samchain/econo-pairs-v1 huggingface dataset:
Andrew Large: Basel II and systemic stability Speech by Sir Andrew Large, Deputy Governor of the Bank of England, at the British Bankers' Association - Basel II/CAD 3 Conference, London, 13 March 2003. *  *  *  Introduction Welcome to all present - particularly Bill Rutledge of the New York Fed, whose President, Bill McDonough, is rightly credited with the paternity of Basel II. Basel II is a significant step forward. It brings life to the concept of capital requirements as a function of the actual risks which banks undertake. And it extends many of the principles long developed in the area of market risk, into that of credit risk. The very essence of the banking business. This was a courageous move. And it has required Herculean labour, intellectual agility, and sheer hard work. It seeks to address the public policy objectives of regulation and supervision on the one hand, and the real-world best practice of how banks manage their businesses on the other. It has sought to provide incentives to private firms to encourage them to manage themselves in ways which reinforce their own strengths, and hence to contribute to financial stability as a whole. But equally it is designed to enable supervisors to develop resources to sharpen their own judgement, to encourage them to take account of individual circumstances, to avoid box ticking, and to add real value to the process. These are worthy ambitions. They rely on the interaction of the three pillars to achieve it.

And my observation here is that we would be advised to give more thought to the underlying issues, risks, and mitigants which could be ingredients in liquidity problems. What are the drivers? What may cause liquidity to be withdrawn? To what extent could uncertainties, referred to a few moments ago, impact liquidity in  BIS Review 14/2003  3  unpredictable ways? What machinery/measures can best be devised to ensure that liquidity will continue to be available in times of stress? And, in the face of attempts to improve the resilience and efficiency of market infrastructure (for example, clearing and settlement), how will changing practices and perceptions affect the drivers of liquidity? This is, I feel, an area where standards and principles could be further developed which engender both the best practice understandings of the private participants on the one hand, and the interface with public policy imperatives on the other. Conclusion Basel II has been steered to this point of take-off for the hugely critical area of capital adequacy. I would identify four challenges for the next stage. First, to achieve the successful implementation of Basel II by banks and regulators across the globe. Second, to ensure that mechanisms exist to update it in the light of evolving best practice. Third, to give thought to whether analogous agreements would be appropriate in securities and insurance.
There were large savings deficits in both the private and public sectors and a high level of indebtedness in the private sector. The loans also gave rise to a growing currency crisis. In addition, increasing cost pressures gradually undermined the competitiveness of the three countries. When the global financial crisis broke out, economic growth in the Baltic states had already begun to decline. Declining growth and the large current account deficits led investors to begin reappraising the value of eastern European and central European assets. Capital inflows dried up, which made it more difficult to fund many projects and further reinforced the downturn in economic activity. The credit rating agencies downgraded the Baltic states, one after the other, which further aggrevated the shortage of capital. The lack of capital thus helped to reinforce the downturn in the same way that the surplus of capital once reinforced the dramatic upturn. There are some signs that the real economy in this part of the Baltic region has now begun to stabilise, but unfortunately the recovery may be a long, slow process. This is partly because external demand is still weak as a result of the global recession. Above all, however, it is because domestic demand is low due to the fact that the Baltic states are now carrying out so-called internal devaluations. This means that wages and other costs have been substantially reduced to restore competiveness and to counteract the serious weakening of public finances.

