samchain/econo-pairs-v1 huggingface dataset:
In short, very rapid and uncontrolled growth in the fringe (i.e. not primary) banking sector came home to roost when the first oil shock hit in 1973, delivering a blow to the economic prosperity enjoyed by the UK since World War II, reducing the value of bank assets and revealing a significant mismatch of borrowings and lending that resulted in a liquidity, and subsequently solvency, crisis. The secondary banks were especially affected, having been able to expand their balance sheets rapidly using 14  wholesale markets , much as Northern Rock did just over thirty years later. The number of affected banks surpassed fifty  15  in total and the Bank coordinated a significant effort – the  so-called ‘Lifeboat’ operation – to assist the troubled institutions, whether through shareholder support, marriages to stronger banks or support directly from the Bank. The most important revelation, however, was that these institutions had been allowed to go effectively unsupervised by the Board of Trade in the first place. Such a circumstance arose due to something seemingly quite simple – the lack of a definition of a “bank” in UK law. Under Schedule 8 of the aforementioned Companies Act 1948, certain firms could be exempted from publishing their accounts in full on the grounds that they were banking companies. On this basis, certain banks – in almost all cases, the well-established ones – were subject to Bank oversight.

The statute’s definition of non-financial resources specifically mentions human resources – that will likely include many of you here today – and we have reflected this emphasis in our Senior Managers Regime to give specific responsibilities to key individuals in firms for the implementation of the prudential framework. Whilst we, as supervisors, may identify issues that warrant further investigation, we will not spot everything. Ultimately, it remains the responsibility of senior managers and Boards of Directors to identify and mitigate the risk that firms are not complying with the spirit of the regulation. Indeed, we hold industry to account for its compliance with the Fundamental Rules and Senior (Insurance) Managers Regime, just as much as we hold it to account for its compliance with the detail of our regulations. Solvency II contract boundary. Turning to an insurance example, Solvency II has introduced some changes to the way insurance companies calculate the reserves for their insurance products. In particular, the rules defining the ‘boundary’ of an insurance contract means that firms cannot recognise future premiums on 49 50  Individual Capital Adequacy Assessment 2.1 and Individual Liquidity Adequacy Assessment 2.1 Financial Services and Markets Act 2000, http://www.legislation.gov.uk/uksi/2013/555/article/2/made 22  All speeches are available online at www.bankofengland.co.uk/speeches  22  unit-linked savings policies that do not include any insurance cover or financial guarantee of benefits.
At the moment they declare Brexit or at the moment you start the transition? This is all unclear. I can’t give you all the answers, but neither am I one of those who believe that the EU will go under without London. How would you define your cooperation with the Luxembourg regulator? I consider that the central bank side is working better because it is constructed differently. We are a Eurosystem, while supervision is not. For the supervisors there are still a lot of national regulations to respect. If a supranational body like the Single Resolution Mechanism (SRM) were to use only European law, things would be clear. That would be our preference. But in supervision sometimes national law prevails and there is still a lot of divergence between national laws that the single supervisor has to respect. How would you centralise the whole thing? Different agencies exist, such as the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). But they only have what is essentially a coordination role at the moment. The Single Supervisory Mechanism (SSM) at the ECB has the effective supervisory function for banking. For all the agencies, there are proposals for improvement on the table. For securities markets, another important piece of draft regulation is the European Market Infrastructure Regulation 2 (EMIR2).

