samchain/econo-pairs-v1 huggingface dataset:
In a world in which the credibility of the central bank to keep inflation low is well anchored, the solvency of most agents is taken for granted and markets are well organised and hence liquid, interest rates remain low across the whole maturity spectrum and valuations high; changes in key rates do not affect inflation expectations that remain low and changes in real interest rates allow monetary policy decisions to be effectively transmitted to the economy. In normal times, interactions between central banks and markets are therefore important but fairly unintrusive:   Central banks influence markets through changing the level of short-term interest rates; they explain the rationale behind their interest rate decisions in order to improve the quality of economic agents’ expectations; they put in place technical mechanisms to promote liquidity on certain key market segments, for example by establishing the list of assets eligible as collateral in their refinancing operations or by setting up a discount window that ensures that banks with unexpected temporary requirements can refinance themselves.   While markets listen to central banks, central banks also listen to markets since the price formation in markets reflects agents’ expectations, in particular concerning inflation, and their assessment of risks; central banks require such information to make their analyses and take their monetary policy decisions. The smooth functioning of markets and financial stability are therefore essential for the effective transmission of monetary policy.

Since this is not the main topic of our discussion today, I will simply give a brief reminder of the facts.   The role of central banks in markets stems from their objectives, the primary one incontestably being to ensure price stability. But this is not their sole objective. As we know, the Fed operates under a “multiple mandate” that is, and I quote, “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” whereas most other central banks, and in particular the ECB, have a “hierarchical mandate” that places the price stability objective above all other policy goals. More specifically, the Maastricht Treaty states that “without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community”. In that perspective, one of the objectives of the Community that we must support is to “promote solidarity among Member States”.   In order to fulfil its mandate, central banks must be credible and thus independent. If economic agents have the least doubt or the least suspicion that the institution might have an incentive to surprise them by allowing high inflation, they might adjust their behaviour as a precaution and thus “create” higher inflation by increasing their wage claims, thereby triggering a wage-price spiral; or by demanding greater returns on their savings, which pushes up long-term interest rates and weighs on growth.
The clearest example was the constitution of institutional protection schemes initially, without which it would have been extremely difficult to finally bring about inter-regional mergers. Today some of these problems have already been resolved thanks to these seven laws that have gradually improved the resolution instruments available at the start of the crisis. For instance, with all savings banks having converted de facto into banks, the current situation differs greatly from that at the start of the process, when the regional governments had the  4  BIS central bankers’ speeches  power to veto mergers. And although the perseverance and skill of the Bank’s supervisory arm managed to convince most regional governments of the inevitability of merging with savings banks from other territories, there have been cases in which sounder inter-regional alternatives were turned down for the sake of mergers which, though they were viable in the scenario then foreseen for the Spanish economy and avoided, moreover, more costly interventions for taxpayers, were clearly worse than the mergers suggested by the supervisor. As encouraging examples of Spain’s achievements during these years, I have chosen the progress made in correcting the current-account deficit and in financial restructuring. However, I could have chosen other actions. For instance, the Pension Reform Law has made historically significant changes and, if its sustainability provisions are properly implemented, will enable not only the pensions of our generation, but also of our children’s, to be paid without problem.

