samchain/econo-pairs-v1 huggingface dataset:
Holding more capital does not impair banks’ ability to create value by lending, provide payment services or satisfy the demand for investment banking activities. High leverage is not a pre-requisite for banks to perform their socially valuable functions. Will higher capital requirements increase the cost of financing? I now want to address the question of whether higher capital requirements per se will increase the cost of financing. A theoretical basis for answering this question can be found in the work of Modigliani and Miller.14 In a perfect, frictionless world, the value of a firm does not depend on whether it is financed by debt or equity. 13  The balance sheet of the two biggest Swiss banks adds up to a multiple of the size of domestic GDP. 14  Modigliani, F. and Miller, M. H. (1958). “The Cost of Capital, Corporate Finance and the Theory of Investment”, American Economic Review, 48, 261–97. BIS central bankers’ speeches  7  Higher equity capital reduces leverage. Thus it reduces return on equity (ROE) when a bank makes a profit but it increases it when the bank makes a loss. In other words, if increased capital requirements lower the ROE in good times, they raise it in bad times, hence reducing shareholder risk. It follows that shareholders will demand a lower average ROE for a better capitalised bank, as this is the counterpart for the better protection they obtain in bad times.

It has been severely tested by: taxpayer bail-outs of systemic institutions; rewards perceived as undeserved; a perception that clients have become counterparties; and egregious examples of misconduct and rigging of markets. Without that licence, the door will be opened to a level of regulation that constrains the ability of finance to innovate and support growth and trade efficiently. The licence will require consistent exemplary behaviour, and finance to have a clear sense of its purpose not as an end in itself, but as a means to promote investment, innovation, growth and prosperity. It is not merely that we should want to follow Churchill’s wish to see “finance less proud and industry more content”. We want to see industry content and finance taking justifiable pride in its contribution to society. That is far from straightforward when, even six years on from the crisis and public bailouts, triggers for public opprobrium are plentiful. Last week, the UK’s Financial Conduct Authority, US CFTC and Swiss FINMA fined six banks $ for misconduct in FX markets: misconduct that went on long after banks had already been fined for abusing interbank interest rate benchmarks. The repeated nature of these fines demonstrates that financial penalties alone are not sufficient to address the issues raised. Fundamental change is needed to institutional culture, to compensation arrangements and to markets.19 As Bill Dudley and my colleague Minouche Shafik have argued, the succession of scandals mean it is simply untenable now to argue that the problem is one of a few bad apples.
The magnitude of the external tax: the energy and terms of trade shocks I.1 What happened? Page 2 of 14 Let me begin by noting that the first peaks on gas and electricity prices took place in the summer of 2021 in the context of the global post-pandemic recovery, when European countries had to build up their gas stocks for the winter and when demand for natural gas in Asia and the United States strongly increased. In this context the price of metals for example almost doubled from 2020 to mid-2021.Tensions in the oil market also emerged during the second half of 2021. Then, the Russian war in Ukraine has caused gas prices to soar. Electricity prices have also reached record levels: as you know, the price of electricity on the wholesale market is closely correlated to the price of gas paid by the marginal electricity producer. As regards non-energy industrial goods, the first blow to European import prices was caused by disruptions in global production chains following the post-Covid recovery. The next blow was the gradual spread of higher raw material prices to all manufactured goods traveling to Europe. These now widespread price increases triggered massive wealth transfers between importing and exporting countries.

