samchain/econo-pairs-v1 huggingface dataset:
In so far as this occurs, it can be interpreted as meaning that the deposit guarantee scheme in practice subsidises risky lending, which would be unfortunate. The picture is, however, complicated by the fact that smaller banks contribute positively by increasing competition in the banking market. Larger banks may also be too large for the authorities to let them fail, which is also a problem. There are difficult considerations to make here. Experiences from the United States When the bank run on the US Silicon Valley Bank began, only about 6 per cent of its deposits were guaranteed by the US deposit guarantee scheme. The rest were unsecured deposits, primarily because they were for larger amounts. This is an example of the fact that deposits in many banks today do not only come from small savers. Many of them, including the Swedish ones, finance themselves to a large extent in the financial markets. Some of the market funding takes the form of direct deposits from financial actors and is not covered by any deposit guarantee and it is normally very volatile. Another part is funding is through the bank issuing securities with a specific maturity. These are therefore not immediately available and thus not exposed to the same risk as the deposit, but on the other hand give rise to a refinancing risk. The run on Silicon Valley Bank also highlighted that contagion effects can be large even when relatively smaller banks get into trouble.

And my main conclusion for monetary policy is that flexible inflation targeting – applied in the right way and in particular using all the information about financial conditions that is relevant for the forecast of inflation and resource utilisation at any horizon – remains the best-practice monetary policy before, during, and after the financial crisis. A related conclusion is that neither price stability nor interest-rate policy is sufficient to achieve financial stability. A separate financial-stability policy is needed. In particular, monetary policy and financial-stability policy need to be conceptually distinguished, since they have different objectives and different appropriate instruments, even when central banks have responsibility for both 1. So today, I will first briefly summaries my view of the causes of the crisis, and then discuss what the possible lessons are for future monetary policy, and finally I shall emphasise the distinction between monetary policy and financial-stability policy. The financial crisis had little to do with monetary policy As I see it, the financial crisis was caused by factors that had very little to do with monetary policy. The factors were the macro conditions; distorted incentives in financial markets; regulatory and supervisory failures; information problems; and some very specific circumstances, such as the US housing policy to support home ownership for low-income households 2.
In some countries, like the U.S. and the U.K., stigma appeared to be sufficiently strong that banks did not use the central bank’s liquidity facilities at their disposal as much as would have been socially desirable. 12 During the crisis, the Federal Reserve encouraged banks to borrow at its discount window, to little effect. 13 As can be seen in Figure 5, much activity in the fed funds market took place at rates above the discount rate. 9  Another way to reduce the balance sheet cost faced by the banking sector is to allow nonbanks to hold some of the central bank’s liabilities directly. For example, every dollar invested in the Federal Reserve’s overnight reverse repo facility decreases the amount of reserves held by banks and, thus, the aggregate size of the banking system’s balance sheet by a dollar. 10  Keister (2016) shows that it is optimal to commit to providing liquidity to a bank that faces a run. Moral hazard is addressed ex ante, by setting a Pigouvian tax that gives incentives for the bank to invest in the optimal amount of liquid assets. The tax can be interpreted as liquidity regulation and supervision. Goodfriend and Lacker (1999), however, argue that neither constructive ambiguity nor extended supervisory and regulatory reach can effectively overcome the fundamental forces that cause a central bank to lend. They propose that the only way for a central bank to credibly limit lending is for it to build a reputation over time for restraining lending.

