samchain/econo-pairs-v1 huggingface dataset:
Today, fierce competition is one of the factors that depress returns despite the increase in risks; it might prompt some banks to reduce fees in order to increase their market share. And tomorrow, the credit cycle might reverse and  BIS central bankers’ speeches  3  default rates surge. Such a scenario ultimately raises the issue of default-recognition methodologies. And last but not least, there is also the reputational perspective. By acting as underwriters in leveraged-finance deals, banks also distribute a certain amount of exposure. In 2014, around € billion of leveraged-loan exposures were distributed. Nevertheless, from a reputational perspective and to avoid potential mis-selling practices, the quality of the distributed assets is of the essence. And currently, 21% of exposures retained by banks are covenant-lite, against 74% of those that they distribute. To sum up: banks appear to be increasing their exposure to the growing market for leveraged finance. The leverage levels of borrowers are increasing, while constraints on loan contracts are being removed. As I said earlier on, there is no such thing as a free lunch, and ultimately, it is the task of risk managers to ensure that the price is adequate – risk and return have to remain in balance. Among other things, this requires forward-looking risk assessments, conservative collateral valuations, continuous monitoring of the borrower’s risk profile, and rapid reactions to changing circumstances. Addressing risks – risk management and banking supervision The market environment I just described undoubtedly calls for effective risk management in order to curb potential excess.

It is these risks that are particularly relevant for risk management in banks, following an economic dictum that has been attributed to several people over the years, including an author of science fiction novels and an American General. The general was Leonard Porter Ayres, who also worked as a statistician and economist. When asked by a group of reporters to impart some words of wisdom gathered from his long years of economic study, Ayres replied: “It is an immutable economic fact that there is no such thing as a free lunch.” I am pretty sure that everyone in this room has used that phrase at least once. Translated into the language of finance, it reads: whoever wants to make a profit has to take a risk. The returns, however, are mostly generated right away, whereas the risk might only materialise in the future. This is where good risk management comes into play. Banks and the entire banking system have indeed become much more resilient to shocks. Nevertheless, good risk management is still necessary. It should enrich decision-making by providing a medium and long-term view, and it should highlight the downside to every upside. In a way, risk managers have to be the spoilsports. The same is, of course, true for banking supervisors. One of the tasks of banking supervisors is to ask questions when things are going well, and to intervene when they are not. Therefore, risk managers, as well as banking supervisors, explicitly advocate a forwardlooking, risk-based approach.
Urban Bäckström: The importance of a well-functioning stock market Remarks by Mr Urban Bäckström, Governor of Sveriges Riksbank, at the World Federation of Investors 20th World Congress, Stockholm, 7 June 2002. *  *  *  First I want to express my gratitude for the invitation to attend your congress and briefly discuss with you the importance of a well-functioning stock market. Let me start by saying that just as it is important that networks for transport, electricity and telecommunications function properly, so is it essential that, for example, payments can be transacted, capital can be saved and channelled to the most profitable investment projects and that both households and firms get help in handling financial uncertainty and risk as well as possibilities of spreading consumption over time. Financial markets constitute an important part of the total infrastructure for every economy that has passed the stage of domestic production. The financial system performs three main tasks: firstly, it handles payments; secondly, it channels savings to investments with a good return for future consumption; and thirdly, it spreads and reduces economic risks in relation to the players’ required returns. A smooth functioning of all these activities facilitates economic growth in that lower costs and risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity. The stock market is one of the most important sources for companies to raise money.

