samchain/econo-pairs-v1 huggingface dataset:
Inflation and monetary policy outlook  Having summarized the Central Bank’s monetary policy stance as well as the effects of this stance on the markets, I would like to share with you the economic outlook underlying our revised forecasts. The first-quarter data on the GDP were largely consistent with the outlook presented in the April Inflation Report. Accordingly, the GDP expanded by 11.7 percent year-on-year during the first quarter of 2010 (Figure 23). This increase was driven by the low level in the same quarter of 2009. Meanwhile, in seasonally adjusted terms, the GDP followed a nearlyhorizontal course by growing by 0.1 percent quarter-on-quarter (Figure 24). BIS Review 133/2010  9  The weak global economy continued to weigh on economic activity and employment in external demand-oriented sectors. The recovery in the private sector gained stability in line with our forecasts. In this respect, the largest contributors to growth in the first quarter became private consumption expenditures and the change in stocks. This was also affected by the low base in the same quarter of 2009 (Figure 25). Meanwhile, public expenditures contributed to growth by –0.8 points (Figure 26). Recent domestic demand indicators show that private consumption demand continues to grow and it will run above pre-crisis levels in the second quarter. Meanwhile, despite the rebound in the first quarter, investments remain below pre-crisis levels. These developments indicate that the total final domestic demand continued to grow in the second quarter (Figure 27).

By the end of 2003 for example, the domestic banks’ assets amounted to over 277% of GDP, compared with a euro area average of 273%, while the ratio of domestic bank credit to GDP stood at 155%, as against 143% in the euro area. More significantly, spreads between short-term lending and deposit rates in Malta, at 2.41 percentage points in 2003, were even narrower than the euro area average of 3.48 points. This suggests that the local banks compare favourably in terms of efficiency with banks elsewhere in the European Union. Furthermore, despite the global economic slowdown and the recent weak performance of the Maltese economy, the profitability of banks in Malta, as evidenced by the return on assets, has been fairly stable at around 0.8%. This compares with an average return of 0.6% recorded by European banks in 2001. At the same time, bank liquidity remains very high, with the domestic banks’ holdings of liquid assets as a share of short-term liabilities, just under 50% at the end of 2003, consistently exceeding the 30% prudential requirement. Maltese banks are also strongly capitalized. Their aggregate capital adequacy ratio, defined as the ratio of own funds to risk-weighted assets, stood at 16.7%. On the other hand, the banks’ loan portfolio still tends to be concentrated on a few sectors, reflecting the structure and small size of the Maltese economy. Furthermore, they still rely too heavily on property as collateral.
Our understanding of digital token money has been heavily influenced by cryptocurrencies like Bitcoin. Cyptocurrencies are privately issued currencies denominated in their own units of account. In our illustration, we refer to money based on cryptocurrencies as ‘crypto tokens’. Digital tokens can be issued in conjunction with a private cryptocurrency denominated in its own unit of account; but they can also use an official currency as their unit of account. On the one hand there are private issuers, who claim that the value of their tokens is stable against official currencies; in our illustration we assign this type of token money to the ‘stable coins’ category. However, state institutions such as central banks can also issue digital token money – the SNB, for example, could issue a Swiss franc token. Ladies and gentlemen, as you see, digital token money can take a number of forms. It is important that we understand the characteristics and implications of these various tokens, as they could influence the SNB’s mandate. I will now set out our thoughts on this topic. Privately issued digital token money Let me start by outlining our view of cryptocurrencies, before moving on to discuss stable coins and state-issued digital tokens. We believe that cryptocurrencies and cryptocurrencybased tokens are of only limited use as payment instruments, stores of value and units of account because they are subject to major fluctuations. Crypto tokens are more like speculative investment instruments than ‘good’ money in terms of their characteristics.

