samchain/econo-pairs-v1 huggingface dataset:
BIS central bankers’ speeches  5  6  BIS central bankers’ speeches  BIS central bankers’ speeches  7  8  BIS central bankers’ speeches  BIS central bankers’ speeches  9  10  BIS central bankers’ speeches

For households with debts, the scope for consumption is also affected by interest rate adjustments if the share of income used for interest payment changes. Accordingly, we take this into consideration when we make our inflation assessment. There has been a swift increase in household debt and house prices over a long period. One potential cause of concern, which we cannot disregard, is that if this trend continues at the same rapid rate, a situation could develop where, at a later date, there is a risk of a considerable slowdown in growth and employment as a result of households finding themselves compelled to increase savings owing to a heavy debt burden. The risks involved here are very difficult to quantify in forecasts or pinpoint in time, but could none the less be a threat to macroeconomic stability. Inflation could then also revert to a state that might prove difficult to deal with. However, it should be underlined that the likelihood of such a scenario arising is regarded as slight, in particular when we have identified it in good time. We have taken these factors into consideration even if they have not been crucial for our monetary policy decisions. The Riksbank does not have a target for the krona exchange rate. However, since the exchange rate is one of many factors affecting growth and inflation, we must naturally take the path of the krona into consideration in the inflation assessment. The exchange rate affects inflation directly and generally relatively quickly through prices of imported goods and services.
Chart 1 plots the distribution of the ratio of UK bank assets to nominal GDP since 1880, broken down into sub-samples. Over this period, this ratio has risen roughly tenfold. It has increased particularly strongly over the past 30 years, peaking at well over 500% of GDP. Other developed countries have experienced a similar, if less dramatic, pattern. This is the “bigger bet” strategy in practice, as a route to higher equity returns. Historically, there is also evidence of the “riskier bet” strategy having been deployed to boost returns. Chart 2 plots the distribution of returns on banks’ assets, again broken down by sub-  11  4  Assuming the beta of its debt is zero – say, because of deposit insurance. BIS central bankers’ speeches  sample. The mean return on bank assets lies in a range of 0.5–1% per year. But the variation in returns has risen dramatically. Asset returns were two and a half times more volatile at the end of the 20th century than at the beginning. This evidence is no more than circumstantial. But it does point clearly to banks having assumed greater risk in greater size as the disciplines of unlimited liability were progressively relaxed. In other words, the historical evolution of banking is entirely consistent with the predictions of Merton’s theoretical model. Debt and taxes There is a second, and simpler, route to boosting equity returns. That is by gearing-up the balance sheet. Increased leverage acts directly on a bank’s equity beta.

In Anglo-Continental Guano Works v Bell (Surveyor of Taxes), Mr Justice Cave summed up thus: “It seems to me... that the gains of the trade are quite independent of the question of how the capital money is found… [One] cannot take into  BIS central bankers’ speeches  5  consideration the fact that the firm or trader has to borrow some portion of the money which is employed in the business... If you did that it would land you in very extraordinary results”.12 Indeed, it might land you in the guano. But banking was about to buck this trend. In Farmer (Surveyor of Taxes) v Scottish North American Trust, Limited, Lord Atkinson referring to the Anglo-Continental case concluded: “It does not appear to me that the reasoning on which this decision is based can apply to a bank whose business is the borrowing and lending of money”.13 From early in the 20th century, debt interest became a legitimate deductible from bank profits. Where banks led, non-financial firms followed. This debt bias has persisted in the century since.14 The scale of tax-induced debt bias is generally greater the higher the rate of corporation tax and the lower the rate of personal taxation of equity. The IMF (2009) has recently estimated the scale of debt bias in a selection of developed countries. For low or tax-exempt investors, such as pension funds and non-residents, debt is typically between 30–40% cheaper than (new or retained) equity.15 For high-tax investors, the biases are smaller but still significant.
Much of the credit for this belongs to the European Central Bank (ECB), whose steadfast commitment to price stability has created an environment conducive to investment, reflected in the fact that interest rates are low across the yield curve. The ECB’s credibility in fighting inflation is now so well established, moreover, that long-term inflation expectations are well anchored at around 2%. Price stability clearly yields important welfare benefits. So there are both advantages and opportunities for policy makers and economic agents in the euro area. But in setting out on this new phase of Malta’s economic development, we must be aware that, while the ECB can, and indeed has, delivered low and stable inflation, it cannot use the interest rate to permanently increase growth. From Malta’s perspective, therefore, the adoption of the euro must be viewed as but one in a continuum of challenges to be faced. The purpose of this conference is precisely to focus attention on the policy choices that need to be made in the years ahead. Put simply, the task that Malta faces is to bridge the remaining income gap with the more advanced members of the euro area. The success of this endeavour will depend importantly on how effectively the public and private sectors work together, both in assimilating the lessons learned during these first years of EU membership and in implementing appropriate policies.

