samchain/econo-pairs-v1 huggingface dataset:
Today I shall confine my brief remarks to some aspects that have to do with the fact that shares now weigh considerably more heavily in household financial portfolios than was the case thirty years ago. As I just said, this development has coincided with a return on shares that has been very high historically. Sooner or later, however, there will be a normalisation, more or less in line with what has happened in the past. This is so because the return on shares is ultimately determined by corporate profits, which are bound up in turn with economic development in general. GDP represents the sum of all profits and wages in the economy and it is hard to see how an annual real growth rate of around 2 per cent could result in a development of corporate profits that warrants a real annual return on shares that averages around 20 per cent. A more “normal” combination of stock-market returns and risks makes saving in shares more troublesome than it has been with the good returns in the past twenty years. The financial system will need to do more than before to help households manage the risks associated with stock markets. The question is how this change is likely to occur. BIS Review 5/2002  1  Greatly increased household saving in shares One factor behind the growing interest in share investment in Sweden in the late 1970s may have been the low valuations initially.

15  See also Blume, M. (2000), The structure of the U.S. equity markets, Rodney L. White Center for Financial Research, paper 17-00, The Warton School, University of Pennsylvania. BIS Review 5/2002  7  conclusion at present could be that certain tendencies that were evident in the United States may also have been present in Sweden. How can households’ risks be reduced? Besides calling for more knowledge about what actually happened while the IT bubble was growing, the course of events raises what is perhaps the more important question of what can be done to provide more support in the future for long-term saving by households. It is essential for society in general that stock markets function properly. At the same time, households need an adequate return on their savings and should be in a position to identify and manage different types of risk. Basically, this is a matter of education. Over the years, the Swedish Share Promotion Association and the Swedish Shareholders Association have done much to improve people’s knowledge of these matters. Information that is prompt, up-to-date, correct and relevant is likewise crucial. The new technology is inundating us with information but more does not necessarily mean better. It follows that households must be helped to interpret the information and pick out what matters most. An import role in this respect is played by independent analysts and consultants, not to mention media. These agents can see through and criticise corporate managements that are unduly optimistic or provide information selectively.
First proposition: The need for radical changes in national economic policy-making Let me begin with my first proposition, that membership of EMU entails much deeper policy changes than were previously acknowledged. The crisis has shown very clearly that countries that adopt the euro have to alter the conduct of their economic policies. These changes are fundamental. Among them, three are particularly relevant. First, in a monetary union fiscal and supervisory authorities have to adopt policies that counteract the emergence of private financial imbalances at the national level. This is a consequence of the ECB’s legal obligation to maintain price stability in the euro area – defined as an inflation rate of below, but close to, 2% over the medium term. Private debts denominated in euros cannot be “inflated away”. Second, fiscal and other national macroeconomic policies have to ensure competitiveness by resisting increases in nominal trends. This is the implication of sharing an exchange rate; devaluation cannot be used as a tool for any one country to regain competitiveness. Benchmarking against other euro area countries is unavoidable. Third, fiscal authorities have to build up sufficient buffers in good times to withstand adverse conditions. This follows from the prohibition on monetary financing which prevents the central bank from directly financing governments as well as the so-called “no bail out clause” of the Treaty which prohibits a Member State to assume the liabilities of another Member State.

This allowed a certain country to run deficits over 3% of GDP every year it was in EMU and never face corrective action. Moreover, the euro area surveillance framework was “blind in one eye”, with no formal framework for monitoring macroeconomic and financial imbalances. The Lisbon Strategy focused on the structural level, but on policy implementation rather than imbalances. Eurogroup discussions on imbalances had no enforcement mechanism. The Lamfalussy framework for financial supervision did not use the concept of systemic risk. Thus a situation prevailed where countries could be congratulated for strong headline fiscal numbers when these data in fact reflected substantial imbalances that were building up in the private sector. To a certain extent, the weakness of these governance procedures was linked to a misplaced faith in market discipline. The institutional design of EMU gave market discipline a central role in economic governance. The absence of a transfer mechanism between Member States was supposed to encourage markets to actively discriminate between euro area issuers. This was based on the assumption that financial markets would always have perfect incentives to enforce the “rules of the game”. This assumption, in retrospect, looks somewhat naïve. It is well established in the academic literature that markets have complex incentives and dynamics. Market psychology tends towards pro-cyclicality. Perceptions converge around certain information sources, such as ratings, or certain benchmarks, such as indices, which creates herd behaviour.
As part of efforts to ensure sustainability in this new and more challenging environment, a Task Force on Islamic Finance and Global Financial Stability was formed by the Islamic Development Bank (IDB) and the Islamic Financial Services Board (IFSB). The report, which was completed in April this year, sets out eight areas that need to be further strengthened to bring the Islamic financial system to a  2  BIS Review 95/2010  higher level of performance in this new economic and financial order that is emerging. A recommendation of the report is the establishment of an Islamic Financial Stability Forum (IFSF) based at the IFSB as a strategic platform for productive dialogues to promote financial stability in Islamic financial system. The IFSF would also be a platform for the Islamic financial system to interface with the conventional system via the Financial Stability Board to facilitate the common objective of achieving global financial stability. To enhance the efficiency of the Islamic financial institutions, a solution is currently being developed to facilitate liquidity management at both national and international level. A Liquidity Management Task Force was established by the IFSB and the IDB to develop this solution. This task force is expected to make key announcements later this year to facilitate cross border liquidity flows for efficient resource utilisation by Islamic financial institutions. Islamic finance has come a long way and is set to continue its trajectory upwards and onwards.

