samchain/econo-pairs-v1 huggingface dataset:
OMTs will be conducive to the monetary authority restoring its power to control credit conditions in the euro area and, through that channel, inflation in the medium term. It thus creates the conditions for a transition from a regime of undisciplined fiscal policies – from a “non-Ricardian” or “active” fiscal policy, using the terminology of the economic literature referred to above – to a regime where fiscal policy respects its inter-temporal obligations – it becomes “Ricardian”, or “passive”. This means that monetary policy has regained its pre-eminence in determining credit conditions and inflation. This renewed assignment of tasks pushes back fiscal dominance and affirms monetary dominance. The second concern can be formulated in terms of the question: will OMTs bring large risks to the central bank’s balance sheet? The answer again is: no. OMTs establish a second type of interaction: between the central bank, real money investors and households and firms,  BIS central bankers’ speeches  7  which save and borrow to finance real economic activity. To the extent that break-up and reversibility premia are squeezed out of bond pricing, real money investors will return to the euro area securities market, and the prices of securities will again better reflect the fundamentals. Households and firms will benefit from restored credit conditions. And the associated widespread reassessment of risks will make market portfolios and the central bank portfolios grow in value. Ultimately, strict and effective conditionality could be seen as acting as a credit enhancement of all euro area portfolios.

The 75 basis point cut in the ECB main policy rate implemented in late 2011 has been accompanied by little reaction or even an increase of lending rates in countries under stress, whereas there has been a complete pass-through in euro area countries considered by the markets as financially solid (see slide 9). Self-fulfilling equilibria driven by break-up fears The third, and most recent, dimension of the debt crisis has taken the form of investor fears of a break-up of the currency union. Whereas exchange rate risk across euro area countries should have disappeared permanently with the creation of the single currency in 1999, there have been signs, especially over the summer, that investors have started pricing in redenomination risk. Investors require a compensation for the risk that the euro might not remain the irreversible currency of the euro area – at least in its current composition. Although it is difficult to disentangle redenomination premia from other sources of risks – and it requires econometric analysis – the inversion of the slope of the term structure of sovereign bond spreads 5 observed in early summer 2012, for instance, for Spain and Italy was consistent with expectations of imminent break-up risks. Market fears of a high probability of not paying back in full, or of equivalently to repaying in a different, lower-valued currency, command high spreads.
The rapid pace of innovation in financial markets also promises better and wider distribution of risk which is good not just for the financial sector’s stability but should support more risk taking in the real economy. Greater investment could deliver stronger medium and long term growth. But there remain a number of sources of vulnerability in the world economy and in financial markets which firms need to bear in mind. Volatility is low, and as time passes longer memories are needed to remember when it was high. While there have certainly been improvements in macro performance in recent years, I do not know a central banker who is not surprised at the faith that markets appear to have in us to keep the great stability going. And the risks in the wider environment are as great as ever. 8  BIS Review 124/2006  It is not clear to me that these risks are fully priced into the market. Market forces may not have been able to correct any excess optimism given the incentives and constraints of participants operating in a world with a good deal of opaqueness about risk taking. In closing, I would stress that I am not saying market participants should avoid risk. But I do think it is important that market participants recognise that risk has not gone away, and that there are limits in the ability of financial engineering to insulate the financial system in aggregate against risk.

