samchain/econo-pairs-v1 huggingface dataset:
Nigel Jenkinson: Strengthening regimes for controlling liquidity risk – some lessons from the recent turmoil Speech by Mr Nigel Jenkinson, Executive Director, Financial Stability, Bank of England, at the Euromoney Conference on Liquidity and Funding Risk Management, London, 24 April 2008. I am very grateful to Emily Beau for her collaboration on this speech, and to Adrian Chiu, Andrew Bailey, John Gieve, Laurie Roberts and Forrest Capie for help and comments. *  *  *  Section I: Introduction Commercial banks play a pivotal role in the economy. They facilitate payments and the smooth transfer of goods and services, and they match savers who may lack detailed knowledge of borrowers and who (generally) want to be able to withdraw their money at short notice, with borrowers who often wish to repay their loans over a longer term horizon. This “maturity transformation” performed by banks is essential to allow capital to be invested in a productive way to support economic growth. But by offering such maturity transformation, banks are inherently exposed to liquidity risk – the risk that a bank is unable to meet its commitments should depositors attempt to withdraw their funds ahead of the bank’s capacity to repay them. As many bankers through the ages have found to their cost, the key objective for the management of liquidity risk is the retention of confidence.

Stefan Ingves: Monetary policy, openness and financial markets Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at Skandinaviska Enskilda Banken, Stockholm, 24 September 2007. *  *  *  "Say as little as possible and say it cryptically". 1 This type of communication strategy is probably quite unthinkable for most central banks today. But this is how US professor of economics Alan Blinder describes central bank communications not so long ago. And I believe that this description is a pretty good one of how things actually worked, say 15 to 20 years ago. I would also guess that those of you here this evening who either monitored or worked in the financial sector at that time would agree with me. But since the beginning of the 1990s the Riksbank as well as most other central banks has taken considerable steps towards greater openness and clarity – both with regard to what we are trying to achieve and how we are going about it. Constantly working towards more efficient communication has been high on the Riksbank’s priorities list ever since the inflation target was introduced. But the pace of this work has varied as conditions for monetary policy and demands on the central bank have changed. So sometimes we have had fairly long periods without any major changes in our methods of communication, sometimes we have made many changes in a fairly short period of time.
So far, they have been effective with regard to market confidence, and have contributed to a significant reduction in various credit risk premia. One channel relies on portfolio composition effects. I know that some contributions presented here made that point in a very sophisticated framework, i.e. positive feedback effects may be generated through the greater liquidity of investing entrepreneurs. Obviously, the soundness of the financial system is critical to the success of these unconventional policies. These policies must be viewed as state contingent policies: they are conditional on the state of the economy. A significant part of the intervention is short-term oriented, as the acquisitions focus on short-maturity assets. Furthermore, the assets purchased are usually of very good quality. In most cases, and in particular in the Eurosystem, the increase in the monetary base is determined endogenously by the banking system, motivated by banks’ preference for liquidity and thus by the state of stress of the banking system. Finally, these measures tend to address aggregate risks. These unconventional measures would automatically unwind, as improvements in inter-bank and credit markets would reduce the need to use these facilities. Financial market indicators, risk premia components and their determinants as well as monetary indicators (inflation expectations in addition to monetary and credit developments) should be taken into account to carry out the assessment. Some implications for financial stability This crisis has triggered a debate regarding possible tools to be developed to prevent the build up of financial imbalances and design countercyclical regulatory policies.

