samchain/econo-pairs-v1 huggingface dataset:
2  BIS central bankers’ speeches  In recent years, goods and services exports have been the engine of our economic activity, against a background of marked weakness of domestic private expenditure and contained imports from the rest of the world. During 2014, foreign trade flows have undergone changes of some scale, as a result of the loss of steam in our export markets (in the emerging economies and, since the spring, in the euro area alike) and the acceleration in imports as the recovery progressively took hold. As a result, the contribution of the external sector to GDP has declined appreciably and the pace of adjustment of the external imbalance has been less rapid than expected. Conceivably, some of these developments are temporary and will be reversed, in part, in the coming months. Moreover, the depreciating trend of the euro may help improve the external balance in the near future. However, the weakness of the euro area, along with the high sensitivity of our imports to changes in final demand, highlight the need to further improve the competitiveness of our economy. As regards inflation, the Spanish economy is currently posting very low rates. This partly reflects temporary factors, but also structural factors that account for the subdued tone of core inflation. Inflation rates have been trending downwards for months throughout Europe, and Spain is one of the euro area countries that has moved most markedly in this direction. We can argue about the advantages and disadvantages of a price situation such as that described.

In terms of composition, under the Budgetary Programme the brunt of the adjustment is borne by government spending, since, as a proportion of GDP, it will be reduced by nearly 1 pp, basically due to cuts in government consumption. Notable among the other expenditure items is that pensions rise by 0.25% as a result of application of the indexation formula included in the reform approved in December 2013. The Budgetary Plan envisages that the relative weight of revenue in GDP will increase by 0.4 pp, despite the fact that the phasing-in of the personal and corporate income tax reform is estimated to have a budgetary cost in 2015 of some 0.4 pp of GDP. The Budgetary Plan anticipates that the loss in tax takings associated with this reform will be offset by tax increases of the regional and local governments, the anti-fraud scheme of the Social Security system and a pick-up in tax revenue attributable to the economic recovery. Meeting the spending targets will call for a very strict budget outturn by all levels of government, as well as the achievement of savings from the reforms approved, particularly by local government. Finally, the Budget envisages a public debt ratio of 100.3% in 2015, up 2.7 pp of GDP on the projection for 2014. These figures illustrate the continuing importance the reduction of fiscal imbalances will have in the economic policy agenda for the coming years. The European Banking Union Allow me to conclude with a reference to the process of Banking Union in Europe.
The Federal Reserve began raising the interest rate already in 2004. Over the course of two years it increased by more than four percentage points, at the same time as loans continued to grow. In the United States, deficiencies in the regulation of the mortgage market and a housing policy that promoted homeownership among low-income earners were more prominent contributing factors. A study based on Swedish data has indicated that low real interest rates in combination with increasing incomes have been important factors behind the increases in prices for housing in Sweden. 7 As both real interest rates and incomes are affected by monetary policy it should be possible to say that movements in housing prices have been indirectly affected by monetary policy. However, the same study points out that if monetary policy had been used  6  A study that shows that asset prices are dampened to only a relatively limited extent by a policy rate increase while the negative effect on GDP is relatively substantial is Assenmacher-Wesche and Gerlach (2010): Credit and Bubbles, Economic Policy, July 2010. 7  Claussen, Jonsson and Lagerwall (2011): A macroeconomic analysis of housing prices in Sweden, The Riksbank’s commission of inquiry into risks on the Swedish housing market. BIS central bankers’ speeches  3  to stem housing-price increases, then this would have been extremely costly in terms of lower growth and lower employment.

