samchain/econo-pairs-v1 huggingface dataset:
Alberto G Musalem: Why focus on culture? Remarks by Mr Alberto G Musalem, Executive Vice President of the Integrated Policy Analysis Group of the Federal Reserve Bank of New York, at the Institute of Law and Finance conference “Towards a New Age of Responsibility in Banking and Finance: Getting the Culture and the Ethics Right”, Goethe-University, Frankfurt am Main, 23 November 2015. *  *  *  Thank you to the Institute for Law and Finance for the invitation to speak here today. It is a pleasure to be at Goethe University. The New York Fed has, for the last two years, been part of an international dialogue on the reform of culture in the financial services industry. Why culture? Let’s begin with the following hypothesis: environment drives conduct. What each of us learned from our parents governs some of our behavior, but not nearly as much as any of us who are parents would like to believe. Place ordinary people in a bad environment, and bad things tend to happen. That said, place someone in a good environment, and good things tend to happen. This is just part of being human. We observe and adapt. Before continuing, I would like to clarify that the views I express today are my own and may not reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. Part of any organization’s environment is its culture.

After much careful study and  2  BIS central bankers’ speeches  planning for a year, the HKMA launched the Tracker Fund, an open-ended exchange-traded fund, in November 1999 and resold $ billion worth of stocks to 180,000 investors. We continued to recoup over $ billion in the next three years through the same mechanism. Ultimately, our market operation turned in a profit of nearly $ billion at prevailing stock prices at that time. 7. The experience of Hong Kong clearly shows that market failures do occur. In the example I have just outlined, market intervention by the HKMA proved to be bold and effective in securing the safety and soundness of Hong Kong’s monetary and financial system. It was, indeed, undertaken in a life-and-death but smokeless war on the financial front. Hong Kong prides itself on being one of the world’s freest and most open markets. Nevertheless, as a much smaller market compared with our American and European counterparts, Hong Kong could fall prey to global predators, resulting in market failures. If the markets were allowed to plunge in free fall, the entire financial system might face a total meltdown. It was at such a critical moment that the Hong Kong SAR Government was left with no other option than to take unprecedented action. Today, with 17 years behind us, Hong Kong remains a free and open market and an international financial centre as before, and any lingering doubt has vanished. After all, “actions speak louder than words”.
In spite of this, such flows may not be considered as one-time effects, but as flows that are characteristic for the process of transition and which have to be incorporated in the monetary policy conduct. The implications of the capital inflow and appreciation of the domestic currency, as well as the reactions of the macroeconomic policy decision-makers will vary from case to case and will depend on the features of the economy itself. Balance of payments deficits, potential factors that may cause their deepening and the liberalization of the capital flows, obviously pose numerous challenges for the monetary policy, both regarding the monetary strategy and the exchange rate regime and regarding its operational setup. The central banks, as key institutional macroeconomic policy makers, and at the same time institutions that permanently work on strengthening and maintaining of their own credibility, unavoidably should focus on the contemporary challenges of the monetary policy, making attempts for timely comprehension of the possible solutions and repercussions. Having in mind this objective, I am glad that on the today's conference are present distinguished experts, governors and representatives of central banks from a number of countries across the world, as well as high rank officials from important international institutions, whose expertise and experience may contribute to good quality discussions regarding the specified contemporary challenges for the monetary policy.

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If the government spends 4 per cent of the Fund annually – the expected real return – this  6  Median income is the income level at the middle point of the income distribution. BIS Review 18/2008  7  will finance close to 20 per cent of public expenditure ten years ahead. The return on the Fund will by then have become such an important source of funding that it is difficult to imagine that the government authorities would find any sound arguments for drawing on the accumulated capital. It is also a flow of revenues that does not have an adverse effect on private sector production capacity, unlike taxes. Irrespective, only a share of future pension payments will be matched by revenues from the Government Pension Fund. Government old-age pension obligations are estimated to increase from around 250 per cent of mainland GDP today to approximately 350 per cent in the course of a few decades. As a result of the pension reform, the increase will be somewhat smaller. As a major shareowner and bondholder, Norway has received increasing international attention. Many countries have established funds similar to the Government Pension Fund – Global, with substantial assets under management. We are open about the Fund’s objectives, organisation and investments. This is necessary in Norway because the funds are public funds and because transparency enhances management. Moreover, the transparency of the Fund is also viewed in a favourable light by those countries in which we invest.