Opting for a new and unfamiliar regime, which is what the 15 per cent band arrangement amounts to, in the midst of the uncertainty prevailing early last year would not have been prudent. The decision to opt for continuity by pegging the lira to the euro at the central parity rate, moreover, was also supported by our study on the equilibrium exchange rate, available on the Bank’s website, which did not produce evidence of a significant misalignment; and by our conviction – which is shared by expert opinion in Malta and abroad – that given the openness of the economy and the speed of the nominal exchange rate pass-through to prices, a possible devaluation is anyway unlikely to have lasting beneficial effects. The 1992 experience proved that devaluation is not the correct antidote for  BIS Review 16/2006  3  structural problems. In less than three years, the inflationary pressures resulting from that decision wiped out whatever competitiveness gain had been achieved. In the event, the commitment to keep the lira/euro peg at the central parity rate – which was also welcomed by the IMF - seems to have reassured both the business community and investors as calm returned to the financial markets. The downward trend in the reserves was first interrupted and then reversed, as capital inflows resumed, including a considerable amount resulting from the redenomination of domestic loans into euro to take advantage of the lower interest rate.
We have now concluded that there is not normally reason to indicate prior to the monetary policy meetings in speeches and press releases how our views of the repo rate path have changed. Our assessment is that it is enough to signal our intentions clearly in connection with the seven monetary policy meetings held every year. In connection with three of these meetings we will publish our own forecast for the future repo rate, and our Monetary Policy Report will show clearly why we have chosen this particular path. On the other four occasions we will make a qualitative assessment of how the most recently published interest rate forecast relates to the new information received. Even if the interest rate path forecast is only a forecast and not a promise, a central bank can hardly be clearer than this with regard to its views on economic developments and the consequences for the interest rate. There may also in exceptional cases be justification for some signalling between two monetary policy meetings. If, for instance, something occurs to radically alter the economic situation, while there is a long time until the next meeting, it may be necessary to make a comment in order to avoid the risk of unnecessary uncertainty in the financial markets. It should then be clear whether the entire Executive Board supports this view or whether it is the opinion of an individual member.

The fact that forecasters revise their assessments is not at all strange, as new information is received all the time. This indicates that as the conditions for the real economy change and new information is received the forecasts for the repo rate path need to be adjusted. There is nothing particularly dramatic about this. It applies to all market agents, to the major banks, to the Ministry of Finance and also to us at the Riksbank. The great uncertainty factor means that all forecasters should be humble, but this should not prevent them from making forecasts. I would therefore like to emphasise once again that the repo rate path we present in the Monetary Policy Report is a forecast and not a promise. The Riksbank cannot undertake, regardless of what  BIS Review 62/2007  3  happens in the economy, to follow the path published. The interest rate path is quite simply the best assessment we can make at a given point in time, given the information that is then available. New information may change the picture of the economy and then the Executive Board will have to rethink how we set the repo rate. The reason why we have chosen to publish our interest rate forecast despite the uncertainty over the future is largely because we believe this is the best way of explaining our thoughts on monetary policy. It also makes it easier for us to justify forecasts and interest rate decisions and to outline alternative scenarios for the repo rate.
Much hinges on the speed with which domestic confidence returns. As is entirely appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the expected recovery in UK growth and inflation. 19  All speeches are available online at www.bankofengland.co.uk/news/speeches  19  On the one hand, there is a modest but rising degree of spare capacity in the UK and core inflation remains subdued. There are downside risks from global growth and the possibility that uncertainties over future trading relationships could remain entrenched. With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response. On the other hand, global growth is showing tentative signs of stabilising. The global manufacturing PMI has returned to expansionary territory, helping push the composite to a six month high in December. Past global monetary policy stimulus is gaining traction and global financial conditions are supportive. Early indicators, from financial market prices and the limited number of business surveys since the election, suggest that there has been some reduction in Brexit-related and domestic policy uncertainties. The labour market remains tight and domestically generated inflation remains generally firm. And total monetary policy space is larger than conventional measures would suggest. In the coming weeks, the MPC will watch closely surveys of business and consumer confidence (including intelligence from our Agents) as well as global developments. We will also undertake our annual supply stocktake.

