samchain/econo-pairs-v1 huggingface dataset:
William J McDonough: The role of financial stability An address by Mr William J McDonough, President and Chief Executive Officer of the Federal Reserve Bank of New York and Chairman of the Basel Committee on Banking Supervision, at the XIII International Frankfurt Banking Evening, Frankfurt, Germany, 3 May 2001. *  *  *  Mayor Roth, President Duisenberg, and distinguished guests… It is an honor to address the thirteenth International Frankfurt Banking Evening in a setting so rich in history and tradition. I have been told that this stately building is more than just the busy town hall for a major European city, it is also an ever-present witness to culture and history, having hosted banquets and celebrations for almost six hundred years honoring coronations and the visits of Presidents and Prime Ministers. Indeed, it seems highly appropriate that our dinner this evening, which recognizes the importance of banking and finance to this distinguished city’s heritage, is being held here, so close to one of Europe’s most historic marketplaces. Since medieval times, merchants have traveled great distances to participate in Frankfurt’s many fairs and markets. The wealth that those markets produced no doubt assisted in the development of increasingly sophisticated financial institutions and a stock market as early as the 16th century, plus several of the most storied banking houses in history. Those institutions, in turn, contributed to Frankfurt’s ascent to prominence by financing additional trade and commerce here and abroad.

Subject to the caveat referred to above, these experts generally share our conclusion that there is no unequivocal indication of a significant misalignment in the exchange rate. If our EU counterparts in the ERM II-related decision-making process also share these views, one would, therefore, expect Malta to join ERM II with a central parity rate which broadly corresponds to the current exchange rate level. Some commentators have cautioned against what in their view is a hasty approach to euro adoption. How would you respond? A judgment as to whether the path to euro adoption is hasty or otherwise can only be made in relation to the economic principles which underlie the criteria and conditions attached to participation in EMU. This is precisely the approach taken in the Treaty, which contains indicators for measuring the degree of economic preparedness of a country, as also in our own study. The obligation to participate in ERM II for a minimum period of two years serves that purpose. The underlying premise is that once a country reaches the point at which it can derive the considerable, undeniable benefits of monetary union, it should do so. In the case of a small, open economy which must support an independent currency in a fully liberalised trade and capital environment, these benefits must also be evaluated in the light of the costs and risks - which are not negligible - of delaying participation. The report presented to Cabinet builds on that approach.
So far, I would say that improvements in Fund surveillance, its policy advice, as well as the transparency it encourages have led to sound policies, better institutions, and overall greater flexibility in emerging markets. A big pay-off was evident last year when the improved economic resilience enabled emerging markets to cope better with the impact of the high oil price. But, definitely, more can be done. And the first point I want to make is that IMF surveillance would be most useful for emerging markets if it strengthens its focus on helping members to better prepare for coping with the challenge of the next crisis. My view is that, with the improvements in economic fundamentals and policies that we are now seeing within emerging markets, there is now less likelihood than before that the next crisis, if it were to occur, will originate from imbalances within emerging market economies. On the contrary, imbalances now seem to be more of a challenge for the major economies with the financing now becoming a major component of the global capital flows. An unwinding of the imbalances could lead to economic slowdown and sudden changes in the financial conditions of the major economies, which, as the past episode of capital account crises shows, can create difficulties for emerging markets in terms of growth implications, abrupt reversals of capital flows and sudden stops.

