samchain/econo-pairs-v1 huggingface dataset:
In Sweden, the Riksbank has regularly highlighted many of the risks in the financial system. We did so most recently in our Financial Stability Report. There we pointed out, for instance, that the financial turbulence might worsen and that the banks' access to funding could deteriorate. At the same time, we have all along made the assessment that financial stability in Sweden has been satisfactory. We make the same assessment now, and the Swedish banks are financially strong. 2  BIS Review 115/2008  As we have seen, a lot has happened on the financial markets recently. We are following developments closely, constantly updating our analyses and we are prepared to take action if necessary. We have regular contacts with banks, market participants and other government agencies, as well as our central bank colleagues in other countries. There is a generally high level of uncertainty in the world economy at present and this will probably persist for a good while to come. I would therefore like to return now to what I mentioned at the beginning – the inflation target and the stability it offers to the economy, particularly when storms are raging all around us. Monetary policy – focus on the inflation target The objective of monetary policy is to maintain price stability and this has been established by law since 1999. To be more precise, inflation measured in terms of the consumer price index, CPI, is to be held at 2 per cent, with a tolerance interval of +/- 1 percentage point.

However, ICAP, the FFO publisher, did not consider it to be a financial benchmark and did not calculate it as such, which raised questions about the FFO’s suitability to be used in such a manner. The TMPG identified this issue during its work on financial benchmarks and encouraged industry groups to examine possible alternatives to the FFO. This led the Securities Industry and Financial Markets Association (SIFMA) and the Risk Management Association (RMA) to jointly recommend that market participants use the overnight bank funding rate, a rate more consistent with international best practice recommendations. See SIFMA’s and RMA’s joint announcement here and the TMPG’s statement of support here. 17  The following year the TMPG was established and issued its first set of best practices, with several recommendations to improve the clearing and settlement processes to alleviate fails. See here. BIS central bankers’ speeches  5  $ billion per day. About a year following implementation of the fails charge, fails declined to only $ billion per day. 18 Best practices can serve as a tool by which control functions, such as compliance, audit, and legal, can test their firms’ procedures and activities against affirmed standards of best practice. The standards can act as a measuring stick that, along with applicable law, regulations, and supervisory expectations, encourages continuous improvement of front, middle, and back offices. For example, the TMPG has a series of practices directed at managing large positions with care.
Considerable progress was made in elevating living standards in many corners of the world, with hundreds of millions of people lifted out of poverty. The world economy has also gone through great transformation. We now have a truly global village. Closer ties have been formed between countries with the help of rapid technological progress and increased international integration. Stronger trade and financial linkages follow suit, at a rigour, more than could have been imagined, half a century ago. Yet, against these gains, the world faces daunting challenges affecting sustainability that could dramatically alter the overall growth outlook in the next 50 years. Today, I would like to name three challenges that confront us. The first is climate change. What was once a theoretical discussion in lecture halls, today, climate change has impacted us more frequently and in more visible ways than ever before. The increasingly complex needs and demands of modern civilisation have indeed exerted a significant toll on the environment. Over the past two decades, carbon dioxide emissions have risen significantly, leading to a wide range of problems such as rising sea levels; melting glaciers; and more extreme weather events. It is alarming that the number of reported weather-related natural disasters has increased threefold since the 1960s. The effects of these events have been devastating – economic activities have been disrupted; large resources have been rechannelled; and vulnerable segments of societies have been the most affected.