However, in order to uphold confidence in, and support for, monetary policy it is important to give a detailed report of when such factors are taken into account. This is a strategy the Riksbank follows. So far, the Riksbank has not found reason to take account of what happens beyond the normal forecast horizon when formulating its monetary policy, although it does normally produce surveys of the economy for longer periods. However, I have argued on several occasions in 1999 and 2000 that there was reason to raise the instrumental rate, taking into account the effects in a longer term perspective. BIS Review 43/2002  3  Nevertheless, asset prices should not be included in the formulation of monetary policy targets. There is otherwise a risk that the central bank would counteract adjustments that were fundamentally motivated. This would reduce the efficiency of the resource allocation and probably subdue growth. Other measures In addition to price stability, most central banks have a responsibility for financial stability. According to a narrow definition, financial stability is equal to a lack of crises in systemically-important banks. The banks have important functions with regard to the payment system and the supply of capital. It is easy to see that without an efficient payment system and capital supply the economy would be unable to function. Monetary policy would have no effect in this situation.
Lars E O Svensson: Some problems with Swedish monetary policy and possible solutions Speech by Mr Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at the Fastighetsvärlden’s conference, Stockholm, 24 November 2010. *  *  *  The opinions expressed here are my own and are not necessarily shared by other members of the Riksbank’s Executive Board or staff. I would like to thank Claes Berg, Karolina Ekholm, Stefan Gerlach, Jesper Hansson, Per Jansson, Pernilla Meyersson, Ulf Söderström and Staffan Viotti for our discussions and their comments. Johanna Jeansson, Lina Majtorp and Magnus Åhl have contributed to this speech. At the most recent monetary policy meeting in October, I entered a reservation against the majority decision. I, like my colleague Karolina Ekholm, instead advocated holding the repo rate unchanged and having a much lower repo rate path that rises steadily to a level of 2.7 per cent at the end of the forecast period. My reason for entering a reservation on this occasion and at earlier monetary policy meetings is because I see several problems with our current monetary policy. In this speech I shall present the problems I currently see in Swedish monetary policy, discuss these problems and describe the motives for my reservation, as well as proposing possible solutions to the problems.

It is hard to see beyond one of two ways of interpreting this statement, 2/4  BIS central bankers' speeches  neither of which stands up to much scrutiny. The first interpretation is that the rules should not change in the future, and to do so would be unwelcome. This is unrealistic, dangerous and inconsistent with practice. As the world around us changes, so must the rules to accommodate these changes. As evidence of this, look at what the authorities have had to do in response to Covid and the shock that created for financial markets. The EU is almost constantly revising, or contemplating revising its own rules, and that’s a good thing. So, I dismiss this argument. The second argument is that UK rules should not change independently of those in the EU. I am being careful to phrase this point. It’s not that UK rules might change independently – the equivalence process provides for re-assessment of such decisions, so this should not be a problem. So, it must be the stronger form that they should not change independently. But that is rule-taking pure and simple. It is not acceptable when UK rules govern a system 10 times the size of the UK GDP and is not the test up to now to assess equivalence. It’s worth considering why we would choose to change the rules. First, it would be rare to say the least if such rules turn out always to work perfectly first time and thus need no amendment.
Gent Sejko: Conducting monetary policy when fiscal space is limited Speech by Mr Gent Sejko, Governor of the Bank of Albania, at the high-level seminar on “Rethinking monetary-fiscal policy coordination”, jointly organised by the Bank of Slovenia and the International Monetary Fund, Tirana, 20 May 2016. *  *  *  Dear Panel Moderator, My honorable fellow Panelists, I believe this seminar provides a perfect platform for exchanging insights on the coordination of monetary and fiscal policies. This issue is quite topical from the perspective of challenges central banks are facing today. Before going into more detail on the topic of this panel, I would like to share some thoughts with you regarding the coordination of monetary and fiscal policies. The price stability mandate of the central bank and their operational independence does not lessen the need of effective coordination between monetary and fiscal policies. At a strategic level, the foremost objective of the macroeconomic policy is to achieve sustainable growth, in a context of price stability and a viable external account. This goal requires the contribution of both the fiscal and the monetary policies, within their respective domains, as well as a fair degree of coordination amongst them. On a macro scale, a balanced policy mix and an effective policy coordination requires: –  Policy sustainability: monetary and fiscal policies need to be on a sustainable path.

