samchain/econo-pairs-v1 huggingface dataset:
‘Resolution’ does not mean ‘resurrection’ of a fallen bank. Rather, it means stabilising the bank so that, over time as far as is necessary, it can be either split up, restructured or parts of it put into insolvency in an orderly way. These new responsibilities and powers, crucially, do not only cover what happens when a bank can no longer carry on operating; they also cover how a bank organises and finances itself when it is operating normally. A key lesson of the crisis is that the structure and financing of a bank when it is operating normally can make it impossible to deal with its failure in an orderly way. If banks are not structured and financed in a way that supports orderly resolution before they run into trouble, the authorities’ options can be very constrained when the bank fails. (iii) Bank structures This brings me to the third plank of ending too big to fail. Banks before the crisis were not organised to be resolvable. The third plank is to ensure that banks are structured in a way that supports resolution and that barriers to resolvability are removed. This can be a daunting challenge – the average number of separate legal entities at G-SIBs is around 1,000 and in some cases is much higher.9 This may seem a rather gruesome business. It is not usual for a firm to spend a huge amount of time planning for its demise. It is certainly an onerous business for all concerned.

For instance, Norwegians could only purchase foreign equities through a fixed pool established in the 1960s (by using the so-called “security dollar” market), and foreigners’ investments in Norwegian equities were strictly regulated and actually limited to NOK 50 000 per person until 1979. That ceiling was raised to NOK 1 million in 1979. Experiences over the past year may cast doubt on the effectiveness and benefits of international capital markets. Nevertheless, history has seen a number of deep financial crises, and it is my belief that market conditions will also return to normal this time. I am confident that private entrepreneurship and public limited companies will continue to exist as the primary organisational bodies for commercial activities. Owners and investors will also be needed in the years to come. But capitalism will have to adapt. After all, the willingness to trust the free play of market forces in finance has been seriously impaired. International stock exchanges lost more of their value in 2008 than in any other single year in recent history. Absolute results, especially with regard to equities, were highly unusual. Many investors have suffered losses. As a result of this experience, required returns will be higher in the future. An investor such as the Government Pension Fund – Global will earn more in the long term because of wide fluctuations in equity values. 1  2  National Transport Plan 2010–2019 (St.meld.nr.16 (2008-2009). BIS Review 68/2009  The Fund has a longer investment horizon than the vast majority of other market participants.
A robust and stable financial system, that we have managed to ensure so far, is a necessary, but not sufficient condition for achieving sustainable growth. Financial system efficiency needs to be upgraded, so that it serves to lift economic efficiency, not least by harnessing the hitherto untapped strength of the grass-root economies, where the emerging organic social-economic network has increasingly highlighted the potential contribution to growth and welfare improvement. For the banking system, the strategy to harness this potential is set out in the Financial Sector Master Plan Phase 2, which is a continuation from Phase 1. BIS Review 20/2010  1  Ladies and gentlemen, The challenges I have raised, together, pose a tall order. So in today’s talk, let me set out our strategy and policy priority in three parts. First, the SWOT analysis of the banking system and the challenges we face; Second, the key strategies in the Financial Sector Master Plan Phase 2; and Third, the key measures in risk-based supervision to ensure stability. First, the strength of our banking system is evident in its continuous solid performance. During the toughest times, our banks remained strong and resilient against the backdrop of economic slowdown. Loan decelerated, partly due to contraction in corporate portfolio and deceleration in household portfolio, as a result of more cautious business undertaking and household spending, and partly due to tightened loan underwriting standard. The good news is the figures are already starting to pick up again.

