samchain/econo-pairs-v1 huggingface dataset:
Finally, if economic shocks extend only to the home country and joint monetary policy is insufficient to absorb the shock, labour market flexibility could take the place of nominal exchange rate adjustment once the domestic currency has been abandoned. Consideration of these criteria based on historical data does not produce an unequivocal answer about Iceland’s suitability as a member of the eurozone. The Icelandic business cycle has been rather weakly linked to that of the euro area – and actually, to most other regions and countries as well (see Chapter 10). Iceland’s export sector differs in structure from that in most other industrialised countries (see Chapter 4). On the other hand, the economy is quite open to trade and the euro area is by far Iceland’s largest trading partner (see Chapters 4, 8, and 20). In addition, the domestic labour market is quite flexible, although downward flexibility of nominal wages has not been tested much and available data suggest that it has been relatively limited to date (see Chapter 14). The OCA theory has many shortcomings and does not take account of a number of potential benefits of participation in a large currency area such as the eurozone. Historical experience also suggests that currency unions can be successful even if the participating countries do not fulfil the OCA criteria at the outset (see Chapter 5). In this context, the following points are worth noting: •  Research indicates that currency union membership will stimulate trade with the currency union without reducing trade with other countries.

There’s always room for improvement and, at the ECB, we have called on Heads of State to strengthen governance procedures further, for instance by making sanctions more automatic in cases of non-compliance so as to prevent governments succumbing to the temptation of being excessively lax. This was seen in 2005 when the core countries failed to meet their deficit commitments and the Commission and the European Council agreed to change the rules so as not to sanction these countries. But the lesson whereby maintaining a monetary union is only possible if divergences remain within a moderate range must also be taken into  2  BIS central bankers’ speeches  account by the national governments of each of the euro Member States, because the policies that may prevent the emergence of these imbalances or help to correct them are, for the most part, the responsibility of national governments. Many tasks lie ahead for all the euro area countries in contributing to reducing divergences. But it is our duty to pay more attention to what Spain should do. Our country reacted a year back when the sovereign debt crisis broke, and it showed resolve in adopting far-reaching measures to correct our economy’s imbalances without resorting to aid from its fellow members. It was able to do so, firstly, because its divergences were not overall as great as those of the countries that have had to apply for external financial assistance.
As an example, an increasing number of trade repositories are collecting valuable transaction data. However, the full benefit of these data can only be realized if we can aggregate this information across the trade repositories, and if regulators have access to the data needed to support their respective mandates.7 The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have produced an analysis of some of the foundational steps that need to be taken.8 Again, implementing these steps will take time and will need our continued attention. 5  See FSB and IMF (2009) The Financial Crisis and Information Gaps. Report to the G-20 Finance Ministers and Central Bank Governors. 6  FSB and IMF (2009), recommendation no. 9: “The FSB, in close consultation with the IMF, to convene relevant central banks, national supervisors, and other international financial institutions, to develop by end 2010 a common draft template for systemically important global financial institutions for the purpose of better understanding the exposures of these institutions to different financial sectors and national markets. This work should be undertaken in concert with related work on the systemic importance of financial institutions.

Recognizing this vulnerability, the Group of Twenty (G20) in its 2009 Pittsburgh Summit statement stipulated that all standardized derivative contracts would be moved to central clearing, and that the remaining non-standard derivatives would be subject to higher capital requirements.2 While there will inevitably be a residual share of derivatives that do not lend themselves to standardization, authorities need to continue to work collaboratively to keep this residual share to a minimum. Why is standardization so important? Standardization has advantages in terms of increasing transparency, price discovery and liquidity. Standardization is also important because it allows the derivatives to be centrally cleared in a CCP. Without central clearing, participants have bilateral credit exposures to each of their counterparties. Moreover, they cannot fully assess their credit risk exposures in this framework since there is no information on the other derivative contracts that their counterparties have with other market participants. Central clearing replaces this complex web with a single set of relationships between the firm and the CCP as its counterparty. This allows for netting, so that a firm’s risk is limited to its net exposure to the central counterparty. This both reduces risk and increases transparency. 2  See Group of Twenty (2009) The G20 Pittsburgh Summit Leaders’ Statement. BIS central bankers’ speeches  5  Consequently, members of the CCP have less of an incentive to pull back in periods of stress and this makes the market more resilient.
(c) Committee-based decision-making: Decisions on monetary, macro-prudential and microprudential policy rest with three Committees, rather than any one individual. 43 The Committees themselves vary in size from 9 to 11 people. They comprise a mix of Bank of England “internals” and “external” experts. Decisions are made either by majority voting (MPC), consensus (PRA) or by consensus with a provision for majority voting (FPC). (d) Transparency and accountability: The deliberations and decisions of each Committee are subject to public scrutiny. The minutes of MPC and FPC policy meetings are published. All three Committees produce periodic reports, tabled in Parliament, on their actions and analysis. 44 And members of each Committee appear regularly before Parliamentary Committees. There is individual accountability, as well as collective responsibility, for policy. These institutional features are no historical accident. Each serves as a constraint on the policy discretion exercised either by the Bank as agent or by its principal Parliament. The 3M  39  For more on the FPC, see Tucker, Hall and Pattani (2013) and Murphy and Senior (2013). 40  Bailey, Breeden and Stevens (2012). 41  Debelle and Fischer (1994). 42  For example, for the MPC the remit specifies that the primary objective is to maintain price stability and, subject to that, the secondary objective is to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment. 43  Although a single individual – the Governor - chairs all three committees.

