samchain/econo-pairs-v1 huggingface dataset:
Solvency II sets out how to estimate the premium needed to compensate for the risk that the borrower defaults or is downgraded, known as the Fundamental Spread. As an approximation, in equation form:  Matching Adjustment = Yield minus risk-free rate minus Fundamental Spread  The most important determinant of the Fundamental Spread is the credit rating of the asset. Broadly speaking, the higher the yield on an asset for a given credit rating, the bigger the Matching Adjustment. Earlier I showed that insurers were diversifying into illiquid assets because they offered wider spreads than bonds. Chart 7 is the same picture but with the split between the Matching Adjustment and Fundamental Spread added. Not only are the yields on illiquid assets wider but the majority of the additional spread is  being captured in the Matching Adjustment. UK insurers estimate the underlying credit quality of these  assets, reflected in the Fundamental Spread, to be similar or better than their corporate bond portfolios. So the shift into illiquid assets is giving insurers a double benefit: first wider spreads and second a bigger Matching Adjustment. This helps to explain their eagerness to increase their asset allocation towards illiquid assets. But why is the Matching Adjustment on illiquid assets larger than on corporate bonds? One possibility is that that the wider spreads are compensating other investors for the risk that they might need to sell into secondary markets that are less liquid than the corporate bond market.

With most of the longevity risk currently being reinsured, the primary determinant of pricing in the bulk annuity market is the investment return on the assets backing the annuities. The big change here is diversification out of bonds into direct lending (Chart 1). Spreads over risk-free rates on investment grade bonds have been narrow for some time. Insurers have been finding wider spreads in a variety of other long-term financing markets, including social and student housing, financing public infrastructure such as hospitals, commercial real estate lending, wind and solar power financing, rail stock leasing and ground rents (Chart 2). These ‘illiquid assets’ (broadly defined as assets other than traded debt securities) currently make up more than 25% of the assets backing annuities across UK insurers. Insurers’ business plans suggest this proportion might increase to around 40% by 2020. Illiquid assets can be a good match for annuities. Diversification may lower overall portfolio risks. And long-term infrastructure investment has wider economic benefits. But these assets bring a wider range of risks than those familiar to bond investors. Insurers need to ensure they have the skills to understand and manage them. To take some diverse examples, the failure of Carillion left some insurers needing to replace a contractor on construction projects; financing student accommodation exposes insurers to the risk of changing UK student numbers; and financing railway stock creates a risk at the point when a new train operator wins a franchise. These assets also typically lack external ratings and observable market prices.
In countries where the banking sector has experienced large balance sheet shocks related to deteriorating sovereign debt, access to bank credit has tightened substantially. Elevated risk premia in the stressed countries have in turn had repercussions on access to finance, in particular for SMEs. In contrast, large corporations can resort to corporate debt instead of bank loans, especially during financial crises, or to foreign loans instead of domestic loans in the case of large multinationals, as happened, for instance, in Ireland.12 SMEs employ around three-quarters of the euro area’s workforce and they generate around 60% of its value added. Their restricted access to finance in a number of euro area countries is clearly a threat to economic recovery. A number of governments, including Portugal’s, are implementing measures to support the financing of SMEs. We see these measures together with the use of EU financial instruments (EIB and EU structural funds) as very important in unlocking access to funding and investment growth. The ECB has  9  See Blanchard O., D. Leigh (2012), Global Forecast Errors and Fiscal Multipliers, IMF Working Paper No 13/1. 10  See Roeger W., in ‘t Veld J.

