samchain/econo-pairs-v1 huggingface dataset:
Christian Noyer: It was vital to break the adverse feedback loop between bank and sovereign risk Interview with Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, in Les Échos, 17 September 2012. *  *  *  Do the ECB’s announcement to purchase sovereign debt and the German Constitutional Court’s approval of the European Stability Mechanism mark a turning point in the crisis? These announcements were welcomed by the markets and the outlook now appears much clearer. The European Stability Mechanism is a key factor for strengthening the cohesion of the euro area and demonstrates that the euro is here to stay and irreversible. It will help ailing economies return to competitiveness and growth. The Governing Council’s decision to purchase, subject to appropriate conditions, government debt is reassuring for at least three reasons: purchases are potentially unlimited, which should end speculation about the possible collapse of the euro area; the strict conditionality will oblige countries to pursue their fiscal consolidation efforts; lastly, these purchases fall squarely within the ECB’s mandate as they are conducted in the secondary market and aim to ensure the proper transmission of the policy stance to the real economy. The ECB has played its role. What must governments now do? Euro area Member States need to restore their credibility and they are already making efforts to do so.

In the treasury market, we have maintained our position as the world’s fourth largest forex trading hub after London, New York and Tokyo. We continue to rank as the second largest over-the-counter (OTC) derivatives hub in Asia after Japan. We will build on these strengths and deepen our markets by developing the structured finance market. The asset securitisation market has already taken off, with structured products accounting for more than half of the Singapore dollar debt market. This will be further boosted when Singapore’s first loan securitisation programme for Small and Medium Enterprises is launched. ASEAN will continue to be an important market. We should build closer ties with some of the fast emerging ASEAN economies. For example, we have made a proposal to Vietnam to connect our two economies, including our financial markets, so as to reap the benefits of synergy. Vietnam is receptive. We are approaching this at a pace which Vietnam is comfortable with. Besides ASEAN, we should also position ourselves to play a bigger role in other growing regions. I am pleased to note that our local players have embraced globalisation to capitalise on opportunities in the region and beyond. In response to increased competition, our local banks have consolidated and expanded abroad. They remain profitable, sound and well-capitalised, and are becoming regionally competitive. China, India and the Middle East offer rich opportunities for both wealth management and capital markets activities. Singapore can play a useful intermediary role to serve the needs of Chinese companies seeking funding and expansion overseas.
Overall, the high dependence of the Spanish economy on financing from the rest of the world, the duration and scale of job destruction and the size of the budgetary deterioration contributed to notably compounding the intensity of the effects of the economic crisis in Spain. Fortunately, since the second half of 2013 our economy has initiated a phase of recovery, one no doubt very gradual but which has enabled it to emerge from the downturn that took hold in early 2011. In recent quarters, domestic demand has begun to rise, underpinned by some recovery in household consumption and investment in equipment, while the declines in investment in construction continued to lessen. Furthermore, the positive contribution of external demand began to lose momentum, marking the start of the rebalancing of both expenditure components. The labour market performance has also been a pleasant surprise since mid-2013, with increasingly lower rates of decline in employment, which turned positive at the close of 2013 for the first time since 2008. Wage moderation, stimulated by the effect of the labour reform, is beginning to make itself felt in employment. And this against a background of price stability, which contributes to easing the pressure on spending exerted by the slow recovery in household and corporate income. As at the very source of the crisis, it is possible in this incipient change in trend to identify certain impulses originating beyond our borders, while others are generated at home.

