samchain/econo-pairs-v1 huggingface dataset:
In connection with international risk factors, we placed emphasis on the uncertainty surrounding international economic conditions and the concern about the low risk premia in financial markets. I think it is fair to say that developments have borne us out here. Other risk factors were related to the vulnerability of Norwegian bank customers, lower interest margins for banks and the new capital adequacy rules. Uncertainty surrounding developments in international economic conditions and financial markets There has recently been considerable turbulence in international financial markets. Could this have a substantial impact on Norwegian financial markets and could it have serious consequences for growth and employment in Norway? Let us look at the reasons for the turbulence and how it has spread. The source of the turbulence can be found in the US housing market and particularly in the subprime mortgage market. In addition, this type of loan is frequently offered at a low rate of interest with small repayments in the first years of the loan term and a higher interest rate later. Mortgages with this structure involve gambling on a rise in house prices. If house prices rise, borrowers’ collateral will increase in value, allowing the mortgage to be refinanced on better terms. Or the borrower can turn around and sell the dwelling at a profit. This is what happened for a period, but then house price inflation slowed, partly as a result of tighter monetary policy.

It’s probably a little soon to bury central bank independence as we’ve known it over the last two to three decades. Yet there’s no ignoring the fact that the economic environment began to shift even before the GFC. I’m referring to the steady – one might even say tectonic – decline in the equilibrium real interest rate, which has naturally reduced the room for manoeuvre in terms of the stabilising role of monetary policy. This trend got a strong new boost during the GFC and has strengthened even further during the coronavirus crisis. The decline of the equilibrium real interest rate to or even below zero has far-reaching implications. The first is that monetary policymakers have to use unconventional instruments, whose long-term consequences have not been analysed sufficiently. It also encourages governments to borrow, especially if the real interest rate is lower than the rate of growth of the economy. It is worth noting that from the long-term perspective the debt levels of most advanced economies are very high, but debt interest payments are meanwhile very low. Relying on debts repaying themselves may be safe only as long as the current favourable conditions persist. If the relationship between the two variables were to invert, debt financing could get a lot more expensive. The second implication is a blurring of the boundaries between monetary and fiscal policy. As monetary policymakers resort increasingly to targeted unconventional instruments, they get more and more involved in the redistribution process.
These attributes are complemented by a competitive tax regime. In the 2008 Forbes Tax Misery and Reform Index, Malta was classified as the fifth most tax-friendly country worldwide for companies and the most attractive in the EU. In addition, Malta has an extensive network of almost fifty double taxation treaties, and income earned overseas may be exempted from double taxation even when no bilateral treaty exists. Malta’s development as an international financial centre is reflected in the range of financial services available. Complementing the traditional retail functions, banks are increasingly offering private and investment banking, project finance, treasury services and syndicated loans. Malta also hosts a number of institutions specializing in trade-related products such as structured trade finance, factoring and forfeiting. At the end of last year, the number of banks stood at 22, up from 17 in 2004. The assets of the banking system, including both the domestically and the internationally-oriented banks, totalled € billion at the end of 2008, an increase of 10.5% over 2007 and nearly double the total in 2004. Other areas, too, have experienced rapid growth. These include fund management and collective investment schemes, captive insurance, asset management, back office  2  BIS Review 65/2009  processing facilities and call centres. Following the recent legislation on professional investment funds, considerable interest has also been shown by the hedge fund industry.

These principles promote sound liquidity risk management frameworks and formal contingency funding plans. Payment systems are an important component of liquidity management. The efficient execution of payment instructions is vital, as payment failures can result not only in higher costs but also liquidity problems. It is, therefore, somehow not clear why banks in Malta have opted for only an indirect participation in TARGET2 when this means that they rely entirely on their foreign correspondents to settle payments in euro. A recent survey carried out by the Central Bank of Malta indeed shows that this choice has occasionally given rise to operational problems and additional costs. Indirect participation, moreover, also carries a reputation risk in the event of a payment failure, and implies the need to have in place a contingency plan to cater for the operational failure of counterparties. In this respect, I am pleased to note that some banks are now considering direct participation in the system. Another project which should help Maltese banks play a more active role in Europe is the Single Euro Payments Area (SEPA), which went live in 2008. SEPA represents the next major step towards closer European financial integration and is a further building block towards the realisation of the full potential of the Single Market. Its objective is to remove the distinction between domestic and cross-border payments, promoting efficiency and safety, minimising transactions costs and reducing bank charges.
Monetary policy must reduce the possibility of passing on these costs in order to keep inflation at bay. This is done partly by keeping growth in demand for goods and services under control. In addition, a strong krone may boost imports of goods and services previously reserved for domestic producers. In rural areas and towns, where local government employment is an alternative to working in agriculture, fisheries, local services or small-scale industry, the public sector with its nationwide agreements can be a wage trend-setter. Wage growth in the public sector can therefore be an important source of higher inflation. In the public sector, higher labour costs due to costly income settlements can only be passed on to customers to a limited extent. On the other hand, the rise in costs can intensify pressures to increase government allocations. Most likely, the central government will be expected to pick up the bill when labour costs rise sharply. In the business sector – with its profitability requirements – higher labour costs must be matched by an increase in productivity. In principle, the central government will apply the same requirements to government agencies. How these requirements will be met in practice will have a decisive impact on developments in central government expenditure and, consequently, on interest rates and the krone exchange rate.

