samchain/econo-pairs-v1 huggingface dataset:
I will return to this in a moment. A too weak and blunt weapon? Another argument against “leaning against the wind” concerns the effectiveness of the interest rate in this context. To “lean against the wind” one must be able to count on dealing with the imbalances by making reasonable increases to the policy rate. One hypothesis is that the optimistic mood often prevailing during a boom in the property market means that significant increases in the policy rate are required to have an effect. Otherwise it would be rather like trying to bring down an elephant with a pea-shooter. The critics claim that the severe monetary policy tightening that would be needed could have serious effects on the rest of the economy. Here we also have the problem that the interest rate is a blunt weapon that affects the entire economy and cannot be aimed at an individual market. If you use a shotgun to take aim at a mosquito in a swarm you will probably also hit those around it, even if you weren’t aiming for them. From this aspect, there is a risk that the central bank could do more harm than good. I think the critics have a point here. As I mentioned earlier, trying to dampen a spiral of overoptimism and rising prices may be like trying to stop a runaway train with one’s bare hands.

Meanwhile, NPL and delinquency have continued to decline, as the ratio of NPL, net of provisions, to total loans has declined further to 2.7 percent as banks attentively monitored their asset quality. Moreover, profit continued to be recorded for nine consecutive years, and the overall capital position of the banking system strengthened further, with BIS ratio at 16.1 percent, of which 12.6 percent is Tier 1 capital. Much of the current strength and resiliency of our banking sector owes a great deal to the reform groundwork laid during the past decade. On prudential supervision, as apart from requiring banks to conform to international best practices on risk-based supervision under Basel I and now Basel II, the Bank of Thailand also moved to strengthen our supervisory function, utilising both on-site and off-site supervision as well as asking banks to carry out stress tests on a regular basis. The key here was to strengthen banks’ own risk management culture and system. Works on strengthening the financial infrastructure were started and are still on-going. In this regard, various initiatives were introduced, including the long-term effort to reshape the financial system, and address inherent structural weaknesses, that was the mission of the Financial Sector Master Plan Phase I. The establishment of the National Credit Bureau to improve credit information, and improvements in financial legislations, including the new Financial Institutions Business Act, the Bank of Thailand Act and the Deposit Protection Agency Act. Today, our banking sector fundamentals continue to be strong, serving as a dependable pillar for our economy.
The TCFD report provides case studies – from Rio Tinto to Unilever to Citi – and finds common characteristics of good scenario analysis:   Using multiple climate-related scenarios to assess strategic resilience    Describing assumptions and parameters specific to the company    Identifying potential impacts of climate-related risks or opportunities    Disclosing potential strategic resilience under different climate-related scenarios  To develop leading practices, the TCFD has created a Knowledge Hub which provides guidance, research, tools, standards, frameworks and webinars.16  12  The Task Force encourages companies to describe the characteristics of their strategies that allow them to adapt to climate-related changes materially affecting their business while maintaining operations and profitability and safeguarding people, assets, and overall reputation. The TCFD report identifies that Investors are likely to need information on the range of scenarios considered by a company; implications of each scenario for the business; strategic options considered; and the reasoning around the strategy adopted. Another factor that may warrant disclosure is the company’s ability—and flexibility—to adjust its strategy in response to emerging climate conditions, including alternative ways to use resources and the robustness and redundancy of business processes. 13 TCFD Status Report (2019) pg. 64 14 TCFD Status Report (2019) pg. 63 15 TCFD Status Report (2019) pg. 62 16 This includes several industry associations and non-governmental organizations that have brought companies together to work through sector-specific approaches to climate change issues.

