samchain/econo-pairs-v1 huggingface dataset:
Eddie Yue: Financial markets in Asia - turning challenges into opportunities Speech by Mr Eddie Yue, Deputy Chief Executive of the Hong Kong Monetary Authority, at the International Swaps and Derivatives Association (ISDA) 34th Annual General Meeting, Hong Kong, 10 April 2019. * * * Thank you for inviting me to speak at the ISDA Annual General Meeting. For those of you coming from overseas, let me welcome you to Hong Kong and the very dynamic Asian region. By now, I hope you have experienced and enjoyed the vibrancy of the city. Indeed, this same vibrancy runs through Asia, which has got strong economic momentum with a promising outlook. But as central bankers, our job is to be on the lookout for future challenges and how to overcome them. So today I’d like to start by outlining two near-term risks on my radar screen, and then discuss two longer-term challenges for Asia. I would then offer some thoughts on how financial sector developments, including a lot of the efforts that ISDA has been involved in, can help overcome these challenges. Challenges for the Asian Economies Asia has seen remarkable economic growth over the past several decades – its GDP, on a purchasing power-adjusted basis, now accounts for more than 44 percent of global output, up from just 30 percent in year 2000. Living standards have improved dramatically, and per capital income has more than tripled over this period.

As an example, the HKMA and our peer authorities in the region have adopted fintech sandbox 3/4  BIS central bankers' speeches  regimes, which are effectively testing grounds with a well-defined scope and a clear timeline. The authorities do not generally stipulate an exhaustive list of regulatory requirements in these sandboxes; rather, the products are to be developed flexibly, and requirements would be evaluated during the process. Coordination among regulators has also already begun as the Global Financial Innovation Network (GFIN) is now inviting applications for cross-border testing of financial innovations. That said, while providing a conducive environment to support innovation, central banks and regulators would have to strike a good balance with its other functions in consumer protection and financial stability, especially as the new and innovative services grow in scale or become widely adopted. Cross-border coordination is also required to address potential arbitrage across jurisdictions, given the much wider reach of fintech products and services. Derivatives markets, on the other hand, have a much longer history. The regulatory framework should therefore be informed by history, and lessons from the global financial crisis must not be forgotten. Regulators need to guard against the problems that plagued derivatives markets before the crisis: namely, the overuse of leverage, excessive interconnectedness, and opacity. I don’t need to “preach to the choir” on the tremendous efforts exerted by regulators and market participants internationally to solve these problems.
The subsequent euro area sovereign crisis, the uncertainties created around the Brexit referendum, and the onset of the pandemic were seen as perpetuating and / or amplifying those risks. At least in the eyes of some MPC members and commentators, accommodative policy over the past decade was also motivated as a way of ‘buying insurance’ against the possibility of a further deterioration in the economic outlook or a renewed bout of market dysfunction. Insuring yourself against unpleasant outcomes makes sense. But insurance comes at a cost. For a monetary policymaker the premium paid to ‘buy insurance’ is the cost of having to alter the policy stance should the risks against which the insurance was bought not materialise. By nature, such a ‘risk management approach’ at that time implied erring on the side of offering more policy support – in practice, of doing more, rather than less, QE – in order to stave off the potential impact of risks that were viewed as heavily skewed to the downside.3 This motivation was bolstered by fears about the effectiveness of monetary policy transmission as Bank Rate reached its effective lower bound, as well as potential downward rigidity in wage and price setting.4  Bank of England  Page 5  Asymmetries in the structure of the economy, in policy transmission and in the distribution of shocks all served to justify – at least on occasion, for some MPC members – an offsetting asymmetry in setting the monetary policy stance.

