samchain/econo-pairs-v1 huggingface dataset:
Firms may then be inclined to tailor their risk-taking to their own assessment of the probability of intervention, while at the same time the incentive for firms to hold adequate buffers of liquid assets is likely to be reduced. The gap between the amount of liquidity that a firm will choose to hold, and the optimal public choice will then widen. It is not surprising, then, that in most jurisdictions firms’ liquidity management is subject to standards imposed by regulation. Intervening in this way requires that the authorities be able to answer some difficult questions. There is the question of calibration: how much liquidity is ‘enough’ for any given firm? In other words, what is the optimal public choice of liquidity buffer? And for how long should a firm be expected to be able to survive without outside help? This is a much more difficult question for liquidity buffers than for capital, as in the case of liquidity it is not sufficient merely to analyse the structure of a firm’s assets and liabilities. The firm also has to take account of the possible ways in which its counterparties and creditors may behave in a crisis. Moreover, in a liquidity crisis, there is feedback from the actions that a firm takes to meet liquidity needs—selling assets for example—to the market’s perception of its solvency and hence to the size of those very liquidity needs.

Acting to return inflation to its 2% target Having already discussed some of the key considerations governing my assessment of the monetary policy outlook, I will conclude with a few remarks on recent MPC communication, notably the statement published in the aftermath of the June meeting. This represents peeling yet another layer off the onion. In both the media and among market participants, there is a cottage industry seeking to interpret central bank statements. I have been part of that industry in the past. Those still working there needn’t worry: I am not about to put them out of business, and I am certainly not going to preannounce my MPC vote today. Of course, there will always be efforts to interpret any central bank communication for clues about the policy outlook. That is both inevitable, and sought after by policy makers: after all, what would be the point of making statements if you hope that they will be ignored? But I would caution the addressees of such statements against reading them solely through the lens of ‘forward guidance’ about immediate policy rate decisions. As I have said in the past,[12] I am sceptical of forward guidance as a tool for central bank communication and policy, at least when understood as providing a definitive view of the shortterm interest rate outlook – what is sometimes called forward guidance with a capital F and capital G. On my reading of the evidence across jurisdictions, experience of using such forward guidance is, at best, mixed.
However, uncoordinated insulation hinders free trade in financial services and flows of financial assets, effectively harming the common markets for them. I believe that the marginal benefits of focusing more on space for coordinated diversification of approaches to regulation are now much higher than those of trying to find “the ultimately and finally correct set of rules” and imposing them on all countries. As to the second difficulty, it seems to me that the much smaller size of the financial sector relative to the real economy in emerging or less developed economies has profound consequences for the optimal mix of regulatory rules – consequences that are neither acknowledged nor discussed. To develop this idea, let me stress that most measures dealing with the crises of financial institutions in the most developed economies were influenced by the fact that those institutions dwarfed the budget revenues of the relevant treasuries. Consequently, their wind-down – with government guarantees for most of their liabilities to agents in the real economy, such as household or corporate sector deposits – would have led immediately to a serious downgrade of the relevant sovereign debt. But this is not the  BIS central bankers’ speeches  1  case with most developing and emerging economies and their financial institutions, whose size relative to the real economy, forex reserves or budget revenues is much smaller. Consequently, the optimal mix of the pace of financial sector growth and the risk of financial sector crises differs significantly, allowing for faster growth even with higher risks.