Indeed, we are now in a world that is fundamentally different, a world that calls for a greater appreciation of the changes that need to be made to the systems and structures, to the institutional arrangements and mechanisms, and to the manner in which we operate in this new environment. The international dimension of these changes calls for an outcome in which the international financial system is less prone to disruptions and failures and in which economic progress is a shared prosperity among nations. Globalisation has had a deep impact on the way modern economies function. The benefits of globalisation have accrued to diverse communities and regions but it has also brought with it significant risks. While the Asian Crisis showed the effects of globalisation, it also showed that Asia was able to rapidly rebound and continue to benefit from increased international trade and financial flows. The rapid restoration of stability and resumption of growth had confined the crisis to Asia. As the current financial crisis is translated into an economic crisis, its repercussions are now being felt on a global scale. While the turmoil had its origins in the developed economies, its continued escalation has extended the effects of the crisis to the rest of the world. Economic and financial globalisation thus not only calls for policy responses at the national level but also at the international level.
The Committee has a distinctly individualistic bias, in contrast to the consensus seeking traditions of many other central banks. It includes four external members who are appointed for their expertise, not as representatives of interest groups; and all members are individually accountable for their votes, which are made public with the minutes. Both the markets and the press take a keen interest in the pattern of voting, and members will often find a way to explain their thinking in more detail. All this adds up to a powerful set of incentives for members of the MPC to focus on maintaining price stability; to pay attention to all relevant information; to weigh up the risks; to take timely decisions; and to explain them clearly. Moreover, clarity about the aims of policy and the transparency of the decision taking process give the MPC significant scope to influence the longer term interest rates set by the market. It’s a far cry from previous policy regimes, when the main players faced very different incentives. Prior to 1997 the key decision makers were politicians, who both set objectives for monetary policy and took responsibility for the technical judgements needed to meet them. Politicians can rarely afford the luxury of focussing on one objective to the exclusion of all others. Attempts to win credibility by constraining their discretion, notably through setting monetary targets, were a fairly comprehensive failure. Interest rate decisions have been the subject of some famous tussles between Number 10 and Number 11 Downing Street under successive Governments.

Allow me to take this opportunity to invite you to join this exchange of experiences in one of the aspects that is increasingly relevant to our institutions. The theme of this Conference, Economic Policies, Trade Integration and Sustainable Job Creation, is particularly timely at this current juncture of the world economy. The world remains in an expansionary phase although there are some signs pointing to a gradual change in the global economic landscape. Some of the risks that had been the focus of our attention are beginning to materialise. In particular, we are witnessing a re-emergence of protectionist measures with pernicious effects on international trade. Beyond the impact that this can have on growth in the short term, its potential impact on the diffusion of technological advances and on improving the welfare of individuals is more worrisome. In 3/4  order to preserve the benefits derived from globalisation and technological innovation, it is now more important than ever to work towards a fairer and stronger global trade system. To this end, it is necessary to work on the reform of the rules governing international trade to ensure that all countries compete on a level playing field. But also, and not least, domestic policy-makers have a responsibility to design the right policies for stimulating innovation and job creation, and creating opportunities for all.
On a more practical level, there is no lack of evidence that things can and do go wrong. We have recently seen lack of operational discipline in some financial markets leading to documentation backlogs and to uncertainty over the enforceability of transfer of risks. We see more relaxed lending criteria in the LBO market, increased reliance on potentially illiquid instruments in trading strategies, and questionable quality of some IPO’s. We have seen specific examples of significant downgrades or outright failures such as GM/Ford, AHBR and, more recently, Refco and Delphi. One reaction to these episodes is that they show the market doing its work and are testimony to the effectiveness of market discipline. The fact that the financial system has coped with these problems may well also be testimony to the strengths of that system. On the other hand, might not these episodes be a potential sign that all is not well? The question is: are vulnerabilities mounting, and will they one day crystallise when a bigger shock arrives that the market simply cannot absorb? The fact is, we just don’t know. And that is why we need to be particularly vigilant. Such questions lead me to think about issues relating to liquidity. If a period of market stress materialises, triggered by a sharp snap back in prices, it is critical that the financial system should be able to meet a temporary increase in the demand for cash without precipitating, in the vernacular, a ‘market meltdown’. Liquidity is therefore the focus of my remarks today.

