samchain/econo-pairs-v1 huggingface dataset:
Luis M Linde: The internationalisation of the Spanish economy Testimony by Mr Luis M Linde, Governor of the Bank of Spain, before the Special Senate Committee for the Development of Internationalisation, Madrid, 2 June 2014. *  *  *  Ladies and gentlemen, Allow me to begin by thanking Mr. Pío García-Escudero and the Chairman of this Special Committee, Mr. Iñaki Anasagasti, for the opportunity to participate in your work. First, today, I shall set out some matters relating to the internationalisation of the Spanish economy and capital flows between Spain and the rest of the world. Next, I shall detail the main characteristics of the international trade financing structure and of the funding of longerterm projects. And finally, I shall review the characteristics of, recent developments in and regulatory treatment of such trade in respect of the remit of the Banco de España. Recent developments in the external sector of the Spanish economy In the second half of 2013 a scenario of recovery began to take shape in our economy. A combination of several positive factors, both at home and abroad, has contributed to a situation in which Spain is beginning to overcome its second recession since 2008. The gradual improvement in GDP growth figures has been accompanied by a sustained correction of the main imbalances built up during the previous upturn.

These rules set provisioning percentages based on risk and criteria so that banks may make an assessment of country risk by monitoring economic developments and the political and institutional situation; further, they contain exemptions arrangements, with such exemptions depending on the type of transaction, its term and the modus operandi. Notably, these rules do not affect foreign direct investment by the Spanish financial system, since they do not apply to debt instruments and to contingent risks, nor to risks vis-à-vis European Union countries. The impact of these rules on foreign trade is low since most trade finance products are not subject to country risk provisioning. Trade credits with a maturity not exceeding one year are exempt, as are pre-financing credits with a term equal to or less than six months for specific export agreements. The rules also provide for an exemption for CESCE insurance operations, which is an added incentive for banks to have this guarantee in medium- and long-term transactions since, in addition to eliminating default risk, they do not then have to set aside country risk provisions. The prudential treatment of instruments supporting internationalisation and, specifically, of instruments linked to short-term trade transactions draws on two significant regulatory frameworks: Basel III, at the international level; and the Regulation (which is directly applicable in all Member States) and the Directive on prudential requirements and their attendant supervision, drafted within the European Union, namely Regulation (EU) No.
And the price of repo in sterling markets has increased approximately in line with its US counterpart, as measured by the increase in GC repo rates relative to 3-month OIS swaps that carry similar economic risks (Chart 3). Alongside this there has been a deterioration in perceptions of overall sterling secured market function over the past year or so, which participants note has coincided with pressure to reduce balance sheet size due to regulatory reporting requirements – in particular the leverage ratio (Chart 4). Some of this impact may be transitory: as dealers and others adjust to the new arrangements they may find ways to transact more efficiently while staying within the letter and spirit of the regulation. As the paper describes, opportunities for netting could be further increased were a greater proportion of repo transactions to be centrally cleared – around 10% of US Dollar repo transactions are currently cleared centrally, compared with 45% in Sterling, and 65% in Euro. 1 Dealers may improve the optimisation of their balance sheets across the whole group, better allocating leverage headroom in one part of the business to more leverageconstrained activity in other parts of the group. And over time new approaches to intermediation could emerge – some exchanges are exploring platforms to allow end users of the repo market (such as pension funds) to transact directly with one another. However, such innovations and adjustments will only ever provide a partial offset to the underlying changes.

