samchain/econo-pairs-v1 huggingface dataset:
Banks’ accountants and auditors are now working hard to calculate losses and reductions in earnings. It is also important to limit the macroeconomic effects so that banks can put this episode behind them as soon as possible. At the same time, we know – not least from the Nordic countries’ experience in the 1980s and 1990s – that the situation is demanding when the value of collateral falls. The most realistic scenario is therefore that it will probably take time for the turbulence to abate. There are important lessons to be learned here. The turbulence has revealed a number of shortcomings, primarily in the markets themselves, but also in the regulatory and supervisory systems. First, it became apparent that there are serious shortcomings in the originate-and-distribute model. Banks used to retain mortgages on their balance sheets. They had an incentive to assess the credit risk carefully in order to avoid losses. Now it has become common for banks to grant mortgages and then sell them in capital markets, to investors that have traditionally purchased securities, such as pension funds and life insurance companies, but also to special purpose vehicles established for this purpose. The mortgages have thus been removed from the banks’ balance sheets, leaving the banks apparently free of credit risk. The sale of mortgages via the securities market can diversify risk and make the financial system more stable and robust. However, the risk has proved to be considerably more concentrated than participants themselves or supervisory agencies had believed.

Fourth, the question has been raised whether the agencies rating the securities issued by special purpose vehicles are independent enough. Growth in these agencies’ earnings in recent years has to a large extent derived from rating these securities. Rating is requested and paid for by banks. High ratings result in sales to more investors. Without high ratings, this market would be far less attractive and the agencies would lose some of their earnings. This may have generated incentive problems. In addition, the agencies, which have specialised in the assessment of corporate bonds, may have lacked the expertise to rate asset-backed securities. Fifth, there have been shortcomings in the supervisory system. As mentioned above, some German banks have taken substantial off-balance-sheet risk. In the US, neither agencies nor lending institutions have been subject to federal supervision, and the various lending institutions and brokers have operated under different regulatory and supervisory regimes with varying intensities of enforcement effort. 1 Both supervisory authorities and banks have underestimated liquidity risk. Special purpose vehicles and banks have invested in long-term assets and taken out short-term loans. The problems in the US mortgage market and the contagion effects in other financial market segments have had negative consequences for many financial institutions and banks. One US bank has gone bankrupt so far. Several US mortgage institutions have had to close or have been bought by other institutions.
An adjustment in interest rates affects the price of households’ assets, such as housing and thereby wealth, and through this channel has an indirect effect on households’ consumption in the way I just have described. However, an adjustment in interest rates also has a direct effect on households’ purchasing power and willingness to incur debt via interest costs for borrowing. The speed and strength of the impact of an interest rate adjustment on households’ interest expenditure depends to a large extent, as I mentioned earlier, on the size of the debts, the percentage of the loans that are variable-rate loans and the average fixed-rate term for the loans at a fixed interest rate. The percentage of variable-rate loans increased during the 1990s and is currently around 35 per cent of the total debts. The larger the percentage of variable-rate loans a household has, the faster an  1  See pp 15-17, Financial Stability Report 2004:1  BIS Review 51/2004  3  interest rate adjustment will affect interest expenditure. The fact that indebtedness and house prices have increased should thereby have contributed to a more rapid and possibly also a stronger impact by monetary policy on household consumption demand than previously. Do the inflation forecasts contain all of the relevant information on house prices and indebtedness? As I mentioned earlier, the Riksbank’s monetary policy is normally based on forecasts of inflation one to two years ahead.

