samchain/econo-pairs-v1 huggingface dataset:
This means that major risks can arise without either counterparties or authorities being aware of this. Two well-publicised cases in this context are the LTCM and Amaranth hedge funds. Both of the funds collapsed and the lack of insight appears to have contributed to the problems. LTCM was permitted a very high degree of leverage by its counterparties, which is remarkable and reflects the fact that there was no overview of the fund’s size and total risk. In the same way, no one observed in time the risks on the energy market that were being built up in the Amaranth hedge fund. The funds’ high leverage and lack of transparency has contributed to a lively debate about further regulation of hedge funds. I shall return to this in a while, but first of all I shall discuss the turmoil we have experienced in the financial markets in the past six months. What has this entailed for the hedge funds and how have they been affected by developments? Several hedge funds have been affected negatively by the recent turmoil As we know, the unrest in the financial markets has its origin in the US mortgage market, the subprime market. The problems in this relatively limited part of the US mortgage market spread to several financial markets at the end of last summer. A large share of the subprime loans had been re-packaged in various structured products and sold on to investors around the world.

Josef Bonnici: Reflections on the financial and economic challenges in the euro area and beyond Address by Professor Josef Bonnici, Governor of the Central Bank of Malta, at the FinanceMalta’s 5th Annual Conference “Malta’s financial services industry – sustaining the momentum”, Mdina, 18 May 2012. *  *  *  Ladies and gentlemen, The euro area continues to face a number of unprecedented challenges. Bond and equity markets have been highly volatile and the degree of uncertainty in financial markets has increased. It can be said that Member States have largely recognised the gravity of the situation and have already implemented or are in the process of implementing various major reforms. These are generally directed at fiscal consolidation and the enhancement of competitiveness and growth, and include significant labour market reforms, as in Spain, and reform of the public administration, as in Italy. Ireland and Portugal are on track in the implementation of their EU-IMF programmes. But the tensions in the debt markets are clearly not over yet. Despite the efforts being made by policy makers across the European Union, the sovereign debt crisis continues and its ramifications are still uncertain. The recent rise in Spanish yields and the turbulence in Greece are evidence of this. The main problem is that fiscal consolidation has to be effected at a time of an economic slowdown. Recessionary conditions slow down GDP growth and compound the difficulties that are encountered in the reduction of the fiscal deficit and debt.
10  See, for example, Blinder (2004), Blinder and Morgan (2000) and Lombardelli et al (2005). 11  The arguments for delegating decisions on interest rates to a committee of experts were discussed in my May 2002 lecture to the Society of Business Economists. See King (2002a). BIS Review 43/2007  5  Second, members of the Committee are individually and publicly accountable for their votes. Disagreement among the Committee is inevitable; it is also desirable because it represents the individual judgements of members, rather than an attempt to create a false consensus. It is a source of strength. Over the past ten years, there have been 153 dissenting votes, on average more than one per meeting. This institutional encouragement of open debate is in contrast to many other central banks. We don’t “do consensus”, as one former member put it. Dissent is more frequent than on other central bank committees which publish individual votes, and is not just token. Table 2 reports the proportion of dissenting votes in four central banks during the period since the MPC was set up. Not only is the number of dissenting votes greater on the MPC, the frequency of more substantive disagreement – where one quarter or more of the voters dissented – is markedly greater. Voting patterns on the MPC reflect the distribution of views about how to interpret the economic data, not a hint about where rates will go. Voting is certainly not used as a signal by the Committee.

