samchain/econo-pairs-v1 huggingface dataset:
23.10.2019  The Banking Union: a key building block of the EU project Opening remarks at roundtable “Banking Union – Five years in the making” Banco de España Margarita Delgado Deputy Governor  Dear chairs of the Single Supervisory Mechanism and the European Banking Authority, president of the European Banking Federation, ladies and gentlemen, good morning. Let me start by welcoming you to Banco de España for this roundtable. Over the next couple of hours we intend to discuss both the achievements and pending elements of the Banking Union (BU) on its fifth anniversary. We are honoured to be accompanied by such distinguished panelists, so thank you for accepting our invitation and for being here today. But before getting down to the discussion, I would like to share with you a few general thoughts on the European Union project and the role the Banking Union (BU) plays as part of this collective endeavour. In my remarks today I will point out what the BU has meant in terms of greater integration for the euro area banking sector, and I will also refer briefly to those developments that, in my view, may still be missing if we are to achieve a truly integrated and cross-border banking sector. The EU project has certainly improved the life of millions of people in Europe since its creation, not only in economic terms, but also regarding rights and living standards across the whole Union.

At the moment, the disruption of the global value chains globally and the growth of costs are creating interruptions in certain industries and are one of the major risks to the expected economic recovery. Hence, timely monitoring of all risks and their timely identification is a current priority, in order to reduce the burden on the banks' balance sheets. According to the latest EIB survey, some of the banks in the wider CESEE region expect a certain increase in nonperforming loans in the period ahead. Upward shifts are also possible in our country, but for the time being the stress tests show sufficient resilience of the banking system, in conditions of a strong regulatory framework, cautious behavior of banks and signs of economic recovery. The central bank's policy is currently relaxed, thereby contributing to favorable conditions of financing and economic recovery, in circumstances when we have enough comfort in the foreign reserves to respond to possible shocks. Of course, given the uncertain environment, we constantly and carefully follow the trends of all indicators, relevant to the monetary policy. At the moment, almost in all countries, the growth of savings increases the sources of funding for banks and their capacity to support the economy, especially at the points that will meet the new post-pandemic requirements and will increase the growth potential. The transition to a green economy is undoubtedly one of the issues that with the pandemic has moved from the margins to the core of priorities.
Second, this pricing indicates that government securities began to be valued higher than central bank money when the purchases started. Investors bought government securities with lower interest rates than the rate paid on Riksbank Certificates and deposits overnight at the Riksbank. Another common idea is that the central bank adds value by providing liquidity and reducing the term premium when purchasing government securities in exchange for more coveted central bank money. This does not seem to have been the case in Sweden. Both the Riksbank and the Swedish National Debt Office judged that the term premium was close to zero, or negative, when the Riksbank's purchases began and that the overall term and liquidity premiums subsequently became negative.12  11 However, my assessment is that the effective lower bound for the Swedish policy rate is around −0.50 per cent  or possibly slightly higher, and that the banks had not further reduced their lending rates if we had cut the policy rate below −0.50 per cent. 12 See Figure 2-3 and Figure 3 in Flodén (2016). 6 [30]  Unclear whether lower long-term interest rates are a stimulus in the Swedish economy Third, it is doubtful whether lower interest rates on longer maturities stimulates demand in the Swedish economy. Unlike the US economy, for example, the Swedish financial market is dominated by short-term interest rates.

