samchain/econo-pairs-v1 huggingface dataset:
The second option is to use the foreign currency reserve. This is somewhat more complicated and takes more time. This is because the Riksbank’s foreign currency reserve is normally invested in interest-bearing securities, for example US government bonds. These must first be sold or borrowed against, and then the payment received must be deposited in a suitable bank account, preferably the Federal Reserve itself, before they can become available for lending to Swedish banks. During the crisis, the Riksbank used both methods. We borrowed from the Federal Reserve and used our foreign currency reserve. Looking back, we can say that the liquidity problems were solved quite well. The Riksbank was able to satisfy the Swedish banks’ demand for dollars when they were needed. However, at the same time, our experiences from dollar lending have brought into focus a number of issues to which we have reason to devote further consideration. What would happen if the Riksbank had been unable to borrow dollars from the Federal Reserve as easily as we could during the crisis? How large a foreign currency reserve do we need to have to ensure that the Swedish banks will not face a shortage of liquidity in a crisis situation? And who is to pay the costs of this preparedness? Having a large foreign currency reserve costs money. At present, these costs are carried by the Riksbank, meaning that, in the end, it is the taxpayers who pay. However, with a certain amount of justification, we can ask whether this is actually reasonable.

And, as the banks have grown larger and have increasingly expanded their operations over national boundaries over the last decade, each nation cannot solve such problems alone. The question of how to manage crisis banks is currently the subject of intensive discussion across the world, and new regulations of some form must also arise from this discussion. Today, I plan to address another lesson from the financial crisis, a lesson that has not yet led to any consequences in the form of regulatory changes, but which nevertheless must be dealt with in the long term. It applies to Sweden, but also to many other countries, particularly in Europe. It relates to the banks’ dependence on funding in foreign currencies, primarily US dollars. What kind of risks are the Swedish banks taking when they borrow in dollars – and who bears the cost? As usual, I would like to point out that the thoughts I present are my own and are not necessarily shared by my colleagues on the Riksbank’s Executive Board. The dollar crisis… As we all know, when Lehman Brothers collapsed in September 2008, the immediate effect was a liquidity crisis that affected the entire world to varying degrees. Banks and investment banks that had based their business on being able to rapidly obtain large volumes of shortterm borrowing, for example by issuing securities with short maturities, discovered that investors in these securities suddenly just vanished.
As loans in the stock are typically amortised very slowly – by a few per cent each year – the development of the debt stock will principally be determined by the previous debt stock in the short term. Limiting the amount of new loans therefore has a relatively slow impact on the debt stock. A reduction in tax relief on mortgage interest can affect all borrowers – and could have potentially major effects on indebtedness To influence the development of household debt we should also consider fiscal policy measures, which in this context means changes to various housing-related taxes. One example is changes to tax relief on mortgage interest. The advantage of this kind of measures is that it has the potential to influence the entire debt stock. The incentive to take out new loans decreases, and the costs linked to existing loans are also affected. In terms of the simple debt equation above, the amortisation rate could therefore rise on existing loans (the incentive to amortise increases if future borrowing costs rise) while new borrowing would be subdued. The debt-to-income limit is an effective complement to the loan-to-value limit There are many indications that the distribution of debt is also significant in terms of risks. As I mentioned earlier, several international studies show that highly-indebted households reduce their consumption more than households with lower debts when there is a fall in housing prices, for example.