As we saw with the onset of the global financial crisis, in the face of deflationary pressures, monetary policy makers can resort to asset purchases in the form of quantitative easing to ease the stance of monetary policy and financial conditions more broadly. Central bank asset purchases can be seen as working in two ways. Asset purchases as a substitute for changing Bank Rate First, they are a potential substitute for monetary easing via the conventional lowering of interest rates should the effective lower bound on Bank Rate bind. In this context, QE can influence the economic outlook through a number of channels. On the basis of quantity-theoretic considerations, an expansion of the central bank’s monetary liabilities may raise inflation expectations directly. QE can also offer guidance to the market about the Bank’s plans for interest rates. In short, QE may work through a signalling channel. The increase in central bank reserves associated with QE may lead to portfolio rebalancing, as banks attempt to restructure their balance sheets by buying financial assets or making loans. More generally, the absorption of duration from markets associated with Bank of England purchases of government debt financed by the creation of central bank reserves can trigger efforts by a broader set of market participants to rebalance portfolios, leading to a bidding up of asset prices. Higher asset prices ease the wider set of financial conditions faced by households and firms, supporting economic activity alleviating deflationary pressures. In sum, QE may also work through a portfolio balance channel.
This forum, which was held on the eve of global turmoil outburst, indicated that the Albanian banking system had significantly increased its resilience. It addressed important matters related to: •  Transparency and customer services,  •  Risks related to foreign currency credit and consumer credit, as well as  •  Interbank market functions and monetary policy transmission in the economy. Today’s forum takes place in an important moment of the banking and financial system. After a hard year, it seems that the situation is becoming eventually normal. Therefore, I am confident that, figuratively, the third forum will have the consolidation of public confidence in the Albanian banking system as the main motif. Achievements in this regard are not lacking. Statistics show that deposit level is approaching steadily to its prior-crisis level, while ALL credit livening-up is continuing. Dear participants, Today’s meeting is held after some important financial and economic events dictated by the global crisis. Now that the situation has cleared up and has entered into an improvement stage, a thorough analysis is being made about its causes, about public authorities’ reaction and about actions to be taken, in order to raise the global financial system’s resilience. Now, allow me to deal briefly with the main features of this unmatched crisis, and then continue with some arguments on the functioning of the Albanian financial system and some necessary regulations for its further perfection.

To provide a longer-term response to stable economic development, public authorities should speed up to design and implement stronger development policies, which in the medium run enable establishment of a better equilibrium in the contribution of various sectors to economic growth, which raise competitiveness of our economy and make it more formal. To find better development equilibriums even in the financial system, it would be necessary to draft policies that would promote a faster development of the non-bank financial sector and would support creation of capital and debt markets for private entities. Accomplishment of these objectives would preliminarily require strengthening of financial reporting standards; completion, accuracy and improvement of law-enforcement in terms of business relations development; as well as a better protection of creditors’ and consumers’ rights of financial institutions and products. In practical terms, these measures would expand financing resources for economic development, thus relatively decreasing its dependence on the banking sector. Also, public authorities should, through a close cooperation among them, review and improve the framework of measures for efficiently withstanding the extraordinary financial situations, being ready to engage the necessary financial, human and technological resources and carry out necessary legal and regulatory changes. Dear heads of the Albanian banking system, The events we have experienced in these 12 months make us believe that prior-to-crisis economic and financial balances are likely to shift to a new equilibrium.
This is a balance that is much easier to achieve in theory than in practice! However, as I have explained here today, my assessment at the latest monetary policy meeting was that it will still be necessary to keep the repo rate at this low level for a long time to come. Thank you! BIS Review 111/2009  7  1. Financial markets functioning better Basis spread, basis points 400  400 Sweden  350  350  Euro area USA  300  300  United Kingdom  250  250  200  200  150  150  100  100  50  50  0  0  Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09  Note.

Broken lines refer to the Riksbank’s forecasts. 10  07  08  09  10  11  12  Sources: Statistics Sweden and the Riksbank  BIS Review 111/2009  7.High unemployment throughout the forecast period Unemployment, per cent of labour force, seasonally-adjusted data 14  14  12  12  10  10  8  8  6  6 Unemployment 16-64 years Unemployment 15-74 years September July  4 2  4 2 0  0 80  85  90  95  00  Note. Broken lines represent the Riksbank’s forecast, 15-74 age group. 05  10  Sources: Statistics Sweden and the Riksbank  8. CPI and CPIF Annual percentage change 5  5 CPI  4  4  CPIF  3  3  2  2  1  1  0  0  -1  -1 -2  -2 00  01  02  03  04  05  06  Note. Broken lines represent the Riksbank’s forecast. BIS Review 111/2009  07  08  09  10  11  12  Sources: Statistics Sweden and the Riksbank  11
For a start, the economy was clearly well suited to participate in Economic and Monetary Union (EMU): it has a long history as a market economy; it is already closely integrated with the euro area through trade and finance; it has close similarities with the euro area in the sectoral composition of output and employment as well as in terms of business cycle synchronisation; it enjoys a relatively high level of development, with a per capita GDP close to the euro area average; and its currency has a long history of stability. The euro, furthermore, offered the prospect of enhancing the economy’s potential to grow faster. The elimination of exchange rate risk and currency conversion costs should result in increased trade, while the low interest rate and inflation environment of the euro area should make for reduced business costs and greater macroeconomic stability. Combined with the fiscal discipline associated with monetary union, this is expected to translate into higher credit ratings and improved investment prospects. From a central banker’s perspective, moreover, a key benefit of euro area membership will be the elimination of the risks inherent  BIS Review 110/2007  1  in managing a small, vulnerable currency and their replacement by the greater security afforded by the world’s second most important currency. Finally, the object of our quest, that is participation in EMU, was desirable for another reason. We were aware that we would thus become part of a framework that has been successful in fostering economic growth and employment creation.

