samchain/econo-pairs-v1 huggingface dataset:
This better aligns risk for shareholders and staff with the risks for society at large. There is an old lesson, here, about eating your own cooking. This ought to help discipline the chefs, reducing the temptation to pursue risky recipes in the first place. Encouragingly, banking practice may already be beginning to match the theory. Several banks have recently announced they will in future consider remunerating shareholders and staff in CoCos. 20  Standard & Poor’s (2010). 21  Calomiris (2010) and Gordon (2010). BIS central bankers’ speeches  9  Conclusion Tackling complex banking through complex regulation is to fight fire with fire. This is unlikely to work in theory. Crisis experience suggests it has not worked in practice. A regulatory framework is needed in which the state is neither omniscient Walrasian auctioneer (shouting out hundreds of millions of risk prices) nor deep-pocketed financier (doling out hundreds of billions of taxpayers’ money). A regulatory Gosplan will work no better for bankers than it did for tractors. The role of regulation is instead to set the overarching rules of the game. In tackling banking stress, that means the framework for banks’ capital structure. As far as possible, that framework should aim to leave the pricing of risk ex-ante, and the consequences of risk expost, to the market. The framework outlined here could be one simple, robust and timely way to help achieve that. It is different. But it is far from radical. Nothing could be less radical than returning banks, and banking risk, to the market.

Second, history suggests that, at least in the latest crisis, they would have given far timelier signals of impending stress, and so a better guide to prompt corrective action, ahead of the crisis cliff-edge being reached. To illustrate that, Charts 6–8 look at the three market-based measures of solvency for the 33-bank panel, again broken down between “crisis” and “no crisis” banks. There is now clear blue water between the solvency ratios of the crisis and non-crisis banks, with the second materially weaker. In the two years prior to the Lehman Brothers crisis, the average marketbased capital ratio was around 5 percentage points lower for crisis than for no crisis banks. Second, market-based measures of capital offered clear advance signals of impending distress. For example, the market-based capital ratio of crisis banks began to fall in April 2007, well over a year ahead of the Lehmans crisis. To formalise that visual impression, Table 1 shows Type I and II errors for the three market-based capital measures. These now  8  Cannata and Quagliariello (2005), Gunther et al (2001), Krainer and Lopez (2004). 9  Berger et al (2000). 10  Calomiris and Herring (2011) prefer a variant of the first measure. 11  Largely, because even marked-based measures of solvency will rely on disclosures by banks, which will themselves be model-dependent to some degree. BIS central bankers’ speeches  5  comfortably outperform a coin toss. Replacing the book value of capital with its market value lowers errors by a half, often much more.
But the figures collected by the HKMA for the local banks’ Hong Kong offices show that, in aggregate, their pre-tax operating profits rose by about 15% in 1999. This compares with the decline of 33% that we saw in 1998. This improvement has been supported by renewed growth in net interest income. Moreover, the aggregate bad debt charge of the local banks showed little change in 1999, having increased by 335% in the previous year. It is true that some banks were obliged to increase their provisions against Mainland related companies during the course of the year. But the general trend in the latter part of 1999 was that the growth in new problem loans began to slow down as the economy improved. This is supported by the figures for problem loans in the final quarter of 1999 which we published recently. These show that the ratio of loans classified as “substandard”, “doubtful” or “loss” to total loans fell to 9.8% at the end of December, compared with the 1999 peak of 10.3% at the end of September. At the risk of tempting fate it does seem that the worst of the bad debt problems for Hong Kong banks is over. Certainly all the local banks are expecting a significant reduction in the bad debt charge in 2000, which will give a boost to profitability. Can we say therefore that life for the local banks is getting back to where it was prior to the crisis? The answer unfortunately has to be “no”.

