samchain/econo-pairs-v1 huggingface dataset:
William C Dudley: Fixing wholesale funding to build a more stable financial system Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York and Chairman of the Committee on the Global Financial System (CGFS), at the New York Bankers Association’s 2013 Annual Meeting and Economic Forum, New York City, 1 February 2013. *  *  *  As prepared for delivery. Thank you for having me here to speak today. As you all know from daily experience, the financial system plays an essential role in modern economies. Because financial intermediation is critical to economic activity, disruption to it can cause severe damage to the economy. The experience of recent years revealed serious flaws in the system. Risk was mispriced and there was a build-up of excesses before the crisis. Structural weaknesses in the financial system then amplified the effect of the bursting of the bubble in U.S. house prices, and the result was a widespread financial crisis. One critical factor was the extensive use of short-term wholesale funding in the years leading up to the crisis. Not only did this aspect of our financial system create the potential for a firm to fail in an extraordinarily rapid manner when faced with a loss of market confidence, but it also served as a channel through which the effects of those failures were widely propagated throughout the broader financial system.

The securities in asset-backed commercial paper (ABCP) conduits serve as collateral for the issuance of asset-backed commercial paper, while repo conduits fund in the repo market. Most conduits are so-called single-seller conduits that only serve individual banks or finance companies. Multi-seller conduits provide funding for asset pools of multiple institutions. Conduits are backed by credit lines from commercial banks, which allow the conduits to have a credit rating. Asset-backed commercial paper conduits are also defined in “Shadow Banking: A Review of the Literature”. Federal Reserve Bank of New York Staff Reports, no. 580, (October) 2011. www.newyorkfed.org/research/staff_reports/sr580.pdf. 2  BIS central bankers’ speeches  Because the boom years resulted in strong earnings, low price volatility and few credit losses, firms were able to operate at extreme levels of leverage. When the housing bubble started to deflate, the vulnerabilities of this type of business model soon became apparent. Heavy reliance on short-term wholesale funding exposed the system to a series of intertwined downward spirals in asset and funding markets. This spread in waves, beginning in the market for asset-backed commercial paper (ABCP) issued by off-balance-sheet conduits, and spreading via auction-rate securities, to the repo, money market and financial commercial paper markets that formed the core financing for market-based financial intermediation. Initial declines in asset prices forced leveraged holders with maturity mismatches to sell assets. This increased price volatility and reduced the value of the assets that collateralized other firms’ borrowings.
However, the resolution of the crisis demonstrated the ability of the monetary and prudential authorities to undertake effective, coordinated and pre-emptive action which prevented it from turning into a full-blown financial crisis. •  The increase of bond markets, shorter durations for interbank financing and the growth of derivatives [such as structured bonds with index-linked yields] challenge the involvement of the private sector in the resolution of international financial crises. •  The process toward larger and more complex financial institutions calls for particular attention from the supervisory authorities. The institutions born of mergers should not incur excessive risks because they feel that they would be “too big to fail”. More generally, we have to be aware of some potential dangers of this race for size. It may lead to oligopolies. An oligopoly is not a desirable situation for at least two reasons: first, it could distort the allocation of capital, and second, it could increase the instability of financial systems. However, the risk of an oligopoly may be mitigated by the presence of new entrants in the financial sector, which reflects the fact that the market remains contestable. •  The implementation of traditional prudential regulations is complicated by the growing importance of non-regulated participants, such as highly-leveraged institutions which have close links with regulated institutions, and the spread of innovative distribution channels, mainly in the field of remote financial services.

