samchain/econo-pairs-v1 huggingface dataset:
Mervyn King: Stocktake of the UK economy Speech by Mr Mervyn King, Governor of the Bank of England, at the East Midlands Development Agency/Bank of England Dinner, Leicester, 14 October 2003. *  *  *  The Bank of England is back in Leicester. Between 1844 and 1872 there was a branch of the Bank of England in Leicester, located in Gallowtree Gate. Sadly it operated at a loss, in part because the Agent lived in style driving about town in a carriage and pair with two men in livery, and the branch was closed. Only six years ago did we re-establish our links with the City through the creation of a new Agency in the East Midlands. The purpose of that Agency - staffed by four members of the Bank who work in rather less style than their predecessors - is to listen to you and other businesses about what is happening on the ground. The reports of our Agents around the country are crucial to the Monetary Policy Committee. The information we receive from you, and our other eight thousand business contacts around the country, are key pieces in the large jigsaw puzzle of the UK economy that we assemble each month in order to see the big picture. Some of the statistical fog hanging over the British economy lifted a week or so ago with the publication of a new picture of demand and output over a number of years.

And output has risen in every single quarter since the middle of 1992, something that is true of no other G7 economy. Why were the 1990s so successful? And can that success continue? Four features of our economy lie behind this improved performance. First, the new monetary framework - based on an explicit target for inflation, a high degree of transparency, and, since 1997, independence of the Bank of England made it clear to everyone that monetary policy was, and would continue to be, targeted on maintaining low and stable inflation. Second, a substantial fiscal consolidation turned a deficit of 8% of GDP in 1993 into a sustainable position for the public finances based on a set of clear rules for government debt. Third, a continuing programme of supply-side reforms, over a period of 20 years, made it possible to reduce unemployment without generating higher inflation. Fourth, although the unexpected twists and turns of the world economy did pose real challenges to monetary policy, especially in the latter half of the decade, those shocks tended to average out over time rather than cumulate in either an upward or downward spiral. In other words, the economic surprises alternated between good one year and bad the next, rather than adding up to “one damn thing after another”. In that sense, Lady Luck smiled on us. Of course, we were not alone in enjoying the 1990s.
At the national level, the PACTE Act proposes certain advances in life insurance, which is by far French households’ leading form of financial savings (EUR 1,700 billion at end-2018), in particular to promote the Euro-Growth Fund by making it simpler and more understandable for savers and to increase insurers’ investment in innovation financing. The French authorities are also very careful that the current review of the Solvency II Directive is favourable to the long-term investment of insurers in equities. At the European level [Slide 3], we need to build a real “Financing Union for Investment and Innovation” to better steer our resources – a savings surplus of EUR 345 billion in the euro area5 – towards equity and innovation. This Financing Union must bring together and amplify existing initiatives, the Capital Markets Union, the Banking Union and the Juncker Investment Plan. I would now like to answer my second question: is the diversification of sources of financing sufficient? From my point of view, the answer is no because diversification carries risks that need to be well managed. II. Diversifying sources of financing is a complex business whose success requires 2/4  BIS central bankers' speeches  managing all the traditional and new risks faced by intermediaries A. First, there are the risks linked to fast-growing private sector debt Corporate debt in France is growing much faster than in the rest of Europe [Slide 4]. We are now significantly above the euro area average.

The aim, as I have said, is to enable the bank’s critical economic functions to continue, without taxpayer support, while it is being resolved. A great deal has been achieved. 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  We now have agreed international standards covering the design of resolution regimes, the amount of ‘bail-inable’ resources banks must hold, and agreement with industry participants to ‘stay’ termination rights by counterparties in derivative and repo transactions if resolution is in train. Alongside this we also have international guidance on how to ensure continuity of access to FMIs as well as on the mechanics of executing a bail-in. The UK now has in place a comprehensive and effective bank resolution regime that implements the EU’s Bank Recovery and Resolution Directive (BRRD) and the international standards. The Bank of England has been established as the UK’s resolution authority with a wide range of powers to ‘bail in’ shareholders and creditors of failed banks. The biggest UK banks have begun to issue bail-inable debt at scale and are well on their way to meeting the target for loss absorbing resources in resolution. 7  Key policies and guidance to firms have been issued, notably on operational continuity and on the internal distribution of loss absorbing resources. Last October the Bank, with the publication of the Purple Book, the Bank set out in detail its approach to resolution and how it would tackle a failing bank.
Default on a mortgage carries much more risk for households – the potential loss of a home – than non-payment of unsecured debt. It’s just that this has become more the case in recent years. As outlined in the introduction, almost all the growth in unsecured household debt, relative to income, involves two relatively new developments that involve less pound-for-pound risk, at least for borrowers, than other forms of debt. Nor do they tell you anything about whether households are “living beyond their means”. One involves a change in the way people pay for cars. Conventional loans for car purchase have been around for a while. But over the last decade or so these have been overtaken by so-called “personal contract purchases” (PCPs) in which buyers make lower monthly payments but don’t own the car outright (there’s usually an option to buy at the end of the term, but the car is otherwise returned to the dealer). This is a highly contingent contract and, as far as households are concerned, it’s one that looks more like a rental arrangement than normal debt. The payments are mostly for depreciation, not pure interest. (They’re, in any case, set in advance and are therefore insensitive to subsequent changes in short-term interest rates.) The car owner can choose costlessly to walk away from the contract, at least once half the original price has been repaid.

