samchain/econo-pairs-v1 huggingface dataset:
We will then, as usual, take a stance on how the new statistics that have become available affect the prospects for inflation and economic activity and the repo rate forecast. At the same time, we will of course closely follow developments and be prepared to take action if and when necessary. Some concluding reflections The events of last autumn clearly illustrate that with a credible monetary policy framework it is possible to conduct a flexible monetary policy that can quickly be adapted to sudden changes in circumstances. The fact that the actual rate of inflation has been far above the target has not been an obstacle to significant and rapid cuts in the interest rate. The forecasts for both growth and inflation have been adjusted downwards considerably and have indicated scope to reduce the interest rate in order to bring inflation back to the target a couple of years ahead. Monetary policy is and must continue to be forward looking. As I suggested earlier, the theme of deflation has begun to appear in the international debate. I commented on this at our latest monetary policy meeting. My view was that the threat of deflation should not be exaggerated and that there are major differences compared to the 1930s, the period that people often refer to in this context. One important difference is that central banks and governments around the world are taking strong measures to support the financial system and stimulation packages have been launched to counter the economic downturn.

All this confirms my main contention that the current environment, per se, creates no reason for delay. Conclusion Let me conclude. The economic outlook for the euro area is brighter today than it has been for seven long years. Monetary policy is working its way through the economy. Growth is picking up. And inflation expectations have recovered from their trough. This is by no means the end of our challenges, and a cyclical recovery alone does not solve all of Europe’s problems. It does not eliminate the debt overhang that affects parts of the Union. It does not eliminate the high level of structural unemployment that haunts too many countries. And it does not eliminate the need for perfecting the institutional set-up of our monetary union. But what the cyclical recovery does achieve is to provide near perfect conditions for governments to engage more systematically in the structural reforms that will anchor the return to growth. Monetary policy can steer the economy back to its potential. Structural reform can raise that potential. And it is the combination of these demand and supply policies that will deliver lasting stability and prosperity. BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11  12  BIS central bankers’ speeches
But proposals for greater market discipline are not going to gain traction in the real world – the only world that matters – so long as wholesale creditors and others believe and act on the basis that some firms can be Too Big To Fail. And, of course, it is not just TBTF. It can be Too Interconnected To Fail too. And it is not just a problem with so-called LCFIs. As demonstrated by the UK’s Secondary Banking Crisis in the 1970s, contagious distress amongst smaller banks can threaten stability more widely when they are afflicted by shared underlying problems: Too Similar To Fail, as one international colleague put it. And thinking of the place of some banks or building societies in their local communities, we can also confront Too Popular To Fail. 6 Putting aside that last notion, the solid point is that whether or not one firm’s distress has systemic consequences will, as a general matter, depend on the circumstances; but, very awkwardly, there are some firms, and some financial-infrastructure providers, whose distress would currently be systemic in almost any imaginable circumstances. We need to sort all that out one way or another. It is part of a wider debate about the future structure of the industry.

And the Treasury is also consulting on how investment banking distress should be handled in the light of the problems with the Lehmans insolvency and administration since last autumn. 7 Cross-border resolutions There is also a vital cross-border element to all of this, which absolutely must be recognised and tackled if we are to establish sounder foundations for a world of free, global capital markets. 6  I owe that expression to my colleague Paul Fisher. 7  See, HM Treasury (2009), “Developing effective resolution arrangements for investment banks”, May 2009. 6  BIS Review 83/2009  Around thirty-five years ago the founding document of the rules of the game for international banking was issued: the Basel Concordat for the supervision of internationally active banks. Although updated in the early 1980s to embrace consolidated supervision in the wake of Banco Ambrosiano’s collapse, its essential precepts have remained unchanged. 8 Home supervisors carry the responsibility for consolidated supervision. Broadly, hosts carry little or no responsibility for branches, other than for liquidity, although it is not easy to pin down what that means; but hosts carry somewhat greater responsibility for the soundness of subsidiaries. (Within well-defined regional areas, variants can operate: eg passporting within the EU.) The point of rehearsing all that familiar stuff is that the division of labour for supervision of banks during peacetime absolutely must be consistent with the insolvency and other regimes that would operate in the event of failure or distress.
The third alternative is both the most obvious and the most radical and would be to create a European Financial Supervisor (for example put forth by Breuer). This simply means having one authority acting with full supervisory powers over branches and subsidiaries of cross-border European banks. The system could be tiered (like in the US) in the sense that the EU supervisor would only be responsible for banks and banking groups with significant cross-border operations, while purely domestic banks could remain the responsibility of the national supervisors. 3  6  Oosterloo and Schoenmaker (2004), “A lead supervisor model for Europe”, The Financial Regulator, Vol.9.3, 34-42. BIS Review 35/2005  A European financial supervisor All three of these alternatives, even the first one, are considerably more far-reaching than what is currently under construction. I do not think many authorities find the first alternative with a lead supervisor very appealing. It addresses the problem only from the cross-border bank’s perspective of minimising the regulatory burden. This is important but does not solve the underlying conflicts of interest between the home and the host countries. In short, it is a model which will only work in normal times when the weather is nice, if even then. The second alternative – the lead supervisor with an EU mandate – seems nice in theory and aims at solving the conflicts of interest by creating a central decision-making body. In practice, however, it could easily become very bureaucratic and inefficient.

