samchain/econo-pairs-v1 huggingface dataset:
History suggests that there are periods in which credit in the economy builds up and periods in which it declines – often after an explosive turning point. But these are not I suspect something a physicist would be prepared to accept as proven to be cyclical. And though they are associated with the economic cycle (which also, I suspect, would be thought of as unproven in the world of physics), the relationship between the two is unclear and much disputed. The build-up of credit in the economy is not always associated with higher growth nor does it always match the economic cycle. The long build-up of credit in the UK economy between 2000–2007 – from 125% to 170% of GDP – does not seem to have much affected economic growth which was little more than its long-run average. We do know, however, that a build-up of credit that ends explosively can trigger a rapid reversal – a spiral of “deleveraging” – that drives the real economy into a very deep decline, more severe and more persistent than the usual business cycle. Not only is this a lesson from the empirical literature. GDP in the UK fell around 6% in the crisis and the recovery since has been slower than our recovery from the 1930s recession. Policy makers in the UK have spent much of last 8 years trying to halt and reverse headwinds to the recovery, including from disorderly deleveraging.

While we are seeing competition between lenders pushing down on rates, particularly in the mortgage market, we have not yet seen evidence of a general deterioration in underwriting standards. Countercyclical macroprudential policy As we move forward in the credit cycle, I think we will need to consider whether and how risks are building in the financial system and how they should be addressed. This is of course already a regular and important element of the FPC’s discussions. But my guess is that it will become even more so in the next phase of the cycle. With that in mind I want to turn now from the conjunctural assessment of credit in the UK to what may look like a more theoretical question but one that is going to be increasingly important to us – what is the objective and the framework for time-varying macroprudential policy? Here I think one can distinguish a number of different strategies. The first is not to attempt time-varying macroprudential policy at all. The second is to set policy to aim to maintain a constant degree of resilience relative to risk. And the third is to use policy actively to lean against the credit cycle. I want to look at these three approaches for the core and riskiest part of the financial system – leveraged banking – and in particular the use of countercyclical capital buffers for banks. I have some sympathy for the “don’t do it at all” approach.
Think in terms of a simple fixed-forfloating swap for 10 years. (This transaction could be to convert a company’s fixed-rate bond issue into a floating-rate liability for example.) The bank pays a fixed rate in exchange for receiving a floating rate (say, LIBOR) from the corporate that issued the bond. If no break clause exists, the bank’s credit department would price the contingent credit exposure to the corporate over the full life of the contract. This could be very high: a substantial rise in shortterm interest rates would make the bank effectively owed a significant amount of money by the corporate. The bank needs to factor in that with this “gain,” there is an associated risk of default of the corporate. In reality, one can think of all these contingent credit exposures as the modern derivatives book’s “loan portfolio”. It is equivalent to a traditional loan book, except that it dynamically changes in line with market prices. The credit risk is obviously bigger when the creditworthiness of a company is lower and when the maturity is longer. The bank’s credit department will therefore calculate a credit spread that it will charge on top of the “risk free” swap level (that would be charged between financial institutions that fully collateralize any mark-to-market swings). For a longer-dated swap, this charge may be very  12  After the “current seller share” had fallen below its minimum on two successive distribution dates – the company’s own investment in the vehicle had not been maintained at a high enough level.