This growth, in my view, is underpinned by a much improved and more diversified financial sector, as well as by a strong presence of international financial firms competing to provide services in the region. And the fourth is the deepening process of regional financial integration, defined as cross-border trade and investment flows within the region. But, many have noted that the progress, while well and good, seems to lag behind that of trade integration. On account of these developments and achievements, two questions are often raised. The first is how the development of the region’s financial markets should move forward so that it can best leverage on the region’s economic interest and potentials, as well as to ensure that the region will benefit fully from its own financial strength and resources. And the second is that, as the region becomes more integrated financially with the rest of the world, in what way can we ensure that the risk that comes with increased integration is adequately managed, and that the region’s financial interest is well protected. These two questions, in my view, are the central themes or the points of focus around which the issues of financial markets and development in East Asia are now being discussed in all circles. And  BIS Review 66/2006  1  from these discussions, a number of important observations have been made that point the ways to the next possible areas of focus in our efforts to further develop the markets. Let me share with you some of these observations.
And the domestic financial markets in the Mainland are big enough to attract many of the leading names in finance to establish a presence, without having to resort to offering business opportunities in international financial intermediation through premature capital account liberalisation. The strategy of financial sector development, as in the case of the overall development strategy of the Mainland of China, is, to the extent that I can observe, one characterised by gradualism, as against “big bang”. There is strong emphasis on achieving a balance among reform, development and stability, which also encompasses the theory of path dependency propounded by Douglas North, the Nobel Laureate in 1993. This was more vividly articulated by the late Deng Xiaoping, I am sure independently without consulting Douglas North, as “crossing the river by feeling the stones”. More recently, Governor Zhou of the People’s Bank of China has encapsulated these theories - gradualism and path dependency - in an interesting, academic exposition, in one of our HKMA lectures in Hong Kong, as the concept of ensuring “Pareto Improvement” in achieving “Pareto Optimality”. This concept is best described through an analogy of a hiker choosing a path (involving Pareto Improvement) to the top of the mountain (the point of Pareto Optimality). The shortest way is of course to go in a straight line. But in a three dimensional world this assumes that one can fly, if the slope of the mountain is concave, or move through earth, if the slope of the mountain is convex.

But exchange rate and other supporting policies that promote the accumulation of foreign reserves, intentional or otherwise, are questionable in terms of their sustainability, just as we all question the sustainability of the current global imbalance, or rather, the sustainability of the US external imbalance. They are, arguably, the two sides of the same problem. From whichever side you are looking at it, a problem that is considered unsustainable will, of course, be corrected, sooner or later, and the questions we all would like to have answers to are how, and how violent or benign the inevitable market adjustment might be. I am afraid I do not have answers to these questions. But I just would like to point out, in this connection, that the style of management of foreign reserves, when the exchange rate of the domestic currency is flexible, is likely to be more proactive than is otherwise the case, in terms of for example currency allocation. Managers of foreign reserves are ultimately held accountable to the people they serve, and the amounts, as I pointed out at the beginning of this survey on Asian finance, are getting to be very large indeed. They are, possibly, large enough to make a difference to the dynamics of the global markets for foreign exchange and for major classes of financial instruments, and enough to make a lot of people with the relevant responsibilities feel uneasy.
8  Malmandier and Nagel (2011): “Depression Babies: do macroeconomic experiences affect risk taking?”, Quarterly Journal of Economics. 9  See Bernanke, B (1983), “Irreversibility, uncertainty and cyclical investment”, Quarterly Journal of Economics, 98(1). 10  Bloom (2009) shows how economic uncertainty reduces the shrinkage of low productivity firms and the expansion of high productivity firms, reducing the reallocation of resources towards more productive units. Leduc and Liu (2012), emphasise the aggregate demand effects empirically for the US. Leduc and Liu (2012), “Uncertainty shocks are aggregate demand shocks”, Federal Reserve Bank of San Francisco Staff Paper 2012–10. 11  Together with the aggregate effects, higher stock market volatility generates greater dispersion in firms’ profit growth and industries’ productivity growth. Bloom, N (2009), “The impact of uncertainty shocks”, Econometrica, 77(3), May. 12  Bloom, N, Bond, S and Van Reenen, J (2007), “Uncertainty and investment dynamics”, Review of Economic Studies, 74.

The charge that central banks are out of monetary ammunition is wrong, but the widespread absence of global price pressures demands that our firepower be well aimed. Indices of policy uncertainty are about 1¼ times their pre-crisis averages in the US and Japan, and as high as three times in China. In the UK, progress since the financial crisis has been more than totally unwound this year with the measure having risen to five times its precrisis average by the start of the official referendum campaign (Chart 3). 5  A closely watched measure of economic uncertainty – the VIX – spiked when the global financial crisis hit. Measures that combine this with other sources of economic uncertainty, such as dispersion among forecasters’ growth projections, households’ unemployment expectations, and currency volatility, show clear variation over time, and rise at times of economic stress. See Haddow, A, Hare, C, Hooley, J and Shakir, T (2013) “Macroeconomic uncertainty: what is it, how can we measure it and why does it matter?”, Bank of England Quarterly Bulletin, Q2. 6  One way some of this has been measured is again to count occurrences in media articles of references to economics, uncertainty, and policy terms like “deficit”, “regulation” or terms relating to monetary policy. See: Baker, S, Bloom, N and Davis, S (2015), “Measuring economic policy uncertainty”, NBER Working Paper No. 21633, October. BIS central bankers’ speeches  3  While clearly these three uncertainty measures are related, distinct movements are visible.
Indeed, an even stronger version of this argument is that the very success of the regime contributed to the decline in market participants’ perception of risk and encouraged them in the leveraged acquisition of risky assets. According to this view, the MPC ought to put independent weight on credit and asset price developments and should have kept policy tighter during the years leading up to the crisis. That would have generated an undershoot of the inflation target in the near term but reduced the likelihood of a disruptive unwinding of the financial imbalances further out. The first point to make is that interest rates affect the whole economy through a variety of channels. Raising Bank Rate in order to curb a credit boom would be fine if that credit boom was also associated with excessive demand growth and overheating in the real economy. But that, by and large, was not the case during the years leading up to the financial crisis. Raising interest rates enough to have had a material impact on the credit boom would most likely have resulted in an even higher value of sterling, markedly weaker activity and higher unemployment. Would businessmen, households and Parliament have accepted this as a price worth paying to bring down credit growth with the hope of forestalling a hypothetical future financial crisis? I suspect the answer to this would be No, even though equipped with 20/20 hindsight we might take a different view.