For, while the EU has for fifty years brought peace and stability to the peoples of Europe, the Single Market and Economic and Monetary Union have created a congenial environment in which economies can grow and people prosper. BIS Review 110/2007  3
Macroeconomic risks and outlook The war in Ukraine and the lockdown in China weighed heavily on the rebound in activity in Europe, and particularly in France, which had gathered pace in the second half of last year. They also strongly amplified, extended and diffused to consumer prices the rise in producer prices, initially driven by rising energy and raw material prices. In other words, we are now facing a "slowflationary" shock whose magnitude and duration remain highly uncertain at this stage. Nevertheless, the baseline scenario for the euro area as a whole, as set out in the ECB's recently published forecasts, remains that of continued growth, albeit at a more moderate pace of 2.8% in 2022 and 2.1% in 2023, with growth revised upwards to 2.1% in 2024. This baseline scenario also includes higher and more persistent inflation, of 6.8% in 2022, 3.5% in 2023 and 2.1% in 1  2024. The risk to this baseline scenario is clearly one of lower growth and higher inflation. For France, we will publish our new forecasts on 21 June and I cannot give you any scoops today. Nevertheless, it is clear from the latest business surveys that we have just conducted that the growth prospects in the short term should be in line with those in Europe, and a little less unfavourable in terms of inflation. So, based on our business survey in mid-May, early June, we expect GDP to rise by around a quarter of a percentage point in Q2, after -0.2% in Q1.

There is thus a significant risk that the collapse of a Swedish bank would have major, negative consequences for the entire Swedish banking system and for the economy as a whole. It is important for a central bank to manage these risks in such a way that they can never threaten financial stability. A reasonable consequence of this is that a systemically-important bank should be subject to particularly stringent capital requirements. The study that the Riksbank published at the end of last year shows that increasing capital ratios is an effective way of safeguarding financial stability, at the same time as the economic  BIS central bankers’ speeches  5  costs of this – in terms of lower GDP – are not necessarily significant.6 Sweden’s historical experience of low capital ratios is also bad, which is demonstrated not least by the banking crisis of the 1990s, and this has led to a gradual improvement. At the end of November last year, the Riksbank, the Ministry of Finance and Finansinspektionen issued a joint press release in which they declared how much capital they believed the four major Swedish banks should have. The capital ratio should be at least 10 per cent by 1 January 2013 at the latest, and at least 12 per cent by 1 January 2015.7 I would like to emphasise that it is very important that the banks reach these levels. However, we should not make this sound more dramatic than it actually is. The Swedish banks are already well-capitalised (see slide 9).
6  BIS Review 68/2002  Chart 4 Cross-country relationship between level and variability of inflation  Note: Mean inflation is the total increase in the quarterly consumer price index, expressed as a four-quarter growth rate, over the indicated horizon ending in 1999 Q4. The variability of inflation is the coefficient of variation (standard deviation divided by the mean) of the gross inflation rate (ie 1 + growth rate) over the indicated horizon ending in 1999 Q4. Each panel covers the all the countries for which a consumer price index was available over the indicated horizon. The largest sample size is 144 (for the 5-year horizon), the smallest sample is 85 (for the 25-year horizon). Source: IMF International Financial Statistics, data item 64, and Bank of England calculations. BIS Review 68/2002  7  Chart 5 Inflation and relative price variability in the UK  Note: Inflation is the total increase in monthly RPIX over the period indicated, expressed as a 12-month growth rate. Relative price variability is the cross-sectional standard deviation of the monthly increases of 80 sub-components of the RPIX in each month. Data ends August 2002. Source: Bank of England calculations based on ONS data. So inflation makes it more difficult for firms and households to work out whether the prices of the products they buy and sell have changed relative to other goods, or whether there has been a change in the overall price level. Such confusion can lead firms to produce, at least temporarily, the wrong level of output.

