samchain/econo-pairs-v1 huggingface dataset:
Philipp Hildebrand: Economic situation and monetary conditions in Switzerland Introductory remarks by Mr Philipp Hildebrand, Chairman of the Governing Board of the Swiss National Bank, at the half-yearly media news conference, Geneva, 17 June 2010. *  *  *  The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. Consequently, it is leaving the target range for the three-month Libor unchanged at 0.00–0.75% and intends to hold the Libor in the lower part of the target range, at around 0.25%. The recovery of the global economy continues and the Swiss economy is benefiting from it. Although the weakening of the euro with respect to the Swiss franc is dampening export activity, this activity is being supported by growth in foreign demand. The domestic sector is still performing favourably. For 2010, the SNB is now expecting real GDP growth of about 2.0%. In view of these pleasing developments, the deflationary risk in Switzerland has largely disappeared. At the same time, uncertainty has increased since the last monetary policy assessment. The latest tensions on the financial markets, particularly with regard to the public finances of some individual countries, have increased the downside risks. Should these downside risks materialise and, via an appreciation of the Swiss franc, lead to a renewed threat of deflation, the SNB would take all the measures necessary to ensure price stability. The SNB’s conditional inflation forecast for 2010 and 2011 has increased slightly since March. It remains unchanged for 2012.

Consequently – with an incipient threat of deflation – the SNB adopted unconventional measures to loosen the monetary conditions further. By carrying out long-term repo transactions and foreign exchange swaps, acquiring Swiss franc bonds issued by private sector borrowers and purchasing foreign currency, the banking system was supplied with large amounts of liquidity. In the past few months, foreign exchange purchases, in particular, have been an effective instrument for averting deflationary risks. While the liquidity created by purchasing foreign exchange and Swiss franc bonds is of a permanent nature, liquidity resulting from repos and currency swaps is temporary. It flows back automatically when transactions are not renewed. This has occurred to a large extent in the meantime. The considerable expansion in the SNB’s balance sheet is therefore primarily attributable to the increase in foreign exchange reserves. These have more than quadrupled to just over CHF 230 billion as a result of the interventions since the beginning of the financial crisis. From today, the SNB will also be publishing information on current foreign exchange reserves on its website (www.snb.ch) at the beginning of each month. The high level of foreign exchange reserves will inevitably increase currency risk and mean that debtors are concentrated in a few major countries. These risks ultimately represent the burden the SNB has assumed in order to protect the Swiss economy from the threat of deflation, in line with its mandate. Balance sheet risks have risen overall.
So the premium on sound regulation and good living conditions has gone up. Location However, the trend towards concentration is unlikely to end in the extreme of only one or two global financial hubs. Location still matters even in the globalised financial landscape of the New Economy. Physical proximity to potential clients will remain important, especially in capital market origination, the M&A business or private banking, where personal services and physical interactions with clients are essential. Indeed, the growing customisation of finance to suit local conditions and meet individual client needs will mean that regional financial centres will continue to play a complementary role. Competition among financial centres will not be a zero-sum game of winner takes all. Smaller centres can coexist with the mega centres, focusing on different niches and serving different regions. There are thus collective gains to be shared through co-operation. Linkages between key financial centres, both across and within time zones, can help the centres to reap the benefits of integration while at the same time preserving close access to local communities. Similarly, there is an important role for closer regulatory co-operation and, where appropriate, harmonisation of standards, particularly in cross-border listing requirements, ongoing supervision, and accounting and disclosure. For the regions they serve, international financial centres make good economic sense. They provide easy access to funding and hedging opportunities, links to other key centres, and markets with liquidity and reach, especially for emerging economies. Financial centres tend to prosper when their hinterlands are buoyant.

