samchain/econo-pairs-v1 huggingface dataset:
Any risk management framework that is driven by the correlation structure of short-term moves alone would most likely be proven too rosy in the event of clusters of defaults. The issue is that the correlation structure locally may be very different than that in the tail of the distribution. Of course, there  2  When the Bank of England takes collateral, it is solely to guard against the risk of default and so all correlations in that state of the world are relevant to what collateral is taken and the haircuts applied. See Breeden and Whisker, 2010, “Collateral risk management at the Bank of England”, Quarterly Bulletin, Q2, pp 94–103. 2  BIS central bankers’ speeches  are many practical problems in analyzing what could happen statistically in the tails, since these scenarios are, by definition, rare and the pay-offs may be non-linear3. Taking this second example a little further, assume that most big banks follow similar strategies. Most banks will then end up with a more diversified credit portfolio than if each bank was only holding the loans it originated itself, but they may also end up with similar portfolios of risk. In such a scenario, the system can easily absorb small shocks, but because of the diversification, a really big shock may threaten to bring down all of them instead of just the ones that happened to have originated the most problematic loans.

Tail risks with counterparty risk correlation The first category of contracts falls under the broad headline of “wrong-way” risk in tail events, and is purely statistical in nature. The particular issue is focussed on contracts that can be perceived of as providing insurance yet, in a stress scenario, when the contract is sufficiently in the money to be worth calling, there is a significant conditional probability that the insurance provider is no longer in business to pay out. In what follows, we look how such problems arise using practical examples and consider what lessons should be drawn. 1  For example, the Squam Lake Working Group on Financial Regulation, July 2009, “Credit Default Swaps, Clearinghouses, and Exchanges”. BIS central bankers’ speeches  1  When investor “A” decides to buy protection from bank “B” on exposure to a third company “X,” she may or may not explicitly take into account that in the event of default by X, B may in fact also be in trouble. Whether or not she does so would depend on the reason for the trade. If A wants default protection then that default correlation certainly should be taken into account2. But if, for example, the goal is just to reduce the price volatility of holdings of a certain corporate bond issued by X, this default correlation may not be seen as that relevant. As a practical example, take the case of a pension fund managing its corporate bond portfolio.
There is some evidence of cyclicality in volunteering, with it falling at the start of the recession and rising during the recovery. A recent report suggested that volunteering numbers had reached a ten-year high. 10 It is possible this upward trend will continue. An ageing population will boost older cohorts where volunteer participation rates are high. And among younger cohorts there is evidence of a behaviour shift, with participation rates having doubled in the past decade. Taken together, these patterns suggest that volunteering is tightly-woven into the UK’s social fabric – a fabric which is large, diverse, international and potentially growing. Measuring the value of volunteering So far we have established that labour inputs into volunteering are considerable. But this does not tell us what value these volunteers create for the economy, much less for society. This is important when gauging the contribution volunteering makes to societal welfare. It is possible to build up an incremental, if somewhat piecemeal, picture of this contribution from its various sources. These are shown schematically in Figure 9 as layers of a “volunteering onion”. At the centre of the onion are the volunteer army, all 15 million of them. The outer three layers then measure respectively: •  The economic value of goods and services created by volunteers – if you like, the GDP-equivalent value of volunteering services;  7  Salamon et al (2011). 8  See for example http://enews.fergananews.com/news.php?id=2697, describing a recent subbotnik in Uzbekistan in August 2013. 9  Volunteering England (2009).

In the data, there does appear to be a degree of “smoothness” in the way official interest rates behave. Rather than jumping from one level to another, factoring in all the news at once, the policy rate usually seems to respond to it over time. Two explanations have often been suggested. One is uncertainty about the impact of changes in official interest rates. If there’s a degree of imprecision in estimates of policy multipliers there’s a case for moving a little more gingerly than otherwise. Another, offered by the economist Michael Woodford, is that smoothing the spot interest rate gives the central bank better control of medium-term interest rates, which may matter more in the transmission of policy. In this case I think a third factor may be at play, namely the need to learn about the extent of these “second-round effects”. We have inevitably had to learn about them and, therefore, to respond to signs of more persistent domestic inflation as and when they emerge. Bank of England  Page 15  The response to demand shocks This is less the case when it comes to plain-vanilla shifts in aggregate demand. These are more common and the appropriate response is well understood: an inflation-targeting monetary authority has to lean against them. Indeed, one additional reason for caution, in the face of these big rises in import prices and their impact on domestic inflation, has been the likelihood that they will also weigh significantly on domestic demand.
In the case of the Federal Reserve, the pre-crisis framework worked well at targeting the federal funds rate and we have high confidence that a similar system could work again in the future. But can we do better?4 In light of recent experience and changes, are there more effective, transparent, or flexible implementation frameworks that would give policymakers capacity to better steer the economy in the direction they need to satisfy their mandate? Recent experience suggests that the Federal Reserve’s new tools – interest on reserves and term deposits5 – as well as its application of old tools towards new purposes – fixed-rate reverse repos and large-scale outright security purchases – can be very helpful, but we can probably still learn more about how best to employ them. We can benefit collectively from studying the impact of differences in the implementation of similar tools across central banks.6  3  An extended effort to evaluate potential long-run monetary policy implementation frameworks was announced in the July 2015 FOMC meeting minutes. 4  For example, some have suggested that the Federal Reserve could target a repo rate, rather than the federal funds rate (see Bernanke, or Gagnon and Sack). Targeting a repo rate could have some benefits, but may entail a number of complications, so more work would be necessary to evaluate the potential consequences of such a change.

