samchain/econo-pairs-v1 huggingface dataset:
Gross portfolio equity inflows to emerging markets surged as investors substituted out of low growth developed markets (Chart 1). Gross equity inflows to certain emerging markets were large relative to domestic market capitalisation (Chart 2). The resulting indigestion problem caused bubbly behaviour in emerging asset markets. In response, a number of countries have thrown grit in the wheels of finance through macro-prudential measures or capital flow restrictions. These surges in foreign capital flows, and associated asset market spillovers, are far from new. Through this century, a new wave of inflows to emerging markets has been building. Although halted temporarily by the financial crisis, its effect has been to buoy emerging asset prices (Chart 3). Earlier centuries have seen many similar episodes of capital flow surges into emerging markets, from the South Sea bubble in 1720 to the East Asian crisis of the 1990s (Reinhart and Rogoff (2008)). Historically, as these waves have broken they have often caused quite a splash, with sharp capital and asset price reversals (IMF (2011)). Some commentators have called those capital reversals “sudden stops” (Dornbusch, Goldfajn and Valdés (1995)). But the underlying problem may be as much the start as the stop. The seeds of emerging market crises are sown in the build-up phase, as inflows dwarf the absorptive capacity of recipient countries’ capital markets. Capturing that dynamic requires a different metaphor – the “Big Fish Small Pond” (BFSP) problem. The Big Fish here are the large capital-exporting, advanced countries.

(a) Excluding Saudi Arabia due to unavailability of data. (b) Weighted averages use each country’s equity market capitalisation as weights. (c) Numbers may differ slightly to those in the text due to rounding.
13  All speeches are available online at www.bankofengland.co.uk/news/speeches  13  This perhaps illustrates that the risk to financial stability from monetary policy may come not so much from the use of monetary policy tools to stimulate demand. Rather, it may come from the risk that in a low for long world monetary policy does not or cannot respond sufficiently vigorously to shocks to avoid macro-economic tail events that would severely stress a less resilient financial sector and more leveraged real economy. Perhaps the most important lesson we learned from the crisis is that financial stability is a necessary condition for macro-economic and monetary stability. Over longer time horizons there is no trade-off between the two.27  But there is also some truth in the converse. Financial stability depends in part on effective demand management. It can be severely tested by macro-economic tail events even when the financial sector itself is not the source of the shock. Policy responses  Taken together, therefore, a low for long world is likely to be a more challenging environment for financial stability. The first and, in my view, most important policy conclusion to draw from this is the need for active and powerful macro-prudential institutions and policy. Effectively used, in relation to both lender and borrower balance sheets, it can constrain risk taking or ensure that higher risk is accompanied by greater resilience.

One notable example of this is the growth of corporate leveraged lending in many jurisdictions. The Bank estimates that the global stock of leveraged loans has now reached an all-time high of $ 3.4 trillion, equivalent to 11% of total advanced economy credit to nonfinancial corporates. The share of corporate debt owed by highly leveraged companies is now very close to or above pre-crisis levels in major advanced economies.11  The growth of this market has been accompanied by a marked easing of underwriting standards and compensation for risk. The share of new leveraged loans with no maintenance covenants has tripled since 2007.12 Spreads have declined and remain below their 2015 levels. And there has been growing use of accounting adjustments (‘add-backs’) that could understate leverage13. There are other examples. We have also seen an increase in sales of complex products as investment banks try to boost their income in a challenging trading environment. And in some countries, retail lending conditions have loosened. For example, in the United Kingdom the proportion of mortgage lending at higher loan-to-value (LTV) ratios has been rising over the past few years and is now close to its pre-crisis peak.14 At the same time, interest rate spreads on high LTV lending have declined and are close to recent post-crisis lows.15  Search for yield behaviour may have been more pronounced in the non-bank financial sector.
There was considerable uncertainty over who was actually holding the bad loans and the problems quickly spread around the world. The uncertainty increased over the summer when credit rating agencies downgraded many of these products. During the third quarter of last year several investment banks reported large write-downs as a result of the bad loans, and in connection with this uncertainty once again increased. In recent months the situation in the financial markets has been characterised by considerable uncertainty over future risks, large write-downs and funding problems for financial institutions. The instability has led to a fear among the banks that they may face liquidity problems, that is, experience difficulty taking new loans when the old ones fall due for payment. It has also lead to fears of an increased credit risk when lending to other banks. This means that the banks have preferred more liquid and risk-free investments, while more banks have experienced difficulties in financing themselves in the interbank market. As a result, government rates have been pushed down, while interbank rates have risen. We have seen this development in many large economies. The interbank markets have been much more volatile than normal. In many countries they have at times functioned poorly in the sense that there has been reluctance to lend money to some banks. In some countries, such as the United Kingdom and the euro area, the considerable uncertainty has led banks to prefer to invest safely in the central bank instead of on the interbank market.

