samchain/econo-pairs-v1 huggingface dataset:
This, after all, was the new economy and massive profits were apparently waiting round the corner. Yes, that was almost the case, wasn’t it? An argument that was frequently put forward when share prices broke new records was that the “new economy” would lead to higher profit growth. Today we know that that has not been the case so far. The share price rise left many companies notably over-valued. Then what always happens happened. A bubble is bound to burst, sooner or later. From the high, the Swedish stock market in general has fallen by around 50 per cent, IT shares by almost 90 per cent and telecom shares about 75 per cent. In a historical perspective these are dramatic figures. Such a large average fall has not occurred since the major corrections in the early 1920s and 1930s. But it is not only on the Stockholm exchange that share prices have fallen so markedly. Much the same has happened in other countries, not least on New York’s technology-oriented Nasdaq exchange. Now let us take a slightly closer look at corporate profits in connection with earlier shifts in technology. A strong expected increase in corporate profits is bound to be mirrored in expectations for the total economy. A country’s GDP represents the aggregate incomes that are earned in the course of a year. The national accounts show the shares of total income that go to owners of capital and to wageearners, respectively.

A few years ago Japanese bankers used to tease me by asking what I thought of the “Wimbledonisation” of the City - meaning that this country organised the best competition in the world but the visitors carried off the prizes. I used to explain to them that it was activity - rather than nationality of ownership or even control - that mattered in terms of the City’s contribution to the wider economy, and in terms of its direct contribution to growth or employment, or BIS Review 134/1999  2  of income or tax base in this country; I even suggested that Tokyo would benefit as a financial centre if it became more open to overseas players. I don’t think that they were convinced at the time. But now that has begun to happen, and some of my Japanese banker friends tell me they finally see the point. It is in fact of course more generally a lot harder to see the benefits of increasing global competition if you are an existing producer, whether an individual business or the national representatives of businesses directly in the firing line than if you are looking at it in terms of the health of the macro-economy. But there is no doubt that it is this characteristic of openness to competition perhaps above all that explains the uniquely international nature of the City (with more foreign banks represented here than in any other centre) and accounts for much of the City’s continuing success.
The assessment of capital adequacy needs to look beyond the computed capital ratio. The new Basel Accord therefore comprises three pillars. The first pillar provides a minimum capital measurement framework for credit and operational risks. In essence, the regulatory capital requirement is aligned more closely with the actual degree of underlying risk that the banking institution faces. It provides the capital measurement that has three options with different levels of complexities for both credit and operational risks to better reflect actual risk. The second pillar focuses on strengthening the supervisory process, particularly in assessing the quality of risk management in the banking institutions. The supervisory process aims to provide the mechanism to ensure that other risks such as concentration risks and market risks in the banking books being managed. Under such an environment, prudent lending such as that characterized by a high degree of portfolio diversification, could justify lower capital requirements. The third pillar specifies minimum disclosure requirements on capital adequacy to enhance market discipline. Despite its relatively more complex architecture, the implementation of the new framework provides a number of options and flexibility to banking institutions. This is to ensure that the approach adopted reflects and is commensurate with the nature of risk-taking activities and the level of sophistication of individual institutions. In adopting the standardized approach for credit risks, the credit exposures are weighted based on recognized external credit ratings.

While the IRB approaches promise greater capital savings in the longer term, the adoption of the standardized approach in the transition is considered a more pragmatic option even for some internationally active banking groups. Under the IRB approaches, banks would need to reach an agreement with the regulator in the countries they operate on the robustness of group internal estimates and validation. The standardized approach is therefore seen to provide the breathing space for a smooth transition to IRB approaches while at the same time allowing banking institutions to avail themselves of the benefits of capital savings. BIS Review 21/2004  3  Different approaches are adopted by regulators Ladies and Gentlemen, While there has been global acceptance of the broad principles of the new accord, differing implementation approaches are being adopted by different countries. In some countries, regulators have opted for the accord to be applied to all institutions while in others selected banks are being mandated specific approaches. Some other regulators have given greater flexibility for banks or have extended the timeline for the implementation of the new accord. These reflect the different considerations and priorities accorded by the various regulators in their policy agenda. In essence, the decision by national regulators are based on a number of common factors, namely, the stage of industry development and market infrastructure, the size and types of institutions involved, the regulatory philosophy and priorities, as well as the economic environment.
Both these problems restrain the attraction of foreign investments and impede the country’s development. Third, efficiency in using the economy funds should be improved even at micro level. This implies the need for improving private businesses’ management and control systems, enhancing analytic and forecasting capabilities, as well as transparency. Allow me to further deal with some of the above-mentioned issues. Stable economic development of the country As we have continuously underlined in our periodical reports, the economic growth over the recent years has been strongly supported by the banking system lending. The growth of banking lending has provided an impulse of about 7 percentage points of GDP in the last five years, making a pronounced and evident contribution to the growth of consumption and investments in economy. Their growth has provided room for expanding the production basis and improving the welfare. However, it has also generated macro and microeconomic imbalances. At macroeconomic level, the high consumption and investments were followed by increasing inflationary pressures and higher trade and current account deficit. These signs of overheating were clear signals that that level of consumption could not be kept for a long time, hence calling for controlling measures by the monetary authority. This is also the key to understand our prudent monetary policy during the period 2006–2008. The institutional investment we have made during these years in terms of consolidating macroeconomic and financial stability was rewarded with a much more moderate and milder impact of the global crisis than in the regional countries.

