samchain/econo-pairs-v1 huggingface dataset:
One explanation could be that Swedish banks are just unusually well-capitalised. However, a quick look at the core capital ratios of European banks shows that Swedish banks instead have relatively low capital levels. The only possible remaining explanation is that Swedish banks are not as good at generating income from services other than lending. And right enough the results also reveal that Swedish banks’ non-interest income is among the lowest in Europe (see Figure 2). So what is a European bank investor’s assessment of Swedish banks? Judging by equity market prices there is some scepticism towards Swedish banks. As regards both valuations of their book capital – the price-to-book ratio – and P/E ratios, the Swedish bank shares are trading at a small, but nonetheless clear, discount in relation to the European banking sector. The possible reasons for such a valuation discount are either that the expected profitability is lower for Swedish banks or that they are judged to be riskier than their European counterparts. I think, though, that the latter hypothesis that Swedish banks are comparatively risky can be rejected – Swedish banks’ high credit ratings, low loan losses and stable earnings tend to suggest the opposite. In other words, it seems as if the equity market is sceptical because it judges Swedish banks’ potential for improvement or growth to be limited. The assessment of Swedish banks’ growth potential as limited has several possible explanations, which are more or less benevolent depending on whom you ask.

But this market has grown very weakly and in real terms is smaller today than it was at the start of the 1990s. It is not that the market for company financing has shrunk, but it seems to have scaled back its connections to the major banks. That is partly because large Swedish companies can turn to foreign banks or directly to the capital market for funding. Also, it is probably partly because Swedish banks in the wake of the banking crisis have made a conscious decision to reduce their share of risky lending. However, it does not seem as if the Swedish banks have fully managed to compensate for this lower lending through increased advisory services or other ”intermediary services”. In essence, Swedish banks have strong positions in a number of areas but these markets are either mature or else the banks’ shares are shrinking. If we were to assume that the trend oracle will be right, I envisage two possible ways forward for the major Swedish banks, both of which represent extremes. The first strategy would be based on the banks’ proven proficiency in terms of organisation and distribution, and to refine this strength and also become better at peripheral advisory services. Fewer resources would be invested in product development and risk-taking – products can easily be copied and risks sold on to other, hungrier investors.
And when such growth is achieved by an individual bank, over and above that achieved by its peers, adverse selection – attracting weaker borrowers, who are unable to raise funds from other lenders – is an additional factor depressing the quality of the loan book. The simple fact is that rapid absolute and relative growth is strongly associated with poorer average loan quality and, sooner or later, sharply higher non-performing loans. The proposal is that, the risk weighting (and so, the capital requirement) of bank loans should include a growth-based component. This could be linked either to the economy-wide growth rate of a particular type of business, or to the growth rate of an individual bank’s lending relative to the market as a whole; or some combination of the two. This would make it more expensive for banks to expand their balance sheets faster that normal when confidence is high and could be a useful means of dampening banks’ contribution to the business cycle. The third, less direct, mechanism to discourage over-rapid expansion would be on the liabilities side. Rapid balance sheet expansion tends to be fuelled by access to less stable sources of funding, attracted perhaps by higher interest rates as the bank seeks to meet its balance sheet aspirations (and feels able to pay, because – as already explained – loan loss experience is good).

