samchain/econo-pairs-v1 huggingface dataset:
Charles Bean: The Great Moderation, the Great Panic and the Great Contraction Text of the Schumpeter Lecture by Mr Charles Bean, Deputy Governor for Monetary Policy and Member of the Monetary Policy Committee, Bank of England, at the Annual Congress of the European Economic Association, Barcelona, 25 August 2009. I am grateful for the assistance of Adrian Penalver. The views expressed are those of the author and do not necessarily reflect those of either the Bank of England or the Monetary Policy Committee. *  *  *  Summary Charles Bean, the Bank of England’s Deputy Governor, Monetary Policy, was invited to deliver the Schumpeter lecture at the Annual Congress of the European Economic Association. The Great Moderation, the Great Panic and the Great Contraction, looks back at the causes of the financial crisis and subsequent recession. He argues that much of what went wrong can be analysed using standard economic tools. The Great Moderation was a period of unusually stable macroeconomic activity in advanced economies. This was partly thanks to good luck, including the integration of emerging market countries into the global economy, and partly a dividend from structural economic changes and better policy frameworks. The longer this stability persisted, the more markets became convinced of its permanence and risk premia became extremely low. Real short and long term interest rates were also low due to a combination of loose monetary policy, particularly in the US, and strong savings rates in a number of surplus countries.

18 documents some similar results from a recent IMF (2008) exercise, showing that the cumulative output loss in outright recessions, as well as in milder slowdowns, on average tends to be almost twice as much if preceded by a financial crisis. The results of Furceri and Mourougane (2009) suggest, moreover, that part of this output loss is permanent; they find that the typical OECD financial crisis knocks around 2% off potential output, which rises to 4% for deep crises. These findings suggest that financial crises can have a material impact on both the dynamics of the business cycle and on the underlying equilibrium growth path. The literature on the “broad credit channel” and the “financial accelerator” points to an amplifying effect of changes in firms’ financial health on their cost of capital. In particular, when borrowers have less collateral they face a higher external finance premium to compensate lenders for the increased monitoring costs (see e.g. Bernanke, Gertler and Gilchrist, 1999). But the quantitative magnitude of the effect in this type of model is usually relatively modest. And the banks in this class of model are simple or non-existent, and any incentive or information problems relate to the borrower, rather than the financial intermediary. Instead, it seems likely that the adequacy of bank capital and the associated phenomenon of financial sector de-leveraging are likely to play a central role. Capital is essential because it is the means by which intermediaries persuade creditors that they will almost surely get their money back.
These relatively stable ratios, however, conceal some differences in the ways individual institutions have lowered their leverage ratios. Most of them have increased their Tier 1 capital, while many have also reduced their assets. Overall, the shock-absorbing capacities of euro area LCBGs improved substantially during 2009 and in the first quarter of 2010. Even those institutions with the lowest capital ratios managed to enhance their buffers to levels well in excess of minimum regulatory requirements. At the same time, the capital buffers in some segments of the euro area banking sector may not have improved as quickly as has been the case for the LCBGs and will require further strengthening. Conditions in euro area LCBG funding markets have also tended to improve for much of the past six months, although the recent rise in sovereign credit risks has led to a setback for longerterm debt financing costs. As shown in the right-side of Chart 5, the most important driver of euro area LCBGs’ net income throughout 2009 and in the first quarter of 2010 continued to be net interest income. By the first quarter of this year, around two-thirds of the total net income of the LCBGs was generated from this source, while, before the crisis, around half of the total came from net interest income.