This, for example, can be done by refraining from rolling over short-term loans. The spillover effects of unexpected events may therefore be more substantial for bank loans than for securities debt. c)  A well developed debt securities market provides the financial system with two legs to stand on  Financial crises are normally related to the banking system. The crises have partly been the result of a very high concentration of risk in banks. In crisis situations, we have seen that financial institutions and securities markets can be complementary and prevent a credit crunch. One example is the crisis that followed the collapse of the US hedge fund LTCM in 1998. For a period during the crisis, there were substantial problems in the private bond market in the US. Financial institutions increased lending and prevented a more extensive credit crunch. Conversely, we have seen that when there have been problems in the banking sector, securities markets have replaced bank loans. BIS Review 48/2002  7  Changes are now taking place, which I think will contribute to strengthening the Norwegian bond market. Proposed legislation changes will for example provide for the sale of housing loans to a separate entity that finances the purchase by issuing bonds. The proposed legislative amendments would permit a wider range of issues in the bond market. In general, a larger number of issuers and investors would enhance liquidity in the secondary bond market. This could also directly or indirectly strengthen banks’ position.
With respect to the first metric, we have seen labor market improvement since the program began last September. Over this time period, the unemployment rate has declined to 7.3 percent from 8.1 percent.4 However, at the same time, this decline in the unemployment rate overstates the degree of improvement. Other metrics of labor market conditions, such as the hiring, job-openings, job-finding rate, quits rate and the vacancy-to-unemployment ratio, collectively indicate a much more modest improvement in labor market conditions compared to that suggested by the decline in the unemployment rate. In particular, it is still hard for those who are unemployed to find jobs. Currently, there are three unemployed workers per job opening, as opposed to an average of two during the period from 2003 to 2007. With respect to the second metric – confidence that the economic recovery is strong enough to generate sustained labor market improvement – I don’t think we have yet passed that test. The economy has not picked up forward momentum and a 2 percent growth rate – even if sustained – might not be sufficient to generate further improvement in labor market conditions. Moreover, fiscal uncertainties loom very large right now as Congress considers the issues of funding the government and raising the debt limit ceiling. Assuming no change in my assessment of the efficacy and costs associated with the purchase program, I’d like to see economic news that makes me more confident that we will see continued improvement in the labor market.

To that end, and because we expect as much from ourselves as we do of the firms we regulate, we at the Bank recently published our very own first TCFD-aligned climate disclosure report.12  9  Task Force on Climate-related Financial Disclosures (TCFD) As of February 2020, support for the TCFD has grown to over 1,027 organizations, representing a market capitalization of over $ trillion. https://www.fsb-tcfd.org/tcfd-supporters/ 11 The Bank is part of a UK regulators taskforce led by the UK government to examine the most effective way to approach climate disclosure. The taskforce was created as part of the launch of the UK Green Finance Strategy 12 Bank of England climate-related financial disclosure 2020 10  5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  The amount of work involved was significant, as was the focus of our most senior executives, Governors and our Court (Board). We learned a lot that we will build on in future disclosures. In line with views we have heard from firms, we found identifying useful metrics to set targets for risk management the most difficult aspect. But these challenges did not stop us - and they should not stop you. Of course, disclosure by firms and their clients is only one part of the challenge. Firms also need to use this information to understand and manage actively the climate-related risks in their business. Our interaction with banks and insurers has revealed they are in the early stages of developing their climate-related financial risk management capabilities.
But, given the stickiness of pay and prices, that would necessitate inefficient fluctuations in activity and employment. Now during the first decade of the MPC, such shocks were small and generally benign, with access to cheap manufactures from emerging economies providing steady downward pressure on prices. But the past few years have provided a less felicitous backdrop. Not only have we had to deal with the consequences of the financial crisis but we have also had to manage several major cost shocks. These include: a 25% fall in the sterling effective exchange rate; fluctuations in the price of oil between $ and $ a barrel; and movements down and up in VAT. Moreover, the impact of these changes has often proved hard to predict. For instance, we significantly underestimated the pass-through into inflation  1  See e.g. Bean et al. (2011). BIS central bankers’ speeches  1  of the exchange rate depreciation. So it should not be surprising that inflation has been both higher and more variable than during the Great Moderation. The question is: would outcomes have been materially better under an alternative framework, such as a nominal income target? The first thing to be said is that the idea of directing macroeconomic policy towards targeting nominal income is by no means new.