The protection gap in Asia is set to widen for the following three reasons: a. First, the frequency and severity of natural catastrophes is increasing. According to UN data, the number of natural disasters in the Asia-Pacific has increased from an annual average of 44 disasters in the 1970s to 146 in the 2000s. b. Second, the wealth and value of assets at risk have also increased. Strong economic growth in Asia and growing urbanisation has led to the rise of small highly-populated megacities, many of which lie along areas that are exposed to natural perils. c. Third, insurance penetration is still low in Asia. Just over 8% 3 of natural catastrophe losses are insured in Asia as compared to 40% in developed regions. 9 ILS, together with other risk management solutions including reinsurance and government pools, have significant scope to play a larger role in reducing the financial impact of natural disasters. Globally, UK, Spain and France have already established natural catastrophe schemes that tap on a combination of traditional and alternative capital. 10 There are positive signs of change, with ASEAN making a push to address its rising exposures to natural catastrophe. Let me provide some examples of recent developments: a. ASEAN has commenced a holistic approach to disaster risk management through the ASEAN Disaster Risk Financing and Insurance (ADRFI) Programme. The Programme will strengthen ASEAN’s disaster risk management capabilities through: i. Improving data required for assessing disaster risk exposure and financing solutions. ii. Enhancing knowledge on disaster financing solutions through capacity building. iii.
The idea for building up the reserves was aired at the Central Bank’s annual meeting in March this year, so it should not come as a surprise. Given the scenario I have been describing, the Board of Governors seems to have ample justification for taking this pause to consider the position carefully and decide the next steps, not only with reference to the more positive assumptions that have now emerged since the July forecast, but also by examining the risks I have mentioned. If the current outlook holds and everyone stays alert and strong, inflation will be brought down over a relatively short period. The most important consideration is to achieve a satisfactory course for the exchange rate, whereby the current account deficit will primarily be reduced by increased exports, decreased imports of capital goods and a sufficiently tight stance to deter consumers from spending on other imports. The other and much less favourable way to adjust the current account would be through a sharp currency depreciation. Such action would have many uncomfortable side-effects which are well known. As yet, the former option is much more likely namely a soft landing.

A soft landing after one of the sharpest upswings ever would represent a success confirming beyond all doubt that the Icelandic economy is highly adaptable and can respond more quickly than larger and more cumbersome systems, and that the largest investment in the country’s history followed by restructuring of the banking sector and housing market has not proved too much of a challenge for economic policy. It would be going to far to call such an outcome a miracle, but it would certainly be satisfying. Because over this same short period, enormous assets have been built up in Iceland. The infrastructure of the economy, and know-how within it and in the main business sectors have all strengthened, and Iceland’s competitiveness and potential for expansion at home and abroad have improved enormously. The old cliché of Iceland’s undiversified economy which also happened to be a fact is a thing of the past.
The progressive lifting of these restrictions in Q2 allowed a gradual recovery in activity to ensue. Indeed, in Q3 as a whole, GDP is estimated to have risen by 16.7% on the previous quarter, according to INE’s flash QNA estimate released last Friday. Notably, in any event, this high quarter-on-quarter rate is largely a statistical consequence of the marked fall-off in output in the two previous quarters. Hence, and returning to the incomplete nature of the current recovery I referred to earlier, it is important to bear in mind that Spanish GDP in Q3 was still 8.7% down on the same period a year earlier and 9.1% below the end-2019 figure. Moreover, as I shall set out in detail later, the intensity of this recovery will have been adversely affected since early July by the fresh outbreaks of the virus in our country, which have prompted a fresh deterioration in the epidemiological situation. 3  GDP aside, the pandemic has also had a very significant negative impact on the labour market. Part of this impact has been through the decline in social security registrations, which at end-September were 2.3% below their level in the same period in 2019 (almost 440,000 fewer registrations) and 2.7% down on the end-2019 figure (532,000 fewer registrations). An even greater part of the negative impact of the pandemic on employment has taken the form of the recourse to furlough schemes (ERTEs by their Spanish abbreviation). Thus, at end-September, the employment of almost 730,000 workers had been fully or partly suspended.