Prevailing academic consensus requires this sustainability to be anchored in simple and effective policy rules, such as an inflation targeting regime and some kind of fiscal sustainability law. Furthermore, sustainability is mutually reinforcing: inflation expectations can only be anchored if the fiscal policy does not rise destabilizing fears while, at the same time, the fiscal policy can be more sustainable if it is not burdened by excessively high interest rates, fueled by a not so credible monetary policy;  –  Policy credibility: monetary and fiscal policies need to be credible. Policy credibility arises from a combination of a clear and sustainable policy framework, the right structure of incentives, as well as a positive track record;  –  Policy awareness: in other words, the recognition of different goals, different transmission channels and different time frames, informing and constraining monetary and fiscal policies. In the long run, a balanced policy mix would minimize demand volatility, enhance the allocation of resources, and promote long-term growth. Effective policy coordination would limit the fiscal deficit to a level that can be financed via capital markets, without recourse to monetary financing, without distorting the allocation of resources, and without unsustainable external borrowing. Effective policy coordination would also bind monetary policy towards achieving its price stability mandate, thus reducing long-term risk premia and supporting financial stability. As a corollary to all what I mentioned, a weak stance in one policy area burdens the other policy area with excessive demands.
‘Climbing the property ladder’ has become a concept in metropolitan areas The property market contributes to substantial distributional effects in society. 14 Those people who own or have owned their home, the insiders, have benefited from the rapid rise in prices on the housing market. In step with these price rises, they have been able to realise gains upon the sale of their homes, which has allowed them to purchase increasingly expensive homes. This, in turn, has pushed up prices further. In addition, households that own their homes have benefited from the taxation system. The home can be seen as a low tax capital investment and, ultimately, also as a kind of pension saving. Similarly, the conversion of rental properties to tenant-owned properties has brought major profits for tenants able to buy their own homes. It is said that people can ‘climb the property ladder’, which is to say earn money on owning their home – a concept that has become common, particularly in metropolitan areas. Thus, there have always been major economic gains to be made by people who have owned their homes and been able to take advantage of price increases. For a large proportion of households, housing has contributed towards an increase of their capital assets, which is reflected in the distribution of wealth.

Lombardi, M, Madhusudan, M and I Shim (2017),”The real effects of household debt in the short and long run”, BIS Working Papers No 607. Långtidsutredningen (Long-Term Survey of the Swedish Economy) (2003), Fördelningspolitikens mål och medel – Bilaga 8 (Distribution policy’s objectives and means – Annex 8). Långtidsutredningen (Long-Term Survey of the Swedish Economy) (2015), Bostadsmarknaden och den ekonomiska utvecklingen – Bilaga 3 (The housing market and economic development – Annex 3). Mian, A and A Sufi (2018), “Finance and business cycles: The credit-driven household demand channel”, NBER Working Paper No 24322. OECD (2019). OECD Economic Surveys: Sweden, March 2019. Thedéen, E (2017),”Banking capital in times of stress”, speech at UBS Annual Nordic Financial Services Conference. Finansinspektionen. Sveriges Riksbank (2013), The Riksbank and financial stability. Sveriges Riksbank (2019), Monetary Policy Report, July. 13 [13]
The exercise only considers the direct effects of tightening, and abstracts from any indirect effects via, for example, the exchange rate or incomplete pass-through. Source: Bank of England, ONS, Bloomberg Finance L.P. and Bank calculations. Summary and conclusion One often hears that real incomes are lower “because of” inflation. In some ways the opposite is closer to the truth: (domestic) inflation is higher because of (external) hits to real incomes. The economy has been hit by severe real shocks. The pandemic raised the global demand for goods and reduced their supply; Russia has cut back severely its supply of gas to Europe. These have had dramatic effects on relative prices (Chart 12 shows the dispersion of inflation rates across the components of the CPI). In particular, import prices have risen significantly compared with the price of UK output. This has unavoidably depressed real incomes: the volume of output may have just about recovered to pre-Covid levels but its consumption value has not. Bank of England  Page 20  Chart 12: There have been big shifts in relative prices within the CPI Standard deviation of annual inflation rates across the 85 CPI items 20 18 16 14 12 10 8 6 4 2 0  20 18 16 14 12 10 8 6 4 2 0  96  98  00  02  04  06  08  10  12  14  16  18  20  22  Source: ONS and Bank calculations.

The UK is a big net importer of (non-energy) goods. And although the North Sea is still providing quite a bit of oil and gas, here too the UK runs a significant deficit. Besides, only a very small minority of UK residents actually receive any disposable income from that source. Notionally “British” companies operating in the North Sea have significant foreign ownership. What domestic shareholdings do exist are likely to be held mostly in pension funds and other long-term (i.e. inaccessible) investment vehicles. This means that, for given GDP, rises in the relative prices of goods and energy make us collectively worse off. And that’s exactly what’s happened over the past couple of years, thanks first to the pandemic and then Russia’s cut in gas exports. Over that period the price of the UK’s imports has risen by 20% more than the average price of its output. You can see this in the last bar in Chart 2. Chart 2: Bucking the long-term trend, import prices have risen much faster than output prices over the past couple of years  12 10 8 6 4 2 0 -2 -4  Change in import prices relative to GDP deflator, annual average, % points 12 10 8 6 4 2 0 -2 -4 60s 70s 80s 90s 00s 10s Last two years  Source: ONS and Bank calculations.
Our policy response was conditioned by the concerns of financial stability, assuming that interest rate cuts would speed up deposit withdrawals from the banking system. Bank of Albania took bold and decisive steps to control these problems and restore the credibility in banking system. As the effects of the fiscal stimulus began to phase out and  BIS central bankers’ speeches  1  confidence was restored in the banking system, we reduced our policy rate to its historic low in order to provide further stimulus for the economy. More importantly, our supervision of the banking system has been enhanced by establishing a thoroughly new Department of Financial Stability and by bringing financial stability issues in the decision-making process of monetary policy. As a result, the set of tools available to the Bank of Albania has extended to include several macro-prudential measures, which aim to address simultaneously both economic growth and financial stability concerns. I believe that similar steps have been taken by most central banks around the world. Willingly or not, the objective of financial stability is now seen as the central duty of our institutions. It does not matter whether the legal mandate of the central bank is amended to include this new objective or not. What matters is that financial stability is a prerequisite to overall macroeconomic stability and monetary stability.

