samchain/econo-pairs-v1 huggingface dataset:
Dimitar Radev: Spillovers from the ECB’s monetary policy decisions are fast and strong Statement by Mr Dimitar Radev, Governor of the Bulgarian National Bank, for the IFLR Yearbook: Global Banking & Financial Policy Review 2019/2020, published on 24 September 2019. * * * There is much discussion these days about the course of monetary policy in the euro area. What global headlines rarely catch, however, is how such policy affects the European economies outside the euro area. Bulgaria is an example where, due to the high openness of our economy and the strong financial links with the euro area, spillovers from the ECB’s monetary policy decisions are fast and strong. Around 50% of Bulgaria’s exports go to the euro area. Investors from the euro area account for 67% of our FDI stock. Our banking system is dominated by the presence of euro area owned banks, which hold around 55% of the sector’s assets. The monetary policy regime in Bulgaria (a currency board with the national currency fixed to the euro) is another factor enhancing the direct transmission of ECB’s monetary policy. Therefore, even though Bulgaria is not a member of the euro area yet, it is important to consider how our economy is affected by the ECB’s continued accommodative stance. Financial stability and its implications are issues to be potentially concerned about. The ECB’s monetary policy in recent years has succeeded in sustaining the economic recovery in the EU following the great financial crisis.

In the EU countries that are not using the euro, the effects from monetary conditions in the euro area led to improving macroeconomic environment, loosening financing conditions, and high bank liquidity. That stimulated lending and, in turn, the increase in residential property prices. However, these developments also increased cyclical risks. The Bulgarian National Bank conducted research into Bulgaria’s financial cycle. Our findings showed that we are currently in an upward phase of cyclical risk accumulation. Hence, we activated and then raised the rate of the countercyclical capital buffer. We have so far taken two decisions. In 2018, we set the countercyclical capital buffer rate applicable to credit risk exposures in Bulgaria at 0.5%, with effect from October 1 2019. In early 2019 we raised the rate to 1.0%, with effect from April 1 2020. The rate is applied to the overall credit stock of banks and not to the volume of newly issued loans. We announced that we could increase the rate to a higher level earlier if credit growth significantly accelerates. Our decisions were taken despite the fact that the standard metric of how the credit-to-GDP ratio deviates from its long-term trend remained deep in negative territory. Furthermore, we strengthened the macroprudential powers of the Bulgarian National Bank. The key element here was the introduction into Bulgarian law of a framework of borrower-based measures – requirements such as loan-to-value (LTV) and loan-to-income (LTI) – in addition to the existing capital-based measures.
Mr. Plenderleith considers what is new in the financial markets in the United Kingdom Speech by Mr. Ian Plenderleith, an Executive Director of the Bank of England, at the 6th Central Banking Conference, in London on 18/11/97. 1. This has been a year marked by important developments in the UK financial markets and I am delighted to have this opportunity to take you through some of the highlights. The UK’s new monetary framework 2. Perhaps the single most momentous change in the financial landscape in the UK has been the new government’s decision, in May, to give operational responsibility for interest rates to the Bank of England -- essentially, to establish operational independence for the central bank. This significant reform, which took effect immediately, and is to be the subject of legislation recently introduced in the UK Parliament, represented an immediate concrete demonstration of the new government’s commitment to monetary stability. It ensures that monetary policy will continue to be directed to the pursuit of low inflation, recognising that that is an essential pre-condition for achieving the sustained growth in output and employment that we all seek to achieve. The step was warmly welcomed by the markets, as was evidenced by the immediate fall of around 50 basis points it precipitated in long bond yields. 3. The framework put in place with that announcement has been carefully constructed and I would like to point to four features of it that I believe will be important to its long-run effectiveness. 4.