The (lagged) effects of this rise in consumer prices are unlikely to have fully materialised as yet. In the context of the aforementioned prospects for strong economic growth in the euro area, the protracted rise in import price inflation in the past few months clearly gave rise to a greater danger of a spillover to domestic sources of inflation, such as, for instance, firms aiming at raising or restoring profit margins. These risks had to be counteracted. With our monetary policy we are contributing to the conditions for high, sustained, non-inflationary growth. Since November of last year, the Governing Council of the ECB has decided to raise interest rates by a total of 175 basis points. Admittedly, this is not negligible. Given the strong economic data, the continuously high level of confidence and the continued strong growth of money and credit, the increase in interest rates does not mean that the ECB has put the brakes on growth. Economic expansion in the euro area is now strong enough not to be hurt by a gradual adjustment of the monetary policy stance. The interest rate moves are providing a clear signal to market participants, social partners and policymakers that the ECB is determined to counter inflationary dangers in a timely fashion, and that the prospects for price stability in the euro area remain good. This is also of great importance for the longer-term potential of the euro.
For Norwegian households, changes in house prices will therefore probably have a greater impact on consumption than changes in equity prices. In Norway, it became more common to own equities for all income and age groups in the 1990s. This was to a large extent reversed last year as a result of the fall in equity prices. We should nevertheless not rule out the possibility that fluctuations in equity prices in the future may have stronger effects on the real economy than we have witnessed so far. Developments in various asset prices may also influence investment. High equity prices may make it easier to gain access to capital to finance the acquisition of new machinery and buildings. A rise in property prices provides scope for raising larger loans against collateral in the asset. Possibilities for increased credit may contribute to higher demand for goods and services. The process may be self-reinforcing since part of the available credit can be used to purchase dwellings and other property. Similarly, bubbles in the stock market can result in overinvestment. When equity and property prices start to fall, companies are left with too much real capital and investment declines. This may lead to or amplify an economic downturn. There may be several factors that imply that particular emphasis should not be placed on financial imbalances in the conduct of monetary policy. First, it may take a long time before imbalances are triggered. The uncertainty surrounding developments so far ahead is considerable.

This imperative translates into high demands on the use of standardised documents and agreements among financial market players, so as to increase market efficiency, transparency and uniformity, as well as to reduce the cost of transactions as we strive towards seamless global inter-linkages. Standardised documentation and practices for a number of products have already been adopted between jurisdictions through bilateral and multilateral agreements. This has facilitated issuance of financial market instruments, contributing towards enhanced liquidity in Islamic financial markets and greater inter-market linkages. Greater understanding and clarity on Shariah matters, will also contribute towards convergence and harmonisation of such interpretations across jurisdictions and thus contribute towards the development of Islamic financial products and services. Realising cross-border potentials and bridging economies With its international outreach and ability to provide comprehensive financial solutions, Islamic finance beckons us with a new frontier that presents new opportunities. As we enter into a more uncertain global environment, it also promptsus to revisit strategies to enhance the resilience of Islamic finance. The theme of this year’s Global Islamic Finance Forum 2012, “Internationalisation of Islamic Finance: Bridging Economies” focuses on the international prospects surrounding the Islamic finance industry and its tremendous potential role in strengthening cross-border economic linkages. More than 500 participants from over 50 countries across the continents gather today in this Forum to explore this prospect.
In the current framework, internal models provide an important means of generating the increased risk sensitivity that is regarded as essential. Making capital adequacy ratios more risk-sensitive should, in theory, also make them more comparable. Capital adequacy assessments are about measuring the adequacy of capital relative to the risks a bank is taking. Measuring capital, ie the numerator, is relatively easy. The denominator, ie risk, is a much more slippery concept, and a certain degree of sophistication and complexity is needed to measure it. But by enhancing the accuracy of risk measurement, we should be making capital adequacy ratios more comparable and reliable, both over time and between banks. BIS central bankers’ speeches  3  As an aside, let me clarify that this is no criticism of the leverage ratio as a regulatory tool. It is simply that capital adequacy and leverage are two different concepts, and measure different things. The risk-based capital framework is not ideal for placing an absolute constraint on leverage, just as a leverage ratio is not ideal for assessing whether capital is adequate to cover the risks undertaken. This is why Basel III adopts a “belt and braces” approach, using the leverage ratio as an important backstop for the risk-based capital adequacy regime. Returning to the rationale for using internal models to measure risk, it is important to remember that a key premise was that banks’ risk-based capital ratios should consistently reflect banks’ risk-taking.

