samchain/econo-pairs-v1 huggingface dataset:
Consequently, last month the Financial Policy Committee (FPC) was able to send two signals that the system had turned the corner. First, it has clarified the overall capital framework for banks, providing much needed certainty to the sector. While there are details still to be finalised and complexities to be reduced, there  BIS central bankers’ speeches  1  is no new wave of capital regulation coming. There is no Basel IV. Indeed, last week, central bank Governors and Heads of Supervision agreed that work to address the problem of excessive variability in risk-weighted assets – one of the final parts of the post crisis capital framework – would be completed by the end of 2016 without significantly increasing overall capital requirements. Second, the FPC now judges that the system is already within sight of the amount of capital it needs to have by the end of the decade and has the capacity to continue lending to the real economy even under severe stress. The Bank’s most recent stress test underscores these improvements. It focused on an emerging market stress, centred on a sharp slowing of Chinese growth, which prompts reassessments of global economic prospects, falls in asset and commodity prices and increased global deflationary pressures.1 Sound familiar? Despite challenging conditions abroad, the UK financial system can continue to take the types of prudent risks needed to grow jobs and incomes here at home.

At the same time, in the MPC’s judgment, it did not yet herald a turn in the stance of monetary policy. I would like to expand on these developments today, including what they mean for the UK’s economic prospects. Since the Bank’s full powers came into force a few years ago, we have pursued a strategy: 1. To rebuild the resilience of the banking system;  2. To maintain an accommodative stance of monetary policy to achieve the inflation target and support the recovery; and  3. To develop and deploy a macroprudential toolkit to prevent the emergence of new vulnerabilities that could derail that recovery over the medium term. We’ve made determined progress in all respects. In particular, we’ve reached inflection points in micro and macroprudential policies, and are able to set out the requirements for one in monetary policy. In doing so, we have increased the prospects of a durable expansion. But the path of policy is not preordained, and continued progress will require both vigilance and dexterity. That’s because private and public balance sheets remain stretched. The global environment is unforgiving. And the supply side of our economy is still healing. Let me expand. 1. A resilient banking system  I will begin with the foundation upon which strong, sustainable balanced growth is built: a resilient financial system. The combination of a radical overhaul of the regulatory framework and years of determined effort has significantly strengthened the UK banking system.
And the tougher the regulations, the greater the reason for the banks to try to circumvent them. If they succeed, no one has won. Instead, there is a risk we will be lulled into a deceptive security, despite the risks merely being moved or hidden in other forms. I might also add that regardless of which regulations are introduced, one still needs effective oversight and supervision of the financial system as a whole and of individual institutions. If we take all of these aspects into account, I believe the Basel Committee’s proposals are a successful balancing act. They entail a substantial upgrading of the bank system in terms of resilience. And the costs to the banks and society are small. BIS Review 159/2010  7  Long phase-in period The Swedish banks are well-capitalised and the costs of the new capital requirements are therefore small or non-existent. But we must remember that the situation is more difficult for many banks around the world. If we force the banks to observe the new teachings immediately, their ability to offer loans to companies and households may be impaired. This could jeopardise the economic recovery. Because although the world economy appears to be slowly recovering, the situation is still fragile. To avoid this, the Basel Committee has agreed on a long phase-in period. Some of the new regulations will begin to apply in 2013. Most of them will be phased in gradually. It will take a further ten years or so before all of the regulations apply in full.

One will also require that a certain percentage of the banks’ assets are liquid, in the sense that they can be converted into cash relatively easily. This reduces the banks’ vulnerability to sudden outflows of funds deposited or maturities of loans that cannot be rolled. Put simply, they require that the bank holds a liquidity buffer. The size of the buffer is calculated to ensure that the bank can manage a 30-day period with very large withdrawals of deposits and substantial loan maturities. These two regulations – on liquidity buffers and more stable sources of funding – entail less risk that the banks will be taken by surprise as they were during the financial crisis. But above all the regulations will lessen the contagion effects on the markets. Stable liquidity management reduces the risk of turbulence in individual markets or banks quickly spreading and creating financial problems for other banks. BIS Review 159/2010  5  Stricter risk management The third part of the Basel Committee’s reform package concerns what is perhaps the most important mainstay of the banks – the way they manage their risks. If risk management is inadequate, having plenty of capital or apparently good liquidity management will not help. Risk management mainly concerns credit risks and market risks. Credit risk means that a borrower is unable to repay his or her loan.
Chart 7 Banks capital and the break-even impact on probability of financial crises reduction in the probability of a financial crisis per year, %  Baseline  0.9  30% Modigliani-Miller Effect  0.8  Tax offset  0.7  More Substitutes to Bank Finance  0.6 Less Sensitive Investment 0.5 0.4 0.3 0.2 0.1 0 0  1  2  3  4  5  6  7  8  9  10  additional capital as % of banks’ risk-weighted assets  That said, initial increases in banks’ capital will probably have a much more pronounced impact on the likelihood of financial crises than successive increases. For example, a 5 percentage point increase in banks capital from 15% to 20% would likely have considerably less impact on the probability of banks’ failing than raising capital from 10% to 15%. So it is  10  BIS Review 100/2010  important to consider the rate at which the marginal benefits of banks holding more capital will diminish. The June 2010 Financial Stability Report provides illustrative estimates that indicate the benefits of additional capital fall to close to zero once a threshold of around 15% of risk-weighted assets is reached. It is difficult to predict the likely volatility of banks’ assets values and the probability of extreme events that could lead to a financial crisis. A natural starting point is to assume that the shocks hitting the economy and banks’ asset values follow a normal distribution.

