samchain/econo-pairs-v1 huggingface dataset:
2023  Economic perspectives Annual address by Governor Ida Wolden Bache to the Supervisory Council of Norges Bank  Thursday 16 February 2023  Economic perspectives 2023  This is a day I have been looking forward to for some time. At long last, we can hold this event as it should be held – at our traditional Norges Bank venue filled to the brim. Three years have passed since last time – three years less ordinary. We have endured a pandemic and the most restrictive measures seen in a time of peace. We have witnessed Russia’s brutal war campaign against Ukraine. The war is a deep tragedy for the people of Ukraine and a dire threat to peace and stability in Europe. Both the war and the pandemic have had far-reaching economic consequences. Over the past year, inflation has reared its head, with inflation rates reaching multi-decade highs. The costs of high inflation have come into clear evidence. What started as a rise in a few prices ended up as a rise in a broad range of goods and services prices. Rapid and unexpected price increases are eroding peoples’ finances and are impacting those with small margins hardest. The surge in inflation is also putting monetary policy and Norges Bank to the test. It is our responsibility to bring it down. That is something I have been mindful of during my first year as central bank governor. The 1970s – high and variable inflation Let us go back in time 50 years.

Less short termism: the promise of significant returns in the short term was often linked to a misjudgement of underlying risk. At the level of individual institutions, compensation schemes must be adjusted to avoid encouraging excessive risktaking on the basis of relatively small amounts of capital. Instead, the incentive structure should encourage profitability over the medium to longer term. At the same time, on Wednesday, the European Parliament approved significant curbs on bank bonuses as part of wider efforts to reform the financial sector. EU finance ministers are set to endorse the law next Tuesday with the curbs taking effect from the start of next year. At the level of the financial system as a whole, we need to improve decisively the prevention of build-up of risks, including systemic risk. Macroprudential oversight will help to prevent the building up of imbalances. The third area of work concerns fiscal consolidation. This affects all industrial economies. Governments must send a clear message to markets – a message of determination and commitment to sound macroeconomic policies. There is no doubt that  2  BIS Review 97/2010  bold government actions including large capital injections in support of the financial sector helped to cushion the impact of the financial crisis. These measures were courageous and important in avoiding an even worse economic downturn. But many countries in the industrial world have reached the limits of fiscal expansion. Rising debt levels and large fiscal deficits have raised concerns among financial market participants about the longer-term sustainability of public finances.
How do they decide when and how strongly to tighten monetary policy? Like many central banks today, the Swiss National Bank follows an approach to decision-making based on risk management. In theory, this is relatively simple. We focus not only on the most likely path of the economy, but also take into account a range of possible outcomes around that path. In doing so, we weigh the potential costs and benefits of different policy measures. Of course, real life is more complicated. Our understanding of the economy is inherently imperfect. Economic models have a limited ability to capture the truth and predict the future. So how do we deal with this complexity and uncertainty in practice? Can we deduce some general principles for decision-making? My introductory remarks will address three such principles, namely pragmatism, consistency and determination. Where relevant, I will touch on our experience in Switzerland. I will begin with pragmatism. Pragmatism  1/4  BIS - Central bankers' speeches  In light of our limited knowledge about the economy and the influence of monetary policy, decision-makers are well advised to be pragmatic. They should choose policies that exhibit a certain degree of robustness to different circumstances. Rather than seeking measures that are optimal in the context of specific situations, decision-makers are better off adopting less ambitious policies that produce reasonably good results in a sufficiently large variety of scenarios. In analysing such scenarios, we work with models that incorporate a relatively small set of key relationships.

I am very pleased to note that the academic part of our conference offers a wide range of contributions on many of the issues I have mentioned. I look forward to interesting discussions and an open exchange of views. It is now my pleasure to give the floor to Andréa, who will chair the first panel. 4/4  BIS - Central bankers' speeches
With regard to the latter measure, I would like to point out that such initiatives from the banks are of course welcome and praiseworthy. But it is also essential that the banks follow up what is happening and that the authorities monitor to what extent the recommendations are actually followed. Moreover, awareness that rising indebtedness and housing prices could entail problems has gradually increased among both lenders and borrowers. The situation on the housing market is now discussed regularly in the media. I would like to believe that this is at least partly because the Riksbank has long been pointing out the risks involved here. However, it remains to be seen whether these measures and the increased general awareness will be enough to slow down developments and bring us onto a less risky course. Very recently there have been signs that developments in both lending to households and housing prices have entered a calmer phase. We are of course following developments very closely. Continued vigilance necessary Despite the calmer situation, there are nevertheless strong reasons to remain vigilant. If it turns out that this was not a break in the trend, but merely a temporary slowdown, and that housing prices and the build-up of debts among households accelerate again, we and others must be prepared to take action. We therefore cannot just twiddle our thumbs; the Riksbank and others must ensure that we have an effective toolbox of measures that can be quickly and smoothly put into operation. I will return to this shortly.

