samchain/econo-pairs-v1 huggingface dataset:
Other residual impacts include the large size of the Federal Reserve’s balance sheet; significantly higher public debt; and substantial damage to public trust in the nation’s government and financial institutions. The second lesson follows from the first. We need to ensure that we have a resilient financial system. To that end, we must ensure that the safeguards put in place in response to the crisis are fully appreciated and respected. But, it also means that we need to finish the job—for example, by building out a fully workable regime for resolving a complex, global firm if one were to become insolvent. We need to ensure that our financial system can continue to provide critical services not just during good times, but also during periods of stress. These objectives are particularly relevant today, when reopening the Dodd-Frank Act and modifying our regulatory framework are under consideration. While it is appropriate to evaluate adjustments that might improve our regulatory regime, it is critical that we do not forget the hardlearned lessons of the crisis and—in the haste to reverse course—undermine the robustness and resiliency of the financial system. The U.S. housing market boom and bust At the heart of the crisis was the U.S. housing boom and bust. Between 1997 and 2006, U.S. home prices nearly doubled in real terms on a national basis.

Market-making serves an important function, and it is important that trading desks can intervene and buy during flash crashes or sell during flash surges. Permitting this could provide greater liquidity and stability to financial markets. I would also exempt smaller banking institutions from the Volcker rule since they rarely, if ever, engage in proprietary trading. Do no harm Many speculate that Congress will make changes to the Dodd-Frank Act. If the scope is confined mainly to small bank relief and adjusting how the Volcker rule is applied, I have no objection. But, because the Dodd-Frank Act addresses many of the key lessons of the crisis, I think it appropriate that changes be made carefully—with a paring knife, rather than with a meat cleaver. Here, I would underscore the importance of preserving higher capital and liquidity requirements for systemically important banks; Title VII, which mandates the central clearing of standardized OTC derivatives; and Title VIII, which gives the Federal Reserve an oversight role for financial market utilities that are systemically important, and which helps promote more uniform risk management standards. While Title II gives the FDIC the authority to resolve a large, complex financial firm by converting its debt into equity and establishing a new holding company, I do not think this is necessarily the only way to have a viable resolution regime. However, if Title II were to be eliminated, then the Bankruptcy Code would need to be bolstered.
15 A far-larger fraction believed bankers did not tell the truth. That leaves banking nursing a “trust deficit” of around 20%. Only estate agents, journalists, government minsters and politicians fared worse, with trust deficits of 40–50%. A survey by the Chartered Institute for Securities and Investment (CISI) earlier this year found that over half of respondents believed it would take over a decade for the culture of banking to be restored in the eyes of the public. 16 And looking at actual complaint cases taken to the Financial Ombudsman by the public, there has been a relentless rise from around 100,000 prior to the crisis to more than triple that number today 17. At least until recently many economists like me, when faced with this evidence, might have shrugged our shoulders. Social capital had no real role in our models of economic growth, unlike physical capital and human capital. Trust did not butter our parsnips and nor did it enter our production functions. Recently, however, that orthodoxy has changed and the importance of trust has become clearer. Evidence has emerged, both micro and macro, to suggest trust may play a crucial role in value creation. At the micro level, there is now ample evidence the degree of trust or social capital within a company contributes positively to its value creation capacity.

A number of foreign banks have already given up their banking licences but this has been largely due to problems in their home market or mergers with other institutions. The Asian crisis is likely to result in further rationalisation among the banks from the region as they are merged and restructured in their home countries. The reduction in business activities such as syndicated lending and trading in regional debt securities may cause other marginal players to leave Hong Kong, simply because they can no longer make money. However, I am sure that the bulk of foreign banks remain committed to Hong Kong and will want to retain a substantial presence here. This is not wishful thinking, but rather founded on hard logic. First, it simply does not make sense to suggest that within the space of a few months Asia, as a whole, has become less relevant to banks with global aspirations. Second, within Asia, Hong Kong retains its unique attractions as the main centre for banks to do business with China. Leaving aside short-term cyclical fluctuations, the economy of the Mainland is clearly on an upward path. Foreign, and indeed local, banks will want to share in the financing and advisory opportunities which this brings, and Hong Kong will remain the best location from which to launch these activities. The costs of doing business in Hong Kong must however be reasonable; and that it is why the current adjustment process is necessary as well as painful.
Having done a lot of convening, the Bank is collaborating in key international fora to advance the discussion on transition finance, including the G20 Sustainable Finance Working Group (SFWG). We support the transition finance framework developed by the G20 SFWG this year and look forward to its operationalisation in 2023 to ensure transition finance is mobilised at pace and at scale. Second, through being creative in the use of and access to the Bank's balance sheet. In November 2021, the Bank published a comprehensive framework to 'green' our corporate bond portfolio to support the transition to net zero, while at the same time not undermining the scheme's primary monetary policy purpose. Whilst the portfolio is currently unwinding in-line with monetary policy objectives, we have created a greening framework for other investors on how to green a corporate bond portfolio. And our convening role as the UK's central bank should ensure they take note. This ties in well with the third area, our prudential work. As the UK's central bank and prudential regulator, it is the Bank's role to ensure the resilience of the financial system to the impacts of climate change, including the transition to net-zero. Collaborating with many others through the Network for Greening the Financial System we are seeking to understand how different transition pathways could affect the economy and the stability of the financial system, as well as the safety and soundness of the firms we regulate.

