samchain/econo-pairs-v1 huggingface dataset:
In undertaking this challenge, banks and supervisors recognise that having adequate levels of capital is not enough to ensure success in banking - or even long-term survival. A bank’s long-term success is determined chiefly by the quality of its management and controls, which together make up its first line of defence. The New Basel Accord seeks to capture the relationship between the adequacy of capital and the quality of risk management by relying on three important and mutually reinforcing “pillars”. These consist of, first, the minimum capital requirements; second, supervisory review; and third, market discipline. The three pillars themselves reflect the trend among bank supervisors to embrace a balanced philosophy of regulation that provides incentives to banks to manage their risks appropriately. The first pillar, for example, seeks to align capital requirements more closely to the actual risks that banks face. But the minimum requirements provide economic incentives - in the form of lower capital charges - for those banks that develop better measures for their exposures to risk and better techniques for managing their risks. Banks with more traditional exposures and less complex operations will be better able to ensure that the their capital base is sufficient for the level of credit risk they face by aligning their capital requirements with external measures of their borrowers’ creditworthiness. The most sophisticated approaches to credit or operational risk will allow banks to rely increasingly on their own assessments of risk to determine how much capital to hold.

This puts the responsibility for assessing and responding to risk in the most appropriate place, namely in a bank’s own management and directors. They are in the best position to know their customers and their risks, and it is therefore most appropriate - and critically important - that they understand their responsibility for administering the bank’s assets and its activities in a responsible manner The second pillar highlights the important role that supervisors play in ensuring that each individual bank is holding adequate capital. Under the New Accord, supervisors will be responsible for evaluating  2  BIS Review 52/2003  the internal processes banks use to determine their need for capital to ensure that managers are exercising an appropriate degree of judgement. The responsibility of a supervisor is to ensure that the banking system operates in a safe and sound manner and that individual banks are run by capable and competent leaders. But supervisors are not the managers of the banks. The decision on how each bank should best respond to different risks: that job should always rest with senior managers and a bank’s board of directors. Instead, by engaging managers in a dialogue about the risks they face and the controls they have adopted to address them under the second pillar, supervisors create incentives for managers to behave prudently and find ways to improve their performance. The third pillar seeks to leverage the ability of markets to provide discipline to banks to ensure that they are not holding unrealistically low levels of capital.
We must therefore be prepared for an extended period of lower returns, even though growth and financial market returns do not always go hand in hand. Over time, we expect equities to yield a higher return than bonds. Over the past few years, the Fund has increased its allocation to equities, compensating to some extent for low bond yields. However, the excess return on equities must be considerable to keep up the overall return on the Fund. This is not impossible, but perhaps more than we can expect. A bolder investment strategy could compensate for low interest rates, although the risk of substantial losses would also increase. This is hardly a tempting path. (Table: Estimated real return) Today’s situation is different from when the fiscal rule was drawn up in 2001. At that time, a real return on the Fund of 4 percent, or a little higher, based on the then prevailing distribution between equities and bonds, was a reasonable assumption. Today, calculations yield a lower figure for expected real return3. The real return on bonds in the Fund’s portfolio can now be estimated at 1 percent. With a normal risk premium on equities, the real return on the whole Fund can be quantified at 3 percent. There is a possibility that the real return will be higher, but it may also be lower. If we spend more than the annual return on the Fund, we will be eating into the savings portion.

