samchain/econo-pairs-v1 huggingface dataset:
There is nothing bad per se about speculation, high risk taking or even high levels of remuneration, provided the principals fully assume the consequences of their actions, and provided, in particular, that the tax payer remains out of the picture. It is clear that our financial system did not satisfy this requirement. In the  BIS Review 33/2010  3  advanced G20 countries, public-sector capital injections to the banking sector so far have been estimated at 3.4% of GDP! 3 This is a lower bound for the risks assumed by the public sector; the latter may have been closer to 25% of GDP for the major western economies, according to a recent estimate by J.C. Trichet. 4 There is absolutely no economic, let alone moral, justification for situations where individuals enjoy high levels of remuneration or high returns when times are good, while the public sector has to come to the rescue when times are bad. In an ideal world, it should now be the responsibility of the financial sector – rather than regulators – to come up with credible proposals for change. These proposals must inevitably imply that all the main players, in particular managers and creditors, have much more at stake than in the past. Depending on how creative we are in finding solutions, financial institutions will have to be smaller and less prone to risk taking. For managers, at the very least, this must mean bonuses being tied to the long-run performance of their firm. Logically, one could envisage going further.

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I have to say that this is not an undisputed statement, because I told this story at a general business event and someone took me to task that every member of an insurance board should be fluent in the theory of a Copula. To be clear, we do not expect Copula fluency for all. But the moral of the story is that there is not a strong consensus on how to set the expectations of Boards so that they can perform their role. We may at times have gone too far in the direction of individual technical knowledge, and by the way it was the Copula story and others that convinced me to stop interviewing people taking up standard NED positions. The PRA has close contact with many Boards, so as supervisors what do we expect of Boards? Three things stand out for me:1.  we expect Boards to exercise good judgment in overseeing the running of the firm and to do so on a forward-looking basis;  2.  that judgement is improved by good constructive challenge from Non-Executives. A firm’s culture should promote discussion, debate and honest challenge.

The alarm bells ring for us when we are told that the CEO or other Senior Executives are very sensitive to challenge;  3.  so we as supervisors depend on Non-Executives, under the leadership of the Chair, to challenge the Executive in all aspects of the firm’s strategy, which includes the viability and sustainability of the business model and the establishment, maintenance and use of the risk appetite and management framework. We also of course rely on the Non-Executives to mentor and coach the Executives and balancing this with the essential ability to challenge is a vital component of an effective Board. In the terms of the Senior Managers Regime, this frames the responsibility of Boards. But, as many Board members have said to me, if only it was that simple, but you have made it so fiendishly complicated. Well, actually we didn’t make it fiendishly complicated, finance has become that way itself – we didn’t invent exotic derivatives. There are those who think the answer is to make finance less complicated, but in the real world there are benefits to innovation if risk management is effective. So, how do we square the responsibilities with the complexity? Not by drowning in complexity, or by doing a Canute and trying to tell it to go away. For Boards it means having a certain level of understanding, not at the level of the maths of a Copula.
This trend towards a downsizing of the banking sector has both positive and negative aspects. The negative aspects are mainly cyclical and relate to the current situation. A deleveraging banking sector implies lower credit supply, which is problematic for a recovering euro area economy. While the early stages of recoveries do not depend on credit as firms tend to draw down internal funds, when credit demand picks up it needs to be matched by credit supply for a sustainable recovery to take hold. The typical lag between credit growth and the economic cycle is around 3 to 4 quarters. The recovery in the euro area began not yet a year ago, and we are seeing tentative signs from survey data that credit demand in the euro area is starting to pick up. The latest euro area Bank Lending Survey (April 2014) shows that net loan demand has turned positive for all loan categories. So, we need to make sure that the banking sector is strong enough to meet that demand. A car can run on low fuel for a while, but at some point it needs to fill up otherwise the engine will stall. At this stage of the recovery it is clear: There needs to be sufficient fuel to rev up the engine. This is one reason why the ECB has been putting so much emphasis on its on-going comprehensive assessment of bank balance sheets in the euro area.