Whether or not a banking licence is required, stable coin issuers must abide by certain regulations just like any other financial market participant. These range from investor and data protection to rules on combating money laundering and terrorism financing. As you see, ladies and gentlemen, stable coins present many regulatory challenges, which in turn require close cooperation between the various authorities. This is particularly true of cross-border projects like Libra. In addition to the regulatory issues, there is the question of whether stable coins might influence the effectiveness of monetary policy. If Swiss franc stable coins were to proliferate in Switzerland, this would have no immediate impact on the effectiveness of our monetary policy. In such a scenario, the Swiss franc would remain the relevant currency. The stable coins pegged to Swiss francs would simply be another Swiss franc-denominated form of money alongside bank deposits and cash. As long as prices, wages and loans are set in Swiss francs, the SNB can influence incentives for savers and borrowers via its monetary policy and thus ensure price stability over the medium term. However, if stable coins pegged to foreign currencies were to establish themselves in Switzerland, the effectiveness of our monetary policy could be impaired. How close stable coins will get to good money and what additional benefits they will offer versus traditional types of money remains to be seen. What matters is that the various book and token money providers operate under identical competitive and regulatory conditions.
Usually, the ambition is to bring the public deficits close to, or below, the 3% Maastricht level. For example, the target in the Czech Republic is not to exceed 4% of GDP in 2006. Nonetheless, it has not yet been fully appreciated that upon EU accession, the Stability and Growth Pact will become relevant to the new member states. Admittedly, the application of sanctions will be postponed until a country becomes a member of the eurozone. But even if a country is not a subject to sanctions, as a member of the EU club it should have in place at least a credible programme towards achieving its objectives. Moreover, if a country targets relatively early eurozone entry, it should first create a sufficient safety margin above the 3% deficit limit to be insured against distress - i.e. it should avoid the mistake that has been made by some of the current eurozone members concerning the S&G Pact. I hope that the uncertainty surrounding the Pact’s future would not be viewed as an excuse for delaying necessary fiscal and structural adjustments. Even if redefined in a more flexible way, it is quite clear that the structural deficits currently observed in many of the CECs will not be tolerable under the Pact, as they will not pass the sustainability and policy mix tests. Therefore, the existence of the S&G Pact makes the case for fiscal consolidation even more appealing than it might look at first sight.

The teething problems with the Stability and Growth Pact have been an example of these challenges. One of the key motivations of the Pact was an effort to avoid free riding by national governments in a multinational currency area. In other words, the desire to achieve a proper policy mix was present at the birth of this rule. In spite of that, the Pact is now criticised for being too rigid, not allowing for a proper policy response in times of distress, and thus ultimately leading to poor real economic performance. This naturally undermines its credibility and supports calls for various “escape clauses”, to use the inflation-targeting terminology. The Pact is thus fighting the same battle that the conservative central banker was some time ago. It should evolve towards a “constrained discretion” system that will fulfil its major goals - sustainability, credibility and co-ordination of stabilisation policies - yet at the same time be sufficiently flexible to allow for proper responses in adverse periods. It has yet to convince policy-makers and the public that it can deliver the lunch without them having to pay too high a price for it in terms of cyclical stabilisation. So far, the Pact has seemed to be losing the battle. This is somewhat unfair, as the adverse period came before most EU countries had achieved the target of balanced structural budgets, which reduced their manoeuvring space considerably. In a sense, the Pact is thus paying a price for being too lax in the previous period, i.e.
As you may be able to infer from my earlier remarks, I think it is quite possible that the conditions the Committee has established to begin to normalize monetary policy could soon be satisfied. In particular, I will be evaluating the incoming information to see if it confirms my expectation that growth will be sufficient to further tighten the U.S. labor market. After lift-off commences, I expect that the pace of tightening will be quite gradual. In part, that is because monetary policy is not as stimulative as the low level of the federal funds rate might suggest. There is strong evidence that the short-term neutral real interest rate – let’s call that r* – is currently quite low, certainly below the level that historically has applied on a longer-term basis. 1 A wide range of models suggest that the short-run real r* is currently around 0 percent, far below its historical longer-run level that is estimated to be about 2 percent. 2 This benchmark “neutral” rate needs to be compared to the actual real federal funds rate. If we measure the latter by subtracting the core PCE inflation rate from the nominal federal funds rate, the actual real federal funds rate is slightly below –1 percent. Thus, current short-term real interest rates are not far below their neutral counterparts, suggesting that the current monetary policy stance is not exceptionally stimulative. The notion that r* is currently very low is also evident by more casual empiricism.