This figure reflects both a most significant decline in revenue and a notable increase in expenditure, of which more than 70% is directly related to the pandemic. The latest data, which exclude local government budgetary developments, are along these same lines: they show a budget deficit to August of 7.8% of GDP in cumulative 12-month terms, 4.9 pp up on the end-2019 figure. Besides the highly significant impact the pandemic has exerted on the main aggregate indicators of activity, its influence, and that of the measures implemented to contain it, has been extraordinarily asymmetrical across sectors, firms and workers. For instance, some services sectors linked to the hospitality industry and to transport, where activity habitually requires relatively high levels of social interaction, have since the start of the pandemic shown much more marked declines than those seen in the other sectors (e.g. manufacturing) across a wide range of activity, confidence and employment indicators. The regional distribution of the declines in activity and employment has also been very uneven.1 The crisis has also had a very uneven impact among workers.
I am afraid that monetary policy cannot make the shocks to our national real income go away. But what monetary policy can – and must – do is to make sure that the inflation that has come to us from abroad does not become lasting inflation generated at home. Our most important tool to bring inflation down is Bank Rate. This is the interest paid on reserves held by commercial banks at the Bank of England. Because commercial banks are at the centre of a system of intricately linked financial markets, Bank Rate affects interest rates and yields more widely. And because those interest rates and yields determine the returns on savings and the cost of credit – including the rates people pay on their mortgages, and the rates businesses pay on loans to finance their investments – monetary policy exerts a powerful influence on spending by households and businesses. Monetary policy, in other words, works through the management of aggregate demand in the economy. Simply put, when inflation is too high, we increase Bank Rate to dampen demand; when inflation is too low, we reduce Bank Rate to boost demand. In reality, things are of course more complicated. For a start, monetary policy operates with a lag. It takes time for changes in Bank Rate to work through the financial system to loan and mortgages rates, and for those changes to affect consumption and investment decisions by households and businesses.

As you can see in blue in Chart 8, long-term sickness has driven much of the persistent rise in inactivity amongst 16 to 64 year olds since the start of the pandemic. That is a striking fact. As their number has increased, the inactive population appears more detached from the labour market. More of the inactive people now say that they would not like a job than before the pandemic, and fewer now expect to return to work. How should monetary policy respond to such a reduction in labour force participation? Bank of England  Page 13  The first thing to note is that this does not seem to be a case in which participation has fallen in response to weaker economic conditions and a weaker labour market. This is not a fall in participation driven by a shock to demand. So, we should not expect there to be a margin of spare capacity outside the workforce that exerts downward pressure on inflation in a way that would call for a lower level of interest rates to stimulate demand. Instead, the rise in economic inactivity is a change to the supply of labour, independent of demand, in particular by older workers. If those workers have accumulated enough savings to sustain a desired level of consumption much like the one they had before their early retirement, at least for a while, aggregate demand will not have fallen by as much as aggregate supply.
This has boosted consumption and private investments, reduced credit price, and eased debt servicing costs for all segments of the economy. Reflecting these actions, the Albanian economy has made notable progress towards steady and long-term growth. The progress has been characterised by gradual acceleration of the pace of growth, expansion of employment and decline in unemployment, as well as improvement of private sector balance sheets. In particular, the banking sector appears liquid, well capitalised, with good profitability indicators. Regulatory capital hovers around 18%, notably above the minimum requirement, whereas the ratio of non-performing loans has dropped to 11% against the 25% maximum level recorded in 2014. Dear ladies and gentlemen, 2/4  BIS central bankers' speeches  The ultimate objective of our work has been and remains promoting sustainable development for the country. The philosophy of our work is built on four main pillars: professionalism, responsibility, accountability, and transparency. This philosophy has been tested and enriched with some valuable lessons learned during the last decade: First, monetary, supervisory and regulatory authorities should adopt a proactive approach to the country’s monetary and financial stability. This requires adequate institutional capacities and adopting a counter-cyclical approach, both toward monetary policy and macroprudential policy. It also requires constantly identifying current and potential challenges in order to address them in due time. Second, long-term economic growth should be anchored in continuous structural reforms.