So far, I have mainly spoken about domestic payments, but innovation is also transforming payment systems across borders and currencies. For example, the SW IFT Global Payment Initiative has contributed to faster and more transparent cross-border payments. However, a large proportion of cross-border payments do not go through SW IFT. Cross-border payments are generally expensive, slow and opaque. The services offered are not of the same standard as for domestic payments. The challenges have long been highlighted by international organisations, but implementing changes has proved demanding. The G20 and the Financial Stability Board (FSB) are behind a new and forceful initiative. The FSB has identified measures and recently published a roadmap for their implementation. I hope that this can be a breakthrough in the work to improve crossborder payments. Furthermore, I would like to mention that the Bank for International Settlements (BIS) is in the process of establishing BIS Innovation Hub Centres in many parts of the world. Their primary purpose is to promote insight into financial technology that can strengthen the financial system. One such hub centre is being established in Stockholm, with the central banks of Sweden and Denmark, Sveriges Riksbank and Danmarks Nationalbank, the Central Bank of Iceland and Norges Bank as participating banks, in addition to the BIS. New technology provides new opportunities for innovation, but also presents new risks that must be addressed. Vulnerability to technology-enabled disruption is increasing – whether the disruption is the result of malicious attacks or other factors.
Similarly, the insurance and risk management markets will have to be developed further to meet corporate and individual needs. There is already a momentum, with capital markets in China, India and ASEAN economies developing well. In bigger economies, micro-finance, mobile finance and rural finance are also being developed. Cross-border financial activities within Asia are also showing signs of increase. These are positive changes, as the development of a deep and integrated financial system provides a vital support for structural adjustments in the region. Economic and financial linkages between France and Singapore Let me now say a few words on how Singapore is responding to these challenges, and how the French business and financial community can collaborate with those in Singapore to promote growth in Asia. The Singapore government has set up an Economic Strategies Committee to identify policy changes to strengthen Singapore’s value as a vibrant global economic node in the heart of Asia. Singapore’s connectivity enables it to facilitate the flow of goods, services, capital and ideas. The value of Singapore as a stable, trusted hub that respects the rule of law, and its value as a consistent regulatory regime are our core strengths. But these will need to be enhanced with new capabilities in knowledge creation and innovation, as well as the development of deeper talent pool, in order for the business community to seize new opportunities. The connectivity and ease of doing business is well acknowledged by global businesses. Today, over 26,000 international companies use Singapore as a base for their operations.

The impact of a financial crisis emanating from the largest economy in the world that also serves as the world’s economic locomotive and provides the global reserve currency is likely to be pervasive and longer-lasting. There are no easy precedents, and we have to remain alert to new surprises. Moreover, the key pillars of economic theories that underpin much of our policy thinking are now being vigorously questioned. We need much more thinking and empirical work on how economies and people behave to draw out the critical lessons from this crisis. But based on what we know, we need to undertake policy changes to build a more stable, sustainable and resilient global economic and financial system. Much of this has to be globally coordinated, given the extensive linkages among economies and the financial system. In Asia, we face many policy challenges, and I will touch on three of these: managing the recovery, economic restructuring, and the regulation and development of the financial services sector. My main theme is that we must be cognizant that many Asian economies enter this crisis with different starting conditions, and going forward, face different challenges from those in advanced economies. Understanding these differences, and avoiding a onesize-fits-all approach, will be critical to the design of policies appropriate to each country and region. Managing the economic recovery First, the economy. The financial crisis hit Asia with unexpected speed and force.
The poor credit performance, particularly as regards lending in foreign currency and credit to businesses was translated into an annual shrinkage of 2% in the loan portfolio in February. Looking ahead, our baseline projections suggest that, after a weak performance in 2013, the trajectory of the Albanian economy will be upward in the medium-term horizon. Economic growth is expected to be more balanced during 2014, driven by both the domestic and external demand. The improvement of confidence climate will enable the real sector to benefit from the monetary stimulus, hence stimulating consumption and investments at home. Also, sustainable recovery of the world economy will sustain Albanian exports, particularly during the second half of the year. Economic growth will be supported by maintaining the current stimulating direction of economic policies, and will benefit from continuing structural reforms. This trajectory will bring the Albanian economy close to its potential and will establish the conditions for complying with the inflation target in the medium term. In the short term, the cyclical weakness of aggregate demand is expected to keep the economy below its potential and will be accompanied with weak inflationary pressures. With 90% probability of occurrence, four quarters ahead, inflation is expected to range between 0.5% – 3.9%. At the end of discussions, the Supervisory Council decided to keep the key interest rate unchanged, at 2.75%.

