Shining light on ‘shadow credit’ – what is Buy-Now-Pay-Later and who uses it?

Gerry Gunner and James Waddell

Buy-Now-Pay-Later (BNPL) is a relatively new form of consumer credit that you might have noticed as a payment option when shopping online or in person. However, there is little analysis in the public domain about who is using BNPL credit in the UK and its contribution to total household debt. We have used the Bank’s NMG Consulting survey to reveal that BNPL borrowers are typically younger adults and renters, and are more likely to report signs of financial distress.

Continue reading →

A quick dive into SME finance

Kim Nyamushonongora and Oscar Spencer

99.9% of UK businesses are small and medium-sized enterprises (SMEs), employing 61% of the UK population. Yet, we know so much more about large businesses, how they function and particularly how they finance themselves. SMEs have been referred to as the backbone of economies around the world. Therefore, SME’s access to finance is systemically important. Using the SME Finance Monitor, a cross-sectional survey by BVA BDRC on 4,500 SMEs each quarter, we dive into how many SMEs use finance, what finance types they used prior to Covid and during Covid, what characteristics make them more likely to use finance and other relevant questions around SME financing. SMEs are defined as having 249 or less employees.

Continue reading →

Bomadland: How the Bank of Mum and Dad helps kids buy homes

May Rostom

On average, parental contributions help children buy homes four years earlier than those without them. Out of every 100 new homeowners below the age of 30, 16 will have had help from ‘the Bank of Mum and Dad’, or Bomad for short. That rises to one in four new homeowners under the age of 25. Those who have had help from their parents put down a deposit twice as large, bought bigger first homes, and had smaller mortgage payments than those who did not. Anecdotes about cash assistance from Mum and Dad have recently been backed up by evidence from Legal & General, which implies Bomad plays a non-trivial role in the housing market. I attempt to investigate its prevalence.

Continue reading →

Lifting the lid on a liquidity crisis

Lydia Henning, Simon Jurkatis, Manesh Powar and Gian Valentini

Autumn 2022 saw some of the largest intraday moves in gilt yields in history. It was then that jargon normally confined to financial stability papers entered into mainstream commentary – ‘LDI’, ‘doom loop’, ‘deleveraging’. And it was then that the Bank of England engaged in an unprecedented financial stability motivated government bond market intervention. What happened and why has been set out in detail in official Bank communications. This article instead hovers a magnifying glass over transaction-level regulatory data on derivative, repurchase agreements (repo) and bond markets to quantify liability-driven investment (LDI) and pension fund behaviour and enrich our understanding of these exceptional few weeks of stress.

Continue reading →

Funding structures and resilience to shocks after a decade of regulatory reform

Kristin Forbes, Christian Friedrich and Dennis Reinhardt

Recent episodes of financial stress, including the ‘dash for cash’ at the onset of the Covid-19 (Covid) pandemic, pressure in the UK’s liability-driven investment funds in 2022, and the collapse of Silicon Valley Bank in 2023, were stark reminders of the vulnerability of financial institutions to shocks that disrupt liquidity and access to funding. This post explores how the funding choices of banking systems and corporates affected their resilience during the early stages of Covid and whether subsequent policy actions were effective at mitigating financial stress. The results suggest that policy responses targeting specific structural vulnerabilities were successful at reducing financial stress.

Continue reading →

How house prices respond to interest rates depends on where they are in the country

Danny Walker

Many people expect the rise in interest rates over the past 18 months to lead house prices to fall. Average prices have already fallen by 1–2% in the UK and by more in the US. In this post I show that historically there have been large differences in how an interest rate shock affects prices in different areas of the country, even though interest rates are determined nationally. House prices respond more to interest rates in areas with more restrictive housing supply, like London and the South East of England. These are also the areas where price growth has been strongest in recent decades.

Continue reading →

Flash loans, flash attacks, and the future of DeFi

Aidan Saggers, Lukas Alemu and Irina Mnohoghitnei

Decentralised Finance (DeFi) may seem a tempting option for those seeking financial gain, autonomy, and self-governance… But how safe is a world in which ‘code is law’? Closer inspection reveals an ecosystem experiencing several hacks, attacks, and fraud. Estimates show at least US$6.5 billion has been stolen since DeFi’s inception, and one particular DeFi feature is often at the centre of this theft – flash loans. Unlimited, ungoverned, and uncollateralised, flash loans give hackers the toolkit to highly leverage their potential attacks. The only cost is the gas fees required to send the transaction. In this blog post we consider the world of flash loans and their criminal counterpart – flash attacks.

Continue reading →

Corporate insolvencies reaching record highs: a look under the hood

Jelle Barkema

How concerned should policymakers be as UK business insolvencies have soared to 60-year highs? This phenomenon has been extensively covered in the media; with media outlets attributing the record-breaking numbers to a ‘perfect storm’ of energy prices, supply-chain disruptions and the cost of living squeeze. Insolvencies are a popular measure of economic distress because they have implications for both the financial system and the real economy. For the financial system, an insolvency generally means creditors will incur losses. Insolvent firms will have to cease trading and lay off workers, which affects the real economy. In this blog post, I assess the evolution of corporate insolvencies over time, including the post-Covid surge to understand what these record numbers mean for the UK economy.

Continue reading →

The effects of subsidised flood insurance on real estate markets

Nicola Garbarino, Benjamin Guin and Jonathan Lee

5.2 million properties in England are at risk of flooding. To ensure the availability and affordability of flood insurance to households in flood-prone areas, the UK Government introduced an innovative reinsurance scheme, Flood Re, in April 2016. It provides insurers with an option to pass the flood-risk element of their policies on to the reinsurer at a lower fixed price according to property council tax band. In a recently published Staff Working Paper, we employ a granular data set of all property transactions and flood events in England. We estimate the effect of Flood Re on property values. We also explore if Flood Re effects are heterogeneous across different subpopulations in England.

Continue reading →

Location, location, location? How UK housing preferences shifted during the pandemic

Martina Fazio and Gary Harper

During recessions, and indeed pandemics, housing prices usually fall. Yet between March 2020 and December 2021 (‘the pandemic’), housing prices grew in the UK, reaching at the time their highest growth rate in a decade. During this pandemic, many more people could work from home, which potentially influenced their housing choices. In a recent Financial Stability paper, we analyse how changes in peoples’ preferences might have played into house price growth. We find that about half the growth in housing prices was linked to shifts in preferences. This was mostly due to an increased premium paid for houses over flats, with changes in location preferences only contributing marginally. But other interventions and macroeconomic factors also affected housing price growth.

Continue reading →