samchain/econo-pairs-v1 huggingface dataset:
The added pressure of the economic environment on bank profitability is the second element of the balance of risks that I would like to highlight. Once again, this is not something specific to the Spanish financial system. Indeed, Spanish banks’ profitability is higher than the European average, but it remains below the cost of capital. Maintaining appropriate profitability is crucial, among other factors, if banks are to generate capital organically and, in this way, reinforce their solvency levels. Spanish bank profits in the first half of the year, down by 11.5% in year-on-year terms, are a sign of the growing likelihood of this risk materialising. Contributing to this decline have been the reduction in gains on financial operations and, to a lesser extent, the increase in operating expenses, although a portion of this was due to extraordinary expenditure associated with the restructuring of certain banks. In addition, the ongoing reduction in impairment losses that began in 2012 is showing some signs of exhaustion. Indeed, in terms of their year-on-year rate, impairment losses increased for the first time since 2012, posting a rise of 3.9%. And we should not forget that, at present, the NPL ratio is still significantly above that recorded before the financial crisis. Specifically, in terms of lending to the resident private sector, in business in Spain, the NPL ratio stood at 5.3% in June 2019, 8.7 pp down from the December 2013 high. Foreclosed assets evidenced a further decline, standing below € billion in June 2019.

14.10.2019  Financial stability situation in Spain X Financial Sector Meeting/Expansión-KPMG Pablo Hernández de Cos Governor  Good morning ladies and gentlemen. Let me first thank the organisers for inviting me to participate in this tenth edition of the Financial Sector Meeting. On this occasion my address will focus on the Banco de España’s assessment of the main factors of risk to financial stability at present, the potential impact on deposit institutions and the tools available to the Banco de España and the other authorities to mitigate such risk. Assessment of the balance of risks to financial stability The balance of risks to the Spanish financial system’s stability has worsened somewhat in the past six months. This has been due in particular to the downward revision of the global economic outlook. Indeed, global GDP growth continued to ease, to a year-on-year rate of 2.8% in 2019 Q2, more than 0.5 pp lower than a year earlier. This slowdown is particularly affecting some emerging economies and Europe. Moreover, growth projections have been revised downwards in recent quarters in most economies. In fact, the increase in global GDP this year is expected to be the lowest since the international financial crisis. This downturn in activity has likewise affected the Spanish economy. As a result, the Banco de España revised its growth projections for our economy down last September, to 2% in 2019, 1.7% in 2020 and 1.6% in 2019.
But I will dwell on one particular point: what makes life difficult for these funds is not so much the fall in bond yields per se but one that isn’t accompanied by a fall in yields (rise in prices) on other, riskier securities they hold as assets. That’s precisely what has happened in recent years: on days that long-term real interest rates have fallen, equity prices have declined. More often than not, in other words, the yields on gilts and equities have gone in opposite directions and, over time, the gap between those yields has widened considerably. Since an independent easing of monetary policy tends at the margin to depress yields (raise prices) of all assets – and that’s precisely what you observe if you focus specifically on those episodes – it’s hard to believe that policy shocks are the main reason for the divergence between bonds and equities that underlies  2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  2  the rise in pension deficits. More likely candidates are growing pessimism about future economic growth, across the world, and the perception that risks around that lower central path are skewed to the downside. This is part of the wider point that, in large part, central banks have been accommodating a long, drawn-out decline in the neutral real rate of interest. The decline in policy rates is a symptom not a cause of the forces shaping the global economy.

