samchain/econo-pairs-v1 huggingface dataset:
Thomas Jordan: Discussions on the topic of the euro/Swiss franc minimum exchange rate Speech by Mr Thomas Jordan, Vice-Chairman of the Governing Board of the Swiss National Bank, held at the Swiss National Bank, Zurich, 10 April 2012. *  *  *  Ladies and Gentlemen I would like to welcome you to this discussion on the topic of the euro/Swiss franc minimum exchange rate and thank you for attending at such short notice. As you are aware, on Thursday of last week a few of the transactions in the foreign exchange market for the euro were concluded at a rate below the minimum exchange rate set by the Swiss National Bank (SNB). I consider it important that you are aware of the sequence of events, and also that I reaffirm the SNB’s current policy. Since this is a specifically market-related topic, we have chosen this rather special approach involving a discussion with news agencies. The fact that a few individual transactions at less than CHF 1.20 per euro were observed last Thursday has led to some isolated doubts being raised about the SNB’s resolve to enforce its minimum exchange rate. Right from the start I want to make it quite clear that such doubts are misplaced. The Swiss National Bank is enforcing the minimum exchange rate with all the means at its disposal. We are prepared to buy foreign currency in unlimited quantities for this purpose. In this respect, our policies are totally unchanged. What precisely occurred last Thursday?

Does the minimum exchange rate continue to apply? Yes. Without any qualification. The SNB has successfully enforced the minimum exchange rate and will continue to do so, without any restrictions. The Swiss franc is still overvalued and represents a substantial challenge for the Swiss economy. The SNB continues to expect that the Swiss franc will weaken. Should the economic outlook and the risk of deflation so require, the SNB stands ready to take further measures at any time. 2  BIS central bankers’ speeches
That means that instruments issued under foreign law must contain explicit contractual provisions to bring them within scope of the authority’s powers, unless there is explicit and watertight statutory provision for this. •  Third, the instrument must be easy to value in resolution, and operationally straightforward to expose to loss (and this is easier for debt than it is for deposits) without disrupting the critical functions of the G-SIB. Otherwise it may not be possible to stabilise the firm quickly whilst achieving the resolution objectives. •  Fourth, exposing the liability to loss must not be likely to give rise to valid legal challenge or “No Creditor Worse Off” compensation claims (NCWO) for breach of the NCWO creditor safeguard. There is a broad consensus amongst regulators and resolution authorities that capital instruments and long-term, vanilla unsecured bonded debt meets all of the above conditions, subject to a couple of caveats. One of the main ones being that if senior debt ranks alongside liabilities that are less reliably loss absorbing, such as sight or other short-term deposits and derivatives, then such debt cannot meet condition four above without bailing in instruments that fail condition three. This is because if equally-ranking liabilities are not exposed to loss, and the resolution authority departs from the creditor hierarchy, then the senior bond holders may have valid NCWO compensation claims. This could put public funds at risk. Equally as importantly, the protection afforded to senior bondholders by the NCWO compensation claim could mean that market discipline is diluted.

Why do I say this, when we have other resolution tools available? I say this because of the importance of protecting critical  1  http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.173.01.0190.01.ENG  BIS central bankers’ speeches  1  functions. It is simply not credible to think that a G-SIB could be dismantled over a resolution weekend without a destabilising disruption to critical functions. Finding a private sector purchaser capable of taking on the business – in whole or in parts – is likely to be even more difficult. Bail-in enables us to stabilise a firm. It buys the time that will allow for an orderly reorganisation or wind down of all or part of a failing firm, in order to address the underlying cause of the failure. There is more than one way to effect a bail-in: either through the use of write-down and conversion powers directly, or via a bridge institution. In a bridge, liabilities are exposed to loss by leaving them behind in an insolvency process with the activity that is to continue transferred to a new legal entity. In contrast, where the bail-in tool is applied directly, liabilities are written down or converted into equity within the existing legal entity. Applying the bail-in tool directly has a number of advantages over the bridge approach, at least in the context of a resolution at the level of an operating company.
The implications of this process for monetary policy - and economic policies in general - have been debated extensively on many occasions. These academic discussions have covered the pros and cons of EU and EMU accession, its optimal timing, the associated risks and so on. Not surprisingly, they have often been inconclusive and could continue for many years to come. However, time presses us, as monetary policy-makers, to cope with these fundamental uncertainties and to make decisions, designing clear steps to be taken to meet the EU accession challenges. Therefore, I am glad that we have gathered here to discuss our future policies. The topics are the same for all of us, and we thus have many ideas to share. But even before we get to the discussion, I would like to stress that in many areas we are unlikely to find universal solutions for all countries. Policies need to take into account the particular circumstances of each accession country, such as its current economic situation, monetary policy regime and fiscal stance. For example, the way towards the eurozone in an accession country with a currency board will be completely different from that of an inflation targeting country with a floating exchange rate. But there may be important differences within these two broad groups, too. So it should come as no surprise that a number of countries have indicated a clear preference for the “fast-track” approach, whilst others have adopted a more cautious approach.

