samchain/econo-pairs-v1 huggingface dataset:
The run up to the financial turbulence of the 1990s During the past twenty years, the financial systems in many countries have been deregulated. For the first time since the outbreak of World War One, capital can again pass more or less freely across national borders. Moreover, major changes in communication and information technology have paved the way for new instruments and methods for risk management. Taken as a whole, this has led to the financial system being more extensive and global today than ever before. This holds even though capital flows relative to GDP were also large at the end of the last century. The rapid financial development and internationalisation are per se a logical consequence of the production of goods and services being globalised, with a massive increase in cross-border trade. They also have to do with growing wealth in many parts of the world. This in turn has increased the need for new financial solutions for businesses and households. The increasing globalisation of production and trade in goods and services generates a demand for a more developed and internationalised financial system so that the opportunities for increased prosperity can be used to the full. Note that this, as always, involves a trade-off between risk and return. It is of course possible to substantially increase stability, in the sense of lowering risk, by measures that result in very low returns. However the solution is not to turn back to a less turbulent, but also less prosperous past regime of capital controls.

An additional insight is that the simultaneous occurrence of foreign exchange rate crises and banking crises is probably the single most important reason why some countries have suffered much deeper recessions when their currency pegs collapsed or came under a severe speculative attack. The contractionary shock to most European countries in 1992-93 was clearly much smaller than for Sweden and Finland in the early 1990s and for Mexico in 1995 and Asian countries in 1997-98. 3  BIS Review 88/1999  Thus, authorities in countries that receive capital inflows should prepare for the day when the movement might reverse. Countries that are vulnerable in this regard should carefully consider the adequacy of their foreign exchange reserves, particularly in relation to their short-term external debt. Since large numbers of countries cannot build up their reserves by increasing their trade surpluses simultaneously, this would seem to argue for greater use of contingent lending facilities provided by the private sector. Given such arrangements, recourse to the new IMF Contingent Credit Lines would then add public sector to private sector affirmation that the domestic policies being followed by the borrowing country are sensible and sustainable. … but the international dimension should also be recognised To say that the key to avoiding future crises in emerging markets must be found in domestic reforms is not to deny that part of the solution may still lie in measures that change the way in which international financial markets sometimes operate.
We have to ask whether today’s blanket approach to welfare, higher education and health is promoting a culture of reliance on the State rather than the encouragement of private initiative. Our system does not focus exclusively on those who are truly in need, but also provides a cushion for higher income earners, at the cost, however, of a heavier fiscal burden. 2  Swedish Ministry of Finance and H. M. Treasury Social Bridges: Meeting the Challenges of Globalisation, London and Stockholm, April 2006. BIS Review 113/2006  3  Social programmes must be sustainable The time has, therefore, come for a radical reform that reconciles the objective of social cohesion with financial sustainability. Non-essential transfer payments should be reduced, especially those that are of a universal nature and do not address a proven need. The introduction of means testing must be seriously considered, accompanied by continued efforts to reduce tax evasion. The criteria for the granting of certain benefits should be tightened further. The underlying objective should be to promote a culture of self-help and efficiency. In the field of higher education, for example, since an academic qualification enhances the student’s income-earning potential, I believe a strong case can be made for at least the partial replacement of grants with loans for students from a better-off financial background, with a repayment schedule that provides for moratoria to suit the post-graduation realities of the particular student.

In this context, the parallel commitments of the major political parties to the continued provision of free health services for all and to prudent fiscal policies are not easy to reconcile. Much the same can be said of higher education, which is characterized by a student subsidy system that is probably unique. The University of Malta and MCAST have together been allocated Lm15.5 million for 2007, compared with no less than Lm8 million budgeted for students’ maintenance grants. Funds that would permit these institutions to offer better quality programmes, and in the process hopefully raise the number of science and technology graduates from its current inadequate level, are instead paid to students regardless of their financial means. Changes needed in the pattern of resource allocation This generous approach to the management of public finances has meant that recurrent revenue, although higher year after year, has often not been able to keep up with recurrent expenditure. For example, in 2005 expenditure amounted to 41% of GDP, roughly matching revenue at 42%. As a  1  A recent paper on public sector efficiency in the new EU Member States gives Malta a relatively high score in terms of public sector performance that measures outcomes. However, when performance is related to the inputs used to gauge the efficiency of the State, Malta ranks 21st in a pool of 24 countries including all 10 new Member States, Greece, Portugal, Ireland and a number of emerging market economies.
Instead of expressing its goal of maximum employment in purely technical and macroeconomic terms, the Fed has come out in favour of collective efforts to combat poverty. Maximum employment may be a legitimate Fed goal alongside price stability, but the plan phrased in this way marks a departure from the previous world in which the Fed isolated itself from political influence. The ECB is unlikely to follow the same path as the Fed when it completes its monetary policy review. It is prevented from doing so by European law and by the limited appetite of EU citizens to reduce social disparities in this way. Instead, central bankers are increasingly voicing support for climate protection. This comes in the wake of a speech given by the former Bank of England governor Mark Carney, who in 2015 drew attention to the risks to financial stability from climate change and the responsibilities this implies for financial regulators. The ECB, however, is going even further: Christine Lagarde says she wants “to explore every avenue available in order to combat climate change”. In a sense it’s understandable that central banks are subscribing to broader government policies, whether at national or EU level. After all, it’s something that’s written into the laws governing their activities. One might also accept that if they want to maintain their influence, they need to move with the times and embrace the values that are increasingly driving world affairs. However, there are many big risks associated with this approach.