In my remarks, I am going to focus only on the set of unconventional monetary policies that are relevant today in an environment in which central banks are constrained from lowering their policy rate any further due to the zero lower bound. I will not discuss the type of extraordinary interventions that occurred at the height of the financial crisis.1 A starting point is that the independence of the central bank with respect to its budget supports its overall independence. The Federal Reserve’s traditional monetary policy framework has helped to assure this budgetary independence. The liability side of our balance sheet consisted primarily of currency and reserve balances on which we did not pay any interest. The asset side consisted primarily of Treasury securities. There was no meaningful credit risk and the interest rate risk was limited because assets were generally held to maturity. This, combined with the zero cost of the Fed’s liabilities, resulted in the Federal Reserve turning over a large amount of earnings to the Treasury each year after covering all of its operating costs and retaining a small portion of its earnings to maintain a level of surplus capital equal to the amount of capital paid-in by member banks. Thus, one key question is how this budgetary independence might be threatened through the use of unconventional monetary policies. After all, some of these policies do have implications for the Federal Reserve’s remittances to the Treasury and, thus, could conceivably create a potential threat to the Federal Reserve’s budgetary independence.
All the usual suspects were present during the build-up to the Icelandic crisis: very strong capital inflows fuelling a credit and asset price boom that subsequently turned into a bubble at the same time as the economy overheated and an unsustainable external position developed, as could be seen in a double-digit current account deficit. And macroeconomic and prudential policies were not up to the task. Quite the contrary: there was a policy conflict between monetary policy and the demand levers pulled by the Government, and the risks inherent in capital flows, FX balance sheets, and credit and asset price booms were left under-regulated and insufficiently supervised. At a deeper level, the macroeconomic part of the story was related to three factors. The first factor centres on the complications that tend to arise with macroeconomic management as very small, open economies become more and more financially integrated. The second relates to the specific conditions of abundant, cheap credit at the global level. Third, major policy mistakes were made in Iceland, both of the type that would be deemed to be such in any book (such as giving an already overheated economy a demand stimulus), and those more closely related to the orthodoxy prevailing at the time: freely floating exchange rates, interest rate policy focusing mainly on low inflation in terms of goods and services, and good micro-supervision; and let the markets do the rest. In the wake of the crisis, it is better appreciated that this view is deeply flawed.

But while nearly all markets are subject to regulation, relatively little thought has been given over the past decade to how different markets matter to stability and, hence, about the role of the authorities in this area. 1  On that, see the Bank of England/FSA paper released last week on how banking supervision is being reformed in the UK in preparation for the establishment of the new Prudential Regulatory Authority. 2  See Tucker P M W “Macroprudential Policy: Building Financial Stability Institutions”, 2011 for a discussion of macroprudential regimes. 3  Bank of England Annual Report and Accounts 2010 pp 26–27. BIS central bankers’ speeches  1  Markets matter to stability in different ways As a provisional attempt at this, I think it might be helpful to distinguish between three types of market: infrastructural markets, intra-financial-system markets, and end-user markets. The first type is those markets that provide essential, quasi-infrastructural support to banking. The obvious example is the overnight wholesale money markets. They are effectively part of the payments system infrastructure. Banking, which is integral to the provision of all three core financial services, simply could not operate without these markets. They have long been, and will remain, of concern to central banks. I will not return to them today. The second category is intra-financial system markets (a slightly broader concept than inter-dealer markets). These markets determine the interlinkages amongst financial firms.
The risk models that are in use are liable to accentuate this phenomenon, even though such models are actually intended to do the opposite, namely minimise risk and instability. A signal from a risk model can trigger sales by numerous investors, whereupon prices fall still further. In this way, a mechanical application of risk models is liable to exacerbate price fluctuations. Financial market globalisation also leads, as I mentioned initially, to increased capital flows. Low transaction costs and high liquidity enable individual investors to pledge assets in the market to a greater degree. This leads to closer links and more interaction between different markets; a player may take large positions not just in markets for different assets but also in markets in different locations. Price movements may be affected if market players lose confidence in a particular geographical market or incur losses that oblige them to dispose of other assets. Globalisation has naturally increased such contagious effects, as we clearly saw last autumn. Recurrent financial crises In many ways, global economic development in the past two to three decades has been outstanding. Annual growth since 1980 has averaged over 3 per cent. The rate in the industrialised countries has averaged just over 2.5 per cent as against almost 5 per cent in the developing countries. Many East Asian countries have achieved even higher growth and thereby a radical improvement in economic prosperity. But development has by no means been smooth.

