samchain/econo-pairs-v1 huggingface dataset:
Mr. Sheng looks at questions relating to financial regulation Lecture by Mr. Andrew Sheng, a Deputy Chief Executive of the Hong Kong Monetary Authority, to the Macquarie University MA (Finance) Programme in Hong Kong on 8/5/97. “A state is better governed which has but few laws, and those laws are strictly observed”...René Descartes (1596-1650) Introduction Financial markets today are the biggest markets in the world. The foreign exchange market turns over $ 1.2 trillion daily, roughly one quarter of annual world exports. The regulation of financial markets therefore concerns us all. This paper covers the What, Why, Who and How of financial regulation. Financial markets engage in the exchange of property rights. Financial assets are derivatives of physical or real assets, derivatives being property rights of property rights that are not “lumpy” or asset specific, and transactions costs in them being lower than transactions in real assets. The first thing to remember about financial products is that they are all defined by the law. Therefore, all financial transactions are about transactions in legal products, under procedures regulated by rules or laws. Even financial institutions are, strictly speaking, legal constructs. To paraphrase another French philosopher: Man is born free, but after that he is bound by the law. What is Financial Regulation? The Dictionary of Finance defines regulation as actions that ‘command and control’ the individual decisions of firms, in an effort to prevent private decision-making that would take inadequate account of the ’public interest’.

In the second part of my speech, I will go on to talk about the SNB’s investment policy, which has become very important in the light of our interventions in the market. I will explain our objectives and the criteria we use for investing the foreign currency purchased in the context of these interventions. The investment policy must support our monetary policy and give us the necessary room for manoeuvre. The economic situation and SNB’s monetary policy Current economic situation  I shall begin by reviewing the current economic situation and the SNB’s monetary policy. Global economic developments have been largely positive. Real GDP of our trading partners grew by some 2% over the past year (cf. chart 1). The US has recovered from the financial crisis; full employment has been reached and the economy is expanding. Recovery also continues in the euro area. Unemployment is falling and GDP is growing in almost all member states. Nevertheless, recovery is not yet as advanced as in the US. Solid growth will still be needed in the future to make up for the setbacks suffered over the last decade. Inflation trends also vary among the various economies (cf. chart 2). The global rise in inflation over recent months is largely attributable to oil prices. However, core inflation – which excludes oil and food prices – has not increased across the board. While it has stabilised in the US, it remains low in other regions, particularly in Japan and the euro area.
Distortions in a currency’s valuation, in particular, can justify interventions on foreign exchange markets – even in an environment of floating exchange rates. With regard to the interest rate instrument, it has become apparent that the room for manoeuvre in monetary policy is larger than previously assumed, and that interest rates can be lowered into negative territory. The fear that the introduction of negative interest will precipitate a flight to cash has thus far proved unfounded. 4  Chart 12 shows the deposit rates of Switzerland, Denmark and the euro area. For the Czech Republic, the discount rate is used, and for Sweden, the repo rate minus 10 basis points. In Sweden, this interest rate is available to the banking system within the context of fine-tuning operations by the Riksbank. 5  In Switzerland, the Federal Council introduced negative interest for foreign account holders in the 1970s. For details, cf. Bernholz, Peter (2007), From 1945 to 1982: the transition from inward exchange controls to money supply management under floating exchange rates, The Swiss National Bank 1907–2007. BIS central bankers’ speeches  5  Further monetary policy expansion in the euro area (from mid-2014) Now we come to the third phase, shaped by quantitative easing in the euro area. Economic recovery in the euro area was slow, although the ECB’s promise in July 2012 to do everything necessary to preserve the euro greatly reduced market uncertainty.

