samchain/econo-pairs-v1 huggingface dataset:
Jon Nicolaisen: Should banks be bailed out? Speech by Mr Jon Nicolaisen, Deputy Governor of Norges Bank (Central Bank of Norway), at the Norwegian Academy of Science and Letters, Oslo, 14 April 2015. *  *  *  Please note that the text below may differ slightly from the actual presentation. On Sunday, 29 September 2008, two weeks after the bankruptcy of the US investment bank Lehman Brothers, the Irish government faced a dilemma: On the following morning, Monday, 30 September, the debt of a number of Irish banks was falling due, and many of these banks could not meet their obligations. Unable to issue new debt in the market, they were in danger of failing. If the banks were to close, economic activity in Ireland would be crippled. The authorities had to act. It was not a matter of a trifling amount. At the time, the debt of Irish-owned banks was over two times Ireland’s GDP. 1 Over half of the banks’ debt had been funded in the market. That evening, the Irish government decided to guarantee most of the debt of Irish-owned banks for two years. The government and the Irish people thereby assumed a considerable risk. Eventually, the losses at Irish banks also proved to be enormous. Since then, the Irish authorities have made capital injections into banks equivalent to around 40 percent of GDP to keep the banks running. 2 This is money the Irish government has had to borrow.

Corporate bond sales had started from March 2022. 2. See ‘Bank Rate increased to 4.25%’ - MPC minutes March 2023, Bank of England. 3. The canonical reference is Friedman (1961) ‘The lag in effect of monetary policy,’ Journal of Political Economy 69(5), pp. 447-466. For an overview of more recent results, see Havranek, T. and M. Rusnak (2013). ‘Transmission lags of monetary policy: A meta-analysis,’ International Journal of Central Banking 9(4), pp. 39-75. 4. My MPC colleague Catherine Mann argued in this direction in a recent speech; see Mann, C.L. (2023). ‘Expectations, lags and the transmission of monetary policy,’ speech at the Resolution Foundation, 23 February. Support for this view is offered in Cesa-Bianchi, A., G. Thwaites and A. Vicondoa (2020). ‘Monetary policy transmission in the United  Page 13 Kingdom: A high frequency identification approach,’ European Economic Review 123 (art 103375). However, that view is not uncontroversial. For example, subjective assessments of the lags in transmission have been found to suggest lags are longer than in the past, as reported in Andre, P., C. Pizzinelli, C. Roth and J. Wohlfart (2022). ‘Subjective models of the macroeconomy: Evidence from experts and representative samples’, Review of Economic Studies 89(6), pp. 2958–2991. In the UK, a case can be made that lags may be longer, as transmission via the mortgage market now relies on longer maturity rate (2 – 5 year maturity) to a much greater extent than in previous interest rate cycles. 5.
Such an action may be vindicated if there are risks to macroeconomic or financial stability or even if self-fulfilling runs on public debt may be a threat to market access, or lastly to avoid the deflationary consequences of a public debt event. However, one may be tempted to underestimate risks for inflation, especially since they only materialize with a lag, and such interventions could also increase moral hazard in terms of government incentives to keep their finances in order. These considerations explain why, when we set up the OMT, we required central bank interventions to be conditional on resolute fiscal policy adjustments, guaranteed collectively by euro area Member States. In addition to highlighting the main trade-offs between public debt sustainability and monetary policy, the great merit of Professor Gita Gopinath’s presentation is to use a formal model to support her rigorous analysis. In particular, she shows how the degree of commitment to low inflation may change the level of sustainable public debt. This analysis is most welcome, not only because public debts are very high, but also because in several parts of the world inflation appears stubbornly low in spite of extremely aggressive monetary policies. The second session examines changes in financial intermediation. Hyun Shin will focus today on the surge of bond-financing in the global economy over the last few years and the pros and cons associated with a broader shift from bank to market financing.

