samchain/econo-pairs-v1 huggingface dataset:
It has already carried out useful work, in co-operation in particular with the Financial Stability Institute (FSI) of the BIS, on the theoretical aspects and practical application of Basel II. Today, I will start by discussing the practical challenges arising from the effective implementation of Basel II. I will then stress the need to pursue efforts to implement the new Basel II framework in the context of the current financial market turmoil. Lastly, I will try to draw some initial lessons from this turmoil with a view to ensuring that implementation is optimal. 1. The effective implementation of Basel II is demanding and requires on the part of credit institutions and supervisors considerable efforts and significant resources. The first challenge regarding Basel II is indeed of a practical nature, i.e. successfully moving from the planning stage of this capital adequacy reform to that of its implementation. This will be particularly challenging since Basel II is a much more ambitious supervisory framework than Basel I, based on three complementary pillars: –  minimum capital requirements (Pillar I), which can be calculated in accordance with various approaches, from standardised approaches to internal ratings-based approaches (IRB), specifically developed by each credit institution.

Some calm has come to the external financial markets, originating, among other causes, in the announcements that steps will be taken towards a banking union and the statements by the governor of the European Central Bank regarding the possibility of shortly implementing a sovereign bond purchase plan, upon previous political agreement on a fiscal austerity program. Besides, no significant sovereign debt payments from peripheral economies have fallen due in the past several weeks. However, the region faces a tough path, because of considerable difficulties to carry out these actions. For example, how a banking union for the  4  BIS central bankers’ speeches  Eurozone could be materialized is unclear and, for the time being, there is no unanimous support from member countries. In addition, there is the negative outlook placed for Germany’s and other central Eurozone economies’ ratings. Plus, in the coming months, several events will occur that may revive market tensions. For September there is, among other developments, the evaluation of the tripartite group on the degree of compliance with agreed adjustments in Greece and the possibility of a new program, aside from the voting at the German constitutional tribunal on the legality of the ESM. For October, there is a strict calendar of debt maturities in Spain, which entails refinancing obligations in international markets. The impulse from abroad on the Chilean economy will be somewhat milder than was foreseen a few months back.
This means that, over the same period, borrowers have become markedly more vulnerable to interest rate rises. Overvaluations in residential real estate  I would now like to turn to the residential real estate market. Numerous indicators point towards overvaluations in this market, since price increases in recent years have been steeper  Page 8/12  than can be explained by fundamental factors. This applies across all residential segments, i.e. single-family houses, privately owned apartments and apartment buildings. The extent of overvaluation is difficult to quantify. Slide 4 illustrates this, using the privately owned apartment segment as an example. It shows two simple indicators and the results of two models, used to measure the valuation of privately owned apartments. Both indicators, i.e. the price-to-rent ratio (in light blue) and the price-to-GDP ratio (orange), reveal an overvaluation of around 30%. An econometric model (red), which explains current prices based on developments in GDP, housing stock and interest rates, shows an overvaluation of roughly 20%. 10 Finally, the ‘user cost model’ (dark blue) reveals a broad range of overvaluations, depending on different assumptions regarding future interest rate and rental developments. 11 Assuming for example that real mortgage interest rates will return to their historical average of 2.6% over the long term, the resulting overvaluation amounts to roughly 30%. If, by contrast, the assumption is a real mortgage interest rate of 1% over the long term, the overvaluation decreases to around 5%.

