samchain/econo-pairs-v1 huggingface dataset:
Stefan Ingves: Challenges for the design and conduct of macroprudential policy Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the Bank of Korea–Bank for International Settlements (BOK-BIS) Conference on Macroprudential Regulation and Policy, Seoul, 18 January 2011. *  *  *  The last three years have been a challenging time for central bankers and policy-makers. And yet significant challenges lie ahead. The crisis exposed gaps in the existing regulatory frameworks and raised questions about previously accepted beliefs and practices. We are still trying to understand the key lessons from the crisis so we can determine the reforms to the financial systems, regulatory structures and policy instruments that are needed to enhance financial stability in the future. But it is clear that a major element of these reforms will be the development and implementation of effective macroprudential frameworks empowering some form of agency to identify system-wide risks to financial stability, and providing the instruments to prevent and mitigate those risks. Of course, while the reforms are being developed and implemented, we must rely on the existing framework and instruments to support the fragile recovery of the real economy and financial system. Sweden’s economy is recovering but vulnerabilities remain Strong Swedish recovery from the crisis As in many countries, GDP fell sharply in Sweden as a consequence of the financial crisis. But Sweden is now experiencing a relatively strong economic recovery (see Figure 1) and the Swedish banking sector appears resilient.

This volatility in itself argues that a central bank with an inflation target should not focus unduly on exchange rate fluctuations.2 If the central bank were to react to every such fluctuation, monetary policy would also be volatile. This is obviously undesirable as it may mean that the central bank itself becomes a source of unnecessary disruptions in the economy. A volatile exchange rate can be regarded as particularly problematic if the central bank allows the exchange rate to take a very prominent position in its analysis, for example by  2  This is closely linked with Krugman’s (1989) assertion that exchange rates are so volatile because the fluctuations are of so little significance to the economy. This effect is generated by a feedback loop in which increased volatility reduces the exchange rate’s effect on trade, which, in turn, leads to an even more volatile exchange rate. 4  BIS central bankers’ speeches  relying on what is known as a Monetary Conditions Index (MCI). An index of this kind is intended to summarise, in one measurement, the effects of interest rates and the exchange rate on inflation and resource utilisation. Somewhat simplified, the idea behind the MCI can be described as this: all other factors being equal, if the exchange rate is strengthened, the interest rates should be lower, and vice-versa.
Let me give a brief account of some of these: The assumption that the repo rate would develop in accordance with implied forward interest rates should in the long run provide more realistic assessments of the future repo rate than the assumption of a constant repo rate. This is particularly the case when there are market expectations of considerable changes in the repo rate during the forecast horizon. For instance, it is difficult in such circumstances to combine the assumption of a constant repo rate with reasonable forecast paths for the exchange rate and long-term interest rates since these are affected by market expectations about movements of short-term interest rates. This in turn also affects the forecasts for growth and inflation. The new interest rate assumption therefore creates the prerequisites for making better inflation forecasts and also more coherent forecasts for individual macro variables. This will eventually improve the basis for monetary policy decisions. Another advantage of making forecasts on the basis of a more reasonable assumption about future interest rates is that it will be easier to assess the forecasts. In normal cases, it is not realistic to assume that the repo rate will remain unchanged in a two-year perspective. An inflation forecast based on that assumption will therefore normally be inaccurate. It will thus also be difficult to make meaningful evaluations of the inflation forecasts.

This led to a downward movement of the implied forward rate, which we stated that we considered reasonable in the press release in connection with the interest rate decision. At present, the implied forward rate is slightly higher than it appeared immediately after publication of the unexpectedly weak CPI outcome for January. However, in the short term the differences are marginal. The current implied forward rate path entails the repo rate remaining unchanged until summer and then subsequently being increased gradually. We Executive Board members will thus take a stance with regard to which monetary policy conclusions can be drawn from the information received since the end of February at our meeting on 27 April. Let me say a few words here on my own view of the situation. The February Inflation Report contained the forecast that international economic activity would remain relatively stable over the coming years. Since the Report was published, the oil price has risen by almost 10 dollars per barrel which is clearly higher than the forecast in the Report. The forward prices for oil have risen, which indicates that there may also be reason to expect a higher oil price for some time to come. Experiences from recent years are that the international upturn in economic activity has been surprisingly resilient to increases in the oil price. Revised national accounts for the United States have been received, which show that growth was marginally stronger at the end of 2005 than was indicated by preliminary figures.
Productivity per head is 4% below its level of five years ago. No-one really understands why. Perhaps the output data are understating the true picture. Perhaps the black cloud of uncertainty moving towards us from the euro area means that businesses are choosing to meet demand by expanding employment, which can if necessary be adjusted downwards relatively easily, rather than  4  BIS central bankers’ speeches  investing in new capital equipment which cannot. Perhaps flexible wages have encouraged employers to hold on to labour. Or perhaps forbearance by banks has allowed inefficient firms that might otherwise have had to contract to continue with more labour than can be employed in the long run. One thing we can see clearly is that the recovery and rebalancing of the UK economy are proceeding at a slow and uncertain pace. At this stage, it is difficult to know whether some of the recent more positive signs will persist. The Monetary Policy Committee will think long and hard before it decides whether or not to make further asset purchases. But should those signs fade, the MPC does stand ready to inject more money into the economy. Printing money is not, however, simply manna from heaven. There are no shortcuts to the necessary adjustment in our economy. The problems in the world economy mean that we shall have to be patient. Over the past twenty years, during regular visits to Wales, I have seen several waves of restructuring of the Welsh economy.

