samchain/econo-pairs-v1 huggingface dataset:
The credit squeeze here has not been, initially at least, a response to losses at home but driven by the dramatic loss of liquidity in financial markets (Chart 1) which was set off by the US sub-prime downturn. One puzzle has been why that problem in one part of one country’s housing market has triggered such global turmoil. Of course the US is not just any country. But while the numbers may look large in absolute terms, even if sub-prime losses reach $ billion as the IMF have suggested 1, they will be quite modest relative to the size of the whole banking system. The answer is that sub-prime provided only the initial spark and the fire fed on much broader weaknesses in the financial sector, which in turn had been allowed to develop by imbalances in the global economy. The most striking feature of the world economy in the last decade has been the explosive growth of China and other emerging economies. For example, since China joined the WTO in 2001, its imports and exports have expanded on average by 25% each year, more than twice the growth in world trade over that period. But these countries have been reluctant to rely, in net terms at least, on foreign capital either because of their own previous currency crises or their observation of the painful adjustment experienced by others. Foreign direct investment has been permitted to allow the transfer of technology and expertise but these capital flows have been re-exported through accumulation of foreign reserves.

Famously Alan Greenspan asked “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions..?” There are two good reasons for care. First policy has to be appropriate for the whole economy; the interest rates which would be needed to have a significant effect, say, on the growth of house prices in recent years might have been far too high for other industries. Secondly central bankers have been cautious to put much weight on their own assessments of when an increase in asset prices is becoming unsustainable. If they get the judgement wrong, they risk slowing growth needlessly and bring inflation persistently below target. Even if central bankers put more weight in future on their judgements of excesses in financial markets, it seems highly desirable also to make the regulatory system more counter-cyclical. BIS Review 94/2008  3  A number of proposals have recently been put forward, which would have the effect of directly increasing a bank's capital requirements during an economic upturn and allow room for capital requirements to fall in a downturn. For instance Professors Goodhart and Persaud have put forward a scheme linking a bank's capital to the growth in its assets. Another possibility is to learn from the Spanish system of requiring banks to set aside general provisions against their loan book in good times which can be a cushion against losses in the downturn.
Negative interest also puts a strain directly on banks, and indirectly on pension funds and life insurance companies, which worry about their profitability and about meeting their obligations. As I have mentioned, the SNB takes these concerns very seriously. Yet the challenges now facing pension funds are not caused first and foremost by monetary policy. Rather, their problems stem from the fact that pension funds have to achieve returns that are nominally fixed and were set when the equilibrium interest rate was higher. For banks, the negative interest rate undoubtedly represents a cost because they have to pay interest on their deposits at the SNB. However, the SNB grants a generous exemption threshold, which reduces the effective interest rate burden for the banking sector. These exemption thresholds give banks the freedom to decide whether – and to what extent – they should pass on negative interest to their customers. From a financial stability perspective, it is not negative interest per se which poses a challenge, but rather the low level of interest rates more generally. It is conceivable that low interest rates will lead investors to take greater risks. This can result in imbalances developing on the real estate and mortgage markets. In Switzerland, a variety of measures have been implemented since 2012 – the countercyclical capital buffer for instance – with the aim of reducing the associated financial stability repercussions. Since then, the pace of growth on the real estate and mortgage markets has slackened somewhat, although mortgages continue to grow faster than GDP.

BIS central bankers’ speeches  11  Figure 8 Sweden’s net external position and accumulated current accounts Percentage of GDP  80  80 Accumulated current accounts Net external position  60  60 Nominal net external position  40  40  20  20  0  0  -20  -20  -40  -40  -60  -60 75  77  79  81  83  85  87  89  91  93  95  97  99  01  03  05  07  09  Sources: Statistics Sweden and the Riksbank  If it is the case that Sweden has no particularly large net claim internationally then this will have some significance for the prospects for the real exchange rate. In theory, countries with a strong external position should in the long term experience appreciating real exchange rates, and vice versa. There is also empirical support for the link between the net position and real exchange rates when studying different countries. 24 With a net claim close to zero one would not necessarily expect any strengthening of the real exchange rate despite a large current account surplus. The fact that Sweden’s external position appears to be close to zero suggests that there is no need for the real exchange rate for the krona to move in any particular direction for this reason. Other factors also affect the real exchange rate, for example relative GDP growth, relative inflation and the terms of trade.
At the same time, Norges Bank presented inflation projections based on an exchange rate equal to the average for June and an interest rate of 7 per cent. Since early this summer, the krone has remained in this range. Consumer price inflation was slightly higher than projected in June and July, but returned to the level forecast in our path in August and September. The next Inflation Report will be presented in connection with the Executive Board’s monetary policy meeting on 30 October. Thank you for your attention. BIS Review 59/2002  5

