samchain/econo-pairs-v1 huggingface dataset:
28  See Rey (2013). 29  See Rey (2013). 30  See Kamin (2010) for a compilation of the empirical research into the effects of globalisation on monetary policy. 14  BIS central bankers’ speeches  nationally, and if they were to try to take into account the spillover effects of their policy abroad, this would mean having to set aside the national objectives, at least temporarily. It would probably be difficult to get the domestic support and understanding that is ultimately needed for such a policy. It would moreover probably be difficult to both estimate and reach agreement internationally on the size of the effects – different countries will most likely have different opinions.31 Having said this, I believe there are good reasons to take global aspects into account in models and monetary policy analyses, to a greater extent than is the case today –spillover– and feedback effects that individual countries’ monetary policy may lead to. Just as the financial crisis started a research agenda on how financial conditions should be included in macro models to a greater extent, I believe that the increased globalisation will create a need for further development work with regard to the analysis of monetary policy in open economies. But it remains to be seen how far this will lead and whether it will have an impact on the practical policy, and if so, how large an impact.

At this point, I would like to briefly comment on the interpretation of our forecast. It is based on the above-mentioned assumptions regarding the development of the world economy, and on the three-month Libor remaining stable throughout the forecasting horizon. In other words, the forecast  BIS Review 101/2001  1  shows the development of inflation on the condition that monetary policy is left unchanged. However, monetary policy will certainly need to be adjusted during the forecasting period. The economic environment changes continuously as new disruptions occur, and the National Bank responds to these changes in order to meet its objective of maintaining price stability. Therefore, it is important to bear in mind that the forecast is made for a three-year period but is valid for only six months at most, i.e. until the publication of the next forecast. The relatively long forecasting period reflects the time lag with which monetary policy measures impact on the price level. We publish our forecast in order to inform the public of our assessment of the inflation outlook, at the time of the forecast, on the basis of an unchanged monetary policy. The publication is a means of making our monetary policy decisions more transparent and easier to understand. I will now make a few remarks about the development of the Swiss economy in the year now ending and the coming year. The recessionary trends witnessed across the globe will not leave Switzerland unscathed.
Put more plainly, we need to think about an environment where those in the position of most influence have the incentive to “poke holes” in myths via robust stress tests, and not the incentives to override their risk managers when the stress-test implications are not to their liking, or risk a near-term loss of clients or market share. Concluding observations New financial myths are regularly created. In closing, I will just speculate on where some may exist that interested parties should be exploring, now.   Potential Myth 1 – Sovereign debt problems will not be disruptive to the world economy. Not long ago, the sovereign debt problems were viewed as manageable and confined to one country. However, as interest rate spreads have widened – as shown in Figure 12 – investors are highlighting that problems in many countries  BIS central bankers’ speeches  5  have yet to be resolved. While I believe the most likely outcome is that there are no serious disruptions, interested parties should diligently consider scenarios that could be disruptive, involving various countries.   Potential Myth 2 – State and local financing problems will not be disruptive to the national economy. While much attention has been given to problems in state and local finances, it is generally assumed that the capacity exists to resolve these problems. While I expect these issues will be resolved without widespread or cascading problems, we should consider what scenarios could emerge if political impasses result in more disruptive outcomes.

These are just two of many potential scenarios that are worth exploring. However, I would add that the recent financial crisis highlighted that unlikely events can happen, and when they do, the outcomes can be quite costly for everyone. So the need for better risk management is clear. Fortunately, the opportunity is there as well. Thank you. 6  BIS central bankers’ speeches  BIS central bankers’ speeches  7  8  BIS central bankers’ speeches  BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11  12  BIS central bankers’ speeches
The Global  Financial Crisis led to a loss of economic activity equivalent to around £ per person in the UK, based on the net present value of the shortfall in income since 2007 compared to its pre-2007 trend(Brazier 2019). 2 For  example, Acemoglu and Zilibotti (1997), Arestis and Demetriades (1997), and Beck and Levine (2004) provide evidence that the financial sector has a positive role on economic growth. 3 The ‘efficient market hypothesis’ was popularised by Fama (1970). Complete markets were theorised by Arrow  and Debreu (1954). 4 For example, markets could be inefficient due to information asymmetries, transaction costs, market  psychology, sticky prices, monopolistic competition, or credit constraints. 5 Drehmann et al. (2012) and Lang et al. (2020) highlight the importance of cyclical risk for financial stability. 6 Glasserman and Young (2015) and Acemoglu et al. (2015) discuss the risk of contagion in the financial system. 7 Woods (2022) discusses alternative approaches to buffer usability. 8 6/7  BIS central bankers' speeches  8 See Bank of England (2021). 9 See Chatterjee (2022) for a comparison of the UK financial conditions index for the GFC and Covid. 10 Lloyd et al. (2021) shows that foreign shocks are a key driver of domestic macroeconomic tail risks. Bluwstein et  al. (2020) also show that global factors can predict financial crises. 11 See Czech et al. (2021). 12 Bank of England (2021) provides more details on vulnerabilities associated with market-based finance and  liquidity mismatch in open-ended funds, in particular.

