samchain/econo-pairs-v1 huggingface dataset:
This makes it harder for the conventional array of risk management tools to capture the actual risk faced by financial institutions today. The challenge we face is not simply in determining whether we are better off today than we were at past periods of considerable stress in the financial system, but also in assessing how well positioned the current system is to deal with prospective sources of stress. That assessment is harder to make today because of the changes now underway in the nature of financial intermediation and the overall conditions in which these changes have occurred. Several examples of these changes are worth noting: The more critical role played by hedge funds and other nonbank financial institutions in credit and other markets has the potential to magnify the impact of distress in those institutions on market dynamics and liquidity if counterparty risks are not managed appropriately. BIS Review 28/2006  1  The proliferation of new forms of derivatives and structured financial products has changed the nature of leverage in the financial system. The addition of leverage imbedded in financial instruments to balance sheet leverage has made this source of potential risk harder to assess. New players, new products and more dynamic ways of intermediating and managing credit may increase the sensitivity of balance sheets and income-to-market volatility and potentially amplify the impact of a sharp change in perceptions about macroeconomic risk or credit on asset prices and liquidity.

It is clear from this economic integration that the fear of the region’s borders considerably compromising economic development cannot be confirmed. Rather, the diminishing, relative importance of intra-regional foreign trade and intra-regional cross-border direct investment is due more to globalisation and the ensuing increase in the influence of Eastern European and Asian economies than to weakening ties within the Upper Rhine region. Thirdly, the most notable aspect of the relationship between the region’s two currencies since the introduction of the euro in 1999 is its stability. That does not mean, however, that the issue of Switzerland’s ascension to the EU is of no consequence. Having its own currency allows Switzerland to conduct an independent monetary policy that is tailored to suit its needs. Finally, the economic policy can help the region thrive further by removing remaining hurdles, such as those in the labour market and in the exchange of goods and services (Cassis de Dijon principle). A well-integrated economic region is the key to a prosperous future. “Three nations, two currencies, one economic area” - the title of the paper - not only describes the reality, it also maps out the way forward. BIS Review 45/2005  1
In this presentation I will cover various dimensions of the sovereign debt problem, and conclude with some observations that are of particular relevance to Malta. The effectiveness of monetary policy In the wake of risk re-pricing by the markets, financial institutions have tended to unwind their holdings of public and private sector debt. This can be seen in Chart 1, which shows the resulting reduction in the leverage of Euro area financial institutions. It is true that deleveraging reduces financial imbalances and corrects past excesses in the banks’ accumulation of assets. However, the process also slows down the return to normal macroeconomic growth. The assets-to-equity ratio in the euro area (shown as the blue line in Chart 1) stood at 14.9 in March 2012, almost three percentage points below its peak of 18 in 2008. (By way of comparison, the same ratio for Malta’s domestic banks has been lower and more stable, as can be seen from the red line. It stood at 10.1 in March, almost unchanged from 10.2 in 2008. I will come back to the Maltese situation later.) The European Central Bank (ECB) has sought to avert a credit crunch and a bank funding crisis via a number of measures, including the two 3-year Longer Term Refinancing Operations (LTRO) launched last December and February. These have been provided on a full allotment basis and at the average Marginal Refinancing Operations (MRO) rate over the three year term.

What businesses banks chose to be involved in, and what business entities chose to own a bank, would be matters for themselves to decide. Over time, banks with the right configuration and mix of activities would succeed, while those without would fail or be eliminated by the competition. But regulators cannot leave it entirely to the market to sort out such matters, especially where the banks involved are not peripheral players but perform key roles in deposit taking and the payments system. Strong banks are important to the health of the financial system and to the entire process of credit intermediation. Regulators cannot guarantee that individual banks will never fail, but they have a duty to minimise the chances of a mishap and to maintain the integrity and overall stability of the financial system. A clear source of potential problems in this regard is the commingling of financial and non-financial activities within the same corporate group. Many regulators regard it as good banking and sound supervisory practice to require clear separation of the two. Firstly, separation will limit the risk of contagion from non-banking businesses to the bank. Banks with significant interests in non-banking activities are exposed not just to credit and market risks which are the primary risks of their business, and which the banks should assess and manage as part of their core competence. These banks will also be taking on the business risks of their non-financial activities.
Greater focus on credit risks Now that liquidity risks are less prominent, there is instead a greater focus on credit risks, as economic activity has weakened and growth prospects have deteriorated. The very large policy rate cuts made by central banks around the world and the fiscal policy stimulation from governments have not been able to prevent a severe weakening in economic activity. Our most recent forecast published in April points to GDP in the world falling by a good 1 per cent in 2009. This is a something quite unique: since 1970 GDP in the world has increased by on average 3.6 per cent a year and growth has not been negative even for a single year. The export-dependent Swedish economy is hard hit by the international downturn. In our April Monetary Policy Update we forecast a fall in GDP of more than 4 per cent in 2009. When economic activity weakens and the demand for goods and services declines it becomes more difficult for the banks’ borrowers to meet their payments. Bankruptcies  2  BIS Review 73/2009  increase and the banks suffer loan losses. The loan losses in their turn make the banks even less willing to lend money and the economy risks ending up in a spiral where falling activity and stricter credit terms reinforce one another. The banks can cope with loan losses The main scenario in the Riksbank’s forecasts does not involve Sweden ending up in a serious downward spiral.