Such “tilt” investment strategies, which overweight high ESG stocks, and “momentum” investment strategies, which focus on companies that have improved their ESG ratings, have outperformed global benchmarks for close to a decade. More widespread adoption of such strategies is essential. At present, one of the biggest hurdles to doing so is the huge variation in the measurement of ESG.18 Common taxonomies to identify environmental outperformance, such as the EU’s Green Taxonomy and the Green Bond Standard can help but they tend to be binary (either dark green or all brown). Mainstreaming sustainable investing will require a richer taxonomy – 50 shades of green. One promising option highlighted by the UN’s Climate Financial Leaders is the development of transition indices composed of corporations in high-carbon sectors that have adopted low carbon strategies. Consideration should also be given to the new assessments by leading asset owners of how well their portfolios are positioned for a two degree target. Once again, Japan is leading the way. GPIF, the world’s largest pension fund, calculates that its portfolio is aligned to a 3.5 degree world. Allianz assesses that it is on 3.7 degree path and has committed to get to 1.5 degrees by 2050.
The episodes of market volatility were triggered by relatively small and transitory disturbances in an environment of strong macroeconomic fundamentals and abundant financial market liquidity. Therefore, these episodes do not provide sufficient guidance on how the financial system would perform in the event of a larger shock that could trigger a more material and longer-lasting reappraisal of risks at a less favourable stage of the credit cycle. However, they have served to reaffirm concerns about preexisting vulnerabilities and potential risks. 3. External environment  Let me now turn to the vulnerabilities we have identified in the external environment. Overall, risks stemming from global imbalances have remained broadly unchanged over the past six months. The chart on the left of slide 4 shows that persistently large US current account deficits have not fully accumulated into the net foreign asset position of the US, largely because of exchange rate and asset price changes. Valuation effects – primarily a weaker US dollar – have played some role in containing  BIS Review 69/2007  1  US external indebtedness. Nevertheless, the negative US net foreign asset position still remains very large in historical terms by comparison. Since the previous assessment, concerns have increased about the possible implications of carry trades in the foreign exchange markets, driven by relatively low short-term interest rates in Japan and in Switzerland and very low exchange rate volatility. An indicator commonly used to highlight speculative pressures on exchange rates is the net short non-commercial positions in currency futures.

As shown in the chart on the right of slide 4, this indicator reached unprecedented levels in early 2007 for the Japanese yen, suggesting that carry trading has grown significantly since the beginning of 2006. In Box 4 of the FSR, a close look is taken at the evolution of the foreign exchange carry trades. The conclusion is that, from a financial stability perspective, large outstanding carry trade positions may be a concern if they make the targeted financial markets vulnerable to unexpected changes either in short-term interest rates in the funding currency or exchange rate volatility. A pertinent issue for the outlook for financial stability is whether there have been signs of a turn in the US credit cycle. The assessment of the markets and banks appears, on the face of it, to be somewhat divided. For example, credit spreads on sub-investment grade bonds have narrowed further, but US banks are no longer easing their credit standards on loans granted to firms. The fundamentals of US firms have overall remained strong. Although rating downgrades have outpaced upgrades in the US credit market, this deterioration of credit quality has not translated into higher default rates. It has been suggested that the existence of abundant market liquidity is one of the reasons why rating agencies have, since late 2004, consistently revised their forecasts of rising global default rates, pushing them further into the future (see the chart on the left of slide 5).
Even if property prices do fall further, there is a strong incentive for homeowners to continue to service their mortgages. The main problem loans we have seen so far have been in the corporate sector and in trade finance. Some companies have run into unavoidable problems because of the regional situation while others may have over-extended themselves. However, it is worth noting that the corporate sector in general in Hong Kong has avoided the excesses seen in the rest of the region. In general, companies in Hong Kong are not highly leveraged compared with their counterparts in the region and have not poured resources into an indiscriminate build-up of fixed assets. The banks have also tended to follow more prudent lending policies than those elsewhere and are better protected by their ability to take and realise good collateral. We do not therefore expect to see the collapse of asset quality that has occurred in some regional economies where corporates and the banks have also had to contend with massive exchange rate depreciation. The local banks in Hong Kong also have the benefit of the cushion provided by their high capital adequacy ratios. This means that even if the banks do have to make higher provisions this year, it will be their profitability rather than their solvency that is affected. While lower profitability is by no means welcome, it is not, by itself, a cause for concern in terms of the stability of the banking system.

