samchain/econo-pairs-v1 huggingface dataset:
With a steely nerve and deep pockets, investors could make profits from exploiting these trends. But as Keynes remarked, the market can often remain irrational for longer than even a strong-willed investor can remain solvent. In other words, these are risky bets. The crisis has also revealed, however, examples of bets which were, on the face of it, essentially riskless deviations from EMH or “apparent arbitrage”. Chart 3 considers the price of two on the face of it identical portfolios – an index of CDS contracts and an individually-constructed portfolio of the same CDS contracts. On average, they ought to trade as one and the same. But for around a year from October 2008 onwards, the spreads on these two portfolios differed by as much as 60 basis points. Even once transactions costs are taken into account, there were persistent and significant riskless  10  Shiller (1981). 11  Shiller (2005), Smithers (2009). 12  Alternative metrics for fundamentals, such as cyclically adjusted price-earnings ratios or q, yield a broadly similar conclusion (Shiller (2005), Smithers (2009)). 13  Shiller (2005). BIS Review 28/2010  5  profits on the table. Chart 4 looks at the difference between two, again on the face of it, identical money market bets – forward rate agreement spreads and forward rates implied by the LIBOR spreads, both of the same maturity. Over the exact same period, these differed by as much as 250 basis points. So why were the bets not placed and the arbitrage opportunities exploited?

During this crisis, the precipitate rise in liquidity premia and fall in asset prices may have called into question the viability of many banks had their assets been fair-valued. Consider again the banking book of UK banks on a mark to market basis. Chart 7 shows the loss of value on this book, which would have peaked at over £ billion during the early months of 2009. The total capital resources of UK banks at that time were around £ billion. In other words, the UK banking system in aggregate would have been technically insolvent on a mark to market basis. The recent recovery in asset prices has been almost as remarkable as the preceding fall. It has meant UK banks were back in the black within a matter of months.   “Liquidity and fire-sales”  The act of marking to market may itself have a bearing on asset price dynamics. This arises because of its potential effects on banks’ behaviour. If swings in perceived solvency cause banks to sell assets, these fire-sales may themselves add to downward pressures on asset prices. Under mark to market, these pressures are felt by all institutions, not just the seller. In effect, fire-sales by one firm have negative externalities for all others. And as other banks adjust their own balance sheets in response, there is a risk the downward dynamic is perpetuated. 18  8  Khan (2009).
As a result, the new tools allow exposures to that sector to be deterred. The application of a global buffer, on the other hand, does not alter the relative incentives across the different lending segments, which may have unintended consequences. Also, other tools are made available to the regulator that do not impact lending institutions’ capital requirements, but rather the characteristics of borrowers and even of loans. Unlike  13/15  capital tools, which are designed to increase institutions’ capacity to absorb shocks, these new tools seek to reduce the vulnerability of borrowers or to limit the appearance of bubbles. Finally, to be able to cover the financial system as a whole, the legislation gives other sectoral supervisors similar tools. In the design of macroprudential instruments that go beyond banks, Spain has taken the lead in European regulation, although clearly the coordinated application of these tools will be one of the tests that the new macroprudential authority has to pass. Of course, these tools can never be applied automatically. Their use must be measured and fine-tuned responsibly by the supervisor. In any event, activation of these measures in cyclical upswings is likely to meet with criticism from public opinion, consumers and the institutions themselves. We must not forget that the aim is to restrict credit, with the focus on a particular sector. When applied to the property sector, the measures will curb credit and make it more expensive, hampering access to owner-occupied housing, even if only temporarily.