Yes, many of these countries have been downgraded lately, but what that means in terms of actual default probabilities is not clear to me at this point, although it might be somewhat clearer after the next session. The fact of the matter is that advanced countries have both considerable means and strong incentives to avoid default. Even Iceland was able to avoid a default after the collapse of 90% of its financial sector and its deepest recession since the interwar period. So, for the post-war period, Walter Wriston has been largely right so far, in saying that “countries don’t go bust” – as far as advanced countries are concerned – although he was wrong as regards all countries. And what holds for advanced countries in this respect does so increasingly for the more important and advanced EMEs. I am not denying that sovereign risk has increased, more broadly speaking. Higher deficits and debt levels and weaker growth prospects bear witness to this. But the degree to which this translates into higher default probabilities in the narrow sense is not clear. My prediction is that default probabilities will remain low for most advanced countries. What, then, about the reaction of rating agencies and markets? Here again, we have the question of what rating agencies are actually trying to measure. I have long experience of dealing with them in my current and past jobs, and I have the sense that they are measuring something more than default probabilities.
But because it is so unprecedented and such an exceptional situation, we really have to monitor that very carefully. Whether it is going to be faster, whether it is going to be a bit more slow because there has been variation in the terms of loans, for instance, to both corporates and mortgages and therefore the transmission is not operating as smoothly as it would if everything was at floating rates. All of that we are looking at extremely carefully to measure the transmission and see how fast it moves. Suffice to say that we are seeing it already. Do we see all of it? Obviously, no. We want to see it all the way down to inflation. Two questions from me. Firstly, the Bank of Canada recently restarted its rate hikes, saying that the reason for this was that it thought the neutral rate had risen from its previous expectations. Do you think similarly? Is that part of the reason that you're continuing to raise rates and signal more rate rises are ahead? The second question is about whether the ECB could consider skipping rate rises, certain meetings, perhaps going to only changing policy when you're issuing forecasts – similarly to the Fed's pause or skip yesterday. It's difficult to say whether we're in the same position as the Bank of Canada because we did not pause. So, in a way we don't have to ask ourselves whether we are at neutral rate or not. We believe that we have ground to cover.

World trade also declined, after having exhibited strong growth in the last few months of 2013, which had raised hopes of a sustained economic recovery. BIS central bankers’ speeches  1  In the US, GDP declined in the first quarter. However, we consider this to be a transitory phenomenon which can be largely put down to an exceptional cold snap experienced this winter. Growth in the euro area was weak and varied greatly from one country to another. While economic activity continued to pick up in Germany, renewed stagnation in France and Italy gave rise to disappointment. We continue to expect the global economy to firm in the coming quarters. However, the global economic recovery will remain very subdued by historical standards. Compared to the last monetary policy assessment, we now anticipate somewhat slower growth, in both advanced and emerging economies. It is entirely possible, however, that global economic growth will be weaker than we have assumed. The euro area continues to face significant challenges. These include the consolidation of public sector finances as well as the implementation of institutional reforms and reforms to promote growth. In addition, various emerging economies are suffering from structural problems. Should the current geopolitical conflicts worsen, this would also hold back activity in the international economy. Since the major currency areas are in different phases of the monetary policy cycle, there is also a danger of greater volatility in the financial and foreign exchange markets.
As you know, we in the Executive Board decided to leave the repo rate unchanged at our latest monetary policy meeting. At the same time, however, we were in agreement that the Swedish business cycle is fairly close to the point at which it is reasonable to give monetary policy a less expansionary stance. Although we all endorsed the outlook for inflation and the economy in the Inflation Report a number of us were of the opinion that it provided scope for somewhat different interpretations of exactly when the interest rate needs to be raised. I myself and two other members  2  4  For a more detailed overview of the debate; see Bean, C. (2003), "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough? ", speech at a BIS conference on "Monetary Stability, Financial Stability and the Business Cycle", 28-29 March 2003, Basel, Switzerland. (http://www.bankofengland.co.uk/publications/speeches/2003/speech200.pdf)  BIS Review 88/2005  interpreted the analysis in such a way that we deemed an increase of 0.25 percentage points to be warranted already at the time of the monetary policy meeting. Allow me to say something about the reasons that, in my opinion, suggest that it would have been appropriate to take a first step towards less expansionary monetary policy at the beginning of December. One is that there hardly can be any doubt now that we are in the midst of a strong, stable cyclical upswing.