Related to all this, the EU must ensure that requirements to clear through CCPs apply also to exchange-traded derivatives and to vital cash markets, not just to “standardized” OTC derivatives. Whatever anyone says, there is really no excuse for where things currently stand on this in Europe. The MIFID II package provides an opportunity to correct it next year. 1  Thanks for comments to Andy Haldane, Edwin Schooling-Latter, Anne Wetherilt, Graham Young and David Lawton (FSA). BIS central bankers’ speeches  1  Those who argue that the gap in the EU’s framework should persist are serious about private gain but, sadly, not about stability. The crisis that threatens to engulf us all illustrates why we should give no room to such sentiments. 3. CCP default and resolution  There is a big gap in the regimes for CCPs – what happens if they go bust? I can tell you the simple answer: mayhem. As bad as, conceivably worse than, the failure of large and complex banks2. We therefore need effective resolution regimes for CCPs (and other financial market infrastructure). The Financial Stability Board will drive this forward as part of our work on the resolution of SIFIs. (A comprehensive package on the resolution of banks and dealers will go to the G20 Leaders Summit shortly. If endorsed, and Finance Ministers have already given their endorsement, it will become a Standard to which countries/jurisdictions pledge to abide.) The EU’s own work on resolution regimes has been a hugely positive input to this global process.
In addition to these important changes in relative productivity outcomes and more general gains in reducing inflation, we have seen a large increase in the mobility of global capital and a wider dispersion in gaps between saving and investment in national economies. The increase in the size of the U.S. current account deficit and the emergence of substantial surpluses in emerging Asia, the major oil exporters and Japan, reflect changes in saving and investment behaviors, changes driven by very different forces in different countries. So far, of course, these imbalances have been financed with relative ease, and it is hard to find evidence in risk premia in financial markets of concern about the sustainability of these trends. One final point about the broader environment: These changes have taken place in the context of unusually low forward interest rates, a subject that has been the focus of considerable attention in U.S. markets in particular. Forward nominal interest rates in the United States at the five- to ten-year horizon have stayed at quite low levels over the past 18 months. Using the inflation expectations derived from the TIPS (Treasury Inflation-Protected Securities), along with measures of inflation risk premia, we can conclude with some confidence that a key factor holding down forward nominal rates is a significant reduction in expected future inflation and increased confidence in those expectations. Inflation and inflation risk are not the whole story though, as forward real rates in both the United States and many other countries have declined to unusually low levels.

Beyond this general judgment about unsustainability, there is little consensus on how this adjustment process will unfold or on its implications for economic activity and financial markets. The plausible outcomes range from the gradual and benign to the more precipitous and damaging. The size of the imbalance and the inevitability of eventual adjustment, however, mean that the world will be living for a considerable period of time with some risk of large movements in relative prices, greater volatility in asset prices, and periods of slower growth in the United States and in the rest of the world. That said, a number of observers have suggested that living with these imbalances for an extended period of time presents very little risk to the U.S. and world economy. These arguments are worth some attention. One view is that the rise in the surplus saving of the rest of the world, the relative ease with which capital now moves across borders, and the increase in the relative attractiveness of claims on the United States together may suggest that the world can sustain larger imbalances, more easily, for a longer period of time than would have been possible in the absence of these conditions. This is true.
In my speech a year ago, I said that one of the great lessons of the global financial crisis in 2008 and, not least, the coronavirus crisis in 2020, was that the repo rate, our policy rate, is not sufficient as a monetary policy tool to stabilise inflation at around 2 per cent.2 The global financial crisis in 2008 and the years thereafter showed that the socalled lower bound for the policy rate was not only an interesting fact, but also 1 I would like to thank Björn Lagerwall for his help with writing this speech, Johan Almenberg, Meredith Beechey  Österholm, Emma Bylund, Charlotta Edler, Dag Edvardsson, Jesper Hansson, Stefan Ingves, Marianne Nessén, Emelie Nilsson, Åsa Olli Segendorf, Ulf Stejmar, Marianne Sterner, Anders Vredin and Magnus Åhl for their help and valuable comments, and Elizabeth Nilsson for translation of the speech into English. 2 See Skingsley (2021). 1 [19]  real constraint on monetary policy. A further lesson from the crisis was that the turbulence on the financial markets could entail the monetary policy steering rate quite simply not having an impact on the interest rates charged to companies and households. Asset purchases can address both of these issues. They can contribute to further stimulus when it is not possible to cut the policy rate. And they can reduce the difference between the policy rate and the interest rate charged to households and companies when there is financial turbulence.

