YouSaid · the spoken record

Hyun Song Shin

lines on the record: 40
first: 2023-08-31
most recent: 2023-08-31
sittings or episodes: 1
sources: podcast

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“I wouldn't put it in those terms. Sure. And I think you probably overplayed somebody's point. But it's definitely, I mean, it's true of economics more generally and policymaking especially. We just have to be very humble. We're always learning. And I think what the last three years has taught us is that we need to be extremely open-minded on what the channels are. And it's very, very fortunate that it seems that we're now we've opened the door to a soft landing, it seems, where we haven't had the very deep recession to bring inflation down.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“You do need activity to slow very substantially to bring inflation down, but we are very happy to see that inflation has come down. So there are still many things that we don't understand fully. I think having gone through the pandemic and the shocks, especially the Russian invasion of Ukraine, shocks the commodity prices, food and energy, these were very unusual shocks that subjected the global economy to really unprecedent a really unprecedented combination of shocks. And so I think we have to be modest here, but I think one thing is for sure, which is that if we knew exactly what the channels of monetary policy Has the terming out of debt meant that short term rates are having less purchase on the real economy.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“But we should not have had the persistent inflation cropping up because I think the excess demand, if you like, was, I mean, it was clearly there. It had a very important role to play, but it wasn't way off the charts. And yet we still had this very persistent inflation taking hold. And by the same score, we are very happy to see the disinflation and the disinflation has come and it's confounded some of the pessimists who've said that look we have to have a very deep recession in order to bring the inflation down. And that logic is completely watertight if you look at the Phillips curve. If you look at a Phillips curve,”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“It's, I mean, if you look at the standard textbook models for how the Phillips curve would work, I mean, we should not have had that inflation outbreak, at least not the persistent inflation. Clearly, there were supply chains, the flare-up with used cars prices and so on that you've covered extremely extensively on this podcast.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“How much does raising the short rate do to slow spending when liabilities are so long term? If homeowners have refinanced their mortgage at very low rates, then they're sitting on very big gains and raising short rates will have limited impact. I think empirically these things still need to be worked out. I mentioned earlier that this terming out is not just a US phenomenon. It's pretty global, I would say. Countries like the UK used to be more or less completely floating rate. Now we have mortgages that are actually between two and five years. That's quite typical. And I think debate is what has been the impact of that turning out. But I think there is a bigger puzzle that we're all wrestling with, which is why do we have the inflation in the first place? And how have we managed to get the disinflation without”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“This is actually a very important part of the debate right now, discussion and research at central banks. And it goes to the channel of monetary policy. So when the central bank raises rates, what are the levers that it's pulling to actually slow the economy down? One channel is the classic credit channel where when you raise rates and there's plenty of evidence, both from, so let me just finish the sentence and explain. So when you raise rates, banks tend to lend less. And the lending standards tend to become higher. And that channel, I think, is very well established. It is less strong in the data this time around. I think there is an interesting set of questions as to why not. You're pointing to another interesting channel, which is if the debt has been termed out.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“And I think that's something that is more conducive to these formal economic modeling. But when monetary policy, fiscal policy are joined up because of the balance sheet interconnections, then I think it's much more difficult. And these kinds of issues are more or less second nature in emerging markets because in emerging markets and developing economies that have really a painful history of financial crises, the debate is on much firmer footing. There's a lot more consensus, I would say. The difficulty, I think, is more when that recognition is not so strong. It's a bit of an uphill struggle to put that on the agenda. But I think that's really why we at the BIS are here. I mean, this is one of our jobs to actually put these things on the table.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“This is why talking about fiscal policy is actually very important function of the central bank. It's true that when central banks talk about fiscal policy, it can sort of raise eyebrows. But I think we have to make it very clear that monetary policy and fiscal policy are not separate policy functions. They're actually very closely interrelated. And so in order to perform monetary policy well, fiscal policy also has to play its part. Now, there is the whole issue of the Phillips curve reasoning. What is aggregate demand when monetary policy is tightening? Should fiscal policy play more of a role if the economy is depressed, even with very low rates, should fiscal policy take up the slag and stimulate the economy more? Those are very, very important debates.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, actually, Joe, in our annual economic report this year, our chapter two, it's great that you asked this question. You know, we have a whole chapter on this point. What we argue is fiscal policy has to row in the same direction as monetary policy, not only for Philips curve reasoning of aggregate demand, but for the kinds of arguments that we raised earlier about if the central bank has to enter the market, intervene in a way and you're going to inject liquidity in a situation that might actually undermine financial stability through a very sharp depreciation of the exchange rate, you could actually end up doing more harm than good. What we call is we need to be at the region of stability. So we need to make sure that monetary policy and fiscal policy are working in concert rather than at cross purposes.