For example, we see increased capacity in writing specialised risks like aviation, energy, marine and political risks. For the life insurance industry, we have also seen greater product innovation as well as increased interest from insurers offering more sophisticated products catering to the needs of the high net-worth and mass affluent segments. BIS Review 163/2010  1  Future challenges and opportunities 7. But greater challenges and opportunities lie ahead. Enhancing risk management capabilities 8. The recent global financial crisis has underscored the importance for financial institutions to have strong risk management capabilities. The use of risk management tools such as stress testing, for example, helps identify potential risks, and allows countermeasures to be instituted early. Insurers in Singapore would have to keep abreast of developments internationally, and should continually look for ways to deepen their risk management tools and capabilities. INCOME is no exception. But unlike some of the other insurers that are part of larger global financial institutions and can therefore leverage on their parents’ risk management expertise, INCOME does not have such an advantage. These global financial institutions have widely-tested risk management practices and more established risk management cultures, given their richer experience. INCOME would have to grow its risk management expertise internally, but it would do well to learn from these global players’ recent experiences. Strengthening governance 9. However, having risk management tools and capabilities alone will not be enough. The challenge is often in successfully integrating enterprise risk management into the insurer’s business, and this would require effective governance.
However, any theory of optimal capital level will have to strike a balance between the increased cost of financial intermediation which result from higher capital requirements and the benefits of the decreased probability of bank failure and economic harm which will be achieved. Recent developments have established a prima facie case for higher minimum capital requirements. The challenge will be for supervisors to manage the transition to higher capital requirements in a phased approach and take into account the need to avoid procyclical pressure on bank capital adequacy under conditions of economic downturn. Zambia has adopted Basel II for implementation although work is still on-going in this area. The enhanced approaches to capital that I have just described have the potential to significantly minimize the probability of bank failure. They may also assist in reducing the extent to which strains on bank capital and liquidity result in an impaired ability to extend credit to the real economy. But the probability of bank failure cannot be reduced to zero. The system of bank regulation and supervision therefore needs to be buttressed by arrangements for deposit insurance (for protecting depositors in the event of default) and for bank resolution (to ensure orderly wind up and avoid knock-on effects to the rest of the banking system). In this regard, an effective deposit protection scheme becomes an important aspect of the financial safety net especially in crisis times.

As the recovery takes root, this positive restructuring of credit will foreseeably step up, and lending at the aggregate level may also be expected to normalise. It will be then that the process of clean-up, recapitalisation and restructuring of the Spanish banking system will be in a position to yield its full benefits. Once the problems of oversizing and risk concentration are overcome, our banking system will be better placed to meet the solvent demand for credit that will emerge with the economic recovery. So far I have talked about the main aspects of the ongoing re-balancing of the Spanish economy and the factors underlying the path of recovery. Allow me to conclude with some thoughts on the complexity of the current economic juncture and the challenges that must be overcome to ensure that the incipient recovery leads to an increase in our long-term growth capacity. The most likely outlook for recovery in the coming months involves relatively moderate growth in activity. Foreseeably, domestic demand will continue to gain in weight, albeit moving on a very gradual course of recovery, in line with what is forecast for its attendant determinants. Investment in construction will join this recovery, albeit taking into account its somewhat more negative position at the start of this year, lagging the other domestic demand components. External demand, meanwhile, will maintain its positive contribution to GDP, but with lower contributions than during the crisis years. Several risk factors cloud this central scenario of recovery.
The change in the ECB's monetary policy stance is not only useful for sustaining the recovery in the euro area in a manner which is compatible with price stability, but is also beneficial for the Spanish economy, since the least easing of monetary conditions is conducive to containing domestic demand and helps re-balance the expansion. Spanish public finances, for their part, remain very healthy. On the latest official forecasts, the general government budget balance will run a surplus of 1.1% in 2006, 0.2 pp up on the figure set in the last Stability Programme update. A balance on this scale obviously complies comfortably with the European fiscal discipline rules in the Stability and Growth Pact. Moreover, it will allow for a further reduction in the public debt/GDP ratio, possibly to below 40% of GDP at the end of the current year. In view of the figures available for the budget outturn during the first three quarters of 2006, it seems very likely that the final balance will be above the latest official forecast. The sound fiscal position reflects the fact that revenue from the main taxes has amply exceeded the estimates made in the budgetary programming exercise, which can be explained only in part by the higher-than-forecast economic growth recorded. The draft State budget for 2007 sets a surplus target for the overall general government sector of 0.7% of GDP, under a macroeconomic scenario marked by a slight slowdown in GDP.