This has taken place in a global environment in which the world economies and financial systems are increasingly becoming more integrated. As a result, it can be expected that there is increased interdependence, events that take place in one part of the world will have implications on other parts of the world. This is likely to be more pronounced in the ASEAN economies and financial systems, given their openness and their high degree of integration with the global economy and international financial system. As the ASEAN and the EU continues to evolve as strategic partners, new opportunities can also be realized. An enhanced relationship will also contribute towards more effective management of the new challenges in the ever-changing global environment. Indeed, this Conference takes place at an important time when it becomes even more constructive and meaningful for our two regions to strengthen our associations, our inter-linkages and our relationships. Learning from the experiences of the EU Ladies and Gentlemen, The unification of Europe on many fronts is a major structural enhancement to the global economic and financial landscape. It is very likely however, that in view of our diversity and different structures and stages of development, the route for the integration process will be significantly different. It can be stated with certainty however, that integration will nevertheless occur. Indeed, the process has already commenced and it is likely to gain momentum as we advance forward. The motivation being the greater stability it brings and the increased growth potential it generates.
These developments were foreseen by the Central Bank and, after a brief interlude, short-term interest rates began to be reduced again from September 2004.e. No apparent pressure of this kind is expected in 2005 either, provided that the tight monetary and fiscal policies continue to be implemented and the incomes policy follows a course in line with inflation. However, as I have just mentioned, the recent press release “March Inflation and Outlook” needs to be read carefully. Graph 3: Demand Deficit (Total Supply –Total Domestic Demand) 12,0  Excess Supply  10,0 8,0 6,0 4,0 (%)  2,0 0,0 -2,0 -4,0 -6,0 -8,0 2004Q1  2003Q1  2002Q1  2001Q1  2000Q1  1999Q1  1998Q1  1997Q1  1996Q1  1995Q1  1994Q1  1993Q1  1992Q1  1991Q1  1990Q1  1989Q1  1988Q1  -10,0  Source: SIS, CBRT. Although the period of chronic inflation has been left behind, a period of lasting price stability has not yet been entered. As I have occasionally emphasized in my speeches, we are still experiencing a period of “disinflation”. Having said that, the distance covered and the gains attained are significant. Throughout this whole process, inflation dynamics not only changed as a result of the policies implemented, but also the effect of disinflation itself. This, in turn, helped inflation to be pushed down in an irreversible way. Breaking inflation inertia is the first clearly noticeable achievement in terms of the changing dynamics of inflation.

The implementation of policies by institutions with clearly defined goals protected from short-term effects and able to communicate regularly, is crucial to creating the required confidence for economic units in their decision-making process. Central bank independence is a concept that can be defined in various ways. The main pillar of independence is not to allow a borrowing-lending relationship with the public sector. There are three more pillars of independence. The first is goal independence that means the ability to freely determine monetary policy targets. Second is target independence, which means the ability to determine targets at its own discretion when price stability is set as the goal. Finally, the third pillar is the power to freely choose and use monetary policy instruments with the aim of achieving the targets. It is again a widely accepted fact that the ability of the central bank to announce its opinion about the general course of economy and the risks using communication technologies is part of central bank independence. This means warning politicians, non-governmental organizations, financial circles, the real sector, in short all sections of the public. After thirty years of chronic inflation and successive economic crises, the Central Bank of Turkey finally obtained independence in 2001, which was quite close to world standards.
This dynamic should have been mitigated to some extent by the rating agencies as they assigned ratings to these new securities, but that process too proved inadequate, especially for residential real estaterelated securities. The problems associated with these misaligned incentives for issuers and inadequate rigor on the part of the rating agencies became apparent as the housing sector turned down and the economy weakened. The result was a dramatic spike in credit losses and an almost complete loss of investor appetite for non-agency, residential mortgagebacked product. A second factor contributing to the collapse of the ABS market was that the benefits of pooling and distributing risk more widely proved to be somewhat illusory. In practice, the performance across different loans that collateralized the securities was much more highly correlated than was anticipated, and the risks associated with these securities was significantly more concentrated than had been assumed. Some banks that were unable to sell the highest-rated tranches kept them on their books. In other cases, the sales were made to off-balance sheet vehicles, in which the banks retained residual risk. This correlation contributed to the aversion of investors to the asset class as a whole. A third contributing factor was the fact that these securities were often complex and heterogeneous and, thus, hard to value. In a stressed economic environment, this complexity exacerbated the erosion in market liquidity conditions, which in turn led to a vicious circle of falling prices and even further diminished liquidity.

