samchain/econo-pairs-v1 huggingface dataset:
Rosanna Costa: Opening address - IV meeting of heads of financial risk management in central banks Opening address by Ms Rosanna Costa, Governor of the Central Bank of Chile, at the IV meeting of heads of financial risk management in central banks, Santiago de Chile, 26 April 2023. *** Good morning, I would like to extend a warm welcome to all participants at this Fourth Meeting of Heads of Financial Risk Management in Central Banks organized jointly by the Center for Latin American Monetary Studies, CEMLA and the Banco Central de Costa Rica, Banco de España, Banco de México and Banco Central de Chile. This initiative, whose first version was launched in 2020, has been consolidated as a forum for analysis and reflection to analyze current and emerging challenges of financial-risk management at central banks. Throughout these meetings, topics related to the governance of risk management and financial risks have been addressed from different perspectives, in a context strongly dominated by the challenges that the Covid19 pandemic has posed. Every organization is subject to numerous contingencies that may hinder or prevent the normal fulfillment of its functions. In particular, institutions such as central banks, whose mandate has important effects on the economy and social welfare, must also consider not only their own risks when making decisions, but also broader risks in the financial sector and the macroeconomy in general.

Because of the additional stress that central bank balance sheets have undergone, in terms of the size and the number and magnitude of new risk factors that must be managed, as I have already mentioned, there is a need to revisit the tools we have used to assess the resilience of our portfolios. To this end, a session will be held to discuss the design of stress tests for balance sheets and how this tool helps institutions to articulate risk tolerance and to assess the capacity of portfolios to deal with different negative scenarios, ensuring that banks maintain the capacity to manage policy measures if necessary. We will also be discussing risk governance, as it is essential to have a solid structure that clearly defines roles and responsibilities. Since the risk management governance structure may differ from one country to another, we want to learn about the construction and implementation of the models, the institutional arrangements within the organization that allow the dissemination of financial risk management objectives and the role played by the lines of communication with the bank authorities in order to specify guidelines and directives to address this issue. Finally, issues related to sustainability and climate change have been incorporated into the balance sheet risk management framework of some central banks. We therefore want to review and understand how central banks' risk is affected by climate change through channels that include the credit risk of their own assets and through their impact on the real economy.
If the authorities determined that a public equity injection was necessary in order to preserve stability, government could be authorised to provide the support, but with a right to claim back the eventual cost, if any, from an increased “insurance” levy on the banking system over a period of years beginning after the crisis had clearly passed. Under that kind of regime, more of the cost of banking system failures could fall on the shareholders of banks generally rather than  28  For example, Philipp Hildebrand (Vice-Chairman of the Governing Board of the Swiss National Bank) on 5 May 2009, in an interview with Handelsblatt, a German daily newspaper. 29  “The pursuit of financial stability”, LSE lecture by Governor George, Bank of England Quarterly Bulletin; and Mervyn King’s September 2007 letter to the Treasury Select Committee, “Turmoil in financial markets: what can central banks do?”. BIS Review 67/2009  13  on the public pursue. Banking sector shareholders collectively would benefit ex ante from the provision of the insurance to the system as a whole; and ex post from support given to any particular firms. The authorities would, in effect, loan their capacity to fund and absorb risk to the banking system for a temporary period during the height of the crisis, but would eventually be repaid by the system. Banks could take that into account in planning their businesses; and might, arguably, have an incentive during peacetime to monitor the threats which their peers posed to stability.

But this crisis has exposed a gap in thinking about what principles should guide any Market Maker of Last Resort or Capital of Last Resort interventions by the authorities. I will not remotely have solved that problem today, but I hope I can prompt others to help clarify thinking and practice in those areas in the years to come. Doing so will be important to developing new “rules of the game” for what must in the future be a more resilient global financial system. BIS Review 67/2009  15
There are examples of heavily indebted countries that have stopped the snowballing process before it led to default. The banking crisis in the early 1990s left Sweden with a substantial fiscal deficit. Lower tax revenues, increased social security expenditure and rescue measures for banks brought the deficit close to 11 per cent of GDP in 1993. Sweden’s public debt rose to 80 per cent of GDP. Fiscal consolidation continued for several years and resulted in stabilisation of government debt and provided room for its eventual reduction. The  13  See Michael Hoel and Jan F. Qvigstad (1986): “Statsgjelden – et problem når veksten er lav og renten er høy (Public debt – a problem when growth is low and interest rates high)”, Sosialøkonomen, and Unni Larsen and Bente Støholen (2010): “Public finances – the difficult path back to sustainable levels”, Economic Commentaries 2/2010, Norges Bank. BIS Review 123/2010  7  UK and Finland conducted a similar process in the 1990s. The Nordic countries in crisis at that time learned their lesson and have kept public finances in order during this crisis. The euro area countries are in a special position. They have a common currency and a common monetary policy. Governments raise loans in the area’s single currency. Monetary policy – management of the euro’s value – is a common policy, conducted by the European Central Bank with a view to maintaining price stability. The countries have common guidelines for fiscal policy, but as mentioned earlier, these have not been followed.