Unfortunately, I cannot readily assess the level of support for the particular option which the Government have now chosen, since the researchers did not ask you to assess it - which is certainly a tribute to the new Government’s ability to surprise the market. But in these surveys I am always fascinated by the outlying views - the small minorities who express a contrary opinion. For example, when asked about the most appropriate regulatory structure 2 per cent of those asked said they thought the best option would be to abandon the SIB and the SROs, and the Bank of England, and that regulation should be carried out directly by the Treasury. I would be very grateful if that 2 per cent of you could stay behind afterwards, assuming they have not been institutionalised since the study was conducted. BIS Review 67/1997  -2-  The strongest message to emerge, though, was the need for regulators to consult the market effectively on both structures and on rules. I am certainly prepared to undertake here and now that we shall do so. We are charged by the Government to produce an over-arching framework pretty quickly, so our discussions with the market will need to start now. But, thereafter, we will consult intensively on the way in which the new structure will affect day to day regulation. I give you my firm undertaking on that point. But, as I said, today I am not speaking to you as the Chairman of the SIB.
The crisis is a powerful reminder that liquidity – both domestic and  BIS Review 76/2010  5  international – can never be taken for granted. How will international liquidity be provided in the future, and by whom? These are not new questions. Over the last ten years, the build up in foreign exchange reserves in emerging economies has been spectacular, which is a sign that the supply of international liquidity was seen both as insufficient and uncertain. More recently, Governor Zhu, from the People Bank of China has raised the issue of reserve currencies. According to Governor Zhu, current arrangements for liquidity provision are a source of instability and have played a role in causing the crisis. Governor Zhu has mentioned, in particular, the intrinsic contradiction embodied in the famous “Triffin dilemma”. Because the dollar is the major reserve currency, international liquidity supply depends on the US running a sufficiently large current account deficit which, by itself, aggravates global imbalances and creates instability. Governor Zhu suggested that the role and status of the SDR be enhanced, with the long term objective of creating a “super reserve” currency. However, international liquidity provision should now be considered in a broader framework. The Triffin dilemma goes back to a period when international capital markets were poorly developed. By then, international liquidity was limited to instruments used to settle payments between official monetary authorities. It was represented by claims on such official entities.

There are good reasons to think that information asymmetries are especially prevalent in international capital markets since “foreign” investors find themselves at a disadvantage when assessing “domestic” projects and investments. 2. Exchange rate risk is, obviously, specific to international capital allocation decisions. 3. So is sovereign risk, always present, if often remote and limited in ordinary times for an increasing number of countries. 4. It is increasingly recognized that differences in financial development play a major role in influencing capital flows and, consequently, current account imbalances. In particular, capital tends to flow from financially repressed economies to countries and markets which provide and abundant supply of safe and liquid assets. For the same reason those countries’ currencies are the main vehicle for holding official foreign exchange reserves. 5. Finally, deliberately or not, public policies have a significant impact on the level and national or international allocation of domestic savings. These influences can be direct, as in the case of capital controls. They may be more diffuse, for instance when authorities build up foreign exchange reserves. By doing so, public entities essentially substitute themselves to private agents in managing and allocating part of the nation’s net foreign savings. Most likely, their choices and preferences will be different from those of the private sector and, therefore, their intervention would alter the country’s external position, tilting it towards holding foreign assets in liquid instruments.
In contrast to earlier periods of sharply rising oil prices, the main reason behind the current rise in oil prices is a surge in demand and limited excess production capacity. Growth in oil demand has been particularly strong in regions where production is relatively energy-intensive, such as China and other non-OECD countries. China alone accounts for about 1/3 of global growth in oil demand this year. Moreover, there has been a marked reduction in excess production capacity in OPEC countries. Small production problems have therefore affected prices more than would otherwise have been the case. In the short term, oil prices constitute the greatest risk to the outlook for the global economy. High oil prices may contribute to a sharper-than-expected slowdown in global economic growth. This could in turn result in lower demand and lower commodity prices. High oil prices have mixed effects on the Norwegian economy. Lower demand abroad will have a negative impact on parts of the Norwegian economy. At the same time, domestic demand is normally stimulated by higher petroleum investment. The balance in the Norwegian foreign exchange market will not be affected to any appreciable extent. So far, the effects of high oil prices on developments in the real economy have been relatively limited. Credit developments in the past year have given ambiguous signals to our interest-rate setting. Growth in household debt is high. Enterprises have been reducing their debt for some time, but developments over the past months may suggest that this trend has been reversed.

