Consumption effects of mortgage payment holidays during the Covid-19 pandemic

Alexandra Varadi and and Bruno Albuquerque

Mortgage payment holidays (PH) were introduced in March 2020 to help households who might have struggled to keep up with mortgage payments due to the pandemic. It allowed a suspension of mortgage principal and interest repayments for a maximum of six months, without affecting households’ credit risk scores. Given the novelty of the policy, we study in a new paper whether mortgage PH have supported household consumption during the pandemic, especially for those more financially vulnerable. Using transaction-level data, we find that temporary liquidity relief provided by PH allowed liquidity-constrained households to maintain higher annual consumption growth compared to those not eligible for the policy. We also find that PH led more financially stable households to increase their saving rates, not their consumption.

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Credit, crises and inequality

Jonathan Bridges, Georgina Green and Mark Joy

Any distributional effects on credit of macroprudential policies are only one part of the distributional story. Relatively little is known about how such policies affect the income distribution in the longer term via their role in preventing crises or mitigating their severity. Our paper helps to fill that gap in the literature by looking at the impact of past recessions and crises on inequality, and the amplifying roles of credit and capital within that. This helps to shed light on the distributional implications of not intervening – in the form of an amplified recession. We find that inequality rises following recessions and that rapid credit growth prior to recessions exacerbates that effect by around 40%.

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Bitesize: Efficiently green? What a simple metric can tell us about banks’ exposure to energy price shocks and the transition to a green economy

Benjamin Guin

UK residential buildings account for about 15% of greenhouse gas emissions. To facilitate the transition to a low-carbon economy, the UK government aims to see many homes upgraded to an energy (EPC) rating of C or higher by 2035. Mortgage lenders are key in transitioning to more energy-efficient housing by financing purchases. This transition can be informed by a simple metric – like the portfolio share of mortgages for energy-efficient properties (with a rating of C or higher) relative to all outstanding mortgages, a variant of the Green Asset Ratio

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Cost versus availability of loans: which matters more for mortgagors?

Alexandra Varadi

In early 2000s, mortgage debt increased rapidly relative to income.  A key driver of this was an expansion in credit supply that made credit cheaper and more widely available. But, it is largely unknown if it is the cost of borrowing or the availability of loans that matters more for mortgagors. I examine this question in a recent paper. I find that increasing loan availability, notably at high loan to value (LTV) or high loan to income (LTI) ratios, increases household borrowing and improves credit access. The cost of borrowing matters too. It is a strong determining factor for mortgagors closer to borrowing limits, and for middle-aged borrowers. And, reducing borrowing costs in tandem with higher loan availability strongly amplifies mortgage borrowing.

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An unintended consequence of holding dollar assets

Robert Czech, Shiyang Huang, Dong Lou and Tianyu Wang

During the March 2020 ‘dash for cash’, 10-year gilt yields increased by more than 50 basis points. This huge yield spike was accompanied by the heavy selling of gilts by mutual funds and insurance companies and pension funds (ICPFs). Focusing on the latter group, we argue in a recent paper that ICPFs’ abnormal trading behaviour in this period was partly a result of the dollar’s global dominance: ICPFs invest a large portion of their capital in dollar assets and hedge these exposures through foreign exchange (FX) derivatives. As the dollar appreciated in March 2020, ICPFs sold large quantities of gilts to meet margin calls on their short-dollar derivative positions, contributing to the yield spike in the gilt market.

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The Bank of England’s 2022 Priority Topics for research

Alongside our multi-year ‘Bank of England Agenda for Research’, the Bank also publishes a set of ‘Priority Topics’, which change each calendar year. The new 2022 Priority Topics are now available on the Bank’s website (see ‘2022 Priority Topics’ under each theme).


Rebecca Freeman, Managing Editor.

The costs and benefits of reducing the cyclicality of margin models

Nicholas Vause and David Murphy

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.

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Does regulation bite only the less profitable? Evidence from the too big to fail reforms

Tirupam Goel, Ulf Lewrick and Aakriti Mathur

Reforms following the 2008 financial crisis have led to significant increases in banks’ capital requirements. A large literature since then has focused on understanding how banks respond to these changes. Our new paper shows that pre-reform profitability is a vital, but often overlooked, driver of banks’ responses. Profitability determines the opportunity cost of shrinking assets, and underpins the ability to generate capital. We develop a stylised model which predicts that a more profitable bank would choose to shrink by less (or grow by more) compared to a less profitable bank in response to higher capital requirements. Combining textual analysis of banks’ annual reports with the assessment of a key too big to fail (TBTF) reform, we show that this prediction holds in practice.

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Gender imbalance in economics: what next?

Misa Tanaka

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. 

The latest report on the Gender Imbalance in UK Economics by the Royal Economic Society (RES) Women’s Committee makes a depressing read. In a nutshell, little if any progress has been made in women’s representation in academic economics in the past decade. A well-considered action plan is needed to improve gender balance and diversity in the discipline, if the next decade is to look any different.

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Pinning the tail on the economy: why domestic developments aren’t enough

Simon Lloyd and Ed Manuel

Central banks don’t just care about what is expected to happen. They also care about what could happen if things turn out worse than expected. In line with this, an emerging literature has developed models for measuring and predicting overall levels of macroeconomic risk. This body of work has focused on estimating the level of ‘tail risk‘ in a country by monitoring a range of domestic developments. But this misses a key part of the picture. In a recent Staff Working Paper, we show that monitoring developments abroad is as important as monitoring developments at home when assessing the vulnerability of the economy to a severe downturn.

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