The normal functioning of the banking system relies on a safe and effective payment infrastructure, which, in Albania, is operated by the central bank. Over 2013, the Bank of Albania focused its efforts on improving AIPS and AECH systems. Moreover, in order to render the financial markets infrastructure complete, we are working to establish the Central System for the Settlement and Registration of Securities. This system will provide possibilities for the further development of the secondary market and will guarantee the settlement of transactions in this market, conform to international standards. In 2013, the approval of the law “On Payment System” was finalised. This law provides a special legal framework for regulating, licencing and overseeing payment systems by the Bank of Albania. It aims at minimising the systemic risk, which is related to the participation in payment and security settlement systems, and risks related to the insolvency of participants in the system. The passing of this Law implies the liberalisation of the payment systems market through the establishment of private payment systems. Furthermore, to encourage the use of electronic payment instruments and reduce the use of cash in the economy, the Bank of Albania has adopted the regulatory framework for using these instruments, by reflecting the principles of the relevant EU directive.
All of that is essential if we are to make progress with comprehending the network characteristics of the financial system. Securities regulators and financial stability authorities will have to meet half way. In that spirit, today I have posed questions about the perspective and responsibilities of Listing Authorities; whether the distinction between public and private market transactions is as relevant for financial stability as it is for some other public policy objectives; how securities regulators need to be alert to innovations outstripping their regimes; how to factor the importance of resilient liquidity into the debate about trading platforms; the importance of CCPs as system risk managers, collecting large-position data, and whether they should apply gross margining; the case for a Trade Repository for securities lending and collateral swaps; the need for securities regulators and accounting standard setters to relax about forward-looking provisions, and for banking supervisors to relax about publishing some regulatory returns; the need for reform of the regulatory regime for some types of shadow banking; and the need for a review of the regulatory and other incentives prompting longterm asset managers to target minimum nominal returns. If that is a longish list, it is because there has still been little public debate in this area. My review of the overlap of interest between securities regulators and financial stability authorities enters familiar territory when it gets to CCPs, shadow banking and banks’ own disclosure practices.

If government indebtedness reaches a sufficiently high level that it triggers a loss of confidence in fiscal sustainability, investors will require additional risk premia to compensate for having to bear greater sovereign credit risk. The resulting rise in sovereign risk premia can be passed through to private sector funding costs, especially if there is doubt about the ability of the public sector to counter adverse disturbances to non-financial and financial sectors. Chart 2 on slide 6 shows how CDS spreads for large banks have become increasingly correlated over the past seven and half months with the sovereign CDS spreads of the countries where these banks have their headquarters. Two snap-shots are shown in the chart: one for 26 November 2009 and the other for 19 May 2010. As can be seen from the chart, between these two dates, as sovereign CDS spreads have risen, so have bank CDS spreads. It is furthermore interesting to note that, in the cases where concerns about fiscal imbalances have been greater, the co-movement has been substantial. The third risk we have identified outside the euro area financial system is the possibility of vulnerabilities being revealed in non-financial corporations’ balance sheets, because of high leverage, low profitability and tight financing conditions. The balance sheet conditions for the euro area non-financial corporate sector have slightly improved since the last issue of the FSR, which has translated into a moderate lowering of the expected write-downs facing euro area banks on their corporate loan portfolios by end–2010.
Clearly, we also have to upgrade our own skills and methods in our role as banking regulator to try to ensure that we can keep up with developments in the market. This is most obviously the case with the new technology that requires us to devise new policies on innovations like virtual banking and internet security. This means that we need to find and train staff who understand the technicalities and are capable of assessing through onsite examination the adequacy of the banks’ controls over the new technology. As you will know yourselves, people with this expertise are in short supply. This emphasis on technology is however only part of the process of trying to make our supervision more risk-based. This is the same approach that is being adopted by the FSA in Japan. It aims to focus on the “self-responsibility” of the banks themselves in ensuring that they have adequate systems to 3  BIS Review 65/2000  identify, measure, monitor and control the whole range of risks with which they are faced. The role of the supervisor is then to assess the quality of the banks’ own systems in relation to the quantity of the risks they are running, and to require improvements if these are necessary. We have been developing this new approach for the last year with the help of the consultant seconded from the US Federal Reserve. So far the main focus has been on the local banks, but we hope to roll it out to the foreign banks next year.

