samchain/econo-pairs-v1 huggingface dataset:
Jean-Claude Trichet: Monetary policy in 2003 Introductory statement by Mr Jean-Claude Trichet, Governor of the Bank of France, at the Forum Institut für Management, Frankfurt, 2 December 2002. *  *  *  Introduction Ladies and Gentlemen, It is for me great pleasure to participate in this “International Forum on interest rates” and to exchange views with an audience of prominent players on financial markets. I welcome the initiative of the Forum Institut für Management. In promoting discussions on challenging issues between market practitioners and economists, this contributes to the attractiveness and spirit of financial markets in the euro area. I would like to open these discussions with some remarks on structural issues that one should keep in mind when examining the prospects for financial markets in Europe. Indeed, by achieving its primary objective of pursuing price stability in a medium-term perspective, the monetary policy defined by the Governing Council of the ECB lays the foundations of the success of euro. But these foundations are also embedded in a far-reaching structural dynamic involving notably three components: •  financial integration,  •  financial stability,  •  and the prospects of European Union enlargement. I would like to make a few remarks on the challenges and opportunities arising from these three – interrelated– topics. 1  Financial integration  1.1  As regards financial integration, the European monetary union has in many respects modified the way in which financial institutions organise their daily business in the euro area.

From a general point of view, volatility is a kind of genetic signature of the price setting mechanism in a competitive market. Prices hover around the equilibrium through successive adjustments. When market participants express widely different views on this equilibrium price, or when the volume of transaction shrinks, volatility usually increases. In this respect, there is a close correlation between the occurrence of crises –such as the revealed insolvency of an emerging country, supply shocks on commodity prices, bursting of equity bubbles– and excessive volatility. Volatility is not an indicator of market inefficiency. However, excessively high volatility has adverse effects on the behaviour of market participants and the real economy. From a corporate management point of view, volatility on capital markets lowers the predictability of the cost of capital. When reviewing investment  10  Source : Report on financial structures – ECB - 2002  11  estimation in « Central banks and financial stability – exploring an intermediate land » – Second ECB central banking conference - 2002  12  BRI – Economic aspects of regional currency areas and the use of foreign currencies – 2002 – document non publié. BIS Review 71/2002  5  opportunities, managers may want to avoid relying too heavily on external finance because of the uncertainties surrounding the cost, or even the sheer availability, of financing. This may lead companies to postpone or downsize investment projects.
At the same time, we shall also need to monitor fiscal intentions in the euro area Member States, as they will become more transparent over the autumn. If governments merely adhere to previous deficit targets for 1999, the structural position of budgets in quite a number of countries would effectively deteriorate. This would entail that they would move farther away from, rather than BIS Review 72/1998  -3-  approach, the requirements of the Stability and Growth Pact, which calls for the achievement of a budget close to balance or even in surplus. In addition to the review of economic developments, a number of organisational issues were settled. (i) The General Council adopted its Rules of Procedure, which will be published in the Official Journal of the European Communities. You will recall that I informed you that the Governing Council’s Rules of Procedure were adopted in July. (ii) The General Council also decided that the non-euro area national central banks shall pay up 5% of their subscriptions to the capital of the European Central Bank (ECB). However, the four national central banks concerned will not be asked actually to pay in their share as the amount due is less than they can expect to receive as their share in the proceeds of the liquidation of the European Monetary Institute (EMI). Further details on the actual amounts involved are provided in the separate handout that will be issued to you this evening.

