samchain/econo-pairs-v1 huggingface dataset:
My view is that the reason why academics, market participants and public authorities devote more time and resources to identifying and assessing risk-related issues is not only the severity of the crisis and the uncertainty currently surrounding our economic and financial systems, but more fundamentally the fact that not only the roots, but also the trunk and branches of the crisis are closely related to risk management and governance aspects. In this regard, a number of thoughtful explanations of the causes and dynamics of the financial and economic crisis have been put forward. There is no doubt that risk managers can extract valid lessons from all of them, since there may be indeed some truth to all. Indeed, there is probably no single argument that can alone explain everything that has happened over the past few years and we also must remain objective enough to separate ideology from facts, when assessing the different versions of the history that have or may become best-sellers.

More broadly, developing practical ways to model realistic interactions among banks and other financial institutions and between the financial and real sectors of the economy would be important advances. Transparency of Process and Results The next element we identified as contributing to the SCAP’s success as a macroprudential exercise was transparency, both of the process and, especially, of the results. The SCAP was groundbreaking because it disclosed firm-specific supervisory estimates in detail, including loss amounts and rates on different types of loans, projections of net revenues, and the amount of capital each firm would have to raise to meet publicly disclosed supervisory targets ratios. These disclosures formed the template for subsequent DFAST and CCAR stress test results. Current stress test disclosures deliver not just insight into individual banks’ ability to withstand stressful economic outcomes, but also provide a broader perspective about the exposure of different segments of bank lending, securities and other activities to adverse economic and financial market developments. These segment-level results, aggregated across banks, are important because they have the potential to serve as public warning signals about over-heating or a build-up of risk that can supplement other cyclical macroprudential analysis. While the transparency of the supervisory stress test results was a groundbreaking element of the SCAP in 2009, subsequent discussion has focused largely on the transparency of the process of generating the results, in particular, information about supervisory stress test models.
It is, of course, two distinct processes – one for the UK to recognise the EU as equivalent to the UK, and one for vice versa. The UK has granted equivalence to the EU in some areas, but the EU has not done likewise to the UK. In a few areas – involving central clearing and settlement – there has been agreement by the EU to extend temporary equivalence to the UK, recognising, I think, the clear risks to financial stability that would have arisen had this not been done at the outset. It would be reasonable to think that a common framework of global standards combined with the common basis of the rules – since the UK transposed EU rules from the outset – would be enough to base equivalence on global standards. Less than this was enough when Canada, the US, Australia, Hong Kong and Brazil were all deemed equivalent. Continuing with the example of central clearing, the EU has recently made the US SEC equivalent for CCPs, subject to certain conditions. These conditions are already met by UK CCPs as they are a legal requirement in the onshored legislation, but equivalence beyond the temporary extension remains uncertain. The EU has argued it must better understand how the UK intends to amend or alter the rules going forwards. This is a standard that the EU holds no other country to and would, I suspect, not agree to be held to itself.

The last observation is that goods-producing value chains are becoming more regionally concentrated. Robotization and automation made cheap labor less relevant when companies decide where to place production. This pattern is obvious in certain sectors with closely integrated supply chain for just-in-time production such as automotive, electronics, and electrical appliances. Locating production line close to the end-market also helps businesses better customize the products based on each market’s preference. Trade protectionism is undeniably one other key factor that help accelerate value chain regionalization. All these changes in value chains could be a threat to today’s businesses. Consumers are ready to switch to a competitor’s product if they find it suits their changing preferences better and quicker. A standalone service business might be disrupted by new service value chains that offers a more complete solution to the customer’s need. Rising wages in Thailand will draw production to emerging market countries with lower wages, while automation will help advanced economies draw production closer to home. But then again, for those who are prepared, this could be an opportunity. Businesses will have to think about how they could incorporate service components into their 6  products. An example of this transition is Daimler and BMW, who joined hands earlier this year to explore service-focused business models such as taxi-hailing, car sharing, parking, and EV charging. This, of course, also means that we will need to continuously reskill and upskill our workforce. 4. Digital transformation The fourth trend is digital transformation.
Basel III notably strengthens the capital framework: its quality has been enhanced, insofar as new, stricter definitions were agreed upon; capital ratios were raised; and two new buffers – a capital conservation buffer and a countercyclical buffer – were created. One notable singularity in the configuration of this latter buffer is that it also offered a response to macro-prudential objectives. That is, admittedly, something new and positive in the regulatory paradigm which, until then, had essentially been micro-prudentially geared. The second novel feature of Basel III has been the design of a common prudential framework for liquidity risk, both in the short term (the liquidity coverage ratio) and the long term (the net stable funding ratio). It is worth stressing that this is the first time an agreement has been forged internationally for the prudential treatment of this risk. The combined tightening of liquidity and capital requirements advises prudent application of such requirements. In this respect, it was agreed the new standard should be gradually phased in, with a transition period running to 2019; however, market pressure will in practice speed up this phase-in. Other new features of Basel III relate to the strengthening of capital requirements for certain banking business risks. This is the case with securitisations, the trading book and counterparty risk.

