samchain/econo-pairs-v1 huggingface dataset:
BIS Review 55/1997  -4-  the banking sector. But it can also bring new risks if the banks do not use their new freedoms well - in particular if they do not develop the credit skills and risk management techniques which are required in the kind of lending boom that may develop after deregulation. 17. The pressures on the existing banks is increased if liberalization also allows new entrants into the market. Competition in some Asian economies has already intensified as a result of the granting of new domestic banking licences and more liberal policies on the admission of foreign banks. The need to meet WTO obligations will give further impetus to this process. But while the long-term impact on the efficiency of the banking system may be favourable, the short-term impact can be to narrow interest margins and erode franchise value. This can drive the local banks to take on more high risk business. 18. I should stress, however, that the answer to this dilemma is not to stop or reverse the process of deregulation. There are examples around the region of bad debt problems embedded in banks which are either owned by the government or, even if they are privately owned, have been granting policy loans on behalf of the government. Such banks should be encouraged to develop their own credit judgment in order to play an effective role in the process of credit allocation in the economy. So liberalization is the right approach.

For example, after rising at a 3.25 percent annual rate during the second half of 2009, there has been a progressive slowing – to a 2.75 percent annual rate during the first half of 2010 and, most likely, to an even slower rate when the third-quarter real gross domestic product (GDP) figures are released at the end of this month. With demand growth barely keeping pace with firms’ ability to increase productivity, job creation has been too weak to significantly reduce unemployment, which stands today at 9.6 percent. And, as is typical in such circumstances of considerable slack, the rate of inflation has declined. Viewed through the lens of the Federal Reserve’s dual mandate – the pursuit of the highest level of employment consistent with price stability, the current situation is wholly unsatisfactory. Given the outlook that the upturn appears likely to strengthen only gradually, it will likely be several years before employment and inflation return to levels consistent with the Federal Reserve’s dual mandate. Why are we experiencing this soft patch now? There are several reasons:   As is typical for the early stages of a recovery, the economy over the past four quarters has benefited from a strong inventory cycle. The swing in inventories from liquidation back to restocking contributed about 1.75 percentage points of the 3 percent growth of real GDP over that period. But this effect is now petering out.   The growth impulse from the 2009 fiscal stimulus package is beginning to wane.
My colleague Lars E. O. Svensson has, for example, claimed that unemployment has been unnecessarily high since the mid-1990s because monetary policy has not been used to a sufficient extent to counteract shocks that have pushed down inflation.3 It is of course important to determine what the situation was with regard to resource utilisation before the financial crisis in order to be able to assess the level that unemployment should eventually fall to. But this is not the issue that I intend to focus on today: my focus  3  See the paper “The possible unemployment cost of average inflation below a credible target” or the speech “Monetary policy and inflation: monetary policy is too tight”, 16 January 2013. BIS central bankers’ speeches  5  here is instead on the issue of how economic policy could be used more effectively to stabilise business cycle fluctuations in the future despite the risks to financial stability. Limited stimulation from fiscal policy In contrast to the situation in many European countries and the United States, there was a significant surplus in public net lending in Sweden when the financial crisis began. In the euro area and the United States, public net lending as a percentage of GDP had shown an average deficit of just under 2 per cent during the 10 years before the crisis.

To a certain extent, these high growth figures were of course a natural consequence of the major fall in GDP in late 2008 and early 2009. But, in contrast to many other countries, GDP in Sweden also began to exceed its pre-crisis level relatively quickly (see Figure 1). BIS central bankers’ speeches  1  Figure 1. GDP in Sweden and abroad Index, Q4 2007=100 106  106 UK Euro area  104  104  USA Sweden  102  102  100  100  98  98  96  96  94  94  92  92 07  08  09  10  11  12  13  Note. Seasonally-adjusted data Sources: Statistics Sweden and national sources. However, despite the relatively favourable development of GDP, it seems that unemployment has become entrenched at a high level. Initially unemployment increased less than we expected given the substantial fall in GDP – it peaked at 9 per cent in early 2010 – but since then it has fallen no lower than 7.6 per cent (see Figure 2). In my view, this is a level that is much higher than what can be considered a long-run sustainable unemployment rate.1 Figure 2. Unemployment in Sweden Per cent of labour force 9  9 Average 1999-2012 Unemployment  8  8  7  7  6  6  5  5 05  06  07  08  09  10  11  12  13  Note.
Here the effect of the far-reaching international financial reform implemented over the last decade should be emphasised. This reform, along with the various economic policy measures adopted during the crisis, is helping to mitigate and manage these risks. In fact, so far, the financial system has mitigated – rather than amplified – the impact of this crisis. This should serve as a reminder of the importance of having a solid banking sector, backed up by prudent global regulatory standards. It should also serve to emphasise the importance of the response to the crisis being as coordinated as possible at international level, something that the Basel Committee on Banking Supervision (BCBS) has been working on since the start of the crisis. This is the only way of ensuring an effective response and avoiding the collateral damage, in terms of financial fragmentation, that would be generated by an uncoordinated isolated response. However, this initially positive diagnosis must not lead to complacency. As we are all well aware, the magnitude of the shock is huge. Also, its duration is uncertain, as the emergence of fresh outbreaks of the virus in practically every country in the world has shown. And, of course, we know that the ultimate impact on the banking sector will largely depend on the scale and duration of the economic crisis generated by the pandemic, and on how effective economic policies are in reducing its impact on households and businesses, as was perfectly illustrated by the vulnerability exercise published by the ECB in July.