This logically implies that an exclusive focus on the two-year ahead central inflation projection will cause policymakers to miss the risk of undershooting the inflation objective sometime in the future, possibly by a non-negligible amount. In turn, this implies that the central projection for inflation does not represent a sufficient statistic for monetary policy, and that a more sophisticated approach, factoring in the possibility of “tail risks” such as the bursting of a bubble, should be taken into account. A possible way of addressing the problem  9  See Dubecq et al. (2010). 10  See Reinhart and Rogoff (2009). 6  BIS central bankers’ speeches  within the traditional forecast-based framework which has been dominant among inflationtargeting central banks is to extend the forecast horizon beyond two years ahead. The risks to the central inflation projection deriving, say, from excessive credit growth and the resulting build-up of an asset price bubble would then be encoded in the probability distribution for inflation at longer horizons. This would allow the central bank to meaningfully discuss the dangers associated with such a build-up, and – assuming that within future policy frameworks monetary authorities will be endowed with macro-prudential instruments – it will allow them to explain to the public the adoption of measures designed to curb credit growth.
As a result, they demand labour up to the point at which the real wage equals its marginal product, or, in log-linear terms: 𝑤 =𝑦−𝑛  (LD)  Equation (LD) is the labour demand curve. For given final demand, 𝑦, labour demand is a decreasing function of the real wage, 𝑤. Second, households supply labour, trading off the disutility of working more with the extra consumption higher wage income brings. The simplest resulting labour supply curve is: 𝑤 = 𝜑𝑛  (LS)  This condition says that households supply more labour when the real wage is high, governed by the (inverse) Frisch elasticity 𝜑. The two curves LS and LD deliver labour market equilibrium real wage and employment. That is illustrated in Figure 1. Figure 1: Labour market equilibrium. Figure 2: Demand and labour supply shocks reduce wages but can result in higher employment. This simple framework can be used to depict – in a simplified way – the dynamics of the crisis, as in Figure 2. First, a large shock to demand shifted the labour demand curve leftwards (from LD0 to LD1). The economy moved from point A to point B. Employment fell, unemployment rose, and wages fell. This captures, in simple terms, some features of the initial phase of the crisis. Second, in the more recent past, labour supply rose (from LS0 to LS1), reflecting a number of forces discussed in the text.

21 However, there are some leading indicators that point to a modest pick up over coming quarters. For example, job-to-job flows have been increasing (Chart 11) and some surveys of pay growth have picked up more sharply in the last year. Although the relationship between these surveys and average wage growth has become less robust in recent years (Chart 12), they do offer encouraging evidence of better wage prospects for those changing or finding new jobs. Of course, the pay of existing employees needs to pick up as well. After all, what matters for economy-wide inflation is the average wage relative to economy-wide productivity. 22 To that end, we will be closely monitoring pay settlements that are bunched around the turn of the year and taking a steer from the pay of new hires as a potential leading indicator of broader pay pressures. Some observers have discounted the implications for inflation of the recent weakness of pay growth because it stems from the types of jobs being filled – a “compositional effect”. However, these are real jobs being performed by real people, and an increase in lowerskilled lower-wage jobs is one consequence of working-off the labour supply shock. We also  20  See Broadbent (2014). 21  According to the ONS AWE measure, pay excluding bonuses for employees in the economy as a whole was 0.6% higher than a year earlier. Including bonuses, pay growth was –0.2%. In the private sector, the equivalent figures were 0.9% (excluding bonuses) and –0.1% (including bonuses).
We should not mix up the question of whether Greece will meet the requirements of the third financial assistance package with the refugee issue. It is in the interest of the Greek people that their economy becomes stronger, irrespective of the refugee issue. For example, Greece must in any case sustainably reform its pension system. What is your view of the progress made on reforms in Greece? The experts from the European Commission, the ECB and the International Monetary Fund (IMF) had productive discussions in Athens, but we are not yet where we want to be. It is no longer about the fundamental aims, it is about the implementation. On this, Greece must stick to the agreement reached in August 2015 on the third assistance package. And at the ECB we want the International Monetary Fund to continue to support this initiative. When will the Greek crisis be over? The Greek crisis is over provided that everyone sticks to the commitments made last summer. BIS central bankers’ speeches  3

