samchain/econo-pairs-v1 huggingface dataset:
The mandate of the euro area’s central banks is clear on this subject and there is no reason to think that some other stray thoughts would let us deviate from our key goal. It should be stressed that the Governing Council of the European Central Bank is monitoring the economic situation very carefully and will not commit to future decisions in a form that would render the Council a prisoner of their own words. Public discussions include two extraneous arguments, based on which it has been claimed that the hands of the euro area’s central banks are tied and therefore they cannot fulfil their primary goal properly. Firstly, it has been presumed that banks’ situation in Europe is so weak that we cannot abandon the extraordinary monetary policy measures that made money supply easier for banks during the crisis. Secondly, it is claimed that until the fiscal situation of some euro area countries is not firmly under control and the new financial control mechanisms have not been implemented, central banks do not dare to focus on the threat of inflation. I do not wish to underestimate either argument. The situation in global money markets, including Europe, is not entirely risk-free yet and the leaders of Europe’s public financing are struggling to ensure that the amended fiscal framework would help avoid crises in the future. However, upon fulfilling their main goal, the euro area’s central banks are not limited by these concerns to the extent that they could or should ignore the price stability goal.

By clarifying that the Governing Council expects its key policy rates to remain at their present levels at least through the summer of 2019, we increased transparency around our near-term policy intentions, which investors could then reflect in their asset allocation strategies.6 It may therefore not be surprising to see capital flows by euro area residents being rather unreactive to the nearing end of the APP, thereby limiting any abrupt and adverse spillovers from policy normalisation in the euro area to global financial conditions. I would call this the “international stock effect” of our APP. Moreover, the benefits go both ways, meaning that our forward guidance is also likely to have contributed to reduce the sensitivity of euro area rates to foreign spillovers. On my last slide you can see that ECB researchers, using the Diebold-Yilmaz methodology, find that spillovers from US Treasury bonds to German Bunds – the yellow line – have remained remarkably stable, at low levels, over the past year or so, despite the continued upward pressure on long-term US Treasury yields.
2  BIS Review 20/2004  The stronger productivity growth is probably connected with economic activity; at the beginning of a recovery the available production resources are used to a greater degree and it is only when the recovery is secure that investment and new recruitment accelerate in earnest. However, there are numerous indications that productivity has risen more than is usual for the economic situation, a pattern that has been even more evident in the United States. It is conceivable that this development is linked to the factors I mentioned earlier; globalisation, deregulation and increased competition. However, more lasting changes in productivity may also be linked to the large investments in IT and telecommunications at the end of the 1990s. It is possible that the full impact from the investments made and technological advances is first achieved in connection with cost-cutting and rationalisation. We have a special boxed article on this subject in the report, which I can recommend reading. It is not possible to determine with any certainty what has caused the improvement in productivity. However, given this more favourable picture, we have nevertheless anticipated a rather higher level of productivity growth in the near future. The new inflation figures received also indicate a slightly more subdued inflationary pressure than we had estimated. The outcome shows not only that electricity prices have fallen back as expected, but also that prices have increased at a slower rate in general.

There was also a risk to the stability of the financial system. The economic slowdown that had begun could thus become more profound and prolonged than was previously anticipated. The easing of economic policy after the terrorist acts contributed to some recovery in international and domestic economic activity. In spring 2002 we made the assessment that inflation one to two years ahead would exceed the target level. A gradual upturn in the underlying inflation rate, combined with unexpectedly high wage increases in the services sectors in particular, indicated that resource utilisation could be higher than we had assumed. The repo rate was raised in two stages. Steering interest rates in several other small countries were also raised at this time. However, during the summer and autumn we saw more and more signs that the recovery had come to a halt. Industrial activity weakened and geopolitical unease increased, as did the concern that the heavy stock market fall that began in 2000 would affect households and firms more than expected. The Riksbank, like the  4  BIS Review 20/2004  ECB and the Federal Reserve, began to reappraise the prospects for economic activity and inflation. Towards the end of the year, we made a downward adjustment in the inflation forecasts and the repo rate was cut by as much as it had been raised during the spring. With hindsight, it could perhaps be claimed that raising the interest rate in spring 2001 and 2002 was unnecessary. However, this would not lead to a fruitful discussion.
But I have suggested to my colleagues that while many companies have begun and will likely continue to raise prices to counter rising costs that derive from a range of factors – including the run-up of commodity prices in 2010 and increases in the costs of production in China – weak demand is beginning to temper the ability of providers of goods and services to significantly raise prices to consumers. My concern is with the transmission mechanism for activating the use of the liquidity we have created, which remains on the sidelines of the economy. I posit that nonmonetary factors, not monetary policy, are retarding the willingness and ability of job creators to put to work the liquidity that we have provided. I have spoken to this many times in public. Those with the capacity to hire American workers – small businesses as well as large, publicly traded or private – are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy. In an environment where they are already uncertain of potential growth in demand for their goods and services and have yet to see a significant pickup in top-line revenue, there is palpable angst surrounding the cost of doing business. According to my business contacts, the opera buffa of the debt ceiling negotiations compounded this uncertainty, leaving business decisionmakers frozen in their tracks.

