samchain/econo-pairs-v1 huggingface dataset:
That is not to say, however, that all behavioural adjustments are either exactly as intended or desirable. This is particularly the case when these responses seek to avoid regulation entirely – so-called regulatory arbitrage. Risk, like energy, does not disappear into the ether. It is typically conserved, at least to some degree. In response to tighter financial regulation, risk is likely to change shape or location, often both. This is not just a conceptual point. The history of financial regulation can be seen as an on-going, evolutionary race to adjust regulatory rules to limit avoidance incentives (Haldane (2013)). The first Basel Accord (“Basel I”) was a direct response to cross-border regulatory arbitrage. Basel II came largely as the result of standardised approaches to risk measurement being arbitraged. And Basel III came in part as a response to both risk models, and the Basel framework itself, being arbitraged. This race has been characterised as “bloodhounds in pursuit of greyhounds” (Eichengreen (2009)). Regulators need both to learn from past experience and to anticipate future opportunities for avoidance (Woods (2017)). The arbitrage problems faced by the bloodhounds were well-exemplified in the run-up to the global financial crisis.

How much it does so is, however, a matter of degree. If regulatory constraints act as control bounds on structurally defective business models, that strengthens the financial system, even if (indeed, precisely because) it constrains diversity. Empirical evidence suggests this latter effect dominated during the recent crisis. (ii)  Discretion versus Rules  The new architecture has introduced measures which are likely to make for a greater degree of supervisory or policymaker discretion in the setting of regulatory standards. This arises, most obviously, in the application of supervisory judgement to certain risks that banks face, to stress-testing and to macroprudential policy. Multiple regulatory rules have been augmented with considerable supervisory discretion. Viewed in the round, this new regulatory regime could reasonably be described as “constrained discretion”. Regulatory rules provide the constraint within which policymakers exercise discretion. In its broad contours, this new regulatory framework has some similarities with the prevailing monetary policy framework in a number of countries (Bernanke and Mishkin (1997)). These regimes have been found to be an effective way of balancing the pre-commitment necessary to avoid policy time-consistency problems with the flexibility necessary to respond to unforeseen circumstances (Arestis and Mihailov (2009), Borio (2010)). Equally, as in the monetary policy sphere, there is a question about whether this new regulatory regime strikes the right balance between regulatory rules and the degree of discretion with which they are operated.
the SRB, in the case of the Banking Union. Admittedly, setting a relatively long transition period may add complexity to the resolution processes that have to be managed during that period. As stated, current regulations require that resolution funds should only be activated when the institution has absorbed losses for an amount equivalent to 8% of liabilities. Evidently, if the bank did not yet have sufficient loss-absorbing debt instruments because the transition period were not over, the established requirement would only be met if haircuts were imposed on other creditors, such as deposit-holders. While the deposits covered by national guarantee schemes would be excluded from loss-bearing, there is no doubt this step might prove destabilising. Thus, in the ongoing revision of the Directive, it might be wise to add a flexibility clause in respect of the requirements established for the use of funds external to the banks concerned 8/10  in their resolution processes, at least for the duration of the transition period set for the fulfilment of the MREL requirements. Lastly, before concluding this section, a remark on the need for coordination among the different Banking Union authorities. The current regulations and the European Commission’s proposals for their revision afford the SRB extensive discretion for deciding, case by case, on questions as important as the objective volume of MREL, the nature of the eligible instruments and the transition regime.