The key standards here are the 40 recommendations of the Financial Action Task Force (FATF), first issued in 1990 and revised twice in 1996 and also this year. After the events in September 2001, eight further recommendations were added, focusing on combating terrorism financing. These recommendations have been accepted by the international financial organisations as a basis for anti-money-laundering criteria in the financial sector. The Basel Committee published a document entitled “Customer Due Diligence for Banks” in October 2001 specifying details of the “know-your-customer” principle for banks. The IMF has added the recommendations to its surveillance work within the FSAP missions and Offshore Financial Centre assessments, having developed a methodology for assessing the general principles in practice. These AML standards are thus on a par with all the other international codes and best practices and form an integral part of the strengthened global financial architecture. I should also note that an increased awareness of the crucial role played by the AML regulations in today’s world is also apparent among private financial institutions themselves. This has been demonstrated, for example, by their adoption of the “Wolfsberg principles” and the involvement of the banking associations in many countries in AML issues. The AML regulations require financial institutions to identify their customers in certain transactions, either in suspicious ones, or in standard ones such as opening bank accounts, safety boxes, etc. The growing use of modern communications channels, e.g.
This year should mark the historic new chapter for the nation’s payment system, where we would see the transfer of the  BIS Review 25/2006  1  payments operation function from the Bank of Thailand to the private sector. This would provide greater flexibility for the system to adapt to the fast changing modern payments system development. Moreover, the recent announcement by the Thai Bankers Association of a major reform in the price structure of various payment media, including cheques, provides an important milestone towards a more efficient payment services. The move reflects a pricing based on the cost of various means of payments which would quickly eliminate inefficiency and costs to commercial banks. Another major achievement that calls for celebration is the significant reduction in the NPL last year. Thai banks have succeeded in bringing NPL down from 556,998 million baht, or 11.82 percent of total loans at the end of 2004, to 461,439 million baht, or 9.05 percent of total loans at the end of last year. In all, the NPL was brought down by a net amount of 95,559 million baht, the largest such decline since 2001, as a consequence of the recovery of the economy and improvement in business conditions. I am confident that this year will see an even more decline in NPL than last year. Moreover, the Financial Institution Development Fund has just completed the merging of Bangkok Asset Management Company, or BAM, with Asset Management Corporation or AMC.