While as a general rule I am against this invasion of jargon, perhaps in this specific case the initials are preferable to the longer version, because IPSs, the focus of this conference, are not merely “institutional protection schemes”, or legal instruments suitable for securing the benefits of consolidation under capital regulations. They are and should be much more than that. IPSs have arisen as an innovative structure in the banking system and, like all new products, they are best evaluated by organising their assessment in steps, or successive degrees of scrutiny, so that at the end of the process their structure can be fully appreciated. The first step in the process of evaluation will be to judge whether they are timely. The second will focus on their design and construction. The third will be a “use test”. And the fourth and final level of assessment will look at how readily they lend themselves to progressive development so as to cover potential future needs. Allow me to cover these successive steps or facets one by one. Let us start with the first, their timeliness. IPSs are a response to an unquestionable substantive need: the downsizing of the Spanish banking sector, following the excesses of the growth period prior to 2007. These factors left many institutions facing the challenge of a future far removed from the comforts that had characterised the previous period, namely: strong economic growth, abundant liquidity on international markets, extensive business margins and healthy assets.
In practice, however, the weak krona has not affected either import or consumer prices as much as the Riksbank had anticipated. There may be a number of explanations for this. • •  One may be that the Riksbank has overestimated resource utilisation and hence demand pressure in the economy. A weaker demand situation probably makes it less possible for firms to let the weak exchange rate pass through to consumer prices. Another factor may be downward price pressure from the increased international competition. Although the price effects of this are presumably of a one-off nature in principle, they may affect inflation over a long period in that it takes time for them to work through the economy. 1  BIS Review 48/1999  •  A further explanation may be that the move to a flexible exchange rate has altered pricing behaviour. When the krona was devalued in the Seventies and Eighties, the new exchange rate was perceived as permanent and prices were set in relation to its weaker level. Since 1992, many of the krona’s depreciations have probably been perceived as transient and therefore resulted in more limited price adjustments. Not a mechanical relationship The relationship between the exchange rate and inflation prospects has evidently changed over time. No straightforward mechanical link can be said to exist between the exchange rate, inflation prospects and the repo rate.

•  At the same time, we need to develop the financial system further. To enhance transparency, we need to reduce the complexity of the financial system, institutions and products. •  The crisis has painfully shown that ensuring solvency of individual financial institutions does not ensure stability of the financial system as a whole. When funding markets shut down, both solvent and insolvent institutions are hit. Neglecting such wider systemic issues has been one of the glaring inefficiencies of prudential regulation. Too great an emphasis has been placed on micro-prudential rather than macro-prudential aspects. Initiatives are now being taken to close the gap that exists in this respect, especially in Europe, where cross-border supervision is still a challenge. Where do we precisely stand today in improving regulation and oversight? 2  •  At their meetings in November 2008 and April 2009, heads of states of the G20 countries have agreed on what are the most important challenges for improving regulation and oversight: (i) strengthening transparency and accountability, (ii) enhancing sound regulation, (iii) promoting integrity in financial markets, (iv) reinforcing international cooperation and (v) reforming the International Financial Institutions. •  Overall, improvements in accounting, capital regulation and macro-prudential supervision feature high on the agenda. The leaders of the G20 called on the IMF and FSB (Financial Stability Board) to produce guidelines on how national authorities can assess the systemic importance of financial institutions, markets, or instruments.
Well defined mandates and a clear delegation of responsibility in the field of monetary policy has worked well. Similarly, the legal authority to implement macroprudential measures to safeguard financial stability should be delegated. We can never fully insulate the financial system from shocks. But we can increase our resilience. One of the most important things we can do is to keep our own house in order – by preventing major imbalances from building up in the economy or in the financial system, and by ensuring that the financial system in general is robust. Thank you for your attention. BIS central bankers’ speeches  13

The issue of authority for central banks begins, in all cases, with the law, and includes the obvious questions of what kind of law is suitable for a particular central bank; how you change a law that is no longer suitable; and what is the optimal timing and strategy for changing the law. But, as your discussions have stressed, there is more to this than the mere word of the law. An interesting aspect of the sharing of experience here has been the extent to which central banks have worked with - and sometimes around - laws that have become inadequate to the needs of modern central banking. As I mentioned in my opening remarks, in the case of the HKMA it has been a question of working without the law, since Hong Kong has no formal central bank law, and we rely on just a few lines of a single statute for our authority. A further point that has been made strongly is the need to base the legitimacy, the credibility of a central bank on something more than just statutes and regulations. This brings into play the question of accountability, through both formal and informal channels. I know that a great deal of your discussion has focused on the role, composition and responsibilities of the board. More broadly, there has been equal emphasis on how we account to the wider public.
Only through much more careful study and data analysis can we thoughtfully address the two most important questions – not whether regulation should be rolled back in order to return to the liquidity conditions prior to the financial crisis, but instead: •  whether there is a diminution of liquidity and/or an increase in liquidity risk that is costly or poses risks to financial stability or macroeconomic performance; and, if this this is the case,  3  This includes requirements for total loss-absorbing capital (TLAC), Title I resolution plan requirements and the option of Title II single point of entry resolution  4  See Joint Staff Report: The U.S. Treasury Market on October 15, 2014, pp 6–7. 6  BIS central bankers’ speeches  •  whether financial market regulation could be altered in a way that improves the balance between the benefits of tougher regulation in terms of enhanced financial stability versus the costs of such regulation, including any adverse impacts on market liquidity provision. In addition, whether microstructure reforms aimed at improving the functioning of markets could be promising in that respect. We certainly don’t want to undermine the progress we have made in making the financial system more robust and resilient. But if there are adjustments to regulation that could improve liquidity provision without increasing financial stability risks, we should be open to considering such changes. I suspect, however, making this determination will require considerably more data, research and reflection before we reach any definitive conclusions.

