samchain/econo-pairs-v1 huggingface dataset:
6  BIS Review 126/2010  Second, the Bank’s permanent operations are intended to offer liquidity support for the banking system, not for the market in any one particular type of security. Intervening in a partial way could create unfortunate market distortions. If there is a genuine market for a private sector security, it should be able to support itself in the medium-term without special forms of liquidity support from the authorities. Third, the asset purchase programme, although focussed on buying gilts, was intended to support the liquidity of all private sector securities by forcing would-be gilt holders to purchase more risky assets (rather than by direct central bank purchases of those assets). There is plenty of evidence to suggest that was indeed the outcome and most private sector markets have recovered to some degree. The covered bond market has also been supported by the introduction of FSA regulations, to provide additional comfort for investors. 16 A second topical issue is bank funding more generally. It is often asserted that the Special Liquidity Scheme provides a funding source for banks and that, given continuing pressures on them to raise funds to support lending, we should extend the lifetime of the Scheme. The first point to note is that the Scheme facilitates funding but does not provide it directly. Rather, as I have outlined today, the SLS provides a collateral upgrade and the private sector remains the ultimate source of funding as the Treasury Bills lent under the Scheme are turned into cash in the market.

The main entry on the liability side of the balance sheet is “central bank money”, comprising banknotes, which are supplied on demand, and the reserve accounts of commercial banks and building societies. 2 These are effectively sterling current accounts for the commercial banks – they are among the safest assets a bank can hold and are the ultimate means of payment between banks. In normal circumstances, the main entry on the asset side of the balance sheet is the Bank’s lending to those same commercial banks. 3 In setting monetary policy, our normal objective would be to lend exactly the amount of central bank money demanded, consistent with the MPC’s choice of Bank Rate. Crucially, although the targets for reserves accounts may react to the state of financial stability in the system, the Bank’s choices here are dictated by the stance of monetary policy. In normal times, we ask the banks to choose their own targets for reserve accounts and then lend just enough cash to the system as a whole so that the banks can collectively meet the aggregate of their targets. The commercial banks will then lend to, or borrow from each other in the inter-bank market, to distribute the total amount of cash around the system so that each individual institution can meet its target. Each bank is incentivised to meet its reserves target by the application of penalty rates to those who are – on average over a monthly maintenance period – either excessively short or long.
For example, the Bank is now obliged to present public explanations every quarter of its monetary policy and monetary, exchange rate and currency developments, and its measures in these areas. As I said earlier, the main objective of Central Bank monetary policy is to keep inflation as close as possible to 2½%. The Central Bank has only a single instrument for achieving this objective: interest rates. The crucial interest rate here is that used in the Central Bank’s repurchase transactions with credit institutions, sometimes called the policy interest rate. Such transactions effectively represent the Bank’s liquidity facility for these institutions. The commercial and savings banks then decide their own rates of interest with reference to the Central Bank’s policy rate and short-term interest rates invariably alter in pace with the Central Bank rate. Other things being equal, changes in the Central Bank interest rate also affect long-term interest rates, but other factors have an impact as well. Their responses to the Central Bank’s interest rate changes are therefore not always foreseeable and tend to take place with some lag. Inflation forecasting plays a crucial role in the Central Bank’s current activities. It produces four forecasts a year and publishes them in its quarterly Monetary Bulletin. The inflation forecast is projected just over two years into the future, on a quarter-by-quarter basis. As in other countries, Central Bank interest rate changes take a long while to have an impact on the economy. The inflation forecast therefore needs to be forward-looking and based on the best available methodologies.

