samchain/econo-pairs-v1 huggingface dataset:
In Iceland’s case, it was both part of the problem and part of the solution. 6. We need to think of ways to protect the sovereign from failing banks. Bailing out bondholders is probably not always the best policy. 7. Finally, some elements of the so-called “Icelandic model” merit further consideration as regards wider applicability: allowing banks to fail, using the exchange rate as a tool for adjustment, and using capital controls as a tool for stabilisation. But we need  2  BIS central bankers’ speeches  to avoid hype and over-simplification. Some of what Iceland did was due to a lack of other options, and the cost-benefit analysis of allowing banks to fail or imposing capital controls might look quite different in larger countries or countries with different connections with the rest of the world. BIS central bankers’ speeches  3

In addition, we have been open about our response pattern, our analyses of economic developments and our assessment of monetary policy performance. Others are bound to judge the Bank in a critical light, not least this assembly. I hope and believe that you will find that our words and actions are compatible, and that in retrospect it will not be difficult to see the rationality in what we do, although it may on occasion seem surprising then and there. If we manage this, confidence in monetary policy should take firm hold and strengthen ahead. The basis for interest-rate setting and the present economic situation  By way of conclusion, I would like to address the basis for interest-rate setting and the present economic environment. The projections and analyses in the Inflation Report, in conjunction with our continuous assessment of the inflation outlook and developments in the money and foreign exchange market, form the basis for our decisions concerning interest rates. In the last Inflation Report published on June 20, price inflation was projected at 2½ per cent in 2003 on the assumption that interest rates remain unchanged. Norges Bank's assessment of the economic outlook was last presented in  BIS Review 74/2001  11  connection with the Executive Board's monetary policy meeting on 8 August. Both the analysis in the Inflation Report and developments since its publication indicated that at today's interest rate level, it is likely that the inflation target will be reached in the course of two years.
Such institutional factors probably account for some  2  Partly because of the strength of this institutional demand (and their tendency to buy bonds then hold them to maturity), inflation-linked markets are significantly less liquid than their nominal counterparts. DMO data show that as a proportion of the market capitalisation of bonds outstanding, turnover in the IG market is about 1/6th that of the conventional gilt market. BIS Review 84/2007  5  part of the measured rise in forward inflation rates. Nonetheless the stability of inflation expectations will remain a key concern for the MPC. Sovereign Investors In a global context, another influential set of investors in financial markets over recent years have been holders of official foreign exchange reserves and Sovereign Wealth Funds (SWFs). A by-product of large current account surpluses, the funds available for investment have ballooned over the past few years – foreign assets held by sovereigns globally currently stand at $ trillion, of which around $ ½ trillion is held as international reserves. This is around 5 times higher than the level seen in the early 1990s, and could well be an understatement. The growth in foreign assets has been particularly rapid in Asian countries (especially China) and oil and gas exporting economies, including Russia (Chart 12). It is difficult to be precise about the size of SWFs because they are not recorded explicitly in most official statistics. But recent estimates suggest that their foreign assets are in the range of $ –2 ½ trillion and they are rising rapidly.

We saw that impact on a few of the big banks earlier this year. In the securitised markets, the pace can look slower to begin with but then comes in a rush. Chart 7 shows the spreads on different tranches of the ABX index, the main benchmark index for sub prime securities. What is remarkable here first is how slow the spreads were to move at all. Of course, the predicted losses on particular tranches do no move smoothly with rising defaults, but throughout 2006 the economic press was a buzz with worry about the US housing  1  In particular, the High-grade Structured Credit Enhanced Leverage Fund and the Higfh-grade Structured Credit Fund both managed by Bear Stearns Asset Management (BSAM). BIS Review 84/2007  3  market; sentiment changed several times on whether the housing downturn would lead to a general recession. Throughout this period the originators continued to write new sub prime loans and the prices of the ABX scarcely quivered. But since January the story has been quite different with two dramatic hikes in the spreads first of BBB and then of the A-rated index. In total, the spread for BBB has gone from 500 basis points at the turn of the year to over 3000 basis points. Each of these steps has left casualties.
These  4  FSB, (October 2014) Key Attributes of Effective Resolution Regimes http://www.financialstabilityboard.org/2014/10/r_141015/?page_moved=1  5  http://www.financialstabilityboard.org/wp-content/uploads/Joint-CCP-Workplan-for-2015-For-Publication.pdf  2  for  Financial  Institutions  BIS central bankers’ speeches  issues around continuity and portability will be the subject of work within the FSB over the course of the coming year. Together, these initiatives to improve the resilience and recovery arrangements for CCPs and their members will help to reduce the probability of CCP default. But while improvements to resilience are necessary they may not by themselves be sufficient. No institution is “fail sfe”. Ultimately, we need to have a credible resolution approach for CCPs. If we do, resolution should offer a continuing benefit in helping to incentivise recovery by removing expectations that the taxpayer will be compelled to step in. By contrast, if we do not have a credible regime in resolution, we run the risk of weakening the incentives both to manage a CCP prudently, as well as incentives for clearing members to contribute to a CCP’s recovery should it get into trouble. The benefits of resolution to market discipline and recovery are common to all financial institutions. But that is not the only insight from banks that is relevant to CCPs. Before going too far in talking up the similarities, I should note – although it should go without saying – that CCPs are very different from their bank clearing members in many important respects, including their business models, legal structures and balance sheets.

