samchain/econo-pairs-v1 huggingface dataset:
Benoît Cœuré: Interview in Corriere della Sera Interview with Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, in Corriere della Sera, conducted by Mr Danilo Taino on 7 March 2019 and published on 11 March 2019. * * *  At its meeting on Thursday, 7 March, the ECB decided to add to the monetary stimulus already in place. What happened? Did the extent of the economic slowdown in the euro area take you by surprise? The slowdown didn’t come as a surprise. Economic activity was exceptionally strong in 2017, thanks to global economic conditions. We knew that euro area growth would adjust towards its potential rate. The slowdown has been stronger than expected and started sooner, which motivated the decisions we took. But those decisions don’t represent a turnaround in our policy; they have been carefully calibrated to this diagnosis. We are adjusting to the new reality rather than reversing our course; we don’t see signs of a recession at present. The ECB staff projections have been revised. They previously envisaged that growth would be consistently above potential, which would have pushed inflation towards our objective of lower but close to 2%, whereas they now foresee that actual output will be initially equal to or below potential output, which means it will take longer for inflation to reach 2%. In the event of external shocks, could the ECB go back to buying bonds on the market? We don’t see the need.

We are still seeing robust economic growth, although it’s less strong than before. It will take longer for inflation to reach our objective, but it will get there. We are reacting to the developments we have seen so far, so we will keep rates at zero for longer, we will continue to reinvest payments from maturing securities in our portfolio, and we will grant banks liquidity at favourable conditions provided that they finance the real economy. If you’re asking me about another asset purchase programme, all I will say is that this instrument is now part of our toolbox, but it is not needed now. Do you think that European governments are pursuing appropriate fiscal policies under the circumstances? It’s difficult for a central banker to give detailed advice on fiscal policy, since fiscal policy is a matter for democratically elected governments. What I can say generally is that the current fiscal stance in the euro area as a whole is slightly expansionary and supports economic activity. The European Commission has invited those countries that have fiscal space, such as Germany, to use it in the way they consider most appropriate for their economies. Those who don’t have any fiscal space shouldn’t use it or pretend to have it. This applies not just to Italy, but also to France. Both countries still have some way to go to rebuild their fiscal buffers. Many market participants believe that Italy could be a source of crisis in Europe… It’s not for me to talk about politics.
The array of options with different “strike prices”, which represent the thresholds beyond which the options do or do not pay out, allows market participants to express opinions about the distribution of possible future aggregate corporate conditions. 12 Credit default swaps are not the only way an investor can engineer a targeted exposure to credit risk. Alternatively, an investor can take a position on corporate credit risk by purchasing a securitised product such as a collateralised debt obligation (CDO). In this case, a pool of assets such as corporate bonds is created and the payment streams produced by these are allocated to different classes or tranches depending on the default experience. This allows investors to take positions on the scale of default losses in the underlying asset pool. 13 Stepping back, the extended example above highlights how financial engineering has facilitated the decomposition of corporate credit risk into different subcomponents and the recombination of these subcomponents into new financial products with different risk characteristics. There are many other examples across the financial system. The consequent broadening of the range of financial products has improved choice and the matching and tailoring of products to customer needs. For instance, the ability of non-financial corporates to manage their risks has been transformed by their increasing use of derivatives to hedge interest rates and currency risk as well as their exposures to commodity prices.

