samchain/econo-pairs-v1 huggingface dataset:
In view of these developments and considering that the amendments to the General Banking Law announced this year by the Ministry of Finance will include a review of the solvency requirements, making them gradually converge to the new Basel III capital standards, it is important that the banks strengthen their capital levels, for example by adjusting their profit reinvestment policies. The stress tests that we perform for each Financial Stability Report indicate that our capital levels are adequate to absorb the occurrence of a severe stress scenario. This scenario has similar characteristics to the one evaluated in the previous FSR, as it considers a fall in GDP in the short term and slower growth in the medium term. Output would stand at –4.5 percent annually during the most critical quarter and would then converge to a growth rate of 1.4 percent by the end of 2017. This is intended to replicate past financial fragility episodes of importance. The results of these stress tests show that the banking system’s position is adequate to deal with a severe stress scenario. They mark a downturn from the past FSR, mainly because of a lower level of initial capitalization and profitability, affected by reduced operating margins consistent with the evolution of the business cycle (figure 16). Let me close with some final thoughts. Final thoughts The economic situation has become more complex, especially in emerging markets. The terms of trade have fallen more than expected and financial conditions have tightened.

But we must not be self-complacent. Quite the opposite: we must strengthen these elements that have traditionally been our main lines of defense against shocks from abroad. Within this framework, our Financial Stability Report shows that it is highly necessary for the private sector to maintain a strong financial position in order to confront tougher conditions. Therefore, both the fragility we detect in the firms’ financial situation and the reduced capitalization of banks are elements that must be monitored carefully, even if at this moment they are not problems by themselves. And about fiscal policy, the effort that the government and Congress have set for 2016 is most appreciated, i.e. substantially slowing down spending growth, in line with the reduction in income associated with the lower copper price and slower economic growth. More importantly, we see it as recognition of the need for a fiscal consolidation process that takes into account the budget constraints that this more complex macro scenario will bring in the near future. With respect to monetary policy, our policy framework plays a fundamental role in smoothing the business cycle. The basic idea is that if fiscal policy is methodical and predictable, in line with the fiscal rule, it provides greater space for a countercyclical monetary policy. In this sense, the first line of defense when facing shocks is monetary policy. That is precisely the role that we have played these years, in which we lowered the policy rate, helping to contain the drop in demand and allowing the peso to depreciate.
Other episodes, by contrast, such as the “new economy” crisis had a more far-reaching impact, albeit of varying intensity and duration in the different geographical areas. Unfortunately, these experiences are no precedent for diagnosing the potential scope of the current episode, which exhibits many new features, including the fact that it is especially concentrated in the Western heartland of the industrialised countries. The recent past has seen turbulence in Asia, Latin America and eastern Europe. Now, in contrast, the shocks are mainly affecting the United States and the more developed European countries. Let me thus take an eminently European perspective as I examine more closely some of the main features at play here. This approach will also help me to look at its implications for euro monetary policy, which I believe is the most logical way to address the possible impact on the Spanish economy. I wish to begin by emphasising the non-existence in the euro area of the sub-prime mortgages that are accepted practice in the United States. Therefore, in the first analysis, the rise in doubtful assets in the United States should affect only the European financial intermediaries that acquired securities linked to sub-prime mortgage loans originated in that economy. However, the propagation of contagion is not confined to the influence of this channel alone, but rather is transmitted through a wider range of shocks.

