samchain/econo-pairs-v1 huggingface dataset:
The foreign banks do not themselves usually have any natural access to Swedish kronor. They therefore fund part of their lending in kronor by borrowing kronor in the short-term from other Swedish banks. However, the risk is that foreign investors will leave the Swedish market if problems arise, as the Swedish krona is a small currency. There are also reasons for believing that the number of foreign banks that act as counterparties to the Swedish banks is limited. Moreover, participating in the swap market is often not a central part of the operations of the foreign banks. This in turn has consequences for liquidity and pricing on the swap market. We saw an example of this when the last extraordinary loan that the Riksbank had offered the banks during the crisis matured in the autumn of 2010. Uncertainty then arose on the money market, and consequently swap counterparties abroad who had acquired short-term funding in kronor through Swedish banks became less willing to enter into swap agreements with Swedish banks. It thus became both more expensive and more difficult for Swedish banks to convert foreign currency into Swedish kronor at long maturities. To a certain extent, Swedish banks also act as counterparties to each other in the swaps. However, from the perspective of the Swedish banking system this is really only a matter of redistributing the maturity risk. The fact that the banks act as counterparties to each other also forges the links within the Swedish banking system even tighter.

Lending is significantly higher in the Swedish banking system than in many other European  2  4  According to Finansinspektionen’s mortgage survey 2013. BIS central bankers’ speeches  countries (see Figure 2). This is partly because Swedes to a large extent save in funds rather than in bank accounts. Another reason is that Swedish banks retain their mortgage loans on their balance sheets, while banks in many other countries “sell” them or securitise them. Figure 2 Lending in relation to deposits in the banking systems of European countries Per cent 350% 300% 250% 200% 150% 100% 50% 0%  Note. Refers to monetary financial institutions Sources: The ECB and the Riksbank. Swedish banks are thus highly dependent on the capital markets to fund their lending. A large proportion, almost 45 per cent, of the funding from the capital markets is in foreign currencies. This borrowing funds assets in both Swedish kronor and foreign currencies. This dependence on market borrowing in foreign currencies gives rise to two risks. The first relates to the extent to which participants are prepared to buy the banks’ mortgage bonds and when necessary convert borrowing in foreign currencies to Swedish kronor. The second lies in the fact that the maturities for assets and liabilities in foreign currency differ. Few counterparties fund the long-term lending in Swedish kronor The borrowing in foreign currencies also funds lending in Swedish kronor to some extent, for example for housing purposes.
(While these tendencies show progress, in Britain statistics reveal a decrease in the volume of transactions via cards, due to electronic transactions via mobile phone or other means.) The increasing use of electronic services such as home banking is a considerable development. Thus, in the last years, these services were more used and the users’ spectrum expanded, including not only businesses, which where the target group at the start of supplying this service, but also by individuals. At the end of 2014, the number of accounts accessible via internet stood at 145211, from 27368 at the end of 2010, followed by fourfold increase of such transactions conducted via these accounts. The encouragement of the use of payment instruments is reflected in the increase of activity of settlement and clearing systems operated by the Bank of Albania. In 2014, the activity of the Albanian Interbank Payment System (AIPS) grew by about 1.5 times, compared to the beginning of operations of this system in 2004. Also, the Albanian Electronic Clearing House System (AECH) shows a considerable increase. The value of transactions cleared in this system, during 2014, was 10 times higher than the value of transactions cleared in 2005, when this system started to operate. The measures taken by the Bank of Albania in March 2011 contributed to the use of the clearing and settlement systems. The measures consisted in the reduction of commissions applied to the users for transactions in the Albanian lek.

