samchain/econo-pairs-v1 huggingface dataset:
François Villeroy de Galhau: Between "shadow" banking and an angelic vision of the market – towards a balanced development of non-bank finance Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the presentation of the 22nd Financial Stability Review, Paris, 25 April 2018. * * * Ladies and Gentlemen, I am very pleased to welcome you this morning to this presentation of the 2018 Financial Stability Review (RSF), dedicated to non-ban k finance. Intended as a forum for dialogue and exchange, the FSR offers leading personalities from diverse backgrounds the chanceto have an open debate. I am delighted to see many of this year’s contributors here among us this morning, and I would like to extend my warm thanks to all the speakers: Klaas Knot, President of the Dutch Central Bank; Philip Lane, Governor of the Central Bank of Ireland; Robert Ophèle, President of the Autorité des marches financiers; Paul Hamill, Global Headof FICC at Citadel Securities; Yves Perrier, CEO of Amundi; and Richard Portes, Professor of Economics at the London Business School. The topic we have chosen to address is far from anodyne: [slide 2] according to the Financial Stability Board (FSB), non-bank financing totalled USD 160 trillion in 2016 [Monitoring Universe of Non-Bank Financial Intermediation, MUNFI], up 50% relative to 2008 and accounting for close to half of all financial assets held by financial institutions worldwide, compared with 40% in 2008.

Unlike inflation, where falling behind the curve would entail a degree of pain down the road when policy eventually needs to catch up, there is no catching up if we fall behind the curve on climate change. It is a one-shot game. And the consequences of getting it wrong would be catastrophic. Responding to climate change is not simply about taking into consideration the effects of the green transition on inflation, nor the possible repercussions of physical and transition risks on financial stability. But it is also about actively taking steps that helps influence the incentives and willingness of society to alter their behaviours in such a way that mitigates adverse climate change. The most impactful channel for central banks in this respect is through the financial system. Incentives, mindsets, and expertise in the financial sector must be geared so as to ensure that sufficient resources become available to finance the green transition. This requires a collaborative approach, both among agencies within a country, as well as internationally. Initiatives being pursued by bodies such as the Network of Central Banks and Supervisors for Greening the Financial System are therefore critical. Forging ahead amidst shifting grounds Mervyn King once said that central banking should be boring. There was a time when that was true. There may come a day when it is true again. But that is not today. The task at hand is far from straightforward. Maintaining economic and financial stability amidst the shifting fault lines will require a steady hand.
I see no appetite to tear those up and start again from a blank sheet of paper, given the huge investment we have all made in their adoption. And broadly Solvency II has served the UK well – as evidenced by the resilience of your firms through the pandemic to date. But the regime is in my view somewhat over-specified, and it also does need tailoring in places – particularly on the Life side. It is common ground between us that the risk margin is not correctly calibrated, resulting in levels of offshore reinsurance of longevity risk in the provision of UK retirement income that will become increasingly uncomfortable over time if we take no action. The risk margin will come down from current levels, and become less volatile. But for us risk margin reform in isolation is not synonymous with discontent about the overall levels of capital in the system. We have not seen persuasive evidence that this is either too low or too high: I discussed the health of returns on equity briefly earlier; nor do I see evidence of current capital requirements meaning that demand for insurance goes unmet. Some big numbers are being bandied about in lobbying for an overall weakening of prudential standards. I have to say that I think these numbers – being based on multi-decade forecasts – are a little speculative.

