What’s been driving long-run house price growth in the UK?

David Miles and Victoria Monro

Since the mid-1980s, the average real (RPI-adjusted) UK house price has more than doubled, rising around one and a half times as fast as incomes. Economists’ diagnoses of the root cause varies – from anaemic supply, to the consequences of financial deregulation, or even a bubble. In our recent paper, we explore the role of the long-run decline in the real risk-free rate in driving up house prices. Low interest rates push up asset prices and reduce borrowing costs. We find the decline in the real risk-free rate can account for all of the rise in house prices relative to incomes.

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Bitesize: What might pension funds do when bond yields fall?

Matt Roberts-Sklar

Government bond yields fell sharply mid-2019, especially at longer maturities. For defined benefit pension funds, lower yields tend to mean deficits widen as discounted liabilities increase by more than the value of their assets. How might pension funds respond to this?

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The ownership of central banks

David Bholat and Karla Martinez Gutierrez

Around the world, central banks have a number of different ownership structures. At one end of the spectrum are central banks, like the Bank of England, that are wholly owned by the public sector. At the other end are central banks, like the Banca d’Italia, whose shareholders are wholly private sector entities. And there are central banks, like the Bank of Japan, that lie in-between. But do these differences matter?

In this blog post, we explore the variety of central bank ownership structures, both historically and globally. We also suggest areas for future research on the topic.

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Perceiving risk wrong: what happens when markets misprice risk?

Kristina Bluwstein and Julieta Yung

Financial markets provide insightful information about the level of risk in the economy. However, sometimes market participants might be driven more by their perception rather than any fundamental changes in risk. In a recent Staff Working Paper we study the effect of changes in risk perceptions that can lead to a mispricing of risk. We find that when agents over-price risk, banks adjust their bank lending policies, which can lead to depressed investment and output. On the other hand, when agents under-price risk, excessive lending creates a ‘bad’ credit boom that can lead to a severe recession once sentiment is reversed.

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Does liquidity spill over in the credit market? The case of CDS and corporate bonds

Robert Czech

Credit default swaps (CDS) have a notoriously bad reputation. Critics refer to CDS as a “global joke” that should be “outlawed”, not at least due to the opaque market structure. Even the Vatican labelled CDS trading as “extremely immoral”. But could there be a brighter side to these swaps? In theory, CDS contracts can reduce risks in financial markets by providing valuable insurance. In a recent paper, I show that CDS also offer another, more subtle benefit: an increase in the liquidity of the underlying bonds.

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Tracking foreign capital

Christiane Kneer and Alexander Raabe

Capital flows are fickle. In the UK, the largest and most volatile component of inflows from foreign investors are so-called ‘other investment flows’ – the foreign capital which flows into banks and other financial institutions. But where do these funds ultimately go and which sectors are particularly exposed to fickle capital inflows? Do capital inflows allow domestic firms to borrow more? Or does capital from abroad ultimately finance mortgages of UK households? Some of the foreign capital could also get passed on to the financial sector or flow back abroad.

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Bitesize: How much did PPI subsidise personal loan rates pre-crisis?

David Seaward

The Payment Protection Insurance (PPI) mis-selling scandal has rumbled on for years. But how did PPI impact loan margins pre-crisis?

This post argues that income from cross-selling PPI substantially offset lenders’ margins on personal loans between 2004 and 2009, and compares the pre-crisis PPI-adjusted margin to loan spreads today.

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CCP porting, are there lessons to be learnt from elsewhere?

Fernando V. Cerezetti and Gerardo Ferrara

Post-crisis regulatory reforms have reshaped and increased the amount of clearing activity in the OTC derivatives market. An emerging issue is so-called “client porting” – i.e. how central counterparties (CCPs) can transfer positions from one clearing member (CM) to another in the aftermath of one member defaulting. In this post, we discuss possible ways to offer clients temporary access to clearing services following a CM default, which we believe could increase the likelihood of successfully porting clients and avoiding further pressure on prices and market stability.

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What happens when ‘angels fall’?

Yuliya Baranova, Harry Goodacre and Jamie Semark.

Over the past 20 years, the share of outstanding corporate bonds rated BBB, the lowest investment-grade rating, has more than doubled. This has left a large volume of securities on the edge of a cliff, from which they could drop to a high-yield rating and become so-called ‘fallen angels’. Some investors may be forced to sell ‘fallen angels’, for example if their mandate prevents them from holding high-yield bonds. And this selling pressure could push bond prices down, beyond levels consistent with the downgrade news. In this post we explore the impact that sales of ‘fallen angels’ could have on market functioning, finding that they could test the liquidity of the sterling high-yield corporate bond market.

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Have FSRs got news for you?

Rhiannon Sowerbutts, Vesko Karadotchev, Richard Harris and Evarist Stoja

While communication has been recognised as an important aspect of monetary policy for over three decades and received an enormous amount of attention in the academic literature, there has been almost no attention paid to the importance and effects of financial stability communication. In a new working paper we examine financial markets’ reaction to the Financial Stability Report.

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