samchain/econo-pairs-v1 huggingface dataset:
Jean-Pierre Roth: Highly leveraged institutions and financial stability – a case for regulation? Address by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank and Chairman of the Board of Directors of the Bank for International Settlements, at the Second Conference on Law and Economics of Risk in Finance, University of St. Gallen, St. Gallen, 29 June 2007. The author thanks Ms Jeanette Henggeler-Müller, Financial Stability Unit of the Swiss National Bank for the first draft of this paper. *  *  *  Highly leveraged institutions (HLIs), or hedge funds, are currently a hot topic. No day passes without a warning about HLIs in the financial press, and HLIs are on the agenda of politicians, supervisors and central bankers in many countries. The German presidency of the EU and the G8 have declared HLIs to be a high priority agenda item. After the collapse of LTCM, the then chairman of the Federal Reserve Bank said that "had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own" 1 . And in the newspaper Bild am Sonntag of 17 April 2005, the German Bundesminister für Arbeit und Soziales accused HLIs of "remaining anonymous, having no face, pouncing on firms like locusts, grazing them and moving on." Why is there such distrust of HLIs?

Figure 4: Mean squared gaps The fact that the extended repo-rate path leads to a better stabilisation of both inflation and resource utilisation is confirmed by the mean squared gaps in Figure 4. The mean squared gap for inflation is the mean squared deviation between the inflation forecast and the inflation target during the forecast period. A lower mean squared gap for inflation entails a better stabilisation of inflation around the target and thus a better attainment of the inflation target. The mean squared gap for output and for hours worked is the mean squared gap for resource utilisation measured in two ways, that is using the output gap and the hours-worked gap during the forecast period. A lower mean squared gap for output or hours worked entails a better stabilisation of resource utilisation around a normal level measured as the output gap or the hours-worked gap. The closer to origo the mean squared gap for inflation and resource utilisation is, the better the stabilisation of inflation and resource utilisation. This case is special as there is no conflict between stabilising inflation and resource utilisation; the extended repo-rate path stabilises both better than the main scenario. This is of course already obvious in Figure 2, so the mean squared gap does not add much new information here. However, the normal situation is considered to be that there is a conflict between stabilising inflation and resource utilisation.
In particular, central banks have had little direct experience with the impact of such a reduction in holdings of domestic securities and in reserves. One relevant experience, of course, was the socalled “taper tantrum,” in 2013 which showed that markets can have outsized reactions to changes in balance sheet policy even before they happen. More generally, experience with asset purchase programs, both here and abroad, clearly demonstrates that market volatility can ensue from balance sheet policy changes that market participants perceive as surprising, unclear, or rapid, or are not adequately distinguished from short-term interest rate policy intentions. All of this indicates to me that, at policy turning points like these, central banks should carefully and clearly communicate their intentions, provide as much transparency as possible, focus on one tool at a time, and make transitions in policy implementation as slowly as overall macroeconomic policy objectives permit.4 The rest of my remarks will go as follows. First, I’ll provide an in-a-nutshell summary of the structure of the Federal Reserve’s balance sheet. Then, I will discuss why it is important that the decline in the balance sheet be gradual and predictable, and explain how the FOMC’s plan provides this gradualism and predictability. I will then talk briefly about how the Federal Reserve is ensuring it is prepared for unexpected developments. We will then open things up for questions you may have. The Fed’s balance sheet, in a nutshell Let’s begin by reviewing, at a high level, where the Fed’s balance sheet is today.

