samchain/econo-pairs-v1 huggingface dataset:
BIS central bankers’ speeches  3  of new regulation,8 or try to model impediments to trade in the form of preferred habitat frictions9 or search frictions.10 These new models provide fresh insights and can also be useful for us in communicating with academics and market experts. These improvements are notable because they represent a significant departure from views that were espoused a few decades ago.11 Much research before the crisis put too much faith in market efficiency and spent too little time exploring the detailed plumbing of the financial system.12 Empirical work can also contribute to our thinking about monetary policy implementation. What more can we learn about the relationship between different money markets, such as the spreads between various secured and unsecured rates?13 How much should we care about volatility in money markets and how does that volatility affect the monetary policy outcome? We saw some interesting work on the topic today.14 In the United States, we also have the benefit of internal work, now public, that we undertook previously. The Federal Reserve had started to examine ways to improve its policy implementation framework before the crisis. Analytical work between 2006 and 2008 provides a solid foundation from which to build. As you may recall, in 2006 Congress granted the Federal Reserve the authority to pay interest on reserve balances held by depository institutions, and this authority was originally set to become effective in 2011.15 We went to work to try to understand how best to employ this new tool.

In the decade before 2007, bank paybills, broadly defined, grew at broadly the same rate as shareholders’ profits. In the 10 years before the crisis, for the global banks, profits attributable to shareholders averaged 60% of the paybill. For the big UK banks, profits were about 75% of the paybill. Since the crisis that picture has changed markedly. In 2013, profits attributable to shareholders were down from 60% to around 25% of the large global banks’ paybills in 2013. Put simply, shareholders have gone from getting 60 cents for every dollar in pay for staff to getting 25 cents per dollar. Across the big UK banks in 2013, the fraction had fallen to just 2% – ie to 2 pence per pound paid to staff. Averages, of course, mask some very different performances by individual institutions. But it is noticeable that, since the crisis, for the industry as a whole, employees have received a larger share of a smaller pie relative to shareholders. And in the UK, due in no small part to one-off factors, this effect has been particularly pronounced. UK banks’ returns on equity would have been nearly 6 percentage points higher in 2013 if the ratio of staff costs to the sum of staff costs and shareholders’ profit had been at its 2000–07 average. The sluggish adjustment in pay may well reflect the expectation that returns in banking are set to increase in the future. There are good reasons why they may do so.
More generally, the views of businesses around the country about the state of trade are passed directly to the MPC through the intermediary of the Regional Agents who attend the monthly preMPC briefing meetings. This may not be quite “One 2 One” but it is a rapid and direct communication. The Bank of England has never had an Agency office in Northern Ireland. It is time to put that right. I am very pleased, therefore, to announce that in January next year the Bank of England will open an Agency in Belfast. It will increase our contacts with, and knowledge of, the economy and people of Northern Ireland. Nigel Falls, one of our most experienced Agents, will be the first Agent for Northern Ireland. He is here tonight, and you will be seeing a great deal of him in future. The second challenge for the future is to build a constituency for low inflation. There is I believe, a good deal of support in this country for monetary stability. Those who experienced the high and unpredictable rates of inflation of the 1970s and 1980s – the “inflation generation” – have ensured that all major political parties are now committed to stability. But there have been times in the past when low and stable inflation was abandoned by those who succumbed to the temptations of monetary laxity. Some of you here tonight are, I hope, taking a break from revision for your final examinations. Thirty years ago this month I was in your position.