Outstanding bank lending to corporates is rising at a faster pace in France than anywhere else in Europe: +4.5% year-on-year at end-November 2015, compared with +2.1% in the United Kingdom, +1% in Germany and an average of +0.9 % for the euro area as a whole. In fact, based on the responses given by business leaders to our surveys, it seems that applications for investment loans are generally accepted fairly readily, and the same seems to apply, more or less, to cash loans. Although difficult to measure, firms’ willingness to apply for loans appears to be strong. Surveys conducted by the ECB show similar results, and rank France on a par with Germany in terms of access to credit and willingness to apply for loans, well ahead of the other major countries in the euro area. Interest rates on loans are also lower in France than anywhere else in the euro area – by around 1 percentage point in the case of individual loans of up to EUR 250,000. With regard to today’s topic, however, there are a number of important distinctions that need to be made. Access to credit is markedly more difficult for VSEs than for other SMEs: –  fewer than 60% of applications for cash loans were accepted (i.e. granting of 75% or more of the requested amount) in the third quarter of 2015, compared with 74% for SMEs.
The launch that we are witnessing today is a major initiative, the development of a Shariah standard that is integrated with details on operational requirements. This approach ensures a transparent basis of Shariah rulings by the SAC, and provides a convergent in understanding between Shariah scholars and industry practitioners. In judiciary matters, where the SAC serves as a reference point in analysing muamalat cases, the court can also draw on these comprehensive and transparent Shariah standards as basis in arriving at a court ruling. The adoption of the standards by learning institutions will pave the way for greater understanding and acceptance of these standards as a global starting point of reference for the Islamic finance community. As we launch the Educator’s Manual, which is the first of 14 series of manuals, I would like to share my thoughts on our approach in developing the Shariah standards, and would also like to emphasise the importance of embracing diversity and mutual respect in Shariah interpretations. I shall deliberate on two additional areas that stakeholders need to consider to maximise the benefits of having the Manual; reconfiguration of academic programmes and strategising talent deployment. The future growth of Islamic finance, especially cross border, is very much dependent on the harmonisation and mutual recognition of Shariah views and rulings across the globe. It is critical if cross border trades are to be strengthened. Numerous efforts are being pursued to narrow the opinion gaps between scholars through symposiums, roundtables as well as bilateral dialogues.

Within the Islamic finance realm, prospective cases studies can include amongst others the application of Shariah Standards by Islamic banks and its effects on product structuring and pricing strategy, legal aspects, risk management, oversight function and governance process of the banks. For the takaful sector, case studies on microtakaful for example can lead to the development of protection schemes that can be offered at affordable prices. I trust the academia has enough resources to produce such case studies and generate new research findings and breakthroughs, given the knowledge and expertise of their academic faculties. In essence, we need to be more exploratory and brave to rigorously investigate or examine real life situations and complex scenarios and benefit from hindsight and learnt lessons that can give new solutions for future growth. The initiative to develop the Educator's Manual is in itself a good starting point to encourage universities to move towards experiential learning. Students will be exposed to Shariah and operational requirements covering areas such as product structuring, legal, accounting as well  BIS central bankers’ speeches  3  as risk management. The transparent nature of the standards would enable students to critique and form their own views and conclusions. It is a leap forward to change the paradigm on the theoretical and operational aspects of Shariah applications. This initiative is certainly a gamechanger for our Islamic finance education programme.
When new information changes the economic outlook, we must of course reconsider our view of how the repo rate should be set in the future. But this is hardly a reason to refrain from being as open and clear as possible about what we currently believe will happen. As I have said on previous occasions – it would be roughly like the Swedish Meteorological Institute refraining from publishing five-day forecasts because conditions might change in the meantime. Another argument against publishing interest rate paths is linked to the way the market functions. This means that in principle the financial market agents could stop looking for other information if they have access to the central bank’s forecasts for interest rates in the slightly longer term. How the market views economic prospects is normally reflected in the long-term market rates. This source of information could thus be lost and this would impair the functioning of the market. But I find it very difficult to imagine that the market agents would stop making independent assessments because we are now publishing our own view of interest rate developments. They know as well as we do that we are living in an uncertain world and that the forecasts we make are constantly being revised. They have strong reasons for continuing to look for information via other channels than the Riksbank and for assessing this information, even when we publish our forecast of the future interest rate path.

