samchain/econo-pairs-v1 huggingface dataset:
Philipp M Hildebrand: Developments in the hedge fund industry Speech by Dr Philipp M Hildebrand, Member of the Governing Board of the Swiss National Bank, at the Swiss Finance Conference 2005, Zurich, 4 February 2005. *  *  *  Ladies and Gentlemen, Let me begin by thanking the organizers of the Finance Forum for the opportunity to be on today’s outstanding program. It is not often that a Swiss central banker gets to speak after a Nobel laureate. Both the gratification and the risks involved in doing so are self-evident. I will enjoy the former and try to ignore the latter. Adding value to the rich debate about hedge funds is a difficult task. It is generally recognized that hedge funds have made an important contribution to the transfer and diversification of risk through innovative asset management skills and techniques. They are a positive force in rendering global financial markets more liquid and therefore more flexible. My comments today will focus on those aspects of the hedge fund industry that strike me as particularly relevant with regard to the need to preserve and enhance liquid financial markets.1 After some general remarks about hedge funds and the hedge fund industry, I will explore the question of whether hedge funds can materially influence market volatility. I will also refer to one of the key characteristics of hedge funds – the use of leverage – and examine how such leverage might affect overall financial market stability.

Mr Yam presents the 1998 Hong Kong Monetary Authority’s annual report Speech by the Chief Executive of the Hong Kong Monetary Authority, Mr Joseph Yam, on the occasion of the presentation of the 1998 HKMA annual report before the Legislative Council Financial Affairs Panel in Hong Kong on 3 May 1999. Introduction Mr Chairman, Honourable Members, I am most grateful to you for giving me this opportunity to speak to you on the occasion of the publication of the HKMA’s Annual Report for 1998. The Report is tabled at this meeting of the Financial Affairs Panel; it is also being distributed to all Members of the Legislative Council this morning. This Report covers the full range of the HKMA’s work for the calendar year 1998, in addition to giving an assessment of the economic and banking environment for the year. I have no need to remind Members that 1998 was, to put it mildly, an eventful year. The Report sets out the many problems and challenges that the HKMA has had to grapple with during the course of the year, and explains what actions and initiatives the HKMA has been taking to address them. You are all familiar with these issues, and you have the details before you. So I do not wish to take up too much time with a long description. My main focus in this presentation will be on the challenges for the HKMA in the coming year, particularly in the light of current economic trends.
Let me take a few examples: steps have been taken in harmonising elements of insolvency frameworks, such as ‘early restructuring’ and ‘second chance’. But these do not cover the conditions for opening insolvency proceedings nor the ranking of claims. As such, they are not enough to facilitate cross-border investment. Similarly, more should be done to remove overlaps in cross-border withholding taxes and reduce home bias in investment strategies. In my view, we need a single rulebook in a wide range of areas also covering consumer protection, anti-money laundering, or accounting rules for a successful CMU. Another reason for a limited “CMU effect” is that some of the agreed initiatives were only recently implemented. Take the securitisation package, for example. Important technical regulatory acts are still pending which prevent the new framework from being applied in full and are a source of uncertainty for those who would like to use it. It is therefore too early to assess the success of this measure. More importantly however, some proposals will not deliver their full potential. In the case of the pan-European personal pension product, the recent agreement gave birth to a rather complex product for which key elements are left to the discretion of Member States. Lack of ambition in the cross-border portability of the instrument may limit its capacity to facilitate labour mobility and the mobilisation of savings across borders in the absence of geographical diversification requirement for investments.