Rather, it lays out a framework and set of principles to govern actions in the face of circumstances in whatever form they take. The distinction between a strategy and a particular course of action is well known in monetary policy. A monetary policy strategy provides the framework for assessing economic circumstances and responding to ever changing contingencies. But a strategy does not spell out interest rate decisions in the future. In my view, the exit strategy from non-standard measures is comparable. As of today, we do not have all the information necessary to decide which exit path will be desirable or optimal from the perspective of tomorrow. But we have developed a set of criteria that will guide our future decisions. In this sense, exit considerations are subject to the same qualification that I always make when I speak on behalf of the Governing Council on monetary policy matters: we are not pre-committed. 4  BIS Review 103/2009  Accordingly, as of today, we are not committed to a particular timing or sequence of actions for the exit phase. But our future decisions will not be arbitrary. They will be guided by a framework. In my view, four cornerstones have to be considered in our approach to exit from non-standard measures: the link to our monetary policy strategy; the forward-looking initial design of the measures; our technical and institutional ability to act; and our reputation for swift and decisive action when it is required. BIS Review 103/2009  5  1.
Maja Kadievska-Vojnovik: Current trends and future of the financial system in the region Address by Ms Maja Kadievska-Vojnovik, Vice-Governor of the National Bank of the Republic of Macedonia, at the regional summit of governors, bankers and businessmen “Financial systems in the region”, Belgrade, 8 November 2013. *  *  *  Dear Mrs. Jorgovanka Tabakovic Dear Governors Dear guests, First of all, I on behalf of the governor of the NBRM, Mr. Bogov, I would like to apologize for his non attendance today, on this very important event. He was unable to joint this event due to objective reasons, but, let me express my truthfully pleasure that I have opportunity to express my views and the views of the governor regarding to the latest development and future challenges for our country and our banking system. After the double-dip recession, in the first half of 2013 SEE are on the way of recovery. The GDP growth in the RM in the first half of the year is 3.4% and is highly influenced by the positive contribution of reforms’ agenda. The improved business environment (RM is at the list of 10 best reformers according to the Doing Business for 2013), the entrance of FDI's that have lead to export diversification alongside with the positive developments at the labor market, are key growth drivers.

We believe that the industry is ready to build and expand its capacity in this area. While we are moving to being more risk-based, there is still a lot more to be done. This includes educating everyone in the industry that “risk-based” does not mean “total risk aversion”. While it is crucial to protect our financial system from being abused, it is also necessary for financial institutions to serve their roles and purposes in the economy and for the society. Accordingly, the new 1/3  BIS central bankers' speeches  regulatory framework demands reporting institutions to take greater ownership of their individual AML/CFT frameworks. Reporting institutions must strengthen their internal governance and controls to preserve financial integrity, not because Bank Negara tells them so, but because it is the right thing to do. This demands a high level of maturity by the industry. For individual institutions which have established a mature control environment, there will be greater latitude to design control frameworks in a way that is more operationally flexible. On the other hand, for individual institutions who are not quite there yet, the new framework raises the compliance bar, calling for them to strengthen awareness, governance and processes to ensure they have the capabilities to preserve integrity of the financial system. On this point, I wish to applaud the Financial Services Professional Board (FSPB) on its recent publication of standards on whistleblowing and on managing conflicts of interest.
Debt has an advantage over equity capital in the sense that payments to debt holders are deducted from profits. In contrast, payments to shareholders, i.e., dividends, are made out of profits and hence are subject to corporate taxes. Forcing banks to hold more capital reduces their tax shield and thereby diminishes banks’ market value. What are the orders of magnitude we are talking about here? Let me offer you a very rough back-of-the-envelope calculation using publicly available data in Switzerland. Assume that a bank has to increase its leverage ratio from 1% to 5%. If this bank is subject to  ”Capital Ratios Helped Mask Looming Crisis”, The Wall Street Journal Europe, 11 November 2008. BIS Review 158/2008  an effective tax rate of 20%, the increase in capital will reduce the bank’s total market value by less than 1%. However, these costs notwithstanding, banks and shareholders may also benefit from holding more capital. For instance, banks that were more conservatively capitalised before the outset of the current crisis have now benefited from their relative strength. In the area of wealth management, for instance, stronger banks have been successful in attracting clients from weaker banks. Moreover, looking at the poor performance of thinly capitalised banks’ stocks over the last decade or so, low leverage ratios do not seem very attractive. Our empirical analysis suggests that risk-adjusted stock returns of banks do not increase with leverage. A cross-sectional comparison of risk-adjusted returns with other industries is also sobering.

