Look abroad! Global financial conditions and risks to domestic growth

Fernando Eguren-Martin and Andrej Sokol

What’s the relationship between financial conditions and risks to growth in an economy? And, in a world of highly integrated financial markets, to what extent are these “local” risks rather than reflections of global developments? In this post we offer some tentative answers. Financial conditions, measured across a broad range of asset classes and countries, display an important common component reflecting global developments. Loose financial conditions today increase the likelihood of a growth boom over the following few quarters, but when global financial conditions are loose, they increase the chances of a sharp contraction further ahead, highlighting some of the challenges of managing risks to growth across time from a policy maker’s perspective.

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Does competition help or hinder bank stability in the UK?

Sebastian de-Ramon, Bill Francis and Michael Straughan.

There is a debate in the regulatory and academic community about whether competition is good or bad for bank stability, particularly following the financial crisis (see Chapter 6 of the Independent Commission on Banking final report). The debate tends to be seen as a head-to-head argument between two camps: those that see competition as bad for stability (competition-fragility) versus those that see competition as good (competition-stability). In new research, we look at how competition affects the stability of banks in the UK. We find that competition affects less stable firms differently than more stable firms and that focussing on what happens to the average firm may not be sufficient.

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A balancing act: the case for macroprudential margin requirements

Cian O’Neill and Nicholas Vause.

Certain policy actions require a high level of precision to be successful. In a recent paper, we find that using margins on derivative trades as a macroprudential tool would require such precision. Such a policy could force derivative users to hold more liquid assets. This would help them to meet larger margin calls and avoid fire-selling their derivatives, which could affect other market participants by moving prices. We find that perfect calibration of such a policy would completely eliminate this fire-sale externality and achieve the best possible outcome, while simple rules are almost as effective. However, calibration errors in any rule could amplify fire-sales and leave the financial system worse off than if there had been no policy at all.

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A Closer Look at the BoC-BoE Sovereign Default Database

David Beers and Jamshid Mavalwalla

Defaults on sovereign debt – the term commonly used to denote debt issued by national governments and other fiscally autonomous territories – are a recurring feature of public finance. They are more widespread than is often appreciated, since 1960 involving 145 governments, over half the current sovereign universe. Examples include the many governments ensnared in the Latin American and Eastern European debt crises of the 1980s. More recently, there have been big bond defaults by Russia (1998), Argentina (2001), Greece (2012), and Puerto Rico (2015). On a smaller scale, scores of sovereign defaults can occur each year on one or more types of debt. Some, such as Sudan’s, have dragged on for decades and remain unresolved (Chart 1).

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The seven deadly paradoxes of cryptocurrency

John Lewis

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.

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Insulated from risk? The relationship between the energy efficiency of properties and mortgage defaults

Benjamin Guin and Perttu Korhonen

A well-insulated house reduces heat loss during cold winter periods and it keeps outdoor heat from entering during hot summer conditions. Hence, effective insulation can reduce the need for households to use cooling and heating systems. While this can lower greenhouse gas emissions by households, it also reduces homeowners’ energy bills, which can free up available income. This can protect households from unexpected decreases in income (e.g. reduced overtime payments) or increases in expenses (e.g. healthcare costs). It could also help homeowners to make their mortgage payments even if such shocks occurred. But does this also imply that mortgages against energy-efficient properties are less credit-risky?

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Bitesize: Premium Delirium II

Nicholas Vause

In a recent post, my co-author and I showed some charts suggesting that investors have been accepting less compensation for bearing credit risk. This type of risk can be very costly when it materialises, but the probability of that happening is typically very low. A similar risk is inherent in deeply out-of-the-money options. Here too, investors seem to be accepting less compensation for risk.

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‘Neither a borrower nor a lender be’: How the sterling money markets dried up

Mathew Sim


Sterling money markets are a critical part of the plumbing of the UK financial system. They act as the main conduit for short-term borrowing and lending between banks, and a whole range of other institutions, financial and non-financial. And the ebb and flow of activity in sterling money markets is also crucial to the Bank of England as the first stage in the transmission mechanism of monetary policy, linking changes in the Bank’s policy rate – Bank Rate – to activity and prices in the wider economy. So when things go wrong in this market, as they did during the financial crisis, the effects reach into every part of the UK economy and, given the significant role of international banks in London, beyond. So what happened in the autumn of 2008, and why?

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‘As safe as houses’: How a small corner of the US mortgage market nearly brought down the global financial system

Johnny Elliot and Benjamin King

In August 2007 problems were emerging in the US sub-prime mortgage market. Rising numbers of borrowers were getting behind on their repayments, and some investors exposed to the mortgages were warning that they were difficult to value. But projected write-downs were small: less than half a percent of GDP. Just over a year later, Lehman Brothers had failed, the global financial system was on the brink of collapse and the world was plunged into recession. So how did a seemingly small corner of the US mortgage market unleash a global crisis?  And what lessons did the turmoil of autumn 2008 reveal about the financial system?

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