This is a feature which is now missing in all of the Fund’s current lending facilities, and Third, since the remaining drawdown of the swaps is linked to a formal package of assistance that requires exceptional financing, Governments in the region, in a way, have pre-committed substantial amount of fund to be made available to support crisis resolution. In this regard, the IMF will only stand to benefit because part of the financing requirement will have already been shouldered by Governments in the region, thereby equipping the Fund with greater financial leverage to deal with other issues elsewhere. Let me now turn to other aspects of self-protection against future crises. On self protection through reserves accumulation, I think it is only proper that differentiation is made of the reasons for reserve buildup on a country-by-country basis. This is to say that one needs to assess whether the buildup is excessive with respect to that country’s overall level of exposure to the global financial markets, to its structure of exports and imports, and to the country’s overall level of external liabilities. On self-protection through the use of capital account measures, I welcome the fact that the Fund’s thinking on this subject has become more liberal. On occasions, it is appropriate to use capital account measures for crisis prevention.
Or, put differently, consumer spending in the UK is probably already above the level projected to prevail in Q3 in the May MPR scenario. Some of these data cover the opening-up of non-essential retail stores on 15 June. That opening-up was quantitatively significant, representing around 13% of consumption spending and halving the share of goods and services consumers which were previously unavailable (Chart 10b). Initial indications from payments and footfall figures suggest this opening-up has accelerated, perhaps significantly, consumer spending. In particular, CHAPS data suggests spending on delayable goods has now returned to pre-Covid levels (Chart 8), well ahead of the corresponding May scenario profile. Looking ahead, the opening of pubs, restaurants, hotels, cinemas and other hospitality outlets on 4 July will provide further impetus to spending. My own market intelligence suggests considerable pent-up demand. Together, these categories represent around another 10% of consumer spending. Initial reports from businesses in these sectors, including from the Bank’s Agents, suggest advance bookings are brisk. There is less evidence on which to base an updated judgement on the other components of GDP. For net trade, the May MPR scenario suggested around a 40% peak-to-trough fall in gross export and import volumes. Trade and port traffic data suggest a somewhat smaller contraction. With the world economy recovering sooner than in the UK, this implies a slightly larger boost to UK GDP growth from net trade in Q2. For housing and business investment, there are even less data on which to make an assessment.

The result has been a sharp and synchronised contraction in economic activity across the globe and an unprecedented collapse in world trade. In the twelve months following the onset of the crisis, it seemed natural to expect those countries where the build-up in debt had been greatest, such as the United States and the United Kingdom, and those sectors that seemed most exposed, particularly financial services and construction, to be the hardest hit. But that is not how it turned out. The fall in UK GDP of nearly 3½% over the final quarter of last year and the first quarter of 2009 represents the largest half-yearly decline since records began in 1955. But that is comparatively mild seen alongside falls of almost 6% in Germany and nearly 8% in Japan, both countries running consistent current account surpluses. Moreover, as most of you will be only too aware, the downturn has hit manufacturing especially hard, with output in that sector down over 10% in the UK, 20% in Germany and 30% in Japan, reflecting the sharp decline in the demand for consumer durables and capital equipment that followed the loss in confidence and reduction in the availability of credit. Rigorous inventory control then propagated the fall in demand rapidly along globalised supply chains. Now producers cannot run down inventories indefinitely, so the rate of contraction should start to ease as de-stocking slows.
A further possibility is to temporarily ease the State aid framework for the business sector and establish certain temporary limits on retail electricity prices. More broadly, the war has underlined the need to accelerate European integration so that the EU is an important player on the global stage, capable of deciding its own future and defending its values. A cornerstone of this integration is the creation of a common and permanent fiscal capacity in the euro area, which would facilitate the economic policy response to severe shocks. The design of this common fiscal capacity must be based precisely on the lessons learned from NGEU and the instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE), which were implemented to deal with the pandemic, and on any lessons we might draw now from our response to the war. The financial realm is a second area of economic integration. Pan-European bond issuances to fund NGEU, and any other potential issuances as part of the response to the invasion of Ukraine, are an important step towards creating a European safe asset. In addition, deeper capital market integration in the euro area would pave the way for greater risk-sharing in the face of asymmetric shocks. Lastly, a third necessary element to bolster the euro area’s institutional architecture is the completion of the banking union, establishing a European deposit insurance scheme and a common framework for resolving systemic crises.

As long as everything is functioning well, the focus of public debate is much more often on our interest rate policy and the inflation target than on our stability task. But more recently, as the functioning of the financial markets has been hampered, the situation has almost been reversed. It has also become very clear how closely related our two main tasks are. The Riksbank’s most important tool in conducting monetary policy is the repo rate. One can say that we try to influence economic activity and inflation by steering the price of credit, that is, interest rates. But to be able to do this, the payment system and the credit markets must function so that the Riksbank’s interest rate decisions have an impact on other interest rates in the economy. Financial stability is in other words more or less a condition for being able to conduct monetary policy in an efficient manner. And of course it works both ways – monetary policy has significance for financial stability, not least through its impact on the banks and on economic activity. For instance, in an economic downturn the number of bankruptcies in the economy increases and so do the banks’ loan losses. A hiccup in the financial machinery In Sweden the market for the shortest interest rate in the economy, the overnight rate, has functioned more or less normally, with the interest rate close to the repo rate. So far so good.
The second pillar is a broadly based assessment of a wide range of other economic and financial indicators. This all-encompassing and systematic approach guarantees that the Governing Council of the ECB takes into consideration all relevant pieces of information when assessing the outlook for price stability in the medium term. All this shows clearly that the ECB needs to focus on the euro area when conducting its monetary policy. Focusing on domestic objectives is, in fact, the mandate of all major central banks in the world, and rightly so. I strongly believe that the best contribution that the euro area can make to world economic growth is to ensure macroeconomic stability "at home" by pursuing policies which lead to sustainable non-inflationary growth in the euro area. Given the size of the economy of the euro area, a stability-oriented policy will help to create a favourable environment conductive to non-inflationary growth at the global level. The mandate of the ECB is fully consistent with this principle. This is the only reasonable allocation of responsibilities among the large economies in the world. Anything else risks blurring such responsibilities and diluting accountability, which would in turn distort incentives in a perverse way. This notwithstanding, the euro area is not, of course, economically speaking, an island and global developments do affect the euro area economy. Hence, let me also stress that one of the requirements of a globalised world is a frequent exchange of information and views among policymakers.

