samchain/econo-pairs-v1 huggingface dataset:
While we do not yet have evidence of how these reforms will hold up during the next economic downturn, many have been in place long enough that we can begin to evaluate their efficacy. In such an evaluation, we should keep in mind the three goals I mentioned in my introduction. First, we must ensure that the probability of failure for a systemically important firm is exceedingly low. Such a failure can lead to contagion that can damage a broad set of financial market participants, and impede the ability of the financial system to support the economy. The failure of a single systemically important firm—because of its size and interconnectedness—can significantly weaken the entire financial system. We saw this firsthand following the failure of Lehman Brothers. Second, if a systemically important firm does fail, we must have mechanisms in place to minimize the damage to the rest of the financial system. While we can make individual firms stronger, more robust and less prone to failure, I expect that there will still inevitably be failures in the future. In principle, we could make individual institutions completely bulletproof in all possible environments. However, this would require such high levels of capital and liquidity that it would likely make them uncompetitive in their ability to provide financial services to their customers. 2/6  BIS central bankers' speeches  Third, we must keep in place the structural changes that have made the global financial system less vulnerable to adverse shocks.

So, what does this imply when we consider revisions to the Dodd-Frank Act and other aspects of reform? Capital and Liquidity Standards It is important to maintain appropriate capital and liquidity standards for large, complex firms to mitigate external shocks and the risks they pose to the economy. In particular, we need to maintain our focus on firms whose impairment would have significant negative consequences for the rest of the financial system. Effective capital and liquidity standards help to limit these adverse consequences. At the same time, they work against conferring a competitive advantage to large banks from a perception that they may be too big to fail. Accordingly, large financial firms have had to more than double their stock of high-quality capital since the crisis. Prior to the financial crisis, large financial firms were not required to hold sufficient high-quality liquid assets to protect against runs, and, as a result, several would have failed if not for extraordinary government intervention. Today, the liquidity buffers for large financial firms have dramatically improved in terms of both their size and quality. This is due in part to investors’ demands, but also to the efforts by regulators and supervisors in the United States and abroad to develop appropriate liquidity standards for large banking institutions. Some have argued that capital standards alone would be sufficient to mitigate the risks of failure. I am not convinced.
Starting from here, we can say that society is demanding safer and fairer financial systems. The view that financial markets were big casinos, where the betting was done with other people’s money and gamblers walked away unpunished, is quite common around the world. Public opinion has been dominated by that sentiment, which has also affected policymaking. On financial development Let me start by stressing that financial intermediation is good, and with the backlash from the crisis it should be repeated that a well functioning financial system is key to prosperity. It promotes economic growth by channeling investment funds from savers to borrowers (Levine, 2006). It is central to promoting entrepreneurship and to facilitating investment, including human capital accumulation. It provides financing to households in order to smooth consumption, and provides insurance. It provides safe and cheap means of payment. The difficulties faced by households and firms in many emerging market economies due to underdeveloped financial institutions and markets should be a clear reminder of this positive role. But financial depth may also be a source of great problems. As in many situations, more is not always better. There is plenty of research concluding that economies with deep financial systems grow more. However, studying this issue in Latin America many years ago I came to the conclusion that in Latin America growth during the eighties was lower in countries with more developed financial systems, since the collapse of their economies during the debt crisis was larger (De Gregorio and Guidotti, 1995).

865–934, New York: Elsevier North-Holland. Micco, Alejandro and Ugo Panizza (2006), “Bank Ownership and Lending Behavior,” Economic Letters, Vol. 93, Issue 2, pp. 248–254. Micco, Alejandro, Ugo Panizza and Monica Yanez (2007) “Bank Ownership and Performance. Does Politics Matter?,” Journal of Banking and Finance, Vol. 31, No. 1, pp. 219–241. Rajan, Raghuram (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton, NJ: Princeton University Press. Reddy, Y.V. (2012), “Society, Economic Policies and the Financial Sector,” Per-Jacobsson Lecture, BIS. www.bis.org/events/agm2012/sp120624.htm. 4
It enabled banks to swap legacy illiquid securities (principally RMBS and covered bonds) for UK Treasury Bills for a period of three years. The Bank announced in early February that it lent £ of TBills, against £ (nominal) of collateral. 8  BIS Review 67/2009  Prudential regulation of banks’ liquidity: how it relates to central bank liquidity insurance But such insurance is not and cannot be a source of longer-term funding to the banking system. Prudent valuations and haircuts mean that our insurance cannot finance anything like the whole of a bank’s balance sheet even in the short run, and also that banks need a clear buffer of surplus capital. Nor is central bank liquidity insurance always going to work. That underlines why prudent liquidity management must be a major responsibility of the banks themselves. In the normal course of their business, they should insure themselves against liquidity risk in private markets. They can do so by, for example, holding a stock of assets that can unquestionably be exchanged readily in the financial markets for cash in anything other than the gravest market distress; by maintaining funding with a prudent maturity structure relative to that of their assets and contingent commitments; and in the case of smaller banks, up to a point by buying insurance in the form of completely committed lines of credit from larger banks, but also crucially by holding unquestionably liquid assets in case their bank-provider is ailing when they call on the line.