As a result of the prospect of low inflation and moderate growth in output and employment, the key rate (the sight deposit rate) was reduced by a total of 5.25 percentage points between December 2002 and March 2004. The key rate has been kept unchanged at 1.75 per cent since then. The reductions in the interest rate have contributed to the depreciation of the krone. Measured by an index of 44 trading partners (I-44), the krone depreciated through 2003 by almost 11 per cent from its highest level in January of the same year. The krone has appreciated again somewhat through 2004. Growth in the world economy has been strong over the past year, particularly in the US and China. The recovery has also gradually broadened. A number of countries raised their key rates in the course of 2004. The Federal Reserve has raised its key rate three times, by a total of ¾ percentage point. The  2  BIS Review 66/2004  Bank of England has raised its key rate by 1 percentage point. In October, the People's Bank of China raised its key rate for the first time in nine years. After rising sharply for several quarters, economic growth in the US slowed somewhat in the second and third quarters of 2004. Looking ahead, growth among our trading partners is projected to moderate, but resource utilisation is expected to increase gradually. Increased global activity has led to rising commodity prices. Oil prices are high.
It’s tempting to stop there, but in all honesty it would not be the full story. Banks and insurers have one crucial thing in common which distinguishes them from other financial services providers, namely that they bring the funds customers deposit or invest directly onto their balance sheets and therefore expose customers directly to the risk inherent in those balance sheets. We did not, however, place insurers under the PRA because they are like banks, even though there are important similarities in the prudential approach we apply to both sectors. Why then? For me, the logic has to do with what we have learned about our role during the crisis. The traditional model of supervision has been quite industry specific. The FSA regime introduced in 1997 created a single authority, but within the FSA the framework of rules applied to insurance supervision is unique to the industry. It is true that in the run-up to the start of the crisis, and for some time thereafter, the FSA mingled insurance and bank supervision in terms of its operating units, but I think that did not work effectively and we have moved to a clear distinction with an insurance supervision directorate headed by Julian Adams. Insurance supervision is a skill of its own, and while our supervisors do move roles between insurance and banking in both directions, we want to ensure that we have groups of truly expert insurance and banking supervisors.

In the UK these contracts are marked to market, which provides useful information, but that is not consistently the case globally. There is scope for problems in, for instance, the time-value of liabilities and the valuation of complex derivative positions. All of this tends to my mind to demonstrate that there is at least one part of the insurance industry that is, globally, large and complex, and UK firms are an important part of this sector. That does not, to be clear, lead to a conclusion that therefore the approach and toolkit taken for globally important banks should apply to these insurers. It leads me to two initial conclusions. First, that in a world of proportionate supervision, we should take a more enhanced and intensive approach for these large and complex firms. This is what the PRA will do, and it does not contradict our policyholder protection objective which, as I indicated earlier, gives us in my view a somewhat different objective in respect of small insurers versus small banks. Second, this degree of complexity inevitably raises important questions around our resolution tools where we face dealing with large-scale run-downs. In this context, I am aware that the PRA will need to be very clear how it interprets and puts into effect its policyholder protection objective in the context of insurers that enter run-off or require some other means to draw the business to a close.
In order to further enhance banks’ risk management in property mortgage lending and to strengthen borrowers’ resilience to withstand future interest rate hikes, the HKMA has just issued a set of guidelines to banks, requiring them to adopt an increase of 300 bps instead of 200 bps of interest rate when stress-testing the repayment ability of mortgage applicants. This measure is applicable to all types of mortgages, including residential as well as commercial and industrial property mortgages. The risk of overheating in the commercial and industrial property market also continues to rise. Our experience shows that the quality of commercial and industrial property mortgages will deteriorate more significantly than that of residential property mortgages during market downturns. In view of these circumstances, our guidelines have also required banks to lower the maximum LTV ratio of mortgage loans for commercial and industrial properties, whether or not for self-use, by 10 percentage points from the existing applicable levels. For example, for mortgage applicants with income mainly derived from Hong Kong, the maximum LTV ratio will be lowered from 50% to 40%. If the applicant’s income is mainly derived from outside Hong Kong, the maximum LTV ratio will be lowered from the current 40% to 30%. The HKMA has also required banks to standardise the maximum LTV ratio of mortgage loans for all standalone carpark spaces at 40% and the maximum loan tenor at 15 years.