Therefore, such labour market reforms can help with containing the level of private and public debt by increasing household incomes via enhanced job creation owing to better matching of job seekers with vacancies. Third: An acceleration of fiscal policy reforms such as the enactment of a fiscal responsibility and budgets systems law, so as to ensure medium and long term fiscal sustainability. These stipulate a medium-term orientation as regards budget formulation and provide for binding expenditure ceilings. For example, the annual growth rate in total public expenditure must not exceed the growth rate of potential GDP, unless corrective measures on the revenue side are introduced to compensate the higher growth rate of expenditure. In this respect, such policy frameworks can directly tackle the level of public debt by promoting lower public deficits. I will not leave out the banking sector reforms: having effective foreclosure and insolvency frameworks and actively and efficiently managing Non Performing Loans should be encouraged in order to tackle elevated risks related to high levels of private debt. However, the adoption of an improved insolvency framework will not be in a position to achieve its full potential if its application is impaired by inefficiencies in the judicial system. 3/5  BIS - Central bankers' speeches  Let me now give some remarks on the situation in Cyprus. Public debt increased rapidly during the economic crisis of 2012-2013, going from 65.8% of GDP at the end of 2011 to 112% in June 2014.
In this environment, product innovation needs to be escalated accordingly in particular, to respond to the growing need for managing risks to realign the risk-return profile of assets and liabilities for financial institutions and investors in reaction to fast changing economic variables. This is made more pronounced by the fact that increasingly, with the unprecedented economic integration, financial markets across the globe are not immune to financial volatilities. Therefore, it is crucial that market participants have the necessary tools to manage financial risks prudently and this is where derivatives can be applied. Application of derivatives will yield benefits to the general public as spread of risk among economic agents will mitigate risk of financial shocks to the financial markets at the macro level and individual institutions at the micro level. As a result, the financial system becomes more robust, stable and resilient to extreme volatilities in the financial markets. The introduction of derivatives in the Islamic finance with adequate legal, regulatory and corporate governance framework will enhance the development of the functioning of the Islamic financial system. Developing the relevant indicators The pricing mechanism for the Islamic financial instruments has so far been based on the prevailing interest rate framework. There appears to be no real difference in both the conventional and Islamic instrument. In order for the Islamic financial instrument to be efficiently priced, it needs to have its own indicator.

4  BIS Review 73/2007  or possibly because of, the fact that the monetary authorities were explicitly targeting the monetary aggregates as a means of controlling inflation. Part of the explanation of the divergence was that the 1980s were a period of rapid financial innovation following the removal of exchange controls and of pricing, income and dividend policies. This changed the amount of money people were willing to hold for a given amount of money spending (which in economics is known as the velocity of circulation). So the increase in money growth did not lead to a pick up in inflation. Even so the acceleration of monetary growth at the end of the 1980s did foreshadow the upturn of inflation at the end of the Lawson boom. The chart shows that since 1992 the rates of growth in broad money and inflation have diverged again and that broad money growth has picked up sharply since 2003. A key question is whether this reflects a further spurt in financial innovation or is telling us that we should expect increasing growth of money spending and inflation. There are good grounds for attributing part of the increase to structural changes in the financial markets which have led “other financial companies” (OFCs) to hold more deposits with the banks for a given level of economic activity. 8 It is within this OFCs sector that the growth in money has been the most rapid (Chart 12).
In the absence of more detailed information on the effect that may be dominant, it does not seem unreasonable to assume that the effects of a reduction of the repo rate path will be of a normal scale. These figures and the estimated effects of a repo rate reduction are not the final word. Of course the future will bring further developments of Ramses and other models, more empirical estimates and new experience, which will lead to the revision of these figures. However, I would claim that these figures are the latest and best word on the basis of the information and knowledge currently available, and therefore provide the best basis for a decision right now. Similarly, the mean squared gaps are perhaps not the last word when it comes to measuring the Riksbank’s target achievement. However, it is fair to claim that is the best way we have found so far of me assuring target achievement, that is, the extent to which the Riksbank has succeeded stabilising both inflation around the inflation target and resource utilisation around a normal level. I consider Figure 1 very clarifying.