Both are bound to be tempted to take on greater risk to generate absolute returns. Of course this syndrome is widely recognised. Investment mandates and management remuneration are often measured against a risk-adjusted benchmark to avoid rewarding such activity. But it can take considerable efforts to spot such behaviour. The proliferation of new and highly complex financial instruments is making it harder to assess the incidence of underlying risk. The assumptions underlying the valuation of positions in such instruments are often unclear. Many of these products have the effect of selling insurance against unlikely financial market events. In so far as there has been a genuine increase in the stability of the economy and financial markets, selling volatility is less risky than it used to be. But it can be more risky than it appears. Our market contacts often cite the example of selling ‘out-of-the-money’ options as a popular strategy recently. Here the seller receives a steady stream of small payments today in return for paying up in the unlikely event that the price of an underlying instrument moves significantly from its current value. With sufficient leverage, a small payment stream can be turned into a tidy return. But as all insurers know, the key to long term return is to spread your risks widely or to avoid correlated risks. In assessing risk in financial markets, a common metric is correlation of positions with the market return. But this is quite inappropriate in this case.
You will be mightily relieved to hear that we are into the home straight now, but it contains the small issue of non-bank finance. Given the increase in bank regulation required in the aftermath of the financial crisis, it is not surprising that the last decade has seen a relative and absolute increase in non-bank finance. Continuing the theme developed earlier, one important way to look at the bank versus non-bank world is that in the former there is assurance on the value of money as the main liability of banks, while in the latter the value of investments explicitly and deliberately is not assured. This is important, but we also have to recognise that the growth of non-bank finance has led to the significant expansion of the landscape of systemic risk since the crisis. In other words, we have seen that the non-bank world can transmit risk into the bank world, and other parts of the core of the financial system, like central counterparties. Consequently, the relative focus of our financial stability work has shifted to the risks posed by non-bank financial institutions (NBFIs).

Andrew Bailey: Monetary and financial stability - lessons from recent times Speech by Mr Andrew Bailey, Governor of the Bank of England, at the Institute of International Finance, Washington DC, 12 April 2023. *** It is a great pleasure to be back in Washington. There is plenty going on and a great deal to talk about, so thank you to the IIF and Oliver Wyman for organising this event. I want to pick out big issues we face, and try to set out how they fit together and the challenges they give rise to. In recent weeks, we have seen the crystallisation of problems in a few parts of the banking sector. This is against a background of a necessary sharp tightening in monetary policy to bring down inflation from levels that are much too high. All of this has to be set against the most serious global pandemic for at least a century and the most serious war in Europe since 1945. Let me therefore draw a first set of conclusions and propositions from what is going on. The post crisis reforms to bank regulation have worked. Today I do not believe we face a systemic banking crisis. When I look at the UK banks, they are well capitalised, liquid and able to serve their customers and support the economy. This positive assessment of financial stability is important for monetary policy.
Given a well-established measure of this kind (with a status equivalent to that of the consumer price index, for instance), financial products ranging from forward traded instruments to loan agreements with terms based on a real-estate index, would enable households, for a reasonable sum, to reduce exposure to the risk of a large fall in property prices. This process is already under way. Banks have made varying progress in their customer orientation. Independent financial consultants have also begun to some extent. Increasingly composite financial products are being constructed and distributed. The range of mutual funds offered by banks includes funds owned by others. So perhaps one can say that the development towards more consumer orientation has already begun but the decisive steps still lie ahead. Re-regulations of the financial system, perhaps accompanied by amended tax regulations, may be needed, of course, to produce the course Merton points out but there is also a need for new structures in the financial system. Another requirement is appreciably more knowledge about how, for example, the systems’ productive components can identify and spread the risks that may have to be taken. Still, I am sure you will agree that this opens up new and truly interesting perspectives for the future in many fields of the life cycle as well as for the development of the financial system. Such a development might also lead to some savings finding their way back to the financial institutions and to markets being dominated by more professional players.

Rising share prices, for instance, tend to stimulate private consumption and business investment and vice versa. It follows that stock market trends are also relevant for monetary policy. So there are a number of good reasons for a central bank to take a closer look at and reflect on how the financial system functions. In recent decades the financial system in most western countries has undergone a notable transformation. One feature of this development is disintermediation, a process whereby a larger proportion of the funds involved in saving and financing flow directly to the financial markets instead of being routed via the banks’ traditional lending and deposit operations. The general public’s heightened interest in share investment, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households’ financial assets. In the same period, moreover, and not least in recent years, it is evident from your Association’s regular surveys that share ownership in Sweden has spread very rapidly. The stock market displays a number of interesting phenomena. In recent decades the real return on shares in Sweden has been almost three times higher than the long-term trend. In this period there have also been a number of dramatic developments, for instance the stock-market crash in 1987, the long downward period in the early 1990s, the mini-crash in 1998 and the IT bubble at the turn of the century. All this raises a variety of interesting issues.
In a globalized world, it is even more imperative for the Fund to focus on promoting stability as a global public commodity. We have enough experience to know how costly it can be if things go wrong. Saying that Switzerland treasures a stable international environment is in many respects an understatement. Given the openness of our economy and the fact that we host an important financial centre, international financial stability for us has all the connotations of a vital national interest. To put things into the right perspective, allow me to mention a few figures that show how interconnected our economic well-being is with global developments. In 2003, Swiss exports of goods and services amounted to 44 percent of GDP. The GDP contribution of our heavily internationally oriented financial sector reached 10 percent. This figure rises to 14 percent if we also include the insurance sector. Swiss banks occupy a leading international position, particularly in the area of wealth management. The value of total assets managed in domestic banks as at the end of 2003 amounted to $ 2.7 trillion. According to various estimates, this corresponds to about one-third of the world’s total private wealth managed abroad. Last, but not least, the banking and the insurance sectors combined employ approximately 185,000 people, the equivalent of 6 percent of total Swiss employment, whereas the fiscal contribution of the banking sector alone amounts to about 13 percent of total tax revenues.