Finally, I should mention the agreement reached to introduce a new supervisory instrument, the leverage ratio, which is not directly linked to a bank’s level of risk; for this reason, it counters to some extent the potential shortcomings present in internal models for calculating capital needs. That leads us to one of the major issues currently under consideration: the use of internal models for evaluating the weighting of risks. There is known to be wide-ranging variability in the calculation of risk-weighted assets across different banks. The Basel Committee itself has published a report on this matter, and increasing numbers of experts and regulators deem it advisable to study the implications of the use of internal models in terms of how they affect the lack of transparency in the calculation of capital requirements and in order to ensure a level playing field for all banks. The prudential regime of systemic banks: more capital and a resolution framework A further aim of the FSB has been to eradicate, or at least alleviate, the externalities created by systemic “too-big-to-fail” institutions. Systemic banks are those which, given their interrelatedness, size and complexity, might entail, in the event of bankruptcy and disorderly liquidation, serious difficulties for the rest of the financial system. The systemic repercussions of the collapse of a bank of such characteristics, as evidenced following the Lehman Brothers bankruptcy, was the driving force behind the authorities having subsequently to bail out other institutions, with the ensuing burden on public funds.
The high proportion of imports means that much of the government spending dissipates abroad. It has been empirically demonstrated that the fiscal multiplier in small open economies is zero or even negative. 13 The impact is further reduced if the shock does not originate in the domestic economy, but from outside – as was the case in the most recent crisis. The crisis has confirmed the limits of discretionary fiscal policy stabilisation. For example, the measures adopted by the Confederation in 2009 and 2010 could not be implemented fully and in a targeted way. 14 Swiss monetary policy has also made an important contribution to economic stability. It is also subject to binding rules. For example, the requirement to ensure price stability is enshrined in the National Bank Act and is defined in the SNB’s monetary policy strategy, which has been in force since 2000 (cf. chart 8). 15 The SNB equates price stability with a rise in the national consumer price index of less than 2% a year. Moreover, the SNB’s independence is enshrined in the Federal Constitution. This requires it to operate without political pressure. As a counterweight to this independence, the SNB has a duty of accountability; it must report regularly to the government and the general public on monetary policy matters. Thus, monetary policy is also equipped with good rules, and this is reflected in a high degree of stability. By international standards, Switzerland has very low inflation rates and low interest rates.

3 Thus, the actual goal of monetary policy – price stability – can be achieved (cf. chart 4). In the fiscal policy domain, the “rules versus discretion” debate is of much newer vintage. Whereas, in 1990, there were only five countries with fiscal rules (Germany, Indonesia, Japan, Luxembourg and the US), today there are 81. 4 The current financial crisis and the associated debt crisis have highlighted the importance of fiscal rules. In principle, fiscal policy can be implemented by means of automatic stabilisers and discretionary measures. To be effective, discretionary measures have to fulfil a number of conditions. These can be  2  Cf. Friedman (1948). 3  Cf. Kydland and Prescott (1977), and Barro and Gordon (1983). 4  Cf. Budina et al (2012). BIS central bankers’ speeches  3  summed up as the three T-criteria: timely, targeted and temporary. 5 In other words, discretionary measures have to take effect in good time, to avoid them having a procyclical effect. This risk arises, in particular, from the fact that discretionary measures require political decisions. So their implementation can take a lot of time. Second, such measures need to be targeted, so that support can be given to the sectors and industries affected. Third, they must be temporary, so as not to permanently weigh on public finances. Experience has shown that, in the upswing, budget deficits are not offset by surpluses, and that discretionary measures therefore often result in government finances being burdened even beyond the downswing.
Access to the trade records of OTC derivatives activity that will be recorded in trade repositories also needs to be made available to be shared among regulators. Fourth, we need greater clarity concerning the responsibilities of the home versus the host country, especially when a bank encounters problems. Fifth, we need to work out how emergency liquidity should be provided on a cross-border basis. If a major financial market utility in London, for example, needs dollar liquidity to stay in operation, who will provide in it? Who will bear the risk and on what terms and conditions? The political unrest in the Middle East and North Africa underscores once again the fact that we operate in a shared world economy in which events in one country and region can have large impacts globally. And to support this globalized economy, global financial firms and a global payments and settlement infrastructure are needed to support this activity. Yet, we currently operate with a financial system that is largely regulated on a country-by-country basis. This is not tenable. What’s required is not some global authority dictating what national authorities can do but instead greater cooperation and trust in exchanging information and agreement on harmonized standards such as those laid out in the Basel III capital  BIS central bankers’ speeches  7  requirements and the CPSS-IOSCO Principles for Financial Market Infrastructures. There needs to be a good faith commitment to try to achieve a level playing field.