I noted particularly that the Association could play a role in three main areas: by acting as an industry representative and interlocutor with regulators; by establishing common standards and documentation; and by promoting market transparency and efficiency. I am glad to say that the Association has delivered on its promises in each of these areas. Its website is, for example, now up and running, and is an important source of information for both members and non-members. If I could put in a plea, however, it would be for more market statistics to be made available on the parts of the website that are open to non-members - or honorary members such as the HKMA. In its representational role, the Association offered very helpful comments last year on the draft guideline that the HKMA prepared on the management of the risks associated with syndicated lending. Our initial draft generated a certain amount of heat. This was I think largely due to a feeling on the part of the industry that we had overplayed the inherent risks of syndicated lending. We therefore made it clear in the final version of our guideline - which we issued in non-statutory form - that syndicated loans are not necessarily riskier than other types of lending. Indeed, the distribution of lending among participants is designed to reduce risk by sharing it.
That frontier is defined by speed. The average speed of order execution on the US NYSE has fallen from around 20 seconds a decade ago to around one second today. These days, the lexicon of financial markets is dominated by talk of High-Frequency Trading (HFT). It is not just talk. As recently as 2005, HFT accounted for less than a fifth of US equity market turnover by volume. Today, it accounts for between two-thirds and three-quarters. The picture is similar, if less dramatic, in Europe. Since 2005, HFT has risen from a tiny share to represent over 35% of the equity market. In Asia and in emerging markets, it is growing fast from a lower base. What is true across countries is also true across markets. HFT is assuming an ever-increasing role in debt and foreign exchange markets. In some futures markets, it already accounts for almost half of turnover. In the space of a few years, HFT has risen from relative obscurity to absolute hegemony, at least in some markets. HFT itself is far from monolithic, comprising a range of strategies. 3 Some involve high-speed liquidity provision, which is akin to market-making. Others involve statistical arbitrage, using trading algorithms to detect and exploit pricing anomalies between stocks or markets. Because these anomalies tend to be eliminated quickly, HFT algorithms have to be highly adaptive, not least to keep pace with the evolution of new algorithms. The half-life of an HFT algorithm can often be measured in weeks.

30 It is interesting to assess those proposals using the framework developed here. 29  European Commission (2010), CFTC-SEC (2011). 30  CFTC-SEC (2011). 12  BIS central bankers’ speeches  (i) Market-making guidelines: In principle, a commitment by market-makers to provide liquidity, whatever the state of the market, would go to the heart of potential price discontinuity problems. Market-making commitments would not forestall the arms race. But they would lessen the chances of liquidity droughts and associated fat tails and persistence in prices. They would, in effect, lower the impact of H. Perhaps for that reason, there have been proposals in both the US and Europe for such a set of market-making commitments. 31 The difficulty appears, first, in specifying these commitments in a precise enough fashion; and, relatedly and just as importantly, enforcing them. In a sense, even the market-makers offering their stub quotes on 6 May were fulfilling a market-making commitment, albeit a paper-thin one. If hard law commitments are too difficult to define or enforce, an alternative may be a set of soft law guidelines. A number of electronic broking platforms, notably in foreign exchange markets, have codes or rules of conduct – for example, around pricemaking and price-taking which control the extent to which any one firm can steal a technological march on others. If these codes were extended across trading platforms and assets, perhaps in time market-making behaviour might adapt. (ii) Circuit-breakers: Circuit-breakers already exist on US and Europe exchanges.
Crucially, the DWF is only intended to provide short-term liquidity support to banks – and is not intended to be used as a replacement for funding, which can only be sourced in a sustained way from private markets. And it is vital to stress that the DWF is not a 100% committed facility. At the point of application, the Bank will make a fresh, independent assessment of whether it deems the counterparty to be solvent and viable. To guard against moral hazard, the DWF charges fees which make it unattractive in normal times, but which would be more attractive under stressed market conditions. Because the  5  For more information, see Fisher (2011), “Recent developments in the sterling http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech487.pdf. 6  For more information see John, Roberts and Weeken (2012), “The Bank of England’s Special Liquidity Scheme”, in the Bank’s Spring 2012 Quarterly Bulletin. 7  Currently the Bank also offers at its discretion the option of a drawing of up to 364-days, for an additional fee. 8  Although counterparties are not guaranteed an allocation in these auctions, they are able to bid up for liquidity, increasing their chances of being allocated. BIS central bankers’ speeches  monetary  framework”,  3  DWF is structured as a liquidity upgrade, the fees charged are linked to the type and liquidity of collateral delivered. The more illiquid the collateral, the greater the value of the upgrade, and hence the higher the fee.