As the restructuring process moves on, moreover, the industrial sector is increasingly composed of more resilient firms producing higher value added products, while new, important sources of output growth are emerging, such as financial and ICT-related services. I, therefore, believe that there are grounds for cautious optimism, provided we persevere. It will, however, take time; there are no easy short cuts to faster growth. 2. EU accession was meant to boost our trade. In fact, exports were down by 11.3 per cent in 2005, although the EU’s share edged up slightly to 51.5 per cent. Don’t tell me the problem is the EU economy, not ours ... First, let’s get the facts right. While Malta’s exports did fall by 11.3% last year, exports to the EU were only 5.2% lower. The drop, moreover, was entirely due to reduced sales of electronic goods and clothes. Sales of some other product categories to the EU increased. And do not forget that Malta is also increasingly an exporter of services, which are not included in these numbers. Second, in the real world it is hardly ever the case that things are either black or white. For a start, it is a proven fact that membership of a single market, particularly in the presence of a monetary union, results in a marked expansion of intra-market trade. That has been the experience of existing EU and euro area members. It is not reasonable, however, to expect that to happen in the first full year after membership!
There is also a risk that financial operations will simply be moved somewhere else, where the regulations function better. Role of the krona unchanged Now that I have discussed the role of the euro in integration of the financial markets in the euro zone, I will take the opportunity to deviate from the subject slightly and mention briefly the euro's role on the Swedish financial market. You will no doubt remember the discussions on the marginalisation of the krona prior to the introduction of the euro in 1999. Some prophets of doom claimed that the krona would not be able to survive so close to such a large currency. Swedish companies and individuals would spontaneously and rapidly go over to the euro. As we now know, this was not the case. According to the statistics the Riksbank collects on a monthly basis from the Swedish credit institutes, it can be concluded that the krona's share of the total assets has declined slightly. However, it has not been replaced by the euro, but by other currencies, probably chiefly the US dollar. At the end of last year, the euro comprised only 6-7 per cent of the total assets. The Riksbank's studies also show that the total Swedish activity in euro on the money market is relatively slight and in particular concentrated to the deposit and swap markets. There are still a few programmes of certificates in euro and the secondary trading in euro-denominated short-term papers is very small.

Finally, Asia is diverse – across stages of economic development, and across a variety of climate related risks and transition challenges. If we can successfully help Asia transition to net zero, it will go a long way in getting the world to net zero. Third, Collaboration – effective transition finance needs close partnership among the public, private, and people sectors. This will be the focus of our conference – scaling blended finance to accelerate the net-zero transition. Blended finance synergises public and private capital to mobilise financing for projects that are marginally bankable. It is also about combining financing with capacity building, technology transfer, and institutional support, to reduce risk and enhance bankability. In short, it is about taking an ecosystem approach to solving a problem of the global commons. Blended finance is not new but catalysing and scaling it requires a fresh approach. The use of public funds and development guarantees to reduce risks and encourage participation by private capital has been around for many decades. But such programmes are too few and too small. Globally, annual flows of blended finance have averaged less than $ billion since 2015. We need a more systematic and coordinated approach to mainstream blended finance. First, we need to build a pipeline of shovel-ready transition projects. There is insufficient capacity and expertise to prepare projects that are attractive to the private  2/4  BIS - Central bankers' speeches  sector.
It is curious, for example, to see how the usual indicators of risk premia – such as CDS, bond spreads and so on – tend to touch bottom around cyclical peaks. However, the reality is quite different. During recessions risks do not increase; they simply materialise. And they do so after having built up during the boom. During expansions, households and firms tend to overestimate the future growth of their income and raise their degree of leverage in an attempt to bring their current spending patterns into line with this expected flow of future income. Banks, likewise short-sighted, also overestimate the ability of their borrowers to pay and their own ability to find, at low cost, the funding needed to meet the growing demand for loans. BIS Review 149/2008  1  When the downturn sharply curtails optimism and borrowers and lenders suddenly revise their expectations, the full scale of the imbalances that have built up emerges, triggering financial pressures that fuel – and are in turn fuelled by – the cyclical slowdown, setting in train a vicious circle that ends in deep crisis. Admittedly, this harmful effect of real growth on credit growth cannot be avoided; but it can be mitigated by means of a monetary policy that takes it into account.

