samchain/econo-pairs-v1 huggingface dataset:
No doubt the drama of policy uncertainty will continue. But what will be the end-game? Broadly speaking, we envision two scenarios: an extreme scenario and a baseline scenario. In the extreme scenario, prolonged political gridlock over policy leads to a liquidity seizure. Failure to ratify the fiscal compact results in handicapped liquidity support efforts on the part of the authorities and heightened market concerns. Rising risk premium leads to explosive debt dynamics, loss of market access and rollover difficulty, which in turn leads to even greater liquidity needs. With the cost of rescue mounting, internal country politics may further delay policy leading to a vicious cycle between rising rescue costs and policy inaction. There are signs that these risks are very real. For example, last month in late July, Spanish bond yields recently jumped up again over 7 percent, making the country’s debt dynamics unstable. There has also been upward pressure on Italian bonds. The ECB came to the rescue by promising to “do whatever it takes to preserve the euro as a stable currency”. Markets stabilized and yields came down. The US stock market also picked up. Nevertheless, the risk that yields could erupt again persists, especially if concrete progress in implementing policy does not take place. In the event of a liquidity seizure, there will be considerable spillover into global financial markets. Trade will decline amid the credit crunch that will surely follow. Asia, Thailand included, will not be spared the turmoil. So that’s the extreme scenario.

Financial stability is a precondition for monetary policy being able to work as intended, while monetary policy can affect financial stability. It is therefore rather natural to take the risk of financial imbalances into account in monetary policy. However, there must be a reasonable connection between alternative regulations and monetary policy. Regulations can be described as an indirectly-targeted means of raising or lowering interest rates in a certain social sector. If the regulations deviate significantly from the monetary policy that is being conducted, distortions and contradictory messages will arise after a while in the financial sector. New control problems will emerge, for example through the appearance of shadow banks or through excessive borrowing abroad. As is so often the case, it is a question of finding the right balance. A low repo rate is justified, but how low? The economic situation over the last 12 months, that is the weak development of economic activity abroad and the low inflationary pressures, has made it necessary to gradually lower the repo rate in order to enable inflation to rise towards the target of 2 per cent and to normalise resource utilisation (see Figure 1). This means that we have a very low repo rate today, which is also reflected in lower interest rates for households and companies (see Figure 10). Determining how low the repo rate should be entails balancing many different factors against each other.
Denis Beau: Navigating a changing weather Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at a Meeting with Observatory Group, New York City, 10 June 2019. * * * Accompanying slides of the speech. I would like to discuss with you today a few issues that come to mind when watching over global financial developments. I do not know whether a storm is coming but the weather has certainly changed over the past quarters and we need to make sure that we are ready to withstand harder times. Indeed, the two points I would like to make in my initial remarks are 1/ risk to financial stability are on the rise 2/ against that backdrop, it would be prudent to strengthen further the resilience of the global financial system. Macroprudential policy has a critical role to play in this respect, alongside a strong focus on filling knowledge and policy gaps while maintaining a steady (regulatory and supervisory) hand at the helm. (1) Risk to financial stability are on the rise [Slide 1] The macroeconomic outlook remains uncertain: the global slowdown, which was initially exacerbated last year by idiosyncratic factors, is deeper and more persistent than initially foreseen. Since last summer, the IMF has revised its assessment of the global economic outlook downwards. The cyclical upswing it expected back in the spring of 2018 became a less even expansion with increased downside risks over the summer. Last autumn and late last year, the IMF insisted on the weakening of the expansion.