Since last winter a “Monetary Policy Update” is published on these occasions, a report which contains a more limited number of forecasts. On the basis of the work described above, the Executive Board establishes its majority view of what is considered a well-balanced monetary policy, giving consideration to inflation and the developments in the real economy during the forecast period. Last Wednesday we published the first Monetary Policy Update of the year. We observed in this report that the financial turmoil has persisted since the monetary policy meeting in February. It has contributed to subduing households’ and companies’ expectations for the future in many countries. At the same time, energy and food prices have risen more than expected. All in all, this means that international economic activity is showing weaker development than the Riksbank had earlier anticipated. Economic activity is still good in Sweden, with high growth in consumption and employment. Exports have also shown good growth. The weaker international economic activity will contribute to a slowdown in the Swedish economy. Rising energy and food prices mean that inflation is high and it is expected to be slightly higher next year than was forecast in February. As before, the Riksbank has to take into account different counteracting factors. On the one hand, inflation is still high, as are inflation expectations. On the other hand, the increasingly weak international economic activity will have an effect on Swedish growth and inflation.
An increase in the capital buffer of 2.5 per cent could then, under slightly simplifying assumptions, be translated into an increase in the banks’ lending rate of around 0.2 percentage points at most.18 Higher capital adequacy thus reduces the risk taken by shareholders and other financiers and should thus lead to a reduction in the banks’ yield requirements and borrowing costs. The increase in lending rates could therefore also be lower. For the family in Upplands Väsby, this means that interest expenditure increases by SEK 204 per month after tax. For the family in Luleå, with a slightly smaller mortgage, the increase is SEK 128 per month after tax. For the family in Stockholm with the larger mortgage, interest expenditure increase by SEK 461 per month after tax. Expressed as a percentage of disposable income, the countercyclical capital buffers entail higher loans costs for our households corresponding to 0.3–0.8 per cent of their disposable incomes. These relatively marginal effects on the wallet will probably not influence the incentives for debt in our standard households to any great degree. To influence households’ indebtedness the capital adequacy requirements made of the banks would need to be raised much more than is now being suggested. On the other hand, the increased capital adequacy requirement means that the banks’ resilience is strengthened, which is desirable in itself and an important purpose of the regulation. Elimination of tax relief would have greater effect If one wants to influence the incentives, there are other measures that could be much more effective.

I nevertheless think that one can draw some conclusions from these exercises: Firstly: Whatever the authorities do in terms of macroprudential policy measures, changes in fiscal policy or in monetary policy, it will affect the price of money in the economy, that is, loan costs, and thereby the incentives for indebtedness. This means that measures taken in one area must take into account what is being done in other areas. The one hand must be aware of what the other is doing, even if they are not completely coordinated. 10  BIS central bankers’ speeches  Secondly: It is clear that of the measures now being discussed, some have much greater potential than others for influencing the incentives for households to borrow. Here the challenge will be to find measures that are sufficiently forceful, but will not be the actual straw that breaks the camel’s back. What one wants to achieve is a controlled adjustment. Thirdly: If we are to deal with the excessively high indebtedness, it is unavoidable that this will have an effect on individual households and entail costs for the economy as a whole – although of course the benefits will ultimately weigh heavier, if we can avoid a really poor outcome. Let me be clear that I do not believe it is enough to solely implement measures that affect the supply and demand for credit through increased loan costs for households. Other measures are also needed.
Oil prices, which reached historical highs in nominal US dollar terms in the last week of October, are a key factor determining near-term prospects for economic activity and inflation, both globally and in the euro area. As I noted earlier, persistently high and rising oil prices have had a visible direct impact on consumer prices in the euro area, and inflation is likely to remain above the upper limit of our definition of price stability of 2% in the coming months. This is a worrisome development, although there is little indication that medium-term inflationary pressures are building up in the euro area. What would be the potential impact of a sustained rise in oil prices on key macroeconomic variables in quantitative terms? For purely illustrative purposes, and using a variety of macroeconomic models, ECB economists have estimated the potential impact of a hypothetical permanent oil price increase of 50% on both inflation and output. According to these calculations, such an increase would add 0.3 to 0.6 percentage points to overall inflation in the euro area in the first year and 0.1 to 0.4 percentage points in the second year, before petering out in the third year (0.0 to 0.1 percentage points).

