samchain/econo-pairs-v1 huggingface dataset:
Paul Tucker: Regimes for handling bank failures – redrawing the banking Social Contract Remarks by Mr Paul Tucker, Deputy Governor of the Bank of England, at the British Bankers’ Association Annual International Banking Conference “Restoring confidence – moving forward”, London, 30 June 2009. *  *  *  Thank you very much to the BBA for inviting me today. It is a real pleasure to be here when so much is being debated about the future of the financial system. I’d like to use the occasion to develop some of the emerging thoughts of the international official sector on the environment – the “rules of the game” or Social Contract – within which banks will need to operate in future. Banks’ liquidity risks and the banking Social Contract The defining characteristic of banks lies in the liquidity services you provide to the economy, and in the consequent liquidity risks that you run. History shows that banks are inherently fragile. Banks are vulnerable to deposit runs. The current crisis has revealed, if it needed to be, that the same goes for money market funds. And it turned out that big securities dealers had effectively been turned into quasi banks by funding themselves partly from balances held by prime-brokerage hedge-fund clients; balances that could be withdrawn on demand, and in some cases were. So what I have to say is about the economic substance of banking liquidity risk, not its legal form.

It is no longer really about protecting depositors, as the vast majority are wholly protected by the insurance scheme. From a micro perspective, it is essentially about minimising risks to, and losses at, the deposit insurer, the UK Financial Services Compensation Scheme. Second, it also potentially alters the dynamics of the market place. It makes it easier for banks to pay up for deposits; the signal that a bank will take greater risk than otherwise, as it would have to, does not matter to the depositors. They are covered, and so simply enjoy the higher returns on their deposits. If the bank succeeds, the rewards are reaped by shareholders and management; if it fails, retail creditors get repaid in full. This doesn’t feel like a stable regime. And it is worth remembering that President Roosevelt seriously hesitated before introducing the equivalent FDIC scheme in the US in the 1930s for precisely that reason. One way of addressing these risks – and the approach eventually being tried in the US – would be to make such risk-taking banks pay a higher levy into the insurance scheme. Riskbased premia would help to offset the incentives otherwise created. And, of course, any such insurance scheme must be pre-funded; it is no good trying to collect levies from riskier banks after they have gone bust. That is why the Bank has advocated this course.
Third, and relating to model approvals, is the issue of the PRA’s own internal views on model calibration. We 8  have previously commented on our use of quantitative indicators , or QIs, but I think it is worth repeating that they are indicators and not pass/ fail standards. In particular, the standard for model approval is that firms must meet the tests and standards laid out under the Solvency II directive, and that is the basis for our 6  http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/eu-insuranceregulation/written/47301.pdf 7 http://www.bankofengland.co.uk/publications/Pages/speeches/2016/921.aspx 8 SS17/16, http://www.bankofengland.co.uk/pra/Documents/publications/ss/2016/ss1716.pdf. CP20/16, http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp2016.pdf 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  assessments. We do not operate QIs as a minimum standard, but rather as an indication of the sort of calibration level we would expect to see for standard portfolios. Models falling outside of our QI ranges (both above and below) attract increased scrutiny. Take as an example our QIs for corporate bonds. We feel that it is hard to argue that a model calibrated below the levels of credit spread increase we saw as recently as 2008-2009 meets the one-in-200-year standard required by the Directive. And so we set our QIs accordingly. But modelling credit risk is a complex business, subject to nuance and considerable expert judgement. Indeed, reasonable, knowledgeable experts might perfectly well disagree on some of the key assumptions.

