samchain/econo-pairs-v1 huggingface dataset:
When credit markets become overly exuberant, not only do the balance sheets of lenders become stretched, cheap credit leads borrowers to become over indebted,  2  2  See Tucker (2012), “National balance sheets and macro policy: lessons from the past”. BIS central bankers’ speeches  raising the probability of default. When defaults eventually pick up, a general awakening occurs, triggering mass deleveraging. This matters to debates about risk measurement and management. It is not simply that the models employed over recent years – notably Value-At-Risk – make assumptions, such as normally distributed returns, that are manifestly false. 3 It is not just a matter of finding better models, useful though that might be. The problem of exuberance is not simply one of lots of Black Swans. It is that the collective behaviour of market participants can generate the tail events that sow the seeds of the system’s destruction. It can breed swans. What the authorities are doing Given the complex mix of factors behind the crisis, it would be surprising if there were a single policy initiative that could make the system safer in future. The response is multi-dimensional. But you will be relieved to hear that at this point I am not going to summarise the whole of the international agenda. 4 I’m going to put to one side, for example, the panoply of measures being pursued internationally to simplify capital markets through greater use of central counterparties, and to avoid the systemic risks of banking activity simply relocating to shadow banks.

In 2001, the Norwegian parliament approved new fiscal policy guidelines stipulating that the annual transfer from the Fund to the fiscal budget – that is annual spending of oil money – should correspond to the expected real return on the Fund. The expected real return is estimated at 4 per cent. The point of reference for the spending rule is a normal cyclical situation. In the event of particularly high capacity utilisation, spending should be lower than 4 per cent, whereas in a cyclical downturn, somewhat higher spending may be appropriate. The intention is for this wealth to be transferred to future generations, and that each generation should only spend the returns. The rule gives weight to long-term considerations when addressing current economic policy challenges. The rule also helps stabilise exchange rate expectations. The fiscal rule has the advantage of having intuitive appeal, and it is easy to check whether it is being followed over the business cycle. In line with the rule, the transfer from the Fund was higher than the expected real return of 4 per cent in the cyclical downturn in 2003 and the following two years. Since 2006, however, the transfer has been lower. It should also be noted that the target for the rule is the cyclically adjusted transfer, shown by the solid line in Chart 6. Automatic stabilisers are allowed to work, thereby reducing actual transfers during upturns and increasing them during downturns, as illustrated by the broken line in Chart 6.
In the same vein, the UK unemployment rate increased by only 2.5% although output fell close to 6% and Germany underwent a decline in output of about 7%, but its unemployment rate actually decreased. This suggests that labour market mechanisms for adjustment in the face of adverse shocks are not working correctly in Spain, as employment is bearing the brunt of the adjustment and this entails a high cost, in terms of long-term economic growth and social well-being. These differences are not only seen in periods of recession, but also in economic upturns, in the form of diverse levels of unemployment, and of productivity and real wage developments. And we know that there are major differences among countries as regards labour market institutions, thus suggesting that such different unemployment or productivity outcomes may, at least partly, be driven by regulatory differences. This is why it is important to look at the experiences of other countries in order to share experiences and to try to draw some conclusions on the pros and cons of the different institutional settings. The medium-term effects of the crisis I mentioned before are also particularly dependent on the functioning of the labour market. First, the crisis may imply the need for a substantial reallocation of labour across sectors, something that may take time and increase mediumterm frictional unemployment. Labour market institutions may, of course, play a key role in galvanising or impeding this process.