Sarah Breeden: Macropru – fit for the future? Speech by Ms Sarah Breeden, Executive Director for Financial Stability Strategy and Risk of the Bank of England, at Lancaster University, Lancaster, 28 April 2022. * * * When the financial system is in poor condition – when there is financial instability – it can be damaging to us all. I like to compare the importance of financial stability to our collective prosperity with the importance of health to an individual. Good health may not be the only thing that matters for an individual’s happiness. But it is essential. Because poor health comes with undesirable consequences. We need only remind ourselves of the global financial crisis, more than a decade ago, to appreciate the undesirable consequences of financial instability. UK GDP shrank by more than 6% during the first five quarters of the crisis, staying below its prerecession size for a further five years. Unemployment increased, with an additional 1 million jobs lost by its peak at the end of 2011. And labour productivity, the best way to measure living standards in the long-run, fell sharply in 2008 and has barely recovered since.1 The poor health of the global financial system was exposed in the most dramatic of fashions. We might liken it to a heart attack. And in response the authorities co-operated across borders and across institutions to design a radical ‘healthcare plan’ – to improve resilience, both at the microprudential individual institution and the economy-wide macro-prudential levels.
Whereas then the exchange rate depreciated continually, amplifying the effect of external price increases, in the past few months the peso-dollar parity has shown large swings, and is now, as of the statistical closing of this Report, at around CLP480 per dollar. After the Bank’s announcement of the reserve accumulation program in early January, the peso depreciated from some CLP465 per dollar to nearly CLP500 per dollar. After that there was an appreciation trend that took it back to pre-intervention levels; however, the effects of this measure have combined with external developments, in particular the sustained weakness of the dollar at the global level and the copper price increasing to all-time highs in nominal terms (figure 15). Thus, since its peak of late 2008, the appreciation of the peso against the U.S. dollar has not differed much from that of the currencies of commodity-exporting countries or other economies that have intervened or applied administrative measures in their forex markets (figure 16). The real exchange rate (RER) followed the trend of the multilateral parity, which has depreciated since December. Considering the level of the nominal exchange rate and parities prevailing at the statistical closing of this Report, in March the RER posted figures in line with its long-term fundamentals (figure 17). The baseline scenario of this Report uses as a working assumption that the RER will stay near its recent levels.

We also work closely with some of the organisations sharing the stage with me today, aiming to get the best result and to minimise the burden on industry. We work extensively with Pay.UK who are working to deliver change across the retail payment schemes through their New Payments Architecture Programme. Together, we are tackling issues such as whether we could build a shared Public Key Infrastructure (PKI) for UK payments. And of course payments globally continue to change apace, so we thrive on our engagement with other central banks on key topics such as standards harmonisation, where our close collaboration is a crucial part of how we can collectively transform the payments landscape. Working together provides the opportunity to learn, share insights and collaborate on common challenges. Conclusion  Just as payment systems are at the heart of the economy, industry engagement must remain at the heart of the Programme. User input enables us to create the platform and capability that industry needs to innovate: the building blocks to transform the payments landscape. But as we mobilise delivery at the Bank, we need industry to mobilise too. We are on track against our plan and we need firms to develop theirs – so the payments industry is ready to transition safely to the new service and maximise the opportunities for innovation and transformation promised. We are developing a strategy to work closely with Direct Participants to provide information, monitor key milestone completion, undertake testing and seek assurance that they are each ready to implement changes.
It is vital that this work continues with real vigour if we are to avoid either the Scylla of costly public backstops becoming increasingly frequently used as frontstops, or – worse – the Charybdis of households and firms having to bear the risks of systemic instability directly. Page 7  3) Ensuring we have central bank tools that are effective To provide a credible backstop, central banks need: first, a well-defined framework for deciding when systemic stability is sufficiently threatened for intervention to be necessary; and, second, a tool that is able to target the underlying market vulnerability. In the LDI case, the decision to intervene was made on the basis of a recommendation from our Financial Policy Committee that UK financial stability was at risk from the development of a selfreinforcing price spiral affecting long-dated UK government debt. That judgment was informed by a dashboard of quantitative measures, starting with the sharp rise in long gilt yields, a blowout in bid/ask spreads and a material reduction in traded market depth. But these measures were not enough to trigger action. A sharp rise in yields for example might simply reflect economic developments. And they could not by themselves elucidate the underlying dynamics driving market pricing. It was only through direct contact with the LDI funds themselves, and broader market participants on both the buy- and sell- sides, that we could understand both the scale of the fire sales underway, and the prospective size, timing and composition of future transactions if yields continued to rise.