In light of the buoyancy of domestic demand in recent years, it is reasonable that private consumption and residential investment should show somewhat lower growth rates, although, as has been the case so far, a continued robust employment and population growth rate would fairly effectively counter the possible deceleration of these two variables. In the construction sector, moreover, investment in civil engineering and in non-residential building, which has so far shown greater resilience, will foreseeably remain vigorous in the  4  BIS Review 134/2007  next few years. This could soften the negative impact on growth caused by the slowing of residential investment, where a cyclical downturn seems to have started. Productive investment will probably continue to be the most buoyant component of domestic demand, although it is hardly likely that it alone will offset the lower contribution of household spending. Therefore, the role of net external demand will be fundamental in ensuring that a certain containment of expenditure is compatible with continued growth of around 3%. The contribution of this variable will hinge crucially on the behaviour of Spain’s export markets, but also on competitiveness, which is a factor that firms and the economic authorities are actually able to influence. In this respect, the basic channel through which the recent episode of financial instability and heightened international uncertainty could affect the Spanish economy’s expected growth scenario depends on the performance of the foreign sector.
It is the interest on the latter transactions that we now often connect with the concept of monetary policy. A central bank can also give loans to individual banks on special terms in temporary emergency situations, when it acts as lender of last resort. However, the stability of the financial system is not guaranteed only by the measures taken by the central bank; other public authorities also have important tasks here. It is in particular important that there are sufficient buffers to manage 1 The nominal anchor for attaining a stable value of money was changed, in many countries, from a fixed  exchange rate to a quantified inflation target and a floating exchange rate. Similarly, the ECB, which was given responsibility for monetary policy in the countries in the euro area, applies an inflation target and a floating exchange rate. 2 Yellen, Janet E., (25 August 2017), “Financial Stability a Decade after the Onset of the Crisis”, speech, https://www.federalreserve.gov/newsevents/speech/yellen20170825a.htm  2 [12]  disruptions and that confidence is good with regard to all participants in the payment system. This is ensured by all of the participants being well -capitalised and having good liquidity. It is also essential to ensure that financial companies can be closed down without any major repercussions on the real economy.

Sometimes monetary policy, micro- and macroprudential policy measures are interchangeable.8  Broad discussions on systemic risk issues are valuable To summarise, we can observe that the Riksbank is responsible for a number of areas that are central to the financial system – cash supply, the RIX system, supplying liquidity in a crisis and monetary policy. The Riksbank regularly analyses  8 See for instance, Finochariao et al, (2016) “Macroeconomic effects of reducing household debt”, Sveriges  Riksbank Economic Review 2016:2, Sveriges Riksbank, http://www.riksbank.se/Documents/Rapporter/POV/2016/2016_2/rap_pov_160922_eng.pdf for a discussion of what needs to be done with different macroprudential policy instruments and monetary policy if one needs to reduce household indebtedness, and what effects the different tools have on macro variables such as inflation and GDP. 9 [12]  the risks that could threaten the stability of the financial system to be able to manage these tasks. We therefore consider that it is also our task to contribute to the general debate in society by means of these analyses. We communicate our views in different ways, both within and outside of Sweden's borders. For instance, we have for 20 years now been publishing our assessments in Financial Stability Reports. We also regularly report our analysis of systemic risks in the Financial Stability Council and hearings of the Riksdag Committee on Finance. The Riksbank also takes part in a number of international committees and working groups where financial stability questions are discussed.
Cycles of the past Let me start with the bad news. The Forum has assuredly not solved the problem of boom and bust in the commercial property market. Indeed, the environment today – slow recovery from a jarring commercial property bust – is eerily reminiscent of the situation twenty years ago when the Forum began. As Yogi Berra reportedly said, it is a case of déjà vu all over again. The Forum was born out of the commercial property crash of the early 1990s. Between 1989 and 1993, UK commercial property prices fell by 27%. This followed a long period of rising prices, high liquidity, expansive lending and weakening credit standards. These ingredients combined to create a classic pro-cyclical spiral. Higher valuations supported ever-larger  BIS central bankers’ speeches  1  loans on ever-finer terms, boosting valuations still further. When that pro-cyclical spiral went into reverse, it left banks, developers and investors all licking their wounds. Today, the situation is much the same. Commercial property prices are 37% below their peak. For secondary properties, they are more like 50% below their peak. This fall-to-earth came after a long wave of rising commercial property prices, deeper liquidity and rapid and, in many cases, imprudent lending practices. The subsequent crash has left banks, developers and investors not just licking their wounds but in some cases requiring life support. The commercial property bust has contributed to several UK banks departing the high street and the economy suffering its most painful contraction since at least the 1930s.

