samchain/econo-pairs-v1 huggingface dataset:
I will start by touching on the benefits and risks of a financial system, and how these can be balanced against each other. I will then go on to describe the global financial crisis and how it was met. Following this, I will discuss how the global financial crisis turned into a euro crisis, and the role the banks are playing in this crisis. In the final part of my speech, I will try to provide some answers as to how society can better avoid crises like this in the future. The economic balance between benefit and risks in the financial sector I have elsewhere described the banking system as a motorway junction for the economy. In the banks, and, more generally, in the financial system, households’ and companies’ income and expenditure meet like a flow of traffic coming from all directions. A robust structure is needed to make this interaction proceed smoothly. When a lot of traffic is moving at high speed, the structure must also have a clear focus on safety. The higher the speed limit, the greater the safety margins must be. Banks are important to the national economy The Riksbank defines financial stability as the maintenance of the financial system’s basic functions and its resilience to disruptions. The system converts savers’ money into productive investments, ensures that we can pay each other when we exchange goods and services, and allocates risk among those who are willing to take risks and those who are not.

By the way, let me note that this pause occurred before mid-December, so it cannot be attributed to the recent spate of heavy snow storms. 2  BIS central bankers’ speeches  By contrast, New Jersey’s economy has seen no pick-up in activity and, in fact, activity there continued to decline at a modest pace through the end of 2010. We monitor Puerto Rico using an index produced by the Government Development Bank of Puerto Rico. This index shows that the recession there, which started back in 2005 – well before that experienced in the mainland – appears to have subsided. As of November of last year, activity was no longer falling, although indications of a recovery are still mixed. Turning to jobs, the latest data indicate that businesses in the region, on balance, were not expanding their workforces at the end of last year. As a result, the total number of jobs in the region has held steady, lagging behind the job growth rate experienced nationally. Much of this recent weakness in employment stems from job losses in the retail, wholesale and manufacturing sectors in our region. In the rest of the nation, these sectors expanded during the last quarter. Moreover, our state and local governments cut jobs much more severely than governments did elsewhere. At the same time, job gains in some of the region’s strongest sectors – professional and business services, finance, education and health – were not large enough to completely offset these losses.
The spectacular growth in the securitisation and credit risk transfer market in the years up to the crisis increased discussion of the potential vulnerabilities, in particular about who were the ultimate holders of the risks originating in the banking system, and their capacity to withstand shocks. These risks were transferred from the originators to various investors outside the banking sector, from institutional investors to hedge funds, but also within the banking sector itself. In fact, weaknesses in the so-called originate-to-distribute model followed by most large banks, and fragilities in the funding of special investment vehicles and conduits resulted in some of those risks backfiring and ending up consolidated on the banks’ balance sheets. The eruption of the turmoil left banks sitting on unwanted risks, such as leveraged loans related to leveraged-buy-out transactions, (often referred to as warehousing risk in the financial jargon), which were intended to be sold on to the market. Likewise, in the structuring of collateralised debt obligations (CDOs), which were an extremely profitable business for banks in the years before summer 2007, the banking system ended up accumulating a considerable proportion of CDO tranches. As the crisis broke, these tranches rapidly became a significant fraction of banks’ impaired or so-called toxic assets. Risk warnings Let’s get back to the European Systemic Risk Board. In addition to risk surveillance and risk assessment, the ESRB will be entrusted with a third task – issuing risk warnings and policy recommendations. This is somewhat new to the central banking community.

