samchain/econo-pairs-v1 huggingface dataset:
Jan F Qvigstad: Lessons from the crisis for monetary policy and financial stability Speech by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at the Annual Money, Macro and Finance Conference, Limassol, 3 September 2010. *  *  *  First I would like to thank you for inviting me and giving me this opportunity to comment on lessons from the crisis. I will concentrate my talk around three lessons and two questions. What I am going to highlight is by no means revolutionary, rather it reflects a growing consensus on experiences from the crisis. 20 minutes only allows me to briefly touch on the different subjects. For a more in depth analysis and discussion of similar issues that I raise here today, I can recommend the Jackson Hole paper by Charles Bean et.al. Transmission mechanism was affected by the financial crisis  The first lesson is that monetary policy is more than setting the key policy rate. We also need to monitor the transmission mechanism closely. The transmission mechanism was affected by the financial crisis. Constraints on banks’ access to funding and a heightened level of perceived risk led to higher lending margins and higher bond spreads. The chart shows developments in our key policy rate and banks mortgage lending rates from August 2007 to November 2008. The widening spread between these two interest rates was not unique to Norway, but occurred in several countries. Banks also tightened their credit standards in response to the crisis.

The evaluation has had greater scope to discuss these weaknesses in more detail than was possible in the Riksbank’s proposal, and it also highlights a number of important principles as to how one can conduct and organise the financial stability work. I believe that these arguments in particular can provide a valuable contribution to discussions in Sweden and to our own development work at the Riksbank, but perhaps most of all to the work of the financial crisis committee. 1  Proposal to the Riksdag 2009/10:RB4, “Proposal regarding certain areas that require investigation as a result of the financial crisis”. (http://www.riksbank.se/templates/Page.aspx?id=43390). BIS central bankers’ speeches  1  Something I consider to be quite crucial in this context is that we do not create institutions that lack the necessary power to make decisions. By this I mean that in all parts of the work on preventing and managing financial crises we should have some institution that is clearly responsible and this institution should also have the necessary mandate, tools and resources to handle this responsibility. When it comes to putting this into practice I believe that Goodhart’s and Rochet’s more theoretical reasoning regarding allocation of responsibility and institutional solutions could be very useful. But, as they are also careful to point out, the principles they discuss must be implemented in a way that suits each country’s individual characteristics. And each country must find its own way.
In late 2006, the Central Bank had doubled its foreign exchange reserves through an international Treasury bond issue the proceeds of which were deposited with the Central Bank. Early in 2008 it began preparing to fortify its reserves still further, as is explained in a  BIS Review 22/2009  3  memorandum published on the Central Bank’s website in October 2008.21 Raising the foreign reserves was deemed important in order to bolster confidence in the Icelandic financial system and thus to facilitate its adjustment to a new reality. Currency swap agreements with three Nordic central banks were announced in May 2008 and renewed towards the end of the year. No other central banks apart from the Nordic ones were prepared to lend their support in 2008, in spite of the Central Bank’s requests and in spite of the public declarations from the international community, including the Financial Stability Forum, about the necessity for consultation and co-operation, not least among central banks, including the establishment of swap lines. As mentioned, the Icelandic banks significantly increased their presence in the retail deposit market abroad, beginning in late 2006. Actually, they were so confident about their success that, at meetings held over the course of 2008, some of their leaders voiced the expectation that it should be easy for them to fund all of their outstanding bonds and other debt for the coming years through deposit business in Europe.