The MPC is, and must remain, watchful for any sign that higher deficits are pushing up funding costs for companies exposed to them or in any other way inhibiting corporate investment. Nor do I want to pretend that monetary policy has no bearing on these deficits. But it’s important to get any such effects in context and, in this respect, I do want to make one particular point. What really matters here is not, in and of itself, the drop in the yield on bonds (i.e. the rise in their price), but one that’s not been matched by a similar appreciation in pension funds’ assets, equities in particular. However, an independent easing in monetary policy tends to push up the prices of all assets, equities as well as bonds. So it seems an unlikely candidate for the divergence that has been the key problem for DB schemes. Let me explain this a little further. Though their liabilities are discounted purely by the yield on bonds, pension funds tend to hold a broader-based set of assets. In particular, they hold significant quantities of equities. In general, that may well be a reasonable strategy. As the riskier asset, equities have tended historically to outperform bonds. The extent of the outperformance, the so-called “equity risk premium”, is  7  (a) Taken from King and Low (2014). Shows the average 10-year yield of inflation-linked bonds in the G7 countries (excluding Italy) over the period 1985-2013. Between 1985 and 1992 only data for the UK are available.
Both series are deflated using the Consumer Price Index from ‘A millennium of macroeconomic data’. Latest data point is for April 2022, based on daily prices to 26 April. Data are not seasonally adjusted. Labour market and business sentiment Momentum in the labour market continues to be both strong, and stronger than previously expected. Vacancies are at historical highs. Redundancies are at historical lows. The MPC forecasts the unemployment rate will fall to 3.6% in Q2 – the lowest level seen for almost fifty years, in part because participation in the labour force has failed to recover from pandemicrelated declines. [9] Bank staff estimates of underlying wage growth continue to strengthen, and  Page 8  are already running at rates above those normally deemed consistent with the inflation target. [10] In its February forecast, the MPC embodied stronger wage growth in its baseline to reflect the likelihood that pay settlements would embody some catch-up for the higher than expected inflation outturns at the turn of the year. On the back of the Bank’s Agents’ reports from corporate contacts, further second round effects were included in the May projection. Chart 5: Unemployment continues to fall but inactivity remains higher than prepandemic(a)  Sources: ONS and Bank calculations. (a) Data from the LFS. Employment includes employees and self-employed. Changes do not sum to 0 as the population is estimated to have increased during the period.

It is not easy, therefore, to reconcile the revised earnings data with other information on the labour market. And these data really matter for the MPC’s assessment of the UK economy. I can promise you that the Bank, the Treasury and the Office for National Statistics will, as a matter of urgency, be working together to try to understand what is happening to earnings. Decisions on interest rates must take into account not only those factors which I have highlighted this morning - the international economy, the possibility of a credit crunch and uncertainty about the trend in earnings growth - but also a wide range of other information relevant to the outlook for inflation, including the behaviour of the monetary aggregates, which are still growing quite rapidly, and the fall in sterling’s effective exchange rate. Over the next two weeks more important data will become available, including the first estimate of GDP growth in the third quarter, a CBI Industrial Trends Survey and the monthly report from our regional Agents. At our next meeting on 4 and 5 November, the MPC will take into account all of this information, and occasions like today are part of the process by which we obtain more information and exchange views with those most directly affected by our decisions. BIS Review 86/1998
Good hedging, indeed! I will not review all the themes addressed in the book, but would like to touch on a few key issues that can help us get a better understanding of what has happened over the last ten years and how the euro is likely to develop over the next ten. David Marsh is cautious when assessing the euro’s first ten years. In his introduction, he even sounds Solomonic, suggesting that: “It’s too early to say”. There is nothing wrong with such skepticism, and it’s always better to be prudent. Such prudence nevertheless reminds me of the answer that Chinese Premier Zhou Enlai gave in the mid 1970’s to a question about the impact of the French revolution of 1789. He too remarked: “It’s too early to say”. Today, I would like to start by presenting some facts about the last ten years. Then I’ll consider the main hidden message of the book, which is that monetary union is a political union. Finally, I will try to give my own perspective on the next ten years. Facts of the last decade Any assessment of the first ten years of the euro should consider what the objectives were at the start of Monetary Union. In particular, we should avoid attributing to the euro merits or demerits it should not have or never aspired to. Let me consider some of the objectives of the euro and the expectations it gave rise to.