As the Riksdag Committee on Finance states in its report in 2007: “A flexible monetary policy requires, in the Committee’s view, a high degree of transparency and that the Riksbank is very clear about why the various repo rate decisions have been made. This is also a prerequisite for the possibility to examine and evaluate monetary policy.” In my opinion, this requires a methodical and detailed discussion of the various monetary policy alternatives, together with the reason why one of them should be preferable to the others. The effects of a changed repo rate path on the forecast for inflation and resource utilisation are calculated with the help of the Riksbank’s model Ramses. In particular, they have been calculated using so-called expected deviations from the main scenario’s repo rate path. This corresponds to a situation in which the Riksbank clearly and transparently announces an alternative repo rate path that it intends to follow and that affects market expectations and thus inflation and the real economy.5 The deviations from the main scenario’s repo rate path that are shown in these graphs entail a reduction or an increase in the repo rate by 0.25 percentage points over four quarters. After this, the alternative repo rate paths gradually return to the main scenario’s repo rate path in accordance with the Riksbank’s historically-estimated reaction function.
House prices have, as I mentioned in the introduction, increased by 140 per cent since 1996; annual changes are now in the vicinity of 8 per cent, down from around 13 per cent a year ago. As in many other countries, these developments have been the subject of much attention in the media, and calls have been made for the Riksbank “to do something about it”. Here some pedagogical challenges arise. We must explain that we do not target house prices but that we do not ignore risks associated with them. This is far from having a target for house prices. House prices vary in response to changing economic conditions, one of them being the stance of monetary policy. In Sweden, as in many other countries, house prices have increased in an environment characterized by strong macroeconomic conditions, rising disposable incomes and increasingly sophisticated financial markets. In this environment it is impossible to pin-point an appropriate rate of change in house prices. But policy makers always have to take decisions under a high degree of uncertainty. BIS Review 96/2007  5  Concluding remarks In conclusion, let me say that we have tried to be open and honest about the uncertainties surrounding the effects of house price developments on the rest of the economy and the appropriate monetary policy response. We have, in fact, been open about our own uncertainties and the differences in opinion, albeit small, that have arisen at times. This may have given rise to “confusion about the confusion”.

The demand for Islamic financial products and instruments is expanding at increasingly significant rates in predominantly Muslim countries in the Middle East and Asia as well as in the non-Muslim economies in the West. The rapid growth of the Islamic financial markets has seen the development of a wide range of products including money, debt and capital market instruments. Such markets are important for the effective management of investment portfolios and for the diversification of risks. BIS Review 35/2007  1  Today, the global demand for Islamic capital market products is served by the existence of the Dow Jones Islamic Index whose market capitalisation now exceeds USD 10 trillion. About 350 Shariahcompliant funds have already been established across the globe. In Malaysia, the sukuk market has been a leading segment of growth in the domestic bond market accounting for half of our domestic bond market and two thirds of the total global outstanding sukuk. A wide range of new Islamic financial instruments has been developed including the Bank Negara Malaysia Sukuk Ijarah, Bank Negara Malaysia Monetary Notes, the Islamic residential mortgagebacked securities and most recently the Commodity Murabahah Programme for managing short-term liquidity in the inter-bank money market. While Islamic finance practitioners and scholars continue to draw from the source of fiqh muamalat to create new and innovative instruments, the legal framework however, needs to be further strengthened to ensure continued acceptance and utility of the financial instruments.
The U.S. government’s financing of Treasury’s actions required federal debt to rise sharply, and stabilizing the financial system temporarily boosted the size of the Fed’s balance sheet. 2  BIS Review 18/2010  The final numbers aren’t in yet, but it now appears that the downturn in real gross domestic product (GDP) in the United States lasted about a year and a half, much shorter than the typical banking crisis downturn. Peak to trough, output fell about 4 percent, less than half the typical decline seen in past financial crises. While there are still some significant downside risks to the economy, in general, the outlook is improving. Of particular note, the capital markets – except for certain securitization markets – are now generally open for business. In addition, the big banks in the United States have been able to raise a large amount of equity capital to put themselves in a stronger position. I believe that Federal Reserve actions over the last year and a half have contributed very substantially to this improvement. But there still is a lot of work to do. Smaller banks – especially those with large commercial real estate exposures – are under pressure, while households and smaller businesses find that their access to credit is still constrained. Moreover, regulatory reform is essential to prevent this type of financial crisis going forward.

