samchain/econo-pairs-v1 huggingface dataset:
Fernando Restoy: Presentation of the book “Financial regulation: the solution or the problem?” Closing address by Mr Fernando Restoy, Deputy Governor of the Bank of Spain, at the presentation of the book “Financial regulation: the solution or the problem?”, Fundación de Estudios Financieros, Madrid, 5 March 2015. *  *  *  Good morning. Many thanks for your introduction and for the opportunity to participate in the presentation of this report on financial regulation by a group of veritable authorities on the matter. I have had professional dealings with all of them to some extent in recent years and, in particular, with the report’s coordinator, José Pérez, who contributed to my joining the Banco de España – when he was Director General of the Research Department – some years ago and who therefore bears some responsibility for me being here before you today. The book’s title is admittedly a provocative one: “Financial regulation: the solution or the problem?” It is comforting to see that the work’s conclusion is not that regulation is the problem and, therefore, that deregulation is the solution. On the contrary, I believe that the authors, on the whole, appreciate the effort made to strengthen prudential regulation and, in particular, to gear it to the aim of achieving more and better capital. At the same time, I understand and largely share the concern to avoid excesses. Regulation, like the vast majority of public policies, is no free lunch. It is there to redress market failings that harm the collective well-being.

In particular, the supervisor should have the real capacity to influence bank managers’ decisions through moral suasion and to formulate non-legally binding recommendations, in the sure knowledge that they will in practice be very widely followed. Supervisory actions would otherwise be excessively hampered by a regulatory framework which, despite having been honed in recent years, can hardly envisage all situations of supervisory significance or include the full range of instruments needed to tackle such situations with the speed required in each instance. Finally, it is difficult for supervision to be effective if it does not include a thoroughgoing review of banks’ financial statements. Allow me to elaborate on this point. Evidently, an essential aim of supervision is to oversee banks’ solvency through the monitoring of capital ratios. Insofar as these ratios are calculated on the basis of accounting information, it is essential to ensure that such information properly reflects the value of the bank’s assets and liabilities. It is true that auditors and securities supervisors also perform this task. However, the specific nature and complexity of bank business, the evident relationship between published financial information and financial stability, and the occasional lack of specificity of prevailing accounting principles all make it advisable that the prudential supervisor should contribute to encouraging supervised banks to follow the best practices, in full conformity with current regulations and the distribution of competencies among institutions thereunder.
•  The central government budget – growth in public expenditure – influences the krone and the size of the internationally exposed business sector in the medium term. Government expenditure and revenues must be in balance in the long term. •  Wage formation, the structure of the economy and incentives determine how well and how efficiently we utilise our labour resources and other economic resources. There is also an interaction: •  In its budget resolutions, the government authorities will attach importance to the effects of the budget on the Norwegian economy and will therefore take account of interest rate effects. In this way, they avoid a situation where growth in public expenditure and the interest rate push the economy in different directions. •  With a known monetary policy response pattern, the parties to the centralised income settlements can take interest rate effects into account when wage increases are negotiated. •  Moreover, the parties to public sector negotiations can take into account that the higher pay increases are, the fewer people that can be paid over government budgets. The interaction here became clear when public sector employment fell after the expensive wage settlement in 2002. In the years following 1997, with strong growth in public expenditure, the fiscal rule pointed to a continued increase in the use of petroleum revenues.

Yet, not only has there been no depreciation pressure on the Hong Kong dollar: it has in fact strengthened following capital inflows into Hong Kong since the outbreak of the crisis in midSeptember last year. Consistent with the principles of the Currency Board, the Hong Kong Monetary Authority (HKMA) has bought a total of $ billion, injecting $ billion into the local money market. The inflow of funds to the Hong Kong dollar was a welcome development, paving the way for monetary easing, which was fortuitously the appropriate monetary policy stance to support the economy. The reasons put forward for the inflow have not been a cause for concern for they did not seem to relate to exchange-rate speculation. Market consensus about the  BIS Review 19/2009  1  causes pointed to the unwinding of carry trades and the repatriation of funds by corporates to finance operations in Hong Kong. It is also likely that there have been some inflows to position for investment in Hong Kong, in light of the better economic prospects of the region, and in particular, China. The second factor in the resilience of Hong Kong’s financial markets is our robust banking system. One of the lessons from this experience is that the stability and effectiveness of the banking system becomes even more essential when financial crisis shuts down the two other financial intermediation channels: the bond market and the stock market.
In one of his books he wrote: “If prices rise, the rate of interest is to be raised; and if prices fall, the rate of interest is to be lowered; and the rate of interest is henceforth to be maintained at its new level until a further movement of prices calls for a further change in one direction or the other.” Just over three decades after his address in Stockholm, Sweden had to leave the gold standard in September 1931. The objective of monetary policy was declared to be to use “every available means to maintain the Swedish krona’s domestic purchasing power”. In this way BIS Review 58/1998  -2-  the Riksbank was the first central bank to declare openly that its monetary policy norm was price stabilisation. Notwithstanding this long tradition, after inflation’s rising trend in the post-war era, Swedish economic policy’s reorientation toward price stability did not begin until the late 1980s and early 1990s. That was a decade or so after such realignment had been initiated in other countries. By then, Sweden had experienced twenty years of inflation that averaged 8 per cent a year. That was the longest inflationary period since the early nineteenth century. In contrast, in the one hundred and forty years from 1830 to 1970, inflation in Sweden had averaged an annual rate of 2 per cent. So one can say that in the present decade we have been re-establishing our roots. Sweden’s policy realignment in the early 1990s was, however, more painful than anyone could have foreseen.