Preferential arrangements such as Trans-Pacific Partnership Agreement, the Regional Comprehensive Economic Partnership and ASEAN Free Trade Agreements have a critical role in spurring productivity growth, accelerating structural reforms and creating a diversified, competitive and resilient Malaysian economy. Once again, welcome to this Conference, and thank you. BIS central bankers’ speeches  3
Secondly, there is a need to improve the handling of cross-border crises. Financial crises tend to spread from one country to another. For example, many financial institutions have operations in more than one country. When such an institution experiences difficulties this therefore has an impact in several countries. An example of this is the Belgian bank Fortis and the events relating to the rescue of the bank by the authorities in Belgium, the Netherlands and Luxembourg. Crisis management becomes more effective if contacts and concrete arrangements between the countries are already in place. It also becomes simpler to decide how the costs of crisis management should be divided between the countries concerned. Joint crisis management exercises and a better flow of information between the relevant authorities in the countries concerned also facilitate cooperation in the event of a real crisis. Thirdly, the credibility of the credit rating agencies needs to be restored. They have played a central role in the events of the current financial crisis and their credibility has been seriously undermined. This is, however, an area where it is easy for regulation to go too far. I believe that to a large extent we can and should trust in the ability of the credit rating agencies to develop their evaluation methods and to restore confidence. Some form of registration and supervision may also be needed, but this should not involve intervention in the independent evaluations of the agencies. Fourthly, the deposit guarantee schemes need to be harmonised.

In order to solve this problem, central banks in many countries have provided the funding that the banks have not been able to acquire on the market. Several central banks have also actively handled problems in individual institutions. One example is the Bank of England, which in September 2007 provided liquidity assistance to the British bank Northern Rock. Another example is the Federal Reserve which granted an emergency loan to the US investment bank Bear Sterns in March 2008 when the bank experienced an acute shortage of short-term funding. It was, however, not possible to rescue Bear Sterns and the Federal Reserve helped to mediate the takeover of the bank by JP Morgan. During the autumn of 2008, the central banks also rapidly and significantly cut their policy rates, sometimes in coordinated actions, to dampen the effects of the crisis on macroeconomic development. Governments have offered guarantees and capital injections to minimise the risk of further bankruptcies in the banking sector. Concern over banks and other financial players going bankrupt has namely been a central component of the financial turbulence. Given the  BIS Review 7/2009  3  vulnerable situation that the global financial system is now in, it may be unwise to let systemically-important financial institutions go bankrupt. Several countries have also decided on a more expansionary fiscal policy to counteract the downturn in economic activity. During the spring and summer of last year, the US government began to issue tax rebate cheques.
Jean-Pierre Landau: Complexity and the financial crisis Introductory remarks by Mr Jean-Pierre Landau, Deputy Governor of the Bank of France, at the at the Conference on “The macroeconomy and financial systems in normal times and in times of stress”, jointly organized by the Bank of France and the Deutsche Bundesbank, Gouvieux-Chantilly, 8 June 2009. *  *  *  I am very pleased to welcome you to this second Banque de France-Bundesbank Conference on “The Macroeconomy and financial systems in normal times and in times of stress”. Actually, the distinction between normal and stress times may be somehow misleading. It is of course fascinating and extremely useful to study the behavior of financial systems under stress. But, from a policy perspective it is essential to recognize that the seeds of instability are sown in normal times. The crisis has shown that public authorities have very limited options in stress times but to keep the system afloat at all costs. This involves rescuing financial institutions whatever previous commitments have been previously made not to do so. Indeed, the doctrine of moral hazard may be one of the most prominent and lasting casualties of the crisis. So, collective efforts should mainly concentrate on detecting those features of financial systems which, even in (apparently) normal times create or amplify stress. This is the essence of the macro prudential approach to financial supervision. One of its main challenges is to grasp and deal with the full complexity of contemporary financial markets and institutions. Financial systems are complex systems.

