samchain/econo-pairs-v1 huggingface dataset:
These, and the series of internationally agreed standards for payments, securities, foreign exchange settlement systems set by central banks, securities regulators, and the private sector, have engendered a remarkable set of changes to improve safety and soundness and operational resilience in this increasingly global system. These are the types of efforts where the return is almost never quantifiable, for the pay-off comes in the avoidance of crisis and a better balance between efficiency and risk. By reducing settlement periods and moving more of the world to real time gross settlement, delivery versus payment and payment versus payment systems, these changes have made a major difference. They have significantly improved the capacity of the financial system to absorb shocks, to handle stress, and to reduce the risk of broader damage or contagion from financial failure in any part of the system. This is and must be a collective effort. It requires collaboration between the official sector and the private sector here in the United States and in the other major economies. And it requires collaboration among the major central banks. Because of the shared interest of participants and the central banks in finding the right balance between efficiency and risk, and because of a widespread recognition of the more integrated nature of national financial systems, success in this area would not have been possible in the past and will not be possible in the future without continued close cooperation between the official and private sectors, within and across national borders.

We believe the systemic importance of the payments infrastructure means that central banks and system participants have a common interest in acting together to address the evolving risks. Let me identify some of the major priorities we see in this area that require further collaboration. Higher standards for the core of the system During the past few years, central banks and securities commissioners have developed new standards for the design, operation, and oversight of payments and securities settlement systems. These new standards have been proposed for incorporation in the Federal Reserve’s Policy Statement on Payments System Risks. We are in the process of working, together with other U.S. supervisory and regulatory agencies, to assess the extent to which the affected U.S. systems meet these new standards. We feel that it is especially important for the entities that form the heart of payments and settlement systems to work toward higher standards for safety and soundness and operational resilience. Given the increased scale of activity handled by these entities, the greater concentration among the major participants, and the increased exposure to cross-border activity, these systems today need to meet a more exacting set of standards, and of course this is also true for entities that are less systemically important. More specifically, we would like to see a greater focus on strengthening risk management practices and ensuring that the financial resources of system operators are adequate to deal with the risks to which they are exposed.
The weakness of the recovery has led some people to suggest that we could increase the effectiveness of quantitative easing by directing the money used to buy the gilts to buying private sector assets instead, or else to inject purchasing power more directly by passing it directly to households in the manner of Friedman’s famous helicopter. Such options can always be split into two legs: a fiscal leg, involving some bond-financed public expenditure and which ought to be subject to the control of the Chancellor and the Treasury; followed by a second monetary, or financing, leg in which the Bank buys the corresponding quantity of government debt on the secondary market and is just conventional quantitative easing. Viewing it this way is, I believe, helpful as it allows one to focus on the merits of the alternative use to which the funds are put. For instance, the easiest way to implement a “helicopter drop” would be to increase tax allowances temporarily. But the life cycle/permanent income model of consumption behaviour suggests that one should expect the vast majority of such a temporary windfall to be saved rather than spent. It certainly is not the obvious way to try to boost demand, unless one can direct the additional income to credit-constrained consumers who are more likely to spend it. In any case, the design of any fiscal intervention does not need to be tied to the question of how the financing is split between money and bonds.

On top of that, the financial crisis has most likely resulted in some deterioration of the capacity of the financial sector to generate export earnings, creating a need for an additional expansion in the rest of the tradable sector of the economy. Generating this shift in the composition of activity requires a real depreciation of sterling. While that has happened – the real effective exchange rate for sterling is almost 15% below its pre-crisis level – it will inevitably take time for resources to transfer to the tradable sector from the domestically-facing sector. Moreover, weak growth in most of the other advanced economies has not provided the best of backgrounds for such a re-balancing. The bottom line of all this is that considerable real adjustments are called for. These real adjustments – balance sheet repair and the sectoral reallocation of resources – inevitably take time. It is against this background that monetary policy needs to be set. On the one hand, a highly stimulatory policy stance can encourage households and businesses to bring forward expenditure, boosting demand and mitigating the destruction of the economy’s supply capacity that can result from a prolonged period of weak demand as firms are driven out of business and the skills of unemployed workers atrophy. On the other hand, such policy can also delay the transition to a new growth path if it slows the process of balance sheet repair and inhibits the process of “creative destruction” as unprofitable firms are closed and the liberated resources shifted to the expanding sectors.
The UK’s Senior Managers Regime (SMR) gives teeth to voluntary codes by incentivising firms to embed them and by reestablishing the link between seniority and accountability. The Bank’s findings suggest that the global macroprudential responsibilities of AEs will likely extend to the oversight of market-based finance given its potential for major cross-border spillovers. 28  See Carney, M (2017), ‘True Finance – Ten years after the financial crisis’. 20  All speeches are available online at www.bankofengland.co.uk/speeches  20  Reinforcing the best of resilient non-bank financial intermediation Over half of investment funds have a structural mismatch between the frequency with which they offer redemptions and the time it would take them to liquidate their assets.29 Under stress they may need to fire sell assets, magnifying market adjustments and triggering further redemptions – a vicious feedback loop that can ultimately disrupt market functioning. Two-thirds of investment funds with structural mismatches are domiciled in the US and Europe so, as is the case for banks, ensuring leverage and liquidity risks are managed in funds investing abroad is both a national asset and a global public good. System-wide stress simulations are currently being developed, including at the Bank of England, to assess these risks.30 And authorities are beginning to consider macroprudential policy tools to guard against the build-up of systemic risks in non-banks. Regulators currently have far less sight of risks within funds compared to the core banking system, particularly synthetic leverage arising from funds’ use of derivatives.

