samchain/econo-pairs-v1 huggingface dataset:
BIS Review 86/1998  -3-  The basic financial analysis that is the foundation of the credit process may be affected by changes in both customer and counterparty behavior. For example, a lesson we have learned from the current turmoil is how complex the concept of leverage is in today’s markets, where leverage roughly describes the ratio of risk to capital. Where leverage once could be measured directly from the balance sheet, we’ve become aware that leverage can be achieved in a number of ways. These include holding a high-risk portfolio of assets, engaging in extensive derivatives trading, especially if it involves options, funding domestic currency assets with foreign currency liabilities, investing in long-term assets with short-dated funding and pursuing a high-risk business strategy. All of these effectively can create leverage. A related lesson learned is that collateral can mitigate credit risk, but it cannot eliminate it. One reason is that posted collateral inevitably lags movements in market prices and recognition of credit issues. In trading agreements, for example, gaps between the amount owed by the customer and the amount of collateral pledged develop surprisingly quickly. One costly solution is to hold large amounts of excess collateral, but that is most often unacceptable to the counterparty. Similarly, when the collateral is real estate, equities or high-yield securities, a gap can open up between the amount owed and the value of the collateral whenever the price of the collateral declines. We have seen both problems in the current turmoil.

Finally, it is important throughout the process of restructuring a banking system that the general public does not have to fear for the loss of their life savings. A reliably funded deposit insurance mechanism, a central bank that can provide liquidity to solvent, viable banks and a wellfunctioning payments system are essential elements of the public sector safety net. The safety net’s true beneficiaries are not financial institutions, but the general public. IV. The Role of the Basle Committee What do I see as the near and medium-term role of the Basle Committee and this organization of banking supervisors? What should be our goals to meet before the next such conference, to take place in New York in the Year 2000? Let me begin by saying that the Core Principles lay out the major highway to effective banking supervision, but do not provide a detailed street plan. One important element of feedback we are receiving from the Core Principles Liaison Group, consisting of members of the Basle Committee and members of the emerging markets, along with more informal feedback, is the need to provide more detailed street plans. There are several ways to achieve that. BIS Review 86/1998  -8-  The first is to continue to elaborate on the Core Principles by producing papers on key topics to augment and update the Compendium. The Compendium is the set of relevant papers issued over the years by the Basle Committee which elaborate further on the Core Principles and provide the next level of detail.
And bank supervisors will be more plentiful and in future they will be smarter. That has been the response to virtually every financial crisis of the past fifty years. It has not arrested the crisis cycle – if anything, the incidence of crises appears to have risen.2 It may  1  Goodhart (2011 forthcoming). 2  Bordo et al (2001). BIS central bankers’ speeches  1  not even have slowed this cycle, as the massive costs of this time’s crisis attest. So although the recent Basel III package may be necessary, there must be a real question about whether it will be sufficient to cope with next time’s crisis. History, at least, provides grounds for pessimism. As a thought experiment, imagine instead we were designing a regulatory framework from scratch. Finance is a classic complex, adaptive system. What properties would a complex, adaptive system such as finance ideally exhibit to best insure about future crises? Simplicity is one. There is a key lesson, here, from the literature on complex systems. Faced with complexity, the temptation is to seek complex control devices. In fact, complex systems typically call for simple control rules. To do otherwise simply compounds system complexity with control complexity.3 Uncertainty would not then divide, it would multiply. Robustness would be a second. This has a particular meaning in the context of complex systems: resilience given ignorance.4 More often, this is called Knightian uncertainty or simply model error.