Jean-Pierre Roth: Central bank policy and developments on the real estate market Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank and Chairman of the Board of Directors of the Bank for International Settlements, at the 8th International Symposium of the Group of Fifteen, Zurich, 1 February 2007. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  The Swiss National Bank takes considerable interest in the real estate market for a number of different reasons. Movements in real estate prices, on which it focuses in particular, can have a bearing on private consumption, investments and bank lending in addition to directly influencing the consumer price index through the rent component. The SNB’s monetary policy is aimed at maintaining price stability, as measured by changes in consumer prices. Therefore, if it had reason to expect that developments in the real estate market could jeopardise price stability in the economy as a whole, the SNB would definitely adjust its monetary policy. The Swiss real estate market has shown a very positive performance over the last few years and has made a substantial contribution to the upturn of the economy. According to the National Bank's assessment, the housing market in particular is currently well-balanced. The present situation thus gives no cause for concern. The SNB will, however, continue to monitor developments closely, particularly those factors that might boost demand for residential space in the future.
Charles L Evans: Thoughts on accommodative monetary policy, inflation and financial instability Speech by Mr Charles L Evans, President of the Federal Reserve Bank of Chicago, at the Credit Suisse Asian Investment Conference, Hong Kong, 28 March 2014. *  *  *  Introduction Thank you, Mr. Naqvi. It is truly a pleasure to be here today at the Credit Suisse Asian Investment Conference, and I thank the organizers for including me in this impressive program. Today, I would like to make three points concerning the U.S. economy and accommodative monetary policy. First, the U.S. economy continues to improve, and accommodative monetary policy will remain a strong support for this recovery for quite some time. Second, although highly accommodative monetary policy can lead to increasing inflation risks today, inflation in the United States is too low. And this is true throughout much of the world. Third, while low interest rates could lead to financial exuberance in principle, monetary policy is not the best tool to mitigate this risk. Instead, macroprudential policies are more appropriate tools to address the risk of financial instability. Before turning to the details of these three points, I need to note that, as always, the standard Fed disclaimer applies: I will be giving my personal perspective, and that is not necessarily shared by my colleagues on the Federal Open Market Committee (FOMC) or in the Federal Reserve System.

However, beyond these basic principles, what is the appropriate monetary policy stance for achieving both financial stability and the dual mandate of maximum employment and price stability? With inflation running well below our 2 percent longer-run target and the unemployment rate still well above its normal long-term level, appropriate monetary policy dictates that low real interest rates should prevail until the economy is further along a sustainable path to its potential level and inflation is closer to target. Nonetheless, it is common to hear the  1  Because of some differences in product coverage and statistical methodologies, total CPI inflation tends to average 1/4 to 1/2 percentage points higher than total PCE inflation. Hence, the FOMC’s 2 percent target on total PCE inflation would translate to a 2.3 percent to 2.5 percent target for total CPI inflation. 2  I recently discussed the costs of too-low inflation and the implications of having a 2 percent inflation target in a January 15 speech; see Evans (2014). BIS central bankers’ speeches  3  argument that these highly accommodative monetary policies might sow the seeds of financial instability. The fear is that excessive and persistently low interest rates would lead to excessive risktaking by some investors. For instance, some firms, such as life insurance companies and pension funds, are under pressure to meet a stream of fixed liabilities incurred when interest rates were higher.3 (And perhaps these liabilities were offered at somewhat generous terms to begin with.)
A further important feature is the expectation that, where available, asset managers and owners will make disclosures of the aggregate greenhouse gas (GHG) emissions embedded in their investment portfolios. Achieving broad coverage will take time and obviously depends on adoption by issuers. Implementation  We are pleased that all Task Force member organisations, companies with market capitalisations of around $ trillion and financial institutions responsible for assets of $ trillion, have today announced their support for the disclosure recommendations. 5  With better disclosure, a market in the transition to a 2-degree world can be built. That market will expose the likely future cost of doing business, of paying for emissions, and of changing processes given both those charges and tighter regulation. And it will help smooth price adjustments as opinions change, rather than concentrating them in a short, dangerous space of time. Early disclosure rules allowed 20th-century financial markets to grow our economies by pricing risks more accurately. The spread of such standards internationally has helped lift more than a billion people out of poverty. Climate-related disclosures could be as transformative for 21st-century markets. 5  Bloomberg data and Bank calculations using market capitalisation as at 12 December 2016 and assets at end-2015. 6  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  6

