samchain/econo-pairs-v1 huggingface dataset:
The 1988 Accord became outdated to a large extent because it was a relatively simple and static document: its one-size-fits-all approach to capital regulation represented an important advance as a universally accepted standard, but it did not provide a means to recognise more advanced risk measurement techniques. It quickly fell behind as the pace of innovation in technology, financial products, and markets accelerated. In response, the Committee designed the New Accord to be a more flexible document and one that would be more welcoming of improvements in risk management techniques. Its evolutionary approaches to credit risk and to operational risk, for example, give banks a range of options to choose from and create explicit incentives for banks to strive to adopt the most advanced approaches. The New Accord still has its limits, however. Members of the IIF and others have cited as an example the failure to recognise use of full credit risk models, which would adjust a bank’s capital requirements in accordance with the benefits of diversification in its balance sheet. As you know, the Committee evaluated proposals that would have allowed advanced banks to estimate the degree to which their assets might behave similarly or default together. For the time being, we have decided instead to establish standard estimates of diversification that banks would apply.

I should also stress that no formal decisions have yet been taken in this respect. As you probably know, the Committee will meet next month for the first time since the comment period closed. I can assure you that we will continue to do our utmost to ensure that you - the industry - can take advantage of the benefits of the new Accord at the earliest possible opportunity. Thank you for your attention. BIS Review 42/2003  5
See also B. Cœuré (2014), keynote address at the ECB-IMF conference on the “International dimension of conventional and unconventional monetary policy”, Frankfurt am Main, 30 April 2014, forthcoming in a special issue of the Journal of International Money and Finance. BIS central bankers’ speeches  3  account deficit was not of concern given the international status of the US dollar; the positive valuation effects and the positive net foreign income balance were seen as evidence that the current account deficit in the US was sustainable. As a matter of fact, we did not experience a US balance of payments crisis, even though we did experience a spectacular global financial crisis.9 What was the connection between global imbalances and the global financial crisis? What were the drivers of those global imbalances? The debate has still not been settled. Similarly, I would claim that the main obstacle today to international monetary policy coordination is the lack of consensus on (and maybe even of understanding of) the degree of slack in the labour and product markets of the major economies. Reaching a consensus on the nature of spillovers is not straightforward either. Most models of international monetary policy coordination assume that policy-makers are able to identify the types of shock and how they are transmitted to the domestic and global economy. But this is often not the case in practice. For instance, there have been marked differences in the views on the global impact of Federal Reserve announcements.

We understand that to build one European wholesale financial market will require a staple diet of solid Bundesbank fare, seasoned with a soupçon of Banque de France, a ración of Banco de España, and so on, as well as a couple of pints of Bank of England pragmatism. There is one important area, I think, in which it has not so far been possible to reach an agreed solution, and one on which I might just conclude with one or two observations. That is the question of TARGET, the inter-linking of real time gross settlement systems across Europe. There are two issues of interest, here. First, pricing policy. We have argued that the pricing of the national element of cross-border payments should relate to national costs, rather than being set uniformly. So far we have not prevailed on that point and, as long as the competition authorities approve, it is likely that there will be a common price within the TARGET system for cross-border transactions. Unfortunately, some of our colleagues do not believe this is an area in which competition should intrude. The second important question relates to the terms on which ‘out’ central banks might link to TARGET in the future. We can see no reason why out central banks should not be able to link to TARGET on the same terms as those which apply to the ins. We accept, of course, the need in both in and out countries for rigorous policing to prevent unintended spillover of intra-day credit into the overnight market.
Conclusion What I hope this discussion highlights is that, in practice, the job of monetary policy makers comes down to making difficult and complex decisions in the face of uncertainty. Over the past couple of years the challenge has been dealing with a succession of real changes in relative prices (via negative supply side shocks) which have pushed up on prices whilst depressing demand and output. That is extremely uncomfortable for everybody. But there was, and is, no easy way for monetary policy to deal with the impact of such shocks. In our current projections there are very major risks to either side of the central case. On one side, higher inflation expectations could become entrenched making it very costly for the MPC to subsequently bring inflation back to target. On the other side, the economy could be much weaker than we expect pushing down on inflation and risking deflation. Recovering to the target from that could be even harder (at least in my personal view). MPC members place different weight on these possibilities and reach different judgements accordingly. But it is clear to all of us that both risks exist. I believe the MPC is charting the right course through these difficult times. Despite temporarily higher inflation for a period, and notwithstanding all the uncertainty, I want to assure you that we remain determined to bring inflation back to target in the medium term, consistent with our remit.