To use real time detailed communication and press conferences in this way was a logical decision, bearing in mind (i) the attention the ECB would receive as a major player in the world financial markets and the global economy, (ii) the necessity to “frontload” the public and the markets with information on the thinking of the new institution and (iii) the interest as regards communication at national level through many different languages of having timely public terms of reference. I do not hesitate to say that this new ECB concept of real time detailed communication has been an important element of the new paradigm in central banking communication. Second, there is the ECB’s Monthly Bulletin, which is always published one week after the press conference. It gives a more detailed explanation of the analysis behind the monetary policy decisions. It regularly reports on information collected by the ECB, such as the bank lending survey. Importantly, it now also includes the ECB staff projections four times a year. An advance copy is published immediately after the Press Conference following the Council meeting. This is another example where the ECB has gone very far in making its policy transparent and communicating its economic assessment in real time. The Monthly Bulletin also contains articles which provide insights into the principles governing our policy. Third, the members of the Governing Council members give interviews and speeches to many different audiences. In them they explain the decisions taken and the ECB’s view on current topics within our sphere of competence.
•  And sixthly, the institution must be prepared to take appropriate remedial action to deal with its liquidity problems. The policy applies to locally incorporated institutions whose failure might have systemic implications, and not to branches of foreign banks operating in Hong Kong, since the liquidity of a branch cannot readily be divorced from that of the bank as a whole. The expectation is that, in the event of difficulties, the head office of the branch, supported if necessary by the lender of last resort in the home country, would provide enough funding to enable the branch to meet its obligations. There are, however, two circumstances in which the HKMA might provide financial assistance to a branch of a foreign bank with funding problems. The first would be for the HKMA to swap Hong Kong dollars for US dollars held by the branch if no suitable counterparty could be found in the market. The second would be to provide urgently required bridging finance on a secured basis to a branch pending receipt by it of funds from head office. 5  BIS Review 77/1999  Instruments for Lender of Last Resort Support The policy statement that will shortly be issued to banks contains extensive details about the instruments that the HKMA would use for lender of last resort assistance.

The vast body of research conducted in the area of monetary policy has documented the real risk of high and persistent inflation and inflationary expectations. It also shows that without a strong and committed monetary policy response, inflation expectations become self-fulfilling, leading to increased uncertainty, disrupted price signals, inefficient distribution of resources, reduction of economic growth and increased long term volatility. Our experience, research and current analysis, show that under current conditions, the only responsible policy for the central bank is to respond by increasing the policy rate and reinforcing its commitment to price stability. This course of action will create the necessary monetary conditions to control inflation and inflation expectations, and will eventually help return inflation to the target within a reasonable time horizon. Our commitment to price stability aims to preserve the purchasing power of the family incomes and the value of household savings; preserve financial stability and create optimal credit conditions; as well as help the private sector to make reliable business and sustainable investment plans. Most importantly, our projections, which benefit from the same models and research analysis, suggest that the current round of policy rate hikes will not be recessionary. The Albanian economy will continue to grow in the medium-term horizon. In this respect, the recent increase of policy rate which aims to preserve price stability and anchor inflation expectations, is simultaneously a measure for protecting the economy;  2/4  BIS - Central bankers' speeches  the private sector; and the households, from the negative effects of inflation.
Second, saving banks may well need a sound corporate governance scheme precisely because of the special ownership and control structure. Third, corporate governance that reinforces transparency is always an important contribution to increased efficiency. Fourth, we supervisors see corporate governance as a way not just to safeguard minority shareholders, but also depositors, arguably the weakest part of the banking framework. As regards the efficiency of institutions, we all know that the application of appropriate corporate governance rules improves the quality of their management, their reputation, their stability and, by extension, their risk profile. This is why the Banco de España is and has always been in favour of strengthening corporate governance and transparency in savings banks and will assign more resources to analysing both corporate governance requirements and the practical application of these requirements at each institution. Conclusions To conclude, let me add that the process of improving efficiency levels should not be viewed as a solution for times when the revenue arising on ordinary activity is adversely affected. Rather, it should be tackled as a process to be pursued over the medium and long term, in parallel to the improvement in risk management systems. BIS Review 31/2003  5

