samchain/econo-pairs-v1 huggingface dataset:
Thomas C Baxter: The rewards of an ethical culture Remarks by Mr Thomas C Baxter, Executive Vice President and General Counsel of the Federal Reserve Bank of New York, at the Bank of England, London, 20 January 2015. *  *  *  These remarks are personal and do not necessarily represent the official position of the Federal Reserve Bank of New York, or any other component of the Federal Reserve System. Introduction Let me begin by thanking Sir William Blair and the Bank of England for inviting me to participate in this Project and at this Conference. At the New York Fed, we have made ethical culture a priority for financial services. We have done this not as a formal part of a supervisory program, but more as a call for reform. In the short time that I have this afternoon, I will speak about the reasons why I believe reform is necessary, highlight some of the important practical features of a strong ethical culture, and conclude by setting out a few of the rewards that might result from it. Bad behavior in the financial services industry prompted the New York Fed’s call for a stronger ethical culture in banking. My list of the most serious transgressions is probably not much different from anyone else’s. It includes the evasion of taxes and economic sanctions; conspiracy and market manipulation with respect to LIBOR and foreign exchange rates; and misselling financial products, including residential mortgages and insurance, to people who should not have acquired them.

I will touch on all three but will focus on two species of recognition: compensation and promotion. Each should be tied to ethical considerations. If the only consideration with respect to compensation and promotion is how much money the individual made for the firm, then that communicates a message that is inhospitable to a strong ethical culture. A second key component is what I call “character at the top.” The usual expression is “tone at the top,” and it refers to the message from the people who occupy the upper most positions in any organization (the board of directors and the “C” Suite). My worry with the typical expression is that it tends to focus on words, rather than conduct. The implication is that if you sing the right notes in the right key then all will be fine. I do not believe this. Employees will be influenced by the actions of key management, and not merely by the songs they sing. If those actions are in harmony with stated mores, then the combination should foster a strong ethical culture. But if the observed actions are not congruent with the words (or, worse, conflict with the words), then employees will follow suit: They may say the right things, but they will not behave the right way. Worse still, they will sense that they work for a firm lacking in integrity. This has long‐term, deleterious consequences.
Phase 2 in Figure 5 describes developments last year up until December. We are now in the early stages of phase 3: The repo rate is starting to be raised, while reinvestments are continuing so that the bond holdings are more or less held constant. We have communicated that we will reinvest principal payments and coupons “until further notice”, but we have brought forward reinvestments of large principal payments that are due during the first half of this year to obtain a more even reinvestment profile over time. An issue we need to address during the spring is how to manage reinvestments of the principal payments due next year. Phase 4 in Figure 5 implies that the repo rate has been raised slightly more. Not until then do the bond holdings start to decrease. The fifth phase in Figure 5 actually concerns developments in the long term. Our strategy is that the repo rate and the repo rate path will in the long term revert to being the main monetary policy tools. Purchases of government bonds or other securities then act as a complement when the policy rate is close to its lower bound. Figure 6 shows the Riksbank’s purchases and holdings of government bonds: The left-hand graph shows the development of our purchases, and the right-hand graph is a technical illustration of how our holdings might develop if bonds that mature after June 2019 are not reinvested.

• What does China economic slowdown and its current adjustment means for capital markets and for the quest of renminbi internationalization? • Should and can the systematically important countries “internalize” their spillovers effects to mitigate negative external impacts?” I organize my points around the three functions of an IMS – liquidity, confidence and adjustment. On liquidity function, there are two areas that we require significant improvement on the current IMS. The first is related to excessive liquidity during normal times. What are the appropriate policies to curb excessive capital flows? The IMF’s approach advocates that recipient countries should implement the capital flow management measures and use macro-prudential tools. Hence, there is an asymmetric treatment of countries as source countries are not expected to do much if not at all. There is of course room for a symmetric treatment. The Holy Grail may exist in the IMF’s articles of agreement as it states in Section 1 that “each member shall seek to promote stability… by fostering a monetary system that does not tend to produce erratic disruptions”. The second is about the existence of safety nets providing liquidity during financial stress times. Again, the optimal provision of liquidity is the main issue. To what extent it should be divided among global, regional and local sources. It is a classic efficiency versus moral hazard problem. Changes in governance structure of the global safety net providing IOs have a potential to alleviate this problem.
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.