In addition, while recognising that many developed economies see a need to downsize their financial sectors and/or institutions, this need is not shared in the emerging world and less developed countries. The different mix of regulatory rules – allowing for faster growth of the financial sector in countries where its relative size is lower, even at the expense of higher riskiness of the sector, would also be welfare enhancing. After all, generally faster growth of less developed economies resulting from faster growth of their service sectors – comprising also financial services – would foster growth of the most developed countries’ export sectors and consequently overcome the slack caused by their need to restrict their financial sector growth rates. It is quiet fascinating how this observation – which in essence merely follows some of the basic logic of the Ricardian argument supporting free international trade – is being almost completely ignored in the current regulatory earthquake. This earthquake is mostly due to the financial crisis, which spread swiftly to the world primarily from the US and later from the Eurozone. The emerging markets were hit as well, some of them very strongly, but by and large their financial sectors have shown stronger resilience than in many developed countries. This was also the case of my country – the Czech Republic – as we have had no bankruptcy of any more significant financial institution and consequently no state aid in the financial industry for many years now. However, this is no reason for complacency.
If the central projection’s a long way from target, that can tell you something about the MPC’s view of the suitability of the yield curve – given, at least, all the other assumptions in its forecasts. In May 2009, after the first slug of QE, the Inflation Report forecast was well below target. This suggested that, unless the economy improved much faster than it expected, the Committee believed that monetary conditions would need to be looser than implied by the yield curve at the time. As things turned out, that’s exactly what happened. But there are limits to how far this kind of reasoning should be taken. One particular problem, when it comes to the so-called “lift-off” date for interest rates, is that the yield curve is currently very flat. As a result, even relatively moderate changes in forward rates, prompted by unexceptional news about the economy, can result in big shifts in the date at which the yield curve first reaches some particular level. But that doesn’t mean the MPC’s views about future policy have moved so dramatically. If nothing else, this demonstrates the problem with focusing too obsessively on that particular date. More generally, the MPC’s inflation forecast is a far from perfect indicator of interest rates. It involves lots of conditioning assumptions, not just forward interest rates, and any of these can change. Our understanding of the economy evolves over time and the economy itself is always subject to unforeseeable shocks.

Monetary policy has, of course, been highly stimulatory here and in other advanced economies since the financial crisis. Not only are policy rates close to their zero lower bound, but the Bank of England, US Federal Reserve and Bank of Japan have all engaged in large-scale asset purchases of government debt and selected private assets, paid for by an expansion in bank reserves – what is commonly referred to as “quantitative easing” . And while their open market purchases have typically been sterilised, the ECB’s policy of full allotment in the provision of liquidity means its balance sheet too has expanded substantially in size (see Chart 6). Quantitative easing is often described as “printing money” but this is somewhat misleading, as it conjures up images of Friedman’s monetary helicopter – of which I will say more in a moment. Rather, in our case it swaps one liability of the state – gilts – for another – claims on the Bank of England in the form of commercial bank reserves. When we buy a gilt from the private sector, say a pension or hedge fund, we credit the seller’s bank account with the appropriate amount, while their bank simultaneously acquires a claim on us in the form of an increase in its reserve account. These reserves bear interest at Bank Rate. As far as a bank is concerned, reserves are a very close substitute for holdings of short-term safe assets, such as Treasury Bills.
Nevertheless, in the spirit of being prepared, and drawing on feedback from previous meetings of this committee 2, staff have developed plans should market rates persistently settle below Bank Rate, to such an extent that the Bank decided it was necessary to intervene in support of monetary control. In such a scenario, the presumption is that the Bank would issue one-week Bank of England bills, draining reserves from the system. That would tend to put upward pressure on market rates, reducing the wedge that had opened up and tightening the link between policy and markets rates. The Bank has a history of issuing these instruments successfully: Bank of England bills were first issued in 2008, to drain excess reserves following the increased size of longterm repo operations. And Bank of England bills also have the advantages of being widely tradable, offering a close substitute to deposits for most participants in the money markets, and of providing additional supply of high quality collateral. I have no particular expectation that the Bank will need to issue Bills in the foreseeable future, but the tool is ready if required. The move to the current floor regime was prompted by the MPC’s policy decisions to cut Bank Rate to the effective lower bound and its subsequent decision to loosen monetary conditions via asset purchases.