Without sensible economic policy implementation, however, the construction programme would be likely to lead to overheating of the economy, high inflation and instability. There is no the scope to discuss the Bank’s analysis further here, however, so I shall merely refer to the coverage in the latest Monetary Bulletin. In recent public discussions it has repeatedly been claimed that the exchange rate of the króna is too high and the Central Bank needs to take measures to bring it back down, such as a large-scale cut in interest rates, which are said to be much higher in Iceland than elsewhere. The fact of the matter is that the interest rate differential between Iceland and its main trading partner countries has narrowed significantly recently. The short-term interest rate differential has not been less since 1996. The Central Bank of Iceland’s policy rate is now lower than, for example, those of the Norwegian Central Bank and the New Zealand Reserve Bank, both of which also apply inflation targeting. The same applies to the policy rate in real terms, calculated relative to these banks’ respective inflation targets. In fact, in real terms the Central Bank of Iceland’s policy rate is at its lowest point since 1996. In this context it is also important to point out that after the change in the monetary framework in March 2001, i.e.
An inflation targeting framework combines two distinct elements: (a) a precise numerical target for inflation in the mediumterm and (b) a response to economic shocks in the short term. The inflation target provides a rule-like framework on which the private sector can anchor its expectations about future inflation. As Gordon Brown put it in his Mais Lecture in 1999, "a credible framework means working within clearly defined  12  6  To be precise, the angle of gaze remains within a certain range - reported by Gigerenzer and Selten (2001). BIS Review 36/2005  long-term policy objectives, maximum openness and transparency, and clear and accountable divisions of responsibility". It is a natural heuristic around which agents can form their expectations. And the discretion in responding to shocks afforded by inflation targeting allows the central bank to adapt its strategy to new information. That is why inflation targeting is sometimes referred to as a framework of “constrained discretion”. Following a shock which moves inflation away from target and output from its normal level, there is discretion about the horizon over which inflation is brought back to target. But the exercise of that discretion must be clearly explained and justified in terms of the need, in the words of the remit of the Monetary Policy Committee, to avoid “undesirable volatility in output”.

To describe monetary policy in terms of a constant rule derived from a known model of the economy is to ignore this process of learning. So how should central banks behave in the light of their ignorance? Two approaches have been suggested. Interestingly, at one end of the spectrum, both Milton Friedman and Robert Lucas argued that policy should be based on a simple rule precisely because of our ignorance. Central banks, in their view, should have limited ambitions and aim simply at steady growth of the money supply – the so-called k% rule under which the money stock rises at a fixed rate, k%, each year. As Friedman (1968) put it, “Steady monetary growth would provide a monetary climate favourable to the operation of those basic forces …… that are the true springs of economic growth. That is the most that we can ask of monetary policy at our present state of knowledge”.9 The principle of adopting a strategy that takes into account limits to our knowledge is a sound one. But advocates of a rigid k% rule argue that we should ignore all other sources of information (estimates of the output gap, for example) and allow any shocks to the velocity of money to feed through to activity or the price level. In practice, experience in both Europe and the US has shown that velocity shocks can be large and few economists now advocate the use of k% rules. So committing to a wholly inflexible rule is likely to be neither desirable nor credible.
However, while the risk-weighted approach has been through wholesale reform, it still depends on mathematical models – and for the largest firms, their own models to determine  2  BIS central bankers’ speeches  riskiness. So the risk-weighted approach is itself subject to what in the trade is called “model risk”. This may sound like some arcane technical curiosity. It is not. It is a fundamental weakness of the risk based approach. Mathematical modelling is a hugely useful tool. Models are probably the best way we have of forecasting what will happen. But in the end, a model – as the Bank of England economic forecasters will tell you with a wry smile – is only a crude and simplified representation of the real world. Models have to be built and calibrated on past experience. When events occur that have no clear historical precedent – such as large falls in house prices across US states – models based on past data will struggle to accurately predict what may follow. In the early days of the crisis, an investment bank CFO is reported to have said, following hitherto unprecedented moves in market prices: “We were seeing things that were 25 standard deviation moves, several days in a row”. Well, a 25 standard deviation event would not be expected to occur more than once in the history of the universe let alone several days in a row – the lesson was that the models that the bank was using were simply wrong.

Financial institutions’ capital moves in parallel with the price fluctuations of assets when these fluctuations result in capital gains or losses. The pursuit of a constant capital adequacy ratio (leverage) tends to reinforce this effect, by sustaining the demand for assets when their prices increase, and vice versa. The challenge for the authorities is to assess whether and to what extent the regulatory framework reinforces these dynamics. In other words, whether the financial regulations determined from a micro-economic viewpoint produce effects that impact the entire financial system. With these questions in mind, work is being undertaken to examine the impact of prudential standards. It is also on this basis that the accounting adjustments that I mentioned earlier have been made. More generally speaking, we will have to set up supervision systems that are more suited to economic developments. The need to develop a “macro-prudential” policy is now under debate. The general principle is straightforward, consisting in ensuring that supervision manages to limit risks for the stability not only of a particular institution, but also of the entire financial system. Its implementation, however, is complex. For the moment, we are only at a preliminary stage, contemplating which tools a macro-prudential policy could be based on, and how these tools could be used. As regards supervision, this crisis has shown the clear advantage in having the banking supervisor close to the central bank. This is a conclusion that is now shared by all central bankers, whatever the regulatory environment they are operating in.
In this context, I am proud that the Bank of Albania has always been and remains frontrunner of change. 3. Bank of Albania, an evolving institution Throughout the transition history, The Bank of Albania has shown able to change and embrace better contemporary and most effective practices. The nature and functions of the institution were fundamentally transformed in 1992, when the Albanian economy started the transition process towards a free market economy. Within a short period of time and in the presence of a shortage of an institutional heritage, the Bank of Albania succeeded to establish the contours of an independent monetary policy, being empowered in the presence of a free-floating exchange rate, regulate and supervise a private banking sector that functions based on the market principles. The qualitative transformation of the Bank of Albania towards a modern central bank evolved further with the approval of the new Law on the Bank of Albania in 1997, which lays down the primary objective “to achieve and maintain price stability”. This Law sets out the decision-making, financial and operational independence of the central bank in the pursuit of its objectives, in line with the best international practices. In addition, it is encouraging that this institutional independence enjoys a broad social consensus. During these years of transition, our monetary policy has marked a notable progress towards: developing a theoretical framework; building up the completion of our knowledge with empirical studies; perfecting the instruments for its implementation; and the transparent communication with the public.

