samchain/econo-pairs-v1 huggingface dataset:
Both the force and speed of action has increased substantially. But all of this concerns how one can avoid crises, not how they should be managed once they occur. Nor did the Larosière group discuss, other than marginally, crisis management or winding up insolvent banks. However, the European Commission’s newly-published proposal does deal with this, and so do new UK and US legislation that have arisen since the crisis. This is, of course, an important step in the right direction. Greater clarity with regard to how banks should be wound up will to a great extent affect both how the supervision is designed and how the banks act. As I said, it is wise to begin at the other end.11 …but difficult with cross-border agreements However, the focus in the legislation, naturally enough in the UK and US legislation, but also the European proposal, is on how to manage national banks in distress. The cross-border problems are avoided to a great extent, even in the Commission’s report. The fact that an integrated financial system in Europe also requires methods to resolve cross-border crises remains to be discussed. And of course this is connected to what I mentioned earlier, namely that it is much too sensitive an issue to discuss how the costs should be divided. 10  The supervisory heads do not have the right to vote in the ESRB. A 2/3 majority is required for recommendations and decisions on publishing warnings and recommendations.

Of course, the financial crisis was due to many factors acting together. But one of the most important lessons was that one should beware of allowing debts to grow too much. This applies equally to households, companies and governments. This is neither a particularly surprising nor especially new lesson; over several hundred years, financial crises have often been preceded by periods when the attitude to credit granting and lending has been too carefree. But it seems as though this is a lesson that we must experience again and again – at least once a generation, and perhaps even more often. BIS central bankers’ speeches  1  A rapid and substantial credit expansion can cause many different problems. If the expansion is characterised by an exaggerated optimism and an underestimation and underpricing of risk, large loan losses may arise in the banks when the sentiment changes. This can lead to banks failing and ultimately to a financial crisis. We experienced this in the 1990s, and Spain and Ireland are experiencing it now. Once the economy has entered a recession after a period of rapidly-increasing indebtedness and rising asset prices, the recovery from this level may be very slow. The reason is that the economy then often enters what is known as a balance sheet recession.1 Put briefly, what this means is that the economic agents need time to adjust their balance sheets if, for example, property prices have fallen. Their incomes will for some time to come be used for amortisation rather than consumption and investment.
Given the importance of the US dollar in trade, debt issuance by the non-financial corporate sector in EMEs, and funding for their domestic banks, most of these reserves are dollar-denominated. As well as coming at a domestic high cost to EMEs,22 this vast accumulation of safe assets has pushed down the global equilibrium interest rate – the rate that central banks must deliver in order to balance demand with supply and so achieve stable inflation.23 More fundamentally, by making the world a riskier place, the flaws inherent in the IMFS are reinforcing the downward pressure on global r*. The IMFS is not only making it harder to achieve price and financial stability but it is also encouraging protectionist and populist policies which are exacerbating the situation. This combination reduces the rate of global potential growth, increases its downside skew, and bolsters the likelihood of an extreme downside event (a fatter left tail). As my colleague on the MPC Jan Vlieghe has illustrated, such a change in the distribution of economic outcomes reduces the global equilibrium rate of interest.24 Past instances of very low rates have tended to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime. Whether the last happens is still within our control, but for now the lower global equilibrium interest rate is reducing monetary policy makers’ scope to cut policy rates in response to adverse shocks to demand, and increasing the risk of a global liquidity trap.