The bond market measure has risen somewhat in recent months, although this reflects unusually low real yields on indexlinked debt following the introduction of the minimum funding requirement for UK pension funds. Does this fall in inflation expectations matter? The simple answer is yes. If the MPC can anchor inflation expectations on the target, then unexpected movements in inflation will not immediately lead wage bargainers or price-setters to change their view of where inflation is headed and hence will help make less likely the inflationary spirals of the past. Both inflation and output should be less volatile as a result. 3  BIS Review 63/1999  But there is also another, albeit one-off, benefit from the new-found credibility of policy and the subsequent reduction in inflation expectations. Over the past two years, inflation has been close to 2.5%. If inflation expectations had not themselves converged on the target, then inflation would have been lower than expected. Why does this matter? Suppose wage bargains are struck on the assumption that inflation will be 3 per cent, but prices in fact rise by 2.5 per cent. Real wages will be higher than either employers and employees expect, and employment – the demand for labour – will fall. An unexpected fall in inflation lowers both output and employment. So by bringing inflation expectations down towards actual inflation, the new monetary policy framework has probably led to higher output and lower unemployment than might otherwise have occurred. We might call these benefits a “credibility windfall”.
In reaction to the deteriorating outlook, we have seen a stream of policy actions, mostly by central banks as many fiscal authorities have felt constrained by excessive debt, deficits or both (at least in the western hemisphere). Last November, the ECB announced three-year term repos, in unlimited scale. And more recently details of their proposed Outright Monetary Transactions (OMTs). In the United States there is to be more quantitative easing (QE), including open-ended purchases of RMBS. In Japan, just last week we saw a large expansion of their asset purchase programme. In the United Kingdom we have been undertaking extra QE since October 2011 and earlier this summer we activated for the first time our new contingent facility of six month repos against a broad range of collateral – what we call the Extended Collateral Term Repo facility or ECTRs. That was intended to act as a backstop should the risks in Europe deepen and crystallise. Usage has declined sharply since the first two operations suggesting that the degree of stress is not that great at the moment. More recently the Bank and HM Treasury jointly launched the Funding for Lending Scheme (the FLS) – of which more later. The full list of policy actions is much, much longer of course. The length of that list reflects the seriousness of the economic situation and the constrained ability of fiscal authorities. In the world of central banking, unconventional policies are the new normal. At least for now. Financial markets have not just been suffering from external shocks.

We cannot write a rule to take care of every situation that may occur, and as a forward looking supervisor we are applying judgement in conditions of uncertainty about the future. How firms deal with the uncertainty of the future will also shape their culture. I firmly believe that what we can best do in this area is to provide a clear sense of direction and guidance through open communication starting with those of us at the top, in which we are clear on what we expect of firms. Open and transparent communication of this sort should then be supplemented by the clear understanding that we will all stick to the script. Trust is important. Consumers need to be confident in the firms that they choose to use, and inevitably trust is an important part of that confidence. Likewise, as supervisors, our judgements are inevitably conditioned on whether we can trust the people with whom we deal. Good culture is a product of trust and it matters a lot for both prudential and conduct regulators. Culture is everywhere and nowhere in firms; everywhere in the sense that it is shaped and determined by all the features of the firm – its people, organisation, reward structures etc; and nowhere because culture is not a tangible thing sitting on a shelf that can be prodded and changed of itself.
22  It is the average of real unit labour costs across firms in the economy that matters for inflation. 8  BIS central bankers’ speeches  need to be mindful of the possibility that it represents part of a longer-term trend towards job polarisation. What matters for inflationary pressures, irrespective of the type of job, is the relationship between wages and productivity, as captured by unit labour costs. Across the economy, wage growth is barely above productivity growth. Unit labour costs are currently soft (growing at only around 1% in the economy as a whole), are below the growth rate necessary to meet the inflation target, and indicate that there is further to go before we reach the new sustainable level of employment. In other words, there is still slack in the labour market that must be used up, and the recent revisions to the profile of UK output up to 2012 seem unlikely to change that assessment materially. That slack is wasteful. And if it were to remain, inflation would remain below the 2% target. The MPC’s current best collective judgement is that, while it has narrowed rapidly, this slack is broadly in the region of 1% of GDP. As this margin of slack continues to narrow, we expect wages to pick up slightly faster than productivity, and unit labour cost growth should increase, consistent with meeting the inflation target. However, the MPC expects it will take the better part of three years for this to happen.