He urged writers to “throw away anything that is false, no matter how much he might love that page or paragraph”. In a similar vein, Malaysia’s microfinance journey has been one of trial and error, as we continuously strived to increase the social and economic impact of microfinance, sometimes working against the tide of popular thinking. This has led to a more nuanced approach to the development of microfinance over time, and an ongoing process of rethinking norms which we may take for granted today. Today, I would like to talk about three perspectives that have shaped the way we approach and implement microfinance in Malaysia. First, technology when used in a clever way, can be of great use. While technological advancements hold great promise for expanding access to financial services for the poor, we need to invest time and resources to understand the factors that affect the poor, and the suitable approach to generate income and create wealth. These insights are what will determine whether technology is central or peripheral to the inclusion agenda. Second, the tradeoffs between financial stability and inclusion requires smart management. A microfinance strategy that focuses largely or wholly on providing credit to the unserved is almost destined to fail, potentially leaving communities worse off from excessive debt burdens. Instead, implementation strategies should ensure that the provision of credit are complemented by the necessary safeguards and financial education.
The risk-taking channel, which was analysed in an article in the Riksbank’s own journal, “Sveriges Riksbank Economic Review”, last year, is really a collective term for several different mechanisms which mean that monetary policy, by setting low policy rates, can encourage various players in the economy to take greater risks.5 The argument is that banks and other financial institutions take greater risks when the policy rate is low by increasing their level of debt or changing the maturity of their funding. This may be justified from the individual player’s point of view, but poses a risk to the economy as a whole. In the light of my experience of the financial market before and after the financial crisis, this theory seems intuitively correct. There is also empirical evidence to support the hypothesis that low interest rates lead to increased risk taking. It is not certain, however, that the change in the players’ risk taking is solely due to monetary policy, it may also stem from a generally low level of interest rates that has structural causes. This is a subject that I am sure we will continue to discuss, not least in terms of what it is reasonable to expect monetary policy can achieve. Monetary policy must take financial stability into account The risk-taking channel has been described as a possible link between monetary policy and the work to safeguard financial stability. My starting point is that it is reasonable for monetary policy to take into account factors that relate to financial stability.

In the slightly longer term, questions also remain about the outlook for global trade at large, a factor that has a substantial impact on an export-dependent country such as Sweden. According to some analysts, the development of global trade is now weaker than implied by historical links with global growth.10 If this is the case, is it because companies have less access to trade credits in the wake of the financial crisis or because there has been a structural shift in the growth curve for global trade? It is perhaps not reasonable to expect the high rates of growth that we saw in the early 2000s – and which were boosted by globalisation in the wake of technological development, lower transports costs, increased specialisation, China joining the WTO and so on – to continue. It is also important to monitor how Swedish exports develop in relation to global trade. These are complex questions that it is probably too soon to answer. However, there is every reason to return to these questions too, particularly with regard to the potential consequences for Sweden. All in all, the Riksbank’s assessment from the September Monetary Policy Update is nevertheless that  10  See, for example, the World Trade Organization (2013)  BIS central bankers’ speeches  9  economic activity abroad will, if only gradually, make a positive contribution to Swedish growth. Figure 7 What can we expect of world trade?
Now it’s hard to say how much weight to put on that because historically consumer confidence goes up and down, and it doesn’t just necessarily feed into consumer spending. But the increase in business confidence is quite striking, especially for smaller businesses. And so one of the big open questions that we’re going to be assessing over the next few months is: is that improvement in animal spirits, so to speak, going to actually feed through and lead to more spending? So, I think where a year or two ago, I think our anxieties were more about the risks to growth to the downside, so as that – well, a year ago, we were worried about events in China, we were worried about uncertainties about Europe. I think now the balance of risk is gradually shifting, where the possibility is that growth could actually be stronger than expected, rather than weaker than expected. The markets expect fiscal stimulus out of this Administration. That’s another factor that probably will over time tilt the equation more to the upside. But on fiscal policy, it’s really hard to factor into your forecast at this point because we don’t know what it is, how big it is, or when it will happen. Other than that, we have it completely nailed down. So, it’s really hard to sort of put that into your forecast. And so the way I think about the fiscal policy outlook is that we’re probably going to get some fiscal stimulus at some point.

