samchain/econo-pairs-v1 huggingface dataset:
11 [23]  Greater dependence on other monetary policy tools For monetary policy, continued low real interest rates mean that it may become more difficult to stimulate the economy only with the use of the policy rate when economic activity is weakening and inflation is below target. If, for example, the long-term real interest rate is around zero, at the same time as the inflation target is 2 per cent, the policy rate will also be around 2 per cent, on average. This does not provide much scope for interest rate cuts in the event of an economic slowdown, as the policy rate cannot be cut too far below zero. If the economic slowdown is large enough, households and companies may also start to believe that monetary policy’s scope is limited and accordingly set their expectations to a rate of inflation below the inflation target. Consequently, the monetary policy toolkit, both in Sweden and in other countries, may also continue to need to include more tools. This may include large -scale asset purchases, a measure impacting long-term interest rates, expectations of future short-term interest rates and the amount of money in the economy. 11 Another measure that could be used is the publication of forecasts of the interest rate path, so-called forward guidance, which the Riksbank also does. This year, it is actually ten years since we started to publish three-year paths for the policy rate.

If real interest rates continue to be low, this could lead to indebtedness rising even more. The interest rate sensitivity of mortgage borrowers will then become even greater and they may be even more affected than the example calculation suggests when the policy rate must be raised. This would be unfortunate as monetary policy probably works best when it affects the entire economy in a similar way. However, the fact that interest rate sensitivity is greater today than previously among mortgage borrowers does not necessarily mean that the impact of monetary policy has also become greater. Inflation depends on how an interest rate adjustment affects the overall demand in the economy. This, in turn, depends on total consumption, which is to say how much mortgage borrowers and other households consume together. The results from the example calculation indicate that the impact on inflation is only slightly greater today than it was 20 years ago. Limited degree of freedom for monetary policy Rapid financial development, in combination with free capital movement, has led to the emergence of significant capital flows between different countries when monetary policy in major currency areas such as the United States and the euro area is changed. This affects asset prices, indebtedness and exchange rates in a way that can limit monetary policy’s degree of freedom. In Sweden, we saw an example of this in mid-2014, when it became clear that monetary policy in the euro area and the United States was moving in different directions.
If the shareholders rely on the possibility of an implied state guarantee for banks, this constitutes a moral hazard on their part, therefore increasing their risk appetite. The implementation of the Resolution Law formally eliminates the basis for the expectation for any such guarantee. Among the costs caused by the failure of a bank, contagion is probably the highest, since it turns the problem of a single bank into a problem for the entire banking sector. It may happen for two reasons: due to the spillover effect of a bank’s exposure towards another, as well as due to public panic, that causes eventual massive bank runs. This channel is particularly pronounced for developing economies, where contagion is faster due to their weak financial literacy, the historical lack of bank failures, and the presence of weaker institutions. In this context, the resolution regime serves as a tool for restoring market discipline and avoiding the risk of contagion. In essence, resolution is an integral part of banking supervision applied to the final stage of a bank’s life, should measures taken during the standard or intensive supervision stages fail to improve the situation of a distressed bank. The drafting of the resolution regime was accompanied by the strengthening of the supervision regulatory requirements, which aim to increase the resilience of the bank and strengthen the financial market structure to avoid the moral hazard.

