Misa Tanaka and John Thanassoulis
In the 2007-8 global financial crisis, a number of banks were bailed out by taxpayers while their most senior employees were paid extraordinary bonuses up to that point (E.g. here, here and here). The resulting public outcry led to new regulations allowing clawback of bonuses earned on the back of decisions that subsequently damage their banks and the wider economy. But will these rules work? Our theoretical research shows that sophisticated banks can game clawback regulations by altering pay contracts so as to incentivise bankers to take risks that benefit shareholders but that are excessive for society. The entire pay package matters, and so, understanding how it shapes risk-taking incentives is as important as monitoring compliance with clawback rules.
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.
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.
Paolo Siciliani and Daniel Norris
Asset managers make it more convenient for savers to diversify their investments in stock markets. They are also in a better position to monitor the managers of firms in their portfolios, even if they adopted a passive investment strategy. However, it has been argued that competition might be weakened when firms competing in concentrated industries, such as airlines, share the same small number of institutional investors as their top shareholders.
Sebastian de-Ramon, Bill Francis and Kristoffer Milonas.
Navigational aids are helpful when visibility is poor or when landmarks are unfamiliar, especially when journeying to new destinations. In a recent working paper, we introduce a new regulatory dataset, the ‘Historical Banking Regulatory Database’ (HBRD), that provides a clearer view of the UK banking sector and helps navigate issues difficult to explore with other datasets. This post describes the HBRD, its benefits for research and policy analyses, and what can be learned from it.
James Barker, David Bholat and Ryland Thomas.
Central bank balance sheets swelled in size in response to the financial crisis of 2007-09. In this blog we discuss what makes them different from the balance sheets of other institutions, how they’ve been used in the past, and how they might evolve in the future as means to implement novel policies – including the revolutionary possibility that a central bank could issue its own digital currency.
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