samchain/econo-pairs-v1 huggingface dataset:
Causes of the financial market turmoil What have been the underlying main causes of the financial market turmoil? What have been the key weaknesses in the functioning of the financial system that have been revealed? And what are the appropriate further responses of market participants and policy-makers? A full diagnosis of the causes and weaknesses is not yet complete and, indeed, not possible as the  19  8  See ECB (2007b), Box 7, on the propagation of the sub-prime shock to other markets. BIS Review 9/2008  market adjustment is still ongoing. Nevertheless, I would like to highlight four areas that are also pertinent to the issues of financial integration and development we are discussing. •  First, the underlying causes and triggers are to be found in the price dynamics of the US housing market and the excesses and shortcomings (in the practices) in the US sub-prime mortgage market. So, a main determining factor of the financial market turbulence is that same one – property price overvaluation – that characterised previous episodes, as emphasised by Kenneth Rogoff. •  Second, weaknesses in the functioning of the market for structured finance products. These included valuation uncertainties due to the complexity of many products, the imperfect information available about the underlying asset characteristics, inadequate appreciation by investors of the embedded risks, and excessive reliance on the ratings of such products by credit rating agencies.

But a more careful analysis shows that other factors played an important role, such as the rapid growth of new financial instruments, the increasing presence of very active and highly leveraged financial market participants. Moreover, ample market liquidity also reflected an increase in risk appetite and a rise in leverage. And the recent market developments showed that an abrupt and sizeable increase in risk aversion caused an evaporation of liquidity in many markets and a rise in market volatility. Therefore, although financial globalisation can play a role in containing market volatility, it cannot be expected to have a dominant and permanent impact. Impact on financial stability – the financial market turmoil What are the broader potential implications of financial globalisation for the stability of financial systems? How are real and financial shocks likely to propagate across borders and asset classes in a financially integrated world? On the one hand, there is obviously an augmented risk of cross-border contagion of asymmetric shocks to the rest of the world if cross-border asset holding is widespread. On the other hand, this risk has to be weighed against the positive side of the very same coin, which is the benefit gained from an increase in international risk-sharing by means of diversification. The resilience of financial asset prices to negative shocks is improved when the market is more liquid and the investor base more heterogeneous.
This was not at all what most people had predicted - given the earlier  1  BIS Review 92/2000  widespread fears of an overheating US economy and the progressive widening of the US current account deficit - and most conventional analysis has for some considerable time now suggested that, on “the fundamentals”, the euro has become increasingly undervalued. I share that view. Why then has the euro weakness persisted? Frankly I’m not at all sure that anyone really knows the answer to that question. What I think we were all somewhat slow to recognise was the impact of the remarkable acceleration of productivity growth in the US economy - not just faster productivity growth but accelerating productivity growth on the latest data up to the second quarter of this year. This has allowed the US economy to continue to grow faster than before without generating inflationary pressures - though there is clearly a limit to how far that can go. But accelerating productivity growth has also increased prospective returns on investment in the US which has contributed to a huge net inflow of capital - in the form of both direct and portfolio investment - which has much more than financed the US current account deficit. The numbers are truly massive.

And there has from the beginning been clear evidence of the anticipated broadening and deepening of euro financial markets more generally, reflected, for example, in increasing issuance of euro-denominated commercial paper, corporate bonds and equities. (If you would like chapter and verse on all this I commend to you the Bank of England’s half-yearly publication, “Practical issues arising from the euro” - available free from our public information department.) I am happy to say that the City of London has played a positive role in this process of euro market integration: it is in fact the greatest contribution that we can make to the success of the project from outside the Eurozone. And it runs in parallel with the distinct, but closely related, pressure for broader international integration of financial markets which is currently reflected in a whole series of market initiatives to unify trading platforms and both clearing and settlement systems, in which both London and Paris are, of course, very much involved. I have no doubt that increased financial market efficiency has an important part to play in improving overall economic efficiency - the question is how best we can bring it about. Jean-Claude and I would also agree, I suspect, that the introduction of the euro has contributed to the increasingly positive macro-economic performance of the Eurozone economy, taken as a whole, over the past couple of years.
Paul Fisher: Microprudential, macroprudential and monetary policy – conflict, compromise or co-ordination? Speech by Mr Paul Fisher, Executive Director for Supervisory Risk Specialists & Regulatory Operations and for Insurance Supervision of the Bank of England, at Richmond University, London, 1 October 2014. *  *  *  The author is also chair of the ifs School of Finance. Any views aired in this speech are personal and should not be taken as a policy statement by the Bank of England. Nevertheless, the speaker is grateful to colleagues at the Bank for helpful comments, and to Andrew Hughes Hallett for his advice on policy coordination issues over many years, including comments on the content of this speech. Thank you for inviting me once again to speak at Richmond University. In the last year I have moved within the Bank of England from the Markets Directorate to the Prudential Regulation Authority (PRA) and from the Monetary Policy Committee (MPC) to the PRA Board. The PRA Board is one of our three formal policy committees, and makes the highest level supervisory decisions for those firms authorised by the PRA. That includes insurance companies, banks, building societies, credit unions and major investment firms. I have been attending meetings since June and will become a voting member in due course.