At the same time, unemployment in the euro area remains high, and the necessary balance sheet adjustments in the public and the private sector will continue to weigh on economic activity. This assessment is also reflected in the December 2013 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP declining by 0.4% in 2013 before increasing by 1.1% in 2014 and 1.5% in 2015. Compared with the September 2013 ECB staff macroeconomic projections, the projection for real GDP growth for 2013 has remained unchanged and it has been revised upwards by 0.1 percentage point for 2014. The risks surrounding the economic outlook for the euro area are assessed to be on the downside. Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices, weaker than expected domestic demand and export growth, and slow or insufficient implementation of structural reforms in euro area countries. BIS central bankers’ speeches  1  According to Eurostat’s flash estimate, euro area annual HICP inflation increased in November 2013 to 0.9%, from 0.7% in October. The increase was broadly as expected and reflected, in particular, an upward base effect in energy prices and higher services price inflation. On the basis of prevailing futures prices for energy, annual inflation rates are expected to remain at around current levels in the coming months. Over the medium term, underlying price pressures in the euro area are expected to remain subdued.
Broadly, having emphasised the importance of not undermining contractual obligations, the principles stress that all private creditors should accept responsibility for their lending and investment decisions – without expecting to be underwritten by the official sector. They encourage co-operative solutions between the debtor country and its creditors, building on effective dialogues established in advance. The tools link official support to efforts by the debtor country to obtain private financing – or maintain existing exposures – on a voluntary basis, and provide for comparability of treatment within the Paris Club, of all categories of creditors other than international financial institutions. They include mechanisms that can be used to limit the use of official financing to fund external deficits or domestic capital outflows or to repay private sector debt. And they provide ultimately for capital controls, as part of payments standstills, in conjunction with IMF programmes. So we have the principles and we have the tools. What we still need to develop is a better framework of understanding as to how they might normally be applied. I agree of course that we should not adopt hard and fast rules, because to a degree each case is different. But we do need to develop some kind of presumption about the limits within which IMF support might be made available to member countries in different situations, and the conditions, relating both to adjustment action and to private sector financing that would normally be applied.

Over time the advantages of capital flows, particularly in the private sector, became apparent, and in a world without capital controls, it is possible to maintain independent monetary policies only by allowing exchange rates to float. So the Bretton Woods system eventually proved unsustainable, and today most advanced industrial countries have floating exchange rates and free movement of capital. Private capital flows now dwarf official flows. And “imbalances” can apparently persist almost indefinitely. The US current account deficit, now almost 7% of GDP, has been over 3% ever since 1999. Australia has run a persistent current account deficit since 1973. Accordingly, the international institutions have shifted the focus of their attention from current to capital account flows and to the fragility of national balance sheets. Those changes have meant that, over time, the post-war settlement has become less relevant. But the need for international institutions has increased. Our own standards of living are now, more than ever, affected by decisions elsewhere. And many people already feel they are losers from globalisation. The number of workers in the world trading system has more than doubled in a short period, with inevitable consequences for real wages of the unskilled in the industrialised world. Governments are having to work harder to explain what the principle of comparative advantage means to people in their daily lives. In fact, most people are winners from globalisation. China is now the second largest buyer of Australian exports.
Type of reforms Those short-term benefits can also be maximised, however, if the type of reforms is carefully chosen. How structural reforms affect the economy is of course complex, but the evidence suggests that the short run gains can be amplified if reforms are well designed, packaged and sequenced 19, with a focus on measures that minimise short-term costs. For example, the experience of Germany during the crisis suggests that reforms aimed at adjustment through the intensive margin – that is, working hours and wages – are less likely to have negative short-term effects than reforms that operate through the extensive margin – i.e. dismissals. 20 This is supported by new micro level research from the Eurosystem which shows that, for a larger sample of countries, firms with flexibility at the plant-level have reduced employment less during the crisis than those bound by centralised wage bargaining agreements, partly because they have been more able to adjust wages to economic conditions. 21 Moreover, if reforms are targeted specifically at frictions that hold back investment demand, their short-term effects should be largely positive, even at the bottom of the cycle. For instance, reforms directed at sectors with large pent-up demand, such as professional services and retail trade, could be expected to elicit a rapid investment response. 22 Indeed, our EAGLE simulations show that the short-term benefits from structural reform in the service sector arise mainly via a strong reaction of investment. adjust over time their knowledge of the favourable long-run effects.