Does that imply that consumers would shrug off a downturn in the housing market? Not necessarily. The rise in house prices has meant that households have taken on a lot of debt, and higher interest rates will mean they have less money to spend on other things. While there are few signs of obvious financial stress at current interest rates, given the strength of the current jobs market and the current housing market, this could change, especially if several of these factors weakened at the same time and the economic climate deteriorated sharply. That’s a long way from our central forecast, but uncertainty about how consumers might react to higher interest rates has been an important reason for tightening policy gradually since last November. We have also avoided springing surprises. I think that’s important: people are more likely to believe what we say, if our behaviour is reasonably predictable. But we wouldn’t be doing our job if we didn’t constantly revise our views in the light of new information and new research. That is why every month has to be a fresh decision. And why I can honestly say that I don’t know, any more than anyone else, where rates will be in a year’s time. Compared with a year ago, interest rates have risen from 3.5% to 4.5%. But the international outlook is clearly stronger now, the domestic economy is buoyant, and inflation remains low.
The new series of targeted refinancing operations (dubbed “TLTRO 2”) should improve medium-term funding conditions for banks and foster bank lending to companies and households. 1  INSEE: Indicateur de climat des affaires et de retournement conjoncturel. BIS central bankers’ speeches  1  3/ Structural policies Moreover, monetary policy is not the only game in town. It is supported by structural reforms that increase potential growth, particularly in countries with a high unemployment rate. History has shown that ambitious reforms can contribute durably to growth. Sweden in the 1990s and Germany a decade later have demonstrated that structural reforms enhance employment rates, potential growth and resilience. They also reduce labour market duality, and provide more opportunities to new entrants in the labour market, particularly young people. In the wake of a severe crisis, Sweden and Germany rebuilt their economic models and, as a result, have been better able to weather the latest downturn. Indeed, a number of European countries are conducting major reforms to bring high and sustainable growth back. Those reforms are particularly challenging when it comes to the labour market, but they are needed. We need to improve labour flexibility and reduce the duality in the labour market between permanent and temporary contracts, which generates both high structural unemployment and inequality. The most emblematic example is Spanish reforms. Their results are impressive, especially when we consider the very difficult economic situation in the country during their implementation.

Paul Tucker: Competition, the pressure for returns, and stability1 Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the British Bankers’ Association Annual Banking Conference, London, 17 October 2012. *  *  *  Introduction Propelled by a deep crisis in the financial system, the international authorities are overhauling the “rules of the game” for global finance. The changes are profound. But it is worth stressing that the goal is not to abolish risk or risk-taking. We need to find broadly the right balance between, on the one hand, safety and, on the other hand, the contribution that sound and honest finance can make to economic prosperity. In striking that balance, international policymakers have maintained three beliefs: •  risk is an intrinsic and unavoidable part of the (monetary) services that banks provide to the economy, just as risk is intrinsic to the businesses that borrow from banks;  •  competition in finance is good, although the authorities need to be mindful that the drive for superior headline returns can contribute to excessive risk in the system as a whole;  •  a global financial system must be maintained, but the authorities need to contain the way that financial problems can be transmitted easily from one part of the globe to others. In short, the things society wants from finance come with risks attached. History contains repeated episodes of herd-like chasing of high headline returns during exuberant phases of the credit cycle.
The Riksbank has also cut the repo rate to the lowest level it has been at since we introduced an inflation target. How monetary policy can be conducted under the prevailing conditions is a question that I will discuss in more detail later. The financial crisis has of course changed these conditions a great deal. But before we get into that, I would like to say a few words about how monetary policy is supposed to work under normal conditions. How monetary policy works normally Normally, monetary policy aims to keep inflation at a low and stable level and to stabilise the real economy. To achieve this, the Riksbank controls the shortest market rate, that is the overnight rate which is the interest rate on loans between the banks from one day to the next. The overnight rate in turn affects the interest rates charged to the general public, and thereby activity and prices in the economy. We have a system in which we influence the overnight rate by determining the conditions for the banks borrowing and lending with the Riksbank so that it is close to our policy rate, the so-called repo rate. The repo rate expresses the level at which the Riksbank wants the overnight rate to lie. The way in which the monetary policy conducted has an impact on, for example, the banks' lending rates, the development of the real economy and inflation is usually called, somewhat loosely, the transmission mechanism.