In addition, financial stability, unlike price stability, is not easily summarised by one statistic (inflation in the case of price stability), so we therefore need in any case to look at a range of indicators. What I suggest instead is a slight evolution of the ECB strategy, to achieve a more “integrated” framework. To formalise this approach, one option worth considering could be to renovate and extend the present second pillar into a “financial and monetary” pillar, alongside the economic one. More specifically, let me mention a few examples of variables that could be monitored under this new pillar: Indebtedness of firms and households; Bank balance sheet information, which is useful for assessing the functioning of the bank lending channel (including in a forward-looking way); Indicators of excess risk tolerance and excess credit, which provide information on the risktaking channel; Stock and house prices, which provide information on the asset price channel. This list could be of course modified and completed. In fact, we already monitor many of these variables. The point of having a structured pillar is to formalise this analysis – including on proportionality of our measures – and ensure we have no blind spots. Such considerations would help us optimise the monetary policy toolkit and fine tune it with the numerous tools that central banks have now at their disposal. To some extent, we have already crossed that bridge in adapting existing instruments in order to take financial stability considerations into account.
Specifically, the ECB expects dividends and share buy-backs to remain below 15% of cumulative 2019-20 profit and to be no higher than 20 basis points of the CET1 ratio, if this is lower. These measures provide more flexibility than the earlier recommendation. This is warranted by a slight decline in the macroeconomic uncertainty compared with the spring and by the fact that the core projection scenarios are close to those used in the vulnerability analysis carried out by the ECB in the first half of 2020 which, as I indicated above, confirmed the resilience of the European banking sector. In any event, a prudent approach is still required, considering that the impact of the pandemic has not yet been fully reflected in banks’ balance sheets, that banks continue to benefit from various public support measures and that credit impairment arises with a time lag. The revised recommendation aims to safeguard banks’ loss-absorbing capacity and to provide support to the economy. The recommendation will remain valid until the end of September 2021 when, provided there are no materially adverse developments, the ECB intends to lift the recommendation and return to assessing banks’ capital and dividend distribution plans based on the outcome of the normal supervisory cycle. Post-crisis, banking sector resilience is key Once the crisis comes to an end and its effects have receded, we will also need to ensure that the banking sector remains resilient, especially to any new risks that may emerge. In this regard, I wish to make a reflection on global banking regulation.

