samchain/econo-pairs-v1 huggingface dataset:
This vicious circle also works in the opposite direction: problems in the banking sector spill over into lending and growth, which weakens public finances and the state’s ability to back up the banking system when necessary. Incidentally, this pattern of interaction between problems in the financial, real and public economies recurs throughout history. Reinhart and Rogoff have described how economic problems and bursting speculation bubbles have led to financial crises and subsequent sovereign debt crises time and again over the last 800 years. Developments in the banking system, 2007 and on So far, the European banks have not regained their credibility in the same way as the US banks did in 2009 and the Swedish banks did in 1992 and 1993. A great deal of uncertainty still prevails over which European banks are robust in the long-term. According to one estimate, the total decline in the value of assets on the European credit markets amounted to EUR 184 billion by the summer of 2011. The same publication made the assessment that losses over the years to come could amount to over EUR 200 billion, of which EUR 125 billion would derive from losses linked to government securities.6 The IMF has calculated that the effects of the sovereign debt crisis may amount to EUR 300 billion.7 Even so, the European banking sector was reported to have a larger balance sheet total in 2010 than in 2008. This reflects the fact that the problem assets have still not been addressed.

  Banks should lend a little more of their own money and a little less of everybody else’s. Now I look forward to discussing this with you in the association. BIS central bankers’ speeches  11
In particular, I’d like to emphasise from the outset my preference for a ‘steady-handed’ approach to  Page 5  monetary policy – one which focuses on the slower moving and more persistent trends in the data rather than responding to each individual data release. As I have discussed in a number of previous talks,[7] I am sceptical that we know enough: (1) about the state of the economy; (2) about key features of the economy’s structure and behaviour; (3) about the intrinsic properties of inflation dynamics; or (4) about the monetary policy transmission mechanism, to be able to use monetary policy to ‘fine tune’ economic and price developments. And I worry that attempts to implement any such fine tuning will introduce more volatility into inflation and the broader economic system, rather than support the stabilisation at target that we seek. Of course, there are occasions – especially in the face of financial disturbances and market dysfunction – when central banks may need to step in to offer support quickly and sizeably to support financial stability and monetary policy transmission. We have seen examples of this of late, not least during the ‘dash-for-cash’ episode at the outset of the Covid pandemic in March 2020. And large macroeconomic shocks may require large monetary policy responses. Again, recent experience offers some examples. But, in my view, as a general rule monetary policy responses to macroeconomic developments need to be measured and persistent if they are to be effective.

As a catalyst for such innovations, I am pleased to announce that following a public consultation process, the Bank has today issued details of the Financial Technology Regulatory Sandbox. Effective immediately, financial institutions and fintech companies will now be able to pilot innovations in a controlled, live-test environment with appropriate flexibilities accorded. This will include flexibilities under existing regulatory requirements that apply to outsourcing arrangements and access to customer information, subject to compensating safeguards. The experience from the sandbox will provide input into formulating more proportionate regulations that will spur the orderly growth of new innovations in the financial industry, including insurance. We see significant potential for positive disruptions to transform the business of insurance and takaful in Malaysia – from the way insurance is consumed, to opportunities for addressing leakages to drive insurance costs lower. Indeed, the greatest gains from technological innovations may well be reaped in the more mundane aspects of running a business efficiently. Today, money is still being left on the table from inefficiencies and leakages in the insurance system. From inefficient manual  2  BIS central bankers’ speeches  processes to the slow take-up of electronic payments, there are large gaps in the supply chain that unduly increase the cost of insurance and limit efforts to combat insurance fraud. The insurance industry needs to accelerate its pace in terms of its technological adoption or else events will dictate the shape of the industry’s future.
Thus, while the overall impact on businesses stands at slightly over 2 pp, it is expected to top 5 pp in the three most affected sectors.22 For households, given that energy expenditure accounts for a larger proportion of the consumption of lower-income households, the price rises seen in 2020 and 2021 will hit this group the hardest. More broadly, the Financial Stability Report also sets out the results of banking industry stress tests for two potential stress scenarios (dubbed “adverse” and “severe”) for the period 2022-2023. The use of this type of extreme scenarios, which are plausible but have a relatively low probability of occurring, is consistent with the goals of prudential regulation, which require that banks have sufficient capital to absorb unexpected losses. The adverse scenario simulates an increase in energy prices in addition to that seen in early 2022, and a greater persistence of international trade bottlenecks. The impact on prices would accelerate the monetary policy response, while also entailing a worsening of financial conditions. Meanwhile, under the severe scenario, the price shocks are slightly more significant than under the adverse one, while including a more marked worsening of households’ and firms’ confidence, triggering further falls in the main domestic demand variables (consumption and investment). 21  Specifically, increases of 22% and 25% in average price levels for 2022 and 2023, compared with the price used in the December projections.

