samchain/econo-pairs-v1 huggingface dataset:
For several years, central banks, including the Bank of England, had warned that financial markets were underestimating risks. So why, you might ask, did the Bank of England not do more to prevent the disaster? We should have. But the power to regulate banks had been taken away from us in 1997. Our power was limited to that of publishing reports and preaching sermons. And we did preach sermons about the risks. But we didn’t imagine the scale of the disaster that would occur when the risks crystallised. With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called “light-touch” regulation hadn’t prevented any of this. And in the crisis, we tried, but should have tried harder, to persuade everyone of the need to recapitalise the banks sooner and by more. We should have preached that the lessons of history were being forgotten – because banking crises have happened before. In the 1930s, the Great Depression saw a collapse of the banking system in the United States. So severe was it that President Franklin Roosevelt, only a week after his inauguration in March 1933, announced a bank holiday shutting the banks to provide a breathing space so that confidence could be restored.

The realisation of the true state of the banking system led to a collapse of confidence around the world and a deep global recession. Over 25 million jobs disappeared worldwide. And unemployment in Britain rose by over a million. To many of you this will seem deeply unfair, and it is. I can understand why so many people are angry. It’s vital that we learn from the crisis. A good place to start is to ask, as the Queen famously did, “Why did no-one see this coming?” The answer is extremely simple: no-one believed it could happen. Recessions were supposed to follow booms and high inflation, not periods of steady and sustainable growth with low inflation. There seemed to be no reason to expect the worst recession since the 1930s. After the ravages of inflation in the 1970s – younger listeners might need to be reminded that inflation hit 27% in 1975 – it was I think understandable that we focussed on the need to bring inflation down. But conquering inflation was not enough to ensure stability. Although inflation was under control, fragilities were building in the banking system. On all sides there was a failure of imagination to appreciate the scale of the fragilities and their potential consequences. No-one could quite bring themselves to believe that in our modern financial system the biggest banks in the world could fall over. But they did. That isn’t to say we were blind to what was going on.
Internal auditors report on these aspects to the top management of a central bank, while the external auditors do so to alert both the management and the legislators. Such compliance auditing is necessary and useful, but not sufficient to gauge the risks faced by a central bank and, accordingly, to take early prescriptive measures. A central bank may operate quite perfectly with regard to its internal procedures and systems. The accounts of a central bank may have been prepared having compliance to the best accounting standards. The external auditors may have given an unqualified certification to a central bank’s financial statements. In the eyes of the public, a central bank may have been projected as a model institution to be emulated by others. Yet, all these salutary features which pertain to a central bank’s past or current actions may hide the major risks it may be facing with regard to its future operations. It is the duty of the auditors to dig out these risk aspects and alert the management and, if necessary, the legislators, before it becomes too late to take any prescriptive measures. This poses a daunting challenge to the auditors of a central bank. A central bank, with its unrestrained resources, may have staffed itself with the best technical talents in the main field of its operations. Auditors are now required to assess their work and make judgments about the adequacy and the consequences of such work.

Monetary policy  2  For example, John suggested in February 2008 to lower the standard Taylor Rule prescription by 50 basis points to take into account the increase in the LIBOR-OIS spread at that time. See Monetary Policy and the State of the Economy, Testimony before the Committee on Financial Services, U.S. House of Representatives, February 26, 2008. 3  See James D. Hamilton, Ethan S. Harris, Jan Hatzius, and Kenneth D. West (2015), The Equilibrium Real Funds Rate: Past, Present and Future, working paper for U.S. Monetary Policy Forum, August. 4  See Thomas Laubach and John C. Williams “Measuring the Natural Rate of Interest”, Review of Economics and Statistics, November 2003, Vol 85, No. 4, pp 1063–1070. Updated estimates available from the Federal Reserve Bank of San Francisco. 2  BIS central bankers’ speeches  affects economic activity through its impact on financial conditions – including the level of equity prices, bond yields, the foreign exchange value of the dollar and credit conditions. If the relationship between the federal funds rate and other indicators of financial conditions were stable, then one could just focus on the level of short-term rates. 5 But, because financial conditions vary considerably relative to short-term rates, as we have seen in the financial crisis and its aftermath, one needs to consider developments in financial conditions more broadly in setting monetary policy.
BIS Review 50/1998  -8-  Employment growth in the EU area has been weak and unemployment in many countries has been high for a long time compared, for instance, with the United States. Labour force mobility is also lower than in the United States. But we also know that the Member States differ considerably. Some, such as the Netherlands and the United Kingdom, have been comparatively successful in generating new jobs. Others have done considerably worse. The remedies chosen by the successful countries vary, too. Some have adopted highly decentralised solutions and extensive deregulation. Others have sought to build up a consensus and make minor changes in some public systems. The question of how labour markets in Europe work and how they can be improved is already very much a part of the European agenda. There have been political initiatives in a variety of contexts in recent years, including national action plans for employment. These plans include the analysis of labour market laws, effects of tax systems and business conditions. Processes are being built up, inspired by the Maastricht Treaty’s successes with budget policy. The annual employment guidelines require each Member State to present a national action plan with a view to improving people’s employability, entrepreneurial spirit, flexibility and equality. These national action plans are to be specific, with goals and time schedules, so that they can be evaluated. Good examples are to be highlighted so that other countries, if they wish, can adopt them.