The IMF’s research does not tell us the channels through which inequality may have dented growth. And without an appreciation of those channels, it is difficult to know where public policy could make inroads into the problem. Nonetheless, it is useful to piece together evidence on possible channels of causation. Growth is rooted in investment, specifically the accumulation of human capital by individuals (education, skills, experience) and physical capital by firms (research and development). Both boost productivity, the elixir of economic life. And both require inter-temporal sacrifice – patience, a willingness to defer gratification. This is a topic I have researched in recent years (Haldane (2010), Davies et al (2014)). Individuals’ patience, and hence human capital accumulation, is a complex process. But it is affected importantly by their financial environment. An important new book by psychologists Mullainathan and Shafir (MS) illustrates the impact of financial circumstances on decisionmaking (Mullainathan and Shafir (2013)). Solving everyday problems of scarcity – of time, money, friendship – absorbs huge amounts of the mind’s energy. It taxes cognitive bandwidth. And this can have dramatic effects on behaviour. In one experiment, two groups – one wealthy, one poor – are IQ-tested, asked to contemplate suffering a significant monetary loss and then re-tested. The remarkable finding is that merely contemplating monetary loss is sufficient to reduce significantly the measured IQs of the poor, lowering scores from “average” to “seriously deficient”. This is a dramatic, environmentally-induced, loss of cognitive power, the direct result of minds being impoverished by financial insecurity concerns.
They seem to perceive that raising equity is, in some sense, costly. Perhaps they are right. But, equally, it is possible that these perceptions are distorted – for example, because the cost of equity is mistaken for the total cost of banks’ capital, or because managerial and shareholder incentives are linked to equity rather than asset returns, as outlined earlier. Either way, the MM hypothesis needs to be objectively reassessed in a banking context. And until then, stress tests need to be administered with a healthy dose of realism. Lesson 5: The plumbing worked With so much having gone wrong during this crisis, it is easy to overlook what has gone right. Well-functioning payment and settlement systems – the plumbing of the financial system – are one such unheralded success. To my knowledge, there are no examples of these systems collapsing under the strain of the financial crisis. This is no small achievement. Pressures on participants within payment systems have been acute. And volumes flowing through these systems have picked up sharply during periods of volatility in asset prices – for example, in the foreign exchange settlement system CLS (Chart 8). The robustness of these systems is no fluke. It is testimony to the efforts made over the past twenty of so years, initially by central banks, to proof these systems against systemic risk. These developments included the introduction of real-time gross settlement (RTGS) in payment systems, delivery-versus-payment (DvP) in securities settlement systems and payment-versus-payment (PvP) in foreign currency settlement systems.

Lesson 7: Banks’ profits were the problem – but are now the solution The shock to global banks’ profitability from the crisis has been sharp and severe (Charts 11). Judging by the response of banks’ equity prices, it may also be prolonged. Despite the recent recovery, the market capitalisation of global banks has fallen by $ trillion since the crisis began. In part, this is a reflection of banks’ business models having been reassessed. But it also reflects fears of future intervention to curtail banks’ risk-taking and profit-seeking. As unfashionable as it may sound, it is important that banks’ profitability picks up, sharply and durably, in the period ahead. From a systemic perspective, this is in the interests of both the financial system and the real economy. In the short term, lending by banks is a necessary condition for recovery in the real economy. And a recovery in lending is best achieved if banks believe new loans will be profitable. Some of the pre-conditions for profitable lending are already in place. For example, margins on new lending have widened fairly sharply, as new lending terms have been re-priced (Chart 12). In other industries, this would serve as the price signal inducing existing banks to begin lending and for new banks to enter the lending market seeking market share. Over the medium-term, global banks have a hefty repayment schedule to governments and central banks. Encouragingly, the flow of repayment has already commenced for some banks.
Against the background of weak credit growth, the ECB is now close to finalising the comprehensive assessment of banks’ balance sheets, which is of key importance to overcome credit supply constraints. To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirms the recent decisions taken by the Governing Council to provide further monetary policy accommodation and to support lending to the real economy. Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance contributes to supporting economic activity. However, in order to strengthen investment activity, job creation and potential growth, other policy areas need to contribute decisively. In particular, the legislation and implementation of structural reforms clearly need to gain momentum in several countries. This applies to product and labour markets as well as to actions to improve the business environment for firms. As regards fiscal policies, euro area countries should not unravel the progress already made and should proceed in line with the rules of the Stability and Growth Pact. This should be reflected in the draft budgetary plans for 2015 that governments will now deliver, in which they will address the relevant country-specific recommendations. The Pact should remain the anchor for confidence in sustainable public finances, and the existing flexibility within the rules should allow governments to address the budgetary costs of major structural reforms, to support demand and to achieve a more growth-friendly composition of fiscal policies.

