samchain/econo-pairs-v1 huggingface dataset:
Domestically,3 UK households had accumulated a lot of debt in the run up to the crisis, much of it matched by an accumulation of assets. But households were dependent on economic growth being sustained and on house prices holding up. Property companies likewise, but with the added spice that there had been a boom in commercial real-estate construction. When crisis hit, the government’s balance sheet deteriorated dramatically, because the public finances were highly sensitive to taxes from finance and property and, most important, the UK’s fiscal “automatic stabilizers” are strong. Households and government have subsequently cut spending to repair their balance sheets. The corporate sector has built up what amounts to a cash mountain, some of which will probably find its way into investment as the cloud of uncertainty lifts, helping recovery. Sterling’s 2007/08 depreciation has softened the blow to demand. And if anything, that strengthened the country’s balance sheet because, in contrast to the EMEs discussed in the Draghi Report, the UK’s external liabilities are largely denominated in sterling while our external assets are denominated in foreign currency. 3  2  See Annex 1. BIS central bankers’ speeches  I could go through many other countries picking out ex ante vulnerabilities in their national balance sheets, and consequent ex post strains. Banking failures brought on a credit crunch, impaired economic growth, lowering wealth, and adding to the debt burden of borrowers, in what threatened to be a vicious circle.

Paul Tucker: National balance sheets and macro policy: lessons from the past Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the Society of Business Economists’ Annual Dinner, London, 28 February 2012. *  *  *  The spectre hanging over the world economy these past years – the drag on our recovery – has been deleveraging. Around the world, households, some firms, banks, governments, whole economies are acting to reduce their debt overhang. By selling assets, cutting spending, deferring investment. What gets delevered – as the ugly phrase goes – is a balance sheet. Balance sheets became stretched. Sectorally. Nationally. Through much of the industrialised West. The idea of over-borrowing, of overstretched balance sheets, is hardly novel. Economists are taught about the importance of stocks of debt; about “budget constraints”, beyond which a borrower’s expected future income, their wealth, is insufficient to service and repay their accumulated debts. But, by and large, economic commentary focuses on flows – the path of output, consumption, and investment and the current account balance. I exaggerate, of course – not least because cumulative flows create stocks. Nevertheless, it is salutary to remind ourselves that less than a decade before our crisis broke, we – the West – had been preaching to emerging market economies (EMEs) the necessity of monitoring, and even managing, the national balance sheet. That was in the wake of the Asian and Latin American financial crises of the 1990s.
The initial design of this ratio was too demanding and, perhaps, not realistic. 2015 for full implementation was clearly too early a date. Another controversial element was the definition of the “high-quality liquid assets” to be included in the numerator. However, after the review agreed by the Basel Committee in January, the ratio definition should be now fairly stable. It should be noted that, rather than a minimum ratio that has to be met at each point in time, such as the capital or the leverage ratios, what is involved with this new liquidity ratio is the setting up of “liquidity buffers” that can be used in times of need. Hence, although the minimum level is set at 100%, a bank could maintain a lower level at stressed times, but should inform the supervisor, in order to agree on a plan to restore the required minimum level. BIS central bankers’ speeches  1  As in the case of the leverage ratio, the short-term liquidity ratio does not come into force immediately. We are now – the present year and next – in an observation period that needs to be used for its fine tuning. At the end of this period, the ratio will be phased in from 2015 – when it will be required at the 60% level – to 2018, when it will fully apply. However, this timetable may be accelerated at national discretion.

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Under new  4  See Wapshott, Nicholas (2011): Keynes Hayek: The ClashThat Defined Modern Economics, New York, London: W.W. Norton & Company, Inc., pp. 72–78. 5  For the past few decades, Charles Goodhart has been a leading researcher at the London School of Economics (LSE) within both monetary policy and financial stability. Another well-known researcher in these areas at the LSE is former Governor of the Bank of England Mervyn King. BIS central bankers’ speeches  5  rules, investors are required to take losses if large global banks encounter difficulties. 6 A system for joint supervision and resolution of systemically important banks was put into operation by the euro area countries in 2014 and 2015. 7 This is great progress. A credible global system for crisis management and bank regulation will in itself contribute to crisis prevention. Bank’s capital requirements have increased, in Norway as elsewhere. This is a good thing. We are going to need solid banks. Reforms and economic restructuring The Norwegian economy is not in a crisis, but we are facing a period of restructuring. We have been in a similar situation before – when oil prices fell in 1986. The crisis that ensued eventually also led to positive changes. In the wake of the crisis, the authorities implemented reforms through the first half of the 1990s that laid the basis for renewed economic growth. The Act establishing the Government Petroleum Fund was adopted in 1990. Banks were instructed to increase efficiency.