One example is when the Japanese central bank committed itself during a deflation crisis to keeping the policy rate at a low level during a certain period. For another example, see the press release from the Federal Reserve Board of Governors on 12 August 2003. 4  BIS Review 40/2007  levels we foresee two years ahead. And the focus should be on not only current interest rates, but also expectations of future interest rate changes 6 . …to market expectations… We left most of these problems behind us when we changed over in October 2005 to making forecasts based on market expectations of the future development of the policy rate. Compared with the assumption of an unchanged repo rate, market expectations normally provide a much more realistic forecast. This was one thing that made it easier to evaluate us. However, an assumption that the policy rate will develop in accordance with expectations in the financial markets has its disadvantages. This perhaps applies above all to the difficulties in communicating the interest rate path when market agents’ assessments differ substantially from those of the Riksbank. Another problem that could lead to a lack of clarity in communication is how market expectations of the development of the policy rate should actually be measured. It may be difficult to estimate and adjust for different premiums – the compensation for differences between securities with regard to the maturity, credit risk and degree of liquidity required by an investor. There are also different ways of doing it.
At the other extreme a fixed rate regime may be more attractive to smaller, more open, economies or where a credible domestic macro-economic framework is difficult to establish, for example, for historical or political reasons. But in this case it is crucial to recognise that domestic policy must be totally and unreservedly committed to maintaining the fixed exchange rate. It is an extremely demanding regime but one which can work well – as we have seen in Hong Kong – where there is a high degree of supply-side flexibility to act as an alternative external shock absorber. It has become increasingly fashionable recently to exclude anything between these two extreme positions – an actively managed float or a pegged rate regime – as an unviable middle ground. It is argued essentially that because they do not exert a sufficient discipline on policy in either direction, or therefore represent a sufficiently clear policy framework, they tend to intensify market tensions when a divergence between the policy needs of domestic and external stability does in fact arise. BIS Review 54/1999  4  I am reluctant to accept that so-called “corner” view in any absolute sense. When tension does arise between external and domestic objectives, you cannot avoid the impact on domestic policy altogether even with a floating exchange rate regime – as I explained in the context of our own recent experience.

First, at the recipient end, a crucial condition for living with financial globalisation is improvement of market structures to ensure that capital inflows are productively employed. That involves attention to structural issues, such as accountancy standards, bankruptcy laws, and governance questions. It involves appropriate sequencing of capital account liberalisation – and arrangements to ensure that the particular risks to the borrowing country, for example, attaching to volatile short-term inflows are properly recognised – and reflected in the price paid by the borrower. That in turn involves effective management of foreign currency assets and liabilities in particular, including management of their relative liquidity, by both the public and private sectors. It involves, also, ensuring that borrowers, and their creditors, are unambiguously clear as to who is ultimately responsible for the liability at the time it is taken on. It involves increased attention more generally to the soundness of financial systems – which is to be the subject of our discussion this afternoon. And perhaps above all it involves improved transparency – of policies, of standards, and of financial and economic data - to enable investors and lenders to make informed assessments of risks. But there is a great deal too that the international financial community can do, as it were from the provider end. This includes the intensive efforts being made, particularly by the IMF, to encourage sound macro-economic and structural policies – and greater transparency – in all IMF member countries.
BIS Review 130/2007  1  While lending and deposit-taking remain the mainstay of commercial banking, the profile of credit markets has changed significantly. Today, conventional credit products are being offered alongside the growing significance of asset securitisation and credit derivative activities. This has had a profound impact on the nature of banking. The rapid development of these synthetic credit markets, coupled with an extended period of ample liquidity in the global financial system, has expanded the avenues for banks to engage in more aggressive lending practices that are funded by borrowing from the wholesale money markets, and by repackaging and selling loans to other investors in the form of asset-backed securities. This represents a significant shift from the more traditional banking models where loans are predominantly funded by deposits. The increasing complexity in the way that debt is created and distributed in the financial system raises important implications for financial stability. The “originate and distribute” strategy that has been adopted by some institutions warrants addressing more comprehensively the full range of risks to which the banks are exposed. This includes the liquidity, foreign exchange and moral hazard risks in banking institutions. Credit risk exposures have also taken on more complicated forms, including counterparty risks on derivatives and foreign exchange transactions. The valuation of such financial transactions and instruments are also often difficult to measure particularly under distressed market conditions. In addition, the correlations between credit and market risk, both within and across national borders, have become more complex.