2/3  BIS - Central bankers' speeches  At the same time, the conduct of monetary policy is not mechanistic. Models are useful, but they are simplifications and must be supplemented by other information. For example, loss functions in such models cannot be directly interpreted as the Committee's view of inflation costs. As the deviation from the target increases, we need to assess the risk of high inflation becoming entrenched in the expectations of households, firms and FX market agents. If this were to happen, we may find ourselves in uncharted territory, where the costs are far higher than when inflation expectations are anchored to target. As last year, Norges Bank Watch notes that Norges Bank's FX transactions related to tax payments to the government result in volatility in the money market premium. As long as the short-term money market functions well, Norges Bank will not seek to steer such risk premiums. But we do not want to contribute to needless volatility, which is why we seek to make FX transactions as smoothed and predictable as possible. The Ministry of Finance is now appointing a working group, in which Norges Bank will participate, tasked with examining various aspects of the government's liquidity management. The practical implementation of the petroleum fund mechanism is one of the topics for discussion. Among the matters the working group will consider is whether the number of due dates for petroleum tax should be increased. Let me conclude by again thanking Norges Bank Watch for an excellent report.
But in my view, the fact that households saw their leverage increasing in spite of their efforts to pay down debt helps explain why they kept at it. Households may well be trying to reestablish a more normal and sustainable leverage ratio. This view also underlines the importance of avoiding busts in house prices as a fundamental underpinning of a recovery in borrowing and consumption. It is likely that these reductions in debt and new borrowing during the recession and the early part of the recovery stemmed from what we might label decreases in the demand for borrowing. As households saw their wealth decline, especially the wealth represented by the value of their home, and as unemployment grew and remained elevated, households’ capacity to repay debt declined, and, as a result, their desired stock of debt declined as well. At the same time, banks too were suffering from heavy losses on mortgages and other lending, and reduced the supply of credit available to households. We can see this in Chart 6 (Banks and Lenders Imposed Tighter Mortgage Lending Standards) which shows the sustained tightening of lending standards reported by banks starting in 2007. Furthermore, Chart 7 (Origination by Risk Score: First Mortgages) shows the percentage of prime first mortgage originations by the credit score of the borrower. The chart reveals a quite dramatic tightening of credit standards during 2008 and 2009.

The Committee’s approach has, I believe, been consistent with its mandate from the Chancellor of the Exchequer, which recognises “that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances” and that “attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output.” It is almost 100 years to the day since the ill-fated Titanic was launched from Queen’s Island, just across the channel. It may be tempting to see a parallel between the hubris and excessive risk-taking that resulted in its tragic encounter with an iceberg on its maiden voyage, and the hubris and excessive risk-taking that led up to the Great North Atlantic Financial Crisis of 2008. But a more optimistic parallel is provided by rebirth of the old Harland and Wolff shipyard as the Titanic Quarter, the biggest regeneration project in Northern Ireland’s history and the largest waterfront redevelopment in Europe. That serves as a reminder of the ever changing nature of the fabric of the economy, as old industries make way for new. And it also serves as a suitable metaphor for the UK economy more generally, as it begins to re-balance in the wake of the deepest downturn in the post-war period. Thank you!
Let me use the Riksbank’s interest rate decision in December 2004 as an example. On that occasion we left the rate unchanged despite the fact that inflation was forecast to be below our target of 2 per cent during the greater part of the next two years. With inflation forecast to be so low during such a large part of the forecast period it would have been possible to justify a further rate cut. But there were also arguments in the opposite direction. The most important was that demand was already growing markedly faster than the economy was deemed capable of sustaining in the long run. The vigorous growth was anticipated to continue and so it wasn’t weak demand that was causing the low inflation. Instead, the low inflation was being caused by unexpectedly high productivity  BIS Review 11/2005  5  and unexpectedly low price increases for imported goods, something that in itself could be expected to further stimulate growth in the period ahead. An additional factor was that the repo rate was already at an unusually low level, which could partly explain the increase in households’ debt burden and the continued rise in housing prices. Even though debt levels were not deemed to be a threat to financial stability, another rate cut could have further fuelled house price inflation and indebtedness. That in turn could have given rise to future problems when monetary policy eventually would most likely have to be tightened.

Scenarios containing different assumptions regarding the repo rate and using a longer time horizon can also contribute to a clearer illustration of the considerations monetary policy has to take into account with regard to balancing inflation against real economic aspects. I have also discussed this. The primary advantage of supplementing the assumption of an unchanged repo rate with alternative interest rate paths and making longer-term forecasts is that it makes it easier to explain the monetary policy message. The simple policy rule – which involves interest rate decisions being based on inflation normally being returned to the target one to two years ahead – will continue to provide a good guide to our actions. The guidelines in the clarification from 1999 will thus continue to form the basis of our monetary policy. When the decisions need to take account of other information than that significant for inflation one to two years ahead, the new working method should make it easier to understand how this is done. Discussing an entire interest rate path can also create the conditions for a more balanced discussion of monetary policy. This can involve when we intend to change our monetary policy stance and how quickly we should proceed. What will happen if we wait a while before changing the interest rate? This type of consideration is probably more important than detailed discussions about tenths of a percentage point in a forecast. In conclusion, I have also mentioned the fundamental framework that governs monetary policy.
In these rapidly changing times, innovation has to be far from static and to continuously keep ahead of time. Just as the needs of the economy and society change, Islamic finance also needs to evolve to keep pace in being part of the solutions. To achieve quality growth, innovation has to focus on amplifying the positive value and impact of Islamic finance to the economy and society. This necessitates Islamic finance moving beyond being perceived as mere imitations of conventional finance. A step up is to have distinct modifications made to the products, services, business practice and operations of Islamic finance. The desired level of innovation is however – to significantly improve the offerings of Islamic finance and to build a sustainable business model to meet the unfulfilled ‘real’ needs of the economy and customers. The delivery of products and services to SMEs for example, can be remodelled to reflect deep understanding of their needs and circumstances. This paves the way for tailor made financial services solutions that can better assist aspiring entrepreneurs. To illustrate, the financing model of Islamic banks for SMEs can be more holistic – to include provision of entrepreneurship training and consulting services, as well as infrastructure support. This model not only leads to greater sustainability, but also provides more 2/5  BIS central bankers' speeches  meaningful customer experience. Within the Islamic capital market, we already see good examples of innovation in the form of green sukuk, an innovative financing vehicle to combat climate change.