20  These percentages should be considered as the lower bound of the total impact of the interest rate rise, as this would also reduce agents’ income, through its negative impact on economic activity, and would curb the accumulation of wealth on account of the higher net interest burden. 13  As far as general government is concerned, the steep rise in the public debt-to-GDP ratio seen since 2007 also means that public finances are more sensitive to interest rate movements. However, the fall in interest rates of recent years has led to a continuous decline in the interest burden as a percentage of GDP, while at the same time, longer average debt maturities (currently standing at more than eight years) limit the short-term impact of higher issuance costs. Specifically, incorporating the current market expectations for rising interest rates into the Banco de España’s latest macroeconomic projections, the public debt burden would increase from 2.2% of GDP at end-2021 to 2.5% in 2024. Under this updated scenario, an additional 100 bp increase in short and long-term interest rates, with all other variables remaining constant, will further drive up interest payments by around 0.4 pp of GDP by 2024. 14  As regards the impact of rising energy prices, variations similar to those observed between the Banco de España’s December 2021 and March 2022 projections21 would have moderate average effects on the degree of financial vulnerability of firms, albeit with notable crosssector heterogeneity.
Wealth has also risen faster than the national income.6 These increases in wealth are transferred and transformed into capital that is used in production. In most cases, this is done via the financial markets. The global real interest rate will in turn adapt so that the desired capital stock matches the available wealth. In recent decades, the upturn in wealth and capital in relation to national income has proved to be relatively greater than the downturn in the real interest rate. This has meant that the capital share of the added value (the ratio between the real interest rate multiplied by capital and national income) has risen despite the real interest rate declining. The capital share and the wage share always add up to one. Consequently, wages share of added value has  6  4  See Piketty & Zucman (2014). Waldenström (2015) provides an account of the wealth/national income ratio in Sweden. BIS central bankers’ speeches  declined in many countries.7 Another way of expressing this is that such large real interest rate cuts have not been needed for capital to absorb the increase in wealth. And this in turn is due to the production technology used. Following this discussion on what determines the development of the real interest rate in the long run, I shall now go on to discuss the inflation target, which is the other factor of significance for nominal interest rates in the longer run.

Miroslav Singer: Czech central bank head sees lowered risk of deflation – interview in The Wall Street Journal Interview with Mr Miroslav Singer, Governor of the Czech National Bank, in The Wall Street Journal, conducted by Paul Hannon on 11 October 2014. *  *  *  The threat of a slide into deflation or a long period of very low inflation in the Czech Republic has diminished, the head of the country’s central bank said Saturday, although he intends to maintain the weak-koruna policy at least into the start of 2016. In an interview with The Wall Street Journal during the annual meetings of the International Monetary Fund in Washington, Miroslav Singer said he had been encouraged by the stimulus measures announced by the European Central Bank since June, since he had expected it to take longer to react to very low inflation rates. Mr. Singer also said that he was confident the central bank could bring its weak-koruna policy to an end without risking a “snapback,” or a sharp strengthening of the currency. The Czech Republic is a member of the European Union, but has chosen not to use the euro. It does have close economic ties to the currency area and particularly Germany. As a result, low growth and low inflation in the eurozone have been a big problem for the central bank.
Critical to this process is the need for banks to understand how the estimates produced by their internal ratings systems compare with the actual performance of a borrower. In practical terms, banks will be expected to have in place - or be actively developing - a data "warehouse". By data warehouse, I mean a process that enables a bank to collect, to store, and to draw upon loss statistics in an efficient manner over time. Corporate governance I mentioned earlier that responsibility for managing risk lies squarely with senior management and its board of directors, and I know that the involvement of senior management will be critical to the successful implementation of the New Accord. This will be particularly true for those banks seeking to adopt the more advanced approaches to calculating regulatory capital. As a bank’s capital requirements will more closely reflect the actual risk to which the bank is exposed, there will be a need for its board of directors and senior management to gain a deeper understanding of their bank’s internal rating systems. How will this be put into practice? It will be the responsibility of bank management to expose its board members to the key elements of the organization’s ratings process. Members of the board will need to be fully aware of whether the system complies with the Basel standards, makes use of the necessary data and produces reliable quantitative estimates.

