samchain/econo-pairs-v1 huggingface dataset:
Mojmír Hampl: Is the euro zone still an attractive target for countries outside the euro? A view from the Czech Republic Speaking points by Mr Mojmír Hampl, Vice Governor of the Czech National Bank, at the conference “Are we on the verge of a new Euro Crisis?”, Copenhagen, 4 September 2018. * * * Ladies and gentlemen, Good afternoon. First of all, let me thank Lars Christensen for his kind invitation to speak here today in front of such a distinguished audience. It is really an honour for me and I am also glad to be in Copenhagen again. In this talk I will try to shed some light on what appears to be a puzzling attitude of some new EU member countries towards the common currency. I will use the example of my home country, the Czech Republic. It entered the EU in 2004 and has no opt-out from euro adoption, so legally we are obliged to join and to make every effort to enter the Eurozone as soon as possible. Yet no major political force in our country pushes for euro adoption at the moment. Talks about joining the Eurozone are simply not part of the political agenda, and we now have a fourth or so government in a row declaring that this issue will be left “for the next government after the next elections” – so it is being postponed to political infinity. The antechamber for euro adoption, the ERM II, is not being considered either.

In one breath they say that we should not adopt the euro – so that we can keep our own currency and hence retain the ability “to weaken the koruna in bad times” – and then criticise the Czech National Bank for doing exactly that in the bad times of 2013. They then happily add that Greece would have benefited from having its own currency and that Germany is profiting from the euro being weaker than the Deutschmark would have been. The same, however, doesn’t go for the Czech Republic after 2013. These endearing 2/3  BIS central bankers' speeches  inconsistencies are present throughout the population. Here again, however, the Eurozone and its satellites offer parallels. You in Copenhagen have a fixed exchange rate against the euro (and previously had a fixed rate against the mark) and thus in effect “buy in” monetary policy from Frankfurt. You have your own notes and coins but not your own monetary policy. Note this fine “Scandinavian paradox”: you have an opt-out from the euro following the 2000 referendum, yet you do not make your own monetary policy, nor did you before the euro was created, whereas the Swedes do not have an opt-out (although they have been trying not to fulfil the criteria and not to join ever since rejecting the euro in their 2003 referendum), yet they pursue autonomous monetary policy. I sometimes wonder whether the Czech sitting-on-the-fence approach is heading towards the Danish model. It wouldn’t be my choice, but it’s good to be prepared.
The rapid growth of recent years has brought the economy to full capacity, the unemployment rate has fallen below 1½%, resulting in substantial wage pressures in certain segments of the market. The sharp expansion has resulted in a rising rate of inflation. In the 12 months to the beginning of October, consumer prices rose by 5.3%. The Central Bank issues inflation forecasts every three months. The latest forecast was issued in July and it envisaged a 3% average rate of inflation in 1999 and a 4% inflation rate from the beginning to the end of the year. A new forecast will be issued in the beginning of next week. The deficit on the current account of the balance of payments has risen. In 1998 it equalled roughly 5½% of GDP. It is expected to be lower in 1999. During the upswing, the Central Bank of Iceland has followed a restrictive monetary policy as reflected among other things in the fact that at present the differential between Icelandic and trade weighted foreign money market rates is well in excess of 5%. The yield on 3-month treasury bills in the market is currently above 9%, and the so-called repo rate of the Central Bank of Iceland is 9%. That can be compared with the repo rate of the European Central Bank of 2.5%. Since September of last year, the Central Bank has raised its interest rates four times, by a total of 1.8 percentage points. In early 1999 it also levied a liquidity requirement on Icelandic credit institutions.