As such, it is a key tool that the PRA uses to deliver its objectives. The SIMR is consistent with the provisions of the Bank of England and Financial Services Act 2016. So whilst the ABI is correct in its assertion that SIMR is not required by the Solvency II directive, it is the consequence of UK legislative choices and not simply an invention of the PRA. Second, there is the thorny topic of approvals under Solvency II and, in particular, internal model approvals. The industry is quite right to point out that the overhead to gaining model approval is considerable. In some cases, weight rather than page length would have been a more appropriate measure of application size. But remember that firms with approved internal models in effect set their own regulatory capital requirements. Once we grant model approval, the PRA has only a very limited ability to adjust a firm’s Solvency Capital 7  Requirement. And as my colleague David Rule previously commented “even acting in good faith, business pressure may create the risk that model changes generating lower capital requirements are favoured over time, and therefore that solvency standards might deteriorate”. In designing our approach, we were also mindful of the FSA’s experience in approving internal models for banks under Basel II, where promised future improvements tended not to materialise. It should therefore come as a surprise to no-one that we approach model approval diligently, sceptically and rigorously.
American households pledged future income for current consumption to such an extent that no savings were left with which to finance corporate investment. The growing savings deficit showed up as a rising deficit on the current account and large amounts of capital had to be imported. The capital inflow was stimulated in turn by apparently boundless expectations that American stock markets would continue to rise and it persisted to such a degree that the dollar appreciated markedly against other currencies. In some respects, developments in Sweden resembled those in the United States, not least the rapidly rising share prices, the new technology’s major significance for investment and highly-strung expectations of future income and profits among households and firms. That is one reason why Sweden and a number of other countries have been heavily hit now that the IT bubble has burst. But history teaches us that after a period of what I would call growing pains, optimism about the new technology’s potential will be restored. Neither the sudden downturn in the global economy nor the terrorist attacks should have changed the new technology’s potential in the somewhat longer run. Inflation too high at present In Sweden, inflation rose surprisingly in the spring and the higher rate then persisted. The high figures at present are mainly, though not exclusively, a consequence of price increases that can be regarded as fairly transitory. The causes include foot-and-mouth disease, higher energy and telecom prices and certain changes in the method for measuring electricity prices.

Should monetary policy try to stabilize a broader set of indicators in the future, not just prices of consumer goods, but also real-estate or other asset prices? Does it make sense to have a separate currency but not to have an autonomous monetary policy, like the Baltic countries and Bulgaria, or to have a separate currency but not to have an effective lender of last resort, like Iceland? Doesn't the system of exchange-rate pegs, quasi-pegs or currency boards increase imbalances of those who are pegged, and thus their vulnerability in a crisis? These questions are important, but they are not being properly discussed in the current debate. Many forget that the state's role in the financial sector is already huge. Central banks, finance ministries and various state agencies across the globe do regulate and supervise the financial industry more, not less, than many other industries. Yet that is precisely why every further tightening of the screws should be carefully considered and analyzed, not adopted  BIS Review 10/2009  1  under pressure or threat, hastily or imprudently. One should bear in mind that regulation never distinguishes the bad banks from the good ones. And even this crisis has revealed that many financial institutions are in good shape and coping with its consequences quite well. Although many people won't admit it, new rules being drawn up today will radically affect the financial market tomorrow and beyond.
In the first part of my remarks today, I would like to give an overview of the key measures that have been taken in response to the crisis. My focus will be on the role played by the ECB. Monetary policy has been critical to averting a more severe economic calamity. But the ECB has also made a wider contribution: we have contributed actively to the debate on the deepening of EMU and we have promoted progress toward the euro area’s new financial architecture, the Banking Union. This work of strengthening the euro area is not complete, however. And this is where I would like to focus the second part of my intervention. Specifically, I would like to ask: what further steps are needed to embark on a path of robust growth, both in stressed and non-stressed economies? We know that achieving high sustainable growth will be indispensable to bring the unemployment rate back to acceptable levels and to support debt sustainability. But for this to happen, the euro area as a whole will need to persevere in its efforts to reform its economic fabric. The process of structural reform is demanding – and it therefore requires long-term commitment and strong ownership to be a success. The starting point: the debt crisis and the emergence of financial fragmentation Let me start by briefly reviewing the evolution of the crisis in the euro area. Very broadly speaking, the crisis has had two main phases.

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To address this issue, last week, the Bank of Thailand as well as the Ministry of Finance filed a new 2-part measure, which received the cabinet approval. The first component of that 2-part package was a 250-billion-baht facility to encourage lending to SMEs using credit guarantee schemes. The second component was a 100-billion-baht package orienting towards what we called “asset warehousing”. Under this facility, they can park their assets with the bank and not have to worry about paying any interest or principal payments on Page 3 of 11  that debt. Furthermore, they also have the option to repurchase those assets at a later date at a fair price. The reason we undertook these measures is to provide support for firms that are experiencing excessively high debt burdens but are still viable over the long term. These measures would help, not just to alleviate the debt burden, but also to reduce the likelihood that borrowers are forced to undertake fire sales of assets which would have a negative impact on the economy by causing all asset prices to drop. Another aspect is that most of these measures that have been undertaken are of a very long horizon which is to ensure continued economic recovery. For example, in the previous SMEs loan scheme, loans were extended for 2 years with the credit guarantees component extending for 2 years. This time, however, we are extending the measures to be very long; the loan component is 5 years, and the credit guarantees component is 10 years.