The trap many European countries fell into was accumulating debt and spending borrowed money in good times, leaving them without the fiscal muscle to pursue a rational countercyclical policy in the face of crisis. This has made the economic downturn even heavier to bear. A number of European countries have experienced stagnation or a fall in GDP – some have faced a considerable decline in nominal GDP. As a result, debt to revenue ratios have increased, further reducing the ability to escape the debt crisis. The unrest surrounding Europe is not making matters any easier. The Russian economy is struggling. There is war in the Middle East and Libya. And on top of high levels of debt and mass unemployment, countries all over Europe are now facing terrorist threats and a refugee crisis. Only a few north European countries – including Norway – still have room for manoeuvre in fiscal policy. These countries have a savings surplus and export capital. But there are few northern European countries, including those within the EU, willing to finance southern Europe’s expenses over the tax bill – be it for refugees or for investment. With a common currency, euro area countries cannot rapidly adjust relative intra-area wages and prices. And there is no European federal government to enforce large-scale transfers from the north to the south. Building up even more debt is rarely the way to resolve a debt crisis.
Given past events, my feeling is, although I have no firm facts to base it on, that the low productivity outcome for 2007 will be revised upwards somewhat as the statistical base improves. But this will not alter the picture of 2007 as a year of very weak productivity growth. We will not know the definite outcome for a couple of years yet. In the Monetary Policy Update published in December last year we could observe that productivity growth had been weaker than we estimated in our October Report (see Figure  12  Sveriges Riksbank (2007). 13  Öller (2007). BIS Review 12/2008  5  3). We therefore revised down our forecast slightly in the short term. In 2008 we envisaged a gradual recover in productivity. After that, our assessment was that productivity growth would develop roughly in line with the trend rate of increase. Several factors indicate that the long-term rate of increase in productivity will remain relatively high, although it will not be as high as during the years at the beginning of the 2000s. Globalisation is one such factor, and will probably continue to be a driving force behind productivity for a long time to come. Integration within the EU is deepening. The countries in eastern and central Europe who have moved away from planned economies have many years of rapid development ahead of them before they catch up with western Europe.

In this respect, the measures announced by UBS, which are aimed at strengthening its capital base, are to be welcomed. The fact that UBS has been able to attract a large and internationally recognised Asian investor for this purpose serves  4  BIS Review 150/2007  as an illustration of one of the ways in which globalisation of financial markets has been to our advantage. BIS Review 150/2007  5
However, the adverse effects have spread to many other economies through global value chains. The euro area, in particular, has slowed significantly since early 2018. This is mainly due to the strong easing in its exports. As a result, average GDP last year grew by 1.8%, 0.7 pp down on 2017, and year-on-year growth in late 2018 and early 2019 fell to around 1%. The euro area’s high degree of openness (its trade flows with third countries account for 50% of the area’s GDP, compared with 38% for China and 28% for the United States) means it is particularly sensitive to external shocks and to the slowdown in world trade. Moreover, the above-mentioned uncertainty over Brexit has prompted a contraction in exports to the UK economy in recent years. Also contributing to the slowdown in growth in the euro area have been specific circumstances in certain sectors and countries. I refer in particular to the difficulties the automobile industry is undergoing in adapting to the new environmental regulations, to new production technologies and to protectionist threats. 2  For a summary of this literature, see, for example, A. Estrada, J. Martínez-Martín and F. Viani (2018), “Una revisión de la literatura económica sobre los efectos de la globalización en el crecimiento y la distribución de la renta”, Notas Económicas, Boletín Económico, 2/2018, Banco de España.

