samchain/econo-pairs-v1 huggingface dataset:
Leverage and financial stability The fundamental problem in the financial crisis was that the ability of many highly-geared financial institutions to withstand substantial – but by no means unprecedented – falls in the  4  BIS Review 133/2010  value of their assets was rightly perceived to be low. Much of the debt of the highly leveraged institutions was wholesale funding – some of which proved footloose when there was increased concern about asset values. It was reasonable to have concerns over the strength of banks because leverage was so high. Between 2005 and 2007 major UK banks – which were by no means the most highly geared – had leverage ratios that averaged slightly above 30. The highest ratios – and this was for major banks – were close to 60 (Chart 5–6). By leverage I mean total bank assets (netted for derivatives and minus cash at the central banks and goodwill) relative to shareholder equity (also net of goodwill and excluding minority interest). So true equity capital was often barely 2% of total assets. The vulnerability that high gearing brought to financial institutions meant that even relatively modest falls in asset values triggered concerns about solvency that in turn led to funding problems that threatened to be – and in some cases became – self-fulfilling as sources of funding dried up and some assets needed to be sold because they could no longer be financed.

They show that big dislocations are almost invariably preceded by large increases in the amount of debt in the economy. It is the combination of very substantial rises in asset prices and in debt that has often proved toxic. Sharp rises, and subsequent falls, in asset prices which have not been preceded (and fuelled) by large rises in debt have been less disruptive. The contrast between the fallout from the sharp falls in equity prices in the early 2000s and the fallout from declining asset prices – most notably US house prices – at the end of the decade is revealing. The run-up in stock prices at the end of the 1990s (“the dot.com bubble”) was an equity market phenomenon and the investment activity it fuelled and reflected was equity financed. The American stock market lost nearly half of its value between March 2000 and July 2002. The fall in asset values wiped out a great deal of the financial wealth of holders of equity, but it did not bankrupt large financial institutions and the knock-on effect on the wider economy was limited. In contrast, the falls in asset values that became serious in 2007 have been followed by financial crises and recessions that have been exceptionally severe in countries where the build-up in debt had been great. The easing of monetary policy in the wake of the recent financial crises has been greater than in the wake of the equity crash of 2001 – both in the US and elsewhere.
One example is that it seems to be possible to reach the target with a sufficiently powerful expansionary policy. One reservation here, of course, is that we still cannot be certain that inflation will really remain around the target, even if this is what the Riksbank expects. Another reservation is that neither is it obvious what part the Phillips curve has played in the rise of inflation in Sweden so far. Increased resource utilisation has certainly gone hand in hand with rising inflation, but we have also seen that wage increases have so far been surprisingly modest given the economic situation. In that sense, it is too early to say whether Sweden's experiences suggest that the Phillips curve is continuing to work like usual. But our experiences nevertheless suggest that central banks’ inflation targets are fully possible to reach. And the recent, relatively rapid increases in service prices are, after all, a sign that some form of Phillips curve is active (see Figure 5). There has been quite a lively international debate on the Phillips curve recently – about its slope and even about its existence. 15 Personally, I take a fairly agnostic view of it. I see it as a mostly qualitative relationship between resource utilisation and inflation that does not say much more than that high resource utilisation sooner or later tends to lead to prices and wages rising more rapidly and that low resource utilisation leads to them rising more slowly.

But what can be said so far is that we in Sweden have already been in the situation that other countries may be about to enter and have had, for some time, the debate that may be on the horizon there. In this respect, we are, in a sense, ‘ahead of the cycle’, both as regards the development of inflation and the monetary policy debate. It could therefore be worthwhile to summarise our experiences so far. Maybe there will be a few lessons that other countries and central banks may find useful and that have implications for the international debate. So let me start there. When I discuss the lessons that I think we have learned, I would like to divide the period after the global financial crisis into two different sub-periods and discuss them separately: the period of falling inflation 2011–2014 and the period of rising inflation 2015–2017. I would like to emphasise that, as usual, I am expressing my personal opinion. It is possible that my colleagues on the Executive Board have come to the same conclusions as I do here, but it is also conceivable that they have made a different interpretation. See Jansson (2016), where I discuss the criticism of the inflation target in more detail. It should be emphasised that this was one type of criticism that was expressed. In the speech, I also address other types of criticism, with less far-reaching implications. 4 Yellen (2017b). 5 Brainard (2017). 6 Draghi (2017).
Both the banks and the supervisors conduct independent assessments of the impact of the stress scenarios on the various business lines of the bank. This approach provides a cross-validation of each bank’s analysis, while at the same time generating results that can be compared across the participating banks. Another important feature of CCAR is that the scenarios and the key aspects of the banks results are made public rather than treated as confidential supervisory information. This transparency is important for supporting market confidence in the banking system. Finally, a critical aspect of the stress testing process is the supervisory review of the capital planning process for each participating bank. This planning process is what reinforces and promotes a proactive stance by management to emerging risks. The structure of bank management compensation also could be designed to provide incentives that reinforce a proactive, forward-looking risk management approach. As I will discuss in a moment, sufficient long-term debt that can be converted to equity is an important element of an effective resolution mechanism for G-SIFIs. While the magnitude of this longterm debt needs to be sufficient to ensure that public funds are not at risk in the event that a resolution of a firm is necessary, making this long-term debt a component of management compensation might also be used to help reduce the likelihood of a default. Long-term debt provided by outside creditors exposed to risk of default can create useful market discipline. However, outside creditors do not have the same information or decision rights as inside management.