As such, there is a great need for policy coordination among them to ensure an orderly supply of global liquidity. In the worst-case scenario, the multi-polar system could be more unstable especially during crisis periods. This is because the reserve currencies are close substitutes among themselves. As such, deterioration in the financial position of one reserve-issuing country could lead to severe capital flight, causing volatility in both exchange rates and asset prices. At this point, it is difficult to foresee if the management of global liquidity in the multi-polar system would be easier or more difficult than the current system. 8. As the multi-polar system is not immune from capital flow volatility, I would like to make a brief comment on recent IMF framework on capital flow management measures. While we support the work of the IMF in conducting empirical study on country experiences in managing surges of capital inflows, we do not support any rules-based approach in dealing with capital flow issues. Policymakers should be able to respond to such challenge in a pragmatic rather than rules-based manner. 9. Let me finish my talk with some comment on the SDR. In theory, there are many good reasons to enhance the role of SDR as one of its distinct advantages is the possibility of managing global liquidity without affecting the value of currencies in the basket. In addition, the basket also has the diversification advantage as the system will be less exposed to shocks in any of its constituent economies.
Over time, the phasing in of petroleum revenues will lead to restructuring and the transfer of resources from the exposed to the sheltered sector. Fourth, the response patterns in stabilisation policy function in a different way than previously. In the past, it was generally understood that high wage growth and overheating of the economy must be met by fiscal tightening. Today, with the fiscal guideline and inflation targeting, it is monetary policy that is tightened to a greater extent in such a situation. The burden of stabilisation policy is thus at times transferred to the internationally exposed sector. Public expenditure grew by 7% from 2001 to 2002. This is considerably higher than the growth in value-added in the private sector of the mainland economy, which is estimated at around 4%. Real growth in public consumption is estimated at 1¾%. In other words, there will only be moderate growth in the production of public services even with a sharp increase in central government allocations. According to the National Budget, there will be virtually no growth in public consumption this year. This is because the cost of producing public services is rising substantially, to some extent reflecting the very high level of wage growth in the public sector. There have also been substantial increases in transfers to the household sector through our social security system. The room for public consumption is influenced by the outcome of wage settlements.

Earlier, the krone was devalued in response to high wage growth, which contributed to veiling the effect of relatively high wage growth on manufacturing industry’s competitiveness. With an inflation target, monetary policy has become forward-looking. The high pay increases awarded in last year’s wage settlements therefore engendered expectations of higher interest rates. This led to an appreciation of the krone. Manufacturing industry is thus faced with a double burden: high wage growth and a strong krone. Over the last 30 years, manufacturing has been scaled back in waves, particularly in the years between 1977 and 1987. In the years leading up to the periods of contraction, profitability in the manufacturing sector deteriorated. It can take time for such a deterioration to translate into lower output and employment. But when the turnaround does occur, it tends to be swift and pronounced. It now appears that a new period of downscaling is under way. Several factors point to this. First, a trend analysis suggests that manufacturing employment will decline in the years ahead. This is partly related to an expected decline in petroleum investment and somewhat higher productivity growth in manufacturing than in other industries. Second, manufacturing costs have increased sharply since 1988 as a consequence of high wage growth. The appreciation of the krone since the summer of 2000 has amplified the deterioration in cost competitiveness. Third, as a result of the fiscal guideline, the internationally exposed sector is exposed to additional pressure.
While these constraints and challenges may weaken the effectiveness of counterparty discipline, they are not fatal constraints. If individual dealers to a very large hedge fund each operate with adequate knowledge of the risk profile of the fund, if they each make conservative judgments about their potential direct exposure to the fund in a stress scenario, if they limit the overall exposure of the firm as a whole to the broader market distress that might accompany that failure of a major hedge fund, if they compensate for the uncertainty in making these judgments by charging appropriate risk premia or building in a greater cushion against adversity, and if the supervisory constraints on the core institutions adequately offset the moral hazard that comes with that relationship, then the financial system as a whole will be less vulnerable to distress in the hedge fund sector. These are exacting conditions, but they are not unachievable. And we all have an interest in encouraging progress toward that objective. Implications for policy and risk management What are the implications of these challenges for central banks and supervisors? The changes in the financial system we’ve seen over the past decade don’t change the principal objectives of policy - to ensure that the core financial institutions maintain an adequate cushion of capital in relation to risk, and to build greater resilience into the infrastructure that supports the financial markets.

