samchain/econo-pairs-v1 huggingface dataset:
Since the banking system as whole cannot return to equilibrium (after the three-year LTROs, the supply of reserves is inelastic in the short term), this behaviour will put pressure on asset prices and (as soon as the economy reaches its full potential) on consumer prices as well, unless an appropriate monetary policy stance is taken. These effects and the speed at which they may materialise are difficult to quantify as cases of protracted periods of excess liquidity have been rare in the past. The experience of Japan does not suggest direct effects on inflation. In the United Sates and United Kingdom, there is also no clear-cut evidence so far of a pick-up in monetary and credit aggregates spurred by excess liquidity. However, it is fair to say that in case of a sustained and more robust recovery in economic activity, excess reserves may have a potential macroeconomic impact by allowing a build-up of significant asset price misalignments, or by distorting the banks’ incentive to supply funding to the economy. Moreover, in the face of asset market fragmentation, such asset price misalignments are more likely to build up in countries where banks have ample liquidity positions. There is nothing, however, in this reasoning that prevents the ECB from tackling these effects by increasing policy rates, whenever the Governing Council deems it necessary to do so. Our operational framework makes it possible to steer a whole range of money market  6  BIS central bankers’ speeches  rates in line with the desired monetary policy stance.

Repairing the single market for capital is a collective endeavour in which the ECB has a role to play – but to be fully effective that role needs to be coordinated with the European Commission, European Supervisory Authorities and market participants themselves. Breaking the feedback loop between bank and sovereign credit should also be a priority. To this effect, steps should be taken towards a unified regime for bank resolution and beyond that, towards establishing a single European banking resolution authority. Finally, the “Financial Compact” should also include the completion of the single euro payment area. Payments are at the very heart of a corporate’s activity and I am not sure that they always get the attention they deserve. Nowadays, more than 50% of the trade of the 27 EU countries takes place within the EU – and that trade is mainly based on cashless payments. With the introduction of the single currency there could no longer be any differentiation between national and cross-border euro payments: they should all be “domestic”. The Single Euro Payments Area project, in short “SEPA”, came to fill this void; its aim is to establish a single market for retail cashless euro payments by overcoming technical, legal and market barriers, so that people can make euro payments throughout Europe as easily, securely and efficiently as within their own countries. Using the SEPA payment instruments, companies can make all euro-denominated payments centrally, from a single account, using the same format.
In part, the problem stems from a failure of imagination. A number of bodies identified the vulnerabilities that were building up as a result of the accumulation of debt. Indeed, in 2006 our own Financial Stability Report highlighted many of the risks which have subsequently crystallised. And we debated these vulnerabilities at meetings of the Monetary Policy Committee on various occasions. But no-one really foresaw the virulence with which the crisis would unfold and the route it would take. But even if we had, would it have made sense to have tried to curtail the accumulation of debt by holding Bank Rate at a substantially higher level, particularly during the 2004-7 period? Aside from the fact that this would probably not have shielded us from a severe downturn – countries around the world that did not experience rapid credit expansion have still slowed sharply – it would just have implied markedly slower growth and higher unemployment at an earlier stage. Is that the price we want to pay to curtail excessive exuberance in the financial sector? My answer would be an unequivocal No. Instead, with two objectives – macroeconomic stability and systemic financial stability – we need to complement Bank Rate with another tool that is more directly focussed on the source of the problem. That tool is so-called macro-prudential regulation, under which banks and other systemically important financial institutions would be subject to balance sheet constraints that reflect the vulnerabilities to the economy that may be building.