Financial turbulence puts a strain on the real economy and is a threat to price stability. Moreover, we are dependent on well-functioning banks and financial market infrastructures for the implementation of monetary policy operations. Second, we have an important role to play in times of financial instability, namely that of lender of last resort. As such, we provide liquidity to financial institutions in financial distress. This emergency action 1 2  Sources: Blick (6 July 2021), Finanz und Wirtschaft (21 July 2021), translated from the German. With a focus on Switzerland, cf. Birchler U.W., The National Bank’s closer focus on the stability of the system, in: The Swiss National Bank 1907–2007. Page 2/12  often comes with high risks for us and for the economy as a whole. These two points illustrate that it is in our interest to identify risks to financial stability as early as possible and to contain them through preventive measures. The SNB’s mandate regarding financial stability was explicitly defined in the comprehensive revision of the National Bank Act (NBA) in 2003. In accordance with art. 5 NBA, the SNB is obliged to ensure price stability and, as part of this mandate, also to make a contribution to the stability of the financial system. By choosing the word ‘contribution’, legislators expressed the fact that financial stability is subordinated to the goals of monetary policy and that it is promoted not only by the SNB, but also by other authorities.
By the end of the year we expect capital levels to be above 10% for the sector as a whole, both under the EBA definition and under the Basel III definition of common equity tier 1 to be used from January when the new European solvency regulations come into force. The improved situation of Spanish banks is also apparent in the liquidity indicators and in market valuations, both in absolute terms and in relation to net book value. That said, obviously the banking sector has to address the adverse impact on its balance sheets exerted by the still-weak macroeconomic environment, the necessary process of nonfinancial sector deleveraging and the persisting fragmentation of European markets despite recent improvements. In order to obtain a comprehensive assessment of the outlook for the sector, we have recently developed a supervisory tool to enable us to regularly conduct forward-looking analyses to evaluate the solvency of Spanish banks under different macroeconomic scenarios. This tool (FLESB) is not intended to estimate banks’ solvency ratios, but rather to evaluate the sensitivity of their solvency to a given set of shocks over a time horizon. The initial results, which were published some days ago in the Banco de España’s Financial Stability Report, offer some comfort as to the ability of Spanish banks to meet the minimum regulatory capital requirements with a sufficient margin, even under adverse scenarios. To conclude, monetary union is now unquestionably at a crossroads.

These ingredients of the single mechanism – a single authority and a common fund – are as essential as the existence of uniform rules and regulations to ensure that holders of bank liabilities in any jurisdiction are treated the same and to severe the link between bank risk and sovereign risk. At the same time, the creation of a genuine single resolution mechanism is essential so that the single supervisory mechanism can operate effectively. Otherwise, it would have to deal with complex interaction arrangements with a constellation of national resolution authorities – each managing its own funds – which would make its task notably more difficult. In this context, the legislative proposal submitted last July by the European Commission is a good starting point. The EC proposes the creation of a single resolution agency or authority, ultimately reporting to the European Commission, which would manage a common fund fed by contributions from the industry. It is common knowledge that the Commission’s proposal is currently subject to intense debate. In particular, apart from the assignment of resolution powers to the European Commission, three matters are prompting most discussion. First, the legal basis of the proposal – anchored in Article 114 of the Treaty – is being questioned by some countries, which even raise the need for a reform of the Treaty. This is despite the favourable opinion on the proposed legal basis of the Council’s legal services, the European Commission and most Member States.
Sources: RCP Database (Version 2.0.5), SMHI scenario data and SMHI Klimatologi [Climatology] report series, no. 41  Second, we know that climate change has economic consequences, but their magnitude is uncertain. Climate change affects the economy via physical risks and transition risks. This is illustrated in Figure 2. The physical risks include different types of extreme weather and gradual warming. Storms, heatwaves and cloudbursts will probably become both more common and more serious in a warmer climate. The gradual warming will lead to smaller harvests, changes in ecosystems, melting glaciers and rising sea levels. Such things affect both households and companies. We have already seen serious examples of how the economy can be affected in connection with the drought in Sweden in 2018, the forest fires in California in 2019 and the bushfires in Australia at the beginning of this year. Transition risks are linked to the effects that arise when adapting the economic system to a less fossil-based economy. The effects may be gradual in that policy instruments, such as carbon taxes, lead to structural transformation when carbonintensive sectors lose competitiveness to greener sectors. The effects can also be more abrupt and create unexpectedly rapid movements in asset prices, such as in the value of coal and oil deposits. 3 [18]  To limit global warming to 2 degrees, the IPCC estimates that only around 20–35 per cent of the world’s known reserves of oil, gas and coal can be utilised.

