samchain/econo-pairs-v1 huggingface dataset:
Governments in the G7 agreed that intervention in the currency markets should be undertaken only when there was a collective view that exchange rates had become out of line with their longer run fundamental values. That reticence served us well. But over the past two decades, some governments, particularly in Asia and the euro area, have tried to fix exchange rates without putting in place mechanisms to ensure that competitiveness could be rebalanced by other means. That has contributed significantly to the problems facing us. It is crucial to the health of the world economy that we find ways of allowing competitiveness to adjust so that trade imbalances, and hence the present scale of indebtedness, can be reduced. Neither liquidity nor austerity are answers to the question of how to restore a loss of competitiveness. Dealing with these structural issues will take time. Meanwhile, how do we resolve the immediate crisis of confidence in some banks and sovereigns? Since the summer, there have been renewed concerns about the adequacy of the capital of banks in the euro area to absorb likely future losses, thus jeopardising their ability to raise funds. Wholesale funding dried up for many banks over the summer, and share prices of European banks are around 35% lower today than at the start of July. A transparent recognition of losses and a substantial injection of additional capital are necessary to restore market confidence.

In the face of a collapse in world trade even faster than that in the 1930s, countries needed no persuasion of the necessity of policy stimulus. But it has proved much harder to form a consensus on how to tackle the underlying problems. So, three years later, the imbalances in demand remain. Around the world, short-run stimulus packages of various kinds, and unsustainably low interest rates, have bought time. So far that time has not been used to deal with the underlying imbalances, or the weaknesses in bank and sovereign balance sheets. Four years after the financial crisis began, the foreign exchange reserve holdings of China are substantially larger than at the onset of the crisis. Markets now realise that before the crisis banks were seriously undercapitalised and so react in a volatile way to any news about the health of the banking system. And the indebtedness of governments around the world is certainly greater. Time is running out. So what is to be done? One way or another, domestic spending must be raised in the surplus countries and lowered in the deficit countries, relative to current trends. In the past, marketdetermined exchange rates have played an important role in rebalancing world demand and trade. Exchange rates are the natural safety valve, which can limit the extent of imbalances in demand across countries.
When Bank Rate was cut rapidly and by more than was anticipated by the market during Autumn 2008, the Bank recorded a large, unintentional surplus. 11 In the permanent regime, it is important that the Bank not be exposed to the risk of a large loss if Bank Rate were to be increased above market expectations. In June 2010, those operations were replaced with a new permanent framework designed in part to reflect these concerns. The operations, pioneered with the invaluable help of Paul Klemperer from Nuffield College, Oxford, are known as “Indexed Long-Term Repos”. The most innovative aspect is that banks can bid to borrow cash against either the normal, “narrow” collateral set – as standard in short-term repos – or a “wider” set of collateral, including private sector securities. Counterparties can submit bids using one or both types of collateral. They can even make a “paired bid”, quoting spreads at which they would be indifferent between the two collateral sets. The Bank of England then allocates a proportion of the operation against wider collateral, where that proportion depends on the spreads offered. The idea is that as the market becomes more stressed, counterparties are willing to pay more to borrow against wider collateral. As the clearing spread rises the Bank, automatically within the auction, lends a greater proportion against wider collateral. The clearing price is the intersection of the revealed demand schedule of the firms bidding and the private supply schedule of the Bank of England.