Reflective of this development is the fact that Icelandic banks have begun to grant credit to borrowers in other countries on a measurable scale, particularly in areas where they have a competitive advantage in analysing the soundness of the prospective borrowers. The title of my presentation is Iceland in a Global Setting. What I have briefly described is a country that has followed the path of many countries, including the Nordic Countries, in liberalising its economy, both internally and externally. This has exposed the economy to market forces and competition from abroad and a monetary regime bent on securing a low rate of inflation was chosen. Iceland is, as mentioned, not a member of the European Union and membership is not on the agenda of the present Government. Iceland operates its own small currency on the margins of the US dollar and the euro. These facts place firm requirements on economic policy while at the same time offering Iceland to reap important benefits from globalisation. This is indeed born out by developments over the last few years that were years of rapid growth of GDP and years which tested the ability of economic policy makers to steer the economy in an environment of liberalised markets and capital movements. More generally, the lesson to be drawn from our experience is that countries only stand to gain from full participation in the global economy. Aside from subjecting the domestic economy to competition from abroad, it disciplines economic policymaking.
There has been unrest in the financial markets, particularly in recent months, and there have been signs of weaker economic growth in the United States and the euro area, among others (slide 10). But at the same time we are now expecting slightly higher growth in other parts of the world, including Asia and eastern Europe. Our view of growth in the world economy is therefore only marginally changed. Nevertheless, our assessment is that the slowdown in among others the United States, together with the unrest in the financial markets will slow down economic developments in Sweden somewhat. I would therefore like to take the opportunity to say a few words about this, as it has received so much attention in recent months. The financial unrest and how it affects the Swedish economy The weaker growth in the United States and the anxiety that has arisen in the financial markets is largely linked to the problems in the US housing and mortgage markets. This concerns above all the market for sub-prime loans. These are, somewhat simplified, loans to households that do not have sufficient credit rating to be granted a normal mortgage. During the summer there were signs that all was not well. The number of households experiencing difficulties in paying their mortgages had gradually increased. The unrest intensified when it was revealed that several financial institutions had made substantial losses related to the sub-prime market.

It is of course important to distinguish between on the one hand our policy and our assessments, and on the other hand the way we communicate them – our communication strategy. I therefore wish to discuss these areas separately today. Moreover, there are other new elements that have been discussed with the Committee on Finance and are linked to the ambition to become clearer and more open. So let me begin there – by briefly discussing the changes we have made recently and why we have made them. After that I will go on to talk about the economic situation and interest rate policy. Changes for better monetary policy The driving forces behind greater openness and clarity Both the Riksbank and most other central banks have become more open and clear in recent years (slide 1). This is partly because we have seen it as a way to easier attain our target  BIS Review 132/2007  1  and to make monetary policy more efficient. By being open about the way we think, it is easier for others to predict our monetary policy. It will also be easier for the general public to make sure that the interest rate decisions we make are really aimed at achieving low and stable inflation. This increases the credibility of the inflation target and makes it easier to anchor expectations around two per cent. Developments in Sweden from the mid-1990s onwards are a good example of this (slide 2).
Self-regulation doesn’t work if there is no clear and consistent allocation of responsibility for the public interest objectives of financial regulation to public bodies that are answerable to the government and to parliament. But likewise, public bodies cannot seek to take on the responsibility of managing within firms, something that has to be the responsibility of boards and management. The senior managers and certification regime is vital here because it creates the framework to establish effective responsibility within firms, while maintaining the role of the public authorities, the PRA and FCA, for supervising and enforcing the public interest. A very good example of how this should work can be seen in the recommendations of the Fair and Effective Markets Review, which provide a means to establish and maintain high conduct standards in financial markets. Structural reform I want now to turn to structural reform and ring fencing. This is a subject in its own right, but I can assure you that I intend to be brief on this one tonight. We are now well into implementation. Last week we issued our second consultation paper on implementing the regime, and we plan one more such paper which will be more in the form of a wrap up of points raised and a few outstanding actions. Any structural reform measure involves complex implementation, the devil is always in the detail, and we need to get that right. I read from time to time that we are apparently watering the regime down via the implementation.