In contrast, the book is full of examples of forecasters and pundits whom Philip Tetlock refers to as hedgehogs; knowing one central truth, they take data as either affirming their views or, if not, discarding the data as unreliable, irrelevant, or uninteresting. The impact of the Great Recession has been helpful in removing some of this type of hubris, but memories are short, and Tetlock's work shows that making lasting improvements in processes that produce good judgment and decision-making requires structure and constant practice. Much of Tetlock's message is around the importance of quantifying statements. He uses a statement by former Microsoft CEO Steve Ballmer as a prime example of a statement that requires quantification: In 2007, Ballmer said, "There is no chance that the iPhone is going to get any significant market share. No chance." Depending how we quantify "no chance" and "significant market share," Ballmer was either accurate or inaccurate. Tetlock argues convincingly that quantifying statements in a manner that allows accuracy to be objectively evaluated is a critical part of good prediction. This is clearly part of the science of prediction, and I would argue not an issue for the sophisticated tools we use to monitor and forecast in central banks.5 However, our tools are so sophisticated and so cutting-edge (as the papers presented today illustrate) that they can become their own form of hedgehog.
13 A buffer of 5% gives room for systemic banks to absorb losses without being forced to close their doors and cease their service to the economy. It achieves not just greater bank resilience, but greater resilience of service to the macro economy. It’s macroprudential. Stress tests tell us that this capital buffer would be big enough to absorb a deep UK recession with sharply rising interest rates and falls in property prices, or a deep global recession, centred on China and emerging markets, with associated global deflation. But it would be a mistake to think that a 5% capital buffer is always and everywhere the right one. So the third part of our approach is flexibility. Flexibility to raise capital buffers if the threat of future losses grows, and cut them again if those threats materialise or recede. That flexibility avoids what might otherwise be a need to capitalise the system for the very riskiest times, all the time. It avoids taking unnecessary risks of holding the real economy back. There will be times when risks are heightened and so to protect the economy, banks should have bigger capital buffers. Broadly, we are seeking to match the size of those buffers – the strength of defence – to the threat of future losses as they change over time. 14 But how will we know the threat level has changed? 11  The Bank of England has called on the European Commission to revisit such rules in the European Capital Requirements Directive IV.

10  Over the three year period 2008–2010, HBoS incurred losses of £ This amounted to around 5% of its 2008 risk weighted assets £ on a Basel III basis). In the same period, RBS incurred losses on trading activities and impairments on all assets totalling £ or 5% risk weighted assets £ on Basel III basis). These banks failed because they entered the crisis with very low capital strength. On a Basel III basis, RBS is estimated to have had a CET1 ratio of just 1.97% at end 2007. HBoS had 4.1%. See FSA (2011) and Bank of England/FCA (2015). BIS central bankers’ speeches  5  That’s why, although they are well meaning, mandatory restrictions on distributions of dividends, coupons and pay when capital buffers are used can have a perverse effect. They create incentives to avoid dipping into capital buffers by taking actions that have broader economic effects. 11 Our baseline standards mean the biggest banks will be subject to a baseline capital buffer of nearly 5% of risk weighted assets, sitting on top of an 8.5% hard floor for tier 1 capital (see table 1). 12 A buffer of 5% goes beyond agreed international standards. Basel III sets a minimum buffer of 2.5% for all banks (the conservation buffer) and supplements it only for banks of global importance. We are intending to go further for big banks of domestic importance, just as the United States is going further on capital buffers for its largest banks.
Trust in banking had, by turns, suffered a double-whammy: first a slow puncture of personalised trust as banks retreated from the high street, then a high-speed blow-out of generalised trust as the crisis broke. That loss of generalised trust is not confined to the financial elite. Many other entities rely on generalised trust on the part of the public, from governments to businesses to the media. They too appear to have suffered a loss of generalised trust over recent years, joining banking at the bottom of the league table. Their crises have been different – from expenses to remuneration to mis-reporting – but the result the same. These trust-busting events have generated, as in finance, a growing perception gap between the elites and the general public. In 2016, the trust gap between the “informed public” and the “mass population” hit a new high of 12 percentage points at a global level. The UK results were even more striking. Not only was the trust gap, at 17 percentage points, higher than in any other country, bar the US. But this gap has widened progressively since 2012, when it stood at only 7 percentage points. 28  26  Sapienza and Zingales (2011). 27  European Central Bank Statistical Warehouse, available at: https://sdw.ecb.europa.eu/  28  2016 Edelman Trust Barometer. For more information, see http://www.edelman.com/insights/intellectualproperty/2016-edelman-trust-barometer/global-results/. 6  BIS central bankers’ speeches  The Bank of England has not been immune to this generalised loss of trust.