11  Carlson, Duygan-Bump, and Nelson (2015) argue that central bank liquidity provision and liquidity regulations are complementary tools. 12  The Bank of England (2013) defines stigma as “the risk that drawings from [the central bank’s liquidity] facilities may be taken as a signal (by investors, depositors, rating agencies, regulators or even firms’ own boards of directors) of more serious weaknesses at the firm in question. 13  See for example Federal Reserve (2007). 4  BIS central bankers’ speeches  This led to the creation of the Term Auction Facility, or TAF, which used an auction mechanism to allocate funds in the hope that banks would feel more comfortable borrowing if other banks were doing the same. The TAF was a success and can perhaps teach us something about ways to mitigate stigma. The ECB seems to have had a different experience. Its lending facilities do not appear to have suffered from stigma to the same extent as those in the U.S. or the U.K. 14 This is related to the fact that banks rely more consistently on central bank provided liquidity in the euro area. This difference could perhaps provide insights into what gives rise to stigma and how to address it. In any case, understanding stigma, and potential ways to mitigate it, seems like an under-researched area at the moment. 15 Let me put aside stigma now and focus on moral hazard.
This was the advice Benjamin Franklin gave to inhabitants of Philadelphia, on the subject of firefighting, writing anonymously to the Pennsylvania Gazette in 1735: “In the first Place, as an Ounce of Prevention is worth a Pound of Cure, I would advise 'em to take care how they suffer living Coals in a full Shovel, to be carried out of one Room into another, or up or down Stairs, unless in a Warmingpan shut; for Scraps of Fire may fall into Chinks and make no Appearance until Midnight; when your Stairs being in Flames, you may be forced, (as I once was) to leap out of your Windows, and hazard your Necks to avoid being oven-roasted.” 32 A firm’s overall loss absorbing capacity is the sum of its capital and subordinated long-term debt which can be bailed in. 33 Of course, it is not the case that changes in banking system capital requirements have no bearing on developments in the wider economy; such changes are likely to impact the price and quantity of credit provided by the banking system and, via this channel, economic growth. But the best empirical estimates we have suggest that this channel is likely to be weak during credit booms, when it’s most needed (Bahaj et al, 2016). Moreover, changes in banking system capital will have no direct impact on build-ups of risk in the market-based financial sector.

I spoke on this subject last week, and the text is available on the Bank of England website, so I am not going to labour the point today. But the general principle is that resolution is a very information hungry activity. To give an example, the FDIC in the US has recently adopted a rule requiring deposit takers to provide detailed information on their derivatives positions within a 60-day period after being notified by the Authorities to do so. The rule was only introduced earlier this year but it will be worth considering a similar approach in the UK. Finally, there is a large missing piece to what I have said about the resolution regime, namely how it would deal with banks that operate with branches or subsidiaries in other countries, and likewise how foreign banks operating in the UK would be sorted out. There is now a great deal of attention on this issue, in the G20, in the EU and via the FSB working group on cross-border crisis management chaired by Paul Tucker, and rightly so. I think it is fair to say that the regimes in the US, Canada, Japan and the UK come closest at present to meeting a kite-mark standard, but more needs to be done in continental Europe. I therefore support the recent European Commission consultation calling for EU countries to adopt resolution regimes.
The real test will come in the next few years when wage negotiations take place in the context of high capacity utilization and high demand for labour. BIS Review 39/2000  6  What should we expect of the labour market and the wage formation system? Basically, there is a general, long-term macro framework for how high wage increases can go before triggering rates of inflation that exceed the target. This framework only allows wages to increase in parallel with productivity and inflation. If we assume that productivity growth in Sweden is about 1 to 2%, this would allow wage increases of between 3 and 4% over time, given an inflation target of 2%. I know that many of those who are engaged in wage negotiations would not agree with this description of the scope for wage increases. Let me therefore mention some important reservations. First, this analysis is only valid in a situation where the economy is in balance as regards employment. In a situation with high unemployment, lower wage increases are desirable, since they stimulate growth in employment. The analysis also assumes that profits are balanced in the sense that sufficient investments are made to ensure continued desirable growth. This was a problem when the EFO model was applied in the late 1960s and early 1970s.1 Around 1970, wage increases became too rapid, and gradually investment in Swedish industry declined. The most important reservation, however, is that the analysis relates to the general, average scope for wage increases in the country as a whole.

In the last Inflation Report the Riksbank viewed that growth would be around 4% this year and average almost 3.5% in the next three years. This seemed to be a higher rate of growth than the economy could sustain in the long run. As available resources are utilized, price pressure will grow. The task of monetary policy is to ensure that growth does not deviate too far from a rate that is sustainable, thus causing shortages and price pressure. Diagram 6. The task of monetary policy  Function of the monetary policy Growth New economy Potential growth Real growth  Time  The Riksbank was of the view that, in the next few years, the inflation rate would be lower than what might be expected with such strong growth. One reason for this was that the modest increase in underlying domestic inflation anticipated in our forecasts was offset by a stronger krona and lower oil prices. Our assessments also took into account the fact that in recent years domestic price pressure had been lower than expected. We do not know exactly why domestic inflation has been so low in the last few years. Deregulation of the electricity and telecom markets is one important factor. But competition has increased in other product sectors too, due to globalization in general and to membership of the EU in particular. Our forecasts are also strongly influenced by our estimates of capacity utilization in the economy and of potential growth. There is some uncertainty in both cases.
If alternatively the pricing of the product is administratively determined, thus involving a subsidy, then the difficulty is again to target equitably a group of beneficiaries entitled to the comfort afforded by that product. 38. We have, as part of our review, invited the IMF also to look at these schemes suggested by the academics. The response from the IMF confirmed our reservations. The best guarantee that the link will not be changed is for us to stick to our guns and not to invent fanciful derivatives which may have the political and psychological attraction of ourselves “putting money where the mouth is”, while really what it means is that the credibility of a simple, rule-based and well tried system could well be undermined to the detriment of Hong Kong. (b) Liquidity Adjustment Facility 39. Another area of controversy arising also from discussions with the academics concerns whether the HKMA should lend to banks at the end of the day through the LAF. They identified this practice as the HKMA playing the role as lender of last resort whereas it is merely a lender of convenience so that banks can settle interbank payments outstanding at the end of the day. The HKMA runs a real time interbank payment system in which each of the 180 licensed banks in Hong Kong maintains a clearing account with the HKMA to effect the settlement of interbank transactions.