At the end of the day, out of turmoil, we all come out with new ideas, new concepts and new lessons to be learned and followed. Or, to be more illuminating let me quote Christopher Adam and David Vines – Oxford University: “… The Great Depression led Keynes to write his General Theory, thereby creating macroeconomics as a basis for national macroeconomic policy-making. The Second World War led – via the Bretton Woods Conference – to the creation of international macroeconomics, and to the birth of the IMF… The present global financial crisis will, we think, most likely lead to a major shift in our understanding of the role of finance in macroeconomics, in both theory and in policy-making”. The recent global economic and financial crisis indeed created a room for upgrade of what we knew or what we thought we knew. It clearly illustrated how fragile our knowledge can be emphasizing the need for a continuous capacity building. Bearing all these in mind, one cannot be oblivious to the role which the training centers, such as the CEF, do have in building the architecture of knowledge. In fact, the global crisis accentuated even more their importance. They embrace and combine the latest theoretical and practical views, trying to spread the new ideas and help policymakers deliver optimal policy responses. The CEF has proved to be a leading institution in helping policy makers to improve institutional capacities.
Forward-looking models can be set up in ways where things go wrong for a while. In particular, by allowing agents to learn more or less gradually that the monetary authority really does mean it about achieving its target for inflation (or some other nominal variable) 12 . Everything still turns out okay eventually, but the route can be a bit bumpy. Experiments of that kind can help policymakers to think through, in a disciplined way, what might happen if inflation expectations were to become dislodged. But, so far, they do not do much to help us know what to look for in identifying whether inflation expectations are in the process of becoming dislodged. We do not know enough about how households and firms form their expectations – how much forward7 looking, how much backward-looking – to be able to model the process rigorously. That is not part of the ‘information set’ of policymakers in today’s world. What this underlines is that policymakers may well not be able to rely on their models to help them terribly much when the stakes are highest; ie when our credibility may be fragile. They are tools to help us think. But they don’t tell us the answers. Crucially, we have to make judgments about whether medium-term inflation expectations are, in fact, securely anchored. We need to resist falling into the trap of thinking that the nominal side is now, and forever, nicely looked after by some miracle of credibility.

By contrast, the risk premia for bonds of particularly burdened euro economies – namely those of Greece, Ireland and Portugal – continued to rise. Overall, the risk premia of certain European sovereign borrowers remain very high, and latent threats of contagion continue to exist. In the global equity and commodity markets, the mood during recent quarters was cautiously positive. In the equity markets, the gratifying corporate results had a strongly supportive effect. In the US, for example, around two-thirds of the most important corporations reported better results than were expected by the market. In the commodity markets, healthy economic conditions – especially in the emerging countries – assisted a continuation of the  BIS central bankers’ speeches  1  upward movement, although here, too, price volatility remained high. However, there were also factors weighing on the markets, like the political unrest in North Africa and the Middle East, the catastrophe in Japan and, finally, the indications of a global economic slowdown in the markets. To summarise, the situation in the international financial markets presents a mixed picture, despite the fact that economic developments are relatively favourable. This reflects the fact that the burden inherited from the economic and financial crisis continues to be very significant. Implementation of monetary policy The financial crisis was characterised not least by turbulence on the money market. While uncertainties in the international financial markets persist, the situation in the Swiss franc money market eased last year, and has been very relaxed since the beginning of 2011.
•  The government budget – growth in public spending – influences the real krone exchange rate and the size of the internationally exposed business sector in the long term. •  Wage formation and economic structures and incentives determine how efficiently labour and other economic resources are used. Even if inflation fluctuates somewhat from one year to the next, inflation has remained fairly close to target over time. Inflation was particularly low in the years around the turn of the millennium when cheap goods flowed from Asia into our country while productivity in the business sector grew sharply. The rise in prices for domestically produced goods and services was also low. Interest rates were cut in response to lower inflation. Economic agents could then expect inflation to gradually move up to target over time. Growth could also remain high for a period without a rapid rise in inflation. Low interest rates made it possible for us to make use of the potential for higher consumption and investment. There are now signs that price and wage inflation is on the increase. Higher food and energy prices are fuelling inflation in other countries. Thus, we cannot assume that prices for imported goods will continue to fall. Moreover, domestic productivity does not seem to be improving as quickly as earlier. The rise in prices is therefore likely to quicken for goods and services produced in Norway.