Allow me to focus on this important aspect of the European regulations, namely the MREL, which will foreseeably be subject to discussion in the forthcoming passage of the revised Directive. 3 Loss-absorption requirements (MREL)  The stringency of the MREL requirement will be determined both by the nature of the eligible instruments and the minimum required volume thereof. Regarding the nature of the eligible instruments, for the MREL to fulfil the objective of providing for the orderly absorption of losses by creditors and the recapitalisation of the bank, the eligible instruments must conceivably be consistent with the seniority of the bank’s liabilities as stipulated in national insolvency regulations, and they must evidence a sufficient degree of stability should the bank undergo serious difficulties. That would suggest a definition of MREL that essentially includes capital instruments plus debt instruments that have a less privileged status than deposits in the insolvency pecking order. The consideration of wholesale deposits at over one year as eligible, which is not excluded in the European Commission’s proposal, will undoubtedly be much discussed in the legislative proceedings, given the special nature of these instruments and their debatable availability to absorb losses in a resolution process. Yet at present the seniority of the liabilities as established in the regulations differs from one Member State to another, specifically as regards the status of senior debt in relation to deposits. That hampers the homogeneity of MREL requirements and prevents the development of an integrated market for senior debt convertible into equity in the event of resolution.
Fortunately, that work is already underway and CCP recovery and resolution forms an important part of the Financial Stability Board’s (FSB) continuing agenda to end Too Big To Fail (TBTF). In October 2014 an Annex was added to the Key Attributes of Effective Resolution Regimes to cover their application to Financial Market Infrastructures (FMIs) 4. More recently, the FSB published its 2015 CCP workplan 5. As part of this, a group on financial market infrastructure (fmi CBCM), equivalent to the Cross-Border Crisis Management Group (CBCM) that I chair for banks, has been established within the FSB to take forward international work on CCP resolution. Authorities in a number of jurisdictions are responding to the need for effective resolution arrangements for CCPs, with legislative proposals expected in the EU, Canada, Australia, Hong Kong and elsewhere to add to existing regimes, including in the US under Title II of Dodd Frank. In the UK, the Bank of England has formal responsibility for the resolution of UK-incorporated CCPs. To aid us in drawing up resolution plans for UK CCPs, we have established the first Crisis Management Group for a CCP. We hope and expect it to be the first of many. But work on CCP resolution needs to be seen in the broader context of financial reform: •  The Committee on Payment and Market Infrastructures, along with the International Organisation of Securities Commissions (CPMI-IOSCO) is continuing its work on CCP resilience and recovery.

•  But reliance on successful resolution of members does not negate the need for CCP resolution arrangements to be capable of responding to both default and non-default losses emerging from both systemic and idiosyncratic shocks. •  In thinking about the underlying objectives and needs of a CCP resolution regime, there are many similarities to bank resolution and these should not be forgotten, but clearly there are many differences too and we need to recognise that. 6  See Section 5 of the Key Attributes on Safeguards. BIS central bankers’ speeches  5  •  Effective resolution requires the ability to act promptly and before the point at which the chance of stabilising the CCP is lost. The resolution authority must have a variety of tools at its disposal to enable it to respond to the reason the CCP failed. It should be able to intervene in a timely and forward-looking way before the end of the waterfall – but incentives must be aligned and we want this to be set up in a way that promotes CCP resilience and makes recovery work. •  In order to continue a CCP’s critical services in resolution, there must be an ability both to cover the losses credibly in a failure scenario and to recapitalise the CCP’s going concern resources – i.e. its capital, margin and default fund. How we achieve this is something for FSB to address so that the shared interest in maintaining stability in the global financial system can be realised.
6  http://www.bankofengland.co.uk/monetarypolicy/Documents/pdf/chancellorletter120321.pdf  7  See for example “Recent Developments in the Sterling Monetary Framework” http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech487.pdf  BIS central bankers’ speeches  available  at:  3  money can surely be relied on to prevent deflation, but even if it provides a temporary boost to real activity it can’t guarantee sustaining a particular real growth rate. Third, the split into prices and real output and the overall outturn for the economy, depend on what else is happening at the same time: monetary policy is just one of the various forces at work shaping the pressures on output and inflation. We don’t conduct monetary policy in a scientific laboratory where everything else can be held constant. QE is often described as being a great experiment. In fact, the theory of monetary policy in the economic textbooks that I was brought up with at Bristol, and later, all considered the supply of money to be the central bank’s primary policy instrument. The use of interest rates to set monetary policy appeared to be viewed by many academic authors as something of a slightly unfortunate and uninteresting practicality8. I want to be clear about one very important point: for monetary policy to stimulate the economy, the Bank of England has to cut interest rates and/or increase the supply of money. That gives firms and households an incentive to spend rather than to save.