At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. … Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children’s education and their own retirement become frightened. There appears to be no rhyme or reason to the market, only folly.” This is a quote from the preface to a recently published biography about the well-known and long term 1 value oriented investor Warren Buffet. Buffet began his career forty-five years ago with only 100 U.S. dollars and has over the years built himself a multibillion-dollar fortune. I quote the passage to illustrate a view held by some of what was going on in the stock market during the end of the 20th century and the beginning of the 21st. Learn from new theories From experience we know that investors may temporarily pull financial prices away from their trend level. Over-reactions can occur so that excessive euphoria drives prices unduly high, just as undue pessimism can push them down too far. New theoretical and empirical arguments have been put forward against the notion that financial markets are efficient. According to the efficient market hypothesis, it is only changes in fundamental factors, such as profits or dividends, that ought to affect share prices.
This element of surprise illustrates the need to carry out stress tests, that is, to test positions against extreme and unforeseen events – such events that may perhaps have a one in a million chance of happening according to the statistical correlations. Stress tests are being carried out to a greater extent, but there is a need to work on and refine the methods. Another weakness lies in the difficulties in identifying the risks that are associated with structured products and the valuation of these. Too many investors have relied on the rating institutes’ ability to assess risk and have thereby failed to make their own assessments. In some cases they appear to have relied on the credit rating institute to such an extent that they have failed to take liquidity and market risk into account, that is, risk that is not captured by the credit rating institutes. In this context one may also note with some surprise that the innovative development has gone so far that certain more or less tailor-made products are not traded and thus cannot be priced on the market but must be valued with the aid of complicated mathematical and statistical models. This creates problems when regulations and auditors demand a valuation of the products to market price. Perhaps it is so that not all ideas from the first years of this millennium deserve to survive.

There is need of better transparency rather than further regulation The debate about regulation of hedge funds’ activities has gained fresh impetus in the wake of the crisis – somewhat surprisingly, since the blame can hardly be placed on the hedge funds. My view in this matter is that there is no reason to introduce specific regulations for hedge funds, apart from greater insight where it is lacking. Such measures threaten the positive contribution hedge funds make, not least under the conditions which we have now experienced. For those of us who reflect on stability in the financial system, it is however extremely important that the major banks’ and the hedge funds’ other counterparties can manage their risk. If they manage their counterparty exposures in a correct manner, that is they take sufficient collateral and can manage any liquidity problems, there is no reason to specifically regulate the hedge funds. However, periods of market turmoil tend to entail certain unpleasantness. I consider that the ensuing debate should focus on market discipline in a broad sense. Transparency is a key word in this context. By means of clear and open information about strategies and risk taking conditions are created for good market discipline. Good insight is also of the utmost importance to those of us who oversee financial stability. This gives us a chance to decide where the risks are. Now that I speak of the need for market discipline, I would like to mention the global association, the Financial Stability Forum (FSF).
The large increase in household debt over the past fifteen years coincides to a large degree with the rise in housing prices (see Figure 7). One important reason for this is that the supply of housing has been small in relation to demand. After the crisis in the 1990s, housing construction in Sweden has been remarkably low, lower than in most comparable countries. The reasons are not entirely clear, but there are a number of explanations that are usually given, such as high construction costs, demanding regulations and regulated rents. I do not  11  Jeremy Stein at the Federal Reserve’s Board of Governors has expressed it as the advantage of monetary policy being that it “gets in all of the cracks” (Stein, 2013, p. 17). The Riksbank has also raised this argument in various contexts, see for instance, Ingves (2010) and Nyberg (2011). 12  In a study of 18 OECD countries over the period 1921–2011, Bordo and Landon-Lane (2013) show that expansionary monetary policy has a significant effect on asset prices, particularly during periods when asset prices have increased rapidly, followed by a later severe downward adjustment. Maddaloni and Peydró (2013) find in a study of data for the euro area that banks ease their credit conditions during periods with low policy rates, even when the borrowers’ credit risk is held constant. 13  See, for example, Blanchard, Dell’Ariccia and Mauro (2013), Borio (2013), Carney (2013), Smets (2013) and Stein (2013).

