samchain/econo-pairs-v1 huggingface dataset:
François Villeroy de Galhau: Banking risks, regulations and supervision Introductory speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chairman of the Autorité de contrôle prudentiel et de resolution (ACPR), at the ACPR conference, Paris, Friday 16 June 2017. * * * Ladies and Gentlemen, I am delighted to welcome you to this new conference organised by the Autorité de contrôle prudentiel et de résolution (ACPR). The three issues that will be discussed this morning – banking risks, regulation and supervision – are all essential and are naturally highly interdependent. To introduce this conference, I would particularly like to focus on the issue of regulations and their impact on the financing of the economy and growth. As you know, this is the subject we chose to address this year in the Banque de France’s Financial Stability Review, which will partly serve as a framework for your discussions this morning. Ten years after the beginning of the financial crisis and eight years after the G20 summits in London and Pittsburgh that forged a global action plan, it is time to take stock. We brought together 14 remarkable and complementary views for the Financial Stability Review from public authorities, academics and industry representatives. What emerges is, to my mind, both an achievement and a challenge. * * * I. Firstly, an achievement: the banking and financial system is substantially more resilient today than it was ten years ago.

In communications on the level of the neutral real interest rate that pre-date my membership of the MPC, a distinction has been drawn between ‘capital R-star’ – a low frequency concept, which ‘looks through’ the impact of short-term economic shocks – and ‘little r-star’ – a higher frequency concept, which is influenced by shocks. 6. In the recent past, the MPC has assumed trend real GDP growth in the UK of around 1½%pa, albeit with the year-toyear evolution of potential GDP more modest in recent years owing to a series of adverse supply developments associated with inter alia Brexit and the Covid pandemic. Supply trends are of course uncertain and regularly reviewed by the MPC. An updated MPC assessment of those trends is scheduled to be published as part of its February 2023 Monetary Policy Report. 7. By the same token, other countries – notably the US – that are net exporters of natural gas (typically in liquefied form as LNG) have seen a substantial, mirror image improvement in their terms of trade. On this dimension, developments in most Western Europe countries (including the UK) are therefore quite different from those in the US. 8. Abstracting from monetary policy, the textbook optimal response to a (real) terms of trade shock would be to switch the composition of demand away from domestic to external sources while sustaining aggregate demand at levels consistent with the full utilisation of available resources, i.e. an ‘expenditure switching’ rather than ‘expenditure reducing’ response, typically associated with real depreciation.
Approximately 40 per cent of the credit institutions’ lending to the Swedish non-bank public consists of loans to Swedish households with their housing as collateral. If the household should for some reason experience difficulty in meeting interest and mortgage payments, this would affect the banks’ capacity to play their central role in the financial system. However, we believe that the probability of such a scenario is thankfully slight. I will return to this in a moment. The rise in house prices over the past ten years has been spectacular, seen from a historical perspective. Since 1996 house prices have increased by around 130 per cent (Figure 3), while the average price per square metre for a tenant-owned apartment has risen by around 250 per cent1. As house prices have soared, household indebtedness has also increased rapidly. This is not an exclusively Swedish phenomenon – throughout the developed world, with a few exceptions, the pattern is repeated – and compared with some countries developments in Sweden appear almost modest. One contributory factor to the relatively modest upturn in Sweden is that here we buy houses almost solely to live in. It is relatively common in many other countries, particularly Anglo-Saxon countries, that individuals buy housing to rent out. They buy extra housing in the same way one buys equity or other financial assets in the hope that they will increase in value.