We endorse the Managing Director’s focused and streamlined Global Policy Agenda (GPA) which, amid great uncertainty and significant downward risks to the outlook, lays down a holistic policy framework to restore confidence, build up economic resilience, and help the most vulnerable countries and people. We firmly support the GPA’s advice against a premature withdrawal of policy support before the recovery has gained sufficient traction. We also strongly endorse the GPA’s call for close global cooperation in health, economic, technology and trade areas to see us through the crisis and the subsequent recovery phases. Our constituency is a heterogeneous group of countries at different stages of containing the spread of the virus and kick-starting their economies, but are all united in their common goal of safeguarding the lives and livelihoods of their citizens. Policy responses have been swift and comprehensive, including supportive fiscal and monetary packages, and innovative social protection programs. Nevertheless, in the oil importing countries in the constituency, macroeconomic stability has been undermined by increased fiscal and external imbalances and soaring public debt. The oil exporting countries have been additionally hit hard by the sharp drop in international oil prices, that not only has put significant pressure on their public finances and balance of payments, but has also derailed their long term diversification plans; while oil prices have recovered somewhat, economic activity is expected to remain subdued for some time.
Operation of a new aluminium smelter will also lead to a higher equilibrium exchange rate for the króna than would otherwise be the case. A sizeable currency inflow will obviously take place in connection with the aluminium projects and domestic interest rates will be higher than otherwise. All these factors have affected market expectations and caused the króna to strengthen. In effect, the economy has already begun this year to accommodate the pending investments. In recent weeks the exchange rate has depreciated once more. The króna had clearly overshot, as is common in foreign exchange markets. More factors have contributed to the weaker exchange rate. These include increasing uncertainty about hydropower development in connection with the Norðurál smelter extension, a deficit on the current account, and greater foreign portfolio investment by Icelanders which amounted to 14.5 b.kr. during the first six months of 2003 compared with 6.8 b.kr. over the same period the previous year. Central Bank currency purchases have had some effect, as I mentioned earlier. Such fluctuations are always to be expected and it should be reiterated that the Icelandic króna has by no means shown any more volatility than we see in other currencies. Let us briefly consider what lies ahead. Four times a year the Central Bank produces macroeconomic and inflation forecasts which it publishes in its Monetary Bulletin. Inflation forecasting plays a vital role for Central Bank policy. Each inflation forecast is projected two years ahead, quarter by quarter.

As in all countries, changes in the central bank interest rate are transmitted to the economy with a considerable lag. Monetary policy therefore needs to be forward-looking and the inflation forecast based on the best available methodologies. If the scenario is that inflation will head beyond the Bank’s target, the Bank will raise its interest rates, while it will reduce them if inflation is tending below the target. Let us first look at the macroeconomic forecast, which of course is a major consideration for future inflation. The main assumptions are that the Central Bank’s policy interest rate, currently 5.3%, will remain unchanged for the forecast period, which is a standard forecasting assumption, and that the exchange rate will be 3% weaker than in the February forecast, with a reference value of 124. However the exchange rate index has continued to rise [i.e. the króna weakens] and currently stands at 128. Another assumption is that fiscal policy will not deliver a stronger demand impulse than has already been decided. In other words, the fiscal stance will be relatively neutral, apart from a considerable increase in public sector investment this year and a contraction next year. This implies that the Treasury balance will not be disrupted by discretionary measures on the expenditure and revenue side. Public consumption is expected to be below the historical average.
A full normalization of credit demand and supply conditions will have to wait until the dust settles in the international financial scenario, to allow more clarity about global and domestic growth prospects. These risk factors have a direct incidence on credit risk premiums implicit in banking operations. We can see that the monetary policy action has more than offset the increase in risk premiums, resulting in a significant drop in credit costs, thus mitigating the effects that the global crisis has had on our economy. One important aspect of the access to credit, aside from its cost, draws from the effect of the environment of uncertainty and economic weakness on the credit approval conditions and credit demand. In these dimensions, we have recently seen signs of stabilization. Internationally, the various indicators of uncertainty and risk in global financial markets, while remain relatively high, have continued to fall. Domestically, the evidence at hand from the Banking Credit Survey for the second quarter of this year reveals that, on average, banking institutions have already stopped tightening their lending standards and perceive early signs of a recovery of the demand for credit. This is particularly evident in the mortgage segment, suggesting that the levels of the long-term interest rates on these loans are not necessarily holding back the demand for housing credit (figure 5).

