samchain/econo-pairs-v1 huggingface dataset:
The combination of macro challenges and regulatory reforms: The current and forthcoming financial landscape for banks I will comment now on the financial landscape for banks and the regulatory reforms. The prevailing low-interest rate environment may pressure banks’ interest rate margins downwards when the negative impact on the interest rate differential exceeds the positive effect of low interest rates on banks’ activity. This potential unintended consequence of monetary policy lies in parallel with other factors that are putting pressure on banks’ profitability, in particular, regulatory reforms aimed at addressing vulnerabilities in the global banking system as well as deficiencies in the current framework. BIS central bankers’ speeches  3  Some of these reforms have already been implemented and banks have improved their resilience. Solvency ratios have been reinforced with a new calibration of the requirements and the definition of the eligible capital instruments for the numerator of these ratios. However, different problems in the denominator related to the measurement of risk still persist and should also be addressed. In this regard, I would say that the major general outstanding issue to finalize the Basel postcrisis reforms is how to mitigate the unwarranted variability in the risk weighted assets that are calculated by banks when using internal models. This revision should be feasible by striking a right balance between sensitivity, simplicity and comparability. There is a special focus also on avoiding significant increases for overall capital requirements.

Luis M Linde: Macro vulnerabilities, regulatory reforms and financial stability issues Speech by Mr Luis M Linde, Governor of the Bank of Spain, at the International Institute of Finance (IIF) Spring Membership Meeting, Madrid, 25 May 2016. *  *  *  I would like to thank Tim Adams, President and Chief Executive Officer of the International Institute of Finance, for his kind invitation to participate in your Annual Spring meeting. In my speech I will try to cover three topics: macro developments and challenges both in the international context and in the euro area; the stance of monetary policy in different areas; and regulatory changes. The international context Today, the recovery of the world economy remains disappointingly uneven and weak. Global GDP growth in 2015 was 3.1 %, the lowest figure since 2009, and projections by most of the international institutions have been revised downwards again. In spite of that, financial markets have experienced a favourable trend in recent months. The more accommodative tone of monetary policy in most of the world, some macroeconomic data that, although not too buoyant, moved away expectations of a new recession and, in a number of cases, corporate profits, better than expected, helped reverse the worrying trends that markets showed at the beginning of the year. However, serious risks remain. Many developed economies have recovered the level of activity prior to the crisis, but their growth rates have been low by historical standards.
Consequently, cooperation efforts are being  BIS Review 53/2003  1  made by central banks and supervisory authorities to overcome the problems caused by the fact that supervision and oversight primarily remain a national responsibility. The ECB - and the Eurosystem as a whole - is also enhancing its activities in the field of European financial stability. One part of these activities is visible through the regular articles and reports. Many other activities are less visible and take the form of discussions concerning financial stability in the ECB Governing and General Councils and ESCB Banking Supervision Committee, or our regular contribution to the strengthening of cooperation among relevant European authorities and our participation in international discussions. I would like to organise the rest of my remarks around the three themes I have identified. First, I will look at what evidence is provided by past crises about the severity of the market frictions. Second, I would like to discuss the changes in the policy framework which have been made and, third, are being made in order to preserve financial stability. B. The three themes and financial stability  Past crises could give us some hints about what could also be important financial stability concerns in the future. One should not go too far back as the financial system is rapidly changing and one must always be prepared for surprises. Often the new crises come as complete surprises.