Moreover, we should be aware that convergence is a continuous process, which will last even after the accession to the Eurozone; this is a lesson we should learn from the failed experience of other countries which considered that joining the euro is the end of the line. Second, while the nominal convergence criteria are deeply rooted in the minds of policymakers, the Maastricht Treaty explicitly stipulates that “a high degree of sustainable convergence” is needed. Yet, this requirement seems to have been overlooked sometimes. In this context, I want 1/2  BIS central bankers' speeches  to highlight that there are four types of convergence that must be taken into account: nominal, real, institutional and structural. Nominal convergence is easily quantifiable, as the specific criteria are clearly defined in the Maastricht Treaty. But we also have to ensure the compatibility of our institutions with those in the euro area and this is the essence of institutional convergence, a process where the central bank and its independence are particularly important. While structural convergence focuses on adapting the structure of our economy to that of the euro area, real convergence, measured by GDP per capita (at PPS) as a percentage of euro area/EU average, is the best proxy for the development level of a nation. So, when talking about convergence towards euro area enlargement, it is important to keep in mind all these valences of convergence. Third, we are very interested in learning the experience of our Bulgarian colleagues, and I am looking forward to their presentations.
•  The second focuses on the effects of climate risks on the economy and the financial system as a whole. This workstream aims to promote the modelling of and economic research into specific climate issues and to draw up global stress scenarios that can be used as a basis for monetary policy and macroprudential supervision. The SNB is a member of this workstream. It is particularly interested in contributing to this group’s activities as it wishes to explore ways to refine and augment its own analyses and tools. •  The third workstream, in which the SNB also participates, examines developments in sustainable finance and the role of central banks and supervisory authorities in promoting socially responsible investment within the scope of their mandates. The  Climate change could also impact productivity, potential growth and, ultimately, the long-term natural rate of interest. For more on this subject, cf. Brainard, L. (2019), ‘Why climate change matters for monetary policy and financial stability’, remarks at conference on ‘The economics of climate change’, San Francisco, 8 November, as well as Weidmann, J. (2019), ‘Climate change and central banks’, introductory remarks at the Deutsche Bundesbank’s second ‘Financial Markets Conference’, Frankfurt am Main, 29 October. Page 6/12  SNB is well placed to contribute here by sharing its experience as a global investor, a subject that we will investigate in more detail in a moment.

1 Furthermore, in 2018, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, the equivalent of the Nobel Prize in economics, recognised William Nordhaus for his work on integrating climate change into long-run macroeconomic analysis. 1  Nordhaus, W.D. (1977), ‘Economic growth and climate: The carbon dioxide problem’, American Economic Review 67(1), pp. 341–346. Page 2/12  It may seem obvious, but it is worth reminding ourselves that our planet has undergone numerous climatic changes throughout history. However, in the past, these changes have essentially been the result of natural forces. Today, global warming is largely attributable to human activity – and the rate of warming is faster than it has been in the past. 2 Climate change is a negative side-effect of economic activity – what economists call a ‘negative externality’. The externality arises because the costs caused by the emission of CO2 and other greenhouse gases are not borne by the emitters. When economic agents emit CO2, they do not internalise the effect of these emissions on the planet or on future generations. This is a classic ‘tragedy of the commons’ scenario: 3 the atmosphere – a shared or ‘common’ resource that is available to us all but belongs to no one – is being overexploited and degraded. The mechanism underlying the ‘tragedy of the commons’ is well understood and documented by economic theorists. Yet, in the case of global warming, several factors are in play that make the phenomenon difficult to grasp and remedy.