The Joint Forum’s study suggests that no single model for organising an integrated risk management function has become dominant. In some financial organisations, the function may exercise a considerable degree of control over individual businesses. In others - and especially in insurance companies - local business units continue to operate autonomously to a great degree. Yet nearly all firms that establish integrated risk management units are highly dependent on the quality of their information technology to collect, analyse, and report firm-wide data efficiently and effectively. Some participants have found that the greatest challenge in developing a centralised risk management structure lies in constructing compatible and efficient management information systems across all of their businesses. As a result, they devote substantial resources in terms of personnel and expenditures to the maintenance and enhancement of their management information systems. b. Risk aggregation into a single measure  Collecting risk data across many business lines has catalysed further efforts to aggregate those measures of risk by quantifying them in a rigorous fashion. This is the second major risk management trend identified in the Joint Forum report. The quantification of risk is certainly not a new concept in the insurance industry. Actuaries have long sought to estimate the likelihood of various events taking place. In recent years, however, we have seen financial risk managers and researchers apply mathematics, statistics, and modelling to many risk exposures that were previously not thought to be readily quantifiable.
However, the mandates of most central banks, including indeed both the Eurosystem and the Banco de España, also cover other objectives. There is, in particular, an area which deserves special attention in this context. I am referring, of course, to the function of promoting financial stability. It is precisely in this area where the impact of financial integration is less clear. Does financial integration promote financial stability? Or does financial integration put financial stability in danger? As a matter of fact, while the effects of higher integration on per-capita income and on the efficiency of monetary policy transmission have received a lot of attention by researchers, the impact of financial integration on financial stability is under-researched. That is why we are holding this conference. Despite the lack of research, it seems clear that there are some areas where financial integration favours financial stability. Firstly, a more integrated financial system enlarges the opportunities available to investors, lenders and borrowers to diversify the different risks associated with their financial decisions. Through such diversification, they should become less exposed to idiosyncratic shocks, asset prices and financial flows should behave in a smoother way and as a result, the risk of financial distress should be reduced. Secondly, in a more integrated system, financial intermediaries would find it easier to grow and at the same time would find the incentive to do so in the enlargement of their potential markets.

In addition, there are a number of initiatives currently underway to exploit more fully the possibilities of cooperation and convergence provided by this approach, and I think the results will be positive. Now it may be that over the longer term, the current structure is judged to be insufficient to meet the needs of a more integrated market, and that a more fundamental re-think of the organisation of EU supervisory responsibilities is necessary. I personally think that this debate will intensify in the next decade. But we would certainly need to proceed with great caution in this debate. I am a firm supporter of the idea that changes should only be made if clear problems are identified. But whatever happens, I think the solutions we have to look for should be cooperative in nature, embracing the needs of all EU member states. This would, in my view, be preferable to an approach which would tend to concentrate responsibilities in the hands of a few Member States while the implications of their actions would extend far beyond their borders. Taking a more inclusive approach is the way that we have found solutions in the past to European challenges, and I think it is the best way forward. EU-wide financial stability is of interest to all of us.
Excess liquidity during the first half of the century gave way to plummeting liquidity during the depths of the crisis. Today, despite rock-bottom global interest rates, market liquidity remains below normal levels. Risk capital is parked on the sidelines. Balance sheet repair So what explains this continuing aversion to risk? Two factors are central: balance sheet disrepair and psychological scarring. In other words, both balance sheet fundamentals and market perceptions, perhaps detached from fundamentals, appear to be weighing on risk-taking. Since the start of the crisis, balance sheets have been a good news/bad news story. The good news is that balance sheet repair is underway in many sectors and countries. The bad news is that this process appears to be far from complete, providing a continuing strong headwind to risk-taking. Consider in turn the balance sheets of banks, households, companies and governments. Pre-crisis, banks’ balance sheets were furthest out of kilter. Average leverage in the global banking system – the ratio of banks’ assets to their equity – rose to highs of over 40 (Chart 9). At the height of the boom, every $ of bank assets was financed with $ cents of debt. The global banking system was financing itself with a 98% loan-to-value mortgage. Since then, global banks have raised their equity by around $ billion and shrunk their assets by $ trillion. As a result, global banks’ leverage has halved to around 20, close to its long-run average.

Real gold prices have more than doubled since 2008, edging towards their previous high-water mark after the oil price shocks of the late 1970s (Chart 6). Safe-haven flows to the Swiss franc have boosted its value by over 30% against both the euro and the dollar since September 2008. The reach-for-return, familiar at times in the past, has flipped into a scramble-for-safety. Risky assets tell a similar tale. The compensation investors demand for risk – the so-called risk premium – in advanced economy equities and investment grade corporate bonds is above or in line with its long-term average value. Bank lending spreads, which embody a compensation for risk, are materially higher for all classes of borrower. And measures of equity market uncertainty, such as the VIX, are at levels not seen since early 2009 (Chart 7). Not for nothing has the VIX become known as the “fear index”. Some risky assets have fared better. Since their trough in late 2008, global high yield debt prices have risen by two-thirds, emerging markets equities have roughly doubled, while commodity prices have risen by even more. But even these assets have recently fallen from their peaks. Investors have concluded this is not a time for bravery. For much of this century, risk was cheap. Today it is expensive. Market participants’ willingness to put risk capital to work can be seen in measures of financial market liquidity. Those have also yo-yoed (Chart 8).