The rapid increase in house prices during the second half of the 1990s is partly due to the decline in interest rates. However, there are also other explanatory factors. Naturally, income growth has also played an important role. Other driving forces behind house price trends include demography and relocation flows that have contributed to a large demand for housing in certain areas of the country, particularly the metropolitan regions. There are also other factors that have had an impact, such as reduced housing subsidies and rising construction costs. There has also been relatively little new building since the crisis years, despite substantial demand for housing. Nevertheless, it now appears that the trend regarding construction has turned. The increase in house prices has in turn contributed to a rise in the value of household wealth, as well as in the collateral for most of their loans. Household debts as a percentage of total assets, which among other things include housing, equity and saving in insurance policies, have therefore shown relatively little increase, despite the fact that the loans have risen in relation to disposable incomes. The fall in interest rates has also meant that the percentage of households’ disposable income used to pay interest expenditure after tax is currently low, despite the increase in indebtedness. Is there reason to be concerned that households have acquired such large debts and house prices have risen so much that it could cause problems in future? To determine this, it is necessary to have some perception of the long-term sustainable levels.
In most central bank legislation, the central bank’s primary purpose is limited to the responsibility for maintaining price stability and for performing tasks relating to financial stability, in some cases supplemented by a more general objective, such as underpinning the government’s economic policy. In some central bank acts, however, high employment is included as one of the central bank’s primary objectives, as is the case in the US. A so-called dual mandate was established for the Federal Reserve, where the objectives of full employment and price stability are put on an equal footing. In practice, monetary policy conducted by a central bank with a dual mandate will not necessarily differ from that of a central bank operating a flexible inflation-targeting regime. A central bank with a flexible inflation-targeting regime will also be concerned with the level of employment. In the draft of the new central bank act, maintaining monetary stability is the primary objective. The proposal does not provide for a dual mandate for monetary policy. This is a wise choice. Even though the difference between inflation targeting and a dual mandate is probably small in practice, there are good arguments for keeping price stability as the primary objective of monetary policy. This will clearly define the main role of monetary policy. In the practical conduct of monetary policy, the central bank will always be faced with a trade-off between different considerations.

In the past, central banks were expected to ensure that money would keep its value in precious metal. Later, this was replaced by a fixed exchange rate regime whereby the currency was pegged to other currencies. Various forms of fixed exchange rate regimes are still in use in many countries, but since New Zealand introduced inflation targeting as a framework for monetary policy in 1990, an increasing number of countries have chosen to link monetary stability to a numerical inflation target. Today, more than 30 countries have adopted some form of inflation targeting. International experience with inflation targeting has been predominantly positive. Both during and after the global financial crisis, economic growth performance has been better in inflationtargeting countries. One important reason may be that a floating exchange rate with a credible anchor for inflation has had a stabilising effect on the economy. Chart: Low and stable inflation Inflation targeting has also worked well for Norway. After decreasing in the early 1990s, inflation has since been low and stable. We can now look back on a quarter of a century of price stability. At the same time, employment has shown less variation since 2001 than in previous periods, in spite of the substantial shocks that have hit the Norwegian economy. In some countries, particularly in emerging economies, exchange rate movements have at times been a source of instability. This is less of a challenge in Norway. The Norwegian household, banking and corporate sectors as a whole take on exchange rate risk to a limited extent.
We must therefore consider whether cash has any important characteristics that are not shared by bank deposits and whether there is a need for other forms of central bank money in addition to cash. Cash has a number of unique characteristics: It is a credit risk-free alternative to deposit money. It is an independent back-up solution if electronic systems fail. It is legal tender that can be used by all. 4/5  BIS central bankers' speeches  For Norges Bank, the question is whether a CBDC could supplement cash to maintain confidence in the monetary system and ensure that Norway’s future payment system is safe and efficient. A list of factors that should be given weight in an assessment of whether Norges Bank should issue a CBDC was presented by a Norges Bank working group in May. Phase 2 of the assessment is now in progress. The working group is focusing on the purposes of a CBDC, the solutions that best serve these purposes and their impact. The working group’s report will be published in spring 2019. This is a long-term process and it is too early to draw any conclusions. A premise underlying the work is that a CBDC must not impair the ability of banks and other financial institutions to provide credit. Conclusion The various developments reflect a payment system in change. It is important to look up and envision the situation a few years ahead. Where do we want to be then?

