samchain/econo-pairs-v1 huggingface dataset:
Stefan Ingves: Basel III – regulations for safer banking Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, to the the Swedish Bankers’ Association, Stockholm, 10 November 2011. *  *  *  I would like to begin by expressing my gratitude for the invitation to speak at this bank meeting on the theme of “Basel III – regulations for safer banking”. In this presentation, I will briefly describe the Basel III regulations and the underlying reasons for them. Following that, I shall discuss the characteristics of the Swedish bank market that are significant for how we in Sweden shall implement Basel III. Before I finish, I would also like to illustrate how the authorities of a few other countries with large banking industries see the need for regulation. Briefly, however, I intend to start by describing the background of bank regulation – why advanced economies need a financial system, and the risks this entails. Banks are important to the economy The banks are of fundamental importance to the national economy. The banks are the single most important participants in the financial system, and their basic functions are often considered to be three. The system converts savers’ money into productive investments, ensures that we can pay each other when we exchange goods and services, and allocates risk among those who are willing to take risks and those who are not.

As we enter into a gradual stabilisation and recovery period, policymakers are now faced with the challenge to find an enduring solution to ensure the stability of financial systems. Islamic finance has a role in shaping the future of the global financial system and reinforcing ethical and moral values that are inherent in Islamic finance principles and fundamental towards promoting the stability of the global financial system. Ongoing efforts to further strengthen the resilience of Islamic financial industry would enhance the prospects for global growth and the potential of Islamic finance to contribute towards global financial stability. 4  BIS Review 129/2010
I am personally committed to enhancing our co-operation with non-member countries and with organisations that have related interests. In this respect, I am confident that the fruitful dialogue that has already begun between the Basel Committee and the IFSB will continue to be successful and mutually rewarding in the future. My talk this evening will address several issues. First, I will talk about why I believe sound corporate governance plays such an important role in bank safety and soundness and financial system stability. Second, I will share some thoughts on how the Basel II capital framework will contribute to better corporate governance. Finally, I will share some of the work that the Basel Committee has underway with regard to bank corporate governance. Why does corporate governance matter for banks and bank supervisors? Before I talk specifically about the corporate governance of banks, I would like to discuss more generally some of the weaknesses in corporate governance that have led to high-profile failures such as Enron and Parmalat over the past few years.

The Riksbank's forecast, like that of other analysts, was that the international recovery would be slower and more prolonged. There were several reasons for this, including geopolitical unease and increased caution among households and firms in the wake of the stock market fall. The conditions for a clear recovery in the euro area were perceived as poorer than we had earlier believed, which made a recovery in other countries, including Sweden, more difficult. The more negative economic outlook, with inflation prospects below the target of 2 per cent, meant that we decided to cut the repo rate during the summer by a total of 0.75 percentage points. The rate is currently at 2.75 per cent. Minor changes in outlook for economic activity So far, international developments have been largely in line with our assessments from the summer. The expansionary policy now appears to be taking effect in certain areas, particularly the United States, where signs of a recovery are becoming more apparent and the risks of a setback appear more slight. The Asian economies are also developing relatively strongly. On the other hand, the prospects for the euro area still appear to be gloomy. In time, the expected upturn in the United States is expected to support a gradual upturn in Europe. All in all, the Riksbank's assessment is that GDP growth in the OECD area will be 1.9 per cent this year, 2.8 per cent in 2004 and 2.6 per cent in 2005.
See Barry Eichengreen and Marc Flandreau, “The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914– 1939,” Open Economies Review 23, no. 1 (2012): 57–87. 9 In his report on the discount system in Europe, Paul Warburg wrote that the “annual tribute to Europe resulting  from our primitive financial system is not merely a waste of money, but reflects upon the dignity of a nation and economic importance of the United States.” See Paul Warburg, The Discount System in Europe (Washington: Government Printing Office, 61st Congress, 2nd Session, Senate Doc 402, 1910), 9. 10 For the guarantee, from 1921 until 1974 when the New York Fed discontinued the guarantee option on banker’s  acceptances, the New York Fed charged 1/8th of 1% on the face amount of banker’s acceptances purchased on behalf of foreign central bank accountholders. Dollar banker’s acceptances became a favored investment instrument by foreign central banks in the days before the introduction of the first regularly issued U.S. Treasury bill in 1929. 11 The maintenance of gold vaults and reciprocal gold custody accounts among major central banks provided  significant operational advantages for the functioning of the international gold standard. In addition to the safety of storing gold with another central bank, through the practice of earmarking central banks could settle accounts with one another without the need to physically deliver gold bullion. This was especially useful in periods, such as wartime, when navigation of sea lanes could be impeded.