Before I begin, I would note that the views I share with you this evening are mine and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.1 Principles and objectives Throughout the history of Federal Reserve operations in financial markets, our approach to engaging with counterparties has been designed to serve the effective implementation of monetary policy. The New York Fed, through its Open Market Desk (the Desk), is in the business of implementing policy as directed by the Federal Open Market Committee (FOMC, or the Committee), and the Desk has demonstrated a willingness to engage with a wide range of counterparties to achieve this objective under the guidance of the Committee. In addition to its role in the implementation of monetary policy, the New York Fed has a number of responsibilities and duties as the fiscal agent for the U.S. Treasury. We have therefore also used our counterparty relationships to assist the activities we undertake in support of the Treasury. Indeed, for decades, the primary dealers have played a critical role not only in open market operations, but also in the underwriting and distribution of newly issued Treasury securities. In addition to carrying out these domestic operations, we stand ready to conduct a number of foreign exchange operations.2 Foreign exchange counterparties are essential to the successful implementation of U.S. foreign exchange policy operations, which are conducted by the Desk but directed and funded generally equally by the Fed and the Treasury.
Although this led to an increase in the productivity growth measured during a transitional period, this was at substantial cost to those who lost their jobs and the economy as a whole, as a large part of the economy’s available resources were not utilised. During and directly after the crisis there were also a number of structural changes in the economy that are likely to have affected developments. Fiscal policy was tightened, with an expenditure ceiling and surplus target, while monetary policy was targeted at achieving a low, stable inflation rate. Such a stabilisation of the macroeconomy means that uncertainty about issues such as future tax rates and price developments decrease, which in turn makes it easier for households and firms to plan. Comparative studies of different countries have shown that this can have longer-term effects, partly through a rise in productivity. Furthermore, several markets were opened to both domestic and international competition through deregulation. Greater competition increases the pressure on profitability, which raises motivation for making production and organisations more efficient, for instance with the aid of more modern technology. There were also other types of structural changes in the Swedish economy during the 1990s. Up to the beginning of the 1990s, the number of people employed in the public sector increased, with a corresponding decline in the private sector. After the crisis there was a turnaround, and the private sector’s share began to increase again.

By potential output and potential growth we mean instead the output and growth that is possible without serious imbalances arising in the economy; the level of output at which supply and demand correspond and actual and expected inflation are in line with the central bank’s inflation target (assuming that there is one). The potential output level is not constant over time; it usually shows a growth trend, which is illustrated in Figure 1. This is mainly because technological developments mean that higher output can be achieved with the same amount of factors of production. Another reason could be long-term changes in the factors of production. The change in potential output from year to year is equal to the potential growth of the economy, which thus is the growth rate that is sustainable in the long term. Figure 1 shows the potential output level according to a simple statistical method where the trend, and thereby also the potential growth rate, is allowed to vary over time. The difference between actual and potential output is known as the output gap, and this reflects the cyclical variations in the economy. A negative output gap, that is to say, when actual output is lower than potential output, is usually connected with a recession. The demand pressure for goods, services and the factors of production is then small and there are ample unutilised resources in the economy. Price and wage increases are small and inflation is usually below the central bank’s target level.
Lee Hsien Loong: Connecting India and Singapore Keynote address by Mr Lee Hsien Loong, Deputy Prime Minister of Singapore and Chairman of the Monetary Authority of Singapore, at the Standard Chartered Bank’s Singapore Conference, Mumbai, 16 January 2004. *  *  *  Introduction I am delighted to be here today to address the Standard Chartered Bank’s Singapore Conference. We stand on the threshold of a major transformation in Asia. With a combined population of 3 billion people, Asia is the largest and most promising region in the world today. It includes Japan, not fully recovered from its post-bubble malaise, but still the second largest economy in the world, with deep capabilities and advanced technology. It includes South Korea, which took painful measures to open up its economy and restructure its chaebol-centred industrial system. And it includes Southeast Asia, whose countries have put behind them the trauma of the Asian Financial Crisis, and are growing and attracting investments again. The biggest stories in Asia are China and India. It has been projected that China’s GDP could overtake Germany in the next four years, Japan by 2015, and the US by 2039. India too is opening up and growing strongly, and could become the 3rd largest economy in the world within 30 years. Globalisation plays a big part in Asia’s vitality. It has resulted in more Foreign Direct Investments (FDI) into Asia, and created jobs and prosperity for Asians.