When a loan matures, it may therefore be tempting for a government to renege on its promise to repay the  3  See Carl August Fleischer (2005): Folkerett (International law). 4  Eduardo Borensztein and Ugo Panizza (2009): “The Costs of Sovereign Default”, IMF Staff Papers, Vol. 56, No. 4. BIS Review 123/2010  3  debt. In economic policy this is known as a time-inconsistency problem. It can be profitable to make lofty promises, but turn your back on them once you have cashed in the benefits. Why do countries not renege on commitments in stable times? We observe that they do honour their commitments, but the economic literature does not provide us with a good explanation for why this is the case. Countries want to preserve a good reputation. Governments that default do so in adverse times, but only after sharp fiscal retrenchment to avoid that fate. 3. Countries default more frequently than we believe  It is no new phenomenon that some countries live beyond their means and fail to settle the bill. History shows that many countries have defaulted on sovereign debts. This has occurred during emerging phases. From 1500 to 1900, Spain defaulted on its sovereign debt 14 times. 5 France defaulted nine times in the same period, while the states that later became Germany defaulted six times. England also defaulted once, but as far back as in 1594. (See Chart: Sovereign debt default.)
It is noteworthy to me that the employment cost index has risen only 2.1 percent over the past four quarters and has shown no acceleration (Figure 7). Fourth, inflation expectations remain well-anchored (Figure 8). This is critically important because inflation expectations are an important driver of actual inflation outcomes. Taking into account the current stance of monetary policy, I anticipate  BIS central bankers’ speeches  5  that inflation will decline to slightly below our 2 percent long-run objective over the next few years. So what does this all imply for monetary policy? I currently anticipate that the Federal Reserve’s federal funds rate target will remain exceptionally low – that is at the current level – at least through late 2014. This policy setting is more accommodative than the setting prescribed by the Taylor 1999 rule discussed earlier.8 Using the Federal Reserve Bank of New York’s current staff forecast, the Taylor 1999 rule – unadjusted for the Federal Reserve’s balance sheet actions – implies liftoff in 2014.9 But this is incomplete because it does not incorporate any adjustment for the Federal Reserve’s balance sheet actions. I estimate that the current balance sheet provides the equivalent of roughly 150 to 200 additional basis points of federal funds rate easing.10 But as time passes, we will come closer to the date when the balance sheet will begin to be normalized. This implies that the amount of stimulus from the balance sheet will gradually lessen over time.

It is hard for domestic monetary policy to offset such effects, both because they are external in nature and because it is unclear how long they will dampen the U.S. recovery. One thing is for certain: Given the effects of banking crises on economic recoveries and the interconnectedness of financial markets, it is imperative that our European partners resolve their banking issues if we are to sustain a prolonged economic upturn. BIS central bankers’ speeches  5  This is not to say that the Federal Reserve has no role to play. Our franchise includes assuring an efficient financial transmission mechanism. For example, everyone acknowledges that small business is the originator of jobs and the incubator of our nation’s prosperity. In addition to wanting to see the whites of the eyes of growing final demand, needing clarity on fiscal policy and wanting regulatory relief, many of the small businesses that Dunk [Bill Dunkelberg] represents – and others that we survey – will need better access to the abundant and cheap liquidity the FOMC has made possible. Small businesses turn to community and regional banks for credit; their credit activity does not move the needle on the dashboards of the megabanks. It is incumbent on the Fed and other bank regulators to reduce the regulatory burdens that are inhibiting – indeed, overwhelming – community bankers whose business it is to lend to creditworthy small businesses. This is a supervisory and regulatory matter, not a matter of general monetary policy.
Assessing the effective degree of leverage in an ever-changing financial system is far from straightforward, and the liquidity of the markets in complex instruments, especially in conditions when many players would be trying to reduce the leverage of their portfolios at the same time, is unpredictable. Excessive leverage is the common theme of many financial crises of the past. Are we really so much cleverer than the financiers of the past? Concerns about the rate at which credit is being created extend to monetary policy. As I said last week in Cardiff, it would be optimistic in the extreme to suppose that the rapid growth of money and credit could be dismissed solely as a positive shock to the demand for money. The spread between interest rates paid by households and businesses and interest rates available in the money market has fallen. This has been one of the factors behind the strength of demand in the UK economy over the past  2  BIS Review 69/2007  year. Despite greater availability of labour, businesses have not expanded employment sufficiently to prevent stronger demand from increasing capacity pressures. Such pressures encourage businesses to raise prices. And that is exactly what the business surveys suggest has been happening. That underlying upward pressure on inflation has in part been hidden by the volatility of domestic energy prices. But it is why we have raised interest rates four times and by 1 percentage point in all over the past year.

