samchain/econo-pairs-v1 huggingface dataset:
The ability to undertake transactions at – or close to – prices that reflect economic fundamentals facilitates the proper allocation of capital, as well as the management and transfer of risk. It also gives borrowers the confidence to plan, and savers to finance, productive investment. Efficient markets also allow for the transmission of monetary policy by allowing changes in policy interest rates to be reflected quickly across financial markets and assets. The rise in automated high-frequency trading has, however, also increased the incentive for market participants to protect information that could signal their trading intentions. This is to reduce the risk of being disadvantaged by trading with other – faster-moving – market participants, and thus receiving a worse price (a phenomenon sometimes referred to as ‘slippage’). 6  This strategic interaction has manifested itself in two observable trends. First, there has been a partial reversal in the trend toward greater price transparency I highlighted earlier. Market participants have embraced other forms of trading, which differ to traditional exchanges either by offering less price transparency and/or a narrower range of counterparties. 4  This effect has been explicitly modelled by Jovanovic, B and Menkveld, A (2011) and empirically documented in a number of instances and trading venues – e.g. by Hendershott, T, Jones, C and Menkveld, A (2011) for the NYSE, Riordan, R and Storkenmaier, A (2011) for the Deutsche Börse, and Hasbrouck, J and Saar, G (2013) for the Nasdaq.

The potential vulnerability of critical nodes in fast markets  Finally, it is unclear whether we yet fully understand how the migration towards fast markets has changed the nature or location of critical nodes within the system, and the risks to which they are exposed. Any intermediation model relies upon a particular infrastructure and has critical nodes. Traditional over-thecounter (OTC) markets, for example, are critically dependent on the willingness of dealers to warehouse risk in return for the informational advantage that seeing the flow provides. Such frictions have started to take new forms in fast markets. In particular at the same time as highfrequency trading activity has increased, a number of banks have stepped back from acting as market makers and have assumed a more infrastructural role. But new market participants still rely on banks to provide market access and extend them credit when engaging in algorithmic trading, through banks’ prime brokerage and clearing businesses. Providing a competitive service to such technologically advanced clients – particularly those trading at very high frequency – requires substantial investment in technology and infrastructure, including that to facilitate the real-time monitoring of exposures and risk management. The costs associated with this are high, and serve as an effective barrier to entry. As few banks provide these services, this leads to a concentration of nodes of market access for short-term liquidity providers. The changing role of banks/dealers in fast markets prompts the question whether the nature of potentially disruptive risks is also changing.
The sale to outside parties of credit risk packaged into new instruments helps, of course, to transfer the risk, but the credit risk still exists. While the transfer of risks to institutions or households that are better able to withstand them is a positive factor, and one of the structural explanations for the resilience of the banking sector during recent periods of stress, we should be conscious that this development may introduce some new risks into the system, such as operational risks, which require adequate treatment. Sellers of credit-related instruments face some degree of legal risk, for example, when new instruments are issued and their enforceability in courts has not yet been tested. Likewise, the creation and management of the new products can put strains on legacy risk measurement and management systems that were not intended to handle them, creating new possibilities for operations to fall short or even to fail in some way, creating losses. These advances in the technology and practice of risk management introduce unique opportunities for public authorities to promote greater stability. I’d like now to turn to the efforts that banking supervisors are undertaking to respond to these recent trends. This represents the next topic I’d like to address today. 5. The supervisory response: Basel II  Against this background of increasingly sophisticated risk management practices, heightened complexity in the financial markets and stronger interaction between the real and the financial economy, the Basel II process started more than 5 years ago.