It means being able to integrate and think critically when there are only pieces of information. It means being able to provide breadth of perspective anchored by depth. For us in Bank Negara Malaysia, mastery of economics and finance is what helps us differentiate the ‘signal’ and the ‘noise’ in economic policymaking and financial regulation. It also helps us to differentiate the symptom and the root cause in the supervision of financial institutions. It also means learning the lessons from history and avoiding the same mistakes within the context of our operating environment. Thus, I encourage you to focus and follow your curiosity in exploring the depths of your field of study. There is no end to learning, and may your thirst for knowledge drive you on. Have the humility to recognise that we never stop learning. As a Chinese proverb goes, “Learning is a treasure that will follow its owner everywhere.” Second, on adaptability. Charles Darwin famously reminded us that, “It is not the strongest of the species that survives, nor the most intelligent, it is the one that is most adaptable to change.” This means one must be able to constantly learn new things. One must also unlearn things that have become outdated. No one can really be certain on the precise impact of automation, artificial intelligence and the new industrial revolution 4.0 on future jobs and the complexion of society.
In a more subtle way, there have also been changes in the culture of these institutions, with greater emphasis now being placed on good governance and on the “purpose” of certain activities or the “service” provided to clients. This strengthening of the financial system’s resilience is a major source of confidence at the start of 2019, in an environment marked by mounting geopolitical uncertainties and slowing economic growth. But it is not time for complacency. One of the core challenges we face, particularly in the euro area, is preventing and limiting the impact of new potential shocks. “Madame la Vice-Présidente”, you have invited me here today to share a central banker and supervisor’s perspective on the different options open to private and public agents for meeting these challenges. Rather than talking about options, I would like to emphasise two “burning obligations” that fall on all of us, namely: for financial intermediaries, micro and macroprudential supervisors, maintaining a strong vigilance (I. ); and for regulators and the private (financial) sector promoting a deeper financial integration of the euro area (II.). I. Continued strong vigilance is needed to navigate through an increasingly uncertain world a. Persistent threats Against a backdrop of intense geopolitical uncertainty and a less favourable macroeconomic environment than expected, the financial industry faces a combination of very “traditional” risks and some relatively new ones.

If not all regulations are aligned, some private actors could (re)locate their IT systems in less-demanding jurisdictions. This is the reason why we need homogeneity among international regulatory texts with the largest outreach. Who could lead this coordination role on cybersecurity regulation? The G7 expert group has been extremely successful in producing “Fundamental elements”, but this group has no standard-setting role and its texts can only guide regulators in their work. I believe the FSB is best placed to engage the dialogue with the various standard-setters to foster the alignment of their texts, as well as to conduct global outreach, and limit the proliferation of working groups. II. Information Cyber threats are increasing, but adequate and consistent measurement is challenging. I would like therefore to make two proposals: About incident reporting. Many reporting obligations on cyber incidents have emerged, requested by various authorities. But these incident reports give little  Page 4 sur 6 information to measure the intensity and sophistication of threats and their evolution. The indicators requested vary from one report to another and this limits the scope of diagnosis and comparisons. The institutions themselves can struggle to transmit information about their incidents in different formats and with different details to the various authorities in charge. FSB agreed on a “cyber lexicon”. 1 As we have done in the past for operational risk, I recommend that we work on a common categorization of cyber incidents to better measure the impacts of attacks, and better understand their evolution. About information sharing and threat intelligence.
The ECB will not be forced to step in for a lack of policy implementation. Third, OMTs will not create excessive risks for euro area taxpayers. Such risks would only materialise if a country were to run unsound policies. This is explicitly prevented by the ESM programme. And we have been very clear that each time a programme starts being reviewed, we will routinely suspend operations and resume them only if the review has been concluded positively. This will ensure that the ECB intervenes only in countries where the economy and public finances are on a sustainable path. Fourth, OMTs will not lead to inflation. We have designed our operations so that their effect on monetary conditions will be neutral. For every euro we inject, we will withdraw a euro. In our assessment, the greater risk to price stability is currently falling prices in some euro area countries. In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it. Moreover, we see no signs that our announcement has affected inflation expectations. They continue to be firmly anchored. This is testament to our track record on price stability over the last decade and our credible commitment to maintaining price stability. The citizens of the euro area can be confident that we will remain permanently alert to risks to price stability.

Public finances were deteriorating. Banks and governments were being forced to pay even higher interest rates. And credit and economic growth were falling further, leading to rising unemployment and reduced consumption and investment. A number of economies could have seen risks of deflation. All of this meant that the outlook for the euro area economy as a whole was increasingly fragile. There were potentially negative consequences for Europe’s single market, as access to finance was increasingly influenced by location rather than creditworthiness and the quality of the project. The disruption of the monetary policy transmission is something deeply profound. It threatens the single monetary policy and the ECB’s ability to ensure price stability. This was why the ECB decided that action was essential. Restoring the proper transmission of monetary policy So let me now turn directly to our recent policy announcements. To decide what type of action was appropriate, we had to make two key assessments. First, we had to diagnose precisely why the transmission was disrupted. And second, we had to identify the most effective policy tool to repair those disruptions, while remaining within our mandate to preserve price stability. In our analysis, a main cause of disruptions in the transmission was unfounded fears about the future of the euro area. Some investors had become excessively influenced by imagined scenarios of disaster. They were therefore charging interest rates to countries they perceived to be most vulnerable that went beyond levels warranted by economic fundamentals and justifiable risk premia.