For us, the Taylor rule derives its appeal from three features. The first is its simplicity in describing the behaviour of different central banks by estimating the policy reaction to deviations from the inflation target and to the output gap. The second is its quality as a benchmark in assessing the current stance of monetary policy with respect to the historical average for a similar macroeconomic situation. And, thirdly, the Taylor rule is appealing because it sets the standard by which monetary policy is introduced in macroeconomic models for forecasting and simulation purposes. The SNB’s monetary policy focus is on maintaining price stability, and we do not follow any explicit rule for setting the short-term interest rate. However, the Taylor rule serves as an important indicator in our decision-making process that helps us to conduct a systematic policy. Having talked about John the researcher, I would like to turn now to John Taylor the policy advisor. Time and again, John has merged research with policy making. On this account, his record is long and outstanding as well. He served as a member of the President’s Council of Economic Advisors from 1989 to 1991. He was on the Panel of Economic Advisers of the Congressional Budget Office from 1995 to 2001. And from 2001 to 2005, he served as Under Secretary of Treasury for International Affairs. His responsibilities included setting up a new currency in Iraq and getting terrorist financing under control.
•  We are encouraged that regulators in the US and Europe have adopted a substituted compliance or equivalence assessment approach so that entities can comply with just the set of rules applied by the jurisdictions in which they operate. •  MAS supports substituted compliance and equivalence assessments as an important measure to avoid potentially duplicative or inconsistent rules, particularly for entities with international operations. In the area of OTC derivatives trading, MAS is putting in place the rules and infrastructure to support cross-border operations and to help reduce uncertainty to the industry. To allay concerns from the industry over the regulatory burden of having to comply with both home  BIS central bankers’ speeches  5  and host regulations, we are participating in equivalence assessments under the US and European regimes. Thus far, ESMA, the European securities regulator, has recommended to the European Commission that the Singapore framework is broadly equivalent to Europe’s, paving the way for central counterparties in Singapore to offer their services to European participants. We have also submitted to CFTC an application for substituted compliance in respect of requirements on US banks operating here. We are in active discussions with CFTC, and will work with them on the substituted compliance determination, where appropriate, as our OTC regulatory regime comes into force. Impact on trade finance and long-term finance The final unintended consequence is the impact on trade finance and long-term finance.

Notably, we have recently agreed in principle to accept preferred interests in two of AIG's large foreign life insurance subsidiaries, AIA and ALICO, in order to make repayment of our loan less dependent on forced divestitures into a depressed acquisition market. Although it will take time, we still expect that the proceeds from asset sales should enable AIG to repay the New York Fed in full. In all that we have done, we have been motivated by two goals: to preserve the stability of the U.S. economy and to protect the U.S. taxpayer. The threat of a major systemic risk event has been averted by honoring all of AIG's contractual obligations around the globe – from insurance policy obligations owed to individuals, municipalities and businesses across the U.S., to the posting of collateral under credit default swap arrangements with the full range of counterparties recently disclosed. As unattractive as certain aspects of this treatment may be, these negative aspects have followed unavoidably from the decision to avert a systemically destructive bankruptcy. I look forward to your questions today and, in the longer term, to working with you and your staffs on the broader public policy questions – such as formulation of a resolution regime for institutions like AIG and consideration of the appropriate supervisory structure for OTC derivatives – that are posed by the events at AIG. Thank you. BIS Review 35/2009  3
There it is possible for a bank to deposit more in its minimum reserve account at the beginning of the period without any extra cost in the form of lower interest than the market rate. This difference in interest rate systems is reflected in the fact that the overnight rate tends to fluctuate slightly more in, for instance, the United Kingdom and the euro area than in Sweden, even under normal circumstances. Thus, there has been no reason for Sweden to take measures to ensure the overnight market functions. The Riksbank’s objective of stabilising the overnight rate has been achieved. At the same time, Swedish banks have had good opportunities to finance themselves. On the other hand, the uncertainty in the financial markets could lead to monetary policy not affecting other market rates in the way we are used to. Ultimately, this could mean that monetary policy does not have the desired impact on economic activity and prices. At present we can see, for instance, that the uncertainty on the financial markets has probably contributed a restraining effect in addition to the actual monetary policy, which is reflected in a larger spread between the interbank rate and the expected monetary policy than normal. However, this is something we handle within the framework of how we conduct our monetary policy, by taking account of events in our decision-making base. There has thus not been any reason for the Riksbank to take special measures from a monetary policy perspective.