when it moves the whole yield curve, or when it affects the exchange rate and other assets prices. There might be several channels through which the policy rate can affect asset prices or asset valuations: ·  first, changes in interest rate modify people’s expectations about future economic growth, and thus their profit expectations;  ·  second, monetary policy decisions may change the set of discount factors economic agents apply to their profit expectations or to the future stream of services or revenues from the asset they hold (housing for instance);  ·  finally, interest rate changes may induce portfolios’ shifts amongst assets that may in turn affect their relative prices. BIS Review 28/2002  1  Besides this, and for the sake of simplicity, I will call it the “interest rate channel”, changes in asset prices also generate wealth effects that may have a significant impact on several components of aggregate demand, namely consumption and investment. These wealth effects feed through to the economy via various channels, such as a direct increase in net wealth, which may lead to a rise in consumption because of households’ inter-temporal smoothing behaviour; via Tobin’s Q, which activates firms’ investment; or via an increase in the value of collaterals, which may reduce agents external financing constraints and enhance final spending, in accordance with the “broad credit channel”. Although the evidence is mixed about the effectiveness of the wealth channel, even in the 1 United States , it is likely to have increased over recent years.
One should not attach too much importance to surveys of inflation expectations. They have their limitations. But they are nevertheless interesting as a part of the base for monetary policy. I believe that the following conclusions can be drawn from Prospera’s most recent survey, published in January: •  Firstly, inflation expectations five years ahead have fallen from 2.6 per cent in October to 2.3 per cent in January. This is good as they were a little too high in October. •  Secondly, inflation expectations in the longer term have not been pushed up by our rapid and large repo rate cuts. As I said, they have instead declined. •  Thirdly, there are no widespread expectations of deflation in the longer term. Inflation expectations five years ahead are close to 2 per cent. The normal correlation between actual inflation and inflation expectations five years ahead also  8  BIS Review 25/2009  indicates that inflation expectations will remain close to 2 per cent even if the CPI falls in 2009 in line with our forecast. •  Fourthly, inflation expectations two years ahead have fallen from 2.8 per cent in October to 1.5 per cent in January. This is slightly more worrying. It is a larger fall than the normal correlation between actual inflation and inflation expectations two years ahead would indicate. The fact that they are far below 2 per cent also indicates that the interest rate should remain low for a longer period of time.

Chart: A countercyclical investor The long-term horizon puts the fund in a position to be a countercyclical investor on a systematic basis. This is done through rebalancing the share of the portfolio allocated to equities. According to the rebalancing rule, when the equity share increases to more than 64 percent of the fund, we sell equities and buy bonds. Conversely, when the equity share falls below 56 percent, we sell bonds and buy equities. This strategy has proved to be profitable for the fund, and has increased the average annual return by about 0.5 percentage point. 2 Chart: International real interest rates So far, the fund has earned an overall annual real return – after inflation and management costs – of 3.8 percent. The cumulative return on the fund in money terms is equivalent to  1  John H. Cochrane (2011): “Discount rates”, The Journal of Finance 66 (4), 1047–1108. 2  For an analysis of the impact of rebalancing, please see Norges Bank (2012): The history of the rebalancing of the fund, Discussion Note 4. BIS central bankers’ speeches  3  more than a third of the fund’s total capital at the end of 2014. Going forward, the returns are likely to be lower. The starting point for calculating the expected rate of return on the portfolio is the real interest rate on high-grade government bonds. In recent years, bond yields in real terms have been close to zero.
And I for one will continue to treat with caution generalised claims of ‘unintended consequences’, comparisons of conditions with the pre-crisis years and dire threats that regulation is preventing the financial sector from doing its job of providing credit and liquidity. My second point about regulation is that the past is not a perfect guide to the future. Financial centres innovate and change at speed. New products and ways of working can become significant very quickly. And sectors that have not generated risk in the past can change their profile quickly. In this respect I would mention the explosive growth since the crisis in the size and importance of asset managers and in the funds they manage, especially open-ended investment funds. Market-based finance has grown very strongly in recent years. Since the crisis it has accounted for virtually all of the growth in net lending to businesses in Europe and the US. 9  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  9  The assets under management of the top 500 asset managers grew by nearly $ trillion over the last 10 years or so. It now stands at $ trillion, broadly equal to annual global GDP. Over half of this is accounted for by open-ended funds, most of which promise daily liquidity to their investors. Such funds have generally been stable in times of stress – during the crisis they experienced relatively modest outflows. Unlike the banking sector they are not in the main highly leveraged.