It’s therefore worth taking some time to think about what we as the prudential regulator and the insurance industry have already learnt from the current crisis –including how the Solvency II regime has responded. None of us knows how the full effects of the coronavirus pandemic will unfold. Our aim at the Bank, alongside colleagues at the FCA and within government, is to build a bridge across the economic disruption created by the pandemic and help UK businesses, consumers and the financial sector to the other side. Insurers will need to be on the front foot in identifying the potential impacts on their longer-term business models in order to meet changing customer expectations. Covid-19: what role has Solvency II played in the industry’s response? I have talked previously about the principles of Solvency II that the PRA supports - a whole balance sheet, market consistent approach to regulatory solvency, and focus on good governance and risk management 1. The adequacy of firms’ capital and risk management during this global, systemic event is certainly being tested. The information we have from the largest UK insurers shows the industry was well-capitalised going into this crisis and has so far remained so, with aggregate solvency ratios around 150% 2. But given the exceptional uncertainty generated by the current crisis, we expect insurers to increase their monitoring of the additional risks presented by Covid‐ 19, and where necessary to update their risk and capital assessments accordingly.
Regarding collateral valuation, it cannot be ignored that provisions apply to the uncollateralised part of each loan. Consequently, guarantees pledged to each loan represent a central element in the new approach for measuring credit risk. To fulfill their role, guarantees have to be effective, that is to say, they need to be validated as a mitigant of credit risk. For this to be true they must subject to strict, rigorous and verifiable valuation criteria. To facilitate this last point, banks should have procedures for the valuation of the collateral with updated information based on revised appraisals adapted to changes in the macroeconomic situation and reliable analysis of trends of market prices, particularly for real estate collateral. Finally, estimates of credit losses and provisions should rely on credit risk models developed on a sufficiently quantitative basis where prudence should be reinforced. In any case,  1  See G. Jiménez and J. Saurina: “Credit Cycles, Credit Risk, and Prudential Regulation”, International Journal of Central Banking, 2006. 4/7  estimates should be based on credible assumptions that are sufficiently justified and consistent over time. The methodology used must be readily understandable and the results intuitive. Also, consistency should be an objective. Banks should establish procedures for periodically testing the reliability and consistency of the results obtained. The periodic testing of the calculation of provisions should be done regularly through, for example, back-testing the estimated credit losses with those actually observed in finalised credit operations.

4  BIS central bankers’ speeches  This is of course an attempt to take the argument to its extreme. Monetary policy has constantly been aimed at bringing inflation back on target and creating conditions for longrun stable growth in the Swedish economy. The reason why the Riksbank has conducted the policy it has conducted is that it has tried to reduce the risk of excessive debt and overly inflated housing prices. Swedish household debt has shown a sharp upward trend over the past 15 years or so and is now very high, both from an historical and an international perspective (see Figure 5). If housing prices were for some reason to fall heavily in a situation with high debt levels, households would find that their earlier calculations no longer held and that their balance sheets did not look the way they expected. This could in turn start a process whereby households try to get rid of some of their debt.
I am grateful to Sarah Breeden, Jon Cunliffe, Lee Foulger, Karen Jude and Ali Moussavi for their assistance in helping me prepare these remarks. 1 For more on resilience and its importance in recent times, see Markus K. Brunnermeier, “The Resilient Society”,  Endeavour Literary Press, 2021  3/3  BIS central bankers' speeches

First, money is needed to place even a riskless bet. That was the scarcest of commodities after the failure of Lehman Brothers in October 2008. Second, placing a bet also requires a trustworthy bookmaker. They too were thin on the ground in the midst of crisis. In their absence, arbitrage may be more “apparent” than real. Market prices are likely to deviate from fundamentals due to liquidity and counterparty premia. By way of illustration, Chart 5 provides a decomposition of the yield on sub-investment grade corporate securities in the UK. By mid-2007 at the peak of the boom, the liquidity premium on these assets had pretty much been eliminated. By the end of 2008, this liquidity premium had risen by almost 2500 basis points. As capital markets moved from flood to drought, market prices turned from rich to poor. Fair value and financial stability Against this backdrop, what are the potential financial stability implications of using market prices as a valuation yardstick? In roughly chronological order, three main arguments have been used in defence of marking to market. Broadly, these mirror the three historic phases of fair value:   “Protecting shareholders”  During the 19th and early 20th centuries, as joint stock companies sprang up, the key purpose of company accounts was to protect shareholders’ interests. Like truth in the face of the war, in the face of crisis the financial accounts appear to have been the first casualty.
Because we had cut the repo rate so quickly and substantially during the autumn of 2008 and early 2009, the scope for pursuing traditional monetary began to shrink as the repo rate began to approach its lower limit. Determining what level is the repo rate's lower limit also proved to be difficult. Can the repo rate be cut all the way to zero, or even to a negative level? There is no clear answer to these questions. However, in line with the majority of the Executive Board, my assessment in July was that the repo rate should not be cut beyond 0.25 per cent. The reasons for this were the concern that some financial markets would find it difficult to function normally at lower interest rate levels and that it could have a negative impact on the profitability of the banks. My view was that the economic situation in principle called for an even greater cut. At the same time, I thought it was too risky to reduce the repo rate even more when we did not really know how the financial markets would function with such low interest rates. One can note after the event that cutting the repo rate to 0.25 per cent was carried out without any apparent problems. In this perspective, the fears that I had in July would seem to be somewhat exaggerated.

