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.
Since the onset of Covid-19, firms and workers have adopted and adapted to new working arrangements, which involved some workers primarily or exclusively working from home (WFH). What lessons – if any – can be drawn from this experience to inform future of work? A previous blog post examined how WFH might affect productivity. This blog post reviews more recent research on the experience of WFH during Covid, and considers what can be learnt about the impact of WFH on time use, workplace interactions and productivity.
Systemic financial crises occur infrequently, giving relatively few crisis observations to feed into the models that try to warn when a crisis is on the horizon. So how certain are these models? And can policymakers trust them when making vital decisions related to financial stability? In this blog, I build a Bayesian neural network to predict financial crises. I show that such a framework can effectively quantify the uncertainty inherent in prediction.
How easy is it to understand this sentence you are currently reading? How easy it is to understand this sentence that has dependency arcs that are longer that make it more difficult to read? How about if my writing is magniloquent? Or what if I use normal words? Writing style matters for how easy it is to read text. This post asks if writing style can influence how long markets take to digest Bank of England monetary policy information. I find that Bank of England publications that summarise their content in the first sentence, and use less unexpected vocabulary, are associated with a faster time for swap markets to reach a new equilibrium price following the publication release.
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.
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.
What can the history and philosophy of science teach us about regulatory reform? In this post, we borrow Thomas Kuhn’s idea of ‘scientific revolutions’ to argue that radical overhauls of regulation often occur after crises but that, once major reforms have been completed, it’s normal to have periods when rules do not change so much. For instance, major reforms made to banking regulations after the Global Financial Crisis of 2007–08 are now coming to an end with future change likely to be more incremental. This post is about why different circumstances call for these different approaches to regulatory change.
Joel Suss, David Bholat, Alex Gillespie and Tom Reader
‘Bad cultures’ at banks are often blamed for scandals and crises, from the global financial crisis to the mis-selling of payment protection insurance (PPI) in the UK. Yet surprisingly little research has tested this claim. This is because quantifying culture is difficult to do. Our working paper gives it a go. Leveraging unique access to data available to regulators, we diagnose the cultural health of the UK banking sector. We find that banks with organisational cultures two standard deviations below the sector average are associated with a 50% increased risk of failure.
Ivan Yotzov, Nick Bloom, Philip Bunn, Paul Mizen, Pawel Smietanka and Greg Thwaites
Text data is often raw and unstructured, and yet it is the key means of human communication. Textual analysis techniques are increasingly being used in economic and financial research in a variety of different ways. In this post we apply these techniques to a new setting: the text comments left by respondents to the Decision Maker Panel (DMP) Survey, a UK-wide monthly business survey. Using over 20,000 comments, we show that: (i) these comments are a rich and unexplored data source, (ii) Brexit has been the dominant topic of comments since 2016, (iii) text-based indices match existing uncertainty measures from the DMP at both the aggregate and firm level, and (iii) sentiment among UK firms has been declining since 2016.
Giorgis Hadzilacos, Ryan Li, Paul Harrington, Shane Latchman, John Hillier, Richard Dixon, Charlie New, Alex Alabaster and Tanya Tsapko
The 2015/16 storms caused the most extreme flooding on record, with parts of the UK impacted by heavy precipitation and extreme wind over a four-month period. These extreme weather events occurred in quick succession, hindering relief efforts and accruing £1.3 billion in insured losses. Without adequate mitigation, such events may result in claims handling strain and capital risk for insurers. Recent research finds that above-average windstorm seasons are typically accompanied by above-average inland flooding. That raises a challenge for insurers: should they have adequate risk mitigation measures in place for periods that are both windy and wet? We argue that insurers need to reassess their model assumptions, especially as climate change might make wet years more frequent than in the past.