Modest rise in Swiss real estate prices overall Among other things, our assessment is based on the development of real estate prices. In Switzerland as a whole, real estate prices have only experienced a moderate rise in the past few years. Moreover, the general price level is still considerably lower than the record highs reached over ten years ago. By contrast, owner-occupied apartments are an interesting deviation from this trend. They have risen sharply of late, almost equalling their 1990 high. Econometric estimates of equilibrium prices which have been additionally carried out also fail to indicate any overheating in the Swiss real estate market as a whole. We arrive at the same conclusion even under the assumption of a significantly higher interest rate level than today’s, which would result in a marked correction of the capitalised value of real estate. Our assessment is based on an observation for Switzerland as a whole. It does not exclude the possibility that there have been excesses in individual regions or in certain parts of the real estate market. BIS Review 86/2005  1  Graph 1: Development of mortgage claims and real estate prices Source: SNB, Wüest & Partner  No sign of banks taking greater risks Since the end of 2002, mortgage claims have recorded annual growth rates of up to 6%. This is quite substantial compared with the rather moderate trend in real estate prices.
And there has been extensive work on labour market dynamics and frictions to establish the point at which the level of unemployment accelerates the rate of inflation which, for the same of simplicity, I will refer to here as the natural rate. 9  However for nearly 5 decades the essential framework of a labour market impacted by inflation expectations that clears with lags around a natural rate of unemployment over the business cycle (or trade cycle in Phillips’ original work) has played a fundamental role in modern macroeconomic models, including those used as part of their forecasting machinery by monetary policy makers, like the Bank of England. So for monetary policymakers the apparent disappearance of the link between pay growth and employment is, as I have said, one of the key puzzles of the post recovery economy in the UK and in advanced economies. It has of course attracted a great deal of attention. I am afraid I do not have the answer to the puzzle to give you here tonight. I suspect that for many years to come, economists in academe and elsewhere will be occupied - and arguing - about this period and revisiting (again) the established Phillips curve framework. But policy makers cannot just ‘down tools’ until we have a better understanding. So I do want tonight to look at some of the main candidate explanations and what they might mean for the policy maker.

Let me now turn to seven more awkward questions for us. First, how do we square the principle of proportionality with the steeper slope of regulatory requirements this inevitably causes for growing firms? This arises in many ways, where we take a softer approach for smaller firms but this has to be withdrawn as they grow. One example is the steps in our Systemic Risk Buffer regime, which we’ve debated with Sir John in the past – it’s true these could be smoothed to some extent by greater granularity and/or an ‘income tax’ approach, but the basic problem of gradient remains. This issue also arises on the resolution side, which is of course outside the scope of the competition objective – it must be right that we exempt small firms from bail-in debt, but this inevitably leads to a moment when successful firms stop being small and need to start issuing. Second, and related to the first, although we have in my view been pretty successful in encouraging new entrants, it is so far notable that no small bank has successfully become a large bank. Perhaps this will change through time, and it may have much more to do with behavioural stickiness of current accounts than regulation, but it would be complacent to be relaxed about it. As an aside, there may be lessons to be learned here from the general insurance market: it is notable that some of today’s largest GI firms started as small challengers within the last 20-30 years.
And the likely public and financial market  5  BIS Review 66/2000  reaction is, in my view, the most effective protection against abuse of the Treasury’s emergency powers. What I have described up to this point relates solely to monetary policy. But the new legislation similarly deals with the Bank’s other key responsibility - maintaining financial stability. And at the risk of trying your patience let me say a few words about that. Less than a fortnight after announcing the Bank’s new independent responsibility for the operation of monetary policy, Chancellor Gordon Brown announced that the Bank’s responsibility for banking supervision would pass to a new institution - the Financial Services Authority, or FSA - which would assume responsibility for the regulation and supervision of all financial institutions in the UK. This was widely seen as the price we had to pay for our enhanced monetary policy role.

The 1946 Bank of England Act conferred upon us powers, subject to the agreement of the Chancellor of the Exchequer, to issue directions to bankers - though the term “bankers” was not defined; and it provided for the Treasury to give such directions to the Bank as, after consultation with the Governor, they thought necessary in the public interest. Such directions would necessarily have been made public: none were in fact ever given. In any event the Bank of England was in a formal, statutory, sense throughout this period well along the spectrum towards the subservient polar extreme which I described earlier, in relation to policy making, although we did enjoy elements of independence, for example, in relation to security of tenure for the duration of fixed term appointments for Governors and Directors, and in some degree in relation to our finances. I am bound to say though that this was not at all how it felt in practice. Even within this statutory framework independence is rather like age - you are as independent as you feel! The question really came down to how far we were able to influence the Government, which in turn depended upon how far they themselves valued our advice and how far they felt a need to take account of it in the light of possible public - including importantly financial market - reactions in the event of disagreement.
These are startling facts and should certainly get your attention! As prudent policymakers, we would be remiss if we failed to carefully assess potential risks that might arise from these unusual and extraordinary policies. As the FOMC’s communications indicate, the Committee has fully reviewed the potential costs of its policies and it reassesses them regularly. I think that the benefits of our policy choices continue to far outweigh the potential risks. However, we must repeatedly think long and hard about two risks that are mentioned often – namely, that our expanded balance sheet and the prolonged period of low rates raise 1) the risk of higher inflation; and 2) the risk of financial instability. What can go wrong? Do we have the appropriate infrastructure and tools to adequately assess and manage these risks? To address these questions, we must evaluate these risks within the context of the goals of monetary policy and the current state of the economy and financial markets. Inflation risks Let me start with the risk of high inflation. As far back as mid-2009, Fed critics warned that our near-zero policy rate and trillions of dollars in asset purchases risk generating very high inflation. On several occasions, to underscore this risk, I have been presented with a gift of a Zimbabwe 100 trillion dollar note. As someone who is subject to a 20 U.S. dollar limit on gifts, I can assure you it is within the guidelines to accept one of these notes.

