samchain/econo-pairs-v1 huggingface dataset:
1 The argument blaming monetary policy for the current crisis claims that low interest rates combined with large current account surpluses in emerging economies, particularly Asian and oil-exporting countries, created an abundance of liquidity that triggered excessive increases in asset prices (that is, a bubble). This was particularly acute in the housing market. When the bubble burst, the crisis erupted. This argument contends that monetary policy failed to act in a timely fashion and allowed severe imbalances to accumulate. Nonetheless, soaring asset prices do not necessarily result in a crisis like this one. Moreover, the financial systems of most emerging markets proved to be resilient despite significant monetary loosening before the crisis. A financial crisis requires the combination of two factors: a surge in the value of a set of assets that will  1  For further discussion on this issue, see De Gregorio (2010). BIS Review 76/2010  1  eventually collapse, and vulnerability of the financial system to the collapse in these assets prices. In the recent crisis the key assets where houses and structured credit products. The key vulnerabilities arose from the exposure of highly leveraged institutions – many of which had a substantial maturity mismatch – to these assets. These factors combined led to a degree of vulnerability that neither markets nor regulators anticipated.

The reason was that a countercyclical policy implied a depreciation of the exchange rate, which was perceived as destabilizing. In effect, if liabilities are denominated in a foreign currency due to some ex-ante inflexibility in the exchange rate, and if the exchange rate pass-through is high due to poor credibility of monetary policy, a depreciation of the exchange rate increases inflation and reduces output. How vulnerable the economy is (in terms of a currency mismatches and exchange rate pass-through in this example) will make a big difference in terms of the policy response. In a similar vein, ex-ante financial stability is crucial to reduce the vulnerability of the economy to shocks. It will be also crucial in reducing financial fragility. Final remarks The world economy enjoyed a prolonged period of stability – with significant associated benefits – until the global financial crisis erupted. While it lasted, growth was high and stable, and inflation was low. However, this period of stability also encouraged financial markets to engage in an excessive search for yield without proper risk management. Such periods, where the job of monetary policy becomes easier, pose an important challenge to policymakers, regulators and the private sector to carefully monitor the build up of financial vulnerabilities. In emerging markets we have lived through periods of bonanza that have led to severe imbalances that eventually culminated in costly crises and economic adjustment. Now it was the turn of industrial countries.
The financial crisis has made the link between the Riksbank's two areas of activity – conducting monetary policy and safeguarding financial stability – very clear. The fact that financial stability is a necessary condition for monetary policy to function efficiently is fairly self-evident, but it is not perhaps something one thinks about as long as everything is functioning normally. But now that the financial markets are no longer functioning efficiently, this link becomes more important. As a result of the uncertainty and distrust prevailing between the banks and other financial institutions, the interest rates paid by the general public are higher than normal, seen in relation to the repo rate. Access to credit is also declining. The economic situation is therefore tightening more than the current level of the repo rate would normally allow. The crisis may also, if it is not counteracted, have significantly negative effects on inflation and growth. It affects the banks’ loan losses to some extent, which in turn has significance for financial stability. We need measures regarding both financial stability and monetary policy to resolve the confidence crisis causing a gridlock in the credit markets and to alleviate the effects of the financial crisis on the Swedish economy. The most recent measure taken was the interest rate cut of 1.75 percentage points to 2 per cent last week, when we also brought forward the meeting we would have held on 17 December.