Building upon these initial studies, the Committee has started extending its analysis to establish a comprehensive picture: for the trading book, the initial analysis has been extended to more complex portfolios, with results expected in the next few months. In parallel, the work on the banking book will extend to the other remaining core asset classes, especially retail portfolios, SMEs and so-called “partial use” exposures (ie exposures that  4  BIS central bankers’ speeches  have not been migrated to the internal models). The Committee also foresees extending its work to operational risk, the third core risk type. And once the Committee has done an initial round of assessment, we will need to repeat the exercise periodically to see whether the policy measures that I will discuss shortly are having the desired impact. Further analysis to establish a comprehensive picture will take us into 2015, but this does not, of course, prevent us from taking action in the meantime. It is clear that a problem exists and the Committee is considering a range of supervisory and policy responses – without, I must add, settling on anything definitive just yet. Given the multi-faceted nature of the problem, it is also clear that we will need a multi-faceted response. As there is no silver bullet, we will likely end up with a series of incremental policy and supervisory changes, drawing from the following list:   Most immediately, we will see supervisory action.
There are examples showing that a period of higher-than-normal house prices can have an impact over a very long period. At the end of the 1800s, house prices in Kristiania (now Oslo) rose sharply. Some areas of Oslo are still marked by the massive volume of residential construction prompted by the rise in prices. The housing market collapsed at that time. The demand for new dwellings was saturated. It was not until the mid-1980s that real house prices returned to the level in 1899. Household debt is now more than one and a half times as high as disposable income. The accumulation of debt partly reflects structural adaptation over time to a deregulated credit market and partly to low interest rates. The higher debt burden has made households more vulnerable. A period will come when households prefer to stabilise debt and reduce consumption. The fall in interest rates has sustained activity in Norway after a period of weak economic developments abroad and high domestic wage and cost inflation. But an aggressive use of the interest rate as an instrument may itself be a source of new fluctuations in the economy because it influences the time profile for saving and investment. It is therefore important that growth is self-driven when the interest rate has to return to a more normal level after a period. The effect of Norway’s interest rate also depends on external interest rates. Many countries have raised their key rates during this cyclical upturn, also in several steps.

Higher demand for companies’ goods provides scope for increasing prices. Experience shows that inflation is directly influenced by the level of capacity utilisation in the Norwegian economy. Some of the rise in prices for domestically produced goods and services can be attributed to higher margins in the business sector. If there is confidence in monetary policy, economic agents will expect inflation to be close to target over time. This will provide a basis for company budgets. This will then contribute to stabilising inflation. Many companies change their prices only once or twice a year. When they change prices, they probably take into account the expected rise in other prices. It has been important to prevent inflation expectations from falling and becoming entrenched at a low level. Surveys of inflation expectations nevertheless indicate that expectations are well anchored around the inflation target in the long term. 4  BIS Review 10/2005  The interest rate is a powerful instrument. The effects come through growth in private consumption, higher house prices, increased residential construction, higher investment in various business sectors, business start-ups, improved corporate profitability, higher employment and wage growth, higher profit margins and higher imported inflation. The effects of the interest rate decline on demand, output and employment have been pronounced. It has taken time for inflation to pick up. This partly reflects low external interest rates and high oil prices, which have moderated the impact on the krone exchange rate.