Borio, C and Disyatat, P (2011), “Global imbalances and the financial crisis: link or no link?”, BIS Working Papers No. 346. Eichengreen, B J and Mitchener, K J (2003), “The Great Depression as a credit boom gone wrong”, BIS Working Papers No. 137. IMF (2012), “The Liberalization and Management of Capital Flows: An Institutional View”, Staff Paper. Kuttner, K and Shim, I (2013), “Can Non-Interest Rate Policies Stabilise Housing Markets? Evidence from a Panel of 57 Economies”, BIS Working Papers No. 433. Lane, P R (2014), “International Capital Flows and Domestic Credit Conditions”, Macroeconomic Review Vol. XIII(1), Monetary Authority of Singapore, Economic Policy Group. BIS central bankers’ speeches  7  Mishkin, F S (2008), “How Should We Respond to Asset Bubbles?”, speech at the Wharton Financial Institutions Center and Oliver Wyman Institute’s Annual Financial Risk Roundtable, Philadelphia, Pennsylvania, 15 May 2008. Obstfeld, M (2014), “Trilemmas and Tradeoffs: Living with Globalization”, paper commissioned for the Asian Monetary Policy Forum (draft). Rey, H (2013), “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, Proceedings – Economic Policy Symposium – Jackson Hole, Federal Reserve Bank of Kansas City. Schularick, M and Taylor, A M (2009), “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008”, NBER Working Paper No. 15512. Stein, J C (2014), Comments on “Market Tantrums and Monetary Policy”, speech at the 2014 U.S. Monetary Policy Forum, New York, 28 Feb 2014.
Diagnosing the market failures So what were the failures, specifically of stress-testing and other risk management tools, that contributed to this credit boom and subsequent bust? It is useful to try and identify the microeconomic friction – the market failure – that was the root cause of these risk management problems. Doing so better enables both financial institutions and the authorities to pinpoint what needs to change and how. These market failures fall roughly into three categories: •  disaster myopia;  •  network externalities; and  •  misaligned incentives. All three have impeccable microeconomic macroeconomic consequences. credentials  and  potentially  disastrous  Disaster myopia In a nutshell, disaster myopia refers to agents’ propensity to underestimate the probability of adverse outcomes, in particular small probability events from the distant past. That makes it sound like a rather unworthy informational failure. In fact, it is well-established in cognitive psychology that economic agents have a tendency to base decision rules around rough heuristics or rules of thumb. 1 The longer the period since an event occurred, the lower the subjective probability attached to it by agents (the so-called “availability heuristic”). And below a certain bound, this subjective probability will effectively be set at zero (the “threshold heuristic”). If the period of stability is sufficiently long – a Golden Decade perhaps? – this subjective approach to evaluating probabilities looks increasingly like a fully-rational, Bayesian approach to updating probabilities. As time passes, convincing the crowds that you are not naked becomes progressively easier.

Suffice to say, time is very unlikely to tell whether Mr Viniar’s empirical observation proves correct. Fortunately, there is a simpler explanation – the model was wrong. Of course, all models are wrong. The only model that is not wrong is reality and reality is not, by definition, a model. But risk management models have during this crisis proved themselves wrong in a more fundamental sense. They failed Keynes’ test – that it is better to be roughly right than precisely wrong. With hindsight, these models were both very precise and very wrong. For that reason, 2008 might well be remembered as the year stress-testing failed. Failed those institutions who invested in it in the hope it would transform their management of risk. Failed the authorities who had relied – perhaps over-relied – on the signal it provided about financial firms’ risk management capabilities. And, perhaps most important of all, failed the financial system as a whole by contributing, first, to the decade of credit boom and, latterly, the credit bust. That is a stark conclusion. But it is a conclusion which is hard to escape. When tested against real stress, large parts of the financial system seized-up and a number of financial institutions failed. Against that backdrop, now is as good a time as any for candour about what went wrong.