As we know from this recent crisis, incentives and a disproportionate focus on short term gains played a central role. This does not mean that we should put on hold initiatives that would promote a more competitive, efficient and sustainable insurance sector. But it does mean that we need to ensure that we have sufficient confidence in the system of checks and balances that exist to safeguard the interests of financial consumers and the long term viability of the industry. Corporate governance is clearly an essential part of that system of checks and balances. As the Government embarks on the Economic Transformation Programme, demand will increase for new and innovative solutions for investment, protection and risk diversification. As presented in the Bank’s Financial Sector Blueprint, expectations are for the insurance industry to be able to deliver a wider range of insurance products that include medical and  BIS central bankers’ speeches  1  health insurance, risk protection offerings for small and medium businesses as well as products supporting the global expansion of Malaysian businesses. Stronger insurance companies are also expected to expand beyond our domestic shores. These developments present tremendous opportunities, but also new risks that must be managed. As individual insurers chart their own paths in this landscape, strong governance systems will assume greater importance to keep business standards in check and to guard against actions that would put the long term interests of the company at risk.
Thirdly, it is educational (and frightening) to see exactly how the shortage of liquidity brought about Enron's downfall when questions were raised regarding the quality of the balance sheet and the market lost confidence in the company. Enron's balance sheet had some similarities with that of a bank, in that the liabilities side consisted of borrowing that proved to be rather short term, while the asset side was difficult to value and had much poorer liquidity. A bank that found itself in an equivalent situation could face a run, with customers withdrawing their deposits, and this was really what happened to Enron. This makes some form of liquidation necessary, even if there later proved to be some value left in the balance sheet. The experiences of the Enron case led to investors temporarily fleeing companies with complicated constructions and ownership or companies suspected of being rather too creative in their accounting. However, this seems to be just a temporary phenomenon. Companies' credit spreads have not been affected as much as was feared and the stock market shook a little, but has begun to recover again. The effect appears rather to have been that accounting methods and procedures have been voluntarily revised, a development welcomed by both market operators and authorities alike. Perhaps the Enron case can become a further indication that the markets have actually become more robust. However, the Enron collapse also illustrates clearly some of the risks that might arise when the markets grow in both significance and complexity.

Each country can then choose whether or not to publish the results of the assessment. A summary of the assessment is included in the IMF's annual assessment of member countries' economies. Dependence and complexity are increasing While the markets have thus (hopefully, I should perhaps add) become more robust, our use of them has grown. Households and companies have become operators on the financial markets, mainly because these offer better and cheaper services than those traditionally offered via the banks. An increasing percentage of the investments made are financed on the market through shares and bonds in other countries than the USA. This has become possible because households' savings are to an increasing degree channelled into shares and mutual funds. We use the financial markets much more than we did just ten years ago. This means that we have good reason to be concerned over their functioning. It has also meant that questions regarding financial stability have acquired greater importance on the international political agenda. At the same time as use of the markets has grown, new instruments are being traded that are increasingly complicated in structure and their risk content has become more difficult to assess. Various forms of derivative have been developed, for instance, to spread risks more efficiently. This in itself creates conditions for reducing the vulnerability of the banks as well as the financing costs of the investments. Essentially, this development benefits long-term growth. In recent years, the use of credit risk derivatives and securitisation has increased, for instance.
Page 9 of 18  Figure 1 Annual GDP growth (contributions, percentage points)  6  6  4  4 Non-mining  Total  2  2  0  0  Mining -2  -2 14  15  16  17  18  19  Source: Central Bank of Chile. Figure 2 Nominal annual exports growth  Contribution to annual GFCF growth  (contributions, percentage points)  30  (contributions, percentage points)  Total  20 10  Mining  0 Agricultural  -10 -20  30  9  9  20  6  10  3  0  0  0  -10 -3  -3  -20 -6  Construction -6 & other works -9 17 18 19  GFCF Machinery & equipment  Manufacturing -30  -30 -9 14  15  16  17  18  19  14  Source: Central Bank of Chile.

These are attributes that we have been strengthening over time and that we must hold onto in the face of new challenges. At the same time, we must be aware that the specific scope of action of the Bank is the macroeconomy and, in particular, the control of inflation and the safeguarding of financial stability. The process of recalibration of monetary policy was triggered by the drop-in inflation measured by the CPI and the policy response boosts economic activity because it seeks to reduce gaps in activity to ensure the convergence of inflation. Estimating greater trend and potential growth was the result of an analysis of macroeconomic phenomena and it influenced the adjustment of the MPR but does not ensure all the microeconomic or institutional conditions to take advantage of all the leeway that it potentially generates. Monetary policy may provide an additional cushion against external shocks, but it cannot shield the economy completely. For this reason, it is important that, at the end of this presentation, as in other opportunities, we understand the focus of the Board’s commitment: to keep inflation low and stable, as the main contribution that the Bank makes to the well-being of Chileans. The stability that this brings to the country should facilitate the contribution of other players to the same end purpose. Thank you.
As regards the Swiss franc, we have noted that the euro/franc exchange rate has for the first time reached its pre-9/11 level. The price losses on equities of the past few years - the SPI today is approximately 40% below its peak - have had a significant effect in Switzerland. They put pressure on both corporations and individuals, with foreseeable higher old-age provisions and nascent insecurity in this area being one of the concerns. The Swiss financial sector, which makes an above-average contribution to gross national product, has been particularly hard hit by the stock market correction. The cut-backs which are now necessary in the financial sector will put a strain on the Swiss economy for an extended period to come. Economic activity Economic activity in Switzerland weakened in the first quarter of 2003. According to preliminary estimates of seco, real gross domestic product contracted compared with the previous period and was again slightly below the previous year’s level. The renewed deterioration in the economic situation did not come unexpectedly. It was primarily the result of the recurring downturn of the global economy, which is partly a reflection of the uncertainties in connection with the Iraq war. Swiss exports were  BIS Review 27/2003  1  down again in the first quarter, and the foreign trade contribution became distinctly negative. Consumer spending had a slightly stabilising effect while investments continued to decline overall. Even though geopolitical uncertainties have meanwhile largely given way, the economic situation in Switzerland remains difficult.