This led to a substantial accumulation of OFR, well in excess of what was required for MAS’ central banking operations. So, in 1981, the GIC was set up – in today’s parlance, a sovereign wealth fund – to manage part of the reserves for higher returns without the central bank constraints of liquidity. Part of the OFR was transferred from MAS to GIC, which was tasked to invest the reserves in a globally diversified portfolio of asset classes with a higher risk profile to deliver good long-term returns. The third pot of reserves is managed by Temasek Holdings, an investment company wholly owned by the government. 3/7  BIS central bankers' speeches  Temasek’s history also dates back to the early years of Singapore’s development. There was little private capital in those days but a rapidly industrialising economy needed key infrastructure – in aviation, in shipping, in telecommunications, in banking, and so on. The government therefore set up enterprises in these areas. Temasek was formed as a holding company in 1974 for these enterprises so that the government could focus on its roles of policy making and regulation without conflict, while Temasek would own and manage these investments on a commercial basis. Today, Temasek is an active, equity investor that aims to deliver sustainable long-term shareholder value. More than a quarter of Temasek’s portfolio is invested in Singapore, with the rest invested in Asia and global markets.
Yet, vigilance in this area is important to prevent buildup and materialization of systemic risk. Last year was no exception in terms of close monitoring of the soundness of the banking system, and changes in the prudential regulation, which were an appropriate balance between the need to support private sector financing, while maintaining the health of the banking system at the same time. What was the monetary policy stance like in 2014 given the already elaborated economic and financial conditions? In general, the accommodative stance was maintained. The main interest rate was maintained at the historically lowest level, the targeted measures to support net-exporting and electricity producing companies were extended until the end of 2015, and certain credit-supportive macro-prudential measures were undertaken. This relatively loose stance was maintained as a consequence of the “benign” external position, which did not jeopardize the foreign reserves, and enabled a rather balanced foreign exchange market during the year. Low inflation was also in favor of maintaining the accommodative stance. Yet, the room for monetary policy accommodation appears to be largely exhausted. The outlook for the 2015–2016, is more or less expected to resemble the state of the economy in the previous year. Growth of the economy is expected to accelerate to 4.1% and 4.5% in 2015 and 2016. The fundamental factors to underpin the growth dynamics remain the same. The boost to the export and investment is expected by the new and the existing foreign companies, as well as those envisaged to enter the market.

Investment cycle is expected to be further strengthened by the continuation of the productive fiscal investments. As the external demand is envisaged to recover further, additional stimuli is expected through this channel. The above mentioned growth factors are expected to strengthen further the labor market and the disposable income of the households, hence boosting the private consumption as well. The growth expectations provide room for additional rise of the deposit potential in the banking system, which accompanied with the rise in the credit demand and the willingness of the banks to lend, should enable credit growth at a rate of 9–10% in the period to come. The inflation is expected to be influenced mainly by the global prices of primary commodities and the consumers prices of our main trading partners. An average inflation of 0.5% is expected for 2015, with the current forecast indicating its reversal to 2% in 2016, reflecting the rise in the demand and in the import prices. The structural improvements in the export sector are expected to continue in 2015, which along with the overall external recovery and the much lower oil prices, are envisaged to bring about a moderate current  2  BIS central bankers’ speeches  account deficit of bellow 1.6% of GDP. In the following year, widening to 3% is expected, reflecting the fall in private transfers and import pressures from the new investment.
7  BIS Review 137/1999  Employment was provided for more and more people, living standards rose and growth was among the highest in the world. Opinions about the causes of the pronounced change in the Swedish economy are not completely unanimous. An increasingly stable form of government presumably contributed. A series of constitutional reforms provided a guarantee of stability. The stable prices presumably played a part. When inflation is low or the price level is stable, those who have to plan for the longer run face less uncertainty. After a rather chaotic period in the history of the monetary system, the introduction of the silver standard in the early 1830s and subsequently the gold standard led to price stability. Another significant factor was probably the credit system’s development. Banks were established and the abolition of interest controls was followed by more financial expertise. That made it possible to exploit the inventions and finance investments in the emerging industries. Economic activities benefited from the abolition of trade guilds, freedom to trade and the reform of joint-stock companies. The reform of elementary education was, of course, another important step that ultimately promoted human capital. This catalogue is not intended to be a complete account of all the factors behind Sweden’s transformation from a poor country into a rapidly expanding industrial nation. The point I want to make is that a variety of institutional changes seem to have been needed to provide a stable framework for the subsequent process of industrialisation.