Luis M Linde: Exiting the economic crisis Speech by Mr Luis M Linde, Governor of the Bank of Spain, at a conference at the Colegio de Ingenieros de Caminos, Canales y Puertos, (School of Civil Engineers), Madrid, 18 February 2014. *  *  *  Let me first thank the School of Civil Engineers, their Governing Board and its President for inviting me to participate in this conference. Civil engineers are one of the most prestigious professional groups in our country, and their contribution over many years to the development of our economy and society has been most important. Currently, they are moreover participating decisively in the expansion abroad of our construction and engineering companies, raising them to the ranks of the international first division. In my address today I shall discuss our view at the Banco de España of recent developments in the Spanish economy and the prospects open to us to emerge from the crisis that began seven years back. I shall begin by recalling the severity of this crisis, moving next to discussing the discernible signs of recovery. Finally, I shall refer to the complexity of the current situation and the challenges ahead for us. The crisis has been of a depth and seriousness unprecedented in our economic history.
Holding more capital does not impair banks’ ability to create value by lending, provide payment services or satisfy the demand for investment banking activities. High leverage is not a pre-requisite for banks to perform their socially valuable functions. Will higher capital requirements increase the cost of financing? I now want to address the question of whether higher capital requirements per se will increase the cost of financing. A theoretical basis for answering this question can be found in the work of Modigliani and Miller.14 In a perfect, frictionless world, the value of a firm does not depend on whether it is financed by debt or equity. 13  The balance sheet of the two biggest Swiss banks adds up to a multiple of the size of domestic GDP. 14  Modigliani, F. and Miller, M. H. (1958). “The Cost of Capital, Corporate Finance and the Theory of Investment”, American Economic Review, 48, 261–97. BIS central bankers’ speeches  7  Higher equity capital reduces leverage. Thus it reduces return on equity (ROE) when a bank makes a profit but it increases it when the bank makes a loss. In other words, if increased capital requirements lower the ROE in good times, they raise it in bad times, hence reducing shareholder risk. It follows that shareholders will demand a lower average ROE for a better capitalised bank, as this is the counterpart for the better protection they obtain in bad times.

For a more detailed and focused analysis of the proposed Swiss law, see the speech given by my colleague Thomas Jordan earlier this week. BIS central bankers’ speeches  1  Part I: Risk and risk-taking Progress in risk measurement: role in the crisis There is no doubt that significant progress in both the definition and measurement of risk has been made in the recent past. As an example, the function of a risk manager was almost non-existent some 20 years ago. However, it is equally hard to dispute the fact that this progress has been over-estimated. For instance it was regularly claimed in the early 2000s that the financial system had never been as resilient and robust as it was at the time. Clearly, developments since the beginning of the financial crisis in mid-2007 have proved the contrary, and we need to draw suitable lessons from that experience. Progress in the definition and measurement of risk may well have played a role in the recent financial crisis. A reason for this is that – as so often in modern finance – conceptual progress, in tandem with progress in the methodology of risk management, has led to a rather blind trust in models. In general, a trained economist learns to interpret models as abstract approaches to reality, with these models serving as a support for economic and business reasoning. Models are not meant to be substitutes for complete, partially qualitative reasoning including, in particular, a discussion of the model’s assumptions and their degree of robustness.
The behaviour of wage costs and the high margins seen in certain activities tend, moreover, to make the inflationary episode more persistent, with the adverse consequences this may have for price and cost-formation habits and for the trend of the relative prices and costs that bear on the economy's competitiveness. It is therefore very important not to lose sight of the fact that the main instrument available in the current circumstances is that of making structural reforms that enhance the economy’s flexibility, liberalise certain sectors and markets, and increase competition. Despite the efforts made in recent decades, there are still numerous areas of the Spanish economy that need reforms. I do not intend to address these in detail, but I shall refer briefly to those spheres where I consider pressing action is needed. And I should stress that it is here where the potential room for manoeuvre to counter weakening growth in the euro area is to be found. 6  BIS Review 122/2008  In the labour market, it is imperative to bring about a milder reduction in employment in cyclical slowdowns. In this connection, we must explore channels which provide a response by wages to changes in the economic environment, aligning them to productivity gains, and avoiding upward inertia in the face of external shocks introduced by mechanisms such as wage indexation clauses.