As to removing the weakest institutions from the system, 2 banks and 28 savings banks had disappeared up to December through integration processes, and there should be further processes in the coming months. Finally, as concerns having institutions on a more efficient scale, average size measured by managed assets has doubled over these years. 1  RDL 9/2009; Third Additional provision of Law 3/2009; RDL 6/2010; RDL 11/2010; RDL 2/2011; RDL 16/2011 y RDL 19/201; and RDL 2/2012  BIS central bankers’ speeches  3  But perhaps the results best testifying to the transformation of Spain’s banking system during the crisis are not quantitative but qualitative, for example, the metamorphosis of savings banks into banks. If before the crisis someone had said that, except for two small institutions, all Spanish savings banks would be converted into banks, nobody would have taken them seriously and they would have been accused of seeking to do away with one of Spain’s oldest and best-loved institutions. Yet today what this conversion brings in terms of improved management, market discipline, etc. has been accepted, and should in the future spare Spaniards from again suffering the consequences of the excesses detected at certain savings banks. Another most important qualitative advance with a view to the medium term has been the enhanced transparency of our banks, not only thanks to the stress tests which, as you know, were first proposed by Spain, but above all to the greater disclosure requirements progressively imposed over recent years.
Trading business mainly consists of purchasing and selling securities on behalf of clients or for the bank’s own account. The current low interest rate environment can affect these three pillars in different ways. On the one hand, lower interest rates could plausibly benefit commission and trading business. Customers might be inclined to shift their portfolios into riskier investments, which would be conducive to earnings in these business areas. At the same time, a decline in interest rates leads to one-off valuation gains on securities in the balance sheet. On the other hand, it is likely that exceptionally low interest rates negatively impact banks’ interest rate margins. Put simply, the interest rate margin is the difference between banks’ interest income and interest expense, shown as a percentage of banks’ assets. To better understand the relationship between the interest rate level and interest rate margin, it is worth looking at the composition of the latter. The interest rate margin can be divided into three components, namely the asset, structural and liability margins (slide 4). The asset margin is the difference between the interest rate charged on loans and a market interest rate of equal maturity. The liability margin is the difference between a short-term market interest rate and the interest paid on deposits and other sources of financing. And finally, the structural margin is the difference between longer and short-term market interest rates – essentially the compensation the bank receives for maturity transformation.

For its part, the SNB monitors developments on the credit and real estate markets continuously and reassesses the need for an adjustment of the countercyclical capital buffer on a regular basis. Thank you very much. Page 10/10  Negative interest rates: necessary from a monetary policy perspective – but with what risks for the banks?
Finally, the Riegle-Neal Act of 1994, which took effect in 1997, largely lifted restrictions on interstate branching for both domestic BHCs and foreign banks. The rationale for this change of heart was a mirror-image of the 1920s. Large banks convinced politicians of the high private costs of restrictions, which inhibited the efficiency of their offering to the public. In Weitzman’s framework, private costs trumped social benefits. The effects of the removal of interstate restrictions were dramatic. The average size of US banks, relative to GDP, has risen roughly threefold over the past 20 years (Chart 1). Too-bigto-fail was reborn in a new guise. The US Banking Act (1933) was co-sponsored by Senator Carter Glass and Representative Henry Steagall – hence “Glass-Steagall”. It prevented commercial banks from conducting most types of securities business, including principal trading, underwriting and securities lending. It also banned investment banks from taking deposits. The key functions of commercial and investment banking were effectively prised apart. The Act was motivated by stability concerns in the light of the Great Depression. The stock market boom of the 1920s had been fuelled by cheap credit from the banks. The stock market crash of 1929 brought that, and a great many US banks, to a shuddering halt. Among many banks, net losses on securities were as great as losses on loans. These losses transmitted to the real economy through a collapse in lending, whose stock halved between 1929 and 1933.

Each has a potentially important bearing on systemic resilience and hence on the social benefits of restrictions. (a)  Modularity  In 1973, Nobel-prizing winning economist Robert Merton showed that the value of a portfolio of options is at least as great as the value of an option on the portfolio. 15 On the face of it, this seems to fly in the face of modern portfolio theory, of which Merton himself was of course one of the key architects. Whatever happened to the benefits of portfolio diversification? The answer can be found in an unlikely source – Al’Qaeda. Although the precise organisational form of Al’Qaeda is not known with certainty, two structural characteristics are clear. First, it operates not as a centralised, integrated organisation but rather as a highly decentralised and loose network of small terrorist cells. Second, as events have shown, Al’Qaeda has exhibited considerable systemic resilience in the face of repeated and on-going attempts to bring about its collapse. These two characteristics are closely connected. A series of decentralised cells, loosely bonded, make infiltration of the entire Al’Qaeda network extremely unlikely. If any one cell is incapacitated, the likelihood of this undermining the operations of other cells is severely reduced. That, of course, is precisely why Al’Qaeda has chosen this organisational form. 15  6  Merton (1973). BIS Review 40/2010  Al’Qaeda is a prime example of modularity and its effects in strengthening systemic resilience.
And I want to assure you that the loss will not affect the capacity of the Bank of Thailand in delivering its mandate in any way. In the final analysis, monetary and financial stability alone can only provide a favorable environment for sustainable growth, but it is not sufficient to ensure that Thailand will overcome the challenge of global dynamism over the long run. The critical challenge here is for the Thai economy to make sustained gains in productivity through increased flexibility, efficiency, and competitiveness amid everchanging global economic conditions and structure. In this respect, we need to continue with financial and real sector reforms, and pursue policies that promote macroeconomic flexibility and sustained growth. Ladies and gentlemen, I want to turn now to the banking sector and its challenges in the medium and longer terms. Despite a challenging year, the banking system turned in a sound and robust performance, recording profit for the 5th consecutive year. Strong earnings over the past few years, together with improved asset quality and recapitalization efforts have strengthened banks' capital base. The BIS capital ratio is at a comfortable level and the NPL ratio has declined. Loan growth has moderated in line with the economy, while borrowers as well as banks, have exercised caution in light of prevailing uncertainties. Improved financial strength and equally important, significant improvement in risk management at banks, have contributed to the resiliency of the system. This allows it to withstand the forces of change from globalization and intensified competition in the banking industry.