One consequence is that the credibility of the institution will eventually suffer, and this will negatively affect its efficiency to the detriment of the membership as a whole. The second is that by granting too many resources under too uncertain conditions the financial soundness of the IMF will be jeopardized. The financial soundness of the Fund may well constitute in itself the topic of another speech. Let me just tell you that, although the IMF financial situation remains strong, recent developments in markets and in Fund lending have increased the risks for the institution. Shareholders of the Fund, through the Executive Board, have the responsibility that the Fund takes sensible decisions. They have an equally important responsibility to safeguard the credibility and soundness of the institution. This can best be done by ensuring that, to the extent possible, the game is played according to the rules. To best pursue its mandates, the Fund must not only be competent and financially sound, it must also be able to preserve its own independent judgment. With this caveat, I would have no problem sharing the very widespread belief that if the Fund did not exist, we would have to invent it. 4  BIS Review 69/2004
This lesson is that a single financial market with a single currency needs a single system of supervision – and alongside this, a Single European Resolution Mechanism (SRM). The SRM is an essential component of banking union. It helps break the bank-sovereign nexus by allowing banks to be resolved at the European level with minimum use of taxpayer funds. And it adds credibility to the European supervisor by providing reassurance that banks can be resolved in an orderly and efficient manner without creating financial instability – especially large cross-border banks. With the development of banking union, we are creating the conditions for a more stable financial sector in the future and a better functioning monetary union. But we also need a banking sector that takes responsibility. As supervisors, we expect the banks to be better capitalised and less leveraged, more stable and efficient, to perform their indispensable role in financing the economy and supporting the on-going, fragile economic recovery. Because the crisis of the European economy is not over. It is true that modest growth has returned in the last six months and that countries under stress have gone through a painful but successful adjustment, reducing their deficits, correcting their initial loss of competitiveness in terms of unit labour costs and even achieving external accounts surpluses. At the same time, the recession has been deep and has left unprecedented and unacceptably high unemployment.

More generally, by emphasising principles in the rules - that an AMA must be credible, that it must adequately capture the  4  BIS Review 45/2003  risk of extreme events, that it must be used by banks in the daily management of their operational risk and not just for regulatory capital purposes - enhanced disclosure and transparency may actually result in more consistency in the application of advanced approaches than detailed quantitative criteria. Conclusion The Committee will need to spend the next few months discussing these three themes internally and with the industry to refine the qualifying criteria for the AMA, to determine how best to allocate operational risk capital, and to ensure a level playing field in the application of the operational risk framework. As we conclude today’s conference, I think all of us have a better sense of the work that is ahead for both bankers and supervisors. At the same time, it’s clear from the issues and themes that you’ve been discussing at this conference that we’ve moved beyond a discussion of the principles behind the rules and to a focus on preparing for their implementation. This seems appropriate, since we expect that, given the very good progress that we have noted in banks preparing to adopt the New Accord, supervisors and the industry will be ready to implement the new rules by the end of 2006.
The analyses in Inflation Report 2/05 are based on a baseline scenario where the key rate shadows forward interest rates up to 2007, and then rises somewhat more rapidly. The krone exchange rate is assumed to shadow the forward exchange rate, which remains broadly unchanged over the next three years. Private consumption accounts for just under 60 per cent of total demand in mainland Norway, and is an important channel through which monetary policy operates. Low real interest rates, solid growth in real disposable income and a continued sharp rise in house prices will result in high growth in private consumption again this year. Higher employment and somewhat higher wage growth will continue to contribute to growth in household demand in the period ahead. Household debt, however, has risen sharply. A gradual normalisation of interest rates will reduce growth in household disposable income. This suggests lower growth in consumption. We assume that households will choose to spread consumption over time, so that the saving ratio will continue to fall even if interest rates rise. Housing investment rose sharply last year. It appears that growth in residential construction will remain high this year, although the rate of growth is expected to slow somewhat through the year. Low interest rates may have contributed to moving forward some housing projects. A gradual normalisation of interest rates implies more moderate growth in housing investment. Developments in underlying demand for housing may also imply that residential construction will stabilise and gradually decline somewhat.