This possibility was created on 16 March 2023 based on an emergency ordinance by the Federal  Page 4/6  Zurich, 23 March 2023 Thomas Jordan, Martin Schlegel and Andréa M. Maechler  News conference  Council. The emergency ordinance allows for emergency liquidity assistance of up to CHF 100 billion without collateral being delivered. However, the claim is secured by means of preferential rights in bankruptcy proceedings. Preferential rights in bankruptcy proceedings mean that, in the event of bankruptcy, the SNB’s claim would be repaid with high priority. Only a few other claims take precedence over the SNB loan, such as wages or deposits covered by depositor protection. Third, Credit Suisse can access liquidity assistance of up to CHF 100 billion under a public liquidity backstop (PLB). This possibility was also created on 16 March 2023 based on an emergency ordinance by the Federal Council. This SNB liquidity assistance also has preferential rights in bankruptcy proceedings. The claim is additionally secured by a federal guarantee. I now hand over to Andréa Maechler. Implementation of monetary policy and international cooperation  Ladies and gentlemen, tension on the financial markets has increased markedly following the collapse of Silicon Valley Bank. In times of heightened uncertainty, US dollar liquidity is particularly sought after. In a coordinated action with five other central banks, we therefore announced on Sunday evening that we would enhance the provision of US dollar liquidity via the standing US dollar swap line arrangements.
In hindsight we know that inflation gradually fell and that it happened earlier in Sweden than in other countries –  2 [13]  discounting the effect of interest-rate changes, inflation fell from around 2 per cent during 2010 to around 1 per cent in 2012. When inflation then fell further in late 2013 and early 2014, despite brighter economic signals, it became necessary for the Riksbank to focus more and more on bringing inflation back to the target. This was particularly urgent bearing in mind that the long period of low inflation had begun to leave its mark on inflation expectations. To bring up inflation and help anchor inflation expectations to the target, the Riksbank cut the repo rate to 0 per cent in 2014 and then gradually down to –0.5 per cent in the following years. As a way of making monetary policy more expansionary, we also began purchasing government bonds at the start of 2015. At that point, the ECB had begun buying assets on a large scale to stimulate demand and bring up inflation. There was a concern that the Swedish krona might strengthen significantly against the euro as a result of this and that this would further prolong the period of below-target inflation. Monetary policy needed to protect the economy against such a development. Today, we can observe that the extremely low interest rate and the Riksbank’s asset purchases have contributed to economic activity growing ever stronger.