Recently published preliminary GDP figures for the first quarter also show that growth continued to fall, although the rate of the fall slowed down. My main emphasis was on what lies ahead of us – the economic cycle further on this year and into 2010. I shall not repeat everything I said at our two most recent monetary policy meetings; anyone who is interested can read the minutes of the meetings. But I would like to take the opportunity to bring up some of the views I expressed then. One view that I wished to highlight concerned the housing market in the United States, which is in many ways the origin of the problems. Some signs of stabilisation are now visible there, although some quarters of adjustment still remain before the stocks of unsold houses have been reduced and house prices stop falling. Falling housing investment has provided large negative contributions to growth in recent years. Very little housing has been built for several years now in relation to the increase in the number of households. When the turnaround comes, housing investment should provide a good contribution to growth. I also mentioned that stocks in the United States have been phased out rapidly and they will sooner or later be down to levels where the demand flow, even if it is declining, will need to be met with increased production. However, here one must bear in mind that this “cyclical” upturn will be temporary if final demand does not catch on further ahead.
Their presence can raise the question whether policy should be conducted in a way that insures against them by trying to avoid particularly bad outcomes, rather than trying to optimise the mean. 5. Beyond lambda Some of the most important tail risks relate to financial stability. It is now clear that, although it secured fifteen years of inflation control and steady economic growth, price stability, narrowly defined, morphed from healthy focus to a dangerous distraction. The financial crisis that exploded the Great Moderation was a powerful reminder that price stability is not sufficient to maintain macroeconomic stability, and that the  24  As per Brainard, W (1967), “Uncertainty and the effectiveness of policy”, American Economic Review, 57(2). There is a literature exploring how this result varies with other forms of uncertainty about the transmission of monetary policy. E.g. Söderström, U (2002), “Monetary policy with uncertain parameters,” Scandinavian Journal of Economics, vol. 104(1), pages 125-145. Interest rate smoothing can also be motivated to the extent that it generates greater purchase over long-term interest rates, e.g. Woodford, M (2003), “Optimal interest rate smoothing”, Review of Economic Studies, 70(4). 25 See King, M (2016), The End of Alchemy: Banking, the Global Economy and the Future of Money, Little Brown. 13  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches  13  evolution of credit and indebtedness can build up major macro problems for the future.

The government bill also states that the Riksbank, without prejudice to the objective of price stability, should also support the objectives of general economic policy with the aim to achieve sustainable growth and high employment. The general economic policy that the Riksbank should support is very much a policy for full employment. According to the 2012 Spring Fiscal Policy Bill, the most important objective for the present government’s economic policy is full employment. 2 Full employment has also been an important objective for previous governments. High employment is the same as the highest sustainable rate of employment. The Riksbank therefore writes at the beginning of every Monetary Policy Report that it strives to stabilise employment around a path that is sustainable in the long run. The Riksbank therefore conducts what is generally referred to as flexible inflation targeting. If one follows this line of reasoning, then the Riksbank’s mandate for monetary policy is price stability and the highest sustainable rate of employment. It may be interesting to note in this context that the Riksbank has in principle the same mandate as the Federal Reserve. According to the Federal Reserve Act, the US central bank should “promote effectively the goals of maximum employment and stable prices”. In this case too, maximum employment means maximum sustainable employment. It is sometimes claimed that the Riksbank’s mandate is a so-called hierarchical mandate, while the Federal Reserve’s mandate is a so-called dual mandate.
15 The degree of interconnectedness in the system may be determined by common exposures to specific asset classes, such as specific sectors in the economy, for example, commercial property, or to specific regions such as emerging Europe, via granted loans or securities holdings. Inter-linkages may also derive from intra-bank and intra-group exposure, as well as from trading and other correlated positions in the financial markets, such as in the credit derivatives market, which may lead to crowded trades, should they need to be unwound simultaneously. They may derive from cross-ownerships and capital participations among institutions, from similarities in business models, or from reliance on the same external sources for funding, for example. While it is unrealistic to think that it would be possible to characterise the degree of interconnectedness of the financial system by taking into account all possible channels for contagion, a great deal of invaluable information exists in a scattered form (at the disposal of supervisors, trading platforms or the institutions themselves). At present, these information gaps imply that most modelling techniques for risk assessment, including macro stress-testing and contagion models, are highly dependent on market-  14  See, for instance, Aikman, Alessandri, Eklund, Gai, Kapadia, Martin, Mora, Sterne and Willison (2009), “Funding liquidity risk in a quantitative model of systemic stability”, Bank of England WP No. 372, June.