The example of Japan in the 1980s suggests that consumer price stability may not be a sufficient condition for precluding bubbles in asset prices and financial instability. With trend inflation averaging two per cent a year, the situation in Japan in the 1980s was very close to what we now commonly mean by price stability. Yet the Japanese economy still moved towards a period of grave financial instability. Thus, the question practitioners have to consider is how to deal with a situation where asset price effects are taken into account with reference to consumer price inflation but where there may still be a risk of asset price bubbles that may lead to financial instability, a destabilisation of the real economy and a severe downward effect on consumer price inflation later on. One could argue that the effects of a large rise in asset prices on aggregate demand may be smaller than the effects of a large fall if such a fall increases general uncertainty and leads to more cautious spending behaviour. If the collapse of a bubble in asset prices has a much stronger effect than the preceding boom, it may be optimal to increase interest rates to raise the probability of bursting a bubble even though such a policy action may temporarily lead to lower consumer price inflation in the short term than otherwise would have been desired.
If contingent capital became more widespread, banks’ capital ratios would be automatically stabilised over the cycle, lowering the chances of future banking crises. As several academics have argued, the same basic principles could be applied to the debt contracts issued by households, companies and even sovereigns. Take a typical mortgage contract. A rise in the value of a property relative to the loan gives the borrower equity against which they can borrow. This provides an incentive to trade-up, raising house prices and generating further equity. This amplifier operates symmetrically, as falling collateral values reduce refinancing options and drive down prices. Economists call this effect the financial accelerator. 18 It adds to cyclicality in credit provision and asset prices. US economist Robert Shiller has suggested it might be possible to devise mortgage contracts that slow, or even reverse, this financial accelerator 19. Instead of being fixed in money terms, imagine a mortgage whose value rose with house prices. So the repayment burden would rise automatically with asset prices to slow a credit boom and fall in a recession to reduce the chances of mortgage default. Mortgages would operate like a contractually pre-committed debt-equity swap between households and banks. They would automatically stabilise household loan-to-value ratios. By reducing the amplitude of the credit cycle, they ought to benefit both borrower and lender. Governments cannot issue equity. But this does not prevent them issuing debt with equitylike characteristics.

It also accounts for a significant proportion of the rise in risky debt prices: a year ago, corporate debt prices were signalling larger losses on company securities than seen during the Great Depression (Chart 6).   Third, improved liquidity in financial markets has lowered decisively uncertainty about future market prices. This has lowered the compensation investors require for such risk – the liquidity premium – boosting asset prices. This accounts for around a half of the fall in spreads on sterling investment grade corporate bonds since March last year (Chart 7). Mirroring the recovery in asset prices, there is now convincing evidence of global output having turned in the second half of 2009. The IMF projects that the global economy will grow by 3.9% in 2010, having contracted by 0.8% in 2009. Surveys of manufacturing in the major economies are at levels last seen prior to the crisis. This combination of a stronger real economy and buoyant financial markets has generated a dramatic turnaround in fortunes of the banking system. Global banks’ net income in 2009 is expected to be around $ billion, compared to a loss of roughly that amount in 2008. Income from market-making in various financial products has been especially lucrative, given higher bid-ask spreads and client activity (Chart 8). This windfall gain has helped repair banks’ over-extended balance sheets. Global banks have boosted their Tier 1 capital ratios by almost 3 percentage points since the start of 2009. UK banks’ Tier 1 ratios have increased by around 3.4 percentage points.
BIS central bankers’ speeches  The benefits of reform Having argued for the extension of the reform race, I am conscious of the risk of fatigue. But as Ravi Menon argued more than a year ago: “it is imperative that we press on with the reform agenda and do not succumb to reform fatigue.”27 Already we can hear some of the runners, particularly those at the back, making world-weary arguments that more reform will hurt jobs and growth, and even that financial crises are just something that happens every five to seven years. If that were true, we are due for another crisis about now. Does anyone find that acceptable? As the memory of the crisis fades, it will be ever more important to explain the benefits of reform to counter the fatalism. So let me take this opportunity to take stock of the benefits of reforms, both of those already agreed and of the next phase of reform I have outlined. While we all recognise that future crises can never be ruled out, the steps taken to make banks safer and simpler have certainly reduced the likely frequency and severity of future financial crises. In doing so, they have reduced the exorbitant costs of instability. The Basel Committee assessed in 2010 that the economic cost of the median financial crisis amounted, over time, to 60% of national income. With a 5% probability of a crisis each year, that is equivalent to annual costs of 3% of GDP.

