samchain/econo-pairs-v1 huggingface dataset:
(*) Significant at the 10% level  24  (**)  Significant at the 5% level  (***)  Significant at the 1% level  BIS central bankers’ speeches  Table 3: Risk-based capital versus leverage for major global banks Variable(a)  Model 1  Leverage ratio  –0.53 *** (0.19)  Risk-based capital ratio GDP Current account Credit-to-GDP  –0.82 *** (0.24) –0.04 (0.05) 0.001 (0.006)  Model 2  –0.09 (0.12) –0.89 *** (0.24) 0.04 (0.04) –0.002 (0.006)  (a) “GDP” is defined as average GDP growth over the period 2007–2011; “current account” is defined as the current account balance as a per cent of GDP in 2007; and “credit-to-GDP” is defined as the stock of bank lending to the domestic private sector as a per cent of GDP in 2007. Notes: For all models, the dependent variable is “failure”. Standard errors are shown in brackets.

Other things equal, the smaller the sample, the greater the model uncertainty and the better the performance of simple, heuristic strategies. Small samples increase the sensitivity of parameter estimates. They increase the chances of inaccurately over-fitting historical data. This risk becomes more acute, the larger the parameter space being estimated. Complex models are more likely to be over-fitted. And the parametric sensitivity induced by over-fitting makes for unreliable predictions about the future. Simple models suffer fewer of these parametric excess-sensitivity problems, especially when samples are short. Experimental evidence again bears out that conclusion. For example, simple rules have been shown to outperform complex ones when tracking serial criminals, provided the number of committed crimes in a sequence is in single figures (Snook et al (2005)). Investment strategies tell a similar story. Simple tallying rules, like 1/N, outperform complex strategies, like mean-variance, unless the sample size is very large. In the study by DeMiguel et al (2007), the sample threshold at which complex rules out-perform simple ones is in excess of 3000 months (around 250 years) of data. Less is more, at least without much (much) more data. (d)  Complex rules and defensive behaviour  There is a final, related but distinct, rationale for simple over complex rules. Complex rules may cause people to manage to the rules, for fear of falling foul of them. They may induce people to act defensively, focussing on the small print at the expense of the bigger picture.
4  BIS Review 59/2004  Developments in recent years With hindsight, we can certainly see that the Riksbank has not always succeeded in predicting inflation correctly and that monetary policy therefore could have been conducted somewhat differently on a number of occasions in the past ten years. This applies, for example, to 1995 and perhaps also to 1999-2000, even though the latter period’s probably too low interest rates did not have any consequences since the upswing in the economy and inflation was broken when the equity price bubble burst. This has also been the case in the past few years. Since the second half of 2003 inflation has been below target, and it is likely that it will continue to be so for at least another half year or so. This suggests that interest rates could have been lower in primarily 2002 and 2003. One conclusion from this is that we must deepen our understanding of factors such as productivity and of the impact on international prices of tough global competition. In these respects we are essentially in the same boat as other forecasters. As far as we can see, no Swedish forecasters have presented forecasts that have differed markedly from our own. In discussions with colleagues abroad, moreover, I have noted that all have been surprised by the low international inflation in the past year.

Caballero, Ricardo J. and Arvind Krishnamurthy, 2009. “Global Imbalances and Financial Fragility,” American Economic Review, May. Lewis, W. Arthur (1954). “Economic Development with Unlimited Supplies of Labor,” Manchester School of Economic and Social Studies, Vol. 22, pp. 139–91. Obstfeld, Maurice, Jay C. Shambaugh et Alan M. Taylor (2010), “Financial Stability, the Trilemma, and International Reserves,” American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pp 57–94. Rajan, Raghuram G. (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton University Press. Wei, Shang-Jin and Jiandong Ju (2010) “Domestic Institutions and the Bypass Effect of Financial Globalization” American Economic Journal: Economic Policy, forthcoming. BIS Review 170/2010  5
I welcome the current initiatives, including the creation of the Simplification Group chaired by Petra Senkovic from the ECB and Edouard Fernandez-Bollo from the ACPR. Various measures are under development, like the growing use of delegation, the streamlining of SREP or JST functioning. However, an essential challenge will be to make sure that all processes will remain optimised over time and that simplification becomes a full and permanent part of decision-making, from conception to execution. To do so, simplification has to become one of the values that guide the SSM. The second priority is to promote mobility, thanks in particular to staff secondments and more on-site supervisors working on banks outside their home country. Other initiatives could include very short staff exchanges or swaps within JSTs, between the ECB and national authorities, to allow members to better understand the culture and practices of their 2/3  BIS central bankers' speeches  counterparts. The third and final priority is to develop synergies. Just as with the Eurosystem, the Banking Union constitutes a system with a strong center and strong national components, which ultimately have to act as one team. The goal is to make the best use of national resources by fostering their participation in all key tasks of the SSM. National authorities should not hesitate to step up their involvement in the SSM. In return, the ECB should further empower national authorities, especially in the framework of day-to-day supervision and in the field of on-site inspections in branches or subsidiaries of significant institutions.