Under both stories, private sector demand growth has been reasonably robust and looks, according to surveys and the Bank’s regional Agents, to continue to be robust for a little while at least. Notwithstanding the US slowdown, world growth weighted for its significance to UK trade has remained solid, due largely to recovery in the euro area. Business investment appears to be  1  In the US, ‘Great Moderation’ is preferred, because low inflation had been achieved in an earlier decade. Bernanke, B S (2004), ‘The Great Moderation’, remarks at the meetings of the Eastern Economic Association, Washington 2004. 2  See Benati L. (2005), ‘The inflation-targeting framework from an historical perspective’, Bank of England Quarterly Bulletin, Summer 2005, pp 160 – 168; and Tucker P M W (2005), ‘Monetary policy, stability and structural change’, speech to the Confederation of British Industry, March 2005, Bank of England Quarterly Bulletin, Summer 2005, pp 247-55. 3  Tucker P M W (2006), ‘Reflections on operating inflation targeting’, speech at the Chicago Graduate School of Business, May 2005, Bank of England Quarterly Bulletin Summer 2006, page 217. 4  This lecture is being given before publication of the minutes of the Committee’s December meeting, and so I am not at liberty to discuss my contributions to that meeting. BIS Review 2/2007  1  recovering. And consumption, although in the near term subject to upside risks from the housing market but downside risks from household debt, looks most likely to grow close to its average rate.
We also noted that the United States needed to reduce the large deficits in its federal budget, which would entail fiscal policy tightening over the coming years. GDP growth in the euro area was expected to be around 2 per cent a year during the forecast period. But there were substantial differences between countries. Germany, which is the largest economy in the euro area, showed relatively rapid growth, driven by exports and the upswing in world trade. At the same time, developments in southern Europe were  BIS central bankers’ speeches  1  hampered by the sovereign debt problems. We also noted that inflation was still high in the euro area and above the ECB’s inflation target, partly because energy and food prices had risen (see Figure 4). Strong but declining growth and rising inflation in Sweden GDP growth in Sweden was expected to be high this year, around 4.5 per cent, but then to slow down to more normal rates of increase of around 2.5 per cent a year in the coming years (see Figure 5). All components of demand contributed to the positive development. Household consumption was expected to increase by between 2 and 2.5 per cent a year over the coming years. Exports benefitted from the upswing in world trade, but we assessed that export growth would slow down in the coming period and approach more normal levels. A strong economic situation, combined with historically-low investment levels, meant that investments in Sweden were expected to increase substantially over the coming years.

Government bond yields 10 year maturity, per cent 20  20 Germany  18  Greece  18  16  Ireland  16  Italy  14  14  Spain  12  12  Portugal  10  10  8  8  6  6  4  4  2  2  0  0 06  07  08  09  10  11  Source: Reuters  12. Government bond yields 10 year maturity, per cent 6.0  6.0  5.5  5.5  5.0  5.0  4.5  4.5  4.0  4.0  3.5  3.5  3.0  3.0  2.5  2.5  USA  2.0  2.0 1.5  Germany  1.5  1.0  Sweden  1.0 0.5  0.5  0.0  0.0 06  07  08  09  10  11  Source: Reuters  BIS central bankers’ speeches  13  13. Stock market developments Index, 1 January 2006 =100 180  180 Sweden (OMXS) Euro area (Euro Stoxx) USA (S& P 500) Emerging markets (MSCI)  160  160  140  140  120  120  100  100  80  80  60  60  40  40 04  05  06  07  08  09  10  11  Source: Reuters  14.
One consequence is that the Icelandic Treasury’s future pension payments burden is negligible compared to most other industrial countries. Of course this represents an enormous economic and social strength for Iceland. The pension funds’ huge assets also impose a great responsibility on their management, who must invest these resources securely and profitably. Furthermore, relative to Iceland’s economy, the pension funds are now at a size where they can have a massive impact on developments in the domestic financial sector. In recent years, Icelandic pension funds have been consistently investing part of their disposable funds in foreign securities. They have considerable scope for making foreign portfolio investments, which by the end of March were estimated at almost 30% of their total assets. Holdings are mainly in foreign equity funds, but they have also invested in mixed funds and individual corporations. Pension funds have also been major players in the domestic equity market. At the end of March 2006, their  BIS Review 46/2006  3  estimated holdings exceeded 200 b.kr. and constituted 16% of their total assets. At the end of 2004, pension funds owned an estimated 12% of all equities listed on Iceland Stock Exchange. Corporate lending by pension funds has also grown rapidly. It is vital for pension funds to exercise the utmost care in their domestic equity investments, and to be cautious about wielding the power that these investments grant them. Likewise, diligence in corporate lending must be an important consideration for pension funds, to avoid an inordinate degree of risk.