This brings me to the issue of ERM2 membership and its consistency with our current monetary policy regimes. The proponents of the ERM2 regime argue that it is a useful monetary policy framework which can have a disciplining impact on domestic policies, limit exchange rate volatility, and help determine the conversion rate for EMU entry, but at the same time provides enough flexibility. Even though there is no doubt a valid point in all these arguments, some of the accession countries’ central banks have expressed much less enthusiasm about the ERM2. I wonder whether we are able to reach a consensus on this subject today. On the practical level, we all have to define our policy positions as regards the appropriate timing of ERM2 membership, choice of central parity, supportive policy mix and so on. Our debate should pay attention to the differences among the individual accession countries in addressing these policy issues. So far, I have focused on the monetary aspect of EMU entry only. In many cases, though, monetary policy is unlikely to be the major bottleneck in the accession process. For many countries, the key practical constraint seems to be their public budgets. Notable exceptions are the Baltic States and a few other candidate countries, for which there seem to be few obstacles to early eurozone entry in this respect. But many other countries run large public deficits, even after subtracting one-off transition costs.
As for the G20 agenda, the challenge is to transform its broad vision into detailed rules that prevent regulatory arbitrage of which banks took advantage of in the run up to the crisis. In closing, I am reminded of an old saying: “Money is a good servant but a bad master.” In the last crisis, excesses in the financial system came close to driving the world economy into the abyss and a repeat of the Depression of the 1930s; and it is my belief that nobody wants to see that happen again. I wish you a productive and successful conference. Thank you. 4  BIS central bankers’ speeches

Subsequent events in London changed that, however, including the FSA´s action against the Kaupthing subsidiary. The three leading commercial banks, representing about 85% of total banking assets, all collapsed. The Icelandic Financial Supervisory Authority took over their operations on the basis of newly adopted legislation, and they were divided into two entities, the new banks and the old. I will not expound on that process here, except to say that top priority was given to the maintenance of smooth payment intermediation and uninterrupted banking operations, and that efforts in that regard were successful in spite of measures such as the “freezing order” imposed on Landsbanki by the British authorities under the Anti-Terrorism, Crime and Security Act – a freezing order that originally extended as well to the Icelandic government, Central Bank, and Financial Supervisory Authority, among others. In fact, in the circumstances, the relative ease with which banking operations and payment intermediation continued to function bordered on the miraculous. The International Monetary Fund conducted an FSAP appraisal of the Icelandic financial system during the summer of 2008. The resulting staff report can be found on the Fund’s website. Another report, which was submitted to the Fund’s Executive Board in connection with the Icelandic government’s November 2008 request for a Stand-By Arrangement, includes the following statement:  BIS Review 22/2009  5  “Iceland’s overstretched, over-leveraged banking system was ill-positioned to cope with the global financial turmoil.
Given this, we assessed in July that monetary policy needed to be even more expansionary to ensure that inflation continues to rise towards the target of 2 per cent. We therefore decided to cut the repo rate by 0.1 percentage points to –0.35 per cent, see Figure 5. We also resolved to extend the purchases of government bonds by a further SEK 45 billion until the end of the year, see Figure 6. The purchases decided upon in April are expected to be concluded in September, at which point the new purchases will be initiated. At the end of the year, the Riksbank is expected to have purchased nominal government bonds for a total of SEK 135 billion. This corresponds to around 20 per cent of the outstanding stock of nominal government bonds and around 4 per cent of GDP. 1 If the ECB continues to buy government bonds at the same rate as so far, their purchases at the end of the year will correspond to around 7 per cent of the stock and, there too, to 4 per cent of GDP. The Riksbank has been portrayed as particularly “strict” in relation to other central banks, as we charge a negative interest rate to the banks when they deposit money with us. I would like to emphasise that the Riksbank is not endeavouring to be kind or strict.