5 [30]  offers liquidity to households and firms by providing liquid deposits and illiquid loans. This creates a liquidity mismatch for the bank. A further problem here is that the bank's assets can be difficult for an outsider to evaluate. As a result, a bank's financial situation depends to a very large extent on the trust its customers have in it. A bank builds trust by having plenty of equity, good earnings, low loan losses and good liquidity. And not least important: a sound culture where risk management is central. Confidence is essential for a bank, but it can also disappear quickly. If this happens, there is a great risk that depositors and other financiers will want to withdraw their money quickly. The risk is that the depositors who arrive first can withdraw their money while those who arrive later are left without, as the bank's liquid assets are then exhausted. This is precisely the reason why bank runs can occur. It can also lead to other financiers quickly withdrawing their funding. If the bank is bad, it should obviously be wound up. The problem is that it is difficult to tell whether or not a bank is bad, so there can be a run on good banks as well. Experience also shows that even bad banks should be wound up in an orderly fashion. There are several reasons for this. One reason is what I just mentioned: banks are highly dependent on trust and are difficult to evaluate.
However, the transformation of this general intention into specific objectives and policies has been, and remains, a complex matter that often involves options or dilemmas that are not always easy to resolve. To start with, the concept of financial stability is difficult to define precisely, nor do we have a sufficiently solid analytical framework equivalent to that used to conduct monetary policy. Moreover, responsibility for preserving stability is normally shared among different authorities, each with its own approach to the issue. As a result of the current global financial crisis, financial stability is very much at the center of debate, prompting an in-depth review of institutional arrangements, authorities’ responsibilities, policies and the instruments that can be used for this purpose. In developed countries, where the crisis had its origin, financial reforms are underway in a bid to overcome the weaknesses that were detected. Emerging economies, although they did not experience the same problems, must take advantage of the opportunity to review their own situation, draw lessons and advance in perfecting their financial systems. From this point of view, the exchange of opinions that is the purpose of this seminar may help in drawing up recommendations. 2. The Central Bank of Chile and financial stability  The concern of the Central Bank of Chile (BCCH) for financial stability is anchored in its legal responsibilities and the powers or instruments assigned to it.

And that, according to Eurosystem calculations, the output gap will return to close to zero by the end of the year ( 0.6%), even though France’s situation is less favourable due to its growth lag (output gap of around 1.4% according to our calculations). The non-standard monetary policy that we have been conducting since 2014 is contributing to this acceleration of growth in the euro area, by supporting domestic demand and by fostering very favourable financing conditions. In concrete terms, this acceleration results in more jobs – over 6 million jobs created in the euro area since the start of 2013 – and in a pick-up in investment. Corporate investment in particular, decisive for supply capacities, is clearly recovering: up 4.7% in 2015, 6% in 2016, and is expected to be up 4% in 2017 and 2018). [slide] This improvement in investment is underpinned notably by ongoing growth in lending to the private sector, at 2.5% year-on-year in August 2017 for firms and at 2.7% for households, with interest rates moreover remaining very low. This growth in lending is over twice as high in France, which incidentally leads us to be very vigilant at the High Council for Financial Stability. We are also observing favourable developments in inflation, which is gradually moving back towards our target of 2% over the medium term [slide]. After peaking at the start of 2017, the inflation rate stood at 1.5% year-on-year in August.
In our forecast, consumption is initially supported by the growth in real incomes that result from the very low inflation we are now seeing – from the one-off windfall from lower international energy and food prices. But as the sharp, one-off, drop in oil and other prices washes out of the system, real incomes increase over the next three years mainly because both pay and productivity gradually recover. In terms of inflation, we are forecasting that this growth in demand from business investment and consumption against a background of tightening supply in the economy will push inflation back to its 2% target over the next two years. We expect interest rates to rise over the forecast period but gradually and to a level below the pre-crisis average. As with all forecasts, there are risks. There is of course geopolitical risk, including at present obvious risks around Greece. But that is not my focus tonight. Another risk that has attracted some attention is whether we see a change in people’s expectations about inflation due to the very low inflation over past months driven by the drop in oil prices. Clearly, if very low inflation expectations became entrenched this could weaken growth. Sustained deflation can also in more extreme cases lead to lower incomes and higher real debt burdens – so-called ‘debt deflation’. The MPC has made clear that it is alive to this risk and would act if necessary to counteract it.

