samchain/econo-pairs-v1 huggingface dataset:
Close to 60 percent of the capital in the Government Pension Fund Global – Norway’s sovereign wealth fund – is invested in global equity markets. In times of good growth in the global economy and when optimism is on the rise, the return on the Fund increases. Conversely, turbulence and low risk willingness in the market have a negative effect on the Fund’s assets. This is a risk we have to live with to achieve solid returns over time. Because of the Fund’s long-term horizon, short-term risk tolerance is high. We can exploit this by engaging in countercyclical investment. The Fund’s size also allows us to reduce risk by spreading our investments across many countries. Norway has become a global financial investor. Through the Fund’s investments, Norway increasingly takes part in value added generated in other countries. Over the past hundred years, growing global trade and cross-border flows of capital and labour have been important factors driving economic progress. At times, the principles of free trade and capital movements have been set out of play. Walls have been raised between countries in the form of trade barriers and restrictions on capital flows. This has not been successful. Countries that have attempted to shield their economies from the rest of the world have fallen back into stagnation. Growing signs of increased protectionism are again causing concern. If this tendency intensifies, international trade and prosperity will be undermined. With its open economy, Norway would be severely affected.

In the absence of a conceptual framework, EME central banks facing large capital flows have had to experiment with the tools at their disposal – such as foreign exchange intervention, macroprudential policies, and capital flow management measures. There is now a rich body of policy experiences, especially in emerging Asia, crying for a theoretical framework. We need a framework that provides coherence not only across these various policy tools but also with traditional monetary and fiscal policies. There is an active research agenda at the BIS on such an integrated policy framework. As a practitioner of some of these policies, MAS is delighted and honoured to organise this conference together with the BIS. What is the Big Deal with Capital Flows? When central bankers from advanced economies meet, they discuss quantitative easing and r-star (the natural rate of interest). When EME central bankers meet, they talk about capital flows. What’s the big deal with capital flows? First, capital flows to EMEs have become quite large. Annual gross portfolio inflows have grown to an average 1.3% of EMEs’ GDP in the eight years following the global financial crisis, compared to an average 0.7% during the eight years prior. [1] A key driver of the surge in cross-border capital flows has been the prolonged period of nearzero interest rates and highly expansionary monetary policies in the advanced economies. There is empirical evidence that quantitative easing policies in the US have made capital flows to EMEs more procyclical [2] . Second, capital flows have become more volatile.
As proved by the experience gathered from the `30s to the `60s, it can provide financial stability at the expense of future productivity and living standards. To quote Andrew Crockett again, “We should be careful that greater safety in banking is not purchased at the cost of reduced efficiency or additional risks elsewhere in the system”. Second, proper functioning of markets requires adequate rules. To me, it seems that something was wrong not only with markets themselves, but with the way they were regulated. Regulation did not pay enough attention to problems that may appear when markets operate. Andrew Crocket explained that the “market mechanism failed because of perverse incentive, asymmetric information and conflict of interests”. This means that, as Tommaso Padoa-Schioppa described it a few years ago, this crisis is not only a failure of markets, but also a failure of governments and regulators. In my view, free markets work properly given a set of good rules. It is natural for human beings to make free choices. It is the regulators` duty to design rules that always preserve this freedom while preventing, for as long as possible, the accumulation of problems from asymmetric information, perverse incentive and conflict of interests. The two approaches of regulation – the one up to the `60s and the one before the outbreak of the current crisis – are a proper basis for understanding what good rules might mean. III.