A number of foreign banks have already given up their banking licences but this has been largely due to problems in their home market or mergers with other institutions. The Asian crisis is likely to result in further rationalisation among the banks from the region as they are merged and restructured in their home countries. The reduction in business activities such as syndicated lending and trading in regional debt securities may cause other marginal players to leave Hong Kong, simply because they can no longer make money. However, I am sure that the bulk of foreign banks remain committed to Hong Kong and will want to retain a substantial presence here. This is not wishful thinking, but rather founded on hard logic. First, it simply does not make sense to suggest that within the space of a few months Asia, as a whole, has become less relevant to banks with global aspirations. Second, within Asia, Hong Kong retains its unique attractions as the main centre for banks to do business with China. Leaving aside short-term cyclical fluctuations, the economy of the Mainland is clearly on an upward path. Foreign, and indeed local, banks will want to share in the financing and advisory opportunities which this brings, and Hong Kong will remain the best location from which to launch these activities. The costs of doing business in Hong Kong must however be reasonable; and that it is why the current adjustment process is necessary as well as painful.
5 In the UK, the Financial Services Compensation Scheme guarantees retail bank deposits up to £ 6 On the eve of the financial crisis HBOS, Lloyds and RBS held over £ billion of sight deposits from UK households, and provided close to half of the UK’s personal current accounts. 7 As the then-Governor Mervyn King said at the time “The actions that were taken were not designed to save the banks as such, but to protect the rest of the economy from the banks.” 4  All speeches are available online at www.bankofengland.co.uk/news/speeches  4  60% of payments were made in cash, by 2018 this had fallen to 28%, and has been predicted to drop to 9% of payments by 2028.8 [See chart 2]. Technology, alongside changes to domestic and European regulations designed to foster competition and innovation, is also enabling a new set of players, in addition to banks and card companies, to provide transaction related services. Some of these seek to replace banks or card companies in performing operations in existing payment systems while others seek to add new services to those operations. These developments are about improving the efficiency and functionality of transacting electronically in commercial bank money. But there is also a new wave of technological development that enables the transactional use not of central or commercial bank money but rather a new form of asset, so called ‘crypto-assets’ - cryptographic digital tokens, recorded in distributed ledgers and held in electronic safety deposit boxes called ‘wallets’.

Not surprisingly, the comparison between different types of cards shows that debit card transactions cost less than those initiated with charge and credit cards. However, the comparison is not entirely fair. We should bear in mind that these cards provide different types of services. Debit card transactions are also cheaper for the issuing bank than the distribution of cash to the public through the ATM system. The variable costs for cash withdrawals vary, depending on whether or not the ATM terminal and the card are owned by the issuing bank. On average, the variable cost for the bank of a cash withdrawal is 1.30 Swedish kronor, to be compared with the cost of 0.23 Swedish kronor that the issuing bank has for a debit card payment. Cash withdrawals are, however, less expensive than charge and credit card transactions. As regards the second question we posed, regarding the functioning of the price mechanism, our results show that users receive very little information through the price structure on the costs that banks have in the provision of payment services. The average Swedish bank does implement a twopart tariff, as was our assumption. However, the problem is that for a large number of payment instruments the variable fee is set to zero, although our study indicates that marginal costs are above zero. On the whole, with the exception of debit card transactions (on the acquirer side) and direct debits, variable costs and fees differ significantly.
Whether policymakers are always fully aware of the ultimate goal to promote the welfare of the people is another question. Policymakers in transition face many challenges and bold decisions. Let me mention just a few. Whether to privatize rapidly or not? Whether to open up the economy at once or retain external controls for some time? Whether to aim at zero inflation or not? The main point is that those (and other similar) questions should not be answered only from the viewpoint of either ideology or academic debate, but should be answered in the light of the fact that they are only means to achieve the ultimate goal of increasing the welfare of a people in each country in transition. I would argue that policymakers tend to forget this and think of measures in transition as the goal in itself. For example, sometimes they are proud of rapid privatization regardless of its effects. The second danger is that policymakers do not care about the ultimate objective at all. Sometimes, politicians do things in order to enrich themselves, their family or friends, instead of increasing society’s welfare. Such behaviour is called a “bad” political culture (Hillman and Swank, 2000). It has to be stressed that those societies perform badly. Corruption is endemic, tax evasion high, resources are misallocated, growth lower, and inequalities higher. In the transition process people are sometimes forgotten. And here I do not refer only to the poor or deprived, but people in general.