Market measures provide both fewer false positives and more reliable advance warnings of future banking distress. Taken together, then, market-based solvency metrics perform creditably against first principles: they appear to offer the potential for simple, timely and robust control of a complex financial web. Contractual prompt corrective action But how should these market-based metrics be put to use in the design of a regulatory framework? Market warnings are useless unless they are acted on, either by the market itself or by regulators. It is not too difficult to devise a reconfiguration of banks’ capital structure that would bake-in the benefits of simplicity, robustness and timeliness. This would involve a cocktail of revised regulatory capital standards fortified by market discipline. It might work as follows. Alongside equity, banks would be required to issue a set of contingent convertible instruments – so-called “CoCos”. These instruments have attracted quite a bit of attention recently among academics, policymakers and bankers, though there remains uncertainty about their design.12 In particular, consider CoCos with the following possible design characteristics.   Triggers are based on market-based measures of solvency, as in Charts 6–8.   These triggers are graduated, stretching up banks’ capital structure.13    On triggering, these claims convert from debt into equity. Although novel in some respects, CoCos with these characteristics would be simple to understand. They would be easy to monitor in real time by regulators and investors. And they would alter potentially quite radically incentives, and thus market dynamics, ahead of banking stress becoming too acute.
In addition to these forecasts, reports also provide information regarding the envisaged course of monetary policy. Since 2007, inflation forecasts, which extended to eighteen-month periods at the outset, started to cover a twoyear time-span. In the face of the extraordinary supply-side shocks experienced since the last quarter of 2007 and with a view to improving the predictability of monetary policy, since April 2008, the Central Bank has added projections to the baseline scenario under alternative scenarios based on the food and energy prices. Moreover, the forecast horizon has been extended to three years for economic agents to have a clearer vision of the future and develop a longerterm perspective. The main objective of sharing inflation forecasts and the likely policy stance with the public is to promote main principles of inflation targeting; i.e. transparency and foreseeability. Such an approach has helped strengthen the monetary transmission mechanism via expectations channel in recent years. However, the Central Bank preferred to avoid providing hints on the course of short-term interest rates in the recent period, as monetary policy now needs to be 6  BIS Review 3/2009  relatively more flexible given the current conjuncture with exceptional uncertainties in the global economy.

On 5 November, the Monetary Policy Committee (MPC) announced its decision to lower the Bank’s interest rates by 0.25 percentage points. This was done in view of the rise in the Bank’s real rate caused by the past few months’ decline in inflation and inflation expectations, which has been more pronounced than previously anticipated. The rise in the real rate was greater than is warranted by the business cycle position and the near-term outlook. In other respects, for the rationale behind the decision, I refer you to the MPC statement and the speech I gave at the Iceland Chamber of Commerce’s monetary policy meeting the following day. Naturally, we are also ready and willing to answer your questions about both this decision and the interest rate outlook. BIS central bankers’ speeches  1  Finally, I would like to mention that the MPC has been examining its monetary policy instruments in the recent term and, although certain changes have been made, this review is still underway. According to the statement from its March meeting, the aim of this review is primarily to ensure that monetary policy instruments are optimally suited to the achievement of monetary policy objectives, given that it is also desirable that monetary policy implementation be as effective, comprehensible, and economical as possible in terms of the Central Bank’s balance sheet. We are ready and willing to answer any questions that you have on this topic. 2  BIS central bankers’ speeches
Let me highlight three areas where improvements in the robustness of the financial network seem feasible: mapping; regulating; and restructuring. (a)  Mapping the network  The SARS episode may be remembered by historians as an overblown economic reaction to a small health risk – that was Nobel Laureate Dr David Baltimore’s prognosis. But there is an alternative reading of the runes, one which offers some lessons, and not a little hope, for financial policymakers. In 2000, the World Health Organisation (WHO) established the Global Outbreak Alert and Response Network (GOARN). This brings together over 120 international institutions and networks to share resources to better identify and manage outbreaks. In the case of SARS, the speed and scale of response was striking. On 12 March 2003, less than two weeks after the Hong Kong outbreak, the WHO issued a global health alert. On 15 March, a “general travel advisory” was issued. By 17 March, a network of scientists from 11 laboratories in 9 countries was established to devise diagnostic tests, analyse samples and share results in real time. This allowed national agencies to promulgate information quickly and widely, with governments in Thailand, Malaysia, China,  22  For example, Bank of England Financial Stability Report, October 2008. BIS Review 53/2009  11  Singapore and Canada each imposing some combination of travel bans, quarantining and public health notices.