Jean-Claude Trichet: Interview in Bild Interview with Mr Jean-Claude Trichet, President of the European Central Bank, in Bild, Germany, conducted by Mr Oliver Santen and published on 15 January 2011. *  *  *  Mr Trichet, in one word, how would you describe the state of the euro today? If you allow me two words: credible and stable. Will the euro crisis get worse this year? Let me be very clear: this is not a crisis of the euro. Rather, what we have is a crisis related to the public finances of a number of euro area countries. All governments have to put their finances in order, and above all those governments and countries which have lived well beyond their means in the past. How are the euro area countries ever to reduce the debt, now totalling € trillion? This year, the budget deficit in the euro area will be half as high as that in the United States or Japan. Virtually all advanced economies face acute fiscal problems. This is something that is often forgotten. That being said, this is no time for any complacency. Let me repeat: the ECB expects the governments in the euro area to make enormous efforts to bring down their debt. Some countries have to get their debt under control again. Can you understand that many Germans are afraid of inflation? The Germans are right to be fiercely against inflation. Inflation hurts in particular the poorest. Price stability is a precondition for growth.
Our network of Bank of England Agents is extremely important in this area. Around the country we have twelve Agencies, in general staffed by long-serving Bank of England people, constantly collecting information at the grass-roots level from their many business contacts. And the information, which they provide direct to the MPC on a monthly basis, can often prove helpful: either in helping us unravel inconsistencies in the data; or, as was the case in the Summer and Autumn of 1998, alerting us to problems in the economy before they show up in the official data. Notwithstanding the help of the Agents, problems with interpretation of the data abound. Some of these will be discussed in our Quarterly Inflation Report, due to be published on Thursday this week. I hope you will have the opportunity to read it. Financial stability Perhaps I could now turn from monetary policy matters to financial stability; and to the second part of my job as the Deputy Governor responsible for this part of the Bank’s work. Go back a little over three years and the Bank had a large department with four hundred and fifty staff supervising banks. Hard on the heels of the decision to grant the Bank independence, the Government decided in May 1997 to establish the Financial Services Authority bringing together existing UK  3  BIS Review 102/2000  financial regulators and supervisors under one roof.

At the time of the transfer to the FSA, the Supervision division was, as I have already mentioned, the largest in the 10 Bank with 450 people. However, while the frontline supervisors all moved out, none of the associated central services and overhead costs moved with them. We committed to remove these excess overheads, setting ourselves the target of taking £ mn off costs - 10% of total costs - over a five-year period. We are consolidating our property portfolio, shrinking the buildings we use from five down to 5  BIS Review 102/2000  one, our main office in Threadneedle Street, in order to deliver substantial savings in accommodation and maintenance costs. At the same time we have sought to improve the efficiency of our central services; and this has required substantial reductions in numbers in some parts of the Bank. Our objective has been, as a public sector organisation, to deliver value for money, to ensure that the Bank is cost effective in its operations and comparable to best practice elsewhere. Finding suitable benchmarks for the Bank, however, is not easy. The Bank employs 2,500 staff which compares with over 15,000 at the Banque de France and also at the Bundesbank. But direct comparison with other central banks is made difficult by differences in functions. For example, the Banque de France retains a network of 211 branches for distribution of banknotes whereas the Bank has closed all but one of its regional cash centres, moving to a system using commercial banks for note distribution.
Second, interest rates must not be set at such high levels that monetary policy contributes to economic downturns that undermine confidence in the krone. If unemployment rises sharply, market operators may perceive the exchange rate as being overvalued and that employment can be boosted by improving business sector competitiveness. This would tend to fuel depreciation expectations. A tightening of monetary policy in such a situation would not be credible, and might trigger renewed speculation against the krone. This mechanism came into evidence during the currency crisis in the autumn of 1992. When both fiscal policy and monetary policy are oriented with a view to influencing the domestic economy, it is important that the two components of economic policy are complementary. However, there is a risk that a situation may arise where Norges Bank maintains a high interest rate level based on its evaluation of the economic outlook, while the government authorities increase spending in order to stimulate employment. This is a genuine dilemma. In view of its mandate and responsibilities, the best way for Norges Bank to address this challenge is probably to promote transparency in its analyses and reaction patterns so that the government authorities can take into account the implications for Norges Bank’s setting of interest rates when decisions concerning the government budget are taken. The objective of monetary policy and Norges Bank’s remit are drawn up by the political authorities. For monetary policy to be successful, it is vital that fiscal policy plays an effective role.