Term premia capture the risks that investors, having locked into a long maturity fixed-interest bond bear over the life of the bond. They are the extra compensation that investors demand to balance the fact that they will be holding a fixed interest long-maturity bond rather than simply rolling over a sequence of perfectly liquid, risk-free short-term bonds. Work by Bank of England economists last year estimated that the trend real rate of interest in advanced economies had fallen by around 4½ percentage points over the last 30 years, from around 4½% to around 2  0%. There are a range of other estimates which show broadly similar results. 3  The Bank work investigates the structural changes in the supply of savings and in the demand for investment that have led to the drop in the trend real rate of interest. It finds that the supply of savings has grown since the 1980s while the demand for investment has shrunk. The higher supply of savings accounts for around two-fifths of the drop in the trend real rate. Demographics, as older people save more, higher inequality, as richer people save more, and the Asian savings glut, drive this higher level of global savings. 2  See Rachel, L. and Smith, T. (2015). “Secular drivers of the global real interest rate”, Bank of England Staff Working Paper No. 571.
Replenishing their inventories, companies substantially increased their demand for commodities worldwide. Russia is a major producer of key commodities. High demand for Russian exports spurs economic growth this year. As companies complete their inventories, the effect of this factor will be tapering off gradually. The growth of oil export quantities will also be supported by the easing of the OPEC+ oil production cuts in response to the recovery of demand. Taking this into consideration, we have raised the oil price path in our forecast by 5 US dollars per barrel in the next three years. According to our preliminary estimates, the expansion of oil output under the new OPEC+ agreements will add about 0.1 pp to GDP growth this year and 0.2–0.3 pp next year. Another important growth driver is domestic demand, including both consumer and investment demand. Considering these trends, we have revised our economic growth forecast for this year upwards from 3–4% to 4–4.5%. After the recovery, the economy will expand at a pace close to its potential. We forecast that GDP will equal 2–3% in the next two years. The possibility to achieve higher economic growth rates will depend both on the expansion of production and logistics capacities and on labour resources, their expertise and performance. T hird. Monetary conditions have been progressively adjusting to the earlier increases in the key rate, but are still accommodative.

We still estimate this neutral range to be at 5–6%, provided that inflation is close to the Bank of Russia’s target of 4%. Thank you all for your attention. 3/3  BIS central bankers' speeches
Fiscal adjustment The Spanish economy has made visible progress in the redressing of fiscal balances towards levels that are compatible with the sustainability of public finances. The adjustment has required strong measures both on the revenue and the expenditure sides. From near double digit deficits in the early years of the current decade, the deficit was reduced to 5.9% of GDP in 2014. The commitments with the European authorities involve a further reduction of fiscal imbalances in 2015 and 2016. In this respect, public deficit targets are set to 4.2% and 2.8% for 2015 and 2016, respectively. Despite the additional efforts shown in the most recent budgetary information (up to November 2015), the fulfilment of these targets is not without risks. To tackle these risks it will be important to ensure a strict implementation of the budget, both at the national and the regional levels and, if the need arises, to be ready to take the appropriate corrective measures within the framework of European Union fiscal governance. But the challenges should not cloud the fiscal consolidation effort already made. This can be easily seen in the structural primary balance’s evolution, which turned around from a deficit of 5.2% of GDP in 2010 to an estimated surplus of 0.6% of GDP for 2015, according to the latest European Commission figures. It is worth remembering that the bulk of this adjustment was made through a severe economic recession and under very stressed conditions in a fragmented Eurozone financial market.

These adjustments will provide a more balanced exposure to global output. Two years ago, the fund made its first real estate investments in Europe. We have recently begun investing in US real estate. In February, the fund announced a joint venture with the TIAA-CREF11, where we invested in five properties on the east coast. One of the properties is on Arch Street here in Boston. Direct real estate investments will provide a fairly stable, inflation-adjusted cash flow. Over time, we aim to invest up to 5 percent of the fund in real estate. Investments will be allocated to more countries as we gain experience. Chart: Further information Regulatory requirements may limit the distribution of certain types of information and must always be met. However, our aim is to be as relevant and transparent as possible in our communication. Our policy is to be transparent about our evaluation of markets. All of the fund’s holdings at the end of 2012 are listed in the recently published annual report, as is the fund’s voting at 10 000 shareholder meetings last year. The fund is a large investor in a macro perspective. At company level, however, we are a minority shareholder. Strengthening shareholder rights and promoting equal treatment of shareholders are two of our key targets when we work with companies and standard-setting authorities. In this regard, we are happy to cooperate with the program on corporate governance at Harvard Law School12.
Without sufficient social acceptance this debate will obviously not even be joined, so it is very important to clearly underline the objectives pursued which I’ve repeated ad nauseam in this speech, but which I shall attempt to express again in a different way so as not to tire you. We should all agree that the best protection against unemployment is not that which concerns itself with subsidising the unemployed, but that which ensures that the majority do not lose their job. We should admit that it is useful to allow employers to improve their productivity because that way we will see higher real wage growth. And, finally, we should let workers take the opportunity to switch to better-paid jobs without losing a substantial part of their protection in the event that they lose such jobs. You will have realised that my approach to the debate on labour market reform is far removed from that of those who confine it to the question of whether or not to lower dismissal costs. In my view it is a mistake to debate cheaper firing alone, and I believe that we can only make headway if we focus on finding formulae that allow us to increase productivity, to reduce the numbers of unemployed and to improve workers' wages. The fact that Spain is today more advanced than other European countries in many areas that I mentioned at the start of my speech should not let us forget that there are still some fields in which we can learn from others.