While this issue is at the heart of risk management challenges for the provision of credit more broadly, the rise in the relative size of the private leveraged fund sector and the rise in the importance of new derivative financial instruments may complicate the design of policies and risk-management practices to counteract these traditional frictions. Virtually all types of credit markets suffer from informational problems - consider the challenge faced by a bank in assessing the risk associated with lending to a small unrated company. But the complexity of new financial products, the rapidity with which positions can change, and the lack of a long time series of historical relationships seems likely to enhance these problems for leveraged institutions operating in new markets such as credit derivatives. Funds typically deal with several different banks and investments banks. The desire to maintain the confidentiality of their trading strategies has traditionally led firms to be quite opaque to outsiders and reluctant to give their banks sufficiently detailed information on a real time basis about the risk profile of the overall fund. Without that information, individual dealers or banks have a difficult time evaluating the probability of default of a leveraged counterparty and the potential covariance with other positions of the firm. Individual firms may also see only a piece of the hedge fund’s positions, and if their direct exposure to the individual fund is small, may perceive less need to worry about the overall risk profile of the fund.
Without the confidence that we will do that, expectations of economic downturn will prompt the financial system to become risk averse; to hoard capital; to de-risk; to rein in. To create the very amplifying effects on the real economy we are trying to avoid. A truly countercyclical approach means banks, for example, know their capital buffers can be depleted as they take impairments; Households can be confident that our rules won’t choke off the refinancing of their mortgage. 42  And insurance companies know their solvency won’t be judged at prices in highly illiquid markets. We must be just as bold in loosening requirements when the economy turns down as we are in tightening them in the upswings. 43  Boldness in the upswing to strengthen the system creates the space to be bold in the downturn and allow that strength to be tested and drawn on. Macroprudential fortune favours the bold. Conclusion  To conclude, boldness is needed in general to set policy while the practice is so far ahead of the 44  development of the theory – the playbook. We are many years from having rules to guide macroprudential policy. But the absence of the playbook doesn’t excuse an absence of clarity about what is guiding macroprudential policy setting. The principles I have outlined aim to provide a little more clarity; to begin to fill in the ‘how to’ guide for macropru.

Uniformly, every institution that has engaged in internal testing also has indicated that this process indeed located further Year 2000 problems that needed repair. Thus, in spite of extensive repair efforts, some problems were not isolated until internal future date tests were performed. This underscores why every organization must build in a program of rigorous internal testing as a part of its Year 2000 project schedule, even for applications designed to be Year 2000 compliant. Moreover, the internal testing process cannot wait until the last minute. Experience has shown that testing programs overall typically consume over 50% of the resources allocated to Year 2000 projects. External tests are conducted by an institution to assess the risks in repaired and internally tested systems where they interface with systems of other institutions. External tests are particularly important where the interface is proprietary or specific to the particular business activity and the dependency on the external interface is critical. For the most critical systems, in particular payment and settlement systems, external testing must be done, and should be done carefully. External tests can take a variety of forms. Point-to-point tests verify the ability of an institution to transmit and receive data with another entity. End-to-end tests take this one step further and verify the ability of an institution originating a transaction to transmit test data to a recipient through an intermediary which correctly performs business functions using that data. End-to-end tests are particularly appropriate for real-time, interactive applications.
During the 1700s and 1800s, the earlier forms of captives were mutual insurers, formed together by firms from a particular industry that shared similar exposures. Today, mutual models are still very much alive. Their contributions to global premiums have risen in recent years after years of decline, and they include captives set up as mutuals. The takaful industry is also thriving and poised to continue growing, in large part driven by growth in Asia. The overlapping markets of the mutual, captive and takaful industries, is likely to provide an important impetus for the wider use of group captives among mid-sized and smaller companies. This region is especially well-placed to harness this potential, given the vibrance of SMEs and fast growing takaful market. Southeast Asia alone contributes almost 30% to global takaful contributions, and this offers an opportunity, as Malaysia has long sought to develop a facilitative regulatory environment to drive an innovative, competitive and sustainable growth of Islamic finance. Second, technology will be a key driver and opportunity for new captive models. Technological advancements are already driving the growth of captive insurance business due to the new risks that businesses face. As an industry founded in response to an inflexible insurance market, the history of captives is very much intertwined with innovation. The first captive can itself be seen as a disruption to the market! Captives can be expected to leverage on new technologies to modernise legacy processes and systems, strengthen risk management capabilities and capture efficiency gains.

