samchain/econo-pairs-v1 huggingface dataset:
The goal, of course, is to be able to resolve distressed giant institutions, complex institutions, without taxpayer solvency support, but also without disastrous disruptions to the flow of essential financial services to our economies. I would say two substantive things about the tools needed to make this feasible. First of all, as the crisis around the world has demonstrated, we need to extend the basic resolution toolkit I was talking about beyond commercial banks to bank holding companies and to affiliated companies; in other words, to groups. And we must extend the scope of the basic resolution regime to non-bank financial institutions and groups in circumstances where their distress could prove systemic. This is essentially what the Dodd-Frank Act does in the United States. It makes it possible for the FDIC to manage and run down a SIFI from a bridge company. This could work well in some circumstances; for example, where there are buyers for parts of the business in the wings, as with Lehman. This is, therefore, a resolution instrument which we should seriously contemplate adopting in Europe. I am not certain that it would definitely work in all circumstances; eg if there were no buyers in prospect, the state ends up running the group, which could be quite a thing, with a risk that staff and counterparties may drift away. But even in those circumstances it would surely be preferable to a normal liquidation.

More specifically, the TALF was designed to support the market for securitized credit. Overall, the TALF performed impressively in meeting that objective. The program contributed to a substantial improvement in conditions in the securitized credit market, facilitating an increase in the availability of credit to households and businesses. Moreover, it achieved this outcome with limited risk to the Federal Reserve’s balance sheet. Let me begin with some general background information on securitized credit markets. Securitization is an important funding source for bank and nonbank lenders. When a lender extends credit, it makes the decision of whether to keep loans on its books or to securitize and sell them to other investors. If kept on the lender’s books, the holdings have to be financed, either by borrowing or by using funds that could be deployed for other purposes, including making other loans. Thus, in many circumstances the lender finds it advantageous to sell assets through the securitization channel, allowing other investors to ultimately hold the assets and hence bear the risk. The amount of credit financed through securitization rivals that provided directly by banks. Indeed, even excluding the sizable securitization markets for mortgage credit, approximately $ trillion in loans to consumers, students, and businesses were securitized over the past decade. 2 The securitization market became significantly disrupted during the financial crisis in 2008 and 2009 in all areas outside of conforming agency mortgage-backed securities. Liquidity for securitized products deteriorated, leading to an unprecedented widening of spreads.
VOLATILITY IN THE FUND’S VALUE Let me now turn from expected returns to the return volatility that must be expected when different equity allocations are applied. The most common measure of risk in financial markets is standard return deviation, i.e. return volatility around the average. The standard deviation of the fund’s benchmark portfolio is determined by two factors: equity return volatility and bond return volatility, and the degree of covariance between the two asset types. Chart: Equity allocation and volatility Volatility is lower for bonds than for equities. As illustrated by the straight line in the chart, this means in isolation that portfolio risk increases with the increase in equity exposure. There is a pattern in our data showing that the standard deviation for equities has over time been two to three times higher than for bonds. The analyses do not support estimates that differ from those of ten years ago for equity risk relative to bond risk. Equity and bond returns do not move in tandem. As a result, bonds reduce the variation in the fund’s value in addition to the contribution from lower volatility. For a given equity allocation, portfolio volatility will be smaller the lower the correlation between equities and bonds is, as illustrated by the dashed curves in the chart. The blue curve assumes a degree of positive correlation between equity and bond returns. This means that although bond and equity price often covary, this is not always the case. For the purple curve, we have assumed that the correlation is negative.