In the long term, increase in competitiveness of the Albanian economy, diversification of growth sources, and integration in the regional and global markets will be prerequisites for sustainable economic growth. The Bank of Albania, therefore, supports pressing ahead with priority structural reforms in the export and import-competing sectors. Fiscal behaviour in the first quarter was characterised by shrinking budget deficit and public spending. During this period, budget deficit decreased by about 57%, in annual terms, reflecting an increase of about 8.2% in budget revenues and a shrinking of about 2.4% in public spending. Albeit showing a higher intensity than our expectations, it is in line with the corrective fiscal policy to be pursued during 2014. Fiscal consolidation is expected to be more rapid on the revenue side, supported by a new fiscal package and a commitment for reducing fiscal evasion. Meanwhile, the clearance of arrears to businesses is expected to improve their financial situation and support economic activity in Albania. Consistent with our previous messages, we support the corrective direction of fiscal policy, and consider this correction as an indispensable step toward improving macroeconomic balances in Albania. The implementation of a corrective fiscal policy has provided more room and opportunities for implementing a stimulating monetary policy to sustain aggregate demand and maintain our inflation target. The Bank of Albania has confidently moved in this direction.
Bank of England (2008), The Development of the Bank of England’s Market Operations: a Consultative Paper by the Bank of England, available at http://www.bankofengland.co.uk/markets/money/publications/condococt08.pdf. Barro, R. J. (1979), “On the Determination of the Public Debt”, Journal of Political Economy Vol 87(5), University of Chicago Press. Beale, N., Rand, D., Arinaminpathy, N. and May, R. M (2009), Conflicts between Individual and Systemic Risk in Banking and other Systems, forthcoming. 23  Kashyap and Stein (2008), NYU Stern School of Business (2008). 24  Tucker (2009). BIS Review 139/2009  11  Berger, A., Herring, R., and Szegö, G. (1995), The Role of Capital in Financial Institutions, Journal of Banking and Finance 19. Capie, F., and Billings, M. (2004), Evidence on competition in English commercial banking, 1920-1970, Financial History Review, Vol.11. Caprio, G. Jr. and Honohan, P. (2008), “Banking Crises”, CDE Working Paper Series. Committee on the Global Financial System (2008), “Central Bank Operations in Response to the Financial Turmoil”, CGFS Papers No. 31. Demirguc-Kunt, A., Kane, E., and Laeven, L (2008), Deposit Insurance around the World: Issues of Design and Implementation, MIT Press. Dudley, W. C (2009), “Some Lessons from the Crisis”, Remarks at the Institute of International Bankers Membership Luncheon, New York City. FSA (2009), “Strengthening Liquidity Standards – Including Feedback on CP08/22, CP09/13, CP09/14”, Policy Statement 09/16, available at http://www.fsa.gov.uk/pubs/policy/ps09_16.pdf Grossman R. S (2001), “Double Liability and Bank Risk Taking”, Journal of Money, Credit and Banking Vol. 33 No. 2.

If a robust financial and regulatory system is one which is parsimonious and transparent, the answer might be that they are not. It may be time to take Occam’s razor to regulatory rulebooks. •  Rethinking capital structure: Asymmetry of payoffs risks excessive risk-taking. The source of this asymmetry is limited liability. It is revealing that limited liability was first introduced into banking in the UK in the mid-19th century. That was roughly the time state support for banks took shape. This is unlikely to have been serendipity. So could the distortions from limited liability be tackled at source? In the early days of banking, liability was not just unlimited; it was often as much personal as financial. In 1360, a Barcelona banker was executed in front of his failed bank, presumably as a way of discouraging generations of future bankers from excessive risk-taking. 16 It has not been conspicuously successful. From the Middle Ages, debtor prisons replaced the gallows. They were a common feature of many developed countries, including the US and UK, right up until the 19th century. The switch to limited liability at that time was a conscious attempt to encourage risk capital into the banking system to help finance growth. In essence, this meant trading off financial risk against future productivity. At first, equity in banks often carried “double liability”, with shareholders liable for losses on the purchase price of their shares plus their par value at issuance.
Far too many instruments that were held in the trading book were subject to low capital requirements but actually could not be traded, leaving values exposed to big swings in liquidity premia. This was a fatal design flaw in the existing regime, and it is one which I hope should be fixed over the next year or so though the Basel Committee’s “fundamental review of the trading book”. 4. Too big to fail  At the centre of the reform effort in the FSB work is “Too Big To Fail.” If one of the largest firms in the world got into trouble right now, in almost every country in the world we would not be able to cope with its demise other than through fiscal support. This is completely unacceptable. If there is one thing that I think unites the members of the G20 – at the political level and at the official level – it is that this will be consigned to the past. We will re-introduce market discipline back into the financial system, which really means re-introducing capitalism back  2  BIS Review 148/2010  into the heart of capitalism. The acid test has to be whether, for every financial institution in the world, it could be resolved if it faces distress in a way that does not disrupt the flow of essential financial services to the economy and without state solvency support. That is the single goal in this area.