At the same time, unemployment continued on a downward path and economic sentiment improved across the board. Some recent signals point to a slowdown, yet they seem to have more to do with temporary influences, growth prospects continuing to look strong. The past year recorded, on average, positive developments in EU candidate and potential candidate countries as well, in spite of GDP dynamics delivering a more mixed picture (from over 7 percent in Turkey to around 2 percent in Serbia and even stagnation in the Former Yugoslav Republic of Macedonia). Nevertheless, the outlook is positive, with recent forecasts pointing to relatively robust growth in the coming years. However, against this relatively rosy background, I should highlight that our economies, even those that belong to the Eurozone, have still much to do in order to become robust and offer good living standards to most of their citizens. Some members of this Club, Romania included, had to go through very painful adjustments during the past decade, as the global crisis found them trapped in a pro-cyclical policy stance and it remains to be seen to what extent they will manage to break free from this pattern in the current good times; some need to fight high inflation, pressures on their currencies or to correct their external imbalances. Nevertheless, the common denominator of all our economies is having to deal with institutional weaknesses and the need to undertake reforms that should make them stronger.
4  All speeches are available online at www.bankofengland.co.uk/speeches  4  The City has long been a leader in financial innovation from the development of the eurobond market in the 1960s through to becoming the Western hub for renminbi and rupee businesses, and Europe’s premier centres for Islamic and green finance. London also has the most vibrant FinTech centre with revenues of £ billion and employment of over 61,000, both of which are growing rapidly. 7  Alongside these benefits for the UK, Europe, and the world, there are risks – risks that first and foremost are borne by the UK. The UK financial system is almost ten times GDP, and is arguably the most sophisticated and complex in the world. Large complex financial institutions and major wholesale financial markets are inherently risky. Left unattended, these risks can easily spill over and damage the domestic real economy. Openness and interconnectedness mean shocks from abroad quickly reach our shores. This is particularly true for risks from the euro area given the tightness of our trade and financial linkages. Equally, these tight linkages mean that others rely on us to maintain high standards of resilience and to share relevant information openly and cooperatively. In short, hosting the leading international financial sector brings immense responsibilities alongside great prosperity. The Bank of England’s primary responsibility is to protect our domestic real economy, and to ensure that finance serves it rather than the other way around.

Programme, which focuses on specific life events targeting identified groups such as young adults, low income households and public sector officials. For example, one specific programme which was launched last month in collaboration with the Government  2  BIS central bankers’ speeches  aims to reach out to 120,000 individuals from low income households by 2015. The Central Bank also has a customer service centre for the general public to walk-in or call-in if they have inquiries, or need to print their credit report. The CCRIS kiosks use bio-metric identification embedded within the national Identification Card, and the report is produced in less than a minute without any charge. I believe that a holistic approach, combining credit information infrastructure with appropriate financial education interventions and avenues of outreach to consumers, will lead to more prudent financial management behaviours. I would like to take this opportunity to thank the International Finance Corporation for its leadership in the area of credit information reporting, and look forward to continuing to build on our long working relationship. I trust that we will have a productive exchange of ideas to further enhance the roles of credit reporting agencies in the area of risk management and to advance the credit reporting industry as a whole. On that note, I wish you a successful and productive programme, and a pleasant stay in Kuala Lumpur. BIS central bankers’ speeches  3
Moreover, these surprises do not relate exclusively to the energy and food components of the HICP, but have translated somewhat to core inflation as well. In parallel, energy futures curves have been steeper throughout this year. And higher inflation in 2022 also increases the probability of second-round effects, in a setting of continued labour market improvements in the euro area. Indeed, the fact that inflation may remain above 2% for the rest of this year (albeit on a decelerating path), will place upward pressure not only on this year’s wage negotiations, but also on those taking place next year. The existence of this backward-looking component in the wage-setting process is a stylized empirical fact and, as such, is included in some of our own forecasting tools. In a context in which an increasing number of companies are identifying labour shortages as a factor limiting their production, the probability of observing second-round effects on wages is also higher. It´s important to emphasize that avoiding this feedback process is in the hands of each country’s economic agents. And were it to occur in one euro area country only, it would have an adverse impact on that country’s competitiveness and, therefore, on its activity and employment. At the same time, one should take into account that, although widespread excessive wage increases would in the current context be counter-productive, increases consistent with the productivity growth and demand of each individual firm are clearly desirable.

And the fact that the BRRD has to be applied before any loan by the European Stability Mechanism is made to a bank means that, very likely, there will not be any direct recapitalisation on a European level. So there is a long list of things, not to mention the reduction in non-performing loans. NPLs have been subject to intense action by supervisors. The average amount of NPLs compared with the total amount of credit came down to 4.8% last year, from slightly above 8% in 2013. Of course, there are around 30 banks that still have higher – in some cases, much higher – NPL ratios, but the targets are there. And the banks beat their targets to reduce their bad loans last year. So it’s working, it’s going in the right direction. In a nutshell, enough risk reduction has been achieved to justify introducing elements of risksharing in the banking union project. And that would be a European Deposit Insurance Scheme? That would be EDIS and the backstop for the Single Resolution Fund, which, in practice, is not so important. How do you think this taking on of responsibility for banking supervision is working? There are risks in everything, of course, but I have always been in favour of having banking supervision with the central bank. That has been the tradition in my country, and there are many good arguments for that.
Whatever the institutional setting for pursuing financial stability, it is important that it guarantees that the systemic aspects of financial decisions are properly taken into consideration, that the institutions involved have the necessary tools to prevent the formation of excessive risks in the financial system and quickly act when they materialize, and that it ensures that these tools are used with a unified view of the micro and macro aspects of financial regulation. Whether this is achieved by having a single entity in charge of regulation or by having instances that facilitate the coordination between the different entities in charge of it may be of second order importance if such coordination works well. In Chile, the Central Bank is expected to act as a lender of last resort to commercial banks facing liquidity problems. We are also in charge of some aspects of financial regulation such as retail payments; bank liquidity and market risk regulation, aggregate limits for pension funds, and others.1 Furthermore, preserving an appropriate functioning of the payment system is a goal established in our charter that is clearly related to the stability of the financial sector. So, we naturally care about financial stability, and accordingly we monitor systemic aspects of the functioning of all participants in the financial sector, conduct regular surveys of market participants, run an annual survey of the financial position of households, and produce a twice-yearly financial stability report that is widely read by other regulators and market participants, among other activities.