There is also a lack of information allowing an  assessment of the firms that could be most adversely affected by the transition and it is not easy to determine the exact consequences of the different future scenarios. Nevertheless, I believe that the banking sector should, to a large extent, already be considering transition risk. We should not forget that analysing the business environment is an essential part of the risk assessment and management that banks must carry out and that, unlike other ‘transitions’ prompted by sudden changes in technology or behaviour, the transition to a decarbonised economy has been announced and reported on. In order to foster robust management, a series of expectations from both the Single Supervisory Mechanism and the Banco de España, within the remit of their supervisory competences, on the appropriate measurement and management of these risks within the sector is expected to be published soon. Allow me to briefly refer to our work as macroprudential supervisor. I am sure you will agree that, in order to be able to conduct this type of supervision, we need to assess financial institutions’ exposures to high-carbon emitting activities, perform stress tests for the financial system as a whole and define the scenarios and methodologies that serve as a guide for banks. In this regard, in order to analyse the risks associated with climate change and environmental degradation, we are developing an internal methodology on the basis of the stress tests applied to the Spanish banking system every year.
The criticism is rarely clear with regard to which of the statements it is based on, but my interpretation is that most of it is based on the first claim – that it is not so important to maintain confidence in the inflation target. Unfortunately, this rarely develops into any more detailed reasoning. Typically, the criticism tends to stop at monetary policy having been inappropriate, while reflections on the merits of a credible inflation target – and in particular on why the advantages of the current target should no longer apply – are almost always lacking. Essentially the criticism concerns whether or not to have an inflation target When thinking about it, this criticism is in fact quite remarkable. What it actually says is that even if confidence in the inflation target is beginning to fail quite clearly, the Riksbank should not do what it can to maintain it. In this sense, one can argue that the discussion is essentially about whether or not to have an inflation target, and perhaps even about whether or not to pursue an inflation-targeting policy at all, although it is rarely expressed in this way. I can only think of one earlier parallel. It was as long ago as the second half of 1994, after the Riksbank had decided to introduce an inflation target, but before it came into force in 1995.

The criticism lived on for quite a long time, but it was probably quite essential to demonstrate at that time that the inflation target was taken seriously. This was until now the only time I can remember that the Riksbank was urged not to do its best to maintain confidence in the inflation target. The criticism then was largely due to the inflation-targeting policy being so new – as I said, the inflation target had not yet even come into force. It is less easy today, after twenty years of positive economic developments, in which the inflation target has been a cornerstone, to see why the Riksbank is being urged to lower its ambitions. Perhaps it is because developments have been so positive for so long that one feels the existence of a credible nominal anchor is no longer as important. If so, I am convinced that this is a mistake. Difficult to see reasonable alternatives to the policy conducted But what about developments in household debt and housing prices? Don't they give a reason for changing monetary policy? The Riksbank has previously used the repo rate to try to subdue the upturn in debt and housing prices. But this was on a fairly modest scale and – above all – during a period when confidence in the inflation target appeared firmly rooted. 9 In recent years, on the other hand, there have been signs that this confidence has begun to be undermined, which has changed conditions rather drastically.
Currently, because the underlying data in firms’ risk-management  16  BIS Review 16/2010  systems are incomplete or are maintained in nonstandardized proprietary formats, compiling industry-wide data on counterparty credit risk or common exposures is a challenge for both firms and supervisors. Further, institutions and investors cannot easily construct fairly basic measures of common risks across firms because they may not disclose sufficient information. In some cases, such as disclosure of characteristics of underlying mortgages in a securitized pool, more complete and interoperable data collection systems could enhance market discipline by allowing investors to better assess the risks of the securities without compromising proprietary information of the lending institution. Fifth, data collection must be nimble, flexible, and statistically coherent. With the rapid pace of financial innovation, a risky new asset class can grow from a minor issue to a significant threat faster than government agencies have traditionally been able to revise reporting requirements. For example, collateralized debt obligations based on asset-backed securities grew from a specialized niche product to the largest source of funding for asset-backed securities in just a few years. Regulators, then, should have the authority to collect information promptly when needed, even when such collections would require responses from a broad range of institutions or markets, some of which may not be regulated or supervised. In addition, processes for information collection must meet high standards for reliability, coherence, and representativeness.

We should continue to develop flexible inflation targeting So, what conclusions should one draw from developments in recent years? How much do we need to reconsider and how much must we modify the monetary policy framework? I would reply: Somewhat, but perhaps less than one sometimes might think. I am fairly convinced that the flexible inflation-targeting policy conducted in many parts of the world has essentially been the right path to take, although it has not solved all of the problems. It appears to solve the problems it is intended to solve, without any serious side effects. I think that it is difficult, particularly with regard to Sweden, to overestimate the role played by inflation targeting in attaining better macroeconomic stability – together, of course, with farreaching changes especially in the fiscal policy area. Economic policy is now more disciplined and we were able to benefit from the stability and credibility this has provided in the most recent crisis. But it is also clear that the financial crisis highlighted some weaknesses and that the work on further developing the inflation-targeting policy must continue, both in the academic field and in central banks. For example, it is evident that there is reason to try to get to grips with and model the interaction between financial markets and the macro economy in a better way than before. Financial factors, and in particular credits and indebtedness, should play a larger role than before in our models and our thinking.
Accordingly, prudent and in-depth analysis of the structure of general government income and expenditure is essential in order to progress in this respect (see the illustrations in Chart 14). On the expenditure side, there appears to be room for continued progress in raising its efficiency and reorienting its composition towards those items that have a greater impact on the accumulation of physical, technological and human capital. In this respect, the outcome of the ongoing public expenditure review may be key to further progress in this direction. On the revenue side, there is room to consider a review and definition of the tax basket, moving towards structures more favourable to potential growth. In addition, in such a highly decentralised government system as the Spanish one, the regional authorities play an essential role. In this respect there is a general consensus on the need for reform of the system of regional government financing, tailoring the resources at their disposal to their requirements, based on a previous objective estimate of those requirements, in order to ensure a transparent distribution of funds and increase the degree of fiscal co-responsibility. Lastly, let me add that this process of fiscal consolidation needs to be accompanied by an ambitious structural reform agenda to boost potential economic growth. In the Banco de España’s latest Annual Report, published in May 2018, we outlined a broad range of areas where such initiatives could be set in process. Here I would like to highlight two of those areas (see Chart 15).