If the government spends 4 per cent of the Fund annually – the expected real return – this  6  Median income is the income level at the middle point of the income distribution. BIS Review 18/2008  7  will finance close to 20 per cent of public expenditure ten years ahead. The return on the Fund will by then have become such an important source of funding that it is difficult to imagine that the government authorities would find any sound arguments for drawing on the accumulated capital. It is also a flow of revenues that does not have an adverse effect on private sector production capacity, unlike taxes. Irrespective, only a share of future pension payments will be matched by revenues from the Government Pension Fund. Government old-age pension obligations are estimated to increase from around 250 per cent of mainland GDP today to approximately 350 per cent in the course of a few decades. As a result of the pension reform, the increase will be somewhat smaller. As a major shareowner and bondholder, Norway has received increasing international attention. Many countries have established funds similar to the Government Pension Fund – Global, with substantial assets under management. We are open about the Fund’s objectives, organisation and investments. This is necessary in Norway because the funds are public funds and because transparency enhances management. Moreover, the transparency of the Fund is also viewed in a favourable light by those countries in which we invest.
As far as Sweden is concerned, it is quite clear that the inflation target has helped provide greater orderliness by playing this role, and this has probably been an important explanation for the Swedish economy having developed so favourably since the crisis at the beginning of the 1990s. … but these benefits seem to have begun to fall into oblivion As I noted earlier, there is broad support for the inflation target. But as regards wage formation, there is currently an opinion, at least in some quarters, that the inflation target has played its part and become irrelevant: It was important when bringing down wage inflation from its high levels of the 1970s and 1980s, but once this has been achieved, the target no longer fulfils any function and might as well be abolished. For several reasons, I see this as a historically questionable and myopic argument, and it would be unfortunate if this view were to gain a firmer foothold. First, it is always sensible to not let oneself be influenced too much by the prevailing situation when discussing the design of frameworks that are expected to be stable and be in place for a long time. It is of course true that the kind of inflation  9 [17]  and wage surge seen during the 1970s and 1980s does not seem likely in the foreseeable future. But at the end of the day, what do we really know about how the situation will be a few years in the future?

Development of the krona has been weak for a few years and there is no doubt that one reason for this is indeed the exchange-rate channel and the expansionary policy to maintain confidence in the inflation target. It would be strange if this were not the case as this is partly how monetary policy works. But, and this is an important ‘but’, it is far from the whole picture. It is obvious that another part of the explanation is that currencies in small, open economies tend to depreciate when there is turbulence in the world. For example the Norwegian krone and the New Zealand dollar have experienced a very similar development as the Swedish krona in recent years, despite the policy rate in Norway and New Zealand being 1.50 and 1 per cent respectively, that is to say significantly higher than in Sweden (Figure 3). This is a very important observation to consider when criticism is being levelled at the Swedish inflation-targeting regime. It gives some perspective to, among other aspects, the “krona collapse” that is often highlighted in the debate. 12 [17]  But if one holds the view that the movements in the krona are not acceptable, one can of course argue for a return to a fixed exchange rate. This would, however, be a political decision and nothing the Riksbank can decide on. Under the Currency Rate Act, the government takes decisions on the exchange-rate system that is to be applied.
However, there still appears to be an institutional gap in respect of the financing of certain types of projects for which the hitherto traditional sources of funding – commercial bank loans and government budgetary resources – may not necessarily remain the ideal financing avenues in view of the new challenges facing the financial system. I firmly believe that a development or promotional bank needs to be established. Such a public sector institution would be geared to the promotion of economic activity in its wider sense complementing commercial banks. In my speech during the course of last year’s IFS annual dinner, I had made reference to the important role that the possible establishment of such a bank could play in promoting the economy and assisting the Government in social and environmental projects. Tonight I would like to elaborate further. In my view, a promotional or development bank could be instrumental in contributing to a more effective mobilisation of the substantial excess liquidity characterising the financial sector and to a more efficient deployment of certain types of Government assets, especially underutilised real estate. It should also serve as a catalyst to support the structural, economic, social and environmental policies of the Government, particularly in connection with the long term financing of priority projects.

The supervisory activity, along with prevention of extreme cases of insured institutions’ bankruptcy, carries out also the administration of such institutions, in cases when they fail irrecoverably. In this stage, the role and contribution of the Deposit Insurance Agency, until that moment “invisible”, appears with the whole magnitude and importance. It is indispensable not only in terms of treating depositors that have had savings at the bankrupt institution, but also in the “calming down” effect for all the depositors of the banking system. In fact, the world experience has indicated that the deposit insurance function of the customers of the banking system is an important instrument in the framework of maintaining the banking system sustainability and keeping public confidence in it. The timely payment of the deposit value at the insured amount, in the case of a bank’s bankruptcy, allows responsible authorities to be focused on the procedures intending the isolation of the case and the recovery of the values of the bankrupt institution. The activity of responsible deposit insurance institutions has different characteristics in different countries. Their legal framework provides responsibilities that are limited only in the role of the payer of the available fund and other cases, when responsibilities are extended further, up to the recovery of the insured institutions’ values that have gone bankrupt.