Each has manifested itself in the form of an upwards shock to large parts of the CPI basket: VAT-able elements, energy, and imported goods and services respectively.4 But these do not reflect increased pressure of demand. In fact, because each of them will push prices up relative to wages, it is likely that each shock will have pushed down on domestic demand, at least temporarily5. In addition, one can argue that the financial crisis also had elements of a negative supply-side shock: forcing up the cost of credit and depressing activity levels. How should monetary policy have responded? In principle, the best policy path is probably to allow the one-off price level effects of such shocks to flow through to final prices but to make sure that there are no second-round effects – such as compensating wage increases – that would leave inflation above the target in the medium term. That is essentially what the MPC has been trying to do. Yes, we could have tightened policy to keep inflation at target when the shocks first hit – but it would have needed to be a very material tightening. I believe that would have engendered a worse outcome on all counts. First, shocks such as the VAT rate increase and the step up in the level of commodity prices were not anticipated, and their impact on inflation is likely to be temporary in nature.
The programme had three key policy goals: (i) to stabilise the exchange rate, (ii) to put government finances on a sustainable path and (iii) to rebuild a financial sector serving the domestic economy. The first goal was imperative in order to stop an adverse spiral of fading confidence, exchange rate depreciation, and increased inflation and inflation expectations. It was also needed in order to stop the negative balance sheet effects coming through FX-denominated or FX-linked loans and CPI-indexed loans. The second, fiscal sustainability, was needed in order to stop adverse public debt dynamics from turning an external liquidity crisis into a potential solvency issue, which would have made it impossible to regain internal and external trust in the Icelandic economy. The third, financial sector reconstruction, is a precondition for private sector debt restructuring and economic recovery. As a result, exchange rate stability became the first priority of monetary policy. However, given the lack of confidence and the overhang of non-resident holdings of speculative ISK positions, estimated at the time to amount to ISK 600 bn, it would have required exorbitant  2  BIS Review 139/2010  interest rates to stabilise the exchange rate through interest rate policy alone, and the room for manoeuvre to use monetary policy to support the domestic economy would have been non-existent, at least in the short run. For this reason, it was decided to introduce comprehensive capital controls, which allowed more space to lower interest rates in line with falling inflation and provide some support to the domestic economy.

However, I am willing to answer questions on both during the Q&A session. While these two stories are different, they interact in important ways. The unsustainable boom that Iceland experienced during the years 2005–2007 was fuelled by a combination of favourable external conditions, macroeconomic mismanagement, and aggressive domestic bank lending. It may well be that the banks’ international activities and the easy access to foreign credit that came with those activities fuelled stronger growth in domestic bank lending than would have occurred in a more traditional small-country banking system. But we cannot be sure about the magnitude of this effect, as we know that unsustainable domestic credit booms fuelled by capital inflows can very well take place in countries that are not home countries to international banks. As so often occurs in great tragedies, the two stories converged in a grand finale in early October 2008, when nearly nine-tenths of Iceland’s banking system collapsed when its three large cross-border banks – Glitnir, Landsbanki, and Kaupthing – were taken into special resolution regimes on the basis of the emergency legislation that had just been passed by Iceland’s Parliament. By that time, however, the Icelandic economy was already on its way into a recession as a result of the inevitable adjustment of the economy after its serious overheating in 2005–2007 and the currency crisis earlier in 2008. As a matter of fact, Iceland was struck by three negative shocks in 2008.
With this confidence and trust, policyholders will continue to be willing to use insurance as a means of managing their risks and investments, with all the attendant benefits this brings to the wider economy. UK insurers can only be internationally competitive, or invest for the long term, if they are financially sound. Policyholders will only buy innovative products if they are comfortable they are adequately protected. This is why we see the second of the Solvency II review objectives as the foundation on which measures to pursue the other objectives can be built. There are a number of ways in which the prudential regulatory regime seeks to ensure policyholders are protected. Firms have to hold capital to meet at least a 1 in 200 event in the bad times. And they have to hold reserves not only to meet their likely commitments, but to allow the business to be transferred to a third party. Ultimately there is also the backstop of FSCS coverage for many policyholders. And these mechanisms are all linked: if the capital and reserves firms hold are not adequate, the FSCS backstop needs to be used, the residual cost of which is paid for by surviving firms who in turn may pass the cost to their policyholders or shareholders. Now, it’s our view that in the round, the current regime provides about the right amount of protection for policyholders.