The system’s vulnerability can be reduced in a number of ways, for example through wellestablished cooperation within the financial industry and between the industry and the authorities, sound security procedures and recovery capabilities. System owners are responsible for the resilience of their own systems. Norges Bank monitors the systems under its supervision to ensure that satisfactory defence mechanisms are in place. A number of payment system participants have outsourced the operation of their systems to a few ICT service providers. This is a source of concentration risk. The failure of key service providers could bring important parts of the payment system to a halt. The problems at EVRY on 6 October 2017 affected approximately 40 banks in Norway, as well as Norway Post and Telenor. This incident illustrates the potential broad repercussions of the failure of a key ICT service provider. Such concentration risk is difficult for individual system owners to address alone. The entire infrastructure served by the provider is exposed to risk, not merely the individual system. ICT service providers are not subject to the same regulation and supervision as licensed banking and payment system participants. It is Norges Bank’s view that the authorities should explore how 3/5  BIS central bankers' speeches  key ICT service providers can best be supervised. Such an evaluation must be based on the work of the ICT Security Commission, which publishes its report in December 2018. Distributed ledger technology Distributed ledger technology (DLT) offers interesting opportunities.
The situation remains highly unstable and the market is showing little confidence in the European leaders’ resolve and ability to bring an end to the debt crisis. The situation is very worrying. 6. Once a country gets into the habit of spending beyond its means, relying on debts to finance its expenses and rolling over old debts with new ones, it is a matter of time that the country would run into trouble. The only way out is to reduce debt and endure the excruciating pain of de-leveraging. While leveraging or borrowing normally produces intoxicating feel-good effects, such as job and income growth, buoyant consumption and investment, strong credit demand, asset value appreciation and business boom, deleveraging has exactly the opposite effect, creating very unpleasant and painful consequences. The injection of ample liquidity into the banking system by central banks to suppress interest rates is certainly helpful in alleviating the pain of those debtors who can refinance their loans with lower interest rates and thus reduce their interest and repayment burden. However, many households in the US are denied access to cheaper and falling mortgage rates because they are in negative equity and cannot afford to refinance. Lower interest rates are thus of little help to them. Moreover, pushing interest rates to close to zero also deprives prudent savers of the interest income that they can earn from their savings. Many savers, including pensioners, have to cut back spending because of the sharp fall in their recurrent interest income.

This has encouraged both individuals and companies to take greater risks to enhance financial returns. Besides, companies have an incentive to rely more on debt than equity because many countries permit the deduction of interest expenses from tax liabilities. These are all causes of the problem of over-leveraging. 4. But there is another cause of this over-leveraging problem that I would like to draw to your attention – it is market failure. By this I mean the market had been sending out wrong signals to the borrowers, be they households, companies or governments, that increased indebtedness was nothing to worry about. A prime example is the experience of Greece. In the 1990s, the Greek Government had to pay on average 1,550 basis points above German bunds for 10-year funding from the capital market. However, after Greece joined the Eurozone, the market supplied funds to Greece at interest rates very close to the triple-A rated Germany. In 2005, 10-year Greek sovereign bonds were traded at only about 20 basis points above German bunds. Because of this extended period of serious market failure, Greek nationals and their government were under the wrong impression that they would be  BIS central bankers’ speeches  1  able to roll over their debts perpetually. Of course, we now know that such an illusion could lead to catastrophic consequences. 5. The ever increasing leverage in the US and Europe eventually came to an end following the burst of the US housing and credit bubbles in 2007, triggering the Global Financial Crisis.
10 One important condition for lending in these programs was that the loan needed to be secured to the satisfaction of the Federal Reserve Bank extending the loan. Despite the degree of dislocation in the financial system at the time and the severity of the Great Recession, there were no losses for any of the Fed’s programs. At the same time, I agree with those critics who argue that there was something fundamentally unfair about the disparity in treatment between the few large financial institutions that were saved versus the millions of individuals who lost their homes or their jobs. My response is not particularly satisfying. Recessions inflict considerable pain on innocent bystanders in the economy. Depressions greatly compound this pain. Given the Federal Reserve’s role and authority, what we knew at the time and the powers and tools that were available to us, I think we made good choices. If the large systemic banking organizations had failed, the hardships inflicted on households and small business would have been far worse. 11 From my perspective, I believe that any critique of the Fed or other agencies should be focused more on the regulatory and supervisory shortcomings – some of which, I admit, were ours – that created the economic and financial market circumstances in which the Fed’s extraordinary interventions proved necessary. This leads me back to some of those lessons learned and the changes that have resulted. The crisis showed that the regulatory community did not fully grasp the vulnerability of the financial system.