Therefore, it seems rather intuitive that a “Swiss-made” monetary policy would potentially fit Switzerland’s needs better than a “one-size-fits-all” European policy. The latest recession is a case in point. The investment spree of the late nineties created a massive worldwide capital overhang. The collapse in asset prices, in 2001, and the ensuing worldwide recession had a particularly strong impact on Switzerland, whose exporters are specialized in the production of capital goods and where the production of financial services represents about 13% of GDP. Because ensuring price stability means avoiding deflation as well as inflation, the SNB had to cut interest rates much more aggressively than the ECB from March 2001 to April 2003. The case of Switzerland is not unique in this respect. Canada, Australia, New Zealand, Norway, Sweden and the UK, for instance, also let their currencies float and pursue successful national monetary policies. They all follow a clear strategy of preserving long-term price stability, and they all have an independent central bank pursuing an independent policy. So we can definitely say that monetary independence and monetary stability are two sides of the same coin. 4  BIS Review 70/2004
José De Gregorio: Monetary policy and financial stability – an emerging markets perspective Presentation by Mr José De Gregorio, Governor of the Central Bank of Chile, at the Brookings Institution, Washington DC, 17 September 2009. *  *  *  It is a pleasure to participate in this meeting and to speak about the lessons for monetary policy the current crisis is teaching us. The big difference between the current crisis with previous ones in emerging economies is that this time “it was not our fault.” The evidence on the performance of emerging countries facing an unprecedented global downturn shows that some lessons have been properly learned. Today I would like to concentrate on inflation targets, especially in the context of strongly rising and strongly falling commodity prices, financial stability and exchange rate fluctuations. Many of the issues I will be discussing today I have covered in recent presentations elsewhere. Indeed, there is not much new material, but I think those are important issues in conducting monetary policy in emerging countries. 1. The causes of the crisis: was it monetary policy or was it financial fragility? The argument blaming monetary policy for the current crisis claims that low interest rates combined with large current account surpluses in emerging economies, particularly Asian and oil-exporting ones, created an abundance of liquidity that triggered excessive increases in asset prices (bubbles). This was particularly acute in the housing market. When the bubble burst, the crisis erupted.

Bank of France reports industrial output continued to make progress in June 1997 BANK OF FRANCE, MONTHLY BUSINESS REVIEW, June 1997. According to the business leaders surveyed by the Banque de France, industrial output continued to make progress in June. Output of consumer and intermediate goods advanced significantly, with a more moderate increase for capital goods, whereas it levelled out in the food-processing industry and slightly dipped in the automobile industry. Capacity utilization rates recovered. Overall demand strengthened both in France and abroad. Export sales grew considerably, in particular to Great Britain, Italy and the United States. Domestic demand rose, stimulated to some extent by inventory replenishment. Order books seem generally satisfactory. While they have emptied out somewhat in the food processing industry, they remain on the full side in the capital goods sector. Inventories are only just above desired levels, despite an increase in the consumer goods sector, and above all in the automobile and food processing industries. In the coming months, activity is likely to intensify across the board, except for the automobile sector which is expected to stabilize. Overall, raw material and finished goods prices changed little. The cost of supplies climbed in certain branches of the intermediate goods sector, mainly due to the rise in the dollar, although these increases were not passed on to sales prices. Business managers continued to take a cautious stance on investment. The little capital expenditure there was primarily concerned the modernisation of equipment and bringing it into line with standards.
But on the whole they have not given enough attention to self-renewal, to inducting and testing out new talent and getting people who have served long and well to make way gracefully for a younger team. In contrast, many international banks have, as a matter of board policy, set age limits and limited the length of tenure of all board members. MAS has discussed this important issue with the local banks. We understand how difficult it is for a director to give way to a younger replacement, particularly if he has performed well over many years and still feels able to fulfil his responsibilities. But unless we overcome this psychological hurdle, we will be unable to sustain the vitality and drive of the organisation, and the quality of our banks will decline. The local banks have agreed that self-renewal of their boards should be a priority, and have told MAS that they will start to make some changes soon. MAS looks forward to receiving nominations from the local banks for new board appointments, and to working with their boards to strengthen corporate governance in the local banks. Technological innovation: cheque truncation A second area of focus for banks is technology. Technological innovations have dramatically altered the financial landscape. Payment systems, for example, can be improved by technology. Ideally, payment systems should be paperless, and in the long run this will happen. But today’s reality is a long way from that. Even a technology pioneer like the US depends on large volumes of paper cheques.