1 3/4  BIS central bankers' speeches  1 ECB (2018), “Special feature A: Financial development, financial structure and growth: evidence fromEurope”,  Financial integration in Europe. 2 ECB (2016), “Special Feature A: Financial integration and risk sharing in a monetary union”, Financial  integration in Europe. 3 ECB Financial Stability Review, (2019), forthcoming, May. 4 European Commission (2019), “Capital Markets Union: progress on building a Single Market for capital for a  strong Economic and Monetary Union”, European Commission contribution to the European Council. 5 ECB (2018), “Special feature B: Integrating euro area corporate bond markets: benefits and potential financial  stability challenges”, Financial integration in Europe. 6 The ECB’s price-based composite indicator of financial integration shows a pronounced increase during 2017,  while quantity-based integration has stalled since 2015 (see Indicators of financial integration in the euro area). 4/4  BIS central bankers' speeches
BIS central bankers’ speeches  11  These alternative models of corporate governance offer a different balance of power between capital and labour. Indeed, the distinction between the two is blurred: the owners of, and workers for, the robots are in effect one and the same. These governance structures may allow a more equitable distribution of robotic rents and generate greater value for the companies themselves and for wider society. Turning to the nearer-term, what if any implications do these labour market trends carry for the economy and monetary policy? Last week, the MPC set out its view in the quarterly Inflation Report. This painted a picture of solid UK growth, alongside subdued price pressures. The UK is growing roughly at trend, but inflation is 2 percentage points below target. The picture among other advanced economies is not greatly dissimilar. The UK inflation picture is relatively easy to explain, at least in an accounting sense. The lion’s share of inflation’s weakness is accounted for by external factors – weak world prices and a strong exchange rate. These factors are themselves in part a reflection of weak world demand, pushing down the prices of oil and other commodities. The impact of external disinflationary pressures on UK inflation is thus likely to be persistent. Nonetheless, in time these external pressures should wane. What will then determine UK inflation is the evolution of domestic costs, specifically labour costs. The UK labour market has been hard to read over the past few years.

In the event, the unemployment rate in the UK peaked at 8.5%, or 2.7 million people. •  Since 2013, the UK unemployment rate has fallen sharply, to a rate of 5.3% or 1.8 million people. This fall in unemployment is considerably faster than the MPC, and other outside forecasters, had predicted. At the start of 2014, the MPC forecast that the unemployment rate today would be more than a percentage point higher than its current rate (Chart 1). •  The main reason for this striking fall in the unemployment rate has been very strong rates of new job creation. Since 2010, more than 2 million new jobs have been created in the UK. The lion’s share of these new jobs – around two-thirds – have been full-time positions and in highly-skilled professions (Chart 2). The level of employment is at a forty-year high. •  This rise in the demand for workers has been met, in part, by increased participation in the workforce. Participation by women has picked up strongly and is now close to its all-time highs. So too has participation by those aged over 50, in part taking advantage of more flexible working practices and removal of the official retirement age. •  The other end of the age spectrum has also seen improvement. The percentage of 18–24 year olds who are not in employment, education or training – the so-called “NEETs” – has fallen sharply from close to 17% to below 13%.
But this better outcome is not achievable when the central bank cannot tie its hands in regards to its future behaviour. In the third scenario (the blue line), the government gives the central bank the mandate of stabilising the level of nominal income around a continuation of its pre-shock trend. The  BIS central bankers’ speeches  5  central bank then pursues this different objective, but again on a quarter by quarter basis. In this case, the output and inflation outcomes lie between the previous two scenarios.10 Giving the central bank a mandate to target the level of nominal income is, in effect, a way of getting closer to the first, but unattainable, scenario. So much for the theory behind a target for the level of nominal income. It is essentially one way of trying to hardwire in a commitment to maintaining a policy that remains loose long after conditions have normalised in order to generate the expectation of temporarily higher inflation in the future. But what may work in an economist’s model may not be such a good idea in the real world. How sensible would it be in practice? And what pitfalls might there be? First, the simulations show the impact of a pure demand shock resulting in strong deflation and, given the zero lower bound on the policy rate, also a high real interest rate.

In Scandinavia and the Benelux countries, the pressing need for economies of scale has forced major banks to look beyond their domestic markets for partnerships, and cross-border mergers have been common. In Singapore, the same thing is already happening in the telecommunications industry. The Government has decided to allow, and indeed to encourage, dominant local players like Singapore Telecom to go beyond foreign acquisitions, to seek foreign mergers. As Singapore banks increasingly confront the same imperative, we will have to consider exactly how far we are willing to trade off retaining a few Singaporean-controlled banks against the logic of globalisation. Conclusion The Asian crisis has led to a rethink of the consensus in favour of globalisation and free capital flows. The result has been to reaffirm the logic of globalisation, and the value of free markets and free trade. But it has also caused a more sober appreciation of the risks of international flows of capital, and clarified the necessary preconditions for countries to minimise the difficulties and reap the benefits from freer capital flows. Singapore’s experience in bringing our financial sector up to best practices during and after the crisis shows how complex and delicate a task it is, despite Singapore’s relatively strong starting point. It will be even more challenging for countries in less favourable circumstances, to find their way forward in post crisis Asia. In this quest, these countries deserve the full support of the international community. 9  BIS Review 76/2000
The banks have thus increased their reserves at the Riksbank. The Riksbank has also lent almost SEK 200 billion in US dollars. We have financed this partly by borrowing against the currency reserve and partly by means of a loan agreement with the Federal Reserve. The fact that the currency reserve appears to have increased is primarily due to exchange rate effects. The liabilities item "Other" includes the Riksbank's net income and the revaluation account. This item has increased mainly due to exchange rate effects, but also because we have earned quite a lot of money from these transactions. Some other central banks, such as the Federal Reserve and the Bank of England, have gone one step further. Apart from increasing their lending to the banks, they have also bought various types of domestic financial assets. When a central bank lends money to the banks, or purchases different types of assets, the banks' access to funding increases. This in turn increases the so-called monetary base on the balance sheet's liability side, that is the total of outstanding banknotes and coins and the banks' deposits in the central bank. A common feature of the measures taken by the central banks is thus that they have inflated the balance sheets and increased the monetary base. There are, nevertheless, some differences and different central banks have also described their measures in slightly different ways.