Making assessments on the basis of long averages means that adjustments are made to take account of cyclical and temporary shocks. However, this might lead us astray. It would be incorrect to claim that the strong employment results achieved over the last ten years are exclusively due to the euro. The improvement is more likely to stem from the structural reforms implemented in the Member States over the years. A third objective of the euro was to move forward the integration of the financial markets. The results in this field are positive, but also uneven, depending on the market segment. Integration is more advanced in the areas close to the single monetary policy, but it also depends on the degree of integration of the underlying market infrastructure. The euro area money market, the segment closest to the single monetary policy, reached a stage of “near perfect” integration almost immediately after the introduction of the euro. The malfunctioning of recent months is common to all currencies. On the other hand, short-term debt securities (i.e. commercial paper and certificates of deposit) have remained much more fragmented. Financial integration has been fastest in the government bond market, where yields have converged and are increasingly driven by common factors, although local factors and perceived differences in credit risk continue to play a role. Likewise, the corporate bond segment is also more integrated as the various markets have merged into a single, yet diversified euro market.
BIS central bankers’ speeches  3  Chart 4  The combination of large deficits and growing demographic problems is particularly challenging, as is the case for southern European countries, where fertility rates are well below the replacement rate and lower than the average for advanced countries. The demographic challenge will be even greater ahead. In some of the countries the number of pensioners will be close to the number of economically active. The basis for economic growth is thus weakened. The burden of rising debt and pension payments will be heavier. It takes a long time to reverse demographic trends. Financial incentives can be effective. Norway, with favourable support schemes for families with children, has a relatively high birth rate. In other European countries, there is a risk that these hard times will exacerbate the demographic challenge. Unemployment, in particular among youth, has risen sharply and many people have a dark view of the future. The events of recent years have brought fresh experience and reminded us of several historical lessons. Economic policy must be sustainable. Governments must save during upturns in order to weather downturns. At the same time, there are limits to what economic policy can accomplish if the economic foundations are being eroded. A competitive business sector is crucial to maintaining growth and welfare. This also applies to Norway. The financial crisis was a reminder of how risk can be mis-assessed.

Table 1  The fiscal rule was drawn up in 2001. Today, the situation is different. In 2001, 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 return. 1 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. The conclusion is that a more robust approach would now be to base fiscal policy on an annual expected real return on the Fund of 3 percent. Such an adjustment would underpin the main principles that were behind the establishment of the fiscal rule – stability and sustainability. 1  8  See Norges Bank Staff Memo 6/2012. BIS central bankers’ speeches  Chart 8  In 2011 the structural non-oil budget deficit was about 3 percent, which is close to such a new path. Adapting petroleum revenue spending to a lower expected return should not therefore be particularly demanding. If we wait, a necessary policy adjustment later could be far more painful.
These two risks could easily occur in tandem, however. According to a new working paper by two Central Bank staff members, growth in private property rentals to tourists via Airbnb has increased real house prices by 2% per year in the past three years; furthermore, it explains about 15% of the rise in real prices 4  over this period.2 A contraction in tourism could therefore exacerbate a drop in house prices stemming from other causes. The impact on the banking system would then be greater. It is nevertheless unlikely that they would be unable to withstand such a turn of events, but they would probably need to use the capital buffers that are designed to cushion against such shocks. That gives rise to the question of how high the banks’ capital ratios should be. Their combined capital, including subordinated loans, was equivalent to 25% of the risk-weighted asset base of the three systemically important banks at the end of 2017, and their so-called gearing ratio was just under 17%. The gearing ratio measures net equity relative to total assets without risk adjustment. Approved dividend payments will lower the capital ratio to 23½% and the gearing ratio to just under 16%. These figures can be expected to fall even further during the year, owing to dividend payments and changes in the composition of capital. The ratios are certainly comfortably above the Financial Supervisory Authority’s capital adequacy requirements, which are close to 20% for the three commercial banks.

The longer long-term inflation expectations are anchored to the target, the greater that scope will be. One of the main tasks of monetary policy, of course, is to foster such an outcome. However, if other decisions that affect domestic cost levels and demand pull in another direction, such a tug-of-war could result in a further rise in the real exchange rate and could adversely affect employment levels. Honoured guests: Although nearly all of the capital controls were lifted in March 2017, a few restrictions on capital transfers remain: on the one hand, restrictions on offshore krónur, and on the other, restrictions on speculative derivatives transactions involving the króna and other transactions that could undermine the efficacy of the SRR. In order to be released from the current exemptions provided for in international agreements on free movement of capital, vis-à-vis both the EEA and the OECD, we must lift these restrictions, and it is appropriate that we aim to do so as soon as possible. The Central Bank is of the view that the economic preconditions are in place to take the final step towards full capital account liberalisation. This also applies to the stock of offshore krónur, which now equals about 3½% of GDP, 2  down from 40% in late 2008, when the capital controls were first imposed. But this cannot be done without statutory amendment. The Bank does not consider it appropriate yet to begin lowering the SRR.
Following the dramatic 1990s in the USA (and Sweden), with soaring prices on shares and property, many people began to think that perhaps the central banks should keep an eye on asset prices and react to these, even if there were no sign of rising inflation. Overrated share prices and/or property prices lead sooner or later to an adjustment in asset prices. If this adjustment is dramatic, the effect could be an economic downturn, with rising unemployment and a slowdown in prices. The extreme valuing of certain shares in the IT and telecom sectors on the  2  BIS Review 39/2001  American stock exchange, Nasdaq, should perhaps have warranted more stringent monetary policy a few years ago, according to the international debate on monetary policy. One argument put forward as to why the central banks should not merely look to forecasts regarding consumer prices when making decisions on monetary policy, but should also monitor the development of asset prices, is that ownership of shares is much more widespread now. Thus, changes in asset prices probably have much greater significance for household expenditure now than they did before. Deregulation, liberalisation and globalisation have increased the importance of the capital markets for economic developments and made them more volatile. Assets with market prices now comprise a much greater share of households' balance sheets than before. This is thus claimed to be a good reason for monetary policy to take into account developments in asset prices.

