samchain/econo-pairs-v1 huggingface dataset:
Another idea that I have discussed is the creation of a database of banker misconduct to combat the problem of “rolling bad apples.” In these cases, employees who are dismissed due to suspicion or proof of misconduct are unwittingly hired by other firms in the industry, where they 5/8  BIS central bankers' speeches  have the opportunity to repeat their actions. Understandably, firms are concerned about legal risk if they share information about banker misconduct, but there may be ways to address these concerns through legislation. Once again, I invite the industry to take the initiative on these issues, and to look to the public sector for support. For their part, I believe that supervisors have a special role to play in assessing incentives at the firm level and their possible implications for bank behavior and misconduct. Supervisors can mitigate misconduct risks by supporting the development of effective corporate governance regimes, prudent risk management policies, and strong compliance and control structures—all within a framework of effective oversight from the firm’s board of directors. Ultimately, establishing and maintaining an effective culture with appropriate risk governance and controls is the responsibility of individual firms and the industry, but the official sector can help by highlighting best practices and addressing collective action problems and other market failures. Areas where further work on incentives is warranted I would like to briefly touch on some areas where further work on incentives may be warranted, including regulatory changes that might address certain incentive and first-mover problems.

In contrast, a new U.S. Treasury repo reference rate will be based on actual transactions in a deep and liquid market, and is designed to be compliant with new principles set forth by the International Organization of Securities Commissions.7 In the foreign-exchange market, bad incentives helped encourage rate rigging at particular rate-fixing times. Reforms were subsequently introduced, including recommendations from the Financial Stability Board’s Report on Foreign Exchange Benchmarks and the recent publication of the FX Global Code, developed by central banks and market participants.8 The creation of millions of unauthorized accounts at Wells Fargo also reflected bad incentives. Bank employees were compensated on sales volume with aggressive crossselling targets without customers actually receiving beneficial services. In response, the Federal Reserve Board entered into a consent cease-and-desist order with Wells Fargo that requires the firm to improve its governance and risk management processes. These recent cases were particularly disturbing in terms of their scale and flagrancy, and—in the case of the rate-rigging scandals—the collusion by employees across firms. I am particularly struck by the fact that manipulation of the foreign exchange market occurred even after the LIBOR scandal was well known. These episodes underscore the tremendous power that incentives have to influence and distort behavior, potentially leading to massive damage to bank cultures, reputations, and finances.
Not only will banks be expected to improve their external transparency, but they will also be expected to operate more transparently internally. In particular, banks will be expected to ensure that the board of directors and senior management are sufficiently well-informed to be able to meaningfully assess the bank’s risk profile. This will place a premium on effective and accurate risk reporting. Likewise, there is an expectation that senior management will communicate effectively to employees their responsibilities with regard to the effective management of risk. Finally, Basel II will enhance clarity by promoting international co-operation between supervisors. International banking organisations have grown increasingly complex over the years, to the point that in some cases it can be very difficult for supervisors - and even for bank management - to have a clear understanding of their global risk profiles. This highlights the need for effective supervisory co-operation for such organisations. Effectively combining the necessary supervision at the local level in the host country with effective supervision at the consolidated level in the home country requires more thorough exchange of information and better knowledge of financial instruments and links within financial groups. This will heighten supervisory understanding of banks’ activities and will promote consistency in the implementation of standards, a level playing field and the reduction of unnecessary regulatory burdens. Next steps While I have focused my remarks on the new capital framework, I would like to emphasise that corporate governance is much broader than Basel II.