chart 3), we can see that, historically, periods of Swiss franc strength have alternated with periods of weakness. The fact that the current Swiss franc strength is proving particularly burdensome for the Swiss economy is due partly to the rapidity of the appreciation, but also to the uncertain economic climate. BIS Review 173/2010  1  Diversification of foreign exchange reserves As you will be aware, our foreign exchange interventions since March 2009 have resulted in the SNB’s foreign exchange reserves expanding to over CHF 200 billion. As we were primarily buying euros, euro holdings accounted for 70% of foreign exchange reserves at one point. In the meantime, we have reduced the euro’s share in the foreign exchange reserves substantially, to 55%. Moreover, we have diversified foreign currency risk further by investing for the first time in Australian and Singapore dollars, as well as Swedish kronor and Danish kroner. Together, these currencies make up 3% of the foreign exchange reserves. The majority of non-euro holdings continues to be in US dollars (25%), Japanese yen (10%), Canadian dollars and pounds sterling. Finally, we have increased the proportion of the foreign exchange reserves that is made up of equities, from 4% back to 10%. This comprehensive repositioning was carried out gradually, and the market had no problem in absorbing it. We were thus able to considerably reduce the risk concentrations in the foreign exchange holdings. An examination of further diversification measures forms part of our annual investment strategy formulation process.
In recent weeks, the perceived likelihood of No Deal has risen sharply as evidenced by betting odds and financial market asset pricing (the UK now has the highest FX implied volatility, the highest equity risk premium and lowest real yields of any advanced economy). In the event of a No Deal No Transition Brexit, sterling would probably fall, pushing up inflation, and demand would weaken further, reflecting lost trade access, heightened uncertainty and tighter financial conditions. Unusually for an advanced economy slowdown, there would also be a large, immediate hit to supply. The Monetary Policy Committee (MPC) would need to assess to what extent that reflects temporary disruption to 2  All speeches are available online at www.bankofengland.co.uk/news/speeches  2  production, with limited implications for inflation in the medium term, or a fundamental destruction of supply capacity because of the abrupt change in the UK’s economic relationship with the EU. As the MPC has repeatedly emphasised, the monetary policy response to No Deal would not be automatic but would depend on the balance of these effects – on demand, supply and the exchange rate – on medium term inflationary pressures. In my view, the appropriate policy path would be more likely to ease than not, using the flexibility in the MPC’s remit to lengthen the period over which inflation is returned to target. But much would depend on the exact nature of No Deal and its impact.