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“The central bank has a very important role to play as a backstop, but it should be a backstop rather than an intervener of the first resort.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“If it becomes generally known that the central bank's threshold for pay is here and therefore they will enter, what that could do is to shift the, if you like, the incentives in the portfolio decision of the private sector market participants. What you're doing by doing that, by having a kind of a rule to enter the market would be to lop off the left tail. Of the outcome distribution means that it becomes less risky to one layer of leverage.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“And it turned out that he was also very well timed for the guilt stress epitode as well. To kind of long story short, the story there is we have to strike a balance. In the end, the central bank has to be a backstop. So if no one else is there to really pick up the pieces, the central bank has to be there to cushion that shop because otherwise the consequences of not doing so would be very, very large. But it should not be a first resort to the extent possible. So whenever possible, it should be a market determined outcome. The central bank shouldn't wade in at the drop of a hat. And if you like, influence market outcomes that way. The other important point is that there's a very important issue here of incentives.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Sufficiently, and we still have this one way type of markets, then simply changing the infrastructure is not going to do that. I think the way that the policy debate, the policy discussion has gone is to look for, if you like, a happy mean, some kind of balance between how much should we make sure that the leverage and other perverse type of demand behavior that could arise can be mitigated from the outset. How much do we need the central bank or other authorities to play a kind of backstop role? And in this connection, I would just point your listeners to a very important BIS markets committee report that we put out earlier this year. It was actually from a working group that was chaired by Lori Logan when she was at the New York Fed and Andrew Hauser at the Bank of England. It was very much motivated by the March 2020 episode.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, actually, I was sitting next to Darryl. Oh, great. And so we had a great discussion of this. I mean, and we've had some very good discussions on this over the years. I think the plumbing is important. I think whenever the plumbing can be improved to improve, if you like, the day-to-day functioning of markets, that's something that we should seize. And in fact, the analysis in Darrell's paper is really excellent. I think on the policy prescription that comes from that, I think that can be some diversity views, should we say. I mean, you mentioned the diversity of the market participants. But that's a necessary condition, if you like, for the all-to-all trading or for central clearing itself to bring to channel that diversity into the market. But that is a necessary condition. We have to be quite sure that there will be a large enough body of buyers out there who will actually come into the market. Now, if we don't have that diversity,”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Growing not in the 30-year horizon that we saw in 2020, but more in the five-year horizon, more in the belly of the curve this time. But it seems that that's something that has come back. It's much smaller than it was before the March 2020 episode. But these are the things that, you know, it's not a precise science, but these are the things that we can look out for.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“You're selling the futures and buying the bonds. But then if margins go up, you have to either come up with additional equity from somewhere. That's very difficult in stressed episode. So you typically end up selling. And so this is another case where safe asset can still be at the center of this kind of episode. So as market observers, as observers from the official sector, we just have to be very careful to be on the lookout for where these stress episodes might arise. I mean, there are some rules of thumb we can use. And I think one of the interesting things is that for the relative value hedge funds, we're seeing again the short positions in futures.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“They grew without our knowing it, without our really noticing it. And then when something happens, this is when all these dynamics take hold. I don't think we need to worry every 10 years that something big will happen. It's just a case of making sure that we have a diversity of buyers and sellers, of participants in the market. And there are some rules of thumb that we should use both in the regulation, but also for the private sector institutions themselves and the risk management. So what are some of the potential kind of decision rules that might be baked in given the kinds of leverage and other exposures out there relative value hedge funds, I think, were very important in March 2020. That was very much about leverage, using futures and the cash bonds, futures implied yields a little bit lower because it doesn't take up balance sheet. And so”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“I think the key here is that we have a diversity of investors. So whatever we do, we have to make sure that when someone is selling, someone is actually willing to come in and buy. And the diversity of the market participants is absolutely key for this. And this is all about finding the right price. And finding the right price means that we have buyers as well as sellers. The reason why these financial stability channels of propagation can be so corrosive is because”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“The UK, it's a combination of both leverage and this story because there was the LDI fund aspect which actually gave it a further amplification boost. But the underlying exposures, I think, are really all the same depending on exactly how it will play out, depends on who are the main players. But the principles are very similar. So even very conventional, very supposedly boring sectors can still be the source of these kinds of perverse. That's a fun.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“The big convexity event. Now, there's something similar also in very boring sectors like pension funds or life insurance. So if you're trying to match duration and you have liabilities to your policyholders, which are, let's say, 30 years, but you have assets that are 10 years, liabilities are much longer duration than your assets. Now, when Rates rise, the duration comes in both on your assets and your liabilities. But because your liabilities are much longer duration than your assets, liability duration comes in much faster. So what ends up happening is that you find that you've got too much duration on the asset side. So you have to sell. So, what's just happened, rates rose, but you're ending up selling. That's another example of leveraged behavior.