This was fueled in part by concern that the counterparty claims on failed institutions would be frozen and unable to be realized quickly. Not only did some core firms have inadequate capital and liquidity, they also faced conflicting incentives as to how to manage their capital resources. For example, many firms that came under stress were slow to cut their dividends or to raise new capital because of fears that such actions would signal their underlying weakness. Obviously, the failure to conserve capital made these institutions weaker rather than stronger. The crisis also underscored severe deficiencies in the international dimension of the regulatory environment. Financial institutions, flows and activities are global, but the vast majority of regulation and information sharing is contained within national boundaries. Where resolution regimes existed, they generally existed only for banking entities and were not set up to handle the orderly resolution of a large internationally active bank holding company or non-bank financial firm. This cross-border problem persists to this day. The interconnectedness of the financial system also caused shocks to spread quickly. For example, the failure of Lehman Brothers led to losses at the Reserve Fund, which precipitated a widespread money market mutual fund panic. It also led to actions by U.K. bankruptcy authorities that had the effect of freezing the assets owned by hedge fund and other clients of the firm and this encouraged such investors to pull assets from other institutions perceived to be weak.
According to the current financial conditions and the results of the Loan Tendency Survey, there has not been any noticeable change in demand and supply conditions in commercial and consumer loans in the first quarter of 2015. Accordingly, we envisage that credit growth will maintain its current trend in the upcoming period. These reasonable levels in credit growth are expected to continue to limit medium-term inflation pressures on the one hand, and support the improvement in the current accounts balance on the other. 2  BIS central bankers’ speeches  2. Macroeconomic developments and main assumptions  Now, I will talk about the macroeconomic outlook and our assumptions on which our forecasts are based. First, I will summarize the recent inflation developments, and then continue with the domestic and foreign demand outlook. In the fourth quarter of 2014, annual consumer inflation posted a quarter-on-quarter decline by 0.7 points and stood at 8.17 percent remaining below the forecasts of the October Inflation Report (Charts 9 and 10). Annual inflation decreased across sub-groups in this period, the most remarkable slowdown being in the energy group, which was led by the plunge in international oil prices. The food group remained as the largest contributor to inflation. Core goods registered a slight fall in annual inflation, while the improvement in the underlying trend, which continued from the second quarter on, halted. Meanwhile, we witnessed the considerable effect of the fall in oil prices on fuel-related services and saw a notable improvement in the underlying trend of services.

In four meetings we raised the MPR by 200 basis points, to 8.25%. The purpose was to limit the propagation effects, via reducing the demand through a more restrictive monetary policy. Just as we then stated, although a deceleration of global growth was expected, we did not see that it would have the necessary force to contain inflation and therefore monetary policy had to be tightened. As a matter of fact, our Report of September 2008, before the economic plunge and when Consensus Forecasts estimated 2.6% growth for the world this year, we announced that the MPR would probably be raised above 9%. But the world changed again, and very strongly. What at first seemed just as a deceleration of global activity, resulted being the first drop in world growth in over sixty years (figure 4). This led to a change in policies with no precedent in Chile’s monetary history. The drop in world demand would result in a larger slowdown in domestic demand than the one we intended to cause via monetary policy. In this new setting, the obvious reaction was to change the sign of monetary policy. The first important signal was revising our projections – in November 2008 – and announcing that the increases that had been forecast in September would not occur. Such an announcement had an immediate impact on financial conditions. This way, the CBC initiated the most aggressive interest rate cut ever implemented in Chile, and one of the sharpest in the world (figure 5).
As regards our asset purchases, we have to reduce their intensity in a pragmatic manner, as we already decided successfully in December 2016. I insist on the word “pragmatic” because, while keeping the current rules, we should on the one hand exploit the margins of flexibility of the programme and on the other hand hold in reserve an additional purchasing capacity – if needed. That said, monetary policy is not limited to QE, and QE is not limited to net asset purchases: we can keep a substantial degree of monetary accommodation even if we reduce our monthly flow of net purchases. 1/ On QE, the academic literature provides consistent evidence that the impact of asset purchase programmes on the yield curve and asset prices is primarily driven by the total stock of assets held by the central bank (the so called “stock effect”), rather than by the flow of transactions conducted over a given period (“flow effect”). In-house studies of the effects of the PSPP find that holding a stock of bonds equivalent to 10% of GDP lowers the 10-year yield by about 45 bps in the euro-area.5 By contrast, flows of purchases have no significant additional impact. These results imply that our current programme lowers the 10-year euro-area government bond yield by about 100 bps.