Our assessments on economic outlook suggest a continuation of economic growth for the rest of the year. Foreign demand and public sector demand continue to provide positive contribution to aggregate demand upsurge, although more moderately than a year earlier. Private sector demand remains an important factor to determine economic growth in the future. Fiscal consolidation measures and the unfavourable situation in global markets and our trade partners will shift the short-term focus of economic growth to the internal demand: private consumption and investments. The capacity of these aggregates to compensate for the slowdown of the two main promoters of the insofar growth, will condition Albania’s economy performance over the upcoming 2–3 quarters. In the longer run, the performance of the Albanian economy shall be determined by its competitiveness and productivity as well as expansion of Albanian goods and services in foreign markets. This requires intensification of structural reforms at macroand microeconomic level as well as financial and macroeconomic stability in the country. *** Taking into account the information set out above, the Supervisory Council of the Bank of Albania deemed that inflationary pressures are downward and remain controlled in the medium run. Developments in the Albanian economy will continue to generate weak inflationary pressures, as a result of the negative output gap action. On the other hand, pressures generated by developments in global economy are expected to be downward. Economic agents inflation expectations remain anchored around the Bank of Albania target.
Claudio Borio will explore the operational aspects and the precautions we must take regarding the methodologies we use to measure systemic risk. Dale Gray will handle the third presentation, integrating the idea of financial risk – by using options – with macroeconomic models focusing on monetary policy analysis, then applying the tools to the particular case of Chile based on his joint research with Leonardo Luna and Jorge Restrepo. Johan Molin will share with us the experience of the Sveriges Riksbank, which has led financial stability analysis since the problems it endured in the early 1990s. This afternoon, Francis Diebold will analyze, for the financial markets of the United States and four Latin American economies, stock returns and volatilities to look for evidence of contagion and its characteristics. Charles Goodhart, Dimitrios Tsomocos and Alexandros Vardoulakis will present us the study of a heterogeneous agent model with a real-estate sector and financial fragility. Later on, Ethan Cohen-Cole and Enrique Martínez-García will present their research on the interaction of financial intermediation and banking system regulations and its effect on the optimal monetary policy response. Tomorrow will begin with the presentation of Jaime Ruiz Tagle and Marcelo Fuenzalida, who will examine, for the case of Chile, the systemic risk of household debt. Miguel Segoviano will follow, with a review of systemic risk and banking stability from a macroeconomic perspective. Then comes a presentation by Jaime Caruana, who will draw some lessons from the recent crisis and the international financial integration.

As we all know, this crisis started little over a year ago, with the end of the real estate boom in developed economies, which would end up exposing both the weakness and the excesses of the subprime mortgage loans. However, and as was apparent in the subsequent developments, the problem went far beyond lending to agents with low payment capacity. Overall, an asset price bubble, particularly in the housing sector, fueled by an accelerated credit expansion has proven to be a dreadful combination. Maybe bubbles cannot be made to disappear, but the integrity of the financial system must be preserved and requires continuous monitoring. BIS Review 134/2008  1  The collapse of Lehman Brothers can be considered a landmark event that took the financial markets from a period of turmoil to a major crisis. In fact, after the downfall of this investment bank, commercial banks in developed economies, regardless of size, began fearing that their counterparts might go broke and stopped lending to each other, which nearly dried up an already precarious interbank market. Every fragility indicator in this market, and stock exchanges around the world, reflected the onset of a confidence crisis. Whether or not it was a prudent decision to let Lehman Brothers go bust will be argued over for years to come, an institution whose fragility was common knowledge since early this year. Probably some bet on a Bear-Sterns-type rescue, a clear example of moral hazard. Maybe it should have been intervened months ago.