10  All speeches are available online at www.bankofengland.co.uk/speeches  10  Chart 11: LTVs high in late 1980s, lower today  Percentage points 10  Per cent 95 LTV on new mortgage loans  90 85 80  Chart 12: The rental/gilt yield spread has been a good predictor of house price inflation  8 6  4 0  4 2  75  0 1995  12  8  Average  70 1985  Per cent 16  2005  2015  Sources: UK Finance Regulated Mortgage Survey and Bank of England. -4  Rental yield spread over government bonds (LHS) Average house price growth over the following five years (RHS)  -8 -12  -16 -2 1987 1992 1997 2002 2007 2012 2017 Sources: ONS, Zoopla/Whenfresh, Land Registry, Bank of England, and Bank calculations. Another upside risk is a re-acceleration of house prices. I’m not so daring as to offer you a precise forecast. Let me just point to a couple of pieces of evidence about the housing market and let you draw your own conclusions. One is that housing is currently “cheaper” than government debt, at least on a very crude comparison of their yields. The red line in Chart 12 is the difference between the estimated rental yield on housing and the yield on 10-year indexed government debt, an indicator of the “neutral” real rate of interest.
However, despite improvements in growth witnessed since 1999, significant reductions in poverty will not occur without a significant increase in growth rates to above 7% on a sustained basis. One of the ways in which growth can be scaled up is through the employment of the vast African resources for the development of the continent. Prior to the global financial and economic crisis, the African continent experienced a surge in investment flows in many sectors including mining, manufacturing, tourism, transport and construction. This inflow of foreign capital helped to finance the development registered in Africa over the past decade. The inflow of foreign capital coupled with high prices of commodities on the global market led to high international reserve accumulation in most commodity exporting countries, including those in Africa. However, following the global financial and economic crisis the accumulation of international reserves declined as commodity prices plunged and foreign capital inflows, both private and public slowed significantly or were reversed. This has had a negative impact on the availability of resources to finance Africa’s development. The challenge going forward is recovering, maintaining and sustaining the economic gains and macroeconomic stability that African countries experienced before the crisis hit. In view of the anticipated reduction in aid flows and foreign direct investment, African countries need to give domestic savings mobilisation as much attention as the other foreign sources of development finance.

To this end, the Bank of Zambia will ensure that the Committee that has been spearheading the development of these guidelines become a permanent one and meet every so often to make the necessary changes in an inclusive manner. Accordingly, you are all urged to forward any contributions you wish to make on an ongoing basis. Ladies and gentlemen, allow me now to welcome and thank Mr Mervin King for graciously agreeing to officially launch the guidelines. Mr. King is internationally renowned for his work on corporate governance, and in particular for his work on the King Committee of South Africa which issued its first report in 1994. The King Report, along with the Cadbury Report of the United Kingdom and the Sarbanes-Oxley Act of the United States have become key references on the subject and it is for this reason that we feel both proud and honoured to have Mr. King with us today. BIS Review 119/2006  1  It is now my honour and privilege to call upon Mr. King to launch the Corporate Governance Guidelines. Mr. King!
9  All speeches are available online at www.bankofengland.co.uk/speeches  9  (ii)  Forward looking stress tests of the Bank’s financial exposures  If the first case study illustrated an example where risk was already being actively evaluated, my second illustrates a completely new area of activity. The concept of enterprise-wide stress tests has transformed private sector thinking on risk management in recent years, driven in many cases by central bank regulators. The Bank of England conducts an extensive annual supervisory stress testing programme in the United Kingdom – and I note with interest the discussions taking place elsewhere in this conference on the potential to expand such exercises well beyond 11  banks, something we have also been considering . But, ironically perhaps, the Bank of England has not until very recently applied such techniques to its own balance sheet. That made sense when large-scale balance sheet expansions were expected to be rare and highly idiosyncratic. But the more permanent shift in the Bank’s firefighter role illustrated in Chart 5 suggests we need a more sophisticated, agile forward-looking way of evaluating the risks we might face, and (importantly) the resources required to deal with them. Development of a suite of stress tests has therefore been a core part of the early work of the new second line team. To shape this work, key judgments are required on ‘the 3 ‘S’s’: Scope, Scenarios and Severity. Scope describes the range of facilities that the Bank might be called upon to use.

