samchain/econo-pairs-v1 huggingface dataset:
However, the procyclicality debate should include not only whether capital requirements will rise and fall with economic cycles, but also whether the new requirements provide useful signals to banks, supervisors, and market participants that will lead them to take appropriate action in response to a changing economic environment. With more gradations in the Basel II framework, banks, supervisors and the marketplace will have an early warning signal when credit quality deteriorates and when it improves. A more risk sensitive  4  BIS Review 35/2005  measure should give bank managers accurate signals to adjust lending policies in a more gradual manner early in cycles, dampening severe contractions or expansions in lending. With its emphasis on planning and risk analysis, the new Accord will require banks (and their supervisors and rating agencies) to think more systematically about the level of capital needed during upturns in order to weather downturns. Herding behavior Another concern that some have raised is that the uniformity imposed by Basel II in calculating capital requirements will result in homogeneous assessments of risk, which in turn will amplify herding behavior in the market place. The new Accord does set requirements for bank risk management by requiring certain types of inputs, and it does set the correlation factors for asset types, but it does not mandate that all banks must have the same assessment of their inputs.

The two largest banks, which account for half of the domestic banking sector, had prospective capital needs of close to EUR 8 billion – or 44% of GDP. This is what the independent due diligence exercise revealed in February 2013. If the sovereign had shouldered these massive recapitalisation needs, debt would have risen to 145% of GDP. This would have critically endangered public debt sustainability. At the same time, traditional ways of burden sharing by the private sector bank creditors were limited, given little junior debt outstanding in banks. All this made the situation in Cyprus highly challenging and exceptional. One needs to bear in mind the starting conditions when assessing the design of the EU/IMF programme, to which I will now turn. Key elements of the EU/IMF programme  Three key objectives guided the negotiations of the MoU: first, to reduce the risks posed by the financial sector; second, to preserve debt sustainability; and third, to restore the conditions for sustainable and balanced growth. Combining these three objectives has proved to be a challenge, to say the least. Not only did the programme have to strike the right balance between short-term financial stability concerns and long-term debt sustainability considerations. It also had to be framed within a political context which requires unanimous decisions in the Eurogroup and ESM decision making bodies. Due to these exceptional economic and political circumstances, programme negotiations dragged on for too long, and the situation of the banking sector became critical. This forced the ECB to act.
It is almost as high as median income in the EU, and not that far from the level in Sweden. Nor does the EU definition of low income capture the considerable rise in median income in Norway over the past 15 years. In relation to the 1994 low income threshold, measured in real terms, the low income group has decreased by more than half, falling particularly sharply in the 1990s when unemployment also exhibited a sharp decline. In addition, turnover is high in the low income group. Around a fourth of the group comprises those aged 16-24, while one fifth are aged 64 and over. Many of those with low incomes are students or old age pensioners. Thus, low income only becomes a social problem when people remain economically inactive for much of their lives. Both labour market developments and short-term financial incentives can lead to this kind of social exclusion. Social security schemes can also over time become poverty traps, locking in many people who would have been unemployed for a period in other countries. A cause for particular concern is the rising number of young people that receive benefits on a permanent basis. I will now turn from today’s income distribution across groups to the distribution across generations in Norway. The Norwegian national insurance scheme is a pay-as-you-go system. This means that a given year’s pension payments from the scheme are covered by government budget revenues that year.

•  The government budget – growth in public spending – influences the real krone exchange rate and the size of the internationally exposed business sector in the long term. •  Wage formation and economic structures and incentives determine how efficiently labour and other economic resources are used. Even if inflation fluctuates somewhat from one year to the next, inflation has remained fairly close to target over time. Inflation was particularly low in the years around the turn of the millennium when cheap goods flowed from Asia into our country while productivity in the business sector grew sharply. The rise in prices for domestically produced goods and services was also low. Interest rates were cut in response to lower inflation. Economic agents could then expect inflation to gradually move up to target over time. Growth could also remain high for a period without a rapid rise in inflation. Low interest rates made it possible for us to make use of the potential for higher consumption and investment. There are now signs that price and wage inflation is on the increase. Higher food and energy prices are fuelling inflation in other countries. Thus, we cannot assume that prices for imported goods will continue to fall. Moreover, domestic productivity does not seem to be improving as quickly as earlier. The rise in prices is therefore likely to quicken for goods and services produced in Norway.
And this, of course, means that movements in interest rates have, everything equal, a bigger (and may be less predictable) impact on the financial system, credit aggregates and asset prices. A lot of work remains to be done to precisely quantify that channel and disentangle its effects from those of the more “traditional” credit channel. Nevertheless, it is clear that, in the future Central Banks will need to pay greater attention to that specific impact of their decisions on the financial system and the economy. The risk taking channel provides the best rationale for “leaning against the wind” when financial imbalances tend to grow. 4/ – the last question is especially topical here, in Korea. How much should we care about the “global monetary stance”? This is not an easy concept to define, or to use from an  4  BIS Review 76/2010  operational point of view. On the other hand, we know that some determinants of price stability are global: they depend on the combined effects of our national policy stances. Put it differently, there are externalities associated with our different monetary policies. For instance, divergences in monetary policies, however justified by national circumstances, can fuel capital flows and create financial imbalances. In theory, those problems can be dealt either with total exchange rate flexibility or , on the contrary, fully sterilized interventions and the dynamic use of foreign exchange reserves. Neither of those polar solutions appear fully attractive or feasible. This is why the search for new “financial safety nets” i.e.

