. Add India in with a slightly lower growth rate and you easily approach 5-5.5 billion barrels per annum which is not far off the 2004 production of the whole of the North American continent - getting on towards 20% of world production. So on the demand side there is clearly a challenge. There is also great complexity in assessing the evolution of supply. The supply and price of crude is complicated by OPEC politics, and the length of time that it will take to get non-OPEC production such as Canada’s tar sands significantly on stream.
No matter how hard times the European Union is going through and no matter how many challenges must be adequately dealt with, an in-depth analysis shows that political, economic and social interests converging towards the continuation of this great project, namely the strengthening of the European Union, are stronger and more motivated than  BIS central bankers’ speeches  1  those stemming from rather circumstantial fears, arising out of the difficulties and vulnerabilities brought along by the global crisis. In order to stick to the virtuous direction that I have referred to – or to return to it –, I personally think that in these difficult times for the European Union, we should not forget to put things into perspective. This means that short-term policies must be harmonised with the long-term vision and policies. Romania’s stance is to consistently support EU-wide economic and institutional reforms. We believe that efforts to strengthen governance in the European Union and the euro area should be made without delay, and they should be understood and supported by all Member States. At the same time, particular attention should also be paid to the small- and medium-sized enterprises. In any country of the European Union, small- and medium-sized enterprises generate most of the turnover and provide jobs for most employees. Romania is no exception to this rule.

However, beyond any quantitative arguments, small- and mediumsized enterprises are an engine of economic growth, especially due to the fact that they are characterised by dynamism, flexibility and innovative power, which makes them able not only to adjust to the changes in the economy and quickly grasp market trends, but also to open up new avenues to economic and technological progress, as they are seen as tireless promoters of change. This is, in fact, the very essence of entrepreneurship. Last but not least, we should all be aware that some of the best-performing small- and medium-sized enterprises today will turn into the large companies of the future (as was the case of Mobexpert and Dedeman, two successful Romanian companies that currently provide thousands of jobs after starting in the early 1990s as small- and medium-sized enterprises, with only a handful of employees). Romania and Europe need small- and medium-sized enterprises not as survivors of the crisis, but as drivers of innovation, the catalyst for economic growth. Let me conclude by emphasising that good economic governance – based on four essential pillars: transparency, accountability, predictability and participation – is an important ingredient of economic growth. In-depth reform of economic governance at EU level and at global level is the way to go if we truly wish to achieve sustainable economic growth and job creation. Ladies and gentlemen, Now let me call on Mr. Vincent Cable to share with you his opinions on growth recovery across the European Union and the reforms for the future of Europe.
William C Dudley: The national and regional economy Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Whitman School of Management at Syracuse University, Syracuse, New York, 27 September 2013. *  *  *  Good afternoon. I am pleased to be here today at Syracuse University. It is always a pleasure to speak with the different communities that make up our region, and it is especially gratifying to have the opportunity to speak with you, our future leaders. So thank you for inviting me. My meeting with you today is part of our continuing efforts to understand what is going on at the grassroots level of our economy. Earlier on this trip, I met with government and business leaders in Buffalo, Rochester and Syracuse to learn about some of the challenges the region faces as well as the collaborative efforts being taken to further economic development. The agenda for these visits is always packed, but that’s part of the point – to meet with a diverse array of representatives in order to get a comprehensive picture of economic conditions in the region and a fuller understanding of the major issues and concerns. This is our fourth trip to Upstate New York in the past few years and recent trips have also taken us to Northern New Jersey, the boroughs of New York City, Long Island, and Fairfield County, Connecticut.

But I am also convinced that expanding the effective size of Asian financial markets through greater integration across jurisdictions, can make our economies better able to absorb the volatility of international capital as effectively as the US and European markets. It is therefore heartening to observe that several initiatives for promoting the development of the financial markets in the region are bearing fruit. A notable example is the Asian Bond Fund (ABF) initiative championed by EMEAP central banks. The ABF has been created specifically to encourage the development of bond markets in Asian economies, with the ultimate goal to create an integrated regional market. In developing the ABF, we have achieved a few firsts, including the introduction of the first exchange-traded bond index fund in Asia, arranging for two Asian markets to allow exchange-traded funds for the first time, and opening up the renminbi inter-bank bond market for the first time to foreign investors. The process leading up to the launch of Asian bond funds has shown that cooperation between central banks in the region can successfully deal with a number of technical and conceptual issues, which bodes well for the further development of this initiative as well as potential initiatives in other areas of financial market development. The successful experience of ABF has laid a strong foundation for enhanced regional cooperation by central banks to promote financial integration in Asia. There seem to be at least three aspects in which further development of central bank cooperation may be useful.
Unlike several of the East Asian economies that have liberalised only recently, Malaysia has always had a significant foreign presence that has represented an important benchmark against which the domestic banks can be measured. While the domestic banking institutions have moved in a deliberate manner to build up their capabilities to expand and provide new services, foreign banks have for the most part been able to move much faster. The more innovative foreign banks have in fact continued to grow their business despite the branching restriction. They are able to leverage on the research and development initiative, expertise and off-the-shelf products or inherit new delivery systems already tested by their parent banks. As such, the foreign banks have generally been better abled at identifying and reacting to changes in the market much faster than most domestic banking institutions. They are able to open new distribution channels that operate beyond the traditional delivery methods for financial services. Using new delivery systems and largely relying on new technologies, foreign banks have generated a more competitive environment for the domestic banks. Progress has nevertheless been achieved as the gap between domestic banks and foreign banks in terms of return on assets has narrowed. On an annualised basis, the ROA of the domestic banks has improved to 1.2% for the first quarter this year compared with 1.5% for the foreign banks. The gap was 1.1 percentage points in June last year. More importantly, the ROA of the top quartile of the domestic banks is even higher at 3%.