With hindsight, information generation and processing was too reliant on a limited number of rating agencies, and there was too much confidence in the ability of individual rating agencies to solve the highly complex information problems underlying some securities. 22 Third, it is very hard to determine counterparty credit risk for state-contingent securities. In a world of full information, the state-contingent survival of counterparties would be known and nobody would accept contracts from those who could not honour them – at least not without a substantial price discount by way of compensation. But when investors cannot know the full network of exposures in the financial system, it is extremely hard to estimate  6  BIS Review 93/2008  where the ultimate incidence of losses from an extreme shock will occur. The failure of your counterparties’ counterparty can shift you up the queue of potential losers quite quickly. Moreover, the fear of potential counterparty risk itself quickly affects the behaviour of individual firms and thus leads to a collective lowering of risk appetite. 23 These problems are potentially the most acute for what might be called tail-risk products. During the boom, tail-risk products, like deeply out of the money options, seemed an easy way to make money. The protection seller could collect a steady stream of premia with the extremely unlikely prospect of having to make a very large payment. Since these sorts of contracts offer “deep” insurance, it is important to the system as a whole that they are held by the most robust institutions.
It is not just about IT. It is about making it less likely that their clearing members will default on their obligations to the clearing house; containing the spillovers from any failure of clearing members; and, above all, ensuring their own financial integrity. They are de facto regulators and supervisors for the markets they clear; and risk managers of their own balance sheet. In protecting themselves, they impose some financial discipline on their clearing members. They do this through financial soundness and operational-capacity requirements for access; initial and variation  BIS central bankers’ speeches  1  margining; and levying contributions to a default fund. And they act as a central market authority for valuing positions and setting minimum margin levels. To deliver those quasi regulatory and supervisory responsibilities, CCPs need to adopt prudent collateral policies; but also to monitor the robustness of their clearing members and risks from the business that they are bringing to the CCP. Amongst other things, that means collecting and analysing information from clearing members on large positions taken by their customers. I am not convinced that that is sufficiently recognised by clearing houses or by standard setters. CCPs are, in truth, system risk managers. They absolutely must think of themselves as that, and organise themselves accordingly. Margining and systemic risk The margining policy of CCPs matters enormously to the stability of the system. CCPs should take care to avoid having margining policies that are unnecessarily procyclical – chasing after events and amplifying market moves.

In London, LCH’s move to clear repos in Spanish government bonds helped that market stay open during some dark days last year. Why are CCPs important? There has been a resumption of interest in the network characteristics of the financial system. CCPs simplify the complex web of counterparty exposures through multilateral netting – precisely what the US authorities contemplated trying to achieve ad hoc towards the end of a weekend when Lehman was slipping away. But they do more than facilitate multilateral netting. They substitute themselves as the counterparty to the trades they clear – hence a central counterparty. This makes them unusual financial institutions, because they run a completely matched book, and so ordinarily are not exposed to market risk in their core activity. They are exposed in a big way to counterparty credit risk. If a counterparty defaults, they have uncovered market risk positions, and need to enter the market to get back to square. Everything important about a CCP concerns how they manage those risks. In essence, having centralised risk upon themselves, they redistribute it to their clearing members. They do that through a waterfall under which, in the event of a counterparty defaulting, the CCP can draw on, first, the margin pledged by the firm, then its contribution to the default fund, then the rest of the default fund etc. CCPs as risk managers Given that CCPs centralise and concentrate risk, their job is not just to deliver ever greater operational and capital efficiency for their clearing members.
However, as the acceptance of cash in commerce is not legally required, the Inquiry’s proposal will not ensure that cash will remain usable in society. Consequently, even if the measures proposed may help slow down this development, I do not think that it will come completely to a halt. Streamlining within the banking industry, for example via cashless bank branches, may certainly have re-  5 See Armelius, H., Boel, P, Claussen, C. A. and Nessén, M. (2018) “The e-krona and the macro economy” Sveriges Riksbank Economic Review no. 3, and Juks, R. (2018) “When a central bank digital currency meets private money: effects of an e-krona on banks”. Sveriges Riksbank Economic Review, No. 3. Sveriges Riksbank. 6 See “Secure access to cash”. Interim report from the Riksbank Committee. SOU 2018:42. 3 [8]  stricted the general public’s ability to use cash, but other factors such as technological progress, changed consumption patterns and the lack of legal requirements forcing traders to accept cash are probably more important. For example, in its report “Grundläggande betaltjänster i en digitaliserad framtid (Essential payment services in a digitalised future)” 7, the Swedish Post and Telecom Authority (PTS) writes that “even if the cash infrastructure is maintained and cash is available, cash will not necessarily be fully usable in the future”. The most recent results of the Riksbank’s survey of payment patterns in Sweden also show that the proportion paying in cash is continuing to decrease, while Swish payments are increasing.

