samchain/econo-pairs-v1 huggingface dataset:
Monetary policy that is oriented towards low and stable inflation will contribute to a stable krone exchange rate over time. If we take steps to counteract an appreciation of the krone when there are pressures in the economy, we reduce the possibility of curbing inflation and increase the risk of fluctuations in the economy. Maintaining stability in the internal value of the krone must thus take precedence. The implementation of monetary policy has been delegated to Norges Bank. Norges Bank sets the interest rate on the basis of our understanding of the regulation. Our interpretation places emphasis on the Government’s rationale behind the regulation, on the objective as formulated in the first paragraph and on our knowledge about the relationships between the interest rate, the krone exchange rate, output, employment and inflation. The interest rate influences price inflation indirectly via domestic demand and via its effect on the exchange rate. When interest rates rise, it is more profitable to save and more costly to borrow. This has a dampening impact on consumption and investment. Lower demand in turn curbs the rise in prices and wages. Higher interest rates make it more attractive to take krone positions and borrow in foreign currency. As a result, higher interest rates normally lead to an appreciation of the krone. This reduces prices for imported goods. In addition, a strong krone curbs activity, profitability and the capacity to cover labour costs in the internationally exposed sector. It is important to be aware of the relationships between employment, output and inflation.

Perhaps one of the stumbling blocks has been the choice of wage settlements at industry level and the large wage increases for employees outside the two largest employer/employee organisations (NHO and LO). The high wage growth awarded to groups whose wages are determined through individual agreements indicates that the labour market has been tight. The rise in salaries for white-collar workers and managers may also reflect weak cost control in enterprises and organisations following a long period of expansion. For a long time, a stable exchange rate and labour costs among our trading partners formed an anchor for wage determination. Since 1998, however, the rise in labour costs in Norway has been around 2 percentage points higher than that of our trading partners. High wage growth, combined with the global downturn and a strong krone, is having a severe impact on manufacturing. It is the combined wage growth for all groups that influences the inflation outlook. However, substantial wage increases for some groups can trigger wage spirals. Wages for salaried staff in the business sector have exhibited sharp growth. This year, it appears that wage increases will particularly be high in the public sector and in parts of the private service sector. Over time, growth in real wages must be consistent with growth in labour productivity. With an inflation target of 2½ per cent and trend growth in the economy of 2 per cent, there will be scope for annual nominal wage growth of about 4½ per cent.
Financial market disruption The disruption of credit and money markets was set off by a deterioration in the US subprime housing market. This started to show up in increasing provisions in the 2006 accounts of banks which held them on balance sheet in a traditional way. But impairment charges of that sort would not have occasioned such ferment in international markets. That was the result of the impact on the new markets for structured credit such as Collateralised Debt Obligations (CDO’s) 1 (Chart 1), which had developed to meet investors’ demand for higher yield. As forecasts of US sub-prime defaults mounted, it became clear that such products had introduced opacity and uncertainty into both the distribution and scale of losses. The crisis played itself out in number of “lurches”, which were reflected in the movements in the ABX indices 2 (Chart 2): •  Although the problems of the sub-prime market were obvious in mid-2006, it wasn’t until January/February 2007 that the rising defaults led to mark downs in indices valuing the riskier tranches of the structured products and difficulties at a number of US sub-prime originators;  1  Collateralised Debt Obligations are securities backed by a portfolio of fixed-income assets that are issued in tranches of varying seniority. As default losses accrue to the underlying portfolio they are applied to the securities in reverse order of seniority. The main types of CDOs are those based on portfolios of leveraged bank loans (CLOs) and asset-backed securities (ABS CDOs).

