samchain/econo-pairs-v1 huggingface dataset:
Christian Noyer: The situation in the euro area Introduction by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Paris Europlace Financial Forum Luncheon, New York City, 23 April 2012. *  *  *  Ladies and gentlemen, It is a great pleasure for me to host this luncheon together with Lawrence Leibowitz. I would like to thank Paris Europlace for organizing this very interesting Forum and the NYSE for welcoming us here, at the very heart of the global financial world. I would like to focus my short address on the situation in the euro area where the important steps already taken to exit the crisis now need to be further enhanced. ********* 1. The important steps to exit the crisis already taken by the euro area are beginning to bear fruit. Indeed, when you compare the situation of the euro area in the first quarter of this year with that in the second half of 2011, the contrast is striking:   Conditions in bank funding markets are much better. For instance, euro area banks have already issued about 70 billion euro in senior unsecured debt so far this year, which is well in excess of what they did in the whole of the second half of last year.

In any case, such reforms are a necessary foundation for dynamic and sustainable growth in the future and they must be vigorously pursued. There is no doubt that the euro area as a whole will benefit from these national reforms that represent a significant asset for us in the global economy. 2.2. The challenge for the banking system: continuing to ensure that the economy is properly financed while strengthening the financial sector  The dilemma here is easy to understand: on the one hand, it is absolutely necessary to strengthen banks’ balance sheets to enable them to better absorb shocks, protect public finances and re-establish normal market functioning. On the other, a disorderly deleveraging would create enormous problems and add credit constraints to the many headwinds currently facing our economies. The euro area is currently making sure that these two objectives – although sometimes difficult to reconcile – are achieved. Banks are meeting their new capital requirements. The capital plans submitted to the European Banking Authority (EBA) indicate an intention to exceed the benchmarks set by  2  BIS central bankers’ speeches  more than 20%. French banks already comply with the Basel 2.5 regulations. At the same time, bank lending seems to be stabilizing, although at a relatively low level. Banks are starting to assess their financial situation more positively and in many cases their willingness to grant loans is increasing. This would not have been possible without the strong support of the Eurosystem.
Despite the increasing non-performing loan portfolio, banks have sufficient capital to address this phenomenon. I would like to elaborate more on this latter point. The performance of lending has become the focus of attention for policy-makers and economic agents. The slower economic growth was followed by sharp deceleration in lending. The reasons are quite understandable: on the one hand, businesses have reduced their demand for loans due to uncertainties relating to the sale of their own products; and on  BIS central bankers’ speeches  1  the other hand, banks have been pursuing a more conservative approach to lending, being uncertain about the success of different business plans. Global theory and practice suggest that the investment and credit cycles progress in line with the performance of aggregate demand. In other words, we will see a stable recovery of lending only when economic growth recovers at a steady pace. However, as we have already stated, we believe that there is room within the Albanian reality for a better performance of lending. Channelling savings into profitable investments and supporting businesses with lending are the reasons for the existence of the banking system. We have been constantly emphasizing this message, and we have taken concrete steps, which have lowered the banking system’s financing cost and provided incentives for lending through an adequate regulatory environment.

It is always true that monetary policy is too restrictive for certain segments of the economy and too expansionary for others. Since there can only be one monetary policy for Switzerland, it must geared to the economy as a whole. Ensuring price stability in the medium and long term is the guiding principle. The SNB’s monetary policy strategy, however, is sufficiently flexible to react in an optimal way to uncertainties related to business cycle developments or the situation on the financial and currency markets. In implementing this policy, the SNB must be able to maintain its credibility at all times. Only then can it effectively – in the long term – fulfil its constitutional and statutory mandate of pursuing a monetary policy in the interests of the country as a whole. BIS Review 70/2010  1
Chart 19: Impact of monetary policy on wealth, across different UK regions (%)  Chart 20: Impact of Bank Rate, across the income distribution (%) Impact as of 2012-14 (% of annual income)  Impact as of 2012-14 (% of net wealth) Financial asset prices House prices Total  Inflation effects Pensions  House prices Inflation effects Financial asset prices Interest receipts/payments Macro effects on labour income Total  25 20  50 40 30  15 20  10 10  5  0  0 NE NW Y&H EM WM  E LON SE SW WALSCO All  -10 1  2  3  4  5  6  7  8  9  10  All  Region in 2012-14  Income decile in 2012-14  Sources: ONS and Bank calculations Note: Chart shows average cumulative real impact of policy changes since 2007 as of 2012-14 as a percentage of net wealth. Sources: ONS and Bank calculations Note: Chart shows average cumulative real impact of changes in Bank Rate since 2007 as of 2012-14 as a percentage of annual income.