The El Niño phenomenon for example, affected many developing countries that are dependent upon agriculture and fishing, particularly those bordering the Pacific Ocean. Last year, it left millions of people hungry and in need of food aid; water shortages across Southeast Asia; and higher food prices globally. Closer to home, thousands have been displaced after the northern state of Penang was hit by the worst flood in more than 20 years. These are indications that despite progress made in regulating global emissions of greenhouse gases over the past decades, we need to do more to mitigate the adverse effects of climate change. Moving on to the second challenge – growing inequality. Globally, the benefits of economic growth have been uneven. In reality, not all members of society have fully benefitted from the growth. While some have gained, many have been dislocated – feeling that they have been left behind. Today, global inequality is at its highest since the 19th century. Recent studies show that the richest 1% now owns half of the world’s wealth combined. In stark comparison, 70% of the 1/5  BIS central bankers' speeches  world’s adult population holds only 3% of the global wealth. Globally, continued widening of the inequality gap would be detrimental to economic growth and social progress in the long-run. Inequality is a threat to growth if it leads to those in the low income segment suffering poor health and low productivity; and to struggle in obtaining quality education.
In other words, uncertainty with regard to the interest rate reflects the monetary policy response to unexpected disturbances in inflation, output and the exchange rate. When the interest rate, as forecast in the baseline scenario, is raised to a more normal level, Norges Bank will be able to assess the effects of interest rate changes and other new information about economic developments. According to our projections, inflation will be close to target three years ahead. We are uncertain as to the functioning of the economy and how long it will take for the resource shortages observed in some sectors of the Norwegian economy to translate into higher inflationary pressures. This may warrant small steps in interest-rate setting. Employment is now rising more rapidly than expected. Corporate earnings are rising sharply, with higher growth in corporate demand for credit. The sharp rise in household debt is continuing. House price inflation remains high. This is to some extent due to structural adjustments, but gives cause for some concern nevertheless. Wide fluctuations in asset prices may be a potential source of instability in demand and output in the somewhat longer run. Prices for oil and several other commodities have picked up further. At the same time, the underlying rise in consumer prices remains low. So far, a tighter labour market does not seem to have resulted in higher-than-expected pay increases, but there is a risk that wage growth may subsequently rise faster than projected. The krone is stronger than assumed.

Office premises have a dominant role as investment vehicles and are therefore most important for the commercial property market as a whole. Investment in new commercial properties partly depends on developments in rental rates and the number of vacant premises. Developments in rental rates for office premises in Norwegian cities over the past twenty years appear to have been fairly uniform, with very high rates at the end of the 1980s, followed by a marked negative correction towards the mid-1990s. Rental rates then rose considerably up to the end of the century, followed by another downward correction. Stavanger seems to have experienced a relatively even rise in real terms throughout the period. Rental rates in Trondheim and Bergen seem to have had  BIS Review 41/2006  1  a less pronounced peak at the end of the century than Oslo, while rental rates in Tromsø have been relatively stable since 1992. Last year rental prices for office premises began to pick up in several Norwegian cities. There is considerable variation within the various quality and location segments. The prestigious segment in central business areas shows the highest rise in prices, while rental prices in some less attractive areas have remained virtually unchanged. During the cyclical peak between 1997 and 2001, only 4 per cent of the office premises in Oslo were vacant. More moderate economic growth in 2002 and 2003 contributed to a fairly sharp rise in the vacancy rate. Over the past two years, the rate has fallen again.
The rise in the surplus savings of the rest of the world, the relative ease with which those savings now move across borders, and the increase in the relative attractiveness of claims on the United States together may suggest the world can sustain larger imbalances, more easily, for a longer period of time. These factors, however, do not alter the fundamental judgment that our external position is unsustainable and the adjustment process ahead could materially affect future economic outcomes. The fact that these imbalances might be sustained for some time shouldn’t make us more confident that they will be. Even if we could be confident that the world would be comfortable financing the United States on these terms going forward, that would not make it prudent for the U.S. to continue borrowing on this scale. Time doesn’t necessarily help. The longer these gaps continue to build, the greater the risks, and the more difficult their resolution. What can we do to mitigate these risks? For the United States, these challenges put a premium on putting in place a more credible fiscal policy framework, maintaining as strong and resilient a financial sector as possible, and preserving an open and flexible economy. These things are all important and desirable, but they are more important, and we can less afford to tolerate any erosion, than would be the case if we were closer to a sustainable external position.