The home equity loan category comprises mainly of sub-prime first mortgages, but also second mortgages, mortgages with high loan-to-value ratios and home equity lines of credit  BIS Review 7/2008  1  •  in June, as losses began to appear in highly-rated tranches of so-called mezzanine CDOs, two heavily exposed Bear Stearns hedge funds collapsed; the rating agencies began to review their methodologies and started to downgrade securities, some by several notches;  •  at the end of July, a SIV 3 sponsored by IKB reported losses on sub-prime mortgage exposures and failed to raise funding in the commercial paper market, and in early August BNP Paribas temporarily suspended redemptions from a number of money market funds because of valuation problems; this provoked an “investors” strike’ on mortgage-backed securities and the commercial paper that funded off-balance sheet vehicles holding them; in turn this led banks to hoard liquidity against potential calls on their committed lines, to a marked tightening of inter-bank markets and funding pressures on banks, including, of course, Northern Rock;  •  after a brief lull in October, renewed doubts about the scale of the losses in the big international banks led to concerns about counterparty risk and sparked a renewed squeeze in the money markets with LIBOR spreads climbing back to levels experienced in August. There are many lessons for markets and the authorities from this turmoil. First it underlined the critical importance of liquidity in managing and regulating banks.
Managing global volatility Before discussing how monetary authorities should respond to this risk, I would like to highlight one other key feature of the modern global economy – which is the way in which the linkages and dependencies between different economies around the world have increased. The international trading system has supported the development of integrated global supply chains in many industries, with the power to transmit shocks to demand and business activity  5  8  International Monetary Fund (2011)  BIS central bankers’ speeches  very rapidly around the world. The financial system has also become a powerful mechanism for transmitting shocks and disturbances. And global media, communications networks and the internet result in the rapid transfer of news and information around the world. The financial crisis and the recession which followed demonstrated very vividly the power and speed of these mechanisms to transmit economic volatility rapidly across borders and around the world. And the conclusion I would draw is that these interdependencies and linkages have greatly increased the potential for global economic shocks and volatility of various different kinds. In an ideal world, we would develop stronger international mechanisms for dealing with these potential sources of economic fluctuations. And there has been a renewed emphasis on various forms of economic co-operation in recent years, including the development of the G20. But the difficulties of establishing and operating frameworks for international co-operation mean that policy frameworks for managing global economic volatility are likely to remain inadequate and imperfect for some time to come.

As a result, economies which are very open to international trade and business like the UK are likely to have to live with more economic volatility than we would ideally like.6 Implications for monetary policy So, let me sum up my analysis so far. I have identified three potential challenges arising from the “New Global Economy” which is shaping the world of modern business and having such a powerful influence on open international economies like the UK and Jersey. The first is a shift in the centre of economic gravity in the world economy towards Asia – which is likely to become the dominant region in the world economy in the first half of this century. That creates market opportunities for other economies as well as competitive threats, and is likely to result in further structural change as businesses adjust to changing patterns of demand and supply. Supply-side policies – focussing on skills, enterprise and innovation – are the key to maintaining growth and employment in the face of these structural adjustments. The two other challenges I have identified – a prolonged period of upward pressure on energy and commodity prices climate and an increase in global economic volatility more generally – have more significant implications for monetary policy in an open internationally focussed economy like the UK. So how should monetary policy respond? 6  See Sentance (2009a) and Sentance (2009b) for a more detailed discussion.
However, I will in some cases refer directly to the situation in the Nordic countries, with regard to the advantages and also the challenges presented by the far-reaching integration of our financial systems. Introduction An IMF study published a few years ago indicated around 130 financial crises in a fifteen-year period during the 1980s and 1990s; some countries were afflicted more than once. As we all know, we have also had our share of crises in the Nordic countries. Denmark has managed better than the other countries – you had no acute systemic crisis, but a few incidents where individual banks suffered major losses. Many international studies point to the large costs linked to crises – costs to individuals, companies and society as a whole, both direct financial costs and indirect social costs. For example, the crisis in Indonesia cost around 60 per cent of the country's annual GDP. A World Bank study shows that poverty combating in this country was reversed by twenty years. The conclusion is, of course, that it is very important to prevent crises and to manage crises in a way that minimises damage. In my earlier work at the IMF, I was directly involved in crisis management in several countries, but also in the prevention work. My assessment is that many countries have made considerable efforts in recent years to reduce the vulnerability of their financial systems. At the same time, much remains to be done, not least to meet the constant changes in the financial world.