And output has risen in every single quarter since the middle of 1992, something that is true of no other G7 economy. Why were the 1990s so successful? And can that success continue? Four features of our economy lie behind this improved performance. First, the new monetary framework - based on an explicit target for inflation, a high degree of transparency, and, since 1997, independence of the Bank of England made it clear to everyone that monetary policy was, and would continue to be, targeted on maintaining low and stable inflation. Second, a substantial fiscal consolidation turned a deficit of 8% of GDP in 1993 into a sustainable position for the public finances based on a set of clear rules for government debt. Third, a continuing programme of supply-side reforms, over a period of 20 years, made it possible to reduce unemployment without generating higher inflation. Fourth, although the unexpected twists and turns of the world economy did pose real challenges to monetary policy, especially in the latter half of the decade, those shocks tended to average out over time rather than cumulate in either an upward or downward spiral. In other words, the economic surprises alternated between good one year and bad the next, rather than adding up to “one damn thing after another”. In that sense, Lady Luck smiled on us. Of course, we were not alone in enjoying the 1990s.
Integrating new labour force entrants into the labour market will have to be compatible, moreover, with improved productivity. In this connection, it will be necessary to better incorporate technical progress and innovations into business and general government activity, and to enhance human capital skills. Likewise, prospective demographic developments will pose significant demands in respect of pensions and protection in situations of dependency. This will all call for further policies geared to re-balancing the sources of growth and stepping up the reform agenda in order to dispel the risks that are emerging and to ensure the continuity of the ongoing improvement in well-being in the medium and long-term. 6  BIS Review 117/2006

On “lowflation” and deflation  Why do we target the low, but positive, inflation rate of 2% rather than a zero or even negative rate? The simple answer is because it’s our job, given to us by the democratically elected representatives of the British people. We are accountable to Parliament for meeting it. On the occasions when inflation moves by more than 1 percentage point away from the target, we are required to explain publicly why that’s happened and what we’re doing about it in an open letter to the Chancellor. Before this year, that had happened 14 times in the past when inflation has been too high. The particularly subdued January inflation rate meant I had to write the 15th open letter, the first to address these points with respect to very low inflation. It is likely that I will have to write a few more of these over the course of the year. Our remit for 2% inflation reflects the lessons of the past, including the fight against high inflation in the 1970s and 1980s, as well as the deflationary disasters that have followed past financial crises. Low, stable and predictable inflation helps to stabilise households’ and firms’ expectations about future price increases. That helps them plan their spending, investment and hiring decisions. In short, the Bank of England worries about inflation so that everyone else doesn’t have to. High inflation damages growth, in part, because high inflation also tends to be volatile, generating uncertainty that makes important economic decisions more difficult.
At the end of last year, however, resource utilisation in the Swedish economy was beginning to be strained and inflation was estimated to rise to the extent that it would exceed the target level two years’ ahead. The Riksbank therefore raised the repo rate by a quarter of a percentage point to 4.25 per cent. The assessment of the risk spectrum indicated at the same time that a weaker economy in the USA could dampen growth in Sweden. As we now know, this is what happened. Developments during the spring During the first half of the year, the economic climate continued to weaken both in Sweden and other countries, but the signals regarding the strength of the downturn were mixed. The weakening in the economic climate was concentrated to the manufacturing industry, while household confidence remained strong, despite an undermining of household wealth in the form of falling share prices. Property prices were not affected in the same way as share prices, which probably contributed to keeping household’s confidence in the future strong. This applied both to the Swedish economy and the US economy. In the USA the Federal Reserve lowered interest rates gradually by 2.75 percentage points during the first half of the year, while tax reductions provided stimulation for households. For the Riksbank the picture was complicated by the fact that import prices rose unexpectedly rapidly in May. Later, the statistics showed that consumer prices had also risen more rapidly than expected.