Thomas C Baxter, Jr: Too big to fail – expectations and impact of extraordinary government intervention and the role of systemic risk in the financial crisis Testimony by Mr Thomas C Baxter, Jr, Executive Vice President and General Counsel of the Federal Reserve Bank of New York, before the Financial Crisis Inquiry Commission, Washington DC, 1 September 2010. *  *  *  Chairman Angelides, Vice Chairman Thomas, and members of the Commission, thank you for the opportunity to appear before you today. For the past 15 years, I have been privileged to serve as the General Counsel of the Federal Reserve Bank of New York. I welcome the opportunity to speak to you about the events that brought Lehman Brothers to bankruptcy, events that occurred during 2008 when our Nation was in the midst of the worst financial crisis it has experienced since the Great Depression. During the crisis, Federal Reserve policymakers needed to respond to a series of extraordinary and hugely consequential problems, usually with little time and imperfect information. Today I will be speaking to you about the facts surrounding one of these problems, Lehman Brothers. In 2008, my job was to provide legal advice to Federal Reserve policymakers, and so while I am happy to share with the Commission my recollections of the events that I will describe, I do not want to exaggerate my own importance.
This event underlines the importance of stepping up our efforts to achieve a greater degree of financial integration among the remaining EU Member States, particularly those belonging to the Economic and Monetary Union (EMU). We have to finalise the construction of the Banking Union, and complement it with the development of a genuine Capital Markets Union. This objective should be seen as part of a coordinated effort involving several other areas of economic governance. All of these efforts, taken together, should be aimed at reinforcing the euro area and making it more resilient to shocks. European citizens and firms still face several barriers to invest across European markets. On paper, the EU enshrines the right to the free movement of capital. In practice, financial activity remains largely national. These inconsistencies and obstacles take the form of regulatory barriers, national options and discretions, and infrastructural limitations, the persistence of which is mainly due to limited political resolve. As a result, investment is not well diversified and may not be optimally matched with savings, and the financial system is fragmented along national lines, severely limiting the potential benefits of the single market. In principle, the problem is not one of scarce resources. In fact, the euro area runs a significant current account surplus, meaning that there are savings that could be channeled towards worthwhile investment opportunities. But more ambition is required to achieve welldeveloped and integrated capital markets in Europe.

However, for surveillance to be relevant and gain traction, it is equally important that the IMF is sufficiently independent in its conduct of surveillance. To deliver credible messages, the Fund’s technical expertise has to be beyond any suspicion of political manipulation. Surveillance, in other words, has to be an exercise in objectivity. Only then can it also be an exercise in collaboration and contribute to a sounder and more resilient international monetary system. This being said, IMF surveillance and collaboration does not release national policy makers from their responsibilities. Keeping one’s own house in order is a prerequisite for an orderly global village. This is particularly true, though not exclusively, in the domain of fiscal policy. Fiscal responsibility is the paramount challenge of our age. Let me now turn to the second main Fund activity, financial support. The scope and nature of this activity has changed considerably over the past few years. Fund resources have been strongly supplemented, and the Fund’s lending toolkit has been made more flexible. But multilateral financing has not been the only instrument used in tackling the crisis. Regional facilities and central bank swap lines have also played a very important role. All these instruments have acted as complements, and not as substitutes, and together they have prevented a breakdown of the system. Looking into the future, the important question is whether it is necessary to proceed beyond the existing loose network of multilateral, regional and bilateral facilities towards a truly global financial safety net.
•  These are stringent requirements which we can only honour with a consistent focus on the ultimate goal of regulation and supervision, namely a stable financial system. I would therefore like to end my list of requirements with a warning. Under no circumstances should regulation be misused to support economic development. That would blur responsibilities and shift tasks from the political domain to supervision. New rules for the banking industry go hand in hand with burdens. With a multitude of new rules, the sum of those burdens can impair the banking industry’s ability to function properly. This must be taken into account and solutions must be found, but this cannot be done by ignoring risks. The past has shown us far too often that there is no point in ignoring risks to banks – in the medium and long term, they always come back like a boomerang. 4. Current status and further need for improvement  Where do we currently stand in Europe in this respect? Do we need more regulation, or do we need less? Since 2009, the regulatory framework has undergone further extensive development and has been decisively improved upon at both the international and the European level.