I would also like to emphasise today that regulation needs to adapt to the evolving financial system. In that vein, I will discuss what remains to be done in developing macroprudential and other policy tools in response to evolving risks in the investment fund sector. Financial stability risks in the euro area In the euro area, we have now seen 22 consecutive quarters of economic growth and declining unemployment – a development which has also been bolstered by our accommodative monetary policy and which has supported financial stability overall. Notably, banks’ profitability has improved somewhat, though it is still at low levels, and they now have higher capital and liquidity ratios, making them more resilient than they were before the global financial crisis. Indeed, the results of the recent EU-wide stress test show that the banking sector has a good level of resilience overall, albeit with some pockets of vulnerability. However, while the fundamentals for solid growth rates over the next two years are still in place, some risks are building up in the financial system. We are currently paying particular attention to three major developments that could trigger financial stability concerns globally and in the euro area. First, the current expansion of the US is now significantly longer than historical norms and the second longest in US modern history. Looking ahead, a down-turn in the US macro-financial cycle could trigger a reassessment of riskier asset classes.
In particular, the manufacturing sector has been struggling under the effects of sterling's ongoing strength and the weakening in the world economy which I have already discussed. Manufacturing output today is little higher than it was in March 1998, and employment in the sector has fallen considerably over that period. The difficulties faced by the traded sector are reflected in the UK's relatively weak net trade position, which has reduced GDP growth in 14 of the last 17 quarters. Surprisingly, but encouragingly, manufacturing output rose by 1.4% in August - the largest monthly rise for two years. Whether this pickup will persist is, of course, unclear at the moment. In assessing whether some of these short-term movements are likely to last, the MPC is particularly reliant on intelligence from firms. Like others, we pay close attention to the major industrial surveys. But we are also able to call on our network of regional Agents, who talk each month to a wide variety of companies, including, I know, some of you. It is clear from the Agents' reports that the confidence of many of those they speak to has been hit in the aftermath of the terrorist attacks. Labour hiring and discretionary spending decisions may be deferred for a while, whilst the situation becomes clearer. And investment could be reduced if businesses look for a higher return to cover any increased risk. What does all of this mean for inflation? So-called 'upstream' prices - including raw material costs and factory gate prices - remain very subdued.

Some business costs, such as insurance, will rise, but that should be at least partially offset by the sharp fall in oil prices. RPIX inflation rose briefly above target in August, but fell back to 2.3% in September. We are just starting to put our next formal inflation forecast together, and you will be able to see the results of that exercise in the November Inflation Report. At this point, I know you would wish a crisp conclusion and some indication of where I think rates should move in the future. Some of you may even think you have detected clues in what I have said as to where I think rates should go. If you have, though, that would be an over-interpretation. There are, I think, clear downside risks. The world economy may slow further if adverse confidence effects persist. Spending which is currently delayed may be cancelled. And the labour market may begin turning more decisively in the UK. But for the moment these risks need to be weighed against the continued strength of domestic demand. Of course, if we are to meet our inflation target, a strong domestic economy will be needed to offset the weakening influence of overseas markets. We have cut interest rates by 150 basis points since the start of the year in part to achieve this, and the full effect of these reductions have still to come through.