We think it is unlikely that the Treasury will lose money on this program, and it sits ahead of the Fed in terms of its loss exposure. The risk posed to the Federal Reserve therefore seems quite remote. Instead, we expect that the program will be profitable for the taxpayers and will be successful in pushing down yields and increasing credit availability. Turning from the issues of design and risk to issues concerning implementation and effectiveness, we have been rolling the TALF out in stages – first the consumer ABS market, with the first subscriptions for TALF loans in March; second, new CMBS securitizations that will start in early summer; and third, legacy CMBS and, possibly legacy RMBS, later this summer. By legacy assets, we mean highly-rated existing securitized assets that are already outstanding. The legacy TALF program will help support asset-backed-securities prices. This should help aid market liquidity and make financial firms that hold such assets less vulnerable to the risk of further losses. So far, the evidence indicates that the program is working as designed. First, the issuance of consumer ABS securities has been gradually reviving. In March, four deals came to market worth $ billion. In April, there were another 4 deals worth $ billion. In May, there were 8 deals worth $ billion and this week, there were 13 deals worth $ billion. We’re not back yet to the $ billion annual rate of issuance before the crisis and we don’t expect to get there, but we are making a good start.
Here it is essential that practitioners such as risk experts, auditors, consultants and the supervisors themselves should strive to learn of and transpose all these regulations to their daily duties. I believe it is time to reflect on our subject today in something of a critical frame of mind. I have some concerns over the scope of the new regulatory arrangements. By way of example, the transposition of Basel III to the European Union has required almost 700 articles, many of which not only involve notable technical complexity, but also entail the promulgation of extensive technical standards and additional supervisory guidelines for better implementation. Just as banking industry practitioners face the challenge of implementing and applying this regulatory agenda, the challenge to regulators and supervisors is to reflect on how to square effective regulations with a framework that should ideally be simpler and more transparent, since the effectiveness of the new regulations will also hinge on this. Thank you. 4  BIS central bankers’ speeches

A big part of that reflects recent success in averting tail risks that were weighing on investor confidence. Europe’s common currency hasn’t fragmented, the U.S. didn’t go over its fiscal cliff, and China hasn’t had a hard landing. But in each of these cases, there is plenty of unfinished business, and important challenges remain. In the euro area, while there are grounds for cautious optimism, much remains to be done to restore confidence and growth. Fiscal adjustment is far from complete and is likely to continue to weigh on growth for some time to come. Financial conditions in the periphery have improved, but remain much less supportive than in the core. Plans to build a banking union and deepen economic, fiscal and political integration remain very much works in progress. And, as the elections in Italy have reminded us, there is an important political counterpart to the economic and financial challenges and risks confronting the region. In the U.S., we are only part way toward addressing our fiscal challenges. Recent measures are chipping away at the deficit, but the approach hardly corresponds to anybody’s ideal of efficiency. While there is little mystery about what ultimately needs to be done, we simply have not yet mustered the political will to make the compromises needed to get there. And, unfortunately, with deadlines coming – and one just having passed for decisions on mandatory spending cuts and spending and borrowing authorizations – we can’t be comfortable that this is going to go smoothly.
The first day of our seminar is dedicated to this topic. The second day of the seminar targets mainly the corporate sector. The Small and Medium Enterprises’ access to finance is also important for financial stability. Small and Medium Enterprises constitute the overwhelming majority (99 percent) of businesses at European level, with important contributions both in terms of value added generated by non-financial corporations (57 percent) and employment (67 percent). Increasing access to finance in this sector is among the EU priorities. It is also 3  true that this portfolio accounted for the highest post-crisis NPL ratio in the European Union. At its peak, the average NPL ratio for Small and Medium Enterprises reached around 20 percent at European Union level. In Romania, the ratio was 35 percent, while the NPL ratio for microenterprises accounted for 53 percent. Therefore, the same lesson learnt from the household sector also applies here: the Small and Medium Enterpises’ financial inclusion should unfold in a sustainable way. On the other hand, the experience with macroprudential instruments for companies is extremely limited at the European level. For example, France has recently implemented a measure focusing on highly indebted firms, but it applies only to large companies. Therefore, I think that deepening this area of research is very useful for macroprudential policymakers. In Romania we have also tried to come up with solutions that might improve Small and Medium Enterprises’ financial inclusion.