This situation was rectified in 1988 through the so-called Accounting Arrangements which required the Hongkong and Shanghai Banking Corporation Limited, as the Management Bank of the Clearing House of Hong Kong Association of Banks, to maintain a clearing account with the then Monetary Affairs Branch of Government for the account of the Exchange Fund. Thus the monetary base was only clearly defined then. The Accounting Arrangements were subsequently replaced by another arrangement, on the occasion of the introduction of Real Time Gross Settlement for interbank transactions in Hong Kong BIS Review 19/1998  -6any change in the monetary base has to be matched by a corresponding change in the amount of US dollar reserves held by the HKMA, and the change brought about by the HKMA rather passively converting Hong Kong dollars in the monetary base into US dollar reserves and vice versa at much the initiative of the banks. 19. The advantage of such a requirement is that whenever there is capital outflow, which would take the form of the sale by the banks of Hong Kong dollars to the HKMA for US dollars at the fixed exchange rate, there will, on settlement of the deals, be a shrinkage of the clearing balance of the banking system. This will lead to Hong Kong dollar interest rates in the interbank market increasing. The greater the outflow, the larger will be the fall in the clearing balance of the banking system and the higher will be the interest rates in the interbank market.
Allow me to return to the first topic of the day and say a few considerations about Artificial Intelligence, Machine Learning and Big Data. The interconnected use of new technologies is 1/2  BIS central bankers' speeches  already a common practice in many operational fields, such as the defense industry, the automotive industry or the healthcare sector. It is, therefore, natural that new technologies would penetrate the financial sector. Their applications are diversified in design and scope, examples of which are: algorithmic trading, portfolio optimization, scoring and pricing models. Moreover, the use of these new technologies receives more and more attention in the financial and economic areas, as the transition from classical banking sector products and services is growing exponentially. In this context, the focus moves from the individual to more general issues and the question arises about the effects that the trinity described by artificial intelligence, machine learning and big data analytics, have on the financial system. Implicit answers to this question are formulated as considerations of financial stability. In other words, the key question is related to the costs and benefits that the new technologies listed above have on financial stability. The answers to this question are quite varied, given that this issue has not been thoroughly investigated up to this moment. Among the best-known benefits, some of the areas where progress can be made by using the specified technologies are: regulatory compliance, systemic risk monitoring, fraud detection and supervisory effectiveness.

As we have seen in the last few years, the deterioration of the perceived solvency of financial institutions located in specific countries within the monetary union can have spillover effects across the financial sector as a whole, can contribute to a disorderly functioning of wholesale markets and can put great stress on the public finances of the countries affected. Consequently, the soundness of financial institutions is of systemic importance within the monetary union and should therefore be preserved through the appropriate integrated crisis prevention and resolution mechanism. Against this background, a consensus has emerged of unprecedented strength on the need to take steps to create a banking union. The first step would be the adoption of a single supervisory mechanism. A regulatory proposal for such a mechanism has been released this week by the European Commission. The proposal has three main features. First, the assignment to the ECB of supervisory responsibilities for all banks in the euro area, and possibly also for banks in countries outside the euro zone willing to enter into cooperation arrangements with the ECB. Second, the adoption of mechanisms to ensure that the ECB’s supervisory tasks are strictly separated from the conduct of its monetary policy. Third, the involvement of national supervisors in the preparation and implementation of decisions. The proposal is in my view well founded. In particular, it makes sense to subject all financial institutions in the euro area to a single supervisory mechanism.
While market failures in provision of small company finance will never wholly be removed, there is very little evidence to show that at least in the United Kingdom they are important in practice today. Nonetheless, it can only be helpful to improve the flow of information between business owners and finance providers, thereby ensuring a better appreciation by both of the relevant risks and rewards attached to particular business plans. The Bank has long been interested in the financing needs of small and medium-sized enterprises. Going back some way, an example of the Bank’s early involvement was our instrumental role following the Second World War in the formation of the Industrial and Commercial Finance Corporation - which evolved into 3i. We would not have described that then as seeking to promote the entrepreneurial economy, but that is precisely what it was. Our role has, of course, evolved since then, in particular highlighting the importance of information sharing and increased understanding between the relevant parties. The Governor has, since 1993, hosted an annual meeting bringing together some of the key players in the SME market. Finance providers, policymakers, business representatives and advisers join together to discuss the key issues relating to the financing of small firms. The main themes to arise from these meetings are published, under the editorship of Adrian Piper and his team, in our annual reports on ‘Finance for Small Firms’. The seventh such report was published in January this year.