It is this Agreement which has now been signed by the President of the ECB and the Governors of the four non-euro area national central banks. The signature by the latter implies their agreement to the operating procedures. It does not, however, imply their participation in ERM II. Further details on the conventions and procedures for ERM II are provided in the separate press release that is being issued to you this evening. The Agreement itself will be published in the Official Journal of the European Communities. (b) Monetary policy issues  BIS Review 72/1998  -4-  The Governing Council agreed on several issues relating to the monetary policy framework in Stage Three. At the centre of this framework is the report entitled “The single monetary policy in Stage Three: General documentation on ESCB monetary policy instruments and procedures”, which contains a detailed description of the monetary policy instruments and procedures to be applied by the ESCB in Stage Three. The report expands on and updates the material included in an earlier version of the report that was published by the EMI in September 1997. I should like to limit my remarks in this regard to the announcement that a copy of this comprehensive report will be released very shortly, at which time a separate press release explaining the nature and purpose of the documentation will be issued.
At the same time, insurers and takaful operators should take advantage of the emergence of new and low-cost distribution channels such as the internet and mobile technology, and adopt multidistribution strategies as a competitive tool to expand the pool of potential customers and cater to a wider range of needs of society. •  Secondly, the industry must deliver more positive customer experience. As the industry is operating in a challenging operating conditions with intense pressure to control costs, one should not compromise on the level of customer service standards. Bad perception of the insurance industry can only happen if services rendered are poor. Industry players must always put the customer experience at the center of their business strategy. Once customers are satisfied with the service level, the upside is to improve customer retention and satisfaction. A recent research has shown that there are various factors that influence customers’ decisions to choose or leave an insurer. Although price and rates and product features are the most often cited reason to select and to leave a provider, about 40% of customers say they would consider choosing an insurer because of brand trust and after-sales services. Therefore, insurers and takaful operators need to assess how customers perceive the quality of their interactions, taking into account the views, perceptions, expectations and values of customers. •  Thirdly, with more complex products and more sophisticated customer demands, the industry needs more skilled professionals to support the financial sector. The insurance industry need to change their approach in attracting talent.

We have also published a working paper entitled: “Studies on the Validation of Internal Rating Systems” Although validation is foremost the responsibility of banks, supervisors must have a thorough understanding of validation in order to ensure the overall integrity of banks’ activities in this area. I think these principles set out clearly what supervisory expectations are, and should provide a useful guide to the industry. Our work on validation will accelerate over the coming months, although our focus will be more on sharing and cataloguing information and approaches, and not on trying to develop a prescriptive method. Close dialogue with the industry in our work will be of great importance. Let me finish by saying that we, the supervisory community, continue to devote significant resources and efforts to improving the consistency of cross-border implementation. Consequently, the excellent dialogue between supervisors, organisations such as the IIF, and the industry more broadly, must continue in the coming months and years ahead. I welcome the discussions that we have been having, both inside and outside this conference, and look forward to hearing more of your thoughts and perspectives. BIS Review 23/2005  3
Progress in the harmonisation of certain market standards, practices and conventions across the euro  BIS Review 72/2000  2  area is reflected in a capital market that is characterised by increased market liquidity, broader maturity spectrum and wider range of financial products. In addition, following the introduction of the euro, the euro area corporate bond market has grown significantly. The activity of private issuers has become more important than that of sovereign issuers, traditionally dominating the euro area bond markets. Positive network externalities and economies of scale have provided incentives for firms to issue their own securities instead of borrowing from banks. However, this trend away from banks towards markets - the so-called disintermediation process - will take time. The development of a broader spectrum of euro-denominated financial instruments will be a gradual process. In addition to the size factor, the international use of a currency is determined by risk factors, since investors may use the euro to hedge their risks through diversification across international currencies. If international investors and issuers consider the euro to be a stable currency, they will hold euro assets to minimise risk in their internationally diversified portfolios. In this context, I should make clear that maintaining price stability not only makes a contribution to improving economic prospects and raising living standards in the euro area, but it is also a major precondition for a currency to play an international role.

However, by maintaining price stability, the ECB almost automatically fosters the attractiveness of the euro as an international currency. Third, the international use of a currency is a complex phenomenon that does not lend itself to ad hoc promotion measures. A currency can be used not only for different functions, but also by different groups of economic agents. In this context, the use of the euro by private agents as an investment and financing currency, as well as a payment and vehicle currency, plays a prominent role. Although the euro is also used by the public sector as a nominal peg and reserve currency, the behaviour of the private sector dominates the internationalisation of the euro. The amount of financial assets managed by the private sector is many times larger than official reserve holdings. In addition, private agents usually adjust their asset management strategies more rapidly than most public sector institutions. But what are the factors behind the internationalisation of a currency? In principle, two basic factors might eventually determine the international role of the euro - size and risk. With regard to the size factor, a broad, deep and liquid euro area capital market may lead to a greater use of the euro through lower transaction costs. This may, in turn, facilitate the development of the euro as a vehicle currency for trade and commodity pricing. Already at this early stage, the introduction of the euro has brought about fundamental structural changes in euro area capital markets.
the substantial tax subsidy benefiting homeowners – amplify fluctuations in asset prices and lending. Conclusion The monetary system has changed through history. If we go far enough back in time, money consisted of coins with a certain quantity of silver or gold. The quantity of silver and gold therefore limited the volume of money that could be produced. This ensured that coins were attractive as a means of exchange and as a means of storing value. On the other hand, paper money cost almost nothing to produce and can be therefore be printed in unlimited quantities. Over the past 100 years, there have been several periods when paper money could be redeemed for silver or gold. For example, this was for a long period the case in the Scandinavian Currency Union. In the period after the Second World War and up to the beginning of the 1970s, the US dollar had a fixed price against gold while other currencies had a fixed exchange rate against the US dollar. This was the basis for what was known as the Bretton Woods monetary system. Paper money had a value because the central bank was obligated to redeem it for gold. 8  BIS Review 111/2008  A system whereby paper money can be redeemed for gold is nevertheless more fragile than a system whereby coins must contain a certain quantity of the precious metal. A central bank can quickly cease to redeem paper money for gold, or redeem notes at a lower gold price than prevailing earlier.