The ATM network of the country has doubled during the last five years and the number of credit cards in use have more than tripled. Improvements in Internet banking, tele-banking and mobile banking facilities are very significant and the progress is mind-boggling. There have been significant improvements in financial markets too. With the introduction of LankaSecure, the Scripless Securities Settlement System, in 2004, government securities are transacted on Delivery versus Payments (DvP) basis and now nearly 27,000 beneficiary accounts are maintained at the LankaSecure. Recently we also allowed foreigners to own 5% of government securities through a new TIERA account that we introduced, and so far, foreigners have purchased $ 55 million worth of Treasury bonds. This is a new instrument that has enhanced liquidity in the capital market Developments in the foreign exchange market are also immense. Helped by the continuous growth in imports and exports, and specially with the recorded improvement in migrant earnings, values and  BIS Review 24/2007  1  volumes of forex transactions through formal channels have improved significantly during recent years. The initiatives we are taking will also improve this sector further in the years to come. In conjunction with these improvements, banks have now stepped forward to introduce new derivative instruments to the market. As you all know, CPC has now started to use hedging mechanisms to minimize the exchange rate exposure, which we expect that would be followed soon by other large public and private sector organizations. Performance of the Share Market has of course been spectacular.
The result was that some bank conduits and buyers of securitized products such as SIVs became distressed and failed as mark-tomarket losses increased. In the post-Lehman bankruptcy world – when liquidity was paramount – securitized products were very difficult to trade, in part, because they were very difficult to value. 2  BIS Review 69/2009  The cessation of new asset-backed securitizations has been problematic because banks have not had the capacity to keep credit flowing freely. This is especially true given that bank balance sheets were already under strain – bank capital has been depleted by credit losses and bank balance sheet capacity has been strained by an inability of banks to securitize new loan originations and by the need for banks to honor their off-balance sheet obligations. For all these reasons, the Federal Reserve determined that it was important to augment the balance sheet capacity of the financial system by supporting the ABS market. This was the purpose of the TALF. By providing non-recourse, term financing for new AAA-rated consumer asset-backed securities to investors, the TALF essentially provides the balance sheet capacity necessary to facilitate the continued flow of credit to households and businesses. The TALF offers three attributes that the private sector has had difficulty providing during this time of financial and economic distress: 1) leverage to purchase highly-rated, low-risk assets, 2) term financing and 3) protection against very adverse economic outcomes.

This increase in yields did not solely reflect an increase in credit risk; it also reflected a genuine loss of confidence and an accompanying increase in risk aversion. Yield spreads on even the very safest ABS obligations soared hundreds of basis points. This can be seen in the fact that AAA-rated student loan tranches, with underlying loans 97% guaranteed by the federal government, climbed to yield levels as much as 400 basis points over LIBOR. With the spike in yields, the economic incentives to issue evaporated – issuance was just too costly and there was no active market. After averaging around $ billion per quarter of new originations in 2007 and the first three quarters of 2008, consumer ABS issuance plunged to only $ billion during the fourth quarter of 2008. Issuance of commercial mortgage backed securities ground to a complete halt and this market currently remains closed. So why did the ABS market collapse? There are many reasons. One factor was that in some areas, the risk management incentives of banks and other issuers of ABS were misaligned with those of the end investors in these securities. This misalignment manifested itself in the overall deterioration in lending standards that took place across the economy beginning during the middle part of this decade. Some originators did not do an adequate job of due diligence because the underlying loans were swiftly moved off their balance sheets through the securitization process.
Among these potential mechanisms, particular importance was accorded to the so-called “competitiveness channel”, which works as follows: when an economy’s inflation rate stands systematically above the average for the rest of the area, the very loss of competitiveness involved – or, what amounts to the same, the relative rise in the cost of output in that economy – tends to reduce demand-side pressures and ease the tensions on prices that led to the initial slippage. However, for this channel to work economies should, inter alia, be adaptable and sufficiently flexible, something which, for social and political reasons, is evidently not easy to achieve. It was also thought monetary union membership would prompt greater discipline in economic policy management. It was assumed that, if a Member State’s management of the economic instruments available to it was inadequate, the subsequent adverse effects on its growth and employment-generating capacity would lead international investors to demand greater returns for investing in the country, or even to freeze such investment. The subsequent tightening of financing conditions would discipline economic agents and ultimately redress economic management. But this mechanism did not work because financial markets, rather than punishing divergences, instead financed excesses, contributing to exacerbating tensions. Unsurprisingly, then, the crisis has called into question the consistency of the institutional arrangements underpinning the euro. The solution would involve a reformulation of the initial project, geared to fuller integration.

