samchain/econo-pairs-v1 huggingface dataset:
In many ways, the situation is deteriorating. As we meet, it is unclear when and how we will be able to return to calmer financial waters. Today I want to begin by discussing why central banks care about financial stability. In a second part, I will try to draw some preliminary lessons for central banks from the current market dislocation. As I said at the outset, the credit crisis is unfortunately still unfolding and its future course is uncertain. Naturally, therefore, we face a lot of questions to which there  1  See for example P. Hartmann, S. Straetmans and C.G. de Vries, 2006, “Banking system stability: A crossAtlantic perspective,” in M. Carey and R.M. Stulz (eds), The Risks of Financial Institutions, The University of Chicago Press, Chicago. BIS Review 141/2007  1  are no clear answers. For the purpose of today’s discussion, I will confine my remarks to the following two issues: The first one addresses the question of the optimal degree of transparency with regard to central bank liquidity operations; the second one investigates the implications of unusually high risk premia in short-term interest rates for the conduct of monetary policy. 1. Why do we care about financial stability? Why does a central bank like the Swiss National Bank care about financial stability? After all, as is the case in a number of other countries, the Swiss central bank does not have a legal mandate to supervise and regulate banks.

The risk premium in the interbank market has generally driven up the 3-month LIBOR which serves as the reference rate for the pricing of  15  Georgios Chortareas, David Stasavage, and Gabriel Sterne, 2002, “Does it pay to be transparent? International Evidence from Central Bank Forecasts”, Review of the Federal Reserve Bank of St. Louis, July/August, 99-117. 16  Frederic S. Mishkin, 2004, “Can Central Bank Transparency Go Too Far?”, NBER Working Paper No. 10829, p. 25. 17  In fact, the Bank of England would have preferred to act covertly, but the market abuses directive prevented this (http://www.guardian.co.uk/business/2007/sep/21/14). BIS Review 141/2007  5  credit. At the same time, interest rates on risk-free securities such as Government notes have declined. The result is a significant increase in the TED spread (the difference between an uncollateralized interbank loan and the risk free rate of the same maturity). With the 3-month LIBOR rising, central banks faced an important monetary policy decision. In countries where the official target rate is a central bank rate, for instance, the euro zone, the 3-month LIBOR became increasingly disconnected from the official target rate (typically a repo rate of two weeks or less). As you can see from Graph 1a, the ECB held its official target rate (the two-week repo rate) constant and therefore tolerated an increase in the 3month LIBOR.
Money market activity In his paper, Ulrich notes that money markets, and the overnight markets specifically, are very important for the transmission of monetary policy. This is a common perspective among central bankers involved in market operations, which I share as well, although I question whether overnight trading between banks is as special as Ulrich suggests. Money markets are where the policy stance of central banks is most directly expressed in market pricing,  BIS central bankers’ speeches  1  either by classic temporary open market operations to vary the quantity of reserves in money markets (as in the Fed’s pre-2008 operating regime) or through the price incentives set by the administered rates available at lending and deposit facilities (as in the ECB’s current full allotment regime). We have seen a myriad of important changes in money market behavior in recent years, with volume decreasing substantially in some instruments and significant changes in the flows between counterparties. How should we evaluate the current state of our money markets? Are they better, worse, or different but just as good as they were pre-crisis? Unfortunately, I don’t believe we currently have an agreed upon framework to evaluate these changes. Let me take a concrete example: Prior to the crisis, activity in the overnight interbank federal funds market was driven by the scarcity of reserves balances relative to required and precautionary demand for those reserves by banks.