It ceased publication of Monthly Statistics, which had appeared since 1974, and launched the quarterly Monetary Bulletin which provides a much better forum than earlier publications for presenting in-depth explanations of the Bank’s assessment of the economic and monetary situation and outlook, its measures in domestic markets and its policies. Furthermore, the new bulletin created an opportunity to present other material which directly or indirectly concerns the Bank’s policy. It was also decided that the bank’s quarterly inflation forecast would be published in Monetary Bulletin. Thus Monetary Bulletin can be described as the main platform today for the Central Bank’s accountability towards the Government and general public. 2  BIS Review 95/2001  New Central Bank Act The most important milestone in the changes affecting the Central Bank, however, was reached this year with new legislation passed by parliament. A committee appointed by the Prime Minister at the end of last year submitted its proposals for a draft Central Bank Act in March. The bill was presented to parliament in the beginning of April and such a broad consensus was reached that it was passed with the unanimous votes of all 56 members of parliament who attended the final vote. The new Central Bank Act is closely modelled on the legislative framework that had been created for central banks in other countries in recent years, including the EMU. A simple target was set for the Central Bank of Iceland, i.e.
2  BIS central bankers’ speeches  At the same time, a less well-documented trend in private-sector portfolio allocation has been acting in the exact opposite direction. This has involved capital flowing “downhill” and is associated with investors seeking instead to reduce “home bias” in their investment portfolio. To see it, Chart 5 plots the global network map focussing on a subset of external asset stocks, namely portfolio equity flows. The same pattern of intensifying global integration is evident. Indeed, the intensification is altogether more dramatic: total holdings of external equity have risen more than 200-fold over the past quarter-century, an increase of $ trillion. But unlike for total external assets, the gap between core and periphery has been closing. The relative contribution of intra-advanced country external portfolio asset stocks fell from around 99% to 84% between 1980 and 2005. Over the same period, the relative contribution of advanced to emerging market external portfolio asset stocks rose from virtually nothing to over 8%. That is a fairly dramatic shift in international investors’ portfolio choice. What explains it? One plausible candidate is increased portfolio diversification by institutional investors in advanced countries. It is well-known that international investment portfolios exhibit an acute home bias, with portfolio shares much more heavily skewed towards the home market than would be implied by conventional asset pricing models (French and Poterba (1991), Forbes (2010)). There is a home-bias puzzle. To illustrate, Table 1 constructs some equity home bias estimates for the G20 countries between 1995 and 2007.

These questions of credit analysis and risk control are an integral part of the current work of the Basle Committee on credit risk management. The starting point for that work is a paper describing the framework for traditional credit risk management by banks. That framework can then be used to consider how changes in the financial markets affect the credit process. In addition to the issues I’ve described, this work will look at the impact of other developments such as credit risk models, credit derivatives and securitization. One goal of this work is to identify areas of risk management which are improving, and those which may need strengthening, especially potential problems in the internal controls that prevent and detect breakdowns in risk control. The second question, how the larger role of capital markets activities is affecting liquidity risk, also involves a reconsideration of the guidance the Basle Committee developed a decade ago. The recent market turmoil has been especially hard on emerging market banks which funded domestic currency assets with unhedged foreign currency liabilities. The liquidity risk of concentrations on the asset side of the balance sheet has a different significance when assets are sold not only to raise cash but also to conduct portfolio management, which assumes generally liquid markets. Moreover, we are seeing new liquidity needs arising from the changed funding practices of customers.
Period averages conceal large, long-lasting swings in growth over time (Chart 4). Their revised measures suggest growth did not flat-line prior to 1750, even though it averaged zero. Rather, growth oscillated wildly. Second, given the scale and duration of these oscillations, they decompose their growth data into “expanding” and “contracting” periods. Chart 5 plots these for the UK over the past 700 years. A broadly similar pattern of expanding and contracting periods can be found in Spain, France, Italy, Portugal, and the Netherlands over roughly the same period. This decomposition changes the growth story radically. Even prior to the Industrial Revolution, economies experienced notable periods of strongly positive growth. Between 1300 and 1700, GDP expanded slightly more than half the time. Over these expanding periods, growth averaged 5.3% per year. The reason average growth was far-lower over this earlier period – indeed,  18 19 20  Solow (1956), Mincer (1984), Romer (1990), Iyer, Kitson and Toh (2005), North (1990). Haldane (2015a). Broadberry and Wallis (2017). 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  little more than zero – was because expanding periods were almost exactly offset by contracting periods. They accounted for slightly less than half the period, during which growth averaged minus 5.4% per year. So what has changed in the period since the Industrial Revolution? Growth during expansion periods is relatively little changed. Since 1750, it has averaged 3.2% per year. That is in fact a bit less than growth during expansion periods prior to the Industrial Revolution.