However, we should focus our resources first on activities where we have a natural advantage, or can build up a capability. We must push in the same direction as market forces, and not against them. Our main approach to developing the financial centre should therefore be to establish a level playing field with transparent rules and the right environment, so that market forces can operate and innovation can flourish. Active promotion of specific activities complements this. Conclusion The major changes in the financial industry compel financial centres to adapt and evolve, or else be bypassed and rendered irrelevant. Singapore aspires to be one of the financial centres in Asia, and a node in the global network of financial markets. By implementing the right policies and strategies vigorously, we hope to develop and grow as a financial centre, serving Asia and contributing to its development and prosperity. 4  BIS Review 50/2001
But if one looks closely, one will find that a good portion of this are raw materials, parts, and components produced in one country and sold to another for further processing or assembly for sale to a third country within or outside Asia. The production of goods for final consumption in Asia is still low, with the exception of Japanese and Korean brands. And while China’s imports from ASEAN have increased substantially in the past few years, their consumption is still mainly in food products, raw materials and low value added products. For luxury goods, their being brand-conscious, ASEAN products have not been able to compete well. This will change over time when Asian products gain more differentiation and sophistication. For example, at the moment, Thai palm oil is no different from Malaysian. There can be no mutual trade. But when it becomes part of the national cuisines, trade and exchange could occur. The more value is added, the more Asia will trade with each other for eventual consumption. But for the moment, the emphasis is more on cooperation than integration. So the second question: If this is so, why are there various monetary initiatives going on in Asia? The way I see it is that even though the level of economic integration is presently still not fully advanced, the financial linkage and contagion affect is very high. Part of this may have to do with the fact that Asian countries lend a good deal of money to each other.

Greater collaboration will be important to create greater synergy of expertise in applied research and development in Islamic finance. Initiatives by industry associations collaborating with local and international research institutes and academia to seek for new global research findings and breakthroughs will enhance the potential for increased product development activities. This Colloquium that is organised by ISRA following the success of the inaugural Colloquium last year, to discuss the new research findings for the various segments of the Islamic financial industry with the expectation that it will contribute to opening new horizons for the future development of Islamic finance. On this note, let me wish you a productive and successful Colloquium. I would also like to congratulate ISRA on the launching of its new Islamic Financial Knowledge Repository. BIS central bankers’ speeches  3
The required return on investment is reduced at a lower interest rate at the same time as saving is less profitable. ii. Interest rate changes also have an income effect through interest income and interest expenditure on existing assets and liabilities. iii. Interest rate changes also affect share prices and real estate prices – lower interest rates increase demand for shares and properties and prices increase. An interest rate reduction also affects household wealth through higher share and property prices which in turn affect consumption decisions. The interest rate channel therefore affects demand for goods and services and thus the output gap with some time lag through many complicated mechanisms. Changes in the use of resources or the output gap then affect inflation in turn, with some time lag. The impact of changes in the instrumental rate on demand and inflation may also be affected by the lending rate set by the banks. The channel that is mediated by the behaviour of the banks can be generally referred to as the credit channel. Higher interest rates may, for instance, reduce the willingness of the general public to keep funds deposited in current accounts, which have a very low return. Deposits have a very low financing cost for the banks and if they have to finance an increased proportion of their lending in another way, the banks may compensate for this by a higher lending rate. 2 However, it is uncertain how the behaviour of the banks affects the impact of monetary policy.

Presumably the relation between the output gap and inflation varies both with the level of the output gap, with the speed of the change in the output gap and with the expectations on central bank behaviour. The Riksbank's monetary policy strategy An important part of the Riksbank's monetary policy inflation target strategy is clarity and openness about the bases on which monetary policy decisions are made. The intention is to create support for the price stability target and understanding of what governs interest rate decisions. This clarity means that the Riksbank's interest rate decisions are often expected and this increases the ability of the Riksbank to affect the somewhat longer rates through its analysis. This openness should also contribute to stabilising inflation expectations. The monetary policy decisions are based on forward-looking inflation assessments of CPI and UND1X – a price index adjusted for certain temporary effects. These assessments are reported in the Riksbank's inflation reports which are published four times a year. The minutes of the monetary policy meetings which are held between six and eight times a year are published with a couple of weeks time-lag. Inflation assessments are made with a two-year time horizon while paying some attention to the potential developments in the third year. Important determining factors for inflation are the development of demand and the output gap. A number of inflation indicators are used, however, to make the assessments. The quantity of money has no special role in the analysis although it is used as one of many indicators.
And I would like to offer some ideas of the regulatory challenges facing the banking industry in the years ahead – and how these relate to the wider economy and the community. Looking back 7. My first term as chief executive of the HKMA began 10 years ago this coming Tuesday. That was around two years after the US subprime mortgage crisis had broken out, in 2007. 8. Obviously, Hong Kong was affected. The local community was especially shocked by one side-effect of the Lehman Brothers bankruptcy – and that of course was the Lehman minibonds episode. In this whole climate of crisis, public trust in the financial services industry had fallen. It was a challenging time to step into the chief executive’s office. 9. I do not want to spoil a very enjoyable lunch – so I will not give you a long list of the measures and initiatives the HKMA has introduced over the last 10 years. At a rough estimate, we issued an average of around 70 circulars a year during this 10-year period. I am sure you all remember them very well! 10. For me, the most important work has been in addressing several broad themes, which to some degree overlap.