Are these repeated crises the inevitable result of human nature at work in financial markets, with greed and fear alternating as sentiment swings from irrational optimism to irrational pessimism? Or is it the failure over many years to find the right incentive structure for banking markets? Or is it a mixture of both? I don’t pretend to be able to offer a complete answer to those questions. But I do want to focus on the relationship between the Bank of England and the banks because it helps to explain why crises occur and what we can do about them. Let me start by saying that, although I do think the role of the Bank needs to be enhanced, it would not be right for the Bank to take back banking supervision from the FSA, as some have suggested. We should remember that the period before 1997, when FSA and the “tripartite arrangements” were set up, was not seen at the time as a golden age of official oversight of banks. Before 1997 the relationship between the Treasury and the Bank of England in respect of banking supervision was often fraught. Remember too that the experience which shaped the design of the 1997 settlement was that of idiosyncratic problems in Johnson Matthey, BCCI and Barings, not a system-wide crisis affecting the liquidity of the banking system as a whole. As a result, the tripartite Memorandum of Understanding which underpinned that settlement was not so much faulty as incomplete.
What can the Federal Reserve bring to the table? First and foremost, we can convene the industry and, as needed, drive toward consensus. We can bring strong research and analysis to the table. We can synthesize the large volume of payments research developed by industry, think tanks, consultants and academics, as we’ve already done for ourselves, as well as provide research by Federal Reserve economists. We can analyze use cases, as we’ve done over the last six months. And to help shape the consensus, we can draw on the basic principles that have guided Federal Reserve provision of payments services over the postwar period: access, efficiency, security and resiliency. Historically, the Federal Reserve’s focus has been on the interbank clearing and settlement of payments, operating efficiency, such as the conversion from paper to electronics, technologies that extend and improve accessibility, and infrastructures and services that are robust to security threats. Moving forward our strategy maintains emphasis on those key areas, but expands our focus to the flow of a payments transaction from end to end, enduser to end-user. The vision is to make sure the core services we provide enable and encourage innovation among payments providers who serve the end-users at the two ends of the payment. The end-to-end view means that payment initiation and delivery of good funds to end-users in the future state need to be timely, cost-effective, safe and easy. When we talk about timeliness and a faster payments system, what exactly does that mean?