The various measures taken, including in particular the purchases of government debt securities, have allowed a more uniform transmission of expansionary momentum to the euro area countries. This benefits, in particular, the countries such as Spain that were hardest hit by the fragmentation of European financial markets. The financing conditions of the Spanish economy have improved significantly. Lending is slowly but gradually returning to normal, as households and firms undertake the necessary deleveraging and new financing flows towards those that are in the best position to take on new investment and spending projects. As the cost of these new funds is lower, this also  BIS central bankers’ speeches  1  reinforces the fiscal consolidation process and helps improve the balance of payments position. Performance of and outlook for the Spanish economy Compared with the weakening in the euro area, GDP in Spain grew by 1% in Q2, slightly above the growth rate for the opening months of the year. This figure confirms the recovery in the Spanish economy, the progress made in the correction of imbalances and the improvement in financing conditions for households and firms. GDP growth in Q2 continued to be based on highly robust domestic demand, with some quickening among the components most closely linked to private demand (household consumption and investment in capital goods and housing). However, net external demand made a slightly negative contribution, as has been the case almost continuously since the start of the recovery, owing to the strong import momentum.
Mr Heikensten speaks on monetary policy with a focus on exchange rate Speech by the Deputy Governor of the Bank of Sweden, Mr Lars Heikensten, to Riksbank’s primary dealers in Stockholm on 19 April 1999. Since November 1992, when the defence of the krona’s fixed exchange rate was abandoned, much of the discussion concerning monetary policy has involved the exchange rate. At this traditional meeting with the Riksbank’s primary dealers, I should like to consider four issues connected with Sweden’s currency. One of these issues is the function of the krona in a monetary policy regime that targets inflation with a flexible exchange rate. Another issue is the actual path of the exchange rate in recent years and the conclusions it warrants. The euro’s introduction at the beginning of January has revived the question of Sweden’s participation in EMU; this raises the other two issues, namely the process towards ERM membership, if this is envisaged, and aspects of setting the future ERM rate that would then ensue. Monetary policy significance of the exchange rate The floating exchange rate regime that was introduced for the Swedish krona in November 1992 was regarded by many people as a fairly temporary arrangement. They considered that for Sweden, as a small country dependent on foreign trade, a fixed exchange rate was most advantageous, so the Riksbank ought to try to reintroduce a fixed rate regime as soon as possible.

Experience shows that in the process of arriving at a reasonable central rate, the factors which are considered include the country’s macroeconomic situation, various indicators of its competitive position, the exchange rate’s historical path and its average levels in recent years. When other currencies have been linked to the exchange rate mechanism, this has usually been done either at or fairly close to the prevailing market rate. ERM membership could stabilise exchange rate expectations A factor of importance for participation in the euro area is the krona’s stability. Membership of ERM2 could also facilitate Sweden’s entrance to the monetary union. It may therefore be appropriate to say something about the timing of an adherence to ERM2. This, as I mentioned, is a matter for the Government to decide. In the Spring Budget the Government has declared that participation in ERM2 is not being considered at present. The choice of an entry date presumably depends in part on the duration of ERM membership that other countries expect from Sweden before qualifying for participation in the euro area. Another central consideration is whether ERM membership as such can contribute to exchange rate stability and smooth the path to the euro area. In my opinion, ERM2 membership could help to stabilise exchange rate expectations if and when it is clear that Sweden does intend to join the euro area. That in turn would simplify the krona’s conversion into euro.
Here again, though, I should add that we are always on the way towards our goals and will never actually meet them. Even in the conditions we enjoy, it is not easy to reach the necessary consensus. This brings me to the “human factor”. The background conditions I have been talking about are aimed in no small measure at enabling individuals to develop their own interests as well as those of society. This symbiosis is essential to the prosperity of the economy as a whole. Where human resources are concerned, what is needed most of all is adequate training, motivation and the right mentality. Over the course of time, the development of the economy and the associated structural change have constantly thrown up new challenges for everyone involved. This can be seen, for example, in the phenomenon of structural unemployment, arising from an imbalance in supply and demand for specific skills. Although the need for continuous training and retraining is nothing new, it has now become an urgent concern. But qualifications alone are not sufficient. They only come into their own when the people in question are also motivated. If we were to restrict ourselves purely to economic activities, we could leave it at that. But after what I said about the correlations between the economy and society, there is clearly more to it. In a democratic community, we don’t just need “economic subjects” who contribute their skills in specific areas and with the right mentality.