Typically, a bank that runs its operations in a normal course of business is already expected to generate returns on their business or normal profits. If the entire profit is taken as base to calculate bonus for their board members, would that seem fair to the institution? I understand that some banks are exploring ways to remunerate board members which are linked not only to the profits of the bank, but also to other factors, such as the reduction of NPL, appropriate provision of loan loss and other indicators of stability. There is still no consensus on the issue, but moving away from the model of basing remuneration solely on net profit is the move in the right direction and is to be encouraged. In fact, if we continue to explore the question with an open mind, we should be able to come up with a better and fairer model. I would like to leave you with a thought:  4  BIS Review 25/2006  the part that is linked to profits should more appropriately be linked to excess return rather than normal profits. Finally when the remuneration has been set, the Board of Directors should take care to reconsider that the amount is not unreasonably high, as the Board is in the position to be the “Role Model” of what should be appropriate practices for the bank. If the Board takes undue benefits from the institution, this would undermine its authority and set bad example for staff and management to follow.
After the global financial crisis the correlation rose sharply to 0.6 for the euro area and 0.75 for non-euro area OECD countries. 2  See Ivashina, V., Scharfstein, D.S., Stein J.C. (2012), “Dollar Funding and the Lending Behavior of Global Banks”, NBER Working Paper No 18528, November. 3  See Bank for International Settlements (2014), “EME Banking Systems and regional financial integration”, CGFS Papers, No 51. BIS central bankers’ speeches  1  cross-border liquidity flows or the US rules for foreign banking organisations may be seen as examples. Such a “de-globalisation” scenario, if confirmed, could become self-validating and have profound effects on the degree of international risk-sharing, spillovers and the global allocation of savings, and therefore on global long-term growth. Shifting economic centre of gravity Since the early 2000s the world has also witnessed impressive growth rates in emerging economies, which have exceeded those in the advanced world. In particular the BRICS (Brazil, Russia, India, China and South Africa) have more than doubled their share of global GDP from less than 10% in 2000 to 21% in 2013; similarly, other low and middle-income economies have seen their share increase from 7% in 2000 to 12% in 2013. The rise of emerging economies is also illustrated by the eastward shift of the world’s economic centre of gravity, which is occurring at a faster speed than ever before in human history.

See also B. Cœuré (2014), keynote address at the ECB-IMF conference on the “International dimension of conventional and unconventional monetary policy”, Frankfurt am Main, 30 April 2014, forthcoming in a special issue of the Journal of International Money and Finance. BIS central bankers’ speeches  3  account deficit was not of concern given the international status of the US dollar; the positive valuation effects and the positive net foreign income balance were seen as evidence that the current account deficit in the US was sustainable. As a matter of fact, we did not experience a US balance of payments crisis, even though we did experience a spectacular global financial crisis.9 What was the connection between global imbalances and the global financial crisis? What were the drivers of those global imbalances? The debate has still not been settled. Similarly, I would claim that the main obstacle today to international monetary policy coordination is the lack of consensus on (and maybe even of understanding of) the degree of slack in the labour and product markets of the major economies. Reaching a consensus on the nature of spillovers is not straightforward either. Most models of international monetary policy coordination assume that policy-makers are able to identify the types of shock and how they are transmitted to the domestic and global economy. But this is often not the case in practice. For instance, there have been marked differences in the views on the global impact of Federal Reserve announcements.
Thus, loans do not only benefit the company concerned, but also contribute to raising an entire economy’s productivity, growth potential and prosperity. 5 Households, too, can harness future income for present-day benefits. The obvious example is a mortgage to buy a house. Let’s take a specific case. A young family – we’ll call them the Miller family – is expecting a child and so will soon need larger living quarters. They have found their dream house, but the money they have saved so far is not sufficient for them to buy it. Thanks to the possibility of taking out a mortgage, the Millers can nonetheless purchase the house of their choice and move in without further delay. The family will from then on be using part of their income to repay the loan, thereby reaping present benefit from their future earnings. In other words, they are putting their income to use at a time when they derive the greatest advantage from it, and in doing so they enhance their prosperity. 6 Finally, borrowing can also make perfect sense for a government. Fiscal income and expenditure are not always in balance. During a recession, for instance, a state’s income declines, whereas expenditure increases due to the activation of various countercyclical measures such as the provision of unemployment benefit. The result is a fiscal deficit. Governments can cover the deficit either by temporarily raising taxes or by reducing their spending. Neither of these measures are helpful in a recession. On the contrary, they would merely aggravate the recession.