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Absolutely. And so, this is how a safe asset can still be at the center of a stress event. But it doesn't have to be leverage as such. It could be leverage-like behavior. And what I mean by that is what other ways can you have where a price decline would beget more sales? I think a typical and a very, very classical example, and it's in the mortgage market actually, a well-known historical episode is what happened in 1994 when you had this rapid steepening of the yield curve, the way that the embedded option in the mortgage market in mortgages means that when you hedge, so when rates go up, the duration increases actually because people stop refinancing.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“And that actually, of course, leads to further price declines, and you can have this loop. Now, why would you have this perverse demand response? Well, leverage is one way that you can have that. So if you're leveraged, if you're levered and the price of your assets fall, well, your creditors want their money back. You need to meet margin calls and you have to sell.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's a very important question, Tracy. And I think it goes to the point made at the outset. How is it possible that a safe asset can still be at the center of a stress event? And I think I think here we have to think about the possible reasons for perverse demand responses. And I will sort of make it more concrete shortly. By a perverse demand response, what I mean is when a price falls, we typically would think, well, that means that it's more attractive to buy. And so people would come into the market. So when the price falls, you expect people to come in and pick up the cheap assets. In these stress episodes, what you typically find is that a price decline actually generates more sales.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Very, very well. I mean, there are clearly a more stressed developing economies that still have the borrowing dollars and so on. But emerging markets did particularly well. But I think there is a very important lesson here on what are the circumstances that mean that you can enter the market with impunity. And when can you enter the market and get away with it?”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Policymakers generally are very reluctant to wade into markets in those stressed circumstances and for good reason because when you go into the market you have to buy the bonds and you're creating reserves as the byproduct of that that's going to be held by some of the domestic participants you're creating money So liquidity injection that has many, many good aspects but what it means is you're also going to put pressure on the exchange rate. So if you're pushing a lot of liquidity into the system and you're a central bank that doesn't have the credibility of a central bank like the Fed, then that's going to lead to a very sharp depreciation of the exchange rate and that could in fact do more harm than good. So I think the short answer to your question, Joe, is that last year we saw a very different set of circumstances emerging markets actually did pretty well. I would say the major emerging markets.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“And what that meant was when commodity prices rose, emerging markets that were commodity exporters actually did very well relative to historical experience. If you look at the Mexican peso or the Brazilian real, it actually appreciated last year. And that's very different from, let's say, the euro, the yen, even all the other advanced economy currencies. We see quite a resilient picture. And so they didn't even need to enter the market. like that now joe your question raises a very important issue which is when can a central bank come into the market intervene and play the role of a buyer of last resort i think this is a very very important policy issue maybe we can get back to some of the discussions that's happening in the official world but when we look at the emerging markets in particular emerging market central bank”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“I think, Joe, what I would say is if we look at the events of last year, if anything, it's been the emerging markets that have done better in some respects than the advanced economies. And let me explain what I mean by that. So a good comparison is between the events of last year with the earlier stress episode for emerging markets in 2015, 2016. So back then, what we saw was a very strong dollar coupled with very low commodity prices, capital outflows for emerging markets. We saw a sharp steepening of yield curves. That combination of stresses are very typical of emerging market stress episodes that we're familiar from the textbooks. What we saw last year was actually quite different. What we saw was the nature of the shocks were different. We had a war and a pandemic.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“The central bank doesn't have to repay the dollar with another dollar because that is the ultimate liability. And as we argued in a BIS bulletin recently, we should not be so concerned about central bank losses in the same way that we are concerned about losses suffered by private sector entity who are subject to those redemptions. But it doesn't mean that there are no limits. I mean, clearly there are limits and we see those limits, especially in very fragile emerging and developing economies that don't have the same credibility in the value of money as with the Fed or with an advanced economy or with other advanced economy central banks.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I think the safest asset is just money. And I think this is where the money in a sense of the high-powered money that is issued by the central bank. So when a central bank conducts QE, what happens is the central bank takes out duration by purchasing the bonds, but then pays for it by creating reserves that are held by the sellers of those bonds, typically commercial banks, who then would pass that on to the sellers, their customers. What that means though is that as interest rates rise the assets that the central banks hold will also be subject to losses and this is why we're seeing the spate of losses on central bank balance sheet. The important thing about central bank liabilities though is that they're not subject to redemption.