Mr. Meyer addresses the competitiveness of financial centres from a Swiss perspective Address by the Chairman of the Governing Board of the Swiss National Bank, Mr. Hans Meyer, at the International Bankers Club Luxembourg, held in Luxembourg on 23/3/98. Both Luxembourg and Switzerland are major financial centres in Europe. The performance and competitiveness of the financial services industry are thus of key economic and social importance to both countries. I should like to use this opportunity to say a few words on the subject from what may be a somewhat unusual perspective. The factors which determine the competitiveness of an industry are basically the same as those determining the success of the entire economy. In both cases, we are looking at a multitude of quite diverse factors with varying degrees of importance. Today, I would like to single out just three of them which I believe are of particular significance: economic stability, social equilibrium (i.e. political stability), and the human factor. Although each of these elements could be dealt with separately, they should ultimately be viewed in a broader context. Let’s start with economic stability. I define this as a state of balanced development across the economy as a whole, characterised by steady growth, a modest inflation rate and low unemployment. One of the main prerequisites for achieving such a state is the ability not only to create but to sustain an appropriate economic framework. This is primarily an objective for monetary policy, fiscal policy and competition policy.
As usual, it is necessary to consider all information, where, in practice, the assessment of effects not covered by models is of great significance. If something cannot be considered to affect the expected value of future inflation and resource utilisation, then monetary policy does not need to react to it.7 Kohn (2006, 2008) mentions three conditions that should be fulfilled before central banks implement “extraordinary measures” to handle possible asset price bubbles, such as the  7  8  See Svensson (2003) for a discussion of monetary policy with extreme outcomes with low probability. BIS Review 22/2010  unsustainable development of housing prices: “First, policymakers must be able to identify bubbles in a timely fashion with reasonable confidence. Second, a somewhat tighter monetary policy must have a high probability that it will help to check at least some of the speculative activity. And third, the expected improvement in future economic performance that would result from the curtailment of the bubble must be sufficiently great.” As these conditions are very seldom fulfilled in practice, it is very seldom that the issue arises, in practice, of allowing asset prices to influence monetary policy.8 It has occasionally been claimed that a central bank should be cautious as regards lowering the interest rate to very low levels, as this would be venturing into unfamiliar waters. I object strongly to “unfamiliar waters” being an argument against cutting the repo rate.

Large shares of the sizeable revenues from the petroleum sector over the past 20 years have been transferred to the oil fund. Norway’s sound public finances have been a great advantage to the economy, particularly through the financial crisis. But the management of the government’s large petroleum revenues through our 40 year-long oil history has not always been equally well planned. In the mid-1970s, the budget deficit – including petroleum revenues – reached a high level. And we could not know then that oil prices would more than double a few years later – with the second oil shock in 1979, known as OPEC II. But we learned from our mistakes. The oil fund mechanism in 1990 and the fiscal rule in 2001 were introduced to discipline fiscal policy in such a way that Norway’s petroleum wealth would also benefit future generations. Oil fund assets are now equivalent to more than twice the GDP of Norway’s mainland economy, and the oil fund, or the Government Pension Fund Global (GPFG), is today one of the world’s largest sovereign wealth funds. The GPFG represents the nation’s savings, to be managed for the benefit of both current and future generations. As an investor, the GPFG makes capital available to other countries for economic activity, and the return on that capital will depend on the economic performance of those countries. The GPFG is a long-term, responsible investor. The objective of investment management is to achieve the highest possible return at an acceptable level of risk.