In all likelihood, the fast upswing in prices has contributed to the fact that housing construction now appears to have picked up in earnest, although the low level of interest rates that has kept down financing costs has probably also played an important role. Changes in house prices also affect household consumption by altering the size of households’ wealth. Since household consumption comprises about half of total economic demand the potential effects on inflation can be considerable. The impact on consumption of an increase in wealth can come about in different ways. One is that households feel richer and therefore become more inclined to consume. In addition, the size of their wealth can affect their ability to obtain loans. The larger the collateral a household can put up for its loans, the greater its chances to borrow and thus to consume. When the value of the home owned by a household rises, it also creates the possibility to mortgage the home further, e.g. to build an extension or renovate and further raise the value of the home or to consume other goods. Another effect is that a higher valuation enables a household to refinance its second mortgage as part of its first mortgage and thereby reduce the interest costs of the debt. Historically, there has been an almost surprisingly strong relationship between changes in the value of households’ real wealth – houses and tenant-owned apartments – and how large a proportion of their incomes that households choose to consume, the so-called consumption ratio.
It reduces the possibility of unsound investments and bubbles in the financial and property markets. Nominal stability will also reduce the risk of sudden changes and shocks that may lead to cyclical turnarounds. Historically, economic growth has generally been strong in periods with relatively low inflation and weak during periods with especially high inflation. Hence, during the last 20 years, real wage growth, which over time reflects productivity trends, has been strongest when inflation was low. In the 1980s, nominal wage growth was strong without a basis for this in the real economy. The result was inflation and weak real wage growth. In the 1990s, more moderate nominal wage increases until 1998 coincided with strong real wage growth because inflation was low. It takes considerable time before monetary policy has an impact. The effects of interest rate changes are uncertain. The key rate is set on the basis of an overall assessment of the inflation outlook. If it appears that inflation will be higher than 2½ per cent with unchanged interest rates, the interest rate will be increased. If it appears that inflation will be lower than 2½ per cent with unchanged interest rates, the interest rate will be reduced. It is equally important to avoid an inflation rate that is too low, as it is to avoid an inflation rate that is too high. The expression "it appears that" refers to our best estimate of inflation two years ahead.

2  BIS Review 80/2001  Central banks have ensured the smooth functioning of markets by supplying liquidity to the banking system. Interest rates have been cut in the US, Canada, the euro area, Switzerland, Sweden, Hong Kong, Taiwan, Denmark, Japan, the UK, New Zealand, Korea and Malaysia. These cuts will contribute to mitigating the negative effects on demand, output and employment. The Norwegian economy is characterised by high capacity utilisation and strong cost inflation. The mainland economy appears to be expanding approximately in line with growth in output potential. At present, we do not have sufficient evidence to assert that international developments will change this situation. The announced increase in spending of petroleum revenues may lead to a more expansionary fiscal stance than in recent years. According to Norges Bank’s assessment, with an unchanged interest rate ahead, the probability that inflation two years ahead will be higher than 2½ per cent is the same as the probability that it will be lower. BIS Review 80/2001  3
Most importantly, it has achieved a high degree of sustainable convergence with the euro area and is about to adopt the euro, a feat many believed unachievable in such a short time span. Here I would like to express my gratitude to the entire banking community, including the staff of the Central Bank of Malta, for their hard work and commitment in preparing for a smooth currency changeover. How did this marked change in fortunes come about? Three factors at least played a role. Like other small countries which leveraged their participation in regional economic groupings to overcome size and resource limitations, Malta has adapted its institutions and policies to the requirements of EU membership and is starting to derive the expected benefits. At the same time, under the pressure of globalization, polices have been implemented to start correcting endemic weaknesses. And finally, advantage has been taken of the cyclical upturn  BIS Review 143/2007  1  in external demand. As a result, the economy has grown by more than 3% in each year since 2005. Recent measures have included the restructuring of the public and public-enterprise sectors, a wide-ranging privatization programme, the first stage of a pension reform, and the complete liberalisation of the trade and capital accounts. As a result, the public sector’s profile in both product and resource markets has been reduced, and the price mechanism now plays a more prominent role in the allocation of resources. Perhaps the most striking change has occurred in the fiscal situation.