Luis de Guindos: Interview in Expresso Interview with Mr Luis de Guindos, Vice-President of the European Central Bank, and Expresso, conducted by Mr João Silvestre on 15 April 2020. * * *  Is this the greatest crisis in living memory? According to the International Monetary Fund (IMF), this will be the worst downturn since the Great Depression. There is a great deal of uncertainty and, given this degree of uncertainty, we need to define and analyse several scenarios. The IMF’s baseline scenario is very similar to other public and private sector forecasts. It’s important to bear in mind that the impact on the economy, which will be huge, is concentrated in the second quarter of the year – as well as in March – and that the impact will be severe, but temporary. This temporary aspect is important. The calculations point to a contraction in the second quarter by as much as 20% compared with the previous quarter. And it will also have an impact on public finances and the financial markets. Despite the uncertainty you have mentioned, is a rapid recovery possible in 2021? The key factor is the duration of the lockdown – the longer it lasts, the greater the impact. We hope that the containment measures will start to be eased over the coming months, reducing the negative impact on the economy, and that we will see a return to positive growth rates in the second half of the year.
BIS central bankers’ speeches  3  Moreover, fiscal governance in the euro area needs to be reinforced by means of the strengthening of the Stability and Growth Pact. This means establishing stricter and more binding rules for fiscal policy, backed up by stronger sanctions or mechanisms to ensure compliance with the rules. At the same time, the effectiveness of budgetary institutions needs to be improved at the national level. In this context, effective rules on expenditure should be regarded as a means of promoting fiscal discipline and limiting fiscal vulnerabilities in the event of adverse economic shocks occurring in the future. III. (b)  Promoting sustainable growth and job creation  Euro area countries also need to increase their efforts to strengthen their growth potential and their ability to create jobs in a sustainable manner. European countries have made reasonable progress over the past ten years in the area of employment. Indeed, over 14 million jobs were created in the euro zone since the introduction of the euro, far more than in the previous ten years (around 8 million). The employment increase in the euro area since 1999 was even significantly larger than in the United States (7.6 million). This is an important achievement, but it remains insufficient, especially against the background of the massive employment destruction observed in some euro area countries during the crisis. Unemployment rates have reached unacceptably high double-digit rates in some countries and segments of the population (i.e.

As predicted in the previous report, the decline in inflation was due to the sharp drop in unprocessed food prices. Accordingly, the annual rate of increase in food prices was 7.02 percent at the end of 2010, undershooting the October estimate of 10.5 percent. The slowdown that occurred was sharper than we expected. These developments in unprocessed food prices explain the almost one percentage point deviation in short-term inflation forecasts. In fact, as also illustrated on the slide, inflation excluding unprocessed food and tobacco remained in line with the outlook presented in the October Inflation Report (Figure 3). 2  BIS central bankers’ speeches  Food prices became the main determinant of the course of consumer prices in the last quarter of 2010 as well. Food prices that posted record highs in the third quarter due to the hikes in unprocessed food prices, declined in the last quarter as opposed to the previous years (Figure 4). Moreover, the favorable developments in inflation in this quarter did not remain limited to food prices; quarterly inflation across all goods and services items stayed below the average of previous years (Figure 5). Meanwhile, energy prices, which followed a horizontal course in the second and third quarters of the year, increased in the last quarter parallel to the developments in international oil prices and exchange rates. The core inflation indicators decelerated in the fourth quarter of 2010 compared to the third quarter (Figure 6).
It is crucial in a period of economic hardship – with companies going to the wall and people losing their jobs – that people do not think the Bank is focused on a narrow inflation target for its own sake. If they feel that we are not accepting responsibility for what happens to growth and jobs, they will look for someone else to do so. If we want to preserve the framework we have a job on our hands – now more than ever – to explain our strategy to the general public. The Bank and MPC need to convince them that the policy we are pursuing is the best way of restoring growth and full employment without reawakening inflation. Indeed it is by bringing output back to potential that we will bring inflation back to target. Secondly, I share the view that setting a target for a measure of consumer price inflation which excludes the costs of home ownership has done us no favours. It is widely recognised as a flaw in the harmonised CPI across Europe but it is of particular significance in the UK given the critical role that home ownership plays here in household budgets and wealth. Something needs to be done to remedy that situation, and if progress can’t be achieved at a European level I think we ought to consider going it alone. More fundamentally, if inflation targeting by an independent central bank is an essential foundation of policy, it is pretty clearly not sufficient on its own.