Structural questions have been brought to the fore during the British Presidency and there have been somewhat more concrete discussions in various committees about how to get Member States in step here as well. One approach involves finding good examples in different fields, just as in the case of employment, and analysing the structural problems of each country. This process generates what the British call peer pressure, which can also contribute to the desired national changes coming about. Once again, however, the decisions in this field largely have to be made at national level. But to perhaps an even greater extent than with fiscal policy, the major benefits of a successful national policy will accrue to the country in question. By itself, this seems hopeful and should facilitate changes. At the same time, the political resistance in most EU countries is strong. Some believe that the very fact of monetary union will generate desired reforms in labour markets. Possibly but not necessarily - when high unemployment rates in recent decades in many EU countries have failed to produce changes, why, it may be asked, would monetary union be more successful? In conclusion, I consider that much work at EU level will be invested in political education and a search for methods to gain support for changes in this field. But I do not foresee the same pressure in the joint processes as in the case of fiscal policy; there is less need of a common approach.
To keep overall demand growing – and inflation stable – in the face of trade deficits, they needed to keep short-term interest rates low and domestic spending strong. In the United Kingdom, Bank Rate has averaged just 4 ½% in the past 5 years. In 2003, it was as low as 3 ½%. But even then, the UK had the highest interest rate in the G7. In the United States, the Federal Reserve cut its interest rate to just 1%, and in Japan, experiencing deflation, interest rates were just 0.1%. Those developments were inevitable if the world economy was to continue to grow. But the price was unusually low interest rates – both short and long-term – which were considerably below the levels to which most investors had become accustomed in their working lives. Dissatisfaction with these rates gave birth to the “search for yield”. This desire for higher yields could not be met by traditional investment opportunities. So it led to a demand for innovative, and inevitably riskier, financial instruments and for greater leverage. And the financial sector responded to the challenge by providing ever more sophisticated ways of increasing yields by taking more risk. But some of those new instruments were so opaque  BIS Review 114/2007  1  and complex that investors lost sight of the risks involved. Until, that is, they were brought down to earth with a bump on August 9.

To pretend that retail depositors can be treated in the same way as unsecured creditors in a business as complex and opaque as some of today’s banks is wholly unrealistic. The upper limit on deposits that qualify for 100% insurance has sensibly been raised, and the Government has made clear that a longer term reform of deposit insurance is also under review. Third, central banks operate as lenders of last resort. We need to be able to lend against good, albeit illiquid, collateral, and at a penalty rate, without destabilising further any bank to which we lend. Reform of deposit insurance will go a long way to achieving this. But in an age of instant communications, where the news of a facility for Northern Rock was leaked even before it was officially announced, it may be difficult to adopt the quiet methods used by central banks in the past. We will, however, explore ways to restore the use of discretion in central bank operations. Finally, it is worth remembering that, unlike the cases of BCCI and Barings a decade or more ago, or the problems with pensions and life insurance more recently, not a single depositor has lost a penny. I hope, however, that the three lessons I have identified will be incorporated in future legislation. It is equally important that the Bank is not distracted from the job of setting interest rates to meet the 2% target for CPI inflation.
This time around, the US strongly increased fiscal expenditure and borrowing, which was used to finance the purchase of overpriced housing. As we now know, and warned insistently before the crisis burst, this mix was bound to lead to severe adjustments, sooner or later. High terms of trade, capital inflows and growth rates have resulted in exchange rate appreciations in most emerging and oil-exporting economies (figure 5). In real terms, the current level of the exchange rate is at its lowest in the past decade in most emerging economies (figure 6). Vigorous economic growth in these economies means also strong currencies, while the opposite is true in developed countries. As I said before, the high indebtedness of developed economies holds back domestic demand growth. Meanwhile, in emerging economies domestic demand growth is thwarted by constraints in domestic supply, which require redirecting purchases towards imported goods. The adjustment of the global economy calls for a change in demand composition, and the exchange rate adjustments works in that direction. It is logical to expect that once the developed economies recover their strength, their currencies will follow suit. The transition may take some time, however. Although the adjustment is good for the world economy, it entails tensions that may require exceptional policies. Thus, several emerging economies, Chile included, have taken action to moderate the exchange rate adjustment.