For instance, in our Financial Stability Report we analyse the financial situation of the household sector and describe our assessment of the situation and potential risks with regard to house prices and indebtedness. The way that monetary policy should manage risks linked to credit booms and rapidly-rising house prices is a difficult problem that will continue to be debated among central banks and in academia. We do not have a perfect solution to this problem. But I nevertheless think that it is a good example of how the Riksbank really tries to find practically-applicable ways of managing difficult challenges. And these must be managed, sooner or later. ...and of course – the financial crisis I hardly need to say that the most dramatic thing that has happened during my period in office here is the global financial crisis. It is partly connected to the problems with house  BIS Review 155/2008  5  prices and indebtedness that I have just mentioned. The crisis is to a large degree a case of an imbalance – of excessive risks in lending and purely structural problems regarding supervision and insight. After just over a year the crisis entered its most intensive phase in mid-September, in connection with the US investment bank Lehman Brothers suffering acute problems. Since then the Swedish financial system has been increasingly affected. The Riksbank and other authorities have taken extensive measures to counteract the effects of the crisis. These measures are still a necessary condition for maintaining satisfactory stability in the Swedish financial system.
An important element of this proposal is that any financial institution that obtains federally-insured deposits or has access to refinancing from the Federal Reserve would be prohibited from owning, investing in or sponsoring hedge funds or private equity firms. Essentially, it aims to separate traditional banking activities from higher-risk, proprietary trading operations. It also proposes imposing limits on large financial institutions regarding their market share of liabilities, as a supplement to the existing caps on the market share of deposits. These proposals have still not been detailed in depth. Nonetheless, on the basis of what has been made public, I am of the view that the initiative is heading in the right direction and represents the first step to ensuring the financial system can effectively support the real economy and is not weakened by the most volatile market fluctuations. It is, however, not the final step. Above all, it should not be a substitute for two other lines of action, which, in my opinion, are essential for a complete reform of the system. The first is that the whole financial system should be subject to regulation, even if the specific regulations may vary according to the activities or institutions to which they apply. However, I do not want the separation between traditional banking activities and high-risk proprietary trading operations to drive the latter to be undertaken by sectors or institutions that are less vigilant or are outside the sphere of regulation.

Percentage change from previous year 8  8  7 6 5  7  GDP Mainland Norway Employment  6  Average 1990-2001 = 2.8%  5  4  4  3  3  2  2  1  1  0  0  -1  -1  -2  -2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001  Source: Statistics Norway SG 240802  Correlation with world index.
The 1970s and 1980s witnessed a succession of cost crises. The fundamental problem was that economic policy had been unable to prevent excessively fast rises in wages and prices from ending up time and again on a collision course with the commitment to maintain a fixed exchange rate. As a result, the krona was devalued five times altogether over the period 1976-82. When the fixed exchange rate was finally abandoned in November 1992, following extremely high interest rates and costly attempts to defend the krona, it was obvious that something fairly drastic had to be done to enable the Swedish economy to develop more favourably than during the previous twenty years. The solution was what could be called a shift in stabilisation policy regime, whereby the framework and rules for both monetary and fiscal policy were fundamentally changed. The shift in regime involved the introduction of a distinct division of roles in Swedish economic policy. The exchange rate remained variable and monetary policy was given the main task of trying to keep inflation at a low, stable level. Fiscal policy, which had often resulted in large deficits under the previous regime of a fixed exchange rate, would now instead be targeted at achieving long-term stability and sustainability in the public finances.

If not addressed, this pro-cyclicality could erode the solvency cushions that banks should be holding against the effects of economic downturns. Addressing this is one of the most important remaining challenges of Basel II and is particularly associated with the implementation of the more sophisticated approaches of the new capital framework. Despite reassuring noises from the Basel Committee, this is not going to be an easy problem to address. Few people, and definitely not banking supervisors, can foresee the peaks and troughs of economic cycles. But our inability to perfectly foretell the future should not be a pretext for inaction. An effective supervisory review process will be critical to create a counter-weight to the cyclical tendencies of the new capital framework, in order to prevent increased incidences of failures and financial instability. Managers of banks and bank directors have an even more important role to play. They have the primary responsibility for identifying and assessing various threats to solvency of their own bank, including the risks that are partially covered or not covered at all under Pillar 1 of the framework. They also need to be cognizant of the cyclicality arising from their quantitative tools and should have sufficient compensatory mechanisms against the cyclicality of regulatory capital requirements. These issues are referred to in Pillar 2 of Basel II. This is what we refer to as “Supervisory CAR”, to address risks not covered or not fully covered by the formulae in Pillar 1.
Furthermore, market dynamics may reinforce this process and those banks that adopt higher standards of risk management and capital and countries that embrace the new supervisory approach could be perceived by markets as less risky, resulting in lower risk premiums and better access to financial markets. BIS Review 8/2005  7  Given the advantages of Basel II, it may be that the timetable set by the markets for banks and countries to evolve to Basel II will perhaps be more demanding than the soft transition that the supervisory community and other institutions are proposing. From a different perspective, I think that what should be of concern to emerging markets is not just the level of capital flowing into a country, but also the volatility of the level of capital inflows. Abrupt changes in capital flows can be just as harmful as lower levels of flows. Volatility erodes confidence in the future supply of credit, rendering long-term planning meaningless. I believe that banks adopting especially the advanced approaches to credit risk will increasingly take longer-term views of their international investments, as stress testing and other requirements will ensure that they consider how their risks would react to certain changes in the market environment. More formalised and disciplined risk assessment processes may provide for early detection of deviations or mistakes, and that may facilitate making smoother corrections at an early stage, reducing the probability of sudden changes in investment decisions.