François Villeroy de Galhau: Financial supervision and the role of national authorities in Europe Opening address by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Autorité de contrôle prudentiel et de resolution (ACPR) Conference on Financial Supervision, Paris, 18 September 2018. * * * Mr. President [M. Draghi], Ms. Chair [D. Nouy], Mesdames, Messieurs,  Bonjour et bienvenue à Paris, It is a particular pleasure to welcome you to this conference on financial supervision and the role of national authorities in Europe. What better way to inaugurate the new headquarters of the ACPR – France’s supervision authority – than to bring in colleagues and experts from across the continent. I urge you to look at a few street names in the neighbourhood: this borough is called in Paris “quartier de l’Europe” – very much in the spirit of what we are doing together at the SSM. I warmly thank President Mario Draghi for being here. Before giving him the floor, let me stress that we all have reasons to be proud of what has been achieved for Banking Union in the past few years. But we must not be complacent. There are two priorities: one in substance, and one in method. **  I. Our priority in substance: strengthening the second pillar on resolution Now that we’ve had the Single Supervisory Mechanism up and running for four years, it’s easy to forget that there were many sceptics who were sure that such a union could not be achieved.
Employment dropped sharply during the recession, contributing to a sharp rise in the unemployment rate from around 4.5 percent in the middle of 2007 to over 10 percent in October 2009. Extraordinary actions by authorities around the world, including the Federal Reserve, prevented full-scale financial and economic collapse, and the global economy stabilized around mid-2009. But since then, the recovery has been bifurcated. While emerging economies have rebounded rapidly, the developed world has grown only slowly. This has hastened a historic shift in the balance of economic power that was already underway before the crisis. In the United States, the recovery has proven to be persistently weaker than expected. Growth has been insufficient to either bring down unemployment significantly or to achieve a self-reinforcing cycle of strengthening confidence, demand, income and employment. Although the latest news on the U.S. economy is somewhat more encouraging than that from earlier in the year, we should not take much solace from that. After a very weak first half, when growth was less than one percent, economic activity has strengthened somewhat and inflation pressures are starting to ease. Growth in the third quarter is currently estimated 2.5 percent, and recent indicators suggest growth in the fourth quarter could be somewhat higher. However as we look toward 2012 the U.S. economy continues to face several obstacles to a robust economy. Accordingly, I expect growth of about 2.75 percent for 2012, not much higher. We also continue to face significant downside risks, mostly related to the stress in the eurozone.