One of the purposes of this was to illustrate that it was not possible for monetary policy to maintain inflation at exactly two per cent all of the time. Changes in the policy rate, known as the repo rate in the Riksbank’s case, are a blunt instrument with regard to steering inflation in the short term. It takes time before interest rate changes have an effect and monetary policy must therefore be based on forecasts of the inflation rate a couple of years ahead. In addition, there is uncertainty over how the economy functions. It is therefore impossible to parry all shocks that affect the economy and temporary deviations from target will therefore arise. The tolerance interval also provides scope for temporary deviations from target that may be justified with reference to the stability of the real economy. Let us say that a shock occurs that makes inflation deviate from target. By not aiming to restore inflation to target as quickly as possible, scope is created to conduct monetary policy in such a way as to dampen fluctuations in, for instance, growth and employment. However, for the inflation target to retain its credibility, the deviations cannot be permitted to become very large or prolonged. To create greater clarity, monetary policy is guided by the principle that the Riksbank’s ambition is normally to bring inflation back on target within two years. One might say that this two-year horizon is a restriction that the Riksbank has placed upon itself to maintain credibility for the inflation target.
Based on this analysis, in the third part of my speech I will describe the wide-ranging regulatory measures taken at international and national level to resolve ‘too big to fail’. Let me just present our own conclusion up front: In Switzerland, the response was quick, targeted and, at the same time, cost-effective. On the one hand, the regulatory amendments strengthened banks’ resilience, reducing the likelihood of a bank getting into financial distress. On the other hand, they introduced measures aimed at ensuring that even a systemically important bank can exit the market in an orderly way in the event of a crisis. We are convinced that the Swiss big banks and the Swiss banking system are much more weatherproof today than they were ten years ago. Many of the planned measures have already been implemented. Page 2/14  However, we have still not quite achieved our objective. Only once the agreed measures have been fully implemented will the conditions for resolving ‘too big to fail’ in Switzerland be in place. The ‘too big to fail’ issue So what is behind ‘too big to fail’, and what concrete form does it take in Switzerland? a) ‘Too big to fail’ institutions must be bailed out in a crisis ...  As I mentioned at the start, ‘too big to fail’ means that an individual institution is so important that the state is under a de facto obligation to bail it out in a crisis. This state obligation arises under two conditions.

The mere assumption that a bank is too big to fail can be a self-fulfilling prophecy. 4 On the assumption that it will be bailed out if necessary, the bank may take on excessive risk much more readily, and focus its business model too heavily on debt-based growth. Thus, the bank becomes even bigger, thereby increasing the likelihood that the state will have to intervene in a crisis, so that the original assumption proves to be correct. Given this increased likelihood of a bail-out, the bank can now take on even more risk, and the de facto bail-out obligation becomes even more acute – a vicious circle. This bail-out obligation can result in very high and unforeseen costs to the state. The scale of these costs was highlighted by the global financial crisis, which at the time saw announced  2 3 4  For example, cf. International Monetary Fund (2014) for an estimate of the magnitude of this subsidy. Cf. Afonso et al. (2014). Cf. Alessandri and Haldane (2009). Page 4/14  state support for the financial sector in advanced economies amounting to some 20% of GDP (cf. slide 2). 5 State budgets, which are already under strong pressure from the recession associated with a financial crisis, can be overstretched by the cost of state support measures. And indeed, during the crisis, a number of countries did find themselves having to shoulder costs well in excess of their financial capacities. Ultimately, they coped by resorting to external support.
But let me be very clear about one thing – banks are not saved because they in themselves deserve to be saved. On the contrary, their managers and shareholders have usually played a decisive role in getting the bank into trouble in the first place. Some banks are saved because they are necessary for the real economy to operate. Actually, governments do not save banks, but rather the functions that banks provide to society. But you can never be entirely sure in advance how the financial system (and ultimately the real economy) will be affected by a bank failure. In other words, knowing which banks to save and which ones to let go is complicated. You need to weight the costs of unsettling the financial system in relation to the costs of saving the bank. This is not an easy task. But despite the substantial uncertainty, you can be sure of one thing – whether you let a large bank fail or rescue it, either way you will incur substantial costs and I am not only talking about financial costs but also about social dislocations! BIS Review 50/2010  5  However, deciding to save a bank does not imply being spendthrift. On the contrary, being economically savvy is my third – and perhaps most important – principle of crisis management. So how does that principle manifest itself in practical actions? Thankfully, history offers us a number of both good and bad examples from which several useful lessons can be drawn.

