samchain/econo-pairs-v1 huggingface dataset:
By pointing out the risks that the Riksbank sees and publishing our assessments, it is probable that conduct that could otherwise lead to systemic risks can be prevented. Openness can thereby be said to constitute a means in our monitoring of the payment system. This also applies to monetary policy, where openness and clarity do not only have the function of creating understanding for the inflation target but also probably affect and stabilise inflation expectations in the economy. Stable prices reduce the risk of financial crises? An issue that is highly relevant for the Riksbank is the extent to which monetary policy focused on price stability reduces the risk for the incidence of financial crises. An economic policy focused on price stability is considered to create the basis for macroeconomic balance. The financial crises we have seen to date have often been preceded by periods of strong credit expansion and building-up of macroeconomic imbalances. Increasing asset prices have also commonly preceded a crisis. Borrowers as well as banks seem often to have based their decisions on loans and lending on expectations of continued high asset prices and that the growth in wealth that rising share and property prices give rise to would be permanent. When these expectations subsequently prove to have been exaggerated, this initiates a process that in some cases has led to financial crises in the bank system. The development in the U.S. economy has brought up the risk that financial imbalances can develop despite stable prices and balanced government finances.

Purely hypothetically it is conceivable that the Riksbank would increase interest rates even if we regard it as most probable that the inflation target would not be  BIS Review 44/2000  4  threatened. In this case, the motivation would be that we make the assessment that the credit expansion in the bank system risks threatening the stability of the system, for instance in the event of a large fall in asset prices. An interest rate decision of this kind could probably also be motivated by the risk of strongly falling inflation if the risk scenario is realised. In practice, it is probably only in retrospect that it can be noted that financial assets and liabilities that have been built up have been an expression for serious financial imbalances. It is therefore normal that the interest rate weapon is only used if the inflation target is threatened. The pressure for change creates challenges for banks and authorities It is evident from everything that I have said that there are no sharp boundaries between the various areas of responsibility of the Riksbank. The Riksbank’s analysis of the development of the banks also serves as a basis for our assessments of stable prices and financial stability. For instance, structural changes in the financial markets probably affect the impact of interest rates on the economy, at the same time as they change the risks banking activities are associated with.
This would make it possible to dismantle a systemically relevant institution in such a way that only those parts of the institution that are vital to the economy need to be saved. Only a limited bailout is then necessary, and this can then be rendered compatible with the functioning of a free market economy, if the capital necessary for maintaining the vital functions does not come from the taxpayer. Cocos: better incentives for bondholders A possible way to keep vital parts of banks functioning during crisis situations without involving the taxpayer is to have recourse to contingent convertible bonds or Cocos. These are bonds that are converted into equity if certain thresholds are reached. One such threshold may be a capital level corresponding to a de facto bankruptcy. With these “low-trigger” Cocos, the necessary capital for supporting the vital functions of the bank is forthcoming precisely when it is most needed, in other words, when the institution would not otherwise be viable as a going concern. The conceptual attractiveness of Cocos is that, in addition to recapitalising banks when the standard form of recapitalisation is unavailable,  11  Banks’ liquidity issues are not dealt with explicitly here. Clearly, weak bank liquidity profiles were at the core of the recent crisis. Liquidity measures represent a critical part of the Basel III regulatory framework. They are also part of the TBTF proposal. Another relevant issue relates to the maturity mismatch between a bank’s assets and liabilities. This is discussed in Hellwig (2008), among others.