When equities were included in the investment portfolio in 1998, the strategic equity share was set at 40 percent, and the equity share in the actual portfolio had reached this level by June of the same year. 1/7  BIS central bankers' speeches  In June 2007, it was decided to increase the strategic equity share further to 60 percent. The implementation of this strategic change took place during a demanding period. Financial market uncertainty was elevated. Although equity markets declined sharply in autumn 2008 and winter 2009, the new strategic equity share was maintained. The increase in the equity share was been completed by June 2009, and Norges Bank had purchased NOK 1000 billion in equities for the fund over this two-year period. The fund’s average ownership stake in global listed companies had increased from 0.4 percent to 1 percent. A large share of the equities held by the fund today was purchased during these two years. In 2010, the GPFG’s investment universe was expanded to include unlisted real estate. Since then, the fund’s strategic benchmark index has been composed of 60 percent equities and up to 5 percent real estate, with the remainder in bonds. As real estate investments involve some equity risk, the equity share in the strategic benchmark index, in an index composed solely of equities and bonds, is now slightly higher than the allocation defined in 2007. The question of the fund’s strategic equity share is once again on the agenda.
Third possible avenue: Diversify the risk management tools of financial institutions As I mentioned earlier, even the best techniques can have adverse effects when used on a standard basis and by all participants. To some degree, this is perhaps what has happened to value-at-risk based techniques, which have been, for very good reasons, massively adopted by the financial industry. Because they use more or less similar parameters and suffer from the same weaknesses – for example, they did not take market liquidity into account adequately at the time of the 1998 crisis –,  BIS Review 28/2002  5  such tools might tend to give converging signals to those that use them. They thus encourage the mimetic behaviour that I discussed previously. Of course, the fact that some market participants are more sophisticated than the average is a guarantee that standardisation will remain limited, since they will develop techniques that are little used by others. However, supervisors might help, and obviously are already helping to spread the idea that financial institutions should round out their current range of risk management tools to include extensive use of stress testing. This technique offers a better reflection of the varying situations of institutions and of the diverse perceptions that institutions have of exceptional events. The application of stress testing techniques and their results are thus inherently more diversified than those resulting from methods based on the value-at-risk approach. 3.

If you want to maintain confidence, you simply do not have the luxury of time. But even if you cannot hinder a crisis, addressing it as early as possible and with determination can at least limit its effects. So my second principle of effective crisis management can be summed up as acting swiftly. While this principle is easy to support, crisis management in practice is often characterised by the opposite: taking too little action, too late. Essentially, there are two main reasons for supervisory and other authorities to neglect taking sufficient action in time – they lack either the willingness to act or the ability to act – sometimes both. There are many reasons for supervisory and other authorities to not want to act. Pressure from the industry and politicians is one of the first that springs to mind. Sometimes – consciously or unconsciously – supervisory and other authorities also want to let banks gamble on turning themselves around. And banks and their shareholders are often more than willing to play along – they face a one way bet as they approach the brink of failure. But in the end, the longer you wait, the harder you fall. For that reason, I don’t have a high opinion of regulatory forbearance or other excuses for supervisory inaction. Ability to act may also be constrained. First and foremost, the ability to act is, of course, dependent upon the tools available.
It also means the macroprudential authority has no framework and tools for loosening regulatory policy to prevent the self-reinforcing deleveraging spirals that kick in in the downturn of the cycle. Second, it is difficult to know ex ante how strong the next credit cycle is going to be and so where to set underlying policy. The FPC faced some of these issues in the design of the UK’s “leverage ratio” capital framework which the Committee agreed last year. Our conclusion, informed by an assessment of the economic costs and benefits, was that provided we had the ability to vary leveragerelated capital requirements countercyclically, in the same way that we could vary the riskweighted capital requirements, we could set the minimum leverage requirement at a lower point. The second approach is to try to maintain the overall resilience of the system over the cycle. The underlying regulatory framework is of course intended to cope with a wide range of risks. It is intended to keep such risks firmly located in the tail of the distribution. But the distribution  BIS central bankers’ speeches  5  of risks changes through the cycle. One approach to time-varying macroprudential policy is to aim to ensure that tail risks do not increase with the credit cycle – ie that the resilience of the system is maintained over time and does not change with the distribution of risks. Stress testing of banks can play an important part in making an assessment of resilience through the cycle.