3/16  Among the emerging economies, China remains beset by the difficulties of managing in an orderly fashion its much-needed economic rebalancing and deleveraging process, despite the significant stimulus measures approved this year by its authorities. China is important for the global economy: it accounts for almost one-fifth of global GDP, in purchasing power parity terms, and it has contributed almost 1 percentage point to annual average global GDP growth since 2005. And clearly, an additional slowdown in its growth rate would have major global implications, through the trade and financial channels, and through the prices of commodities, for many of which it is the main source of demand.1 Some of the emerging economies with the greatest vulnerabilities, such as Argentina and Turkey, have been particularly affected by the financial tensions and continue to face significant challenges. In Argentina especially the situation has worsened considerably in recent weeks, against a backdrop of great political uncertainty. As mentioned, the slowdown in activity has been particularly acute as regards trade. Various factors are behind this downturn. They include most notably the impact of trade conflicts, especially between the United States and China, and the uncertainty associated with Brexit. The trade conflict has unfolded in various phases. In spring 2018, higher US tariffs on different products (mainly imports from China) came into force, with the countries affected retaliating accordingly. Moreover, the US government threatened to extend and step up tariff rises (including, in particular, those on vehicle imports, a sizeable portion of the bilateral trade with Europe).
Increasingly, it is taking place through vehicles – such as open funds and ETFs – that issue very short-term (often intraday) liabilities and invest in long-term instruments. It may be a matter of priority to develop a conceptual and operational approach to macroprudential policy that allows regulators to monitor those parts of the financial system that are currently out of reach. BIS central bankers’ speeches  3  *** When central banks entered into non-conventional territory, most observers saw that as a temporary incursion. For some of us, this temporary situation has lasted seven years. For the euro area, the current horizon extends, at least, until 2017. This is quite a long period. For many young people today – say, for instance, current PHDs students -, conventional monetary policies are a prehistoric curiosity. Non-conventional is the only “normal” that they have experienced in their lifetime as adults. Will the future look like the past or be different? This question cannot be avoided for three reasons. First, over the past 30 years, long-term real interest rates worldwide have been steadily declining. If low equilibrium rates are a permanent phenomenon, which is rooted in structural shifts in the world economy, then current difficulties and challenges will persist. The chances that we will sooner or later hit the ZLB again are non-negligible.

This may come at a cost in the longer run, however, as price rigidity impedes the adjustment process and reduces the efficiency of monetary policy. A large part of the perceived differences between the FED and the ECB in terms of policy reactions results, in fact, from differences in price flexibility. Because of specific rigidities in Europe, the fall in inflation that normally follows a decline in output materialized later and more slowly. Moreover, it notably happened after several governments had implemented a series of structural reforms and adjustment policies in 2010–2011. This explains part of the delay in implementing non-conventional measures in Europe, as compared to the United States. A third challenge comes from managing the risks that low interest rates and nonconventional policies imply for financial stability. Significant advances have been achieved in developing proper macroprudential frameworks and instruments for the banking sector. Strong capital and liquidity requirements have increased its systemic robustness. New countercyclical tools have been developed. Progress has been made towards reducing moral hazard through proper resolution mechanisms for large and systemic institutions. However, the timeliness and efficacy of macroprudential measures on specific areas of exuberance, such as real estate, are still being put to the test. More importantly, I see one blind spot. Risk has not fully disappeared but rather has morphed and migrated to new parts of the financial system. Specifically, maturity transformation has developed outside the banking sector and by direct market intermediation.
Thus, over time, a central bank like the SNB can usually rebuild its equity level all on its own after a loss. Nevertheless, even for a central bank, a long period of negative equity is not without its problems, as it can undermine the bank’s credibility and its independence in the longer term. For these reasons, it is important for the SNB to maintain a sufficient level of equity. To ensure that the SNB can carry out its monetary policy mandate without restriction, also in the long term, in the interests of the country as a whole it is essential that its capital base be adequately rebuilt. This means that the necessary profits must be earned, and retained. In the long run, the entire economy will benefit. BIS central bankers’ speeches  1

This apparent resilience, relative to past downturns and relative to the experience of other countries, is the result of a number of factors. Some of these factors stem from developments outside the financial system, like better macroeconomic policy and better microeconomic or supply-side fundamentals. And some stem from changes in the nature of financial intermediation, the structure of the financial system, and the capacity of financial institutions to manage risk. To start with the broader economic context, the strength and length of the expansion of the 1990s helped ensure that U.S. financial institutions entered the latest recession with strong capital positions. The fact that the recession was shallower and shorter than the average of the past helped limit the scale and scope of losses to financial institutions. The forcefulness of the monetary policy response and the large fiscal stimulus provided by the tax cuts and expenditure increases played a significant role in limiting the depth of the downturn and in helping to bring about the recovery. It is significant that the yield curve has been steeper and stayed steep longer in this latest recession than in the previous one. And, finally, the stronger microeconomic fundamentals of the U.S. economy - the shift to just-in-time inventory management, the speed of innovation in the U.S. economy, and other factors that seem to have reduced the amplitude of the business cycle and improved the flexibility and resilience of the U.S. economy in response to shocks - have also contributed to financial stability.
14 However, by the same token, a faster balance sheet reduction than currently anticipated by markets could trigger some yield tightening. Second, compared with QE, QT conveys much less information about the future path of interest rates. Purchases and interest rates were linked in the ECB’s forward guidance, as I have already explained, but the ECB no longer employs forward guidance on rates as a policy instrument. Therefore, the ECB’s balance sheet adjustments alone no longer provide direct information about the timing of its interest rate adjustments. Again, this weakens the announcement effects of QT compared with QE. In sum, all these arguments point, in my view, to the need for the balance sheet reduction in the euro area to be very gradual and predictable. It is also essential that balance sheet reductions leave room for action against fragmentation if it reappears, whether either through flexibility in PEPP reinvestments or through activation of the TPI should this prove justified and necessary. 15 A coherent monetary-fiscal mix In the last part of my address, I wish to focus briefly on how the monetary -fiscal policy mix should be in the current context. High inflation and monetary policy normalisation present a complex scenario for fiscal policy. The normalisation of policy rates and of the Eurosystem balance sheet means that  13  See M. Bernardini and A. Co nti (2021), “Assessing the flexible implementatio n o f the ECB’s pandemic asset purchases”, Banca d’Italia Covid-19 Note, 20 December 2021.

