samchain/econo-pairs-v1 huggingface dataset:
In my remarks today, I want to focus on one particular post-crisis change, the introduction of supervisory stress testing, as embodied in CCAR and the stress tests required by the DoddFrank Act (DFAST). In my personal view, supervisory stress testing and the CCAR are the most significant and impactful of the many regulatory and supervisory changes implemented following the global financial crisis. The CCAR and stress testing introduced a forward-looking perspective to capital adequacy and capital planning, something that static book-value-based regulatory capital measures lacked. We felt this acutely during the financial crisis, when market values of bank equity plunged while book values evolved only very slowly, based on accounting measures of losses. Aside from the stress-test-based quantitative requirements, the CCAR also requires large complex banks to do systematic capital planning, including developing criteria for when dividends and share repurchases will be made, increased or curtailed. This is an important innovation, as banks were slow to reduce dividends during the financial crisis, even as losses mounted and share prices fell.1 I want to examine supervisory stress testing through the lens of a paper I wrote in 2009 with former colleague Til Schuermann and current colleague Kevin Stiroh, now head of the New York Fed’s Supervision Group.2 That paper looked at the very first set of stress tests conducted by the Federal Reserve and other federal banking supervisors. The Supervisory Capital Assessment Program, or SCAP, was a watershed moment in the financial crisis.

However, with the recent passage of the Economic Growth, Regulatory Relief and Consumer Protection Act, many of these will no longer be subject to DFAST supervisory stress testing or could 2/6  BIS central bankers' speeches  participate only on a periodic basis. The very largest and most systemically important firms, including all domestic bank holding companies with assets exceeding $ billion, will continue to be required to participate in DFAST supervisory stress testing on an annual basis. These recent changes are consistent with an emphasis on structural macroprudential concerns, in that they focus the DFAST stress tests on the set of firms that are individually the most systemically important. The intention seems to be to balance the burden of the supervisory stress testing regime against the negative impact that distress at one of these firms could cause to other banks and the rest of the financial system—part of the broader tailoring of the regulatory framework to the size and risk profile of different types of institutions.3 At the same time, however, reducing the set of firms subject to annual DFAST supervisory stress testing seems less consistent with cyclical macroprudential concerns, as it could narrow the window that stress test results provide on the build-up of risks and the loss-absorbing capacity of the banking system.
Instead, we need to provide greater support to displaced workers so they can obtain the skills needed to find new well-paying jobs. We also need to ensure that there are strong global institutions and international cooperation to help manage the effects of globalization. This includes responding to the challenges stemming from financial globalization—the flow of capital across national borders. These issues are important to me as a central banker, as they affect the long-term health and productivity of the U.S. economy, the economic opportunities available to our people, and the efficiency and stability of the global financial system. The debate around globalization, particularly in advanced economies, reflects many factors. Undoubtedly, the global financial crisis and subsequent slow recovery have been significant. But, just as important have been longer-term trends, such as growing income inequality, the loss of middle-income jobs, and the rise of large emerging market economies such as China and India. Although the debate about globalization is not new, I believe we are at a particularly important juncture. If support for liberalized trade and an integrated global economy were to suffer a significant setback, the consequence could be slower economic growth and lower living standards around the world. While considerable effort has gone into liberalizing trade and developing the existing set of trade agreements, that does not mean they cannot be improved upon. I have no doubt some trade agreements could be enhanced or updated.