Retail sales in November and December posted a slight decline compared with the corresponding period of 1995. Activity in the construction sector fell back in the fourth quarter and posted a sharp twelve-month drop. Employment levels varied little in industry, with the exception of the automobile sector, where they posted a further substantial decline. They remained stable in the market services and retail sectors, but fell sharply in the building industry. BIS Review 4/1997
It seems to me  8  BIS Review 133/2010  the natural way to do that is to make sure they can withstand falls in asset values by having sufficient loss-absorbing capital rather than to expect monetary policy – moves in interest rates – to substantially reduce asset price variability, much of which might be warranted. The short-term nominal interest rate is a very blunt instrument to use to try to limit gearing of financial institutions. Capital requirements, and explicit limits on gearing, are more direct means to control leverage. This is why I think the direction of the policy emerging from the Basel III process – which will put in place higher capital requirements on banks – is right. It is also why time-varying limits on gearing of financial firms – limits that might vary with asset prices and with the economic cycle – are likely to be useful in helping maintain financial stability. I believe that is a much more fruitful way forward than abandoning inflation targeting. But while I think this is plausible, the case is not proved. Simply because they are a more direct means to control leverage does not prove that capital requirements or limits to gearing are a far more effective tool to preserve financial stability than changing interest rates.

Indeed it is possible that the attractiveness to those seeking funds of debt relative to equity is greater at higher interest rates. This is because interest payments are tax deductible whereas dividends are not. The scale of that subsidy to debt gets bigger as debt payments rise, which will happen as interest rates rise. A more formal version of this story goes like this: Suppose that nominal interest payments by issuers of debt, paying an interest rate r, are deductible against corporation tax (levied at rate tc) but that returns on equity paid by issuers have to come from post-tax income. Assume that all nominal returns received by holders of debt and equity are taxed at a common rate – a single rate that is charged on interest received, dividends and nominal capital gains. Because all receipts of income from financial claims are taxed at the same rate then the payments that need to be made by companies on debt and equity would, on average, need to be the same (because we ignore risk considerations). But companies can deduct interest payments against tax which means that the cost advantage of debt over equity to the company is measured by the nominal interest rate multiplied by the corporate tax rate – r x tc. This is increasing in the nominal interest rate. In this case, all else equal, the tax consideration is likely to lead to an increase in leverage when the nominal interest rate is higher.
The result could have been a vicious cycle involving low economic activity, increased funding stress for banks and a further reduction in lending, eventually leading to significant downside risks to price stability. The actions of the ECB have helped to break this cycle and to bring confidence back into the euro area financial system. The large amount of liquidity now present in the system is a consequence of these actions. It represents the symptoms of a malfunctioning interbank market, which, if left untreated, could have led to a credit squeeze. The ECB’s ability to maintain price stability remains intact: we will have the possibility to adjust the interest rates and, if necessary, we have at our disposal a range of tools to actively absorb the excess liquidity. 8  BIS central bankers’ speeches  The ECB has addressed the immediate symptoms, but monetary policy cannot cure the underlying causes. The situation in financial markets has reached a turning point but recent market developments have highlighted that it remains fragile. All the relevant players must act responsibly by taking the necessary steps. Banks need to meet capital adequacy objectives, improve their funding profile, and start lending again. Governments must build on the steps already taken to restore sound fiscal positions and support long term growth. At the ECB we will continue to closely monitor further developments. We will do whatever it takes to fulfil our mandate of delivering price stability over the medium term for the 330 million people of the euro area.

In addition, we might choose to include effects on the payment system and on general economic performance if, for instance, we saw a significant risk of a future financial crisis. The clarification of our monetary policy that we published in 1999 states that we would explain clearly the reasoning behind our decision if this situation were to arise. Naturally, this question - of whether the risks are sufficiently large to require special consideration in the monetary policy decision - is not a simple one. It concerns weighing up difficult issues about which opinions may differ from time to time. So far, however, considerations with regard to the effects of house prices and household indebtedness on factors other than the inflation rate have only played a marginal role in interest rate policy. Inflation and monetary policy Let me conclude with a summary of my current views on inflation and monetary policy. Since the early summer, inflation in Sweden has developed roughly in line with the Riksbank’s assessment in May. Inflation is low both by Swedish and international standards, at around 1 per cent. At the same time, it is important to emphasise that the decisive factor for monetary policy is not the present inflation rate, but our views regarding future inflationary pressures. At our monetary policy meeting in May, the Riksbank judged that inflation would remain relatively stable over the coming year and then increase gradually as a result of rising international and domestic resource utilisation.