The level playing field resulted in everyone playing the same game at the same time, often with the same ball. Through these channels, financial sector balance sheets became homogenised. Finance became a monoculture. In consequence, the financial system became, like plants, animals and oceans before it, less disease-resistant. When environmental factors changed for the worse, the homogeneity of the financial eco-system increased materially its probability of collapse. So where does this leave us? With a financial system exhibiting, for individually quite rational reasons, increasing complexity and homogeneity. A network which, in consequence, was robust-yet-fragile. A network predisposed to tipping points and discontinuities, even for small shocks. A network which, like Tolstoy’s unhappy families, could be unhappy in quite different ways. A network mostly self-repairing, but occasionally self-destructing. A network which, like the little girl with the curl, when the going was good was very, very good – but when it turned bad was horrid. Part 2: Improving network stability This is a gloomy prognosis: a financial system teetering between triumph and disaster. Unlike Kipling, policymakers in practice are unlikely to treat those two imposters just the same. Recent events have rather illustrated that. Public interventions in the financial system during this crisis – through liquidity injections, capital injections or public sector guarantees – already total in excess of £ trillion. 22 So what could be done to protect the financial network from future such dynamics? And are there lessons from other network disciplines which might help inform these efforts?
We can thus expect a decrease in ROE, but this only reflects the decreased risk premium associated with the decreased risk-taking. Similarly, the cost of debt decreases and this drop in the cost of funds perfectly offsets the effect of the greater use of the more expensive source of capital in the firm’s financing structure. The essence of the Modigliani-Miller theorem is that the cost of capital and thus the firm’s value are unaffected. Of course we do not live in a perfect world, and the Modigliani-Miller equivalence does not hold. Financing matters. The relevant literature typically puts forward a number of factors to justify the higher cost of equity financing: the fiscal advantage of debt, the cost associated with bankruptcy and the differential liquidity and issuing cost between debt and equity. These arguments apply to pure equity financing, not in the case of Cocos. As debt instruments, Cocos offer the fiscal advantage of other debt instruments. As hybrid instruments, they substitute for other hybrids that are already part of the financing structure of banks and that have proved relatively inexpensive for banks to issue. Finally, it is not clear that bankruptcy costs are relevant in the context of the TBTF problem where precisely those costs are never really incurred. For all these reasons, we may hypothesise that the total cost of bank financing will not materially increase as a result of higher capital requirements, in particular if the latter can take the form of Cocos.

Holding more capital does not impair banks’ ability to create value by lending, provide payment services or satisfy the demand for investment banking activities. High leverage is not a pre-requisite for banks to perform their socially valuable functions. Will higher capital requirements increase the cost of financing? I now want to address the question of whether higher capital requirements per se will increase the cost of financing. A theoretical basis for answering this question can be found in the work of Modigliani and Miller.14 In a perfect, frictionless world, the value of a firm does not depend on whether it is financed by debt or equity. 13  The balance sheet of the two biggest Swiss banks adds up to a multiple of the size of domestic GDP. 14  Modigliani, F. and Miller, M. H. (1958). “The Cost of Capital, Corporate Finance and the Theory of Investment”, American Economic Review, 48, 261–97. BIS central bankers’ speeches  7  Higher equity capital reduces leverage. Thus it reduces return on equity (ROE) when a bank makes a profit but it increases it when the bank makes a loss. In other words, if increased capital requirements lower the ROE in good times, they raise it in bad times, hence reducing shareholder risk. It follows that shareholders will demand a lower average ROE for a better capitalised bank, as this is the counterpart for the better protection they obtain in bad times.
Martin, and S. Pruitt (2012): “The effects of official bond market intervention in Europe”, Federal Reserve Board of Governors, mimeo; Eser, F., and B. Schwaab (2013): “The yield impact of central bank asset purchases: The case of the ECB’s Securities Markets Programme”, ECB Working Paper Series No. 1587 and Ghysels, E., J. Idier, S. Manganelli, and O. Vergote (2014): “A high frequency assessment of the ECB Securities Markets Programme”, ECB Working Paper Series No. 1642; Altavilla, C., D. Giannone, and M. Lenza (2014): “The financial and macroeconomic effects of the OMT announcements”, CSEF Working Paper No. 352. BIS central bankers’ speeches  5  Inflation developments since the Great Recession Euro area inflation developments over the past six years have been remarkably volatile. From the 4.1% peak of July 2008, HICP inflation fell markedly at the trough of the recession and reached negative levels in the short period between June and October 2009. However, in the second half of 2009, prices started increasing again, also due to a rise in energy prices. In spite of a persisting level of economic slack, the HICP inflation climbed rapidly and steadily up to a peak of 3% from September to November 2011. Similar developments could be observed in the U.S., where inflation remained stable after a decline in the first months of 2009 and gave rise to a debate on the “missing disinflation”.4 If those developments were somewhat surprising for their swiftness, more recent inflation dynamics have displayed a remarkably high degree of persistence.