The new Law replaces the standard insolvency proceedings of a bank with the resolution undertaken by the relevant authority. Banks’ failures and financial crises may be common events. They are very costly, as well, which, in some cases, can be as high as 40–60% of the Gross Domestic Product. This includes losses in deposits, weakening of access to finance and loss of public confidence in the financial system, which, in turn, reduces its capacity to support economic growth and decrease poverty. Also, standard insolvency 1/5  BIS central bankers' speeches  proceedings for failing banks proved inadequate in times of crisis because they did not address systemic risk nor ensured the continuity of critical functions; moreover, they did not protect depositors. These procedures require time, long negotiations as well as complex arrangements with creditors, which may damage and further diminish the asset value of the distressed bank, hence causing severe consequences for the real economy. For this purpose, the new Recovery and Resolution Law provides the Supervisory and Resolution Authorities with the legal capacity and the necessary instruments for restructuring bank operations, in the event its possible failure jeopardizes financial stability or undermines other objectives of the regulator. The aim is clear: on the one hand, we have the public interest on financial stability, while, on the other hand, remain the shareholders of the bank, who have voluntarily undertaken the risk by investing in the bank.
Moreover, there is plenty of evidence, accumulated over recent years, which suggests that identity-diversity can yield significant social benefits, in part at least because it serves as a proxy for cognitive and experiential diversity. For example, research by McKinsey has looked at how gender and ethnic diversity affect firm performance. 45 Looking at a wide cross-section of international firms, it finds that companies with higher levels of ethnic and gender diversity have tended to out-perform less diverse companies, often by material amounts. These effects are stronger, the greater is the degree of diversity on these companies’ leadership teams. Diversity, in short, supports the bottom line of the annual report, not just the CSR paragraph. And what is true of companies appears also to be true of cities. Researchers have created “creativity indices” for cities measuring their degree of technological innovation and  41  Alesina et al (1999)  42  May and Anderson (1991), Watts (2002), Haldane (2009)  43  Alesina and La Ferrara (2000). 44  Page (2007). 45  McKinsey (2015). 8  BIS central bankers’ speeches  dynamism. 46 There is a striking correlation between these indices and a city’s degree of sexual and ethnic diversity – cities such as San Francisco, Boston and Seattle in the US, and also London, Dublin, Vancouver and Sydney. It seems a vibrant city both helps create, and is created by, a diverse and cosmopolitan populace in a virtuous loop.

Since August, inflation has fallen back to target (for the first time in 5 years) and unemployment has fallen rapidly towards 7%, so what have we learned on the journey towards our threshold? With the wisdom of hindsight, there have been three main drivers of the recovery thus far: a marked reduction in extreme uncertainty, the repair of the core of the financial system and significant deleveraging by households. These have driven a recovery in consumer spending and housing investment, which together have accounted for almost all the GDP growth in the year to Q3. As my colleague Ian McCafferty outlined earlier this week, there are also early signs of a recovery in business investment. The less good news is that the recovery has not – as measured at least – been accompanied by meaningful productivity growth. Given the continued openness of the economy and the credibility of macro policy, it is hard to think of any reason why there should have been a persistent deterioration the UK’s  1  My MPC colleague Ben Broadbent discussed these issues extensively in September 2013 in a speech at the London Business School, “Conditional guidance as a response to supply uncertainty”. 4  BIS central bankers’ speeches  productivity performance. In fact there are several reasons to expect productivity growth to pick up as the recovery proceeds. For example, until recently, the fragility of the banking system limited the reallocation of capital and labour from less to more productive activities.
This is important for ensuring that resources would be allocated efficiently and that the direction of development would be in line with the needs of markets, which reflect private sector’s priority and expectations. At the initial stage of development, as is the case now for the Asian Bond Market, government policies and efforts will be important to spearhead the process of growth and development. But once the momentum takes off, market mechanism should take over to ensure that the pace and focus of development are consistent with market expectations. And, at this level, the role of policy should be to support and facilitate market development by streamlining rules and regulations, by facilitating cross-border trade and investment flows, and by providing the necessary financial infrastructure. This approach will help ensure that the region’s financial environment remains conducive to private sector activities and participation. Let me take the opportunity here to stress that, at this juncture of financial markets development in Asia, I think that support from the authorities is still important and remains a crucial factor. But in order to leverage the impact of government’s support and involvement to the fullest, it is important for the authorities to be clear and firm on their commitments to develop the markets. Government involvement should also be focused and concentrate on issues that cannot be tackled by private market participants.