Think, for example, of a wage-setting mechanism allowing for sectoral differences versus one that imposes uniform wages across sectors. Second, long unemployment spells may cause permanent destruction in human capital, giving rise to the process of “hysteresis” and leading to an increase in the structural unemployment rate. The concept of “hysteresis” being identified, among the first authors, precisely by Olivier Blanchard in 1986 in a joint paper with Larry Summers. Of course, this effect may be larger if rigid labour market institutions complicate the task of finding a new job, while the literature also finds that the level of the tax wedge or the inadequate design of unemployment benefits are important drivers of structural unemployment. In addition, a protracted recession may also reduce the potential labour force by discouraging vulnerable workers from seeking a job. This effect is again not independent of policies, since there might be social and financial incentives to stay away from the labour force, and the development in the past of early retirement schemes for older workers subsidised by governments in some countries is a good example. Overall, looking at the research published, three elements of the labour market institutional setting seem particularly worth looking at as possible determinants of the different outcomes across countries: first, the legislation on types of employment contracts and unemployment protection schemes; further, the institutional design of collective bargaining; and finally, active labour market policies and labour market intermediation mechanisms.
And our future prosperity will depend on our maintaining an environment of low and stable inflation. One of the most worrying comments I have heard in recent months came at a lunch of senior businessmen I attended. One of the diners suggested that the UK was returning to its old ways “of depreciating the exchange rate and inflating its way out of trouble.” Soon after, a City circular asked “is the MPC turning a blind eye to inflation?” This is dangerous talk. The evils of inflation are well known. The high and volatile rates of inflation of the 1970s and 80s stunted our economic performance. Companies and households were unable to budget and plan efficiently. Resources were misallocated. Longterm contracts were avoided. The value of hard-earned savings was eroded. This dangerous talk has perhaps been partly fuelled by the behaviour of inflation in recent years. CPI inflation has averaged close to 3% over the past four years, significantly higher than the 2% target and for the most part higher than the MPC anticipated. CPI inflation has been above target for 41 out of the past 50 months. Lest we forget, this is a long, long way from the high and volatile inflation of the 1970s and 80s. Even so, it is perhaps understandable that some may have started to question the commitment or competence of the Monetary Policy Committee. Has the MPC gone soft on inflation? Is this a conspiracy with the Government to deflate away some of its debt?

Our economy has been affected by a number of large shocks – to energy prices, the level of VAT, and the value of sterling – which have caused prices to increase. Some of these shocks were not predictable in advance. And even if they were, trying to use monetary policy to offset short-run movements in inflation is likely to have amplified output volatility. 9  Another defining feature of this recession is that it has been very deep. If companies are already down to their core customer base, cutting prices may generate little additional demand. Put more formally, as output fell, the demand curve faced by some companies may have become increasingly inelastic, thus reducing their incentive to cut their margins. See Bils (1989) and Ravn et al (2006) for examples of pricing models that incorporate such customer behaviour. 6  BIS Review 122/2010  But that does not mean that we should not learn from the behaviour of inflation. My current assessment is that changes in the structure of the economy, the nature of the financial crisis, and the different role played by policy all affected the behaviour of inflation during the downturn. And it is important that we learn from those developments to help set policy in the future. Conclusion So what are the implications for policy? Surely with inflation above target and expected to remain so for some time, the natural thing is to begin to reduce the degree of monetary stimulus?
More often than not, there will be a number of possible interest rate paths that might be said to provide a reasonable balance, in view of the uncertainty involved. The results of this trade-off are presented in the Inflation Report in the form of a chart that presents baseline scenarios for the interest rate, the exchange rate, inflation and capacity utilisation in the economy. The formulation of a precise inflation target, our projection for the interest rate 3 – 4 years ahead in time and our desire to achieve a balance between output stability and inflation may perhaps give an impression of excessive optimism with respect to managing the economy and invite a repeat of earlier attempts to fine-tune the economy. But it is important to bear in mind the lessons drawn from the 1970s and 1980s, i.e. high stabilisation policy ambitions may lead to wide fluctuations in the economy, with high and variable inflation. In our conduct of monetary policy, we must not underestimate the uncertainty surrounding the decisions taken. Even if the Bank publishes a forecast for the interest rate, this does not mean that the interest rate will follow the forecast throughout the projection period. Forecasts of inflation, output, the interest rate and other variables are based on an assessment of the current situation and a perception of how the economy functions. Disturbances to the economy may result in changes in the forecasts. Data revisions imply that the current economic situation is not fully known.