But central banks and, beyond, financial intermediaries cannot substitute for adequate – and sometimes difficult – public policies. The green transition does hold risks – including for inflation –, but it also offers economic and financial opportunities, as new technologies gradually reach scalability. The sooner we start, the more positive (or the less negative) the economic balance will be. 2/ Let me now turn to the second major transformation underway: the digital transformation. Here, Europe is still lagging behind the United States and China. It is of the utmost importance to remain at the technological frontier in order to reap the benefits of innovation in terms of productivity and growth, as the winner often takes all. Beyond the economic fallouts, it is also a matter of strategic autonomy.
This hump in inflation is largely due to the food and energy price pick-up that we have seen and that has become worse in recent months. However, at the moment, we have no reason to believe this would be more persistent. The growth situation maybe a little bit trickier to analyse. The events in Japan and the continuing events in the Middle East and North Africa could be interpreted as a downside risk on growth. At the same time, we see continued evidence of rather robust growth in some parts of the euro area, so I would not say that the overall growth outlook has shifted downwards despite the negative events I mentioned earlier. The risks may be to the downside, but my baseline scenario has not shifted. BIS central bankers’ speeches  1  Q. How would you describe the monetary policy stance. Is it appropriate now? When it comes to interest rates, I would say that monetary policy is accommodative. In my view, it is appropriately accommodative. It is appropriately accommodative in the sense that we still have some way to go towards repairing the damage that has been experienced as a result of the crisis we have been living through during the past three years. Q. Does that mean that you don’t see interest rates going up for, say, over the next three months? As you know, the Governing Council of the ECB never pre-commits on interest rate policy decisions.

First, the experience of the Single Supervisory Mechanism shows the advantages of all the players being subject to one leading authority in an integrated banking space, with clearly defined responsibilities and coordination. This single supervision allows for comparisons across a vast sample of comparable institutions, and thematic campaigns of on-site missions. Second, our active supervision features regular and comprehensive stress testing including on interest rate risks, which is also applied to less significant institutions. The  2/3  BIS - Central bankers' speeches  European Banking Authority (EBA) conducts an EU-wide banking stress test every two years, taking into account the latest macro-financial developments: in 2023, stress test scenarios are typically based on a sharp rise in short-term and long-term interest rates. Moreover, following the EBA guidelines on Interest Rate Risk of the Banking Book (IRRBB) – as part of the rigorous application of the Pillar 2 process – , published in 2018 and enhanced in 2022, European banks are required to perform regular supervisory tests to measure the impact of interest rate movements on their interest margins and economic value of equity; US regional banks such as SVB are not. III. Resolution: how to make it work Now for our last blessing. Since the global financial crisis, banks and authorities have strengthened their ability to deal with crisis events by developing a resolution framework. However, in the case of Credit Suisse, the Swiss authorities chose the option of a merger.
7 Consequently, our proposition could now include this consideration: Different economic agents will be more or less willing to invest in negative rate investments to the extent that their costs of handling currency are lower or higher than others’, and to the extent they have available to them zero interest rate economic arrangements. In addition, having talented individuals looking for these opportunities is a dead-weight loss to society. We would rather have them use their talents for more socially productive purposes. In addition to the convention that all prepayments of debt carry a zero interest rate, creditors often have the option of deciding when to settle a debt, for example by choosing when to deposit a check once it is received. In an environment in which negative nominal rates prevail, one would want to collect debts slowly (at least from creditworthy counterparties). 8 For example, if one were to receive a check from the U.S. government for a tax refund, one could simply put it in a safe place and earn zero interest on it during the time the check remained undeposited. (These practices could trigger further innovations, such as a check with a “deposit-by” date embedded in it.) How strong these incentives are depends on the level of the negative rates. The lower the negative rate and the more persistent it is expected to be, the more attractive these practices would be. Consequently, these zero rate economic arrangements form another constraint that would prevent rates from going too far into negative territory.