One of the most encouraging trends we have been able to report during these seven years has been the improved relationship between banks and their small business customers. Research by the Forum Of Private Business shows that the performance of the banks had improved significantly since 1992. The improvement is the result of a number of factors, for instance the implementation by the banks of codes of practice and the increased emphasis on training relationship managers to understand the specific challenges faced by small businesses. There is, of course, always room for improvement, but the increased degree of information sharing and trust has been notable. The reports have mapped other positive developments - for instance, a changed balance between term lending and overdrafts. The Three As In monitoring finance for small firms, we have sought with others to ensure that the types of finance on offer and the finance providers themselves are efficient and effective. We like to think of this in terms of the three “As”: availability, appropriateness and accessibility. In many cases, the availability of finance is a bigger issue for small firms than its actual cost. Availability is likely to be affected by a number of issues, above all the prevailing macroeconomic environment. Banks adjust their risk assessments of small firms as trading conditions alter: this can mean that in an economic downturn credit is rationed. There was evidence of this in the last recession.
Indeed, as the share of economic activity accounted for business and financial services increases, it is even possible that a growing part of business investment is simply unmeasured. When your teams spend time developing spreadsheets that will be used for 3-5 years, do you count that as investment? So it is difficult to know whether or not the management of risks associated with pension provision has had a bearing on the recent measured weakness in business investment. 5  Nobel Prize winner, Modigliani, F, and M. Miller, 1958, ‘The cost of capital, corporation finance and the theory of investment’, American Economic Review 48, 261-297. 4  BIS Review 47/2006  Financial market uncertainties It has, though, surely been an important factor in financial markets in recent years. The most obvious manifestations have been associated with their own jargon: Liability-Driven Investment (or LDI), and so-called ‘alpha-generating’ active-management strategies. LDI involves matching a fund’s assets more closely with its quasi-fixed-income liabilities, via purchases of long-duration conventional bonds, inflation-indexed (or real) bonds, interest-rate swaps and inflation swaps. This may well have amplified the fall in very long-maturity real forward rates, which has been such a puzzle in recent years (Chart 14). Greater asset-liability matching represents a reduction of risk, and so – at least at first blush – does not obviously square with a more aggressive approach to active management via increasingly popular ‘alpha’ strategies. But quite what such strategies entail may need a bit of unpacking.

27 For this reason, I believe that to alleviate fears about excessive meddling of governments in private companies, a SWF code of conduct will have to set the limit for individual stakes at a level significantly below the typical threshold of a controlling minority, let alone an absolute majority. As long as a recipient country can be confident that a particular SWF operates in accordance with these two paramount guidelines, there is no reason to demand intricate levels of portfolio transparency from SWFs. Transparency is an attractive answer to intractable problems. But it is unlikely to solve the problems I have tried to outline here. Indeed, I fear that, in some cases, extensive transparency requirements for SWF portfolios could actually end up triggering protectionist reactions in mature markets. It is also important to remember that most stock exchanges already impose various disclosure requirements for large equity holdings in listed companies. There are, of course, a host of reasons why SWFs should, over time, become more transparent. Many of these reasons have to do with the presumed desire of the citizens of a SWF country to demand accountability. Once again, the history of central banking may provide some valuable insights here. The more independent central banks have become, the  November, 2007. McCormick moreover stressed that the US remains open and welcoming to investment from Sovereign Wealth Funds. 26  Truman (2007a). 27  As far as I know, Larry Summers has coined this term.