samchain/econo-pairs-v1 huggingface dataset:
The Fiscal Compact also accelerates the application of the excessive deficit procedure by introducing sanctions when the debt and deficit to GDP ratios are excessive. Fiscal surveillance has been extended to a broader excessive imbalances procedure, which goes beyond fiscal imbalances and seeks to identify and correct a range of macro imbalances and shortcomings in competitiveness. In fact, various euro area member states ran into problems despite of their adherence to the SGP criteria, to the extent that they nonetheless manifested other types of imbalances, such as excessive private indebtedness. Preventive recommendations are provided to member countries at an early stage in the formation of imbalances. The severity of the financial crisis has also exposed the inadequacy of the current financialsector regulation and supervision. As already indicated, macro-prudential risks were overlooked and the link between sovereigns and banks was underestimated. In reaction to this, European institutions and member states have engaged in a major overhaul of bank regulation and supervision with the objective of creating safer, sounder and more transparent financial institutions. One of the major initiatives to strengthen the governance framework was the establishment of the European Systemic Risk Board (ESRB). In its first year of operation, the ESRB tackled key issues relating to the interaction between three factors: the creditworthiness of European sovereigns, the increasing difficulty of banks in raising funds, and weakening economic growth.

Alternatively, more direct supervisory requirements may be necessary for addressing the improvement of information systems or the separability and preservation of critical payment systems. But such measures have costs and I would argue increase the relative benefit of efforts to identify the no doubt very difficult changes necessary in both the private and the public sectors to reduce organizational complexity in financial firms. I note that the CBRG report not only has recommendations largely addressing the four impediments to recovery I described, but also a recommendation to simplify financial firm organizational structures. A final benefit of recovery planning is that it is a prod to concrete action in the near term, when the institution is healthy and provides a ready-made menu of options when the firm is distressed. Moreover, the impediments to recovery are also impediments to resolution. If the recovery plan does not succeed in averting failure, but the firm has acted on the plan, it will enter resolution with better information systems, a reduced risk profile and perhaps fewer intragroup exposures than it otherwise would have. Resolution planning As I mentioned at the outset, the financial crisis validated for many concerns about the adequacy of measures to resolve large financial firms without high costs and destructive externalities. The Lehman bankruptcy reminds us that every financial institution is resolvable, but at a cost.
This, together with the difficulties of the latest round of budget and debt‐limit negotiations, shifted the consensus to postpone the expected date of the beginning of tapering. Recent figures indicating a recovery of employment in October stronger than expected have led some to bring forward again their forecasted date of tapering. Developments in coming weeks will be crucial to assess whether recent data mark a change in tendency or a temporary phenomenon. The question of how the reversal will occur is the hardest to answer. If everything goes as planned, the withdrawal of the monetary stimulus would be gradual and related to improved economic conditions in the US. But, the significant reaction of markets to the announcement  4  A few papers trying to quantify the impact of various macroprudential policies include Lim et al. (2011) and Tovar et al. (2012). 5  See for instance the article by Rey (2013) and the presentation by Smets (2013) at Jackson Hole. BIS central bankers’ speeches  3  of the possibility of reducing the speed of purchases, gives us some reason to worry about the ability of authorities to guarantee a smooth transition to a scenario of normal monetary conditions. Financial markets are large, and even the Federal Reserve may have some transitory trouble taming them.

Our understanding of the transmission channels behind this synchronized increase is still limited.5 These recent events have elicited mixed feelings in the international community. On the one hand, there is the view that the longer the global liquidity persists, the more likely that vulnerabilities will build up in capital‐receiving countries. In this view, a gradual normalization of international liquidity conditions would be a welcome event for those countries where fundamentals are still strong. Furthermore, to the extent that the normalization comes with better prospects for advanced economies, the somewhat tighter access to international borrowing would be accompanied by an increase in external demand. On the other hand, there is the view that a fast reversal of expansionary monetary policies in advanced countries would yield a sudden and important tightening of financial conditions and a surge in financial volatility. Recent years have taught us all too well that a situation like this may have unforeseen consequences. All in all, the final impact of the tapering of QE policies on the rest of the world will depend on when it takes place, how it is done, and what countries do in the meantime. Let me first address the issue of when it will take place. After some speculation earlier this year that tapering would start in September, subsequent developments indicated that the recovery of the US labor market had been more sluggish than initially expected.
Building on these principles, we will continue working towards a clearer consensus on the appropriate circumstances and scale for IMF lending, the possible need for additional financial instruments, and the adequacy of the present framework for the orderly resolution of sovereign debt problems. Fourth, the Fund’s role in low-income countries. Low-income countries present the international community with some profound challenges. Over a billion people live on less than a dollar a day, and hundreds of millions are affected by disease. Addressing the HIV/AIDS pandemic, in particular, will be critical for growth and poverty reduction in many developing countries. Achieving durable economic growth in these countries – which is essential for lasting poverty reduction and reaching the Millennium Development Goals – will therefore require a strong social framework as well as sound economic policies. On our part, the IMF can help countries put in place policies and systems to effectively manage the increased and large inflows of aid that could be forthcoming in response to the HIV/AIDs crisis. Importantly, lasting poverty reduction can only be achieved with stable and sustained growth. The IMF, with our mandate in promoting economic stability, can help countries to put in place strong macroeconomic frameworks that will lead to economic expansion and debt sustainability. As in everything else that we do, we must ensure that our assistance to low-income countries continues to fit their particular needs and circumstances.