While this presence may have diminished over the last two years, Hong Kong remains an important market for the Japanese banks and I am sure that you will continue to demonstrate your commitment in the years to come. BIS Review 65/2000  4
One factor behind the rising CPI is increased indirect taxes, for instance for tobacco, and higher administered prices. Another explanation is that the impact on the CPI from the falling interest rates in 1996-1997 is diminishing. All in all, this means that the CPI is closing in on underlying inflation as measured in various ways by the Riksbank. BIS Review 101/1997  -5-  Still, the CPI outcome for September is somewhat higher than the Riksbank had counted on. Figures for a single month admittedly do not warrant definite conclusions but it is certainly important to pay heightened attention to price movements in the coming months. Normally it is underlying or trend inflation that is primarily of interest for monetary policy. This holds unless transitory price effects influence inflation expectations. In a setting where inflation expectations are firmly anchored to the inflation target, monetary policy has some room for manoeuvre. But if expected inflation starts to rise, we must be on the alert, particularly in that the current monetary stance is stimulatory. The importance of expected inflation for price and wage formation was evident not least in connection with the 1995 round of wage negotiations. At that time, expectations of future inflation seem to have been a bit above 4 per cent, which probably contributed to the excessively high level of the ensuing wage agreements. Now that the Swedish economy is on the threshold of very important wage negotiations, there must be no doubt that the Riksbank is truly serious about the inflation target.

First, the negative impact of a bubble burst will be less severe both for the economy as well as for financial institutions as such, provided that a banking system is well supervised, the level of exposure on this market is low, the system has quality assets and the capital stock is adequate to absorb the effects of the shock. Second, if the bubble expansion reflects the expectations of extraordinary gains, the supervisory policy may substantially diminish the economic benefits from and the scale of speculation, e.g. by way of reducing the LTV ratio, restricting the loan term or introducing the requirement to provide own contribution for housing loans. Third, the supervisory activities – as an instrument preventing asset bubble formation – have the advantage of affecting directly one selected group of entities which may play an important role in bubble formation. Compared to interest rates, those measures have an effect of a conventional intelligent bomb, which is both selective and precise. Supervisory activities pursued in order to prevent the creation of an asset bubble may be especially effective if bubbles occur, among others, as a result of the legislation the sector is regulated by. In Poland, this principle is illustrated by regulations which restrict the investment policy of open pension funds and the impact of those regulations on the stock  5  Crockett A., Marrying the micro- and macro-prudential dimensions of financial stability, BIS speeches, September 2000. Borio C., Towards a macro-prudential framework for financial supervision and regulation?, CESifo Economic Studies, Vol. 49, No.
They should be appointed in recognition of their personal and professional repute, and perform their duties without being perceived as biased due to any relationship with the institution, its significant shareholders or its management team. Moreover, institutions should guarantee independence in order to avoid groupthink. The board of directors as a whole should have sufficient knowledge, skills and expertise to  1  Keynote speech by Frank Elderson https://www.bankingsupervision.europa.eu/press/speeches/date/2022/html/ssm.sp220611~fa99fcbb52.en.html. 1  properly understand the institution's activities, ensuring the board's effective ability to take decisions independently and autonomously in the best interests of the institution. Risk culture Another aspect I would like to emphasise is the importance of promoting a strong risk culture across the institution. The elements I mentioned earlier (challenge, involvement and independence) are the cornerstones of a good internal organisation structure. An appropriate risk culture emanates from the board of directors, but it has to be properly embedded across the organisation, especially among senior management. I would call this “tone from the top and echo from the middle”. Decisions such as excessive risk taking, putting the bank’s short term interests ahead of its longer-term interests, can damage an organisation’s reputation and culture. The board of directors is responsible for setting the strategy and defining the sustainable business model that is right for the institution, without getting bogged down in the details. That is the job of senior management. Banking is a sector that is very vulnerable to uncertainty and reputational issues.

