Peter Eckley and Liam Kirwin.
In the world of bank capital regulation, minimum requirements grab all the headlines. But actual capital resources are what absorb unexpected losses. Banks and building societies typically hold resources substantially in excess of requirements – called the capital surplus. One reason is to avoid breaching the minimum due to unforeseen shocks. Another is to build resources in anticipation of requirements arising from growth or regulatory change. The chart shows how capital surpluses (on total requirements including Pillars 1 and 2, and all types of capital) have varied in recent decades. It is based on historical data from regulatory returns.
Alastair Cunningham, David Bradnum and Alastair Firrell.
Uncertainty is a hot topic for economists at the moment. Have business leaders become more uncertain as a result of the EU referendum? If so, has that uncertainty had any effect on their plans? The Bank’s analysts look at lots of measures of economic uncertainty, from complex financial market metrics to how often newspaper articles mention it. But few of those measures are sourced directly from the trading businesses up and down the country whose investment and employment plans affect the UK economy. This blog reports on recent efforts to draw out what the Bank’s wide network of business contacts are telling us about uncertainty – comparing what we’re hearing now to trends seen in recent years.
Saleem Bahaj, Jonathan Bridges, Cian O’Neill & Frederic Malherbe.
It’s not just what you do; it’s when you do it – many decisions in life have “state contingent” costs and benefits. The payoffs from haymaking depend crucially upon the weather. Putting fodder away for a rainy day can be quick, cheap and prudent when skies are blue. But results may take a soggy and unproductive turn, if poorly timed. The financial climate is similarly important when assessing the costs and benefits of macroprudential policy changes. We argue that it is best to build the countercyclical capital buffer when the macroeconomic sun is shining. We find strong empirical evidence to support our claim.
“Too slow for too long”, referring to global GDP growth, was the title of a recent IMF publication. But is world economic growth really that slow? Looking at the data over the past several decades, global growth since the crisis does not appear particularly weak; at least not in a historical perspective
Macroeconomists like to use US data to test and develop theories- the coverage is generally very good, and the world’s largest economy is an obvious benchmark. But what if the US happens to be very atypical in some respects? For example the evolution of the income distribution…
Equity prices reflect the market value of public companies, making them an important indicator of the economy. In practice, stocks by firms listed on the local stock exchange serve as the ‘domestic’ equity benchmark but this might be misleading as an indicator of the national economy: stock markets track the performance of individual firms, including their international business. This makes it particularly challenging to extract a signal for the UK economy from UK equity prices, as the universe of UK-listed firms tends to be very global – for instance, around 2/3 of sales represented on the FTSE All-Share are generated abroad. So for a better read of the UK economy, I’ll look at a subset of more UK-focused stocks and other more domestically-focused UK equity indices.
Philippe Bracke and Alice Pugh.
Economic theory suggests that property prices and rents should move together: rents represent the flow of housing services gained from living in a property, and prices are determined by the discounted value of all future rents.
Much has been written about the productivity puzzle. But there are actually two puzzles apparent in the data – one in the level that hit at the crisis and the other in the growth rate, which is a more recent phenomenon – and they could be driven by completely different sources. Distinguishing between the two puzzles is important precisely because of these potential differences – if anyone analyses the puzzle as a whole looking for the force driving it, the actual underlying variety will confound our estimates of the relative importance of these drivers.
In this post I discuss:
- what people mean by the productivity puzzle, usually a percent deviation from the pre-crisis trend;
- how I think of it as actually two puzzles: one in the level and the other in the growth rate; and
- why this distinction can be important, using the example of a simple growth accounting decomposition of productivity growth into capital deepening and technological advancement.
Dan Wales and Emil Iordanov.
Have FOMC discussions changed since the end of 2015? Are the committee more concerned about international risks now?
Roy Zilberman and William Tayler.
Last year the Bank organised a research competition to coincide with the launch of the One Bank Research Agenda. In this guest post, the authors of the winning paper in that competition, Roy Zilberman and William Tayler from Lancaster Business School, summarise their work on optimal macroprudential policy.
Can macroprudential regulation go beyond its remit of financial stability and also contain inflation and output fluctuations? We think it can and argue that macroprudential regulation, in the form of countercyclical bank capital requirements, is a superior instrument to both conventional and financially-augmented Taylor (1993) monetary policy rules. This is especially true in responding to financial shocks that drive output and inflation in opposite directions, as also observed at the start of the recent financial crisis (see Gilchrist, Schoenle, Sim and Zakrajsek (2016)). This helps to effectively shield the real economy without the need for a monetary policy interest rate intervention. Put differently, a well-designed simple and implementable bank capital rule can achieve optimal policy associated with zero welfare losses.