The extent to which international inflation is affected by one’s own increases in interest rates is not usually taken into account, since the effect is assumed to be negligible. To use an economic term, individual central banks do not internalise the effects of their own actions on international inflation. However, as all central banks raise their rates simultaneously, international inflation is dampened quite significantly. The results of not taking this effect into account could be that all central banks go a little further in their policy rate hikes than they need to. This in turn may lead to the whole world economy becoming weaker than necessary.8  7 See, for example, Obstfeld (2022). 8 Another mechanism that could lead to overall excessive interest rate increases is if central banks try to bring  about lower inflation by strengthening their own currency. This requires the interest rate being raised more than in the rest of the world, which may lead to an international race toward higher interest rates. 6 [15]  This is an interesting hypothesis worth considering, although it is not easy to see how it could be taken into account in practical policy. Formal international coordination of monetary policy is probably not on the cards, and without this it is natural that each individual central bank continues to focus on inflation in its own country.
To be clear however, QE asset purchase operations were not designed to tackle a liquidity problem in the financial system. Rather, the impact on liquidity was one of the channels through which QE has affected the real economy and thus has had its intended effect in monetary policy terms. While estimates of the impact of QE are inherently uncertain, one of the desired outcomes of central bank asset purchases is to lower yields thus affecting longer term interest rates and creating a positive economic effect. In doing so, QE can improve the functioning of financial markets by reducing liquidity premia. The third post-crisis development is the impact of the growth of automated trading in financial markets, and the challenges this poses for maintaining continuous market and liquidity. Over the last year volatility in many financial markets has picked up from a low base and we have seen some acute but short-lived incidents of extreme volatility and impaired liquidity in secondary markets. On 15 October last year there was unprecedented volatility in the US Treasury market, and on 15 January this year there was substantial volatility in the Swiss Franc exchange rate following the unexpected decision by the Swiss National Bank to remove its Europe/Swiss Franc floor. Now, central banks are known for their powers of understatement, so what do I mean by words like “unprecedented” and “substantial”. On 15 October, 10 year US Treasury yields moved intra-day by around 8 standard deviations of preceding daily changes.

The result was therefore greater volatility in financial markets, and a dramatic increase in the vulnerability of economies to financial shocks. This contraction in credit supply was thus a powerful channel through which the financial sector hit economies. The result was the largest contraction in real economic activity since the Great Depression. In the better times, securitisation and the shadow banking system appeared to have reduced the sensitivity of the aggregate supply of lending and thus the sensitivity of the real economy to transitions in bank funding conditions. But they did not do so at the point it would have been most valuable, during the global crisis. As Stanley Fischer has recently put it: “when non-banks pulled back, other parts of the system suffered. When non-banks failed other parts of the system failed.” (Fischer (2015)). The originate to distribute model created tradeable assets – the securities in securitisation. The success of the model depended on there being liquid secondary markets for these securities. In its broadest sense, market liquidity refers to the ease with which one asset can be traded for another, and thus different markets can be more or less liquid. The level of liquidity in financial markets depends on among other things the amount of arbitrage or market making capacity and whether specialised dealers (market makers) will step in as buyers or sellers in response to temporary imbalances in supply and demand (Fender and Lewrick 2015).
The FPC has a remit, too, to strengthen the structural fabric of the financial system, including through improved financial infrastructure. That objective has a place deep in the Bank of England’s heart – from Lancashire cotton mills of the 1930s, to 3i of the post-war years, to CHAPs of the 1980s, to Vickers of the past few years. Supporting and executing these new responsibilities will be a massive task. First and foremost, it will require the Bank to have a rich and diverse set of skills. Historically at least, the Bank has been skills-rich but diversity-poor. But I am pleased to say that, too, has been changing for the better. This year’s graduate intake has close to a 50/50 gender split. One in seven of the intake is drawn from ethnic minorities. Only a fifth come from Oxford or Cambridge. The PRA’s arrival next year will broaden further the diversity of the Bank’s skills and experience – legal, accountancy, banking, insurance. The Bank’s policy committees, meanwhile, bring diversity of experience and expertise to the decision-making table, from academe and the private sector. 13  Bank of England (2012). BIS central bankers’ speeches  7  There has been a transformation, too, in the Bank’s approach to external communications and transparency. Think back twenty years. Then, there were no quarterly Inflation Reports, no six-monthly Financial Stability Reports and certainly no press conferences to accompany both. Twenty years ago, there were no minutes of the deliberations of the Bank’s policy committees (today, the MPC and FPC).