Another way to consider the graveyard question is to look at the returns of the insurance firms that we oversee and ask whether or not they resemble tombstones. Empirically, returns on equity can be volatile thanks to things like competitive pricing pressures, catastrophe risk losses and asset market volatility, but they have remained healthy in recent years. Since the introduction of Solvency II, returns have been in ranges of about 8 to 10% in general insurance, and 10% to 15% in the life sector. Our insurance sector is clearly alive and kicking. Moreover, the PRA does not aspire to a zero failure regime – more than fifty insurers regulated by the PRA are currently in some form of run off, for example – and even our primary objective of safety and soundness is in some ways just a means to end. Policyholders are not well served by firms that are so safe and cautious that they might apparently be able to live forever, but never grow or change. Such firms are more likely to be broken by a storm than to bend with it. On the contrary, policyholders are better protected by firms that: first, are sufficiently profitable and attractive to external capital to be able to change and grow in response to the changing external environment; and second, are able, if their business models do fail, to exit the market in an orderly fashion, paying their remaining liabilities as they fall due. What we do have a very low appetite for is disorderly failure.
The first implication should not be of excessive concern as long as the unemployment rate remains low, which is the case for Thailand. This is because the market mechanism will allow efficient adjustment as uncompetitive firms have to either upgrade themselves, or close down and free up labor resources to more competitive firms. This reallocation process implies that the country makes a better use of labor resources and should therefore yield higher productivity. At present, Thailand’s unemployment rate hovers steadily around 1 percent despite strong baht appreciation in recent years. In the meantime, export growth has remained robust with a swift recovery from the global crisis. These developments possibly indicate that our export sectors have adjusted themselves well and labor resources are being allocated more efficiently. In line with this view, the baht appreciation has somewhat catalyzed the adjustment of Thai economy to a more efficient use of labor resources. In fact, Thailand has continued to face a shortage of labor supply and has to employ immigrant workers from neighboring countries. This tight labor market phenomenon creates incentive for firms to shift factor of production from labor to capital. This shortage of labor will then accentuate my second implication of a strong baht, since the shortage of labor, in addition to cheaper capital goods in baht term, gives incentive for investors to make imported-capital investments. This is the part where the private sector role is essential, especially as Thailand has benefited from immense foreign direct investment in which Japan played the top role.

Furthermore, a QR Code payment system is safe and reliable since it was developed on existing payment infrastructures of banks and payment service providers such as PromptPay or credit and debit card infrastructures, which are highly secure, compliant with international standard and subject to regular examination. The forth is facilitating further innovations. This open infrastructure will lead to further development of various financial innovations in the future. E-Payment will not only facilitate payment flows but also provide solid foundation for SME’s financial data collection. Data from retail electronic payments can be effectively used to support credit granting, which will provides more alternatives for SME financing. Financial Institutions in many countries have started to provide information based lending instead of traditional collateral based lending. These four important criteria of QR Code will lead to an expansion of QR Code payment services to all merchants in our daily life such as department stores, fresh markets, coffee shops, and convenient stores. QR Code payment services are accessible for all type of merchants, including brick and mortar stores and e-Commerce. Moreover, it can easily be rolled out to various locations such as business districts, tourist destinations, or rural areas. To promote standardized QR Code payment, BOT has allowed banks and payment service providers to propose their projects for consideration in the central bank’s  4  Regulatory Sandbox.
In this respect, it should be kept in mind that the crisis has not demonstrated the superiority of any specific model and that, by contrast, it has witnessed the collapse of all manner of institutions, whether they be specialised in traditional business, in investment banking or in a combination of the two. Moreover, given that the introduction of restrictions on banking activity means forgoing the potential benefits of diversification, it is essential to ensure that these are smaller than the risk of combining traditional banking and own-account investment activities, even after the entry into force of solvency regulations which strengthen and step up prudential controls. Finally, it is necessary to assess as precisely as possible the impact structural measures may have on the location of risk outside the regulated sector and on the liquidity and efficiency of securities markets. More generally, we still lack an overall analysis of the diverse regulatory changes envisaged in the three areas in question, of their internal consistency and of their combined impact on the financial system and on the economy in general. For example, at the limit it could be argued that structural measures (perhaps those having the greatest impact on the business strategy of the main banks) are the least necessary if we are confident that the combination of the new solvency requirements and the reform of resolution regimes will really minimise the government support required to protect deposits.

In particular, while macro-prudential powers will rest also with national authorities, the ECB will be able to use macro-prudential instruments, either at the request of national authorities or by deciding to adopt stricter measures than the ones adopted at national level. This implies an increased coordination function in the macro-prudential areas for countries within the SSM that will naturally create some overlap with the macro-prudential role of the ESRB for the wider EU. However, I expect the macro-prudential functions of both institutions to be complementary. The ESRB will play its role in adopting recommendations to help coordinating macroprudential decisions as provided for in EU Regulation (namely CRR), in particular with the countries that do not join the SSM. In addition, while the SSM will exclusively focus on banking systems, the ESRB has an additional macro-prudential function regarding the nonbank parts of the financial sector, and as such will be well placed to address cross-sectoral issues. Interplay with the other ESAs Finally, let me be very brief regarding the SSM’s interaction with ESMA and EIOPA. Although the supervision of markets and the insurance sector will remain with the national authorities,  2  BIS central bankers’ speeches  ESMA and EIOPA will play important roles in the coordination of information sharing between the SSM and the national authorities. In particular, cooperation with EIOPA on the bank-led conglomerates will have to be very close given that the SSM is expected to take over their supplementary supervision.
An area of focus has been in green finance, with over RM2.5 billion in financing extended from the financial sector to companies that promote clean and efficient energy from sustainable sources. There are many ways in which we can better protect our environment. Art provides a sober reminder of this, as depicted in one painting from the Bank’s collection which captures the KL Banjir of 1971, by Mohd Hoessein Enas, showing the iconic Merdeka Square under several feet of water, just a stone’s throw away from the location of the Bank’s headquarters which had moved only shortly before the event. Another exhibit at the BNM Museum and Art Gallery depicts the two major Asian tsunamis of the past 13 years. This piece of installation art by Malaysian artist Oi Nuen Sprunt was displayed here in 2014, bringing home the message of nature’s power and unpredictability, but also the healing power of human compassion and kindness. Today, we bring you a more hopeful exhibition, with works that remind us of what exists just beyond our doorsteps, to be preserved and nurtured. The artists featured here today have all created their imagery direct from the source, which says a great deal about their passion and commitment to their craft. Few of us would take the time or trouble to observe nature at such an intimate level. These works allow us to do so in some measure. I am deeply encouraged by our own Bank staff who have also submitted works for the exhibition.