And similarly, London and Hong Kong could explore synergies when it comes to sourcing the funds for investments into China. 18. I hope I have given you a taste of the many possibilities that lay before us as the RMB moves into the international financial landscape. This is a very exciting juncture and I hope that we – financial institutions, businesses, policymakers – would work together to address some of the issues that may inevitably come up along the process while creating values out of this collaboration. To begin with, today’s seminar is a good opportunity for us all to share experiences in RMB and to learn from each other. Let me once again extend the warmest welcome to all of you. 19. Thank you. BIS central bankers’ speeches  3
To link back to a part of the reasoning above, it could be said that the new analysis has its starting point in the financial markets not being as ‘frictionless’ as the earlier models assumed. 11  New and old tools can be combined, depending on the situation The general level of interest rates in the world has fallen in recent decades, policy rates have fallen to zero or thereabout and new versions of old tools such as asset purchases have had to be used to provide monetary policy stimulation. But shocks in the transmission mechanism have also justified the emergence of new monetary policy tools. To an increased extent, companies are obtaining funding directly on the market, and not just via loans from the banks. This is the reason that central banks have gone in and purchased corporate bonds to thereby support lending in the economy and maintain a functioning transmission mechanism. The policy rate will probably be in focus again, once times and the financial conditions have normalised. The level of the policy rate specifies a kind of foundation for short-term risk-free interest rates, as well as other interest rates in the economy. But how policy rate changes spread to interest rates with longer maturities, non risk-free interest rates and the interest rates faced by companies and households can vary, depending on the situation in the economy, conditions on the financial markets and the structure of the financial sector.

There is an international debate on the importance of being able to make large cuts, down to –5 per cent or more, for instance. 12 Would this be possible in Sweden? Purely technically, it is probably possible. But if such a measure were seriously to be considered – perhaps in a situation where the pandemic was having much greater negative effects on growth and unemployment – we would have to carefully consider a number of questions, not all of which would be strictly economic. The economic questions include the effects of negative interest rates on the functioning of the banks and on their profitability, something that is perhaps more important in countries other than Sweden. The idea is that there is a boundary beyond which interest rate cuts de facto become counterproductive in that lending becomes impeded. 13 Another economic question concerns the well-known reasoning that there is a point at which the general public decides to withdraw all its savings and convert them to cash or go over to using some other currency so as to avoid a negative interest rate. A question of public confidence The classic objection to negative interest rates may need to be complemented by other, less macroeconomic reasoning that concerns public confidence in the central bank and the country’s currency. The central bank is an important institution in most countries and its remit means that it takes responsibility for confidence in the means of payment, the country’s own currency.
Government bank rescue measures and recapitalisation brought the ratio up to 8 per cent. Equity capital has not fully kept pace with growth in lending since then and the equity ratio has declined to 6 per cent. Today, the ratio is even lower than it was following the bank crises in the 1800s and the beginning of the 1900s. 6  In more precise terms, the sum of a bank’s assets and certain off-balance sheet items must not be greater than 20 times capital. For banks that are “in good standing” and that satisfy certain requirements, this multiple can increase to 23. See Financial Stability Review, Bank of Canada, June 2009. In the US, the ratio of Tier 1 capital to total adjusted assets must be at least 3 per cent for banks rated “strong” and 4 per cent for all other banks. The ratio applies on a consolidated basis. See “Background Note: Banking and the Leverage Ratio”, World Bank, http://crisistalk.worldbank.org/2009/03/banking-and-the-leverage-ratio.html. 7  See Northcott, Carol Ann, Graydon Paulin and Mark White (2009) “Lessons from Canada ”, Quarterly Journal of Central Banking, Volume XIX, No. 4, May, and Ratnovski, Lev and Rocco Huang (2009): “Why Are Canadian Banks More Resilient?” IMF Working Paper No. 152, July. 6  BIS Review 131/2009  For a number of Norwegian banks, the ratio of equity capital to total assets is lower than 5 per cent.