In this regard, the recent, widely different experiences of Ireland and Portugal are highly instructive. 1 Thus, whereas real per capita income in these two countries was not very different in the early 1990s, it had roughly doubled in Ireland by 2006 to 131% of the euro area average, but had only improved slightly in Portugal to 68%. How can such divergent performances be explained? Before joining the euro area Portugal pursued a pro-cyclical fiscal policy, which reinforced domestic demand, while in Ireland the fiscal stance was more disciplined. Whereas unit labour costs and inflation rose fast in Portugal, cost and price pressures were more contained in Ireland. As a result, competitiveness declined in Portugal, reflected in a growing current account deficit, whereas Ireland remained competitive and enjoyed a roughly balanced current account. These different policy approaches left their mark in the post-euro period. In Ireland, real output growth in the years 1999-2006 continued at a strong pace, 6.5% per year on average, and the fiscal balance was in slight surplus. In contrast, Portugal experienced an average growth rate of 1.7%, continued weak competitiveness and a substantial current account deficit. A major factor behind Ireland’s success was a 3% average annual increase in labour productivity growth, compared to less than 1% in Portugal. Another lesson that has emerged from the experience of these two countries, and is also widely documented in the literature, is that cost levels are not the only determinant of competitiveness.
The peer group includes Barclays, Cooperative Banking Group, HSBC, Lloyds Banking Group, Nationwide, RBS and Santander UK. (d) From 2018, Basel III Tier 1 capital ratios reflect IFRS 9 transitional arrangements as agreed in European law. (e) Series begins at end-2007. Chart 2: UK banks’ holdings of liquid assets Liquidity Buffer  (a)(b)(c)(d)(e)  LCR HQLA  £ 800 750 700 650 600 550 500 450 400 350 300  2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: PRA regulatory returns (a) UK liquidity consolidation groups for major 7 UK banks. (b) DLG consolidation is applied to Barclays, HSBC, Lloyds, RBS and Santander UK, whilst solo UK entities are shown for Nationwide and Standard Chartered. (c) Liquidity buffer refers to the liquidity held under the ILG regime, which is reported weekly until at least July 2019. (d) LCR HQLA refers to high quality liquid assets under the EU Delegated Act (reported monthly since October 2015). (e) Definition of liquid assets is broader under the LCR. 17  All speeches are available online at www.bankofengland.co.uk/speeches  17  Chart 3: Modelling errors in market risk (10 years of data)  (a)(b)(c)  Variance Squared bias MSPE  4.50E-05 4.00E-05 3.50E-05 3.00E-05 2.50E-05 2.00E-05 1.50E-05 1.00E-05 5.00E-06 0.00E+00 1  2  3  4  5  Past days modelled Source: Hinterschweiger, Neumann, and Saporta (2018), ‘Risk sensitivity and risk shifting in banking regulation’, Bank of England Financial Stability Paper No.44 (a) True model is number 3.

30 See a speech by Stefan Ingves, ‘Basel III: Are we done now?’, https://www.bis.org/speeches/sp180129.pdf. 29  12  All speeches are available online at www.bankofengland.co.uk/speeches  12  work in more detail and sets out some thoughts on how one might approach the financial stability case of making an adjustment in this area, in line with the principles I outlined earlier. This evaluation exercise highlights that interactions between different types of policy are likely to be a fertile area for research going forward. Summary  The finalisation of Basel III late last year represented a final step towards completing the reforms to banking regulation that followed the crisis. I hope I have been able to convey today the reasons for those reforms and the financial stability benefits both here in the UK and internationally. The focus of regulators has now shifted towards completing the implementation of the post-crisis reforms, but also towards monitoring for any unintended effects the reforms are having, as well as being alert to new risks that emerge. We will consider making adjustments to regulations in response to unintended consequences and new risks to ensure that the resilience we injected into the banking system post-crisis stands the test of time. Or put in the words of the young Tancredi in the novel The Leopard by Giuseppe di Lampedusa, “if we want things to stay as they are, things will have to change”. 31  Thank you. 31  https://en.wikipedia.org/wiki/The_Leopard.