They will help economies to reap the full benefits of belonging to the Single Market and to the Economic and Monetary Union. They will help societies to sustain social models which would otherwise be debased by the permanent output loss caused by the crisis, and the related loss of tax revenues.16 I should add that there is a need for reforms in all euro area countries, including the larger ones, albeit to varying degrees and in different areas. Even if a euro area country doesn’t feel the pressure of financial markets and programme conditionality, its government should take seriously the responsibility to carry out necessary reforms that will ultimately support growth elsewhere in the region. And it is the responsibility of all euro area governments, jointly, to advance the reforms outlined last December by the President of the European Council that will give stable foundations to the single currency. The Single Supervisory Mechanism is an important first step, to be complemented as soon as possible by a Single Resolution Authority and Fund; further steps towards an economic, fiscal and political union should follow, completing our Economic and Monetary Union. If there is a lesson to be learnt for all euro area countries, it will be to make sure that in the future they make the necessary changes pro-actively and not in response to a crisis. Thank you for your attention. 15  A coordinated reduction of mark-ups would lead to a similar impact on GDP growth in the adjusting countries.
During this period, the Albanian banking sector continued to increase its lending to the economy, albeit at lower paces. Difficulties added to the real sector of the economy and the exchange rate depreciation by about 12% in 2009 were followed by decreased credit quality and increased bank provisions to face the credit risk. Distinguished participants, The pre-crisis phenomena and those that occurred in 2008–2010, offer a valuable experience to economic actors and public authorities of each country in our region. Not to mention all, I would like to dwell only on some of them, which I consider important for enhancing the sustainability of our economy and of the financial system in the future. First, the region needs a better balance in the factors supporting the sustainable economic growth. I think that the public authorities should assign priority to increase in investments and implementation of stimulus policies for developing the competitive sectors. In this way, the country’s export capacity would grow by creating better conditions for a sustainable improvement of the external balance of our economy. 2  BIS central bankers’ speeches  Second, closely related to the first issue, I would highlight the need for undertaking and deepening the structural reforms. This strategic objective remains a constant priority for each of our economy.

In theoretical and scientific debate round-tables, efforts have been focused on identifying causes and taking measures to prevent recurrence of such events in the future. A new financial infrastructure is being designed. This is the context of this annual meeting, on whose focus is the identification of post-crisis challenges our region is faced with. Allow me to briefly address two or three of my personal opinions about this situation. Before the impact of international financial crisis, all countries in the region were involved in important reforms aimed at increasing the economic growth. At this stage, through necessary legal improvements and prudent development policies, there took place the opening of economies and the development of trade, increase in domestic and foreign investments, overall liberalization of markets and promotion of financial market development, to provide more qualitative and sustainable financial services to businesses and households. From the macroeconomic viewpoint, fiscal policies in the region are aimed at fiscal consolidation through revenue growth and greater investment-oriented public spending. Monetary policies, thanks to different exchange rate regimes, have generally kept consumer price rise on track and interest rates have followed a downward trend. However, the global financial crisis has affected the countries in our region, due to some weaknesses that were present during the growth phase. First, the closeness of our countries and the concentration of trade with the European Union area, as well as migratory movements, have brought about a large use of the euro in the regional economies.
But nobody believes that that is a description of the real world in which households and companies manage their affairs. Both are, to a greater or lesser degree, rationed in their access to credit, given that borrowers know a great deal more about their conditions and prospects than do risk-averse lenders, and that lenders face obstacles in ensuring that borrowers honour their contracts. 2 The availability, price and terms of credit– whether unsecured or secured – will be sensitive to a range of factors, including assessments of the idiosyncratic risks of a particular borrower, and the risks common across borrowers. Variations in these factors give rise to the possibility of a credit cycle. A borrower’s ability to pledge collateral can help to overcome the problems of “asymmetric information” and enforceability, by evidencing its net worth and giving it a continuing stake in its contract with the lender. This can give rise to the so-called “financial accelerator” channel of the Monetary Transmission Mechanism (MTM), in which monetary policy works partly by affecting lending terms through its effect on asset values and so the net worth of borrowers. 3 But credit conditions also depend on the access to credit of the lenders themselves. There is an important distinction here between intermediation across bank balance sheets and via the capital markets, although as I shall describe it turns out to be blurred. Total credit: capital markets and securitisation For the moment, I shall put that distinction to one side in order to focus on total credit.