10  BIS central bankers’ speeches  Figure 9 Average capital flows to and from emerging economies (*) (percentage of GDP) 15  15  10  10  5  5  0  0  -5  -5  -10  -10 80  82  84  86  88  90  92  Inflows  94  96  98  Outflows  00  02  04  06  08  10  Net flows  Source: Central Bank of Chile based on IMF data. (*) Includes Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Israel, Malaysia, Morocco, Mexico, Peru, the Philippines, Poland, Russia, South Africa, South Korea, Thailand, Taiwan and Turkey. Figure 10 Capital flows to and from Chile (*) (percentage of GDP) 20  20  15  15  10  10  5  5  0  0  -5  -5  -10  -10  -15  -15 86  88  90  92  Inflows  94  96  98  Outflows  00  02  04  06  08  10  Net flows  (*) Up until 1995, it shows foreign direct investment and portfolio investments from or in a foreign country, in the capital account (excluding reserves) of the balance of payments. From 1996 onwards, it shows assets and liabilities of the financial account flows (excluding reserve assets). Source: Central Bank of Chile.
However, it was not clear, at that point in time, whether this sharp increase at the beginning of the year was a one-off effect in connection with the launch of the single currency and thus quickly fall again. In view of these uncertainties, the Governing Council of the ECB saw nothing in the development of M3 in the spring of this year to prevent it from reducing the interest rates. 3  BIS Review 99/1999  Current assessment of the monetary, financial and economic situation Please allow me to explain briefly how the Governing Council of the ECB currently views the monetary, financial and economic situation in the euro area. Since the beginning of the year, the annual inflation rate for the Harmonised Index of Consumer Prices has stood at around 1% in the euro area as a whole, i.e. within our definition of price stability. Whilst the rate of price increases in food products has been falling since the beginning of the year, energy prices have increased strongly as result of the sharp increase in oil prices over the last few months. Overall the upward pressure turned out to be moderate, and perhaps more moderate than expected, which is a reflection of the increased competition in the service sector and the success of deregulation in some markets. However, since production costs could also increase in time as a result of the increase in energy prices, the increase in oil prices contributes to certain risks to price stability.

However, this should not lead to sustained higher inflation rates, as long as the unions do not use the higher energy prices as grounds to demand additional wage increases. The monetary aggregate M3 rose in July by 5.6% compared with 5.3% in June. The money supply figures have recently been revised upwards and we still need to examine the factors responsible for these revisions carefully. Measured by the moving average over the last three months, i.e. May, June, and July, M3 growth has moved further away from the reference value of 4.5% announced by the Governing Council of the ECB at the beginning of this year to 5.4%. This increase is largely attributable to the low opportunity costs of holding money. However, the gradual improvement in the economic outlook has probably also played a role. Similarly, the development in lending to the private sector is not restrictive at present. Annualised growth rates of just over 10% do not, in any case, indicate that the conditions for lending are currently unfavourable. As previously explained, the money supply development of M3 plays a prominent role in our strategy. However, short-term fluctuations in the money supply should be viewed cautiously, not least because of the uncertainties associated with the brief existence of Monetary Union and the recent statistical revisions to the money supply figures. However, the most recent figures suggest increased growth. At the same time, the prospects for an economic recovery in Europe starting this year and continuing into next year have clearly improved in the meantime.
It is most appropriate he should be our first Keynote Speaker given his profound knowledge on the topics to be addressed in this conference. Among his recent honours, I would recall that last year he received the 2016 Bernácer prize at the Banco de España as the best European economist under the age of 40 working in macroeconomics and finance. His keynote speech today will focus on “Central bank swap lines”. Ricardo, we are very grateful to have the opportunity to exchange views with you again in our institution. The floor is yours. 5/5

This surcharge amounts to additional loss-absorbing capital of between 1.0% and 2.5% of riskweighted assets, with the specific requirement depending on the degree to which an institution is systemically important. Second, it introduces a countercyclical buffer ranging between 0.0% and 2.5% of total risk-weighted assets, to increase the system’s resilience to cyclical systemic risk. This buffer can be temporarily imposed when credit growth is judged  1  Cf. for instance Borio, C. (2012) or Schularick, M. and Taylor, A. (2012). BIS central bankers’ speeches  1  excessive. These new rules are being phased in over several years and will come into full effect in 2019.2 Regulation in Switzerland: Framework and progress so far Switzerland is well advanced in the process of introducing a new regulatory approach in line with this international framework. There was, and still is, an urgent need to proceed faster and to go beyond the global minimum standards. First, the size of Switzerland’s two major banks, Credit Suisse and UBS, relative to GDP is very large by international standards (8:1 in 2007 and 4:1 today). It is worth recalling that, back in October 2008, in order to prevent a breakdown of our financial system, the Swiss authorities had to take measures to strengthen UBS, putting a large amount of public funds – up to USD 60 billion – at considerable risk. Despite the favourable turn of events since then, we have to take all means necessary to avoid such a situation in the future.
6  See for example, Borio, C., Furfine, C and Lowe, P “Procyclicality of the financial system and financial stability: issues and policy options” BIS paper 1, March 2001 and BIS Annual Report: The unsustainable has run its course and policymakers face the difficult task of damage control, 30 June 2008. 7  See Box 9 – Market dynamics and options selling, pp. 60-61, Bank of England Financial Stability Review, June 2005. 10  BIS Review 93/2008  Table 1 Growth of selected financial markets (per cent) OTC derivatives (notional principal outstanding) (a) 98H1 - 07H1 07H1 - 07H2 FX forwards and swaps 8.1 18.8 FX options 11.0 8.0 Interest rate swaps 28.1 13.7 Interest rate options 23.4 8.9 (a) 05H1 - 07H1 07H1 - 07H2 Credit default swaps 17.2 36.0 Asset-backed securities (issuance) (a) (b) 98H1 - 07H1 07H1 - 07H2 07H2 - 08Q1 Non-agency RMBS 15.7 -67.4 -67.5 CMBS 25.0 -40.9 -93.8 Auto loans 7.8 -32.5 -17.1 Credit cards 6.7 -9.8 19.0 Student loans 12.0 -56.9 -34.2 Collateralised debt obligations (issuance) (a) (b) 05H1 - 07H1 07H1 - 07H2 07H2 - 08Q1 Corporate CDOs 121.0 -46.0 -92.1 CLOs 42.5 -56.9 -74.4 ABS CDOs 38.7 -68.2 -85.2 Sources: BIS, Dealogic and SIFMA. (a) Annual growth rate. (b) Growth of annualised issuance. 43 It is vital that market forces should be decisive in determining which instruments live or die.