Measuring these broader risks is harder today because the classic array of historical stress events drawn from the past 25 years of financial crises are probably even less valuable than they were as an illustration of how market dynamics might unfold today in response to similar changes in asset prices and credit losses. Those past crises would likely cause less damage today, if they were to recur, because of the many changes in the structure of our financial system - namely, the greater dispersion of credit and market risk, the improvements in risk management, the size of the capital cushions, and the improvements in many parts of the payment and settlement infrastructure. But most crises come from the unanticipated. Assessing a firm’s exposure to risk in the tail of the distribution requires, among other things, an evaluation of the impact of the failure of a major counterparty and the impact that failure might have on other counterparties and on market prices. It requires, for the largest institutions, an understanding of the constraints the firm may face in its ability to adjust positions or hedge against further losses without amplifying the shock. And it requires anticipating potentially adverse effects on market liquidity, as other market participants react to actual and anticipated losses. In the financial system we have today, with less risk concentrated in banks, the probability of systemic financial crises may be lower than in traditional bank-centered financial systems.
These two transformations present banks with a twofold challenge: on the one hand, they are exposed to and must protect themselves against the intrinsic risks associated with these developments; on the other, they have to act, because they have a role to play in these transitions, particularly on the financing side, with government backing. 1. The banking sector and the transition to a digital future and a sustainable economy Let us begin by diagnosing the situation. The banking sector is currently facing the twin challenges represented by the digital and green transition. These have the potential to weaken banks but also the wider financial system, and could ultimately impact the real economy. 1.1 Vulnerabilities in relation to the digital transition [SLIDE 2]  From blockchain and artificial intelligence to electronic payments, the cloud and big data, the growing digitalisation of banking and finance represents a multi-faceted evolution that is changing how banking has traditionally been done. We can pick out three broad shifts that characterise banking’s digital transformation and that are impacting the industry’s business model. First, customers have new expectations in terms of digital services. I am thinking here in particular of greater accessibility to tools to manage accounts remotely and obtain remote banking services, faster – even instant – payments, and more flexible customer relations. As the chart shows, more and more Europeans are using the internet for online banking, in a clear sign of how the sector is going digital [SLIDE 2].Customers also have new product needs.

For example, they are making public commitments in different areas that can have a positive impact in terms of mitigating and adapting to climate change, such as their carbon footprint, fossil fuel exit strategies, shareholder engagement and greenhouse gas emissions reductions. The ACPR and France’s securities regulator, the AMF, which have been monitoring these commitments for the last two years, stress that significant headway has been accomplished in a short time, but also warn that progress still needs to be made if banks are to communicate more clearly and transparently about their objectives and especially about the means of action likely to ensure that these collective commitments are kept. Banks could also contribute to the transition to a sustainable economy by playing their part in the emerging green bonds market. This market doubled in size in 2021 to reach EUR 460 billion globally, of which half is denominated in euros [SLIDE 7]. But it still has lots of room to grow, judging by the fact that green bonds made up a mere 0.4% of the total volume of bonds issued during the same year worldwide and 2.6% in Europe. In this setting, the new label will help to support a fast-growing market while also preventing greenwashing risks. 2.3 Central banks are also helping to steer these transformations as they lead by example [SLIDE 8] To conclude, I would like to say a few words about what we at the central bank are doing. I will offer two illustrations for each challenge.
It was quite simply impossible to know who was actually left with the direct or indirect exposures to the subprime loans. This led to liquidity waning in parts of the interbank market. It therefore became more difficult and more expensive for the banks to refinance themselves. When many banks experienced problems, a number of central banks chose to take measures to increase liquidity in the interbank market. The unease in the credit markets has continued during the winter and spring. Many large and established banks have been gradually forced to write down the value of their subprimerelated assets. This has led to some major financial groups requiring new capital. At the same time, there has been increased uncertainty over international economic activity. This has in turn contributed to major fluctuations on the world’s stock markets. Over the past week the unease has increased again. This has contributed to rising interest rates on the interbank market in, for instance, the United States and the United Kingdom. With the free capital movement this of course also affects Swedish interbank rates. But higher interest rates in the interbank market do not by definition mean that the banks will experience liquidity problems. The Swedish banks have had good liquidity throughout the entire period of turmoil. They have not been exposed to subprime-related securities to any great extent. Their solidity was and remains good and their loan losses are at present very small. Nevertheless, the Swedish banks have not been able to entirely escape the effects of these events.