The establishment of this new body in charge of macro-prudential oversight is expected to bring significant improvements to the EU institutional framework for financial stability. The participation of the European Supervisory Authorities (with voting rights) and all the EU national supervisory authorities (without voting rights) will allow enhancing the capacity of the ESRB to identify systemic risks and to define areas for recommendations for policy action. Indeed, it is expected that the recommendations of the ESRB would primarily concern the supervisory and regulatory field. It is important to note that macro-prudential oversight should not be regarded as a substitute for the responsibilities of other authorities, namely supervisors. It should instead facilitate and complement where required the conduct of micro-prudential supervision by the competent authorities. The effectiveness of the ESRB warnings and recommendations will rely on their quality, the act or explain mechanism between the ESRB and the addressees, the possibility of the ESRB to publish its warnings and recommendations, and also the possible role of the  4  BIS Review 125/2010  Council of Ministers and the European Supervisory Authorities in supporting the implementation of the warnings and recommendations. The combination of these elements should provide an adequate framework of incentives and mechanisms, which will greatly benefit the compliance with risk warnings and recommendations. In this context, it has been considered not necessary to provide a legallybinding nature to the ESRB risk warnings and recommendations, as this would lead to a certain overlap of responsibilities and tasks, particularly with micro-prudential supervisors.
Whilst this is a legitimate concern, given the experience in other monetary systems, the situation in Hong Kong is actually quite different. For as long as the monetary policy objective is exchange rate stability within the framework of a currency board system, the additional armoury available to the HKMA, the authority of which was derived from the same legislative foundation for the currency board system, cannot be used in a manner inconsistent with the objective of the currency board itself. In other words, it is arguably ultra vires for the HKMA to conduct money market operations or other market activities contrary to the objective of the maintenance of exchange rate stability. This is a legal nicety which is again not well appreciated. 21. The events leading to the sharp interest rate increase seen on one day last October illustrate quite clearly how our system works. There was substantial capital outflow earlier that week, caused by people taking a short position in the Hong Kong dollar and sparked off by Taiwan allowing its currency to depreciate in order to maintain its export competitiveness17. The outflow caused the clearing balance of the banking system to shrink sharply, in accordance with the discipline of the currency board system, as the banks sold Hong Kong dollars to the HKMA for US dollars. There was in fact not enough Hong Kong dollar in the clearing accounts of the banks to effect settlement with the HKMA.

As Hong Kong has to import almost all the raw materials and equipment, devaluation of the currency does not mean that the export prices would necessarily be lowered by the same extent of the devaluation. As you know better than I do, although price is always important, competitiveness does not depend on price alone, whether or not you are talking about manufactured goods or services. Competitiveness depends on a host of factors, including better cost control, innovation, entrepreneurship, marketing and constant striving to achieve productivity gains. In this context, I cannot help tell an old, but true, story involving a conversation with an American friend 6 or 7 years ago, when the $ was depreciating and the DM and the Yen surging to new highs. He was complaining that many countries, including the Southeast Asian economies, were manipulating their exchange rates to gain trade competitiveness. As a result, American goods were having a hard time selling overseas because they were too expensive. I told him that, while it may or may not be true that some countries were deliberately keeping their exchange rates low, the apparent difficulty experienced by US manufacturers to penetrate the Asian markets was not caused by pricing alone. For example, how could the Americans expect to sell their refrigerators to Hong Kong households if most of the refrigerators they tried to sell were almost as big as the kitchen of an average flat here in Hong Kong?
And, the central idea came with a coalescing around a view on the institutional  BIS central bankers’ speeches  1  structure of monetary policy, that an independent central bank, with a clear objective and target emanating from the public via Parliament was the best way to achieve and sustain the public good. I have absolutely no doubt that in the UK this change has been an outstanding success. Moreover, the benefits of the public good are not challenged – there is a difference between a healthy debate on what the setting of policy should be at any point in time and an unhealthy undermining of the fundamental public good. We have seen the former, and the record of the last nearly twenty years shows that this important distinction has been robustly maintained, all for the good. It is therefore easy to conclude that another crisis, the financial crisis, has made the same mark. Likewise, it is easy to conclude that a stable financial system is a necessary condition of stable economic growth. So far, so good. But it has been less easy to describe simply what constitutes financial stability. It doesn’t reduce to a single measure, like the rate of inflation. It has many heads. There is nothing wrong with this per se, but it may help to explain why it has taken longer to arrive at a stable institutional structure for achieving it.