In the words of Alan Greenspan, “what turns otherwise seemingly minor imbalances into a crisis is an actual or anticipated disruption to the liquidity or solvency of the banking system”. When banks are already weak, for example because of a high level of non-performing loans, an external shock such as an attack on the currency will further damage confidence in the banking system. Banks will lose domestic deposits and will find themselves unable to rollover short-term external borrowing. The resultant capital outflows will put further downward pressure on the exchange rate, force up interest rates and drive down asset prices. The customers to whom banks have lent will get into financial difficulties, further weakening the position of the banks. With their capital and liquidity impaired, the banks are in no position to lend, and this leads to the “credit-crunch”, and resultant shrinkage of the real economy that we are seeing in so many countries in the region. The reasons for the banking sector weaknesses are various. Lending excesses drove up asset prices and allowed companies to become over-leveraged. Poor risk management on the part of the banks themselves was compounded by ineffective banking supervision and lack of transparency which provided little scope for market discipline to be exercised until the problems were glaringly obvious. At that point, the market reaction was extreme. Even if supervisors did have the will to tackle banking sector problems in their countries, they were often subject to political interference that stood in the way of prompt corrective action.
To my mind the most notable exclusion is traded or market risk for banks, which might be where a transition shock would be most likely to manifest – indeed current and recent stresses in energy and commodity markets illustrate this point. As we build capabilities, we will be better able to size the risk and its potential policy implications. We will also learn over time whether the real world looks more like the EA scenario, or if we are living in a ‘late’ or ‘no’ action world. All of this will inform the PRA’s judgements about capital requirements and any other responses to climate risks. Today’s publication is important step forward, but it is not the last word. 1. Climate Biennial Exploratory Scenario 2. For the purposes of this speech, I focus on the prudential regulation and financial stability aspects of climate risk, as opposed to the Bank of England’s other responsibilities as a central bank. 3. The PRA’s supervisory statement on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change 4. The PRA Climate Change Adaptation Report 2021 set out some of these issues in more detail. 5. My colleague Sarah Breeden also reflected on the role of government, central banks and financial firms in the economy’s transition to net zero in a recent speech: Balancing on the net-zero tightrope − speech by Sarah Breeden | Bank of England 6.

Significant resources have been devoted by the Bank in the last two years to achieve these objectives. One of it was the relicensing process. We had reassessed a total of 839 money changing companies and remittance service providers and issued new licences to those that met the necessary requirements. We have also provided time for companies to improve their operations. These companies had demonstrated that they are able to comply with the required rules. For those that qualify the licensing processes, improvements in their operations could be achieved within a reasonable timeframe. We have also made it clear to the industry that companies found to be carrying out unauthorised activities will be firmly dealt with through enforcement actions. Out of the 839 licenses issued earlier, the relicensing process had reduced a total of 365 licenses as a result of revocation, merger, voluntary surrender of license or industry players themselves decided to convert to become an agent of a larger entity. We have significantly increased our interactions with the industry to help companies understand the regulatory requirements that must be observed. These engagements have also helped the Bank better understand the practical issues that are faced by the industry and we have responded accordingly to some of these issues. I can assure you that we will continue to work with the industry to find solutions to legitimate issues raised by the industry but the industry must act responsibly and with the public’s interest in mind. Enforcing compliance will continue to be an important focus of the Bank.
Several critics claim that, by implementing measures such as quantitative and credit easing, central banks have, at times, adopted “quasi-fiscal” policies and that the boundaries between fiscal and monetary policy were, thus, blurred. Yet, central bank independence is a delicate democratic concept. Its objective is to prevent temporal inconsistencies in the policies pursued from leading to results that could harm the economy as a whole. In other words, independence enables central banks to focus on price stability in the long-term interests of a country, as opposed to prioritising the short-term demands of specific political or economic interest groups. At present, the use of unconventional measures is largely motivated by the fact that monetary policy is at the zero lower bound and fiscal policy options are very limited. These are exceptional responses to exceptional circumstances and should remain so. Finally, it is important to acknowledge that, by expanding their balance sheets, central banks have had to assume increased financial risks. Many central banks have purchased bonds when interest rates were very low. They are therefore exposed to considerable interest rate risks, which could lead to significant balance sheet losses and even to negative equity positions. In the short term, this is not a problem as it does not affect a central bank’s capacity to fulfil its mandate. After all, as a central bank has banknote-issuing privileges, it cannot become illiquid. Moreover, it is normally in a position to rebuild its equity in the longer term.