Jaime Caruana: Basel II - back to the future Speech by Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the 7th HKMA Distinguished Lecture, “Basel II - Back to the Future”, Hong Kong, 4 February 2005. * 1. *  *  Introduction  Let me begin by expressing my gratitude for this invitation to participate in the “Hong Kong Monetary Authority Distinguished Lecture”. I am honoured to join the list of prestigious speakers who have discussed critical issues in economics and finance in this forum, issues made especially prominent by the important role that the Hong Kong Monetary Authority plays in promoting financial stability under the leadership of Joseph Yam. From my perspective as Chairman of the Basel Committee on Banking Supervision, I am indebted to Mr Yam for his support and initiative in contributing to the development, and now the implementation, of the new bank capital framework, or “Basel II”. “Nothing endures but change,” wrote the ancient Greek philosopher Heraclitus more than two thousand years ago. In a world where change is the only constant, success depends on the depth of our awareness of the risks and rewards on the horizon and on the quality of our preparations to respond to them appropriately. That is true not just in the banking industry, but certainly also in the formulation of public policies geared to promoting more sustainable economic growth through greater financial stability.
The pace of recovery is significantly faster now than then, bouncing rather than edging back. More fundamentally, a slow exit risks putting central bank balance sheets on an unsustainable footing. 10  Minsky (1986). 8  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  8  Entering fast and large, and exiting slow and small, puts a ratchet into central bank balance sheets.11 With large or frequent enough future shocks, this strategy is not time-consistent: either the stock of Government assets to buy is exhausted or, more likely before that, debt-serving concerns begin to contaminate perceptions of the future monetary stance. The latter is what academics call fiscal dominance.12 An asymmetric QE response function nudges us towards that fiscal danger zone and adds to concerns about the erosion of monetary policy independence. Or that, at least, is the risk. It is these two points, taken together, that lead me to believe that this is the most dangerous moment inflation-targeting has so far faced. The answer is not to change the regime itself. Indeed, I can think of few poorer times to do so. In my view it does, however, call for immediate thought, and action, on unwinding the QE currently being provided, given the state of the economy and central banks’ balance sheets. The Bank’s on-going review into the process and sequencing of QE unwind is a welcome opportunity to do so. A dependency culture around cheap money has emerged over the past decade.

Our understanding of the transmission channels behind this synchronized increase is still limited.5 These recent events have elicited mixed feelings in the international community. On the one hand, there is the view that the longer the global liquidity persists, the more likely that vulnerabilities will build up in capital‐receiving countries. In this view, a gradual normalization of international liquidity conditions would be a welcome event for those countries where fundamentals are still strong. Furthermore, to the extent that the normalization comes with better prospects for advanced economies, the somewhat tighter access to international borrowing would be accompanied by an increase in external demand. On the other hand, there is the view that a fast reversal of expansionary monetary policies in advanced countries would yield a sudden and important tightening of financial conditions and a surge in financial volatility. Recent years have taught us all too well that a situation like this may have unforeseen consequences. All in all, the final impact of the tapering of QE policies on the rest of the world will depend on when it takes place, how it is done, and what countries do in the meantime. Let me first address the issue of when it will take place. After some speculation earlier this year that tapering would start in September, subsequent developments indicated that the recovery of the US labor market had been more sluggish than initially expected.
One can even imagine that they want to point out some additional avenues, which, as we have been absorbed by more immediately pressing aspects of our work - we have not, as yet, been able to explore sufficiently. What next? Trying to answer the question of “what next” is a risky endeavor. No doubt with globalization unfolding its opportunities and risks, new priorities will promptly capture our attention and overtake our pre-established agendas. But it is always better to try to anticipate them, particularly when they reflect problems that should already have been addressed, be it: 2  As regards the latter, some follow-up actions are needed, including measures to discourage excessive reliance on short-term financing and strengthen countries’ capacity to withstand sudden shifts in market sentiment. In addition, the Interim Committee has requested the Fund to consider other ways to strengthen incentives for creditors to use available information to analyze risks appropriately and avoid excessive risktaking. Possibilities include introducing provisions in bond contracts regarding bondholder representation and voting in case of negotiations on bond restructuring; extending the Fund’s policy of providing financing to member countries in arrears to private creditors; encouraging strong bankruptcy systems for both domestic and international capital markets; and advising member countries to exercise greater caution in granting public guarantees. We also need to examine the possibility of closer contacts with creditors in order to explain Fund arrangements and, if needed, catalyze private sector financing so as to achieve more equitable burden sharing vis-à-vis the official sector and limit moral hazard.