BIS central bankers’ speeches  9  ... making it difficult to maintain price stability and financial stability It is very clear that it will be more difficult for the Riksbank to carry out its main tasks of price stability and financial stability in the event of a substantial fall in prices on the housing market. I shall begin with price stability. If demand grows weakly as a result of a fall in housing prices, we would normally end up with lower inflation. However, if decreasing confidence in the Swedish housing market among foreign investors leads to a general fall in interest in investing in Sweden, we would presumably see a substantial depreciation of the krona, which could strongly push up inflation. It is very likely that uncertainty over the development of inflation would increase. If we go over to financial stability, I can repeat what I have said many times before, which is that financial stability and price stability are interconnected. One reason for this is that if it becomes more difficult for the banks to obtain funding, it will also become more difficult to ‘reach out’ with repo rate changes. We usually describe this as a weakening of the monetary policy transmission mechanism. And this, naturally, makes it more difficult to stabilise inflation around the target. The Riksbank would also have to use its various tools to manage liquidity problems in the banks. We saw this clearly during the acute financial crisis of 2008–2009. I shall now summarise my comments so far.
Developments since May The MPC’s next Monetary Policy Report is not published for another three weeks, and we have not yet begun to discuss what our updated August forecast might look like. What I am going to discuss today will be the MPC’s initial assessment, as set out in the minutes of our June meeting, of what we had learned about the economic outlook since our May MPR, as well as my own interpretation of the very latest data which have come out over the last three weeks since the June MPC meeting. Global growth appears to have been somewhat stronger than we expected in May, largely due to upside news in the euro area. Activity in the US so far looks to have been broadly in line with expectations; but CPI inflation in the US has now reached 5.4% - its highest level since 2008, and 0.5pp above market expectations at the time of release. Despite that, global yield curves, led by US Treasuries, have first risen and then fallen back in recent weeks; the ten year gilt yield is now 10bps lower than at the time of our May forecast, while ten year US Treasury yields are 20bps lower. Bank staff models suggest US factors have been the dominant driver of the movements in UK yields since May.

How quickly this reduction will feed through to consumer prices depends among other things on competitive conditions and margin setting. A change in the real interest rate will also influence demand in the economy. •  The real interest rate channel to aggregate demand  •  An increase in the real interest rate reduces demand, both for consumer and investment goods. It becomes relatively more attractive to save, and leads to a reduction in current consumption. Investors in their turn will face higher investment costs and will as a result reduce investment demand. •  The exchange rate channel to aggregate demand Strengthening the exchange rate means that domestically produced goods and services become relatively more expensive than competing foreign products. Demand for domestically produced goods is thus reduced. It is common to assume that the effects through the channels mentioned so far will come about within one year of a change in the interest rate. The direct exchange rate channel to inflation is probably the one that acts quickest. •  The demand channel to inflation The reduction in aggregate demand as a result of the rise in the interest rate will in turn slow the rise in prices. This is mainly due to two factors. First, output is reduced. The decline in output results in lower demand for labour. This reduces wage growth. Second, firms set lower prices as a result of lower demand. The impact on inflation is often assumed to come one to two years after the effect on aggregate demand.
The TARGET system processes today around EUR 1500 billion per day, 50% more than the average in 1999 and an estimated three times the amount that all the large-value payment 11 systems in the 12 euro area countries processed together in 1990. –  Thirdly, a large currency area means deeper and more liquid financial markets. This allows market participants to diversify their risks on a wider basis; moreover, as currency risk is eliminated, they can focus on the analysis of credit risk. A large currency area also provides more scope for specialised institutions to develop. All in all, market efficiency and liquidity 12 help to cushion external shocks. 2.3  Taking into account these benefits, one could question why financial stability issues are still important in the euro area. In my view financial stability issues need to be re-visited today against the backdrop of the farreaching changes observed on the financial markets in the last decade, and taking into account the succession of market instability episodes. Just to name a few, the Asian crisis, the Russian/LTCM crisis in 1998, the “Tech-bubble” as of 2000. These episodes were characterised by situations of liquidity stress, market volatility, and the late discovery of risks that had spread widely through complex hedging and financial innovation devices. In this respect the complex relationship between volatility, financial innovation and financial stability deserves attention. Clearly, volatility levels primarily reflects the degree of uncertainty of market participants.