The board needs to harness the work of the auditors as an independent check on the information received from management. I believe that this emphasis on the role of the board and senior management in developing and implementing an effective risk control environment will, with the help of independent audit and other control functions, result in better-managed banks. Culture The second “C” is culture. I believe that the increased responsibilities of the board of directors and senior management under Basel II will foster a culture of improved risk management. This notion underlies the second pillar of the new framework, which takes as its starting point that the board and senior management have an obligation to understand the bank’s risk profile and ensure that the bank holds sufficient capital against its risks. Supervisors, in turn, are responsible for reviewing the bank’s assessment to evaluate and determine whether that assessment seems reasonable. The key, in my view, is that risk awareness starts at the top of the organisation. The board and senior management cannot abdicate their responsibility to understand and manage the risks arising from the bank’s activities. I believe that this focus on sound risk management at the very top will help to set the tone throughout the bank that effective risk management is everyone’s job. Of course, this may also represent a cultural shift for supervisors. Basel II places a firm emphasis on taking a risk-based approach to supervision.
Central banks have borne much of the burden of supporting the global economy as it has recovered from the global financial crisis. In some advanced economies, such as the UK and US where the output gap has largely been closed, that extraordinary monetary support is now being gradually withdrawn. In others, such as the euro area, a gradual withdrawal has been clearly signposted. The gradual withdrawal of exceptional monetary stimulus is unlikely by itself, however, to remove entirely the weight from central banks’ shoulders. Many have acquired new powers and new responsibilities since the crisis, particularly in the regulatory sphere. At the same time, the crisis has dented trust in the financial sector, including in central banks. In combination that has raised expectations, but also some doubts, about the role of central banks in serving society. 1  Central banks have, over the course of the recent past, undergone a revolution in their degree of transparency and accountability. This has delivered huge gains. By improving public understanding, it has helped stabilise the economy and the financial system. And by improving public accountability, it has allayed concerns about central banks being over-powerful and under-accountable to the societies they serve. But time has moved thing on and, as in the past, central banks will need to move with the times. In response to greater levels of responsibility, but more fragile trust, I will argue a second revolution in central bank practices may be needed.

The deliberative model has not been tried and tested in anger for the full gamut of societal decisions. As put, that is true. Yet there is at least one domain of public policy where this model has been tried and tested (both literally and metaphorically) for a wide range of societal decisions over many centuries: the judicial system. Many judicial systems draw on both expert (judges) and non-expert (juries) opinion, like the Athenians. Non-experts are drawn randomly from the population, as in Athens. There is a clear process for deliberation among participants, as in the boule. This system is the nerve-centre of decision-making on a defined set of issues, as in Ancient Greece. The English judicial system has already lasted for almost 1,000 years, more than twice as long as the Greek Empire. The Next Revolution  Against this backdrop, what concrete steps might central banks take to build an improved infrastructure for engagement with the general public? Can it build on others’ experience in engaging wider society, in ways which improve the public’s and policymakers’ understanding of the economy? Let me offer some suggestions, which are motivated by recent initiatives at the Bank of England aimed at doing just that. 19  All speeches are available online at www.bankofengland.co.uk/speeches  19  (a)  Minding Your Language  Historically, the language of central banks has often been pitched at a level which has made it difficult for most non-experts to understand. This has contributed to the public’s understanding and trust deficits.
However, using the CPI as a target variable has occasionally led to a number of pedagogical difficulties, not least in recent times. The reason for this is that household mortgage rates are included in the CPI. For example, when the Riksbank lowers the interest rate to bring inflation up, mortgage rates will fall. The short-term effect on the CPI therefore heads in the “wrong direction”, that is, the interest rate cut makes inflation fall further (see Figure 2). 5  See, for example, Skingsley (2015) and Flodén (2015). 6  When the inflation target is very low, say, 1 or 0 per cent, inflation will vary around that level. The nominal interest rate will also be lower on average for a lower target. The lower the interest rate is in normal conditions, the less scope there is to lower it before it hits its lower limit and can no longer be used to stimulate the economy. Another problem with permanently low inflation is that because it has proved to be difficult to lower nominal wages in practice, it can be difficult to adjust real wages between individuals at a company and between different sectors.