If a policy is not very effective on its primary objective, one of the consequences could be unnecessarily large policy changes. •  The authorities need to be able to co-ordinate or communicate in some way about what they are doing and why. Otherwise one can show that there is a risk in some circumstances of a dynamic being created which is destabilising (eg where one authority tries to offset the effects of another in turn). •  And perhaps most importantly, the targets need to be achievable & coherent as a set. Let me explore this last point briefly by taking an extreme case. If the MPC were to be set a target of absolute zero unemployment, that would be physically impossible and however hard they tried, it would not be achieved. If they did try hard nevertheless, it would probably lead to an over-expansion of the economy that threatened both financial stability and prudential safety and soundness. In a less extreme case one could imagine an MPC target for money supply growth which, given time-varying shocks to the velocity of money, might not be consistent with the other objectives. Applying these conditions to the UK authorities So the first question I want to ask is whether the MPC, FPC and PRA Board have been set an achievable and coherent set of targets? Is it possible to achieve CPI inflation at 2%, financial stability, and safety and soundness of firms simultaneously 7?
Eva Srejber: Internationalisation and financial integration Speech by Ms Eva Srejber, Second Deputy Governor of the Sveriges Riksbank, to The Bankers' Club, Gothenburg, 29 March 2001. *  *  *  Thank you for the invitation to come to Gothenburg and speak about internationalisation and the ongoing process of integration in the financial markets. I intend to begin by putting developments on the financial markets in a historical perspective and then to deal with the forces behind current developments. I shall then focus more specifically on Europe and the role played by the euro and, finally, I shall briefly discuss the important work pursued by international organisations in strengthening the financial system and thus reducing the risk of crises arising. Globalisation from a historical perspective Over the past few decades we have seen how the global economy has been internationalised on a large scale and how deregulation and technological achievements, particularly within the IT field, have created new conditions for growth. During the same period, global purchasing power has more than doubled. And it is not only the western world that has benefited from the opportunities offered by internationalisation; many poor countries have managed to climb a few steps up the global income ladder. The Asian 'tiger' economies are good examples of this. A look back in time shows that this development is not unique.

In 1857 the Swedish National Debt Office ventured out onto the international capital market. The first railway loan was issued in Germany and comprised the start of an era with extensive capital imports to Sweden lasting more than 50 years. This provided Sweden with access to capital for productive investments on a scale that would scarcely have been possible otherwise. The central government borrowing paved the way abroad for other borrowers, such as municipalities, mortgage institutions and industrial companies. The large Swedish banks were to a large extent given the task of acting as intermediary in bond loans and thus had the opportunity to develop contacts with foreign banks. The integration of the financial markets increased. For Sweden, this meant that our manufacturing companies could make use of the greater access to capital and lower interest rates in industrially-developed Europe. Gothenburg, with its proximity to the British goods and capital markets, played an important role here. For instance, the Skandinaviska Kreditaktiebolaget, which was the country's leading bank during the latter part of the 19th century, had its registered office here. The internationalisation of the financial markets was facilitated by the fact that Sweden joined the monetary co-operation of the time, the gold standard, while the national integration of the markets was strengthened by the fact that the Riksbank was granted a monopoly on issuing banknotes at the end of the century. This also helped to lay the foundation for a more modern monetary policy.
Capital is much higher than it was fifteen years ago before the global financial crisis with a  1  The ESRB is responsible for the macroprudential oversight of the EU financial system in order to contribute to the prevention or mitigation of risks to financial stability. 2 3  See Warning of the European Systemic Risk Board of 22 September 2022 on vulnerabilities in the Union financial system (ESRB/2022/7). Speech by ESRB Chair Christine Lagarde, Hearing at the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 20 March 2023. Common Equity Tier 1 ratio of 15.5% at the end of December. The liquidity position of the European banks is also robust, with an LCR ratio of 164.7% at the end of the fourth quarter of 2022, clearly above the minimum requirements and even the pre-pandemic levels, and with a large part of these liquidity buffers in cash and deposits with the central banks. This has been the result of regulatory reforms agreed internationally over the last decade. In the EU, these reforms have been applied to all banks, irrespective of their size. The role of banking supervision is worth noting. In the Banking Union, certain supervisory priorities of the Single Supervisory Mechanism were wisely set to mitigate and anticipate the adverse effects of the current macroeconomic situation.