With output some 10% lower than it would have been if pre-crisis growth rates had been maintained, it would appear that the margin of spare capacity ought to be large. But the evidence from past sharp downturns after banking crises is that they can have a significant impact on the economy’s supply potential (Chart 8). Downturns typically lead to less investment, more capital scrapping, fewer business start-ups and more business closures and a restriction in the availability of credit is likely to aggravate these effects. Moreover, lower employment can lead to skills atrophying and the long-term unemployed becoming disconnected from the labour market. Business investment has fallen sharply in this recession – down more than a quarter from its peak – though only part of that is likely to reflect a restriction in the availability of credit. Heightened uncertainty is also likely to have played a part. But against that, both business closures and, as noted earlier, unemployment have risen less than feared. So the overall impact of the downturn on the present and future supply potential of the economy is rather uncertain. In addition, in present circumstances the extent of the downward pressure on inflation from spare capacity is also uncertain. Once one allows for the effect of transient factors such as the restoration of the VAT rate, oil price movements and the likely impact of sterling’s depreciation, underlying inflation has been surprisingly resilient. That could be because the impairment of effective supply as a result of the credit crunch is large.
For instance, it is very pleasing that the evaluation gives such high marks to the efforts we have made to improve the analytical base for our forecasts and for monetary policy. Our ambition has been to use the latest and best scientific methods in our analyses and we have therefore continuously updated our working methods. It is therefore particularly satisfactory that the authors observe in their conclusion that "the Riksbank compares favourably with the best central banks in the world". However, we must not rest on our laurels. Conducting monetary policy is associated with great uncertainty, not least because developments in the economy often follow different paths than anticipated. We must therefore always take heed of constructive criticism, continue to hone our analyses and test new approaches with an open mind. However, after this evaluation I feel fortified in my opinion that we are on the right track. Recommendations in the evaluation As I do not have much time at my disposal, I shall concentrate my comments on the recommendations in the report as to how monetary policy and its framework could be improved. Three of the recommendations are aimed at the Riksdag and the Government and concern the forms for the monetary policy debate and the appointment of the members of the Executive Board. As these recommendations are not directed at the Riksbank, I will refrain from commenting on them. With regard to the recommendations aimed at the Riksbank, I shall first comment on some suggestions on which I agree with the authors.