Meeting the needs of the future To continue to serve the interests of our member countries and the international community at large, the IMF has to be in a position to deal with the influences that are expected to shape the global economy in the coming years. We must not remain static, nor must we change only in a reactive manner when forced to. For that reason, I have initiated an examination of the Fund’s medium-term strategic direction. We hope to use this opportunity to explore a variety of issues and their implications for the work of the IMF. These include matters like global financial flows, regional integration, efforts to reduce poverty, and questions concerning global governance, transparency, and accountability. We are still in the early stages of the review, and there have been many preliminary ideas floated and discussed. At this juncture, it is important for all of us to remain flexible and open-minded, particularly to views and opinions from outside the IMF. However, there is a sense that the continuing evolution of the Fund must remain grounded in the institution’s key areas of responsibility, as specified in our Articles of Agreement – that is, to facilitate international monetary cooperation, to foster a liberal system of international trade and payments, and to promote macroeconomic and financial stability, as a condition for sustained growth.
And the information sources may evolve – firms’ definitions of products, business lines, risks, committees and so on do not stay the same. So – along the same lines pursued by law firms for example – one big win is the ability to produce structured data from a range of sources, the analysis of which traditionally required significant manual effort. Over time it may be possible, for example, to train tools to recognise business lines via their numerical characteristics and patterns, and their unstructured data alongside structured regulatory returns. ML also allows documents with similar characteristics to be classified together and analysed, either within or across banks. For example, it could be used to follow the escalation trail from the most junior to the most senior committees. This sort of work is labour intensive when performed by humans: aided by machines, supervisors could in future devote time to those areas where humans have a comparative advantage. Setting a supervisory strategy without effective communication is pointless, as we rely on the firms to take actions to mitigate the risks. To achieve complex supervisory outcomes – which often require significant, multi-year remediation by firms – boards and senior management of firms have to understand the context and rationale for what we are trying to achieve, as well as what we would deem to be a successful outcome. So getting our communications right is key. But how clear are those communications?

Evidently, the situation we are in calls for a whole set of thoroughgoing reforms and measures, in step with the scale of the challenges facing the economy. And if the adoption of structural reforms always requires a particular effort on the part of the industries involved in economic, social and political terms in order to achieve the highest degree of consensus possible, such effort is evidently all the more necessary in the current exceptional circumstances. Now on to the last matter I shall address today: the situation of the Spanish financial system. The Spanish financial sector has been affected by the financial crisis since it began, although its effects have undoubtedly heightened since last summer. The current crisis has two characteristics. Firstly, it is an international crisis on a large and widespread scale, affecting different markets, numerous institutions in various countries, a wide variety of assets and the real economy. In a further manifestation of the process of globalisation, the problems generated in very specific geographical markets have ultimately spread to most countries, and it is not very realistic to believe that isolation from the crisis may be an option. Secondly, the crisis is going to cause an across-the-board reduction in the financial and banking business in particular. The excesses seen in financial innovation and in overly expansionary credit policies have caused many of the current problems, whereby there will foreseeably be a back-to-basics movement entailing a clear reduction in total turnover in the financial sector.
Eva Srejber: How the Riksbank's financial assets are managed Speech by Ms Eva Srejber, First Deputy Governor of the Sveriges Riksbank, at the Handelsbanken, Stockholm, 25 April 2006. References and diagrams to the speech can be found on the Sveriges Riksbank website, www.riksbank.com. *  *  *  Let me begin by thanking you for the invitation to come here and speak about the Riksbank’s financial asset management. The reason that I wish to take up this question is that, as you know, we recently changed the currency allocation in our foreign exchange reserve. This change is part of the general review of financial asset management that has been under way at the Riksbank for some time. In order to avoid any confusion with regard to what lies behind overall changes in our financial asset composition, it is important to explain the principles for our asset management. On a general plane, the Riksbank does not differ from other asset managers. Like them, we endeavour to generate earnings for our owner, in our case the general government. It is instead the way our management is limited that makes the Riksbank, like other central banks, different. Central banks exist ultimately to carry out a number of tasks crucial to the economy, which are linked to monetary and exchange rate policy and the functioning of the payment system. For us at the Riksbank it means that we are to ensure that inflation is low and to promote the safe and efficient functioning of the payment system.