So far we have only succeeded in the first phase. There are still two more phases in the fight against inflation: In the second phase, inflation needs to fall to below 10% in the second half of this year, in line with our forecast. And then, in the third phase, inflation needs to continue to fall to levels close to 2% next year, which will be the best news for the economy. More than before, the new Bank Board is monitoring and discussing money flows in the economy, and above all loans to households, firms and the government. We must look at money. We conduct monetary policy. The term is derived from the word "money", which we label as M1 and define as the quantity of money in the economy. We have added elements of monetarism to New Keynesian economics, the predominant school of thought at the CNB so far. For illustration, broad money (M3) has risen by 31% since January 2020 (pre-Covid). The price level has increased by 33% in the same period. In order to significantly slow inflation, money growth must also be slowed substantially. Our DSGE model created according to the New Keynesian theory ends with the threemonth PRIBOR interest rate (Michl, 2019b). On top of that, in our considerations, the Bank Board must discuss the evolution of longer client interest rates and take into account how the interest rate transmission mechanism works and how changes in shortterm rates will affect long-term rates.
I will share some of the challenges we see in the road ahead as the industry continues to adapt to and implement necessary changes. And then I’ll finish with a brief discussion of two of the issues that keep me awake at night. Progress to date Three years ago, I encouraged you to acknowledge that it is impossible to predict the nature or timing of a future crisis event. I posed a question about what a financial system better prepared to weather all storms would look like. As financial institution supervisors and as leaders of financial institutions, we all knew we needed to be better prepared for crisis events, whatever their character, source or timing. Since I made those remarks, a number of stress events have reinforced not only the need for continued substantive changes in firms, but also the benefits of the changes we have made so far. 1. Starting first with what has been accomplished to make financial firms – and the system – more resilient today to future shocks. First, in the area of capital resiliency, as a result of both new bank capital standards and our new stress testing regime, bank capital levels and the quality of capital have increased significantly – and on some measures, nearly doubled from pre-crisis levels. The banking system has more capital and, thus, a better ability to withstand stressful events when they arise.

At the same time, our supervisory focus on capital planning and management across firms has led to greater focus and attention on the internal processes that firms use to manage their capital, including the prudent distribution of capital to shareholders, whether through dividends or share buybacks. In the area of liquidity, again, new rules and regulations have raised both the absolute level of liquidity in firms and the quality of liquid assets (that is, assets that are readily accessible). This provides for a much stronger ability to manage through stress conditions. As many firms learned in the depths of the crisis, what was once thought to be a liquid asset quickly became illiquid as markets seized up and normal outlets for converting assets to cash evaporated. Further, our enhanced focus today on liquidity management across the range of  BIS central bankers’ speeches  1  firms we supervise has led to heightened management – and board of directors – attention to liquidity levels, liquidity risk management and liquidity stress testing. In addition, global supervisors have finalized rules – or are in the process of finalizing rules – in the areas of both capital and liquidity, including additional and more stringent rules for the largest, most systemically important firms. For these firms, additional buffers will be required, as will stronger risk management practices. 2. In addition to becoming more resilient, firms have made some progress in becoming less complex – although the progress is somewhat less measurable and less dramatic to date.
Balance sheet measures turn central banks into financial market players  Let me now turn to balance sheet measures. Here, the central bank enters the financial markets as a major participant. In the case of quantitative easing, or QE, it will often purchase medium and long-term government bonds with the aim of lowering the relevant interest rates. 5 As well as government bonds, some central banks have extended their purchase programmes to include other asset classes, including asset-backed securities, covered bonds and corporate bonds. At the Bank of Japan, the purchase programme also encompasses certain equities 6 and shares in real estate funds. In chart 3, you can see that a QE programme impacts directly on a number of financial markets. This more direct influence of monetary policy on a broader segment of the financial markets is evident in the extent and impact of the QE programmes. Chart 4 shows the impact of the QE programmes by the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan. 7 The chart is based on findings from a total of 24 studies which estimated the impact of each securities purchase programme on capital market rates. The blue bars show the breadth of the estimated impact of each QE programme. The red diamonds indicate the respective median. We can see that the QE programmes across the different currency areas may have reduced the yields on ten-year government bonds by over half a percentage point on average.