I therefore should perhaps say a few words on the challenges for Europe’s financial markets that may be posed by the exit of the UK from the European Union. We do not yet know what arrangements will govern the trade of financial services and the integration of financial markets between the UK and the EU once the UK has completed its exit. That will be one of many issues to be determined by governments in negotiations over the coming years. Nor do we know how the financial sector in the UK and elsewhere in Europe will respond to the process and outcome of those negotiations. There are many possible answers to both questions. What I think is clearer is that this is not a zero sum game. 10  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  10  It is certainly possible – indeed some would say likely – that some wholesale financial market activities currently carried out in London and elsewhere in the UK are in future carried out elsewhere in Europe. But as I have discussed earlier this evening, the re-emergence of London as the world’s leading financial centre over the past 50 years, despite the decline in importance of the UK in the world economy, is the product of many factors. It may in part be due to London’s role as Europe’s financial centre.
This progress has been driven by a combination of factors, but the most important has been the Asian financial crisis itself, which prompted policy makers in the region to recognize the potential benefits of financial cooperation as a mechanism that can allow the region to prevent or to better manage the risks of financial crisis. Since the 1997-98 crisis, regional financial cooperation has been strengthened in three main ways: The first is the strengthening of liquidity arrangements, the second is the introduction of regular policy dialogue and surveillance, and the third is the coordination of efforts to develop the region’s bond market. So far, progress which has been made includes an expanding network of Bilateral Swap Agreements between ASEAN and Plus Three countries under the Chiang Mai Initiatives to provide short-term liquidity. There is also the Formal and Informal ASEAN+3 Finance and Central Banks Meetings to exchange information and discuss policy issues, as well as the discussion under the APEC platform. Also, new developments from the Asian Bond Market Initiative and the APEC Forum have also been launched to develop the region’s bond market. My point is that these achievements are important and their realization would not have been possible without the awareness and the determination of the authorities concerned to make them happen. But notwithstanding the progress made, more can definitely be done to bring regional financial cooperation to a level that is on par with the region’s economic and financial potentials.

This is important for ensuring that resources would be allocated efficiently and that the direction of development would be in line with the needs of markets, which reflect private sector’s priority and expectations. At the initial stage of development, as is the case now for the Asian Bond Market, government policies and efforts will be important to spearhead the process of growth and development. But once the momentum takes off, market mechanism should take over to ensure that the pace and focus of development are consistent with market expectations. And, at this level, the role of policy should be to support and facilitate market development by streamlining rules and regulations, by facilitating cross-border trade and investment flows, and by providing the necessary financial infrastructure. This approach will help ensure that the region’s financial environment remains conducive to private sector activities and participation. Let me take the opportunity here to stress that, at this juncture of financial markets development in Asia, I think that support from the authorities is still important and remains a crucial factor. But in order to leverage the impact of government’s support and involvement to the fullest, it is important for the authorities to be clear and firm on their commitments to develop the markets. Government involvement should also be focused and concentrate on issues that cannot be tackled by private market participants.
Throughout their history central banks have aimed to ensure the overall soundness of the financial system and this followed naturally from their basic functions. Three historical developments were the key to this. In the beginning central banks were first and foremost banks – and like any bank they needed to consider the soundness and creditworthiness of their clients as well as factors in the general trading environment that might cause them losses. Second, over time, central banks developed a monopoly over ultimate liquidity, the means of final settlement, and they facilitated the settlement of inter bank payments through the rediscounting of commercial bank assets and the collection of reserves in the form of bank deposits. Third, as commercial bank money progressively developed into a larger share of the money stock, the value of money became dependent on the soundness of commercial banks. In this environment the concern of the central bank for the orderly functioning and stability of the banking system arose from the need to maintain the public goods of a stable means of payment, a unit of account and a store of value. This included last resort lending when commercial banks suffered from liquidity strains. This historical development meant that by the end of the nineteenth century, or by the early years of the twentieth at the latest, central banks’ concern for financial stability was an already well-established part of their function. However, the second half of the twentieth century saw many central banks also taking on the responsibility for statute-based micro prudential supervision.

