Marius Jurgilas, Ben Norman and Tomohiro Ota.
The final, practical determinant of whether a bank is a going concern is: does it have the liquidity to make its payments as they become due? Thus, the ultimate crucible in which financial crises play out is the payment system. At the height of recent crises, some banks delayed making payments for fear of paying to a bank that would fail (Norman (2015)). This post sets out a design feature in a payment system that creates incentives, especially during financial crises, for banks to keep making payments. This feature could address situations where banks in the system would otherwise be tempted to postpone their payments to a bank that is (rumoured to be) in trouble.
The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”. In this guest post, one of the keynote speakers at the event, Andrew Gelman professor of statistics and political science at Columbia University, points out some of the pitfalls of randomly assigned experiments with control groups.
When studying the effects of interventions on individual behavior, the experimental research template is typically: Gather a bunch of people who are willing to participate in an experiment, randomly divide them into two groups, assign one treatment to group A and the other to group B, then measure the outcomes. If you want to increase precision, do a pre-test measurement on everyone and use that as a control variable in your regression. But in this post I argue for an alternative approach- study individual subjects using repeated measures of performance, with each one serving as their own control.
The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”. In this guest post, one of the keynote speakers at the event, David Halpern, CEO of the Behavioural Insights Team, argues that insights from behaviour science can improve the design and effectiveness of economic policy interventions.
Behaviour science has had major impacts on policy in recent years. Introducing a more realistic model of human behaviour – to replace the ‘rational’ utility-maximizer – has enabled policymakers to boost savings; increase tax payments; encourage healthier choices; reduce energy consumption; boost educational attendance; reduce crime; and increase charitable giving. But there remain important areas where its potential has yet to be realised, including macroeconomic policy and large areas of regulatory practice. Businesses, consumers, and even regulators are subject to similar systematic biases to other humans. These include overconfidence; being overly influenced by what others are doing; and being influenced by irrelevant information. The good news is that behavioural science offers the prospect of helping regulators address some of their most pressing issues. This includes: anticipating and addressing ‘animal spirits’ that drive bubbles or sentiment-driven slowdowns; reducing corrupt market practices; and encouraging financial products that are comprehensible to humans.
Paolo Siciliani, Nic Garbarino, Thomas Papavranoussis and Jonathan Stalmann.
Systemically important banks are material providers of critical economic functions. The Global Financial Crisis showed how distress or failure of one of these firms may have a severe impact on the financial system and the real economy. Systemic capital surcharges protect the economy from these negative spillovers by decreasing systemically important firms’ probability of distress or failure. A graduated approach facilitates effective competition to the extent that the capital surcharges faced by firms are more proportionate to the scale of systemic risks that they pose. This post illustrates some of the competition implications with respect to the methodology used to set the number and level of thresholds.
Karen Braun-Munzinger, Zijun Liu and Arthur Turrell.
If a boat is unstable and someone jumps out, does it capsize the boat for everyone else? In a novel application of agent-based modelling, we examine how investors redeeming the corporate bonds held for them by open-ended mutual funds can cause feedback loops in which bond prices fall further, posing risks to financial stability. In our model, reducing the speed with which investors pull out their investments over time helps to keep prices stable and remaining investors’ savings on an even keel.
Deposit insurance schemes guard against bank runs by reducing or removing individual depositors’ incentives to withdraw their funds if they believe their bank to be in trouble. They help protect depositors but they risk also protecting risky bank business models by removing depositors’ incentives to avoid riskier banks. What can be done about this? In the past the answer was sometimes to make small depositors bear part of the risk through “co-insurance”. This was proven not to be credible. In this blog I consider some of the options available, including the risk-based levies currently being introduced in the EU and elsewhere, and increased transparency, drawing on recent literature on the saliency of tax in consumer choices.
Robert Hills, John Hooley, Yevgeniya Korniyenko and Tomasz Wieladek.
When funding conditions became much more difficult in the recent financial crisis, how did UK banks react? Did they adjust their domestic and external lending to different degrees? Did foreign-owned banks behave differently from UK-owned banks, and did it make a difference whether they were a branch or a subsidiary? Did the other features of their balance sheet make a material difference to their lending behaviour? Our research suggests that the answer to all of these questions is “yes”.
Alex Golledge, Tim Pike & Phil Eckersley.
The car industry’s fortunes play an important part in the stability of the broader economy. The automotive industry (including manufacturers, their suppliers, dealers, servicing, leasing and refuelling) accounts for over 4% of GDP. Demand for new cars is particularly sensitive to the economic cycle, typically falling sharply in recessions but growing strongly in recoveries (Chart 1). So it was not surprising that the Government introduced a car scrappage scheme between April 2009 and March 2010 to stimulate private new car demand following the recession. This article examines a fairly recent development in the industry, namely that new car purchases nowadays are mostly financed by manufacturers’ own finance houses. This has a risk of exacerbating the cyclicality of new car sales shown in the chart. Moreover, manufacturers increasingly bear the risk of future falls in car prices, potentially making the industry even more vulnerable to macroeconomic shocks.