And the Basel Committee is developing the capital framework to ensure implicit offers of contingent support by banks, for example to their SIVs, will be properly capitalised. Interconnections created by derivatives are being reduced and made transparent. Requirements are being imposed, and incentives created, for banks to centrally clear derivative trades, helping to replace the complex web of bilateral deals with a central model. Trade reporting and margining requirements are being strengthened. More broadly, overall disclosure has been enhanced on the key risks arising from business models, sources of funding, market risk measures and loan forbearance policies.5 Through such initiatives, complexity and obscurity are being replaced by simplicity and transparency. A fairer financial system That goes some way towards increasing the effectiveness of market discipline. But that discipline will never be felt fully if markets believe that creditors and shareholders will be bailed out in a crisis because banks are too big to fail. Expectation of bail out was validated comprehensively last time. The US authorities sought to make Lehman Brothers a test case of moral hazard. Instead, this exception proved the rule. AIG was rescued within twenty four hours. As Barney Frank observed, the free market lasted for a day. This “heads-I-win-tails-you-lose” environment for the world’s largest banks struck right at the heart of the sense of fairness in our societies. It simply had to be fixed. Tackling the rampant moral hazard at the core of the system has not been easy but, at the Brisbane Summit, G20 Leaders marked a watershed in our efforts.
An important element of this proposal is that any financial institution that obtains federally-insured deposits or has access to refinancing from the Federal Reserve would be prohibited from owning, investing in or sponsoring hedge funds or private equity firms. Essentially, it aims to separate traditional banking activities from higher-risk, proprietary trading operations. It also proposes imposing limits on large financial institutions regarding their market share of liabilities, as a supplement to the existing caps on the market share of deposits. These proposals have still not been detailed in depth. Nonetheless, on the basis of what has been made public, I am of the view that the initiative is heading in the right direction and represents the first step to ensuring the financial system can effectively support the real economy and is not weakened by the most volatile market fluctuations. It is, however, not the final step. Above all, it should not be a substitute for two other lines of action, which, in my opinion, are essential for a complete reform of the system. The first is that the whole financial system should be subject to regulation, even if the specific regulations may vary according to the activities or institutions to which they apply. However, I do not want the separation between traditional banking activities and high-risk proprietary trading operations to drive the latter to be undertaken by sectors or institutions that are less vigilant or are outside the sphere of regulation.

Lorenzo Bini Smaghi: From boom to bust – towards a new equilibrium in bank credit Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, at the Ernst & Young Business School seminar, Milan, 29 January 2010. *  *  *  I would like to thank, in particular, L. Cappiello, P. Aberg, G. Wolswijk and D. Marqués Ibañez for their contribution to the drafting of this speech. The opinions expressed are solely my own. 1. Introduction  There is now a broad consensus that the period leading up to the crisis was characterised by excessive credit growth. When the bubble burst, it resulted in the most pernicious banking crisis since the Second World War, accompanied by a severe economic recession. In order to revert to a more balanced and sustainable management of credit, while safeguarding the role that credit plays in stimulating growth, new rules, regulations and incentives for financial market participants are needed. This is what the regulatory authorities and governments of all major industrial countries and developing countries are working towards. This is not the end of the issue, however. Once the objective of establishing a new “steady state” has been identified, the path towards achieving this objective must be carved out. This will not be easy. If the adjustment is too swift, it could result in an over-adjustment of credit flows, i.e. be too restrictive, giving rise to recessionary effects on the real economy.
One thing that I of course knew from the beginning is that forecasts – regardless of the uncertainty of their accuracy – must be made when one is making a decision and future developments affect which decision alternative appears most appropriate. This applies in particular to monetary policy decisions. As monetary policy affects inflation and resource utilisation with some time lag, we need to gain an idea of how inflation and resource utilisation will look in the future to be able to decide on what is the most appropriate repo rate now. But unlike when deciding on, for instance, investment in a particular share, it is not possible to disregard the fact that the interest rate decision itself affects future developments. We therefore also make a forecast of our own future decisions, which is affected by the current decision. This makes particular demands of our forecasting. One question that one can pose is to what extent the Executive Board is involved in the forecasts of future repo rate decisions. This is a forecast of what stance we, this group of six individuals, will take at future monetary policy meetings. Today I shall therefore describe the  BIS Review 65/2010  1  process leading up to the repo rate path, that is, the Riksbank’s forecast of the future repo rate. Forecasts are of course always uncertain to a greater or lesser degree. The most recent financial crisis is a very good example of this.