Mr Bäckström discusses the prospects for the Swedish economy on the threshold of the new millennium  Speech given by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, at the Umeå School of Economics and Business Administration on 3 December 1999. *  *  *  First a word of thanks for the invitation to Umeå to discuss the prospects for the Swedish economy on the threshold of the new millennium. In an economic perspective, the last century of this millennium appears to be unique. The dramatic improvement in prosperity and living standards that has taken place during the 20th century is unparalleled in the history of our country. As recently as the 19th century, Sweden was poor, perhaps even one of the poorest European countries. History teaches us that material prosperity can never be taken for granted. Countries and areas can suddenly rise up and become culturally and materially prominent only to subsequently fall back again into poverty. There are examples of this in the present millennium as well as in those preceeding it. Economic growth is not just a matter of the usual economic aspects, i.e. accumulation of real capital and population increase. There are cases where countries with a high rate of capital investment and relatively high population growth have failed to transform this into rapidly increasing material prosperity. The former planned economies are clear examples of this. Something more is evidently required.
The rate of petroleum revenue spending – growth in public expenditure – is important for developments in competitiveness, which is also referred to as the real krone exchange rate, in the long term. But, in the short term the krone exchange rate can vary widely, and it depreciated in autumn 2008 because capital sought safe havens. This helped Norwegian manufacturing in the first phase of the downturn. Since then, the krone has appreciated considerably. In 2009 and 2010, government petroleum revenue spending shows a substantial increase and foreign investment via the wealth fund a decrease. This increases commercial demand for NOK, which directly contributes to an appreciation of the krone. More fundamentally, the krone is influenced by the difference in activity at home and abroad and how fast the interest rate has to be increased in Norway to keep inflation low and stable. The economic geography of Norway will change over the next 10–15 years. The domestic cost level and the real economy crisis abroad will bring pressure to bear on jobs and businesses in manufacturing communities. Job losses may have the most severe effects in areas where manufacturing has the highest concentration. In the ten most typical manufacturing municipalities Vestre Toten in Oppland, Lund in Rogaland, Fusa in Hordaland, Årdal in Sogn and Fjordane, Ulstein, Hareid, Sykkylven, Stordal and Haram in Møre and Romsdal and Verran in Nord-Trøndelag, local manufacturing accounts for more than a third of total employment.

The FPC has set out a steady-state resilience framework to promote financial stability. But let me leave you with an encouragement to each play your role. LDI fund managers and pension schemes must ensure lessons from the crisis are learned and fully embedded into their operations and onto their balance sheets. I look forward to your support in building the operational and financial resilience that will help ensure we deliver financial stability. I’d like to thank Alex Briers and Natan Misak for their assistance in drafting these remarks. I would also like to thank Renée Horrell, David Baumslag, Leo Fernandes, Pierre Ortlieb, Steven  Page 8  Dodkins, Stephane Amoyel, Lee Foulger, Gian Valentini, Clare Macallan, Thomas Wise, Danny Walker, Ali Moussavi, Andrew Bailey, and Georgia Waddington for their helpful input and comments. The views expressed here are not necessarily those of the Financial Policy Committee. 1. See A roadmap for increasing productive finance investment 2. The responsibility for supporting and enabling an orderly transition to net zero is wider than the pension sector. It is for the entire finance sector to support and enable that transition. See Climate action: approaching a tipping point? − speech by Sarah Breeden 3. See Risks from leverage: how did a small corner of the pensions industry threaten financial stability? − speech by Sarah Breeden 4. In this speech, I will use ‘LDI funds’ to refer to leveraged LDI funds and LDI mandates in which many pension schemes invest. 5.
Average annual growth of almost 7 percent between 2002 and 2007 faltered in 2008 and turned into a contraction in 2009 as the exports and investment flows dried up considerably due to the global crisis. However, all signs now indicate that the economy has rebounded quickly and is headed towards renewed growth and an improving fiscal balance in 2010. The resilience of the Turkish financial system, combined with our flexible and effective liquidity management framework shaped by the experiences of past crises, has turned out to be considerable assets in managing the recent crisis. As a result, growth forecasts of international institutions for the Turkish economy have been revised upwards repeatedly and reached as much as 7.2 percent, the highest among OECD countries. The crisis and slowly emerging global architecture in its aftermath present major opportunities that have once again highlighted the importance of economic cooperation  2  BIS Review 101/2010  and coordination among countries and economies. In the case of the Middle East this is perhaps best embodied in the multiple synergies in financial integration and joint investment opportunities between Turkey and the Arab world. It is a great pleasure to see that the relations within our region have been strengthening on a solid ground. The strong historical, cultural and social ties among our countries constitute a solid basis to further develop multilateral relations.