However, as shown in Chart 5, the average homeowner still is substantially more leveraged than before the crisis and has lower net worth. One significant problem is the trajectory of home prices. Homeowners have lost more than $ billion in home equity since the housing market turned. For homeowners with mortgage debt, about one-quarter of these homeowners have mortgage debt that exceeds the value of their homes. The loss of home equity is a serious problem in itself of course, but it has been exacerbated by the fact that many households have found it very difficult to refinance to take advantage of lower mortgage rates. Without a substantial improvement in the ability to refinance, the outlook for real estate prices, and in income prospects, it seems likely that many of the households that ended up with too much debt after house prices fell 30 percent from their peak may need to deleverage further. This implies that for the household balance to fall and provide an impetus to growth, those households with low debts will have to spend more of their income. In many ways these households are in a similar situation to large corporations: their balance sheets contain substantial liquid assets. They are undertaking precautionary saving as a response to greater uncertainty about the economic outlook and their long-term prospects. In more normal times, lowering short-term interest rates would induce households and businesses to spend more or invest more in less liquid long-term assets as the real return on their liquid short-term assets fell.
12 The theory of asset pricing under Knightian uncertainty throws up at least two striking results. First, in the face of such uncertainty, asset prices are not precisely determined but instead lie in a range. This indeterminacy in prices is larger the greater is uncertainty and the greater agents’ aversion to it. Second, asset prices exhibit a downward bias relative to fundamentals. Uncertainty gives the appearance of “pessimistic” expectations. Both of these theoretical predictions match pretty closely the moments of many asset prices in the world today. Many appear to lack a clear compass relative to fundamentals. Most are excessively volatile. Among investors, pessimism is the new optimism, with talk of a lost decade in succession to the Golden one. Risk models – or the failure thereof – have played their part in generating these foggy outcomes. That is the diagnosis. What of the prescription? In their recent consultation paper, the Financial Services Authority has outlined some very good proposals for improving stresstesting practices among financial institutions. 13 Based on my reading of the identified failures in stress-testing, let me put forward a complementary “five-point plan”. •  First, setting the stress scenario. The key elements here are devising a multifactor risk scenario that is sufficiently extreme to constitute a tail event. Arguably, designing such a scenario is better delegated to the authorities than to individual firms, in part because they ought to be more immune to disaster myopia. In its Financial Stability Report (FSR), the Bank describes such stress scenarios.

A quick survey suggested  9  The KPMG survey of risk managers in October 2008 pointed to a similar conclusion, as does the FSA consultation paper on stress-testing published in December 2008. 6  BIS Review 18/2009  these were very modest stresses. We asked why. Perhaps disaster myopia – disappointing, but perhaps unsurprising? Or network externalities – we understood how difficult these were to capture? No. There was a much simpler explanation according to one of those present. There was absolutely no incentive for individuals or teams to run severe stress tests and show these to management. First, because if there were such a severe shock, they would very likely lose their bonus and possibly their jobs. Second, because in that event the authorities would have to step-in anyway to save a bank and others suffering a similar plight. All of the other assembled bankers began subjecting their shoes to intense scrutiny. The unspoken words had been spoken. The officials in the room were aghast. Did banks not understand that the official sector would not underwrite banks mis-managing their risks? Yet history now tells us that the unnamed banker was spot-on. His was a brilliant articulation of the internal and external incentive problem within banks. When the big one came, his bonus went and the government duly rode to the rescue. The time-consistency problem, and its associated negative consequences for risk management, was real ahead of crisis.
At that time, the long “fiscal dominance” history of the Turkish economy that severely restricted the efficiency of monetary policy and shallow financial markets that were not well developed were the primary characteristics of the Turkish economy. All these limited the economy’s room for maneuver on the eve of the adoption of the new monetary policy regime. Independence of the Central Bank of Turkey that came in 2001, was almost the only institutional factor in hand at that time on the way towards the ultimate objective of price stability. Given this overall framework and conditions, the Central Bank of Turkey preferred a smooth transition towards inflation targeting whereby it would wait until all these factors that restrict the efficiency of monetary policy would weaken. In early 2002 following the achievement of relative stability in financial markets after the 2001 Crisis, the Bank announced its new monetary policy regime in a public statement as implicit inflation targeting. As it was emphasized in the same now historical statement, the final aim was to adopt the full-fledged inflation targeting regime, once the preconditions were met. This ‘new’ regime was defined as inflation targeting since the central bank announced a numeric target for annual inflation jointly set by the government according to its law and price stability was now its primary objective. Furthermore, it was similar to inflation targeting in the sense that the decision making process was shaped in a forward looking manner by exploiting the broadest set of information available.