This objective is founded on my belief that the first two pillars gain sustainability only if the public understand the role of the central bank, its independence and its policy. Last but equally important, I would like to emphasise the need of cooperation and coordination with the fiscal policy. Fiscal policy and its impact are facts of life which can’t be ignored. Therefore, monetary and macro-prudential policies have to be designed and implemented in full awareness of its existence. A Central Bank does not live in an isolated island; its success will, among others, depend on its ability to act in coordination and cooperation with the fiscal policy, without losing its independence. Incorporating this understanding in the central bank theory and practice requires some adjustments and flexibility but, at the same time, requires that central banks preserve their focus and independence and acknowledge their limitations. Altogether these changes will allow the central bank and its inflation targeting regime to become a useful tool at the hand of the monetary authorities to preserve economic and financial stability in the post-Global Financial Crisis period. Thank you very much for your attention! BIS central bankers’ speeches  3
Consistent with the predictions of Merton’s model, a leverage strategy has simultaneously boosted risks and returns to holding bank equity. Chart 5 summarises this strategic evolution in banking over the past century of so. It is based on a simple calibration of the Merton model. Leverage is shown along the x-axis and return on equity along the y-axis. The lines are iso-volatility contours, drawn for different levels of underlying asset volatility. Banking has migrated in a North-Easterly direction, as banks have assumed greater asset risk and higher leverage. In the Merton framework these strategies raise equity returns, precisely as we observe in practice. There is a second, largely silent, factor that contributed to this century-long rise in bank leverage – tax. Debt interest costs tend to be tax-deductible from profits in most developed countries. But the cost of equity financing is not typically tax-deductible. This biases corporate financing towards debt and away from equity. This tax non-neutrality is hardly new. In the UK, it dates back more than a century. Tax legislation for interest and dividends was first established in the UK in 1803. Throughout the 19th century, however, neither dividends nor debt interest were automatically deducted from profits when calculating company tax. Payments to debt-holders and shareholders were made net of tax and, roughly-speaking, treated equally. This equal treatment was justified on the grounds that the profit of a business should not be affected by its method of financing.

One obvious solution was to limit shareholder liability. This, it was felt, could broaden and deepen the pockets of the investor base, freeing up bank capital and credit. The United States had been an early-adopter, with Connecticut and Massachusetts permitting limited liability from 1817. Neighbouring states had quickly followed suit. Although limited liability had existed in parts of Europe from the 17th century, it was only during the second half of the 19th century that its tentacles spread widely.4 In the UK, wholesale change came with the Limited Liability Act and Joint Stock Companies Acts of 1855 and 1856. Interestingly, banking was slow off the mark. Limited liability status was at first not taken up enthusiastically. Bankers appeared to prize unlimited liability. It served as a safety certificate  2  Cleary (1965), Collins (1988). 3  Turner (2009). 4  Hickson and Turner (2005). 2  BIS central bankers’ speeches  for depositors, a badge of prudence. “A depositor would be much more likely to trust his money with a bank whose shareholders he knew must yield up to him the uttermost farthing”. This from the lips of a banking expert of the day.5 But unlimited liability in banking remained under attack. Walter Bagehot believed its risk benefits were illusory as many shareholders did not possess so much as the “uttermost farthing”. Bagehot believed unlimited liability generated its own incentive problem: the wealthy assumed too much risk for the control they could exercise, dissuading them from investing (Bagehot (1873)).