Friedman (1957) as well as Modigliani and Brumberg (1954)). In other words, their consumption level would remain more or less steady throughout. In reality, income at certain stages of life does not suffice to cover this hypothetical consumption level. This is true mostly in younger years and in old age. Taking out a loan enables a household to overcome financial bottlenecks in certain phases of life and to make use of their income at a time when they derive the greatest benefit from it. Page 4/16  diversification of investment risk. For society as a whole, it means that accrued savings are made widely available and thus put to better use. Let me give you an example. An entrepreneur is faced with the question of what use to make of his assets. There is no major purchase to be made at the moment. Neither is there a profitable project at his own company in the pipeline. Do you remember our university graduate with her brilliant idea for a product? The entrepreneur could lend her some of his assets against interest and so generate a return. 7 By extending a loan to the young graduate, he is also diversifying his investments. As the proverb has it, he is not putting all his eggs in one basket. Overall, we can conclude that an effective credit system represents an essential basis for a thriving economy. It allows borrowers to put their income to the best-possible use over time.
Suffice it to mention large-scale investment in power-intensive industries and other sectors during the first half of the period in question, a major increase in real disposable income in the past few years and credit expansion which has been funded by foreign borrowing. The Central Bank's monetary policy has therefore played a minor role in this development and its impact has primarily been of a short-term nature and will eventually be levelled out. Of course, the Central Bank is also aware that open access to foreign capital softens the impact of its monetary policy. However, it should be borne in mind that access to foreign capital is not unlimited in the final analysis, and is neither risk-free nor available to all Icelandic companies. Household and corporate sensitivity to interest rate changes may be low at present, but in the long term the impact of higher interest rates cannot be avoided. The Central Bank is convinced of the impact that its interest rate instruments have, and recent discussions about high interest rates can be cited as precisely such evidence that their impact is being felt in full. Furthermore, the Central Bank has been accused of basing its assessments of economic developments on somewhat outdated data. Undoubtedly there is always scope for improvement, but the Central Bank does compile extensive data about financial market developments on a monthly basis, and various other data even more frequently. Its data on the exchange rate of the króna, for example, cannot be more up-to-date.

In weighing up this decision, interest rate reductions among some of Iceland's trading countries in recent months have also been taken into account. Exchange rate To reiterate, the main objective of monetary policy is price stability. Since the exchange rate is an important determinant of prices, exchange rate stability has been an intermediate objective of monetary policy. During the first four months of last year the króna appreciated somewhat, but this trend was reversed in the middle of June and the currency was under pressure for most of the time until the end of the year. It depreciated by almost 9% from the end of 1999 to the end of 2000. To some extent the depreciation was triggered by fishing quota cutbacks and the resulting deterioration in the economic outlook. Demand for foreign exchange also outstripped supply because of last year's current account deficit, which is estimated at ISK 68.9 billion, as well as heavy investment by Icelanders in foreign securities amounting to almost ISK 40 billion net. Pension funds play the leading role in these investments. By the end of 2000, the real exchange rate of the króna had fallen below its average for the past twenty years. Actions in the foreign exchange market Under the prevailing circumstances, the Central Bank considered it necessary to take action to counter the depreciation of the króna. Besides raising its interest rates, the Bank intervened in foreign exchange markets thirteen times after the middle of 2000 in order to cushion against sharp fluctuations.
At the same time, euro area governments need to further strengthen the macro-prudential framework at the national and the European level. As you know, the European Systemic Risk Board is developing tools to identify and address potential future sources of systemic risk in the EU. And the three new European supervisory authorities – for banking, for insurance and occupational pensions, and for securities and markets – are strengthening our focus on spillovers within the EU’s financial system. However, one important element in the framework for macro-prudential supervision in the euro area is still missing. We still have no clear mechanism in place to deal with the systemic risk emanating from large cross-border financial institutions. We should intensify ongoing work on the establishment of a mechanism for the resolution of bank failures at the European level. This brings me to the third challenge that euro area governments face: the elimination of remaining institutional deficits in the euro area governance framework. European governments have made considerable progress on this front. In particular, they have reinforced the Stability and Growth Pact, with more “automaticity” and less room for discretion in the application of the preventive and corrective arms. In addition, the European fiscal compact will ensure strong national budgetary frameworks in order to facilitate compliance with the government’s obligations under the Stability and Growth Pact. And EU Member States have introduced a surveillance mechanism that aims to prevent and correct macroeconomic imbalances within the EU. It is now essential that the new governance framework is implemented to the letter.

Second, progress is being made to reduce the vulnerabilities intrinsic to the derivatives markets. We, regulators, tend to think that clearing and settling those derivatives through CCCPs will considerably reduce aggregate counterparty risk, limit the contagion channels, hence strengthening the whole financial system’s robustness. I am fully aware that there are doubts, in some parts of the financial community, on the opportunity of such an evolution. There are fears it will lead to greater standardization of derivative products and less flexible markets overall. This is clearly a case, where the optimum trade-off between efficiency and stability is different according to the market and regulator’s point of view. But, of course,  BIS central bankers’ speeches  1  regulators’ views are naturally finding their way into legislation, especially on this issue, as you know, in the United States. More generally, when any new financial regulations are designed, two polar views were expressed. One view is that regulatory reforms will take a significant toll on the economy. The argument is because they would raise, in this case, the cost of funding for the economy. It is feared that financial institutions will then pass this cost on to the private sector through an increase in lending rates or worse abandon certain financing segments. This would in turn have a negative effect on output growth.