Elvira Nabiullina: Review of recent inflation developments in Russia and economic outlook Statement by Ms Elvira Nabiullina, Governor of the Bank of Russia, in the follow-up to the Board of Directors meeting, Moscow, 13 December 2019. * * *  Today, the Board of Directors has decided to cut the key rate by 25 bp down to 6.25% per annum. We will consider the necessity of further key rate reduction in the first half of 2020. Let me dwell on the main factors behind the decision. First. Annual inflation continues to decline faster than we expected. Our revised inflation forecast for the end of this year is 2.9–3.2%. Meanwhile, average 2019 inflation will stand at 4.5%, which reflects the high price growth rate in late 2018 and the first months of 2019. This significant slowdown in inflation in the second half of the year was caused by a joint action of a number of disinflationary factors, both temporary and more persistent. These factors include an increased supply of individual food products due to a bumper harvest. Also, price growth of imported goods is still limited due to the ruble appreciation and inflation deceleration amongst Russia’s trading partners. At the same time, moderate demand, both external and internal, is a more persistent factor. The proportion of temporary and persistent factors has yet to be estimated. Most indicators that we analyse reflect low inflationary pressure. Annual core inflation is declining at the same rate as the headline consumer price index.
Margarita Delgado: Digital transition in the banking business. Lessons after COVID-19 Webinar closing address by Ms Margarita Delgado, Deputy Governor of the Bank of Spain, at the presentation of the report “Digital transition and transformation of the banking business in Spain driven by COVID-19”/ KPMG/IEAF, 16 June 2021. * * * I should like to thank KPMG, the Instituto Español de Analistas Financieros and its Foundation for their kind invitation to participate in the presentation of the report “Digital transition and transformation of the banking business in Spain driven by COVID-19”. One need only look at the title to understand just how relevant this report is in the current context. And having read it, I think it is also fair to emphasise the accuracy of its analysis and conclusions. The report takes as its starting point an established fact: the health crisis has catalysed, or accelerated, certain trends whose growing influence over the banking business model was evident even before the outbreak of the pandemic. What trends are these? I refer, of course, to the increased use of digital banking channels, particularly mobile phones; the growth of digital payments to the detriment of cash; and the entry of non-traditional competitors into the banking business. COVID-19 has probably advanced these trends by a decade, or at least half a decade, in just one year. But, as we all know, digitalisation has been a dominant factor in the transformation of the banking business for some time.

I’ve spent this morning talking about measures to tackle the root cause of the stress last autumn, poorly managed leverage. But LDI funds aren’t the only non-bank to use leverage. [20] And leverage is also not the only vulnerability in the non-bank system. Forced selling that can follow from leverage can also arise from liquidity mismatches[21] or from a lack of preparedness for margin calls. [22] Identifying vulnerabilities is only half the battle. We also need to understand how market participants will behave when a stress hits. To this end, the Bank is very shortly launching its exploratory exercise to enhance understanding of the risks to and from non-banks, their behaviours, and how these behaviours can amplify shocks. As part of this exercise the Bank may reach out to some of you attending this conference. Shining a light on how market participants may behave collectively in a stress will help both the Bank and yourselves better prepare for such events. You’ll hear plenty from us once the exercise is launched. In particular, my colleague Lee Foulger will be giving a speech next week outlining how this exercise will helps us to better understand system-wide resilience. But what should we do about these vulnerabilities? We should seek to contain them and to mitigate their financial stability impact. This is what I’ve laid out today with respect to LDI funds’ leverage. Further frameworks may need to be built up.
Stress tests provide an assessment of whether the capital buffers held by banks are sufficient to absorb losses in a stress. So they are well suited to guide the calibration of countercyclical capital buffers. The Bank of England is developing a countercyclical approach to annual stress testing of banks. Rather than applying a constant level of stress from year to year, the severity of the stress would vary with the cycle. It would increase as risks build up and decrease after they have abated or crystallised. The parameters of the scenario – falls in GDP, asset prices, employment etc – would be most severe during periods of exuberance when credit and asset prices were growing quickly and the financial system was least concerned with risk. The parameters would be less severe when exuberance had evaporated and prices had corrected, which is often the time when the system is most risk averse. We aim to develop this approach over the next three years, starting with the 2016 stress test. Along with a regular assessment of data and indicators it will be a key part of a forward looking, data driven approach to setting the UK’s countercyclical capital buffer for banks. We have set out more details in a recent Bank paper.2 As always, one issue will be assessing the costs and benefits through time in so far as that is practicable. Another is where to set the countercyclical capital buffer in different parts of the cycle to enable it to be relaxed at times of stress.