If we have to contact 25 different regulators or supervisors in order to get a picture of who and what in the single market is allowed and under what conditions, it would be extremely cumbersome. From that point of view, we welcome an increase in efficiency at European level. We consider the completion of the banking union important for the single market and the single currency, in other words, one market, one banking supervisor and one security supervisor in the medium term. That should be accompanied by one deposit insurance system as well. But I understand those who say, “Let’s first clean up all the remaining negative elements from the past before we accept a sharing of responsibility at European level. That is exactly what we are doing now by pushing for the resolution of non-performing loans. We’re trying to put supervisory standards on the same level. It is not enough to assign only the responsibility to the European level, we also need a level playing field in terms of the tools and their implementation. The Commission de Surveillance du Secteur Financier1 (CSSF) has recently expressed its concern about its sanctioning powers. What do you think of Director General Claude Marx’s statement? I don’t know this statement. According to European law, the authority for criminal cases is still a national affair. When it comes to administrative sanctioning, that’s another issue. Some propose setting up a sanctioning authority that does nothing but sanctioning.
Among the buffers Hong Kong banks have built up are a capital adequacy ratio of above 20%, and a liquidity coverage ratio of above 150% – well above international standards. The classified loan ratio is just 0.56%. 2/5  BIS central bankers' speeches  22. At the same time, with a return on equity of 13% last year, the Hong Kong banking industry is also among the most profitable in Asia. Capacity 23. Next, I would like to look at the capacity of the industry – skills and training. 24. It is not a coincidence that one of the financial industry’s main professional bodies – the cohost of today’s gathering – is the Hong Kong Institute of Bankers, which was founded back in 1963 to enhance the profession. 25. Everything in the financial services industry goes back to people. Since the financial crisis 10 years ago, we have seen a significant increase in the complexity in capital, liquidity, risk management and other requirements. On top of that, we have rapid developments in technology and related areas like cybersecurity. The industry has to constantly upgrade its professional expertise and standards just to keep pace. 26. But unlike some other financial sectors, our regulatory framework for banks focuses on authorizing corporate entities. There is no formal licensing regime that applies to individual banking practitioners. Our approach has therefore focused on encouragement and guidance – and to benchmarking.

Let me briefly outline some of these roles: •  The MAS, as the statutory regulator, will monitor compliance with the laws and regulations that govern the integrity of the markets, seek enforcement of the laws, and propose amendments in order to keep them relevant in a changing market environment. We have undertaken a substantial review of our securities laws in the last year. Insider trading is now both a criminal and civil offence, and we have recently proposed to amend the laws to capture a wider pool of persons who seek to take advantage of inside information. The proposed new Securities and Futures Act (SFA), to be put to Parliament later this year, will contain other substantial changes. I will elaborate on one of these, concerning the 1 prospectus registration regime later in the speech. •  The Singapore Exchange (SGX), with its frontline interface with the industry and markets, plays a key role in preserving fair and transparent markets. It is responsible for the listing  1  The SFA would also incorporate the provisions concerning the raising of capital that are presently found in the Companies Act, thereby creating a single compendium of laws governing the securities industry. BIS Review 14/2001  1  rules for companies that raise capital and have their shares traded on the exchange. It is also responsible for ensuring that conditions exist for orderly trading of listed securities. •  The conduct of issuers themselves is at the core of a system of market discipline.
BIS Review 115/2007  15  Norway has a substantial current account surplus. If oil prices remain high, this might also be the situation in the years ahead. Most of the current account surplus is matched by capital outflows from the state to the Government Pension Fund – Global. Adjusted for these outflows, the surplus has been between NOK 0 and 70 billion in recent years. It is also likely that oil companies invest substantial foreign exchange earnings abroad. In the chart, the term basic balance has been used to mean the current account adjusted for the estimated capital outflows from the state and oil companies. The basic balance has been negative in the past few years and is estimated to fall close to minus NOK 150 billion this year and next. 16  BIS Review 115/2007  The large basic balance deficit reflects a substantial saving deficit among mainland industries and households combined. Developments in banks’ balance sheets and sources of liquidity are influenced by these flows. The saving deficit is to a great extent financed by raising capital abroad, often through banks. Access to and pricing of this funding is influenced by the recent turbulence in international money markets. The situation has similarities with the situation in the mid-1980s. Then, as now, there was a large saving deficit in the private sector of the mainland economy, while high petroleum revenues laid the basis for a current account surplus.