In its internal audit report published in March 2013, the FSA highlighted several issues pertaining to the breakdown of the internal audit function, which led to the manipulation of the rates. Despite the Group internal audit functions carrying out their routine audits in this area, deficiencies in the banks’ systems, controls and policies were not adequately highlighted. The lessons learnt from the above cases and others clearly reinforce the key roles played by both the internal audit function and the Audit Committee. My view is that the strength and effectiveness of the internal audit function will influence the risk and compliance culture in an organisation. The function has to continually be refreshed such that it remains robust and effective. 2  BIS central bankers’ speeches  Clearly, the job is now more difficult and challenging than ever, given the increased expectations by stakeholders and heightened scrutiny when things go wrong, as well as increasing obligations under the statute that place additional fiduciary responsibilities on audit committee members. I would like to share my thoughts on four matters where efforts are necessary to raise the bar on audit standards and audit quality. Firstly, the audit coverage and scope should not be confined to compliance or risk-based parameters. The audit scope should be holistic, encompassing new risk areas and tail risk events that originate from the evolving operating environment and financial landscape.
The way in which financial services are delivered to consumers is also moving towards more cost-efficient channels that reduce the need for face-to-face contact. Enquiries and complaints are largely handled by phone or e-mail, and usually in a highly fragmented manner by different parts of a financial institution. This can mean less effective advisory support for the vulnerable groups of financial consumers. More recently, the wider adoption of electronic channels to make and receive payments has had enormous potential for greater financial inclusion. Key to this progress is the access to the relevant technology and safeguarding its security and thus gain the willingness to trust it. This will also involve the awareness of its benefits. These developments can be overwhelming to consumers and businesses who are illequipped to make informed financial decisions due to their inadequate knowledge on financial matters, thus diminishing their effective participation in the financial system. Symptomatic of this has been the rapid growth in household debt and leverage in a number of countries. This has been particularly prevalent in an environment of ample liquidity and low interest rates. This is also being reinforced by changing social norms, such as social pressures to spend, which has further eroded financial discipline among households. Such pressures are further compounded by the rising cost of living in the urban areas. Financial capability levels have however generally lagged the socio-economic changes that are taking place, resulting in poor financial management.

Going forward, the challenges imposed by the rising trend of urbanisation and other demographic changes are set to become more pronounced. The implications of this for financial education strategies are far-reaching. It will require a fundamental re-thinking of current approaches to delivering financial education that will have its optimal impact. The approach will need to be comprehensive and with all stakeholders in the financial ecosystem. We have a shared responsibility to develop effective channels for delivering financial education, build the necessary infrastructure and continuously evolve relevant financial capability programmes that will facilitate consumers to make sound financial decisions with confidence, and cope successfully with the new emerging economic and financial challenges. This Summit provides an excellent opportunity for stakeholders to come together to generate new knowledge and ideas in our journey towards achieving effective participation in the financial system through financial education. It is such concerted efforts that will strengthen the potential to create an enduring impact that will make the difference in achieving a more balanced and sustainable economic future. 4  BIS central bankers’ speeches
17  Here we are referring to total debt as a percentage of annual disposable income. BIS central bankers’ speeches  7  How could various measures be expected to influence expenditure – in terms of direct loan costs, such as interest, and other loan-related cash flows, such as amortisation payments – for these households? We can assume for the sake of simplicity that the interest rate on the mortgage loan is initially 4 per cent for all households. We also assume that our households have a variable interest rate, that they do not amortise their loans at all and that they have no savings. Capital buffers have limited effects on wallets One of the more accepted macroprudential policy tools is the so-called countercyclical capital buffers, which are being introduced as a result of the new Basel regulatory framework. This means that it will be possible to make an extra capital adequacy demand of the banks in good (read: overheated) times that can be reduced again in less good times. Say that the banks are now subjected to countercyclical capital buffers and increase their capital adequacy ratio by a total of 2.5 percentage points. Say also that the banks pass on all of the cost for the increased capital adequacy requirement to their mortgage customers.