However, these averages hide relatively strong fluctuations over the course of the year. At the beginning of 2003 inflation rose rapidly and during a couple of months it actually exceeded the upper tolerance limit of 3 per cent. However, it had fallen back by May and was once again in line with the 2 per cent target. The downturn continued throughout the remainder of the year, particularly for CPI inflation. The fact that CPI inflation fell more than UND1X inflation was due to the interest rate cuts made earlier in the year. In December, CPI inflation was 1.4 per cent, while UND1X was 1.7 per cent. The upturn at the beginning of the year was mainly due to rising electricity prices caused by supply problems in the hydroelectric power companies’ reservoirs and by unusually high demand resulting from a cold winter. Oil prices also rose and contributed to the higher inflation rate. The high energy prices had an impact on several sub-components of the CPI. For instance, housing costs and various prices linked to transportation activities rose unusually quickly during the spring. When adjusted for energy prices, the path of inflation in 2003 was much more stable and remained within the interval of 1.2-1.9 per cent. Small deviations from target Despite the fact that inflation fluctuated substantially over the year, we can conclude that the average CPI deviation from target level was relatively small in an historical perspective; around half a percentage point, compared with approximately one percentage point during the period 1995-2002.
The portfolio size and composition to which each central bank eventually normalizes will, of course, depend on what it eventually determines is appropriate to support implementation of monetary policy in the longer run. Indeed, the FOMC has indicated that in the longer run, it will hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities. The ECB has also used unconventional measures to provide accommodation, but unlike the Federal Reserve, BoJ, and BoE, this has primarily been through liquidity provided directly to the banking system via longer-term refinancing operations, rather than through asset purchases. This liquidity was provided at fixed terms of up to three years, thus allowing the size of the ECB’s balance sheet to normalize automatically as refinancing agreements mature. By contrast, the ECB’s upcoming purchases of asset-backed securities and covered bonds will present it with longer-term portfolio considerations. Finally, I should note that central banks – like other financial market participants – need to remain aware of changes in the financial market landscapes in which they operate. They may need to adapt their operations accordingly as they move away from asset purchases and back to money market instruments to implement monetary policy. For example, in addition to reflecting developments in its balance sheet since the financial crisis, the FOMC’s approach to normalizing policy also reflects changes in U.S. money market dynamics that have been influenced by various factors.

Importantly, as the Chair noted during her post-meeting press conference, this statement is intended to provide information to the public about the eventual normalization process; it does not signal a change in the current or future stance of monetary policy. According to the principles, the Committee will adjust the level of monetary accommodation primarily by utilizing policy tools to influence the level of short-term interest rates – in the first instance, using tools with rates directly administered by the Fed. Tools that can immobilize or drain large levels of reserves to tighten control over the federal funds rate also remain available. However, the principles do not envision that active adjustments to the SOMA portfolio will play a featured role. Specifically, the FOMC indicated that the federal funds rate will continue to play a central role in the Fed’s operating framework and communications during normalization, and that it will raise the target range for the federal funds rate when economic conditions warrant a less accommodative monetary policy stance. Adjustments in the interest rate that the Fed pays to depository institutions on excess reserve balances – that is, the IOER rate – will be the primary tool to move the federal funds rate into the target range. Raising the IOER rate should put upward pressure on a range of market interest rates and influence overall financial conditions in a way that fosters the Federal Reserve’s macroeconomic objectives.
Mario Draghi: Hearing at the Committee on Economic and Monetary Affairs of the European Parliament Introductory statement by Mr Mario Draghi, President of the European Central Bank, at a hearing before the Committee on Economic and Monetary Affairs of the European Parliament, Brussels, 18 February 2013. *  *  *  Madam Chair, Honourable members of the Committee on Economic and Monetary Affairs, It is a pleasure to be back here in Parliament and in front of your Committee for our regular exchange of views. We enter 2013 in a more stable financial environment than in recent years. This has been achieved through concerted reforms by governments and parliaments and decisive actions by European institutions. But considerable further efforts are needed to ensure that Europe continues emerging from the crisis, re-creates confidence among investors and citizens, and re-establishes stability and growth. This house has a key role to play in the reform agenda. I am thinking in particular of the adoption of the legislation for the Single Supervisory Mechanism. This is of crucial importance for progress towards financial union. Today, I will first review economic and monetary developments in the euro area since December. I will then address the two topics that you have selected for our discussion: the impact of a low interest rate environment; and the establishment of a Single Resolution Mechanism.

