samchain/econo-pairs-v1 huggingface dataset:
As the safety net can in various ways make the bank's funders immune to certain risks, it may be tempting to allow the bank to take greater risks than is optimal from the point of view of the economy as a whole. Simply put, the safety net reduces the private costs of applying strategies associated with a higher level of risk; the bank’s financiers gets the upside but not the downside of the increase in the level of risk. This phenomenon is usually called moral hazard. The design of public supervision and regulation is important in the effort to reduce the problems relating to moral hazard. Not least, the conditions concerning aspects such as guarantees and liquidity assistance have a major impact on the possibility to counteract problems and reduce the costs they give rise to. If the state is forced to intervene and save a bank, it is important that the shareholders and other funders do not come out of the process unscathed. Designing a public safety net for financial operations thus entails a number of difficult considerations. Crises change the role of the authorities During the bank crisis of the 1870s, however, there was no real safety net to speak of. The Riksbank sat on the sidelines and had no role to play in the practical management of the crisis.

But this frontloading approach also proved effective from a political perspective. By acting with speed and determination, the Latvian government was able to capture the sense of urgency prevailing among the population and mobilise it to support adjustment. This way, most of the required painful budgetary decisions could be passed before the so-called “adjustment fatigue” kicked in. The bottom line is this: when adjustment is inevitable, it is better to take the medicine right away than to let the fever rise for months. This is undoubtedly an important factor that explains the different trajectories of the Baltics and certain southern European countries. But fiscal consolidation alone would not have allowed the Baltics to exit the crisis so swiftly. The ECB has long argued that the potential trade-off between fiscal discipline and growth can be mitigated if consolidation is accompanied by growth-enhancing structural reforms. The case of the Baltics confirms this. From a political economy perspective, the Latvian experience also shows that a critical mass of structural reforms is helpful to overcome vested interests. Education, health care, central administration: hardly any public sector category was spared by the reforms. Combined with targeted social safety net measures, this comprehensive approach helped the government to foster public acceptance of change. At the same time, the quality and long-term sustainability of the reforms may – at least initially – have suffered from this approach. Structural reforms are not just about across-theboard cuts but are much more complex and multifaceted.
The support measures that may become relevant in special situations can either relate to market stabilisation, as was the case in the autumn of 2008, or to bond purchases as a complement to monetary policy when the policy rate is restricted by its lower bound. There is a great deal to suggest that real interest rates in Sweden and abroad will be lower in the future than they were during the decades preceding the financial crisis, partly as a result of demographic changes and a new saving pattern in the global economy. 15 As a consequence, several central banks, including the Riksbank, have revised down their assessments of what is a normal level for the policy rate. The likelihood is therefore greater than we will touch the lower bound for the repo rate in the event of economic slowdown. This means that we in the future more often may need to use bond purchases as a complement to the repo rate and repo rate forecast. So, even if I have argued that a portfolio of government bonds has a limited role to play in monetary policy in normal conditions, I nevertheless expect that the Riksbank, along with other central banks, will find itself in situations where bond purchases are justified as a complement to interest rate policy.

Euro area banks’ CET1 capital ratios remain at a solid level of about 14%, whereas profitability has stabilised on the back of the strengthening recovery. Some weak banks have been successfully resolved with the impact on the rest of the euro area banking sector being well contained. Notwithstanding these positive developments, important challenges remain, including the still subdued profitability, structural challenges in some parts of the euro area banking sector, such as the presence of excess capacity and cost inefficiencies, as well as – in a few countries – the persistently high stock of non-performing loans (NPLs). On aggregate, however, further progress has been made with respect to resolving NPLs, and a comprehensive action plan to deal with legacy asset quality issues was adopted by the Council of the European Union and is now being followed up by EU and national authorities. The ECB has published guidance to banks on NPLs and a draft addendum, currently subject to public consultation. With respect to financial stability, we observe that at the current stage the euro area’s position in the financial cycle is consistent with the ongoing economic recovery. There are no indications of widespread asset price misalignments and credit developments remain modest. Nevertheless, relatively buoyant real estate dynamics and high household debt levels in some countries warrant careful monitoring. We expect the national macroprudential authorities in the euro area to remain vigilant and ready to use the macroprudential policy instruments at their disposal to counteract the any emerging risks when necessary.
The Act goes on to say that the person would not be guilty of misconduct if they satisfy the Regulator that they have taken such steps a person in that position could reasonably be expected to take to prevent the breach. For the first two limbs the burden of proof would fall on the Regulator in the same way as the continuing provisions I mentioned earlier. But, crucially, it would be for the senior manager to satisfy the Regulator on the question of reasonableness – thus the presumption is created until it is rebutted. The change that the Government has announced to create “the duty of responsibility” will, if Parliament approves it, replace the presumption with a statutory duty on senior managers to take reasonable steps to prevent breaches of regulatory requirements by their firms from occurring. Thus it will be for the Regulator to show that the senior manager did not take such steps as it was reasonable for a person in that position to take to prevent the breach of regulatory requirements. In my view this does not represent a watering down of the requirement. Why? Well the “duty of responsibility” creates a positive duty on senior managers to take reasonable steps to prevent regulatory breaches occurring. This will be on a statutory footing, which hardwires the concept in the very fabric of the regulatory regime, rightly reflecting the importance which society places on this issue.