21.10.2020  Opening remarks XIX Germán Bernácer Prize Ceremony at the Banco de España Pablo Hernández de Cos Governor  Ladies and Gentlemen, It is a great pleasure for me to welcome you all, and to introduce this Award Ceremony for the 19th Germán Bernácer Prize. I would like to start by thanking Luis de Guindos, Vice-President of the European Central Bank and Chairman of the Selection Committee of this award, for his contribution to this initiative. Luis, we are greatly honoured by your presence at this ceremony. Let me also thank The Observatory of the European Central Bank – chaired by Guillermo de la Dehesa – and the sponsors, represented here by Luis Isasi, President of Banco Santander España. As you know, the prize is named after Germán Bernácer, a prominent Spanish macroeconomist with deep knowledge of monetary theory, who became Head of the Servicio de Estudios of the Banco de España in 1930. The Bernácer prize recognises outstanding scientific research by young economists under 40 from the euro zone, and our institution has been a strong supporter of this award since its inception in 2001. On this occasion, I am glad to congratulate the winner of the 19th Prize edition, Mr. Loukas Karabarbounis. He is a Professor of Economics at the University of Minnesota, a Consultant at the Federal Reserve Bank of Minneapolis and a Research Associate at the National Bureau of Economic Research.
This applied, for instance, during the depression in the United States in the 1930s, when the large credit crunch was not sufficiently taken into account in monetary policy, and to the period prior to the high peacetime inflation rate during the 1970s and 1980s, when the money supply expansion was not taken into account. If we judge that developments might lead to substantial disturbances, the choice lies between attempting in time to avoid the accumulation of large imbalances and waiting until the situation turns and then counteracting the fall in demand. Many in the central bank world consider that interest rate policy should not react to asset prices and credit expansion in an upswing phase, over and above their estimated consequences for inflation and real stability in the short term. The arguments they bring out are that it is difficult to make an accurate evaluation and that it is uncertain what effect an interest rate increase will have. Other objections are that it may be difficult to be clear with regard to what has affected the interest rate decision and that confidence in the price stability target may therefore be undermined. Those who advocate a more preventive strategy meet this criticism by saying that there are nevertheless theories regarding asset price and credit cycles and some methods for calculating when large deviations from equilibrium levels are building up.

Finally, I will offer some reflections on the regulation of hedge funds. Definitions surrounding hedge funds and the hedge fund industry can give rise to confusion. In many ways, the word “hedge” has little definitional value.2 Hedge funds are best understood as potentially leveraged private investment vehicles deploying a wide range of largely unconstrained investment strategies with the aim of achieving high absolute rates of return. Hedge fund managers typically invest a share of their personal wealth in their own funds in order to align their incentives with the interests of the external investors. Hedge funds usually have a dual fee structure. The investor pays an annual management fee of 1% to 5%. In addition, most hedge fund managers charge incentive fees on capital gains. These incentive fees vary between 20% and 50%. Many hedge funds impose investment lock-in periods of anywhere from one to three years. During these lock-in periods, principal and in many cases profits cannot be withdrawn. During the last decade, the hedge fund industry has steadily grown in size. In 1990, there were an estimated 2000 hedge funds managing around USD 40bn. In less than 15 years, these numbers have increased dramatically.
2  BIS Review 2/2003  markets enhance the ability to manage and trade risk, they are at the heart of modern finance and the backbone of financial innovation. Their development has enabled market participants to hedge risk, develop arbitrage, and, therefore, enhance the efficiency of price setting in financial markets. Of course, the other side of the coin is that derivatives are sometimes criticised as they may be regarded under some circumstances as a potential threat to financial stability. I will come back to this point later on. The elimination of currency risk within the euro area has also had far-reaching effects on the equity markets. This is crystal clear when observing volatility patterns and portfolio allocation methods. As regards volatility patterns, recent developments seem consistent with the predictions of economic theory, where stock prices should reflect expectations of future dividends, interest rates and risk premia. It follows that the introduction of the euro should be associated with a reduction in differences 7 in volatility across markets. Indeed, a recent empirical study demonstrates that those countries whose stock exchanges had a structural high or medium volatility regime, converged towards those with a low volatility regime. From the point of view of the European stock market as a whole, this shows an improvement in global efficiency. As regards investment patterns, sector-diversification strategies have been defined as an alternative to country diversification.

In stress test parlance: this year’s test is “topdown”, whereas next year’s is “bottom-up”. As banks become better prepared to face the risks posed by climate change, they need to be led by people who are also better prepared to deal with these topics. When assessing the suitability of prospective members of the management body of banks, knowledge and experience of climate-related and environmental risks will be among the areas of general banking experience against which suitability will be assessed. Finally, we will seek to include an understanding of climate-related and environmental risks as a specific area of expertise within the collective suitability of a bank board. An environmental risk that is intimately connected to climate change, but also constitutes a risk in itself, is the loss of biodiversity. In our Guide on climate-related and environmental risks we single out biodiversity loss as one of the drivers of both physical and transition risk. It is becoming ever clearer that beyond climate-related risks, biodiversity loss could also be a source of material financial risks.9 More research needs to be done.10 At the ECB, we will follow these developments closely – and we encourage banks to do the same. Integrating international networks and European initiatives Much like the EBRD, the ECB is also part of global initiatives which promote international cooperation on joint solutions for climate change. Most prominently, the ECB is a member of the NGFS.