For example, a mezzanine CDO tranche might have attachment and detachment points of say 7% and 10%, meaning that for losses on the underlying collateral of less than 7% they continue to pay out at par, but become worthless when losses reach 10%. The pay-offs to such instruments are therefore highly sensitive to quite minor changes in expected credit conditions. In a full-information world with known probability distributions, instruments with such highly sensitive pay-offs are no more difficult to price than any others. But when lack of complete information makes the future uncertain, in a Knightian sense, contracts with highly sensitive pay-offs to slight changes in credit conditions become increasingly risky. Moreover, innovative instruments inherently will not have a long run of performance data. Those seeking to summarise their likely performance using statistical metrics based on limited data and drawn from very benign circumstances have a very difficult task. Many investors in RMBS and ABS CDOs linked to US sub prime mortgages have been surprised by the extent to which the performance of these instruments has fallen short of even their worst expectations. Securities with complex pay-offs, therefore, are highly vulnerable to increased macroeconomic uncertainty. 20 Second, information loss is built into the securitisation process because of the separation between the originator of the loan and the end investor. Chart 2 illustrates how information is lost at every step in the chain of risk transfer. To some extent, holding a diversified pool of underlying loans acts as protection against a lack of information about idiosyncratic risk.
22  First, improved central bank communications can help stabilise the economy. They do so by improving outside agents’ information on the likely course of the economy (now and in the future) and/or on the likely course of policy (now and in the future). This reduces the degree of uncertainty felt by households and firms, better enabling them to make decisions about spending, saving, working and the like. Improved information about the economy or economic policy may also have an effect on expectations. For example, information on the target or instrument paths for monetary policy might help shape inflation expectations. In this way, transparency initiatives can also help improve the effectiveness of economic policy. 23  These are the ex-ante benefits of communications arising from improved understanding. Second, transparent communications improve the ability of outside agents to assess the performance of the central bank and hold them to account. They fulfil a democratic demand for accountability. 24  They also  increase incentives for the delegated party to make wise decisions in the first place, knowing they will be held to account. 25  These are the ex-post benefits of central bank communications arising from improved  trust. These conceptual benefits, improved understanding and trust, are fairly well-understood, if not uncontentious. 26  Over the course of the past couple of decades, a body of empirical evidence has built up to  21  Drawing on the methodology from Hansen and McMahon (2016). For example, Blinder et al (2008), Reis (2013).

As a personal trust-building device, it may be a good time to rebalance these scales, to start abiding by a “one mouth, two ears” policy - a time, if you like, for a little more conversation and a little less action. 70  Jung et al (2014). 21  All speeches are available online at www.bankofengland.co.uk/speeches  21  Some of this is likely to involve central banks engaging on an on-going basis with a different, and more eclectic, set of partners than in the past. For example, this year the Bank is looking to increase its engagement with state schools outside of London and the South East, who might otherwise not have had any contact with the Bank or anyone else in the public policy domain. I personally have been increasing my engagement with these schools for the past four years. Recently, the Bank’s regional Agents have begun increasing their engagement with charities, social enterprises, faith groups and trades unions, among others, listening to their often very different perspectives on how the economy is faring. This is something the Governor and I have prioritised over a number of years. These events are similar in spirit to the Community Advisory Council run by the Federal Reserve. Personally, I find they provide an incredibly useful window on the world, one which has shaped my view on policy.
Experience in developed economies show that financial services, notably stock trading, can take rapidly to the internet. This should be no surprise. As an Economist online finance survey recently described, financial institutions deal in a product - money - that has long been accepted as “virtual”. Unlike a piece of clothing, account-holders are happy to accept their money represented as figures on an ATM screen, or by a credit or smart card.13 The new financial landscape calls for a tripartite, complementary response from regulators, industry and investors. The MAS as regulator will foster healthy market practices, while maintaining a sound overall investment environment. At the same time, in a democratised environment, investors need to recognise that there is little substitute for self-education, and thereby exercise greater caution in making individual investment decisions. Finally, industry participants need to set high professional standards and observe an exemplary code of conduct, in order to retain their customers and build their reputations which, in the long term, are their most precious assets. 13  “Online finance: a virtual threat”, The Economist, 20-26 May 2000. 7  BIS Review 69/2000