As a result, as soon as house prices began to fall in the United States and monetary policies became less expansionary in the face of the inflationary risks arising from commodity price rises, the credit expansion cycle was broken. That caused significant rises in default rates, which affected the securities that had been distributed on the market among large numbers of investors, and the crisis whose main events I have mentioned was triggered. Having described the complex and extremely difficult international context, I now propose to offer some considerations regarding the situation of the Spanish banking system, by  4  BIS Review 133/2008  answering two questions. What has happened in Spain during these fifteen months of financial crisis? And what is going to happen in the near future? What has happened in Spain? The answer as to what has happened in Spain during the crisis is, as we all know, that nothing has happened remotely comparable to the succession of bank bankruptcies and bailouts seen in the United States and practically throughout Europe. And this despite the fact that, at the beginning of the crisis, many international analysts identified the Spanish banking system as that which would suffer the greatest problems on account of its need for external financing, its dependence on wholesale markets and the degree of its exposure to the property market.
Some economists urge the Bank of Japan to soon join the IT club 3 . So, what is so special about IT and what makes it so attractive for so many central bankers and economists? Undoubtedly, the source of the growing IT popularity is its effectiveness in ensuring macroeconomic stability. Firstly, IT has proved effective in delivering price stability. Though the contribution of IT to lowering inflation is still a matter of debate 4 , empirical research suggests that it has significantly  1  Volcker P. “Panel discussion: The Art of Central Ranking” at “Monetary Policy: A Journey from Theory to Practice - An ECB Colloquium held in honor of Otmar Issing”, 16 March 2006. 2  See: Bernanke B.S. “A Perspective on Inflation Targeting”, Remarks at the Annual Washington Policy Conference of the National Association of Business Economists, Washington, D.C. 25 March 2003. 3  According to Ito the Bank of Japan has not yet adopted IT for political reasons. See Ito T. “Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?”, NBER Working Paper 10818, September 2004. 4  See “Does Inflation Targeting Matter?” Ball L., Sheridan N. in Bernanke B.S., Woodford M. (ed. ): The Inflation-Targeting Debate, NBER, 2005. BIS Review 42/2006  1  contributed to lowering inflation and its volatility, especially in emerging markets 5 .

  Second, complement existing micro-prudential rules with macro-prudential instruments to address system-wide risks with the aim of ensuring greater resilience of individual institutions, and the financial system as a whole.   Third, enhance comprehensive cross-border crisis management and financial stability surveillance arrangements. This can be done via channels such as the EMEAP Monetary and Financial Stability Financial Committee, which was established in 2007 to enhance regional collaboration and cooperation in the area of macromonitoring and crisis management. Efforts are also directed to strengthen financial safety nets within the region (e.g. cross-border collateral arrangements, currency swap arrangements). We are quite confident these arrangements will further strengthen the resilience of regional financial systems and economies. These measures will become increasingly important in the light of our effort to increase the integration of financial systems within the region.   Fourth, establish a holistic framework for consolidated supervision. All the activities of financial conglomerates are within appropriate risk levels and not overly complex, and the large groups are not a source and channels for amplifying contagion effects. Supervisory cooperation initiatives at the regional level will also be directed at enhancing existing or introducing additional platforms (e.g. creation of supervisory colleges) for discussing issues related to the supervision and resolution of cross-border financial institutions.   Fifth, promote fair and transparent market conduct practices by financial institutions through heightened market conduct surveillance and transparency requirements, while also raising the level of financial capability of consumers through education and awareness programmes.
At one extreme - and I exaggerate to make the point - some appear to have a vision of maximum harmonisation across the EU, with uniform regulation and centralised oversight at some point in the future, whereas others lean more towards harmonisation only to the extent to which it is demonstrably necessary, with mutual recognition, and an EU-wide passport based primarily on the removal of barriers to cross-border activity. Of course that approach leaves plenty of room for debate about what exactly “demonstrably necessary” means. Underlying the debate at that level are legitimate differences in priorities as between the different public policy concerns - how much weight to put upon consumer protection as against systemic stability or freer competition, for example, which are not necessarily easy to resolve even at the national level. And there may - just possibly - also be, less legitimate, differing perceptions of national self interest. The truth is that there are no easy answers, and I think myself that we are bound to move forward in a pragmatic, incremental, way - recognising the different considerations that apply in different areas of the markets rather than on the basis of a grand design. In this context, I am actually rather encouraged by the recent discussion papers put out by Eurofi and the Wicks group, which stand back a little from the more immediate issues and look at the way forward in a broader - and longer-term - perspective.