This reluctance can partly be explained by the fact that retail bank customers regard cash holdings as an attractive alternative to bank deposits, and could withdraw their deposits if interest rates turn negative, thereby depriving the banks of an important refinancing source. Thus, uncertainty over the collective behaviour of bank customers could be seen as a factor dissuading banks from passing on negative interest rates. As a result, banks’ liability margins – the difference between the interest on a maturity-matched alternative funding source and the interest on deposits – have dipped into negative territory.4 This is clearly illustrated in chart 6. Banks have responded to the pressure on liability margins by raising mortgage rates (i.e. by increasing the asset margin). In principle, the slight rise in mortgage rates is good news from a financial stability standpoint. So can negative interest rates even be regarded as a tool to combat imbalances on the  2  Cf., for instance, O. Jordà, M.HP. Schularick & A.M. Taylor, Betting the House, NBER Working Paper 20771, 2014, M.D. Bordo & J. Landon-Lane, Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence, NBER Working Paper 19585, 2013, or L. Gambacorta, The Risks of Low Interest Rates, Ensayos Sobre Política Económica, 29, 64: 14-31, 2011. 3  The same applies to all bank loans. 4  The bank’s total margin is made up of three components: asset margin, liability margin and transformation margin, minus any hedging costs (so-called structural contribution).
Why exports and FDI are key pillars: when you have a domestic market of twenty-one million people and purchasing power of now Page 1 of 17  almost four-thousand US dollars, you simply cannot sustain the 6% or more growth that we need to achieve by just selling into this domestic market. It’s simply not possible. And why do we need 6% growth? We have a very aspirational  society now or more. It’s an educated society which is exposed to all the latest communication technologies so people know what is available around the world and they aspire to achieve a lot of material benefits for their families. So if one cannot deliver that, clearly there could be tensions in terms of our social and political stability. So it has to be growth in exports that drives our growth process to the point where we can achieve 6% plus growth to meet the aspirations of our people. And FDI, if you look around Asia, which has been the most successful continent in terms of growth and export performance, whether it is a country as large as China or one as small as Singapore, FDI has played a key role in the export transformation that has driven those economies. So that’s the model that the government is trying to put in place. It is doing a number of things to sustain that model in terms of the macro-economic policy making. have been put in place.

That is a feature that may hold future growth back, once the euro has left its past weakness behind and has appreciated considerably against the dollar. In any event, the bleaker outlook for employment and the deterioration in financial wealth were conducive to an increase in the household saving ratio, consequently reducing their propensity to consume. The sluggishness of expenditure naturally affected investment plans which, in turn, were discouraged by the decline in stock market prices, balance-sheet restructuring by the most debt-ridden companies and the tightening of lending conditions by banking institutions in certain countries. The limited adjustment capacity of the European economy was manifest in the relative lack of responsiveness of nominal wages to the economic slowdown. Job creation was affected as a result, especially in the second half of the year. This lack of flexibility, along with the rigidities of price formation in the industries least exposed to competition, also hindered the moderation of inflation rates, thereby conditioning the European Central Bank’s monetary policy decisions. The loss of momentum behind the process of reforms in 2002 is telling if it is borne in mind that the European economy is still far from achieving its goals in terms of greater flexibility and integration of the markets for goods and factors, the promotion of innovation and the incorporation of new technologies into productive processes. Generally, demand-side policies contributed to tempering the scale of the slowdown, although the potential constraints on these policies were manifest throughout last year.
Furthermore, in terms of growth [slide 3], euro area per capita GDP has improved almost as rapidly as in the United States since the euro was introduced (an annual average of 1.1% in the euro area between 1999 and 2017, compared with 1.2% in the United States), with the gap between the two only widening slightly during the 2011-12 European crisis. B - The means: independence The means employed to carry out this mandate is the independence of Eurosystem central banks. Beyond the initial example of the Bundesbank, this independence became established in economic research3 after the Great Inflation of the 1970s: governments hope that by accepting a little too much inflation they can prolong the growth cycle; but this hope is illusory as economic players rationally anticipate this “inflationary bias” – and thus amplify it. Empirical evidence4 confirms that as a country’s central bank is granted greater independence, its inflation decreases. Nevertheless, independence is still contested in our democracies, starting unfortunately with the greatest of them all. Independence only has real value if there is a clear mandate – price stability – and robust performance-based accountability to the country’s citizens and their representatives: every year the President of the ECB is summoned to four hearings before the European Parliament and gives eight press conferences (i.e. twice that of the Fed up to this year), while the Governing Council has published its accounts since 2015. At the same time, the ECB must take heed of economic and social players.