Dimitar Bogov: Improving education and access for children and youth to financial services Address by Mr Dimitar Bogov, Governor of the National Bank of the Republic of Macedonia, at the 3rd Annual Regional Meeting for Europe and Central Asia (ECA), Skopje, 2–3 October 2014. *  *  *  Dear Ministers, Esteemed guests, Dear ladies and gentlemen, It is my honor and privilege to welcome you all here in Skopje, Macedonia to this important event for the region of Europe and Central Asia. The aim of this meeting is to gather together in one place the regional leading policy-makers, financial institutions and experts that are engaged in the issues of children and youth access to financial services, financial inclusion and financial education, employability and entrepreneurship opportunities, to share success stories and challenges. There has been some progress made in these fields because of the existence of international movements such as Child and Youth Finance International that are keen to develop a generation that will be better prepared to prevent future financial crisis by increasing the financial education, access to finance, employability and entrepreneurship skills of children and youth. On a global level, significant progress has been achieved in advancing the mentioned priorities. Important steps have already been made in the area of improving access to financial services in the previous years. Access needs to be complemented by the quality of the financial services. The quality of financial services and the participation in the financial system is equally important for all participants in the system.
There are of course a number of conditions that have to hold before we can be confident that increased disclosure will deliver real benefits for financial stability and efficiency. As far as market discipline is concerned, increased disclosure by itself is not enough to achieve this: the market has to have an incentive to monitor the disclosed information, the ability to monitor it, and the means to influence the banks once it is disclosed. There is no point, for example, in introducing extra disclosures if the burden of producing and absorbing it proves too high. This will not achieve our aim of improving stability and will probably negatively affect efficiency through the imposition of pointless costs. I think that the proposals in the new Basel Accord do incorporate these considerations, even though there has been some concern from the industry about the proposed volume of disclosure. First, the disclosure requirements are intended to use information that is already produced for other purposes, whether regulatory or internal. This helps to keep producer costs down. And secondly, there are recommendations for standard formats and templates for disclosures, which will help keep the user costs of absorbing the information low. Equally there is no point in enhancing disclosures if the market has no incentive to apply the information because creditors believe that banks will not be allowed to fail. So our goal of improving and harnessing market discipline has to go hand in hand with continued rolling back of state guarantees, whether formal or implicit.

The ECB does not vote. Where I do agree is that making the presidency of the Eurogroup a permanent position could strengthen the institutional architecture of the euro area. How would the hypothetical independence of Catalonia affect its relationship with the ECB? At the ECB we act according to regulations, and the treaties. We would adhere firmly to the legal provisions and we would not do anything that is not legal. What conditions would need to be met in order to gain a seat at the ECB? Whether this is political fiction or not, I don’t know. But the ECB only acts on the basis of facts, not hypotheses. If the number of countries in the euro area were to increase then we would respect that, but there would be no shortcuts unless they are provided for by the Treaty. The European Commission has launched an investigation into the use of deferred tax assets (DTA) in the banking sector in Spain and various other countries. The ECB was very critical about DTAs when it had to be evaluated during the banking stress tests. There are four countries that resorted to using these measures widely and the legislation that they adopted varies from one country to the next. I believe that we must look at each case separately and in context. Personally I dislike the idea of resorting to attempts to create the impression that a balance sheet’s loss absorption capacity is greater than it is in reality.
Opting for a new and unfamiliar regime, which is what the 15 per cent band arrangement amounts to, in the midst of the uncertainty prevailing early last year would not have been prudent. The decision to opt for continuity by pegging the lira to the euro at the central parity rate, moreover, was also supported by our study on the equilibrium exchange rate, available on the Bank’s website, which did not produce evidence of a significant misalignment; and by our conviction – which is shared by expert opinion in Malta and abroad – that given the openness of the economy and the speed of the nominal exchange rate pass-through to prices, a possible devaluation is anyway unlikely to have lasting beneficial effects. The 1992 experience proved that devaluation is not the correct antidote for  BIS Review 16/2006  3  structural problems. In less than three years, the inflationary pressures resulting from that decision wiped out whatever competitiveness gain had been achieved. In the event, the commitment to keep the lira/euro peg at the central parity rate – which was also welcomed by the IMF - seems to have reassured both the business community and investors as calm returned to the financial markets. The downward trend in the reserves was first interrupted and then reversed, as capital inflows resumed, including a considerable amount resulting from the redenomination of domestic loans into euro to take advantage of the lower interest rate.