Of course we followed what they were getting up to very closely, and always stood ready to help when we were called upon by the markets to do so, as we occasionally were, intervening on our own initiative only to ensure that the public interest was properly respected. For the most part we took the view that market participants know better than we do what will work and what won't; it is after all their salaries if not their jobs that are on the line. Where public policy issues were involved, we established a tradition of extensive consultation right across the relevant sections of the market - a tradition which the FSA has certainly maintained. In the UK's relatively well-developed markets - particularly the wholesale markets - we recognised early on that where intervention was judged to be necessary - in the interest of market transparency or of prudential or behavioural conduct for example - it needed to be informed by those who properly understood the subtleties of the market if we were to reduce the risk of unforeseen consequences which could either frustrate the purpose of the intervention or unnecessarily obstruct market innovation. In some instances this approach, which I suppose might be described as market-sensitive, involved encouraging the market itself to address the particular issue in question as a preferable alternative to official action.
This is the fruitful paradox of recent years: the coexistence of “domestically focused” policies that results in a “globally-cooperative” monetary environment. And for this purpose, monetary policy must be conducted in full independence. That is, independently of political powers, of course, and we regret to have to say it again. But also 1/3  BIS central bankers' speeches  independently of short-term pressures or any particular economic interests. So we take account of market indications, but we must not be market dependent; this includes not relying too exclusively for inflation expectations on market-based measures. We are data dependent and I say this in particular for the ECB: in our coming Governing Council meetings, we will assess actual economic data and we will act accordingly if and when needed. II. Financial stability issues and crises On financial stability issues, the Bretton Woods system has undergone numerous disruptions and crises since its inception, including its quasi break-up in 1971. And a decade after the GFC, we still have to define the future of our current international monetary system, or “non-system” as many describe it. Today we will discuss financial stability risks caused by the growth of cross-border flows and financial assets. Over the past few years, international capital flows have been too abundant in good times, – potentially fueling domestic bubbles and destabilising national financial systems – but also prone to “sudden stops” in bad times.

The exponential increase of contagion effects through cross border flows and stocks, but also asset price volatility, has led to an evolution of the IMF’s view on capital flows, from its original doctrine of liberalisation, into a more pragmatic Institutional View. More importantly we need to enhance the crisis prevention toolkit and avoid excessive risktaking. Our first line of defense to address financial stability issues should be sound macroeconomic, prudential and structural policies. It is the reason why it is so important to strengthen the bilateral and multilateral surveillance of the IMF. But, prevention can never cover all risks. The Global Financial Safety Net (GFSN) has been reinforced over the past few years, thanks to the increased IMF capacity – whose total resources amount to about 1.3 $ trillion, and should be at least maintained in the future –, the development of regional financing agreements (RFAs) in Europe and Asia, and networks of central banks swaps. But the GFSN is still imperfect in coverage, and of insufficient size: total IMF resources have dropped from about 4 % of global external liabilities in 1980 to less than 1% in recent years.1 Besides, the coordination between the different layers of the GFSN should be more effective in case of a systemic crisis. There is also scope to make better use of precautionary instruments, and to protect sound by-standers without increasing moral hazard, as suggested in particular in the report of the G20 Eminent Persons Group on Global Financial Governance. B. Two new challenges after extending globalisation I.
Second, banking does not have its own ethics—nor should it have its own ethics. The qualities that you value in other aspects of your life should be the same qualities you apply at work and encourage in your colleagues. Third, candid assessment is critical to improving culture. I invite you to think in particular about the incentives and norms of behavior within your organizations. Do they support or impair the qualities and principles that guide you and that your firm espouses? Before expanding on those points, let me explain why I believe that reforming culture is important, 1/6  BIS central bankers' speeches  and justifies the time and effort of not only of today’s program, but of the ongoing work at your institutions and collectively across the industry. The manipulations of LIBOR and foreign exchange rates prompted the New York Fed’s work on culture. Of course, widespread misconduct did not originate with either episode. The timing, however, was significant. Despite the near-death experience of the financial crisis, new rules and regulations, and―in some cases―large fines and penalties, the LIBOR and FX events made clear that serious ethical and behavioral problems had persisted in the industry. I was particularly struck by how the manipulation of foreign exchange rates occurred even after the LIBOR fixing was widely known. The appropriate lessons from the LIBOR scandal did not seem to have been learned. That was both surprising and profoundly disappointing to me. The LIBOR and FX collusions were not occasional atonalities in an otherwise harmonious financial system.