In other words, looking at a cross-section of UK companies, secular innovation (for the upper 1% or 0.1%) has co-existed with secular stagnation (for the remaining 99%). The two are engaged, not so much in a secular struggle, as a secular stand-off. Technological diffusion, and hence productivity growth, has been the casualty. 67  Andrews, Criscuolo and Gal (2016). Department for Business, Energy & Industrial Strategy (2017). 69 Haldane (2017). 70 Productivity figures refer to the non-financial business sector, but other sectors for which data are not available over the full ten-year period are also omitted. 68  19  All speeches are available online at www.bankofengland.co.uk/speeches  19  There have been one or two recent studies which have been quoted as questioning the importance of this “long tail” issue for the UK. 71  These pieces use the same data used here. The problem arises not from the  data but from the (mis)interpretation placed on them by these studies. All of these studies show, very clearly, that the UK has a significant long tail problem. Appropriately defined, they also demonstrate that this tail has lengthened during the course of the crisis. To give one example, my Bank colleague Patrick Schneider recently published a blog post showing that a good chunk of the slowing of productivity growth since the crisis could be accounted for by workers in the top quartile of the productivity distribution. 72  This is entirely consistent with the tale of two companies.
It was also the insight that there exists a political temptation to use monetary policy in the short term, which risks creating unnecessary fluctuations in the economy. Despite this division, there is always a certain implicit interaction between fiscal and monetary policies. 14 When the policy rate is cut, central government interest payments are reduced, which tends to improve the fiscal balance. When the Riksbank purchases government bonds, this leads to reduced costs for new borrowing for longer maturities. And the opposite is also true: when fiscal policy becomes more expansionary, there is increased activity in the economy and, ultimately, inflationary pressures, which thereby influences monetary policy. However, the last two major crises, combined with the low level of interest rates, raise a few difficult questions. Firstly, if normal monetary policy is not enough, is it conceivable that fiscal policy could ‘help out’ more explicitly when necessary, not just with automatic stabilisers (which can be more significant than monetary policy)? In other words, more discretionary measures that require active decisions could be used. 15 Depending on the circumstances, such a ‘coordination’ between fiscal and monetary policy would, of course, be more or less complicated. In a severe economic downturn with very weak resource utilisation, it is natural for the automatic stabilisers to start by themselves and for the discretionary part of fiscal policy, which naturally strives for normal resource utilisation, to become expansionary. The question, however, is whether this takes place to a sufficient extent, given the fiscal policy framework.

In all, the domestic economy seems to have adjusted well to the greater risks and challenges that have emerged. The pace of growth has moderated from last year’s but the overall growth momentum still looks firm and economic stability remains sound. The key issue going forward is the risk posed by the higher oil prices to the outlook on domestic growth and inflation. And under a more pessimistic scenario, an important question is how resilient is the domestic economy to absorb a much larger shock, this is to say persistently higher oil prices. In the meeting of the Monetary Policy Committee last Wednesday, members of the Monetary Policy Committee spent considerable time discussing this type of questions based an preliminary analyses prepared by our staffs at the Bank of Thailand. While the numbers are still preliminary, the results seem to suggest a greater trade-off between growth and inflation going forward. In particular, higher oil prices will adversely affect both growth and inflation, but the effects on inflation is projected to be more pronounced because of the pent-up pressure on prices as mentioned earlier. Reflecting this, the Committee felt that the risks to economic stability have increased with higher oil prices and it is only proper that monetary policy should be vigilant on inflation.
And if one member of the monetary union improves his competitiveness through structural reforms, the others have to follow through. This process may lead to a “virtuous cycle” of reforms improving the whole competitiveness of the Euro area. The ageing of Europe’s population is another important common challenge faced by all industrialised countries but which is especially affecting our continent. In that context, it is all the more essential to address current fiscal imbalances before the budgetary impact of ageing sets in. This will need to be done through continuing efforts to reform the welfare state – notably by enhancing its efficiency and effectiveness. Reforms should not merely aim at overhauling our countries pension systems, but might also be directed towards increasing labour force participation rates. These new challenges require appropriate macroeconomic policies and further broad structural reforms, some of which have been already engaged in most countries. Confronted with major trends in demographics and global economic integration, the overriding goal of policymakers should be to strengthen the resilience of our economies to shocks. Further reforms remain to be undertaken in order to improve the smooth operation of goods and labour markets. In both cases, ill-conceived protection mechanisms have often turned into rigidities that hold back growth. Indeed, reaching a high growth potential in knowledgebased economies requires new forms of flexibility and enhanced adaptability:  2  BIS Review 115/2007  -  In goods markets, monopolistic rents, which are rarely justified, should be reduced, hence favouring R&D, free entry and exit.