Benoît Cœuré: Restoring trust in the Economic and Monetary Union Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the Forum Eco Libération ESCP “Reprendre confiance en (l’)Europe”, panel discussion: “L’Euro méfiance, c’est fini?”, Paris, 1 December 2012. *  *  *  It is a great pleasure to participate in this panel that touches on a topic very close to our hearts at the ECB: trust in our common currency, the euro. 1 In any society, the monetary contract fundamentally rests on trust, and I will borrow the explanation from my co-panellist, Michel Aglietta: “Money involves trust because it is a debt between society as a whole and each of its members.” 2 Remember that credit comes from credere and fiduciary comes from fidere, both verbs meaning to trust in Latin. As for trust in a central bank, well, that is secured and reaffirmed by permanent assessment of the central bank’s performance against its mandate and strategy. Such an assessment has become very complicated as a result of the global financial crisis. Communication about the intentions and policy actions of a central bank has long been focused on its decisions on the level of the short-term interest rate and, in the case of some central banks, on the likely direction of that rate. But in a deep financial crisis this channel of policy interventions and communication becomes less significant.
Jean-Claude Trichet: Financial stability Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the Forum Financier Belge, Brussels, 26 November 2003. * A. *  *  Introductory remarks  It gives me great pleasure to be here in Brussels and to address you in this very well-known forum at the kind invitation of Governor Quaden. The topic I shall be talking about today, namely “financial stability”, is obviously very broad and challenging. My main topic of discussion will be the probable consequences the profound changes currently taking place in the financial sector will have on financial stability and on the policies of the Eurosystem in this regard. The main reason why I am talking about this topic - and why we at the ECB are following the issue - is that the stability of the banking sector and the financial system at large is of the utmost importance for the Eurosystem, as it is for any central bank. It is the precondition for a successful conduct of monetary policy and the maintenance of smoothly functioning payment systems, which are major responsibilities of a central bank. I would like to focus on three specific developments: the increasing importance of financial markets in general and market volatility more specifically, financial innovation, and the process in hand to increase the integration of financial systems across countries.

My objective has also been to focus on European issues and to highlight the special conditions of the euro area and the role of the ECB and the Eurosystem in fostering financial stability. Thank you very much, ladies and gentlemen, for your attention. 6  BIS Review 53/2003
12 Adequate levels of capital requirements, beyond regulatory minima, should depend on structural and cyclical factors, notably the overall position of a country in the cycle. A general equilibrium framework is thus needed to account for the overall impact of higher capital ratios that can constrain banks’ capacity to provide credit to the economy while, at the same time, can bring down the cost of credit by reducing banks’ default probability. The optimal level of capital requirements is thus one that balances the costs linked to more expensive equity funding with the benefits of a lower rate of bank defaults. Results from this model-based approach can quantitatively assess the impact on overall GDP indicating that, as the capital ratio increases, household consumption and borrowers’ welfare first increase and then decrease, thus highlighting the importance of correctly taking into account the starting point – and the position in the cycle – when assessing the effects of a policy measure. We have also assessed banks’ response to capital shortfalls, using a GVAR model, also used to examine the cross-border effects of deleveraging. This empirical work confirms common wisdom that, in response to a negative shock to the leverage, banks tend to shed assets instead of raising capital while keeping the leverage constant. 13 The macro-feedback nexus is however not the only reason why an initial shock to an entity can be amplified at the system-wide level.

The literature has identified three broad sources of systemic risk: (i) macroeconomic shocks that are significant enough to cause distress in the financial system, (ii) the unwinding of imbalances in the financial system generated by excessive leverage, and (iii) contagion risk, created by increasing interconnectedness and herd behaviour. Whatever the origin, the primary role of macroprudential authorities is to identify, measure and reduce systemic risk. Identification of risks clearly needs to be probabilistic, attempting to predict the level of overall risk of the system in different scenarios. Many indicators to measure systemic risk have been proposed since 2008. Many of them though, have a “micro-level” dimension dedicated to calculate the contribution of significant institutions to systemic risk. The Marginal Expected Shortfall (MES), CoVar, CoRisk or Conditional Tail Risk (CRT), for example, fall under this category. 3 Taken in isolation, they are not useful to predict future levels of systemic risk, as they tend to use contemporaneous market prices and do not consider the system as a whole. The ECB has developed a Composite Indicator of Systemic Stress (CISS) 4 that comprises five aggregate market segments accounted for by a range of variables and time-varying rank correlations between them. More recently, the CISS indicator has been used by Hartmann et al. (2015), jointly with credit to the private sector and cycle variables (industrial production, inflation and a  1  Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.
Allowing transparent dynamic provisioning would help to reduce the more harmful effects of credit cycles and, therefore, to produce economic growth with minimal fluctuations. Second, I believe that regulators and supervisors, and central bankers too, must further discuss procyclicality, the impact of accounting and prudential standards on the credit cycle, and how monetary policy interacts with the credit cycle. Our experience with the statistical provision may be useful, although it is not necessarily either the best or the only solution. The important thing is that we should be ready to discuss countercyclical mechanisms, in provisions, in capital and wherever we believe they might be appropriate and feasible. 4  BIS Review 149/2008  Finally, but no less importantly, we should enter into international agreements to ensure that countercyclical mechanisms are applied consistently in all countries. A global banking system requires uniform and internationally coordinated responses. I assure you that applying prudential measures in isolation is not an optimal situation, even if such measures are shown to be the most appropriate ones. *** Behind the ideas of White and Rojo (Weiss und Rot) that I have set out today were many other economists who I have not been able to mention, and who also contributed to help us to smooth cycles and strengthen credit institutions in the future. I have referred to these two because I wanted to pay tribute to all those economists that with their ideas and research, are seeking to make life easier for us and helping us to take better decisions.

