Bank of England and Financial Times Schools Blog Competition: Get writing!

The Bank and the FT are joining forces to launch a schools blogging competition.  We’re looking for the best blog written by a school student on the theme of  “The Future Economy”, with the winning blog(s) appearing on both the FT online and Bank Underground. Continue reading

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Open letters: Laying bare linguistic patterns in PRA messages using machine learning

David Bholat and James Brookes

In a recent research paper, we show that the way supervisors write to banks and building societies (hereafter ‘banks’) has changed since the financial crisis. Supervisors now adopt a more directive, forward-looking, complex and formal style than they did before the financial crisis. We also show that their language and linguistic style is related to the nature of the bank. For instance, banks that are closest to failure get letters that have a lot of risk-related language in them. In this blog, we discuss the linguistic features that most sharply distinguish different types of letters, and the machine learning algorithm we used to arrive at our conclusions.

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Filed under Banking Supervision, Microprudential Regulation, New Methodologies, Text mining

Monetary policy spillovers in the first age of financial globalisation: ripple or a riptide?

Georgina Green

In the first age of financial globalisation, from around 1880 to 1913, many countries tied their currencies to the mast of gold. The Bank of England’s unparalleled influence over this period is depicted by the Lady of the Bank, seated on the globe with a shower of gold coins to one side, which is carved into the Bank’s pediment. There was an old saying in the City that the Bank’s rate could draw gold from the moon. But could it?

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Can central bankers become Superforecasters?

Aakash Mankodi and Tim Pike

Tetlock and Gardner’s acclaimed work on Superforecasting provides a compelling case for seeing forecasting as a skill that can be improved, and one that is related to the behavioural traits of the forecaster. These so-called Superforecasters have in recent years been pitted against experts ranging from U.S intelligence analysts to participants in the World Economic Forum, and have performed on par or better by accurately predicting the outcomes of a broad range of questions. Sounds like music to a central banker’s ears? In this post, we examine the traits of these individuals, compare them with economic forecasting and draw some related lessons. We conclude that considering the principles and applications of Superforecasting can enhance the work of central bank forecasting.

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Filed under Macroeconomics, Monetary Policy, New Methodologies

The 2016 Sterling Flash Episode

Joseph Noss, Liam Crowley-Reidy and Lucas Pedace

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Peer to Peer – Scale and Scalability

Anna Orlovskaya and Conor Sewell

Peer to Peer (P2P) lending is a hot topic at Fintech events and has received a lot of attention from academia, journalists, various international bodies and regulators.  Following the Financial Crisis, P2P platforms saw an opportunity to fill a gap in the market by offering finance to customers and businesses struggling to get loans from banks.  Whilst some argue they will one day revolutionise the whole banking landscape, many platforms have not yet turned a profit.  So before asking if they are the future, we should first ask if they have a future at all. Problems such as a higher cost of funds, or limited ability to scale the business, may mean the only viable path is to become more like traditional banks.

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Bitesize: Risk-weight watchers: a probe into UK banks’ capital ratios

James Cui and Marcus Pettersson

Shortcomings of the Basel capital framework became apparent in the 2007-8 crisis. One much reviewed and debated issue is that capital ratios can be increased by changes to methods and models for calculating RWA (M&M changes hereinafter) rather than by changes to balance sheets. How have UK banks fared in this respect?

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Bitesize: The rise and fall of interest only mortgages

Sachin Galaiya

The interest-only product has undergone tremendous evolution, from its mass-market glory days in the run-up to the crisis, to its rebirth as a niche product. However, since reaching a low-point in 2016, the interest-only market is starting to show signs of life again as lenders re-enter the market.

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Filed under Financial Stability, Housing market, Microprudential Regulation

The Spanish Connection – Consequences of a macroprudential regulation in Spain on Mexico

Jagdish Tripathy

Does macroprudential regulation spillover to foreign financial systems through inter-bank linkages? This question has received a lot of attention in recent years given the discord between the international nature of the global financial system and its regulation and supervision by national jurisdictions (e.g. this article). For example, subsidiaries of Spanish banks issue almost half of all credit issued by commercial banks in Mexico. These subsidiaries are also fully owned by their parent banks headquartered in Spain. Therefore, it is quite natural to ask whether macroprudential regulations in Spain can have unintended consequences on the Mexican financial system and the Mexican economy in general. While Mexican subsidiaries of Spanish banks are de-jure ring-fenced from regulations in Spain, does this hold de-facto?

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Completing Correlation Matrices

Dan Georgescu and Nicholas J. Higham

Correlation matrices arise in many applications to model the dependence between variables. Where there is incomplete or missing information for the variables, this may lead to missing values in the correlation matrix itself, and the problem of how to complete the matrix. We show that some of these practical problems can be solved explicitly, via simple formulae, and we explain how to use mathematical tools to solve the more general problem where explicit solutions may not exist. “Simple” is, of course, a relative term, and the underlying matrix algebra and optimization necessarily makes this article more mathematically sophisticated than the typical Bank Underground post.

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