This provision builds up a buffer during the benign part of the cycle, which starts to be released when recession comes knocking on banks’ doors. Counter-cyclicality is intrinsic to dynamic provisions and part of its usefulness can be seen in the resilience shown so far by Spanish banks in the current crisis. Furthermore, its direct impact on the profit and loss account (reflecting losses at a time when these losses are really being built up in balance sheets) constitutes a way to make banks more aware of how credit must be priced, reducing the underestimation of loans risk premia and, to some extent, compensating the relaxation of credit granting standards in good times. It also delivers the right information to investors about the financial position of the bank. In all, dynamic provisioning allows a proper recognition of credit risk. I must also admit that there are voices raised by some institutions that do not agree with this view, and particularly, accounting standard setters. In this respect, we should call for further dialogue between accounting rule setters and supervisors as well as a clarification regarding roles and objectives of each of them. I really think that our objectives are compatible and that delivering the relevant information to investors should not be an impediment for supervisors to ensure the stability of the banking sector by promoting the most adequate measures that experience and results have proved to be useful. Very much in line with dynamic provisions, the buildup of capital buffers also deserves room in our discussions.
  Be aware of and act, as appropriate, in respect of non-compliance with minimum reserves and statistical reporting requirements, in accordance with Regulation (EC) No 2818/98 of the European Central Bank of 1 December 1998 on the application of minimum reserves and Regulation (EC) No 2819/98 of the European Central Bank of 1 December 1998 concerning the consolidated balance sheet of the monetary financial institutions sector.   Draft proposed Circulars and Monetary Circulars for approval by the Governing Council.   Approve internal circulars, to be endorsed by the Governor.   Authorise expenditure and order the related payments.   Submit the Banco de España’s budget proposal, annual accounts and proposal for distribution of profit to the Governing Council for approval. 9  ANNEX 3 - Rules for senior officers following termination of office. Spanish and European framework Institution  Applicable regulations  Law 13/1994 of 1 June 1994 of Autonomy of the Banco de España. Banco de España  Position  Term  Governor and Deputy Governor  2 years  Elected members  2 years  Limitations Scope of prohibition  Internal Rules of the Banco de España Code of Conduct of the Governing Bodies of the Banco de España.

- Separation of the supervisory function from the monetary policy function: officials shall respect the separation of the ECB’s specific tasks concerning policies relating to prudential supervision from its tasks relating to monetary policy, as well as other tasks. - Public appearances and public statements: officials shall carry out their duties and responsibilities as, and consider themselves in public appearances to be, representatives of a high-level ECB body. - Relations with interest groups: while maintaining the open, transparent and regular dialogue with representative associations and civil society required by the Treaty on European Union, officials shall at all times, and in particular in their interactions with interest groups, observe their independence and professional secrecy obligations, and the basic principles established in the Code of Conduct. - Declaration of Interests: officials shall on an annual basis submit to the Ethics Committee, for assessment and onward submission to the President, a signed Declaration of Interests which shall include information about the member’s previous occupational activity, private activities, official mandates and financial interests, as well as about the gainful occupational activity of their spouse or partner, that may raise conflict of interest concerns. - Conflicts of interest: officials shall avoid any situation which may raise conflict of interest concerns.
We cannot – as in the 1970s – allow the interest rate to remain low over a long period of time in an attempt to achieve permanently higher output. This would lead to wide fluctuations and high inflation. Seldom are the considerations underlying interest rate setting pulling in such different directions as today. In many quarters, it is now argued that the interest rate should be raised rapidly to restrain house price inflation. This is understandable in the light of the severe effects that house price inflation and high debt have had on many countries. In other quarters, it is argued that the interest rate should be lowered to keep down the krone exchange rate. This also seems well founded in view of the substantial challenges facing Norwegian enterprises. However, we cannot raise the interest rate and lower it at the same time. The interest rate is set to secure low and stable inflation. With strong growth in spending on goods and services or with falling demand, the interest rate can at the same time stabilise developments in output and employment. In this case, there are no conflicting objectives. BIS Review 15/2010  13  When inflation expectations are firmly anchored, we can give weight to the path for output and employment when we set the interest rate. In the assessment of the outlook for inflation and output, we also look at house prices, total credit and the krone exchange rate. In this respect, these variables are taken into account when we set the interest rate.