The NEU-CP market in Paris is by far the most active in the euro area, with outstandings of EUR 72 billion in mid-May, and the Banque de France’s most recent involvement since the end of March has been very effective and widely acknowledged by industry professionals. With its new Main Street Lending Program, the Fed recently went a step further by giving itself the possibility to fund the purchases of bank loans to businesses, via a special-purpose vehicle created with a US Treasury Department guarantee. We are not at that stage yet – the euro area has a different institutional framework – but we should not necessarily exclude it in the future if it proves to be a lever needed to maintain the financing of the economy by lightening bank balance sheets. What’s more, the French proposal for a “recovery fund” envisages its partial use for this very purpose. The Covid crisis has once again called upon the Eurosystem’s reactivity and creativity to fulfil its mandate in total independence. To conclude with the words of Jean Monnet, “I have always believed that Europe would be built through crises, and that it would be the sum of their solutions”. Without, of course, wishing for it, this is the situation we find ourselves in. And rest assured, the ECB has risen to this challenge. 5/5  BIS central bankers' speeches
Previously, liquidity was also influenced by purchases and sales of foreign exchange to influence the krone exchange rate. This has not occurred for the past 11½ years. Banks as a group cannot directly influence the level of their liquidity in Norges Bank. The level of banks’ liquidity is determined by the central bank’s liquidity supply and any changes in other central bank balance sheet variables. Changes in banks’ demand for central bank reserves lead instead to changes in market interest rates. For example, banks’ demand for more liquidity will be reflected in an increase in money market rates. Liquidity in the banking system  BIS Review 113/2010  7  Norges Bank determines market rates by providing sufficient liquidity to ensure that the shortest money market rates fall to a level close to the rate banks receive on their deposits in Norges Bank. Interest rates cannot fall below this “floor” as no bank will want to provide loans at a rate lower than the rate they can obtain from Norges Bank. Banks’ loans from and deposits in Norges Bank have been substantial and increasing over time. Demand for loans was particularly high during the financial crisis. It would appear that banks have grown accustomed to dealing directly with the central bank instead of redistributing liquidity in the interbank market. We are having to supply more liquidity now than previously in order to hold down money market rates close to the floor.

Realised real rates – calculated as observed nominal rates minus the realised inflation rates – have also declined, and have been substantially lower in the 2000s than in the 1980s (chart 3). There are several potential explanations for this development. A first explanation is the “global savings glut” hypothesis, which states that the decline in real interest rates was the result of an increase in savings from emerging economies and oilproducing economies. It is argued that this increase was driven by, among other things, an accumulation of foreign exchange reserves, elevated oil prices and precautionary savings (chart 4).2 But the decline in real rates could also result from a decrease in growth prospects – itself caused, for instance, by a decline in the growth of productivity or population, or by demographic shifts, particularly a reduction in the working population relative to the nonworking population (charts 5 and 6).3 None of these possible explanations for the reduction in real interest rates has been fully confirmed, and therefore they do not constitute a sound basis for forecasting future interest rate developments. But the discussion highlights the fact that, in order to understand longerterm trends in real interest rates, we have to rely on low frequency changes in fundamental economic factors, while monetary policy does not play a primary role here. The cyclical downturn Let us now turn to more recent interest rate developments. As mentioned, since the financial crisis and the global economic slump that followed, we have seen a further fall in rates to very low levels.
According to micro simulations conducted by Banco de España staff, 68% of firms would have liquidity shortfalls2 between  2  The definition used here considers that a firm has a liquidity shortfall when cash inflows, basically arising from the sales of products or services, are below the payments relating to their operating activity (supplies, rentals, financial expenses and personnel costs) and those arising from their decisions to invest in fixed assets and debt repayments. 3  April and December 2020, almost 10 pp higher than under a counterfactual scenario of no pandemic3. It is estimated that the corporate sector’s overall liquidity shortfalls between Q2 and Q4 2020 will amount to around EUR 230 billion. Ignoring liquidity needs associated with investment in fixed assets, which are less relevant for liquidity risks as this expenditure has a lower degree of commitment and can more easily be avoided, the liquidity shortfall during the same period is estimated to be around EUR 25 bn higher than under the no-pandemic counterfactual scenario. Additionally, results show that more than half of these liquidity needs could not be covered through the use of both firms’ liquid assets and the undrawn amounts of their credit lines. These simulations also show that a prominent portion of firms’ aggregate liquidity needs would be generated by companies of low credit quality, which are expected to have more difficulty gaining access to credit, especially in periods of high uncertainty and increasing concerns over credit risks.