Among the buffers Hong Kong banks have built up are a capital adequacy ratio of above 20%, and a liquidity coverage ratio of above 150% – well above international standards. The classified loan ratio is just 0.56%. 2/5  BIS central bankers' speeches  22. At the same time, with a return on equity of 13% last year, the Hong Kong banking industry is also among the most profitable in Asia. Capacity 23. Next, I would like to look at the capacity of the industry – skills and training. 24. It is not a coincidence that one of the financial industry’s main professional bodies – the cohost of today’s gathering – is the Hong Kong Institute of Bankers, which was founded back in 1963 to enhance the profession. 25. Everything in the financial services industry goes back to people. Since the financial crisis 10 years ago, we have seen a significant increase in the complexity in capital, liquidity, risk management and other requirements. On top of that, we have rapid developments in technology and related areas like cybersecurity. The industry has to constantly upgrade its professional expertise and standards just to keep pace. 26. But unlike some other financial sectors, our regulatory framework for banks focuses on authorizing corporate entities. There is no formal licensing regime that applies to individual banking practitioners. Our approach has therefore focused on encouragement and guidance – and to benchmarking.
A positive example is the Swiss labor market. Unencumbered by a history of pervasive unionization, Swiss labor market flexibility has continuously been strengthened. Today, it is comparable to Anglo-Saxon standards. Against the backdrop of our two countries’ differing legal, political and economic traditions, let me now turn to what strike me as significant lessons with regard to our respective relations with Europe and, more specifically, with EMU. Structural reform and EMU The United Kingdom is currently harvesting the fruits of its growth-boosting liberalization policies implemented during the past 20 years. A dynamic market economy yields strong and stable output  1  See e.g. Judgment Under Uncertainty: Heuristics and Biases, D. Kahneman (editor), Cambridge University Press, 1982. 2  Rising current account deficits, increasing unemployment and inflation led to the collapse of the Sterling. The UK requested for IMF assistance and the BoE secured a stand-by credit from other central banks, among them the SNB. Negotiations with the IMF were protracted. Fund officials were determined to ensure that UK officials had in place a set of policies that promised a drastic decrease in public sector borrowing in order to achieve a deceleration of inflation and an improvement of the balance of payments. An agreement was reached in December 1976. Immediately afterwards, confidence in the pound was restored. See e.g. The International Monetary Fund, 1972-1978: Cooperation on Trial, Margaret Garritsen De Vries, IMF, 1985. 2  BIS Review 24/2004  with low unemployment and monetary stability.

In the context of benefits for Switzerland, I have already discussed why the argument that EMU membership would induce the Swiss political authorities to embark upon a necessary and otherwise impossible economic reform program should be dismissed. For the United Kingdom, the economic cost-benefit assessment of EMU membership is a different one. Analogous to the Swiss case, the UK would lose monetary policy as a flexible instrument to respond to asymmetric domestic shocks such as the current steep rise in domestic house prices (Chart 6). However, unlike Switzerland, the UK would gain from lower interest rates. In this context, it must be remembered that the Bank of England’s post-monetary independence highly successful monetary policy under an inflation targeting regime follows a long period of stop-and-go monetary policy and relatively high inflation (Chart 7). The argument that EMU would somehow induce further structural reforms is equally irrelevant for the UK as it is for Switzerland though partly for different reasons. As I outlined earlier, initiated by the economic shock experience of the late 1970s, the United Kingdom has independently and autonomously embarked upon a long-standing and far-reaching economic liberalization course. The current nature of the relative business cycles between the UK and the Euro-zone points to higher economic costs of UK membership in EMU than for continental European countries. This is illustrated by the different interest rates settings of the ECB and the Bank of England in recent times.
So whatever my own intellectual interest in helicopter money, as a Governing Council member I have a fair deal of skepticism and circumspection. So we’re not near the point where the ECB could, for example, decide to finance by itself the big public investment boost it has been calling for? Say, by lending € billion or more to the European Investment Bank (EIB)? The theoretical example you cite underlines the problem I just mentioned of the borderline between monetary and fiscal policy. We are already supporting investment in the euro area through our monetary policy. We have brought down the entire yield curve and we are buying securities of public entities such as the EIB as part of our asset purchase programme. But it is absolutely not our role to decide which investment should go ahead, which bridge should be repaired or which school built, nor whether the investment should be private or public. Ben Bernanke, in his memoirs, suggests that if the United States and Europe took different paths out of the crisis, that is partly because Europe’s monetary policy in the first years was too tight, and its fiscal policy too strict at the wrong moment… I’m not for rewriting history, but the ECB and governments reacted with the tools they had at the time.