The ECB’s entire range of instruments, characterised by a wide corridor between the interest rate on the marginal lending facility and the rate on the deposit facility, weekly repurchase agreements, the acceptance of a large number of counterparties and a wide range of collateral, is based on the money market functioning. If the money market doesn’t work, the mechanism for transmitting monetary policy doesn’t work. The only solution remaining for a central bank at this point is to stand in for the market and perform the role of the banks, even by lending directly to the private sector. Maybe this solution is the most preferable? I don’t believe so. In my opinion, the functioning of the market is a statutory objective for a central bank. It should therefore intervene to guarantee the liquidity of the market. It should be remembered that every injection of liquidity is guaranteed by the collateral deposited by the counterparty banks. This means that banks’ assets are made liquid. It’s obvious that without such a liquidity intervention, the market would collapse, taking the banking system with it. This is always true for last-resort interventions whose objective is to keep a solvent but illiquid system alive. It is at the heart of the role of central banking, particularly in times of systemic crisis. There can be no doubt that the ECB had to take on this role and I believe it has done so in an appropriate way.
The PRA is well aware of the need to have regard to facilitating long-term productive investment in the economy when pursuing its statutory objectives.5 Insurers active in the bulk purchase annuity market tell us that they intend to continue this diversification into direct investments, targeting on average a c.40-50% share of total assets backing annuity obligations, significantly higher than before Solvency II. Overall, I think the PRA’s implementation of Solvency II works well for annuity business. That is why we recommended adoption of a similar framework for superfunds. Solvency II does though have one significant flaw as a regime for annuities business: the design of the risk margin. Particularly in relation to long-dated insurance risks, such as longevity, the risk margin calculation is too sensitive to interest rates. As a result, the risk margin is too high when interest rates are low and too low when they are high. With interest rates currently low, insurers have responded to a too-high risk margin on annuity business by reinsuring longevity risk on new business offshore. Meanwhile Transitional Measures on Technical Provisions (TMTP) offset the risk margin on the pre-Solvency II back book. The irony is that UK insurers do not hold an especially high level of risk margin (net of TMTP) on their annuity books in practice. This outcome is unwelcome from our perspective because UK insurers are increasingly exposed to offshore reinsurers and TMTP is higher than it otherwise would be, giving the impression that UK insurers are more reliant on transitionals to meet capital requirements.

2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  2  I see four main risks: 1. longevity risk - the risk that annuities to pensioners need to be paid for longer and therefore at a higher cost to the insurer because people live longer than expected; 2. market risk - the risk that asset returns are insufficient to pay the pensions: for example, because the insurer holds assets of shorter maturity than its liabilities, market interest rates fall and the insurer cannot afford to buy sufficient bonds to produce the income needed to meet its annuity obligations to pensioners; 3. credit default and downgrade risk - the insurer suffers losses because the assets in which it has invested default or downgrade; and, perhaps most importantly 4. management and governance risk - in the absence of regulation the owners and managers of an insurer may be incentivised to maximise their own short-term returns rather than managing the business in the long-term interest of the annuity holders. The interests of owners and managers are not necessarily aligned with those of the policyholders because owners share the benefits of taking more risk in a good outcome but have limited exposure to losses in a bad outcome because of their limited liability. Policyholders might be unable to monitor how an insurer is run because of the long-term and complex nature of pensions business.
Many other central banks, including the Bank of England and Bank of Canada, have ongoing analysis projects on digital central bank money. 31 Considering how rapidly developments are proceeding, it is probably good to be aware that it will require both resources and cooperation with external players, both authorities and companies, for the Riksbank to act proactively in this matter. The Riksbank will modernise the supply of settlement services I have given several reasons for why the private market cannot be expected to provide a secure and efficient payment system without government interference: economies of scale and network effects lead to concentration in a monopoly system that becomes vulnerable and results in a lack of competition and innovation. At the same time, positive network effects suggest that cooperation and standardisation may be effective solutions. In Sweden, we have a long tradition of cooperation between the banks in the area of payment which has been very positive for Swedish consumers. Bankgirot, Bankomat (ATMs), Bank ID and Swish are a few examples. The Riksbank and other central banks have traditionally provided systems and central bank money to allow financial institutions to be able to regulate their mutual debts in a secure manner. The payment market is now in a state of transformation, among other things due to technological progress, not least via solutions for smart phones. In other words, we are on the way to a market in which end users demand that payments be rapid and constantly available.