I will begin with a broad overview of the current international approach to overall economic management, then say something about the present disturbances in Asia, and finally about their implications for the prospects for the rest of the world. Let me begin with just a few words about the process of international economic and monetary management. I have just returned as it happens from the annual Spring Meeting of the IMF in Washington, where the Finance Ministers and Central Bank Governors from all around the world gather to discuss current international developments. We all meet again every autumn. Last week, we debated much the same agenda in a variety of meetings - in the Group of 7 major industrial countries; in the Group of 10 - actually eleven - a somewhat wider range of industrial countries; in the Interim Committee in which all IMF member countries are represented, in constituencies; and this time in a new ad hoc Group of 22 or 23 countries including a broad cross-section of industrial, emerging and transition countries. Invariably the journalists, who also gather in Washington, quite reasonably ask, “What exactly did you decide in all those meetings?” And almost invariably, we have to respond that “We did not actually decide on anything - we agreed we should do some further work and meet again for further discussions!” You could be forgiven for thinking that the whole process of reaching international agreement on anything moves at a snail’s pace!
Jörg Asmussen: Introductory statement by the ECB in the proceedings before the Federal Constitutional Court Introductory statement by Mr Jörg Asmussen, Member of the Executive Board of the European Central Bank, in the proceedings before the Federal Constitutional Court, Karlsruhe, 11 June 2013. *  *  *  Mr President, Members of the Federal Constitutional Court, Introduction The Federal Constitutional Court has invited the European Central Bank to comment on its monetary policy mandate, and particularly the decision taken by the Governing Council of the ECB in respect of the bond-buying programme, Outright Monetary Transactions (OMTs). My aim is to demonstrate that our measures were necessary, that they are effective, and that they fall within the mandate of the ECB. I will confine myself to the most important aspects of our written statement, looking in particular at two aspects – the “scope of monetary policy” and the “possible consequences of the ECB’s measures for national budgets” – as specifically requested by the rapporteur for today’s oral proceedings. The necessity and effectiveness of the ECB’s actions Let me first briefly explain why the European Central Bank opted for the OMT programme. The need for monetary policy operations In order to understand the need for our monetary policy measures, it is important to be aware of the economic environment that we faced last summer. Fears of an involuntary break-up of the single currency led to severe tensions in the capital markets.

The growth momentum is expected to pick up further after China’ s announcement to formalise the use of RMB in foreign direct investment (FDI) in 2011. The upside is very significant as China’ s total FDI amounted to USD 116 billion in 2011, or RMB 750 billion equivalent. Besides facilitating the rapid development of the sukuk and dim sum bond markets, more importantly, the Pilot Platform will contribute significantly to financial stability in the Asian region. With the advanced economies undergoing structural adjustment and fiscal consolidation, the two-speed recovery will continue to entice portfolio flows into Asia. The key challenges for Asia are to channel such flows to productive use, reduce concentration in short-term positions of the more volatile asset classes, and to avoid such flows spiking up a  BIS central bankers’ speeches  1  property price bubble. Channelling the inflows into the bond market will serve these useful purposes as the investors are typically institutional investors who take long-term positions in strategic economic sectors. The global financial crisis has reminded us of the destructive powers of a liquidity crunch and the need for quick access to local currency liquidity in times of stress. In particular, the increased risk aversion arising from the recent financial crises and heightened alertness to the counterparty exposure have raised the demand for secured lending. As an illustration, the average tripartite collateral management deals outstanding administered by Euroclear Bank increased substantially from EUR 76 billion in 2001 to EUR 325 billion in 2011.
(Figure 2)  BIS central bankers’ speeches  3  Figure 2 The banks’ funding December 2010 Per cent  Source: The four major banks’ reports and the Riksbank. At the same time, the Swedish banks’ exposures towards the Baltic countries became increasingly onerous. The global financial crisis became the factor to trigger an economic crisis in the Baltic countries. Investors saw the Baltic as a high-risk region where the devaluation of the currencies was also expected. Knowledge of these risks made international investors increasingly unwilling to lend money to Swedish banks. Even the Swedish banks that did not have any lending activities in the Baltic were affected by this, to a certain extent. The Riksbank’s measures dampened the negative effects When the crisis had finally struck with full power, we acted rapidly and forcefully. Over three months, the Riksbank lent an amount corresponding to about SEK 500 billion to the banks. This meant that the Riksbank’s balance sheet increased from about SEK 200 billion to about SEK 700 billion. We acted in our role as lender of last resort.3 All lending took place against collateral. So as to avoid restricting the banks’ opportunities to borrow, we eased the regulations for collateral slightly. Among other changes, we accepted more types of security than previously. However, these new types of collateral were also of very high quality. To make it possible for several institutions to use certain of the Riksbank’s lending facilities, we also decided to increase the number of counterparties.