The two main risks are liquidity and solvency risks. I will start with liquidity risk, which arises from the tension between the lesser willingness of lenders to lend and the higher financing needs of firms. The pandemic has increased credit risks perceived by lenders, which together with the higher economic uncertainty, might discourage them from lending. Some lenders might react by demanding a higher risk premium on the interest rate charged on their lending operations, while others may instead decide to cut the amount they are willing to lend. This pattern has been observed in previous crisis episodes and, in particular, during the Great Financial Crisis. For firms, the shock implies a significant fall in their turnover due to the lockdown measures introduced by authorities to prevent the spread of the virus. The turnover reduction together with the existence of fixed costs translates into an increase in firms’ liquidity needs. Firms may cover part of these needs by using their liquid assets or by resorting to the undrawn amounts in their credit lines, but in many cases these buffers will not be large enough considering the size of the shock. Therefore, firms will try to cover their remaining liquidity needs by resorting to fresh borrowing. The result will be an increase in credit demand against the background of a possible contraction in credit supply. The severity in firms’ liquidity risks depends on the amount and composition of liquidity shortfalls and the buffers firms have to cover them.
Inflation developments  Dear Members of the Press, Having summarized the current global conditions, I would now like to share my evaluation of inflation developments in Turkey that occurred in the last quarter. In the third quarter of 2010, consumer prices and the annual inflation rate went up to 1.15 percent and 9.24 percent, respectively (Figure 6). This rise in inflation can be attributed to the sharp increases in unprocessed food prices. Meanwhile, the decline in annual services inflation and the positive outlook in prices of staple goods continued; and the main trend of inflation maintained its course consistently with the medium term targets. Thus, rates of quarterly change in all sub-categories remained well below the average figures of past years with the exception of food prices (Figure 7). In the third quarter, food prices recorded a sharp increase driven by unprocessed food prices. Thus, the contribution of food prices to annual inflation reached 4.2 percentage points (Figure 8). Unprocessed food prices, which saw sharp slumps in the second quarter, showed substantial increases in the third quarter, bringing annual unprocessed food prices inflation to the historically highest level of 28.74 percent (Figure 9). While fresh fruits and vegetables prices became determinant; the persisting surge in meat prices became another factor influencing the rise in the group prices. At this point, I would like to underline that the fluctuating course in unprocessed food prices increases the volatility of consumer inflation and thus creates significant forecast uncertainty.

By contrast, monetary tightening may be implemented at an earlier stage, should the recovery in economic activity turn out to be faster than expected. The weakness in the global economic outlook not only delays recovery in external demand but also leads to continuing expansionary monetary policies across developed economies, which in turn fuel domestic demand through an acceleration of capital inflows to emerging markets. Should capital inflows continue, the divergence in the growth rates between domestic and external demand is likely to intensify in the forthcoming period. Additional policy instruments, other than the short-term policy rates, would be needed to curb risks emanating from this channel. In this respect, should the disparity between domestic demand and external demand continue and be accompanied by rapid credit expansion and deterioration of the current account balance, all to lead to financial stability concerns, it would be necessary to utilize other monetary policy instruments such as reserve requirement ratios and liquidity management facilities more effectively. Food and commodity price inflation has accelerated recently. The aggregate demand is not yet at a level to exert inflationary pressures. Along with this, the strength of the Turkish lira limits the pass-through from food and commodity inflation to core goods and services inflation. However, the potential second-round effects continue to pose a risk, if increases in food and commodity prices persist.