There was considerable uncertainty over who was actually holding the bad loans and the problems quickly spread around the world. The uncertainty increased over the summer when credit rating agencies downgraded many of these products. During the third quarter of last year several investment banks reported large write-downs as a result of the bad loans, and in connection with this uncertainty once again increased. In recent months the situation in the financial markets has been characterised by considerable uncertainty over future risks, large write-downs and funding problems for financial institutions. The instability has led to a fear among the banks that they may face liquidity problems, that is, experience difficulty taking new loans when the old ones fall due for payment. It has also lead to fears of an increased credit risk when lending to other banks. This means that the banks have preferred more liquid and risk-free investments, while more banks have experienced difficulties in financing themselves in the interbank market. As a result, government rates have been pushed down, while interbank rates have risen. We have seen this development in many large economies. The interbank markets have been much more volatile than normal. In many countries they have at times functioned poorly in the sense that there has been reluctance to lend money to some banks. In some countries, such as the United Kingdom and the euro area, the considerable uncertainty has led banks to prefer to invest safely in the central bank instead of on the interbank market.
Stefan Ingves: Monetary policy and financial stability Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, to the Riksdag Committee on Finance, Stockholm, 13 November 2008. *  *  *  Counteracting the effects of the global financial crisis When I have opened my daily newspaper in recent months the headings have often concerned crises, stock market collapse and economic downturn. The contagion effects of the US mortgage crisis that have been around since summer last year, have taken on proportions hardly anyone expected. In mid-September the international financial turbulence entered its most intensive phase so far. The global financial system has since then been shaken to its foundations and even countries like Sweden – far from the centre of the crisis – are tangibly affected. The Riksbank’s main tasks are to safeguard financial stability and price stability. To manage these we are now continuously taking various measures to counteract the effects of the financial turbulence on the Swedish economy. Other authorities, the Government and the Riksdag have also implemented measures to the same end. One thing I have learnt from the years I have worked with managing financial crises is that things can change rapidly. Each situation is unique and must be dealt with on the basis of the conditions prevailing there and then. Although Sweden has long been on the periphery of the turbulence in the financial markets, we are now more strongly affected. When the situation requires it, we must be flexible and act both quickly and powerfully.

But once we have closed the accounts on this crisis, we will hopefully have purged the parts that function poorly and replaced them with something better. It is necessary for the financial system to function in a safe and efficient manner for the central banks to be able to conduct monetary policy efficiently. This is a necessary condition for good and sustainable economic development on the whole. I have every hope that we can work together to achieve this!
This illustrates the importance of further reforms. 1/1  BIS central bankers' speeches

Furthermore,  our  active  supervision  demonstrates the strong value of regular stress tests, which are this year typically based on a sharp rise in short and long-term interest rates: this is the way we in Europe already deal actively with IRRBB, including for smaller institutions. Page 3 of 6 Resolution is the third ‘blessing’, also less operational. The fact that the Swiss authorities opted for a merger in the case of Credit Suisse raised new questions about how to make resolution more reliable. Let me share just some thoughts at this point. The first concerns the resolution of large or even systemically important banks. The provision of potentially significant amounts of liquidity in times of crisis is a prerequisite for successful resolution. The framework for the ECB to provide "Eurosystem resolution liquidity" has yet to be built. The other priority, at the other end of the spectrum, is to shift from resolution "for a minority" - a far too small minority of cases: two in the last nine years - to resolution "for the majority" of cases, including small and medium-sized banks. The European Commission's proposal for a revised crisis management and deposit insurance (CMDI) framework is a step in the right direction. Yet, level-playing field must be ensured not to give unfair advantage to smaller banks; and greater pooling between the Resolution Fund and deposit guarantee schemes should not lead to large companies potentially benefiting from the same protection as the smaller deposits of individuals or SMEs. II.