But, more importantly, there is a political pressure towards it, driven by populist impatience that would like to have a lot, right away. For a number of years this impatience has been hindering long-term efforts in the form of fiscal consolidation and structural reforms, and these have unfortunately slowed in G20 countries. When we compare the performances of our different European Member States, it is clear that debt and public spending are not the engines of growth. There is a need today for fiscal stimulus in those countries that have surpluses, and for structural reforms across the board: without this there can be no sustainable growth. On this issue, I would just like to say a word on France, which has stood out as a positive exception over the past two years: the gilets jaunes (yellow vest) crisis provided justification for an emergency “package” to bolster purchasing power; but I do not think it should or even could halt the transformation efforts already underway. Lastly, and this is our third challenge, isolationism, characterised by the escalation of trade tensions, constitutes the biggest short-term threat to global growth. Even before the tariff hikes, the uncertainty caused by protectionist stances, essentially on the part of the United States, already appears to be threatening growth via its impact on business investment. More broadly, uncooperative economic strategies – including within Europe – are on the rise.
The time we used to spend queuing at the bank can now be used in a more fun or more productive manner, or hopefully both. I am not one of those who enjoyed standing in a queue at the post office on a Saturday morning to pay my bills. The savings in resources attained through improvements in the efficiency of the payment system since the days of the brown envelopes have actually been estimated at around five per cent of GDP. This is a productivity gain from which we all benefit. In many emerging economies the potential productivity gains from a functioning payment system would of course be even greater. Sweden - an IT country Sweden and the other Nordic countries are currently, alongside the USA, world leaders in the use of IT. If one looks at the percentage of households with access to the Internet, in 2000 Sweden with an estimated 61 per cent held second place in the EU. Only the Netherlands had a higher percentage. If we instead look at expenditure on IT in relation to GDP, Sweden came top among the EU countries in 2001. Sweden is an IT country. Why have developments moved so quickly in Sweden? There are many answers to this question, but allow me to mention a couple I believe to be important. One concerns the deregulation of the telecommunications market.

IT is also a necessary condition for the methods used to calculate financial risks in portfolios of securities or credits. The new Basel Committee rules on capital adequacy in banks, to take an example, are entirely dependent on such calculations. Network effects in the payment system The banking sector in Sweden is, as we know, strongly concentrated. This can raise questions in certain contexts as to how well competition functions. However, the concentration has also enabled, as I pointed out earlier, a more rapid exploitation of network effects and economies of scale connected with IT developments. Let me go into this in more depth, hopefully without becoming too abstract. The development of payment services is governed, just as on other markets, by supply and demand. Supply is affected by costs and technology, while demand is affected by factors such as price, acceptance, comfort and accessibility. Advantages of scale within the production of payment services arise as these services are often connected with high fixed costs and relatively low flexible costs. Building up a new computer system is expensive, but every transaction that passes through the system costs less. The economies of scale effects provide incentive for various types of co-operation and joint solutions, where producers join forces to utilise the economies of scale and spread costs over greater volumes. There are also advantages of scale on the demand side, the in the form of positive network effects. Positive network effects mean quite simply that a particular system becomes more usable the more people who use it.
I’m a lawyer, and I like to say that legal expertise is what gets you into the room. Knowing the law is necessary for professional legitimacy. But, in my view, it is not sufficient. Lawyers also have to consider the bigger picture—the purpose of relevant laws, the client’s needs, common sense, and fairness. Those same inquiries should be on the minds of other professionals—including risk professionals in the first line of defense. I mentioned earlier the recent “beneficial owner” regulations. Those rules are part of the customer due diligence regime for financial institutions. The rules tell you the information firms are required to gather and retain to help keep financial crime out of the banking and payment systems. They do not, however, directly answer the question, “Is this the type of customer we want to do business with?” That question requires judgment that is not the exclusive domain of lawyers. The answer will depend not on laws and regulations, but on your institution’s purpose and principles. Manage Account Relationships One area where the difference between what’s legal and what’s right is immediately relevant is the management of customer account relationships, including accounts for respondent banks. I know that this can be tricky. Banks do not want to take on unnecessary legal and reputational risk for the weaknesses and failures of account holders. Nor do banks want to needlessly disrupt or impair the efficiency and speed of the payment system. But that system is under attack. Perhaps we need to think differently about risks, benefits, and costs.

The regulatory community and the industry must act to ensure that supervisory practices and internal controls within the financial institution remain vigilant and install the necessary safeguards against cyber security threats. There is a need to intensify our efforts in this regard and to place cyber security issues as a priority in our effort to make the financial system safe and sound. Driving the cyber security agenda forward in the industry In many countries, supervisors place significant emphasis on the oversight role of the boards of financial institutions as a primary line of defence. However, in reality, the focus on technology risk remains superficial in most board discussions. In 2012, a survey by Carnegie Mellon among senior executives and directors from among the world’s largest firms across various sectors indicated that, 57% of respondents viewed that boards are not reviewing the existing policies for cyber-related risks sufficiently. Faced with a multitude of issues, board members are likely to prioritise headline issues that are more pressing or more directly related to the core business of the financial institution. More often than not, the cyber security agenda gets side-lined. Supervisors have an important role in encouraging boards to strengthen their oversight over cyber security risks. In fact, because of its importance, a mandatory requirement ought to be the norm. In the digital era, cyber security demands a more strategic and specific focus and should be properly understood at all levels within the financial institution.