Such risks have also been one of the arguments in favour of opening the Riksbank to scrutiny and of promoting a policy that is as clear as possible. An open debate and good opportunities to scrutinise the Bank appear to me to be the best antidote against an introverted and exaggerated inflation-fighting perspective. Having said that, though, I think that there is every reason to object to the recurrent interpretation that the low inflation is an expression of an excessively hawkish stance on the part of the Riksbank. Firstly, for a large part of the period in question monetary policy has been guided by a measure of underlying inflation UND1X, and so policy should first and foremost be evaluated in terms of this measure, in accordance with the Bank’s clarification in 1999. UND1X inflation has averaged 1.9 per cent since 1995, which is undeniably quite close to the target. (Figure 5). The fact that CPI inflation during this period has been lower – 1.4 per cent – is mainly due to the sharp decline seen in the general level of interest rates, partly because a low-inflation environment has been secured. Furthermore, ten years may be too short a period over which to assess policy, at least when a number of those years have involved an adjustment from one regime to another, as in Sweden’s case. Another way to approach this issue is to study the episodes when inflation has undershot the Riksbank’s target. That has mainly happened on three occasions.
Communications strategies are now seen as a crucial part of central bank activity, and no just as icing on the cake. The  BIS Review 71/2004  1  emphasis now is increasingly on forging links, building bridges and storing up political capital and public goodwill that will help us deal better with the next crisis. Similar observations might be made on the subject of the effectiveness of central banks - surely the result that we all strive for. Radical changes in our functions, progress in technology, and the process of accountability have all dictated cuts in staffing and resources, and various forms of streamlining and re-engineering. Much of this can be healthy and refreshing. But we should also be mindful of the need for flexibility, for some reserve capacity to deal with sudden and unexpected events. This is why the increasing focus on strategic planning and risk management, reflected in your discussions this week, is welcome. There is, of course, much still to be done on these subjects. I understand that the discussions over the past few days have been lively and, at times, quite passionate. There is, I think, one main reason for this - and it is the same reason why this meeting has attracted such an excellent attendance. Central bank governance is a field in which great change is taking place. A number of drivers are forcing this change.

They include the quest for efficiency and greater effectiveness; the lessons learned from crises; political pressure - and its converse political opportunity; and what has from time to time been referred to as “fashion” but which I think can be more generously described as best practice. We have heard many times these last few days the familiar disclaimer that there is no “one model that fits all”. Many of you have stressed the uniqueness of your governance arrangements only to be reminded subsequently that these are arrangements familiar to one, two or even several other central banks. The modesty and diffidence with which experiences have been described is, of course, to be expected among central bankers. But there is, I think, a very pleasing mismatch between this and the enthusiasm with which all of us have been drinking up information about each other. This demonstrates that the BIS network is far more than an academic exercise. It also reflects an important truth: that, although our economic and political environments may differ widely, although we may pursue different policies and follow different legal structures, we all face a number of constants. Finance, money and banking behave in very similar ways no matter where we find ourselves, the more so with globalisation and liberalisation of markets. Politicians and the media the world over have the same qualities and the same vices. And so for that matter do central bankers. The human factor, which is at the root of all of our discussion on governance, is universal.
However, if the expansion of credit really accelerates again this may lead to problems in the longer term.5 It is therefore important to carefully monitor the situation so that risks to financial stability do not arise. Financial stability is also a precondition for the ability of monetary policy to have the desired effects on inflation and the real economy. I therefore see it as natural that aspects of financial stability may have to be taken into account in monetary policy decisions. On the other hand, we should not exaggerate the importance of the policy rate as a tool for promoting financial stability. The policy rate is a relatively blunt instrument that has an impact over a broad front. I am convinced that there are other instruments that are more effective for managing financial stability. This naturally leads on to how we can adopt a new perspective on financial stability against the background of the financial crisis – and the new policy area macroprudential policy. Macroprudential policy – financial stability from a new perspective Despite the fact that there are plenty of historical examples, not least our own banking crisis in the early 1990s, I think that many people were surprised by the latest global financial crisis, and the size and scope of it. There were probably few people who thought that problems on the US housing market could lead to a debt crisis in Europe.