Some may not adequately address recent changes in the global economy—such as the rise of digital trade—and may need to be refreshed. And, important trade barriers still remain that should be addressed. In particular, from a U.S. perspective, the access of U.S. firms to some foreign markets and the protection of intellectual property rights are issues that deserve close attention. But, in addressing these issues, we should take care to preserve the vital benefits of trade to higher standards of living in both advanced and emerging market economies. Our focus should be on further strengthening an open trade regime, and, as appropriate, amending and improving these agreements. 1/8  BIS central bankers' speeches  The Pace of Globalization To begin, let me briefly describe the pace of globalization as a reminder of what is at stake. Global economic integration has increased dramatically in recent decades. Trade in goods and services, for example, has grown from nearly 40 percent of global GDP in 1990 to 54 percent in 2016. Over the same period, the stock of foreign direct investment has increased from roughly 10 percent of global GDP to 36 percent. Put simply, national economies and financial systems have become more integrated and interdependent.2 This rapid growth in trade reflects falling trade barriers, declining transport costs, and improved information and communication technology. These trends have enabled the development of complex global supply chains that allow companies to manage their production more efficiently.
To conclude, I would like to thank CEMLA, the co-organizing central banks for putting together this meeting and the team at the Central Bank of Chile for their work and for arranging the logistics of this event. Currently, when we are living under very uncertain circumstances, it is especially relevant to be discussing risk issues. This is so because high uncertainty affects the evaluation process when making decisions, when assigning probabilities to certain events and, finally, how our institutions are governed and managed. There is no doubt in my mind that this meeting will enrich our knowledge on the subject. We will also benefit from the richness of the exchange of information between institutions, which I hope will show us the road to the future of risk management. I wish you very fruitful sessions today and tomorrow, which will encourage learning, generate more conversations over time and development collaborative work that will provide continuity to the topics that will be covered in these two days. Thank you very much. 3/3  BIS - Central bankers' speeches

But it is less clear what the changes on the other side will be: how banks will respond to the new regulatory and economic environment. There is much soul searching in the industry about what the future looks like. The reform programme and returns in banking The most marked change in this new landscape is the much greater amounts of capital in banks and as a consequence the much reduced level of leverage. Headline levels of required capital have increased. And the risk associated with many types of assets and business activities has been fundamentally re-appraised. For the largest firms, the equity levels required will be around 7 times higher than before the crisis on a risk weighted asset basis. 4  BIS central bankers’ speeches  Moreover, international standards will determine not just the leverage firms can carry on a risk weighted basis but also, when an international leverage ratio is agreed in 2019, the absolute amount of assets they can carry for any given level of capital. A number of major jurisdictions such as the US have implemented leverage ratio rules in advance of that; the FPC will shortly issue proposals to do so in the UK. Lower leverage will reduce the returns that banks’ shareholders make, relative to pre-crisis. But it also means that banks will be safer investments which should also reduce the returns that investors require.
Let’s now turn to why Sri Lanka should exploit its growth opportunities in the services sector. First, the widely held view that Sri Lanka is an agricultural economy and it should continue to be so in the future as well has entailed certain limitations on its future growth. This belief would have been nurtured by the historical experience of high prosperity which the country attained through agriculture, specifically through subsistence paddy farming, in both Anuradhapura and Polonnaruwa eras. In these  5  4  World Bank’s World Development Reports for various years  BIS Review 4/2007  periods, when the country was subject to frequent foreign invasions, it would not have been unusual to regard food security as the number one priority of the nation. Hence, a larger share of growth, output and employment was occupied by agriculture. But today, these issues are not of grave concern to a nation open to the rest of the world. This is because international markets have developed both intensively and extensively to cater to the every possible demand of consumers. Hence, countries in the present era could easily replenish food shortages, provided they have the required purchasing power. Agriculture faces a serious man-power shortage too, because it is not the most preferred occupation by many. This is because, Sri Lanka’s universal free educational system, an enviable pride among other developing nations, has been instrumental in creating a generation of educated youth with an urban ideology, based on a marked preference for white-collar jobs.