And then, as a practical matter, once market processes have been stopped, how and when do  BIS Review 35/2001  you get things started again, particularly if needed corrective policies still have not been convincingly and transparently implemented? –  To sum up, I believe the one size fits all disposition inherent in the standstills approach risks making situations much worse than they need to be. The only thing that strikes me as predictable under such an approach would be that market access would be harmed across the board. Just as bail-outs may encourage too much risk taking, efforts to orchestrate preemptive bail-ins may encourage too little. A minimalist approach to payment suspensions This is not to say that payment suspensions always can and should be avoided, or that ever-larger bailouts are desirable or feasible. I would note that in December 1997, we at the New York Fed played an important role in encouraging creditors from around the world to begin working with the Korean authorities to find a solution that complemented the courageous policy actions of the then new government. This effort, which began with commitments to maintain inter-bank credit lines and culminated in a refinancing of these claims, was but one of many times we have helped borrowers and creditors find mutually beneficial solutions.
Paul Fisher: An unconventional journey – the Bank of England’s asset purchase programme Speech by Mr Paul Fisher, Executive Director for Markets and Member of the Monetary Policy Committee of the Bank of England, based on a presentation to contacts of the Bank’s Agency for the South-West, Stonehouse, Gloucestershire, 11 October 2010. *  *  *  In March 2009 the Bank of England’s Monetary Policy Committee (the MPC) embarked on an “unconventional” journey. Having cut Bank Rate to an historic all-time low of just half of one per cent, the MPC initiated a programme of asset purchases financed by the issuance of central bank reserves – commonly known as “Quantitative Easing” or QE. 1 To date the Bank, in line with MPC decisions, has bought £ of assets, equivalent to some 14% of UK annual nominal GDP. In this talk, I would like to briefly recap on why we started the QE programme and how well it has worked. I then want to explain some of the details behind why it was done the way it was and some technical details on what we plan going forward. Let me be clear upfront that the purpose of this is to share some of our broader thinking about the asset purchase programme, not to drop any hints about the future direction of monetary policy.

But I want to emphasise that such an outcome would not mean that the public finances have been made worse off. The ongoing dynamic effects of the programme will have been to make it cheaper for the Government to issue its debt in the interim. More importantly, over the lifetime of the programme, it would have delivered great benefits to the public purse by stimulating the economy and avoiding deflation: the increase in taxes received as a result of higher nominal GDP should be an order of magnitude larger than any financial deficit on the purchases themselves. To genuinely assess the impact on the taxpayer, one would have to take these and other factors into account. The counterfactual story will never be known precisely but the  13  Speech available at http://www.bankofengland.co.uk/publications/speeches/2010/speech437.pdf. 14  The DMO’s objectives include: “to conduct its market operations, liaising as necessary with regulatory and other bodies, with a view to maintaining orderly and efficient markets and promoting a liquid market for gilts.” See page 31, “Debt and Reserves Management Report, 2010–11”, HMSO, March 2010. BIS Review 135/2010  5  scale of the boost to the economy means that the all-round financial benefits for the public finances should far outweigh any cash deficit that might be left at the end of the programme. The gilt sales programme will not be the only technical issue surrounding an exit from unconventional policies. The Bank is also likely to re-introduce its reserves averaging framework for commercial bank reserves, for example.
Reforming and adapting financial regulation remains an urgent priority. G20 Leaders have agreed on detailed principles and a roadmap. The newly formed Financial Stability Board has the difficult task of steering regulatory reform. We are very fortunate that the FSB, as well as the Basel Committee, has been enlarged and become a true reflection of the world economy. As you may know, the European Union is moving towards the creation of a new European Systemic Risk Board (ESRB) which will be responsible for macro-financial supervision and will draw extensively on the resources and expertise of the Eurosystem. In France, the Government has decided to create a single authority responsible both for banking and insurance supervision, with very close links to the Central Bank. This will enable us to look at the state of and developments in the financial system from a truly systemic perspective. Much remains to be done. Let me outline the main objectives. In the current circumstances we should (1) try and keep up the momentum in the pursuit of reforms, (2) achieve balance in the implementation of the agenda; and, (3) ensure consistency between our regulatory actions and macroeconomic policy. Keeping up the momentum Over the last few weeks, major international banks have announced impressive quarterly profits. It is striking that these performances were achieved only a few months after some of those same institutions came very close to failure. This might give the impression that the financial sector has recovered its balance and that no further reforms are necessary.