Yet that should not mask the fact that belonging to a monetary union entails a series of constraints or commitments which, among other things, involve the necessary adaptation of economic agents’ behaviour and of the means of pursuing economic policy. In a monetary union, the control of two essential instruments usually at hand to combat crises passes to a supranational level and, therefore, they cease to be available to meet the specific needs of the member countries: both very short-term interest rates – the key tool used by a central bank when setting its monetary policy – and the exchange rate have been set in the European Monetary Union, since 1 January 1999, on the basis of the aggregate  BIS central bankers’ speeches  1  situation of the area as a whole. They cannot be managed to serve the specific needs of any national economy. It is the national economies that have to be in a position to live with the standards set for the whole. National authorities retain control of the other economic policies, which remain under their responsibility; however, the proper functioning of the area evidently requires that their handling should observe specific common principles, preventing misalignments in one country from prompting imbalances in the rest, or from destabilising the monetary union as a whole. The way in which these common principles have been implemented has differed depending on the specific economic policy tool in question.
As I will shortly explain, however, the arguments typically advanced against participation in a currency union are not very strong in Malta’s case. It is sometimes argued, for example, that the Maltese economy might be on a different point on the business cycle relative to the euro area, warranting a different monetary policy stance from that of the  1  IMF Survey. Adopting the Euro. Vol. 33. Number 10. May 31 2004. 2  In July, for example, while noting that “credible convergence towards adoption of the euro was likely to be a positive driver of foreign currency ratings over the coming years”, Fitch Ratings only upgraded the ratings for the Baltic States and Slovenia. They refrained from making other EMU related changes for those Member States where the size of the fiscal deficit is such that it is likely to delay entry in the euro area, noting that further changes are still premature. 3  Thus, for example, Moody’s latest credit opinion on Malta notes that “far-reaching structural reforms - most of which are guaranteed by compliance with EU requirements - will support the country’s A3 rating over the medium term. “ Similarly, Standard and Poor’s note that “being a member of EMU is not a direct rating factor in our analysis.

Since they intended to hold them to maturity, they were able to book them at amortised cost. As interest rates rose and the bonds fell in price, a problem arose. When the bank had to sell the bonds due to the bank run, it realised a large loss, adding to the problem. This raises an important question about how different assets should be booked. Admittedly, the reason for the bank’s problem is that interest rates rose so quickly, but if the bank had been forced to book them at market value, the problems would have been discovered earlier. All this may seem technical, but it has a major impact on banks' capital adequacy, as the starting point for all capital adequacy regulations is the accounting values. I don't have a clear view of what needs to be done here, but when assets that have been booked at amortised cost have to be sold quickly at a large loss, it can affect the viability of the bank and, ultimately, financial stability, and therefore it is a problem. Global rules are important for Sweden I would also like to take this opportunity to emphasise the complexity and interdependence of the global financial system. Banks are exposed to many risks that can be difficult to both understand and monitor. Banks in most countries are also dependent on other banks and other financial institutions. Many of these are located in other countries and are therefore supervised in those countries.
For those peripheral European economies that experienced a credit boom, it is plausible to think a tighter macro-prudential stance would have helped reduce the severity of the global crisis of 2008 and the euro-area crisis of 2010. Tighter capital standards would have slowed pre-crisis credit growth, tempering the boom. And the extra capital built up in the European banking system would have helped contain some of the collateral damage from the resulting credit bust. In short, as in the US, the boom-bust cycles in credit and GDP in the euro-area would plausibly have been much less severe had policy been ambidextrous. The current conjuncture The third example is from the present. In response to the crisis, short-term interest rates in major advanced economies fell rapidly to their floor and have remained there (Chart 9). Aided and abetted by programmes of quantitative easing, real long-term rates have followed suit, falling to historically unprecedentedly low levels (Chart 10). These responses from monetary policy were a natural reaction to the opening-up of sizable output gaps in many advanced economies. Extraordinary times called for extraordinary measures. Whether by coincide or causality, what has happened since in financial markets has been striking. The risk-taking cycle in some advanced economies has decisively turned. For example, issuance in the US high-yield market reached a record high in 2013, with half coming in a “covenant-lite” form (Chart 11). This is evidence of a renewed “hunt for yield” among investors [Stein, 2013].