Some of these indicators may contain information relevant to early warnings as they may draw attention to rapidly increasing exposures to specific asset classes, broad-based increases in financial leverage and dynamics in the maturity profile of financial institutions’ debt which could indicate roll-over problems. 12 In the ESRB context, early warning indicators and early warning signal (EWS) models should play an important role in both the risk surveillance phase and in the lead-up to the risk warning phase. EWS models are designed to indicate when a financial system, market or intermediary reaches a “danger zone”, which usually points to a crisis ahead. In the past, a number of forward-looking stability indicators were used by most central banks, but these were not necessarily comprehensive frameworks of developed EWS models covering most financial systems. One reason for this may have been that the older generation of these models performed well in the sample but they typically failed to predict future crises. Recent research suggests that their out-of-sample performance can be improved, in particular with respect to credit cycles and asset price bubbles. 13 A caveat that remains is that it seems difficult for them to improve their predictions on the timing of credit booms and asset-bubble bursting. 12  See, for example, ECB Financial Stability Review, December 2007, Box 16 “A market-based indicator of the probability of adverse systemic events involving large and complex banking groups”; ECB Financial Stability Review, June 2006, Special Feature B “Assessing banking systemic risk with extreme value analysis”.
Liquidity is lent against sufficient collateral and is subject to an interest rate that is higher than the policy rate. 2/4  BIS - Central bankers' speeches  SNB's contribution to managing Credit Suisse crisis This brings me to Credit Suisse. Credit Suisse has long struggled to cope with a loss of confidence and with outflows of client funds. The collapse of Silicon Valley Bank in the US triggered a swift deterioration of the situation in mid-March, despite the fact that there was no direct link between the bank in California and Credit Suisse. Credit Suisse's counterparties cut credit limits and clients withdrew deposits at a rapid rate. If Credit Suisse had collapsed, many Swiss households and SMEs would no longer have had access to their deposits, and payments via Credit Suisse would no longer have been executed. Furthermore, SMEs in particular would no longer have been able to benefit from existing credit limits at Credit Suisse and maturing loans would not have been renewed. The economic fallout would have been enormous. But there was even more at stake here. The collapse of Credit Suisse would have sent a shockwave through the global financial system. The consequences for the real economy, both in Switzerland and abroad, would have been dramatic. This extremely demanding situation required quick and decisive action. The federal government, FINMA and the SNB worked together under high-pressure conditions to find a solution that was viable and as market-based as possible in order to safeguard financial stability and protect the Swiss economy.

The UK economy entered the crisis with too much debt in banking, in the household sector, in government and, for the nation as a whole, externally. And the UK entered the crisis with the composition of demand imbalanced – too much public and private consumption, too little net trade. Indeed, aggregate demand had been unbalanced for so long that the economy’s productive capacity was (and probably still is) unbalanced, investment in capital having followed the pattern of demand. For prosperity to be put on a secure footing for the longer term, adjustment is still needed. With one vital exception, engineering structural change in the economy is not the responsibility of the central bank. The exception of course is the safety and soundness of the banking system, which is a precondition for broader monetary stability. An undercapitalised banking system would not be able smoothly to supply sufficient credit to aid recovery as demand picks up, enabling investment in innovations and efficiency. Nor has it been able to do so as much as needed to help capital shift to firms and sectors that are beneficiaries of the new pattern of global and domestic demand. In my view, that may explain some of the weaknesses in productivity growth.9 The Financial Policy Committee required recapitalisation of the UK’s big banks and building societies not simply because that is needed to underpin stability, which it is, but also because a resilient banking system is a precondition for sustained and better balanced recovery.
Karolina Ekholm: The role of forecasts in monetary policy Speech by Ms Karolina Ekholm, Deputy Governor of the Sveriges Riksbank, held at Handelsbanken, Stockholm, 11 May 2010. *  *  *  The theme I have chosen for today’s speech is the role of forecasts in the monetary policy decision-making process. Given the events in recent days, I realise that many people are probably more curious about how we at the Riksbank view the problems with public finances in southern Europe than about our methods for making and using forecasts. So I shall begin with a few words about this. The EU countries have now decided to implement several measures aimed at preventing the public finance problems in Greece from creating new problems in the financial markets and possibly leading to a new economic downturn. The Riksbank considers it a very positive sign that a large rescue package with measures has now been presented to promote financial stability in Europe. We all gain from safeguarding stability. However, it is still too early to say exactly what effects the new package will have. Here in Sweden the financial markets are functioning, but this does not rule out the possibility that they will suffer contagion effects from the international financial markets. Swedish banks have only small direct exposures towards the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) and are well-capitalised in an international comparison. However, the Riksbank follows developments closely and has regular contacts with Swedish banks and with other central banks.