Of concern has also been lack of adequate information on debt concentrations in the system partly due to the increasingly elaborate ways in which debt is passed on from originating institutions to different investors. The propensity to under-price credit risk, especially under conditions of excess liquidity, has also increased concerns over underwriting standards. The consequent sharp pricing corrections would in turn have the potential to result in broader economic disruptions. Recent developments in the prudential regulatory and supervisory framework have, and will continue to play an important role in promoting sound risk management practices in the light of these changes. These of course, include the modification of capital standards that are more granular in addressing different types of risk. Supervisory approaches globally have also evolved to place a greater emphasis on sound risk management and early interventions to address emerging risks before they become major problems. There is also more emphasis being placed on the expectations of financial institutions to play a greater role in ensuring that financial products offered to customers and investors are suitable given their needs and financial circumstances, and that they have a good understanding of risks assumed with the products.
In the area of payment services for example, e-payment has revolutionised payment mechanisms through convenient and accessible channels. In Islamic finance, a recent initiative in Malaysia has been the Investment Account Platform (IAP) that was launched in February this year. It is an important example of a collaborative strategy by the industry to bring game-changing innovations to the market. The IAP is the first Islamic bankingintermediated internet-based platform that combines the expertise of Islamic banks and efficiency of technology to channel funds from investors to viable economic ventures. It promotes risk-sharing financial transactions by providing the platform for Musharakah and Mudharabah-based equity financing. The platform has strong prospects to support crossborder investments and increase global connectivity through the participation of banks worldwide. The potential impact of such technological disruptions is significant. An estimated 10% to 40% of overall banking revenues could be at risk by 2025 due to fintech innovations outside banking institutions that are able to achieve a significant pricing advantage. In Islamic finance, like the Investment Account Platform in Malaysia, fintech has immense potential to be the next game changer. It offers opportunities for industry players to radically transform operational models by adopting digitisation strategies that will be able to deliver much greater scale or alternatively, a high degree of specialisation. It also opens up new possibilities for improving efficiencies, reducing wastage and enhancing the customer experience. All of this adds up to stronger market positioning and financial performance.

Therefore, the euro area is currently battling a fiscal crisis in some member countries, a competitiveness and current account crisis in the region as a whole, a deep banking crisis in some countries, and a fragile banking system in many others, which would be exacerbated if the sovereign debt crisis should end in default by any of the countries concerned. A currency crisis as such is not part of the problem, however, any more than it was in the US. As is discussed further in Chapters 16 and 25, a number of reforms have already been adopted in response to the shortcomings in the design of the euro area, but it is not certain that they will suffice to preserve the currency union in its current form. Forecasting near-term developments in the euro area crisis is beyond the scope of this report, however. The results of the reforms made to date have not yet been fully tested. If they prove inadequate, the crisis could be amplified and, in the worst-case scenario, could have severe repercussions for the future of the euro area in its current form. If they are successful, the reforms could strengthen the eurozone. The outcome has yet to be determined.
After the Lehman bankruptcy, banks suddenly deposited an aggregate amount of around € billion. Deposits increased since the ECB responded to the tensions in the market by accommodating the increase in banks’ demand for liquidity. 4 The extent of banks’ use of the ECB’s deposit facility is a useful indicator of the impairment of the flow of liquidity throughout the banking system, especially when the group of depositing banks is different from the group of borrowing banks. 5 A further troubling indication of the malfunctioning of money markets right after the Lehman bankruptcy came from cross-border transactions. Before the bankruptcy, cross-border transactions accounted for 60% of all unsecured overnight interbank lending. Right after the bankruptcy, this proportion dropped to 50%. A fall in the cross-border flow of liquidity indicates a fragmentation of the euro area money market along national borders and threatens the implementation of a common monetary policy throughout the euro area. The ECB reacted and succeeded in calming markets, including money markets, first by conducting two monetary policy operations with a three-year maturity, and then, most recently, by committing to remove redenomination risk in countries having signed to an ESM assistance programme (the so-called Outright Monetary Transactions, OMTs for short). For example, the share of the cross-border overnight transactions increased gradually from 30% to 50% following the OMT announcement.

In many areas, we have identified the necessary tasks only in general terms. Progress in figuring out the details and the implementation path and how to coordinate the efforts on a cross-border basis is more limited. I would particularly highlight the cross-border coordination problem – regulatory oversight is national, but many financial firms and infrastructures operate on a global basis. Effective reform requires mutually consistent global standards – and while international cooperation to date has been good on many fronts, progress is uneven, and the devil is in the details of implementation. We need all national authorities to resist the temptation to favor domestic financial interests over the interest of achieving a true level playing field globally. And we should resist the urge to favor locally controlled infrastructures where global solutions would better advance the collective financial stability interest. Instead we should work to ensure fair access to global infrastructures. Also, it is important that national regulators have access to data and a role in the regulatory oversight of such global infrastructures when that is relevant to their own national financial stability agendas. In the United States, I think we have made more progress in bolstering the resilience of our banking institutions than we have on the other tracks. There are two elements to this. The first element is the increase in capital that has already occurred. The major U.S. banking institutions are much better capitalized today than they were in the fall of 2008.