In recent years there has been a notable move to lenders charging a daily or monthly fee on overdrafts. Although not technically an interest rate, they are nonetheless a cost of borrowing. And in some cases, may have replaced interest charges entirely. So are customers charged more than the interest-charging overdraft rate alone suggests?
Since 2012, long term rates have fallen and there have been various other policy packages to boost credit availability and lower borrowing costs. But how have these fed through to different types of fixed mortgage rates?
How have falling retail deposit interest rates affected savers’ behaviour? One place to look is the market for fixed-rate bonds, which give a guaranteed interest rate for a set period of time. These rates tend to be higher than instant access accounts, because customers must tie up their deposits to receive the higher rate. Fixed-rate bonds represented around 40% of new time deposits in January 2017. Continue reading
Evidence suggests that small and medium-sized businesses (SMEs) rely more on bank credit than other businesses. So how has their cost of borrowing fared since last year’s Bank Rate cut? And how do their rates compare with overall businesses? Continue reading
The topics of central bank digital currency (CBDC) and distributed ledger technology (DLT) are often implicitly linked. The genesis of recent interest in CBDC was the emergence of private digital currencies, like Bitcoin, which often leads to certain assumptions about the way a CBDC might be implemented – i.e. that it would also need to use a form of blockchain or DLT. But would a CBDC really need to use DLT? In this post I explain that it may not be necessary to use DLT for a CBDC, but I also consider some of the reasons why it could still be desirable.
Mounir Kenaissi and Mariana Gimpelewicz.
A key feature of the post-crisis regulatory reform agenda has been the introduction of a leverage ratio to complement the risk-weighted framework. The FPC designed the UK leverage ratio to mirror risk-weighted capital requirements so the two frameworks move in lock-step over time and across firms. For the sake of simplicity however, the FPC did not reflect Pillar 2 capital charges, which aim to capture risks that cannot be modelled adequately in the risk-weighted framework, in the leverage ratio framework. In this post we explore what happens to leverage and risk-weighted requirements once Pillar 2 are taken into account. We find that in keeping the leverage ratio simple, the perfect lock-step interaction with risk-weighted requirements no longer holds, which could prompt riskier banks to take on more risk.
Sebastian J A de-Ramon, William Francis and Qun Harris
Shakespeare first coined the term ‘sea change’ in The Tempest to describe King Alonso’s lasting transformation after his mystical death by drowning. Resting five fathoms deep, Alonso suffers a sea change into something rich and strange, with coral for bones and pearls for eyes. In a recent working paper, we explore for evidence of a possible sea change in UK banks’ balance sheets using data spanning the 2007-09 crisis. Our initial dive into the still murky, post-crisis waters shows signs of something strange and unrecognizable, with UK banks, in response to higher capital requirements, increasing the level and in particular the quality of capital more after the crisis. This post describes our dive and its findings.
Stijn Claessens and Neeltje van Horen.
Foreign banks can be important for trade. They can increase the availability of external finance for exporting firms and help overcome information asymmetries. Consistent with these channels, we show that firms in emerging markets tend to export more when foreign banks are present, especially when the parent bank is headquartered in the importing country. In advanced countries, where financial markets are more developed and information is more readily available, the presence of foreign banks does not play such a role. Financial globalization through the local presence of foreign banks can thus positively affect real integration.
Last autumn, Charles Goodhart gave a special lecture at the Bank. In this guest post he argues that regulators should focus more on the incentives of individual decision makers.
The incentive for those in any institution is to justify and extol the virtues of the decisions that they have taken. Criticisms of current regulatory measures are more likely to come from outsiders, perhaps especially from academics, (with tenure), who can play the fool to the regulatory king. I offer some thoughts here from that perspective. I contend that the regulatory failures that led to the crisis and the shortcomings of regulation since are largely derived from a failure to identify the persons responsible for bad decisions. Banks cannot take decisions, exhibit behaviour, or have feelings – but individuals can. The solution lies in reforming the governance set-up and realigning incentives faced by banks’ management.
Caterina Lepore, Caspar Siegert, Quynh-Anh Vo
The 2016 Nobel Prize in economics has been awarded to Professors Oliver Hart and Bengt Holmström for their contributions to contract theory. The theory offers a wide range of real-life applications, from corporate governance to constitutional laws. And, as the post will hopefully convince you, contract theory is also helpful in regulating banks! To this end, we will unpack the outline of the theory and apply it to a number of real-world conundrums: How to pay banks’ chief executives and traders? How to fund a bank’s balance sheet? How to regulate banks?