The economy must continue on a growth path consistent with its capacity, while the inflation trend must be aligned with the target. Moreover, the asymmetric pace of growth between the developed and emerging economies brings along exchange rate tensions that subject us to new trials. We face a complex scenario. Inflation has proceeded in line with the target, although, as we have been saying, it may cross over the upper bound of our tolerance range because of the strength of the world price hikes for oil and foodstuffs. It is important to limit the unwanted propagation of these shocks to other prices. Accordingly, the Bank has quickly come to the scene, making sure that no inflationary pressures incubate that might compromise the fulfillment of the objective of low, stable inflation. We have withdrawn the strong impulse that monetary policy brought in 2009–2010. We estimate that the MPR will have to be raised further in the coming months, but by how much and exactly when will depend on the implications of incoming data, without ruling out any scenario a priori. As always, the Board will guide its decisions to ensure that inflation remains low and stable, which is the best contribution that the Central Bank of Chile can make to the country’s development. Thank you.
There appears to be a good deal of uncertainty concerning the conditions surrounding the availability of official finance. It could be that investors are demanding higher interest rates to compensate for that uncertainty. There is also uncertainty among market participants about what would happen in the event of a debt restructuring and the expected repayments that would ensue. One role for the official community is to try and mitigate these uncertainties through greater clarity about the criteria for official lending and its crisis resolution policies – a theme I return to below. If successful, one outcome of these reforms would be lower borrowing costs for emerging markets. Investors are also starting to differentiate among borrowing countries more clearly than before. This has led to a greater dispersion of spreads on emerging market debt. Before the Russian crisis these spreads were tightly compressed with the central 50% of the distribution of emerging market spreads covered by a range of only around 100 basis points. At present, the range covered by the central 50% of the distribution is over 500 basis points. Correspondingly, there has been a sharp fall in the correlation between changes in emerging market spreads. The rolling 26 week correlation between changes in emerging market spreads reached a peak of around 0.8 at the time of the Russian crisis. Since then it has steadily declined, reaching a level of only 0.2 before the recent rise to around 0.35 following adverse developments in Turkey and Argentina. This differentiation in spreads is a welcome development.