6 The Swedish National Debt Office offers a repo facility that in practice means that the short market rates on  government securities can hardly fall more than 40 basis points below the Riksbank’s policy rate. 7 From interest rate swaps one can calculate the expected average 3-month STIBOR rate five years ahead. And from pricing of RIBA and FRA contracts it is possible to calculate the expected difference between the STIBOR rate and the policy rate about two years ahead. The calculation of the expected policy rate is based on the assumption that the difference between STIBOR and the policy rate is expected to be the same during years three to five as at the end of year two. Thanks to Henrik Erikson of the Monetary Policy Department who has helped me with these calculations. 4 [30]  2017. This way of looking at data thus also supports the conclusion that the Riksbank's purchases pushed down the rate on government bonds by around 35 basis points. Figure 2. The rate on short government securities was lower than the policy rate SEK billion and basis points respectively (left figure ) and per cent (right figure)  Note. The blue field shows the volume of nominal government bonds owned by others than the Riksbank. Interest on repo transactions for nominal government bonds relative to the policy rate. The interest rate on repo transactions that pass over the end of the year may be affected by year-end effects. These rate listings have been removed.
While such ambitions are quite legitimate, most of them would find achieving this goal very challenging. Why? Because an IFC, by definition, serves not only domestic customers on its own turf, it also captures financial businesses and money-flows either from a large hinterland or the neighbouring areas or both. This is a big challenge because it entails serving customers from the other jurisdictions or cross border transactions. It also entails the need to deliver consistent and efficient financial services in order to be competitive in international financial business. The truth of the matter is that only a small number of cities can successfully become international financial centres because IFCs need a critical mass and market depth. It should be noted that international financial transactions and money tend to migrate towards those centres that provide the most efficient and competitive services to customers. In other words, domestic financial centres will need to go through very fierce competition before a few of them can emerge as successful IFCs. Given Hong Kong’s accomplishment as one of the region’s premier IFCs, there are many study groups from abroad coming here to learn the tricks that have helped achieve what we have today.

More specifically, the financial services industry, the regulators and policy makers can and should work together to upgrade the 3Cs, which is essential in maintaining our competitiveness against other financial centres. Now I would like to name a few initiatives that the HKMA is pursuing in this regard in collaboration with the stakeholders. (a)  Competence: in conjunction with the SFC, the industry and professional bodies such as the TMA, the Hong Kong Institute of Bankers and the Hong Kong Securities and Investment Institute, we are seeking to revamp and formalise the professional qualifications and training for market practitioners in the fields of private banking and wealth management in general. The HKMA has also stipulated in its supervisory circular that banks must ensure that their staff have the necessary qualifications and professional training in the relevant fields. We are making good progress in this regard and we hope to be able to introduce an enhanced qualification and training framework in a few months’ time. (b)  Control: under the Banking Ordinance, directors and senior management of banks must be “fit and proper”, given the important roles they play in ensuring that their banks are run prudently and properly. In order to enhance the control and governance functions of individual institutions, the HKMA has recently refined the procedures for approving the appointment of bank directors and senior management. In addition to the usual vetting, we now convene face-to-face meetings with some of the nominated candidates.
Just as our operations have had to adjust, at speed, so too has the way we interact with one other. Face-toface meetings – the lifeblood of central banking, sadly – have been seamlessly replaced with audio and video calls. Indeed, over 12,000 of them every day (Chart 17)! The challenges we have faced are minor compared with those of healthcare professionals and other key workers in recent months – and many other organisations have achieved similar feats. But for an institution as traditional as the Bank of England, the experience has been profound. 13  All speeches are available online at www.bankofengland.co.uk/news/speeches  13  Chart 16: no. of market operations per week  Chart 17: The impact of remote working  Contingent Term Repo Facility (CTRF) Indexed Long-Term Repo (ILTR) Term Funding Scheme with additional incentives for SMEs (TFSME) Asset Purchase Facility - Corporate Bonds & Gilts No.

And the banking system, with much stronger capital and liquidity reserves, continued to lend – supported by new schemes such as the CCFF, built from scratch in record time. In designing our interventions, we have been careful to demarcate clearly between our respective institutional responsibilities: the MPC took the decisions on asset purchases; the Treasury bore the financial risk on lending to corporates; and we reminded financial markets that any usage of the Ways & Means account would be temporary and short term. In light of those actions, and similar steps by other central banks globally, core markets are today stable and well-functioning. That is no small achievement. But it is far too soon to take a lap of honour, even on the narrow stage I have occupied today. Financial markets could come under strain again, if there is another leg to the global infection cycle, or if economic data come out persistently worse than expected. And even if – as hoped – we escape that, the sheer scale of our interventions means we must, in time, ask ourselves hard questions about the financial markets we  14  All speeches are available online at www.bankofengland.co.uk/news/speeches  14  rely upon, and their potential to amplify the sort of ‘dash for cash’ we saw in March and April.
Thus, we have made limited progress in closing the substantial output gap that was created during the recession. A similar conclusion is drawn from an assessment of labor market conditions. Although the unemployment rate has declined by about 2 ¾ percentage points since peaking at 10 percent in October of 2009, a significant portion of that decline reflects the substantial decline of the labor force participation rate over that period. It should also be noted that since the previous business cycle peak at the end of 2007, the decline of the labor force participation rate has been more than accounted for by a decline in participation of people in the prime working age of 25 to 54. The inflation data are also consistent with this overall picture of an economy operating well below its full potential. Total inflation, as measured by the personal consumption expenditures (PCE) deflator, has been quite volatile in recent years due to sharp fluctuations in energy prices. Core inflation, which excludes the volatile food and energy components and thereby may be a better guide as to underlying inflation, slowed from around 2 percent in early 2012 to just above 1 percent in mid-2013. In recent months it has shown signs of stabilizing, but remains well below the FOMC’s expressed goal of 2 percent for total inflation. Fortunately, inflation expectations remain relatively stable at levels somewhat above the current inflation rate. This stability should help prevent an undesirable further drop in inflation relative to our 2 percent objective.