Øystein Olsen: The conduct of monetary policy Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament), Oslo, 4 May 2015. *  *  *  Please note that the text below may differ from the actual presentation. Accompanying charts can be found at the end of the speech or on the Norges Bank’s website. I would like to thank the Chair of the Committee for this opportunity to report on the conduct of monetary policy. My introduction here today is based on Norges Bank’s Annual Report for 2014 and our monetary policy assessments up to the monetary policy meeting in March. Chart: Inflation and projected capacity utilisation Monetary policy in Norway is oriented towards keeping inflation low and stable. The operational target is consumer price inflation of close to 2.5 percent over time. The inflation target provides the economy with a nominal anchor. Inflation has edged up in recent years and hovered around 2.5 percent through 2014. When inflation expectations are firmly anchored, monetary policy can serve as the first line of defence when the economy turns down. Monetary policy seeks to be robust and takes into account the risk of particularly adverse economic outcomes. The goal is to avoid an abrupt economic downturn and higher unemployment. In the event of major shocks, for instance a sharp drop in oil prices, this may imply a more active monetary policy than normal.
Or were high interest rates on the contrary needed to prevent the flight of necessary capital, a weakening of the exchange rate and the failure of companies with foreign-currency debt? Or was it perhaps the case that the high interest rates led investors to expect additional business failures and social unrest, so that they withdrew their capital for precisely this reason? As we do not know what a different direction of policy would have led to, even today we cannot tell what would have been most appropriate. But we do know that the tight nature of many of the programmes was eased as time went by, partly as the crisis became less acute and the shortage of foreign currency less troublesome. Another question concerns the structural changes and reforms that were required in connection with some programmes. Such conditions may be justified as regards the banking sector or bankruptcy proceedings, for example, as these are often clearly a part of the problems. They are more questionable, however, when they concern components of the economy that are not self-evidently connected with the current stabilisation problems. There were elements of this in, for example, the programme for Korea, which stipulated measures for the liberalisation of imports. Such matters are  BIS Review 2/2002  5  liable to discredit the IMF, besides leading to the IMF’s proposals encountering more opposition than otherwise in the borrower countries.

Country crisis programmes and IMF stipulations A third topic in the ongoing globalisation debate is the role of the international financial institutions, not least in the management of financial crises in recent years. The International Monetary Fund (IMF) has  4  BIS Review 2/2002  been criticised in particular from both the left and the right of the political spectrum. On the one hand the IMF has been accused of pumping in too much money in the form of massive support for countries with a medium income level and thereby disrupting the market’s normal credit assessments by protecting private creditors from losses. On the other hand, the measures required of individual countries have been said to be inappropriate and unduly harsh, leading to negative economic, social and political effects. During the past decade the IMF has provided support for countries with payment difficulties. This has amounted in practice to guaranteeing short loans in particular so that the country in question did not have to engage in onerous renegotiations with creditors and perhaps ultimately suspend payments, with serious potential consequences for its economy and standards of living. It is debatable whether this approach is sustainable in the longer run, although in each case acceptable alternatives have been hard to find at the time of the crisis. One consequence, of course, is that for such countries borrowing has been ‘cheaper’ than would otherwise have been the case.
The stock of private productive capital (relative to employment) has increased by 40%, and much the same can be said of the stock of residential capital (relative to the population). The stock of public capital, essentially comprising transport, health, educational and other infrastructure, has almost tripled in real per capita terms over this period. Government spending on education and health has risen twofold. The percentage of the adult population with intermediate and higher studies has increased by 28 pp and 20 pp, respectively. Moreover, since 1978, the Spanish population has grown by over 10 million, and the number of people in work has risen by more than 8 million, including over 6 million women. This has raised the female participation rate from a mere 28% to 54%. Overall, economic success in the democratic era can probably be put down to a combination of our economic integration into Europe, the consolidation of stability-oriented economic policies, the development of our welfare state and the modernisation of our tax system. Against this backdrop, I would like to focus my address on the outstanding structural challenges and the economic policies best equipped to address them, as further explored in the Banco de España's latest Annual Report, published in May. These challenges can be illustrated, first of all, by acknowledging the Spanish economy's failure in recent decades to converge consistently towards the per capita income levels of the euro area.

In this regard, the main challenges facing us all (including the financial sector) when it comes to managing these risks are plain to see. Among others, I would single out a lack of harmonised definitions, ESG data gaps and the ability to measure impacts. With this in mind, I will now address certain key aspects that concern all sectors, and not just the financial sector. Main regulatory initiatives  We authorities, regulators and supervisors have been shaping the regulatory framework for appropriate management of this risk. This is still an ongoing task, but important progress has been made. At the European level, I would highlight the following: first, the EU Taxonomy Regulation,13 which establishes the bases for determining when an investment or economic activity may be considered environmentally sustainable, and lays the groundwork for other European sustainable finance regulations; and second, Directive (EU) 2022/2464 (CSRD)14 on corporate sustainability reporting, published on 14 December 2022, which updates and reinforces the rules on environmental and social reporting by the companies concerned, which are large undertakings (defined as those that meet at least two of the following requisites: balance sheet total over € million, net turnover over € million or average number of employees over 250), along with listed small and mediumsized undertakings.15  13  Regulation (EU) 2020/852  14  https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464  15  Article 19 bis of Directive 2013/34/EU amended by the CSRD.
Now I do wonder if some of you expected me to give a speech about what we can’t do. You might have expected a lecture about how sustainable growth is impossible without financial stability. You might have expected warnings that undermining our primary objectives will increase the probability and severity of crises, whilst decreasing the ability of finance to support economic recoveries. These things are indeed true, and colleagues of mine have argued these points in public. [3] So I will not repeat my colleagues’ arguments today. Not because I don’t agree with them (I do). Page 4  But because I want to talk about the other side of things. About what we can, and about what we will, do differently because of the new objective. And this is because industry thrives better when trusted public institutions provide foundations upon which the private sector can build, innovate, and succeed. The PRA must do what it can to strengthen these foundations. [4] In particular, PRA rule making can deliver three things: harness the UK’s strengths as a global financial centre, maintain trust in the UK as a place to do business, and tailor regulations to UK circumstances. The PRA will make rules that harness the UK’s strengths as a global financial centre I believe that the PRA can help harness the UK’s strengths as a global financial centre by providing a high level of responsible openness. Responsible openness is essential to the UK’s success because it is one of the world’s most connected financial centres.