Investment advice by persons not carrying on a business: a growing number of online discussion fora, chat-rooms and bulletin boards allow persons to post their opinions concerning securities. An entity providing a platform for public discussion of securities would not attract licensing.11 Neither would a participant, as long as he is not deemed to be “carrying on a business” of providing advice. In the context of dealing, we will treat two common practices as passive conduits. First, websites providing hypertext links to, or advertisements for, licensed dealers. But websites should not advertise for, or link users, to unlicensed dealers, including overseas dealers not licensed by MAS. Second, licensing is not necessary for providing prospectuses and application forms passively on websites, or via email upon the request of investors. These merely improve on the efficiency of paper distribution.12 Websites must not go beyond being passive conduits. MAS will consider portals or websites providing facilities for accepting or relaying orders to dealers as licensable. This is because such a facility carries the risk of failure to transmit trade orders in a timely and accurate fashion, potentially to the detriment of investors. Overseas websites specifically targeting Singapore residents Our final principle deals with overseas websites. MAS will apply the same licensing principles to overseas websites which specifically target Singapore residents, as it does to local websites. This is to ensure that foreign and local internet players are treated on the same regulatory basis.
We often talk about asset markets in very general terms without going into any great detail. In this context one can argue that monetary policy is a blunt instrument and considerations of risks associated with credit and asset markets should be left to the supervisory structures in place. In principle, supervisory rules can be fine tuned towards different asset markets in a more precise way than monetary policy. If prudential rules are or become binding we are also likely to see some macroeconomic consequences of these policies. In my view it is far from obvious how much weight is to be put on monetary policy and how much on supervision. Monetary policy can play a role, albeit perhaps a limited one, not the least because this will help to manage inflation expectations over the long term. Furthermore, when imbalances build up monetary policy and supervision can support one another. Criticism from different sides… I mentioned in the beginning that we have been criticized from many angles. Thus, in the very same year that an outside review came to the conclusion that the Riksbank had given too much independent weight to house price developments, other Riksbank-watchers criticized us for neglecting the ongoing build-up in house prices and debt levels. Some market commentators in Sweden have in the past year referred to the rapidly rising house prices as a reason for increasing the repo rate at a substantially faster rate than our published interest rate forecasts.

Focus was first placed on strengthening the institutional capacity of the domestic financial intermediaries so as to narrow the performance gap between the domestic and international financial intermediaries. In parallel with this was the intense effort to develop the domestic bond market. During this phase of the development of the financial system, significant advancement in the banking sector was made in terms of capitalisation, risk management and governance practices, delivery channels and in human capital development in the industry. This paved the way for the interest rate reform to move to greater market orientation, thereby supporting a more efficient pricing of financial products and services. The more competitive environment that it generated also became an important driver of productivity gains, customer centricity and innovation in the financial system. Equally important, was the attention that was given to the development of a deep and vibrant domestic bond market as an alternative channel for the efficient raising of funds, particularly by the corporate sector. The development of the bond market has enabled better matching of long-term projects with long-term funds, and by reducing the over-reliance on the banking system, it has contributed significantly to financial stability. Among the institutions that was established to support the development of the domestic bond market was the establishment of the domestic rating agencies and Cagamas, the mortgage corporation. The Malaysian bond market has since evolved to become the largest in South East Asia to now account for 110% of GDP.
I am rather doubtful myself, for several reasons. First, in the absence of single accounting standards, a comparison between banks belonging to different accounting universes will mean absolutely nothing. Second, that sort of ratio did exist in the United States and proved of no help, precisely in the country where the crisis emerged. Finally, in the present circumstances, it could add to the reluctance of banks to be active lenders in the interbank money market, therefore reducing market liquidity and still increasing the over-reliance of the banking sector on the central bank counterparty. That said, it is essential to enhance the counter-cyclical nature of capital requirements. For instance, implementing a forward-looking provisioning system and an additional capital requirement at the cycle peak would be effective measures to make capital requirements more contra-cyclical. In this regard and especially in the light of the profits announced by the major banking groups and the large payouts to traders, CEOs or shareholders in the form of dividends, I would like to stress that these profits should primarily be used to bolster capital ratios and allow banks to focus on their core task of financing the economy. All in all, I praise international standards in the field of prudential rules.