It will be also tolerant of bank failure – Barings Mark 2 rather than Mark 1 – so that market discipline can work its magic. Second, during the course of the crisis, there has been a radical, if underplayed, rethink of the Bank’s approach to supplying liquidity to the banking system.13 While not quite a change on the scale of the Overend and Gurney crisis, this allows banks to access the Bank’s facilities against a much wider range of collateral. The Bank’s liquidity menu is now crystal clear, from which banks can now themselves choose. Third, an entirely-new piece of policy machinery has been introduced – new not just for the UK, but internationally too. In the UK, this is called the Financial Policy Committee or FPC. It was put on earth to do macro-prudential policy, to act as the bridge, to provide the missing link, to monitor the punchbowl before it is emptied and before aspirin needs administering. A year on, the FPC is doing just that. Most recently the FPC has been navigating a particularly hazardous course. The financial system and economy are suffering the hangover from hell. The FPC’s task is to keep the system safe in the face of heightened risks of a relapse, while at the same time keeping the banks’ credit arteries open to support the economy. Both objectives are steeped in the Bank’s history – and both objectives are embodied in the FPC’s remit.
Chart 10  Chart 11  US and UK equity market depth  Equity financial depth projections for G20 EMEs Per cent of GDP  Per cent of nominal GDP  120  200 US (a)  180  UK  160  100  140  80  120 60  100 Brazil China India Russia G20 EMEs  80 60 40 20 0  40 20 0  1929 1939 1949 1959 1969 1979 1989 1999 2009  1995  Source: Global financial data and Thomson Reuters Datastream  Source: Thomson Reuters Datastream, GDP projections from Chart 7 and Bank calculations. (a) Prior to 1973, US market capitalisation is based on the New York Stock Exchange only. Notes: Chinese financial depth includes A-share index.

(a) Excluding Saudi Arabia due to unavailability of data. (b) Weighted averages use each country’s equity market capitalisation as weights. (c) Numbers may differ slightly to those in the text due to rounding.
This is obviously true relative to foreign exchange markets, but also relative to the gilt market, which had been the exclusive focus of previous MPC asset purchase decisions. To provide some metrics: the volume of sterling corporate bonds traded in a typical day is less than 5% of that traded in gilts, while typical trade sizes are around £ and £ respectively. Bid-offer spreads for a representative sterling investment grade bond would be around 10bps, whereas for a benchmark 10 year gilt these would generally be less than half a basis point. So a key challenge was to articulate an approach which would be effective in this different context. An immediate consequence was that the MPC framed its policy decision somewhat differently: it determined to purchase up to £ billion of corporate bonds over 18 months, whereas for gilts the MPC decided to purchase a fixed total of £ billion of gilts over a six month period, reflecting not only our ability to purchase more quickly in that market but greater certainty about the achievable pace. Turning to implementation, the Bank has an inclination to use auction-based mechanisms to implement policy decisions where possible. Auctions cater for wide participation among active participants in the market in question and avoid the Bank having to discriminate actively between counterparties or instruments. 6  There was a much smaller (around 1.5%), near-instantaneous and much less remarked-upon spike on 30 December in the euro-US dollar exchange rate. 7 See box on page 9 of the Bank’s August 2016 Inflation Report.

Given these considerations, the Bank chose instead to set minimum reserve spreads privately for each bond in the auction, drawing on a range of sources of information. One factor is the balance of our portfolio relative to the market as a whole, where the MPC was very clear that purchases should be representative of outstanding issuance. The Bank therefore publishes every month a ‘sector key’, showing the target share of purchases for each sector alongside our current holdings. 8  Since the August 2016 decision, cover in these operations has averaged 3.1, with the second operation in August 2016, which received offers slightly below the target level of purchases, standing out as an anomaly. 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  By adjusting our reserve spreads over time to reflect progress against that sector key, we can make ourselves relatively more willing to buy in sectors where we are underweight, tilting purchases towards those sectors. Collectively these choices were designed to encourage participation and competition in the auction, ensure that the Bank does not over-pay for bonds but delivers appropriate value for money, and accommodate the likely variable intensity of participation through time. Impact so far So if that was the theory, what have the results been? Most obviously, and even before purchases began, there was a clear and immediate impact on market pricing from the announcement of the August package. Yields on gilts eligible for purchase in the APF fell by 14-18 basis points on the day (Chart 4).