In general, one may say that the level of risk depends on three factors: speed and sustainability of GDP growth, sectoral concentration of exposure (real estate), and currency mismatch in borrowers' assets and liabilities. Faster GDP growth allows one to expect faster accumulation of assets and, therefore, faster improvement in the ability to service loans. However, estimating potential output growth is tricky. Such estimations are roughly based on the average of the past few years' performance. Today we think that potential output growth may be around 7 percent in Estonia. Let me remind you that a few years ago we thought it was 4 to 5 percent. Upward revisions are not the problem, of course, but there are also several examples of downward revisions: Portugal, Greece... even Poland. While credit growth has given a significant contribution to output growth, it is hardly sufficient in the long run. Too high indebtedness will limit output growth potential, as loan-servicing costs will eventually curb consumption and investment. The effects of economic slowdown or recession on loan quality may be quite different over the business cycles, however. All things considered, Estonian borrowers weathered the effects of the Russian crisis of 1998 relatively easily. However, one has to keep in mind two things. Firstly, the household credit to GDP ratio was at around 10 percent. Now it is around 30 percent. Secondly, the households' loan servicing ability did not deteriorate dangerously, as low-income households who suffered the most in that recession had not had access to credit.
However, as with a physical transaction, the effectiveness of such measures is largely dependent on their proper implementation and the establishment of a set of comprehensive policies and procedures that are rigorously enforced. However, it should be noted that this is only a temporary assessment. Continuing developments in security technology are required to maintain the effectiveness of security measures on an ongoing basis as new threats to existing systems arise over time. Banks should accordingly be responsible for ensuring that they keep up with such developments on a continuing basis. Unless they do this, their existing security measures can quickly become obsolete. If security breaches arise from this, it would not only expose the banks to risk of loss, but also more generally undermine the confidence of their customers in the use of the internet for banking purposes. All the evidence suggests that security is very much at the forefront of customers’ minds in deciding whether to use this new medium. Legal risk In this connection, legal risk becomes an important issue in internet banking, and one aspect of this is how any losses from security breaches should be apportioned between banks and their customers. In this regard, the views of the HKMA are quite clear and have been communicated to the banks.

Although there are no candidates at present, it would be open to other non-bank issuers to go down the same route – in which case, if we received an application, we would want to be sure that the issuer was financially sound and that the card scheme itself is sound in terms of chip security and risk management policies and procedures surrounding it. When it comes to electronic banking channels, our regulatory approach is, at this stage, less specific in nature. The first step is to know what the banks are actually up to in areas such as internet banking. We therefore issued a letter to authorised institutions in 1997 saying that while banks do not need to  BIS Review 108/1999  4  seek formal approval from the HKMA to offer their services through the internet, they should discuss with us in advance their plans to do so. This is to enable the HKMA to assess whether the institution’s proposed internet banking system is sound and the service provided through the internet will have adequate security. Note that we are not looking for absolute security. This does not exist in either the electronic or physical world of banking. However, the level of security should be “fit for purpose”, i.e. appropriate to the type of transactions to be conducted. The important thing is for the banks to undertake a rigorous analysis of what their security needs are in the context of the particular service that they are planning to offer.
And, given the depressed level of household and business confidence and the fragility evident in financial markets, I also conclude that there remain significant downside risks. It is worth elaborating on these points. First, what are the temporary factors that slowed growth in early 2011? Of the items noted by the FOMC, two bear special mention:   Energy and commodity prices rose sharply over the six-month period ending in May 2011. This sapped households’ real purchasing power here and abroad, so they responded by both consuming less and cutting savings.   April’s tragic earthquake in Japan disrupted many global supply chains. Many goods assembled here contain Japanese-made parts. When Japan was unable to produce parts, U.S. production and sales slowed. I am certain that parts shortages affected many sectors here and abroad. These temporary factors are now waning. Nonetheless, four factors are preventing a more vigorous recovery:   First, problems in the housing market are a serious impediment to a stronger economic recovery. Residential construction – which typically boosts economic activity during a recovery – is at a standstill. Moreover, many homeowners are now  2  BIS central bankers’ speeches  consuming less because the decline in house prices reduced their wealth and they are concerned that the decline in home values and wealth may not be over. Mortgage rates are at record lows and house prices no longer appear overvalued on affordability measures.

But obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption. Meanwhile, the large supply of foreclosed homes for sale – and the prospect that unemployment and negative equity will continue to feed the foreclosure pipeline – continues to put downward pressure on home values. The risk of further house price declines in turn discourages would-be buyers from entering the market. Continued house price declines could lead to even more defaults, foreclosures and distressed sales, undermining wealth, confidence and spending. Breaking this vicious cycle is one of the most pressing issues facing policymakers.   Next, cutbacks in employment and spending by state and local governments intensified in 2011 and are likely to continue. Looking forward, states are likely to cut spending further as the federal government stimulus aid to states peters out.   In addition, by current law, in 2012 the federal government will end much of the support it has been providing to the economy through stimulus programs. As these measures expire, households will be able to consume less and businesses will have less incentive to invest for a while. Plus, the new Budget Control Act calls for additional sharp cuts in federal spending. Our nation needs to get its public finances in order. Done correctly, with a focus on the long term, this could support confidence and growth. But it is very important to avoid excessive short-term cutbacks or tax increases that could harm the recovery.
This morning I will talk about economic conditions in the mainland and in Puerto Rico, paying particular attention to the developments since my visit last year and to the role of exports. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. Introduction to the New York Fed By way of introduction, let me start with a synopsis of what the New York Fed is, what we do, and what makes my job so interesting. The New York Fed is part of the Federal Reserve System, America’s central bank, which was created by Congress in 1913. With this act, Congress delegated to the Fed System its constitutional authority to manage the supply of money in the nation’s economy. Congress designed the central bank to be decentralized, representative of all regions of the country – including Puerto Rico and the Virgin Islands – and independent of the political process. The Fed System is comprised of the Board of Governors in Washington, D.C. – a federal agency currently led by Chairman Ben Bernanke – plus 12 regional Reserve Banks that span the country. For example, the district overseen by the New York Fed includes all of New York, the 12 northern counties of New Jersey; Fairfield County, Connecticut; Puerto Rico and the U.S. Virgin Islands. Each Reserve Bank is distinct, with its own charter and a board of directors drawn from its district, but overseen by the Board of Governors.

Last year, some of Puerto Rico’s banks were consolidated and many improved their balance sheets by selling underperforming assets. Both of these steps are likely to produce stronger, healthier institutions more able to make the sound lending decisions that support economic growth. 6  BIS central bankers’ speeches  All of these activities, ranging from effective monetary policy and prudent financial regulation to fostering economic literacy and measurement, complement and reinforce each other to help support a strong economy in Puerto Rico. Conclusion To sum up, the mainland economy experienced a pick-up in activity during the second half of 2010 that shows signs of continuing in 2011. The recovery in Puerto Rico has taken longer to get off the ground, but now shows signs of firming. On the mainland and in Puerto Rico, unemployment remains stubbornly high, but many indicators suggest that conditions are in place for stronger employment growth in the coming months. With government and business leaders like yourselves working together to build a better future for Puerto Rico, I am hopeful that we will soon be able to look back at 2010 and see not only the end of the island’s long recession but also the beginning of an era of growth and prosperity for Puerto Rico. Thank you for your kind attention. I would be happy to take a few questions. BIS central bankers’ speeches  7