6  See John Galbraith (1990): A Short History of Financial Euphoria. 7  “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management”, Report of The President’s Working Group on Financial Markets, April 1999. 8  Q & A with Joseph Stiglitz, Columbia University and The International Herald Tribune, 11 October 2006. http://blogs.iht.com/tribtalk/business/globalization/?p=177  9  G7 Finance Ministers and Central Bank Governors Plan of Action, 10 October 2008. 2  BIS Review 158/2008  Naturally, therefore, rental cars have a much shorter life span than non-rental cars. The same reasoning applies to banks. No sane banker will intentionally manage his bank into insolvency. But he or she has a lower incentive to avoid insolvency than if he were not insured. This sub-optimal level of caution is immediately apparent in banks’ balance sheets: Banks tend to hold very low levels of capital. In a cross-sectional comparison, banks have much lower capital cushions than uninsured firms. On average, listed non-financial firms have capital-to-asset ratios of 30 to 40 percent. 10 In stark contrast, before the onset of the current crisis, all of the world’s top 50 banking institutions held, on average, only 4 percent of capital. None of them held more than 8 percent. 11 In short, banks have a preference for very high leverage. This highlights a fundamental dilemma of capital regulation: Banks don’t like it. Bankers will typically argue that high leverage is beneficial or even necessary. Therefore, banks will naturally oppose any regulation aimed at restricting leverage.
3  3 [20]  The period 2011–2014 – inflation falls far below target In conjunction with the global financial crisis, Sweden’s GDP fell heavily, but the recovery was also surprisingly rapid. In 2010, Sweden’s GDP increased by about 6 per cent, approximately as much as it had fallen in the year before. The increase was mainly due to the recovery in world trade and strengthening in global activity, which benefited Swedish exports and investment. Exports were also helped along by the weak krona. In July 2010, the Riksbank started to raise its repo rate from the level of 0.25 per cent to which it had been cut in conjunction with the crisis. CPIF inflation in 2010 amounted to 2 per cent. 7 The Swedish economy developed strongly and resource utilisation increased rapidly. Until the summer of 2011, the recovery seemed to be continuing at a fairly good pace. By this point, the Riksbank had raised the repo rate in stages to 2 per cent. However, during the summer and autumn of 2011, unease increased over developments in public sector debt in the United States and several euro area countries. Growth prospects abroad deteriorated. This also spilled over onto the Swedish economy. Sweden’s GDP slowed down sharply in 2011, fell slightly in 2012 and only showed modest growth in 2013. Inflation started to fall in 2011 and basically fell until 2014, when CPIF inflation amounted to about 0.5 per cent and CPI inflation to just below zero.