This is largely due to the scarcity of the instruments in the market. In Malaysia, the growing ringgit sukuk market has resulted in an active secondary market. This is largely due to the regular and varied issuances throughout the year. This is supported by the investment in research and development and in talent development to ensure the availability of expertise in the structuring of sukuk instruments and in sukuk documentation. Having the potential to innovate new instruments will depend on having the necessary talent. This is an area of focus in Malaysia to develop the skills, expertise and capability. The Islamic financial system in Malaysia now offers a wide range of financial products and services that are competitive and able to meet the changing requirements of the domestic and global economy. Way forward for the global Islamic financial system As we advance forward, we need to recognise the forces of change and the transformation taking place in the international financial system and global economy. Relentless efforts have been initiated to reform the international financial system by the international community to address the weaknesses that have contributed to the recent crisis. In this environment, Islamic finance needs to continue to evolve to remain effective and competitive. The Islamic financial system does not exist in isolation and will continue to develop as an integral part of the global financial system.
16  supply of safe European assets, facilitating the general functioning of financial markets and the specific conduct of monetary policy. 17  References Aguilar, P., Ó. Arce, S. Hurtado, J. Martínez-Martín, G. Nuño and C. Thomas (2020). “La respuesta de la política monetaria del BCE frente a la crisis del COVID-19”, Occasional Paper, Banco de España, forthcoming. Andreeva, D. and M. García-Posada (2019). The impact of the ECB´s targeted long-term refinancing operations on banks’ lending policies: the role of competition, Working Paper No. 1903, Banco de España. Arce, Ó., R. Gimeno and S. Mayordomo (2017). Making room for the needy: the creditreallocation effects of the ECB’s corporate QE, Working Paper No 1743, Banco de España, forthcoming in Review of Finance. Arce, Ó., I. Kataryniuk, P. Marín and J. J. Pérez (2020). Thoughts on the design of a European Recovery Fund, Occasional Paper No 2014, Banco de España. Arce, Ó., M. García-Posada, S. Mayordomo and S. Ongena (2018). Adapting lending policies when negative interest rates hit banks’ profits, Working Paper No 1832, Banco de España. Arce, Ó., G. Nuño and C. Thomas (2019). “The Eurosystem’s monetary policy following the end of net asset purchases”, Analytical Articles, Economic Bulletin 1/2019, Banco de España. Bernanke, B. S., M. T. Kiley and J. M. Roberts (2019). “Monetary Policy Strategies for a LowRate Environment”, AEA Papers and Proceedings, No 109, pp. 421-426. Brunnermeier, M. K., and Y. Koby (2018). The Reversal Interest Rate, NBER Working Paper, No 25406. Eggertsson, G. and M. Woodford (2003).