My conclusions are that the financial sector can support the international competitiveness of the UK economy and contribute to growth in the medium to long-term when: UK firms successfully compete to win business around the world; The UK is a top tier global financial hub where firms from around the world choose to do business; and The financial sector supports growth by meeting the needs of the wider national economy. That last point needs emphasising. Finance matters because it does useful things. Financial firms help people and businesses to make payments. They channel savings to businesses with promising projects that create growth. They help people and businesses manage risks. And they give families ways to smooth over shocks to their finances. The more efficiently the financial sector does these things, and the fewer gaps there are in the services it provides, the greater the benefit to the wider economy. Good regulation is a good foundation for success Sadly, the PRA cannot claim credit for success when all these conditions are met. This is because success is primarily driven by the work of the financial services industry themselves. The success of the financial industry is also a consequence of many other factors beyond the PRA’s control, such as a trusted legal system, a competitive tax structure, reliable infrastructure, the selfreinforcing benefits that arise when a skilled workforce and large number of firms converge in one jurisdiction, and even a convenient time zone. Clearly the PRA cannot deliver all of that.
The only effect is liable to be increased uncertainty about the future. The criticism, which presupposed that economic agents are rational, also concerned the labour market. In that the Phillips curve disregards a central explanatory variable – inflation expectations – it is not stable over time. A demand stimulus that pushes inflation up erodes real wage levels. Employees will therefore demand compensation for the price increases and the attendant loss of purchasing power. That means that the additional employment which the stimulus was designed to generate will never materialise. Moreover, Keynesian economic policy had already been criticised in the 1930s on the grounds that stimulating demand in a downturn is considerably easier than tightening policy in an upswing. Economic developments in Sweden from the 1970s onwards provided plenty of support for Keynesianism’s critics. Inflation rose at the same time as keeping total unemployment down proved increasingly difficult. Public spending expanded continuously and particularly in downward phases. Government debt grew even though tax pressure rose. A fundamental loss of competitiveness was countered with repeated devaluations. Back to price stability In a number of industrialised countries, economic policy was realigned in the years around 1980. The aim was to provide a good foundation for stable growth by keeping inflation low. In Sweden the corresponding realignment did not occur until the turn of the 1980s. After almost two decades of high inflation, the costs were considerable. The financial excesses that had characterised the late 1980s in particular were ruthlessly exposed when the inflation bubble burst.