To build as accurate a picture as possible of the impact of reforms, we need high-quality data. In particular we are asking firms to validate internally the data they submit to us. Other aspects of the review There are some aspects of the review which are important but which do not lend themselves to being tested quantitatively through a QIS, and I wanted to touch briefly on a few of these. To support thinking about asset eligibility criteria for the Matching Adjustment, there will be some qualitative questions about this in the QIS, alongside the main part of the exercise. The Solvency II review also presents an opportunity to simplify the regime, not just for the MA but more broadly: streamlining of the process for approving internal models and model changes, for example. And there are some simplifications that can be made by the PRA even within the existing framework: we plan to produce a consultation paper on simplifications to the Solvency II reporting process. Together, these changes will allow our supervisors to increase their focus on the big risks that matter, while reducing cost, and increasing flexibility for industry. LIBOR The building work for the Solvency II review is important, but insurance isn’t the only sector with construction work going on. And as is so often the case, the building work next door is affecting us too. Sterling Libor is ceasing at the end of this year.
Sources: Danker and Luecke (2005), Eijffinger and Geraats (2006), Plosser (2011), Warsh (2014), Cordemans (2015), Blinder et al (2017), Praet (2017), Bank of Japan. 36  All speeches are available online at www.bankofengland.co.uk/speeches  36  Table 2: 2013 forward guidance survey results Effect on expectations for the next change in Bank Rate Remain low for Rise sooner longer than No than Don't know previously change previously expected expected Percentages of households Percentages of companies, survey by Markit (Bank’s agents)  Percentages of households Percentages of companies, survey by Markit (Bank’s agents)  23  43  13  22  45 (47)  34 (31)  14 (19)  7 (4)  Effect on confidence Slightly No less change confident  Much more confident  Slightly more confident  1  14  56  7 (12)  51 (62)  39 (24)  Much less confident  Don't know  12  4  13  3 (1)  0 (0)  0 (0)  Sources: Bank/GfK NOP survey and Markit. See February 2014 Inflation Report for more detail on the survey questions. 37  All speeches are available online at www.bankofengland.co.uk/speeches  37  References  Acemoglu, D and Robinson, J (2012), Why Nations Fail: The Origins of Power, Prosperity and Poverty, Random House Inc. Adams, P and Hunt, S (2013), ‘Encouraging consumers to claim redress: evidence from a field trial’, Financial Conduct Authority, Occasional Paper, No.2.

It is a game that gives people the chance to set monetary policy to steer the US economy. In the UK, “MyUK” allows people to put themselves in the Prime Minister’s hot-seat and invoke Article 50 on any day of the week. These are effectively single-person games, designed largely for educational purposes. But there is no reason a similar game could not be designed which was multi-person. This would allow interactions among the public, in their communications and choices, to take place. This is crucial for understanding the propagation of stories, and the contagion in choices, across the economy. Once those are captured, the game could offer important insights into public actions and reactions to central bank interventions, in an experimental setting. There are many existing games that are multi-player and interactive, many of them hugely successful. A small sample would include Second Life, Minecraft, EVE Online and World of Warcraft. A number of these games contain elements of the economy or financial system, albeit in a simplified form. Creating a game with a realistic economy, realistic psychology and realistic policy would not be a venture into the unknown. Robert Shiller has spoken of the role played by “narrative entrepreneurs” in catalysing and shaping the popular narratives that propagate across society. Central banks are narrative entrepreneurs, shaping views on the economy and on policy through their words, providing a hopefully benevolent “nudge” to expectations. In a world of new media, that narrative entrepreneurial role has probably never been more important.
You will recall that the overnight rate reached 280% on 23 October 1997. Although the overnight rate quickly subsided, term rates remained high for some weeks thereafter and the stock market experienced considerable volatility and property prices fell. Renewed exchange rate pressure in January again saw interest rates spike upwards, though the reaction this time was less severe. Nonetheless an inverse yield curve persisted during much of January with the interbank rates higher than the prime lending rate. Also during this period, the banks have had to contend with the blows to confidence from continuing regional upheavals, most notably the liquidity crisis in Korea around the turn of the year and the dramatic events in Indonesia which are still being played out. Coupled with mounting evidence that the domestic economy is slowing down, it is not surprising that the banks in Hong Kong are going through more difficult times. The severity of the Asian crisis is a once-in-a-lifetime event and no banking system in the region can hope to be unaffected by it. There is bound to be an impact on the banks’ funding and liquidity, their loan growth, their asset quality and ultimately their profitability. Apart from the effect on individual banks, the Asian crisis will also have repercussions on Hong Kong’s position as an international financial centre, given that so many regional and international banks affected by the crisis are based here. How precisely has the Asian crisis impacted on banks in Hong Kong?