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Absolutely, and that's especially true for those homeowners. Actually, refinance their mortgage. I think that's a very, very good example. And what we also see is that in the household sector, mortgage duration has also lengthened as well, not just in the US. I mean, US is special because of its institution over the 30-year fixed rate. But it's also true in other economies that there's been this shifting out. I think on balance, I would say that the lengthening of the liabilities is a good thing on balance. But every silver lining has a cloud. And here we have exactly this problem that it's not a free lunch. You have to pay for the additional risk that comes from rated duration.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I think before we go there, Tracy, I think we have to point out that lengthening duration has also a lot of the advantages. One thing that is very good with very long duration exposures is that with very long duration liabilities is that you're not facing the rollover risk that you used to if you were borrowing short. So, you know, for example, if you go back to the Asian financial crisis, there you had the combination of currency mismatch as well as a maturity mismatch. And if your liability is very short term and your creditors want their money back, then that's actually going to lead to a much sharper episode of stress. So lengthening duration has also a lot of advantages for financial stability, for mitigating financial stability risks.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“The course of this conference. So, I think that's, if you like, looking through the sector to the underlying exposures. And if we do that, I mean, that's what's out there. What's different, of course, is that inflation is high, and so monetary policy has to respond. And after a very, very long period of low for long, we are seeing, if you like, the consequences of raising rates once the exposure has lengthened.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“That's now nine plus years. So we've had a tremendous lengthening of duration. And so as central banks have raised rates in response to inflation, what that's meant is that the price impact has been that much larger. So if you're not marking to market, if you're using ultimate maturity accounting, we call that interest rate risk on the banking book. And this is what happened with SVP. You don't mark the market until you have to. If you're marking to market, then its duration risk. So as long-term rates go up, the price of your assets will go down accordingly. And the longer the duration, the bigger the impact. And I think in that sense, there is a broad continuum here between what we saw in SVB, the UK guilt episode, but also I think just in terms of emerging market bonds that I think will also talk about your”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“They're borrowing, and we see it in the corporate sector. They've really termed out their bond issuance. We see it in the household sector as well. But I think especially important would be the government bond market. There's been an increased duration of the bonds outstanding. Not surprising really because a government that manages would also be taking advantage of the low long-term rate. So just to give you a number, in the BIS Annual Economic Report this summer, we had a small discussion on this. If you look at the duration in aggregate of advice,”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“It's worth thinking about the journey that we've been on for the last 10 years or so, well, maybe 10, 12 years. You know, we've had a very long period of low-for-long interest rates. And, of course, central bank asset purchases that it's really compressed the yield curve. And what that's meant is that borrowers have taken advantage of that and they've turned out.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“You have clearing, you have the central counterparties that actually act as creditors and debtors to a wide range of participants.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, you can draw a kind of flowchart here. You've seen those New York Fed charts where you have ultimate creditors on one side and ultimate borrowers on the other side and money flows from right to left following the balance sheet direction. We can think of something like that in this case as well. We have fewer of these bank-based intermediaries, although we, of course, still have them, but they've shrunk in size and heft, if you like, within the system. Instead, what we have are many non-leveraged players, asset managers of various stripes, life insurance companies, pension funds. And I think a very, very important class of players are the other hedge funds as well. There are non-regulated market intermediaries there. And a very important part of the infrastructure here would be the new central counterparties, other exchanges, where rather than having intermediation go through a dealer balance sheet.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“So we're going from banks to non bank players. In the jargon, they're called MBFI, it's non bank financial intermediaries, but it's not just the intermediaries. I mean, it's also the way that infrastructures, CCPs, exchanges, they've also become very important as well. So this is, I think, a very, very important topic for us to touch on.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“And have an overview of the way that the structure of intermediation has changed since the GFC. As you say, Joe, the GFC very much was around the banking sector, and in particular credit risk. The idea is that you need capital there to absorb losses on the assets because they're risky assets. And that's the way that you protect the depositors and other claim holders. I think what we saw in March 2020 with the stress episode in the treasury market is that even safe securities can be at the center of a financial stress event. I think the UK guilt episode last year. Again, these are safe assets, but they were very much at the centre of financial stress. And I think what that does point to is the shifting nature of risks, the different propagation mechanisms, and the different set of players out there.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, absolutely. I mean, I was going to say it's such a pleasure to do this in person, Tracy. And it's a great topic, of course. And I think you've had other people on during the day that have explored bits of this. But maybe the thing to, the point to start with is just to take her step back.”
2023-08-31 · Odd Lots · Hyun Song Shin on the New Financial Stability Risks · IDENTIFIED FROM THE TRANSCRIPT · source