The Asian Miracle decades in the 1980s and 1990s were largely fueled by the industrialization, rapid capital accumulation, migration of cheap labour, urbanization, emergence of middle class, and hot money, largely supported by banks at the core of financial intermediary. The “miracles” eventually turned out to be a crisis in the making, and Asia had learned the lessons the harshest way. Fortunately, Asia has come a long way after the Asian Financial Crisis. A series of structural reforms were carried out to reduce structural weaknesses, improve growth potential and safeguard monetary and financial stability. Policies, including monetary and exchange rate policies, prudential regulations and supervision, as well as legal and market infrastructures, have been redesigned to prevent distorted incentives that could lead to vulnerabilities or building up of fragility in the system. Thus far, the Asian economies’ and financial systems’ resilience has been well tested by the Global Financial Crisis and its aftermath. However, against the backdrop of the increasingly volatile, uncertain, complex, and ambiguous world we live in today, we cannot be complacent and I think it is not an overstatement to say that the real challenges still lie ahead for Asian financial systems. Ladies and gentlemen, After the Global Financial Crisis, the persistently low-growth and low-yield environment has affected Asian banks in various channels. Deteriorating asset quality with higher credit costs tends to outweigh benefits of the lower funding costs, thereby squeezing profit margins.
4  non-renumerated reserve requirement of 40% with a holding period of a year on capital inflows into the bond market and high-yielding deposits. It worked, and monetary transmission through the interest rate channel was restored. As a result, we also avoided the build-up of significant carry trade positions with the associated risk to financial stability. We see such instruments as temporary and only to be used as a third line of defence. Furthermore, it remains an open question whether they will be seen to be more in the nature of macroprudential tools or as infringements on our treaty obligations to maintain free capital movements. We are hoping that everybody has learned the lessons of the crisis where large and volatile capital flows played a key role.3 In concluding, let me come back to the IMFS and ask what I have said about the plight of SOFIEs means in terms of desirable reforms. First, we need to continue to adapt IMF surveillance and facilities and other parts of the GFSN to modern realities. Second, we need to further reduce financial regulatory flaws and gaps at the regional and global level regarding capital flows and cross-border banking. Third, we need to try to find ways to make central bank swaps a more transparent and reliable part of the GFSN. Finally, international organisations and treaties need to accommodate but monitor SOFIEs’ use of macroprudential and capital flow management tools. With time, we might develop a new consensus on the rules of the game.

The evidence suggests that foreign exchange markets exhibit excess volatility and that exchange rates diverge from fundamentals for protracted periods. In some sense, the existence of carry trade can be construed as evidence of this, as it involves betting that interest rate differentials are not fully compensated by exchange rate movements; i.e., that uncovered interest rate parity does not hold, except at long horizons, and then often through sharp and disorderly corrections. This, in turn, gives rise to two concerns: first, regarding detrimental effects on the traded goods sector , and second, on financial stability where volatile capital flows, currency mismatches, and rollover risk of foreign currency debt are among the key players. Adverse effects on financial stability can be particularly severe when a blocked interest rate channel and an erratic exchange rate channel interact badly with other economic and financial risks that can face small, open, and financially integrated economies – such as the global financial cycle, domestic financial vulnerabilities, and policy conflicts. We saw trends before the GFC that were consistent with this story. Data on longterm interest rates and spreads in small advanced economies and in many emerging markets economies showed strong and growing correlations with longterm rates and spreads among core rate setters (mainly the US and the eurozone), although still some way from the theoretical limiting case. The GFC reversed this process somewhat, as risk premia skyrocketed, cross-border banking partly retreated to home base, and restrictions on capital movements were in some cases reintroduced.
From that point on, expected returns on all assets would be lower. Higher saving was often touted as the possible reason for lower interest rates ahead of the crisis. At the time the argument was first made, during the early part of the last decade, the suggested “glut” in saving was often associated with the fast-growing East Asian countries. Some economists, notably Thomas Piketty, have suggested that, because the rich generally save more, widening income inequality may have contributed to the trend. Others have pointed out the importance of demographic factors. Whatever the underlying cause, the important point is that higher desired saving would tend to have a similar impact on the price of all long-dated assets, whatever their risk. That’s why it looks like a good candidate for the co-movement between equities and bonds evident in the early (pre-2001) part of Chart 2. The other determinants of asset prices – the level of, and uncertainty about, future economic growth – tend to have differing effects on the two asset classes. Lower expected growth will reduce investment demand and, by shifting that schedule to the left (Chart 3), will tend to reduce the equilibrium risk-free interest rate. Future profits will be discounted more generously, as before, but now the profits themselves will be lower. So despite a lower interest rate, and a rise in bond prices, equity prices fall on impact (Chart 6(b), which  5  Friedman and Schwartz (1963).