This conference is focused on one important element of this: the role of financial markets in the setting and transmission of monetary policy. That is covered in the Bank’s publications on how the economy works, including the Committee’s 1999 paper on the Monetary Transmission Mechanism (MTM), and books describing the models used in forecasting. 1 But those high-level descriptions miss out an awful lot about how the real and financial parts of the economy connect. Financial variables are limited to the short-term interest rate, the exchange rate, and equities. Nothing on the role of long-maturity interest rates, or on credit spreads and risk premia – which misses out a whole universe of financial asset prices. Very little on credit more generally. Next to nothing on money. And nothing at all on the role of bank intermediation. These gaps were perhaps underlined by a degree of confusion amongst commentators about the way in which Money and Credit featured somewhat more prominently in the Committee’s discussions during the backend of 2006 and into this year (Chart 1). With both having been strong for a while, some asked whether this marked some kind of change in the reaction function, implying a greater stress on nominal variables. Given the near identity of deposits and bank lending, Money and Credit are often used almost inseparably, even interchangeably, with wider measures of non-bank credit looked at only when assessing the health of corporate and household sector balance sheets.
Unfortunately, these productivity figures are not the outcome of genuine improvements in the efficiency of productive processes, meaning they will hardly be sustainable in the medium term. The fact that labour costs are still growing at a high rate in this situation (on National Accounts figures wages increased by 4.6% in the second quarter of 2009) while employment  BIS Review 124/2009  3  was declining at a rate of over 7% and inflation was negative, reveals once more the persistence of serious inefficiencies in the behaviour of our labour market. The outlook for the Spanish economy remains highly uncertain, albeit less so in recent months in light of the likely recovery in the world economy in 2010. The Spanish economy will probably continue posting declines in output in the second half of this year, in contrast to the modest pick-up in activity expected in the euro area. Bearing on this different behaviour will be the marked weakness of investment, not only in the case of housing, given the supply overhang, but also probably in that of corporate investment, since low capacity utilisation allows increases in demand to be addressed without having to undertake new investment projects. Nor will it seem feasible to increase public investment in 2010, following the intense effort made in 2009, linked largely to the above-mentioned Local Investment Fund for Employment. How private consumption will fare is much more difficult to predict.

Smaller firms have been the most vulnerable to the shock and, despite the mitigating measures put in place, are more likely to be affected by solvency problems. Naturally, differences in credit risks across sectors of activity (besides the most directly affected sectors) and in the geographical distribution of the exposures may also contribute to the possible future heterogeneity of the impact of the crisis on banks. As regards the geographical aspect, the high impact of the pandemic in 2020 H1 in some foreign countries that are material to Spanish banks suggests that the benefits of geographical diversification could be lesser in this crisis than during the global financial crisis. However, the contribution of foreign business to Spanish banks’ return on ordinary activities increased in 2020 as a whole, and the growth in impairment allowances was relatively contained in various material countries. In any event, the potential uneven performance of the banking business in the different geographical areas needs to be monitored. Moreover, in view of the possible materialisation 9  Indeed, the distribution among banks of the percentage of credit exposure to the sectors hit hardest by the pandemic (e.g. hospitality and transportation and storage) is very concentrated, at values of close to 20%. 9  of permanent damage to some sectors of economic activity with asymmetric recovery paths, it is important to continue monitoring changes in credit quality.
In the current circumstances any deviation from projections could have serious consequences for the credibility of the fiscal consolidation efforts. To ensure strict compliance with targets, monitoring and supervision procedures will have to be strengthened and contingency plans designed to ensure that targets are met and certain expenditure items are behaving adequately. The cooperation of local and regional governments is essential if the ambitious process of fiscal consolidation facing us is to be tackled successfully. The fiscal effort to be made by the Spanish economy, in a situation in which the available projections point to moderate growth, is considerable, and may become even more so if nothing is done to correct the upward path of interest rates triggered by the Greek fiscal credibility crisis and the contagion spreading it to other vulnerable economies. To make this effort feasible, the fiscal consolidation programme has to be accompanied by structural measures designed to strengthen the potential growth of the economy, since this largely determines the sustainability of public finances. In this respect, it is vital to correct the inefficiencies which have grown up in the labour market, since here the required reform will largely determine Spain’s ability to become more competitive and generate employment. Nor should it be overlooked that a relatively significant part of the increase in the budget deficit in the last two years is directly or indirectly related to the rise in unemployment.