It is difficult to include all such factors, but calculations show that we should expect a given interest-rate increase to subdue consumption for mortgage holders more now than in the mid-1990s. 8 At least for certain groups, monetary policy therefore has a greater impact on the real economy now than previously. This could justify slower rate hikes than has been the case in similar economic situations in previous years. For other groups of households, on the other hand, the impact of rate hikes is not as great. There is hence an intrinsic tension here. The Riksbank has only one policy rate and it is adapted to aggregate demand and the economic outlook in general, and above all to how inflation will develop. Higher interest-rate sensitivity and the extent to which it affects the impact of monetary policy will, in other words, be a source of uncertainty. It will, after all, be a challenge to have a situation for a number of years in which interest rates rise – albeit slowly – while debt is higher than ever before. The supply of labour is greater From household consumption and the demand side of the economy, I would like to go on to the labour market and the supply side and my third and final example of the transformation of the economic landscape.
The situation prior to the meetings in both July and September was marked by a low rate of inflation, for example CPIF inflation has been below two per cent since 2011, and a level of resource utilisation in the economy that was deemed to be lower than normal. The forecasts in July and September were that inflation was expected to rise towards two per cent in 2015 and that resource utilisation was expected to increase as growth picked up. The assessment was that the expansionary monetary policy would contribute to this. I personally voted to keep the repo rate at the historically-low level of one per cent at both the July and September meetings. Figure 1 Repo rate remains low Repo rate, per cent 5  5 July September  4  4  3  3  2  2  1  1  0  0 07  09  11  13  15  Note. Outcome data are daily rates and forecasts are quarterly averages. Source: The Riksbank  BIS central bankers’ speeches  1  What were the trade-offs behind my decisions? On the one hand an even lower repo-rate path could, according to the Riksbank’s calculations, lead to inflation reaching the target somewhat sooner and to resource utilisation improving somewhat faster, while on the other hand there were other circumstances to take into account that made the decisions more complicated. For example, there is always uncertainty about exactly how monetary policy will affect the economy during the forecast period.

When analysing the state of the economy I have focused on understanding how much can be attributed to cyclical fluctuations and how much to structural factors. In practice it is of course difficult to precisely distinguish between structural and cyclical factors, but it is nevertheless important to analyse this as monetary policy can only affect the latter. I have also asked myself what the relatively strong development of the Swedish household sector in relation to the weaker situation in the industrial sector means for monetary policy. All in all, I thought it was reasonable to leave the repo rate unchanged, for two main reasons. First, I think it would be wrong to lower the repo rate further in a situation in which the economy is improving. Second, I believe that a lower repo rate today could increase the risks associated with household indebtedness in the longer term. I will now explain my thinking about monetary policy today in more detail and describe how I see the current situation in the Swedish economy, what I believe monetary policy can achieve and how I see the situation in the period ahead. Divided demand – the explanation is to be found abroad I would like to begin by looking back in order to describe my view of the situation today. Approximately five years have passed since the financial crisis began in earnest and these have been turbulent years for the global economy.
•  In the second approach, strong supervisory and regulatory policies have to be in place even as monetary policy adjusts the level of risk-taking in the economy. •  In the third approach, monetary policy must be appropriately calibrated to the economy for macroprudential measures to effectively target specific areas of imbalances. 6  BIS central bankers’ speeches  42 In practice, the difference between the two approaches is likely to be one of degree and emphasis rather than of fundamental principle. Central banks will choose the most appropriate combination of the two approaches, taking into account the structure of their economies and the nature of the threats to financial stability existing at any point in time. 43 And let us not forget the continued relevance of the traditional approach. Just because central bankers had previously ignored financial stability considerations with costly consequences, we must not overcompensate now by placing such an undue burden on monetary policy to secure financial stability, that it becomes detrimental to price and output stability. 44 We do not need to reinvent macroeconomics. Nor do we need to discard most of what we know about monetary policy, built from decades of rigorous research and painful experience. Much of that knowledge remains relevant. In thinking about the so-called new normal, we should pay equal heed to what is new and what remains normal. No doubt, we need to update our paradigms to meet new realities. But we do not need to overhaul them.

Indeed, monetary policy was getting boring. 5 Monetary policy was unencumbered by financial stability considerations. To be fair, central bankers were not unconcerned about financial stability. But financial stability was seen as the preserve of prudential regulation and supervision. Academic thinking reinforced policy practice: the macroeconomic models central banks relied on did not map clear linkages between financial and real variables. 6 Economists warned that it was difficult to identify a financial bubble. How does one tell if the value of an asset reflected economic fundamentals or speculative fever? So, when faced with potential financial vulnerabilities, it was deemed better to clean up after a bubble had actually burst than to try to lean against suspected bubbles. 7 But beneath the still waters of macroeconomic stability, deadly financial whirlpools were forming. Financial imbalances built up steadily in the advanced economies from the mid-1990s to mid-2000s and culminated in the Global Financial Crisis of 2008/2009. The Crisis sent financial systems into a tailspin and plunged economies into recession. The cost of cleaning up after the bubble had burst proved extremely high. The “clean versus lean” debate has been re-ignited, and within the “lean” camp there are differences over how to lean. Monetary policy has become interesting again. Financial stability: what we know and what we don’t know 8 Following the Crisis, there has been growing consensus that it is important for central banks to pay more attention to financial stability. We know now that macroeconomic stability does not guarantee financial stability.