Domestic fixed  2/7  investment provides a return in the form of higher production capacity in the future. Building up financial assets abroad allows us to pay for more imports in the years ahead. In the past few years, there has been a sharp increase in Norway’s saving, as conventionally measured in the national accounts. As a share of GDP, Norway’s saving after the turn of this century has been almost double the average for the 1980s and 1990s. The explanation for these figures lies in the Government Petroleum Fund. Norway’s petroleum resources are in principle part of our national wealth, but are not recorded as such in the national accounts. When oil is extracted and sold, natural assets are transformed into financial wealth. As long as this financial wealth continues to grow, it will appear as government saving in the accounts, while it is in reality a conversion of wealth. In this sense, we are not saving so much more than we used to. Nevertheless - when households see that the state, which has undertaken substantial pension obligations, puts money aside, some may perceive this as a guarantee for their own pensions. This may influence their own private saving decisions. The value of the Petroleum Fund, measured as a percentage of GDP, will rise in the years ahead. On the other hand, Norway, like many other countries, is facing substantial fiscal challenges. The expected dependency ratio, i.e.
This is correct, of course, to a point: the Bank’s policy influences exchange rate developments to a considerable degree, and the exchange rate is higher than Iceland can tolerate for the long term. But the Central Bank’s high policy rate is not the source of the problem. It is a response to the conditions reigning in our economy: strong excess demand no matter where one looks, large output growth, sharp increases in purchasing power, excess demand for labour, influx of capital … the list goes on. The Central Bank decided to raise the policy rate now because inflation has risen once again, and indicators suggest that it will be higher in 2007 and 2008 than earlier projected. Demand has grown more rapidly than was expected when the Bank  2  BIS Review 131/2007  announced its last interest rate decision. Output growth is greater than estimates allowed for. Private consumption is on the upswing, and indicators imply that consumption growth will accelerate even further. Gross capital formation was greater in 2006 and 2007 than previously estimated. Real estate prices continue to rise rapidly, pushing inflation upwards as well. A shortage of labour, wage drift, growing wage costs, and rapidly rising disposable income are also contributing factors. And it appears as though some people think that, under these circumstances, the best solution is to let an inflation episode flow through the economy, as it were. But inflation wouldn’t merely flow through; it would pass into the economy and settle there.

But by now most have realised how unlikely these problems are to disappear so quickly. There is every reason to believe that the coming months could prove difficult as a result, and there is correspondingly little reason to believe that the crisis is past. Uncertainty abounds. A huge investment bank like Merrill Lynch could not foresee that, in only two weeks’ time, it would have to write down billions of dollars’ worth of outstanding debt. The CEO of the company has had to pack his bags and leave, albeit with a generous going-away present. The largest bank in the world is also beset by the restlessness, and it isn’t yet fully clear what the effects will be, but that CEO has received his marching orders as well. And according to the latest reports, while there are reported write-downs of a mere 20 billion dollars on subprime mortgages, the actual amount could in the end be between 250 and 300 billion. BIS Review 131/2007  3  One cannot help but wonder whether market participants in Iceland and elsewhere preferred to suffer through a shaky third quarter in the hope of some redemption in the fourth quarter, and in the process, avoided recording some items that should have appeared in third-quarter accounts.