Category Archives: Financial Stability

Car finance: what’s new?

Tim Pike, Phil Eckersley and Alex Golledge

Since our first post, car finance has risen up the agenda of regulators, journalists and policymakers. Here we provide an update on recent developments. Sterling’s depreciation has had little impact on car finance costs: first because pass-through to new car prices has been muted, and second because finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments. Providers are increasingly retailing contracts where consumers have no option to purchase the car at the end.  This avoids some risks associated with voluntary terminations, but it creates new risks around resale value. In sum, the industry continues to accumulate credit risk, predicated on the belief that used car values will remain robust.

Continue reading

1 Comment

Filed under Financial Stability, Macroeconomics, Uncategorized

The Dog and the Boomerang: in defence of regulatory complexity

Joseph Noss and David Murphy

For some years, financial regulations have been becoming more complex. This has led some prominent commentators, regulators and regulatory bodies, to set out the case for simplicity, including Adrian BlundellWignall, Andy Haldane, Basel Committee and Dan Tarullo. In his contribution, Haldane illustrates how simple rules can achieve complex tasks: by simply adjusting its speed to keep its angle of gaze fixed, a dog can manage the complex task of catching a Frisbee. In this post, however, we argue that some financial risks are hard to catch with simple rules – they are more like a boomerang’s flight path than that of a Frisbee. Complex rules can sometimes do a better job at catching risk; and simple rules can be less prudent.

Continue reading

4 Comments

Filed under Financial Markets, Financial Stability, Macroprudential Regulation, Microprudential Regulation

Modelling the Macroprudential Balancing Act

Angus Foulis and Jon Bridges

Macropru is new.  Although many countries have now used macroprudential tools, there is no well-established guidebook to help policymakers develop their reaction functions.  The principles behind macroprudential strategy are still being explored, with recent speeches by Alex Brazier, Vitor Constancio, and a review by the IMF,FSB & BIS.  This post illustrates how the balancing act at the heart of the macroprudential debate can be formalised – it is a call to arms for further research, rather than the definitive guide.

Continue reading

Comments Off on Modelling the Macroprudential Balancing Act

Filed under Financial Stability, Macroprudential Regulation

Bitesize: Common ownership across UK banks: implications for competition and financial stability

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.

Continue reading

Comments Off on Bitesize: Common ownership across UK banks: implications for competition and financial stability

Filed under Banking, Bitesize, competition, Financial Markets, Financial Stability

Bitesize: Blink and you’ve missed it: French government bond ‘mini flash’

Gosia Goralczyk

On 16 February 2017, following the release of the ECB’s January meeting accounts, French government bond (OAT) futures experienced a so-called ‘mini flash’, with yields falling 11bps within 85 seconds, in a period of significant illiquidity, before retracing most  of the move within eight minutes.

Continue reading

Comments Off on Bitesize: Blink and you’ve missed it: French government bond ‘mini flash’

Filed under Financial Markets, Financial Stability

Green investment for busy people: retail investors need help to navigate towards the 2°C climate goal

Misa Tanaka

In 2015, the global leaders gathered in Paris acknowledged that climate change represents an urgent and potentially irreversible threat to human societies and the planet, and agreed to work together to limit global warming well below 2°C. Achieving this goal requires global investment to shift away from fossil fuel extraction and power generation towards developing low-carbon energy sources and increasing energy efficiency in the coming years. Retail investors could play a big part in this process if more ‘green’ financial products are marketed on online investment platforms that make it easy for people to understand, assess and compare the climate-related risks in alternative products.

Continue reading

1 Comment

Filed under Financial Markets, Financial Stability

Big Data jigsaws for Central Banks – the impact of the Swiss franc de-pegging

Olga Cielinska, Andreas Joseph, Ujwal Shreyas, John Tanner and Michalis Vasios

The Bank of England has now access to transaction-level data in over-the-counter derivatives (OTCD) markets which have been identified to lie at the centre of the Global Financial Crisis (GFC) 2007-2009. With tens of millions of daily transactions, these data catapult central banks and regulators into the realm of big data.  In our recent Financial Stability Paper, we investigate the impact of the de-pegging in the euro-Swiss franc (EURCHF) market by the Swiss National Bank (SNB) in the morning of 15 January 2015. We reconstruct detailed trading and exposure networks between counterparties and show how these can be used to understand unprecedented intraday price movements, changing liquidity conditions and increased levels of market fragmentation over a longer period.

Continue reading

Comments Off on Big Data jigsaws for Central Banks – the impact of the Swiss franc de-pegging

Filed under Currency, Financial Stability, Market Infrastructure, New Methodologies

Guest post: Why regulators should focus on bankers’ incentives

Charles Goodhart

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.

Continue reading

3 Comments

Filed under Banking, Financial Stability, Microprudential Regulation, Resolution

Of Goosebumps and CCP default funds

Fernando V. Cerezetti and Luis Antonio Barron G. Vicente 

A vestigial structure is an anatomical feature that no longer seems to have a purpose in the current form of an organism. Goosebumps, for instance, are considered to be a vestigial protection reflex in humans. Default funds, a pool of financial resources formed of clearing member (CM) contributions that can be tapped in a default event, are a ubiquitous part of central counterparty (CCP) safeguard structures. Their history is intertwined with the history of clearinghouses, dating back to a time when the financial sector resembled a Gentlemen’s Club. Here we would like to address the following – perhaps impertinent – question: are current mutualisation processes in CCPs a historical vestige, like goosebumps, or do they still hold an important risk reducing role?

Continue reading

Comments Off on Of Goosebumps and CCP default funds

Filed under Financial Markets, Financial Stability, Market Infrastructure

Unintended consequences: specialising in risky mortgages under Basel II

Matteo Benetton, Peter Eckley, Nicola Garbarino, Liam Kirwin and Georgia Latsi.

Do financial regulations change bank behaviour? Does this create new risks? Under Basel II, some banks set capital requirements based on their internal risk models; others use an off-the-shelf standardised approach. These two methodologies can produce very different capital requirements for similar assets. See Figure 1, which displays a snapshot of recent risk weights for UK mortgages. In a new working paper we show empirically that this discrepancy causes lenders to adjust their interest rates and to specialise in which borrowers they target.

Continue reading

1 Comment

Filed under Banking, Financial Stability, Macroprudential Regulation, Microprudential Regulation