One risk we emphasised at that point was that of overheating in the Baltic countries. Two of the Swedish banks had large and growing operations in these countries, meaning that a sudden slowdown in the economies of these countries could have led to significant loan losses for the Swedish banks. In particular, we analysed the banks’ resilience towards a sudden economic downturn in the Baltic countries. The stress tests we conducted indicated that the banks had enough capital to cope with such a development. Another risk we emphasised before the crisis was the rapid rates of increase in household indebtedness and in housing prices. One repeated statement was that we did not regard this as being an urgent problem, but that the development was not sustainable in the longer term. At this point, we could observe that housing prices and household indebtedness had increased by about 150 per cent over a ten-year period. At the same time, households’ disposable incomes had only increased by about 50 per cent. There may indeed be reasons for household debt to increase significantly faster than income for a period, but, over the longer term, this is not sustainable. A third risk we emphasised was that the price of risk was very low in a historical perspective. The low risk premiums could indicate that the investors had not received sufficient compensation for the risk they undertook in the purchase of various types of assets.
In such a context there is a risk that the banks could act even more procyclically than they usually do and would amplify the cycle. To be clear, the uncertainties and the economic slowdown have so far not caused banks to tighten their lending conditions or to grant less credit. But we need to keep a very close eye on how this evolves. How will the banks behave if the economic slowdown continues? Would you say that financing conditions in the euro area as a whole have already tightened significantly? Financing conditions have tightened somewhat in recent months, but not significantly, thanks in part to our forward guidance on interest rates. This partly compensates for such effects. But you’re absolutely right, we as central bankers must always ask ourselves whether our monetary policy stance is appropriate for us to attain our objective. And what is your answer at the moment? We have revised our assessment of risks to growth downward. I would say that is a clear indication that the level of alert is higher than before. 2/5  BIS central bankers' speeches  Three quarters of below-potential growth, higher risks and at least slightly tighter financing conditions – what does that signify for the inflation outlook? Is the ECB’s Governing Council losing its confidence in reaching the target of 2% over the medium term? Three quarters of below-potential growth are certainly not good news. But we have a medium term perpective.

4/5  BIS central bankers' speeches  Financial cycles have become increasingly important. I think that our framework has strengths that we should preserve. Central bank independence is increasingly coming under attack around the world – not just in the United States, but also in Italy, for example. How much does that worry you? The independence of central banks is of key importance and should not be called into question. Whatever the criticism may be, every other regime in which the central bank is closer to the finance ministry is much worse than the current system. But not everybody seems to agree. There may be populists who dream of something different. But most politicians are very conscious of the need to keep monetary and fiscal policy separate. Any other approach can quickly turn dangerous. 5/5  BIS central bankers' speeches
In particular, in many cases the expected share price would be higher without dilution even admitting the possibility of a “bad state of the world” scenario. The problem with this approach was that each individual bank’s decision not to raise capital to protect against the “bad state of the world” scenario increased the likelihood of the “bad state of the world” scenario. There was an important externality. If a bank raises additional capital, it doesn’t just make its own bank stronger, it also makes the entire banking system more stable. Yet it reaps only a portion of these benefits. This was the collective action problem that the SCAP was designed to remedy. Perhaps, I can best illustrate the problem via two figures. In Figure 1, banks have sufficient capital. The mean value of capital is well above zero, the distribution is narrow, and none of the distribution falls below zero – everyone believes the bank is solvent. In Figure 2, losses push the distribution of capital to the left and uncertainty about the value of the assets widens the distribution. Thus, unlike the case in Figure 1, a portion of the distribution falls below zero. The bank may be insolvent. Thus, the bank is likely to encounter funding difficulties. The point of the SCAP was to push the probability distribution back to the right by adding capital – and to narrow it by creating more certainty about how much capital the banks need.

We set the main scenario that the banks must use, and the banks were required to apply the stress test in the manner they deemed appropriate in assessing their capital adequacy. Supervisors used independent quantitative techniques both as a check on firm estimates and to assist in their evaluation of the firms’ tools and processes. We evaluated their efforts in terms of: 1) how the stress test is applied, 2) what this implies in terms of capital adequacy, and 3) their capital plans and requests to pay dividends and/or conduct share repurchase programs. Our evaluation of their capital planning processes and their requests to make capital disbursements was based mainly on three factors: 1) capital adequacy, 2) the quality of the capital planning process, and 3) the credibility of their plans to meet the Basel III capital requirements. Elements of a good planning process include: 1) description of risk appetite and capital targets, 2) robust internal controls, 3) incorporation of stress testing and stress-test results into the decision making process, 4) good governance with respect to the role of senior management and the board of directors, and 5) well-articulated capital distribution policies that describe how decisions are made relative to the expectations of future outcomes. Some outside observers ask why supervisors would ever want to use bank-run stress tests rather than supervisory stress tests. The answer is that they serve different purposes.