One aspect that indeed needs further thinking is the issue of financial cycles and how they could be mitigated and whether monetary policy should play a role in doing so. Let me say a few words about this. Before I became involved in central banking I was state secretary in Sweden’s Ministry of Finance in the early 1990s and dealt, among other things, with the management of our nation’s banking crisis. Being in the middle of a crisis like that was indeed a frightening experience. Financial crises would seem to evolve from excessive optimism. That is, credit expansion (domestic or foreign), which feeds into asset prices, lowers the cost of capital, stimulates investment and subsequently leads to an economic boom. Eventually, the investments are found not to be sustainable in that they do not generate profits. The whole structure may ultimately collapse, the economy moving from boom to bust, often followed by banking or currency crises or a combination of the two. The most severe bubbles have historically been those that involve rapid credit expansion in the banking system. Economic history books are full of examples of this process. Also, the 1990s provided many illustrations of similar events. The discussion about financial cycles is far from new. One example is the major debate of the 1920s and 1930s between the Austrians (Hayek, etc.) on the one hand, and Keynes on the other.
APPENDIX Figure 1 – The Race to Net Zero emissions by 2050  Source: Bank graphic based on NGFS data  Figure 2 – Transmission channels from climate risks to financial risks  Source: NGFS Climate Scenarios for central banks and supervisors  Figure 3 – NGFS suite of models  Source: NGFS Climate Scenarios for central banks and supervisors  Figure 4 – UK emissions today  Source: Bank calculations based on the Committee on Climate Change 6th Carbon Budget Assessment  Figure 5 – Reaching Net Zero in the UK  Source: Committee on Climate Change 6th Carbon Budget  Figure 6 – Global shadow carbon prices consistent with Net Zero 2050  Source: Preliminary analysis for the updated NGFS Climate Scenarios  Figure 7 – Impact on global GDP (relative to prior trend)  Source: Preliminary analysis for the updated NGFS Climate Scenarios

And given the lack of momentum from private and public sectors, U.S. growth will likely remain low for an extended period of time. While economic data releases have pointed time and again to delayed consumption spending and persistently high unemployment, available fiscal and monetary policy space seems to be quite limited. On the fiscal side, further stimulus will be constrained by the promised cuts in federal spending that accompany the recent raise of the U.S. debt ceiling. On the other hand, the Fed’s commitment to maintain the federal funds rate “exceptionally low” at least through mid-2013 should remind us that, in order to be even more accommodative, the Fed might need to rethink and come up with some creative policy actions – probably something that is much more creative than the recent “Operation Twist” that seems to disappoint many market participants. The fact that the U.S. government and the Fed are running out of traditional policy “bullets” leaves one only to wonder what the government and the Fed will do in the face of future shocks. And if they eventually resort to “creative” policy actions, the implications of their policies on the global economy can be quite unpredictable. Across the Atlantic, the Eurozone is also struggling with their sovereign debt crisis, which only deepens and intensifies as time passes. Over the past few months, we have seen some Eurozone member countries that are unwilling to collaborate fully, let alone going the extra mile, to get the problems solved.
Here we can discern the two core tasks that the Riksbank still has: to maintain price stability and to promote a safe and efficient payment system. Banks are of central importance Nowadays, a very large part of what we normally refer to as money consists of funds in accounts at the banks, and a very large proportion of the payments made take the form of transfers between the accounts provided by the banks. The banks therefore play a central role in the financial system. Although banks in various forms have existed for many centuries, it was not until the 19th century that the financial sector began to develop on a large scale. The emerging industries needed funding. There was also a need for major infrastructure investments, for example in the railways. The banks acted as credit intermediaries, thus enabling the investments to be made. They gathered together our savings surplus and converted it into loans. Even though the financial markets are much more sophisticated today than they were in the 1800s, the basic role is the same, that is to mediate credit and provide payment services. These functions are indispensable to a modern society. If they were to fail, the entire economy would suffer extensive and indiscriminate damage. This is what gives the financial sector its unique position. Banks entail bank crises The expansion of the banks also led to bank crises. In Sweden, for example, the expansion of the 1870s ended in the severe crisis of 1878-1879.

As the safety net can in various ways make the bank's funders immune to certain risks, it may be tempting to allow the bank to take greater risks than is optimal from the point of view of the economy as a whole. Simply put, the safety net reduces the private costs of applying strategies associated with a higher level of risk; the bank’s financiers gets the upside but not the downside of the increase in the level of risk. This phenomenon is usually called moral hazard. The design of public supervision and regulation is important in the effort to reduce the problems relating to moral hazard. Not least, the conditions concerning aspects such as guarantees and liquidity assistance have a major impact on the possibility to counteract problems and reduce the costs they give rise to. If the state is forced to intervene and save a bank, it is important that the shareholders and other funders do not come out of the process unscathed. Designing a public safety net for financial operations thus entails a number of difficult considerations. Crises change the role of the authorities During the bank crisis of the 1870s, however, there was no real safety net to speak of. The Riksbank sat on the sidelines and had no role to play in the practical management of the crisis.