It seems unlikely, however, that the upswing could be derailed entirely for this reason. As regards inflationary pressure, there are a number of question marks as I mentioned earlier. We don’t know how long the recent rise in productivity will last. In the inflation outlook that I have presented, some consideration has been given to the new data. At the same time, there are good arguments pointing to both higher and lower productivity growth. The same applies to our view of international inflation. As regards wages, there are also risks on the upside, which are essentially related to the way in which wage formation in Sweden is conducted. It can still not be ruled out entirely that the wage bargaining round will be derailed. Should the outcomes prove higher than expected, it is likely to have an impact on the future level of interest rates. So far I have not said anything about the exchange rate. There may be reason to touch upon this. For a long time, we have expected a krona appreciation that over the course of the forecast period would bring us to levels approximately in line with what we believe to be appropriate in the long term, given mainly the competitiveness of the Swedish economy. During the period 2002-2003 as a whole, the krona strengthened roughly as expected. Recently, however, this strengthening has been curbed. One reason for this appears to be expected relative interest rates, where there has been a certain shift since the autumn.
The valuations offered for redemptions were increasingly uncertain and – in some cases – lagging behind investors’ perceptions of falling property values. You’d be hard pressed to create greater incentives for your investors to cash in. Faced with overwhelming redemption pressure, many funds were forced to suspend. Even so, at least 18 per cent of the suspended funds’ assets under management – £ – had a for sale sign put up outside. Notwithstanding the recent signs that the market has stabilised, I welcome the Financial Conduct Authority’s action to open up a public discussion of the challenges associated with funds that invest in illiquid assets and offer short notice redemption. 27  The impact of firesales depends crucially on whether there are others out there willing to buy. The firesale feedback loop can be made more pernicious as ‘liquidity providers’ – the market-makers and active investors – step back at the same time as others are selling into the market. In recent years, market-making dealers have been less willing to see their inventory of securities rise – a preference likely to become more pronounced in times of higher volatility. 28  And insurance companies and  pension funds can face incentives to step back as the value of their assets falls towards their liabilities. 29  7  All speeches are available online at www.bankofengland.co.uk/speeches  7  Such behaviour is very understandable from the perspective of the individual company.

The consequences of our inability to cope with these capital flows did not show up in the usual macroeconomic indicators such as growth, unemployment and inflation. Overall balance in each of the major economies was maintained. Rather, the massive flows of capital from the new entrants into western financial markets pushed down interest rates and encouraged risk-taking on an extraordinary scale. Banks expanded their balance sheets and new instruments were created to satisfy the search for yield. In the five years up to 2007, the balance sheets of the largest UK banks nearly trebled. The build up of risk came to threaten the stability of the entire financial system. Capital flows provided the fuel which the developed world’s inadequately designed and regulated financial system then ignited to produce a firestorm that engulfed us all. To prevent another crisis will require reform to both the regulation and structure of banking and the international monetary system. I have spoken about the former on earlier occasions. Tonight I want to focus on the question of how we can reduce the imbalances in the world economy. Although overall growth in both high and low saving countries was sustainable, the composition of that growth was not. And the composition of growth reflects the interaction between countries’ economic policy choices. No individual country faced strong incentives to alter its own choices, but the collective outcome was costly to everyone.
To some degree, this is perhaps what has happened to value-at-risk based techniques, which have been massively adopted by the financial industry. Because they use more or less similar parameters and have the same features – for example, they took inadequate account of market liquidity at the time of the 1998 crisis –, such tools tend to give converging signals to those that use them. They thus encourage the herd behaviour that I discussed previously. -  Of course, the fact that some market participants are more sophisticated than the average is a guarantee that standardisation will remain limited, since they will develop techniques that are little used by others. -  However, supervisors are helping to spread the idea that financial institutions should round out their current range of risk management tools to include extensive use of stress testing. This technique offers a better reflection of the varying situations of institutions and of the diverse perceptions that institutions have of exceptional events. The application of stress testing techniques and their results are thus inherently more diversified than those resulting from methods based on the value-at-risk approach. These are only examples of options to help improve the functioning of markets. Indisputable progress has already been made: the generalisation of concepts of appropriate transparency since the Asian crisis and the comprehensive use of stress testing are two significant examples. However, I would like to stress one point.