In the best case, this provides a more balanced development, both with regard to the growth in credit and the banks’ resilience to shocks. This is a slightly more general approach than, for instance, the system of dynamic provisioning they have in Spain.8 The beauty of it is that by using aggregate measures of growth in lending we also capture other things that would otherwise remain off the banks' balance sheets. Note that we can make a connection between the Taylor rule for the policy rate and a corresponding rule for capital adequacy. Let me refer back to an equation I showed earlier, namely the banks' lending rate expressed as a function of the central bank's policy rate and a risk premium. 8  http://www.bde.es/provesta/proestae.htm. BIS Review 41/2009  17  Image 11  i  lending t  = it + m(ct ,...)  The premium is partly due to the bank’s demand for compensation for the need for capital cover for lending. If the capital adequacy requirement is controlled with the aid of our special rule, then not only bank-specific risks but also systemic risk factors will be priced in the lending rate. The banks’ lending rate thus depends on both the policy rate and a premium that in turn depends on the capital adequacy rule. In addition, both the Taylor rule for the policy rate and the capital adequacy rule depend on the output gap. This means that one can in principle link together these equations into a system.
Wage level Percentage of wages in the US 50  50 South Korea  40  40  Taiwan  30  30 Singapore  20  20  Hong Kong  10  10  0  0 1980  1985  1990  1995  2000  2002  Sources: US Department of Labor and Norges Bank  The advances in Asian economies have generally relied on an abundant supply of cheap labour, but wages have gradually increased in step with productivity gains. A higher income level paves the way for higher imports. Chart 5. Exports and foreign assets Per cent of global GDP. 1870 - 2001 25  125 Exports (righthand scale)  100 75  Assets (left-hand scale)  20 15  50  10  25  5  0 1870  1890  1910  1930  1950  1970  0 1990 2001  Sources: IMF and Norges Bank  Today’s globalisation has a historical parallel. In the period preceding World War I, the world experienced a period of strong growth in trade and cross-border capital flows. There were few political barriers and major technological advances fostered growth in trade. Prosperity increased. But this period was interrupted, and in the interwar period protectionism gained ground, with trade barriers and a contraction in international trade. This was combined with an economic recession. In the post-war period, trade barriers have gradually been scaled back. Trade picked up already in the 1950s, and since the 1980s financial markets have become evermore interwoven.

A deeper market reduces transaction costs, and it is easier to find counterparties. This has provided companies with greater scope for hedging against foreign exchange risk. The use of instruments that reduce the risk associated with a floating krone is also increasing in Norway. A considerably larger portion of credit in other countries is now channelled via the bond market. Less risk is being accumulated in banking systems. The development of new markets and instruments, for example credit derivatives, has also led to a broader risk spread than earlier. The improved diversification of risk is probably one of the reasons that world financial markets have coped with the stock market decline and the accounting scandals with limited damage to the wider economy. This is probably one reason why the downturn following the stock market decline in 2000 was considerably less pronounced than earlier downturns. The new instruments spread risk, but do not eliminate it. Financial markets have become highly complex. This alone entails an operational risk, which is a challenge to participants and the supervisory authorities. 2  BIS Review 11/2004  A shift in the international division of labour Increased trade promotes growth and lays a basis for prosperity. A number of Asian countries have experienced strong, export-led growth - Japan from the 1950s and several countries in Southeast Asia from the 1960s. Chart 3.
Even if banks are successful at tackling their internal Year 2000 concerns, they may still face risks from critical services that they receive from vendors. In addition, banks should assess their credit exposures to customers that face significant Year 2000 challenges of their own. I hope that all financial organizations sufficiently address the Year 2000 conversion in time to limit possible disruptions. If they do not, we will find it increasingly difficult to deal with the issues arising from deficient organizations over the course of 1999. There will likely be some chance that vigorous catch-up efforts on their part will allow them to avert serious problems. On the other hand, the closer the time until January 2000, the more difficult it will be for the customers of that firm to find an alternative provider of financial services. Many banks already are indicating that they will be reluctant to take on new wholesale customers in the latter half of 1999. To avoid this bottleneck, supervisors need to take all possible steps to identify firms whose progress to date has been insufficient, and to pressure them to adopt a plan that will address their Year 2000 problems. BIS Review 85/1998  -6-  Inevitably, however, supervisors may face difficult enforcement issues during 1999 regarding those institutions that are not making appropriate progress.