I do not think, therefore, that the new capital requirements will be much of a problem for the Swedish banks. We have now made some progress in clarifying what regulations should apply to the banks in the future. This is good. A lot of the earlier criticism from, for example, the Swedish banks, stemmed from the great uncertainty about the form of the new regulations and how they would affect the future playing field. I am also convinced that well-capitalised Swedish banks will do well in the fact of international competition in the period ahead. Central banks should play an important role in macroprudential policy In Sweden, both the Riksbank and Finansinspektionen have a responsibility to maintain financial stability. However, although the objective is the same the areas of responsibility differ. Finansinspektionen is responsible for supervising individual institutions, in particular those that can affect the stability of the entire financial system. The authority should also work to promote orderly financial markets by supervising securities trading. The Riksbank has a broader assignment and monitors the development of the financial system as a whole. How responsibility for macroprudential supervision should be divided is now being studied by the Financial Crisis Commission. Some guidance can be taken from the European Systemic Risk Board (ESRB). The ESRB was set up in early 2011 to manage macroprudential policy at the EU level. However, the body has no binding instruments; it can instead issue warnings and recommendations to various players.
Crisis prevention: bank capital requirements I would like to discuss one particular weapon in the crisis prevention armoury, which is bank capital. This is, of course, a very topical subject at the moment, with the revision by the Basel Committee on Banking Supervision of the 1988 Capital Accord. Importance of capital Why does bank capital have a crucial role in crisis prevention? This question has two aspects: first, the importance of capital itself; and second, the special role that banks play in the economic system. Capital has a vital two-fold role. First, capital - or rather equity capital - acts as a buffer against insolvency. It therefore helps to protect the system and limit calls on the safety net. And second, equity capital helps to align the objectives of the firm’s owners with the objectives of the authorities. Where the owners of firms invest only pinpoint capital, or see their investment erode to the point where the firm is only marginally solvent, owners have an incentive to “gamble for resurrection”, because with limited liability, taking on extra risk has substantial potential upside but no extra downside for owners. But with a higher cushion of capital, owners do have something to lose. That said, we should not overstate the role of capital in ensuring the health of the banking system. If other fundamentals are shaky - such as the macroeconomic environment, the legal system, or the framework for asset valuation and auditing - capital is likely to produce only limited comfort.

Culture is at the heart of behavior and norms, and the single most important factor driving the decision-making of employees. It’s not an exaggeration to say that culture is critical—both when things go right, and when they go wrong. Before I get any deeper into ideas about culture, I should give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. Culture Shapes Our Working Lives When we talk about company culture in the context of financial services, the first thing that comes to mind is the risky, unethical, and sometimes criminal behavior in the banking industry, particularly during the financial crisis. And 10 years on from the crisis, this behavior persists. Instances of fraud, money laundering, and scandals related to foreign exchange and LIBOR continue to make the headlines.1 This behavior puts a spotlight on the essential role of robust regulation and strict enforcement. But illicit and unethical behavior is rarely the result of an isolated “bad apple.” It’s more often the symptom of a rotten culture. And rotten cultures don’t appear overnight—nor for that matter do positive, inclusive ones, where people feel empowered and accountable to upholding the values of the organization. Culture is created—intentionally or otherwise—by the structures, incentives, and behavioral norms that shape our working lives. Today I want to move our attention away from the extreme behavior that makes the headlines, and think more deeply about organizational cultures.
They are complexity on the one hand, and homogeneity on the other. In essence, the financial network has over time become progressively more complex and less diverse. Why? And what have been the consequences? In the 1987 film Wall Street, the financial sector mantra was “greed is good”. The stock market crash of the same year put paid to that doctrine, at least temporarily. By the early part of this century, both the circumstances and the individuals had changed. So too had the mantra. It had become the rather gentler “diversification is desirable”. Risk-taking became less Gordon Gekko and more Merton Miller. Diversification came care of two complementary business strategies. The first was “originate and distribute”. Risk became a commodity. As such it could be bundled, sliced, diced and then re-bundled for onward sale. Credit became, in the jargon, structured. Securitisation was one vehicle for achieving this. Derivatives, such as CDS, were another. As these marketable instruments passed between participants, the network chain lengthened. In principle, these instruments delivered a Pareto-improving reallocation of risk. Risk would flow to those best able to bear it. They had deep pockets which they sought to line with higher yield. For the system as a whole, this sounded like the land of milk and honey. For a risk shared was a risk halved – perhaps more than halved, given the magic of diversification. The network chain, meanwhile, just kept on growing. 1  Federal Reserve Bank of New York (2007); May, Levin and Sugihara (2008); Allen and Gale (2000).

In the long run, a larger and more liquid bond market in Norway could provide a basis for improved risk management and enhanced diversification of risk in the financial system. A new pension system is now being considered. One of the main questions relates to the distribution between pay-as-you-go and fund-based schemes. There will always be a measure of uncertainty associated with future economic developments, and thereby with future pensions. The funding of pensions will continuously reflect this uncertainty. Not even public pay-as-you-go schemes can guard us against this. A higher proportion of fund-based schemes will make this uncertainty more visible and provide greater opportunities for each individual to adapt. Thank you for your attention. 10  BIS Review 48/2002