Economists and central bankers were remarking on the low level of real interest rates as early as 2005.1 The MPC discussed the factors behind the more recent decline, since the financial crisis, in the February 2014 Inflation Report, in the context of its forward guidance. My colleague David Miles went through some of these arguments in more detail in a speech in February this year. The debate about “secular stagnation” has also focussed a lot of attention on the issue. The only wrinkle here is to distinguish those factors that are good for risky assets from those that are bad – and, in doing so, to say something about distributional effects. I also want to caution against mistaking cause for effect and in particular, when it comes to asset prices, putting central banks at centre stage. Autonomous changes in monetary policy certainly can have an impact on asset prices. But that does not mean they’re the only thing that actually  1  Bernanke (2005). BIS central bankers’ speeches  1  does so. Over time, trends in real asset prices are determined by real (non-monetary) forces: we may occasionally be prominent actors but it’s someone else who’s written the script.
The first concerns the state of the securitisation markets and that for covered bonds in particular. In Europe, the ECB routinely takes covered bonds and other private sector securities as collateral in all of its operations. And there is a perception of state support for the covered bond market, perhaps because covered bonds have often been issued by quasi-state banks. The Bank is occasionally lobbied by industry representatives to offer more support to the covered bond market. I want to make three points in response. First, that RMBS and covered bonds are already eligible collateral in both the Indexed LongTerm Repo operations and in the Discount Window Facility alongside a range of other private sector securities. 15 It is only short-term OMOs, which are conducted for monetary policy purposes, where such assets are not eligible. In order to help manage the risks arising from securitised assets, and to help improve market functioning by establishing higher standards, the Bank will be demanding detailed disclosures – to the Bank and publicly – on the underlying assets and structures. This transparency initiative has generally been welcomed by investors and we hope it will encourage the establishment of viable securitisation markets in future. 14  Further details are available on the Bank’s website at http://www.bankofengland.co.uk/markets/marketnotice100719.pdf. 15  A bank may not submit its own covered bonds in Long Term Repos, only those of other issuers. But it may submit either in the DWF.

To make the choice of path regarding digitalisation of the payment market easier, we need a clear Swedish stance that is based on political priorities and decisions. This includes a review of the Sveriges Riksbank Act that clarifies the Riksbank's mandate. It is also important to cooperate with other public authorities. The e-krona would have points of contact with many other authorities, for instance the tax account, to which all those who are to pay tax receive access, functions as a form of state money. It is possible that the best solution would be to build an e-krona system together with other authorities. It would also be good if the legislation in this field in Sweden was updated to take into account the fact that payments will in future be made digitally. If the means 8 See, for instance, Project Jasper https://www.payments.ca/sites/default/files/29-Sep-17/jasper_re-  port_eng.pdf, Project Ubin http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/ProjectUbin.aspx and Project Stella https://www.ecb.europa.eu/pub/pdf/other/stella_project_leaflet_march_2018.pdf. 4 [9]  of payment issued by the Riksbank is not generally accepted, it will be difficult for the Riksbank to perform its task of promoting a safe and efficient payment system. According to the Sveriges Riksbank Act, the Swedish krona, in the form of cash, is legal tender. But at the same time, it is possible to waive the obligation to accept cash by, for instance, putting up a sign that cash is not accepted. As the use of cash is declining rapidly, it is urgent that the legislator takes a stance on what status in the law legal tender shall have.
The fact that forecasters revise their assessments is not at all strange, as new information is received all the time. This indicates that as the conditions for the real economy change and new information is received the forecasts for the repo rate path need to be adjusted. There is nothing particularly dramatic about this. It applies to all market agents, to the major banks, to the Ministry of Finance and also to us at the Riksbank. The great uncertainty factor means that all forecasters should be humble, but this should not prevent them from making forecasts. I would therefore like to emphasise once again that the repo rate path we present in the Monetary Policy Report is a forecast and not a promise. The Riksbank cannot undertake, regardless of what  BIS Review 62/2007  3  happens in the economy, to follow the path published. The interest rate path is quite simply the best assessment we can make at a given point in time, given the information that is then available. New information may change the picture of the economy and then the Executive Board will have to rethink how we set the repo rate. The reason why we have chosen to publish our interest rate forecast despite the uncertainty over the future is largely because we believe this is the best way of explaining our thoughts on monetary policy. It also makes it easier for us to justify forecasts and interest rate decisions and to outline alternative scenarios for the repo rate.

