Category Archives: Microprudential Regulation

Reflections on the Bank’s History

David Kynaston

Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers David Kynaston, visiting Professor at Kingston University, reflects on more than three centuries of Bank history…

It was a huge honour to be asked by Mervyn King to write a history of the Bank. The eventual book, Till Time’s Last Sand, was published last autumn. It covers 1694 to 2013 and is based heavily on the Bank’s own archive. Fitting more than 300 years of history into a single volume was a difficult task, and condensing that into a short blog post is harder still. Here I will try to bring out a handful of key lessons from my research into the Bank’s history that might be useful for the policymakers, economists and other interested observers of today – and their successors…

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Filed under Economic History, Macroprudential Regulation, Microprudential Regulation, Monetary Policy

Car insurance telematics: why the black box should become more transparent

Fergus Cumming

Imagine you have just passed your driving test. After many hours of careful instruction, you are keen to put your good driving habits to the test on the open road. You phone up your insurance company but discover that your insurance premiums will cost you hundreds of pounds more than you can afford because “newly-qualified drivers are worse than average”. This post is about how developments in the car insurance market have the potential to revolutionise the way we drive and how we guard against the risks of bangs, scrapes and scratches. The increased use of telematics (also known as black boxes) has important implications for anyone who might consider driving, policymakers and for society as a whole.

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Filed under Insurance, Microprudential Regulation

Insulated from risk? The relationship between the energy efficiency of properties and mortgage defaults

Benjamin Guin and Perttu Korhonen

A well-insulated house reduces heat loss during cold winter periods and it keeps outdoor heat from entering during hot summer conditions. Hence, effective insulation can reduce the need for households to use cooling and heating systems. While this can lower greenhouse gas emissions by households, it also reduces homeowners’ energy bills, which can free up available income. This can protect households from unexpected decreases in income (e.g. reduced overtime payments) or increases in expenses (e.g. healthcare costs). It could also help homeowners to make their mortgage payments even if such shocks occurred. But does this also imply that mortgages against energy-efficient properties are less credit-risky?

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

When Harry Fired Sally: The Gender Punishment Gap

Mark Egan, Gregor Matvos and Amit Seru

Earlier this year the Bank hosted a joint conference with ECB and the Federal Reserve Board on Gender and Career Progression. In this guest post, Mark Egan, Gregor Matvos and Amit Seru summarise the paper they presented on the differential punishment of male and females in the US financial industry.

The gender pay gap – that women earn lower wages than men – is well known. Is that where the disparity in the workplace ends? No. In a new working paper, we document the existence of the “gender punishment gap”. We study the career trajectories of more than 1.2 million men and women working in the US financial advisory industry and examine how their careers evolve following misconduct. Women face more severe punishment at both the firm and industry level for similar missteps. Following an incidence of misconduct, women are 20% more likely to lose their jobs and 30% less likely to find new jobs relative to their male counterparts. The punishment gap is especially prominent in firms with few female managers.

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Filed under Financial Markets, Microprudential Regulation

US Hurricane Clustering: A New Reality?

Alex Ntelekos, Dimitris Papachristou and Juan Duan

The 2017 Atlantic hurricane season was the fifth most active in 168 years.  It was also one of only six seasons to see multiple Cat 5 hurricanes (Irma & Maria).  These two hurricanes, followed similar tracks and, together with Hurricane Harvey, occurred close together.  This situation can hinder relief efforts.  For insurers it may also lead to resource strain, disputes and unhedged risks, if insurers do not have enough ‘sideways’ reinsurance cover.  Our post asks whether three major hurricanes occurring in the US in close succession really was exceptional or, as our analysis of recent data suggests, it might happen more often in future.  Is the insurance industry underestimating the likely ‘clustering’ of major hurricanes?

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Filed under Insurance, Microprudential Regulation

Open letters: Laying bare linguistic patterns in PRA messages using machine learning

David Bholat and James Brookes

In a recent research paper, we show that the way supervisors write to banks and building societies (hereafter ‘banks’) has changed since the financial crisis. Supervisors now adopt a more directive, forward-looking, complex and formal style than they did before the financial crisis. We also show that their language and linguistic style is related to the nature of the bank. For instance, banks that are closest to failure get letters that have a lot of risk-related language in them. In this blog, we discuss the linguistic features that most sharply distinguish different types of letters, and the machine learning algorithm we used to arrive at our conclusions.

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Filed under Banking Supervision, Microprudential Regulation, New Methodologies, Text mining

Bitesize: The rise and fall of interest only mortgages

Sachin Galaiya

The interest-only product has undergone tremendous evolution, from its mass-market glory days in the run-up to the crisis, to its rebirth as a niche product. However, since reaching a low-point in 2016, the interest-only market is starting to show signs of life again as lenders re-enter the market.

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Filed under Financial Stability, Housing market, Microprudential Regulation

Who’s driving consumer credit growth?

Ben Guttman-Kenney, Liam Kirwin, Sagar Shah

Consumer credit growth has raised concern in some quarters. This type of borrowing – which covers mainstream products such as credit cards, motor finance, personal loans and less mainstream ones such as rent-to-own agreements – has been growing at a rapid 10% a year. What’s been driving this credit growth, and how worried should policymakers be?

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

New machines for The Old Lady

Chiranjit Chakraborty and Andreas Joseph

Rapid advances in analytical modelling and information processing capabilities, particularly in machine learning (ML) and artificial intelligence (AI), combined with ever more granular data are currently transforming many aspects of everyday life and work. In this blog post we give a brief overview of basic concepts of ML and potential applications at central banks based on our research. We demonstrate how an artificial neural network (NN) can be used for inflation forecasting which lies at the heart of modern central banking.   We show how its structure can help to understand model reactions. The NN generally outperforms more conventional models. However, it struggles to cope with the unseen post-crises situation which highlights the care needed when considering new modelling approaches.

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Filed under Microprudential Regulation, Monetary Policy, New Methodologies

10 Years after Northern Rock – is the UK more or less likely to see another bank run?

Stephen Clarke

(Northern Rock image – Lee Jordan – Flickr, reproduced from wikimedia commons under CCA licence)

Ten years ago this month, queues of people started to form early in the morning outside Northern Rock branches across the UK, to withdraw their money out of fear that their bank would soon collapse.  As the day wore on panic spread, and the run continued until when the government stepped in to guarantee all Northern Rock deposits. It was the UK’s first retail bank run since the 19th century and one of the first symptoms of the global financial crisis.  This anniversary is an appropriate time to reflect on those events, but also to look forward and assess how things have moved on in the last decade, and whether something similar could ever happen again.

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Filed under Economic History, Financial Stability, Macroprudential Regulation, Microprudential Regulation