In order to illustrate this point, I will look at the incentives with regard to risk-taking by the various stakeholders of a bank and try to gauge the likelihood that these incentives lead to decisions that would be optimal from society’s viewpoint. In my second section I will focus on the “too big to fail” (TBTF) problem. My goal here will be to discuss the variety of solutions that can be envisaged in order to restore proper incentives and in particular assure that the capital necessary for maintaining the vital functions of financial institutions will in the future come from sources other than taxpayers. I will argue that higher capital requirements, in part in the form of contingent convertible bonds (Cocos), together with appropriate organisational measures, can fulfil the objective of a “partial” bankruptcy and lead to improved incentives for key bank stakeholders. In this speech I will adopt a relatively academic point of view, appropriate for today’s circumstances, which will lead me to the conclusion that sound theoretical principles underlie the TBTF package currently submitted to the Swiss Parliament.1 Finally, I would like to address the question of the likely impact of current regulatory efforts on the cost of capital for banks and their expected return on equity. 1  The importance of this issue for the Swiss National Bank (SNB) is reflected in the number of times it has been addressed by members of the SNB Governing Board.
And for much of the period since rates fell to the floor, policy has been actively changed – asset purchases have built up to now stand at around £ billion. Chart 1 Bank rate from 1694  % 18 16 14 12 10 8 6 4 2 0 1700  1800  1900  2000  So it is the level to which interest rates have fallen that is unprecedented. I believe it has been right to loosen aggressively the stance of monetary policy because of the scale of the deflationary and recessionary forces unleashed by the remarkably rapid downturn that followed the crisis in the banking sector. This crisis intensified dramatically in the autumn of 2008 when the banking system came close to total collapse. That would have been an outcome comparable in its impact to the failure of the system for electricity supply. Many now argue that monetary policy should be set in a different way so as to reduce the chances of this sort of banking crisis. That is one of the issues I want to discuss today. The argument that the aims of monetary policy need to be broadened beyond a focus on inflation is one  BIS Review 100/2010  1  that deserves to be taken seriously because the damage done by extreme financial instability is great. If there were no tools better suited to help preserve financial stability than varying interest rates then the case for broadening the goals of monetary policy would be strong.

David Miles: Monetary policy and financial stability Speech by Mr David Miles, Member of the Monetary Policy Committee of the Bank of England, at the Bristol Business Forum, Bristol, 14 July 2010. *  *  *  I would like to thank Conall MacCoille and Gilberto Marcheggiano for research assistance and I am also grateful for helpful comments from other colleagues. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Monetary Policy Committee. Monetary Policy in the UK has never been as expansionary as it is today. Just over 15 months ago the level of Bank Rate was reduced to what is – to all intents and purposes – its floor. As Chart 1 rather starkly shows, this is the lowest level to which Bank Rate has fallen since the Bank of England was established at the end of the seventeenth century. Bank Rate has not been changed for 16 consecutive meetings of the MPC. That is not so unusual. In fact, as the Chart reveals, between 1720 and 1820 Bank Rate did not move from 5%. Had a Monetary Policy Committee then met each month, as it does now, it would have decided at 1200 consecutive meetings not to change the level of interest rates. So it is far from unusual for the interest rate set by the Bank to remain constant for over a year.
All of this in an environment of lower growth, zero rates and stimulus plans. When you were in government you joked that you slept like a baby, in that you woke up crying every two hours. How are you sleeping now? Well. Very well! I wouldn’t wish what happened in 2012 on my worst enemy. The situation now is totally different; back then we were on the brink of collapse. The Spanish economy, the Italian economy, doubts about the integrity of the euro… the situation of the Spanish banking industry was terrifying and contagion was spreading to the Treasury. It was a dramatic situation. I don’t think there is going to be a recession in Europe, that’s very unlikely. But yes, I am worried that we 2/5  BIS central bankers' speeches  will have two or three years of subdued growth, of below-potential growth. That is what is worrying me at the moment. And that this subdued growth may mean that the price stability objective is not met. Monetary policy is not the philosopher’s stone, it cannot be used to fix everything. Other policies are needed. So do you echo the calls of Presidents Draghi and Lagarde for countries with fiscal space, above all Germany, to boost spending and investment? This is important, yes, but my proposal goes further than that. Our current system of national fiscal policies and national budgets, with a set of rules like the Stability and Growth Pact, is not sufficient.