And the second is the improved communication between policymakers and market participants, which has allowed the bond market to form its own expectations about policy direction and to respond accordingly. These two qualities, in my view, are positive for the development of the bond market in the longer-term. Outlook and developments in the bond market This year the Thai economy will continue to expand, driven by momentums in domestic demand and export, including the launching of new infrastructural projects. Higher investment will imply higher funding requirement. Given ample liquidity in the system, funding investment expansion domestically should be a preferred option to funding it from abroad. Domestic funding will help make the domestic credit market competitive while helping to avoid the unnecessary pick-up in external debt. It is in this context of domestic resource mobilization that the bond market can have an important role to play. BIS Review 29/2005  1  This is to say that while bank credit will continue to be a major intermediary for investment finance, the need for long-term investment financing will offer considerable opportunity for the bond market. On the supply side, the fixed income market can be an important channel for long-term capital mobilization, while on the demand side, there will be ample demand to invest in fixed income instruments from domestic institutional investors. It is in this context that the current efforts to develop the domestic bond market by the Government are timely, and this priority now ranks high on the Government's agenda.
It is the challenge of ensuring that the strength of the infrastructure of controls within financial institutions will stay abreast of the pace of change in the complexity of risks and the tools we have to manage them - a process that we as supervisors will actively reinforce. A second issue relates to the degree of concentration in some core financial intermediation functions. The two largest government-sponsored enterprises in the mortgage market now hold 36 percent of Agency mortgage-backed securities, as compared with less than 10 percent at the end of 1993. The  BIS Review 33/2004  3  exposure of banks to these GSE’s, primarily through holdings of the GSE debt funding these MBS positions, is as a consequence very large. Two institutions now account for essentially all of the market for the clearing function for government securities and agencies, as well as for tri-party repo activity. A relatively small number of institutions now account for a large share of activity in the over-the-counter derivatives business generally, as well as in certain categories of risk-transfer instruments. These developments have different sources. Some are the result of public policy choices. Some are the consequence of the economies of scale inherent in these businesses. Overall, we have a very competitive financial system, with a larger diversity of institutions, and therefore a stronger overall system of financial intermediation.

In concert with better risk modeling, securitization and credit derivatives have facilitated the dispersion of credit risk across firms and across sectors of the financial system. These changes have led to significant risk transfers within the banking system, as well as a net transfer of credit risk from commercial banks to other financial intermediaries. As a result, we believe we are seeing a more efficient risk allocation within the financial system as a whole, since risks can be transferred to firms where they will diversify, rather than reinforce, risks arising from core businesses and to parts of the financial system that are significantly less leveraged than banks and securities firms, such as institutional investors and mutual funds. These risk management advances have been accompanied by the growth of key derivatives markets that have lowered the costs of hedging market-price-sensitive positions and activities. One important example of this is the growth of the market for long-dated swaps, which are now used by banks to hedge mortgage securities and whole loans. The notional value of long-dated interest rate derivatives (those with maturities of more than 5 years) has more than tripled since the end of 1998, considerably faster growth than for comparable shorter-dated instruments. The growth of these markets reflects a very substantial increase in hedging capacity, and this “wider pipeline” seems likely to facilitate the ease with which the market adjusts in conditions of stress. Growth in these OTC derivatives markets has been accompanied by welcome improvements in market practice.