While it is difficult to make this distinction in practice, I believe it is useful to keep the difference in mind as we discuss and explain our work. 5/7  BIS central bankers' speeches  In my view, communication is vital, and we should explain our goals as clearly as possible and acknowledge all expected outcomes of policy changes. By recognizing the full set of expected outcomes, including those that are not desired, I believe we can more effectively communicate the goals of supervisory policy, increase accountability and transparency, and better fulfill our mission to promote a safe, sound and stable banking and financial system. Thank you for your attention. 1 I would like to thank Jim Bergin, Dianne Dobbeck, Hampton Finer, Robert Fitchette, Lauren Hargraves, Bev  Hirtle, Michael Holscher, Anna Kovner, Don Morgan, Siobhan Sanders, and Katherine TilghmanHill for helpful comments and discussions. 2 Board of Governors of the Federal Reserve System, Supervision and Regulation Report, November 2018 and  U.S. Department of the Treasury, A Financial System that Creates Economic Opportunities, Banks and Credit Unions, June 2017. 3 This can be thought of as determining optimal policy that considers the net benefits as in Bank for International  Settlement, An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements , August 2010 or as promoting the sustained provision of financial intermediation across a wide range macroeconomic conditions as in Kevin J. Stiroh, A Perspective on Supervisory Objectives, and Trade-offs, February 23, 2017.
Britain needs a thriving banking system to serve households and businesses, and Lloyds and RBS will be able to play that role to the full only when back in the private sector. I welcome your announcement that Lloyds Banking Group will be returned to private hands soon. And I very much support your plans for a full review of the future structure of RBS. The return of banking supervision to the Bank of England has also seen decisive actions. The Financial Policy Committee (FPC) and the new Prudential Regulation Authority (PRA) have acted quickly to make our banking system more resilient. In March, the FPC recommended that banks’ capital should be assessed using more prudent estimates of expected losses and risk weights. Since April, the Board of the PRA has been making those assessments and asking banks to take action to deal with any shortfall of capital. That work is now complete, the banks know the results, and tomorrow we will publish them for each of the major banks. In total, the eight largest banks have a capital shortfall of around £ relative to the standard recommended by the FPC. After this exercise, our major banks all now have plans for actions to fill that shortfall. The first evidence is the announcement on  1  2  As measured by the rate of increase in the GDP deflator. BIS central bankers’ speeches  Monday by the Co-operative Bank. Others will follow.

The real challenge – on a global scale – is to rebalance the world economy so that very low interest rates are not required to exhort deficit countries to spend in order to absorb the surpluses elsewhere. Monetary policy cannot provide the answer. It can only buy time to bring about the necessary structural changes in investment, trade and capital flows. Whether they involve changes in currency values or restructuring of debt is a political choice, but a failure to deal with global imbalances will not only retard the recovery in the world as a whole, but worsen the scale of the adjustment ultimately needed. It will inevitably be a bumpy ride. The other obstacle to a return to normality is our banking system where, despite the generous provision of liquidity and funding from the State, lending remains lacklustre, and risk premia high. Although the combined balance sheet of our largest banks has shrunk since the height of the crisis in 2008, it is still 400% of annual GDP. Leverage ratios have fallen, but all our major banks remain highly leveraged. And of course the two biggest lenders to the domestic economy remain largely in state ownership. It is difficult to imagine a banking sector like that making a real contribution to any economic recovery. It must be time for decisive action. Chancellor, you have made clear tonight that you embrace that view.