That selling pressure overwhelmed the capacity (or willingness) of intermediaries to warehouse those instruments, leading to sharp and disorderly price declines in core assets relied upon, directly or  Page 5  indirectly, by households, firms and governments to support economic activity. And central banks’ traditional tools, working through banks, were unable to direct liquidity to the source of the shock (Figure 1). European energy markets in Spring 2022 saw similar dynamics too, when sharp price movements triggered by the invasion of Ukraine triggered large margin requirements on energy derivative positions that thinly-capitalised intermediaries struggled to meet, driving liquidation of positions that further amplified the initial shock to energy prices. Some may argue that Covid, Putin and the UK’s autumn 2022 fiscal announcements are truly exceptional shocks that would challenge any market structure, and are unlikely to be repeated. Maybe. But the underlying vulnerabilities are real and growing, and hoping for calmer times is not a strategy. LDI was just the latest warning of the need for action. 2) Public backstops vs. private self-insurance Given that the evolution of this new form of systemic liquidity risk is real and growing, there is an important debate to be had about how responsibility for insuring against the social consequences of that risk should be shared between private and public interests. It is a core function of public institutions to provide a backstop against genuine tail risks. The alternative – systemic collapse – would be hugely costly to the real economy.
Maintaining a stable currency safeguards purchasing power over time and ensures the currency’s continuity across the territory, so that every individual can spend that currency anywhere and at any time and enjoy the same ability to purchase necessary goods and services. Back in the 18th century, France's authorities found themselves unable to guarantee this stability. After the bankruptcy of the John Law note-issuing bank in 1720 and several other  2  failed attempts to set up a central bank,5 the hyperinflation fuelled by monetary financing of the Revolutionary Wars and the ensuing default on two-thirds of France’s public debt in 1797 had destroyed confidence in the currency.6 The most pressing task facing the Consulate government was to rebuild the foundations of that trust, which it did by authorising the establishment of the Banque de France in 1800 and anchoring the value of the franc through the creation of the Germinal franc in 1803. In establishing the Banque de France, France set up a central bank that was capable, because it was trusted by the French people, of offering an “elastic” money supply, to use the economic jargon, that is, of adjusting the money supply to suit the needs of the economy. In this way, the foundations for an active lender-of-last-resort policy were laid very early, providing a means to combat financial crises and thus support the economy.

For these first six channels, one can argue that it is the expected stock of security holdings to be purchased by a central bank that chiefly determines the amount of accommodation—that is, the impact the central bank’s purchases are expected to have on the size and duration of assets available to the public. Alternatively, for the market function channel, the “flow” effects are most important, in that the transactions associated with a central bank’s asset purchases can also affect an asset price by altering market liquidity and functioning, although such effects may dissipate quickly. This channel could achieve monetary accommodation through the purchase of any security type in which market functioning has become stressed. One example is the European Central Bank’s Securities Markets Programme, which was designed “to address the malfunctioning of securities markets".10 The purchase of non-sovereign assets can be helpful by providing additional channels for 2 / 10  BIS central bankers' speeches  monetary accommodation to be realized. Further, having additional markets to operate in can help central banks overcome functional limitations that could exist if they were restricted to LSAPs in only one market. For example, the stock of assets held by the private sector in a given market might be too small to meet the monetary policy goal. Or, the purchase of a large amount of the existing stock of a given market might result in impaired market functioning, which, in the extreme, could impair the effectiveness of the LSAP and other monetary policy tools.
These resources comprise first the margin collateral of the defaulting member, then some of the CCPs’ own capital (their ‘skin in the game’) and then the mutualised loss absorbing capacity of the default funds to which all members contribute. These resources are considerable. In 2017, in addition to the £ billion of initial margin, default funds held by UK CCPs totalled around £ billion. As a very broad comparison, at the height of the financial crisis the UK Government had to make an initial injection of £ billion of public funds into RBS and Lloyds. As I noted at the outset, in the Lehman case, the margin held by CCPs was sufficient to enable the CCP to liquidate, auction or transfer all of the defaulted contracts in a few weeks. We would need to go much further into the tail of the probability distribution of very bad events to exhaust a CCP’s prefunded resources against default than would be necessary to exhaust a bank’s capital. If bank  6  The largest cross-border banks are considerably stronger than during prior episodes of market stress. Common equity requirements are seven times the pre-crisis standard for most banks. For global systemically important banks (G-SIBs), they are more than ten times higher.