This, in turn, should benefit emerging market economies by improving the degree of confidence that they can have in the future level of capital inflows. This is very much related to the discussion about procyclicality, an important issue that we at the Committee have taken up and addressed seriously. In particular, some have suggested that the ratings-based approaches will drive up the cost of credit for borrowers precisely at times when its supply is falling, namely during downturns in the business cycle. This is a very complex point and deserves a whole lecture in itself. Given the time constraints today, I would like just to summarise my own views. Of course, I fully respect the different opinions that may exist on this issue, but in my opinion, there are some elements that make me think that the concerns over procyclicality are exaggerated. There is some degree of procyclicality inherent in banking behaviour. The question that we should consider is whether Basel II, or any regulation, will unduly exacerbate this behaviour. Furthermore, it is also important to consider the trend around which cycles will fluctuate. I think that under Basel II, in the context of a more efficient and sound financial system, fluctuations will occur around a superior trend. This superior trend represents a better relationship between the capacity of the economy to absorb risks and the ability of the banking system to provide credit. Furthermore, one cause of pro-cyclical behaviour is low capitalisation and weak risk management.
For countries where SME-credit evaluation skills are scarce, the centralisation of expertise using such an arrangement would be able to facilitate this as banks build their capacity. There have also been a wide range of innovative financial products and services to support this agenda. A highly successful programme in Malaysia has been the RM2 billion SME Assistance Guarantee Scheme which was established in February 2009 to ensure that viable SMEs adversely impacted by the economic slowdown would have continued access to financing. Under this scheme, SMEs are able to obtain financing with an 80% guarantee cover provided by the Credit Guarantee Corporation. The cost of the guarantee was borne by the Central Bank. This scheme has assisted about 10,000 SMEs from all sectors of the economy in sustaining their businesses and preserving employment. Venture capital and private equity funds are required to provide early stage financing for innovative SMEs. Due to the highly specialised focus of such funds, it is common for fund-offunds to be established as a pooling mechanism for the purpose of risk diversification. However, the success of these forms of financing depend very much on the enabling environment in terms of availability of talent as well as deep and relatively well developed equity market for early stage investors to “exit”. Finally, micro financing is important to provide access to funding for micro enterprises. There are now many highly innovative schemes to achieve outreach, including by mobile banking and agent banking. Critical to the success of such financing is pricing and accessibility.

Under section 24(1) read together with section 25 of the Central Bank of Malaysia Act 1958 (Part III of this Act is still in force), such defaced or stained currency notes are no longer legal tender and therefore should be rejected by members of the public. Bank Negara has issued a clear guideline on how financial institutions and the general public should treat and handle ink stained currency notes. Read together with the Panel Code (S411) it is an offence to dishonestly receive or retain any stolen property with knowledge or reasons to believe that it is a stolen. Therefore, it is an offence to retain or hold dye-stained currency notes which mostly are involved in a robbery. To help the public, in  2  BIS central bankers’ speeches  identifying stained banknotes, we shall conduct awareness program to educate the public on this matter. It is with great pleasure that I launch the My Ringgit apps and the use of the ink staining technology for our ATMS. See also: Frequently Asked Questions. BIS central bankers’ speeches  3
A comparison with European countries that fared poorly as a result of the financial crisis shows that Iceland’s exports have not grown more than those of euro area countries or those with fixed exchange rates. Actually, excluding seasonal effects, some of the fixed-rate countries have experienced greater export growth (Chart 2). 5. Actually, if exchange rate volatility is excessive and exporters are heavily leveraged in foreign currency, a large currency depreciation could conceivably have a negative impact on exports. Even though the depreciation has a positive effect on an exporter’s cash flow, the balance sheet effects could make the company technically insolvent. This complicates access to credit, which may be a prerequisite for the expansion of exports in a small economy with specialised export production. According to the above, my preliminary diagnosis is that the erosion of the value of the króna since its launch as an independent currency in 1920 can be traced to an inadequate monetary framework (particularly in the early years), general lack of discipline in economic policy-making, and the interaction of those problems with problems of running the world’s smallest independently floating currency. In order to maximise the chance of recovery, all of these underlying weaknesses must be treated simultaneously, including the instability of the  BIS central bankers’ speeches  3  currency, as some of the prescribed medications for long-term reduction of exchange rate volatility are difficult to administer unless exchange rate volatility is reduced first.