While dealing with short-term issues, we need to pay attention to long-term challenges that could restrain our competitiveness, productivity, and growth potential. The rising trend of disruptive technology will also come into play as it brings both opportunities and 3  threats. To tackle these long-term challenges, structural reforms are underway to upgrade and unlock our economic potential in the long term. The government has made structural reform a national agenda and has launched several important initiatives. One of our main focuses is to upgrade connectivity infrastructure within Thailand and within the region, including roadways, railways, waterways, power lines, air networks, and digital networks. This strategy will establish Thailand as a center for regional transportation and logistics, connecting the Indian Ocean with the Pacific Ocean, as well as connecting Thailand with South China and neighboring CLMV countries. Beyond building physical infrastructure, the government is pushing forward to restructure the Thai economy towards a high-value and innovation-driven economy under the ‘Thailand 4.0’ theme. This policy focuses on promoting targeted industries, including the ‘new S-curve’ industries. As many of you are well aware, the Board of Investment (BOI) revised the criteria for investment promotion privileges to be based on the value added content of the project rather than on its location as in the past. Thailand’s economic model will be geared towards sophisticated high-valued manufacturing, innovative manufacturing, and modern services. This can be done by focusing on promoting technology, creativity, research and innovation, especially with respect to IT-based services.
Given these fears, I think it is sensible to review the framework to assess whether it is fit for purpose or can be materially improved, though the hurdle for change should be high. But there is a danger of expecting too much from monetary policy. The Great Recession of 2008–9 was unlike earlier policy-induced downturns aimed at reining back excessive inflationary pressures. The period of stability in the decade or so preceding the crisis encouraged an increasingly relaxed attitude to risk and an excessive build-up of debt, particularly within the financial system. That was shattered by the cardiac arrest of the global financial system in the autumn of 2008, resulting in a large downward shock to demand, here and elsewhere, and the realisation that substantial adjustments to balance sheets were called for. So it should not be surprising that the recovery since the middle of 2009 has been so muted. Monetary policy can – up to a point – play a smoothing role in such circumstances by encouraging households and businesses to bring forward spending from the future to the present. And other, more targeted, central bank policies can help unblock dysfunctional markets or else, as with the Funding for Lending Scheme, support the supply of credit. We stand ready to take further such action should it be warranted. But such policies cannot – and should not seek to – prevent the necessary de-leveraging and rebalancing of production away from non-tradables towards tradables.

As my colleagues Ben Broadbent and Gertjan Vlieghe have explained, downside risks to growth can be expected to increase the attractiveness of risk-free assets (gilts) relative to riskier assets (equities). See Vlieghe, G (2017), ‘Real interest rates and risk’; Also Broadbent, B (2014), ‘Monetary policy, asset prices and distribution’; 8 This might reflect that the sterling investment-grade corporate bond index includes a significant amount of issuers that are not UK-based and therefore not necessarily UK-focused. But internal analysis suggests that in recent years the spreads on sterling corporate bonds issued by UK-focused companies have tended to track the broader sterling investment-grade corporate bond market. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  It seems unlikely that rates can be so persistently low without either weaker growth prospects or more uncertainty. In London’s West End Office markets, the picture is particularly stark. Even if the magic combination of persistently low rates and historically typical rental prospects comes true, valuation methodologies similar to those being developed by the industry point to prices 10% below today’s level. Precisely why these markets have become stretched is impossible to know for sure, but I’d caution against placing too much weight on monetary policy as the primary or underlying explanation. A range of underlying forces have driven down natural rates of interest, including demographics, perceived downside risks, expected productivity growth. 9  Monetary policy may have been a prominent actor, but it was reading a script set by these economic forces.