The rules and procedures of the various payments systems that settle in RTGS – CHAPS, Bacs, FPS, LINK, Cheque & Credit, and Visa Europe – are maintained by their respective private sector members, though there is close cooperation between the schemes and the Bank’s operational team. The recognised payments schemes are themselves supervised by the Financial Markets Infrastructure Directorate of the Bank. We will want to examine the Bank’s role in delivering payments and settlement services, looking closely at how the United Kingdom compares to elsewhere around the world and the international guidance on risk standards set out in the Principles for Financial Market Infrastructure. The Bank’s experience, particularly during the financial crisis, has been that having direct operational control over RTGS has paid substantial dividends in terms of the delivery of its mission, so I think it is fair to say we start with a certain bias in that regard. But the appropriate model for IT development, service governance and risk management depends quite heavily on the chosen way forward for the RTGS infrastructure. In light of the emerging results of the blueprint, the Bank’s supervisory function will review whether any changes are necessary to the supervisory model for the high value sterling payments system. A blueprint with buy-in The agenda I have set out today is an ambitious one, with important implications both for the many institutions and infrastructures that interface with the system today and for those that might do so in the future.
We saw a much calmer development in Sweden in the 1950s and 1960s when electrification became widespread. This contributed to a rapid technical transformation, which largely followed a calm course, although it involved a very extensive migration and in its later stages involved entire industries being wiped out. However, this was a period that was in many respects quite different from our current day and different from the period at the turn of the previous century. Sweden had the advantage of having remained neutral in the Second World War and we were able to benefit from a relatively stable demand from the countries building up their economies from the ruins. We had capital market regulations and the international scene was dominated by the Cold War, which led to a clear bipolar world. The USA dominated our part of the world and provided support for clear international financial structures, partly based on the need for solidarity. What has happened so far in Sweden? To return to today’s situation, we can conclude that the Swedish economy is doing better than it has for a long time. Price stability has been established. Production and employment have increased at a rapid rate and would appear to continue to do so. Looking at the past six years, the economy has grown by an average of 3% per year and at the moment we appear to be in an annual rate of between 3 and 4%.

Examples of this include the introduction of the steam engine and the telegraph at the beginning of the 19th century, the building of the railways somewhat later and the internal-combustion engine and electric motor in the 20th century. These changes usually follow a similar pattern of growth and structural transformation. The transitional phase initially involves a period of crisis, which is expressed in company closures and rising unemployment. After this, productivity and growth increase. Some industries expand rapidly and are met by expectations of large profits. The demand for labour is unevenly distributed and matching problems arise. Wage differentials increase. In many ways the “new” economy can be regarded as one in a row of structural changes taking place in society. It is thus more appropriate, in many respects, to talk of a blend of new and old, rather than a new economy. In comparison with the steam engine, the railways and electricity, today’s IT developments may be perceived as marginal. But, while there is considerable exaggeration in the discussion of the importance of IT, I would still say that today’s change process could be compared to these events. Computers and the Internet allow us to gather information easily, cheaply and rapidly, as well as facilitating contacts between buyers and sellers at almost all levels. IT affects a number of areas, such as financing, stock management and procurement. This often involves a dramatic reduction in costs.
We have to understand that monetary policy alone cannot ensure price stability without the appropriate fiscal discipline at the overall level of the Economic and Monetary Union. For my part, I would give three economic justifications for the Treaty provisions that gave rise to the Stability and Growth Pact. Firstly, by coordinating the fiscal policies of the Member States of the Monetary Union, the Pact ensures a good policy mix within the euro area. This is essential for monetary policy. Since Europe does not have a significant federal budget, just as Europe has no federal government, the sum of the national budgets must serve as an overall budget for the area as a whole. This calls for close mutual surveillance and coordination of fiscal policies within the euro area. That is the reason why sanctions, including fines, can be decided against bad behaviours. Europe has not practised benign neglect as regards fiscal policy: it has given the Council, which is the political body at the centre of Europe much more influence and power on the fiscal policy of Member States that in any existing federation or confederation. Secondly, the Pact helps prevent well-run economics from having to bear unjustified risk premia by setting up a system of penalties for excessive deficits. Thirdly, the Stability Pact allows us to disprove the assertion that the euro area has no automatic stabilisers in the event of asymmetric shocks to a member economy.

Lars Nyberg: The mortgage market from a Riksbank perspective Speech by Mr Lars Nyberg, Deputy Governor of the Sveriges Riksbank, at The Swedish Bankers’ Association’s Annual Bank Meeting 2004, Stockholm, 11 November 2004. *  *  *  First and foremost, thank you for the invitation to speak at the bank meeting today. The mortgage market is the focus of today’s meeting and I will discuss this market from a Riksbank perspective. But what is that exactly? The Riksbank’s remit is to conduct monetary policy in such a way that leads to stable prices, but also to promote stability and efficiency in the payment system. For both of these tasks, the situation in the mortgage market since the mid-1990s, with increasing household debt and rising housing prices, has been of great interest. Is this development sustainable? And if not, what should be done? Incidentally, we share these issues with a number of other countries in the Western world. I intend to begin with a brief reminder of how we arrived at this situation. Then I will discuss the risks to financial stability. Finally I will give my views on the possible implications for the inflation target and monetary policy. Housing prices and debt Since 1996 house prices have risen by just over 80 per cent in current prices. Swedish household debt has increased by 85 per cent over the same period (Figure 1).