At its heart, a model – any model – is just a framework for thinking about an issue, be it how the economy reacts to different shocks, how the setup of a car might affect the way it handles a corner, or how a disease might spread through a population. As all modellers would concede, they can only provide an approximation of reality, which is always far more complex. That isn’t to say that models aren’t useful – far from it. Economic models, like any other, are essential. But they are not a panacea. For example, it would be a mistake to think one can just keep learning and adding to a single economic model until it gets ever more complete. What tends to happen is that one just ends up with a very large model which nobody can understand or use for any practical purpose. Instead, the best way forward in understanding the economy seems to be to use a variety of different models, remembering the relative strengths and weaknesses of each, and applying judgment accordingly. That is exactly what the MPC does when it considers the appropriate stance of monetary policy. The Bank’s approach to modelling strives to be eclectic. 6  The remit can be found at http://www.bankofengland.co.uk/monetarypolicy/pdf/chancellorletter110323.pdf  BIS central bankers’ speeches  5  What about forecasts? They too are essential, given that the lags between setting policy and its impact on inflation require us to be forward-looking.
Today, all the Swedish banks have voluntarily strengthened their capital bases by more than the Basel regulations require. Banks in many other countries have done the same. At the same time, the concept of bank sector solvency has been increasingly undermined. Many risks are not on the balance sheet. It is therefore more relevant to consider the ratio between total risk exposure and the capital base. With the expansion and growing complexity of financial market operations, it has become increasingly important that banks are capable of managing the risks in their business. The financial turbulence in recent years has underscored this and banks are also more determined to have such a capability. The  BIS Review 9/2000  2  capacity to understand, monitor and control internal risks is thus featuring more and more prominently in the organisation of financial enterprises. A major aspect of this work has been the development of more advanced methods for the quantitative measurement of risks. As one might expect, most progress has been made in the measurement of market risk; the extensive trading in financial instruments provides a good supply of price statistics and this is a considerable help when it comes to estimating market risks. Much work is now being done in many places to construct models for a better management of credit risks, which are still by far the largest risk category for banks. The difficulties here, however, are far greater than in the case of market risks.

For instance, the Riksbank is one of few central banks to publish its own forecast for the policy rate and possibly the only central bank where the minutes state which Board member has said what during the monetary policy meetings. 1  Inflation has been low for longer in Sweden than in many other countries In recent years, international interest in Sweden as an object of study has been more due to economic developments here, and to the measures the Riksbank has taken, rather than the changes in the monetary policy framework. Despite the Swedish economy developing relatively well since the global financial crisis 2008-2009 (see Figure 1), inflation began to fall earlier in Sweden than in the rest of the world. This has meant that inflation has undershot the target and been lower than in many other countries for a long time (see Figure 2). This has in turn contributed to the Riksbank considering it necessary to cut its policy rate below zero,  * I would like to thank Mikael Apel for his help in writing this text, Elizabeth Nilsson for translating it into English,  Goran Katinic for help with the slides and Björn Andersson, Gina Bayoumi, Claes Berg, Charlotta Edler, Gabriela Guibourg, Marianne Nessén, Marianne Sterner and Anders Vredin for their valuable comments. 1 Another completely fresh example is the Riksbank’s thoughts on introducing a digital currency (see Skingsley, 2016). 1 [20]  which only a few other central banks have done so far.
Holston, K., T. Laubach and J. Williams (2017), “Measuring the natural rate of interest: international trends and determinants”, Journal of International Economics, No 108, pp. 5975. Jarociński, M. (2017), “VAR-based estimation of the euro area natural rate of interest”, ECB draft paper. 15  Johannsen, B.K. and E. Mertens (2021), “A Time-Series Model of Interest Rates with the Effective Lower Bound”, Journal of Money, Credit, and Banking, Vol. 53, Issue 5, August, pp. 1005-1046. 16

Investment strategy, governance and organisation must continue to evolve in tandem The sceptics who 20 years ago doubted the decision to give Norges Bank task of managing the oil fund have not been proven right so far. In the National Budget for 2018, the Ministry of Finance states that the Bank has managed and continues to manage the fund in a sound manner. Norges Bank believes that the Bank is well positioned to manage the GPFG and perform central banking tasks in a sound manner also in the future. If the fund remains under the aegis of the Bank, Norges Bank recognises that there are arguments for establishing a separate committee for monetary policy and financial stability. Such a committee will substantially unburden the board of central banking matters, and the composition of the board can then be tailored more closely to specific tasks relating to investment management. In this case, the Executive Board favours a 4/7  BIS central bankers' speeches  model that is based on the current governance structure. Norges Bank also recognises that there are aspects of the current organisation and governance that could be reconsidered. The organisation, governance structure and supervision must be considered in the light of new challenges for the management of the fund and for central banking. In recent years, changes in the Ministry’s mandate have given the Bank greater responsibility for formulating parts of the GPFG’s investment strategy.