Rather, as JFK once said, “the time to repair the roof is when the sun is shining”. By setting the CCyB rate above zero now, we lock in existing excess capital at a time it is relatively cheap (in good times, retain earnings is the main driver of capital increase and the impact of a higher capital requirement on credit and the economy at large is limited is the current circumstances) to be able to absorb futures losses and loosen the regulatory requirement at a time capital is scarcer and the macroeconomic impact of a gap would be significant. 3/4  BIS central bankers' speeches  A number of European countries have taken similar steps to increase their room for manoeuver ahead of a possible future storm. In that context, macroprudential policy is often described as a complement to monetary policy: a policy necessary to remedy the financial stability consequences of very accommodative monetary policy. I would have a more encompassing perspective: macroprudential policy is a complement to monetary policy both today and in the future: by contributing addressing financial buoyancy, it enables monetary policy to be relatively more accommodative today – but the preventive reach of macroprudential policy should not be overestimated, especially while macroprudential authorities are still relatively young and the policy toolkit less sophisticated than that of other policies; more significantly, by building up (macro)prudential room for manoeuvre ahead of the next storm, it also helps restoring monetary room for manoeuvre to address adverse developments.
That was my starting point for our December meeting, the minutes of which will be published next week. Summary and conclusions Let me try to pull together some of my central themes. 21  “…households have increased their debt….more debt unavoidably leaves them more vulnerable to bad luck, eg adverse economic shocks”, Tucker, P. M. W. (2003), “Credit conditions and monetary policy”, speech at the Leeds Financial Services Initiative, Bank of England Quarterly Bulletin, Autumn 2003, p. 373. BIS Review 149/2007  9  I have stressed that we should take care to avoid talking about money when we mean credit. In a similar spirit, we should be clear when we mean total credit and when bank lending, but without assuming the two are divorced. I have also stressed the need for attention to the underlying drivers of credit conditions throughout the economic cycle. In today’s financial system, we may well need richer data on credit quantities and flows outside the banking sector, perhaps along the lines of the US Flow of Funds statistics. The Bank’s new Credit Conditions Survey is also designed to give us better qualitative information to put alongside the quantity and price data. Even so, as with asset prices more generally, we will sometimes find it hard to distinguish between changes in credit conditions warranted by fundamentals and those that are not. Failure to recognise fundamentally warranted and sustainable shifts would deplete welfare.

3 In the short term, higher capital requirements may result in lower growth in credit and overall GDP. Analyses conducted by Norges Bank using Norwegian data find similar patterns. 4 When credit growth is strong, a higher buffer requirement may restrain the build-up of financial imbalances. But if capital requirements are raised too quickly, the result may be excessive credit tightening. The level of the buffer must therefore be considered in the light of other capital requirements. The decision basis for setting the countercyclical capital buffer has been harmonised with the international regulatory framework from the Basel Committee and the EU. In the EU, the European Systemic Risk Board (ESRB) is responsible for formulating guidelines for EU countries. Norges Bank and Finanstilsynet have been invited to participate in key committees and working groups under the ESRB to assist in the development of this framework. The impact on the economy of a higher buffer will depend on how banks adjust. Roughly speaking, banks can raise their capital ratios in two ways. They can increase equity capital or reduce risk-weighted assets. Banks can increase equity capital by raising fresh equity or by boosting earnings and withholding dividends. When it is more expensive to fund lending with equity capital than with deposits or other debt, increasing the buffer will increase banks’ funding costs. These costs will, to some extent, be passed on to customers, dampening credit demand. Banks can also improve their capital ratios by reducing risk-weighted assets. This can be done in two ways.
For more information see: https://www.hyperledger.org/ 15 See FCA Discussion Paper on Distributed Ledger Technology (April 2017) at: https://www.fca.org.uk/publications/discussionpapers/dp17-3-discussion-paper-distributed-ledger-technology 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  Figure 3: The Promise of FinTech  As it does, risks will evolve. Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics. New investing and risk management paradigms could affect market functioning. At the same time, the resilience of the system could also be built, through greater diversity in provision of financial services as well as increased redundancy. A host of applications could reduce costs, improve capital efficiency and strengthen operational resilience. The challenge for policymakers is to ensure that FinTech develops in a way that maximises the opportunities and minimises the risks for society. We are ideally positioned to realise FinTech’s promise in the UK. The Bank will work with the market and other authorities to build the hard and soft infrastructure the system needs to support innovation and growth, consistent with the City’s best traditions. 9  All speeches are available online at www.bankofengland.co.uk/speeches  9