But starting from this elevated level, the risk that the FPC is concerned about is that with limited housing supply, the demand for housing in the UK continues to push prices up; that lenders are ever more willing to finance high loan-to-income mortgages as house prices rise, and that as a result household indebtedness climbs sharply, making the economy and financial system more vulnerable. This risk is greater at a time of exceptionally low interest rates which may well mask the likely true cost of a mortgage over time. So at its recent meeting the Financial Policy Committee agreed two measures. First, that when lenders are assessing applications for mortgages they test whether the mortgage would be affordable if interest rates were to be 3% higher. And second, that no more than 15% of a lender’s flow of new mortgages should be more than four-and-a-half times the borrower’s income. These measures do not bite now on the market as a whole. Most lenders are already testing whether borrowers could afford mortgages if interest rates were to rise by around 3%. The FPC’s first recommendation is intended to stop that from slipping. And though the proportion of new mortgages worth more than four and a half times the borrower’s income has been increasing sharply, it is currently around 10%, below the 15% limit the FPC has set in its second recommendation. These measures should be thought of as insurance.
This is just an example to illustrate how the railways played a major part in Sweden’s industrial upswing in the late 19th century. Productivity and growth rose. For the information technology, this phase of the process probably lies ahead. The new technology has not yet seriously altered either production and distribution processes or consumer behaviour. Progress is still a little hesitant as more and more people use the new technique for surfing and learn the new technology. The potential will also be limited as long as the technique is not entirely user-friendly. IT generates pressure for change When the new information technology really catches on, it will probably lead to a rapid expansion and transformation of capital stocks. The entire economy will then be involved in intensive investment and high productivity growth. Old technology will be replaced by new and each unit of capital equipment will then require a smaller input of labour. Unprofitable units or firms will be closed down, accompanied by new establishments. Structural changes generate developments that are often referred to at present as a new “economy”. The marked improvement in productivity maintains profits and keeps prices down. During the transformation, a good circle is created but it is difficult to tell how long it will last. It can be described, if you like, as a period of extensive rationalisation and heightened efficiency. The growth trend is raised for an indefinite period, enabling the economy to expand more rapidly without inflation taking off.

Put to good use, this transformation can probably create stronger potential growth, lead to higher productivity growth and lower inflation, and benefit employment. The favourable changes that have occurred over a number of years in the Swedish economy since the 1980s suggest that such a development is within our grasp. All forecasts to date about the spread of the Internet have been on the low side. In the United States, it was 38 years before 50 million households had radio sets, while the intervals for television sets and cable television were 13 and 10 years. The Internet, however, had reached 50 million households after only 5 years and according to some estimates the number of users will increase greatly during the next few years. It has been said that whereas conventional telephony in Sweden is growing by 7% a year, traffic on the Internet is currently rising at this rate every week. It is not just that more and more people are subscribing; those who surf on the Internet are doing so more and more. The number of surfers is measured by Sifo Research & Consulting; the figures show that almost 3.5 million people in Sweden surf, which is not quite half of the population aged 12 to 79. Of these, as many as 2 million stated that they surfed on a daily basis. Another noteworthy figure is that in the age group 50-79 years, almost 20% are active users of the Internet. So the Internet is not something that only young people find attractive.
BANCO DE ESPAÑA  10	 TESTIMONY BY THE GOVERNOR OF THE BANCO DE ESPAÑA BEFORE PARLIAMENT IN RELATION TO THE DRAFT STATE AND SOCIAL SECURITY BUDGET FOR 2019  The third source of risk for projected revenues that I wish to highlight relates to the fact that the estimation of the revenue impact of the new taxes is subject to a high degree of uncertainty, given the absence of any data on how they have functioned in the past. Finally, caution should be exercised in relation to the potential delay in the entry into force of the measures accompanying the Draft Budget, which adds a further risk for expected revenues in 2019. 2.3  The government deficit target and the fiscal policy stance in 2019  Having discussed the spending policies and revenues of the Draft Budget separately I will now consider them together, in order to assess the uncertainty surrounding achievement of the deficit target of 1.3%. For this purpose, economists at the Banco de España have conducted a preliminary updating of the December projections, which I have already considered in detail. In particular, the impact on these projections of the revenue and spending measures that have been included in the Draft Budget since then is estimated, resulting in a general government deficit of around 2% of GDP in 2019, as compared with the Banco de España’s December projection of 2.4%. Moreover, the economic growth forecast would be revised down slightly, mainly as a result of incorporation of the impact of the tax measures.