Figure 15 shows that the population has increased much more than the number of completed homes over the past ten years, which is an indication that housing construction has been too low. Despite housing investment now increasing, it is important that structural problems on the housing market are discussed so that we can obtain greater efficiency on this market in the longer run. Several inquiries have put forward proposals regarding what needs to be done, most recently this was done in an annex to the Long Term Survey of the Swedish Economy. Not having an efficient housing market is not merely a problem for indebtedness, it can also comprise a threat to a healthy development of society and it can create conflicts between the generations. The Riksbank has long pointed out the risks linked to the high level of household indebtedness and has previously also weighed in them in the repo-rate decisions to some extent, by setting the rate somewhat higher than would otherwise have been the case. However, the effect these considerations have actually had on monetary policy – the amount by which the repo rate has actually been set higher – has been exaggerated substantially. There are quite simply limits as to how far the policy rate can be used for this purpose. And 6  BIS central bankers’ speeches  let me emphasise that the main focus for monetary policy has always been to bring inflation back on target and to attain a good development in the real economy.
It is, of course, possible that neither of these two reasons - investor protection and protection against financial stability risk - will be relevant because the very instability and riskiness of the world of unregulated crypto finance, most recently demonstrated by FTX, will in the end ensure that the sector cannot grow. Indeed, some have argued for regulators grappling with the crypto world to keep it outside the regulatory framework to ensure that users’ ‘caveat emptor’ concerns prevents both growth and connection with mainstream finance[4]. And that leads to my third reason. Forecasting the direction and pace of technological innovation is an even more uncertain game than economic forecasting. Promising technologies fall by the wayside; unexpected ones flourish. And technologies combine in ways that cannot be anticipated. But the technologies that have been pioneered and refined in the crypto world, such as tokenisation, encryption, distribution, atomic settlement and smart contracts, not only seem unlikely to go away as our everyday lives become more ‘digital’, but may well have the potential to improve efficiency, functionality and reduce risk in the financial system. A potential example of this is the integration of functions in ‘smart contracts’ that I mentioned earlier. A possible use case for such integration, which has been pioneered in the defi world is the combining the functions of trading, clearing and settlement of tokenised financial assets into a  Page 6  single, instantaneous contract, rather than being carried out in sequence by three separate institutions over a number of day.

Both elements will mitigate the risk of financial fragmentation due to non-coordinated measures taken by the different authorities, namely, “ring fencing” initiatives. Spanish G-SIBs fully comply with the pre-conditions to be considered “Multiple Point” groups: they are organised through local retail banking subsidiaries; critical economic functions, e.g. payment systems, are organized at the local level; subsidiaries are selfsufficient in capital and funding; and they rely on separate firms detached from the bank for operational support, for instance, on information systems. So, although there are still many issues to be clarified, we think that the most realistic resolution approach for the Spanish international banking groups is the “Multiple Point” strategy, provided that, in the event of resolution, their organisational and financial structures are suitable for healthy parts to be sold or maintained as a surviving group, split from their distressed sister companies, using other resolution tools such as asset transfers or bridge banks. Now, I will go to the second main element of the new framework, the bail-in instrument. BIS central bankers’ speeches  3  Next year, most of the FSB work on resolution will focus on preparing proposals on the adequacy of G-SIFI loss absorbing capacity in resolution, namely, what we call “gone concern loss absorbing capacity” or GLAC. This concept is similar to the Minimum Requirement of Eligible Liabilities (MREL) set up in the EU Bank Recovery and Resolution Directive.
Obviously, as I argued earlier, we need economic and social reforms at the national level. But a large part of the solution lies at the European level as well: (slide 11) as of today, Europe needs what I call a “Financing and Investment Union” (FIU) to steer abundant savings into productive investment. The FIU would merge together the initiatives already in place, which do not deliver sufficient results: the Capital Markets Union of course, but also the Juncker Plan and the Banking  Page 7 sur 8 Union. We need to put the pieces of the puzzle together in order to magnify their impact through synergies. There are two objectives: increased diversification of firms’ financing – with more equity financing, and higher resilience of the euro area thanks to private risk-sharing across domestic borders. 3. Beyond the “Financing and Investment Union”, which is the first step, I believe that Europe should move forward on two further concrete steps. The second step, after the FIU, is a collective economic strategy for the euro area. Growth and employment will be stronger in Europe if we combine more reforms where they are needed, such as in France and Italy, and more fiscal support in those countries with room for manoeuvre, such as Germany. In practice, for such a collective economic strategy to exist, the euro area needs to overcome the current sense of distrust. So it needs an institution that fosters confidence: it could consist of a euro area “Finance Minister”.