Since mid-March, the liquidity supply in the Swiss franc money market has been influenced by the exceptional measures taken to manage the Credit Suisse crisis. The SNB provided ample liquidity to Credit Suisse in the form of interest-bearing loans, which led to an increase in sight deposits. Due to outflows of customer deposits at Credit Suisse, some of this liquidity also reached other institutions in the financial system. This increased the supply of liquidity in the Swiss franc money market. As Thomas Jordan has explained, it was important that the liquidity assistance to Credit Suisse did not influence our monetary policy stance. We therefore consistently continued with our regular monetary policy implementation in the Swiss franc money market. This currently comprises tiered remuneration and the absorption of sight deposits by way of open market operations. To ensure that the secured short-term Swiss franc money market rates do not fall and that they remain close to the SNB policy rate despite the additional liquidity in the Swiss franc money market, we have reduced the increased liquidity supply via open market operations. As you can see from chart 3, we have used SNB Bills and repo transactions with various maturities to accomplish this. Not only our open market operations in the money market but also our foreign exchange transactions have an impact on sight deposits. Since the last monetary policy assessment, the Swiss franc has appreciated by around 2% on a trade-weighted basis. In order to ensure appropriate monetary conditions, we have sold foreign currency in recent quarters.
Thus, for instance, fiscal policy coordination mechanisms have been the focus of particular attention, with monitoring and surveillance procedures to avoid excessive budget deficits (of over 3% of GDP) and high public debt proportions (over 60% of GDP) coming into play. Indeed, these thresholds, along with the procedures for their prevention and ultimate correction, took the form in 1997 of an agreement known as the Stability and Growth Pact. In contrast, the rules for coordinating “structural” policy (e.g. those governing the workings of the labour market or the markets for goods and services) were fairly lightweight as a result of their broader scope for application and of the difficulties involved in setting common objectives. Also, in the area of financial regulation and supervision policies, countries continued to enjoy a high degree of independence. The limitations of the monetary union’s adjustment mechanisms As events have shown, the constraints imposed by the institutional framework were not powerful enough to ensure the appropriate response by national authorities in the face of potential slippage from the stability levels required. It was hoped that the very fact of monetary union membership would activate sufficient response mechanisms.

On top of all this, in the middle of the recession, Spain’s public finances worsened markedly from a surplus of nearly 2% of GDP in 2007 to a deficit of more than 11% of GDP in 2009, and, in addition, the severe job destruction over the last five years has raised the unemployment rate to over 25% of the labour force. The labour market was also subject to certain illusions during those years. The enormous growth in the construction sector lay, without a doubt, behind the major immigration flows, and this strong population growth drove buoyant consumption and, by extension, the increase in activity and employment in all sectors, delaying the reforms that would have led to a more balanced adjustment between wages and employment. To overcome the crisis further reforms are needed at the national and European levels However, it should also be noted that the size of the imbalances that built up in the Spanish economy was not only a consequence of insufficient adaptation to the conditions and restrictions of euro area membership. They are also related to the deficient functioning of the disciplinary mechanisms with which the euro area is equipped and the fragilities inherent in its institutional design and its system of governance. Hence the Spanish crisis is closely related to the euro crisis, and overcoming it also depends on Europe’s ability to respond to the institutional problems of the Monetary Union.
No hard data on industry-wide uptake are available but intelligence from supervisors is that the scale of adoption of advanced analytics across the industry so far is relatively slow. There is clearly, however, the potential for usage to accelerate. At the macroeconomic level, changes in technology, including AI, could, over time, profoundly affect the nature of the financial services consumed and may result in changes to the structure of the financial services industry. This set of issues is being explored at the Bank of England by Huw Van Steenis in his review of the future of the financial system. What matters to  1  McWaters, J (2018) 2  All speeches are available online at www.bankofengland.co.uk/speeches  2  us as prudential supervisors is the extent to which the development of advanced analytics changes the risks to the safety and soundness of the firms we supervise. Increasing levels of automation, machine learning and AI could improve the safety and soundness of firms in some ways. For example, until recently, most firms were using a rules-based approach to antimoney laundering monitoring. But this is changing and firms are introducing ML software that produces more accurate results, more efficiently2, by bringing together customer data with publicly available information on customers from the internet to detect anomalous flows of funds.3 ML may also improve the quality of credit risk assessments, particularly for high-volume retail lending, for which plenty of data are available and can be used for training machine learning models.