Youth unemployment would also remain elevated, with devastating effects for individuals in terms of labour market “scarring”. 8 And this would ultimately affect society as a whole as, given our demographics, realising the potential of the young and their capacity for innovation is essential for long-term sustainability. Second, a situation of persistently low potential growth would make it even harder to work through the debt overhang that still exists in parts of the euro area. For firms that took on debt based on pre-crisis growth expectations, low potential growth acts as a major barrier to new investment, as any profits generated will likely be absorbed by servicing existing debt. And we do see signs that this effect has been operative in euro area: there is a clear negative correlation between corporate debt-to-GDP levels in different countries at the beginning of the crisis and the evolution of business investment since. Third, low potential growth can have a direct impact on the tools available to monetary policy to deliver its mandate. The reason is that low potential growth implies a lower equilibrium real interest rate, which in turn means that, faced with a negative output gap, nominal policy rates need to go lower still to steer output back to potential. This materially increases the likelihood that central bank policy runs into the constraint set by the effective lower bound for interest rates, which is not far below zero. It therefore also increases the likelihood that we have to resort recurrently to unconventional policies to meet our mandate.
All these issues have triggered uncertainties in the markets, causing the future forecasts to be more challenging and the participants’ exasperation to peak. I would consider the immunity shown by our economy in terms of price stability as the most outstanding development. Albania’s economic activity is progressing in line with our previous expectations. A few days ago, INSTAT published the inflation figure for August 2008, according to which annual inflation marked 2.5%. Following a 12-month period of inflation rates standing at around 4-4.5%, in line with our forecasts, it is assessed that inflation will fluctuate in the next few months at around 3%, which is our quantitative objective. Worth to note, however, is that the risk for its upward deviation is still present and it mostly relates with the international developments mentioned above. The main risks stemming from the internal environment relate to any possible deterioration of the energy situation and the plausible implications with the fiscal situation in the future. For the moment, the main risk stems from the lagged effects (otherwise referred to as second round effects) of certain developments such as the rise of wages beyond an acknowledged logical level. Any similar rise would generate new inflation, to later impose another rise in wages, which in turn would again and again trigger inflation. I do not think this is the right path. Wage-inflation spirals have been studied relatively early and they represent the least appropriate recipes to offset the inflation effects.

How can they be managed more effectively? For a relatively long period of time, they have been vital to our country. According to a Bank of Albania survey on the first quarter of 2008, about 26% of Albanian households living in the territory of the Republic of Albania are recipients of remittances from abroad. Households’ geographical distribution indicates that 59% of recipient families live in the rural areas while the rest in the urban ones, receiving about 66% and 34% of total workers’ remittances, respectively. Remittances represent the most important component of rural families’ monthly income, accounting for about 40%. The largest part of workers’ remittances (about 70%) for the first quarter of 2008 was used for non-productive purposes. About 48% was used for consumption, which entails meeting households’ everyday needs for food, clothes, furniture, etc., 16% for construction and reconstruction and 10% for education and medical purposes. Around 19% of remittances are used for investment and savings, providing evidence for their economic impact on Albania. Despite these figures, their future prospective is yet unclear. The integration of Albanians into their host countries, their economic and financial situation and other similar reasons have a negative impact in the long term. Our analyses and assessments show that the difficult economic situation the developed economies have been experiencing, expressed in the economic slowdown, unemployment growth and increase of inflation, has also provided its impact on the performance of remittances which have grown less this year relative to the previous years.
Northern Rock represented the most extreme case of this, the bank run, starting with wholesale creditors and then on to a full-scale retail creditor run. And it follows from this assessment that banks depend upon maintaining the confidence of their depositors that they will over time be able to meet claims on them. A very important part of maintaining confidence in banks is that the value of their assets – the loans they make, to simplify – has not fallen below their sustainable value in the accounts of the bank. In order to prevent this happening, banks maintain buffers of their own funds – capital – which can be used to maintain the claims of depositors. 1  Liaquat Ahamed: “Lords of Finance” (Windmill Books, 2009), p14. 2  Carmen Reinhart and Kenneth Rogoff: “This Time it is Different: Eight Centuries of Financial Folly”. Princeton University Press, 2009. BIS central bankers’ speeches  1  Here then we have the two fundamental elements of the safety and soundness of banks, liquidity and capital. Banks are often said to fail either because they are insolvent (lack of capital) or because they are illiquid (lack of funds to meet the claims of depositors to be repaid). My own experience of dealing with banks that get into trouble suggests that the reality is somewhat different – it isn’t a case of either one or the other. On the whole, banks lose deposits for a reason – depositors worry that there is something going on that they do not like.

