The Dog and the Boomerang: in defence of regulatory complexity

Joseph Noss and David Murphy

For some years, financial regulations have been becoming more complex. This has led some prominent commentators, regulators and regulatory bodies, to set out the case for simplicity, including Adrian BlundellWignall, Andy Haldane, Basel Committee and Dan Tarullo. In his contribution, Haldane illustrates how simple rules can achieve complex tasks: by simply adjusting its speed to keep its angle of gaze fixed, a dog can manage the complex task of catching a Frisbee. In this post, however, we argue that some financial risks are hard to catch with simple rules – they are more like a boomerang’s flight path than that of a Frisbee. Complex rules can sometimes do a better job at catching risk; and simple rules can be less prudent.

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Filed under Financial Markets, Financial Stability, Macroprudential Regulation, Microprudential Regulation

Pension fund deficit risk

Matt Roberts-Sklar

In recent years, the volatility of pension fund deficits has been dampened by pension fund assets behaving more similarly to pension fund liabilities. This is partly because bonds make up a bigger share of assets than a decade ago, and partly because bonds and equities are moving more closely than before. Both factors have increased the correlation of assets with pension funds’ liabilities which tend to be intrinsically bond-like. This matters because the volatility of pension deficits can affect pension fund investment decisions. Given their size, changes in pension fund asset allocation can materially affect asset prices.

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Modelling the Macroprudential Balancing Act

Angus Foulis and Jon Bridges

Macropru is new.  Although many countries have now used macroprudential tools, there is no well-established guidebook to help policymakers develop their reaction functions.  The principles behind macroprudential strategy are still being explored, with recent speeches by Alex Brazier, Vitor Constancio, and a review by the IMF,FSB & BIS.  This post illustrates how the balancing act at the heart of the macroprudential debate can be formalised – it is a call to arms for further research, rather than the definitive guide.

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Filed under Financial Stability, Macroprudential Regulation

How will households react to the real income squeeze?

Philip Bunn and Jeremy Rowe

Rising inflation is eroding the spending power of UK households’ incomes.  How will they react to that?  The answer will make a big difference to the economic outlook.  Will they dip into savings and carry on buying the same amount of goods and services, or will they just spend the same and be able to buy less with it?  New survey evidence suggests that households intend to do a bit of both with nominal spending increasing by around half of the rise in prices but real consumption also falling.  But not all households say they will respond in the same way: households with debts and limited savings to fall back on are less likely to be able to increase spending.
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Filed under Macroeconomics, Monetary Policy

Bitesize: Common ownership across UK banks: implications for competition and financial stability

Paolo Siciliani and Daniel Norris

Asset managers make it more convenient for savers to diversify their investments in stock markets. They are also in a better position to monitor the managers of firms in their portfolios, even if they adopted a passive investment strategy. However, it has been argued that competition might be weakened when firms competing in concentrated industries, such as airlines, share the same small number of institutional investors as their top shareholders.

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Filed under Banking, Bitesize, competition, Financial Markets, Financial Stability

A CAMEL ride: Retracing the history of UK banking through a new historical database

Sebastian de-Ramon, Bill Francis and Kristoffer Milonas.

Navigational aids are helpful when visibility is poor or when landmarks are unfamiliar, especially when journeying to new destinations. In a recent working paper, we introduce a new regulatory dataset, the ‘Historical Banking Regulatory Database’ (HBRD), that provides a clearer view of the UK banking sector and helps navigate issues difficult to explore with other datasets. This post describes the HBRD, its benefits for research and policy analyses, and what can be learned from it.

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Filed under Banking, Microprudential Regulation

Bitesize: How trendy are retail sales?

Matthew Swannell

Since the turn of the year UK retail sales data have been grabbing headlines. Sharp contractions have been attributed to rising prices. That is no doubt part of the argument. But is there more to it?

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Filed under Macroeconomics

Central Bank Balance Sheets: Past, Present and Future

James Barker, David Bholat and Ryland Thomas.

Central bank balance sheets swelled in size in response to the financial crisis of 2007-09. In this blog we discuss what makes them different from the balance sheets of other institutions, how they’ve been used in the past, and how they might evolve in the future as means to implement novel policies – including the revolutionary possibility that a central bank could issue its own digital currency.
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Filed under Banking, Economic History, Macroeconomics, Monetary Policy

Bitesize: Blink and you’ve missed it: French government bond ‘mini flash’

Gosia Goralczyk

On 16 February 2017, following the release of the ECB’s January meeting accounts, French government bond (OAT) futures experienced a so-called ‘mini flash’, with yields falling 11bps within 85 seconds, in a period of significant illiquidity, before retracing most  of the move within eight minutes.

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Filed under Financial Markets, Financial Stability

The Forward Guidance Paradox

Alex Haberis, Richard Harrison and Matt Waldron.

In textbook models of monetary policy, a promise to hold interest rates lower in the future has very powerful effects on economic activity and inflation today.   This result relies on: a) a strong link between expected future policy rates and current activity; b) a belief that the policymaker will make good on the promise.  We draw on analysis from our Staff Working Paper and show that there is a tension between (a) and (b) that creates a paradox: the stronger the expectations channel, the less likely it is that people will believe the promise in the first place.   As a result, forward guidance promises in these models are much less powerful than standard analysis suggests.

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Filed under Macroeconomics, Monetary Policy, New Methodologies