12 Market fundamentalism – in the form of light-touch regulation, the belief that bubbles cannot be identified and that markets always clear – contributed directly to the financial crisis and the associated erosion of social capital. Ensuing events have further strained trust in the financial system. Many supposedly rugged markets were revealed to be cosseted: •  major banks were too-big-to fail: operating in a privileged heads-I-win-tails-you-lose bubble;  •  there was widespread rigging of benchmarks for personal gain; and  •  equity markets demonstrated a perverse sense of fairness, blatantly favouring the technologically empowered over the retail investor. 13  Such practices widen the gap between insider and outsider returns and challenge distributive justice. More fundamentally, the resulting mistrust in market mechanisms reduces both happiness and social capital. We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital. It is necessary to rebuild social capital to make markets work. This is not an abstract issue or a naive aspiration. I will argue that we have already made a start with financial reform and that by completing the job, by returning to true markets, we can make capitalism more inclusive. What then must be done? There are a wide range of policies to promote inclusive capitalism from early childhood education, training and the importance of differentiated pathways and mixed-income neighbourhoods. These are all fundamentally political issues.
And that explains the solid the anchoring of our inflation expectations, which we see as one of our major assets because it helps avoiding second round effects when we have oil price increases in particular. Clearly, in particular on the side of energy and commodity prices we have a number of developments that we will continue to monitor closely. WSJ: Tighter monetary policy would have the biggest impact on countries like Spain, Greece and Ireland where private debt is linked to Euribor. Can you understand why those peripheral countries are concerned about this hawkish shift? BIS central bankers’ speeches  1  TRICHET: I also said in my last press conference that the present interest rates were appropriate. In any case all countries in the euro area have an immense stake in the solid anchoring of inflation expectations because medium and long-term interest rates incorporate future inflation expectations. WSJ: Inflation is being driven by energy and commodity prices and higher value-added taxes in some countries. Is the ECB’s focus on headline inflation misplaced? Does the Fed have it right by focusing more on core inflation? TRICHET: In the U.S. the Fed considers that core inflation is a good predictor for future headline inflation. In our case we consider that core inflation is not necessarily a good predictor for future headline inflation.

2 All three of these reasons – evidence that U.S. monetary policy is currently only moderately accommodative, the fact that U.S. financial conditions have been influenced by economic and financial market developments abroad, and risk management considerations – argue, at the moment, for caution in raising U.S. short-term interest rates. So, directionally, the movement in investor expectations towards a flatter path for U.S. short-term interest rates seems broadly appropriate. That said, to my eye, market expectations derived from futures prices – which price in about one 25 basis point rate hike through the end of 2017 – appear to be too complacent. If the incoming information validates my view of the outlook, then I believe that U.S. monetary policy will likely need to move at a faster pace than implied by futures prices towards a more neutral posture as the labor market tightens further and U.S. inflation rises. Moreover, market expectations may be putting insufficient weight on the possibility that the economy could outperform our expectations, that financial conditions could ease, or that the risks to growth from Brexit and other international developments could fade away. If such events were to occur, this might necessitate a faster pace of adjustment. For these reasons, I think it is premature to rule out further monetary policy tightening this year. As I said before, it depends on the data, broadly defined, and, as we all know, that is not something one can predict with any accuracy.