In fact, this is the first crisis episode when the initial reaction of the National Bank was loosening and not tightening the MP. This time, despite the strategy of de facto fixed exchange rate, solid fundamentals and strong official reserve buffers allowed for loosening of the monetary policy and adopting regulatory flexibility. Also, our initiative for access to the ECB backstop facility, which was also supported by other central banks in the region, and the positive ECB response, allowed for wider space for accommodative policies. The symbiosis of these actions has enabled conducive financial conditions, i.e. decline of borrowing interest rates at historically low levels and uninterrupted credit flows growing at a rate of 6% annually, double than in the EU, that helped "ring –fencing" of the labor market, preserving wages and jobs. Where do we stand now, what are the major challenges ahead and is it time for complacency? A common denominator for all policy makers at the moment is the lingering uncertainty. Many scenarios are in place, from smooth and orderly recovery, through strong rebound with price pressures, ending to stalled recovery amidst new and more virulent strains. From a central bank perspective, our advantage is that there is still policy room for maneuver, although narrowed.
As we saw so clearly in the run-up to the financial crisis, the credit and business cycles operate on different time horizons, with the former as much as twice as long and twice as big.10 In  6  Decision-making should be quicker with fewer agencies involved, and when trade-offs can be internalised rather than being subject to negotiation. 7  Blinder (2010) argues that, because of economies of scope, the Federal Reserve should be both the systemic risk regulator and should supervise because preserving financial stability is closely aligned with the objectives of monetary policy and is likely to require lender of last resort powers. 8  Monetary policy affects banks’ balance sheets for example by changing the return on their assets; through its impact on the economic cycle and the amount of bad loans; through its impact on credit demand; and by affecting the value of their collateral and hence funding conditions. 9  Brunnermeier and Sannikov (2013). 10  See Aikman et al (2014), Drehman et al (2012). 4  BIS central bankers’ speeches  pursuing price stability, monetary policy can contribute to the gradual build-up of financial vulnerabilities through its effect on the degree of risk-taking in the economy.11 For example the period of low and predictable interest rates before the financial crisis helped drive a “search for yield” and leverage cycle, even with inflation subdued. It doesn’t take a genius to see that similar risks exist today.

Financial institutions must be convinced that there is a long term gain by hiring cyber risk specialists, including in-house specialists that can develop timely and customised solutions based on a deep understanding of the institution’s operating systems, business needs and organisational culture. There is also substantial scope for the financial  2  BIS central bankers’ speeches  industry to work more closely with telecommunications firms, internet service providers and other vendors to ensure that cyber criminals do not take advantage of external vulnerabilities to penetrate the security perimeter. In most countries, such initiatives lacked the coordination necessary to provide an effective system-wide defence against cyber crimes. Part of this change will be influenced by the attention and importance that supervisors place on the management of security risks. The role of supervisors and the public sector In the face of further digitisation of the financial sector, the responsibility of financial supervisors in ensuring the stability and integrity of the financial system will become increasingly challenging. Regulatory and supervisory frameworks need to be updated to acknowledge the significance of cyber security threats. It is necessary for us to establish a clear expectation on the management of such risks by financial institutions. We should outlined clearly in key areas that could cause threats such as outsourcing arrangements with third party service providers, stress testing, anti-money laundering requirements and business continuity plans.