If we do this what will we call it? We thought perhaps we could go for: “strong and simple”. I rather like this, but perhaps others will say it is clear why we are not in the advertising industry. Simple design  In designing a strong and simple regime we will have to decide on two things:   first, which firms are in it; and    second, how to simplify requirements. On the first of these, size measured by total assets is likely to be one good proxy – not least because it is simple. But other factors could also perhaps be brought in. For instance, purely as an illustration we could consider making eligible all firms with total assets of less than £ and who are also:   not systemically important;  6 In fact, the Financial Services and Markets Act 2000 (as amended) is explicit that it is not our role to ensure that no firm fails. 6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6    not internationally active;    not involved in trading activities;    not approved to run an internal model for capital requirements; and    capable of exiting the market in an orderly way, for example through solvent wind-down or an insolvency procedure. Now I’m quite sure that our disgruntled bank chair will be spluttering over their coffee at one or other of the items I just listed.
And they present new challenges for the framework of incentives and constraints that central banks and supervisors set for financial institutions. On balance, we believe these changes in the financial environment are likely to come with substantial benefits in terms of overall market efficiency. In the remainder of my remarks today, I will highlight some of these benefits, but will also consider some of the challenges they present for central banks and governments in determining where on the spectrum of efficiency and vulnerability to crisis the financial system should operate, and in crafting the policies consistent with achieving that objective. 2  BIS Review 85/2006  Changes in financial markets since the late 1990s In the United States and the other major markets, the policies designed to mitigate the risk of financial crises rely primarily on a capital-based system of supervision of the major financial institutions, reinforced by measures to improve market discipline. These policies have evolved to reflect both the fundamentally important role credit markets play in the economy, as well as the reality that these complex markets are susceptible to a range of potential market failures. In thinking about the potential supervisory and regulatory challenges presented by the broad evolution of the financial system over the past decade, it makes sense to first consider how some of these changes may have enhanced market functioning by mitigating at least some of the imperfections that characterize these markets.

William C Dudley: Regional and national economic conditions Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York and Chairman of the Committee on the Global Financial System (CGFS), before the Morris County Chamber of Commerce, Florham Park, New Jersey, 18 September 2012. *  *  *  Good afternoon, I am pleased to be in northern New Jersey to address the 8th Morris County Economic Development Corporation (MCEDC) Business Growth Forum – an annual event organized by the Morris County Chamber of Commerce. It is always a pleasure to speak with the business community and I thank you for inviting me here today. I get out of my office in New York City regularly to inform myself – first-hand – about economic conditions and challenges across the second Federal Reserve District. Each visit within the region helps me to strengthen relationships with the diverse people of this District and build a deeper understanding of the economic challenges that we face. Today, I want to talk a bit about the Fed – what we do and why we do it. Then I’ll provide some thoughts about the national and local economic outlook. Normally in these regional outreach speeches I say little about monetary policy. But since the Federal Reserve made some meaningful decisions last week and it is important for people to understand the reasons and motivations for our actions. I will conclude with a brief discussion of policy.
The fiscal rules set up under the Maastricht Treaty and the Stability and Growth Pact provide an important framework to ensure the necessary fiscal discipline. The rules are useful at the country level to preserve budgetary discipline and sustainable public finances, which is the best contribution fiscal policy can make to macroeconomic stability and growth. In a monetary union like EMU with a single monetary policy and national fiscal policies, there are two additional arguments. For small countries, there is an incentive for an expansionary fiscal bias which could threaten sustainability, because the common interest and exchange rate might adjust only marginally to their fiscal imbalances. For big countries, on the other hand, lack of fiscal discipline may have an effect on the common interest and exchange rates, creating a negative externality for the other participants. Compliance with the fiscal framework of the Treaty and the SGP guarantees the sustainability of public finances and the operation of automatic stabilisers, while respecting as much as possible the fiscal sovereignty of Member States. Could we rely on financial markets to impose sufficient discipline on budgetary policy? In principle, growing concerns about the sustainability of a country’s debt should be reflected in the risk premia that this country would have to pay for its borrowing. However, it would be unrealistic and therefore very risky to rely only on financial markets.