As I noted earlier, while the Code is not a set of rules, nor is it regulation, support for the Code and its principles is central to achieving its goals. With that in mind, I would like to turn now to the Statement of Commitment that was developed alongside the Code, talk about steps the New York Fed itself is taking, and then touch upon some of the industry measures underway to support adoption. The Statement of Commitment was developed and appended to the Code to provide a standard tool by which an institution may—on a voluntary basis—demonstrate its commitment to the principles of the Code. The Statement of Commitment provides that an institution is an FX market participant and has reviewed the Code. By using it, an institution acknowledges the principles as reflecting good practice and exhibits a commitment to conducting that institution’s activities in a manner consistent with the Code. The Statement, like the Code itself, acknowledges that market participants vary by size, complexity and nature of activities, and that diversity should be reflected in the steps they may need to take for adoption and adherence. Central banks, similar to FX market participants, are committed to the Code’s adoption as well. Following its publication, BIS central bank governors expressed their support for the Code by noting that central banks “are strongly committed to supporting and promoting adherence to the Code.
Now, in addition to continuing to explore such monetary policy tools, policy makers would have to elaborate on the uses of regulatory rules for limiting the risks threatening financial stability and designing the optimal institutional structure for that purpose that finds the perfect balance between the risk of losing central bank independence and the risk of creating coordination problems (between the central bank and the regulatory and supervisory agency). Financial stability in Turkey and the monetary policy In the second part of my speech, let me turn to financial stability in Turkey and the monetary policy we have started to implement in the aftermath of the global financial crisis. Turkey used to be among emerging economies with high volatility and particularly sensitive to global risk perceptions throughout the 1990s and early 2000s. However, this time the headwinds from the global crisis has remained relatively subdued thanks to the resilience of the financial system and prudent macro policies. Of course, the growth rate of the economy has dropped sharply, but neither price nor financial stability has been seriously jeopardized. In fact, Turkey was one of the few emerging countries that ended up with higher credit rating than pre-crisis level. A combination of several factors made the difference, but lack of excessive borrowing turned out to be the key.

We do not concentrate on inflation to the exclusion  BIS Review 93/2006  1  of all else; we also give consideration to real economic and financial developments. We conduct what is known as flexible inflation targeting. It is made fairly clear in the preparatory works to the Sveriges Riksbank Act that the idea is that we shall also give consideration to developments in the real economy as long as the inflation target is not threatened. A long-term perspective I will now move on to talk about the development of the Swedish economy in a long-term perspective. Let me begin by observing that I personally consider monetary policy to have been very successful since the crisis at the beginning of the 1990s. There is a substantial difference between the economic developments over the past 14 years and during the decades prior to this period. Sweden had an inflation rate much higher than that in Germany every year of the 1980s (see Figure 1). The 1980s began with two devaluations of 10 per cent and 16 per cent. For a devaluation to be successful, inflation must be kept down afterwards so the country does not lose competitiveness again. However, this was not successful in the 1980s. After the devaluations, Sweden’s competitiveness declined by around 30 per cent up to the crisis breaking out in 1992 (see Figure 2).
We already acknowledged the benefits from all specific measures implemented during the crisis, but we should be aware of their transitory role and the need to get back to the standard policy tools. Of course, the signs of current recovery are pointing to different stages of the normalization path and therefore, this reversal in the policy settings will differ from country to country. The new threat of deflation in the advanced economies is yet another potential obstacle in this reversal. From this point, that is already a challenging one, the next big challenge will be to return to a solid and sustainable growth. During this crisis, we experienced a lot and we learnt a lot. A number of weaknesses, mainly in the financial and fiscal areas, have been detected and addressed. Anyway, with the first signs of economic recovery, not everything has been fixed yet. There is still a need to repair banks’ balance sheets, to squeeze central banks’ balance sheets, to restore market confidence and to strengthen public debt management. The prolonged period of low interest rates has created a room for fiscal expansion and public debt increase, but the fiscal authorities must be aware that the end of this period is just about to come. The regulatory and institutional reforms undertaken in the last years should contribute to the soundness and stability of the financial systems. What has been done in this field in the last years should be fruitful on a longer horizon.

10  Too little capacity to absorb losses and the real economy pays when the system amplifies bad times. Too much capacity and the real economy pays because the system can’t perform as efficiently in the good times. So in determining bank capital and more generally, macroprudential policy is a balancing act. To support the real economy it must be both prudent and make economic sense. But make no mistake: the consequences of the financial system’s defences being overwhelmed are typically so great that it should be able to absorb very severe economic shocks. Tales of such shocks should be passed down through generations. 2) “What could, not what will” Central to assessing that the system can absorb severe shocks – is stress testing. And my second  principle is the one that guides the calibration of the economic scenarios that we test the system against. It is to always make sure those scenarios are the answer to “what could happen?”, not to “what will happen?”. In this principle, we embody a central lesson of the financial crisis. 4  All speeches are available online at www.bankofengland.co.uk/speeches  4  Our shared profession is easily criticised for its failure to foresee the crisis. But clairvoyance is not a reasonable standard to be held to.