Mr Lee examines issues relating to the changing financial landscape  Keynote address by Mr Lee Hsien Loong, Chairman of the Board of Directors of The Monetary Authority of Singapore and Deputy Prime Minister, at the 16th General Meeting of the Asian Bankers Association, held in Singapore on 26 November 1999. Introduction The international financial landscape is changing rapidly. In Asia, economies and financial systems have undergone a traumatic two years. Weakening economies uncovered flaws in financial institutions and supervision. Entire financial systems went down, undermined by slack lending practices and inadequate legal frameworks. The financial troubles in turn affected the real sector, sending economies into steep decline. Now the crisis is passing. In many countries, macro indicators have stabilised, and growth has resumed. But it will take years of hard work to clean up the bad loans, recapitalise the banks, strengthen the legal and supervisory framework, change long established cosy relationships, and put long-term growth on a firmer foundation. While Asia has been preoccupied with reconstruction and recovery, globalisation and technology have progressed apace, especially in the US and Europe. Technology is both a critical cause and a catalyst. Financial arenas are becoming more open, new products and services are being invented and marketed, and regulators everywhere are scrambling to assess the changes and master the flux. An international wave of mergers and acquisitions has swept the industry, as boundaries between financial sectors and products have blurred dramatically.
Currently, they could even absorb the kind of losses that a sharp rate rise would entail. The introduction of the countercyclical capital buffer – which requires banks to hold capital beyond minimum requirements if momentum on the Swiss mortgage and real estate markets is deemed excessive – has played a role here. A capital buffer of this kind has been in place – specifically with respect to mortgage-backed loans for financing residential real estate in Switzerland – since the end of September 2013. So overall, as things stand today, we may draw three conclusions. First, exceptionally low interest rates are putting pressure on interest rate margins and this is weighing on the profitability of Swiss banks. This is particularly true of the domestically focused banks, whose operations are heavily geared towards interest business. Second, the negative interest rate per se has not thus far caused an additional erosion of these banks’ profitability. This is due in part to the fact that, thanks to the exemption thresholds granted by the SNB, for most domestically focused banks negative interest has not yet resulted in any material direct costs. At the same time, these banks have responded to profitability pressure by raising asset margins. Third, they have further increased their risk appetite. The risk exposure of the Swiss banking system is nevertheless manageable at the moment, thanks to the capital surpluses currently available. 8  Cf. SNB (2016): Financial Stability Report 2016, www.snb.ch/en/mmr/reference/stabrep_2016/source/stabrep_2016.en.pdf.

A second – and important – explanation can be seen in the red shaded area of this chart (slide 8). Domestically focused banks have reacted to the decline in liability margins by increasing asset margins by around 50 basis points. Specifically, following the introduction of negative interest, they raised rates for long-term mortgages (shown here in blue), while returns on long-term market investments (illustrated here using the ten-year swap rate in yellow) continued to fall. The banks have since managed to keep asset margins high, notwithstanding the fact that market rates have continued to decline. But there is another, equally important explanation for the limited impact of the low interest rate environment on the profitability of domestically focused banks: these institutions have increased their risk appetite. This applies particularly to affordability risk (typically measured using the loan-to-income ratio) in lending and to interest rate risk from maturity transformation. Let’s take a closer look at the current risk situation with respect to domestically focused banks in Switzerland. Affordability risk refers to cases in which a borrower can no longer afford to make interest and amortisation payments for a loan under unfavourable conditions. 5 A representative quarterly survey conducted by the SNB indicates that a substantial share of new mortgages exhibit high loan-to-income ratios. Moreover, this share has been rising since 2013. 6 Put simply, interest rate risk is the risk that banks will suffer losses as a result of rising interest rates.
By liquidity I mean two things. First, institutional liquidity: the continued ability of individual financial institutions to meet claims as they fall due. And second, market liquidity: the depth of markets for the sale or loan of assets or the hedging of the risks that underlie those assets. To set the scene, it is perhaps worth reflecting on how liquidity needs and processes may amplify the risks of instability—that is, their ability, in stressed conditions, to disrupt the functioning of the financial system generally, and the banking and payment systems specifically. The traditional route arises from the banking system’s role in maturity transformation between short term deposits and long term loans. Managing this mismatch whilst maintaining the confidence of depositors is the essence of the business of banking. However, the presence of this maturity mismatch means that individual banks are by their nature fragile. The connections between banks, and the potential for doubts about one bank to spread to others, mean that the failure of one bank to manage its mismatch can potentially put at risk the financial system more widely. Bagehot in 1873 summed up this link between maturity mismatch and systemic risk:  BIS Review 79/2005  1  ‘Of the many millions in Lombard Street, infinitely the greater proportion is held by bankers or others on short notice or on demand; that is to say, the owners could ask for it all any day they please: in a panic some of them do ask for some of it.