Their response to the cry of this time is different is to assert that “it almost never is.” Why, then, is it so hard to understand the true picture of financial crises? I think that the issue here lies clearly in the characteristics of banks. One of the conclusions of work on the history of financial crises is that they have worse outcomes when they involve banks. As an example, if you remember the stock market crash of 1987, which seemed very bad at the time, it did not threaten the banking system, and its effects were contained. It was not a major financial crisis in its own right. The reasons for this difference when banks are involved have to do with the nature of banks. At the heart of banking is a technical term called maturity transformation, or more simply, banks borrow at a shorter term and lend at a longer term in respect of the duration of their deposits and loans. This is the essence of banking. Banks transform savings that may be required by their owners at short notice into longer-term loans. This is a benefit to the economy and society because it allows longer-term borrowing by companies and by all of us to buy houses. But it makes banks inherently illiquid. If all depositors decided to ask for their money back at the same time the bank would struggle to pay-out and survive. This is because the bank will generally find it difficult to realise its assets in time.
These universal banks combined traditional bank lending with various forms of investment banking activities. By using economies of scale from these different areas, they were able to offer competitive prices - but also to exploit various conflicts of interest. When prices fell, the banks were accused of having contributed to issues of securities of dubious quality and of having painted an overly bright picture of the companies’ future in their prospectuses. The commercial banks were also accused of having converted loans lacking creditworthiness into shares, by contributing to new issues, where shares were sold to an uninformed public. In addition, it was claimed that certain company management had lined their own, and their families’, pockets in various ways. Although it was difficult to prove that the banks had knowingly and systematically misled the general public, it was revealed that prominent figures in various banks had earned large sums at the cost of their customers, and in some cases at the cost of the banks. This contributed to the introduction of the Glass Steagall Act in the United States in 1933. The Act required complete legal separation of commercial banks and investment banks. A commercial bank could not be included in the same group as a bank that mainly conducted operations in the securities markets. However, during the 1960s and the 1980s the regulations in the United States were gradually loosened up. Commercial banks were given increasing opportunities to conduct investment banking activities, albeit on a limited scale.

The risk of a conflict of interest lies in the fact that their suggestions for investment have been designed more to promote the seller’s or the company’s interests rather than to fulfil the needs of the investor. The second example comes from the life insurance sector. When the life insurance part of a company buys services from the property and liability insurance part, there may be incentives to deviate from correct internal pricing, especially when one part of the company is a mutual company and the other is a profit-making company. Another problem in an insurance company is how a surplus - or a deficit - should be distributed between different groups of insured parties. The question is whether, for instance, those receiving pensions now should share the burden of the insurance companies’ poorer income, or whether they have had the level of their pension payments guaranteed. However, today we have gathered to discuss conflicts of interest in banks, and I have promised to talk about the classical conflict between commercial banking and investment banking. The conflict lies within the universal bank’s double role as lender and investment adviser. If a bank’s borrowers suffer deterioration in their financial prospects, the bank can reduce its credit risk by helping with new share issues, etc. This conflict of interest has been discussed in the United States for several decades now, but in Sweden it has scarcely been mentioned. There is reason to ask why the differences are so great, and I shall return to this point.
Moreover, Finansinspektionen is working on introducing an “amortisation culture”, that is, an environment that encourages more households to amortise their loans. The Swedish Bankers Association also recommends that borrowers should amortise their loans. Finansinspektionen has also raised the risk weights on mortgages, which means that the banks have to hold more capital when they issue mortgages. We could perhaps also consider whether it is possible to create financial incentives for households to reduce their indebtedness, for instance, via the tax system. However, such solutions are beyond the mandate of the Riksbank. Regardless of what one decides to do, I believe it is very important to make households aware of the risks a high level of indebtedness may entail for their own finances. As I said earlier, there is a risk that many households are taking it for granted that the economic conditions that have prevailed in recent years will continue to apply. But it is not only households’ increased propensity to take on debt that has caused our current situation. If we look back, we can see that the rise in household indebtedness has gone hand in hand with housing prices. One important explanation for the rising housing prices is that the supply of new housing has been inadequate. Compared with many other countries, construction of new housing in Sweden has been very low.

There are several factors that are usually highlighted as explanations for this structural problem: high costs for land and construction, the current legislation on planning, construction and the environment that makes strict demands regarding the type of housing that can be built, and rent regulations. I do not intend to go into this in depth now, but would like to note that structural measures are required in the housing market, which will contribute to an increase in housing and reduce the lock-in effect. However, such measures are beyond the mandate of the Riksbank. We should perhaps also reflect on the banks’ funding of mortgages, to create a better balance in funding sources and thus better stability. The banks’ issues of covered bonds to fund housing have been successful and led to good access to funding and lower funding costs, and ultimately to lower mortgage rates. But one should also be aware that as covered bonds have become so common, we have also built vulnerabilities into the banking system: the dependence on the market for covered bonds functioning properly and the risk that the banks’ balance sheets are too highly mortgaged limits the scope to take action in a crisis situation. An excessive share of encumbered assets risks putting the banks’ other investors BIS central bankers’ speeches  7  at a disadvantage, which can mean they become more volatile in times of financial stress.