The Riksbank has the sole right to issue banknotes and coins in kronor. This comprises the single largest item on the liability side of the balance sheet. The size of this item is governed entirely by the general public’s demand for cash. 1  The currency assets in the foreign exchange reserve are invested in foreign fixed-income securities. Just over 90 per cent of the capital is invested in government bonds and the remainder in US agencies. 2  For further reading on the role of the gold reserve, see Henriksson (2002). 3  With the aim of counteracting a fall in gold prices, 15 European central banks agreed in September 1999 that they would regulate the sale of their gold holdings during a five-year period. This agreement was renewed in 2004. 4  For a detailed survey of the Riksbank’s steering interest rate system, see Otz (2005). 5  This works by means of the Riksbank selling kronor for euro on the spot market and investing the euro on deposit. At the same time, a forward agreement is made to repurchase the kronor up to six months later. Forward agreements are signed to eliminate currency risks. The average duration in the swap portfolio should be three months. BIS Review 33/2006  1  We also need our own capital in order to cover losses that may arise in our activities.
Some are used for securitisations, where investors obtain returns linked to the credit risk on a portfolio of assets. Regular cash-market securitisations, with a full transfer of the underlying assets, shrink bank balance sheets. But synthetic securitisations, which have become prevalent over the past couple of years, can involve increased money holdings16. It is not obvious that such deposits would be of macroeconomic significance over and above any effect on asset prices/risk premia stemming from the prior associated demand for (synthetic) credit. But we should pause before concluding firmly that the money data are benign. First, their counterpart, bank lending, has been growing at around 15% (although the 3-month annualised rate is somewhat lower). Second, the money holdings of non-financial companies have recently been rising rapidly, perhaps signalling on upside risk to the outlook for business investment in an environment of robust profits and aggregate demand. Third, looking at UK OFC money may be too narrow if we are trying to assess whether there is an upside risk to asset prices, and so to aggregate demand, from money growth. Given that asset prices are today determined in global capital markets, global rather than domestic money (and credit) growth may be just as relevant. On one measure, the rate of growth of ‘world’ broad money17 has slowed from around 15% to around 8% since 2003 (Chart 9), perhaps consistent with the gradual withdrawal of monetary accommodation in the US and elsewhere.

Forward-looking uncertainty This is where my own second puzzle kicks in: whilst we can busy ourselves trying to identify why realised asset price volatility has not fallen more over the past decade, central bankers seem to expend quite a lot more energy worrying about the low level of future volatility implied by options on a range of financial assets. So, on the one hand, members of my community variously enumerate risks from low risk premia and the Search for Yield; global imbalances; energy prices; household balance sheets and house prices in a number of countries; releveraging of the corporate sector via Leveraged Buy Outs; flatter Phillips Curves; and so on10. On the other hand, implied volatilities derived from options, with a range of expiry dates, on long-term yields, equities, and exchange rates are all well below levels around the turn of the century (Chart 3). And in recent months, at least for short expiry options, they have dipped below the averages for the first part of the 1990s. But implied volatilities may not be the best measure of the market’s forward-looking assessment of risks. They represent one standard deviation (sd) in the market’s underlying probability distribution, whereas arguably central bankers are worrying about greater-than-one-standard deviation events. The market’s assessment of such risks can perhaps be gauged by looking at how much of the current option-implied distributions lie beyond one sd compared with option markets in the past, and with historical outturns.
However, there are many types of shock where there is no conflict between stable nominal developments and stable developments in the real economy. For example, a sharp decline in overall demand may give rise to a deflationary recession. In such a situation, an expansionary monetary policy may contribute to both nominal and real economic stability. Whether disturbances arise on the supply side or the demand side, it should be possible to use the interest rate to influence economic developments. The interest rate is an instrument, rather than a target variable. A passive monetary policy will lead to both price and exchange rate instability and to greater fluctuations in production and employment. However, an active monetary policy does not imply attempting to fine-tune economic developments. We must be mindful of the uncertainty associated with economic developments and the effects of monetary policy. Normally, interest rate changes should be made gradually to allow us to acquire more information, for example about the effects of previous interest rate changes. 2  BIS Review 7/2001  Uncertainty and credibility According to Norges Bank's mandate, monetary policy is to be aimed at maintaining a stable krone exchange rate against European currencies, based on the range of the exchange rate maintained since the krone was floated on 10 December 1992. In the event of significant changes in the exchange rate, monetary policy instruments will be oriented with a view to returning the exchange rate over time to its initial range.