But in view of persistently low external interest rates, such a policy would likely have resulted in a sharp appreciation of the Norwegian krone, and inflation and activity in the Norwegian economy would have fallen to too low a level. The weak external environment is thereby also contributing to keeping Norwegian interest rates low. With firmly anchored inflation expectations, Norges Bank can today give weight to stabilising economic developments when setting the interest rate. Inflation targeting has become more flexible. We have chosen to take a long-term approach to bringing inflation back up. But we will not lose sight of the inflation target. Should the outlook for inflation or growth weaken considerably, there will still be room for manoeuvre to counteract such developments through monetary policy. Monetary policy in the light of new banking sector regulation The financial crisis taught us some important lessons. First, the crisis illustrated that low and stable inflation is not sufficient to ensure financial stability. Second, the crisis clearly revealed shortcomings in the regulatory framework for banks. As a result, banking and financial regulation is now undergoing change worldwide. Regulation and supervision are the authorities’ most important instruments to prevent financial instability. In March, the Government presented a legislative proposal on new capital adequacy requirements for banks. The proposal is in line with the EU’s new regulatory framework. A key element in the new framework is capital buffers that banks will be required to hold in addition to the minimum requirement. This will increase banks’ loss-absorbing capacity.
This is because a given basket of goods today costs considerably more if bought in Europe or the USA using exchanged euro or dollars than if bought in Sweden. Sometimes they talk about "hamburger parity" as a simple illustration of this concept, i.e. compare what a certain well-known hamburger costs in different countries. And this brings us to the fact that the krona should be valued approximately ten per cent higher in order to buy the same hamburger here as in the USA. More complicated calculations of the balanced real exchange rate provide similar results, perhaps even slightly more than ten per cent. The Riksbank's forecast of the path of the krona shows a similar development. Now we in Sweden are not alone in having seen our currency weaken; other industrial nations with a floating exchange rate are seeing the same thing, e.g. Canada, Australia and New Zealand. This is probably due to the unease on the financial markets during the spring, as times of trouble often entail capital moving away from the less liquid currencies and fleeing to those perceived as more stable and liquid, primarily the US dollar. On top of this comes the development on the Swedish stock exchange, which appears to have played a major role recently. The foreign exchange market and the stock exchanges have been strongly correlated for a period of time, particularly since the stock exchange fell. Since mid-2000, 85 per cent of the variations in the -SEK/EUR exchange rate can be explained by variations in share prices.