The Zero Bound on Interest Rates and Optimal Monetary Policy, Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, 34(1), pp. 139-235. Fiorentini, G., A. Galesi, G. Pérez-Quirós and E. Sentana (2018). The rise and fall of the natural interest rate, Working Paper No 1822, Banco de España. Galesi, A., G. Nuño and C. Thomas (2017). “The natural interest rate: concept, determinants and implications for monetary policy”, Analytical Articles, Economic Bulletin 1/2017, Banco de España. García-Posada, M., S. Mayordomo and S. Ongena (2018). Holston, K., T. Laubach and J. Williams (2017). “Measuring the natural rate of interest: international trends and determinants”, Journal of International Economics, No 108, pp. 59-75. 18
In particular, it’s self-evident that central bankers need some way of judging the degree of slack in the economy and its effect on prices. If there are either ample underused resources or binding capacity constraints, monetary policy may need to respond pre-emptively. But the concept of the output gap becomes less useful, in my view, if it morphs from being a broad signpost for policy into a de facto intermediate target for policy. If policymakers start to believe that they can steer the output gap towards zero – effectively, to “fine-tune” policy in order to achieve that – they are liable to come unstuck. And our recent experience in the euro area, coupled with my assessment of how the economy is evolving, only reinforces that view. There are three main reasons why I say this. The first is that estimating the output gap in real time is fraught with uncertainty, and the misleading signals this can give to policymakers have been painfully exposed by the crisis. In 2007, real time estimates from a range of international institutions – the European Commission, the IMF, the OECD – envisaged the euro area output gap at that time to be in the range of minus 0.6% to minus –0.2%. According to the most recent estimates, however, we now think that the euro area output gap in 2007 was in the range of plus 2.6% to 3.3%. This shows how wrong real-time estimates can be.

This is equivalent to over half of the global investment needed to contain temperature rise by 1.5°C1. 5. The public sector alone cannot meet the enormous financing needs. Commercial banks can and do play a crucial part in fostering the green transition. They can do so by adopting clear strategies and targets to develop green finance products and services to support the transition of the real economy. 6. We fully recognise that commercial banks are at various stages of this green transformation, and there is much scope to create synergy among banks in the region. The Alliance serves as a platform to foster this much needed public-private sector partnership. The IFC offers a deep pool of knowledge and expertise in climate finance across the globe. The HKMA will leverage Hong Kong’s international financial centre status as a focal point to promote green banking in the region. 7. Since its launch, the Alliance has organised capacity building events on a wide array of green finance topics, including green bank transformation, green building, voluntary carbon markets, climate risk management and green capital markets. 8. Today the Alliance is taking another big step forward by enlarging our network of partners through a membership programme. 9. The programme aims to connect banks that are aware of the urgency in green finance and are committed to mainstream green banking to help tackle climate change.
While the number of foreign banking organizations operating in the US has contracted over the last decade, the overall importance has grown. Foreign banking organizations now account for 45 percent of total banking assets in the United States, up from around 40 percent a decade ago, and they account for a substantial share of total securities underwriting in this market. Our framework for supervision and regulation is supportive of innovation. Much of the most transforming innovations in finance started in our markets or were adopted more quickly and more broadly here than in many other financial systems. The U.S. system, relative to the model in many other countries, has involved a continuous, risk-focused process of supervision and a strong enforcement mechanism working alongside the supervisory community. In addition, we have traditionally assigned a more important role to market discipline, importantly through a strong disclosure regime, in reinforcing the supervisory regime, than has been the case in other markets. Our system is successful in matching capital with ideas, in allocating savings to where returns are highest, in creating opportunities for households to better withstand the costs of change and dislocation that are inevitable offshoot of an open and dynamic market economy, and in spreading risk to where it can be best absorbed. The high degree of competition and flexibility that characterize our approach helps drive the pace of innovation, both in new forms of financial instruments and in new ways to manage risks. No financial system, of course, is without vulnerability.

One – perhaps extreme – characterisation of such robust control thinking starts from the adoption of a so-called MINIMAX strategy to monetary policy decisions.16 Even if it is too abstract to offer a practical guide to monetary policy, it can act as a device to help clarify some ideas underlying the policy debate. The MINIMAX approach involves choosing the policy setting which works best in the worst circumstances that you might face across the possibilities of how the economy behaves. More precisely, if we characterise uncertainty as being reflected in a set of different possible models of the economy, policymakers seek to minimise the welfare cost in that model where those welfare costs are highest, given the observed developments in macroeconomic data. The intuition here can be understood using a recent practical example. Most new Keynesian macroeconomic models have more than one steady state. But the inflation targeting literature originally focused on developments around one of those states, namely – and of course unsurprisingly – that defined by the inflation target itself. But in the face of deflationary risks and the aftermath of the global financial crisis, another steady state – one characterised by the zero lower bound on nominal interest rates, the liquidity trap and the threat of persistent deflation spiral – could no longer be ignored. Since this other steady state entailed lasting deviations from the inflation target, the threat of falling into it weighed heavily on central bank thinking.
With regard to this last point, the Committee has decided that the amount of excess provisions that can be included in Tier 2 capital will be limited to a certain percentage of a bank’s risk-weighted assets, which is still to be determined. This change represents a major improvement that will go a long way toward ensuring that a bank’s capital will adequately protect it against unexpected losses and that it will provide incentives to sound provisioning. I am also pleased to note that the early reactions to these changes have been positive. Securitisation The second note published in January addressed changes to the treatment of securitisation exposures. We are particularly committed to developing an appropriate and balanced treatment for banks’ exposures to securitisations since the 1988 Accord does not address this important risk management tool. At the same time, a securitisation transaction can result in an extremely intricate structure, which makes it hard to specify a simple rule. Public comments on our proposals acknowledged this challenge, as many found the proposed capital rules in the third consultative paper for securitisations to be among the most complicated parts of the New Basel Accord. Many also thought the treatment to be perhaps too conservative. In response, members of the Committee pledged in Madrid to streamline the relevant proposals. Equally important, we wanted to adopt, where possible, requirements that are more compatible with the best practices in use today. The note released in January illustrates the progress we’ve made.