This is by any standards a large portfolio – amounting to about a third of the total stock of conventional gilts in issue, with an average duration of 12 years, it has a so-called ‘PV01’ – or valuation 7  sensitivity to a one basis point movement in average interest rates – of about £ . Now an open position of this size would be many times larger than even the most aggressive traders in this room would dream about running themselves. Your natural instinct as a risk professional if you came across this in the private sector would probably be to seek an immediate reduction in the position, or a hedge in the market. But any attempt to do this would undermine the very policy objective of the Monetary Policy Committee in pursuit of their 2% inflation target: ie to induce a portfolio shift into riskier assets by removing duration from the market. As I noted earlier, this is a classic example of the central bank policymaker as fireman. What then is the role for the central bank financial risk function? For the new second line, it is a classical watching brief. Its first duty would have been to ensure there were sufficient resources to back the risk. In this case, that was achieved some years ago by placing the portfolio in a separate subsidiary of the Bank  7  For more details on the current composition of the APF gilt portfolio and the operations, see http://www.bankofengland.co.uk/markets/Pages/apf/gilts/results.aspx.
6  All speeches are available online at www.bankofengland.co.uk/news/speeches  6  Some of these are on a slower track due to our work with insurers in response to Covid-19. Others have been brought into sharp relief by the crisis. I’ll focus on three. UK life insurers have been incentivised to invest in long-term, illiquid assets with higher yields for some time, given the low interest rate environment. As a result exposure to credit and other risks (e.g. property) has been increasing. This is further exacerbated by Covid-19 as wider economic disruption has impacted the underlying creditworthiness of some of these assets. The PRA has published several – one might say many - supervisory statements setting out how we expect firms to manage risks arising from such investment strategies. We’ve clarified how we expect firms to apply and model the matching adjustment4; taken a deep dive into liquidity risk5; and provided additional guidance on the practical implementation of the Prudent Person Principle 6, which is the part of Solvency II that deals with qualitative aspects of investment risk management. We will be publishing some further, important clarifications on the Prudent Person Principle at the end of this month. We expect firms to demonstrate that they have strong governance and internal investment limits that are effectively implemented; this remains one of our top priorities for supervision of the life insurance sector.

It’s therefore worth taking some time to think about what we as the prudential regulator and the insurance industry have already learnt from the current crisis –including how the Solvency II regime has responded. None of us knows how the full effects of the coronavirus pandemic will unfold. Our aim at the Bank, alongside colleagues at the FCA and within government, is to build a bridge across the economic disruption created by the pandemic and help UK businesses, consumers and the financial sector to the other side. Insurers will need to be on the front foot in identifying the potential impacts on their longer-term business models in order to meet changing customer expectations. Covid-19: what role has Solvency II played in the industry’s response? I have talked previously about the principles of Solvency II that the PRA supports - a whole balance sheet, market consistent approach to regulatory solvency, and focus on good governance and risk management 1. The adequacy of firms’ capital and risk management during this global, systemic event is certainly being tested. The information we have from the largest UK insurers shows the industry was well-capitalised going into this crisis and has so far remained so, with aggregate solvency ratios around 150% 2. But given the exceptional uncertainty generated by the current crisis, we expect insurers to increase their monitoring of the additional risks presented by Covid‐ 19, and where necessary to update their risk and capital assessments accordingly.
Not only do Europe’s governments have far higher revenue as a percentage of their GDP, they also show a broader quota of social security contributions in respect of direct and indirect taxation (15% of GDP in the euro area, as against 7% in the United States), which tends to make the system more gradual. Fourthly, redistributive policies are also expressed in other ways than through government expenditure, for instance through the regulation of labour markets. On the basis of a series of indicators such as minimum wages, the legal safeguards protecting those in employment and the unemployment benefit replacement rate, the United States is at a lower level than the 20 average level for the EU. One way of measuring the magnitude of automatic stabilisers is the budget’s overall sensitivity to cyclical fluctuations in the economy, which can be expressed in terms of the elasticity of the primary budget balance (as a percentage of GDP) in relation to the output 21 gap, in other words the gap between real revenue and its potential level. If budget policy is anti-cyclical, the coefficient should be positive (in other words, it increases in a phase of expansion and decreases in a recession). An OECD study gives us a correlation of 0.48 for 22 the euro area and 0.34 for the United States. The lower overall budget responsiveness to the economic cycle in the United States can be ascribed both to lower current expenditure elasticity and to low tax responsiveness compared with most of the countries in the euro area.