On the one hand, the crisis has resulted in a more expansionary monetary policy stance in some countries. This has probably contributed to the rise in commodity prices in recent months, and to the rise in energy prices, in particular. On the other hand, the expected economic slowdown associated with the crisis should dampen inflationary pressure. However, the aggregate effect of the crisis on inflation is far from obvious. The crisis has thus increased the uncertainty surrounding the inflation outlook. Consequently, central bankers are currently challenged not only on the financial stability front; they also need to be extremely alert to developments on the price stability front. 8  BIS Review 71/2008
BIS Review 2/2007  3  Our commitment for the future is to continue working constructively in the improvement of the quota system, the strengthening of the governability, credibility and effectiveness of the Fund. 4  BIS Review 2/2007

The size of payments will then depend on how much has been saved, the pension period and calculated return. Under a defined-benefit pension programme, life insurance companies and pension funds – or those behind them – in a sense offer insurance against a form of absolute risk to which everyone is exposed. Absolute risk may, for example, be a change in economic developments as a result of major disturbances to the world economy or the domestic economy. Under a defined-contribution pension scheme, the individual member assumes the absolute risk. With a larger share of pension savings in defined-contribution schemes, some of the risk that is now being borne by insurance companies will be transferred to members. One problem that may arise in connection with defined-contribution schemes is that members end up with benefit payments that are  BIS Review 48/2002  9  markedly lower than expected. Therefore, it would also be appropriate to apply risk limits to definedcontribution pension schemes. Conclusion The local government sector employs a rising share of workers in our country, accounting for close to 25 per cent of employment today. The behaviour of local government, as a user of labour and employer, is of considerable importance for economic developments and also for the inflation outlook. The local government sector is a major user of financial service, both as borrower and as buyer of insurance products. Norway has a well-developed financial system, but its bond market is small compared with other countries.
∂γ  ∂∆ What role does higher bank capital play in reducing the likelihood of financial crises ( ) or their severity (∂k )? ∂k  At least for the likelihood of crisis, subsequent evidence has tended to be rather ambiguous. Historical evidence, using aggregate economy-wide covariates, has reached the perhaps surprising conclusion that bank capital ratios have virtually no predictive power for the occurrence of financial crises in major advanced economies (Jordà et al (2017)). That is,  ∂γ ∂k  is indistinguishable from zero. This result holds both in the full  sample (1870-2013) and in the post-WWII period. Micro-econometric studies on the link between bank failure and bank capital have found a more tangible relationship, however. For example, Vazquez and Federico (2015) find that US and EU banks with stronger 12  This echoes and extends findings from earlier research by Borio and Lowe (2002), Borio and Lowe (2004) and Drehmann, Borio and Tsatsaronis (2011), which found credit gap measures to be key determinants of crisis risk. 11  All speeches are available online at www.bankofengland.co.uk/speeches  11  pre-crisis capital and structural liquidity positions were less likely to fail. Berger and Bouwman (2013) report a similar finding using a longer-run data set of US banks.

BIS central bankers’ speeches  1  We need to build a new system – one that delivers sustainable investment flows, based on both resilient market-based, and robust bank-based, finance. We need finance for the long term. We need a financial system that is F-A-I-R: that is Fair, Aligned, Inclusive and Resilient. Let me expand briefly on each, beginning with fairness itself. (i)  Fair  The twin crises of solvency and legitimacy undermined trust in market mechanisms and the effectiveness of the financial system. Banks were undercapitalised, mismanaged and operated in a privileged heads-I-win-tails-you-lose bubble. In parallel, there was widespread rigging of some markets for personal gain. By replacing such implicit privilege with the full discipline of the market, social capital is now being rebuilt and economic dynamism restored. G20 leaders have endorsed a wide range of measures to end too-big-to-fail in banking. The Financial Stability Board 6 is now working on a series of initiatives to make the system more fair and effective, including examining governance and compensation arrangements to ensure they promote good, and punish bad, behaviour. 7 In the UK, authorities are pursuing reforms that will increase individual accountability, particularly in wholesale financial markets. 8 Such initiatives are beginning to turn the tide of ethical drift which has plagued the system and would hold back the SDGs if left unchecked. (ii)  Aligned  Aligning incentives will increase finance’s potential to support the SDGs. Alignment requires transparency. Consider the example of climate change.