Such ideas could, of course, be met with skepticism and run up against logistical problems that may seem insurmountable. Nevertheless, they need to be discussed, as they could provide a concrete way of recognizing that each medium-sized or developing country must have a more equitable share of responsibility for the future of the world economy, a share that they believe is unjustly denied them in the present institutional arrangements of the international financial system. * * * Now, at the end of this analysis of a number of key issues confronting the world economy, it is perhaps appropriate to come back for one minute to the central messages of our eminent predecessors of the Lunar Society two hundred years ago. I am told that they included: • •  4  the value of drawing lessons and inspiration from various disciplines and from the experience in different countries; the need to establish and disseminate standards so quality would be upheld and trade would flourish; and  This decision must be taken by an 85 percent majority and thus requires the active support of all G-7 members. BIS Review 43/1998  -9-  • •  a deep concern for the social implications of economic change and a keen desire to improve education; and, of course, a strong sense of purpose and confidence in the promises of their new world. No doubt these messages could strike a chord with many people today, including why not? - the stellar group that will assemble in Birmingham.
Thirty years ago in Sweden, bank deposits and other very liquid assets with little risk made up almost 60 per cent of households’ financial wealth, as against less than 20 per cent today. The major part of this adjustment in financial portfolios has gone to shares but a good deal now takes the form of insurance saving. The trend towards forms of saving with a higher risk has been accentuated by new rules for insurance companies, permitting a high proportion of shares, although this is arranged more indirectly. Similar tendencies are to be found in other industrialised countries. So it is not just in Sweden that saving has moved away from traditional bank deposits. This is a positive trend. However, long-term saving requires an ability to manage the associated risks. Stock prices fluctuate widely, in marked contrast to the stability of bank deposits. This is something that could affect not only the individual investor or household, but also the economy on a large scale. Therefore, I think it’s important to discuss the risks of the financial sector in general and the stock market in particular. This could be even more important now that so many newcomers have entered the stock market. Allow me to quote the following:  “With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtalking each other to get investors’ attention.

In addition, I should point out that, like the ECB, we resolutely support the initiative recently launched by the European Securities Markets Authority (ESMA). As the regulator of rating agencies, ESMA is seeking to establish guidelines so that these entities make public the way in which they incorporate sustainability elements into their valuations. To conclude, allow me to reiterate the importance and scale of the challenge we face. It may sound clichéd; but it is nonetheless true that we are not only talking about our well-being, but the well-being of future generations who may be left with little leeway if we are not sufficiently ambitious. The challenge extends to all agents and sectors, and proof of this is the broad and varied representation here in this room today. The financial sector undoubtedly has a notable responsibility in this challenge. In our capacity as financial authorities and under our mandate, we can and must do everything within our power to properly value, manage and mitigate the risks associated with climate change. The challenge is paramount and the need for coordination – with other national and international authorities – enormous. But I believe that, if we have been capable of structuring an appropriate regulatory response to the international financial crisis, we will also be capable of rising to the challenge here. I think that the measures rolled out from Europe will ultimately be an international reference and standard.
BIS central bankers’ speeches  1  •  Doing so, without recourse to public funds. What this implies for the size of MREL and TLAC is the same. Resources should be sufficient to support the continuation of critical economic functions at the point of resolution. Based on an assumption that going concern capital is eroded on the way in to resolution, this implies that there is sufficient loss absorbency to convert to equity capital to stabilise the firm. Stabilisation for this purpose means having resources available to allow the firm to be reauthorised by all relevant home and host supervisors and to maintain market access. All of these factors are set out in the EBA’s technical standard. The same considerations are described in the principles that cover the FSB Term Sheet. It is worth pausing to unpack what this is likely to mean for different sorts of firm and different group structures. Certainly for G-SIBs, the assumption lying behind the calibration of TLAC is that given the size and complexity of their operations and their activities cross-border it is hard to conceive of a significant restructuring at the point of resolution. Rather the accent is on stabilising the firm via bail-in 2 to restore solvency to buy time for an orderly restructuring and/or a solvent wind-down afterwards. This should be good for the system and, by preserving value, for creditors of the firm. By contrast, a very small bank may need no MREL beyond its current capital requirements.