I now come to central banks’ foreign exchange market interventions. The exchange rate is an important variable for a small open economy like Switzerland, and thus for its monetary policy. Yet the SNB only rarely intervened directly in the market in previous decades, and 5  6 7  In addition to the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan have also introduced securities purchase programmes. With respect to Switzerland, the SNB’s purchases of Swiss franc bonds in 2009 and the large-scale repo transactions and foreign exchange swaps concluded in August 2011 may be termed quantitative easing. These are exchange-traded funds which replicate the TOPIX, Nikkei 225 or JPX-Nikkei 400 indices. Andrade et al. (2016), The ECB’s asset purchase programme: an early assessment, ECB Working Paper Series, No. 1856, September 2016. Page 4/8  then only with small amounts. Since March 2009, this has changed. It was at this point that the SNB began buying foreign currency on a large scale, in order to counter excessive upward pressure on the Swiss franc and prevent an undesirable tightening of monetary conditions in Switzerland. Alongside the negative interest rate, our willingness to intervene in the foreign exchange market as necessary constitutes a key element of our current monetary policy. To sum up my remarks so far: the sphere of influence of monetary policy on the financial markets has increased markedly with the broad application of unconventional measures.
As the Presidents of the European Council, European Commission, Eurogroup and European Central Bank argued in their report, European monetary union, which has so far relied on fiscal rules, will not be complete until it builds mechanisms to share fiscal sovereignty.27 Possible  23  Kenen (1969). 24  This refers to a fall in output relative to potential output. See Chamberlin et al (2013). 25  These estimates are reported in Melitz and Zumer (2002). 26  The Delors Committee (1989) report, which provided the foundation for monetary union in Europe, recognised that market discipline would not be sufficient to ensure that participating countries followed sound fiscal policies, and that fiscal constraints would therefore be required. Beetsma and Uhlig (1999) provide a formal motivation for the resulting stability and growth pact as a device to internalise the costs of inflation that might otherwise result from imprudent fiscal policies. See also Chari and Kehoe (2007). Recent experience demonstrates that overindebtedness can also have costly spillovers through financial crises. 27  See Barroso et al (2012). BIS central bankers’ speeches  7  options range from a transfer union to a pooled employment insurance mechanism. Whatever is ultimately chosen, the degree of fiscal risk sharing will likely have to be significant. Similarly, in a monetary union between an independent Scotland and the rest of the UK the two Parliaments would have to agree on whether fiscal rules were sufficient or whether similar risksharing mechanisms were necessary.

That reduces the likelihood of a shock affecting one part of the currency union, and hence reduces the need for the exchange rate to adjust. Kenen (1969) argued that more diversified economies were better candidates to join currency unions because industry-specific shocks were less likely to have macroeconomic effects, reducing the need for exchange rate adjustment. 8  See Carney (2013). 9  Moreover unit labour costs in Scotland and the UK as a whole have moved closely together (chart 2), whereas large relative movements in the Eurozone imply divergences in competitiveness (chart 3). 10  The five tests focused on the degree of convergence between the UK and the rest of Europe, the degree of flexibility to adjust without moves in the exchange rate, and on whether joining would promote investment, financial services, and growth, stability and employment (HM Treasury 2003). BIS central bankers’ speeches  3  the benefits of a shared currency but can also mitigate the cost of losing exchange rate flexibility.11 Mundell originally argued that currency areas should coincide with regions which had high internal factor mobility.12 The idea was that by moving from areas where demand has fallen to those where it has risen, workers help moderate changes in wages and unemployment.13 There are clear practical impediments to labour mobility within the euro area including language and culture.
Both the macro and the asset pricing literature seem to have understood the importance of taking time-varying long-run equilibria into account, but a coherent treatment within macro finance models would be desirable. [35] And a third theme is an improved modelling of cross-country interrelations: this pertains to a more refined understanding of the workings of quantitative easing in a currency union, but also to the spillovers of policy-induced yield curve changes across different currency areas. [36],[37] Finally, one question is whether changes in long-term rates that are due to changes in the risk-less rate versus the term premium have similar effects on spending and the economy. On these and other topics concerning the interplay between monetary policy and the yield curve, I look forward to learning from new academic research – including the future contributions of the UCL research community. Thank you for your attention. [1] I am grateful to Wolfgang Lemke for his contribution to this speech. [2] On how to measure the risk-free rate in the euro area appropriately, see European Central Bank (2014), “Euro area risk-free interest rates: measurement issues, recent developments and relevance to monetary policy”, Monthly Bulletin July. [3] Some of the long time series shown in Chart 1 are from Jordà, Ò., Knoll, K., Kuvshinov, D., Schularick, M. and Taylor, A. M. (2019), “The rate of return on everything, 1870–2015”, The Quarterly Journal of Economics, 134(3), pp. 1225-1298. [4] Today, I will not discuss the potential non-policy drivers of the secular downward trend in rates that I mentioned earlier.