But leverage has started to creep back up in the past year or so as we have seen the return of more leveraged investors. That is not to say that there is no macroprudential interest in the UK CRE market at the moment. A rapid fall in CRE values could affect the UK economy through other channels. About 60% of lending to SMEs and smaller corporates is secured on property collateral so a fall in values could well constrain investment. And there are important initiatives in train to develop a database of CRE debt and to explore the use of “through the cycle” valuations1. In my view, the overall picture of the credit cycle in the UK suggests that it is entering into a more normal phase. Credit terms remain easy for both households and corporates and credit is readily available. At an aggregate level, credit in the economy is growing below pre-crisis levels though to me that might well be a misleading metric. Aggregate indebtedness is considerably below pre-crisis levels though it remains high. At a more granular level, credit is  1  4  See Brazier, A (2015) “Nurturing resilience to the financial cycle”. BIS central bankers’ speeches  growing fastest in the areas of unsecured lending to consumers and lending to buy to let housing investors. The stock of credit in each of these areas is reasonably material at around 10% of GDP. But it is a relatively small component of the overall stock of credit.
Any discussion of Basel II should probably start with the 1988 Basel Accord, which established the first internationally accepted definition and measure of bank regulatory capital. In many ways, the 1988 Accord was a tremendous success story. It was adopted in over 100 countries, and contributed to the strengthening of bank capital at a time when a number of countries had experienced problems in their banking systems. It has become one of the benchmark measures of a bank’s financial health. While the simplicity of the 1988 Accord helped to foster its widespread acceptance, that simplicity has become a liability for some banks and supervisors. Almost 20 years later, industry developments in risk measurement and management have widened the gap between the regulatory capital measure under the 1988 Accord and the internal capital measures used at many internationally active banks. More sophisticated technology and telecommunications, as well as market innovations, have enabled banks to better measure and manage their risks. As a result, the Basel Committee determined that a new capital framework was needed that would address these developments for the most complex and sophisticated banks, but that would also be appropriate for less complex banks. The Committee also  BIS Review 34/2005  1  determined that the new capital framework should provide incentives for banks to improve their risk management practices without reducing the overall level of capital held in the banking system.

One of the fundamental tenets of risk management is that banks need to create provisions to absorb expected losses and to have sufficient capital to absorb unexpected losses. Accordingly, capital and provisions are an essential part of any supervisory framework. I believe Basel II reinforces the need to implement sound policies in both areas. In this respect, it is important to analyse provisions and capital over at least one complete economic cycle. Moreover, a range of potential future scenarios, with an emphasis on stress scenarios, should be considered, taking into account past experience and current conditions. Indeed, Basel II requires banks adopting the more advanced approaches to credit risk to apply a forward-looking approach to credit risk management by meaningfully stress testing their credit portfolios. Gaining room for manoeuvre and shoring up finances during good times in the business cycle is not only prudent policy, but is also consistent with sound risk management. Many would say that risks increase during bad times, but I believe this is only partly true. In my view, the exposures of banks, and therefore their risks, actually increase during economic upturns. These risks may not materialise until times of difficulty, but the seeds are generally planted during good times. In sum, when designing their capital and provisioning strategies, managers should have the aim of strengthening banks during good times and should remember that the imbalances that foster financial instability usually build up during the best parts of the economic cycle.
That, in our context, is I think now much easier to understand than a more consensual approach would be, but there was certainly a learning period. It has been suggested to me that the arrangements I have described somehow diminish the position of the Governor. Well if that’s true this Governor at least welcomes it! I am sure that all of you are well aware of how finely balanced monetary policy decisions are at the margin, and that all of you have agonised, just as I have, over the right thing to do and the right time to do it. I find the cross-bearings on those decisions provided by the other Committee members - and they are I remind you all highly qualified experts in their own right - immensely reassuring. If a majority of them argued for a particular decision, that would certainly weigh heavily with me, although - as a matter of personal integrity - I always reserve the right to take a different point of view from that of the majority on those occasions when I am particularly confident of my own judgement. That has not so far happened but it almost certainly will; people should not be unduly surprised. Finally, in relation to monetary policy, let me say a few words about accountability.

And the likely public and financial market  5  BIS Review 66/2000  reaction is, in my view, the most effective protection against abuse of the Treasury’s emergency powers. What I have described up to this point relates solely to monetary policy. But the new legislation similarly deals with the Bank’s other key responsibility - maintaining financial stability. And at the risk of trying your patience let me say a few words about that. Less than a fortnight after announcing the Bank’s new independent responsibility for the operation of monetary policy, Chancellor Gordon Brown announced that the Bank’s responsibility for banking supervision would pass to a new institution - the Financial Services Authority, or FSA - which would assume responsibility for the regulation and supervision of all financial institutions in the UK. This was widely seen as the price we had to pay for our enhanced monetary policy role.