The importance of the services sector for both industry and agriculture can be identified by examining the full-range of modern production flows. In fact, this is something which many have tended to disregard and therefore assign a lower value to services than real productions like agriculture and industry. Such a flow which should come one stage after the other in the order given, is presented in the following tabular exposition:  Modern production flows Stage  Process  Identity  1  Basic Research  Service  2  Applied Research  Service  3  Incubation and Testing  Service  4  Commercial Development  Service  5  Planning and Financing  Service  6  Manufacturing  Industry  7  Warehousing, Transporting and Marketing  Service  8  Financing  Service  9  After-sale services and maintenance  Service  10  Continued Research and Development for Next Generation Products  Service  It is apparent that only one out of the 10 different production stages constitutes industry (or agriculture) and all others are services. If one is concerned about developing agriculture or industry, he cannot ignore all the essential service ingredients that should precede and follow the actual act of production. Since people see only the visible output, they fail to observe the full range of other services that have contributed to its creation as well as subsequent continuation.
Household debt and real housing prices Per cent of disposable income and index, 2000 Q1 = 100 200  200  Household debt ratio Real property price index  180  180  160  160  140  140  120  120  100  100  80  80  60  60 80  85  90  95  00  05  10  Note. Debts refer to total debts. Real housing prices are nominal property price index deflated using the CPIF. Sources: Statistics Sweden and the Riksbank  12  BIS central bankers’ speeches  Figure 8. Monetary policy deliberations • •  Inflation Resource utilisation  Target attainment during the forecast period  Monetary policy deliberations  Repo-rate path Probability of the scenario Debt Consequences of the scenario: • inflation • resource utilisation  Expected target attainment beyond the forecast horizon  Source: The Riksbank  Figure 9. Household debt ratio Per cent of disposable income  Note. Households’ total debts as a share of their disposable incomes, totalled over the past 4 quarters. Sources: Statistics Sweden and the Riksbank  BIS central bankers’ speeches  13  Figure 10. CPIF inflation  Note. Annual percentage change. The CPIF is the CPI with a fixed mortgage rate. Sources: Statistics Sweden and the Riksbank  Figure 11. Repo rate  Note. Repo rate, per cent. Forecast refers to quarterly mean values, outcome refers to daily data. Source: The Riksbank  14  BIS central bankers’ speeches  Figure 12.

One of the reasons why we have an Executive Board consisting of several members is that different assessments and approaches can be tested against one another, which should ultimately lead to better decisions. In addition to the agreement on economic developments and the direction for monetary policy, there was also broad unity among the Executive Board that household indebtedness is a risk that needs to be managed. The low interest rates mean that there is an increased risk that the economy will not develop in a way that is sustainable in the long run. There are thus now even greater demands for measures within other policy areas to deal with household indebtedness and developments on the housing market. Macroprudential policy plays an important role in this context. Welcome framework for macroprudential policy – it improves the conditions for managing household indebtedness One message I have conveyed time and time again – including in my August speech last year – has been that a framework for macroprudential policy would facilitate the monetary policy deliberations.8 More accurate tools could be used to manage household indebtedness (see the lower half of the diagram in Figure 8), at the same time as monetary policy could to a greater extent focus on the inflation target within the normal forecast period (see the upper half of the diagram in Figure 8). 7  One must bear in mind that the inflation forecasts in the Figure are calculated on the basis of the current reporate paths.
Such involvement would not normally involve the central bank in significant financial risk. But in more difficult - and mercifully rare - situations, where the failure of one institution could bring down other - otherwise viable - institutions, the central bank may need to consider acting in the role of “lender of last resort” to the failing institution, against poorer quality, less liquid, assets which might expose the central bank to financial loss. The key phrase here, of course, is “where its failure could bring down other otherwise viable - institutions”. The central bank safety net is not there to protect individual institutions from failure. It is there to protect the stability of the financial system as a whole. In the absence of a serious systemic threat, the right course would normally be to allow the institution to fail. If any institution felt that it could rely on being bailed out if it ran into real difficulty, that, too, would introduce “moral hazard”, encouraging excessive risk-taking and financial fragility in the system as a whole. There can be nothing automatic about “lender of last resort” assistance - and, when it is provided, it should always be on the most onerous terms that the borrower can bear: it is not provided to protect the shareholders who should be looked to first. Nor is it there to protect the management.

But the Bill, taken together with the MOU which I have described, sets out those wider functions much more clearly than ever before, defining our responsibilities, our powers to exercise those responsibilities, and our lines of accountability to the Government, to Parliament and to the public at large. This is a much more precise framework for the Bank’s operations, but one which I am convinced is more appropriate to our modern times. I was delighted to learn last week that I am to be allowed to continue, for the next five years, to walk out with this attractive New Lady of Threadneedle Street, and I look forward to the challenge of carrying through the very positive changes now being made to the role and structure of the Bank. BIS Review 18/1998
And the impact of these efforts on emerging markets can be quite unpredictable and inconsistent with economic theories, due to the international currency status of the US dollar and the safe haven status of US dollar investment. Distinguished audience, Against the background of quite an unpredictable external environment, I believe that the Thai economy would still turn in reasonable growth rate for the year 2011. On the demand side, I see consumption and investment continuing on the rise. Consumer spending is expected to benefit from a high level of farm income from rising output and agricultural prices, high employment, and good consumer confidence. Meanwhile, investment by the private sector is also expected to grow, though at a slower rate than the periods following the crisis recovery. Currently, business sentiment and future investment plans are still showing an improving sign. And, public investment spending remains a key factor to keep demand momentum going forward. What we need to assess more cautiously is the future export performance. Of course, our export sector would be affected by the slowdown in the global economy to the extent that a large proportion of final demand for Asian and Thai exports remains in G3 economies. Having said that, I believe that exports will continue to grow along with world trade as long as the US and EU growth slowdown does not cause another global recession. I also want to stress that the process of export diversification in Thailand has advanced continuously in terms of markets and products.