Conclusions  I don’t think that you were much surprised by my saying that I don’t think much of lax regulation. Given the obvious tendency towards exaggeration and erroneous developments in financial markets, and the potential damage for the economy and society, good regulations are an indispensable prerequisite for ensuring that the financial sector is able to function properly in the long term. This does not mean that the consequences of regulation and supervision for the banking industry’s ability to function should not be considered. The desire of some to make up for the rigour of the rules with less stringent supervision is something I reject. That would be the wrong approach. But what are required are not only good regulations, but also a well-functioning supervisor that exercises tough but fair control to help ensure a stable banking system and a level cross-border playing field. A decisive factor for the success of the SSM will not just rest on banks in the euro area being subject to a consistent supervisory approach. Rather, both supervisory legislation and the powers of European supervision must take further steps in the direction of harmonisation. Finally, it is not possible for every conceivable situation to be covered by regulations, nor can every crisis be anticipated from a supervisory point of view. Although regulation and supervision can ensure a certain measure of protection, or build a line of defence, as it were, they cannot and should not eliminate every risk.
These include the rise of non-bank financial intermediation, and the deep pockets of opacity and interconnections with the banking system – as we have seen in cases such as Archegos, Evergrande, Greensill and Huarong. In addition, medium-term structural trends such as the ongoing digitalisation of finance and increasing climate-related financial risks are so cross-sectoral and global in nature that they can only be effectively addressed through greater cooperation across sectors and across jurisdictions. 2/3  BIS - Central bankers' speeches  My third point is that cooperation can, and should, take different forms. While regulation – most notably the Basel framework – is perhaps the most visible product of global cooperation, there are a number of other, equally important, dimensions. Supervisory principles and guidelines, while often high-level in nature, are a powerful tool to help raise the bar when it comes to the quality and effectiveness of risk management practices and supervision, and to help provide a common global baseline. Supervisory cooperation, including through the sharing of supervisory intelligence and best practices, is a vital channel for authorities to assist and learn from one another. Indeed, merely having a continuous and ongoing channel of communication among authorities is perhaps one of the most important levers available to us. Equally, cooperation should be multi-faceted in scope, and should encompass both microprudential and macroprudential financial stability dimensions.

We learnt this lesson the hard way in the wake of the GFC, and that is why the Committee's membership – comprising both central banks and supervisory authorities – is crucial to ensure that we benefit from both the system-wide and institution-specific perspectives. Moreover, given the increasingly cross-sectoral nature of many of today's financial stability issues – such as digitalisation and climate – I believe that more cooperation across different sectors – for example, on accounting, competition, anti-money laundering, data privacy, and taxation, to name a few issues – is also vital. In many instances, we are all working on similar issues from a slightly different angle, and so we would surely all benefit from sharing notes and ensuring that there are no unintended gaps or overlaps. Let me end by noting that cooperation need not mean full harmonisation. While having a single, uniform "global rule book" may be theoretically appealing, the fact is that we live in a heterogeneous world, with structural and cyclical differences across banking systems and jurisdictions. Moreover, many of our central bank and supervisory authority members are accountable to their national legislatures, so it is crucial that global standard setting bodies are perceived to be legitimate and transparent. This is why the Basel Committee has an extensive outreach programme with a wide range of stakeholders that go beyond market participants, to include academics, public sector bodies, legislatures and civil society. Indeed, there needs to be an appropriate balance between globally-agreed decisions and national measures.
2/3  BIS - Central bankers' speeches  At the same time, the conduct of monetary policy is not mechanistic. Models are useful, but they are simplifications and must be supplemented by other information. For example, loss functions in such models cannot be directly interpreted as the Committee's view of inflation costs. As the deviation from the target increases, we need to assess the risk of high inflation becoming entrenched in the expectations of households, firms and FX market agents. If this were to happen, we may find ourselves in uncharted territory, where the costs are far higher than when inflation expectations are anchored to target. As last year, Norges Bank Watch notes that Norges Bank's FX transactions related to tax payments to the government result in volatility in the money market premium. As long as the short-term money market functions well, Norges Bank will not seek to steer such risk premiums. But we do not want to contribute to needless volatility, which is why we seek to make FX transactions as smoothed and predictable as possible. The Ministry of Finance is now appointing a working group, in which Norges Bank will participate, tasked with examining various aspects of the government's liquidity management. The practical implementation of the petroleum fund mechanism is one of the topics for discussion. Among the matters the working group will consider is whether the number of due dates for petroleum tax should be increased. Let me conclude by again thanking Norges Bank Watch for an excellent report.