In this regard, measures need to be developed to quickly put Africa’s high potential economic growth on a path that is environmentally sustainable. Deliberate actions need to be taken in successfully transferring environmentally friendly technologies to Africa. A case in point is the use of solar technology, for which achievements thus far are promising. Most of Africa is endowed with solar energy, and transforming it into usable energy would substitute the widespread use of wood fire energy by the majority of the continent’s population. In addition, because this is proven technology no more resources need to be devoted to Research and Development. Further, solar energy circumvents the costs related to the generation and distribution of yet another clean source of energy, hydroenergy. In addition to generation, distribution of hydroelectricity presents Africa with a unique challenge of supply network or grids due to the vast landscapes that constitute the rural setting where majority of the population resides. This is part of the wider infrastructural constraint that the continent is yet to overcome. 4. Africa and the world economy  In the real sector, a number of African exports experienced an overall increase in prices in 2003. International gold prices increased, much to the benefit of the continents top producers, South Africa and Ghana. Likewise, oil prices increased during the same period leading to higher revenues for countries such as Nigeria, Equatorial Guinea, and Chad (ADB, 2003).
One could thus say that, in this case, the reason one may want to prevent a balance sheet recession is because of monetary policy considerations – one wants to stabilise inflation and the economy as a whole – rather than to maintain financial stability. Those occasions when I have advocated a policy of “leaning against the wind”, that is, holding the policy rate a little higher because I perceive risks in a rapid increase in lending and house prices, this is the sort of problem I have had in mind. A further aspect of the problem is that in countries like Sweden most people buy a house or apartment to live in, not to rent out. Nor do we have the possibility that exists in some countries of handing the property over to the bank when interest payments become too much, and thus getting rid of the loan. When interest rates rise or one wants to pay off one’s debts, one simply cuts down on other expenditure. One could thus speculate as to whether the risk of financial instability resulting from an over-mortgaged household sector is less here, but on the other hand the effect on demand in the economy when households begin saving is greater. Interplay between monetary policy and macroprudential policy The two areas I have discussed so far have concerned monetary policy possibly contributing to a credit-driven bubble, and the fact that it may not be particularly effective when the bubble has burst.

The times when I have seen risks of this happening and therefore advocated a policy of “leaning against the wind” it was for monetary policy reasons. But it is not necessarily the interest rate lever that needs to be used to prevent this type of credit-driven bubble. The regulation lever is probably at least as effective in most cases. But what is worth noting in particular is that in this case one would use the regulation lever, not to maintain financial stability but for monetary policy reasons. This is a further example of the  12  See, for instance, Mishkin, F. S., “Monetary Policy Strategy: Lessons from the Crisis”, paper presented at the ECB Central Banking Conference, “Monetary Policy Revisited: Lessons from the Crisis”, Frankfurt, 18–19 November, 2010. 6  BIS Review 164/2010  close links between the two policy areas and their tools, and also of how regulation can actively support monetary policy. Greater focus on systemic risks... Another lesson from the crisis is that as we now try to improve the regulatory framework and supervision, we should focus much more than before on the risks at the systemic level, for the financial system as a whole. The type of measure that is discussed in this context is often referred to as macroprudential policy. The actual toolbox for macroprudential policy is gradually being developed.
Internationally, a number of empirical studies have been conducted on the effectiveness of exchange market interventions. The studies of interventions in the 1990s find that they were more effective than 5 studies conducted in the 1980s. This may be due to shifts in monetary policy regimes and greater emphasis on transparency. It is probably easier to win credibility when market participants know that interventions are anchored in stabilisation policy considerations rather than a short-term exchange rate objective. However, this presupposes market confidence in the ability of economic policy in general and monetary policy in particular to deliver nominal stability. It is first and foremost the signal effects of interventions that have been found to be effective and particularly when interventions are made publicly known and justified by the central bank. 4  Lars E. O. Svensson. ”Independent Review of the Operation of Monetary Policy: Report to the Minister of Finance”, February 2001. 5  L. Sarno and M.P. Taylor. ”Official Intervention in the Foreign Exchange Market: Is it Effective, and if so, How does it Work”, Discussion Paper No. 2690, February 2001, Center for Economic Policy Research. BIS Review 74/2001  7  For Norges Bank, it may be appropriate in special situations to intervene to a limited extent to stabilise inflation, should the krone move to a level that we do not consider reasonable on the basis of fundamentals, and if this could contribute to stabilising inflation. However, Norges Bank will not act in a way that prompts unilateral bets against the krone.