In parallel, ASEAN is working on a Comprehensive Economic Partnership arrangement with Japan. The US, too, has announced the Enterprise ASEAN Initiative, under which it will pursue agreements with individual ASEAN countries, taking into account their respective progress in economic liberalization. Southeast Asia’s adherence to economic liberalisation and freer trade has helped the region to stay on investors? radar screen. Most of its economies have recovered from the Crisis. Confidence has returned and the economies are growing again. Stock markets have rallied as capital flowed back into the region. The countries have made progress remedying the structural weaknesses that contributed to the crisis. Their finances are now much sounder - with balance of payments in surplus, and foreign reserves accumulating. Thailand is doing particularly well as the fastest growing economy in Southeast Asia. Malaysia, has maintained satisfactory growth rates, as has Indonesia despite the political and security issues. Vietnam escaped the Asian Financial Crisis and is now opening up and taking off. Singapore’s fortune has been more mixed. It weathered the initial storm well, but then got hit hard first by the global electronics downturn and then by SARS. After all these tribulations the Singapore economy is now at last picking up and on a growth path again. Over the longer term, Southeast Asia remains a region of promise, with strong fundamentals. It is outward oriented, with a large and young population, strong emphasis on education, a positive work ethic, good infrastructure, and abundant natural resources.
And default itself amplifies losses in the network, most obviously through direct bankruptcy costs, but also through fire sales of the sort already discussed. Moreover, when entities are highly leveraged, they will have only limited capacity to absorb losses, making such a cascade of defaults more prone to occur. A similar network dynamic can occur when institutions are hit by a payment shock, such as the drying up of wholesale funding that occurred at the start of the crisis and again around the time of the collapse of Lehman’s. The analysis of the behaviour of such financial networks is still very much in its infancy 9 . But a key point material to regulatory design is that some types of network will be inherently more stable than others, depending on both the nature of the network and the obligations on its members. For instance, a network where all institutions are of similar importance and exposures are evenly spread is likely to be relatively stable, as the consequences of an adverse shock to any one institution will be spread widely and thinly. In contrast, as we saw with the collapse of Lehman’s, networks in which there are a relatively small number of key players are potentially very susceptible to the failure of a key player. By the same token, a network in which exposures are collateralised or can be netted across the system will be  9  For more discussion of this issue, see Haldane (2009).

BIS Review 101/2009  9  Asset Relief Program (see Taylor, 2009), raised the possibility in investors’ minds of the failure of a whole range of institutions that had previously been considered safe. That is evidenced in the simultaneous sharp spike upwards in the CDS spreads of a number of financial institutions after the collapse of Lehman’s (see Fig. 12). Moreover, the prospect of having to make significant default pay outs called into question the solvency of a key provider of that insurance, AIG. The bottom line of all this is that the information requirements for managing risk escalated rapidly at the same time as investors were waking up to the realisation that the distribution of prospective returns on a range of asset-backed securities was a great deal worse than they thought. Not surprisingly, there was a rush for the exits and a drying up of wholesale funding to institutions that were thought to be at all vulnerable. Moreover, attempts to cope with that by selling off assets ran into an adverse selection problem: if someone is selling an asset, then perhaps that indicates that they know it’s a “lemon”. And even the revelation of central bank support in its role as Lender of Last Resort, far from solving the problem, could be interpreted as a negative signal about an institution, as was so in the case of Northern Rock, for example.
That being so, central banks may be able to stabilize demand and output growth more effectively than in the past. Most obviously, cuts in interest rates are now much more likely to be understood as a response to an adverse demand shock rather than as attempts to generate extra demand and jobs in the short run at the cost of stoking up higher medium-term inflation. And so it is easier for central banks to cut interest rates when that would desirable in order to stabilise demand conditions and so keep inflation in line with the target. Related to that, greatly increased transparency across the central banking world makes policy surprises – and so outsized market reactions to policy decisions – somewhat less likely. Second, more competitive and transparent product markets (partly thanks to the internet), together with more flexible labour markets, may have improved the real economy’s ability to absorb nasty shocks without persistent large falls in output. Third, developments in banking probably mean that more households have access to credit to help them to smooth their consumption by borrowing during ‘bad times’. And by routinely distributing more risk to non-banks, the banking system may be less likely to wish or need to conserve capital, refraining from taking risk, when faced with increased demand for liquidity from its corporate and household customers. For these reasons, consumption growth may be less prone to violent lurches than during, say, the 1970s and 1980s.