Low oil prices amplified the fall in investment in the petroleum sector. At the beginning of 1999, the outlook for the Norwegian economy seemed fairly bleak. In this situation, the possibility that Norway would enter a recession of a type that would further reduce confidence in the krone was considered a definite risk. This is why Norges Bank decided at the beginning of 1999 to reduce interest rates. Owing to the uncertainty associated with economic developments and the effects of interest rate changes, Norges Bank adopts a gradual approach to the setting of interest rates. Interest rates were therefore reduced in five steps by a total of 2.50 percentage points in the period from 28 January to 23 September 1999. The lowering of interest rates contributed to strengthening the krone. 6  BIS Review 7/2001  In mid-1999, Norges Bank considered the risk of a recession of a type that would reduce confidence in the krone to be substantially reduced. In addition to the reduction in interest rates, this was partly due to brighter prospects for international growth and higher commodity prices. However, we still envisaged a growth pause in the Norwegian economy. The projections for price and cost inflation in the next few years were then in accord with the corresponding aim for inflation for the ECB.
17  See the reasoning on this in Williams (2009) and Bayoumi et al. (2014). 18  See for example Krugman (2014) and Pettersson (2014). 19  Bordo and Filardo (2005) note that episodes of deflation have been common throughout history and often been unproblematic. But they also note that these unproblematic episodes often occurred under the gold standard regime and that long-term inflation expectations were then firmly anchored. Mechanisms that are based on expectations of lower prices in the future then do not arise so easily. 8  BIS central bankers’ speeches  phones. The price level for these goods has fallen fairly quickly, as a result of the rapid productivity growth, even during periods when the general inflation rate has been clearly positive (see Figure 5). But despite the falling prices, demand for these goods has not collapsed, but rather increased over time. To summarise, I am thus worried about the low inflation in Sweden in recent years. I see it as particularly problematic that the low rate of inflation risks impairing wage formation and contributing to unnecessarily high unemployment. There is also a risk that the credibility and efficiency of monetary policy will deteriorate and that there will be arbitrary reallocations between lenders and borrowers. But, at the same time, I believe that some concerns and problems have been exaggerated in the debate. I see it as a small risk that Sweden would suffer a prolonged period with falling prices.

However, bail-in is not yet a well-defined concept in the international policy discussion; I’m not sure how my description of a mechanism resonates with the overall discussion. Right now, the common theme of a set of bail-in concepts is putting in place a statutory or contractual trigger that would convert a firm's debt into equity, thereby immediately strengthening the firm's capital base. Short-term debt and liabilities would likely be excluded. To move the bail-in mechanism from concept to a meaningful proposal, the official community needs to develop one or more specific proposals that can be vetted, debated and improved. In that spirit, let me list some areas in which a bail-in proposal needs to be more specific. A proposal needs to make clear:   The nature of the trigger. Is it contractual or supervisory? Is it rule-based and if supervisory, rule-based or discretionary? 6  BIS Review 140/2010    The desired capital structure before a bail-in. Consonant with the work in Basel on capital and liquidity requirements, how much bail-in eligible debt should the firm have? To answer that requires specifying goals for the capital structure of the restructured firm. It is probably crucial that the post-bail-in capital structure provide enough loss-bearing capacity to make regeneration of the company's prospects credible.   Estimates of the market capacity to purchase bail-in eligible instruments relative to the amounts of such instruments that would be needed and the price sensitivity of markets to volume and financial institution credit quality.