According to our model, a rise in house prices has a strong and prolonged effect on household debt, as it takes time before all dwellings have been traded at the new higher price level. Growth in credit to households can therefore remain high for quite some time, even if the increase in house prices should start to subside. What then is driving house prices? In our empirical model, house prices are determined by household income, banks’ lending rates after tax, the housing stock, unemployment, and an indicator of household expectations of their future financial situation and of the Norwegian economy as a whole. 3 Household income has contributed most to the rise in house prices in the last two years. Interest rates  3  D. H Jacobsen and B.E. Naug (2005): “What drives house prices?”, Norges Bank Economic Bulletin, no. 1/05, pp. 29-42. BIS Review 106/2006  5  have increased since the summer of 2005. Given the lags involved, the cumulative contribution from interest rates to house prices is still positive. Nevertheless, in the period ahead, the normalisation of interest rates in Norway may moderate the rise in house prices. Observations from other countries, such as the UK and Australia, indicate that a rise in the key interest rate by the central bank has been followed by slowdown in house prices. Growth in household debt has been higher than growth in disposable income for several years now.
In 1999, 54% of Turkish exports - $ billion - and 53% of Turkish imports - $ billion - went to or came from EU countries. •  About 54% of Turkey’s official reserves consists of Euro - 11 currencies and the euro itself. •  The foreign exchange deposits belonging to Turkish workers in other countries and held in the Central Bank of Turkey amount to about 11 billion euros, almost 93% of which is in the form of deutsche marks. •  Our external debt totals about $ billion, 34% of which consists of Euro - 11 currencies and the euro itself. •  Since 1 January 2000 the Turkish Treasury has borrowed via bond issues in the international capital markets a total $ billion, 37% of which is denominated in euros. •  During the last five years, 60% of direct foreign investments in Turkey came from Europe. •  Of the 9.3 million foreign tourists who visited Turkey during the first ten months of this year, 5.1 million came from Europe. Given the breadth and depth of Turkey’s relationship with the European Union, it is no wonder that the euro and the creation of a European currency will powerfully affect the Turkish economy from now on. Assuming that the euro is accepted by the international financial markets as a stable reserve currency, the medium and long term will see the euro’s share in Turkey’s financial accounts continue to increase.

When making that assessment, we have to take into account that Iceland’s recession was the result  2  BIS central bankers’ speeches  of two stories: the macroeconomic boom-bust cycle in a small, open, and financially integrated economy, and the rise and collapse of three cross-border banks operating on the basis of EU legislation. The first is familiar, and Iceland was already on its way into a recession as a result of it when the banks collapsed. The second was unique at the time, as it occurred during the first international financial crisis since the birth of the EU single market. Iceland lost around 12% of GDP from peak to trough during the recession. But the recovery began in the middle of 2010, and the Central Bank forecast from February is that Iceland’s economy will grow by just over 2% this year. The recovery has already reduced the seasonally adjusted unemployment rate from over 9% at the peak to around 4½%. New banks, smaller and domestically oriented, have been rebuilt. But there are still significant legacy issues and challenges, including capital controls and inflation expectations well above target. Source: Philippon (2008): The Evolution of the US Financial Industry from 1860–2007. Source: Philippon and Reshef (2008): Wages and Human Capital in the US Financial Industry 1909–2006. BIS central bankers’ speeches  3  Before I close, let me expand my scope again and say a few words about possible broad long-term future trends regarding the relative size and importance of the financial sector.
A crucial part of this more intensive supervision is not just to look at the activities of the firm, but also much greater scrutiny of the quality of its governance and management. This includes a very thorough and careful assessment of the suitability of those who run regulated firms, as well as time spent looking at the Board as a whole to ensure that it has sufficient experience and character. For the largest firms, the PRA Board is involved in these judgments and in approving the appointments of the most senior staff. And, in marked contrast to the pre-crisis period, there is a much greater focus on a firm’s business model and the firm’s understanding of their vulnerabilities. This enables the supervisors to assess if there are risks posed to financial stability by the way that the firm chooses to conduct its business, or if indeed it is not viable. The aim is not that the supervisors should run firms. But they should not be shy to question if executives and boards have the right capabilities, if they understand the business model and the particular risks to which it is exposed and, overall, whether that business model can be operated successfully while managing the risks it entails. These three changes in the official landscape – macroprudential policy, more powerful international governance and more intensive supervision have shaped, and will continue to shape the world in which banks operate.