Such possible profit squeezes could also prompt financial institutions to take on inappropriately risky assets to earn an apparently positive  8  BIS central bankers’ speeches  return. These concerns are present to some extent at very low rates, but they are magnified at negative rates of interest, a point made by Ben Bernanke in his 2004 speech on the topic. 9 A special case in the United States concerns the 2a-7 money market mutual funds, which are more prevalent in the United States than in Europe. Money market mutual funds are institutions that offer a floating rate of interest to shareholders that is intended to maintain the value of a share in the fund equal to par, or very close to par, at all times. With negative interest rates, and in the absence of a sponsor that is willing to subsidize shareholders in the fund, such a financial institution would not be able to return a dollar invested today to a shareholder the next day. In such circumstances, the fund must disband, as it has “broken the buck.” Recent SEC reforms specify that prime institutional funds be offered only shares expressed as floating Net Asset Values in 2016, but retail and Treasury-only money funds will retain a fixed NAV share structure, and therefore will still be subject to this complication in an environment of negative nominal rates. 10 6. Signal of deflation  Another complication centers on the signaling effects I mentioned earlier.
It will also contribute to the prompt detection of errors and deviations from targets, allowing banks to implement corrective measures and develop buffers as appropriate at an early stage. Banks should be encouraged to develop systems that allow managers to identify and understand the risks they are facing, consider the risks that may arise in the future, and respond promptly and actively to both. This will maximise the likelihood that they can continue to operate, even in the most difficult of conditions. Continued outreach and dialogue A second lesson I have learned through the development of Basel II is that communication with interested parties is absolutely essential. One reason we were able to incorporate leading practices into Basel II is because of the open and transparent process by which the Framework was developed. There has been a steady dialogue with the industry since the Committee began discussing revisions to the capital Accord back in 1999. Many of the firms represented here today contributed extensive and valuable feedback to the Committee on its proposals over the years. The Committee has tried to explain to the industry as clearly as possible its objectives and methods during this process, and in turn firms and industry associations have shown a willingness to engage in a serious dialogue to find practical, prudent solutions. This has helped supervisors to better understand the state of industry practice. Where we have found these practices to be reasonable and appropriate we have tried to incorporate them into the revised Framework in a sound manner.

And the value of stress testing and scenario analysis is even more important in those situations where risk measurement is based on scarce or incomplete data or unproven quantitative tools. The above mentioned examples demonstrate the clear view we have taken in the Committee that the sound and stable functioning of credit institutions requires consideration not only of micro conditions, but also, and very importantly, incorporating a macro, long-term and forward-looking perspective. I think these principles also make good business sense. I believe that risk managers, should incorporate macro perspectives into their risk management models and into the design of the bank’s capital strategy. That is, to analyse how risks may change through the cycle and in stressed economic conditions, and incorporate these elements into the decision-making process. It is often thought that risks increase during times of economic downturn. But this is only partly true. Banks’ risks increase as they take on more business and extend more credit during times of economic expansion. The risks may not crystallise until times of difficulty, but the seeds are sown during the  BIS Review 46/2006  5  good times. It seems to me to be both prudent policy and consistent with risk management objectives to take a long term perspective, using the results to make decisions that gain room for manoeuvre in the good times in order to face up to difficulties that arise in the bad times..
It is often too late to take recovery action when a firm drops below minimum standards. And because firms approaching the minimum often have to deleverage sharply which can have a very adverse impact on the real economy. So we have created incentives for firms to run with a substantial buffer of capital above the hard minimum. Where common equity capital is less than 7% of risk-weighted assets, firms now face restrictions on bonuses and dividends. For systemically important banks, the required buffers are higher still. These buffers should give banks more room to use their capital to absorb losses rather than hitting the brakes on lending. On the other side of the equation, some action has been taken to tighten up the calculation of firms’ risk-weighted assets. And work is also underway to examine whether we can improve the “standardised approach” to risk-weighting – an approach in which banks use a riskweight prescribed by the regulators. As a result, the amount of capital in the system has increased substantially. Globally, the large banks now hold some $ of additional equity capital. Major UK banks have raised their equity capital by £ Their leverage has broadly halved. On average, the Major UK banks are now running with an end-point Basel 3 common equity capital ratio of 10%. Roughly speaking, that is more than double the equivalent pre-crisis ratio.

Key among them are the interaction between sovereign debt and banking fragility and the problem of big banks in small countries – of which my country, Iceland, was a prime example and Cyprus is the latest. I will expand on this shortly. The financial crisis and the policy responses to it, especially some of the drastic decisions taken in the heat of intense crisis management, have changed the structure of the financial sector and will do so more profoundly going forward. There are several reasons for this, such as the plain collapse and disappearance of financial institutions, the non-viability of certain business models and practices in the new environment, the need for the financial sector to shrink and deleverage after the real risks in this world had been revealed, the intended and unintended consequences of new prudential regulation, the coming effects of structural regulations that at least partly ring-fence insured deposits and payment systems from the “casino”. Then there is the shrinking of cross-border banking through the retreat of banks  1  See http://www.bis.org/speeches/sp081119.htm  BIS central bankers’ speeches  1  behind their national borders and the weakening and, in some cases, collapse of international financial centres in smaller countries. We can see where this is heading: towards a financial sector that is smaller, less leveraged, less complex, more fragmented, more regulated, and more national.