Many papers have been written recently that show what may be the consequences of the scenario in which the financial markets - in view of no adequate measures undertaken by economic decision-makers - initiate adjustment processes by themselves 16 . If the financial markets start pricing in higher risk premium for American debt securities, the outflow of capital from this market - or even decreased capital inflows - may lead to a fall in bond prices, i.e. to a sharp increase in long-term interest rates, a slowdown on the property market, depreciation of the dollar and, consequently, stagnation or even recession, which may be observed globally. In order to mitigate the probability of such a scenario, structural reforms should be implemented in many countries. The USA should substantially reduce its budget deficit and - via a reform of the pension system - increase the household savings rate. In the EU and Japan a series of structural reforms should be accelerated to raise the flexibility and competitiveness of the labour and product markets . In the Asian countries, and first of all in China, the exchange rate regime needs to be made more flexible, which should be preceded by reforms that would strengthen the financial system, also via a greater openness to foreign capital inflows. At present, it is difficult to assess the likelihood of the scenario involving a serious slowdown in the global growth; nevertheless, implementation of necessary reforms is proceeding slowly.
Including financial sector debt in the total leads to some double counting. But in my view, including financial sector debt is informative as it reveals information about the financial system that is intermediating credit - and as such, about financial stability. 7 ‘Down in the slumps: the role of credit in five decades of recessions’ by Jonathan Bridges, Chris Jackson and Daisy McGregor (Bank of England Staff Working Paper No. 659). As reported in Carney (2019), ‘The global outlook’, over half of recessions are preceded by private sector credit booms and within advanced economies, two-thirds of private credit booms have also ended in recessions. 8 See, for example, Schularick and Taylor (2012), ‘Credit booms gone bust: Monetary policy, leverage cycles and financial crises, 1870-2008’, American Economic Review, 102(2): 1029-61, and Kaminsky and Reinhart (1999), ‘The twin crises: the causes of banking and balance of payments problems’, American Economic Review, 89: 473-500. 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  Between 2000 and the crisis in 2008, total global debt as a proportion of global GDP grew by over 60 percentage points, a growth rate of nearly 30%. Between 2008 and 2018 it has grown by around 25 percentage points, a growth rate over the last 10 years of just under 10%. However, the bulk of the post crisis growth occurred in the first 5 years after the crisis as governments stepped in to offset private sector deleveraging and support the economy.

The second risk that may arise after we have left the EU, is the related but perhaps more prosaic issue of the flexibility of the UK’s regulatory framework and allocation of responsibilities within it – the division of tasks between Parliament, Government and the regulatory authorities. Much of our financial sector legislation and regulation has been made at the EU level. This has increasingly taken the form of extremely detailed EU primary and secondary legislation directly applicable in Member States.4  This approach has been justified as necessary in the EU by the need to prevent divergences between member states. The cost, however, as some have observed, is an over complex and rigid regulatory framework.5 As a preparatory step for Brexit, Parliament has ‘onshored’ EU legislation and regulation and also the allocation of responsibilities that lie behind it. At some point, post Brexit, we will, I think, need to address this rigidity and hard wiring of detail to ensure we have a coherent, effective and flexible regulatory system with appropriate accountability. How we do that will have an impact on how we address risks, at firm and at system level, in a fast changing financial system. Financial stability post-Brexit With that nod to the future, I will leave Brexit - for today at any rate – and turn to the examination question you have set for today – financial stability post Brexit. I would like to focus on the question of debt.
The years before the financial crisis – the calm before the storm From about the middle of the 1990s until the outbreak of the financial crisis, economic development both in Sweden and abroad was characterised by positive growth and low inflation. Fluctuations in production and inflation decreased, at the same time as productivity growth in Sweden and elsewhere increased. There are many ways of illustrating this development, but one way would be to examine government bond rates in Sweden, the euro area and the United States (see Slide 1). Certain clear patterns can be detected. These include decreased interest rate levels and a reduction of fluctuation in these over time. In addition, from the mid-1990s, interest rates in various countries developed in a strikingly similar manner. This strong development can be further illustrated by growth in the world economy, which fluctuated between 2 and 5 per cent and averaged almost 4 per cent (see Slide 2). All in all, developments from the mid-1990s until the start of the financial crisis can be compared to a voyage through relatively calm waters, to return to our nautical analogy. But then the storm broke. Sweden’s economy during the financial crisis – what happened? Happily, we can now start talking about the financial crisis as something we have left behind us.

All in all, the monetary policy stance suggests a gradual increase of the repo rate towards more normal levels (see Slide 12). This is a precondition for the balanced development of the Swedish economy. As I mentioned two days ago, housing prices and debts among households have increased heavily for a longer time. The rate of increase of household debts has far exceeded the rate of increase of incomes. If this development continues, imbalances may arise in the Swedish economy over the long term. Consequently, in this regards, the normalisation of the repo rate level may also contribute to promoting a stable economic development in the future. Even if the development of Sweden’s economy is favourable, it is naturally not risk-free. What risks can we see at present? Firstly, the krona may appreciate more than we had expected. The assessment we have made is that the krona, to a significant extent, already reflects the high growth rate of GDP and the strong state of public finances, for example. However, I would like to point out that forecasts of exchange rates are always associated with significant uncertainty. It cannot be ruled out that the favourable development of the Swedish economy has led many investors to reappraise their view of investing money in Sweden. So could an excessively strong exchange rate form a problem? Yes, it may form a “problem” in so far as demand for Swedish exports will decrease and inflation may not increase in line with expectations, as imported goods become cheaper.