This is becoming a more pertinent issue in the UK as we move into a more normal phase of the credit cycle; credit is beginning to grow again albeit at rates below the pre-crisis peaks. And within the aggregate numbers some sectors are growing relatively quickly. Time-varying macroprudential policy is hard and there is much new ground to be broken. But there is a benefit in ensuring that the financial system maintains resilience as the distribution of systemic risks moves through the cycle and where necessary trying to ensure that such risks do not build up unchecked. I am conscious that I have spent the last half hour talking about the role of policy through time. Einstein, of course, taught us that time was in the end indistinguishable from the dimensions of space: “for us physicists believe the separation between past, present and future is only an illusion, although a convincing one”. There is I am afraid only so much brilliant simplicity an economic policy maker can take. So I fear that for the immediate future at least we will need to maintain that convincing and indeed convenient illusion and set policy accordingly. BIS central bankers’ speeches  7
But the rate of interest required to stabilise the economy was extremely high at that time, much higher than it is today. So despite the higher stock, interest payments on mortgages are well below the pre-crisis average. Looking ahead, from these very low levels, the neutral rate of interest is more likely to rise than fall over the future. But it would have to rise a long way – and certainly by a lot more than is currently priced into government bond markets – even for household interest payments to return to that average. The fact that mortgage debt is higher than it was a generation ago doesn’t make it “unsustainable”. Third, the fact that growth rates are better indicators than levels may be telling us something more fundamental, not just that there are structural differences in affordability. In particular, it could be that the things that drive speculative, riskier lending tend to develop faster than the fundamentals that determine more sustainable levels of debt. Those fundamentals can vary (the decline in the neutral rate of interest is an example), the sustainable level of debt along with them. But perhaps they usually do so only gradually. If so, very rapid growth of debt would often be a sign of something else – of looser credit supply and a rise in the proportion of lending that’s riskier, less sustainable and more prone to default.

This structural change may have some implications for payment systems and market infrastructures, especially in periods of financial distress. One important implication is that more than ever before, the smooth functioning of the financial system is dependent on the assumption that the option to trade can be exercised even under stressed market conditions. This is a natural consequence of the development of markets and instruments which are actively traded or that are held in the expectation that, should the need arise, they could be traded. Moreover, the new financial environment appears to be more reliant on the immediate availability of funding liquidity. Funding liquidity is critical for the orderly execution of trades and it can become scarce at times of distress, precisely when  3  For further details see Claudio E.V. Borio (2007): Change and constancy in the financial system: implications for financial distress and policy. 4  BIS Review 130/2007  it is most needed, as market participants cut credit lines and/or raise margin requirements to protect themselves against counterparty risks. In conclusion, the stability of the financial system is also dependent on the assumption of ample market liquidity and, most critically, of the smooth functioning of the payment systems and market infrastructures. Second, the complexity of the financial system has greatly increased. This complexity applies not only to individual financial instruments, but also to the financial system as a whole. Its various segments have become more closely interconnected and the linkages across them more opaque.
My assessment is that leverage ratios and countercyclical buffers are good instruments for the management of systemic risks which will help us strengthen the financial system when the need arises. But they have their limitations. Both of these instruments are indiscriminate and it will be difficult to determine when it will be appropriate to increase or decrease the countercyclical capital buffers. If we are to be able to combat risks efficiently, we will also need instruments that can be directed towards the areas in which the problems exist. Variable risk weighting – a usable instrument One instrument that a growing group of countries is choosing to introduce is variable risk weighting for lending. 11 These can be seen as a complement to countercyclical capital buffers and are aimed at counteracting the build-up of risks in lending to specific sectors. Varying risk weighting is thus a more focused instrument than countercyclical capital buffers. 9  This work is being conducted within the framework of the government’s inquiry Fi 2012:05 “Inquiry on capital adequacy regulations”, to be concluded in the spring of 2013. 10  This capital conservation buffer is to be held in the form of core Tier 1 capital and is to consist of 2.5 per cent of the risk-weighted assets. 11  In the United Kingdom, the Financial Policy Committee has been given a mandate to introduce risk weighting, so-called sectoral capital requirements, see Financial Policy Committee statement, March 2012. See also Bank of England Instruments of macroprudential policy, a discussion paper, December 2011.