Finally, a fair market is one with open access, in which clients feel they can trade safely and on the basis of merit, with counterparties who hold to clear standards of market practice and integrity. And here, clearly, FX markets have had ground to make up over the past decade. Standards in some parts of the market fell  1  See Section 5.2 of https://www.bis.org/publ/cgfs37.pdf. See the July 2019 Financial Stability Report, at https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2019/july2019.pdf. 2  4  All speeches are available online at www.bankofengland.co.uk/news/speeches  4  unacceptably short in the years running up to, and following, the financial crisis – and that led to a concerted push to turn the corner with agreement of the FX Global Code. The overall takeup numbers are impressive: as of 9 September, there were 956 public commitments to the Code on the Global Index.3 And the Code has driven some beneficial changes in market practice – eg on information sharing. But it will take time to see whether it has led to a persistent step-up in behaviour. So, while it may be an ‘A for effort’ on fairness, it’s also a ‘must show consistent improvement’. Technology and FX market fragmentation  In many ways, though, the most profound change in FX markets has been happening elsewhere, in response to hard economics and technological innovation. As a relatively standardised, high volume product, spot FX had embraced widespread electronic trading well before the financial crisis.
It is important that this critical issue be well understood. The public must be absolutely confident that the Fed can meet its monetary policy objectives of low and stable inflation and sustainable economic growth. Before I begin to get into these issues in earnest, let me note that, as always, the views I put forward today are my own and do not necessarily reflect the position of the Federal Open Market Committee (FOMC) or the Federal Reserve System. Turning first to the outlook, the economic contraction appears to be waning and it seems likely that we will see moderate growth in the second half of the year. The economy should be boosted by three factors: 1) a modest recovery in housing activity and motor vehicle sales; 2) the impact of the fiscal stimulus on domestic demand; and 3) a sharp swing in the pace of inventory investment. In fact, if the inventory swing were concentrated in a particular quarter, we could see fairly rapid growth for a brief period. Regardless of the precise timing, there are a number of factors which suggest that the pace of recovery will be considerably slower than usual. In particular, I expect that consumption – which accounts for about 70 percent of gross domestic product – is likely to grow slowly for three reasons. First, real income growth will probably be weak by historical standards.

Cœuré’s report – compiled over four months and published in October – provides a full assessment of the risks posed by stablecoins from a microeconomic viewpoint, in terms of anti-money laundering and consumer protection, but also from a macroeconomic one, in terms of financial stability. Within the framework of the Financial Stability Board (FSB), we are now preparing a coordinated regulatory response to these challenges, due to be published by next summer. I shall turn now to the second pillar of our response: supporting innovation to enhance our payment systems and meet the growing expectations of consumers. We first have to take advantage of the opportunities offered by the digital revolution to develop a genuine panEuropean payment solution. As Steve Jobs said, “innovation is saying no to a thousand things”. This observation sheds light on the challenge that European banks are about to face with the PEPS-I project (Pan European Payment Solution Initiative). I have every hope that they will be able to forces – and go beyond “national” practices – and rapidly propose a single, panEuropean payment solution, thus avoiding market fragmentation and the dominance of nonEuropean solutions. The Eurosystem will be ready to provide support as and when needed, in line with what we are doing to promote the use of TIPS (Target Instant Payment Settlement). As a market infrastructure capable of processing pan-European instant payments, TIPS could be used for the interbank settlement of transactions initiated via PEPS-I.