This point is particularly important because the Commission Bancaire's decision on whether to authorise the use of certain approaches may hinge on meeting these requirements, which, moreover, tie in with those in the new IFRS. It should be underlined that the Commission Bancaire carries out these activities in close cooperation with other European oversight authorities as a member of the Committee of European Banking Supervisors (CEBS) whose objective is to achieve closer convergence of supervisors' regulations and practices. In this regard, CEBS has set up operational networks, known as supervisory colleges, for major cross-border banks. Composed of the home-country and host-country supervisors of Europe's largest banking groups, these networks make it possible to find pragmatic solutions to the main problems encountered when implementing Basel II. Likewise, convergence of supervisory practices must be also materialised by the filing of the first accounting and prudential reports in FINREP and COREP formats, respectively, which form a common framework for Europe. ** * Let me say in conclusion that over the past year the French banking system has demonstrated its ability to develop new activities and thus find the fresh sources of growth needed to diversity its revenues. But these positive results are not without certain vulnerabilities, given that margins are slim and some complex financings are exposed to both operational risk and model risk. It is therefore necessary to ensure that banks’ balance sheets remain robust. To achieve this, naturally, pricing structures must correspond to actual risk exposure, and risk management techniques must be strengthened.
Mugur Isărescu: Integrated supervision Opening speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the Seminar “Integrated Supervision”, jointly organised by the Romanian Financial Supervisory Authority and the National Bank of Romania, Sinaia, 22 January 2014. *  *  *  Distinguished guests, Ladies and gentlemen, It is a pleasure for me to warmly welcome you to this seminar on Integrated Supervision. The newly established Romanian Financial Supervisory Authority and the National Bank of Romania decided to jointly organize the conference on this challenging topic that has recently come into the spotlight. I particularly want to thank our guests from the national supervisory authorities of Austria, the Czech Republic, Germany, Poland, United Kingdom and Ireland. I also welcome the experts from the World Bank, the International Monetary Fund and the European Commission who will generously impart their knowledge to all of us. I do wish all of you a pleasant stay here in Sinaia. This three days long seminar is an excellent occasion to learn, to exchange views and to generate professional ties. Allow me to say a few words about where you are. This is a premise of the National Bank of Romania’s training center, situated in Cumpatu district, in this lovely resort, Sinaia. The name Sinaia is an eponym of Mount Sinai. By the end of the 17th century, a group of Wallachian monks, led by Mihail Cantacuzino, a landlord of those times, went on a pilgrimage to Palestine and the Sinai Peninsula.

They were hosted at Saint Catherine monastery. Once returned, they established a convent quite here, in the heavily forested area, at the bottom of the Carpathians. The new monastery was called Sinaia, in the memory of their journey to the Sinai Peninsula. A century later, the first King of Romania, Carol I fell in love with the place and built Peles Castle, his summer residence. Following the establishment of the Peles Castle a railroad connecting the capital to the king’s new summer residence was built. Little by little, Sinaia became popular among the members of the high society: they started building summer residences as well as hotels, villas. You can visit the Peles Castle and the Sinaia monastery on Friday. And now about this seminar. The topic of this seminar is integrated supervision to ensure financial stability. It relies on several conceptual layers. First of all, to understand that the frontiers among financial activities have been blurred by financial innovation and the formation of conglomerates. Secondly, effective Regulation and Supervision involves a working together of regulators and supervisors, who oversee various financial markets. And thirdly, macro prudential concerns are increasingly on the radar screen of Regulation and Supervision. Above all one needs to understand the functioning of overall finance. The program of our seminar is quite rich.
There could therefore be a point to following both these lines in the internal analyses. 13  Woodford (2012) illustrates this in a formal model analysis. 4  BIS central bankers’ speeches  imbalances – that leans against the wind – could be that it takes longer for inflation to attain the target than it would have if the central bank had not included financial imbalances in its deliberations. Although this policy can be justified in ensuring a good development in the longer-run perspective, in practice there are of course limits as to how much and for how long inflation can be allowed to deviate from the target. This has been a very important point in my own monetary policy deliberations and I will return to this at the end of my speech. The dividing line in the debate: how effective are the respective policy areas? Another important thing to note is that a monetary policy that leans against the wind is not intended to replace macroprudential policy measures. This could of course be necessary if there is no macroprudential policy in place or during a period when macroprudential policy is being organised. But once it is in place, macroprudential policy shall be the first line of defence against financial imbalances. This is definitely my opinion and as far as I can see it is shared by most of those participating in the debate, that is, even those who think that monetary policy should be able to lean against the wind.

