Insurance companies: amplifiers or the white knights of financial markets?

Graeme Douglas, Nicholas Vause and Joseph Noss

Risky asset prices plummeted following the collapse of Lehman Brothers in 2008. Whilst driven partly by deteriorations in fundamental news, these falls were amplified by ‘flighty’ investors that sold at the first signs of trouble. Conventional wisdom dictates that life insurers, with their long-term investment horizons, are better placed than most to ‘lean against the wind’ by looking through short-term fluctuations in asset prices. They could thereby stabilise prices when others are selling. But the structure of regulations can greatly influence insurers’ investment incentives. Using our model of insurers’ asset allocations, we find that new ‘Solvency II’ regulations reduce UK life insurers’ willingness to act as the white knights of financial markets, particularly in the face of falling interest rates.

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

10 Years after Northern Rock – is the UK more or less likely to see another bank run?

Stephen Clarke

(Northern Rock image – Lee Jordan – Flickr, reproduced from wikimedia commons under CCA licence)

Ten years ago this month, queues of people started to form early in the morning outside Northern Rock branches across the UK, to withdraw their money out of fear that their bank would soon collapse.  As the day wore on panic spread, and the run continued until when the government stepped in to guarantee all Northern Rock deposits. It was the UK’s first retail bank run since the 19th century and one of the first symptoms of the global financial crisis.  This anniversary is an appropriate time to reflect on those events, but also to look forward and assess how things have moved on in the last decade, and whether something similar could ever happen again.

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Filed under Economic History, Financial Stability, Macroprudential Regulation, Microprudential Regulation

Beyond blockchain: what are the technology requirements for a Central Bank Digital Currency?

Simon Scorer

What type of technology would you use if you wanted to create a central bank digital currency (CBDC) i.e. a national currency denominated, electronic, liability of the central bank? It is often assumed that blockchain, or distributed ledger technology (DLT), would be required; but although this could have some benefits (as well as challenges), it may not be necessary. It could be sensible to approach this issue the same way you would any IT systems development problem – starting with an analysis of requirements, before thinking about the solution that best meets these.

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Filed under Banking, Currency, Market Infrastructure

David vs Goliath: the supermarkets’ battle for the consumer

Tim Pike, Juliette Healey and Carleton Webb

Price inflation for food and drink rose sharply between July 2016 and July 2017, going from minus 2.6% to +2.6%. But could those increases have been even steeper?  In this post we examine the evolution of the UK supermarkets sector. Monitoring their pricing behaviour can be important for understanding short-run inflationary developments given the supermarkets’ high share of imported goods, the general volatility of food prices, and the fact that the largest four supermarkets account for over  a quarter of UK retail sales.  We find that intense competition in the sector has slowed pass-through of higher import prices following sterling’s recent depreciation.  We think that competitive pressures will bear down on food price inflation for the foreseeable future, despite pressure on supermarkets’ margins.

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Filed under Macroeconomics

Who withdraws money from distressed banks?

Benjamin Guin, Martin Brown and Stefan Morkoetter

The recently proposed liquidity regulations for banks under Basel III emphasize the importance of deposit insurance and well-established customer relationships for the stability of bank funding. However, little is known about which clients withdraw their deposits from distressed banks. New survey data covering the behaviour of households in Switzerland during the 2007-2009 crisis suggest that well-established customer relationships are indeed crucial for mitigating withdrawal risk when a bank is in distress.

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Filed under Banking, Financial Stability, Microprudential Regulation

Bitesize: The very volatile value of cryptocurrencies

John Lewis

Proponents of private cryptocurrencies argue they are a better store of value than traditional “fiat” currency. But even if a cryptocurrency’s value cannot be inflated away by large supply increases, that doesn’t automatically mean its value is stable in terms of ability to buy goods and services.

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Filed under Currency, Financial Markets

Foreign-owned firms and productivity

Sandra Batten and Dena Jacobs

Many governments around the world pursued policies to free up capital flows from the late 1970s to early 1990s with the aim of boosting productivity.  There’s now a debate raging about the costs and benefits of globalisation. While detractors highlight concerns about inequality, supporters of capital liberalisation point to the productivity growth it has fostered. Drawing on a unique UK firm-level dataset that merges data from the ONS business and innovation surveys, we show that foreign-owned companies are more productive than domestically owned firms and that their presence boosts domestic labour productivity. We suggest three reasons why: foreign-owned companies invest more in R&D; they are better managed; and they collaborate with other organisations and promote the diffusion of ideas.

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Filed under Macroeconomics

Car finance: what’s new?

Tim Pike, Phil Eckersley and Alex Golledge

Since our first post, car finance has risen up the agenda of regulators, journalists and policymakers. Here we provide an update on recent developments. Sterling’s depreciation has had little impact on car finance costs: first because pass-through to new car prices has been muted, and second because finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments. Providers are increasingly retailing contracts where consumers have no option to purchase the car at the end.  This avoids some risks associated with voluntary terminations, but it creates new risks around resale value. In sum, the industry continues to accumulate credit risk, predicated on the belief that used car values will remain robust.

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Filed under Financial Stability, Macroeconomics, Uncategorized

Bitesize: Elections, confidence and misery (US edition)

Thomas Viegas and Emil Iordanov

Since Donald Trump was elected to the Oval Office last November, consumer confidence in the US has picked up notably. But is this post-election rise unusual?

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Filed under Economic History, International Economics, Macroeconomics

Your country needs funds: The extraordinary story of Britain’s early efforts to finance the First World War

Michael Anson, Norma Cohen, Alastair Owens and Daniel Todman

Financing World War I required the UK government to borrow the equivalent of a full year’s GDP.  But its first effort to raise capital in the bond market was a spectacular failure. The 1914 War Loan raised less than a third of its £350m target and attracted only a very narrow set of investors. This failure and its subsequent cover-up has only recently come to light following research analysing the Bank’s ledgers.  It reveals the shortfall was secretly plugged by the Bank, with funds registered individually under the names of the Chief Cashier and his deputy to hide their true origin.  Keynes, one of a handful of officials in the know at the time, described the concealment as “a masterly manipulation”.

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Filed under Debt Management, Economic History, Evolution of Central Banks