We are also establishing stricter requirements for financial standing of turnaround managers. However, stricter control does not remove systemic deficiencies of financial resolution, namely: –  longtime presence in the market of undercapitalised banks under resolution (up to 10 years);  –  high cost: the current lending scheme provides for allocation of 1.6-fold more resources than acquiring a share in the capital, that also has indirect implications and aggravates structural liquidity surplus;  –  consolidation of banks under resolution is impossible as they have different turnaround managers appointed under bankruptcy proceedings;  –  insufficiency of financially sound turnaround managers;  –  higher DIA debt burden;  –  long loan maturities;  –  and the last one is the above-mentioned use of banks under resolution as a ‘bad asset depot’ by turnaround managers. Also, all of these are indeed systemic shortcomings of our mechanism, the one that has been around for many years. This resolution mechanism has seen no change since the time it was set up. It is still grounded in long-term soft credits extended in large amounts to entities wishing to take part in a financial turnaround. It is time for us to make the next step – the one to enable us to overcome these problems. BIS central bankers’ speeches  7  The Bank of Russia stands ready to assume broad responsibility for the impact of bank resolutions, acting, in addition to its role of the main funding source, as a central enabling facilitator to this process.
In-principle support has been received from the Asian Infrastructure Investment Bank, the Asian Development Bank, and the International Finance Corporation under the World Bank Group. And others have also indicated an interest. IFFO will be launched in July and we look forward to sharing with you more information about its work. Corporate Treasury Management 10. I would now like to turn to issues of more immediate concern to you in your treasury management roles, and to share a few factors which I believe are shaping your business:  11. First, the continuing liberalisation of the Mainland’s capital account. As I mentioned earlier, the Mainland authorities have continued to implement measures to liberalise cross-border fund flows. I am sure many of you are familiar with the progress, but let me just quickly name a few key measures introduced in recent years:  2  BIS central bankers’ speeches  •  The Shanghai-Hong Kong Stock Connect has been in place and operating smoothly since November 2014, allowing international investors access to the A-shares listed in Shanghai through the stock exchange in Hong Kong, and vice versa. •  The Mainland-Hong Kong Mutual Recognition of Funds scheme was implemented in July 2015, allowing Mainland and Hong Kong funds to be distributed in each other’s markets through a streamlined approval process. •  The QFII arrangement was refined in February this year by relaxing individual quotas and shortening the investment lock-up period, among other improvements.

Many market participants have considered CTCs useful for a number of reasons:  BIS central bankers’ speeches  3  •  one, through centralising treasury activities, CTCs help effectively translate management’s vision into firm-wide policies, such as preferences on operating currencies, hedging and day-to-day transactions;  •  two, CTCs help lower funding costs through the optimal use of intra-group funding and netting, as well as external financing; make more co-ordinated use of corporate balance sheets, and; enable corporates to more effectively tap capital markets for longer term funding;  •  three, they help optimise working capital positions and facilitate daily sales through customised transactional arrangements. And by concentrating excess liquidity in CTCs, senior management can achieve better visibility and control over their cash and reduce frauds; and  •  four, they act as corporate centres to consolidate various foreign exchange and interest rate exposures and allow centralised hedging on net positions. Therefore, corporates can eliminate redundant procedures to reduce associated costs and enhance efficiencies. 17. In addition, more and more corporates are adopting technologies, such as the “Enterprise Resource Planning” System and the “Treasury Management System”, which enable them to improve control over local subsidiaries’ activities and standardise treasury operations. All in all, CTCs can play the critical role of an inhouse bank within a multinational corporation and a function that multinationals should develop in tandem with their global expansion plans. Hong Kong as a preferred CTC location 18.