The ones already developed over many years and which the crisis is now leading us to adapt, or the new ones under scrutiny, are only meaningful and will only produce their desired effects if they are applied by all countries and, needless to say, first of all by those that negotiated them. From that viewpoint, the adoption of the Basel II framework by the United States looks to be one of the most important and urgent issues. It is also very important to improve and harmonise accounting standards. The views of G20 countries sometimes differ as to the role of accounting. For instance, one contentious issue is marking-to-market and the extent to which fair value accounting should be applied. It is vital that the accounting choices of standard setters better take on board the financial stability dimension, since they have an impact on the latter. Lastly, the crisis has also highlighted the limitations of self-regulation; it is also essential that the regulation of all systemically important institutions and markets be proportional to their potential impact on financial stability. However, in order to implement such an approach, agreement would have to be reached at the international level on a standard definition of the systemic nature of an entity, which clearly does not depend on its size alone. Moreover, the consistency and the appropriate balance of such potential specific rules with the general rules must also be ensured.
In the Bank’s latest monetary policy report, inflation was projected to remain somewhat below target in the years ahead, against the background of prospects for moderate wage growth in the wake of the fall in oil prices and the need for economic restructuring, among other things. Rather than operating a strict inflation targeting regime and lowering the key policy rate, Norges Bank has chosen to bring inflation back to target more slowly, in the light of firming growth in the Norwegian economy and decreasing unemployment. Higher capacity utilisation and prospects for increased inflation abroad imply that the risk of too-low inflation is small. The Bank gives weight to the expectation that inflation will pick up gradually from today’s level. 3/8  BIS central bankers' speeches  Real economic considerations in the conduct of monetary policy Since 2001, Norges Bank has gradually given more weight in its conduct of monetary policy to a reasonable trade-off between the path for inflation and the path for output and employment. Over this period, monetary policy has gone from “underpinning fiscal policy” to being the first line of defence in stabilising the economy. Norges Bank’s role in stabilising the economy is clearly defined in the draft objects clause, which reads “the Bank shall otherwise contribute to high and stable output and employment”. This formulation differs somewhat from the usual wording in other central bank acts.

The order of priority for these considerations does not dictate the weight the central bank can give to stable output and employment in the short term. Norges Bank does not interpret “high and stable output and employment” to mean that the Commission is advocating that monetary policy should have greater responsibility for stabilising the economy than it does today. Monetary policy cannot have primary responsibility for the level of output and employment. There is broad consensus among economists that monetary policy cannot influence the long-term growth potential of the economy. The level of economic activity, and thereby employment, is a result of overall economic policy, particularly with regard to more structural factors such as wage and income formation, the tax and social security system and the functioning of the labour market. Monetary policy is only one piece of this picture. But monetary policy can make important contributions to stabilising the economy. First, the policy rate can be rapidly adjusted in response to shocks to the economy, as for example in 2008 and 2014. Second, the policy rate has a direct and pronounced impact on many segments of the real economy. This means that as long as there is no conflict with the inflation outlook, monetary policy can be oriented to influence average output and employment over time. Many countries, including Norway, have experienced that employment losses in connection with an economic downturn are not fully reversed following a turnaround; for example, unemployment may become entrenched at a high level or the labour force may be reduced.