This evidence is not, however, uncontested (for example, Cecchetti and Kharroubi (2012)). 5  For example, Beck et al (2000) show evidence that finance has an important impact on growth by fostering productivity growth and resource allocation rather than capital accumulation. 6  For example, Froote et al (1993). 2  BIS central bankers’ speeches  co-operation forged between different groups of people over time. It is the sociological glue that binds diverse societies into a cohesive whole. 7 The global financial crisis of the past few years provides a case study of how these capitals, plural, can be decimated by crisis and the toll taken by society. Consider financial capital. At their peak, the world’s 100 largest banks had a market capitalisation of around $ trillion. That was around 8.5% of annual global GDP. At its trough, this had fallen to $ trillion – a destruction of financial capital of $ trillion. Banks have subsequently recovered some of their poise. Nonetheless, the market capitalisation of the world’s 20 largest banks today remains around half its value in 2007. Their market value lies well below the book value of their assets, with the ratio of so-called “price to book” currently around 0.8. Put simply, that means many banks are a valuedestruction machine for investors. Yet these losses pale by comparison with the losses felt by the wider economy as a result of the financial crisis. In the UK, eight years on, GDP is still tracking around 15 percentage points below its pre-crisis trend.
But what if we take banks as a whole? The answer is that banks create deposits when they extend loans to their customers. When a bank grants a loan, money that did not exist before is credited to the customer’s account. The bank does not have to find someone who wants to save before it can make a loan. The bank creates its own funding in the act of lending. Banks thereby also create the money we all use. No other financial firm can do that.5 Non-bank financial institutions must hold deposits in a bank for them to be able to pay another party. Almost all the money we spend daily is deposit money created by a bank. There is little likelihood that many customers will withdraw large amounts simultaneously. Banks can therefore create far more deposits than they can pay out at the same time.6 But a bank cannot extend loans and create deposits without limitations. First, it must assess the customer’s debt-servicing capacity, ie credit risk. Second, the bank must assess the degree of liquidity risk associated with lending long and creating deposits that customers can withdraw at any time. Third, it must comply with statutory rules. Banks’ willingness to assume some degree of liquidity risk is a public good. In its absence, we would have less access to long-term loans and money in the form of bank deposits. On the other hand, too much liquidity risk entails a risk of instability and crises like the one we experienced in 2008.

In contrast, the need for adjustment is less in those large corporations whose growth has largely been based on increased geographical diversification. All the foregoing factors will influence the pattern of exit from the recession. The need to reduce debt levels will, coupled with fiscal consolidation demands, continue to limit the possibilities of expanding domestic spending, meaning that the recovery should turn on net external demand. At the same time, it is necessary to begin to reverse the dynamic of external debt, which will require further progress in attaining a more balanced foreign trade position, overcoming the obstacles posed by the high investment income component and the dependence on energy imports. A pick-up in competitiveness will thus be pivotal if external demand is to stand in for the shortcomings of domestic demand and boost growth on the supply side, which in the current circumstances is the only way forward. To overcome the crisis an economic policy geared to the medium term is needed to help complete the correction of the macroeconomic imbalances still in place, to further the restructuring of all sectors and to allow the structural reforms outstanding to be tackled. BIS central bankers’ speeches  3  Fiscal consolidation is unavoidable if growth in the medium term is to be restored, despite the fact the scale and timing of the adjustment required may have adverse effects in the short term. This is the only strategy available for restoring market confidence.
In financial crises, savers and investors lose money for two reasons: first and foremost, because their pension funds and direct investments such as stocks, bonds and real estate lose value, and also second, because taxpayer money has to be used to rescue banks. Financial crises occur when risks are underestimated and price expectations of investments are exaggerated. This can lead to credit and asset price bubbles which sooner or later burst. When banks do not hold enough equity capital to absorb the losses they incur, they fail. Sovereign money would do nothing to change this situation. Risks can be underestimated and future returns overestimated in a sovereign money system too. Even without recourse to sight deposits, banks can grant loans which are too risky, hold too few provisions for times of crisis and become insolvent if a bubble bursts. Moreover, a key problem in the financial crisis was banks’ heavy reliance on short-term financing from the money market. These interbank loans proved to be a less stable source of financing than private customers’ sight deposits; in fact they dried up at the very start of the financial crisis in 2008. Sovereign money would not help to eliminate this risk of instability either. There are other, far more effective approaches to stave off credit and asset price bubbles than sovereign money. The significant increase in the capital and liquidity requirements for banks in the aftermath of the financial crisis is one such approach.

Another objective is to reduce the basis risk that arises from having liabilities in the form of time deposits that are linked with HIBOR and loans that are linked to prime. The deregulated environment that banks now face will add new complications to the process of managing interest rate and liquidity risks. I shall return to the subject of deregulation in a moment. A second prerequisite for success is the need for banks to develop new sources of income. It looks as if the days of easy profits from mortgage lending have gone, and the banks now need to work harder to generate income growth. The introduction of new fees and charges on deposit accounts is one manifestation of this process. Another is the increasing shift of some banks into higher margin, but also higher risk, products such as credit cards and other types of personal finance. Banks are also trying to become financial service providers rather than just banks. The aim is not just to broaden income sources, but also to reduce the volatility of income through more reliance on recurring fees and commissions. One way of achieving this is to move into the realm of wealth management, by which I mean securities, unit trusts, insurance, pensions and private banking. The interim results of some of the local banks showed a growing contribution from this area, including particularly sales of guaranteed funds. As a result, I understand that May of this year was one of the best ever months for fund sales in Hong Kong.