We know that recoveries from financial crises tend to be slow; it takes on average about eight years to reach the pre-crisis level of real per capita income following financial crises. 3 Distorted and damaged financial sectors don’t allocate resources effectively. We may not pay the price for a number of years as the boom builds up. But in the end the price we pay is large when a financial system misallocates resources in the boom and in the following bust. Real GDP per head – the best measure of our aggregate living standard – remains 1% below its pre-crisis peak. This high cost to the economy and to society is why we need not only robust regulation of financial institutions but also of the financial system as a whole. Financial stability and sustainable growth are complements. They are not alternatives. Turning back to the reallocation mechanism, there are now some positive signs. The financial sector is well into its recovery. Bank lending growth to non-financial businesses was positive in 2015 Q1 for the first time since the crisis. Beyond the banking system, the Bank’s agents are reporting private equity firms purchasing debt-laden companies and restructuring their funding. The creation of new firms, a sign of vibrancy and reallocation in the economy, increased by 30% in 2013. And labour market ‘churn’, the movement of workers between firms is almost back to its pre-crisis average having fallen sharply in the crisis. In addition, we have seen a return of business investment over the past two years.
During the crisis, some examples of bad incentives that sustained the boom included: 2/7  BIS central bankers' speeches  1. Compensation practices at financial firms that rewarded volume and short-term performance over longer-term, sustainable returns; 2. The conflict of interest inherent in the willingness of the credit rating agencies to designate tranches of subprime mortgages triple-A in exchange for fees; 3. The ability of Fannie Mae and Freddie Mac to use their implicit government support to take on large amounts of mortgage risk with very little capital backing; and, 4. The ability of AIG to use its triple-A rating to provide credit protection to banks and securities firms against complex mortgage obligations with little direct capital support or an adequate liquidity backstop. Culmination of the crisis Once the housing bust got underway, stress on the financial system increased sharply as asset prices fell and bank earnings plunged. In the spring of 2008, such pressures led to a forced sale of Bear Stearns to JPMorgan Chase. Later in the year, the government placed Fannie Mae and Freddie Mac into conservatorship. In September, Lehman Brothers failed. And, a day later, AIG was rescued in order to protect the rest of the financial system against further losses and even broader contagion. With confidence in financial markets and financial intermediaries badly frayed, the Federal Reserve and the U.S. government intervened and provided a range of liquidity backstops, debt guarantees, and capital infusions to forestall a complete collapse of the financial system and the economy.

The Conference Report summary of the legislation’s key provisions, provided in plain English by the Senate Banking Committee, states that it seeks to end “the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.”8 While there is much to criticize about Dodd–Frank, I cotton to those blunt statements on ending too big to fail. For, if after the myriad rules and regulations are written and implemented we have not eradicated too big to fail from our financial infrastructure, reform will have failed yet again. I have spoken to this topic on several occasions.9 If you pull up a copy of the Sept. 28, 2009, Wall Street Journal, you will find an article I wrote with my colleague Harvey Rosenblum about the interference too big to fail poses for the effective conduct of monetary policy. In looking at regulatory reform and implementing Dodd–Frank, I think a key point worth repeating is that the distinction between “commercial banks” and “the shadow banking system” is a false one. The two became intertwined beginning with the bypassing of Glass– Steagall strictures by Sandy Weill and Citicorp and the deregulatory initiative of Gramm– Leach–Bliley.
Although these developments caused the prices of core goods to increase more in the fourth quarter than in previous years, the price hikes adjusted for tax effects remained below those of previous years (Figure 5). 2  BIS Review 31/2010  Processed food prices followed a course in line with the outlook presented in the October Inflation Report, whereas unprocessed food prices surged more than expected (Figure 6). Thus, food prices, which increased due to processed food prices in 2008, maintained an upward trend in 2009 due to the surge in unprocessed food prices. As I have already mentioned, these high-rated increases in unprocessed food prices explain substantially both the rise in inflation in the last quarter and the deviation from the end-2009 inflation forecast. In Turkey, annual inflation in unprocessed food prices displays remarkable fluctuations and this creates a significant forecast uncertainty. To illustrate this, following the lowest rate of third quarter change of the past five years in 2009, this group also displayed the highest rate of increase over the last six years due to price hikes in fruits-vegetables and meat in the fourth quarter of 2009 (Figure 7). Here, I would like to remind that, in the third chapter of Inflation Report that will be posted on our website shortly you can find the Central Bank’s  BIS Review 31/2010  3  detailed assessments regarding volatility in unprocessed food inflation, including comparative analyses between Turkey and other countries.