In particular, they find that the first phase, QE1, triggered portfolio rebalancing out of emerging economies into US equity and bond funds – perhaps reflecting the role of QE1 in reducing tail risks in the United States – while the opposite occurred under QE2. Finally, to the extent that the unconventional policies are successful in their aim of boosting activity in the originating country, they will generate aggregate demand spillovers onto other countries through increased demand for imports. It should be obvious from this discussion that the spillovers from unconventional monetary policies are diverse in nature and ambiguous in overall sign. But from the point of view of the world as a whole, there has to be a strong presumption that these unconventional monetary policies have been expansionary. And with the world economy still suffering from deficient global aggregate demand and underutilised resources that surely has to be a good thing. That said, I would not wish to underplay the difficulties that some recipient countries have faced in absorbing large inflows of relatively short-term capital in a safe fashion. The presence of these complex spillovers has led to suggestions that monetary policies need to internalise these spillovers and be better co-ordinated (see e.g. Committee on International Economic Policy and Reform, 2011). While I can accept the logic of this, I am afraid I do not think we know nearly enough about the magnitude – or even the sign – of these spillovers to make this a viable option.
Of those born before 1940 as many as 90% agreed with the statement that “the control of inflation is one of the most important missions of German economic policy”, whereas only 51% of those born after 1950 agreed with the statement. Those who value health most are often those who have experienced sickness. There is a lesson here. The past decade has been good for central banks and central bankers. But that success should not blind us to the realisation that if public acceptance of price stability is based on no more than recent experience of the opposite, then the democratic legitimacy of central banks requires a more solid foundation. So how can we build the constituency for low inflation? Openness and transparency of the MPC, and explanations of our actions, are an essential part of our task. But we can do more. Over the past few months I have been chairing a working party in the Bank designed to answer the question of how we can build the constituency for low inflation. We have been exploring possible educational initiatives to increase public understanding of the benefits of monetary stability. And we have also been considering the way in which public opinion polls might be used to tell us about the degree of public understanding of the inflation target, the role of the MPC in achieving it, and, more generally, about the inflation process itself. I hope we shall be able to announce the results of those deliberations before long.

But we cannot rest on our laurels. There is still much to learn and to change. Economic theory moves forward and economic behaviour is never constant. The practice of monetary policy must keep up. But what we will not change is our commitment to monetary stability and to the achievement of the Government’s inflation target. It is that commitment which can deliver economic stability to this country. BIS Review 63/1999  10
Afterwards it often appears fairly obvious that certain price movements were not rooted in reality. However, during an upturn phase in the economic cycle it is obviously easy to get carried along on a tide of optimism and leave common sense on the shore. Many may be pulled in by others acting as though the trend of large profits will continue – assuming that “so many” investors surely can’t be wrong, even though the fundamental forces indicate otherwise. An investor may also consider it costly to go against the tide and act on the basis of a view that does not appear to be shared by others. In this situation, being the one who points out that current developments are not sustainable and that the expectations are unrealistic may be rather like trying to stop a runaway train with your bare hands. At least, if one lacks the right tools. …the consequences can be severe when the bubble bursts. Not all bubbles that arise have serious consequences for the rest of the economy. So are there any common denominators in the worst scenario cases? Yes, these cases often involve a loan-financed price upswing in the property market that has accelerated at an untenable rate over a long period of time. And when this kind of bubble bursts, it almost always does so with a bang rather than with a whimper.

This is the reason why it has always been my firm belief that timely sharing of experiences and lessons between policymakers is in itself a big part of policymaking. Candid discussions on policy effectiveness and unintended risks that could arise go a long way in minimising potential policy missteps. While capital flow volatility will remain a key feature of the global financial system, we have to acknowledge that with heightened uncertainties prevailing in the global economy, capital flow volatility would only intensify. For example, in Malaysia, two-way capital flows have increased by almost three-fold in the aftermath of the Global Financial Crisis. Yes, we have had large swings in capital flows before and we have been able to manage these surges. What worries me, however, is the fact that monetary and financial stability risks posed by large and destabilising capital flows are expanding, evolving and becoming more entangled. We are very familiar with the risks posed by volatile capital flows. At the extreme, capital flows can lead to the build-up of domestic vulnerabilities, such as currency mismatches, external indebtedness and broader financial imbalances. These risks are becoming more entwined and complex than ever before. Capital flows undoubtedly complicate efforts to achieve monetary and financial stability. Allowing exchange rate adjustment to deal with capital flows may also be too simplistic.
Thirdly, notwithstanding the availability of suitable collateral, there will be a maximum limit on the amount of support provided to an individual institution through repos or the credit facility. This limit would normally be set at between 100% and 200% of the capital base of the institution concerned subject to a cap of $ billion. Exceptions We believe that the provision of these details will go a long way towards removing market uncertainty and improving market liquidity, especially in times of crisis. This is the first time that we have made clear our requirements and parameters in setting out the mechanics for lender of last resort support. The emphasis, both in these details and in the preconditions for support, is on a rule-based approach more than on discretion or constructive ambiguity, and this is consistent with the HKMA’s policy of transparency. It is, however, necessary to stress that the policy still requires the exercise of discretion by the HKMA DWYDULRXVVWDJHV LQ MXGJLQJ ZKHWKHU D V\VWHPLF ULVN H[LVWV IRU H[DPSOH LQ GHFLGLQJ ZKHWKHU DQ institution meets the preconditions for support, and in determining the methods and level of support. Furthermore, any policy that is essentially a contingency plan for dealing with unusual, unanticipated, and undesirable situations must necessarily contain a provision for circumstances that fall outside the framework outlined in the policy. Such a situation might arise where, for example, an institution is unable to comply with the preconditions for lender of last resort support that I have outlined.