Let me begin my discussion on how to achieve that by looking at the current trend towards bank downsizing in the euro area. The trend towards downsizing banks Financing of the real economy in the euro area has historically taken place through banks. The euro area therefore requires and has a large banking sector. The aggregate balance sheet of euro area banks is around 270% of GDP, whereas in the US, where capital markets are deeper, it is only around 70% of GDP. The euro area banking sector, however, expanded rapidly in the years before the crisis from already high levels. From the start of the expansion in 2005 to its peak in 2012, banks assets increased by more than 60 percentage points of GDP. This was associated with the development of unsustainable bank business models. Banks relied too much on debt to finance their lending, and that debt depended too much on wholesale market funding and too little on deposits. The crisis has brought those business models to an end and triggered a process of structural change in the banking sector. European banks have entered a period of secular deleveraging and restructuring. Bank balance sheets declined by around 20 percentage points of GDP in 2013 alone. Loan-to-deposit ratios fell from 142% in the first quarter of 2008 to 117% at the end of last year, and I expect these ratios to continue to fall. Credit growth has consequently been very weak.
The Board estimates that the disaster had a negative effect of about 3 percentage points on first-quarter GDP growth. In the second quarter, assuming a gradual normalization of productive processes, the effect is reduced to around 2 percentage points. These assumptions are based on a scenario in which the reduction in output is concentrated in Regions VI, VII and VIII, and primarily affects the manufacturing sector. It is important to consider that the difficulties caused by the catastrophe in the making of spending decisions may hold down demand, and it is likely that some short-term effects will be seen in consumption and inventories. With respect to inflation, problems in production or distribution will probably increase the price level immediately, an effect that should be temporary for the most part. The usual economic statistics for March could give a better approximation of the immediate effects of the earthquake and tsunami. Overall, the complexity of an accurate reading of the data must be taken into account, partly due to difficulties and delays in the collection of information used in the construction of official statistics. Actually, the task of gathering February’s information – carried out in March – has already proven problematic. In the medium term, the dynamics of demand, economic activity and output gaps will depend not only on usual concerns about the world economy, but also on the size and specific characteristics of reconstruction efforts.

Considering the issues described above, the Board believes that the balance of risks for inflation and growth is unbiased. However, on this occasion, the earthquake and tsunami introduce unusual uncertainty, particularly regarding economic activity data for March and April. Thus, the Board considers that the balance of risks for growth is biased downwards in the very short term. Accordingly, the Board will continue to use its policies with flexibility so that projected inflation stands at 3% over the policy horizon. Conclusions I would like to wrap up this presentation with some brief reflections. Fifty years ago, in May 1960, our country was also hurt by a big catastrophe. The earthquake in Valdivia caused the destruction of a large area in central-southern Chile, comparable only to the recent disaster. Human and material losses were aggravated by a severe macroeconomic maladjustment following the disaster. Weak fiscal accounts and monetary management led to neglect control of inflation, which soared in the following years. Our current situation is certainly different. Fiscal accounts are in order, and our monetary policy scheme, as I have already mentioned, has the virtue of allowing us to accommodate shocks without compromising the inflation objective. Although so far we have no statistics and preliminary data will be known in the coming days, it is possible that the immediate reaction to this tragedy will include a temporary increase in inflation and a sharp deceleration of economic activity, both as consequences of the major disruptions in productive processes and commercialization channels.