2  2 http://www.snb.ch/en/ifor/finmkt/fnmkt_benchm/id/finmkt_reformrates  Page 4/7  Berne, 15 December 2016 Andréa M. Maechler  News conference  Slides  Page 5/7  Berne, 15 December 2016 Andréa M. Maechler  News conference  Page 6/7  Berne, 15 December 2016 Andréa M. Maechler  News conference  Page 7/7
There is nothing easy about this activity, and the lessons of the pre-crisis and crisis periods demonstrate the dangers of encouraging broader attitudes which act to discourage the work of supervision in favour of a light touch approach in which the risks in the system build up and are praised as contributors to stability and prosperity, until that is the crash comes. Supervision is a continuous activity which needs to benefit from constant public attitudes towards it, and in turn supervisors need to be accountable and explain what they do. We have made big strides forward on these fronts in recent years. When we talk about banks, solvency and capital is at the heart of effective prudential supervision. The capital regime that is being put in place is stronger not just in terms of the quantity and quality of capital that is funding banks, but also because of the incentives that are being embedded in the regime. To end, I don’t believe that we can ignore the risk in banks, and the consequence if it crystallises. This helps to explain why the exercise of judgement is such an important part of the supervision of banks. Therefore we have to create a system of rules, we have to supervise banks and have the scope and freedom to apply those rules in ways that create the right incentives for banks to maintain safety and soundness, and to guard against the time when something does go wrong we must be confident that our resolution regimes will work.

One thing that helps to keep the talk relatively short is that I’ll use a few symbols here and there (you’re economists so I reckon I’m allowed to). As well as saving space it helps to make clear the effects at work and to give some idea of the orders of magnitude. That said, the points I’ll try and make are, I think, perfectly intuitive. I’ll begin by reviewing exactly why it is that uncertainty can have such powerful effects on decisions that are costly to reverse. In doing so I’ll emphasise that what really matters is not uncertainty per se but the scale of the downside risks in particular. This is a standard feature of the economics literature in this area. As long as it doesn’t take too long to make an investment, once the decision to go ahead with it has been made, a firm can profit from upside events as and when they occur. The real value of delaying a project is in avoiding bad, loss-making outcomes. I then want to say something about the perceived duration of the uncertainty. Does it make a difference if firms expect things to be resolved soon or only after a longer period of time? This is where it’s helpful to construct a little “toy” model to work out what matters. In this set-up there’s a discrete event whose outcome either raises or lowers the profitability of a sunk-cost (irreversible) investment project.
One possible reason why risk-shifting may have been difficult to detect is that risk-based capital standards coincided with the shift to a much more complex regulatory framework. Complexity has an important impact on risk-shifting incentives - and not in the ways some have suggested. For example, some have argued that simpler rules are easier to arbitrage. The evidence suggests the exact opposite. Take the tax system. Simple linear tax schedules are typically found to be more robust to problems of tax arbitrage than complex rules (Hindriks, Keen and Muthoo (1999)). Why? Because complexity increases the number of loopholes through which the tax-avoider can slip. Indeed, evidence suggests that complexity of the tax system may be the single largest determinant of tax avoidance across countries (Richardson (2006)). The same logic carries across to financial regulation. Regulatory complexity creates wormholes. At a macro level, cross-country studies suggest that regulatory complexity, in particular the use of internal models, appears to have had an important bearing on bank failure (Cihak et al (2012)). At a micro level, the parts of the regulatory framework which have been most prone to arbitrage are those where complexity and opacity has been greatest – for example, the trading book. Incentives will always exist to shift risk to where it is cheapest. No tax or regulatory system can fully avoid those incentives. But some regimes may be better at constraining those incentives than others. The current mix of complexity and self-regulation may provide too few constraints.