That, in sum, is what Basel II is all about. I believe that the incentives for better risk management that are built into the new capital framework, and the flexibility to adapt the framework to local needs, will ensure its validity. I also believe it marks a major step forward in the right direction, and that it will contribute to a more resilient and stable banking system that is capable of promoting sustainable economic growth. The Committee recently announced its intention to verify that Basel II meets our long-stated objective of maintaining the overall level of capital in the banking system while keeping incentives to adopt the most advanced and risk-sensitive approaches. As a result we intend to conduct a fifth Quantitative Impact Study, or QIS 5, in the last quarter of this year. It is important to understand sooner rather than later what the impact of the framework will be. The Basel Committee will continue its work based on the existing timetable, and supervisors and bankers planning to implement Basel II should continue their preparations accordingly. Banking supervision and financial stability Let me turn now to my second topic, which is the link between effective banking supervision and financial stability. I’m sure we can all agree that a stable banking system is critical to the long-term growth of an economy. But discussing financial stability issues is always a challenge because we don’t have a framework for financial stability as comprehensive as in the case of price stability.
Our first supervisory stress test was in 2015 for general insurers and we have repeated the exercise every two years, bringing life insurers into it for the first time last year. Our experience has been that these stress testing exercises give us valuable additional insights into firms’ financial resilience, beyond those that can be obtained from the usual solvency capital requirement calculation. 4  See Rule 3.8 of the Conditions Governing Business part of the PRA Rulebook. 3  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  3  Use of a common scenario enables peer comparison to identify both genuine differences in firms’ risk profile, and potential optimism in any one firm’s modelling and assessments, thus helping firms improve their risk management. It improves our understanding of the potential aggregate, systemic impact of management actions taken rationally by individual firms. It helps us to identify any concentrations in reliance on individual reinsurers, jurisdictions, or external models, for example. It informs our supervisory approach and helps us to identify priorities if a particular scenario crystallizes (e.g. cluster of US hurricanes). The 2019 stress test again indicated general insurers’ resilience to a range of natural catastrophe risks.5 This resilience is reliant on significant levels of reinsurance, particularly from Bermuda, and we worked jointly with the Bermuda Monetary Authority, who highlighted their firms’ reliance on onward reinsurance, and in particular to the capital markets via Insurance Linked Security structures.

Solvency II review, internal models and the solvency capital requirements calculation Having mentioned the Solvency II review, I do not propose to try and cover the many topics that it encompasses. I do want to talk about one aspect which risks being overshadowed by the familiar headline topics of risk margin, regulatory reporting, and matching adjustment. That is, the overall approach to setting capital requirements, and the potential role of sector-wide stress testing in that. Under the existing implementation of Solvency II, there are many firms for which the standard formula is not appropriate, and internal models are the near-exclusive determinant of capital requirements for all or part of the business. And those models either have to be approved or, if not, rejected in their entirety, using a bottom up approach of assessing compliance with a large number of technical tests and standards. The philosophy is, in effect, that everything can be modelled, and that determining capital adequacy is essentially a technical exercise. This denies the reality: first that some risks are simply not conducive to modelling; and second that even for those that are, there will always be a chance that the model is wrong. It hinders supervisors in responding flexibly to risks not well captured by a specific model, or by modelling in general. And it has led to huge expenditure of effort by both firms and supervisors in the approval of models and model changes.