The theory is that, in a liberalised global financial system, international capital flows reward countries with sound economic policies and punish those which pursue unbalanced and inconsistent policies. International capital flows also prevent distortions from getting as far out of line as they would if the economy in BIS Review 53/1999  2  question was closed to outside investors. Thus, according to this view, capital flows act as an early warning system that forces quick corrections of policy errors. Undoubtedly, there have been circumstances in the past that have lent substance to this view. In the Latin debt crisis of the late 1970s and early 1980s, for example, many borrowers were clearly pursuing unsustainable and destabilising macroeconomic policies. The resulting outflow of funds and the short-term economic crisis that ensued served to bring policies to task and to trigger lasting economic reforms in some countries, notably Chile. More recent experience, however, raises serious questions about this view of the role of international capital as a robust, reliable and objective referee of the soundness of economic policies. Events during the Asian crisis naturally come to mind. The flight of international capital bore practically no relation to a forward-looking assessment of changes in the policies and macroeconomic fundamentals of the region. It is true that some countries were pursuing quasi-fixed exchange rate regimes that may have allowed pressures to build up for too long.
The questions about trend productivity and other matters that may have altered the relationship between growth and inflation are one of several elements of uncertainty in the Riksbank’s forecasting  3  BIS Review 28/2000  work. When constructing assessments and material for decisions it is therefore important to check what is happening and be alert to any signs of changes that should be taken into account. The current assessment The Inflation Report we are publishing today presents a picture of the Swedish economy that remains bright, with good growth and moderate, though rising inflation. External economic prospects have gone on improving. It is above all GDP growth in the US economy that continues to be remarkably positive but it also looks as though growth in the euro area and the United Kingdom could be higher than assumed earlier. International consumer prices, however, are not expected to move up to the same extent. Less relaxed monetary policies among a number of central banks and growing pressure from international competition are judged to hold external prices back. But partly because the krona is not expected to appreciate quite as rapidly as we counted on earlier, import prices to producers are now assumed to be somewhat higher. On account of strong competition, however, we do not foresee a full pass-through to consumer prices. Domestic demand is also expected to be stronger than we foresaw in the December Report, notwithstanding the subsequent repo rate increase of 0.5 percentage points.

Part 1: The digitalisation of financial services and their potential impact on Europe’s market infrastructure •  Technical innovations in financial services will be among the key focal points for the Eurosystem over the next few years;  •  In my article, I address four key topics where innovation in financial services will have to be tackled in the coming years:  A)  pan-European instant payments;  B)  person-to-person mobile payments;  C)  the emergence of new (non-bank) service providers;  D)  distributed ledger technology (DLT). A)  Pan-European instant payments  •  In 2015, the Euro Retail Payments Board invited the European Payments Council to develop an instant payment scheme for euro payments based on the SEPA credit transfer;  •  the implementation of this scheme is foreseen by November 2017;  •  By that time, end-user solutions for instant payments in euro should be made available at the pan-European level by the payment service providers;  •  This means that by November 2017 the European financial market infrastructure has to be ready to clear and settle instant payments on a pan-European scale;  •  As an operator of market infrastructure, the Eurosystem is exploring how to support the settlement of pan-European instant payments.
Tools which act on liquidity risk – minimum liquid asset requirements, restrictions or gates on liability redemptions – may be more suitable. Second, procyclicality. Asset management has at least the potential to amplify pro-cyclical swings in the financial system and wider economy. If so, it may contribute to the mis-pricing of risk with risk premia undergoing cycles of feast and famine. That still leaves some big questions begging. How large are these mis-pricing cycles? How do they affect risk-taking in the financial system and activity in the wider economy? And, if so, how best can public policy modulate those cycles? At present, we do not have good empirical answers to any of those questions. Jeremy Stein at the Federal Reserve Board has recently offered some answers (Stein (2014)), drawing on work by Feroli et al (2014). He notes that portfolio adjustments by asset managers can cause abrupt and asymmetric adjustments in risk premia which may have a significant impact on economic activity and systemic risk. On that basis, he makes a case for monetary policy leaning against financial market vulnerabilities, even when they are not sourced in leverage. The evidence here is fully consistent with Stein’s and Feroli et al’s: the behaviour of unlevered asset managers may have the potential to induce pro-cyclical swings in portfolio allocation and in risk premia, with damaging consequences for systemic risk and economic activity. But whereas Stein discusses the role of monetary policy, a natural first line of defence against such swings is so-called macro-prudential policy.

You have probably seen pictures of bank runs – when queues form outside banks in crisis as people want to withdraw their money in the form of (safe) cash. This is why central bank money is still the linchpin of the system, even if it is rarely used in normal circumstances. The fact that it is available as an alternative acts as a kind of guarantee for the private bank money. 4 It is also the case that some key systems for payments are increasingly concentrated to a few agents. See, for instance, the card payment market where two American companies are entirely dominant in Sweden. Unlike our neighbouring countries, we do not have any domestic card payment network. This means that we are dependent on foreign infrastructures to make the majority of households’ payments. Without cash, therefore, an important part of the Swedish infrastructure would be completely in private ownership and dependent on foreign infrastructures and foreign companies. So if the use of cash continues to decline, it is not enough to say that this works fine at present, because the future will look rather different, regardless of whether we produce an e-krona. Other functions that cash has performed include functioning as a back-up when there have been disruptions to other forms of payment. It has also helped ensure  3  See, for instance, Fung et.al. (2018) and Söderberg (2018). 4 See, for instance, Tobin (1985).