The increasing competition in Sri Lanka’s banking industry has widened the scope of the IT infrastructure development to meet diversified demands made by numerous users. Today, customers of some banks enjoy services through Internet banking, Telebanking, Mobile telephone banking and Visa/Master Credit and Debit card facilities. The growing competition and expectations have also increased awareness amongst banks of the role and importance of technology in banking. 3. Worldwide Outsourcing and Service Improvements  3.1 An even more recent area in which the advancement of ICT facilities has had a significant impact is in the outsourcing of financial services. By 2010, it is projected that more than 20 per cent of the global financial services industry might shift offshore. In 2005, 70 per cent of world financial institutions used outsourcing compared to 26 per cent in 2003. For developed countries, outsourcing financial services offer cost reductions, while IT companies in many developing countries, such as India, Sri Lanka, China, South Africa, the Philippines, Singapore and Malaysia got opportunities to use their IT skills and profit from it. Similarly, the outsourcing of business processes, such as call centres, general processing for human resources, finance and accounting, back office services has also taken place. This trend has influenced some banks in Sri Lanka also to form their own subsidiaries to handle IT operations within the group. 4.
Traveling this road has not been easy. At the outset, the mere idea of granting autonomy to the Bank cast a heavy blanket of doubt, not only because of the novelty of the scheme, but because it was difficult to dissociate its potential benefits in the fight against inflation from the political circumstances of its origin. However, the Bank's actions and its first monetary policy decisions made it possible to enhance the legitimacy of the Bank. This behavior has been extended and deepened over time, largely on the initiative of successive Central Bank boards. The adjustments to the monetary policy framework, increased attention to issues of financial stability, efforts to improve the market 7  orientation of its policy decisions and the adoption, by its own initiative, of higher standards of transparency and accountability are expressions of this. Thus, the capital invested by the Bank in seriousness and commitment to the inflation target and financial stability has contributed enormously to provide spaces of independence to its monetary policy making. At the same time, the institutional autonomy of the Bank has not hindered dialogue and coordination with the Executive, through the Minister of Finance. Nor has this autonomy been translated into greater rigidity, but has provided an institutional arena within which it has been able to adapt, in a timely and flexible way, to new challenges, safeguarding the necessary independence to carry out its work.

With these additions, we reaffirm the Board's decision to not only disclose rigorously how the institution is managed, but also use its autonomy to improve the quality and transparency of its processes beyond what it is strictly required by law. The Monetary Policy Report In recent months, inflation and growth were below the estimates in the June Report. However, the main differences were related to factors that we consider to be transitory, in particular supply-side factors that affected the performance of activity and the level of certain prices. For this reason, neither the outlook for the economy for the next two years nor the general orientation of monetary policy, differs much from the projections contained in it. In the baseline scenario I will examine in a moment, core inflation —the CPIEFE— will gradually return to 3% as from mid-2018, after several months around 2%, while headline inflation will rise somewhat faster, as prices of its most volatile components return to their historical patterns and market expectations about the world prices of fuel and foodstuffs are confirmed. We expect GDP growth to pick up beginning in the second half of this year. With this, the activity gap should remain fairly stable for some time, to begin closing gradually towards the second half of 2018.
And the financial sector should be instrumental in driving that change. Today I want to move us from aspiration to action, and set out how we can achieve this in practice - both at a micro-level, through the decisions each of you make as individual financial institutions, and at a macro-level, across the financial system as a whole. Risks from climate change  But first, a reminder of why climate change matters to you as financial institutions and to us as the central bank and supervisor. Clearly, climate change matters for the environment and for our planet. But what has become self-evident now, even if it was not five years ago, is that climate change creates financial risks.2  These can arise from physical risks, whether acute weather events like floods and wildfires, or longer-term climate trends like the rise in sea level and record-breaking temperatures in the Arctic Circle3. They can also arise from transition risks – the changes in government policy, technology and consumer preference that move our current emissions pathway towards one consistent with net-zero. And let me remind you that the need to transition is economy wide, not just in the energy sector – in transportation, agriculture, real estate, all parts of industry, even sovereigns.

Figure 7 shows model simulations of the effects on the CPIF and unemployment, according to the main scenario’s repo rate path and according to the repo rate path I voted for, under the assumption that foreign interest rates will be lower  BIS central bankers’ speeches  9  than in the forecast, particularly towards the end of the forecast period.14 My preferred repo rate path, which goes up to 3.25 per cent at the end of the forecast period, gives a lower unemployment forecast than does the main scenario’s repo rate path. It may seem that the target fulfilment of the CPIF forecast is worse, as it lies above 2 per cent towards the end of the forecast period. However, my assessment is that this is an overestimate of inflation. Inflationary pressures are influenced by resource utilisation, and it can probably be expected that the level of resource utilisation that is consistent with unchanged inflationary pressures will actually rise during the forecast period. In deep recessions, it is usual for the functioning of the labour market to be impaired initially, as typically the jobs that have disappeared differ from those arising once the economy has recovered. However, eventually it does start to function normally. In that case, perhaps inflationary pressures will be significantly lower towards the end of the forecast period than is shown by these simulations.
But I also believe that, if the exchange rate is reacting to a re-evaluation of real economic prospects – and not to some other inflationary shock – the effect should be a one-off change in relative prices, albeit spread out over time. It is important to stress that the MPC could try to offset all the price level effects of such shocks in order to leave the inflation rate unchanged. The problem with that idea in practice is the time it takes for Bank Rate to affect inflation. To counter short-term movements induced by relative price shocks would need very large and frequent changes in Bank Rate – including to offset the lagged responses of earlier changes. That sort of policy response would be very de-stabilising, likely to cause undesirable volatility in output, and be damaging to the economy as a whole. This is where the full remit of the MPC becomes effective – requiring us to support the Government’s objectives for growth and employment. Once there has been a shock to inflation, the Committee have to decide how quickly it should bring inflation back to target. To do that we have to judge the underlying state of inflationary pressure. And we have to monitor inflation expectations to check that they are not adversely affected by a succession of temporary shocks to the price level.