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And so that’s just another factor that maybe tilts the risk to the economy a little bit to the upside. Maureen O’Hara: So, Bill, how about we think a little bit more broadly. You talked about where – it looks like interest rates are going up, at least that’s what, you know… President Dudley: Gradually, right. Maureen O’Hara: What Janet Yellen indicated would happen. There’s this interesting question, though, about will interest rates over the next year go to quote normal levels, or is there a new normal, right? I mean we’ve struggled through how many years now of zero interest rates, and the distributional consequences those have had, is there a “new” normal? Do we have an idea what that “new normal” is going to be? President Dudley: Well I think if you look at what the FOMC publishes, the so-called Summary of Economic Projections, one of the things that they forecast, we forecast, is the long-run federal funds rate, where we think the federal funds rate is going to end up in the long-run. So think five, six, seven years out. And that estimate has come down over the last few years. So what that’s telling you is that people on the FOMC think that the normal federal funds rate is lower now than it’s been in the past. And the idea behind that is a very simple one. One, there’s probably still some residual headwinds left over from the financial crisis that are going to persist for some time.

And if you don’t have that, then I think that has its own set of consequences. Maureen O’Hara: Yes, well, I think you’ve raised a great point, that there are both positive and negative consequences of globalization. Let me raise something that may have similar negative and positive, and that’s the impact of technology. I think we’re all beginning to see a brave new world in which technology is entering ways that even 10 years ago were hard to fathom. And you know, I think that just as globalization seems to have made people nervous about the future, so has technology. Now, what are your thoughts on that? Is technology going to be the bigger influence over the next decade? Is that what’s going to change our economy and the ability of people to make that leapup that you just talked about? President Dudley: Well I think technology is always challenging. I think it’s been challenging for decades, even centuries. My mom for many years lived in Westville, Massachusetts, and if I have this right, it was the buggy whip capital of the world at one point. Well, Westville had to make the transition from being the buggy whip capital of the world to other things. And I think – so, I don’t think this is new. I don’t think this is a new story about technology.
It would not be sensible to relax capital requirements when the unusual hazards persist. Today, gradually strengthening capital adequacy, and so building resilience, is best not only for stability but also for sustaining the recovery through what might lie ahead. Monetary policy With government needing to set fiscal policy in order to repair the public finances, that means that the burden of stimulating our economic recovery falls mainly to monetary policy. Bank Rate is at, effectively, zero. And the Bank has provided further stimulus, via quantitative easing, in order to underpin demand, and so guard against inflation being persistently below our 2% target further down the road. For the economy as a whole, that has bought time to smooth the adjustment. For firms, it has reduced the cost of capital and the weight of debt burdens. The equity prices of leveraged firms have generally risen more than the market as a whole. Easy monetary conditions no doubt go some way to explain why more firms haven’t failed; and why the Bank has received few approaches, under what is still known as the London Approach, to help banks and firms keep talking when a co-operative solution is within reach. In all this, the Monetary Policy Committee faces a delicate and unavoidable balancing act.

If one thing is clear from that brief and incomplete survey, it is that, sadly, the repair of the credit system will take time. Stopping this happening again: the Financial Policy Committee So will the even broader task of putting in place better “rules of the game” for the financial system. For all the measures in train internationally on banks’ capital, resolution regimes, over-the-counter derivative markets, central counterparties, shadow banking and so on, they will I fear eventually be found wanting. Conditions change. One generation’s reforms are eventually overtaken by the evolution of the structure of the financial system or by temporary bursts of misplaced exuberance. At its simplest, that is why the government has established the Bank of England’s new Financial Policy Committee – to ensure that the moment when the financial system’s resilience is critically impaired does not get overlooked; that it is anticipated and appropriate action is taken. A standing body, meeting regularly, transparently, and backed by powers to take decisions on regulatory measures – the FPC is the body charged with being on the case. It won’t be perfect, but it can be much better than the pre-crisis regulatory regime. The initiative to create the FPC is necessary, because both macroeconomic policymakers and financial regulators have had to learn some tough lessons. On the one hand, we all need to be attentive to the effects that easy monetary policy globally can have on risk-taking behaviour.