Chart 3: Variability of default probability estimates(a)(b)(c)(d)(e)  Chart 4: Risk Weight variability in 2011(a)(b)(c)(d)  PD 2007  PD 2009  PD 2011 Mean PD = 100  7.1  Mean RW = 100 250  250 3.4  4.9  200  4.3  200  8.9  3.3  150 100  100  50  50  0 Sovereigns  Banks  Corporates  Source: FSA, and Bank calculations (a) Based on the results of the FSA’s hypothetical portfolio exercises for 2007, 2009 and 2011. (b) Results are based on portfolios comprising assets rated by all respondents in the sample (co-rated). (c) Portfolios differ between the exercises in 2007, 2009 and 2011. Results have been normalised by the mean. (d) Sample sizes differ: six to twelve in 2007 and seven to thirteen in 2009, depending on portfolio; and eight in 2011. (e) The bars show the maximum – minimum ranges. The values on top of the 2011 results indicate the maximum – minimum ratio. BIS central bankers’ speeches  150  0 Sovereigns  Banks  Corporates  Source: FSA, and Bank calculations (a) Based in the results of the FSA’s hypothetical portfolio exercise for 2011. (b) Results are based on portfolios comprising assets rated by all respondents in the sample (co-rated). (c) The sample includes six banks. (d) The bars show the maximum – minimum ranges. The values on top of the 2011 results indicate the maximum – minimum ratio.
Since coupon rates on  7  Fed funds equivalents are calculated by comparing the change in the 10-year Treasury yield due to asset purchases to the change that historically occurred following movements in the target federal funds rate. This is a simple framework, so the uncertainty around this measure is likely large. 8  For more information on the TBA market, see Vickery and Wright (2013). 4  BIS central bankers’ speeches  agency MBS are offered in 50 basis point increments, the originator might choose to sell the remaining cash flows to investors in the TBA market in the form of an agency MBS with a coupon rate of 3 percent and retain the remaining 25 basis points.9,10 In this case, the 3 percent TBA contract would be the production coupon.11 The Desk focuses its purchases in production coupons because these securities are the most liquid segment of the TBA market and their yields are closely tied to the primary mortgage rate through the dynamics I just described. Purchases are distributed across different agencies, maturities, and coupons in amounts that are roughly proportional to anticipated gross issuance of those securities. Purchases lower the yield on these securities relative to where they would otherwise be, which should enable originators to offer lower mortgage rates to borrowers.12 Lower borrowing rates should in turn help stimulate demand in the housing market, support home prices, and increase mortgage borrowers’ purchasing power. As I mentioned before, asset purchases affect interest rates in part by removing risk from investors’ portfolios.

The structure of the current purchase program reflects the Committee’s expressed intention to provide policy accommodation as necessary to improve the outlook for the labor market and allows the FOMC’s policy response to adjust over time in response to incoming information. The flexibility to adjust purchases is useful given our relatively limited experience  1  The FOMC also directed the Desk to reinstate its previous policy of rolling over maturing Treasury holdings into new issues. See the Desk’s Frequently Asked Questions for more information. In practice, the amount of maturing proceeds will be quite small over the next several years, since nearly all securities maturing within the next three years were sold or redeemed as part of the MEP. 2  The current par value of the portfolio excludes about $ billion of agency MBS trades scheduled to settle in the future. BIS central bankers’ speeches  1  with the balance sheet as a monetary policy tool and the uncertainty about the policy’s effects. Of course, previous asset programs have also been conditioned on the FOMC’s assessment of the economy and its evolving views on the efficacy and costs of purchases. For example, the September 2011 FOMC announcement, in which the Committee introduced the MEP, noted that “the Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate”.