But it highlighted a number of deficiencies in the legal framework. It turned out to be a long process to finally have the institution closed, something which may have contributed to the failure coming at higher costs to the deposit insurance scheme than necessary. Other countries appear to have had similar experiences Taking a broader outlook, it is not uncommon that countries rely on some modification of the ordinary corporate insolvency procedure to deal with weak banks, and in some cases a different regime altogether. And many countries seem to be able to handle small problems within their ordinary framework. But when it comes to those exceptional circumstances where the payment system and the stability of the financial system are at risk, the common denominator between different crises seems to be that the authorities did not find it possible to rely on the normal rule. Instead there have been special provisions or special crisis legislation. A case which I followed closely was the Asian crisis in the late 1990s. Like in Sweden in the early 1990s, it was necessary to take specific measures to avoid a serious interruption of the financial system. And there are a number of emerging markets which have had similar experiences and have been confronted with the same dilemma of how to secure financial stability without overly eroding market discipline in the long run. 4  BIS Review 62/2008  But I think that until recently, most industrialised countries may have felt quite removed from this problem.
Three of the four major banks have carried out new issues since last autumn and Swedbank will soon conduct an additional new issue – all on the private market and without government guarantees. In many countries, where the banking systems have been affected by the current crisis to a greater extent, this has been impossible. In addition, all four major banks have strengthened their capital by reducing or cancelling dividends to shareholders for the previous year. It should be pointed out, however, that the danger has not yet passed. If the situation deteriorates more than expected, credit ratings may come under pressure and the banks may experience funding difficulties once again. The Riksbank's measures safeguard financial stability Since the financial crisis broke out, the Riksbank has entered into swap agreements with two of the Baltic states. We have made it possible for the Estonian central bank to swap Estonian kronor for Swedish kronor should the need arise, and for the Latvian central bank to borrow euros direct from the Riksbank. The aim of these agreements is to make it easier for the central banks in Estonia and Latvia to safeguard financial stability in the respective countries. Entering into these swap agreements also serves to safeguard financial stability in Sweden. In order to secure the supply of liquidity, the Riksbank has also lent kronor and dollars to the Swedish banks when they have not been able to acquire funding on the market.

I have a background in resolving banks, and I regard having the capacity to resolve failed large banks – including the largest – as the Holy Grail of resolution. Unlike the legendary Holy Grail, I think there is a good reason to believe that the objective of being able to resolve large banks that fail can be within our grasp. But the challenge of resolving PRA-regulated firms goes beyond banks. Insurers raise exactly the same issue of continuity of provision of critical financial services. Moreover, in a line of business such as with-profits life, the business model involves pooling many vintages of long-term contracts in a single fund for the benefit of policyholders. A typical resolution involves run-off over a long period, which remains a sensible approach. But the public policy interest is reasonably directed towards ensuring a process of resolution, which is fair to those various vintages and more broadly which allows more rapid payout to policyholders, since the current arrangements can involve long delays and pressure for policyholders to accept lower payouts in return for greater speed. This is a different, but nonetheless important, public policy interest in orderly resolution. I am very clear that when firms mess up, they should be allowed to fail, and by doing so they are putting at risk the money of their shareholders and if necessary after that, those who provide debt funding according to levels of seniority.