On our continent, monetary and budgetary policies are often judged in relation to what is decided in the United States rather than in their own right. However, it is very rare that the opposite happens. Particularly at moments such as we are experiencing right now, one often hears people asking how come monetary and budgetary policies in the euro area do not closely follow the strategies implemented in the United States, without their pausing for a moment to consider whether or not those US policies are suited to the European economy. There is still a kind of unthinking reflex in Europe that prompts some people to believe that our economic policy authorities should adopt the same approach as the US authorities, and that we are making a mistake when we do not do so. This kind of asymmetrical assessment was perhaps alright under the Bretton Woods system, in which the European countries pegged their currencies to the dollar, and under the subsequent fluctuating system in which the individual European countries were relatively small, which allowed them to benefit from a certain amount of autonomy from the decisions reached on the other side of the Atlantic. But with the creation of the euro and the development of the euro area to levels akin to the US economy, it would have been rather ironic if economic policy decisions in Europe simply mirrored the conduct of other authorities.
Beyond the direct trade policy shock resulting from a rise in import tariffs, two factors at least may amplify the decline in global GDP: a decline in investment demand caused by firms’ falling business confidence due to uncertainty, and a rise in the financing cost of capital due to an increase in actual or perceived borrower risk. According to Banque de France model estimates, the negative impact on GDP of higher import tariffs is 2 to 3 times larger when we account for these indirect channels. And this increase in uncertainty can produce front-loaded negative effects, even before the effective implementation of protectionist measures. That said, protectionism is first and foremost a negative supply-shock, with stagflationary effects. As such, the adverse effects of protectionism cannot and should not be accommodated by monetary policy. In spite of protectionist threats, the global economy continues to expand strongly, at 3.7% this year. We have used a lot in our latest IMF meetings, the nice French word « plateau » to describe global growth. But this “plateau” is not even: the strong acceleration in the US, even if it is temporary and fragile, is offset by a moderation elsewhere. In short, we are moving from synchronized growth to economic divergence. Consequently, countries might be suffering from the ongoing rise in US interest rates. Helene Rey’s famous paper in 20133 argued that floating exchange rates are not sufficient to give countries independence from US monetary policy if they have an open capital account.

There are increasing signs that the labour market is tightening and nominal wage growth is picking up: the Phillips curve is back to work, albeit a bit later than expected; and this should pass through to core inflation which has been lagging behind due to the temporary effects of the appreciating terms of trade and declining corporate margins. We at the Governing Council are thus increasingly confident in the sustained adjustment in inflation back to our objective, with our forecast for 1.7% in each of 2018, 2019 and 2020, vindicating our unanimous decisions in June. Alongside these positive developments, there are, however, growing uncertainties: protectionism – I will come back to this later; rising oil prices; the US policy-mix – a warranted monetary policy normalisation and a less warranted fiscal stimulus – with which many EMEs are struggling; and equity market valuations, that may appear more in line with economic fundamentals and corporates earnings after the latest correction, but remain volatile in part due to geopolitical risks as well. Within Europe, Italian fiscal policy is under investor scrutiny. And there is Brexit, although its direct effect on the euro area macroeconomy is likely to be small. How should we, as euro area central bankers, respond to this economic environment? By combining two apparently contradictory aims: clarity and flexibility. As regards clarity, our first duty as policymakers is to provide markers to help guide economic actors and financial markets in the increasing fog of uncertainties.