This is because long-term lending is inherently riskier than short-term lending, as short-term interest rates (and, hence, the opportunity cost of long-term lending) may perform quite differently to what was previously anticipated by market participants. By p urchasing government bonds in secondary markets, the central bank absorbs part of that long-term risk, through what is called the duration extraction channel. This leaves less duration risk for private markets to absorb, so the term premium falls, driving down the long-term interest rate. Third, there is the risk that a bond issuer will default on its future payment obligations, and investors demand a default premium to compensate them for this risk. As in the case of the term premium, central bank purchases shift this risk from private investors to the central bank, which reduces default premium and, therefore, yields – a channel called default risk extraction. All three of these asset purchase channels reduce long-term rates and thereby stimulate the economy. Indeed, according to many empirical studies, the ECB's APP made a significant contribution to boosting euro area economic activity and supporting the convergence of inflation to its aim. 6 The existing evidence also shows that in the case of PEPP 7 - that was designed to permit flexibility in the allocation of purchases across jurisdictions, as well as  6  A number o f academic studies have examined empirically the effects o f this unconventional po licy.
This trend is, namely, towards a more intense and systematic use of the possibility of introducing capital requirements tailored to each bank’s actual risk profile (the so-called Pillar 2). This tendency in supervisory practice interacts with the past or envisaged regulatory changes which quite openly pursue the progressive extension of banks’ loss-absorbing capacity. Such is the case with the introduction of macroprudential policies, the setting of supplementary requirements on leverage ratios, the adoption of capital surcharges for systemic institutions,  4  BIS central bankers’ speeches  the foreseeable upward revision of risk weightings for certain exposures and the introduction, from 2016, of minimum requirements for the coverage of losses by holders of weak banks’ debt instruments as a prior condition for mobilising resolution funds. Naturally, under the single supervisory mechanism, the harmonisation of prudential surveillance arrangements may be expected to involve a uniform treatment of risk when it comes to determining the capital required of all European banks. In that way, the competitive distortions potentially generated by the different national approaches at present will be minimised. It is also to be expected that regulatory requirements will be introduced gradually, as is needed to avert excessive procyclical effects and significant market shocks. Clearly, in keeping with regulatory developments and market demands, the key question for a large number of financial institutions in Europe and the rest of the world is not so much whether they should raise their loss-absorbing capacity, but rather what the most suitable way and the right time to do so are.

Admittedly, the political agreement on the single resolution mechanism has some limitations, insofar as it does not entail per se the full lifting of national borders in respect of the management and resolution of banking crises. Unquestionably, though, the agreement marks decisive progress towards cross-country uniformity in the treatment of different bank liabilities in the event of viability problems and, in turn, it minimises the vulnerability of national public finances to bank crises, by ensuring that investors, and not taxpayers, will bear the brunt of the costs of these crises. In doing so, it does in fact successfully defuse many of the factors that have destabilised the monetary union over the past four years. At the same time, the creation of a single resolution mechanism is a vital complement to the single supervisory mechanism. It resolves the problems of legitimacy and compatibility of incentives that would have been generated by the relinquishing of sovereignty over the  BIS central bankers’ speeches  1  surveillance of the banking sector and crisis-prevention without concurrently having a common mechanism for managing and covering the ensuing consequences. Accordingly, the political agreements reached are added motivation for all those involved – the ECB, national supervisory authorities and banks themselves – in the intense preparations for the single supervisory mechanism.