Following a period of relative calm, many derivative users received large margin calls as financial market volatility spiked amidst the onset of the Covid-19 (Covid) global pandemic in March 2020. This reinvigorated the debate about dampening such ‘procyclicality’ of margin requirements. In a recent paper, we suggest a cost-benefit approach to mitigating margin procyclicality, whereby alternative mitigation strategies would be assessed not only in terms of the reduction in procyclicality they would deliver (the benefit), but also any increase in average margin requirements over the financial cycle (the cost). Strategies with the best trade-offs could then be put into practice. Our procyclicality metrics could also be used to report margin variability to derivative users, assisting them with their liquidity risk management.
This post by Misa Tanaka is based on her talk at the Royal Economic Society’s webinar on Gender Imbalance in UK Economics which took place on 6 October. She is Head of Research at the Bank of England and a member of the Royal Economic Society’s Women’s Committee.
In March 2020, the Covid-19 (Covid) outbreak turned the world upside down. With economies virtually shut, financial markets were an exception and remained open. However, it was not business as usual for them: the increased need to meet immediate obligations, and a more generalised increase in risk aversion, led investors to liquidate positions in favour of hard old cash. In a recent Staff Working Paper we pose that investors did not seek any type of cash but rather that the world witnessed a ‘dash for dollars’. We show that the resulting race for dollars went beyond exchange rate markets and led to selling pressure on dollar bonds in corporate bond markets, which experienced particularly large increases in spreads.
Recent reforms that followed the Great Financial Crisis, as the establishment of the Single Supervisory Mechanism in Europe and the Prudential Regulatory Authority in the UK, reflect the belief that the governance of banking supervision affects financial stability. However, while existing research identifies the pros and cons of having either a central bank or a separate agency responsible for microprudential banking supervision, the advantages of having this task shared by both institutions (shared supervision) have received considerably less attention.
Dollar shortages in funding markets outside the United States have been a recurrent feature of the last three major crises, including the turmoil associated with the ongoing Covid-19 pandemic. The Federal Reserve has responded by improving conditions and extending the reach of its network of central bank swap lines, with the aim of channelling US dollars to non-US financial systems. Despite the recurrence of this phenomena, little is known about the macroeconomic consequences of both dollar shortage shocks and central bank swap lines. In this post (and in an underlying Staff Working Paper) I provide some tentative answers.
Starting today, Bank Underground (BU) is launching a special series of ‘Covid-19 Briefings’. These posts are different to our regular posts – rather than containing primary analysis or the author’s own research, they instead aim to summarise key lessons from the early literature on a particular area of the economics of Covid-19. Each post focuses on a different area, and aims to provide an introduction to key papers, rather than a comprehensive overview of all the literature. As with any BU post, they are the views of the authors, not necessarily those of the Bank. We hope our readers find them helpful in understanding the new, rapidly developing and fast growing body of work on the economics of Covid-19.
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Asset prices tend to co-move internationally, in what is often described as the ‘global financial cycle’. However, one such asset class, exchange rates, cannot by definition all move in the same direction. In this post we show how the ‘global financial cycle’ is associated with markedly different dynamics across currencies. We enrich traditional labels such as ‘safe haven’ and ‘risky’ currencies with an explicit quantification of exchange rate tail risks. We also find that several popular ‘risk factors’, such as current account balances and interest rate differentials, can be linked to these differences.
Will people in 2030 buy goods, get mortgages or hold their pension pots in bitcoin, ethereum or ripple rather than central bank issued currencies? I doubt it. Existing private cryptocurrencies do not seriously threaten traditional monies because they are afflicted by multiple internal contradictions. They are hard to scale, are expensive to store, cumbersome to maintain, tricky for holders to liquidate, almost worthless in theory, and boxed in by their anonymity. And if newer cryptocurrencies ever emerge to solve these problems, that’s additional downside news for the value of existing ones.
Would removing the 1p and 2p coins from circulation cause inflation? Or deflation? Or neither? Our analysis, and the overwhelming weight of literature and experience, suggests it would have no significant impact on prices because price rounding would be applied at the total bill level, not on individual items and it would only affect cash transactions, which make up a low proportion of spending by value. Even if individual prices were rounded on all payments, analysis of UK price data suggests no economically significant impact on inflation.