After a careful examination of the evidence, the authors of the October 15 flash rally report conclude that “the events of October 15 underscore the importance of efforts by the official and private sectors to understand more fully the implications of the evolving Treasury market structure for liquidity, trading and risk management practices, data access, and monitoring and surveillance.” The report goes on to suggest “further study of the evolution of the U.S. Treasury market and the implications for market structure and liquidity;” “continue monitoring of trading and risk management practices across the U.S. Treasury market;” “an assessment of the data available to the public and to official sectors on U.S. Treasury cash securities;” and “continued efforts to strengthen monitoring and surveillance and to promote interagency coordination related to trading across the U.S. Treasury market.” 4 I concur with all these recommendations. There is much more work to do – not just with respect to the U.S. Treasury market, of course, but also on the broader issue of how changes in regulation and market structure influence liquidity conditions across the different financial markets. For example, electronic trading was introduced to the foreign exchange market well before recent regulatory changes. Consequently, a study of the foreign exchange market may shed some additional light on the role of electronic trading on liquidity risk in an environment prior to recent regulatory changes.
Tightening of monetary policy is on the agenda for most central banks around the world, and, as you know, for the Riksbank as well (see Figure 4). There is also a consensus among central banks that policy rate increases are the most appropriate tool for dealing with unexpectedly high inflation. However, it is far from clear how assets are to be managed. In the international discussion about the holdings of securities, there are a lot of concepts that may appear mysterious and which I would therefore like to try to explain and put into context before I begin to discuss how we at the Riksbank have thought about the management of our assets in the future. From “QE” to “tapering”, reinvestments and “QT” Figure 5 shows a simple outline of how central banks' monetary policy has looked in recent years. As I mentioned earlier, the crisis has affected many countries in the same way. And, as you are probably aware, many central banks are currently struggling with inflation far above the targets. In this way, the illustration can be said to be quite general. We can imagine that the figure starts at the outbreak of the coronavirus pandemic. At that time, many central banks bought assets so that their holdings grew – this is usually referred to as quantitative easing or QE. Purchases were made at a predetermined pace, usually with the aim of achieving a certain level of holding.

Fourthly, I would like to highlight that financial education, over time, improves the living standard in the long run, including retirement age. In a recent analysis, the essential reason why an individual needs to amplify his financial literacy is that this investment will help him to reach his money management objectives. Although personal objectives may vary from an individual to another, on financial education point of view, improvement of society’s living standard is guaranteed and confidence for the future is boosted. Financially literate individuals, are capable to make healthy financial plans, from an early stage of their career. Their knowledge enables them to plan their finances for retirement, children’s education and accumulation of financial assets. These individual behaviours, seemingly irrelevant, bring about great benefits in the national perspective. Fifth, I would like to underline that financial education is a long-term process, extended over time, and that the presence of specialised institutions is indispensable. Although in financial crisis individuals incur large damage, they continue to be involved in future crisis. The number of individuals, who are familiar with interest rates they either receive or pay in financial transactions, remains low. The same may be said about investment strategies, financial risk identification and assessment, and other elementary money management concepts. Many people do not think in financial terms and do not perceive accurately profits and costs resulting from bank loan use, or wealth-related effects originating from home ownership and other similar long-term assets.
With regard to inflation targeting strategies, it has been acknowledged that if financial imbalances accumulate and there is, for example, substantial uncertainty about the sustainability of asset price movements, it is not advisable to strictly pursue an inflation forecast for consumer prices over a horizon of one to two years. In such circumstances, it may be better instead to set interest rates with a view to a time-frame extending well beyond conventional forecast horizons. The ECB’s monetary policy strategy has some features that can become quite useful in this respect: •  First, from the beginning, the ECB has adopted a “medium-term orientation”. This implies that policy is not set for a time horizon of one or two years. Rather, the ECB pays due attention to the need to take into account the entire horizon over which monetary policy and macroeconomic shocks impact on the state of the economy. This lengthening of the policy horizon helps to trace out the likely macroeconomic impact of a financial misalignment. •  Second, the monetary policy strategy of the ECB is broad-based implying that a whole range of several indicators and models are employed and cross-checked, thus making the assessment and policy response to financial imbalances robust. In particular, the commitment to monitor and assess money and credit developments - besides being instrumental in identifying longer-term risks to price stability in general - may help to guard against ignoring asset price bubbles.