If the market had asked for a higher risk premium, the increase in borrowing costs might have sent a sobering message to the Greek government and its people to avoid overstretching themselves and therefore might have avoided a near breakdown of their economic and financial systems. 4. Hong Kong also experienced market failure in 1998, a year after the Asian financial crisis had severely hit a number of regional economies. Although Hong Kong managed to stand on its feet after the crisis, market confidence and sentiment were weak. International predators, with meticulous preparation and organisation, launched an attack on the Hong Kong dollar and our financial markets. They first discreetly borrowed Hong Kong dollars and waited for the right moment to profit by short selling the currency and attacking our Linked Exchange Rate System. At the same time, they built up substantial short positions in the stock and futures markets. These global predators also spread doomsaying through the Hong Kong media to stoke panic among Hong Kong people, creating an environment ripe for their short selling activities. The Hang Seng Index (HSI) dived 50% to 8,000 in August 1998 from 16,000 a year earlier and the predators boasted they would push down the HSI by another 50% to 4,000, which was an extremely low level. Aggregating the earnings of all listed companies, when the HSI was at 8,000, the price-earnings ratio was eight, and if the Index fell another 50%, the ratio would drop to just four.
The FSB is developing proposals, for the G20 summit in Brisbane, on total loss absorbing capacity for institutions, so that private creditors stand in front of taxpayers when banks fail. In addition, we are working with industry to change derivative contracts so that all counterparties stay in while resolution of a failing firm is underway. Second, creating fair and effective markets In recent years, a host of scandals in fixed income, currency and commodity markets have been exposed. Merely prosecuting the guilty to the full extent of the law will not be sufficient to address the issues raised. Authorities and market participants must also act to re-create fair and effective markets. In the Bank of England’s view, changes to both the hard and soft infrastructure of markets will be required. Examples of the former include reforming the calculations of benchmarks such as Libor or the daily foreign exchange fixes. The upcoming FSB report on these issues, co-chaired by the Financial Conduct Authority’s (FCA) Martin Wheatley and the Fed’s Jeremy Stein, will be decisive in this regard. Consideration should also be given to increasing pre- and post-trade transparency in a host of fixed income markets and accelerating the G20 pledge to move the trading of all standardised derivatives onto electronic exchanges and platforms. BIS central bankers’ speeches  5  Such changes are vital, but they cannot anticipate every contingency or discipline every miscreant. The scandals highlight a malaise in corners of finance that must be remedied.

09.02.2023  (De)globalisation and economic policies in the European context Dialogue with the Governor on the Future of Globalisation/Cañada Blanch Centre for Contemporary Spanish Studies and London School of Economics and Political Science London Pablo Hernández de Cos Go verno r  Let me start by thanking Professor Andrés Rodríguez-Pose, the Cañada Blanch Centre for Contemporary Spanish Studies of the London School of Economics (LSE) and the LSE for their kind invitation, and for giving me the opportunity to hold this dialogue with you on a fascinating topic: the future of globalisation. The questions currently surrounding this topic are of the utmost importance for highly open and integrated economies, such as the euro area and the UK. The two extraordinary shocks that have recently hit the global economy, the Covid-19 pandemic and, above all, the Russian invasion of Ukraine, have disrupted global value chains and commodity markets, and generated an environment of heightened uncertainty and geopolitical tensions. Added to the past and present episodes of trade tensions between the US and China, among others, these shocks have prompted renewed questions regarding the future of globalisation and the increasing importance of geopolitical factors in shaping international economic relations. Although the globalisation of goods was slowing down even before the pandemic, concerns about the resilience of global value chains and the supply security of strategic products are now becoming more apparent in decisions made by firms and policy measures considered by governments.
The current turmoil has interrupted some of this progress, and has reminded us that rapid economic expansion is not without its risks. The damage to some economies has been severe. But the foundations remain strong, and the prospects for the next half-century are, in my view, favourable ones. The signs of economic revival are already with us. Recovery may be a BIS Review 2/1999  – 10 –  longer and more difficult process than some of us had expected a year or more ago. But there is no doubt that it will come. It is now up to us, as partners in this large and diverse region, to seize the initiative, and turn that recovery into an enterprise that will make us stronger, more cohesive, and more capable of managing the stresses and uncertainties that a global financial system must inevitably produce. *  BIS Review 2/1999  *  *

That puts the house-price-to-earnings ratio back to its level in 2003. Transactions are running at 2005 levels – a little over 110,000 a month. Looking at the most recent data, there has been a slowing in the monthly pace of increase. In the three months to February this year, prices grew at an annualized rate of 11% and transactions increased at an annualized rate of over 50%. But the very latest figures for March, however, could suggest a pause in the growth in prices and activity – prices were flat on the month and transactions actually fell by 5%. And the latest mortgage approvals numbers, which came out this morning and tend to lead transactions, fell again in March leaving the number of approvals for house purchase down 12% on their January peak. Discussions with the lenders suggest that the checks that lenders now need to do under the FCA’s new Mortgage Market Review rules, about which I will speak later, may be slowing the speed with which approvals can be processed. But just as one cuckoo does not signal spring, it is far too early to say, on a couple of month’s figures, whether this is the beginning of a turning point in the market. Indeed it would be dangerous to ignore the momentum that has built up in the UK housing market since the spring of last year.