And it applies to small and large banks alike, though for large banks there is not only the question of ensuring access in domestic systems but also ensuring that payment services that are provided on a cross-border basis or require access to financial market infrastructure in other jurisdictions can be maintained. The Bank is considering how best to address these issues both domestically and, alongside Canada and other countries, at an international level. Looking forward, there are three issues around the core payments systems that the Bank is beginning to look at. One relating to risk, specifically cyber risk; one about infrastructure provision, in terms of reviewing the operating hours of the UK’s RTGS system; and one in the field of regulation, which is focused on the changing regulatory landscape for payments in the United Kingdom. Although cyber risks have long existed, over the past year or so in UK circles they have rapidly become a central issue, so much so that, in June the Bank’s Financial Policy Committee made a formal recommendation to put in place a new program of work on cyber security for key UK financial infrastructure1. The Bank of England has set each scheme a specific priority regarding cyber risk and we and the payment schemes need to deepen our resilience to cyber risks. The prompt for this change is probably obvious: the evidence shows that cyber attacks on the financial sector have increased markedly in frequency and sophistication over the past two years or so.
The currency reserve should thus be seen as an insurance policy that not only reduces the risk of crises, but also ensures good protection when they nevertheless occur. The cost of borrowing the currency reserve should therefore be funded by the banks that create liquidity risks in foreign currency. The possibility of transferring this cost to the banking sector should be investigated as soon as possible. 21 See Bryant et al. (2012), who discuss the background for why coordination can increase social benefit, and  Jonsson and Moran (2014), who illustrate this in a number of example calculations. See also Spencer (2014) for an interesting discussion. 22 See IMF (2016). 23 See the Riksbank’s financial independence and balance sheet (draft proposal) from the Ministry of Finance. 19 [23]  The currency reserve’s share of the banking system’s foreign funding in 2016 was on the same level as in 2002, but would – if the Government’s proposal were to be implemented – fall dramatically (see Figure 7(a)). This is also a very low level from an international perspective (see Figure 7(b)). The countries with lower currency reserves are the euro countries (with the exception of Bulgaria) which, similarly to the United States and United Kingdom, enjoy the benefit of possessing a reserve currency. Furthermore, as members of the euro area, they also have greater chances of receiving liquidity in euros from the ECB. Figure 7.

The foreign currency reserve needs to be readily available in the event of a crisis Sweden has a large and expanding banking sector with major commitments and funding in foreign currency. In the event of a financial crisis, the Riksbank has a unique role as crisis manager due to its ability to provide liquidity support to the banks. In order to provide liquidity support in foreign currency, the Riksbank needs to maintain a foreign currency reserve. This should be so large that it covers the needs that could be expected to arise in the short term in a financial crisis. The International Monetary Fund (IMF) makes the assessment that the current level of the foreign currency reserve is sufficient for the Riksbank to cover the requirements of a financial crisis. 22 My own assessment is that the foreign currency reserve needs to remain at today's level or become larger. However, the Government proposes that the foreign currency reserve should be roughly halved. 23 This is a high risk proposition. It could both take time and be expensive not to have the money at hand at the height of a crisis but to be forced to ask the Swedish National Debt Office to borrow it. If the foreign currency reserve is large enough, it could also act preventively by creating confidence in the Riksbank’s ability to act in a crisis.
In many ways, the situation is deteriorating. As we meet, it is unclear when and how we will be able to return to calmer financial waters. Today I want to begin by discussing why central banks care about financial stability. In a second part, I will try to draw some preliminary lessons for central banks from the current market dislocation. As I said at the outset, the credit crisis is unfortunately still unfolding and its future course is uncertain. Naturally, therefore, we face a lot of questions to which there  1  See for example P. Hartmann, S. Straetmans and C.G. de Vries, 2006, “Banking system stability: A crossAtlantic perspective,” in M. Carey and R.M. Stulz (eds), The Risks of Financial Institutions, The University of Chicago Press, Chicago. BIS Review 141/2007  1  are no clear answers. For the purpose of today’s discussion, I will confine my remarks to the following two issues: The first one addresses the question of the optimal degree of transparency with regard to central bank liquidity operations; the second one investigates the implications of unusually high risk premia in short-term interest rates for the conduct of monetary policy. 1. Why do we care about financial stability? Why does a central bank like the Swiss National Bank care about financial stability? After all, as is the case in a number of other countries, the Swiss central bank does not have a legal mandate to supervise and regulate banks.