For me, it is quite simply a question of which strategy provides the best conditions for the Swedish economy to develop in the best possible way. A policy that leans against the wind essentially entails avoiding imbalances leading to very negative effects on GDP, unemployment and inflation. This does not mean abandoning the inflation target – this is still the foundation of our monetary policy. But the result of such a policy could be that it takes longer for inflation to attain the target than it would have done otherwise. There are thus both gains and losses with such a policy, which need to be weighed against one another. My own stance has always been guided by this deliberation. The recent low inflation outcomes have meant, for instance, that I have placed greater emphasis on the more shortterm outcome for inflation. At our most recent monetary policy meeting I said that my tolerance for further downward revisions of inflation prospects in the near term has now reached its lower bound and that I will not vote for a repo-rate increase until CPIF inflation picks up and rises above 1.5 per cent. Does this mean that I am in effect contradicting myself? Not at all. What I have talked about today concerns principles for monetary policy – arguments that the strategy needs to be flexible and allow financial risks to be included in the monetary policy deliberations. But this does not mean that the monetary policy decisions will be self-evident.
Others – including the European Banking Federation – promote the idea of a “lead supervisor” approach, providing banking groups with a single interlocutor which has powers relating to the group as a whole. Both proposals raise significant political, legal and practical issues. Yet it is clear that the status quo will not be sufficient in the future. We need to move forward. And we need arrangements that reduce compliance costs for banks and streamline their interaction with supervisory authorities if we are really to make progress in integration. I think the key to success will be pragmatism, both on the part of the supervisory authorities and on the part of the industry. Let me highlight the principles that I believe should guide us in finding a way forward. I will begin with four principles which could be classified as being on the prudent side of the debate. Firstly, I believe that we need an approach which ensures legal clarity for all concerned. Banks need to know what requirements they should meet, on what basis and in which countries; supervisors need to know what activities they are responsible for and who they are accountable to; and depositors need to know where they can turn and on what basis if things go wrong. Informal arrangements between supervisory authorities can be extremely useful. But they do need to be grounded on firm and clear legal settings and accountability mechanisms. Secondly, we must recognise the diversity of situations within the EU. The European banking industry is far from homogenous.

The proceeds from the gold sales are placed in a bond portfolio, whose composition differs from that of our currency reserves. Approximately 65% of the portfolio is invested in Swiss franc bonds or hedged against exchange rate risks. The rest consists of bonds denominated in euros (25%), US dollars (3%) and other currencies (7%). The average duration of the portfolio is about three years. This investment profile takes account of the SNB's legal framework and of the fact that future beneficiaries will want their return denominated in Swiss francs. The market value of the gold proceeds amounts to approximately Sfr 8 billion. Since it was created in May 2000, this portfolio generated an average annual yield of 4.3%. The legal provision still prohibiting the National Bank from acquiring equities has in fact rather well served the interests of the future beneficiaries of the free assets, as stock markets have been on a decline since May 2000. Next September, the Swiss people will have to decide on the appropriation of the free assets. There are several conceivable scenarios: either the so-called gold initiative is accepted, or the counterproposal of the Federal Council is accepted, or both proposals are rejected. Each scenario has different implications for the date of transfer of the free assets and for the SNB's balance sheet.
At a time when we are witnessing an increase in corporate nonperforming loans, I reiterate my call for the banks to expand their provisions commensurately with this heightened credit risk. At the same time, dividend policies must be mindful of the need for higher levels of retained earnings in order to further strengthen capital buffers, also in view of the more onerous requirements of Basel III. Finally, I would encourage risk officers to go beyond simple compliance with regulations and proactively espouse prudent risk management practices and good judgement. BIS central bankers’ speeches  3  Before I hand over the floor to Professor Bannister, I would like, on this my last official meeting with the financial community, to express my sincere appreciation to you all for the cooperation and understanding I have benefited from over the past twelve years. Thank you. 4  BIS central bankers’ speeches

Such an exercise is essentially identical to the common practice of constructing Taylor rules for monetary policy, as in Chart 2. Chart 4 draws the macro-prudential policy-implied path of US bank capital ratios. In deference to the architect of modern theories of credit-induced instability, let us call this the “Minsky rule” [Minsky, 1986]. The path of the Minsky rule is, in many respects, the mirrorimage of the Taylor rule. It suggests that hypothetical US banks’ capital ratios would have been systemically and significantly tighter than their actual path between 2000 and 2009. In  2  BIS central bankers’ speeches  other words, a tight macro-prudential stance would have counteracted the effects of a loose monetary policy stance. Although it is impossible to know for certain, it seems plausible that having this extra degree of policy freedom would have helped stabilise the US economy and financial system. A tighter bank capital regime would have tended to slow pre-crisis credit growth, thus constraining the boom. And more capital in the US banking system would have helped protect the wider economy from the credit crunch that followed the bust. In short, the boombust cycles in US credit and GDP would have plausibly been somewhat less severe had US policy been ambidextrous. The euro-zone crisis As a second historical example, consider the behaviour of some euro-zone crisis countries. In the run-up to monetary union, monetary policy was loosened significantly in a number of the peripheral European countries whose interest rates converged on core euro-area countries.