Michael C Bonello: The challenges faced by the Maltese economy ahead of euro adoption and their implications for monetary policy Interview with Mr Michael C Bonello, Governor of the Central Bank of Malta, by The Times, 2 March 2006. *  *  *  1. It has been reported that Malta needs a real growth rate of 4 per cent per annum if it is to reach the EU average per capita GDP in 20 years. Growth, in fact, only averaged about 0.5 per cent in real terms in the five years to 2005. Are you preoccupied? More important than expressing concern is the need to understand the reasons for this slow growth. Since the turn of the century the economy has faced challenges of both external and domestic origin, and the recent period of weakness reflects the size of the task ahead. The slowdown began in 2001 with external shocks to the key sectors of tourism and semi-conductors. Since then the relatively slow growth in Malta’s main trading partners has been compounded by the competitive pressures unleashed by globalization and by our integration in the single European market, all of which has forced an acceleration in the pace of restructuring of the manufacturing sector. At the same time that we were opening up our markets, low-cost producers were undercutting our competitiveness, particularly in labour intensive sectors. These, along with the sharply higher price of imported oil since last year, are among the factors that have contributed to the slow down.
For instance, landmark judgments may not only re-shape policies, but also lead to improvements in risk management practices or fairer outcomes to the customers. The series of legal cases involving the sale and purchase contract (Bai` Inah) highlight several important lessons in this regard. For Islamic banking institutions, the decisions have led to further enhancements to the legal documentations for Bai` Inah contracts itself. In the context of Islamic finance, the task of upholding legal certainty is even more complex, for two reasons. First, Shariah principles and requirements must be infused into the law of the land from the religious sources. Secondly, these prescriptions – written many centuries ago – must be applied to the context of modern finance. For brevity, I will refer to these two aspects of legal certainty as Shariah certainty. 1/4  BIS central bankers' speeches  My remarks today will focus on the importance of legal certainty in the development of Malaysia’s Islamic finance industry – with a particular emphasis on Shariah certainty. I will begin by reflecting on the past, before sharing some thoughts about some considerations for the present as well as future. Looking at the past, Islamic finance has developed rapidly in Malaysia over the recent decades. To a large extent, this progress is attributable to the certainty provided by the legal framework for Islamic finance in Malaysia.

The UAE-based energy company declared that its USD700 million sukuk was no longer Shariah-compliant – and thus unenforceable – because the scholarly consensus was said to have shifted since issuance in 2003. Now, let’s move on to the future – we need continued certainty. We have come a long way in setting in place the strong foundation of a legal framework. The law review and harmonisation committees have done good work in ensuring that Shariah principles can be imported into Malaysian law in a way that is effective and seamless. The progress of the past has positioned us with both opportunity and challenge at present. To navigate these well, we need to promote continued certainty as we move into the future. This will require excellence at both the institutional and individual levels. Institutional excellence At the institutional level, the judiciary plays a vital role in upholding legal certainty. Judges – along with arbitrators – ensure that disputes are settled by the application of the law, rather than unbounded discretion. The courts also ensure that these laws are intelligible, clear and also predictable. For Islamic finance, the Shariah Advisory Councils (SACs) of Bank Negara Malaysia and the Securities Commission play a complementary role to the courts – by providing Shariah certainty. It is important to note that this role does not [in any way] substitute the function of the judiciary in upholding legal certainty.
As said above, the banking sector represented the crucial part of the financial sector of the country. Therefore, it was also the one to be hit the most seriously in the course of the economic reform, especially on the credit allocation side. On the contrary, deposits continued to grow despite the negative real interest rate. BIS Review 53/2003  1  The economic transformation included deregulation of most prices, thorough foreign trade reorientation [after the collapse of the Soviet Union], enterprise privatization, tax system changes, and foreign exchange liberalization. Given the depth of the economic transformation, the transition countries achieved relatively quickly a generally stable environment after the initial shock.

Although the latest news on the U.S. economy is somewhat more encouraging than that from earlier in the year, we should not take much solace from that. After a very weak first half, when GDP growth was less than 1 percent, economic activity has strengthened somewhat and inflation pressures are starting to ease. Growth in the third quarter is currently estimated to be 2.5 percent, and recent indicators suggest growth in the fourth quarter could be somewhat higher. This modest rebound reflects in part the passing of transitory factors such as the damping effect on household and business spending power from rises in energy and food prices as well as the supply disruptions related to the earthquake and tsunami in Japan. However, as we look toward 2012, the U.S. economy continues to face several obstacles to a robust recovery. Accordingly I expect growth of about 2.75 percent for 2012. Consumer price inflation has begun to moderate. This moderation is just starting to become evident on a 12-month time horizon – in which consumer price inflation as measured by the consumer price index (CPI) is rising at about a 3.5 percent annual rate. Given current expectations for the path of energy prices – taken from futures markets – consumer price inflation on a year-over-year basis should continue to fall over the next few months. We cannot be satisfied with the current state of the economy or the outlook for the next few years.