One way of answering this question is to look at the macro picture and determine the trend rate of GDP growth that would be commensurate with such a strong increase in corporate earnings. This is also pertinent in the context of the current discussion about a “new economy” that is perceived as being capable of higher productivity growth and thereby an upward shift in potential GDP growth. A simple growth model shows that in order to justify a P/E ratio between 30 and 35, the growth trend for total factor productivity would have to move up almost 3 percentage points.4 That in turn implies 4  The feasibility of a higher future increase in corporate earnings can be analysed with a simple model where GDP growth is determined by the inputs of capital and labour together with the efficiency with which these resources are utilised in production. Using a simple Cobb-Douglas function, the rate of increase in the return to capital can be derived as gR=gA+(1-a)(gL-gK), where gA, gL and gK are the growth rates for total factor productivity, labour and capital, respectively. The relevant factor in the present context is the return to capital (the flow of income to owners of the capital stock in relation to the value of the stock) because this should be linked to the growth of corporate earnings.
Increasingly not. Where firms fail to provide their own authoritative disclosures, customers, investors and rating agencies will attempt to construct their own. And that’s not good for your financial health: because disagreement between different measures of a firm’s climate performance, whether driven by poor data or otherwise, increases equity risk premia, and hence the cost of raising investment finance.15 It increases the overhead from dealing with investor queries or resolutions on ESG issues, which have risen this year despite the Covid-19 pandemic.16 And it will leave you scrambling when disclosure becomes mandatory. The FCA is already consulting on proposals that firms listed in the UK will be expected to make a TCFD disclosure.17 And the EU Taxonomy Regulation will make green revenue and expenditure disclosures obligatory for those falling within its jurisdiction. Setting out pathways to mandatory TCFD disclosures should be a priority for public authorities; in the UK this is being explored by the Government-led taskforce on climate disclosure.18 If that gives the case for disclosure in principle, what makes a good disclosure from the perspective of effective capital markets functioning?

GDP outcomes and forecasts Annual percentage change 6  6  5  5  4  4  3  3  2  2  1  1  0 mar-00  0 mar-01  mar-02  mar-03  mar-04  mar-05  mar-06  mar-07  Sources: Statistics Sweden and the Riksbank  BIS Review 138/2007  7  Figure 2. Employment outcomes and forecasts Annual percentage change 4,0  4,0  3,0  3,0  2,0  2,0  1,0  1,0  0,0  0,0  -1,0  -1,0  mar-01  mar-02  mar-03  mar-04  mar-05  mar-06  mar-07  Sources: Statistics Sweden and the Riksbank  Figure 3. CPIX outcomes and forecasts Annual percentage change 3,5  3,5  3,0  3,0  2,5  2,5  2,0  2,0  1,5  1,5  1,0  1,0  0,5  0,5  0,0  0,0  -0,5 mar-00  -0,5 mar-01  mar-02  mar-03  mar-04  mar-05  mar-06  mar-07  Sources: Statistics Sweden and the Riksbank  8  BIS Review 138/2007  Figure 4. Productivity outcomes and forecasts Annual percentage change 5,0  5,0  4,0  4,0  3,0  3,0  2,0  2,0  1,0  1,0  0,0  0,0  -1,0  -1,0  -2,0 mar-01  mar-02  mar-03  mar-04  mar-05  -2,0 mar-07  mar-06  Sources: Statistics Sweden and the Riksbank  Figure 5.
For instance, according to a recent working paper of the Peterson Institute, in order to have an expected fiveyear loss rate of 0.5% or lower, the European entity could securitise 50% of a country’s debt or 25% of its GDP.13  Capital Markets Union, financial integration and economic growth A European safe asset is crucial for the CMU project which in turn important for economic growth. A big and liquid market, both of debt and equity, would spur innovation and enable the development of an efficient venture capital market. This relates to the importance of boosting the euro area’s capacity to engage in activities conducive to innovation and productivity growth. In the years since the Great Recession, the pace of productivity growth in Europe has been persistently slow. In fact, European productivity growth had already started to stagnate during the mid1990s.14 While some economists have argued that this is all part of a global secular decline in growth, driven by factors such as an ageing population and growth convergence across emerging markets,15 others believe that scientific progress will keep pushing the technological frontier forward.16 In any case, it is vital that we have financing mechanisms in place in Europe that can support science and technology’s contribution to economic growth. One powerful way in which policy can assist this process is by stimulating the emergence of deep and integrated European capital markets.