This is the only looking glass by which we can, in some measure, with the eyes of other people, scrutinize the propriety of our own conduct.”9  Candid self-assessment is essential to knowing where you stand and how you are progressing toward your goal. Industry groups here and in other financial centers are working on useful ways to measure culture—consistent with the maxim, “if it’s important, you will measure it.” But, assessment cannot stop there, and it cannot be the job of someone else—such as management, compliance, audit or a regulator. Each of us must also be reflective about our own faults. We must also commit to do better going forward. When it comes to making a candid assessment of your group, your firm and your industry, I would like to suggest that you devote significant attention to incentives. I believe that incentives shape behavior, and behavior drives culture. If you want a culture that will support your long-term business strategy, you need to align incentives with the behaviors that will sustain your business over the long haul. There are many ways of encouraging certain behavior through incentives. Promotion is quite powerful, as is compensation. They are powerful, in part, because they convey values and community esteem. People work hard to earn money. But, most also work hard to earn the trust and respect of colleagues, peers, subordinates and seniors.
Thus, from December 2013, when the deterioration in bank balance sheets was at its worst, to June 2018 the volume of non-performing loans in transactions with the resident private sector has declined by 60%. And the amount of foreclosures has done so by 40% since its 2012 peak. The consolidated return on equity, which in 2012 stood at around -25%, has gradually picked up to levels of 7% on data as at June 2018, and the overall capital ratio has risen from 11.4% in 2012 to 15.1%. Despite this notable improvement in its financial position, the Spanish banking industry continues to face significant challenges. These are largely shared by other banking systems in the euro area, and include i) the reduction in assets impaired by the crisis, ii) the recovery in profitability, such that Spanish banks may draw closer to the solvency levels of other euro area banks, iii) adaptation to the new regulatory framework and, iv) the configuration of a new competitive setting characterised by the emergence of new technologies and competitors. I shall now focus on describing each of these challenges, beginning with that of the reduction in assets impaired by the crisis. As stated, the volume of non-performing loans has diminished significantly from its 2013 peak. This reduction has been assisted by the economic recovery, insofar as it has favourably impacted debtors’ ability to pay, and also by the disposal of impaired portfolios.

This is associated with the adaptation to a more demanding regulatory framework that involves higher requirements in respect of own funds and liquid assets, along with other additional demands derived from the new resolution regulations. These regulatory changes, which have been introduced globally, are the response by the economic authorities to the shortcomings highlighted by the international financial crisis. Their essential aim is to increase banking systems’ resilience in the face of adverse shocks and to prevent taxpayers from having to bear the cost of the resolution of ailing banks. The first raft of reforms, known as Basel III, which was designed between 2010 and 2011, focused on increasing the volume of bank capital and improving its quality, and on the introduction of new minimum liquidity requirements and counterparty exposure limits, and of macroprudential instruments, such as the so-called countercyclical capital buffer. All these requirements will be effective, practically in their entirety, in late 2019. Spanish banks have already largely adapted to these new requirements, with their liquidity and capital ratios currently standing above the minimum levels stipulated. In any event, as 6/8  regards the CET 1 and Tier 1 solvency ratios, their aggregate levels – albeit with significant dispersion across banks – are, as at March 2018, low compared with those of the euro area banking systems, according to data from the European Banking Authority. This once again highlights the need for Spanish banks to adopt capital-strengthening strategies. With regard to the solvency regulatory measure, which does not take into account risk weightings, i.e.