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.
Continue reading “The seven deadly paradoxes of cryptocurrency”
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?
Continue reading “Insulated from risk? The relationship between the energy efficiency of properties and mortgage defaults”
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.
Continue reading “Bitesize: Premium Delirium II”
Harry Goodacre and Nicholas Vause
Earlier this year, a number of financial market participants, commentators and regulators suggested that investors have been accepting less compensation for bearing given amounts of credit risk. This short post presents two charts in support of that view.
Continue reading “Bitesize: Premium Delirium”
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?
Continue reading “‘Neither a borrower nor a lender be’: How the sterling money markets dried up”
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?
Continue reading “‘As safe as houses’: How a small corner of the US mortgage market nearly brought down the global financial system”
Antonis Kotidis and Neeltje van Horen
The leverage ratio requires banks to hold capital in proportion to the overall size of their balance sheet. As opposed to the capital ratio, risk-weights are irrelevant to its calculation. The leverage ratio therefore makes it relatively more costly for banks to engage in low margin activities. One such activity – which is crucial to the transmission of monetary policy and financial stability – is repo. This column shows that a tightening of the leverage ratio resulting from a change in reporting requirements incentivised UK dealers to reduce their repo activity, especially affecting small banks and non-bank financial institutions. The UK gilt repo market, however, showed resilience with foreign, non-constrained dealers quickly stepping in.
Continue reading “Repo Market Functioning: The Role of Capital Regulation”
Felix Ward, Moritz Schularick, Òscar Jordà and Alan M Taylor
In April the Bank hosted a workshop organised jointly with the IMF and ECB, on the theme of “International Spillovers of Shocks and Macroeconomic Policies”. In this guest post, the authors of one of the papers presented look at how and why co-movement of international equity prices has increased over time.
Asset markets in advanced economies have become integrated to a degree never seen before in the history of modern finance. This is especially true for global equities starting in the 1990s. We find that this increase in synchronization is primarily driven by fluctuations in risk-appetite rather than in risk-free rates, or in dividends. Moreover, we find that U.S. monetary policy plays a major role in explaining such fluctuations. This transmission channel affects economies with both fixed and floating exchange rates, although the effects are more muted in floating rate regimes.
Continue reading “Global Financial Cycles and risk premiums”
Emanuele Campiglio, Yannis Dafermos, Pierre Monnin, Josh Ryan Collins, Guido Schotten and Misa Tanaka
Climate change poses risks to the financial system. Yet our understanding of these risks is still limited. As we explain in a recent paper published in Nature Climate Change, central banks and financial regulators could contribute to the development of methodologies and modelling tools for assessing climate-related financial risks. If it becomes clear that these risks are substantial, central banks should consider taking them into account in their operations. Both central banks and financial regulators might also consider supporting a low-carbon transition in a more active way so as to contribute to the reduction of these risks.
Continue reading “Climate change and finance: what role for central banks and financial regulators?”
Srdan Tatomir, Iryna Kaminska, Marek Raczko and Gregory Thwaites
How have equity markets responded to news about Brexit? To answer this we split firms into those whose share prices are particularly sensitive to Brexit-related news, and those which are not. The latter group provides a “control sample”, against which to assess the impact of individual pieces of news on the former. The ratio of the two groups’ prices gives a barometer of equity market sentiments around Brexit. So far, this measure points to downward pressure on valuation of companies more exposed to Brexit. The bulk of the fall occurred on the night of the referendum, with little movement afterwards, suggesting little additional “news” from subsequent developments beyond the immediate aftermath.
Continue reading “Fog in the Channel? How have equity markets reacted to Brexit news?”