The sharp appreciation of the euro has notably been stemming from the significant reappraisal of growth prospects for the euro area, as well as from the geopolitical context. The impact of the strong euro on growth is currently offset by the strength of domestic demand in the euro area; but the recent appreciation of the euro exchange rate has led us to revise down slightly the outlook for inflation. Let me recall that the exchange rate of the euro is not a policy target of the ECB. But the exchange rate remains an element that we closely monitor owing to its possible implications for the medium-term outlook for inflation. I would like to finish by insisting on one word: confidence, but confidence without complacency. 3/4  BIS central bankers' speeches  Confidence, because our monetary policy is effective and the economic recovery is robust. But confidence without complacency, because monetary policy is not the only game in town. It must be supplemented by national reforms, particularly in France where the current acceleration of reforms is positive. It must also be supplemented at the European level by strengthening the euro area: in order to lastingly boost growth, we must complete Monetary Union by invigorating Economic Union. All those who legitimately reject overloading monetary policy – on both sides of the Rhine – must now firmly support a stronger economic union. Thank you for your attention.
But what might scare people the most is not necessarily what we should focus on the most. Transition risks, the ones related to the adjustment towards a low-carbon economy, are less visible long-term risks that have not yet materialised. Nevertheless, we need to be prepared for these as well. Transition costs and uncertainties about the winners and losers will certainly create strong market volatility and lead to adverse aggregate macroeconomic outcomes. According to our first estimates made by the ACPR – the French supervisor –, 11 13% of French banks’ total net credit exposure is to sectors vulnerable to transition risks. The DNB conducted a similar exercise and found roughly the same exposure for Dutch lenders.12 Financial institutions may object that the timeframe for the materialisation of these risks is far beyond their investment horizon and the average maturity of their balance sheets. They may argue that their exposures can be adjusted progressively if needed. In my view, it is delusional to think that when risks become perceptible, everyone will be able to cut their exposures at the same time and in an orderly fashion. My hope is that the current momentum among supervisors around the world will help us to better measure and mitigate the long-term risks associated with climate change, and hence smooth the transition. In this regard, we, as supervisors, should collectively move forward in two priority areas. [slide 4] Our first priority should be the identification and disclosure of existing exposures in the financial sector, or “the snapshot of risks”.

In my remarks today, I will address these two questions: (i) how can we better measure the long-term risks associated with climate change? (ii) and how can we develop the opportunities related to the financing of the transition? [slide 2] **  1. From physical risks to transition risks, and from a snapshot to a video Dr Shuckburg has just given an excellent presentation of the available research, which confirms 1/4  BIS central bankers' speeches  that the forces of climate change are powerful and inevitable. Physical risks – the increased frequency and severity of extreme weather events – are obviously the most visible and immediate source of risk for the financial sector. [slide 3] With 710 natural disasters in 2017, 9 we have just lived through another year of record climate turbulence. The 600 mark has been exceeded only five times, all of them in the last six years. Needless to say, the insurance sector is at the forefront in dealing with physical risks. Yet, contrary to widespread belief, if not covered by insurance, physical risks could loom large for banks as well. The lack of insurance protection when natural disasters occur, or what we call “protection gaps”, may increase credit risks for banks if it leads to suppressed economic activity and higher unemployment. Globally, protection gaps are already sizeable. 10 They could increase further, including in developed countries, if insurers increase their premiums or simply retreat from risky market segments. Physical risks should therefore be, at the very least, carefully monitored.