3/5  BIS central bankers' speeches  The public message is quite clear. Are there more discreet messages in private? No, none. I say the same thing in public that I do in private. Have the ECB’s non-standard measures run their course? No. We can still increase bond purchases or lower interest rates further, which means that we still have the same tools available. What is happening is that the secondary effects are becoming more tangible . And each measure has less of a return. I look at the effects, and these can vary greatly. I am worried by risk taking in the asset management sector against the background of low interest rates. It is a matter of concern for me. Banks are now better capitalised, they have more liquidity, and they are much safer than they were. But they face low profitability, which is a problem. Supervision is centralised and is more suitable than when it was the remit of national authorities. But in the area of asset management and investment funds, what we see is that, in a low interest rate environment, their investment strategy always moves towards increased risk, in the sense of assets with potentially greater returns and greater risks but that are less liquid. And there is also more leveraging, not to the extent seen in the United States, but still more than before. And the supervision in this sector is not comparable with that in the banking sector. There is a risk.
The international experience has shown that the employment of innovative means in the banking and financial system contribute to reducing social costs in the economy from 1% to 2% of GDP. In the case of Albania, this figure may be higher, as cash use in economy is considered to be high. Allow me to highlight some of the considerable developments of banking system. Nowadays, businesses and individuals are increasingly using banking services, mainly in the payments market, where the adaptation of information technology to the development of banking services and products is more substantial. In recent years, the use of banking cards has been rising, not only for basic services, but also as a means of payment. This is followed by the development of the necessary infrastructure, such as PoS and ATM devices. As reported by banks, the number of PoS and ATM devices currently stands at 6.427 and 811, respectively. The number of physical Points of Sale grew 19% in 2014, compared to 2010. Recently, we have also seen an increase in virtual services through the development of infrastructure for the realisation of e-commerce. The expansion of infrastructure for the use of cards is accompanied by the considerable increase in the number of debit and credit cards in circulation. In 2014, 777.195 debit cards and 84.824 credit cards were issued, or, in relative terms, increasing 103% and 20%, respectively from 2010. Notwithstanding the innovations, cards in the world remain very convenient, preferred and secured instruments.

I would like to underscore that large spaces still exist for improvement and narrowing the gap between the Albanian market and the advanced markets, and to some extent between the regional markets, .They should, therefore, constitute our common challenge for the future. In the framework of encouraging market towards these innovative services, the Bank of Albania as the regulator and catalyser has undertaken recently a set of measures. In more concrete terms, the establishment of legal and regulatory basis for the e-money institutions, followed by the licensing of the first institution of this type in March 2015, constitutes a 2  BIS central bankers’ speeches  premise to introduce the innovative services in the Albanian market of payments. The regulation of the activity of these institutions is based on the European practices not only in the framework of Albania’s adherence to the Single European Market, but also as one of the most optimum solutions in terms of security and efficiency at national level. The liberalisation of the payment systems market through the Law on Payment Systems will boost the development of the market. This legal framework provides the necessary space for private enterprises, and lays down the standards in terms of security and efficiency, and will support the development of a contemporary financial structure.
Unfortunately I do not think that it makes much sense to try to show specific statistics for such outflows, since in this field data are notoriously unreliable - the more so in instances where controls exist which encourage outflows through what are euphemistically called informal channels. But in general terms the existence of such outflows is strongly implied, if not actually identified, in the overall balance of payments figures. Regarding capital outflows, allow me, for purposes of exposition, to make the following exaggerated distinction. In respect of advanced economies, outflows of direct investment tend to reflect the global workings of comparative advantage, as businesses seek to exploit particular strengths or niches; and portfolio outflows tend to reflect the search by each investor for a balanced international portfolio, within the total of which, however, domestic investments will typically tend to predominate. By contrast, in the less advanced economies there will be less wealth to provide the springboard for a large amount of direct overseas investment, and a large part of the leakage of funds from the country will be through what I have referred to as informal channels - which others may describe as capital flight. The position of any particular country in the spectrum between these two extreme characterisations will depend on, among other things, the stage of economic development that the country has reached, and on the degree of confidence that the population has in the government’s policies and in the financial institutions.

They include the quest for efficiency and greater effectiveness; the lessons learned from crises; political pressure - and its converse political opportunity; and what has from time to time been referred to as “fashion” but which I think can be more generously described as best practice. We have heard many times these last few days the familiar disclaimer that there is no “one model that fits all”. Many of you have stressed the uniqueness of your governance arrangements only to be reminded subsequently that these are arrangements familiar to one, two or even several other central banks. The modesty and diffidence with which experiences have been described is, of course, to be expected among central bankers. But there is, I think, a very pleasing mismatch between this and the enthusiasm with which all of us have been drinking up information about each other. This demonstrates that the BIS network is far more than an academic exercise. It also reflects an important truth: that, although our economic and political environments may differ widely, although we may pursue different policies and follow different legal structures, we all face a number of constants. Finance, money and banking behave in very similar ways no matter where we find ourselves, the more so with globalisation and liberalisation of markets. Politicians and the media the world over have the same qualities and the same vices. And so for that matter do central bankers. The human factor, which is at the root of all of our discussion on governance, is universal.
However, on receiving your much appreciated invitation, I thought I’d take advantage of the sense of calm reflection which university fora instil to pause and ponder on what may happen to the Spanish economy after the crisis, when the global economy recovers. It is worth reflecting on the aftermath because the global nature of the crisis is "homogenising" the different economies. And by blurring the differences from one economy to another, it is hard to discern the different tasks awaiting them. As the crisis left nobody unscathed, not even those countries which acted prudently, i.e. those that did not incur excessive debt or whose competitiveness did not worsen, are faring better than those which were not so virtuous. But when the crisis ends, differences will re-emerge. When a plane taking off from New York almost crashed last month, the health and well-being of all the passengers hinged on how the crisis was resolved, without this depending on their youth, cholesterol levels, excess weight or the state of their lungs. The drama was the same for everybody. Luckily, they all emerged safe and sound from the landing on the Hudson. But after that, with the crisis behind, their health and well-being depends once again on the state of their organs, diet and exercise, and on taking the right medicine. Countries worldwide have entered into a similar negative spiral (a deep slowdown in – and in some cases the collapse of – consumption, employment, output, credit, investment...).