Chart 10: External positions and assets prices indicators y/y growth rates of stock market indices  Current account deficit in % of GDP Region  CEE  SEE  SRB  Baltics  ROM  HUN  CRO  MKD  BIH  SLO  BUL  POL  15.0  5  10.0 0 5.0 -5  0.0 -5.0  -10  -10.0 -15  -15.0 -20.0  -20 2007-2004  2012-2007  2015-2013  -25.0  AVERAGE(2009-2012)  -25  IIP, net as % of GDP Region  CEE  AVERAGE(2013-2016)  Real Estate Prices, y/y change in % SEE  Baltics  0  BUL  CZR  EST  CRO  LAT  LIT  HUN  POL  ROM  SLO  MKD  SRB  12  -10  10 8  -20  6 -30  4 2  -40  0 -50  -2 -4  -60  -6 -8  -70 2007-2004  2012-2008  2015-2013  average 2010-2013  average 2014-2016  Source: International Monetary Fund, Balance of Payments Statistics, WEO October 2016 Database, Eurostat. Despite the absence of sizable inflows, relatively high external financial exposure of the region underlines the risks in case of global tightening of the financial conditions in the context of tightening of the US monetary policy or a “surprise” tapering by ECB.
Structural reforms are incomplete and a possible roadmap for euro-accession or just for further convergence cannot be done without a detailed program of these reforms which should cover governance issues (both in the public and private sectors), investment prioritization, better tax collection, broader reporting, centralized procurement, addressing the issue of companies with negative capital, and much more. In the financial sector, the recent Financial Sector Assessment Program undertaken by the IMF and WB has issued a number of recommendations for structural reforms, including a series of macroprudential policies which the National Bank has already started to implement. Agustin Carstens, General Manager of the Bank for International Settlement, said at the presentation of the 2018 Annual Report in Basel: “We must seize the day. Addressing vulnerabilities is key to keeping the growth momentum on track. The stronger performance gives us a window to pursue necessary reforms and recalibrate policies. Let’s not miss this opportunity”. On this note, let me conclude here and wish you all not to miss the opportunities. 7  Figure 1. Real and potential GDP* 1060 1055 1050 1045 1040 1035  GDP  Potential GDP  Source: NBR Note: *logarithmic scale = computed as 100*log(GDP at constant prices)  2018Q1  2017Q3  2017Q1  2016Q3  2016Q1  2015Q3  2015Q1  2014Q3  2014Q1  2013Q3  2013Q1  2012Q3  2012Q1  2011Q3  2011Q1  2010Q3  2010Q1  2009Q3  2009Q1  2008Q3  2008Q1  1030  Figure 2.

Foreign denominated loans represent now only one third of the total stock of loans, compared to two thirds prior to the crisis, therefore reducing the exposure of debtors to foreign exchange risk (Figure 8). Financing from the parent banks are now 9 billion euro (as of July 2018), compared to 26.1 billion euro in December 2008 (Figure 9). Currently (as of July 2018), domestic deposits count for 70.9% of total banks’ liabilities, whilst the foreign liabilities represent only 9% of total banks’ liabilities. Loan to deposit ratio decreased from 122% in December 2008 to 75.2% in June 2018, showing that the local deposits are now the main source of financing for banks. Of course, the higher solvability ratio (Figure 10) and the much lower NPLs (Figure 11) also indicate that the banking sector is more resilient now than ever to external shocks. 4  Even the high concentration of sovereign debt in the hands of local banks has a positive side effect, which is the relatively low reliance on non-residents (they account for about 18% of the market). These are all indicators of reducing the contagion effect by alleviating the risk of a sudden reversal in the investors’ sentiment – which was described as a high systemic risk in the latest Financial Stability Report of the National Bank of Romania.