In more concrete terms, the first reason on the back of low lending rate is related to the high risk – both real and perceived – that investment in agriculture bears. However, I think this risk is being reduced. On the one hand, the improved support to agricultural production, the improved roots network and the consolidated trade chain for the supply of the inputs in the market, drive to the improvement of this sector’s business. On the other hand, promoting agritourism and supporting agribusiness, grow the value added chain and profitability of investment in agriculture. In this context, I would like to greet the Albania Agribusiness and Tourism Support Facility 1/2  BIS central bankers' speeches  (AATSF), which includes the joint contribution of the Albanian Government and the European Bank for Reconstruction and Development (EBRD). This facility provides a significant contribution, around EUR 150 million, in both forms: direct loans and supportive guarantee for lending. To this end, by seeing the positive reaction that banking sector is displaying towards this scheme, with four banks already becoming part of it, I would like to encourage the other banks to adopt a more positive approach towards this sector. Also, I would like to emphasise that global experience suggests the promotion of private insurance schemes to address risk reduction in agricultural. In future these schemes should become an integral part of this equation. The second reason on the back of low lending rate in agriculture is related to the fragmentation of agricultural land.
To achieve this, they engaged in “quantitative easing” and “credit easing” policies by expanding and changing the composition of their balance sheets. The goal of these measures was to mitigate the effects of the economic slump and stabilise financial markets in the face of high uncertainty (charts 8 and 9). One may wonder – and many people do – whether these policies have gone too far. While the jury is still out on unconventional measures,4 there is no doubt that the policy of lowering short rates to virtually zero and keeping them there was fully justified. Had this policy been too expansionary, it would have translated into inflationary pressures. Yet, much to the contrary, inflation in most advanced economies has been subdued and is, in some cases, still falling even five years into the crisis. Finally, heightened uncertainty in global financial markets has increased the demand for safe assets like government bonds. At the same time, the supply of such safe assets has decreased as investors have increasingly questioned the relative security of assets that were previously considered safe, a fact that is reflected in the down-grading of several sovereign bonds. With an increased demand for and decreased supply of safe assets, their price has been bid up and their yield pushed down. The Swiss case These changes in the supply and demand for safe assets are of particular relevance in the case of Switzerland.

Christensen, J., Rudebusch, G. (2012). The Response of Interest Rates to US and UK Quantitative Easing. The Economic Journal, Royal Economic Society, vol. 122, pages 385–414. Gagnon, J., Raskin, M., Remache, J., Sack, B. (2011). The Financial Markets Effects of the Federal Reserve’s Large-Scale Asset Purchases. International Journal of Central Banking, vol. 7 (1), pages 3–43. Gambacorta, L. (2009). Monetary policy and the risk-taking channel. BIS Quarterly Review, December 2009, pages 43–53. Gordon, R. (2012). Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. NBER Working Paper No. 18315. Miller, M., Weller, P., Zhang, L. (2002). Moral Hazard and the US Stock Market: Analysing the “Greenspan Put”. The Economic Journal, Royal Economic Society, vol. 112, pages 171–186. Schularick, M., Taylor, A. (2012). Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008. American Economic Review, American Economic Association, vol. 102(2), pages 1029–61. Tinbergen, J. (1954). Economic Policy: Principles and Design. North Holland Publishing Company. BIS central bankers’ speeches  7  8  BIS central bankers’ speeches  BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11  12  BIS central bankers’ speeches  BIS central bankers’ speeches  13  14  BIS central bankers’ speeches