Today, the proportion of Thai exports to non-G3 countries growing significantly higher, particularly to China, and ASEAN. In parallel, the share of G3 in Thai exports has declined from more than 50 percent in 1995 to less than one-third. Ladies and Gentlemen, Turning to the final part of my talk. As a central banker, our challenge is to constantly weigh the balance between risks from global slowdown on our economic growth versus rising domestic inflation pressure. Despite more downside risk on growth at present, the central bank assesses that the Thai economy is growing at around its potential and demand pressure could transmit readily to higher inflation outcome as well as expectations. To this end, the Monetary Policy Committee has been raising the policy rate to normalize monetary policy and bring the real policy rate closer to the positive range, yet remaining sufficiently accommodative to cushion the downside risk on growth. With many uncertainties ahead, it is wise to keep the inflation rate low to ensure that the economy remains competitive and to minimize pockets of instability, whether through excessive growth of bank credits, fiscal spending, or asset price bubbles. Low inflation helps keep the health of the economy in check and preserve the purchasing power or real income of all segments of the population. This is especially important for salary earners and the poor, whose real income could easily by eroded by higher inflation. Worse is to allow inflation expectation to run away because it will be costly to get expectation well anchored again.
History has taught us that Malthus and its intellectual descendants have always been proven wrong. The whole process of economic growth was borne out of the ability of mankind to overcome scarcity through human inventiveness and technical progress. It won’t be different this time. I am also very optimistic in the long run on the fundamental rebalancing of the world economy. Income per capita levels in the emerging world will progressively converge to those of the advanced economies and this will present gigantic market opportunities for producers in those countries. At the same time, tensions and insecurity created by differences in income and productivity levels will abate and disappear. The transition process, however, may be bumpy. Unavoidably, advanced economies, especially in Europe, will have to adjust to the permanent shift in world comparative advantages. They will have to increase flexibility and, above all, develop and preserve their most precious resource – human capital – through education and excellence in research. Emerging economies will have to face the dual challenge of aging and reducing inequalities. During that transition period, which may last several decades, it is important that the whole process is not derailed by shocks and crisis borne out of imbalances in the world economy. This is where the twin questions – (1) of the level and distribution of global demand and (2) the level and allocation of world savings – may matter most. Inside the G20, there is broad agreement on the need to rebalance aggregate demand.

There are good arguments to create international instruments providing a reliable store of value. There are also conceptual and political difficulties. A choice would have to be made as to the true nature of the “super reserve currency”. Would it be a basket of existing monies such as the SDR today? Or would it be a new “fiat” currency? More fundamentally, a new reserve currency would, in fact, grant a collective guarantee against exchange risk. This guarantee would benefit surplus countries and would be given by deficit countries. When the substitution account was discussed more than 25 years ago, it became clear, at the time that it would have to be part of a package encompassing explicit, binding and symmetric rules on balance of payment adjustments. Most likely, the same questions would be raised again today and the creation of a new reserve currency would have to be part of a broader framework. That may take time, as our Chinese colleagues are fond of reminding us when we discuss those issues. 4  BIS Review 170/2010  In the meantime, financial development in emerging economies can go a long way towards expanding the range of safe and liquid financial assets available to domestic and international investors. Capital markets in local currencies have developed significantly over the last decade as fiscal positions in emerging countries have dramatically improved. There seems to be considerable scope for regional financial and monetary arrangements to prosper in the future.