As a result, dealers were, it is true, able to carry high levels of inventory and to accommodate easily shifts in the demand for market-making. But they were also vulnerable to falls in asset prices and tightening in wholesale markets conditions. When faced with severe stress, they were forced to withdraw from market-making altogether. In short, when conditions became really testing, market liquidity, like bank capital, proved to be an illusion. With regulation tighter, it may well be harder for market-makers to absorb inventory when end investors wish to off-load assets; market liquidity may start to fall away at an earlier point. The risk of another complete failure of market liquidity should be much reduced. But market participants will not always be able to sell what they want, where they want and when they want. BIS central bankers’ speeches  5  Investors need to recognize this change in market structure and adjust accordingly. In this respect it is perhaps worth observing that it is currently quite puzzling that, when market participants seem to be worried about market liquidity and the impact of regulation on market making, liquidity risk premia seem to be so compressed. It does raise questions over whether liquidity risks have been properly priced. Central bankers are, of course, supposed to worry about new risks. But I would not want to leave you with the impression that nothing has improved in the financial stability world.
The financial and banking system provides vital financial services to the public. It is also a channel through which the central bank’s monetary policies are implemented. In the efforts to preserve financial stability, a careful balance is made in achieving the objectives of a sound and stable financial system with that which is efficient and effective in meeting the requirements of the economy. This is so that the system is innovative and competitive, while at the same time, the risks do not undermine the stability of the system. In Malaysia, derivatives are generally used as hedging instruments and to a limited extent to enhance yield. Derivatives have allowed banking institutions to increase product innovation without losing their ability to manage the increased risks. With the advent of credit derivatives and Basel II proposals, derivatives have been more widely recognized as a risk mitigation technique which could also economise on capital adequacy requirements. In 2003, it is estimated that the notional value of total outstanding OTC derivatives, comprising interest rate and foreign exchange forwards, swaps and options, grew by more than two fold in Malaysia, to RM 171 billion over the last four years. It is important to note that statistics on OTC derivatives are difficult to capture, and that notional amounts are not an accurate reflection of the actual risk exposure to financial institutions. Between 1999 and 2003, it is estimated that the average annual growth in interest rate and foreign exchange OTC contracts collectively and in aggregate is about 40 percent.

On behalf of the Supervisory Board I would like to thank Lilja Steinþórsdóttir for our pleasant work together. In her place, the Supervisory Board appointed Stefán Svavarsson Chief Auditor. Financial institutions compete fiercely for talented employees, which is not surprising given the pace at which the Icelandic banks’ activities have expanded. It is vital for the Central Bank to have as capable employees as possible in its service. It must take prevailing conditions into account to ensure that this is the case. On the Supervisory Board in 2006, Ólafur G. Einarsson resigned from the post of Chairman which he held since 1998. Helgi S. Guðmundsson was elected Chairman in his place. On behalf of the Supervisory Board I would like to thank Ólafur G. Einarsson for his particularly successful leadership during his years as chairman. The Supervisory Board held 22 meetings during the year. I would like to thank the members of the Supervisory Board for their pleasant cooperation and fine work. I also thank the Board of Governors and employees of the Bank for their very good work during the year and fruitful collaboration with the Supervisory Board. 2  BIS Review 34/2007
Regional Network surveys normally include supplementary questions on special topics, and over the past year, many of the special topics have concerned prices. We think they give us better insight into price drivers than the standardised questions we asked previously. We will continue to ask network contacts about prices when relevant, such as in the upcoming survey that will be published in March. If we learn that some of these questions adequately capture future price increases, we can include them in our regular questionnaire. It is also useful to look at similar surveys in other countries, as Norges Bank Watch points out. Norges Bank Watch discusses monetary policy trade-offs in an environment of high inflation, and whether the costs of high inflation after a cost-push shock are exaggerated in our modelling system. They point out that an optimal monetary policy response depends on the nature of the economic shock and the transmission of monetary policy. At the same time, the cost of high inflation must be measured correctly. Let me first say that these are the very questions that have featured in the discussions of our Monetary Policy and Financial Stability Committee over the past year. Among other things, we have devoted considerable time to assessing the effect of higher interest rates on household disposable income and the relative importance of the nominal and real interest rate. The results were also presented in a box in the June 2022 Monetary Policy Report.

They point out, for example, that the Government's electricity support scheme for households substantially reduced consumer price inflation when it was introduced. Measures that reduce inflation directly will, at the same time, prop up household purchasing power and contribute to keeping pressures in the economy elevated. The overall effect of measures of this type is therefore uncertain. When there is little spare capacity and inflation is high, it is advantageous that monetary and fiscal policy pull in the same direction. The policy rate affects the economy broadly and primarily impacts aggregate demand. Fiscal policy measures can, within budgetary limits, be more targeted. The fiscal stance is one of several key assumptions underlying our forecasts and policy rate decisions. It is our experience that the Bank's response pattern is well understood by the fiscal authorities. Norges Bank Watch also questions our estimation of the output gap during the pandemic. They present an alternative approach to estimating capacity utilisation in the Norwegian economy showing that the lockdown in certain sectors led to a steeper fall in potential output than according to our estimates. Norges Bank Watch acknowledges the  1/3  BIS - Central bankers' speeches  considerable uncertainty surrounding such estimates but contends that their estimate could, in isolation, suggest that the policy rate should have been kept somewhat higher through the pandemic. We find this to be useful input on how the output gap should be estimated.