At the same time as banks sold mortgages to special purpose vehicles, they established credit lines to these same vehicles. When the special purpose vehicles encountered funding difficulties, they had to draw on their credit lines. This put credit risk back on banks’ balance sheets. Second, there were shortcomings in the regulatory system. Through high credit lines to special purpose vehicles, some banks had large exposures to a single counterparty. Banks may have used a loophole in the old capital adequacy rules, Basel I, where the risk weight for unutilised credit lines was zero in banks’ capital requirements. If national regulations for large exposures were based on Basel I, this may explain why some of the beleaguered German banks had extended credit lines that were many times larger than their capital. Under the new capital adequacy rules, Basel II, banks are required to set aside capital against all of these credit lines. Third, there were shortcomings in the US subprime mortgage market. A substantial share of these mortgages was sold through agents, such as estate agents and mortgage brokers. The agents’ earnings were based on high lending volumes, and they did not have to bear any risk for losses on these mortgages. Negative incentives are created when the responsibility for credit assessment and the responsibility for bearing risk are separated. As a result, agents  BIS Review 115/2007  5  have extended loans to many borrowers who do not have the capacity to service these loans.
One such loophole was the possibility for banks to provide shortterm guarantees without having to set aside regulatory capital. The new capital adequacy framework, Basel II, rectifies this situation. It is also important to encourage market discipline and counterparty surveillance, crucial elements to the well functioning of financial markets. Basel II is enhanced through the so-called Pillar III, which requires banks to publish information on key parameters of their business profile, risk exposure and risk management. The recent episodes have also reminded us of the importance of vigilance and competence in supervision. In general, the markets themselves are the best regulators as long as economic agents follow the advice of Sir John Gieve, Deputy Governor of the Bank of England: “Financial markets … can only work well if investors and firms expect to live or die by their own decisions and do not come to rely on a safety net to mitigate their losses.” 5 That is a good advice also with respect to safeguarding financial stability in a rapidly changing world. We might not be there quite yet. With reference to the banking industry, as Martin Wolf so eloquently put it in the Financial Times: “No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials – particularly, central bankers – fail to come at once to their rescue when they get into (well-deserved) trouble.” 6 Nominal stability Let me now turn to challenges to nominal stability.

In a speech two weeks ago, British Prime Minister Gordon Brown proposed a new role for the IMF: “…its role should be to prevent crises and not simply manage or resolve them as in the past. And in a wider role the IMF, working with the global financial stability forum, should be at the heart of what we need – an early warning system involving regulators and supervisors in all countries for financial turbulence affecting the global economy.” 4  3  Financial Times January 26, 2008. 4  Speech at the Chamber of Commence in Delhi, 21 January 2008. BIS Review 14/2008  3  Obviously, there are pipelines that are not on our present maps. Also, our knowledge of what flows through the known ones is scarce. But would it help us if we knew? Would we be able to predict a looming crisis and thus prevent it? I do not have the answer to this, but I think it is fair to raise the question. We must expect turmoil in financial markets to occur from time to time. There will always be stupidity and greed, fear and euphoria (and some scoundrels). Accidents will happen. Authorities should strive to establish regulatory frameworks that give the right incentives for prudent behaviour. It is important to avoid overregulation that severely restricts markets and stifles innovation. We must of course make sure that obvious shortcomings in existing regulations are corrected.
BIS central bankers’ speeches  3  The fact that the U.S. economy has continued to grow at around a 2 percent pace in 2013 despite this quite intense fiscal restraint provides evidence to the second key point, which is that the private sector of the economy has largely completed its healing process and is now poised to ramp up its level of activity. Key measures of household leverage have declined and are now near the lowest levels they have been in well over a decade. Household net worth, expressed as a percent of disposable income, has increased back to its average of the previous decade, reflecting rising equity and home prices and declining debt. Recently, banks have eased credit standards somewhat after a prolonged period of tightness. As a result, we are now experiencing a fairly typical cyclical recovery of consumer spending on durable goods. For example, sales of light-weight motor vehicles have increased steadily over the past four years, reaching an annual rate of 15.7 million in the third quarter of 2013, though sales in September and October have been somewhat below that average. Similarly, after five years in which housing production was well below what is consistent with underlying demographic trends and the replacement demand for houses, it now appears that we have worked off the excess supply of housing built up during the boom years of the last decade.