In the decade prior to the crisis, in both the euro area and the UK, inflation was low, stable and predictable. Inflation targets were achieved without causing undesirable volatility in output and employment, the so-called “divine coincidence”.1 Both regions experienced continuous expansions in activity. It is not entirely surprising that “end of history” declarations of the Great Moderation were increasingly commonplace. But such nominal stability masked growing financial imbalances and increasing strains in competitiveness. The financial crisis would expose how a healthy focus on price stability had become a dangerous distraction. Central banks had won the war against inflation only to lose the peace. When the music stopped, the consequences for the real economy were dire. In both the euro area and UK, output fell by around 6% and unemployment rates rose initially by 2½ percentage points. It took 7 years for GDP per capita to recover to pre-crisis levels. In response, the financial system and the institutional architecture have been fundamentally reformed. The capital requirements of large global banks are ten times higher than the pre-crisis standard. Liquid assets – 1  See Blanchard, O., and J. Galí (2007). "Real Wage Rigidities and the New Keynesian Model". Journal of Money, Credit, and Banking, 39(1), pp. 35-65. 2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  2  relative to liabilities that can readily run – are also tenfold higher now than before crisis. We are ending too big to fail and transforming the resilience of financial market infrastructure.
It has justifiably become a cornerstone of our global economy, which thrives on openness, including in international financial and banking services. But such openness makes domestic economies more vulnerable as a result of contagion and spillovers from shocks that originate elsewhere – whether from other international economies or global capital markets and the international financial system. In addition, when banking is international, it can generate problems of effective oversight and coordination, and so difficulties in ensuring a full understanding of the risks being run within that sector. To get the benefits of international banking safely, these risks need to be managed. We need to work out how to be better lion tamers to create a safe environment for all. And we should aim to get to the point where we are happy that even in a crisis it is safe to put our heads in the lions’ mouths. Globally, the regulators of financial services activity have been prominent in their response to the crisis. We have sought to improve the resilience of banking, domestically and globally, thereby supporting financial stability. But in pursuing this objective, we need of course to look at the costs as well as the benefits of our approach. We need in particular to ensure that that resilience and stability is not achieved at the expense of what might colloquially be described as the “stability of the graveyard”.

As host supervisors we learnt all too clearly the need to get sufficient detail on the significance of overseas banks’ branch activities to understand their potential impact on UK financial stability, the need to understand the major risks run by a global parent and the impact that might have on UK operations, and the potential need for early supervisory intervention. In the immediate aftermath of the crisis, and reflecting these lessons, there was a change in approach from this fragmentation to regulatory balkanisation. This approach is aligned with the pure host-led model I described earlier and is based on the premise that host entities should be clearly separable and separated from their parent group. At the extreme, this treats local subsidiaries in isolation from the parent group, with a sufficient local pool of capital and liquidity so that it is self-sustainable in the event of failure, ensuring that the entity can be resolved on its own. On the face of it, this provides for domestic financial stability. However, it is not without cost. The benefits of international trade and capital flows are reduced. Total global capital requirements are higher since the benefits of diversification in international banking are not recognised. And how realistic anyway is the premise of self-sustainability at the individual country level for businesses that are inherently global and closely integrated – as opposed to groups that represent in effect a collection of standalone retail banks.
The development of fully unified European instant payment systems, integrated capital markets, and the possible creation of a safe euro-denominated asset should among others contribute to the international expansion of the euro. ** At this critical time, let me conclude with verses from Othello: “To mourn a mischief that is past and gone is the next way to draw new mischief on”. In modern English it means: “when you lament something bad that’s already happened, you’re setting yourself up for more bad news.” Making the best of such a misfortune as Brexit is the surest way to overcome it. Our collective response to Brexit should be the further integration of Europe: if we remained mired in technical nit-picking with self-satisfaction in some quarters and attacks from others, and distrust on all sides, we would not only have missed an opportunity, we would, collectively, have failed in our duty. Thank you for your attention. 3/3  BIS central bankers' speeches

To this end, under the JC3, a new subcommittee on data has been established earlier this year to take this work forward. These initiatives complement various ongoing efforts at the national level to strengthen national climate policies, institutions and frameworks. We will have the opportunity to hear more about these efforts over the course of this event. The 5 areas I have just mentioned are necessary but insufficient conditions to mitigate the worst effects of climate change. At the end of the day, actions at the individual firm level matter enormously. And the actions of financial institutions matter more than most given their role in the economy. The more we learn and observe about climate risks and practices in the financial sector, it is evident that we are still a long way from the breakthrough needed in how the financial sector thinks about and acts on climate issues. Such a breakthrough calls for financial institutions to recognise and reflect the systemic nature of the climate challenge in their business and risk considerations, and adopt an integrated and inter-disciplinary approach to climate issues. This means bringing together dimensions of climate science and technology with economic, social, risk and behavioural considerations. It means treating climate considerations not as a standalone issue, but one that is embedded in an institution’s growth strategies, risk management and business operations. It means committing substantial investments to build the capacity and culture needed to make long-term shifts in business activities that support and are aligned with climate mitigation and adaptation.