We need to ensure that no financial institution is “too big to fail.” This means we need Congress to enact a resolution mechanism that allows large, complex financial firms to be wound down smoothly, without the need for extraordinary interventions. In addition, we need to take steps to make the financial system as a whole more resilient and robust. This requires many steps – some already in train – including higher capital requirements for large banks, bigger liquidity buffers, and changes to ensure that compensation practices are consistent with safety and soundness and financial stability. It’s a long list – there is no single silver bullet – and it will take time, but the regulatory community and the political leadership will fail to meet our shared responsibility as stewards if we do not implement the necessary reforms in a timely and effective manner. Outlook for the recovery and risks from the financial sector The U.S. economy has begun to recover. Growth in the second half of 2009 was a bit stronger than expected and the pace of layoffs has diminished. We currently expect that the economy will keep expanding, but at a somewhat slower growth rate than during the second half of 2009 as the temporary boost from the inventory cycle fades and the effects of the stimulus bill gradually weaken. With modest growth, we expect price pressures to remain well contained. Nonetheless, it’s far too early to pop the champagne corks.
Third, as central bankers we had to design intervention strategies that had not been studied in recent times. The extraordinary liquidity measures that central banks took at the height of the crisis on both sides of the Atlantic had been expelled from the economics textbooks. 1  The Works of Tacitus translated by Alfred John Church and William Jackson Brodribb (1864–1877). http://www.sacred-texts.com/cla/tac/a06010.htm. BIS Review 29/2010  1  Modern monetary economics had suggested that unlimited arbitrage in financial markets would make such measures irrelevant and unnecessary. 2 In the event, amid conditions of extreme uncertainty, private arbitrage was unavailable. As in ancient Rome, public credit became vital because private finance had – at least temporarily – disappeared. What are some of the long-term lessons we can draw from the current crisis? Just as we have had to re-evaluate our understanding of the nature of risk of market disruptions and the potential responses in terms of implementation of monetary policy, so we must re-evaluate our understanding of the role of financial markets in our economies and our societies. The lack of a framework for monitoring and addressing systemic risk in the run-up to the crisis is part of the motivation for financial reform and improved market regulation. But we must also consider fundamental questions about the relative importance and limits of the pure financial “game” in markets, the potential abuse of market power, and, more generally, the role of the financial sector in the economy.

This can be done without making statements about the policy instrument in the future. Each month we provide the market with a comprehensive assessment of the risks to price stability over the medium term. This allows market participants to form expectations about the future course of monetary policy, conditional on our real-time assessment of the state of the economy. In this sense, the ECB is predictable, and this minimises the volatility of expectations in normal times. Our quantitative definition of price stability and our medium-term orientation significantly reduce the likelihood of either deflation scares or inflation scares. The firm anchoring of inflation expectations – throughout a time of crisis – meant that we could maintain the rate on our refinancing operations at positive levels without having any materialisation of a deflationary risk or inflationary expectations. The phasing-out process I mentioned that we chose to expand our credit to banks. When executing lending policy, a central bank functions much like a private financial intermediary. Private credit extension is accompanied by restrictions on the borrower to limit its ability to take risks and to protect the value of the loan. If a central bank provides credit support, the analogy suggests that it must follow up with a continuous re-evaluation of the credit conditions to safeguard its funds and make sure its commitment is not abused. It also has to make sure that it does not subsidise certain economic activities nor permanently suppress the private interbank market.