In a very direct way, policies aimed at promoting the transition towards a carbon-neutral economy are likely to affect the volatility of headline inflation and, more indirectly, climate change and the remedial actions needed to tackle it could affect our ability to achieve price stability through their impact on the so called natural interest rate, which is an important benchmark for inflation-targeting central banks when setting our interest rates. 2/6  It is still not clear the way climate change affects monetary policy and thus more analysis is needed to address the implications of climate risks on the economy and on monetary policy. Therefore, we have to step up our efforts to develop the tools and models needed for such an analysis. And, finally, climate change will affect the risks of the assets held on our balance sheets. Monetary policy implementation exposes us to such risks directly through holdings of assets and indirectly through collateral pledged by counterparties. In this regard, and very much related to my previous comments on the implications of climate change for the financial sector, central banks also have to step up their efforts to incorporate climate change into their risk management models and frameworks. And this, together with climate-related disclosure requirements, can decisively contribute to the correct pricing of climate-related risks by financial markets.
In the post-crisis era, the conventional wisdom is that emerging markets should choose either a free-floating or fixed exchange rate system. But neither is a panacea. Fixed exchange rates are hard to sustain in a world of global capital mobility. Furthermore, they tend to be viable only when supported by large foreign reserves and strong institutional arrangements. Even then, the exchange rate can still become misaligned and vulnerable, as has happened in Argentina. In Hong Kong, strong foreign reserves and well-developed financial authorities and institutions made its currency board workable and credible. But even the Hong Kong dollar came under fierce attack in this crisis. In other countries a fixed exchange rate may be completely infeasible. Thus Professor Steve Hanke’s proposal to set up a currency board system to stabilise the rupiah was viewed with deep scepticism by policymakers both in Indonesia as well as the IMF and the World Bank. Neither does a free-floating exchange rate always work. Even developed countries do not remain impassive when capital flows overwhelm trade flows and threaten the competitiveness of the country’s exports. A prime example is Japan. And despite a free-float, the exchange rate may spiral downwards if there is a loss of confidence. This happened in Indonesia and Brazil after they abandoned their exchange rate pegs. Singapore operates a managed float. This policy has prevented the currency from getting too far out of line and rendering our exports uncompetitive as a fixed rate might have done.

Lessons learnt at great cost of human suffering and political upheaval may help us formulate sounder policies for the future. A thorough comparative study would occupy several PhD theses. But a brief review of what happened in each country will be a useful basis for examining some of the major themes for strengthening the global financial system. Asian crisis – what happened Thailand The crisis began in Thailand after a long boom. The establishment of the Bangkok International Banking Facility or BIBF and the implicit guarantee of a fixed exchange rate encouraged unhedged borrowing in foreign currency by Thai companies. This led to a build-up of external debt and an asset bubble. As the Thai economy weakened, the balance of payments deteriorated and the baht came under pressure. Attempts to defend the baht were costly and ultimately unsuccessful. When the baht was finally allowed to weaken, its sharp fall triggered the collapse of many Thai corporations as well as the banking system. The Thai economy contracted sharply. The aftershocks of the Thai problem affected many other Asian economies. Confidence in the whole region was shaken. Both domestic residents and foreign investors alike rushed to hedge or reduce their exposure to the region. Malaysia Malaysia was among the next to be affected. Its economy was fundamentally sound although there were concerns over a property boom and over investment in infrastructure. An acute loss of  1  BIS Review 93/1999  confidence, partially prompted by Thailand’s problems, led to a sell-off of Malaysian shares and the ringgit.