The ESRB has repeatedly noted8 that a lack of tools is hampering authorities’ ability to address financial stability risks beyond the banking sector. The ongoing review of the prudential rules governing investment funds and insurers provides opportunities for legislators to assign the power to operate such tools to the authorities. And the ongoing review of the rules governing central clearing offers an opportunity to enhance authorities’ monitoring capacity through better data quality. The ESRB has provided extensive input to the these legislative reviews, setting out what it believes is necessary.9 Hybrid risks The ESRB has devoted a substantial amount of efforts in recent years to advance our understanding, assessment and macroprudential policy response capacities to the so-called “hybrid” risks, in particular, cyber threats and climate risks.10 As regards cyber risk, at the ESRB we are concerned that a major, i.e. systemically relevant, cyber incident has the potential – in a worst-case scenario – to trigger financial contagion and erode public confidence in the financial system. If the financial system is not able to absorb such a shock, financial stability is very likely to be put at risk. This concern led the General Board of the ESRB to adopt in December 2021 a Recommendation to establish a pan-European systemic cyber incident coordination framework (EU-SCICF).11 The aim of this recommendation is to  8  See, for example, Macroprudential policy beyond banking: an ESRB strategy paper, ESRB, 2016.
6  BIS Review 86/2010  With regard to how the supranational institutions competent in this area are being reorganised, special mention should be made of the political impetus from the new extended G20, since without its contribution the reform of international regulation would have been unlikely to advance so strongly. Also, the recently created Financial Stability Board (FSB), which replaces the Financial Stability Forum and of which Spain has become a full member, is playing a central role in this process of change. The FSB is charged with identifying vulnerabilities of the international financial system and coordinating the responses of the national authorities and other international fora. In addition, it oversees the international application of regulatory and supervisory standards, promotes the development of the colleges of supervisors and prepares the contingency plans required for managing international financial crises. Sweeping changes are also afoot within the European Union in micro-prudential and macroprudential supervision. In the first, although ultimate responsibility will continue to lie with national supervisors, the European System of Financial Supervisors will be in charge of improving the quality and consistency of supervision, strengthening that of cross-border groups and establishing a single set of rules applicable to all European financial institutions. In the macro-prudential area, which can be defined concisely as that entrusted with identifying systemic risks, responsibility will lie with the European Systemic Risk Board, which also makes the recommendations or proposes the corrective measures it considers appropriate.