Coming to my second question, how should central banks react if they see the risk of an emerging asset price bubble? The options range from not reacting at all to consciously trying to prick an emerging bubble. Obviously, attempts to deflate an asset price bubbles are likely to require substantial interest rate increases which, in turn, could adversely affect economic activity and inflation. In view of the difficulties in identifying a bubble, it seems established wisdom today that central banks should be exceedingly careful in dealing with asset bubbles. There is, however, a more subtle way: to cautiously consider “leaning against the wind” when an asset price bubble is developing. Indeed, some academics have argued that, by accepting some short-term deviation from the pursuit of its stated objective of price stability, a central bank may improve the conditions for maintaining price stability over the medium to long-term. If a potentially costly bubble is firmly under way, then a somewhat tighter monetary policy stance than would otherwise be needed could be warranted. Certainly, there are also risks involved in “leaning against the wind”. First, as I mentioned already, there can never be full certainty as to whether an asset price bubble is under way. Second, by influencing market psychology, a monetary policy tightening could trigger dynamics that are difficult to foresee and may be hard to control ex post. Effective communication, as always, is crucial, especially in situations of heightened uncertainty.
In a similar vein, the work of financial supervision is moving away from a purely retrospective, rulesbased approach. This is particularly true in the banking world. Bank supervisors in the United States and many countries around the world are assessing the safety and soundness of banks based less on the strength of the balance sheet today, and more on the strength of controls that will safeguard a bank’s financial health tomorrow. Still, we believe that evaluating the strength of controls is, in itself, not enough. Indeed, the tremendous competitive spirit and ingenuity of the financial services sector drives rapid innovation in the goods and services offered. As those offerings evolve, so, too, must the structures evolve that are intended to control the associated new risks. Against this backdrop of constant evolution and inventiveness, the job of bank supervisors is certainly not to hinder the responsible pursuit of new opportunities and profits. Rather, it is our job to encourage banks to ensure that their controls evolve with their businesses. The members of the Basel Committee believe that public policy can best support the enhancement of risk management by building incentives directly into our system of supervision, the foundation of which consists of regulatory capital rules. Along that line, the Committee is now engaged in an historic effort to revise the international rules governing the minimum capital levels required of internationally active banks.

This group is responsible for promoting the consistency and quality of implementation of the New Accord and facilitating the exchange of information among national supervisors about bank and supervisory practices. Through the AIG, senior line supervisors - that is, the people who actually assess banks’ risk profiles - are seeking ways for examiners to validate and supervise internal risk assessment processes in a more consistent fashion across jurisdictions. Implications of Basel II on the supervisory approach We’ve also continued to think about how we should adjust our method of supervision to incorporate the tenets of the new framework, which brings me to the third and final area that I would like to address today. Naturally, allowing banks to rely on internal models in determining their capital requirements has led, and will continue to lead, to changes in our supervisory process. Fortunately, we have the benefit of some experience already at our side. In 1996, under the “market risk amendment” to the original Basel Accord, qualifying banks with large market risk positions were first permitted to incorporate internal estimates of the associated risk in their regulatory capital requirements. When determining whether a bank may rely on its market risk model for capital purposes, our examiners have had to evaluate the technical underpinnings of the model, as well as the risk management and control processes surrounding its implementation and use.