And in the countries which have perhaps conducted the most expansionary monetary policy, the United  22  In line with this interpretation, Karlsson and Fredriksson (2013) find that the repo rate has had the same shortterm impact on mortgage rates before and after the financial crisis. 23  The conclusion that Rey emphasises is that monetary policy needs to be supplemented with other tools; either macroprudential policy measures that can counteract undesired fluctuations in asset prices, or restrictions to the international mobility of capital to quite simply throttle the mechanism causing concern. 24  See, for instance, Ball and Mazumder (2011), Coibon and Gorodnichenko (2013) and the IMF (2013). 25  One of the explanations most often given for inflation initially being held up is that inflation expectations had become anchored around the level of the inflation target and that this contributed to temporarily keeping inflation up in a different way than in earlier economic downturns. This explanation is also, at least partly, consistent with the conclusions I have drawn on the ability of monetary policy to influence inflation even if the effects on economic developments are less tangible. Another, closely-related, explanation given is that the link between aggregate demand and inflation is weaker when inflation is low to start with. Over the past decade or two, inflation has been low in relation to the levels common in the 1970s and 1980s. When the financial crisis began, inflation was thus already low. And when inflation is low, there are factors that counteract a further fall.
To date, the global financial market fallout from the Brexit vote has been short-lived, and U.S. financial market conditions remain supportive to economic growth. Nevertheless, I believe that the potential aftershocks pose medium-term downside risks to the global economy, and that these risks need to be monitored. With respect to inflation, I think the outlook has not changed much recently. Headline inflation, as anticipated, has climbed a bit this year as earlier energy price declines have fallen out of the year-over-year inflation calculations. In contrast, core inflation has been broadly stable, with the core PCE deflator rising by 1.6 percent over the past four quarters, moderately below our 2 percent objective. The fact that core inflation has been broadly stable over recent months in the face of the earlier declines in energy and non-energy import prices is notable. It makes me somewhat more confident that overall inflation will return to our 2 percent inflation objective over the medium term as long as the economic growth that I expect actually materializes. If the economy were to grow at the pace I discussed earlier, this would likely translate into sufficient job gains to continue to remove any remaining slack in the labor market – which, by my assessment, is already operating quite close to a level that is consistent with what is achievable on a sustainable basis. This would likely lead to further pressure on labor resources, higher wages and, over time, somewhat higher inflation.

Models including these rigidities had greater explanatory power than previous models and were more in line with monetary policy practices at that time. Price stability emerged in both central bank mandates and macroeconomic models as the overriding objective that central banks should pursue in order to maximise social welfare. In the words of an influential article, one could see a “science of monetary policy” developing next to the traditional “art” of monetary policy.3 But there was a notable absence of a role for banking and finance in these models. Wage and price rigidities, together with a few other frictions, appeared to be sufficient to provide a realistic characterisation of the transmission mechanism of monetary policy in the main macroeconomic models. Financial sector developments did not seem to affect this mechanism, because financial intermediation was assumed to be fully efficient. And generally, the interest rates faced by households and businesses typically moved in line with movements in central bank policy rates. True, there were some models that incorporated financial frictions into macroeconomics.4 Central banks themselves were also aware of the role of monetary and financial markets in the monetary policy transmission mechanism. The first Eurosystem Research Network at the ECB studied the so-called bank lending channel, which maintains that banks play a crucial role in the transmission of monetary policy. But the impact of financial frictions was generally estimated to be small in developed countries and these frictions were therefore absent from the canonical models used for monetary policy analysis.