In doing so, it will also contribute towards enriching further the diversity of players and strengthening the institutional infrastructure of the Malaysian Islamic banking system. The continued growth of Islamic finance in Malaysia The international economic and financial environment is expected to remain very challenging with several major economies now in recession and continued uncertainties prevailing in the international financial system. In spite of this, the Asian economies are still growing, albeit at a more modest pace. The dominance of domestic demand and increasing regional economic integration have enhanced the prospects for Asia to sustain a modest pace of growth. In this challenging international financial environment, it is encouraging that Islamic finance has continued to demonstrate its evolution and strong growth. Islamic finance has now become a new vehicle contributing to increasing the financial linkages not only within Asia but also with the rest of the world thereby facilitating cross-border allocation of capital globally. Indeed, a number of international financial centres have recognised Islamic finance as an integral part of their financial system in order to complete the suite of financial products and services being offered, and therefore are actively developing this segment. The Islamic finance industry has not only continued to grow but it has also been able to present a higher level of dynamism. The key indicators of the Islamic banking sector continue to record a progressive pace of development. The Islamic banking assets have expanded by 23% to RM234.9 billion compared with a year ago.
As employment rises and the lack of labour increases, it is also reasonable to assume that the rate of wage increase will be gradually raised. The Riksbank’s forecast assumes that wage increases will grow as resource utilisation in the labour market rises. A rising rate of wage increase and a stabilisation of productivity increases at a more normal level will mean that cost pressures in the economy increase in the coming years. With more rapid cost increases, price increases will also be greater in the long term. There is thus good reason to believe that inflation will increase during the forecast period. At the same time, what we are expecting is a modest upturn in inflation, despite a strong upturn in employment and relatively high GDP growth. This is due to continuing favourable supply conditions. For one thing, productivity growth is expected to remain at a relatively high level, and for another thing the labour supply will probably increase more than during previous economic upturns. A larger supply of labour  4  BIS Review 17/2007  will hold back the pressure for higher wage increases. Moreover, it appears that international price pressures will remain high. These hold back price increases on imported goods. But I would also like to emphasise that the inflation forecast is uncertain. This is illustrated by the uncertainty bands around the inflation forecast that is included in our report. The uncertainty bands are based on the Riksbank’s historical forecasting errors.

When we make forecasts for the labour market, we also have to take into account the fact that the labour supply will increase when economic activity strengthens. This is a normal pattern. The Government’s policy will probably also mean that the number of persons in the labour force increases slightly more than has been usual in previous economic upturns. The fact that the labour supply increases will mean that unemployment will fall at a slower rate than employment rises. With regard to inflation, we expect it will fall over the coming six months. It is the large fluctuations in energy prices that make an impact on inflation in the short term. We cannot – and should not – do much about this type of short-term fluctuation in inflation. In the longer term we are expecting inflation to rise and be close to 2 per cent two years ahead. One might wonder, if inflation is now expected to fall in the short term, what reason do we have to believe that it will rise to 2 per cent in the longer term? One important reason for this forecast is that productivity growth should be more modest in future. Over the past two years we have been able to note that productivity growth has slowed down compared with the years before that. This indicates that productivity growth is about to slacken to a more normal level, seen from a long-term perspective.