First, quantitative easing, through the purchase of public and private debt, seeks to extend the effects of low short-term interest rates to the rest of the yield curve, including to longterm rates, over which monetary policy normally has no direct influence. To do this, the central bank purchases assets with long-term maturities, generating an increase in their price, or, tantamount to this, a reduction in their yields. These lower yields on the assets acquired by the central bank are in turn partly passed through to the yields on assets with a similar duration, such as the interest rates on bank loans, which tend to be the most relevant ones for the saving and investment decisions of households and firms, thus stimulating demand and price rises. Second, forward guidance seeks to transmit to private agents the central bank’s commitment to maintaining an expansionary monetary policy throughout the early stages of the recovery, in order to avoid the deanchoring of inflation expectations. These programmes, whose application has involved major challenges for central banks given the lack of any similar experience in the past, seem to be working acceptably well, assisting the economic recovery and avoiding the emergence of crisis-induced deflationary pressures. According to analysis carried out by the Banco de España, ECB action can explain around half of the nominal GDP growth in the euro area over the period 2015-2017. That said, it is important to stress that central banks cannot take sole responsibility for the recovery.
Figure 2 The Riksbank’s balance sheet total SEK billion 900  900  800  800  700  700  600  600  500  500  400  400  300  300  200  200  100  100  0 Jan-07  0 Jul-07  Jan-08  Jul-08  Jan-09  Jul-09  Source: The Riksbank. Central banks in other countries have also expanded their balance sheets. Owing to the nature of the crisis and the structure of the financial systems in different countries, the central banks have implemented different measures and to a different extent. However, common to them all is the fact that their balance sheet totals increased dramatically immediately after the US investment bank, Lehman Brothers, filed for bankruptcy in September 2008 (Figure 3). 2  BIS Review 160/2009  Figure 3 Central banks’ balance sheet totals Percentage of GDP 30  30 The Riksbank ECB  25  25  Federal reserve  20  20  15  15  10  10  5  5  0 Jan-07  0 Jul-07  Jan-08  Jul-08  Jan-09  Jul-09  Sources: Respective central banks. How has the work on our two main tasks affected the Riksbank’s balance sheet? Let me begin by discussing monetary policy and then move on to financial stability. Monetary policy The target of monetary policy is to maintain inflation at 2 per cent. The Riksbank normally steers the short-term interest rate to attain this target.

The short-term interest rate in turn affects other interest rates, and thereby activity and prices in the economy. The Executive Board of the Riksbank decides on the repo rate at its monetary policy meetings. This shows the level at which the Riksbank wants the short-term interest rate to lie. The repo rate has a direct impact on other interest rates in the economy. I shall now describe how this works in practice and how it is reflected in the balance sheet. To counteract the deep recession the Riksbank has rapidly cut the repo rate to 0.25 per cent and announced that it will remain at this low level until next autumn (Figure 4). In normal circumstances the Riksbank can steer the short market rates without any tangible effect on its balance sheet. This is because the banks usually turn to one another directly to smooth deficits and surpluses in liquidity instead of turning to the Riksbank. They then pay an interest rate that is the same as the repo rate. The repo rate thus has a direct impact on the interbank rate and through this on short-term interest rates paid by companies and households.
I must not fail to mention that, since May, the figures – including those relating to the use of Official Credit Institute credit lines – point to a less sharp contraction in lending to companies, a trend that is all the clearer if, along with bank loans, other channels of corporate financing, such as securities issues, are included. In respect of the initiatives to promote an appropriate flow of credit to SMEs, which are so important throughout the European Union and, of course, in Spain, some of the ideas tabled are rather unrealistic, owing to their technical complexity, to political difficulties or to both. However, certain corrections that can make a positive impact are indeed possible. On the national regulatory front, certain changes have been adopted. Further to Circular 4/2013, the Banco de España has revised the definition of SMEs, adopting the broader criterion recommended by the European Commission; moreover, with the entry into force in late September of the Entrepreneurs’ Law, the discount factor applied to capital consumption envisaged in the new Basel III and European regulations has been introduced early. I would also like to clarify that the contractionary behaviour of business lending at the aggregate level may prove and, indeed, is proving compatible with a reallocation of resources within the sector, meaning that the reduction in credit for some companies runs alongside an increase in credit for those which, in the opinion of credit institutions, are better placed to undertake profitable projects.

Luis M Linde: The recovery of the Spanish economy Speech by Mr Luis M Linde, Governor of the Bank of Spain, at the XVI Congreso Nacional de la Empresa Familiar, Instituto de la Empresa Familiar, Madrid, 28 October 2013. *  *  *  Let me begin by thanking you for inviting me to take part in this Congress. It is an important meeting and offers me the opportunity to discuss, firstly, the recently released data suggesting an improvement in economic activity across the European Union, and also in Spain. And, secondly, to address the strengthening of the Spanish banking sector and its role in the start of the recovery we expect in 2014. In the euro area, the indicators signal that activity is beginning to pick up, and most analysts foresee that this recovery can take root. As a member of the European Central Bank’s Governing Council I should, before continuing with my address, highlight the contribution of the monetary policy applied by the ECB to containing the crisis. In facing up to the crisis, the European Central Bank has used its full range of measures, providing abundant liquidity at increasingly lower prices. The easing of monetary conditions has led to a substantial reduction in official interest rates, to their current level of 0.5%, almost 4 pp down on that five years ago.