Moreover, the output gap forecast, which was revised upwards owing to the better-than-expected growth outlook for 2013 compared to the figures presented in the July Inflation Report, added 0.1 percentage points to the year-end inflation forecast. Developments in the exchange rate and oil prices were also influential on the revision in the inflation forecast for 2014. When evaluated together with output gap forecasts, we expect these cost-side factors to push the inflation rate in 2014 up by 0.3 percentage points. 4  BIS central bankers’ speeches  Although inflation is estimated to fluctuate in the short term due to the base effect on energy prices, we expect it to remain on a downward track. As the effects of the hike in tobacco prices in January 2013 on annual inflation taper off, we expect inflation to plunge in early 2014, and come down to levels consistent with the target by the last quarter of 2014. In addition to these forecasts, alternative scenarios on the inflation outlook and the global economy are discussed in the Risks section of the Inflation Report. You can examine the Report for details. While concluding my remarks, I would like to thank all my colleagues who contributed to the Report, primarily those at the Research and Monetary Policy Department as well as the members of the Monetary Policy Committee, and thank every one of you for your participation. Chart 1  Chart 2. Global Risk Appetite  Portfolio Flows to Emerging Economies (12-Week Moving Average, Billion USD)  Source: Bloomberg, Credit Suisse.
Anita Angelovska-Bezoska: Financial regulation, implementation and transition effects on emerging market economies Speech by Ms Anita Angelovska-Bezoska, Vice-Governor of the National Bank of the Republic of Macedonia, at the Fourth OMFIF Main Meeting in Europe, Ankara, 5–6 September 2013. *  *  *  Special thanks for the preparation of the background note to Ana Mitreska, Monetary Policy and Research Department and Natasa Andreeva, Financial Stability and Banking Regulation Department. Mihajlo Vaskov and Ljupka Georgievska also contributed to the drafting of the Note. Background note prepared for the participation of the Vice Governor Anita Angelovska Bezoska at the Fourth OMFIF Main Meeting in Europe, Ankara, Turkey, 5–6 September 2013. Since the onset of the global financial crisis the financial regulatory overhaul has been put high on the policy agenda with the aim of increasing the resilience of the banking system and thus promoting global financial stability. Stronger banking system will be better placed to absorb financial or economic shocks and prevent transmission of these shocks to real economy. The regulatory reform basically addresses the lessons learned from the crisis that insufficient capital and liquidity buffers, non-adequate on and off-balance sheet risk coverage and excessive leverage can undermine the stability of the financial system leading to contraction of the economic activity that can further aggravate the financial instability and require public sector intervention to avoid full-blown banking crisis. In this vein the reform will undoubtedly contribute to creating more sound and resilient banking system that is a key for sustainable growth.

And the recovery of the euro – including its recovery against sterling – will help to ease the severe imbalance within our own economy between the domestically-orientated sectors which have typically been doing relatively well and those businesses and sectors that are most exposed to competition from the Eurozone and which have been having a rough time. That imbalance is, I know, a real concern up here north of the border, and it has more generally for some time been one of the most difficult issues confronting us in conducting monetary policy. But there are, of course, also major domestic uncertainties. What – as I have often explained before – we are seeking to do through monetary policy – in order to achieve the Government’s inflation target – is to keep overall nominal demand growth more or less continuously in line with the supply-side capacity of the economy to meet that demand. That is a necessary condition for maintaining our steady economic progress. But we cannot directly observe supply-side capacity in either product or labour markets, nor therefore anticipate just how it will develop, with any great precision, nor do we know precisely what is currently happening or is likely to happen to the rate of growth of aggregate demand in the economy anyway. Our forecasts and policy judgements are based upon very careful scrutiny of all the latest data available to us, informed by the best technical analysis we can muster.
Here again, the argument does not hold up in the face of the facts since the financial crisis unfolded in an environment of low interest rates and contained inflationary pressures in spite of soaring property and commodity prices, in short, in a context where price stability seemed well secured. The same was true for the previous bubble that formed on stock markets. A low  BIS Review 78/2008  1  interest rate environment, which often makes agents less vigilant about risk or makes them less able to gauge it, combined with very strong central bank credibility, is in no way a guarantee of financial stability. This is one of the manifestations of what some economists have termed the paradox of credibility. -  The third argument relates to the extraordinary transformation that our financial systems have undergone over the past few years, with a growing, if not predominant, role for market financing at the expense of bank intermediation. Yet the operational framework of central banks, by means of which they perform their role of lender of last resort, is mainly focused on banks, and retail banks in particular. Here again, the facts prove the opposite. The crisis has shown that banks remain at the heart of the financial system and that, as a consequence, the operational framework of central banks remains entirely effective. In addition, this framework makes it possible to reach other market participants, such as brokerdealers and investment banks. 2)  What have central banks done since the start of the financial turmoil?

As regards the central banks’ response to the crisis, although they converged in their shortterm liquidity management methods, they nonetheless responded differently in terms of monetary policy. The underlying reasons for this divergence are both due to the nature of the shocks that the economies are facing and the mechanisms of their propagation to the real economy and to nominal variables. Over the recent period, the industrialised economies have undergone three common shocks: rocketing real-estate prices at least in a number of countries, soaring commodity prices and finally the financial crisis triggered last summer. They have also experienced specific shocks: the real-estate crisis in the United States in a context of household overindebtedness, for example. In the latter case, the economic slowdown already underway since mid-2006 and the expected consequences of the credit crisis on economic activity over the medium term has led the US monetary authorities to change their monetary policy stance. The very different situation in the euro area, where activity remained favourable, has led the ECB to keep its monetary policy stance unchanged in spite of the uncertainties generated by the financial crisis in a context also characterised by persistent inflationary tensions. 5)  What lessons can we learn for the future? At the current juncture, financial turmoil is still affecting the markets.