Risks to the outlook for price developments continue to be seen as broadly balanced over the medium term, with upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices, and downside risks stemming from weaker economic activity and, more recently, the appreciation of the euro exchange rate. Inflation expectations for the euro area remain firmly in line with the Governing Council’s aim of maintaining annual inflation rates below, but close to, 2%. Our monetary analysis is consistent with price stability. The underlying pace of monetary expansion and loan dynamics remain subdued. The annual growth rate of loans to the private sector remains negative. To a large extent, subdued loan dynamics reflect the current stage of the business cycle, heightened credit risk and the continuing process of deleveraging. Overall, inflationary pressures should remain contained over the policy-relevant horizon. Taking the evidence together, this allows our monetary policy stance to remain accommodative. The impact of a low interest rate environment Let me turn to the first topic that you have chosen for our meeting today, namely the implications of a low interest rate environment. The impact of the global financial crisis on the economy and, potentially, on price developments has been unprecedented. We have taken unprecedented measures in response, aiming pre-emptively and forcefully to avert risks to price stability, in accordance with our primary mandate. First, we have reduced our key interest rate to 0.75%, a level previously unseen in virtually all euro area countries.
The outlook for the Spanish economy over the next few years According to the latest economic projections published by the Banco de España, the upswing is expected to continue until 2019, although activity will tend to slow on account of, among other factors, the less expansionary fiscal policy stance and steady or rising prices for oil and other commodities, which are expected, in any event, to be higher than over the last two years. With regard to the composition of spending, the less expansionary fiscal policy stance and the squeeze on the income of resident agents, resulting from the rise in inflation associated with the increase in energy prices since early 2016, will somewhat reduce the growth of private domestic demand. Net external demand will continue to make a small positive contribution, against a background in which exports are expected to remain dynamic while imports remain relatively weak. The risks surrounding the central scenario The favourable outlook for economic activity I have described is subject to risks originating essentially in the external environment. First, although there has been an improvement in the outlook for world activity and trade, it has been accompanied by an increase in global uncertainty stemming from the greater strength of restrictive positions on trade, migratory movements and international policy coordination, in the area of financial regulation, for example. Second, we should not forget that, despite the significant progress made in deleveraging in recent years, our level of debt is still high.

Finally, it may also be said that, from a medium and long-term perspective, population ageing exerts upward pressure on items such as healthcare, care for the elderly and, in particular, pensions. In this latter case, the reforms introduced in recent years, such as raising the retirement age, the definition of a factor of sustainability linking the initial pension to the increase in life expectancy, and the new mechanism that makes the annual revision of pensions conditional upon balance between the system’s revenue and expenses, with ceilings and floors, have  7/8  contributed to containing the increase in expenditure and to shoring up the long-term sustainability of the pensions system. That said, in the absence of increased revenues, the adjustment mechanism would rest mainly on a reduction in the average pension relative to the average wage, which is known as the “replacement rate”. With a view to the future, it would be advisable to set an “objective replacement rate”, on the basis of which system revenues should be adjusted to ensure their sustainability. It would moreover be desirable if the reform strategy chosen were to lead to an increase in the system’s transparency and a stronger relationship between contributions and benefits, maintaining automatic adjustment mechanisms that ensure financial equilibrium. Challenges for the European Union governance framework I should like to conclude with a very brief reference to the risks arising in Europe and globally too from political positions and currents of opinion contrary to globalisation and free trade.
At the time of the transfer to the FSA, the Supervision division was, as I have already mentioned, the largest in the 10 Bank with 450 people. However, while the frontline supervisors all moved out, none of the associated central services and overhead costs moved with them. We committed to remove these excess overheads, setting ourselves the target of taking £ mn off costs - 10% of total costs - over a five-year period. We are consolidating our property portfolio, shrinking the buildings we use from five down to 5  BIS Review 102/2000  one, our main office in Threadneedle Street, in order to deliver substantial savings in accommodation and maintenance costs. At the same time we have sought to improve the efficiency of our central services; and this has required substantial reductions in numbers in some parts of the Bank. Our objective has been, as a public sector organisation, to deliver value for money, to ensure that the Bank is cost effective in its operations and comparable to best practice elsewhere. Finding suitable benchmarks for the Bank, however, is not easy. The Bank employs 2,500 staff which compares with over 15,000 at the Banque de France and also at the Bundesbank. But direct comparison with other central banks is made difficult by differences in functions. For example, the Banque de France retains a network of 211 branches for distribution of banknotes whereas the Bank has closed all but one of its regional cash centres, moving to a system using commercial banks for note distribution.