European Central Bank: Press conference – introductory statement Introductory statement by Mr Jean-Claude Trichet, President of the European Central Bank and Mr Lucas Papademos, Vice-President of the European Central Bank, Luxembourg, 2 July 2009. *  *  *  Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference here in Luxembourg. I would like to thank Governor Mersch for his kind hospitality and to express our special gratitude to his staff for the excellent organisation of the meeting of the Governing Council. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia. On the basis of its regular economic and monetary analyses, the Governing Council decided to leave the key ECB interest rates unchanged. The current rates remain appropriate taking into account all the information and analyses that have become available since our meeting on 4 June 2009. The fall of annual inflation rates into negative territory in June is in line with previous expectations and reflects mainly temporary effects. After a return to positive inflation rates, we expect price developments to remain dampened over the policy-relevant horizon. Recent data releases and survey information provide further indications that economic activity over the remainder of this year is likely to remain weak but should decline less strongly than was the case in the first quarter of 2009.
11  There may in any case be interactions between the two . And even when there aren’t, their effects can be quite similar and therefore difficult to distinguish from one another. To generalise, increases in trade and technological innovations both tend to improve overall well-being but, by producing sharp shifts in relative prices, they can also make some people worse off, at least for a period of time. The early classical economists certainly recognised the parallels between technological improvements and 12  free trade. Aware too that the public tended instinctively to support the former , they used these parallels to persuade people of the virtues of the latter. Here, for example, is lawyer and proto-economist Nassau 13  Senior, writing in 1828 : “If we should think it madness to prohibit, or to tax, the use of an improved steam-engine, because it must be injurious to those employed in raising coal, what pretence is there for prohibiting or taxing foreign ribands or velvets because their importation would be injurious to the English silk-weaver? To prohibit every change which is accompanied by individual injury would be to prohibit every improvement whatever”. This is heavily rhetorical but the question could still be asked today. At least in advanced economies many people are doubtful about the benefits of trade (a Pew Research survey in 2014 found that only 28% thought it helped to lower prices and thereby improve real incomes).

This was important, because it meant that, in principle, a country could have lower productivity across the board, in the production of every good, and still end up as a net exporter of some of them. But the basic points survive: there’s no reason to suppose that commerce across an international border is any less mutually beneficial than that within a single country; nor is there any reason to view imports as intrinsically bad. Of course, you might feel differently if you happen to be in one of the sectors at a comparative disadvantage. In the mid-1970s, just as the post-war boom in global trade was getting started, the UK’s clothing and textile industry employed over 800,000 people. That’s one in every 30 jobs. As markets opened up international prices fell steeply and, over the following thirty years or so, the domestic industry all but collapsed. Output fell 65%, employment by 90%. It now accounts for one in every 370 jobs. Not all of this reflects the effects of greater trade. Part of the post-war decline in textile employment – employment in manufacturing in general, in fact – reflected relatively rapid productivity growth, not cheaper imports. If it takes progressively fewer people to make the same amount of stuff you might expect employment to fall. Over time the share of jobs in manufacturing has fallen in every developed country, including in those regarded as industrial powerhouses, such as Germany and Japan.
4  BIS Review 129/2009  I will present some of the key findings of this survey, as it provides a comprehensive picture of the financial situation of SMEs in the euro area and their access to financing over the first half of 2009. The survey evidence provides input into the discussion on constraints in the access to finance of firms, and SMEs in particular. At the same time, given that this is the first time the survey has been conducted, the results of the survey should be interpreted with caution. I will start with the turnover and profit situation of SMEs in the first half of 2009. Thereafter, I will turn to the most interesting results of the survey in the current economic situation, namely the evidence on SMEs’ access to finance and their experience when applying for a bank loan. Last but not least, I will briefly add some evidence on the heterogeneity across euro area countries. Let me start with the financial situation of firms in the euro area. Overall, SMEs’ assessment of their financial situation is more negative than that of large firms (see Chart 7). This suggests that SMEs were more strongly affected by the crisis up to the first half of 2009. For instance, a higher net share of SMEs than of large firms reported that their turnover had decreased. Turnover and cost developments had a negative impact on firms’ profits.

Beyond regulatory capital requirements, euro area banks need to stabilise their earnings streams so that organic capital growth can be restored, solvency ratios can be safeguarded and asset growth can gradually resume. As I have already mentioned, in order for credit markets to recover, it is not only credit supply that will need to expand, but also – and possibly to a larger extent – credit demand, which depends on several factors, including GDP growth, unemployment and inflation, which in turn affect the expectations of banks’ customers. As regards the role of monetary policy, the exceptional circumstances related to the financial crisis led to the introduction of extraordinary measures. Our aim was to support the liquidity in the financial system and (indirectly) to enhance the flow of credit to the private sector, above and beyond what could be achieved through policy interest rate reductions alone. In particular, we have fully accommodated banks’ liquidity needs at fixed interest rates, we have further expanded the list of collateral that we accept in our operations and we have provided liquidity for longer periods, of up to one year. Through such one-year refinancing operations, we provided € billion in June and an additional € billion two weeks ago. In addition, we have provided liquidity in foreign currencies, notably the US dollar, to address the needs of euro area banks to fund their dollar assets. Finally, we have been buying covered bonds directly since July this year, as this market segment is an important source of funding for banks.