11 By cash, I mean banknotes and coins held by the Swedish public as a proportion of total deposits in MFIs and central government. 12 The exception is when the Riksbank (or another central bank) introduces quantitative easing and purchases government bonds with newly created bank reserves, which is a form of newly created money. See Alsterlind et al. (2015) for a more detailed description of this. 4 [15]  actually create new deposits. In the same way, money is destroyed if I repay a loan to the bank. The new money created is thus private, electronic bank money and the amount of money is governed by lending. The Riksbank thereby indirectly influences demand for new money via the interest rate, but monetary policy does not attempt to steer the money supply directly. 13 Private bank money (sometimes called “inside money” in the sense it is inside the private sector) is a claim on the issuing bank. In the same way, money created by the Riksbank, for example Swedish banknotes and coins, is a claim on the Riksbank or Swedish government (known as “outside money”). It is thus possible to regard a 100-krona banknote as a kind of IOU with an eternal maturity that does not pay any interest. There is also another kind of central bank money in Sweden, namely the banks’ balances in the Riksbank. Liabilities on the Riksbank’s balance sheet are usually considered to be completely safe, as the Swedish government stands as guarantor.
Mario Draghi: ECB press conference – introductory statement Introductory statement by Mr Mario Draghi, President of the European Central Bank, Frankfurt am Main, 5 December 2013. *  *  *  Ladies and gentlemen, I am very pleased to welcome you to our press conference. I will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Rehn. Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. Incoming information and analysis have confirmed our assessment and monetary policy decisions of last month. Underlying price pressures in the euro area are expected to remain subdued over the medium term. In keeping with this picture, monetary and credit dynamics remain subdued. At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%. Such a constellation suggests that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on. Our monetary policy stance will remain accommodative for as long as necessary, and will thereby continue to assist the gradual economic recovery in the euro area.

Policy clearly within our mandate Another argument that I think is fairly difficult to understand is that the Riksbank, because of the policy we have conducted, should have acted beyond our mandate and done something we should not have done. Sometimes it has been claimed that we have introduced a new target for monetary policy or that we have begun to conduct housing policy. Had we only kept to our task, monetary policy would have been more expansionary, we would have come  2  See Svensson (2013). 3  I discuss this question in greater detail in Jansson (2013). BIS central bankers’ speeches  3  closer to attaining the inflation target and everything would have been much better, the story goes. But as I have already said, the purpose of the policy conducted in recent years has been to create the conditions for a sustainable development in the Swedish economy by reducing the risk of excessive debt and inflated housing prices. After a number of years of rapidly-rising house prices and a build-up of debt among households, it became clear in many countries that developments were based on overly optimistic calculations. When housing prices fell, household assets declined in value rapidly, but the size of the loans remained the same. Households in this situation have reduced their consumption and begun to save to achieve a better balance between assets and debts.
I shall therefore explain and inform you, as far as possible, how the Riksbank will manage the supply of liquidity. I shall also give my opinion of the risk of liquidity problems actually arising in practice. In Sweden, all major payments between accounts are managed within the RIX payment system which links together the Riksbank and all major credit institutions. A bank that has a payments deficit always has the option of financing this deficit by borrowing from the Riksbank against collateral at the Riksbank’s lending rate. Similarly, a bank that has a surplus always has the right to invest it at the Riksbank at the Riksbank’s deposit rate. These rates at present stand at 4.25% and 2.75% respectively. However, a bank that has surplus liquidity always gains by lending it to a bank that has a deficit via the market for lending between banks, the interbank market. The bank that lends its surplus funds then receives a higher rate of interest than the Riksbank’s deposit rate, while at the same time the bank that borrows money pays a lower rate of interest than the Riksbank’s lending rate. Loans on the interbank market occur within the framework of set credit lines so that here no collateral is required. If the financial system as a whole has a liquidity deficit with respect to the Riksbank – as a result of the banks ordering banknotes from us – the deficits and surpluses cannot be settled on the interbank market.

Ms Hessius discusses the role of the central bank and market liquidity  Speech given by Ms Kerstin Hessius, Deputy Governor of the Sveriges Riksbank, at a seminar of Sveriges Finansanalytiker Förening on 14 September 1999. *  *  *  The financial sector plays a central role in our society’s economy. It is this sector that enables us to make payments, to transform savings into investments or future consumption and to spread and minimise potential financial risks. It is therefore essential that the financial sector functions smoothly when we pass from one millennium into the next. Many actors share the responsibility of a smooth transition. Naturally, the Swedish Riksbank is one party involved, but everyone – from private savers and investors to public authorities and the media – must bear their part of the responsibility. Agents in the financial sector addressed early the potential problems that may arise in connection with the transition to a new millennium. Substantial resources have been devoted to measures designed to minimise the risk of any technical problems arising and to ensure that all systems can cope with the transition. The Financial Supervisory Authority has closely monitored work on systems adaptation since 1997. The role of the Riksbank in this connection is bound up with our regular tasks as Central Bank in the economy – to implement monetary policy, to promote a secure and efficient system of payments and to ensure that sufficient notes and coins are available in the economy.