Reducing counterparty credit risk in uncleared markets – but what are the costs?

Darren Massey

When you rent a house, the landlord – your counterparty – will take a security deposit as prepayment to cover potential costs such as unpaid rent or bills. New regulations introduced in major jurisdictions will require major participants in uncleared over-the-counter derivatives (OTCDs) markets to uniformly exchange initial margin – a more complicated version of a security deposit. Much like a rental deposit, OTCD parties must agree the deposit amount, who should hold the funds, and crucially, when a claim can be made. And just like the rental deposit, the protection provided brings new challenges and risks. This blog outlines some of these risks in the OTCD market, and as the framework is implemented, suggests that firms and regulators should consider these risks.

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Bitesize: Are leasehold houses really a thing?

Andrew Blake

The so-called ground rent scandal has prompted the launch of a government consultation into leasehold reform. One surprise is just how widespread is the practice of selling newly built houses as leasehold, a practice that seems to have been growing over time. Given that the Land Registry publishes details of all housing transaction since 1995, plotting changes in the pattern of leasehold versus freehold for each type of newly built home is easy.

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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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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 19^th 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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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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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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