I expect that much of the cost to banks of adopting the advanced approaches of Basel II will come from precisely these types of initiatives. While it will not be inexpensive to achieve these capabilities, particularly for a very large and diverse organization, I believe that it is essential for the largest and most complex U.S. banking organizations to continue down this path. We know all too well the costs to society of bank weakness and ultimately bank failures. As our largest banks continue to grow, to prosper and to pursue new opportunities, they must simultaneously make the investments required to manage themselves appropriately. Likewise, the new framework is providing supervisors with an opportunity to enhance their ability to identify and respond to sources of banking risk, and to share this knowledge within the supervisory community. The Basel Committee was established precisely to maintain an open and constructive dialogue among banking supervisors. This spirit of communication will be more crucial than ever as the new framework is adopted across national jurisdictions. To help ensure that market competition is driven by each bank’s strengths, rather than by differences in each country’s regulatory capital rules, the Committee established the Accord Implementation Group. This group, comprised of senior line supervisors, is responsible for promoting the consistency and quality of implementation of the New Accord. Further, the group has been established to facilitate the exchange of information among national supervisors about bank and supervisory practices.
The measures that can still be used are often described as unconventional in order to distinguish them from the customary instruments. Most central banks in advanced economies make use of these unconventional measures. While the Federal Reserve and the Bank of England are chiefly focused on ensuring a more expansionary monetary policy, the goals of the European Central Bank (ECB) and the SNB are somewhat different. In the case of the ECB, its unconventional measures are directed against disruptions in the transmission mechanism of monetary policy arising out of the deterioration in government finances and credit conditions in the single currency area. The SNB, for its part, took a stand against an unwarranted tightening of monetary conditions as a  BIS central bankers’ speeches  1  result of the strength of the Swiss franc – a strength whose origin was to be found in international developments. Unconventional measures mainly take one of the following three forms – forward guidance regarding the future path of policy interest rates, quantitative easing (QE), or foreign exchange market interventions.1 What is involved here, and what do we hope to achieve? In the case of forward guidance, the central bank provides explicit information on the expected movement in short-term interest rates. To a certain extent, central banks had already provided such indications previously. This applies, in particular, to countries that communicate their monetary policy on the basis of an inflation forecast conditioned on a given interest rate path.

The exceptional nature of the situation can be seen not least from the long duration of interest rates close to zero. Apart from the case of Japan in the 1990s, there has been no other example of this in monetary history. There is certainly no precedent for the extent to which unconventional instruments have been used. Central bank independence and mandate Ladies and Gentlemen, I would now like to turn to questions relating to the independence and mandate of central banks. During the crisis, central banks intervened flexibly and on a huge scale, and with success. The downside of this success is that politicians and the general public have higher expectations of central banks when it comes to crisis and economic management. This carries the risk that monetary policy will be overburdened in the long term. In addition, the unconventional measures of the past few years have blurred the boundaries between monetary and fiscal policy in places. This is not without its problems as, ultimately, the central banks have no political authority to make fiscal policy decisions. In its recent Annual Report, the Bank for International Settlements issued a stark warning about the political economy risks of unconventional monetary policy. Risks of this nature mainly relate to the potential long-term impact on central bank independence. These warnings should be taken seriously. As you probably recall, in the 1990s, following the painful inflation experiences of previous decades, a global consensus developed that monetary policy should focus primarily on maintaining price stability over the medium term.
Thus, based on better growth prospects for our trading partners, favorable external financial conditions and increased terms of trade, the baseline scenario included in our Monetary Policy Report published the first days of this month, considered that, for the next two years, the Chilean economy will receive an external impulse higher than considered at the end of 2016, when our previous report was published (figure 1). 1  / Breakfast presentation at The Council of the Americas, April 20th, 2017. Figure 1 Trading partners GDP  Terms of trade (*)  (annual change, percent)  (index; 2013=100)  4.5  4.5  4.0  4.0  105  105  Mar.17  100 Mar.17  3.5  3.5  Dec.16  3.0  100  3.0  Dec.16  95  95  Sep.16  Sep.16 2.5  2.5 Avg. 00-07  Avg. 10-15  16  17  18  90  90 13  14  15  16  17  18  (*) For comparison effects with the new 2013 Benchmark Compilation, the ToT of previous Reports are adjusted to 100 for 2013. Source: Central Bank of Chile. 3. On the domestic front, inflation has been consistent with what was expected in December. The annual variation of the CPI index fell to 2.7% in March, a significant drop compared to the 4.5% figure of a year ago. The behavior of the nominal exchange rate, which has appreciated relative to its level one year ago, has been a fundamental driver of inflationary dynamics.