He would be responsible for defining the collective strategy with the Eurogroup, and for ensuring it was implemented in each country. He would also be tasked with managing a reinforced ESM (European Stability Mechanism). In terms of timing, this second step can only reasonably come after the elections scheduled for next year in some euro area countries, as it requires modifying the European Treaties. The third step, in the longer term, would be to complete the Economic and Monetary Union with a European fiscal capacity. This involves gaining more trust from Member States, to avoid it being seen as a one-way “transfer union”. A genuine euro budget would be a stabilisation tool and could include, for example, a European-wide unemployment insurance scheme. It could also be used to finance certain “European public goods” such as digital technology, the energy transition or the integration of refugees. And in the long term, it could directly issue common debt and even raise taxes. Page 8 sur 8 ** Let me sum up. To withstand the current global headwinds, we in Europe must safeguard our three common economic and social assets. And we cannot just wait for better conditions: as a central banker, I have given you my views on the path we can take in the economic area. It is now time for Europeans to embark on some decisive actions to be able to look to the future with confidence.
Beyond the socio-economic demands, there is a moral obligation for us to do more to help the millions who are still living in abject poverty and highly vulnerable to financial hardship, with no means to change their circumstances. This global symposium presents an opportunity for us to explore solutions from different perspectives. I see this as having “an eye for innovation”. Indeed policy makers are now improving their capabilities in technology and innovation, recruiting talent, establishing dedicated team and intensifying partnership with the private sector, to help them see things a little differently. While there is no shortage of ideas on new and innovative ways to increase financial inclusion, the key challenge to my mind is the ability to scale up and achieve sustainability. The symposium’s theme refers to “harnessing innovation”, but one needs to truly understand innovation in order to successfully tap on such innovation to attain the dual objectives of scale and sustainability in inclusive finance. With that in view, my remarks this morning will focus on three areas where an eye for innovation is needed: a. First, putting on a new lens to spot the opportunities from existing innovations that can be tailored to financial inclusion;  b. Second, identifying and working on our blind spots by driving efficiency gains with technology-enabled financial inclusion; and  c.  Third, having a clear picture of the policymakers’ role in promoting an enabling environment for financial innovation and technology.

Only then, can financial institutions expect to support the low income and vulnerable segments of our communities as long-term partners to create opportunities that will improve lives. A clear picture of policymakers’ role in promoting an enabling environment for financial innovation and technology Finally, policymakers can play a meaningful role to promote an enabling environment for innovation to support financial inclusion initiatives. I shall focus on three areas. First, regulation should aim to be technology-neutral and outcome-focused, proportionate to risks and harmonized across sectors. A technology-neutral approach allows policymakers to assess the merits of innovations based on the outcomes, without fear or favour for the underlying technology. Regulation should be proportionate to the risks that products or institutions present to the broader financial system. This requires continued efforts to strengthen the capacity among national regulators and supervisors to assess the benefits and cost of regulation. Only then can we really move from proportionality as a concept to practice. Regulation between different sectors should also be harmonised to focus on activities that should be regulated, rather than the institutions conducting such activities. For example, if an e-commerce platform collects, pays interest on and mobilises deposits, a banking license may be necessary as public interest is involved. Second, communicating clear expectations to the market while incorporating feedbacks through engagements with the private sector is important.