Even if Finansinspektionen’s justification for the mortgage ceiling was to protect consumers, the measure can also be used for macroprudential supervision. From a stability perspective, the credit risks in the banks’ credit portfolios could be reduced if the rule contributes towards reducing the economic vulnerability of households. The loan ceiling may also contribute towards more stable price formation on the housing market, as the rules influence how much money households are willing to put into purchasing housing. If this counteracts excessive price variations on the housing market and the unsustainable accumulation of debt among households, it will also likewise contribute towards reducing the risk of loan losses in the banking system. 12  See, for example Lim, C., et al., (2011), “Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences”, IMF Working Paper, 11/238. 6  BIS central bankers’ speeches  A loan ceiling based on income would have largely the same characteristics as one based on the value of housing, but may have certain advantages. If debts are not linked to price movements on the housing markets, this avoids the problem of price increases and indebtedness reciprocally being pushed upwards in a rising spiral. Effectively combating future financial crises will require flexibility An efficient financial system is a prerequisite for a modern economy. A shock leading to the breakdown of any of the financial system’s functions can have major economic costs in the form of sharp falls in GDP and high unemployment.
The reason for this is that adjustments to the policy rate have large and direct effects on the CPI which are not connected to underlying inflationary pressures and which are also counter-productive. This means, for example, that interest rate cuts, which are intended to bring inflation up, instead further lower CPI inflation over the short term as the costs for mortgages fall. For this reason, the CPIF, i.e. the CPI with a fixed interest rate, has increasingly acted as guidance for monetary policy. But large variations in the CPI in recent years, due to adjustments to the policy rate, have sometimes led to problems in communication. By switching to the CPIF, we are making monetary policy clearer. The target is that the annual change in the CPIF shall be 2 per cent. However, it is not possible for the Riksbank to achieve this target every single month, so, for  * I would like to thank Magnus Jonsson for his help with writing the speech and Goran Katinic for his help with  data and figures. I would also like to thank Carl Andreas Claussen, Charlotta Edler, Cecilia Roos-Isaksson, Martin W. Johansson, Ann-Leena Mikiver, Marianne Nessén, Marianne Sterner, Ingvar Strid, Ulf Söderström, Anders Vredin and Daniel Wallemo for valuable comments and Calum McDonald and Gary Watson for helping to translate the speech into English. 1 [23]  various reasons, inflation will vary around 2 per cent.

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 combination of these three imbalances is the source of the economic slowdown under way, above all in the United States, accompanied by strong inflationary pressures and by financial turbulence unfolding since the last summer. Overcoming the current economic phase implies some correction of the imbalances I have just mentioned. Two questions come to mind: 1. How long will the current critical economic and financial phase last? 2. What can economic policy do to speed up the correction and alleviate its costs? The reply to the first question is that probably more time will be needed than is thought to overcome the current adjustment because the imbalances that underlie this critical period go back a long way and will take time to unwind. Time will be needed, in particular, before American households start saving again in a significant way, to run down part of their debt. In the short term, this may involve slower growth for some years. Time will be needed before the financial operators regain trust in the capacity to resort to sound sources of finance so as to be able to reduce their current high appetite for liquidity. Some financial instruments will remain relatively illiquid, until the prospect of a capital gain will not become realistic gain. It will not however be possible to return to the very low levels of risk remuneration seen in recent years. Credit institutions will have to rethink their business models in order to better assess the opportunities for growth based on the availability of capital.

Jean-Pierre Roth: Ten years’ experience in steering interest rates – taking stock of the Swiss National Bank’s monetary policy strategy Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the University of Fribourg, Fribourg, 20 November 2009. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). *  *  *  The Swiss National Bank’s monetary policy strategy has proved successful over the ten years since its introduction. Throughout this period, the SNB fulfilled its mandate of ensuring price stability while taking into account economic developments. The inflation forecasts, produced quarterly on the basis of various indicators, have proved especially useful. It has always been possible to successfully manage the Libor – the operational objective of the SNB’s monetary policy – despite an international environment which, at times, has been extremely turbulent. The Libor was maintained within a range intended to provide the bestpossible conditions for a favourable development of the Swiss economy.