High oil and gas production and high prices, combined with high returns, have resulted in the value of the Government Pension Fund rising rapidly in recent years. The Fund is approaching the nominal value of one year’s GDP and may reach two in the course of the next decade. This is based on the assumption that oil prices remain high over the next few years and then fall to about USD 30 per barrel. The government bases its withdrawals from the Pension Fund on an average real return of 4 per cent for financing current expenditure. Given this spending rule, the return may come to finance more than 15 per cent of government expenditure in 10 years. We thus reap considerable benefits from managing our petroleum wealth well. The return represents future income that we forego if we draw on this wealth today. But even with this source of income, more than 80 per cent of expenditure must be covered by other sources. Financing the large pension payments that will have to be disbursed in the coming decades will be very demanding in any event. 2  BIS Review 30/2006  The Pension Fund has a prudent investment strategy, with broad risk diversification, and a real return of 4 per cent is expected in the long term. There are examples of companies and investors that achieve a considerably higher return on capital over time.
Its recommendations have been approved by the IMF and the G8 and include a range of measures to fill particular gaps or put right particular faults in the regulatory system by: •  strengthening prudential oversight of capital, liquidity and risk management; implementing Basle II and requiring more capital against, for example, off-balancesheet vehicles, securitisations and tail risk;  •  enhancing transparency and valuation particularly for complex structured financial products and off-balance sheet vehicles;  •  changing the role and uses of rating agencies, including by distinguishing ratings of corporates and structured products;  •  strengthening the authorities’ responsiveness to risk; and  •  increasing the robustness of arrangements for dealing with financial stress; ensuring central banks’ operational frameworks are flexible enough to deal with extraordinary situations in money markets and mechanisms for dealing with weak or failing banks are put in place. More generally we are discussing in the FSF how the authorities can go further in moderating the financial cycle. Of course monetary policy can play a role in this. One goal of monetary policy is to stabilise the economy in the face of shocks and central banks have always looked at credit and money growth as important indicators of the state of the economy. The rapid growth of credit in 2006 for example was one factor leading the MPC to start raising interest rates. However central banks have been wary of putting a lot of weight on disciplining financial markets by changing interest rates.

It has long been known that projects usually end in failure not because they are bad but because somebody does not understand what his or her role in the process involves, or even why this process exists. Communication improves the level of understanding and acceptance on the part of all stakeholders. It helps create commitment observed in diasporas, and also creates room for internal motivation. It was as early as at the beginning of the 21 century that public administration in Singapore knew the art of project implementation, which institutionalised the role of communication in project planning. 1 p.m. Lunch with a friend. Global brought him a small gift from his weekend family trip to an exotic country. It was a real bargain, and it only took a few minutes to arrange for the trip on the way home from the Friday visit to a modern art gallery. Both Global and his wife are lovers of modern art. All they had to do was to get in touch with their virtual travel agent and they could both go through the offers displayed on the screen in his car, consulting an e-expert. They decided to go for the most exotic trip, which was also quite affordable. Global competition does its job. Their only concern was not to miss the plane. Global and his friend do not waste their time ordering meals, as an e-waiter has already sent suggested menu to their communicators (in Global’s case, consulted with his e-dietician).
This level is 1 pp of GDP higher than the average volume of this type of investment during the crisis. In any event, foreign direct investment in Spain was impacted to a lesser extent than portfolio investment during the recession, with no divestment recorded in any year, in contrast to what occurred with portfolio investment. That reveals its greater stability compared with other forms of international investment. Another notable characteristic of the recent trend of this item is the decline in the relative weight of these capital inflows in the form of debt liabilities – which comprise intra-group loans and have scarcely accounted for 12% of the total since 2013, compared with over 30% during the pre-crisis years (average between 1999 and 2007) – and the increase in investment in the form of equity. Thus, while in recent years the volume of foreign direct investment has, in terms of GDP, been around 1.5 pp below that observed during the pre-crisis expansion, its composition is sounder, since it is less vulnerable to adverse shocks. Challenges The future outlook for the foreign sector will be influenced by protectionist tensions and by the uncertainty still surrounding the final shape of EU-United Kingdom relations in the wake of Brexit. On the evidence available, the protectionist tensions between the United States and China may be expected to affect global trade flows in two ways: on one hand, a notable direct impact via the global value chains; and on the other, indirect adverse repercussions via their effects on global confidence and investment.

The pick-up in our competitive capacity is highly tangible in terms of Spain’s unit labour costs relative to those of the rest of the euro area. These costs fell by 14% between 2008 and 2019, after rising forcefully during the pre-crisis years. The gains in competitiveness vis2/6  à-vis the euro area were reflected, in the early stages of the crisis, in heavy job destruction, and throughout the subsequent period, in wage moderation. Contributing to this were the successive amendments to the labour market legal framework during the crisis, which proved to be effective levers for boosting the recovery in employment. Overall, these developments enabled the competitiveness lost in relation to the other euro area countries – measured via relative unit labour costs (ULCs) – to be restored. Specifically, while for the market economy as a whole ULCs growth in Spain from 1999 to 2008 exceeded that observed in the euro area by 16 pp, the current relative level is 5 pp below that of 1999. We must add to these improvements the enhanced financing conditions for resident agents as a whole. Included among these agents are Spanish firms which, from end-2012, saw their financial costs ease strongly. Also, most particularly, there was a correction to the differences in the interest rates they had previously to pay compared with their competitors in the core euro area countries.