Although credit  10  4  Source : Report on financial structures - ECB - 2002. BIS Review 2/2003  still plays a prominent role in the allocation of financial resources, credit institutions themselves are relying on the financial markets to manage their balance sheets. These two points suggest that the benefits of enhanced liquidity entail the management of a new range of risks. This should not lead us to conclude that financial integration has necessarily negative side effects from the point of view of financial stability. Financial integration may help to foster financial stability. I would like to put forward three reasons for this: –  First, the setting up of a large currency area eliminates disruptions arising from currency risk that would otherwise prevail between the participating countries. Domestic economies are immune to currency misalignment episodes that disturb regional trade. Currency risk premia are eliminated from interest rates. –  Secondly, the setting up of a large currency area implies an overhaul of market infrastructure. In this respect both public bodies, such as national central banks and market participants, have a unique opportunity to pool best practices. Indeed, this has been the case in the euro area where, for example - the TARGET system, interlinking domestic real-time gross settlement systems, has demonstrated its ability to absorb large volumes of crossborder flows, and to perform well even in critical circumstances such as September 2001.
We cannot allow innovation to have “free pass to ignore public interest”.3 Earlier this month the Bank published a discussion paper on digital money including the possibility of central bank digital currencies (CBDC).4 A CBDC would, if introduced – and that is an important if being considered by a number of recently announced groups5 – be a new form of central bank digital money issued by the Bank of England for use by households and businesses. Importantly it would co-exist alongside cash, commercial bank deposits, and core payments infrastructure such as RTGS. RTGS at the heart of UK payments A decision on whether to introduce CBDC will be made in due course. But a significant programme to enhance the existing infrastructure is already well on the way to delivery and is set to start to make a real difference 12 months from now: the renewal of the RTGS service itself. RTGS sits at the heart of UK payments. It is the infrastructure where the key UK payment systems ultimately settle – CHAPS and a myriad of retail systems including Bacs, Faster Payments, cheques and cards. The RTGS service settles an average of £ each working day (which is equivalent to more than the UK’s GDP every three days). This settlement occurs in central bank money, the ultimate risk-free asset. In addition to its settlement functionality, RTGS also plays an important role in the implementation of monetary policy.

In the medium term, the renewed service will enable access with a simpler and more proportionate onboarding processes including streamlined testing requirements and interfaces such as Application Programming Interfaces (APIs). And increasing capacity significantly to facilitate more participants. This in turn should support greater innovation and competition within the payments sector in the future. Wider interoperability: Further down the line the CHAPS implementation of ISO 20022 will align with the UK’s forthcoming new retail payment system – the New Payments Architecture (NPA) for retail payments. The implementation of a common messaging approach – through the UK’s ISO 20022 Common Credit Message (CCM) – will deliver wider interoperability between payment types and makes it easier to switch between payment systems should the need arise. The Bank also continues to work with other central banks and operators to ensure that as a global standard, this provides greater interoperability and harmonisation with other international payment infrastructure – leading to an improved user experience, more efficient fraud detection and increased efficiency. Improved user functionality: The new system will be designed to better support the needs of users, for example enhanced liquidity management, the introduction of APIs and greater data availability. 3/6  BIS central bankers' speeches  Strengthened end-to-end risk management: Since the operation of CHAPS was brought inhouse in November 2017, we have introduced a more robust system with greater oversight and governance.
•  Fifthly, central bank independence is of the essence. It is an integral part of the acquis communautaire, which is laid down not only in national legislation but above all in the  8  BIS Review 71/2002  Maastricht Treaty. The effective implementation of the acquis communautaire is not only a legal prerequisite for accession to the EU. It also implies the effective transformation of accession countries’ economic framework, which should facilitate their integration into the EU and, later, the euro area. In this context, it should be ensured that there is no discrepancy between the central banks’ formal status in the legislation and the implementation of that legislation. It is of utmost importance that all present and future Member States respect this economic and institutional ground rule of the European framework. •  Sixthly, let us not forget the present and future contribution of Central and Eastern European countries to the economic prosperity of Europe at large. It seems that this contribution might be sometimes underestimated, while the relative influence of the US economy, for instance, might be sometimes overestimated. In fact, transition economies, as a whole, are as important as the US in terms of external demand addressed to the euro area: they both enjoy the same share, i.e. 13% of our exports. And, during the last two years, transition economies contributed for two-thirds to the overall growth of our total external demand, while the US contributed for less than 0.1%.