While the debt issue does not look to be serious for now, a build-up of household debt stock could imply that private consumption would likely to become more sensitive to interest rate changes. This would have a direct implication on monetary policy because even a small change in the policy rate could now have a large impact on GDP when households are highly leveraged. It is therefore prudent for us to monitor household debt closely and ensure that the rise in household leverage is manageable. The second challenge is posed by the slow recovery of commercial bank credits. Despite some positive development, it is clear that credit expansion has not kept up with economic growth, and the intermediary process between depositors and investors is still clogged up. While it is true that many companies can now resort to other means of financing such as issuing debentures or drawing from their retained earnings, the banking sector is still by far the largest source of funds for the corporate sector and is likely to remain so for many more years. Thus, a dysfunctional banking sector can surely threaten to undermine the strength of the economic recovery. In the near term, non-performing loans (NPL) as well as non-performing assets (NPA) must be reduced more speedily, and indeed this has been one major focus of my work at the Bank of Thailand.
On the consumer side, household balance sheets are now healthier, reflecting higher aggregate household net worth relative to income and less leverage. Also, sturdy employment gains and falling energy prices are boosting real income growth. Together with accommodative financial conditions, this should lend support to further gains in consumer spending. Similarly, despite some recent market turbulence, conditions on the business side are supportive to sustained gains in investment. Credit to businesses is generally readily available, cash flows are strong and corporate balance sheets are healthy. The energy sector is another bright spot that has been supporting business investment and the U.S. economy. New extraction technologies have had a dramatic impact on this sector, with natural gas production up 15 percent since 2010, and crude oil production up a remarkable 35 percent. 2 Moreover, natural gas prices have fallen significantly in recent years and are far lower than those in most other industrialized economies. These developments have dramatically boosted jobs and incomes in these industries, with beneficial spillovers to manufacturing competitiveness more generally. Of course, as with any forecast, there is some meaningful chance that growth will turn out to be either weaker or stronger than expected. However, I believe that the risks around this forecast are reasonably well balanced, and that the likelihood that growth will be substantially weaker or stronger than the forecast is relatively low. The subsiding headwinds that I discussed earlier are the primary reason for seeing the downside risks as limited.

All of this remains very much a work in progress. But, these efforts should help us to avoid repeating the mistakes of the recent past, and enable us to take a more proactive stance toward mitigating potential future vulnerabilities. Of course, we at the Fed are not alone here. Since the recent financial crisis, central banks worldwide have been engaged in a broad rethinking of how to better fulfill their mandates. Let me close with a final thought. The largest problems that countries create for others often emanate from getting policy wrong domestically. Recession or instability at home is often quickly exported. Equally important, growth and stability abroad makes all our jobs easier. This means that there are externalities in the work we do, so that more effective fulfillment of our domestic mandates helps to bring us collectively to a better place. Ensuring global growth and stability is and will remain our joint and common endeavor. Thank you for your kind attention. 6  BIS central bankers’ speeches
The banks of the countries participating in the SSM have been divided into two groups of significant and less significant institutions. The ECB will exert “direct supervision” over the former; as regards the latter, it merely assumes “indirect supervision” functions, as the national authorities will in fact continue to be responsible for their effective supervision. A list of 120 significant banking groups has been drawn up, accounting for approximately 85% of euro area bank assets. 15 of these are Spanish groups, representing around 90% of the assets of our country’s deposit institutions. It should be borne in mind that when we talk about 120 groups, we are referring to consolidated groups; that is to say, the number of individual banks is far higher. In total there are 1,244 individual institutions, which is essentially explained by the importance of cooperative banks in certain euro area countries, in particular France, the Netherlands, Austria and Finland. To directly supervise the significant banks, the ECB has created two directorate generals, which shall perform the continuous monitoring of the 120 groups. DG I will supervise the 30 biggest banks in terms of balance sheet and activities, while DG II will cover the remaining 90 significant banks. However, the supervision of specific aspects or matters, what is known as on-site inspection, will be carried out by different teams. The ECB has thus adopted a different model to that place at the Banco de España to date: functionally separating the continuous monitoring of banks and inspection visits.

Late last year, as the long, dark winter closed in, there were considerable jitters in financial markets, with some observers fretting that the economy may be on the verge of a hard landing. Indeed, there was a lot of talk about the possibility of a recession looming. I am happy to report that the economy has emerged from the New York freeze. The sun is out, the tulips and the cherry blossom are now in full bloom and the picture of the economy is similarly rosy. In the first four months of the year, the U.S. economy added over 800,000 jobs, and the unemployment rate is now 3.6 percent—the lowest level in nearly 50 years. The latest GDP numbers indicate that the economy remained in high gear through the first quarter, with growth clocking in at an impressive 3.2 percent annual rate. Despite this very strong economy, we are not seeing any signs of inflationary pressures. In fact, the latest inflation data have come in lower than expected, with core inflation over the past 12 months dipping to 1.6 percent. Now, most people don’t seem that bothered by inflation that is a touch too low, but at the Federal Reserve we have set a long-run inflation goal of 2 percent. When inflation runs persistently above or below that goal, we take that very seriously. So far, the recent downward movement appears mostly to reflect normal volatility in inflation statistics.