Jean-Claude Trichet: European priorities - an ECB perspective Speech by Mr Jean-Claude Trichet, President of the ECB, at the European Institute, Washington, 23 April 2004. *  *  *  Ladies and gentlemen, The introduction of the single European currency has been a historical landmark. For more than five years now, we have had a single currency and a monetary policy conducted by the Eurosystem, consisting of the European Central Bank and the national central banks of the euro area. The euro has been firmly and credibly established as a stable currency. The euro area has witnessed a period of moderate inflation rates and low long-term interest rates. Almost all countries have seen their lowest market interest rates since the Second World War. Where do we stand now and which are the “European priorities” we are currently facing? I would like to concentrate on three key priorities, which I consider particularly challenging at the current juncture: the historical enlargement process of Europe, the need for higher growth and employment by means of structural reforms and the necessity of implementing an original concept of fiscal surveillance in a single currency area. The historic enlargement of Europe Ten countries in Central and Eastern Europe and in the Mediterranean will join the European Union (EU) on 1st May 2004. This upcoming enlargement is profoundly rejoicing. It is an emblematic illustration of the victory of political democracies on totalitarism. It is a living demonstration of the efficiency of market economy rules.
On the other hand, problems remain on the housing market, which are dampening household demand and restraining the recovery. Many households have seen the value of their homes decrease sharply, with homes now being worth less than mortgages in many cases. In such a situation, many households are choosing to strengthen their balance sheets by restraining consumption in favour of saving. Furthermore, house sales entail a serious risk of incurring losses. In turn, this may mean that the unemployed are less willing to move to regions in which there exist job opportunities. The labour market may thus have become less flexible, and long-term unemployment in the United States may have risen as a consequence of the crisis. Happily, in Sweden, the level of GDP seems to have returned to about the same level as prevailed before the crisis erupted. Our overall assessment is that resource utilisation is on the way to becoming normalised. However, I would like to point out that it is very difficult to measure resource utilisation, as this cannot be directly observed. Different measures also provide somewhat different pictures. While a number of measures indicate that resource utilisation has already returned to normal, other measures continue to point to a certain degree of spare capacity. There are many indications that unemployment has the potential to  4  BIS central bankers’ speeches  decrease a bit more before any “bottleneck problems” arise in the labour market (see Slide 9).

Norwegian interest rates are now somewhat higher than expected short-term interest rates in the long term. This reflects a relatively tight monetary stance and tight economic conditions. On the other hand, interest rates in the US and Germany are exceptionally low as a result of the downturn. Short-term rates have not been that low in the US for 40 years. The wide difference between the economic  2  BIS Review 65/2002  situation and short-term interest rates in Norway and abroad is one of the driving forces behind the appreciation of the krone. Forward rates ahead indicate that the market expects the interest rates differentials to diminish as the cyclical divergence narrows. The relationship between interest rates and exchange rates was not as strong during the period when equity prices rose sharply towards the end of the 1990s and to the first quarter of 2000. This was a period when the quest for equity gains was also important for exchange rate developments. Financial markets have since shifted their focus. Even if the krone is strong, expectations concerning the krone are not particularly strong. If kroner are bought forward for delivery a few years ahead, and the exchange rate is agreed today, it will be at an exchange rate that is on a par with the average exchange rate for the 1990s. The cyclical divergence that is reflected in the krone exchange rate is not entirely disassociated from our position as an oil economy.