And we emerged from all this with the most robust banking system in the region. Indeed, the HKAB and HKMA partnership is a very important one, as we continue, in accordance with the requirement laid down in the Basic Law, to develop Hong Kong as an international financial centre. And there are many more challenges ahead for us that require an even stronger partnership to handle. We are all well aware of the forces of globalisation and technological advance, and the opportunities and risks associated with them. The Asian financial turmoil has also put us on clear notice that those forces, made more potent by the activities of the highly leveraged institutions, can be brutal and do not tolerate excesses or mistakes. It takes great effort, particularly in a small and entirely open international financial centre, for both the regulated and the regulator to harness these forces, and derive and maximise the benefits that undoubtedly flow from them. This process is likely to involve changes to both the structure of the banking sector and to the supervisory framework, perhaps to the extent of affecting special interest groups. But the fact of the matter is that changes are inevitable. And in coping with them, we have a choice between either dealing with the relevant issues ahead of time, making full use of our strong partnership, or leaving them to the brute forces of the market.
Central banks and financial supervisory authorities can, within their mandates, promote financial stability by ensuring that financial institutions include climate risks in their risk assessments. Climate risks must be addressed in the same manner as other risks facing the financial sector. To the extent climate risks lead to higher credit risk, funding risk and systemic risk, climate risks should be included in the assessment of whether banks are sufficiently capitalised and have adequate long-term funding. Climate risks and the Government Pension Fund Global Norges Bank manages the GPFG under a mandate from the Ministry of Finance. The capital is invested with the objective of achieving the highest possible return within the limits of acceptable risk. The GPFG’s mandate requires responsible investment activities to be integrated into investment management. The aim of being a responsible investor is in part to support the long-term financial performance of the GPFG's investments. In addition, we seek to mitigate the financial risks associated with environment-related and social conditions in investee companies. Chart: Invested in more than 9 000 companies in 73 countries Seventy percent of the GPFG is invested in equities. With ownership shares in more than 9 000 companies in 73 countries, we take part in global growth and value creation. Many of the companies in the GPFG’s portfolio could be impacted by physical climate change and the consequences of regulatory and technological countermeasures. Climate change could thus influence the GPFG's long-term return.

The overall risk, including climate risk, has been reduced. The Norwegian economy is also exposed to abrupt changes in operating parameters for oil and gas production through spillovers from offshore activities to the wider economy. We have long known that Norway’s offshore petroleum activities would be gradually reduced. If global climate policy proves to be stricter than currently expected, the decline in offshore activity may occur sooner and more rapidly than previously assumed. This will have consequences for Norway’s industry structure. Even though it is likely that the biggest changes in oil-related industries lie some years ahead, climate risk may also have an effect on the oil sector in the short term. There are perhaps signs of this effect in recent years’ oil stock prices. Chart: Valuation of oil stocks The price-to-book (P/B) ratio is lower for international oil companies than the average P/B ratio in the stock market, and this gap has widened in recent years. There may be several reasons for this, but we know that investors’ climate risk awareness has increased in the same period. Measures to influence industry structure are not within Norges Bank’s remit. However, if the decline in the oil-related sector were to occur abruptly, the spillovers to the wider economy could be considerable. Monetary policy is adjusted to changes in output, employment and inflation and can therefore support overall activity and employment in a period of restructuring. The responsibility for the restructuring itself lies elsewhere, not least with the business sector.