But we do have the consolation of knowing that there is a good chance that those who have perpetrated or adopted those misperceptions may have lost a lot of money as a result - if they were brave enough to put their money where their mouth was. Perceptions of the euro I shall turn now to the euro. I would be deceiving you if I said that the euro, as seen from Hong Kong, enjoyed a particularly positive image at present. Arguably one could expect no better for a currency which has lost around 18% of its external value in little over a year, regardless of whether this was judged to be the result of the strength of the US dollar rather than any intrinsic weakness of the euro itself. It is worth noting, however, that the euro was launched at a time when the Euroland currencies were particularly firm against the dollar - having climbed, in the case of the Deutsche mark, by almost 50% since its low point in 1985. Against this background, and the widening of interest differentials in favour of the dollar in recent months, the direction of the euro’s movement is, with hindsight, hardly surprising. BIS Review 23/2000  2  The depreciation of the euro is of course a fact, and it is perhaps the only concrete basis for the scepticism that one hears being expressed about the euro.
In parallel, investors have become more reluctant to invest in the banking sector when profit expectations are low, making it difficult for banks to raise new funds. Banks’ soundness therefore tends to be more correlated to economic fluctuations than in the past, contributing to the amplification of the credit cycle. •  Accounting regulations so far may also contribute to amplifying credit cycles to some extent. In most financial centres, current provisioning behaviour does not allow banks to take a forward-looking view of their risks, as accounting and tax rules only accept loan-loss provisions for impaired loans. Such a regulatory environment may amplify the credit cycle, contributing to low provisioning and over-lending during upswings and paving the way to sharp corrections during downswings. Using full fair value accounting for loan portfolios might further amplify credit cycles by increasing the volatility of banks’ earnings. •  Prudential rules may also have been unable so far to always prevent these developments. Current capital adequacy rules are not risk-sensitive; as a result, credit  2  BIS Review 41/2001  deterioration does not require additional regulatory capital unless loan losses erode the capital base under minimum requirements. As most banks – particularly large ones – have capital far beyond the prudential minimum requirements, they can bear a reduction of their capital base without being compelled to restrict their credit granting. Therefore, capital ratio is not pro-cyclical as such.

Current accounting and tax frameworks hamper the widespread adoption of dynamic provisioning by requiring that risks on specific loans be identified prior to provisioning. Discussions among accounting standard-setters, tax authorities and regulators are essential to encourage such a reform. •  Globalisation and the development of financial markets have created a real need for reliable information and harmonised accounting practices. We fully support such trends towards increased transparency. But, it is nonetheless vital to ensure that, when applied to banks, some of the new widespread accounting practices neither distort the presentation of banks' individual situations, nor disrupt their management practices. A “full fair value” approach assumes that a “fair value” can be determined for all financial instruments; but this does not necessarily apply to banking activities, since loans and deposits are essentially neither liquid nor tradable. Using the full fair value approach for the banking book might result in sharp swings in banks' earnings and prompt banks to curtail their lending activity. This approach might further amplify the credit cycle and could potentially affect financial stability. This is the reason why an increasing number of bank regulators are not in favour of this approach as regards banking book. Let us now focus on asset prices moves. Financial authorities might reflect on some ways to foster behavioural diversity in financial markets. As we have seen before, a series of factors, such as short-termism, mimetic behaviour or index management, have tended to make “contrarians” less pro-active on financial markets.
These doubts are founded on an incorrect understanding of the guarantees that are requested by the national central banks to protect against the risk that central bank liquidity is not repaid. In particular, the discount applied to the nominal value of credit claims provided as security in refinancing operations is very high. This means that, for credit claims deposited as collateral with a nominal value of € the national central banks accepting the new collateral provide, on average, the equivalent of around € in liquidity. This discounting represents a powerful method for absorbing the credit risk involved in such operations. It is also worth highlighting the fact that the main elements of risk control continue to be shared by the Eurosystem: the criteria for acceptance and measures for controlling risk are approved by the Governing Council, which is also responsible for the continuous monitoring of the effectiveness of all of the measures for mitigating risk. With regard to the third point, it is undeniable that, in some countries in particular (especially Spain and Italy), banks used some of the liquidity acquired via the three-year long-term refinancing operations for temporary investments in government bonds. Today, central banks do not have an instrument for the precise and targeted allocation of credit to a sector or in favour of a specific financial use.