Expectations concerning the next six months indicate accelerating growth for domestically oriented industry and continued solid growth for the export industry. Higher growth is also expected in both household and corporate services. The solid growth in retail trade is expected to continue in Region North, while growth in the building and construction sector appears to be slowing somewhat. According to our regional network contacts in the region, employment has fallen somewhat in the manufacturing and public sectors. In the near term, employment in building and construction and the service sector is expected to increase, while employment in all other sectors is expected to remain unchanged. The supply of qualified labour in the region is satisfactory, and growth in profitability is solid, but moderating. The global economy Global economic growth is expected to be somewhat lower this year than in 2004. In the US, growth was solid during the first half of 2005, and it appears that this trend will persist. In the longer term, growth is expected to moderate somewhat. In the euro area, growth is expected to remain fairly weak during the next couple of years. In the UK, growth has slowed markedly and is expected to be moderate in the period ahead. In Sweden, growth has edged up following a couple of weak quarters and is expected to remain at approximately the same level. In Japan, there was a marked decline in growth from the first to the second quarter, and growth is expected to be fairly moderate in the period ahead.
4  See Hélène Rey, 2013, “Dilemma not trilemma: The global financial cycle and monetary policy independence”, paper presented at the Jackson Hole Economic Policy Symposium. Incidentally, Hélène Rey was the 2006 Germán Bernácer Prize winner. 5  For more details on the construction of the measure see Scott Baker, Nicholas Bloom and Steven J. Davis, 2012, “Measuring economic policy uncertainty”, working paper, Stanford University. 2  BIS central bankers’ speeches  account for a significant proportion (10–30%) of the differences in productivity between firms and between countries.6 Their research did not stop at documenting the impact of the differences in management practices. They also offered suggestions for policy interventions that could encourage the uptake of good management behaviour. Competitive and flexible markets enable managers to re-optimise resources within and outside the firm more easily. Educational standards matter as well. Better-managed firms have better educated workers and they use them more efficiently. Moreover, better educated managers have necessary skills to adopt state-of-theart management practices and adapt to changing environment. This enables them to maintain and improve their global competitive position. Multinational companies also have a strong positive effect, as they transplant their management styles to the countries in which they operate.7 These research-based conclusions highlight a key role of structural reforms in the wake of the global economic crisis. Countries with more competitive market conditions, better education and more investment in R&D and innovation policies can maximise the beneficial impact of managerial capital on productivity and growth.

Discontinuation of the minimum exchange rate The minimum exchange rate has undoubtedly served Switzerland well during an exceptional period. However, the old adage popular among economists – “there’s no such thing as a free lunch” – holds true for monetary policy as well. The SNB Governing Board was well aware that the introduction of a minimum exchange rate would entail certain risks – and we consistently alluded to these. That the SNB would have to make large foreign currency purchases and expand its currency reserves in order to enforce the minimum exchange rate was thus to be expected. The SNB must be willing to bear these risks if doing so is necessary for the fulfilment of its legal mandate, and if these risks are justified given the chances of success. We enforced the minimum exchange rate consistently for more than three years (6 September 2011 to 15 January 2015). At the peak of the euro crisis in 2012, the SNB had to purchase CHF 188 billion of foreign currency. Adding this to purchases from prior years reveals that the SNB’s currency reserves rose from CHF 50.5 billion in 2007 to  1  In August 2011, the SNB announced that it would very significantly increase the supply of liquidity to the Swiss franc money market by expanding banks’ sight deposits at the SNB from CHF 30 billion to CHF 80 billion within a few days.