It is important to keep in mind that the local banks are still making money so far this year despite the more difficult operating conditions. Equally, you will not be surprised to hear that profits are generally lower than the same period of last year due to a combination of increased funding costs, flat lending volume and increased bad debt provisions. The outlook for the year as a whole is uncertain. If banks can record the same profits as last year, they will be doing very well. Certainly, nobody should have exaggerated expectations about the 1998 outturn. It will be a tough year, but I am confident that the banks can manage their way through it. What kind of strategy are the banks adopting to achieve this? I have already mentioned some of the steps: namely, to build up liquidity and to be more selective and cautious in their lending. Loan review and collection procedures are being stepped up to ensure that banks can identify problem loans at an early stage and take action to safeguard their position. Banks are also being more proactive in their asset and liability management, particularly in terms of their funding strategy and how to price their deposits against the competition. Although banks in Hong Kong are highly efficient in terms of the cost-income ratio, the pressure on revenues means that they need to pay even more attention to costs.
The repo rate – is sometimes outside of the uncertainty bands The fourth standard figure in our Monetary Policy Reports and Updates refers to the forecast for the repo rate and the uncertainty concerning this (see Figure 8). There is an important difference of principle between the decision on the repo rate up to the next monetary policy meeting and the assessment of the repo rate path after that, that is, the forecast for the repo rate over the coming three years. We are careful to point out that the repo-rate path is “a forecast, not a promise”. The uncertainty bands shown in the figure are based on forecast errors for risk-adjusted market rates from 1999 to 2007 and after that on the Riksbank’s own forecast errors. The uncertainty increases as the forecast horizon lengthens, here, too. The figure shows, for instance, that the repo rate in three years’ time will with a 90 per cent probability be between 0 and 7 per cent. And there is a 10 per cent probability that it will be outside of this interval! The fact that the repo rate is sometimes outside of the uncertainty bands is illustrated by the forecast in September 2008 just before the financial crisis hit Europe and Sweden with full force (see Figure 9). The repo rate was cut over the following three quarters to a much lower level than the lower limit for the 90 per cent uncertainty band.

These are better indicators of the underlying inflationary pressures. Moreover, in the longer run CPI inflation and CPIF inflation coincide. But it has turned out that uncertainty sometimes arises as to which target variable the Riksbank uses, whether it is the CPI or the CPIF. Sometimes it has been said that target fulfilment would be better if CPIF inflation was closer to 2 per cent during the forecast period, even if this means that CPI inflation is further from 2 per cent. I don’t believe this is correct. 11  For a description of the model see L. Christiano, M. Trabandt and K. Walentin, “Introducing financial frictions and unemployment into a small open economy model”, Working Paper no. 214, Sveriges Riksbank, 2007. 12  See C. Goodhart and J.-C. Rochet, “Evaluation of the Riksbank’s monetary policy and work with financial stability 2005–2010”, Sveriges Riksdag, August 2011, p. 66. 4  BIS central bankers’ speeches  However, it is natural to highlight the CPIF as a measure of underlying inflation when the forecasts for the CPI and the CPIF differ, and this is because of the Riksbank’s own monetary policy.13 Be clear about resource utilisation The Riksbank also endeavours to stabilise production and employment around sustainable paths of development. However, neither the Riksbank nor the Government and Riksdag have specified what are considered to be sustainable paths for production and employment. We usually try to ensure that resource utilisation is normal towards the end of the forecast period.