Chart 1 plots 4  the turnover share of the largest 100 UK businesses since 1998 (i.e. concentration ratio). This ticks up in the lead-up to the financial crisis, although this pick-up is more modest than in the US, from 20% to around 5  28%. Concentration has flattened-off in the period since the crisis, however, in line with other European countries. Turning to measures of concentration within the financial services industry, the international pattern is somewhat more uniform. Chart 2 plots the largest five banks’ share of total banking assets in the US, euro area and the UK. Levels of banking concentration started fairly high, averaging around 30%. They drifted further upwards in the run-up to the crisis, although this drift was again fairly modest. Since the crisis, however, measures of banking concentration have flat-lined and, in the UK, have fallen slightly. Concentration indices have their limitations, though, and need not always be associated with market power. Some firms may be able to exercise market power in setting prices even without having a large share of a market if, for example, there is brand loyalty. And in a world of differentiated products, concentration measures such as HHIs or concentration ratios no longer correlate closely with market power (Bresnahan (1989)). With non-homogenous goods and non-Cournot competition, a better measure of market power is often provided by firms’ mark-ups – the ratio of their price to their marginal cost (De Loecker and Eeckhout (2018)).
However, China’s reopening may temper inflation through its impact on supply bottlenecks. Indeed, the end of the zero-COVID policy will avert production distortions caused by restrictions. In the recent past, the COVID-induced production stoppages in China were key factors behind the bottlenecks and inflationary pressures and, therefore, the reopening could be seen as net deflationary. All in all, it is difficult to disentangle the net effects of all these factors on inflation and close monitoring will be needed. The resilience of euro area growth and its composition In the second half of 2022 the euro area economy proved more resilient than expected and the slowdown in the fourth quarter of last year was less severe than anticipated . This has occurred in a context on which a significant reversal of previous supply shocks (bottlenecks and energy prices) was observed, households and firms had plenty of buffers (in particular the household savings built up during the pandemic), the post-COVID rebound in demand continued to generate positive effects and monetary policy had not yet been fully transmitted. However, there is much uncertainty about the continuity of these factors. In particular, the sharp decline in European gas prices reflects unusually mild weather, energy-saving measures and strong inventory levels, which mitigate supply risks for next winter. However, 12  Ko lerus, Diaye and Sabo ro wski (2016) “China’s Footprint in Global Co mmodity Markets”. International Mo netary Fund.

In particular, according to the flash estimate,2 inflation was slightly lower than expected and stood at 8.5% in January, down from 10.1% in November. Furthermore, the strong fall in gas prices, the easing of global supply chain disruptions, the appreciation of the euro and tighter financing conditions (the latter reflecting, inter alia, our policy tightening) also pointed to inflation falling more strongly in the coming months than envisaged in December. At the same time, the fact that core inflation (5.2% in January, according to the flash estimate) has held at record high levels was a powerful reminder that price pressures remain strong, as past energy price rises continue to spread throughout the economy. All in all, this information led us to assess the risks to the inflation outlook as being more balanced, especially in the near term. As regards financial market-based indicators, in the run-up to our February meeting the riskfree forward curve continued to point to expectations of further interest rate increases in our subsequent meetings, including 50 bp hikes in both February and March, with a terminal market rate of around 3.47% (0.6 pp higher than before our December meeting). This was corroborated by analysts’ expectations, as reflected in surveys conducted shortly before the meeting.