Although the international economic outlook is somewhat less favourable than in March, the upswing in the global economy is likely to be maintained in the months ahead. In the US, in particular, the latest production and labour market indicators have been disappointing. Due to the high commodity prices and the production losses in Japan, the SNB has revised its 2011 growth forecast for the advanced economies downwards to some extent. Moreover, numerous countries are planning to undertake additional cost-cutting measures in the year  BIS central bankers’ speeches  1  ahead. The rise in commodity prices since autumn of last year is expected to result in significantly higher inflation worldwide in 2011. Swiss economic outlook According to the SECO estimate, the growth of real GDP in Switzerland slowed in the first quarter, mainly because of the muted advance in private consumption and equipment investment. By contrast, exports recorded a marked gain as a result of robust international demand, particularly from Germany and Asia, despite the strength of the Swiss franc. The strong momentum in construction also supported growth. Utilisation of technical capacity continued to pick up and was above the long-term average in manufacturing; in the construction sector it actually attained a record high level. The recovery on the labour market also continued. After a massive increase during the crisis, measures introducing short-term work have largely been retracted. In May, the seasonally-adjusted unemployment ratio decreased to 3.0% and companies are reporting more difficulties in recruiting qualified employees.
My second observation is that this is a difficult topic, one that generates very heated discussions, but one that is necessary as the industry tries to tackle the complex issue of what can be done to restore public faith in the financial industry. This begins with questions like: •  What is the source of the problem? •  Are the problems we are experiencing unique to financial services? •  What incentives and disincentives – compensation, fines, prosecutions and other measures – need to be altered for behaviors to really change? This is a topic that we will surely revisit a number of times over the coming months as both the industry and the supervisory community begin to answer some of the tougher questions. Complexity Let me now turn to the third element of the supervisory framework: reducing complexity. In large measure, this translates into sound recovery and resolution planning. The development and implementation of a credible resolution mechanism for large, global banks is a must. By credible, I mean that if a failure of one of these financial institutions arises, then home authorities will proceed with the resolution plan, rather than intervene to prevent a failure. Although the specifics of the resolution mechanisms will necessarily vary to some extent across jurisdictions, the goal is common: to be able to resolve any large, global firm regardless of its home jurisdiction without taxpayer funds and in a way that minimizes the knock-on effect to financial markets and other financial institutions.

Earlier this year, the Federal Reserve issued guidance for the largest firms that outlined five “capabilities” that should be at the top of the list of “to dos”: •  Collateral management: firms should have effective processes for managing, identifying and valuing collateral it receives;  •  Effective management information systems (MIS) around payment, clearing and settlement activities: firms should have a comprehensive understanding of obligations and exposures associated with payment, clearing and settlement activities;  •  Stronger analytics around funding: firms should have the ability to analyze funding sources, uses and risks of each material entity and critical operation, including under stress;  •  MIS by legal entity: firms should have demonstrated MIS capabilities for producing key data on a legal entity basis; and,  •  Arrangements for shared or outsourced services: firms should have robust arrangements in place for the continued provision of shared or outsourced services needed to maintain critical operations. While there are many other areas that supervisors/regulators and legislators need to continue to work on to make cross-border resolution a reality, these five areas are ones that we have highlighted for near-term focus by firms. Another important element to preventing the failure of a firm is ensuring that firms can respond to any weakness by having recovery plans that are implemented well before resolution becomes necessary.
I would now like to turn briefly to the experience of the Central Bank of Malta in dealing with these policy issues over almost 50 years of its existence. Malta is an extremely small, open economy, highly dependent on international trade for its prosperity. The Bank’s monetary policy objective was initially set as the promotion of “the orderly and balanced development of Malta and a rising level of employment and income consistent with the maintenance of monetary stability in Malta and the external value of the currency”. In practice, among these multiple objectives, the Bank gave priority to maintaining stability in the external value of the Maltese lira (or pound as it was initially known). An exchange rate peg was seen as necessary to support foreign trade and inward investment from abroad. Moreover, given Malta’s  2  For an account of the euro area’s exchange rate policy during the first decade of its existence, see Lorenzo Bini Smaghi, “The euro area’s exchange rate policy and the experience with international monetary coordination during the crisis”. Speech delivered on 6 April 2009 in Brussels. 2  dependence on imported goods to satisfy domestic consumer demand, the peg was also seen as a prerequisite to safeguard domestic purchasing power. 3  Throughout its existence, therefore, the  Bank’s monetary policy orientation was always focused on a fixed exchange rate as the nominal policy anchor.

-  Persons filling key roles should be expected to have the necessary skills and experience to carry out their tasks appropriately. The supervisor has a role in assessing the qualifications and integrity of these key personnel through fit and proper tests. 2  BIS Review 38/2005  -  Depending on the size and complexity of the bank, appropriate structures and control mechanisms such as strong internal audit, external audit and the oversight function of the board (directly or through supporting committees such as audit committees, risk committees, compensation committees etc) support the effective operation of a supervised bank. -  Other elements, such as the appointment of independent board members who can exercise objective judgement, are usually recognised as good practice. Basel II and corporate governance Let me turn now to the Basel II capital framework. I am asked to speak about Basel II quite frequently, but while I am often requested to talk about the mechanics and the impact of the new framework, I am seldom asked about its corporate governance aspects. This is unfortunate because, in my view, Basel II is fundamentally about better risk management anchored in sound corporate governance. With that in mind, I would like to focus now on three areas where I believe Basel II will contribute to more effective corporate governance. I will refer to these as the three C’s: controls, culture and clarity. Controls The first “C” is controls.