International financial markets have moved from a situation of widespread risk undervaluation to one in which extraordinary caution is exercised in their evaluation. Past experience has clearly shown the tendency of markets to overreact. It is even possible that certain recent developments reflect, at least partly, an excessive reaction. But it is unreasonable to expect that, once the situation has returned to normal, international financing conditions will simply be as they were prior to the summer of 2007, which nobody today hesitates to qualify as excessively lax. Likewise, few question the fact that the expansion of the balance sheets of a large number of major financial institutions exceeded limits which should not have been overstepped. The current deleveraging process may initially reflect the correction of some of the excesses committed. But taking a broader view, it also reveals a more fundamental movement towards a general reduction in the debt levels of financial intermediaries and the containment of credit flows, the effects of which must likewise be felt by the ultimate borrowers, namely households and firms. Finally, I should point out that the magnitude of the imbalances generated and the scale of intervention designed have prompted a necessary pause for reflection on the role the economic authorities should play in developing and supervising financial markets.
Indeed, the PRA has found that despite the sophistication of insurers in modelling climate risks, there are still gaps in their own risk management. The PRA is increasingly focused on cognitive dissonance in some insurers whose careful management of climate risks on the liability side of their balance sheets is not always matched by similar considerations on the asset side. And the PRA’s banking survey last September found that, although almost three quarters of banks recognised the risks of climate change, only one in ten were taking a long term, strategic approach to them. With that in mind, we expect firms to consider scenario analysis as part of their assessments of the impact of climate risks on their balance sheet and broader business strategy. An important question is the form these scenarios should take. Climate scenarios aren’t forecasts, but datadriven narratives that help companies think through different possible futures. The scenarios should be comprehensive, rigorous and challenging. The assumptions and methodologies in the models – such as the assumed global temperature rise, the energy mix, or whether the transition happens smoothly or abruptly – should be sufficiently transparent to allow for comparisons and external challenge. And finally, scenarios should be implemented consistently across the business, linking identification of risks and opportunities to both strategy and disclosure. To do this, firms will need either to develop their own transition scenarios or build on commonly available models.

IOSCO could play a constructive role in coordinating such mandates and in any event, the current iterative process of disclosure, reaction and adjustment will be critical to ensure that these eventual market standards are as comparable, efficient and effective as possible. Second, risk analysis The second step on the path to a new horizon is better climate change risk management. Climate change creates both physical and transition risks.7 Physical risks arise from the increased frequency and severity of climate- and weather-related events that damage property and disrupt trade. Transition risks result from the adjustment towards a lower-carbon economy. Changes in policies, technologies and physical risks will prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent. The longer meaningful adjustment is delayed, the more transition risks will rise. Climate risks also have a number of distinctive elements, which, in combination, require a strategic approach. These include their:   Breadth, as climate risks affect multiple lines of business, sectors and geographies;    Magnitude, as the full impacts of climate risks are large, potentially non-linear and irreversible;    Foreseeable nature;  6  For example the Oil and Gas industry group convened by the World Business Council on Sustainable Development and the Institute of International Finance for banks. 7 The other channel concerns liability risks. These stem from parties who have suffered loss from the effects of climate change seeking compensation from those they hold responsible.
Macroeconomic imbalances have been too pronounced for monetary policy alone to contain them, exacerbated by special conditions that have hindered measures from having the necessary effects. Other aspects of economic policy would have needed to be tightened, in particular the fiscal stance, even though the Treasury is much better placed than in most other countries, with virtually zero net domestic and foreign debt which by itself is a notable achievement. Financial companies would also have needed to show more prudence in their lending decisions and they should be encouraged to display the utmost caution in this respect. In public debate in recent weeks and months, there have been occasional calls for Iceland to adopt a different currency. Without expressing any opinion on the issue here, I would point out that this cannot be done overnight and it is crucial not to act rashly. The current debate appears to be prompted by the recent volatility of the króna. I hardly need to mention the great volatility that has been witnessed in capital markets, exchange rates, interest rates and securities prices around the world in recent weeks. Iceland has not escaped this trend any more than other countries, but the fluctuations it has experienced have not been sharper than in many others. A key precondition for joining a monetary union is to achieve macroeconomic balance. Whatever the outcome of the currency debate, the problems of the  BIS Review 111/2007  5  day will not vanish without being tackled, and that takes time.