As we approach two decades of the SEG, it is timely that we re-establish our bearings to ensure we remain relevant and true to the original mission of contributing to the international dialogue on capital flows to ensure that the concerns and interest of the SEACEN group are adequately protected.1 As most of our economies continue to face wave after wave of large and often volatile capital flows, I am reminded of the remark by Professor Jon Kabat-Zinn, a professor emeritus of medicine at the University of Massachusetts who famously said: “You can’t stop the waves, but you can learn to surf”.2 Just like the surfers who do not have control over the speed and patterns of the waves, policymakers from small open economies do not have much control over the size, speed, and the direction of capital flows that each country faces. Like it or not, capital flow volatility and the risks it entails are a by-product we have to deal with as long as we intend to benefit from free capital mobility. To paraphrase Professor Kabat-Zinn, we can’t stop the flows, but we can learn to manage these flows in the best way possible. Unlike the surfers, however, we policymakers do not have the luxury of repeating a surf when we make a mistake. There is no room for policy missteps as investors can be very unforgiving.
Therefore, in order to make sure that central bank independence is understood, internalized and safeguarded by the public, it is necessary for them to fully comprehend the rationale of independence, understand why it is important and become convinced that central bank independence does not imply independence from society. For this reason, I firmly believe that it is vital to talk about independence frequently. 20  BIS Review 36/2005  As I have reiterated before, it is a globally accepted phenomenon that achieving price stability is the prerequisite of establishing a sound market economy and attaining sustainable growth and employment rates in the long run. Another globally accepted phenomenon is that price stability can only be achieved by employing lasting, sound and stable policies. For this reason, the public provides central banks with freedom from political authorities in order to enable them to implement the necessary long-term targets to control inflation and attain price stability, to achieve full employment and to sustain growth. This structure gives central banks the opportunity to reject the implementation of policies that pose risks to attaining price stability and creates an environment in which they can give warnings when required. These are the reasons why central bank independence is essential. Monetary policy implemented by a central bank that is able to effectively exercise its independence, is accepted by all sections of the public and the political authority.

So, for example, an Austrian subsidiary to a German bank could be subject to a mixture of some Austrian and some German rules. If the Austrian subsidiary has a branch in, say, Poland, the Austrian supervisors will have the main responsibility for the supervision of the Polish branch, while the Polish authorities remain responsible for financial stability. So, the  BIS Review 39/2006  7  Polish branch could be subject to a mix of some German, Austrian and Polish rules and the German supervisor will be the consolidating supervisor of the group, but the Austrian supervisor will be the home supervisor of the Polish branch. A foreign branch will be part of the home country’s deposit guarantee schemes but could also opt to top it up by connecting it to the deposit guarantee scheme in the host country, if that is considered favourable. At the same time, basically the national jurisdictions of the host countries will be applicable for other consumer protection aspects of the bank’s operations regardless of whether it is a branch or a subsidiary. And if, for example, the German bank is bought by, say, an Italian bank, jurisdictions and supervisory responsibilities will change all over again… Are you still with me? If it sounds confusing, that is because it is confusing, even in this relatively simple case, involving just supervision in sunny weather. Now consider what would happen if we add to this scenario a financial crisis involving several large banking groups. Now, complications could add up really rapidly.