In the field of transparency, the key elements of the new partnership are, first, a commitment by emerging market economies to implement transparency about transparency by publishing ROSCs, and, on the part of the international community, new opportunities for emerging markets to engage in the process of constructing and developing codes and standards. There is encouraging evidence of greater collaboration and consultation between developed and developing countries in the design and implementation of the core standards – for example, on banking, securities and insurance regulation, data, payment systems, insolvency and transparency of monetary, fiscal and financial policies. That is all to the good and there is further to go. It is crucial that we find new ways of involving emerging market countries in the process of designing and implementing standards and codes. In this area, ownership is all. Transparency cannot and should not be imposed on any country. Countries themselves benefit most from being transparent and releasing the reports of assessments by the IMF about their financial systems. And the enthusiastic embracing of transparency by a number of emerging markets has paid off in terms of better relations with creditors. Ultimately, the most successful route to enhance the influence of emerging markets on the development of standards and codes is to strengthen the role of the IMF and the World Bank, the twin institutions that can claim legitimacy through the membership of 183 countries.
This trend has resulted in increased cross border financial flows. My remarks this morning will focus on three aspects of Islamic finance that is of interest to Central Banks. The first relates to the financial stability of the Islamic financial system and to highlight the sources of stability that is derived from the inherent elements of Islamic finance and the regulatory and supervisory framework that has been developed to deal with emerging risks that are specific to the Islamic financial system. The second relates to the role of the Central Bank in developing the Islamic financial infrastructure, including the international Islamic financial architecture. The third aspect concerns the implications of the increased internationalisation of Islamic finance and the potential for greater interdependence thus requiring more effective surveillance and cross border coordination to ensure financial stability across jurisdictions. Intrinsic value propositions of Islamic finance The strengths in Islamic finance are derived from the principles of Shariah that require financial transactions be accompanied by an underlying productive economic activity thus resulting in a close link between financial and productive flows. This requirement reduces the prospect for over-exposure to risks associated with excessive leverage and imprudent risk taking. Fundamental to Islamic finance is the profit and risk sharing which explicitly requires the appropriate due diligence and ensures that the profit is commensurate with the risks. The risk associated with the real investment activity is therefore explicitly integrated into the financial transaction.

While the basic legal, regulatory and supervisory framework that takes into account the distinctive features of Islamic finance are already in place, efforts are now underway to put in place a comprehensive infrastructure to deal with the new challenges confronting the international financial system. Looking beyond the current crisis, an integrated crisis management framework will be part of this infrastructure. It is recognised that a more facilitative and modernised legal framework is also required and that the boundaries of the regulatory framework for Islamic finance would also have to be regularly adapted to keep pace with the evolution and transformation of the financial system. Finally, the supervisory framework for Islamic finance is also being reinforced by a financial safety net framework that comprises the lender of last resort facility and a deposit insurance system. These financial arrangements are now in place in Malaysia. Also important are the institutional arrangements for resolution of troubled Islamic financial institutions. In Malaysia, we have in place a mandated resolution mechanism to provide for expedient, effective and cost efficient resolution of Islamic financial institutions. Yet to be put in place however, is a mechanism for cooperation between regulators within and across jurisdictions for resolution to contain potential systemic risks beyond the national boundaries.
Similarly, the bank may be thought to be too important to be allowed to fail, in which case people might expect an injection of capital by the state to make good abnormal losses. In any of these cases, there is an incentive for the bank to raise leverage. Moreover, the lower is the perceived uncertainty associated with the loans, the more the bank can afford to leverage up, while maintaining the same uncertainty over the return on its capital. So the environment of the Great Moderation would have been particularly conducive to intermediaries increasing the leverage of their positions. The incentive distortions here are intrinsic to the process of financial intermediation. The next set of distortions is more specific to the present conjuncture and relates to securitisation. Securitisation is attractive because selling on the loans and the attendant risks enables a bank to leverage more loans off its capital. And, as noted earlier, such distribution of risks should in principle be beneficial for the economy. Unfortunately, it transpired that this model, or at least its application in the past few years, suffered from a number of incentive problems. First, there is the obvious one that if a loan originator can sell a loan on at par, then he has less incentive to take care who he lends to.

In 2007, for instance, the US current account deficit stood at $ billion, while China’s surplus stood at no less than $ billion. Moreover, the deficits are also large in historical terms. A number of competing explanations have been advanced for this pattern of flows. First, it could simply reflect the juxtaposition of strong demand in the United States, coupled with China’s adoption of an undervalued exchange rate in order to accelerate the development of the traded goods sector and to soak up labour from the rural areas (Dooley, Folkerts-Landau and Garber, 2004). Second, it could reflect a “savings glut” in the surplus countries (Bernanke, 2005), resulting from a lack of an adequate household safety net in China, the accumulation of precautionary holdings of international reserves by several emerging market countries after the Asia crisis, and rational savings of the windfall gains from higher oil prices on the part of oil producers. Finally, it has been suggested that the United States holds a comparative advantage in the creation of “high quality” financial assets from real investments, leading to a direction of savings into the US financial markets (Caballero, Farhi and Gourinchas, 2008). Now while these flows are certainly likely to have added to the growth in credit, on the face of it they could only be a part of the explanation. For instance, the cumulative US current account deficit over the 2000-7 period was $ trillion.