It must be acknowledged that no regulation can prevent financial institutions from encountering difficulties. A new regulatory framework must therefore ensure that banks bear the ultimate responsibility for risk undertaken by them. Regulatory compliance will then be in their own interest. We can never fully insulate the financial system from shocks. But we can increase our resilience. One of the most important things we can do is to keep our own house in order – by preventing major imbalances from building up in the economy or in the financial system, and by ensuring that the financial system in general is robust. Thank you for your attention. BIS central bankers’ speeches  3
Never before in recent history have global interest rates been as low for as long as they are today. The interest rate level was moving down long before the 2008 financial crisis. What lies behind this is an enduring decline in long-term real interest rates. The decline is attributable to structural changes that have weakened the growth capacity of many economies, low productivity growth and weaker growth in the labour force. BIS central bankers’ speeches  13  In the wake of the financial crisis, interest rates fell from an already low level to even lower levels. Central banks slashed policy rates to counter the downturn. The room for further rate cuts was gradually exhausted. In this situation, central banks have shown a capacity for new thinking. They have purchased securities on a large scale. The purchases have continued to push down long-term rates. In addition, a barrier has been broken. In a number of countries, the policy rate is now negative. Negative policy rates can affect the economy via lower bank lending rates and a weaker exchange rate. These are well-known channels. But the effect of further policy rate cuts may weaken when rates fall below zero. An important reason is that banks are reluctant to set negative deposit rates, especially for households. For many retail customers, substituting cash for bank deposits is fairly inexpensive. If banks hold back on deposit rates, lending rates can only fall to a limited extent before banks’ earnings are reduced.

For example, we will not entertain attempts at fishing for banking information and other spurious requests. As with all major international financial centres, customer confidentiality is a cardinal principle of our financial sector. It will only be lifted by a Singapore court order and only if the safeguards set out in the Mutual Assistance in Criminal Matters Act are met. These provisions do not shield criminal activities. Singapore will continue to participate actively in the fight against crime, money laundering and terrorist financing. Going forward, we will work to deepen the sharing of knowledge and practices with jurisdictions that approach us for assistance through training programmes. We believe that we can make contributions on economic and financial issues, particularly those pertaining to the region. For instance, our unique monetary policy framework has proved to be sufficiently robust and flexible to cope with shocks in the external environment. We are keen to share our experience through research papers, policy dialogues and seminars with developing countries which are experimenting with intermediate exchange rate regimes. IV. Conclusion  Let me conclude. I have outlined our priorities for the next five years. Our emphasis is on action. We must translate the seminar findings and conclusions into a set of practical initiatives and implement them. We must be prepared to take calculated risks and adapt as we go along. This will require not just hard work and dedication, but also a spirit of openness, inquiry and enterprise. I am confident that together we can achieve our goals for MAS and Singapore.
Daily trading volumes have quickly picked up in line with interest from market participants and now amount to about 3-4 billion baht per day, compared to about 1-2 billion baht last year. Annual turnover for 1999 for certain popular issues amount to one-third of its outstanding amount, which is a very encouraging sign. Bid-spreads are narrowing and now can boast a level not significantly far from the more developed bond markets. We have completed a yield curve available on the internet that spans from less than one-year, out into the 15-year tenure. This, complemented with the low interest environment, has boosted the issuance of corporate bonds. Last year alone, we have seen over 200 billion baht of private bonds issued. Of course, some of these were used to recapitalize the banking system, but no small amounts were also used for refinancing corporate debts as well as for business expansion. We are fortunate that the legal framework for the supervision of the capital market, namely private and public offering and investor protection, have already been instituted. In fact the private debt market started to flourish since 1992 after we set up the Securities and Exchange Commission. With this framework, the private debt market was able to resume activity again after the crisis but this time with the government yield curve as pricing benchmark.

Clearly in principle the colder the external frost, the higher we need the internal temperature: the danger is that we overload the domestic boiler, with households becoming reluctant to take on more debt, or pay higher house prices, so that consumer spending growth moderates regardless of the outside temperature. Earlier this year in fact things seemed to be moving in the right direction: global demand appeared to be picking up quite well, and there appeared to be a reasonable prospect that consumption growth would moderate largely of its own accord. There was at that time a question of whether that moderation might need to be encouraged by higher interest rates. With the downward revision - over the summer - to the expected pace of global demand growth, the emphasis of our policy debate has shifted. The questions now are how far we need to try to sustain domestic demand growth by lowering interest rates, in order to maintain overall stability; and how far we can sensibly do so without excessive risk of overloading the domestic boiler. The best outcome for us of course would be if the external frost would continue to melt, with the global economy maintaining its gradual recovery and the euro continuing to strengthen in foreign exchange markets. And that is in fact in my view the most probable outcome. But until things become clearer we are very much on the spot. And perhaps, I thought, 'on the spot' was not a bad answer to the opera's third riddle.