The second big change for the industry is the reduction and I hope removal of the implicit taxpayer subsidy that came from the perception – and as it proved, the reality – that the largest banks were too big to be allowed to fail. New powers to bail-in banks’ creditors, living wills, international standards on the debt that can be bailed in – all of these mean that we are getting closer to be able to say “no bank is too big to fail”. This will change banks’ costs. Being too big to fail, the implicit taxpayer subsidy, reduced large banks’ borrowing costs in relation to their smaller brethren. As we make it more and more possible for a big bank to fail – like any other company – without having to be bailed out by the taxpayer, creditors are realising that they bear more risks than before. The cost of insuring £ UK banks’ senior debt against default was just 8 pence before the crisis. Today that cost has increased by almost a factor of 10, driving up banks’ cost of funds. This is part of the reason why the spread over the risk-free rate on banks’ lending is higher now than before the crisis and is likely to remain so. Put simply, credit was mispriced before the crisis, in part due to the implicit insurance of taxpayer bailouts. Taken together, lower levels of leverage, higher liquidity and the removal of the implicit taxpayer subsidy will mean changes to banks’ business models.
Cross-border flows of goods and services, money, people and especially information have all risen to their highest levels, in some cases, ever. Yet at the same time, levels of productivity across countries have tended to diverge. So too, as a result, have levels of GDP per head. Technological trickle-down and GDP catch-up has gone into reverse gear at the same time external openness has switched up a gear. How do we explain this? (b)  Technology Transfer  To begin doing so, it is useful to recognise that two distinct forces are at work when technology is transferring across countries or companies. 31  First, there is technological adoption – the time it takes a new technology  to first reach a country or company. Second, there is technological penetration – the extent to which technology then reshapes processes and products in a company or country. 32  Economists often refer to the first of these as the extensive margin, the second as the intensive margin. In principle, we might expect these two aspects of technology transfer to move in lockstep. The two dimensions to diffusion should be complementary. In practice, international evidence seems to suggest a puzzling divergence in the two dimensions of technology transfer across countries. Average adoption lags for new technologies have tended to fall over time, consistent with rising cross-border flows of ideas, capital, goods and services and people.

6  See: McKinnon, R.I. and H. Pill (1997). “Credible liberalisations and overborrowing,” American Economic Review 87(2), pp. 189–193. BIS central bankers’ speeches  3  The inflationary consequences of strong growth led to a loss of competitiveness, as the real exchange rate appreciated (Chart 14). The current account of the balance of payments shifted into deficit, creating a dependency on the inflow of foreign capital (Chart 15). 7 And the rapid pace of economic growth obscured the underlying weakness of public finances, in some cases abetted by creative accounting practices, such as shifting government liabilities off the balance sheet. The case of Ireland seems particularly close to Asia’s experience in the 1990s: while public finances appeared relatively strong, a vast external debt was being accumulated by the banking system. The implicit government liabilities towards the financial sector arising from deposit insurance schemes and the need to manage systemic risks were neither fully recognised nor appropriately priced (Chart 16). By contrast, the Greek experience appears closer to that of Latin America. In these cases, fiscal indiscipline, in part initially obscured by creative accounting practices, lies at the heart of the accumulation of financial imbalances, rather than a build-up of external debt on bank balance sheets. Argentina’s crisis in 2001 is a case in point, although the experience was shared by many Latin American countries in the 1980s (Chart 17).
Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank “writing a cheque on itself”. That is, banks extend credit by creating money. This “money creation” process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the draw-down of back-up lines – to which it  13  Akerlof, G. A. (1970), “The market for “lemons”: quality uncertainty and the market mechanism”, Quarterly Journal of Economics, Vol. 84, No. 3, pp. 488-500. A market for “lemons” issue arises when informational deficiencies give rise to uncertainty about the true quality of a product. In such circumstances, buyers choose to pay only average prices for goods that carry the risk of sellers overstating their true quality. As a result, sellers of good products, having little incentive to participate in such markets, are driven out by those sellers of poor quality products. The most common example of the problem is the market for used new cars. Rationing in the interbank markets is discussed by Freixas, X. and J. Jorge (2007) in “The role of interbank markets in monetary policy: a model with rationing”, Universitat Pompeu Fabra, Economics Working Papers. 14  Kashyap, A. K. and J. C. Stein (2000), “What do a million observations say about the transmission of monetary policy”, The American Economic Review, Vol. 90, No. 3, pp. 407-28.