Even though neither the changes nor amounts involved were large, there is little doubt that they had some effect and prompted a new marketing drive by the banks. In a climate of rapidly growing disposable income, house prices began to soar again. The Central Bank has emphasised the need to change the public sector mortgage credit system but has not stated an official view as to how this should be done. Nonetheless, immediate reforms are vital to give monetary policy more leverage over the mortgage loan market. Another important consideration is that whatever mortgage loan arrangements that are developed should provide a solid foundation for the domestic bond market. The Central Bank has been making these points for several years with little result. International agencies have agreed that a review of the role of the HFF is long overdue. Particular mention may be made of the IMF, most recently this summer. The Fund’s reports show that its analysts have striven to make an in-depth study of mortgage credit arrangements in Iceland. In its Article IV Consultation report published in June, the IMF claimed that a higher policy rate than otherwise had been needed as a result of the HFF’s activities. It should be added that one reason for the limited success in keeping the lid on inflation has been an enormous increase in disposable income in 2006 and 2007, driven by both wage rises and tax cuts. These factors and others have fuelled domestic demand and thereby inflationary pressures.
The measures implemented by the central banks and other authorities in various countries to improve the functioning of the financial markets, what Ben Bernanke calls "credit easing", 5 can reduce the spread and thus contribute to a lower market rate. However, even if the various spreads are still larger than normal, it is, quantitatively probably only a rather moderate reduction of the real market rate that is possible in this way. The really substantial effect on the real market rate can instead be achieved if inflation expectations can be raised. It is particularly dangerous if, instead, expectations of deflation arise, that is expectations of negative inflation. The real interest rate may then become far too high. A nightmare for central banks is a downward spiral, in which a too high real interest rate slows down the economy and leads to increasing deflation and expectations of decreasing inflation, which in turn lead to a still higher real interest rate that slows down the real economy even more and leads to even greater deflation. With a zero lower bound it is therefore important for the central banks to affect and raise inflation expectations in some way. How this should be done is the real problem with a zero lower bound for the interest rate bound and a liquidity trap. It may even be necessary to raise inflation expectations above the inflation target for a while in order to achieve a sufficiently low real interest rate.

The Bank has benefitted from capacity building, training, technical assistance, and funding from:   The African Development Bank (AfDB);    The Association of African Central Banks (AACB);    The British Department for International Development (DFID);    The Economic Community of West African States (ECOWAS);    The European Union (EU);    The German Technical Cooperation (GTZ);    The International Monetary Fund (IMF);    The International Fund for Agricultural Development (IFAD);    The Reconstruction Credit Institute (KFW);    The United Nations Development Programme (UNDP);    The West African Monetary Agency (WAMA);    The West African Monetary Institute (WAMI);    The West African institute for Financial and Economic Management (WAIFEM); and  BIS central bankers’ speeches  9    The World Bank  This list is by no means exhaustive. We want to assure these organisations of our cooperation at all times and we know that with their continued support we shall maintain the course despite the challenges of our time.
Future Work: Full Credit Risk Modelling The Committee will spend the next few months considering these and other themes carefully and finding ways to balance the complexity of the New Accord against the need for appropriate sensitivity to risk; to ensure that the assumptions supporting the rules are appropriately conservative, but not excessively so; and to apply the rules consistently to protect and promote competition in the global banking market. But when the ink dries on the New Accord, rest assured that the Basel Committee will not be adjourning. Just from the comment letters we received, we can already identify a wide range of issues ahead to continue to find new ways to advance risk management, to promote greater transparency, and to strengthen the stability of the financial sector. I’d like to conclude by mentioning just two of the potential items on our agenda for future work once the New Accord is implemented. The first would be to consider the benefits of full credit risk models in the calculation of minimal capital requirements. In theory, a bank’s capital requirements would then reflect to the greatest degree the economic benefits of diversification in its balance sheet. In fact, the Committee did at one point evaluate whether advanced banks should be permitted to estimate the degree to which their assets might behave similarly or default together in the New Basel Accord. As you know, we decided that we are not quite there yet.

The focus of my discussion will be on the latter part of this period. This is because developments in 2000-2001 were illustrated very clearly in last year's assessment. Price rise and monetary policy 2001 The fact that inflation was over the target level during the second half of 2001 and first half of 2002 was largely due to supply shocks similar to those we are experiencing now. Food prices rose considerably as a result of mad cow disease, foot-and-mouth disease and higher prices for fruit and vegetables resulting from poor harvests. There was also a rise in electricity prices. The Riksbank's  BIS Review 15/2003  3  assessment was then, as it is now, that these price rises were essentially temporary and inflation would soon fall again. This proved to be the case and in this sense the upturn in inflation 2001 did not comprise a serious monetary policy problem. However, the inflation rate rose even after adjustments were made for food and energy prices; there appears to have been a rising trend in various measures of underlying inflation from early 1999 to early 2002. It has since been shown that the Riksbank and other forecasters overestimated GDP growth and underestimated inflation when we made our forecasts for 2002 during 2000 and 2001. Perhaps we were a little too optimistic with regard to the economy's capacity to grow without inflation accelerating.