Let’s be clear on this: French and European savers aren’t going to become Americanised in their savings behaviour or appetite for risk. These transatlantic differences have historical, cultural and sociological roots. And it’s not our role to go into them here, even less try to change them. However, the French debate would be made much easier if we distinguished clearly between the two main objectives underlying savers’ aversion to risk: security and liquidity. With regard to security, or capital protection, this is something that is important for savers. Genuine risk-taking, with all the potential gains it entails, will only ever be for a minority of investors. In the case of liquidity, however, increased life expectancy, lower pension replacement rates and the greater health risks associated with living longer are all pushing French savers to adopt longer and longer investment horizons. We need to be able to offer them suitable savings products: ones that are less liquid, with or without a long-term capital guarantee, and that allow savers to benefit from the higher returns offered by equities over the long term. A crucial point is to avoid any tax distortions that might mean these products are penalised more than liquid and risk-free investments. This level playing field in terms of taxation should also apply to the companies that are financed: in other words we need to avoid making debt financing more attractive than equity financing.
So, when unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment. Today, I would like to explore further the implications of the Fed’s dual mandate framework for monetary policy-making in today’s environment. And don’t worry, the views I am about to express are my own and not necessarily those of my Federal Reserve System colleagues. Brief update on the U.S. economy It’s useful to start with a brief update on the U.S. economy. The economic outlook clearly has deteriorated this year. Early in 2011, most forecasters thought that the recovery was gaining  BIS central bankers’ speeches  1  traction and that economic activity would increase at a solid – though not spectacular – rate this year and next. The financial repair process seemed to be progressing well, and, at least among large firms with access to the bond market, borrowing costs were quite low. We also had finally begun to see a long-awaited improvement in labor market conditions, with private job gains running about one-quarter million per month during the winter of 2011 and the unemployment rate falling about 1 percentage point over a four-month period. Higher prices for energy and other commodities were taking a bite out of purchasing power and the disasters in Japan were a drag, but these influences were expected to be temporary and growth was expected to strengthen.

In the more optimistic case to which I subscribe, the productive capacity and potential wealth of the U.S. have not been permanently damaged and currently unused resources are still productive. Accordingly, in my opinion, monetary policy should be used more aggressively to increase aggregate demand. In time, a reduction in excessive risk aversion, supported by natural market forces would reestablish the fundamentals that previously supported stronger growth and full employment. In this way, large social losses would be mitigated. By stimulating aggregate demand, we can have “Morning in America, again” and our best days can still be ahead of us. 6  BIS central bankers’ speeches  But the clock is ticking – the longer we wait, the more likely it is that unutilized skills diminish to the point that more permanent damage takes hold. Challenge #3: monetary policy held back by zero lower bound By now, the third obstacle is quite well-known: the federal funds rate in the U.S. is currently constrained by the zero lower bound on interest rates. Given the economic scenario and inflation outlook I have discussed, were it possible, I would favor cutting the federal funds rate by several percentage points. But since the federal funds rate is already near zero now, that’s not an option. To date, the Fed’s policy-making committee, the FOMC, has used a number of nontraditional policy tools to impart greater financial accommodation. I have fully supported these policies. Today, however, I simply think we need to do more.