More importantly, the licensing of new retakaful operators in Malaysia will also ensure that the technical knowledge is made more readily available and enhanced in the market, particularly in takaful and retakaful underwriting, as well as in promoting product development and innovation. Under this initiative, qualified applicants will be allowed to conduct in both the Malaysia Ringgit and international currencies retakaful business under the Takaful Act 1984. Flexibility is accorded to the retakaful operators to conduct its retakaful business in Malaysia by way of an incorporated entity or a branch. Foreign applicant is also welcome d to conduct retakaful business in Malaysia through a joint-venture with Malaysian companies, subject to the merits of each case. It is anticipated that this measure would serve as a catalyst in our efforts for Malaysia to become the centre for takaful and retakaful business through the establishment of a significant number of strong and reputable retakaful operators. Ladies and gentlemen, Let me conclude by saying that the future prospects of the takaful industry will be very much depend on the combined efforts of all the relevant parties; the regulators, market participants and the international community at large, to chart the strategic direction for the industry. Collective effort is crucial in order to maximize the potential for the industry. Sharing common vision and goal will be an important first step. I believe that our sincere efforts in realizing this noble objective would InsyaAllah, God Almighty will shower us with His blessings, guidance and assistance.
Ensuring an easy, predictable path to securitization of standardized mortgage products is essential to making mortgage credit available throughout our country – in traditionally underserved rural areas and urban areas, and to all sorts of current and potential homeowners, provided by financial institutions of different sizes in different locations. A strong regulator whose primary focus is the housing finance system can also help ensure fair access to smaller institutions. In summary, it is my personal belief that housing finance reform must incorporate an explicit government backstop accompanied by significant sources of high-quality first-loss private capital. Thank you for the opportunity to appear before you today. I look forward to your questions. 2  BIS central bankers’ speeches

The price boom has continued in spite of the generally weak economic activity of the last two years. This is a new experience which differs from previous business cycles, when prices have tended to recede during periods of economic decline. Similar developments have occurred in other countries, for example in the US, England and Holland. The situation could appear worrying, particularly given that the rise in housing prices has been accompanied by an increase in household indebtedness. The upsurge in prices has raised questions about the healthiness of this trend. Are the price rises in the Swedish housing market the result of a bubble? Are the higher levels of household indebtedness sustainable? The Riksbank's view is that the current price developments in the housing market do not reflect any speculative expectations of future price rises which would warrant the term “bubble”. Nor is household indebtedness a bigger problem than usual for this stage of the business cycle. I will explain this in a moment. The other segment is the market for commercial property. Here, it is primarily prices for office premises which have displayed a different trend to that seen in the housing market. Commercial property prices have adjusted to the economic slowdown. In Sweden, both prices and rents have fallen since 2000 at the same time as vacancy rates have risen. I myself do not believe that these price declines are a concern from an economic perspective, as was very much the case with the property crisis at the beginning of the 1990s.
I think we can all admit that even with the best of intentions it is difficult for us to take a fully objective view of our domestic structure of laws and institutions, in particular when looking for weaknesses. The role of being the scapegoat for bringing bad tidings from the results of the FSAP assessments is well-known to the IFIs from their traditional work and it is actually a much appreciated role by the domestic authorities. On an FSAP mission it is quite common that high officials from the country concerned, in private, remind the IFI representatives not to forget to mention certain shortcomings. If you plan to conduct FSAP-like assessments without the involvement of the IMF or World Bank, it is important that you establish a process which ensures the integrity of the assessment. The FSAP is not only a way to identify weaknesses but also a tool for prioritisation of remedying these weaknesses and for providing technical assistance. An important part of the FSAP outcome is to leave behind a list of recommended remedial action, setting out the priorities. Since the scope of the FSAP is broad, prioritisation should become easier and more balanced than if assessments were conducted following a piecemeal approach. The FSAP process also contributes by informing about new research findings and about good practices used in other countries. 2  BIS Review 52/2006  The future FSAPs By now, FSAPs have been performed in more than 130 countries.

The first one, which we may call the pan-European approach, has tended to produce a lot of numbers on aggregates and averages in the financial stability analysis. No country wants to stick out in the assessment; they hide behind these broad numbers. But you cannot identify weaknesses and vulnerabilities through averages. “On average”, banks’ credit portfolios and capital ratios may be robust but an FSAP should look for the outliers – the ones which will break first. Whichever approach you select, you would need to include a detailed analysis of those major financial groups which cross the borders between the European countries and sometimes also operate outside the region. These groups are in many cases so large that they could influence countries both positively and negatively depending on developments. Let me give you a recent example from my own country: Icelandic investors have bought large stakes in Swedish financial firms. The investments are rather small from the Swedish point-of-view but significant for their parents in Iceland. Recently, there has been volatility in the Icelandic financial and currency markets. Luckily, the investments in Sweden are doing very well and have rather contributed to strengthening the Icelandic financial system. But in another situation the reverse could have been true – had the Icelanders made these investments during the Swedish banking crisis in the 1990s the Swedish holdings would have contributed to weakening the Icelandic economy.