In 2003 it was able to raise its profits substantially in spite of a mixed macroeconomic and financial environment. Thanks to these profits, banks were able to bolster their capital significantly, thus enhancing their capacity to absorb shocks. The resulting capital ratios in the banking sector are high both in historical terms and by international standards. This impression of pronounced robustness in the Swiss banking sector is corroborated by the relatively low level (in historical terms) of the stress indicator. This is a new indicator calculated as a synthesis of different stress symptoms. The indicator considers in particular the capital ratios, profits, share prices and risk premiums on bonds in the Swiss banking sector. As far as the outlook is concerned, we believe that the macroeconomic environment and the financial markets do not present any significant threat to the stability of the Swiss banking system. The forecasts for 2004 point to a rebound in economic growth in Switzerland and the European Union along with a continuing upswing in the United States. Moreover, the rise in prices on the Swiss real estate market has remained moderate by both historical and international standards. It is thus unlikely that this market will see any abrupt downward adjustment - traditionally a major stress factor for the banking sector. And finally, the available indicators suggest that the major global banking sectors are  BIS Review 39/2004  1  also relatively robust. At present, therefore, the risk of contagion - i.e. of a crisis having repercussions on Switzerland - is remote.
Annuity writers should be cautious in changing their longevity assumptions. For example, the annual data can be volatile because of factors such as the failure of flu vaccines. Moreover, the slowdown in the rate of improvement in life expectancy appears less marked amongst wealthier people, who are represented disproportionately in annuity portfolios. Nonetheless, we have concluded that we should make some changes to our quantitative indicators in the light of recent longevity experience. These indicators are used by supervisors as one input into our review of whether insurers’ models meet Solvency II tests and standards. Third, we will soon complete the first full cycle of Solvency II reporting. Later this year, I plan to hold roundtables with insurers, investors and analysts to discuss Solvency and Financial Condition Reports (SFCRs). We are also reviewing whether an ongoing requirement for audit of every year’s SFCR is proportionate for the smallest insurers. It would be unhelpful for the PRA to be too prescriptive about the depth of content of SFCRs. But it strikes me that some areas could be made more consistent. For example, changes in Solvency Capital Requirement coverage could be broken down to show what is attributable to changes in capital, to changes in modelling and to changes in risk assumptions. Insurers need to explain fully to policyholders, investors and others what lies behind their Solvency II ratios. This is particularly true in more complex areas like internal models and the matching adjustment.

Turning to life insurance, a potential concern is that the shift towards direct investments might in future lead to a concentration of exposure to UK property. Excluding unit-linked business, UK insurers’ property-related 9  exposures grew significantly over the course of 2016 to stand at 11% of non-linked assets. The most rapid growth has been in mortgages and loans secured on property, particularly equity release mortgages. Our analysis of insurers’ equity release exposures suggests that a stress roughly aligned to the FPC’s banking system stress test (a 30% fall in house prices and 0-0.5% growth per annum thereafter) could lead to industry-wide losses of £ billion (see table and chart below). 10  The Prudent Person Principle in Solvency II is an important safeguard against concentration risk . It requires insurers to invest only in assets whose risks they can “properly identify, measure, monitor, manage, control and report”. Moreover, assets must be “properly diversified” so as “to avoid excessive reliance on any particular asset, issuer or group of undertakings or geographical area and excessive accumulation of risk in the portfolio as a whole”. Assets not admitted to trading on a regulated financial market are required to be kept to “prudent” levels. The illiquid direct investments I described earlier would typically fall into this category. Later this year, we plan to set out in a supervisory statement our expectations of how UK insurers should invest their assets in accordance with the Prudent Person Principle.
Because banks have been identified as the primary focus of money launderers and provide an entry point for laundered money into the financial system, most efforts to combat this scourge are targeted towards banks. Under the money-laundering Act, banks have certain obligations, which are placed upon them by the law. These include: •  To keep identification record of its customers for a period of ten years. This is aimed at safeguarding the documentary evidence to prove that the financial institution has sufficient knowledge of its clients. •  To report to the Money Laundering Investigations Unit whenever there are reasonable grounds to believe that a money laundering offence has been or is about to be committed. •  To comply with any directives issued by the Bank of Zambia. •  To designate an officer in each branch or office as the money laundering officer. •  To provide training to staff on anti-money laundering techniques. In conclusion, Mr Chairman, I would like to state that the effects of money laundering are incomputable and unknown to many of us. The Prohibition and Prevention of Money Laundering Bill has laid a foundation and will serve to deter the use of the Zambian financial system as a site to launder dirty money. It has given each one of us a challenge. For the banking sector, the challenge is to ensure that their corporate governance structures and risk management systems are redesigned to take care of this growing threat.