Firstly, financing Asia’s retirement funding gap. Asia is experiencing declining fertility rates, increasing life expectancy, and a rapidly aging population. Between 2011 and 2030, Asia’s share of population aged 60 and above will increase from 40% to almost 50%, compared to the global average of 20%7. At the same time, public retirement and pension systems remain inadequate, and the retirement funding gap is estimated to be up to 13 years of retirement savings8. Insurers can play a pivotal role in financing individuals’ retirement security through pension, annuity and saving products, complementing public pensions. 6  Source: Munich Re Study on Asia-Pacific Insurance Market 2020 (March 2012). 7  “Financing Social Protection in Developing Asia: Now and In the Future”, NUS, 27 May 2013. 8  2013 Manulife Investor Sentiment Survey. 4  BIS central bankers’ speeches  22. Insurers in Asia stand to benefit from robust premium growth on the one hand; but will also be subject to greater volatility from fluctuations in the economic and financial market cycles on the other. The low-interest rate environment is likely to magnify the present value of future increases in longevity, which will in turn, affect the solvency position of annuity providers and pension funds. While this can have unintended consequences on insurers’ role in supporting retirement adequacy, it can provide the impetus for product innovation and alignment with the new investment and regulatory climate.
The vulnerability of countries to financial crises when private capital is freely mobile was uppermost in the mind of officials then, and has recently returned to prominence in the wake of recent crises. Capital flows do, however, bring real economic benefits. They enable savings from around the world to move to those countries with the most profitable investment opportunities, benefiting lenders and borrowers alike. And such capital flows also transfer knowledge and expertise. The most important task of any financial system is to guide the allocation of scarce capital. As Larry Summers, the former US Treasury Secretary, said earlier this year, "If you are looking for reasons why some countries succeed and why other countries do not succeed in the new global economy, a very large part of it goes to the greater success of the successful countries in channelling capital into the right places, and then making sure that it is used in a disciplined way." At Bretton Woods it was thought that post-war reconstruction could be financed by capital provided by the new World Bank, the twin of the International Monetary Fund. Hence it would be possible to finance reconstruction from long-term investment supplied by official institutions, without the necessity of allowing free movement of private capital that might raise the problem of the "impossible trinity". Soon, however, the demand for capital imports exceeded the ability of international institutions to supply loans. Private capital markets came into their own.

Jiří Rusnok: Basel Consultative Group Meeting - welcome speech Welcome speech by Mr Jiří Rusnok, Governor of the Czech National Bank, at the Basel Consultative Group Meeting, Topic "Regulatory Treatment of Sovereign Exposures - Survey of Recommendations", Czech National Bank and Bank for International Settlements, Prague, 4 October 2016. * * * Dear Basel Consultative Group members, Dear experts from all around the world, Dear ladies and gentlemen, Let me warmly welcome you to the Czech National Bank (CNB). We are proud to host the expert meeting on the Basel regulatory reform and its design, using the perspective of emerging markets and developing countries. In the wake of the recent global financial crisis, the Basel Committee on Banking Supervision (BCBS) is making reform steps towards more healthy, stable, and resilient banks and financial systems. The latest Basel reform includes more and better bank capital, leverage and liquidity requirements, as well as macro-prudential measures, ranging from G-SIB surcharges to countercyclical capital buffers. The reform effort is successfully underway and new standards are gradually being implemented worldwide, covering advanced as well as emerging markets and developing countries. When designing further details of the regulatory reform, we have to pay special attention to differences in financial systems among countries and regions. Namely, financial systems in emerging markets and developing countries are often shallower and less liquid than in advanced economies. Therefore, emerging market countries can hardly take over all regulatory measures without modifications.