10  Importantly, in addition to the ECB measures, others that have also been conducive to the flow of bank funding to the economy during this crisis are the public guarantee programmes implemented by national governments and the decisions of both macroprudential and microprudential authorities to allow financial institutions to make use of their capital buffers. In particular, the public guarantee programmes would help explain the disparate performance of credit between households and firms in Spain: while the rate of decline in credit to households has increased slightly, credit to productive activity has grown at rates over 7%. More than 40% of all new credit granted to firms comes under the guarantee programme, which reflects its importance in explaining these developments. The ECB also approved a second block of measures, relating to the asset purchase programmes, designed to stabilise financial markets in all euro area countries and neutralise the downward pressures on inflation stemming from the contractionary effects of the pandemic. Since end-February, financial conditions had tightened in the euro area, with both corporate and sovereign risk spreads widening considerably. This widening of spreads implied an increase in financing costs both for governments and firms, which acted as a channel for transmission of the pandemic crisis to the real economy. The spread widening in the euro area was uneven: countries that started from weaker fiscal positions, with higher debt levels, and those that were most affected by the first wave of the pandemic witnessed a much more pronounced increase in their financing costs.
Indeed, the author of the Life and Times of Marlborough would likely have approved of this choice of venue for today’s launch. After all, Blenheim Palace was built as a gift to the first Duke of Marlborough, John Churchill, in recognition for his leadership of the Allied forces to victory in the Battle of Blenheim in 1704 – a victory that would decisively turn the War of Spanish Succession. Winston Churchill was born here in 1874 and proposed to his wife, Clementine Hozier, on these grounds in 1908. Banknote character Winston Churchill will replace Elizabeth Fry, the prison reformer, on the Fiver from September of this year. The new £ note will in due course sit alongside the new £ which will feature Jane Austen, the new £ which celebrates JMW Turner, and the existing £ which profiles Boulton and Watt. Individuals who symbolise the breadth and depth of British achievement across statecraft, social reform, literature, visual arts, science and commerce. This demonstrates that our banknotes do not just have economic value – the classic roles of money to facilitate trade, store value, and provide a unit of account. Banknotes have cultural value as well. By depicting characters on our banknotes, we celebrate those who have advanced British thought, spurred innovation, shown exceptional leadership, shaped this diverse society and forged its common values. In these regards, money is memory for a country and its people. BIS central bankers’ speeches  1  I have already alluded to why Churchill is a worthy choice.

This added strength means we expect polymer notes to last at least two-and-a-half times longer than the current generation of £ banknotes, generating cost savings over time. Polymer notes are also better for the environment. Because they will last longer, we will have to print fewer. That means less energy in production and transportation. And when a polymer banknote has reached the end of its useful life, it will be recycled. Importantly, using polymer means we can incorporate better security features. It allows for see-through panels, coloured foils, detailed metallic images, and a new advance: tactile features. In fact, I can announce today that tactile features will be present on all the other denomination polymer notes, leaving The New Fiver identifiable by their absence. This all means safer banknotes, with the tactile feature helping the visually impaired to recognise our different notes, ensuring the nation’s money is as inclusive as possible. By adopting polymer, we’re aligning with international best practice, alongside Australia, New Zealand, and Canada. As Churchill did, we may have to wait a while for the Americans to join up. We have exploited polymer’s possibilities in The New Fiver’s design. It features Churchill’s portrait, captured in Ottawa by Yousuf Karsh. The famous glower of the war-time hero prompted, in this case, by the photographer’s decision to take Churchill’s cigar away from him. 1 Behind the portrait is an illustration of the Houses of Parliament by Abigail Daker, viewed from the South Bank, looking across Westminster Bridge.