That is to say, we only intervene intensively in the event of likely failure, to ensure that insolvency is orderly and that depositors are paid out promptly. Recent work at the Bank investigated the predictive power of the regulatory returns for these firms.9 It found a significant and stable correlation between simple explanatory variables and the probability of default one, two and three years later. In most banking data sets, this structural relationship is obscured by the intervening hand of supervision - leaving few if any observable banking failures. The research has the practical application for focusing our scarce supervisory resources in a systematic and efficient way on those credit unions where they are most likely to be needed. The tool cannot yet be classified as ML, as there is no learning involved. But it does demonstrate how more advanced analytics can be used to enhance effectiveness of supervision, and we are beginning to experiment with introducing genuine ML into this tool. 7  I am grateful to Hermann Hauser for first bringing this argument to my attention. Professor Peter Gahan, University of Melbourne 9 Coen, J., Francis, W B., Rostom, M (2017) 8  5  All speeches are available online at www.bankofengland.co.uk/speeches  5  The task that lies at the heart of supervision – the third step I referred to above – is setting strategies to reduce prudential risks. For each firm that the PRA deems sufficiently critical, we form an assessment of the key risks to its safety and soundness.
That, of course, is why the respective supervisors need to take an interest in all parts of a financial group and in intra-group exposures. But none of this, it seems to me, means that long-term savings institutions have taken on the distinctive special characteristics of banks. So far, I would hope, so good in the sense that perhaps most of you would agree that this particular distinction remains. But have I chosen this extreme example as an Aunt Sally? Well perhaps to a degree I have. So let me take some less obvious cases. What about money-market mutual funds, for example? Surely they at least have some of the characteristics of banks? They, too, act as a repository for liquidity and it is possible to make payments from some of them, which looks very like a banking arrangement? And so it does.

In this latter context banks have traditionally played a key role in financing the corporate and household sectors, earning their return by gathering information about, and assessing and monitoring, the creditworthiness of private sector borrowers, especially those who do not or cannot cost-effectively provide the comprehensive, public, information that would allow them to access the capital markets. Much of the banks’ lending, while nominally at short-term, for example in the form of callable overdrafts, is in practice illiquid and non-marketable. So a further  BIS Review 13/1997  -2-  distinctive characteristic of banks is that they typically function with a mismatch between their highly liquid liabilities and their less liquid, non-marketable, assets. There is no need, I think, to labour the importance to the economy as a whole of these distinctive banking functions, or the damage that would be caused if the banks’ role - as the repository of liquidity, as the core payments mechanism, and as the principal source of finance to at least a large part of the economy - were seriously interrupted. That in itself helps to explain the public interest in the effective functioning of the banking system, or why banks collectively have been regarded as special. But beyond that, the distinctive banking characteristics that I have described, of liquid liabilities and less liquid assets, give rise to special needs. Given the banks’ role in the payments system they may need late access to liquidity to square their positions vis-à-vis each other after executing payments instructions on behalf of their customers.
Second, regional policymakers are still trying to trying to make the cultural change whereby we are comfortable with both hearing about potential vulnerabilities in our economies and being comfortable in expressing concerns about vulnerabilities that may exist in our regional neighbours. That is a cultural change but it is a necessary change if regional surveillance and defence mechanisms are to be truly effective. Of course, it is must be remembered that, regional or international, such mechanisms are a supplement and not a replacement for national resilience. What the future holds? The state of the global economic and financial system It is indeed the case that after almost seven years of ups and downs, there continues to be plenty of uncertainty. Therefore, let me just say that we have been going through very stormy weather for the last seven years, and now we see some of the dark clouds parting and the sun shining through. Does it mean the storm is over? I cannot say. It is still the case that reading a financial newspaper on Friday can sometimes give a different picture of the global economy from what was reported on Monday. Many macroeconomic statistics continue to be volatile or show weak trends. On the other hand, many financial statistics, while also being volatile, have shown very strong trends. BIS central bankers’ speeches  7  After seven years of very aggressive monetary policy, we continue to face a world of weak growth. There has been much discussion of the new normal.

However, suppose that, for some reason, the appropriate and effective instruments to ensure financial stability are not available, for instance, because of serious problems with the regulatory and supervisory framework that cannot be remedied in the short run. In such a second-best situation, if there is a threat to financial stability, one may argue that, to the extent that policy rates do have an impact on financial stability, that impact should be taken into consideration when choosing the policy-rate path to best stabilise inflation and resource utilisation. Such considerations could result in a lower or higher policy-rate path than otherwise, in order to trade off less effective stabilisation of inflation and resource utilisation for more financial stability 5. However, so far all of the evidence indicates that in normal times  5  Such considerations could include evidence of the “risk-taking channel” as in Borio and Zhu (2008). Adrian and Shin (forthcoming) and Adrian and Shin (2010) argue, in a model with such a risk-taking channel, that short interest-rate movements may have considerable effects on the leverage of securities broker-dealers in the market-based financial sector outside the commercial-banking sector. If we assume that the risk of a financial crisis increases as this leverage increases, and that policy rates affect leverage, then policy rates would affect the risk of a financial crisis (Woodford 2010b). However, new regulation is likely to limit excess leverage and limit the magnitude of these affects.