7  The major UK banks on average now have total loss absorbency of around a quarter of their risk-weighted assets (RWAs) compared to an average end-state requirement of around 28% (including buffers). 8 While no measure is perfect, a range of market-based estimates suggest the implicit ‘too big to fail’ subsidy has fallen sharply since the crisis. Estimates suggest that the value of the implicit subsidy has fallen from around £ in 2010 to less than £ now – down around 90% http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/capital-andresolution/written/69208.pdf 11  All speeches are available online at www.bankofengland.co.uk/speeches  11  If counterparties have confidence that resolution will stabilise a bank so that it can continue to meet its obligations, they will not accelerate actions that could frustrate a resolution to the detriment of all parties. And the public needs to have confidence that we have learned the lessons of the crisis: that we have acted to ensure that we have an alternative to the previous crisis where we had privatisation of bank profits in good times and the socialization of bank losses when things go wrong. 9  For that reason, the Bank committed to Parliament in April 2017 and in the Purple Book last October that from 2019 we would implement public reporting of banks’ resolution plans and our assessment of their effectiveness. This marks an important transition in the implementation of full resolvability in the UK.
Just as important is how these rules are put into practice. In normal circumstances, such as those before the crisis, this is a rather easy task, since the public and politicians understand “conventional” monetary policy quite well. People have a clear picture of how central banks act and communicate. In such times, the requirements of accountability and transparency are satisfied without undue controversy through a number of measures, namely, the annual accountability report submitted to parliament, regular  4  Cf. the National Bank Act (NBA) and Message concerning the revision of the National Bank Act. Functional independence means, in particular, that the SNB fulfils its mandate without seeking or accepting instruction from any of these bodies. Financial independence includes both the budgetary autonomy of the SNB and the prohibition against granting loans to the Confederation, thereby barring the state from using the banknote press. The SNB’s independence in personnel issues, finally, is ensured by the fact that Governing Board members and their deputies can only be dismissed during their term of office if they no longer fulfil the requirements for exercising that office or if they have committed a grave offence. 5  Specifically, art. 99 of the Federal Constitution states that “as an independent central bank, the Swiss National Bank shall follow monetary policy which serves the general interest of the country; it shall be administered with the cooperation and under the supervision of the Confederation.” Art. 5 of the NBA sets out in detail the SNB’s constitutional mandate.

Another aspect that needs to be addressed is the role of adequate control systems and financial risk management. A proper system of financial risk control and management must start by defining policies at the highest level, the board of directors. It also requires the involvement of senior management in tracking and monitoring risk. And, ultimately, it needs the development of an organizational culture that is capable of properly combining the goals of profitability and leadership with risk sensitivity. In this regard, a topic that is central to the discussion of financial reforms is the overall structure of incentives of financial intermediaries. I believe this is an issue that all players in the financial system must follow with care. As a result of the current problems, we will observe more regulation in financial markets and everyone, even those of us not at the center of these difficulties, must remain watchful. Problems of moral hazard, transparency and new ways to meet the requirements of central banks to provide liquidity are leading to a review of regulatory frameworks at the international level. We must be aware that more regulation leads to the search of ways of avoiding them, which may end up threatening financial stability. This last dimension must be taken into account in the analysis and regulatory proposals, which obviously introduces an extra element of complexity in this area. Thank you. References Allen F. and D. Gale (2000). “Financial Contagion”, Journal of Political Economy, 108(1). Benmelech E. and J. Dlugosz (2009).