How much risk a company should take in its core business and in the provision of pensions is obviously a matter for its board. A famous paper in corporate finance 5 finds that, subject to some (admittedly fairly strong) assumptions about tax etc, the market value of a company (measured as the sum of the value of all its financial liabilities, equity and debt) should not depend on its capital structure. Rather, its capital structure affects the risk to equity holders, and so the headline return they should rationally require to compensate for risk. Within this framework, defined-benefit pension schemes can be viewed as deferred compensation and so as entailing a form of indebtedness (in many cases, de facto indexed-linked borrowing) for their sponsors, to be ‘serviced’ alongside their more conventional external indebtedness. Perhaps that has become most obvious when a fund is calculated as being in deficit. It would seem that in recent years there has been a keener awareness of this way of thinking analytically about pension obligations. If there has been an ‘awakening’, maybe it was triggered by a combination of the volatility of the value of equities held by funds, especially when they fell sharply a few years ago; the volatility of the discounted value of their liabilities as long-maturity real rates fell; regulatory requirements governing the closure of deficits; and fluctuations in the net value of funds having for the first time to be reflected in firms’ capital in their financial accounts.
We used our main policy tool, the one-week repo auction rate, and macroprudential policy tools in line with the Liraization Strategy. Accordingly, we kept the policy rate (the one-week repo auction rate) unchanged at 14% in the January-July 2022 period. On the other hand, we acted in a proactive manner in the face of intensifying risks of a global recession driven by geopolitical developments and global financial conditions. To limit the effects of these risks on domestic supply, investment and current account surplus capacity and to sustain the structural gains in industrial production and employment, we initiated a rate-cut cycle in August. As of November, we had delivered a rate cut of 500 basis points in total, bringing the policy rate down to 9%. With these decisions, we enabled investments that will strengthen Türkiye's position to continue at suitable financing costs at a time when the global economy was facing supply chain and financing problems. In 2022, we also conducted an effective reserve management to reinforce our international reserves. We created a diversity of sources through deposit accounts converted from foreign exchange, YUVAM accounts that we devised for non-resident citizens, FATSI accounts aimed at bringing physical gold into the financial system, and regulations regarding the selling of a portion of export proceeds to the Central Bank. As a result of all these actions, our international reserves rose by 17% from USD 111 billion at end-2021 to USD 128.8 billion at end-2022. Meanwhile, international reserves of central banks decreased by 6% on a global scale in 2022.

The possible need for speedy assistance necessitates that a central bank must have internal procedures for managing requests for liquidity support and doing so very rapidly. To accomplish this, central banks need to have a detailed crisis plan that can be put in place within very short notice. The crisis plan should include the following types of information: Organisational structure •  A division of responsibilities for analysis, information, decision-making, etc. •  Staffing requirements for different tasks, with substitutes. Analysis plan •  A description of the information necessary to make a decision about whether or not a systemic crisis may occur. •  Necessary information about systemically important individual banks. Information strategy •  A plan for informing and coordinating information and decisions with the other domestic agencies involved in the crisis. •  A plan for informing authorities in other countries about the situation. •  A plan for communicating with the financial markets. •  A plan for spreading information to the public and media (ex ante and ex post transparency). Plan for implementing ELA •  A clear description of the routines which must be followed and the legal requirements which must be met for ELA. Legal procedures, for example contracts, for lending against other collateral than what is normally eligible •  An inventory of the instruments available for implementing ELA. •  Guidelines for acceptable collateral and appropriate haircuts.
For example, in the establishment of shariah parameters and centralization of shariah rulings and the creation of financial instruments that the Central Bank used to mop up liquidity from the financial market on a daily basis. The forward looking plan of our various institutions of higher learning to offer courses in Islamic finance related subjects that have enable a steady supply of talent and workforce to the industry. Equity-based financing Let me touch on the subject of equity-based financing. This subject has captured the imagination of many especially within the academic circles. Some even went to the extent of saying equity-based financing is the heart and soul of Islamic finance. This is a point that will invite a lot of comments and a subject of endless conversation. In practice, somehow, bankers are not into this. In Malaysia and in the Middle East, however, more than 70% are debt-based financing. Why is this so? Let me discuss this point with greater detail. For the benefit of those who are less familiar, in a nutshell Mudharaba is a profit sharing and loss bearing concept where the Financier provides financial investment in a business and the Entrepreneur provides expertise in running the business. The financier gets to share profits and absorb loses and the entrepreneur have a share of the profit Musharaka is where both Financier and Entrepreneur commit to invest financially in a business. In both cases, the profits and losses are shared according to ratios that both Financier and Entrepreneur agrees prior to the venture.

The “non-cash” euro is already in use The final stage of the introduction of the euro will include two changeovers: the changeover to the noncash euro, which concerns all book-entry transactions (cheques, bank accounts, bank card payments, transfers, loans, etc.) and the changeover to the cash euro, which concerns banknotes and coins. This summer, banks in France started to systematically convert bank accounts into euros and provide customers with euro cheque books. In various participating countries, in particular France, all bank accounts have already been converted . It is now up to each citizen in the euro area to establish a new scale of values for the currency and to make payments in euro. In this respect, retailers have a fundamental role to play: their active participation and their readiness to accept payments in euro will greatly facilitate the euro changeover as a whole. The cash euro will be in circulation within 8 weeks As regards the cash euro, the main task now consists in frontloading the banknotes and coins so that, on 1 January 2002, transactions can be carried out smoothly in the best possible security conditions. To achieve this, frontloaded coins are supplied to credit institutions. Banknotes will soon be provided to them (as of 1 December in France). Retailers will also be provided with frontloaded banknotes and coins.