If people came to believe  6  BIS Review 91/2010  that inflation was not going to be brought back to the 2% target, then Bank Rate would have to change by a potentially much larger amount in order to ensure that inflation is, in fact, returned to target. The recent high rate of CPI inflation can be largely attributed to a number of temporary factors, combined with weak downwards pressure on inflation from the subdued level of demand. Nevertheless, given the expected degree of spare capacity in the economy over the next few years, and that the temporary factors should wear off, the most likely outcome is that inflation falls back to below target over the next couple of years as shown in the May Inflation Report (Chart 12). On that basis it was sensible not to try and offset the recent rise in inflation by tightening policy. But let me be clear about the risks. Our central expectations could be wrong. Certainly the inflation data have tended to consistently surprise on the upside, month-by-month. What if spare capacity continues to exert much less restraint on inflation than anticipated? Or perhaps current data estimates have significantly underestimated demand and output growth? Or the exchange rate effect is bigger than incorporated in the projections? We could also be wrong in the other direction: downside pressures on UK output growth (Chart 13) could yet lead to an even bigger fall in inflation than the central case.
The asset purchases that are now part of the ordinary monetary policy toolbox involve various kinds of risk being transferred from society at large to the central bank’s balance sheet. 14 This is why the risks have increased on the Riksbank’s balance sheet. But the risk buffer that the Riksbank has in the form of equity and revaluation accounts has not grown at the same rate. This means that we need to take measures to ensure that the Riksbank has enough of a buffer for the risks that exist on the balance sheet. Generally accepted accounting principles indicate that the Riksbank may make provisions for the risk of losses existing on the balance sheet. The Riksbank has  14 A transfer of risk from the public to the central bank’s balance sheet is actually one of the channels through which asset purchases may have an effect on the economy. See CGFS (2019). 10 [13]  previously had a relatively small balance sheet, associated with small financial risks, and has therefore not needed to make provisions to complement the existing loss-absorbing buffer. However, risks have increased in recent years as new assets have been purchased and the balance sheet has grown. As from this year, the Executive Board is therefore starting to make provisions to strengthen our buffer, so that it can be used if the Riksbank should make losses. The provisions will thus form a complement to the existing equity and revaluation accounts.

To its credit, the insurance industry has taken important strides in rising to the challenges faced. Generally, Bank Negara has been encouraged by the positive response of the industry to new regulations that further strengthen corporate governance and risk management standards and promote the fair treatment of consumers. Of course, some companies have been more progressive than others in absorbing the regulatory principles within their companies. But overall, our supervisory interactions with the industry have shown that the industry as a whole has made good progress in lifting standards of financial and business practices. This is encouraging as ultimately, both the industry and Bank Negara have a common interest in promoting an efficient and stable insurance market in Malaysia. At Bank Negara, we are continuing to strengthen our regulatory and supervisory capabilities as well as sharpen our focus. As those from Malaysia would be familiar, we are now into the fourth month of the Bank’s new regulatory and supervisory structure. The new organisational structure for the regulatory and supervisory functions within the Bank were realigned back in November last year to move from the previous sectoral approach to regulation, to one that will integrate the Bank’s regulation of the different financial sectors under its purview along functional lines. As a result, the functions previously under the former Insurance Regulation Department have now been assumed by the newly established Financial Sector Development Department, the Prudential Policy Department, the Consumer and Market Conduct Department and the Financial Surveillance Department.