We can preempt such a rise in inflation by tightening monetary policy at a later time. 2  BIS Review 27/2003  Relaxed monetary policy Our interest rate cut of 50 basis points last March was the last possible downward interest rate adjustment. Our intention was to resolutely counter the appreciation of the Swiss franc vis-à-vis the euro in the current difficult economic environment. So far, it has been a successful step: the Swiss franc has depreciated markedly against the euro. Monetary conditions have again become considerably more relaxed. For the time being, we intend to continue to implement an expansionary monetary policy and to support the economic recovery in Switzerland. Swiss franc investments are to remain unattractive in the foreseeable future. Economic recovery is still uncertain. There is even recurring talk of a deflation risk in Switzerland. We consider this to be a minimal risk. In a few months, inflation may well be negative. An actual deflation spiral leading to a strong decline in the demand for goods and in output is, however, highly unlikely as long as the Swiss franc does not appreciate inordinately. We shall therefore continue to take decisive steps to combat a tightening of the monetary conditions brought about by any significant rise of the Swiss franc against the euro. You will certainly have taken note of the high growth rates of the money supply aggregates in the last few quarters. The money supply aggregates are currently growing at rates last seen at the end of the eighties.
Eventually, this will be pulling the rug from under the financial sector, undermining confidence which is the basis for the financial market in general. I hope that this year the Association will be addressing this problem of self-regulation when the banking community is capable to reach agreements in a civilised way, develop rules on its own, and control their fulfilment. I believe that the maturity level of banks, the banking system, and the financial market certainly makes it possible to develop self-regulation in banking which is lacking now. Therefore, we are forced to act in this way imposing restrictions and sanctions. In my opinion, this is still not a long-lasting trend, and we should think about how we may progressively develop a self-regulation institute. Lastly, I would like to say just a few words about large-scale and longer-term priorities in regulation and challenges. As regards this issue, I am happy that we have a common view of these challenges associated with digitisation, the emergence of green finance, sustainable development in general, and cyber risks. These are really long-term problems we need to respond to. Probably, a digital ruble is one of the most frequently discussed topics today. From the very beginning when we started to prepare our consultation paper on this issue, we were aware that banks might be wary about this idea. However, digitisation is disrupting the entire payment market in a large number of countries, with consumption behaviour models also altering. The development of central bank digital currencies has become a worldwide trend.

4  BIS central bankers’ speeches  The regulation of the financial sector affects the country’s citizens Policy discussions in Sweden, in the EU, globally  Could be perceived as abstract Often technical  Behaviour of the financial sector  Effects on the real economy  Swedish citizens and consumers  Crises cost society enormous amounts GDP growth in Sweden, 1960-2010, SEK billion  Source: The Riksbank  BIS central bankers’ speeches  5  The real effects have a high social and economic price Unemployment in Sweden, 1985-2000, percentage of labour force  Source: The Riksbank  Problems in the banking sector impact the country’s citizens in many ways Via the real economy  Problems in the banking sector  Directly against bank customers  Via the public sector  Weaker economic development  Deposit guarantee Need for capital injections  Increased uncertainty  New banking relationships  Higher unemployment Lower wages Lower pensions  Higher taxes Deterioration of public welfare  Higher interest rates  New terms  Poorer economy for households  6  BIS central bankers’ speeches  A financial crisis will ultimately threaten basic social functions The financial system is central in the society  Household  Who can pay whom in a serious crisis? Household’s bank Grocery shop  Grocery shop’s bank  ?