1.1  External environment and financial conditions  The forecasts are produced drawing on information that characterises the context of the Spanish economy (in particular regarding the international environment and monetary and financial conditions) (see Table 1). According to these assumptions, the expected course of activity in and imports from the main geographical areas with which Spain trades were revised downwards over the course of 2018. The resulting growth rates for Spain’s export markets in 2019 were estimated at slightly over 3%, a similar rate to that forecast for 2018, but significantly lower than that observed in 2017. The price of oil per barrel is expected to stand below $ on average in 2019, 6% less than in 2018. Finally, I should stress that borrowing conditions for households and firms are expected to remain easy. Allow me to go into greater detail on some of the above. Regarding the international environment, the world economy admittedly ended 2018 maintaining a broadly expansionary course. But the signs of an across-the-board slowdown are evident, albeit more marked in some regions than in others. Largely, this is in response to the partial materialisation of certain focal points of uncertainty, assailing the world economy since early last year. These include most notably the trade tensions between the United States and China, the uncertainty over the terms of the United Kingdom’s withdrawal from the European Union (EU) and some tightening of global financial conditions.
They apply in particular to agriculture and labour-intensive manufacturing, that is, to just those activities where the poorest countries have advantages over the industrialised world. The European Community spends, for example, EUR 2.7 billion annually to make sugar a profitable crop for its farmers at the expense of cheap sugar from developing countries. At the global level, agricultural subsidies, which according to IMF estimates are currently equivalent to over two-thirds of Africa’s total GDP, are definitely not helping to improve the situation for the poorest countries. So there are good grounds for believing that increased trade does benefit the world in general as well as the developing countries. In this respect the industrialised countries could do quite a lot to improve conditions for developing countries simply by reducing their barriers to trade in agricultural products, for instance. It is also the case, however, that the gains from increased trade are not automatically distributed fairly. There is scope here for the industrialised world to take initiatives in the context of trade negotiations. More can also be done, in industrialised as well as developing countries, to facilitate adjustments and distribute the gains more equitably. On the whole, trade is a field where we know what ought to be done if only the political will were there. Pros and cons of capital flows Another topical issue in the globalisation debate is the increasingly large and rapid cross-border capital flows. I see the freer movement of capital as basically desirable.

Another subject for criticism has been the conditions attached to the loan programmes. This was the case not least in connection with the Asian crisis, when critics considered that the IMF’s economic policy stipulations were inappropriate and unduly harsh, being more likely to lessen instead of enhance the chances of a recovery. Once again, we can refer to Sweden’s problems in the early 1990s. When the fixed exchange rate had finally been abandoned in 1992, many argued that interest rates ought to be lowered both more quickly and further than was actually the case. I was one of them because I believed this was needed both for a quick end to the economic decline and to facilitate the consolidation of the government finances. In addition, it ought to aid a faster recovery in the banking sector. Others, including the Riksbank at that time, preferred a more cautious path in the hope that this would prevent a further weakening of the krona. Striking the right balance in these respects is difficult and even with hindsight we cannot be sure who was right. The problems in Asia were similar. Would it have been more appropriate to lower interest rates in order to avoid the failure of companies with loans in the domestic currency and the collapse of the banking system, or to stimulate demand to a greater extent so as to keep the economy going?