At the same time, some measures recently introduced at the national level have also supported the availability of bank financing to SMEs. Specifically, the regulatory definition of an SME has been significantly widened, bringing it in line with that predominating at the European level and so extending the benefits of the lower capital requirements associated with loans to such firms. As a result of the conjunction of the previous developments, most quantitative and qualitative indicators point to a higher dynamism in credit flows in Spain which is linked both to supply and demand factors. For instance, data from the Central Credit Register show an upward trend in the number of credit transactions with non-financial corporations which has been driven by an increase in both loan applications and their approval rates. This evidence is moreover consistent with the results of the survey on the access to finance of firms conducted by the ECB on the basis of a sample of European companies. In particular, since the end of 2013, Spanish SMEs have reported an improvement in their perception of access to credit, a signal which is consistent with that from the Bank Lending Survey. 4. Policy considerations on SME’s financing  Allow me to say now a few words on policy considerations regarding the specific case of small firms’ financing. Undoubtedly, the crisis has been a painful reminder for us that the access of SMEs to finance may deteriorate suddenly and sharply in periods of high uncertainty.
I was particularly interested to learn from our hosts today, in their press release of 23 February, that their preferred outcome of the review could free up £ billion of capital which could be returned to shareholders. You will not be surprised to hear that I have some doubts about a reform package which materially decapitalises the insurance sector. While it’s natural for the private sector to focus on private interests, it’s part of our job to keep an eye on the potential public costs of significant insurance failures. In our system, the highest standards are, rightly, applied to financial institutions that bring most risk to the system. Insurers are not at the top of that list – fortunately for this audience that position is reserved for your cousins in the banking sector. But insurance is absolutely essential for the functioning of the economy. For example, collectively insurers are responsible for paying over £ billion of annual retirement income, and a similar amount in motor claims. Imagine the costs to the wider economy of a disorderly failure of a single large insurer or of multiple failures thanks to a common vulnerability. Coming back to the matching adjustment, this makes a contribution of around £ billion to insurers’ capital base at the last count. The principle of the MA – that long-term investors that match assets closely to their long-term liabilities are exposed to fewer risks – is sound. But it does represent the bringing forward – and potentially paying away in dividends – of unrealised returns.

Such a policy has two goals: the first is to provide the market with reliable information on what the rate of inflation will be so that investment, wage setting, and other market decisions can be made with greater confidence in what the future price level will be. The second is to ensure that the inflation rate is very low in order to improve the quality of price signals. Such a policy might minimize the gap between actual and expected inflation that spill over to the real economy. By removing the inflation bias of discretionary policy, nominal interest rates would be lower, and by diminishing uncertainty over the future price levels, a credible nominal anchor would reduce the inflation risk premium in both nominal and real interest rates. Here, there is a need for clear operational rules to know what short-run stance of policy would be appropriate for the future. The purest examples of such rules are a fixed exchange rate and a fixed rate of growth in a monetary aggregate. Either rule provides a clear anchor for inflation expectations. A credibly fixed exchange rate is the most transparent nominal anchor. A floating exchange rate with a money growth rule as the nominal anchor is also easy to monitor, if somewhat more difficult to achieve. Both anchors suffer, to some extent, from being indirect routes to the real objective of monetary policy, which is price stability.
W A Wijewardena: Why worry about inflation? Speech by Mr W A Wijewardena, Deputy Governor of the Central Bank of Sri Lanka, at the Central Bank of Sri Lanka, Colombo, 25 May 2007. *  *  *  Inflation, a continuous and steady rise in the general price level, is, by any standard, the public enemy number one. By the same token, hyper-inflation, an increase in the general price level to a very high level within a very short period of time, is a killer, akin to a mass destruction weapon. Mr. Gideon Gono, Governor of the Reserve Bank of Zimbabwe, a country with an inflation rate of more than 3700%, equated his country’s inflation to an economic HIV, a situation where people would die en masse. This reference eloquently amplifies the gravity of the cost of inflation which a country has to bear. Why public enemy number one? From the point of view of economics, there are usually two declared public enemies: inflation and unemployment. Of the two, inflation ranks higher. This is because inflation hurts everyone alike: bankers, businessmen, workers, consumers and so forth. You cannot escape it unless you are smart enough to beat it by raising your income faster than inflation. In contrast, unemployment which is also a serious problem, disadvantages only the unemployed. That category is only a segment of the society. Hence, inflation is a bigger public enemy than the unemployment.

This is because when such adjustment is not made, though the amount of money received by way of interest may be high, its actual real value is lesser and lesser than before. It is tantamount to the awkward situation where savers pay interest in real terms to borrowers. Thus, inflation contributes to enrich borrowers at the expense of savers. The high borrowings so encouraged would further fuel inflation. At the same time, the much needed savings flow would dry up retarding the long term development. Third, arising from the same unadjusted interest rates, inflation discourages financial savings and encourages non-productive types of investments in real estate, gold, bullion and other types of precious metals. Bank deposits, stocks and shares are the main casualties, because their real value falls every year due to inflation. But, on the other hand, real estate and precious metals appreciate in value due to inflation. Hence, as an insulating measure against inflation, people would transfer their financial savings into such non-productive types of investments. But, for sustainable long term growth, the necessity is for savings in the form of financial savings and inflation would dry up that savings flow. Fourth, inflation distorts the resource allocation function of an economy. For the market system to allocate resources among competing uses, a price expressed in terms of another price called the relative price, should change. For instance, if the price of carrots increases relative to the price of cabbages, carrots would become more profitable than cabbages.