We are particularly interested in creating the right incentives through a set of robust criteria that will enable banks, subject to supervisory approval, to employ increasingly sophisticated approaches for setting capital requirements for other risks. Second and third pillars Let me also briefly touch upon the two other pillars of the revised capital adequacy framework supervisory review and market discipline. These topics are certainly familiar and important ones to all of you. Supervisory review of capital is a critical complement to minimum capital requirements. The Consultative Paper proposes that supervisors should ensure that each bank has sound internal processes in place to assess the adequacy of its capital, based on a thorough evaluation of its risks. I want to stress that this proposed approach in no way intends to replace the judgement and expertise of bank management, or to shift responsibility for capital adequacy to supervisors. On the contrary, it is well understood that bank managers have the most complete understanding of the risks their institutions face, and it is they and the bank’s board of directors who have primary responsibility for managing those risks. The task for supervisors in this framework is to evaluate how well banks are assessing their capital needs relative to their risks, including whether banks are appropriately addressing the relationship between different types of risks. Most importantly, in proposing this second pillar the Committee intends to foster a more active dialogue between banks and their supervisors, such that when deficiencies develop, prompt and decisive action can be taken to restore capital.
Nevertheless, the main reason that we have not fully recognised diversification effects at this stage is because first we need to see clear evidence from many banks that they have robust systems in place themselves to assess and quantify such effects and that they rely on their measures of diversification in their daily risk management. Of course, as systems improve in the future, we would be happy to discuss them, and once there is a “best practice” in this field we will be better able to recognise it in the capital framework. In the meantime experience with internal credit models will provide us with highly valuable information. In addition, since loan pricing is not predominantly driven by regulatory requirements, banks are free to recognise diversification benefits in their own pricing calculations. Consequently, they can indeed capture their sense of the benefit of diversification in their credit decisions and loan pricing for every borrower, whether in an emerging market country or not. From a different perspective, I think that what should be of concern to emerging market is not just the level of capital flowing into a country, but also the volatility of the level of capital that is flowing inwards. Abrupt changes in capital flows can be just as harmful as contractions in flows. Volatility erodes the confidence that businesses and governments have in the future supply of credit, rendering long-term planning meaningless.

And as if this was not blatant enough, all this occurred in a climate of malicious rumors about the RMB and the Hong Kong dollar, glorified by publications from the so-called in-house currency strategies and analysts, and by the usual “reliable information from authoritative sources”. Well, it did not quite work out the way they intended. They miscalculated on two counts. First, they did not factor in the need for the HKSAR Government funding this year’s budget deficit, unexpected at the time when the budget was drawn up, through a drawdown of foreign reserves. And so the currency board adjustment mechanism involving sharply higher BIS Review 85/1998  -4-  interest rates was not triggered. Second, they did not realize that the HKSAR Government was far from the sitting duck they thought we were. Committed to the free market as we may be, we took the view that free markets do not mean that markets can be freely manipulated. They need to be fair markets as well. We have a responsibility to tackle market manipulation and avoid serious market dislocations developing. So after much agonizing we acted on two fronts. First, we intervened in the stock and futures markets to deter market manipulation, by making sure that the manipulation did not pay off. Second, we followed this action through with various measures to strengthen our monetary and financial systems. On the monetary side, we introduced technical measures to modify our currency board arrangements of our linked exchange rate system to make it less susceptible to manipulation.