The Yellen camp’s view is that the Phillips curve looks largely as it normally does or, at any rate, has changed so little that it still works as an effective channel through which central banks can influence inflation. According to the Borio camp, the Phillips curve has instead almost broken down or, at any rate, changed so  9 [20]  much that it no longer forms a central part of the inflation process. More specifically, high resource utilisation no longer results in higher inflation, according to this view. Instead, it is claimed, inflation is highly influenced by structural factors. Factors often emphasised as exerting downward pressure on inflation are globalisation and, looking forward, more and more digitalisation. 14 These are arguments that those who have followed the debate in Sweden in recent years will recognise. According to this view, the central banks will find it difficult to steer inflation for a long time to come. As I mentioned in my introduction, taken to its conclusion, this means that it is pointless to set up targets for inflation, as this is mainly determined by factors outside monetary policy. As I also noted earlier, the Yellen camp does not share this view but believes that inflation targets are meaningful, important and possible to attain. Implications of the Swedish experiences What view, then, should we take of the international debate in light of our experiences here in Sweden? As I see it, our experiences overall are more in line with the Yellen camp's view.
Ownership MAS will require all the financial activities in each banking group to be grouped together, either under the bank or under a non-operating financial holding company (FHC). The non-financial activities must be segregated from the banking group and divested. They can be sold to third parties, or alternatively to the principal shareholders of the bank, so that the principal shareholders own them directly, and not through any of the entities in the financial arm of the group. MAS will regulate the bank or FHC, but it will not regulate the non-financial activities. Currently, all the local banks are listed, and so are many of the non-banks in the groups. The banks and non-banks already have separate sets of shareholders. In fact, the minority shareholders, i.e. the shareholders other than the principal shareholder, typically account for about 70% of the ownership of the bank. MAS will require this separation of ownership to be retained. The bank or FHC in the existing banking groups must continue to be listed on its own. For example,, it cannot be subsumed as a 100%-owned subsidiary of a listed top-level holding company, which owns both the bank as well as the nonfinancial entities. Having distinct groups of shareholders for the financial and non-financial activities will strengthen market discipline on the bank, and facilitate clearer accountability of its performance to minority shareholders. It will help to ensure that the separation of the financial and non-financial activities is substantive and not just pro-forma.

Therefore, in the present exercise MAS will allow the principal shareholders to continue owning indirect stakes in the banking groups through the non-financial entities that they control. MAS will review this arrangement later. Management To avoid conflicts of interest, the management of the financial entities should be separate from the management of its non-financial affiliates. There should be no sharing of executive directors and management staff, such as the chief financial officer and chief operating officer. On the board of directors of a regulated financial entity, a majority of the directors should not be holding directorships on the boards of the non-financial affiliates as well. Name-sharing Mixed conglomerates usually leverage on common brand building. Many of the non-financial affiliates of local banks share the name of their parent banks. Financial and non-financial entities alike have built up goodwill in the brand name over the years. But reputational and contagion risks can result from sharing of names and corporate badges between the bank and its non-bank affiliates. Where an unregulated entity sharing a name fails or falls into disrepute, the public may attribute its problems to the bank, causing a bank run. MAS will therefore disallow the sharing of names and logos between the financial and non-financial entities. We are considering amending the Banking Act, to prevent the use of names or acronyms by companies that may confuse the public, or give the impression that a company is related to or associated with any Singapore-incorporated bank.
Domestic economic activity in much of Asia will inevitably be subdued, with knock-on effects elsewhere, and major imbalances are likely to emerge in international trading patterns. It is too soon to have any very clear view about the likely scale or duration of these economic effects. The IMF, in its Interim World Economic Outlook, based on information available to early December, has tentatively estimated that world gdp growth this year - at 3½% - might be around 1% lower than it had expected in the autumn. They expected much of the impact to fall on the Asian economies themselves - with forecast growth in the newly industrialised Asian economies falling by 2½%, whereas growth in the G7 countries was expected to be only about ¼% lower at 2¼%, with a substantially larger impact on Japan. My impression is that, notwithstanding these revisions, most analysts would still see the risks as being quite heavily on the downside. There have been suggestions that the dampening of activity, particularly in this country and in the US, as a result of these developments is welcome insofar as it will help to prevent the re-emergence of inflationary pressures. And that is true - up to a point, my Lord Copper. It is clearly not desirable that the necessary moderation of demand should be narrowly concentrated on those sectors that are exposed to international competition. And while some of the industrial countries can certainly tolerate significant external deficits for a time, persistent, large deficits would not be sustainable indefinitely.

These weaknesses certainly need to be addressed in the borrowing countries’ own interests if they are to continue to reap the great benefits of the free international movement of BIS Review 5/1998  -3-  capital without similar extreme volatility in the future. But the immediate question was, and is, how to contain the present problem. Essentially there are two broad options. One is simply to allow financial markets exchange markets, interest rates, and stock and bond prices - to take the strain, and to seek to restore confidence, and moderate the impact of market movements, by restrictive macro-economic policy adjustment. The second is to limit the financial market impact and the extent of the associated macro-economic adjustment by providing or arranging alternative external financing. In practice these options are not, of course, mutually exclusive and the real question is the appropriate balance between them. Where a country has transparently been pursuing an undisciplined and unsustainable macro-economic policy, most people find it easy to accept that that country should bear the burden and adjust, painful though that may be. Many people find that harder to accept where, as in the present case, conventional macro-economic policies have, for the most part, been relatively responsible. There were certainly adjustments to macro-economic policy that needed to be made - a more flexible exchange rate regime in some cases, for example, or a somewhat tighter overall macro-economic stance, with perhaps some adjustment between fiscal and monetary policy.