This meant that private sector solutions were prioritised, as has been seen in the processes that have unfolded in the past few months. Today, it is fair to say that the restructuring and recapitalisation of Spain’s financial institutions is well under way. It is now just a case of formalising and implementing the agreements reached. As a result, Spain’s deposit institutions that did not already have sufficient capital have now secured it, either from the markets or from the FROB. The Banco  8  BIS Review 86/2010  de España has conducted stress tests to verify that all institutions – banks, savings banks and credit co-operatives – will actually have sufficient capital available, not only for what would currently seem to be the most reasonable scenarios, but also for complex growth scenarios in the near future. Accordingly, before end-June, the Banco de España will take the steps necessary to formalise the processes already agreed and to ensure they are correctly implemented. If, by month-end, any of these processes has failed, or any institution has been left behind, the Bank will act, using the mechanisms envisaged for this purpose in the FROB legislation. Moreover, the Bank intends to publish the results of these stress tests, to reveal the deterioration estimated, the consequent capital requirements and the capital funding committed, to provide the markets with a perfectly clear idea of the situation of the Spanish banking system.
This in turn assumes that authorities have enough information at any point in time to “connect the dots” of a complex network of CCPs and global dealers. Hence the critical importance of enforcing the new reporting requirements to trade repositories (TRs), and further to this, of being able to aggregate data collected by TRs across products, institutions, and jurisdictions, and conduct analytical work based on this data. 2 Optimal design of loss allocation tools [slide 9] Let me now turn to the third known unknown, which is the subject of much debate: what is the optimal design and composition of a CCP’s recovery tools? [slide 10] In the field of recovery, we are entering new territory, which is why the authorities have wisely taken a very cautious approach to giving guidance to FMIs on the design of their recovery plans. Ideally, recovery tools should be comprehensive, effective and controllable; they should create appropriate incentives for risk management and minimise any negative impacts. However, the challenge is that no individual tool can equally meet all of these criteria because of trade-offs, for example: •  Uncapped cash calls are comprehensive, but may create disincentives for central clearing. •  Variation margin haircutting can be comprehensive and effective (as it reduces payouts rather than requiring additional pay-ins), but the loss allocation and hence the systemic effect is uncertain. •  Initial margin haircutting may help achieve comprehensiveness, but increases the potential for contagion risk. The optimal choice of recovery tools is still evolving and remains a controversial issue.

But this certainly requires strong supervision, effective cooperative oversight arrangements, and setting up the right incentive structure so that CCPs don’t lose sight of public interest, starting with the interest of their indirect members. Let me conclude. Central clearing will make the global financial system safer. However, it also has the potential to redistribute risk. Its overall systemic effect will thus depend on the incentives for risk-taking and central clearing that accompany risk redistribution. Hence the need for the official sector to provide the right incentive framework ex-ante, produce data that can help understand the distribution of risk, and tightly supervise CCPs in a spirit of cooperation across jurisdictions. Thank you for your attention. BIS central bankers’ speeches  5
•  In 2014, 43 countries ranked China as their top export market, higher than the comparative figure for the US, at 31. The recent slowdown in the Chinese economy and volatility in its financial markets have therefore sparked fears that the Chinese economy was headed for a “hard landing” and that it would drag down much of Asia with it. But much like the dreams of a vast insatiable market two centuries ago, today’s fears are understandable but overblown. To many, China’s economy seems like what Winston Churchill described the Soviet Union half a century ago: “a riddle wrapped in a mystery inside an enigma”. China is indeed a complex economy but is not necessarily beyond comprehension. China’s economy is at a major inflection point. It is facing three necessary but significant challenges at the same time: •  First, the Chinese economy is adjusting to a lower rate of growth. Managing this moderation without major dislocation is a key priority for China’s policymakers. •  Second, China is addressing risks and vulnerabilities in its economy and financial system. Doing this without triggering a crisis of confidence is another key priority. •  Third, China’s economy is undergoing perhaps the most comprehensive and ambitious structural reform programme of any country in modern times. BIS central bankers’ speeches  1  In the short term, these three objectives may at times be in conflict, presenting a trilemma of difficult trade-offs for policymakers.

In 2007 and 2008, the IMF expects emerging countries to account for more than half of world economic growth. The same positive trend is reflected in their financing conditions. Emerging market economies increasingly finance themselves in the form of bonds in local currency at long maturities and fixed interest rates. By doing so, they have escaped the curse of “original sin” – the inability to borrow abroad in their own currencies – that made the crises of the 1990s so costly. Their capital markets have expanded rapidly, both in size and in the range of instruments available. Asian stock market capitalisation, for instance, increased five-fold between 2000 and 2005, as against only a one and a half times increase for the major European and US stock exchanges. Issuance of bonds and syndicated loans from emerging market corporates has also accelerated markedly, and has even exceeded sovereign issuance in some countries. Lastly, risk premia on emerging market assets have fallen significantly, reflecting sound economic fundamentals. For this series of reasons, emerging markets have become an attractive asset  2  BIS Review 140/2007  class for long-term international investors, as shown by their rising share in asset allocations. It is therefore not so surprising that they have so far been relatively immune to the current subprime crisis, and might even be seen as “safe havens”! Let me now turn to some major challenges of financial globalisation. First, the impact on monetary policy.