So much so, that we actually formed a taskforce to look into that possibility for ASEAN. However, that seminal work reached a very firm conclusion, which was accepted by regional policymakers. The conclusion was that ASEAN was not ready for a currency union, and will not ready for a long time to come. It was therefore not a goal that ASEAN should pursue as other forms of integration provided much more opportunity for increasing regional economic welfare. What should the role of financial integration be within ASEAN? Essentially, it is as a catalyst for economic growth. Finance is the bridge that will facilitate the movement of trade and investment flows across the borders of regional economies. This is recognised and accepted by all ASEAN economies. However, given the reality of the differing stages of financial development, and the risks associated with premature financial openness, the outcome has been the adoption of a flexible approach that enables its members to pace their integration based on their state of readiness. For example, in March 2015, the ASEAN Banking Integration Framework was launched. It adopts a bilateral approach to banking integration. Countries can negotiate reciprocative agreements that would allow Qualified ASEAN Banks to operate in each other’s territory. The Financial Integration Blueprint also recognises the risks of financial integration as well as the need to ensure that all sectors of society benefit from financial integration.
Does that forecast make the rate hike unnecessary? There are two answers to this. First, the rate hike is a part of the forecast, and if it is not implemented, the forecasted inflation path will no longer be the most likely one. BIS central bankers’ speeches  5  Second, the inflation outlook is uncertain and, in light of current inflation expectations, it would be imprudent not to take action. It has also been asked whether there is a transmission mechanism in place at present. Do higher interest rates reduce inflation? It is a bit paradoxical to say that interest rates have little impact and then make a terrific fuss about them. Be that as it may, the transmission mechanism is certainly damaged at the moment, and it was somewhat damaged before the crash as well. But there is a transmission mechanism in place. The weight of non-indexed, variable-rate loans has increased. Low deposit rates have fostered a shift towards investment in real estate in the recent term, and some have expedited purchases of consumer durables. Finally, there is some impact on the exchange rate in spite of the capital controls, both because of decisions by owners of offshore krónur on whether they expatriate their interest and because domestic residentsare subject to a repatriation requirement but not a conversion requirement. It has been asked why we are raising interest rates when there is no economic overheating and investment is at a minimum.

We also stated that, in view of the economic situation and outlook, the current interest rate level appeared broadly appropriate for the next several months. In other words, significant new developments would be required for the MPC to raise interest rates – or lower them – at upcoming rate-setting meetings. I notice that the bond market seems to have realised the implications of this, as yields at the longer end of the market have not risen since the last interest rate announcement. But looking further ahead, it should be clear to everyone that if GDP growth forecasts materialise in coming  BIS central bankers’ speeches  3  years and the slack in the economy disappears, the monetary slack manifested in a negative real policy rate of over 1% must be removed over time. So where do we stand with respect to the monetary policy stance? Is monetary policy lax or tight? Chart 3 shows the Central Bank’s real interest rate measured by the effective policy rate and twelve-month inflation. The chart shows that, in spite of two recent rate hikes, the real interest rate will be lower in Q4/2011 (assuming unchanged interest rates in December) than at any time since the financial crisis struck, with the exception of Q1/2009, when inflation soared up above 18% and a dramatic disinflation episode was in the offing. Chart 3  Chart 4  But what about the Taylor rule, shown in Chart 4? There is a significant deviation at the moment – one that perhaps requires some explanation.