6  ]In a recent paper entitled “A monetary policy strategy in good and bad times: lessons from the recent past”(ECB Working Paper, No 1336, May 2011), S. Fahr, R. Motto, M. Rostagno, F. Smets and O. Tristani simulated a “counterfactual” monetary policy strategy which did not include credit and money among its variables of observation and reaction. The authors found that as a consequence of the shock caused by the collapse of Lehman Brothers, the euro area would have entered into a protracted period of deflation and the level of GDP at the end of 2010 would have been 2 percentage points below that which was observed. 6  BIS central bankers’ speeches  The two long-term refinancing operations achieved the purpose for which they were intended. In an environment of a near-shutdown of private credit markets, banks were not able to refinance their assets and were unable to maintain their level of exposure to households and businesses. The extensive long-term refinancing allowed for the partial and temporary substitution of private credit with central bank money and thus avoided a disorderly process of credit to the economy running dry. Nevertheless, these operations were not without their criticism. These can be summarised in three points: 1. The growth in liquidity following the two operations will ultimately lead to inflation;  2. The Eurosystem’s balance sheet is exposed to unprecedented and uncontrollable risks;  3.
4  BIS Review 24/2008  Chart 1: Credit spreads: levels and volatility(a) Basis points 300  Chart 2: Global RMBS, CMBS and ABS issuance $ billions  Basis points 1600 (b)  Spread (rhs) Volatility (lhs)  1400  250  1200 200  3,000  ABS excluding MBS RMBS Non Prime RMBS Prime CMBS  2,500 2,000  1000  150  800  1,500  600  100  1,000  400 50  500  200  U 0  0  0 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06  98 99 00 01 02 03 04 05 06 07 08  Sources: Merrill Lynch and Bank calculations. (a) Option-adjusted spreads over government bond yields and 90-day annualised historical volatilities. (b) 31 Dec. 2006. Source: Dealogic  Chart 3: Housing problems spread to banks(a)  Chart 4: 3-month LIBOR spreads over expected policy rates(a)(b)  Index 104  Price / Index 140  Basis points 120  102  120  100  100  100  80  98  80  96  60  94 92  ABX index (BBB 2006H1) (rhs) Global bank equity index (rhs) Case Shiller US property index (lhs)  90 Jan. Apr. Jul. Oct. Jan. Apr. Jul.

John Gieve: The return of the credit cycle – old lessons in new markets Speech by Sir John Gieve, Deputy Governor of the Bank of England, at the Euromoney Bond Investors Congress, London, 27 February 2008. The original speech, which contains various links to the documents mentioned, can be found on the Bank of England’s website. *  *  *  Introduction The turmoil in credit markets since August has been novel in some ways; but in others, the longer it has gone on the more familiar it has seemed. It has been looking less and less like the crystallisation of a “tail” risk – the “unprecedented and unforeseeable” event described by Northern Rock directors – and more and more like the unwinding of a wider credit boom during which risk premia had become unsustainably compressed. The excesses may have been most obvious in the complexities of structured credit and the sub-prime sector but they have not been confined to them. As in previous banking cycles, a period of strong growth, low interest rates and rapid increases in asset prices lead to over confidence and bad lending at the top of the cycle; defaults, deleveraging and retrenchment follow in the downswing. But the way this old story has unfolded through the new credit markets has sprung some unpleasant surprises, including the speed with which losses in just one market in one country – the housing market in the US – have disrupted wider credit markets in all advanced economies.