CoCos or contingent capital issuance instruments that count as additional Tier 1 and satisfy our conditions amounted to another € billion. Internal capital generation, either by retained earnings or by extra provisions, and we calculated the provisions that are above what would have been the normal trend of evolution of provisions because indeed, as you well know, since last year banks have been increasing provisions just preparing for the exercise and the two things together amount to € billion. And then the other measures, asset sales and others, amount to € billion. This is a measure of the front-loading by the banks in preparing for the exercise, which is important to highlight because capital increases or increases in extra provisions done last year indeed reduced the numbers that the exercise could detect in the end. 2  BIS central bankers’ speeches  The stress test itself, it’s also important to highlight that the severity of the scenario in the adverse case was indeed higher than in previous exercises. In fact, if we compare with previous exercises, taking the metric of the GDP drop in the adverse scenario, after two years in this present exercise the GDP on average would drop by 5.1%, whereas in previous exercises it dropped by 3% or 4% only. And this exercise had a third year which was not present in the previous exercises, so that the overall drop in GDP in the adverse scenario over the three years comes to 6.6%.
At the same time, it extended across national borders. Just before its collapse, the three major cross-border banks that constituted the bulk of the banking system had over 40% of their total assets in foreign subsidiaries, 60% of total lending was to non-residents, 60% of income was from foreign sources, and over two-thirds of total lending and deposits were denominated in foreign currencies. How did this happen, and why was it allowed? I do not think we yet have the research and the consensus to provide a reasonably undisputed list of the main causal factors in this process; however, I think four factors will rank highly on that list. These are Iceland’s membership in the European Economic Area (EEA) in 1994, privatisation of the Icelandic banking system in the early 2000s in a manner that placed the major banks in the hands of risk-loving investment bankers, the global conditions of ample and cheap credit that prevailed in the years prior to the international financial crisis, and the tendency in Iceland both to adopt international and EU regulations without critical analysis of Iceland-specific risks and to base supervision to a significant degree on mechanical checks of adherence to those regulations. Let me expand a bit on the EEA part, as it is highly relevant to my topic. The EEA Agreement provides a legal and regulatory framework based on European Union Directives, including a framework for free movement of capital and provision of financial services.

Although they were not necessarily articulated fully at the time, these solutions had several goals: to preserve a functioning domestic payment system, ringfence the state in the case of bank failures, limit the socialisation of private sector losses, and create the conditions for rebuilding a domestic banking system. The adopted solution incorporated several elements. The Government declared that all deposits in Iceland were safe. Second, on 6 October the so-called Emergency Act was rushed through Parliament, giving the Financial Supervisory Authority broad-based powers to intervene in failing institutions, granting all deposits seniority over other unsecured claims in case of bank failures, and giving permission for Government capital injections into new domestic banks. The Emergency Act thus allowed new domestic banks to be created when the old crossborder banks failed and were placed in special resolution regimes followed by winding-up proceedings. In essence, the old banks became the property of the creditors, which were mostly foreign. The new banks were created by carving the domestic assets and liabilities out of the old banks, so it was not a good bank–bad bank split. The idea, then, was that the Government would recapitalise the banks and place compensation bonds in the estates of the failed banks. However, valuing the assets and liabilities proved a complicated process in the middle of an economic and financial crisis, and a solution emerged where the creditors of the failed banks became majority owners of two of the banks and kept a small equity stake in the third.