Put another way, similar activities that involve identical risk issues should be regulated on an equal basis to avoid tilting the playing field. Failure to do so will result in regulatory arbitrage and cause activities to migrate towards looser controls. In Singapore, the regulators for banking, securities and insurance activities are consolidated in MAS. Specific to the capital market, we have integrated our legislation for the securities and futures industries, and harmonised our regulation of the financial advisory business to support the cross-selling of products. What is critical however, is not how regulatory responsibility is divided or consolidated into one or more agencies. The overriding objective is equitable treatment and consistency in the approach to the measurement and management of risk. Capital requirements illustrate this most clearly. Most regulatory models have moved away from setting fixed minimum capital for regulated activities. In banks as for capital market intermediaries, regulators are adopting and refining the risk based regulatory approach. Where risks take on a similar profile therefore, the capital charges should be aligned based on a consistent principle. This is so even as the risk management regime in the banking, securities and insurance sectors retains some distinctive features that recognises the differences in these businesses. Legislative initiatives in Singapore In Singapore, at the heart of the regulatory framework for the capital markets is the Securities and Futures Act (“SFA”) which was enacted in September last year. The SFA is an omnibus Act that sets out the regulatory framework for the capital market.
This is the assessment that was described in the Monetary Policy Report published on 2 July this year. I will also comment on the new information received over the summer. Finally, I shall report how the majority of Executive Board members and I personally viewed monetary policy in July. But I shall began by describing developments in the financial markets, which are both the reason for the economic downturn being so severe and a necessary condition for growth to pick up again. Financial markets Improved situation in the financial markets The situation in the financial markets has improved over the past six months both in Sweden and abroad. Risk premiums in the interbank market, for instance the TED and basis spreads, have fallen and are now close to the levels prevailing prior to the outbreak of the crisis two years ago (see Figure 1). This is a sign that the interbank market is functioning better. Other positive signs that the situation in the financial sector has stabilised are that Swedish companies can once again take loans in the international capital market, that equity prices have risen and that the krona has strengthened. However, the problems in the financial sector are not over yet. Several other types of risk premium are still at higher levels than prior to the crisis, for instance, credit spreads for companies and Credit Default Swaps. Moreover, the banks’ loan losses will probably increase (see Figure 2). 1  1  See the Financial Stability Report 2009:1, Sveriges Riksbank.

That’s important, but it does not change the need to make judgements, or even make the judgements any easier. Data get revised; models over simplify; forecasts are fallible. It’s essential to invest in state of the art techniques; indeed the Bank has just introduced a new macro economic model. But progress depends just as much on recognising all the uncertainties and allowing for them in a systematic way. The monthly interest rate decision requires a complex assessment of all the evidence. We need to be both sceptical and open minded, if we are to avoid major error: sceptical when it comes to interpreting the data, but alert for signs that we may be getting it wrong. The decision to raise rates in February, while inflation was still well below the new target, reflected a top line view that inflationary pressures were likely to build over the next couple of years. While this has been the emerging picture for some months now, we have been surprised by a number of developments pointing in different directions, which have needed careful evaluation - notably, the resilience of household spending and the strength of the exchange rate. We have also had an opportunity to reconsider earlier judgements, especially about the amount of spare capacity and the likely growth in potential supply. That is the nature of the exercise. March will be another month. There can be no foregone conclusions when it comes to setting interest rates.
However, in a wider perspective we can note that even in the future the worlds’ banks will have capital that only amounts to a few per cent of their assets. This is almost within the margin of error for a valuation of the total assets. The equity/assets ratio in the banking sector is only one fifth, or even one tenth, of that for companies in other sectors. However, a central element of the Basel III Accord is that the standards are minimum regulations – countries that want to impose stricter requirements may and should do so. We have already seen cases of this – for example in the United States, the United Kingdom and Switzerland. Decisions have also been made in both the United States and the United Kingdom on more structural measures to protect the central functions of the financial sector, for example through the Dodd-Frank Act and the follow-up of the Vickers Report. In the EU, the Liikanen Report has taken up the issue of ring-fencing, that is separating the different operations of the banks from each other. The reason is that the financial systems are different in different parts of the world. It is therefore important to design regulations that are tailored to the banking system that has to comply with them. We also need to maintain a respectable distance to the minimum regulations. Considering what we know about the Swedish banking system, there are good reasons for ensuring that Swedish banks comply with the global standards by a broad margin.

This means that for every SEK 1 000 in risk-weighted assets, the banks funded their operations with SEK 70 of their own money and with SEK 930 in borrowed money. This is in fact a rather generous calculation and includes capital that turned out be of dubious quality. Decisions had also been made at that time that allowed the banks to use their own internal risk models to a greater extent to calculate their capital adequacy requirements. The banks were thus able to substantially reduce the risk weights of their assets, including mortgages, in the long term. The major banks’ internal risk models indicated that the risks associated with mortgage lending were extremely low. In several cases this meant that the risk weight of a typical mortgage could easily be as low as 6 per cent, which meant that only 6 per cent of the mortgage would need to be covered. With a capital adequacy ratio of 7 per cent and a risk weight for mortgages of 6 per cent, this meant that a bank could fund each SEK 1 000 of a mortgage loan with SEK 996 in borrowed money and SEK 4 in its own money. The risk the bank itself took when it lent SEK 2 million for the purchase of a house thus corresponded to SEK 8 000 of its own capital.