BIS Review 146/2008  3  To name just a few developments in the past 12 months: a new Dow Jones Islamic Market Index was launched to track China-related equities listed on the Hong Kong Stock Exchange; Islamic mutual funds were introduced by a local bank and an asset management company featuring China-related equity investments through the stock market platform in Hong Kong; and an exchangeable sukuk linked to the shares of a Mainland company listed in Hong Kong was issued in March, enabling investors to gain exposure to China’s growth story. The response so far has been highly encouraging: for example, the sukuk was 10 times oversubscribed. Likewise, positive progress is achieved in the development of Islamic banking in Hong Kong. Following the first Islamic banking window introduced three months ago, I’m glad to witness yet another market player who is set to launch its Islamic banking window in Hong Kong at this auspicious occasion today. The increasing number of banks taking part in Islamic banking activities will add further momentum to the development of an Islamic capital market in Hong Kong by providing an important tool for funding and liquidity management. The Hong Kong Monetary Authority will continue to give full support to the HKSAR government in its initiative to develop Islamic finance in Hong Kong by acting as a market enabler and infrastructure provider. The HKMA has taken important steps and devoted considerable resources to promote the industry in Hong Kong.
Examples probably include money market mutual funds and an element of the prime brokerage services offered by securities dealers to levered funds. 1  See Section 1, Financial Stability Board, “Shadow Banking: Scoping the Issues”, April 2011; Section 3, European Commission , “Green Paper on Shadow Banking”, March 2011; and also Turner, “Securitisation, shadow banking and the value of financial innovation”, April 2012. 2  My definition was: instruments, structures, firms or markets which, alone or in combination, replicate, to a greater or lesser degree, the core features of commercial banks: monetary or liquidity services, maturity mismatch and leverage. See Tucker, P M W, “Shadow Banking, Financing Markets and Financial Stability”, January 2010. BIS central bankers’ speeches  1  With that brief bit of scene setting, I will quickly set out my current thinking on policy. The objective should not be to curb non-bank finance in general, but to recognise where a form of intermediation is banking in substance or in the risks it creates for the system as a whole. Shadow banks that are really part of banks Many examples of shadow banking are sponsored by banks or are operated by them, or both. They are effectively part of their “parent” bank. In the run up to the present crisis, prominent examples were Structured Investment Vehicles, ABCP conduits, and money funds. Many benefitted from financial support from their “parent” during 2007–08.

And repo has enriched the money markets. But it is also true that anyone holding a securities portfolio can build themselves a shadow bank using the securities lending and repo markets. One simply lends out the securities at call for cash, and then one employs that cash by making loans or buying credit-assets with a longer maturity. This is leverage and maturity mismatch. That example assumes the shadow-banking business is built by the investor who holds the securities outright. But, of course, nothing is so simple. The first lender of securities might lend against securities collateral and do no more; that is relatively common in European markets. But the entity that has borrowed those securities could themselves repo out the borrowed securities for cash, and employ the cash in a lending or credit-asset business. And  4  BIS central bankers’ speeches  so on – ie at any point in the chain of securities lending, an intermediary can build themselves a shadow banking business. Such chains can prove fragile for all sorts of reasons – because many securities are at call, and because many secured lenders try to realise their collateral instantly upon default. It is also worth mentioning that some asset managers have no – zero – appetite to hold the underlying paper outright in the event of their counterparty defaulting, either because the assets are not covered by investment mandates or the fund managers do not know how to manage them, etc.