The object depicted is linked to each note’s key motif. On the 20-franc note, the object is a butterfly, and on the 200-franc, a particle collision. The key motifs of the six notes are time, light, wind, water, matter and language. As I mentioned earlier, the security features are the same for all denominations. I hope you like the new banknote series as much as I do. Now that all the notes are here, people can choose their own favourite. Before I finish, I would like to take this opportunity to Page 2/3  Berne, 3 September 2019 Fritz Zurbrügg  News conference on new banknotes  express our heartfelt thanks to Manuela Pfrunder and her team, and to congratulate them on a tour de force in designing the series. And with that, I will hand you over to our Chairman, Thomas Jordan, who will look back over the project and the challenges it presented, both for the SNB and for our partners. Page 3/3
Faced with Brexit, Europe has the additional imperative of not letting sources of systemic risk for the EU grow outside the EU. In this regard, the proposal recently made by the EU Commission is a step in the right direction, but it should be streamlined and strengthened to make sure that euro-denominated clearing activities are supervised and so located in the European Union when they exceed certain thresholds. One additional word about cyber-risks: as we have been reminded by the two viral attacks carried out in the last two months, we are at the same stage that medicine was at before Pasteur and vaccinations. The challenge is to take swift and decisive actions to enhance cyber resilience in the financial system, building notably on the G7 recommendations: the G7 is, at this stage, the key forum to act. 2. Two requirements to consolidate what we have achieved so far. Although there are still some areas of work, tremendous progress has been made since the crisis to enhance the resilience of the global financial system. I believe that two requirements are necessary to consolidate our achievements. The first one is to remain vigilant to avoid any backtracking. As you know, the US Treasury recently published a “Report”, exploring the  2  possibility of adjusting its national banking regulations iii . Some adjustments to national regulations, applying for instance to locally-active entities, or the Volcker rule, may indeed be deemed appropriate and legitimate.

We experienced a collapse in house prices, as well as a severe banking crisis, a foreign exchange crisis, fiscal deficits and high inflation. Hermod Skånland, the Norwegian central bank governor at that time, summarised the causes of the crisis as “bad banking, bad policy and bad luck.” Efforts were now focused on bringing public spending under control, while large parts of the banking system were nationalised. Unemployment soared. Monetary policy aimed at a stable krone exchange rate, resulting in high real interest rates. But with a binding commitment to a fixed exchange rate, inflation was brought under control. The banking crisis and the downturn in the early 1990s made clear how vulnerable our small open economy was to terms-of-trade shocks and that our banks needed to be properly regulated. Furthermore, it became evident to policymakers how hard it is to conduct countercyclical economic policy, or even to avoid being procyclical. In the following years, structural reforms were implemented in order to increase growth capacity, including a major general tax reform. The tax code had already been tailored to capture the economic rent in the petroleum sector – the petroleum company tax rate is about 80 percent. Confidence in monetary policy gradually gained a firmer footing, after a succession of devaluations had come to a halt. Inflation and the real interest rate declined, and cost competitiveness improved considerably. Norway has not experienced a really pronounced economic downturn since the crisis around 1990.
The existing money market infrastructure managed by SIX has many advantages: for instance, it has a wide range of participants, including the SNB, who make up a homogeneous market and interact on a shared platform. Moreover, that infrastructure is highly automated and standardised. It is in the process of being upgraded, to better respond to the changing needs of participants. A new repo trading platform, CO:RE, was launched in 2016. Moreover, a new triparty agent is being set up which will offer market participants a wide range of services and will enable a more efficient management of collateral through closer integration with pure trading activities. Page 7/9  Finally, a resilient and modern repo market infrastructure is essential to allow the SNB to deploy its entire monetary policy toolkit effectively and at any time. Indeed, the SNB uses the same SIX platform as private participants to implement its monetary policy, by auctioning/exchanging repos or reverse repos or even issuing SNB Bills. As you will recall, the latter were issued at the beginning of the crisis. They proved to be an efficient and flexible way to absorb liquidity. I will now turn to the second point: the replacement of the Libor as the reference money market interest rate. It should be noted that the decline in transaction volumes for the unsecured segment of the money market involves not just the Swiss franc but all currencies.

The empirical evidence that has been produced by the Committee indicates that, in fact, banks with less capital headroom, and here the key word is “headroom”, tended to lend less during the pandemic. There was also a relatively larger decline in average risk weights at banks with less capital headroom, perhaps because of an attempt to defend capital ratios, and importantly also, the buffer threshold appears to have been the constraint, forcing banks to adjust their behaviour as lower capital ratios alone did not drive the results. Finally, another interesting finding is that the issue was not only one of quantity but also about prices. Banks’ proximity to buffers appears to have affected the cost of lending. The reasons behind this problem are unclear. It may have occurred because the level of uncertainty was very high for banks, and they were foreseeing that there might be losses in the future, and thus wanted to keep these buffers so they could be used to cover those losses. That is one possibility. The lack of formal guidance by supervisors on the rebuilding of these buffers might be another issue. Low profitability may also be a reason for this result or market stigma. We are now in the process of trying to understand precisely the origin of this problem. Closely related to this and a very important issue is the question of releasable buffers.