Despite the fact that this progress has been achieved, the SNB considers that the big banks’ loss-absorbing capital is still below the level needed to ensure sufficient resilience. This assessment is based on three factors: First, in the event of a further escalation of the euro  BIS central bankers’ speeches  1  area crisis, the loss potential for the big banks would be substantial compared to their lossabsorbing capital. As I have just pointed out, the big banks have only moderate direct exposure to the most vulnerable peripheral euro area countries, yet if the crisis in these countries were to deepen, a general deterioration in economic and financial conditions could be expected. In such a case, the potential losses for the banks would extend to a significant portion of their credit and trading positions. Second, the SNB’s assessment is based on a comparison with capitalisation levels at other international big banks. This comparison uses the definitions of the Basel III framework once fully implemented. These definitions yield the most accurate picture of a bank’s true resilience. The comparison based on these definitions reveals that both Swiss big banks – and in particular Credit Suisse – are below the international average. Given the importance of the big banks for the Swiss economy and for financial stability, an above-average capitalisation level would be appropriate. Third, the leverage of both big banks remains very high, despite a reduction in risk-weighted assets.
Capital may be slower to move but even the labour market doesn’t clear immediately and some of those losing their jobs in the low-demand sector would probably spend some time being unemployed before finding new jobs in the high-demand sector. Note too that the demand shifts would have to be quite big to have any material or noticeable effect. Because the curved and straight lines have the same slope to start with, small shifts don’t do that much to average costs in the economy6,7. Indeed, in the real world, recognising that demand can move around unpredictably, firms generally operate with a margin of spare capacity, precisely so they’re able to meet any sudden rise in orders without incurring undue extra costs. This serves to flatten out the cost curve a bit. 6  Students of economics will recognise this as an example of something called the “envelope theorem”. Around an optimum – in this case an optimal amount of capital – changes in the environment have only second-order effects on decisions. 7 Clearly the effects could be higher if the economy isn’t starting from an allocative optimum to begin with. There is quite a bit of work in the economics literature exploring the effect of allocative inefficiencies on aggregate productivity, even in standard business cycles. See, for example, Davis and Haltiwanger (1998), Chari et al. (2007) and Osotimehin (2019). 12  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  12  But on occasion sizeable shifts do happen.

10  Adelino, M., Song, M. and Robinson, D. (2014), “Firm age, investment opportunities and job creation”, NBER Working Paper 19845, January. 11  The Financial Stability Board defines shadow banking as “credit intermediation involving entities and activities outside the regular banking system”, a definition which ranges from more transparent and regulated entities such as institutional investors and money market funds to highly complex and unregulated entities such as structured investment vehicles and special purpose entity conduits. 12  “Finance for Growth”, Report of the High Level Expert Group on SME and Infrastructure Financing, December 2013. 6  BIS central bankers’ speeches  quality securitisation in Europe, which the ECB and the Bank of England have been jointly pushing.13 Securitisation has the double benefit that it not only encourages existing originators to extend more SME loans, but to the extent that it partially removes credit risk from bank balance sheets, it may also help smaller, less diversified originators to enter the SME loan market. In this way, it could also mean that SME lending is less dependent on a few large banks in each country. It is worth reflecting, however, on what the new normal should be once the credit cycle picks up. On the one hand, there clearly benefits to having a more balanced financing mix. It is useful not only to provide a cyclical cushion in bad times, but also to increase market contestability and reduce over-banking in normal times.