All these elements may contribute to a strengthening of the decelerating trend in world trade and activity which is already under way. In Spain, this deceleration has already caused some deterioration in the economy’s current-account deficit. The compatibility of strong domestic demand with an ongoing external surplus has unquestionably been one of the most positive features of the current upturn, compared with previous ones. However, some of the factors which favoured the strong performance of the external balance have tended to lose steam recently, as is the case of the higher energy bill during much of 2018 due to oil price rises and the weaker tourism flows from the rest of the world. In the future, persistence of the recently observed moderation in activity on a global scale, particularly in the euro area, or a hypothetical increase in the cost of funding Spanish external debt will pose risks for the performance of the external balance. At the same time, the need to reduce the still-high external debt makes it essential for the Spanish economy to keep running external surpluses in a sustained manner. 1.4  Macroeconomic projections of the Draft Budget  The Draft Budget is based on macroeconomic projections of real GDP growth in Spain of 2.2% in 2019, down 0.4 pp from the 2.6% projected by the government for 2018, while the increase in nominal GDP is estimated at around 3.8%.
redemptions to CBRT)  -14.8  Redemption of net TRY government bonds (redemption-issue)  18.9 -28.9  Primary surplus inflow TRY denominated operations  privatizations  and  other  -4.8  Accordingly, while the Central Bank’s foreign exchange purchases and interest payments boosted liquidity by TRY 11 billion in 2008, the Treasury’s operations amounting to TRY 14.8 billion and the TRY 10.5 billion increase in monetary base eroded liquidity by a total of TRY 25.3 billion. Significant uncertainties exist regarding liquidity conditions in 2009. The reason is that the Central Bank’s foreign currency purchase/sale operations against TRY and the Treasury’s net foreign exchange collections or payments are not yet clear, and the realizations can also be different from the envisaged within the year. Under the assumptions that the Central Bank will not conduct foreign currency purchase/sale operations against TRY and that the Treasury will act as net foreign currency payer at a reasonable level, it is predicted that though the liquidity shortage in the market will be at moderate levels throughout the first quarter, it will be gradually permanent from the second quarter onwards. If the Central Bank sells foreign exchange against TRY, a permanent liquidity shortage might emerge earlier than expected. On the other hand, in case the re-commencement of FX buying by the Central Bank due to improved conditions in international markets or the utilization net FX inflows of the Treasury in terms of TRY might hinder occurrence of permanent liquidity shortage.

In fact, in a period when uncertainties surrounding the global economy are at high levels, the Central Bank adopted the strategy to use foreign exchange reserves to primarily support the foreign exchange liquidity of our banking system. Within this framework, the Central Bank resumed its activities as an intermediary in the Foreign Exchange Deposit Market; lending rates of this market was reduced and maturities were extended. Besides, during periods of ailing price movements, foreign exchange liquidity was injected via foreign exchange selling auctions. Moreover, it has been declared to the public that if deemed necessary, additional measures might be taken to ensure that the financial markets function efficiently. All these measures have helped contain the effects of the global financial turmoil on the domestic economy. The Central Bank will continue to take the necessary measures, provided that they do not conflict with the price stability objective. In the last quarter of 2008, global financial conditions have been tighter than required by the stance of monetary policy, owing mainly to the intensification of the global financial crisis. Turkey has also been undergoing a similar process. In this context, the Central Bank recently made a measured cut in short-term interest rates, in order to offset the extra tightening in monetary conditions. In order to be able to comprehend the monetary policy decisions of the Central Bank, the nature of the shocks to the economy should be analyzed properly at the outset.