Sizing UK banking sector’s exposures to climate policy relevant sectors

Giovanni Covi, James Brookes and Charumathi Raja

Climate transition will undoubtedly expose UK banks to new risks and opportunities. Hence, we quantify the UK banking sector’s share of total assets allocated towards climate policy relevant sectors (CPRS). Using The Global Network data set mapping the network of UK banks’ loan and security exposures, we find that the UK banking system’s direct CPRS exposures amount up to 6.1% of total assets, or 45.7% of non-financial corporate (NFC) exposures. When considering also indirect CPRS exposures towards other financial corporates, the share of total assets subject to CPRS classification increases up to 10%. While 83% of these assets are tied up in carbon-intensive sectors, 17% will likely benefit from climate transition plans. We do not measure exposures subject to climate-related physical risks.

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Shifting the composition of start-up cohorts can boost macroeconomic performance

Ralph de Haas, Vincent Sterk and Neeltje van Horen

Anaemic productivity growth and limited business dynamism remain key policy concerns in Europe and the US. Policies to improve macroeconomic performance often target existing firms. Examples include tax measures to stimulate firm-level Research & Development and structural reforms to eliminate distortions in labour, financial, and product markets. In a new paper we investigate an entirely different policy lever, one that has so far remained largely unexplored: influencing the types of firms that are being started in the first place. Using a comprehensive new data set on European start-ups, we show how tax policies that shift the composition of new start-up cohorts could deliver meaningful macroeconomic gains.

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Cryptoassets, the metaverse and systemic risk

Owen Lock and Teresa Cascino

Cryptoassets could have important roles within the metaverse – a decentralised, immersive next generation of the internet. Cryptoassets enable verifiable ownership of digital items, and when built to common standards, can move interoperably between web applications – increasing the asset’s value proposition. They can also align the incentives of developers, content creators, users and investors on metaverse platforms, and are required to incentivise miners and validators to add metaverse-based transactions to the underlying blockchain. We argue that if an open and decentralised metaverse grows, existing risks from cryptoassets may scale to have systemic financial stability consequences. Widespread adoption of crypto in the metaverse, or any other setting would require compliance with robust consumer protection and financial stability regulatory frameworks.

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Rolling substitutions in financial markets: did quantitative easing in 2020 lead to portfolio rebalancing?

Jack Worlidge

Purchases of government bonds have been a prominent tool that has helped central banks meet inflation objectives when short-term interest rates have been constrained by their effective lower bounds. But how does QE work? There are a range of channels through which QE can/might operate, though there remains uncertainty over the relative size and importance of these channels. This post presents new evidence from granular transaction data consistent with a portfolio rebalancing channel. Specifically, during the Bank’s latest QE programme (known as QE5) investors were found to have bought less new gilt issuance and bought more risky assets like corporate bonds.

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Monetary and fiscal policy in interwar Britain

David Ronicle

Macroeconomic outcomes in Britain’s interwar years were terrible – they featured two of modern Britain’s worst recessions, unemployment twice peaked above 20% and was rarely below 10% and there were two periods of chronic deflation. Policy, meanwhile, was pulled in multiple directions by multiple objectives – employment, price and financial stability and debt sustainability. These challenges gave birth to modern macroeconomics, inspiring the work of John Maynard Keynes. In a new working paper, I apply modern empirical techniques to look at the period with fresh eyes. I find that monetary and fiscal policy played a central role in macroeconomic developments – and that outcomes could have been better had policymakers been less wedded to the traditional policy consensus, and especially the Gold Standard.

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Booming entrepreneurship during the Covid-19 pandemic

Saleem Bahaj, Sophie Piton and Anthony Savagar

Recessions typically discourage entrepreneurs from starting new businesses. During the Great Recession, a ‘generation’ of start-ups went missing which contributed to a slow recovery in employment.  Two years after the pandemic started, evidence for the UK suggests a very different story: the pandemic inspired many entrepreneurs to start new businesses and this supported the recovery in employment.

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Climate and capital: some outstanding issues

Marco Bardoscia, Benjamin Guin and Misa Tanaka

There is a lively debate about whether and how capital regulations for banks and insurers should be adjusted in response to climate change. The Bank of England will host a conference later this year to discuss the points in favour of and against adjustments to the regulatory capital framework to take account of climate-related financial risks. The call for papers asks for research on appropriate capital tools to address these risks, eg whether risks point to microprudential tools which are firm specific or rather macroprudential system-wide ones. Moreover, it asks for research on an appropriate time horizon over which the risks should be considered and how scenarios and forward-looking data should be used. This post will review the existing literature and identify some key gaps.

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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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Citizens’ advice: lessons from the public

Kel Nwanuforo, Andrew Mills and Sharon Raj

The Citizens’ Panels (now the Citizens’ Forum) is a Bank of England discussion forum to engage with the UK public on important topics such as the labour and housing markets, or climate change. It included a forecasting competition, and Bank Underground invited the winners to contribute short pieces about how they evaluate the UK economy, discuss issues of their concern, and to propose solutions.

Part of Bank Underground’s purpose is to give a platform for views from Bank of England (‘Bank’) analysts that may differ from those of the Bank or its policy committees. Alternative views are encouraged within the Bank, but the range of opinions and ways of thinking by analysts is likely to be limited to some extent: by education, experience and less tangible factors such as the language analysts use to explain their thoughts. The Citizens’ Panels therefore offer a rich source of information. By now, they include some 3,200+ participants with a wide range of backgrounds: some are familiar with economics and central banking but many may know little about either. This blog represents the voices of some of those panel members about the UK economy, and how they addressed the forecasting challenge, which we put in front of participants as part of the Citizens’ Forum online community – which by-the-way is open to all.

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Remote working, bargaining power and productivity

Lena Anayi

Remote working soared during the Covid-19 (Covid) pandemic. Over half of British workers worked from home during the initial Covid lockdowns (first panel in Chart 1). And by February this year, nearly a third of workers were still doing so at least some of the time. But will this last? In this blog post, I explore firms’ and workers’ attitudes to remote working, the extent to which these may differ, and factors that might affect negotiations between them on future remote working arrangements.

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