The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the fed funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve. The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. In the longer run, the Committee intends to hold no more securities than it will need to implement monetary policy efficiently and effectively, and that the SOMA will consist primarily of Treasury securities. Given the $ trillion in large-scale asset purchases (LSAPs) conducted since September 2012, the level of reserve balances in the system will be significantly higher during normalization than was envisioned when the 2011 principles were adopted. In light of this, as I just outlined, the FOMC has judged it appropriate to operate with a framework for interest rate control that is based primarily on administered rates rather than reserve draining tools. Given the unprecedented nature of this framework, the Committee has made clear that it is prepared to adjust the details of its approach in light of economic and financial developments. The FOMC has consistently adapted its policies as needed in recent years and will no doubt continue to do so as necessary throughout the normalization process in order to foster conditions consistent with its dual mandate.
There were examples of demands that the banks reduce their deposits, in spite of the provisions in EU directives on financial companies’ equal right to conduct business anywhere within the European Economic Area. In this case national interests outweighed pan- European commitments. As a result, it appeared as though the banks’ plans to meet their funding needs through retail deposits would be, at best, difficult to carry out. The Board of Governors of the Central Bank explained the foreign authorities’ attitudes towards this deposit accumulation to the leaders of the Icelandic banks and informed them that they would be faced with strong and swiftly mounting opposition. The Central Bank of Iceland was unequivocally of the opinion that the banks’ foreign deposits should be held in subsidiaries rather than branches and that Landsbanki’s deposit business in London should be transferred to a subsidiary of the bank. The preparation for this transfer began early in 2008, and the Central Bank was informed soon thereafter of what was needed to make the change and how long it would take. Judging from discussions with senior executives at Landsbanki, the Central Bank assumed that the process had begun that spring. In July, it was revealed that this was not the case. Although the Central Bank’s position on the matter was clear, it did not have the power to force changes or make demands. Moreover, other Icelandic authorities also had limited legal power in this respect under the legislation then in force which was and is based on EU Directives.

This renewed effort has both greatly deepened our understanding of economics and shaped our policy response. The crisis is now behind us. The recovery in the euro area is resilient and is increasingly broadbased across countries and sectors. Domestic demand, supported by the ECB’s monetary policy, is the mainstay of that recovery. Five million more people are employed now than were in 2013, and unemployment though still too high is at an eight-year low. Worldwide, the financial sector is now more resilient. The global economic outlook is also improving, and downside risks are moderating. However, what we need in Europe to ensure that economic growth and higher prosperity is sustained through time are structural reforms and a renewed sense of purpose for the EU. Started in the aftermath of the Second World War, European integration was the response to citizens’ desperate need for peace. The system of treaties between governments that had dominated European relations between the two wars and even before had utterly failed to deliver what governments are mainly for: security and prosperity. Pooling sovereignty on issues of direct common interest became the new basis for cooperation between the European nations. At the time such a project seemed bold and optimistic – just as calling for further, deeper integration seems bold and optimistic today. But our founders were right. Europe has delivered peace, prosperity and political stability for a period of time that has no precedents in its modern history.
Therefore, we discussed this topic already last year, but we have now progressed to the active phase of the efforts aimed at establishing the centralised information service Know Your Customer, or KYC, as we have got used to saying. This platform will make it possible to reduce the number of banks’ refusals and companies’ expenses for the communication with banks. Clients’ risks will be assessed not by banks, but by the platform developed by the Bank of Russia that will classify companies into three risk groups according to the traffic light principle. Banks will be able to focus only on the group having these risk signs and on the analysis of the operations of clients involving potentially higher risks. We are going to launch this platform into regular operation at the end of 2021 and then scale it up so as to embrace all credit institutions by the end of 2022 Q1. Of course, we believe that it will make life easier for SMEs. We have also discussed how to improve this platform together with you. The second issue is the Faster Payments System (FPS). Initially, we launched it to enable P2P transfers. We can see that it is highly requested. However, right from the beginning, we have built this system considering the needs of retailers and small businesses and comprehending that this system may help SMEs cut costs significantly. The FPS addresses the issue of high acquiring fees and considerably reduces costs for trade and service companies.

I will start by touching on the benefits and risks of a financial system, and how these can be balanced against each other. I will then go on to describe the global financial crisis and how it was met. Following this, I will discuss how the global financial crisis turned into a euro crisis, and the role the banks are playing in this crisis. In the final part of my speech, I will try to provide some answers as to how society can better avoid crises like this in the future. The economic balance between benefit and risks in the financial sector I have elsewhere described the banking system as a motorway junction for the economy. In the banks, and, more generally, in the financial system, households’ and companies’ income and expenditure meet like a flow of traffic coming from all directions. A robust structure is needed to make this interaction proceed smoothly. When a lot of traffic is moving at high speed, the structure must also have a clear focus on safety. The higher the speed limit, the greater the safety margins must be. Banks are important to the national economy The Riksbank defines financial stability as the maintenance of the financial system’s basic functions and its resilience to disruptions. 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.