Improving the OTC and commodity derivatives markets is a key part of this agenda, It is a complex matter and one in which alignment of details is essential to avoid regulatory arbitrage. BIS central bankers’ speeches  1  The third challenge is to enhance transparency across the board: with regards to markets, institutions, and products. Insufficient information contributes to mispricing of risks, mistrust among market participants, which can result into downturns and crises. At our October meeting of G20 Finance Ministers and Central Banks Governors we will be discussing IOSCO “recommendations to promote markets’ integrity and efficiency to mitigate the risks posed to the financial system by the latest technological developments”. 2. Improving policy discipline globally  Aside from a more resilient global financial system, we need to have more disciplined macro policies as the lack of discipline in macroeconomic policies in several countries led to the build-up of unsustainable external imbalances before the financial crisis. There is still a gap between the degree of economic integration and the willingness of policy makers to take into account interdependence and spillovers. Keeping one’s house in order is no longer sufficient in an integrated world. Spillovers from the rest of the world can influence economies considerably. Multilateral surveillance is now being enhanced along two tracks. The informal G20 track and the formal IMF track. The G20 Framework for Strong, Sustainable and Balanced Growth, incorporates a first systematic multilateral assessment of global imbalances.
Via this re-evaluation, negative rates loosen the perceived lower bound on the future distribution of short-term interest rates.4 Through this mechanism, negative interest rates have a marked impact on transmission, particularly in the euro area, as they push down the short and medium segment of the risk-free curve, which for the most part is the segment of the curve that determines the pricing of loans to non-financial corporations. It follows that control of this segment of the curve directly influences the level of lending rates. To illustrate the effectiveness of negative policy rates, ECB staff undertook a counterfactual exercise. They constructed the forward curve that would prevail in a scenario without either the negative interest rate policy or the forward guidance on the future path of the policy rates. As shown in Chart 2, the forward curve derived from the overnight index swap curve would be pinned at a higher level and would be distinctly steeper (the dashed blue line on the right) than the forward curve that we observe today (the red curve). 3 / 19  BIS central bankers' speeches  While this mainly serves as an illustration, as it is based on a number of assumptions and input parameters, it is indicative of the sort of tighter interest rate constellations that the euro area economy would face in the absence of this important policy tool. Our negative policy rate thus contributes substantially to providing monetary accommodation.

1 / 19  BIS central bankers' speeches  In recent years, the ECB has deployed an innovative, multi-pronged approach in the design of its policy stance. While it is always possible to envisage a wider range of instruments, the current policy mix includes four elements: (i) pushing the policy rate into negative territory, (ii) forward guidance on the future policy path, (iii) the APP, and (iv) TLTROs. Importantly, these measures work as a package, with significant complementarities across the different instruments. I will outline the effectiveness of these four measures. Doing so shows the capacity of our policy framework to provide the monetary accommodation required to return inflation to the mediumterm goal, even when the policy rate is no longer in conventional positive territory. Furthermore, the effectiveness of these tools also provides leeway for further easing if it is required. Negative policy rate (deposit facility rate) The 2014 decision by the ECB to push the relevant policy rate (the deposit facility rate) into 2 / 19  BIS central bankers' speeches  negative territory was a crucial policy innovation. Subsequent cuts have taken the deposit facility rate to its current level of minus 40 basis points. An important mechanism that reinforces the impact of negative interest rates relates to the way expectations about the future path of monetary policy are reflected in market interest rates.2 At any point in time, a wide range of future interest rate paths is conceivable and market participants assign probabilities to different parts of this distribution.
I will now tell you from my own expertise that denying the need for adjustment is not a viable option. It is nevertheless true that ensuring fiscal sustainability without jeopardising the prospects for economic growth is a major challenge to decision-makers. No doubt the recent heated debates within the European Union and heightening fears about the euro and the euro area could not make things easier. Economic and financial conditions have tightened worldwide, but we, here in Romania, have already grown accustomed that our European dream has to pass exceedingly rigorous and tough exams. I realised a long time ago that the European Union would not bring forth roses on our way there. Even countries with robust economies, the old EU Member States, face major difficulties to integrate into the monetary and fiscal mechanisms, and some are even compelled to seek international support. However, the great benefits that the establishment and enlargement of the European Union has brought about should neither be forgotten, nor denied. The European Union has made Europe a robust economy at global level and, just to quote Romano Prodi, has brought the much-desired peace after centuries of conflicts. Boundaries have gradually been removed and people began to feel they belong to a much larger space than their own country, i.e. an area characterised by peace and democracy. From this perspective, one can say without the risk of being wrong that the history of Europe has moved in a virtuous direction.