On this front, Thailand has done remarkably well, registering a substantial increase in net inflow of foreign direct investment in the four years following the crisis despite the overall net capital outflow due to debt repayment within the banking sector. Foreign direct investment (to the non-bank sector) increased from an average around 1.4 billion US dollars during 1992-1996 to 3.4 billion US dollars during 1997-2000. Though much work is required on the corporate sector in the march toward modernization of the Thai economy, the government and the central bank also have vital roles in maintaining stable economic environment and providing the required infrastructures to allow the private sector to drive forward to create wealth and prosperity. Several long-term plans have been made in the past couple years. On the macroeconomic front, the Bank of Thailand has adopted Inflation Targeting as a framework of our monetary policy since May 2000. It may be a little too early to claim our success, but the results thus far have been encouraging. Long-term interest rates of the interpolated 14-year government bonds were reduced from 8.3 percent at the beginning of 2000 to currently at 6.1 percent. Inflation remained subdued and will stay within the target range during the next two years. The maturity of state enterprise debentures offered in the market increased from a maximum of 7-year in 1998 up to 20 years in 2000, reflecting greater confidence on the long-term economic stability.
Erdem Başçi: Recent economic and financial developments in Turkey Speech by Mr Erdem Başçi, Governor of the Central Bank of the Republic of Turkey, at the press conference for the presentation of the April 2011 Inflation Report, Ankara, 28 April 2011. *  *  *  Distinguished Members of the Press, Esteemed Guests, Welcome to the press conference held to convey the main messages of the April 2011 Inflation Report. The Report summarizes the economic outlook underlying monetary policy decisions, shares our evaluations on global and domestic macroeconomic developments and presents the medium-term inflation forecasts which have been revised in view of the last quarter developments, along with our monetary policy stance. Moreover, the communication and impact of our new monetary policy implementation are extensively analyzed in the Report through Boxes. Distinguished Members of the Press, In the first part of my speech, I would like to very briefly summarize the global economic developments and provide you with a short reminder of the new policy stance that we have recently introduced. The global economy continued to recover in the first quarter of 2011, while the growth dynamics between advanced and emerging economies continue to diverge (Chart 1). Downside risks in advanced economies remain critical, causing these economies to maintain expansionary monetary policies, while domestic demand remains strong in emerging economies amid accelerated capital inflows. Chart 1. Aggregated Growth Rates* (Annual Percent Change)  * Weighted by each country’s share in global GDP. Source: Bloomberg, CBRT. 1.

Conclusion The changes in the financial system since 1998 confront us with a mix of benefits and challenges. The larger size and scope of the core institutions, the greater opportunities for risk transfer and hedging provided by innovation in derivatives, the improvements in risk management, the larger role played by a much expanded number and more diverse mix of private fund managers seem likely to have improved the stability and resilience of the financial system across a broader range of circumstances. The same factors that may have reduced the probability of future systemic events, however, may amplify the damage caused by and complicate the management of very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones. Supervisors need to continue to focus attention on reducing the vulnerability of the market to these low probability, but extreme events, while preserving the benefits that have come with these changes in financial markets. The limitations of the conventional risk-management tools in assessing potential losses in the adverse tail of possible outcomes in today’s financial system magnify the risk that individual institutions will operate with less of a cushion than might be desirable for the market as a whole. As the structure of markets change, we need to continue to review whether the overall framework of supervision over the core banks and investment banks provides the right balance of efficiency and resilience for the system as a whole.