For 2010, the SNB is currently expecting real GDP growth of about 1.5%. On the one hand, our export industry is exposed to the relatively hesitant growth in European demand. On the other, Switzerland is well equipped for a recovery. Public finances are relatively healthy, the financial positions of both households and corporates are sound, and the labour market is flexible. The risk of deflation has fallen in the wake of the economic recovery. The most recent SNB inflation forecast from mid-March shows that price stability is not threatened in the short term. The SNB has sufficient leeway to maintain its expansionary monetary policy for the time being. However, the forecast also shows that the current monetary policy cannot be maintained over the entire forecast horizon without compromising medium and long-term price stability. Moreover, this forecast is still associated with considerable uncertainties. The most recent financial market concerns that have arisen about the public finances of individual euro area countries represent a considerable risk in this regard. Over the past few years, Switzerland has benefited from the advent of the euro and the associated increase in European currency stability. Any threat to this currency stability would, by definition, have a negative impact on Switzerland, above all if the Swiss franc were to appreciate sharply due to its role as a safe haven currency. The SNB will not, however, allow such a development to turn into a new deflation hazard for Switzerland.
The Fed also backstopped the commercial paper market (formerly funded in large part by money market mutual funds) by introducing the Commercial Paper Funding Facility (CPFF). When wholesale funding for non-residential mortgage securitizations evaporated, the Fed rolled out the Term Asset-Backed Lending Facility (TALF). These actions ultimately stabilized funding markets and crowded back in private funds. But, they were an emergency response, not a sustainable long-term solution. After all, because most of the special Fed liquidity facilities were authorized under Section 13.3 of the Federal Reserve Act, they were required to be temporary in nature and to end when times were no longer “unusual and exigent.” Much has been done over the past few years to mitigate the structural flaws that make wholesale funding a point of weakness in the global financial system. The New York Fed, for example, has led a Federal Reserve effort to make the tri-party repo system more resilient to stress, while the SEC has taken steps to address risks associated with money market mutual funds. Nonetheless, some important issues and vulnerabilities remain. Moreover, because  BIS central bankers’ speeches  3  the Dodd-Frank Act raised the hurdle for the Federal Reserve to exercise its Section 13.3 emergency lending authority, extraordinary interventions will be more difficult to undertake, perhaps causing investors to be even more skittish in the future. This is why it is essential to make the system more stable. To that end, I look forward to hearing the insights and suggestions that come out of today’s workshop.

As with bank deposits prior to deposit insurance, this created an incentive for investors to be the first to get out whenever there was any uncertainty over the underlying value of the assets in the fund. By being first in line, they could exit while the fund could still repay at par, leaving others to bear any losses. The longer the investor waited, the greater the risk that the fund would be forced into the fire sale of assets to meet redemptions and end up breaking the buck. As the crisis unfolded, the Federal Reserve, the U.S. Treasury and others took a series of actions to contain the spiral of funding runs and asset fire sales. First, the traditional lender of last resort function was strengthened through the introduction of the Term Auction Facility (TAF) and foreign exchange swaps with foreign central banks. Then, as the crisis intensified, the lender of last resort liquidity provision was extended to directly backstop key wholesale funding markets and made available to certain nonbank firms. The Federal Reserve created a direct backstop to the tri-party repo system through the Primary Dealer Credit Facility (PDCF). When the Reserve Fund broke the buck after the failure of Lehman Brothers, precipitating a run on money market mutual funds, the Treasury guaranteed money market fund assets and the Fed introduced the Asset-Backed Commercial Paper Money Market Fund Liquidation Facility (AMLF).