Building blocks: the useful elements of blockchain

Simon Scorer

Blockchain is often discussed as if it is one single technology. But it is really a combination of several distinct features – decentralisation, distribution, cryptography, and automation – which are combined in different ways by different platforms. Some of these features may have benefits, while others may be unnecessary or even unhelpful – depending on the specific application. In this post, I consider whether and how these features may have different potential applications in financial services. Blockchain will only be truly useful in settings where one of more of these features solves a problem that existing technologies cannot.

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New banking regulation: is it affecting the clearing of derivatives?

Jonathan Smith and Gerardo Ferrara

Just like the beginning of an unforeseen family argument, two key tenets of the post-crisis reforms have unexpectedly started to butt heads: the leverage ratio capital requirement and the mandatory requirement to centrally clear certain over-the-counter (OTC) derivatives.

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Currency will be no longer determined by those in power

Estelle McCool

Estelle McCool, from King’s College London Maths School, is the winner of the second Bank of England/Financial Times schools blog competition. The competition invited students across the UK to address the question “What is the future of money?”

Our world today is dominated by globalisation. We’ve been trading globally since before the Vikings left Scandinavia, yet the face of world trade has been altered by technological revolution and the removal of economic barriers. A global currency seems the next logical step in international integration. But what would provide the prototype of this new money?

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A nearly worthless currency ignites imaginations

Sofia Comper-Cavanna

Sofia Comper-Cavanna, from Burgess Hill Girls School, is a runner-up of the second Bank of England/Financial Times schools blog competition. The competition invited students across the UK to address the question “What is the future of money?”

The Venezuelan bolívar is practically worthless. When money has become so far devalued that the quantity of paper notes used to purchase toilet rolls is more than the quantity of paper you buy, is there any way for society to find a purpose for money again?

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Bank of England and Financial Times schools blogging competition: And the winner is…

Estelle McCool from King’s College London Maths School, whose post, “Currency will be no longer determined by those in power”, is published today on Bank Underground and the FT.

We had more than 200 entries from schools all over the UK, focused on the question “What is the future of money?”. The final selection of a winner and two runners up was made by our panel of judges: Diane Coyle, Bennett Professor of Public Policy at the University of Cambridge, Chris Giles, Economics Editor of the Financial Times and Sarah John, Chief Cashier and Director of Notes of the Bank of England. They were impressed by the quality and breadth of the entries, and had a tough time making their final decision. The three posts they selected spanned a range of different issues, including the growth of electronic money as a payment mechanism in Africa, the behavioural and psychological aspects of spending decisions and even the very nature and value of money itself. After careful deliberation and much discussion they selected “Currency will be no longer determined by those in power” as the overall winner, praising the engaging writing, insightful analysis and use of developing economies experiences with new types of currency to inform the global debate on the future of money.

We are also publishing the two posts selected as runners-up, written by Sofia Comper-Cavanna from Burgess Hill Girls School and Utkarsh Dandanayak from Royal Grammar School, Guildford.

Belinda Tracey

Managing Editor

The problem with cashless societies

Utkarsh Dandanayak

Utkarsh Dandanayak, from Royal Grammar School, Guildford, is a runner-up of the second Bank of England/Financial Times schools blog competition. The competition invited students across the UK to address the question “What is the future of money?”

No one likes parting ways with hard-earned cash. As consumers, this behavioural trait of ours allows us to think twice before engaging in transactions that we may later regret. However, now there is a chance that this trait will be lost, with the introduction of Mastercard, Apple Pay and the like, which digitalise payment processes to provide transactional convenience. What is often forgotten is the subtle but potent side effect — financial abstraction — the fundamental problem with a cashless society.

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Currency Mispricing and Dealer Balance Sheets

Gino Cenedese, Pasquale Della Corte and Tianyu Wang

Deviations from covered interest parity (CIP) represent an arbitrage opportunity, at least in theory. In a new paper, we show that post-crisis financial regulation may explain why this mispricing persists and cannot be arbitraged away. Our exercise uses a unique dataset on contract-level foreign exchange derivatives coupled with an exogenous variation associated with the public disclosure of the leverage ratio. We find that dealers with a higher leverage ratio demand an extra premium from their clients for synthetic dollar funding (e.g., borrowing in euros and swapping into dollars) relative to direct dollar funding (i.e., borrowing dollars in the money market), resulting in CIP deviations.

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Have FSRs got news for you?

Rhiannon Sowerbutts, Vesko Karadotchev, Richard Harris and Evarist Stoja

While communication has been recognised as an important aspect of monetary policy for over three decades and received an enormous amount of attention in the academic literature, there has been almost no attention paid to the importance and effects of financial stability communication. In a new working paper we examine financial markets’ reaction to the Financial Stability Report.

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The Great War and the Bank of England as Market Maker of Last Resort

Mike Anson, David Bholat, Mark Billings, Miao Kang and Ryland Thomas

During the global financial crisis, some central banks acted as market makers of last resort, buying and selling securities in financial markets when trading in them had stalled. Some commentators claimed this role was “a completely new” one for central banks. In this blog, we show, on the contrary, that the Bank of England acting as a ‘market maker of last resort’ has precedent. Using newly transcribed micro-level data which we are publishing today, we detail how officials intervened in the 1914 financial crisis in a way that has at least a passing resemblance to the actions the Bank took during the Great Financial Crisis (GFC) of 2007-09.

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Give me more! Higher Capital Requirements and Loan Collateralisation

Sudipto Karmakar

How do banks adjust when faced with a sudden rise in capital requirements? The most frequent response, in the theoretical literature, is that they reduce lending or “deleverage” (see, e.g., Aiyagari and Gertler (1999); Gertler and Kiyotaki (2010). This is particularly true in crisis episodes when raising equity can be costly. However, in a new paper co-authored with Hans Degryse and Artashes Karapetyan, I show this is only part of the story. Banks may also ask borrowers to provide more collateral; collateralised exposures carry lower risk weights on average and hence enhance capital ratios. This requirement can adversely affect young and new borrowers that typically lack collateral to pledge and are also unlikely to have longstanding banking relationships.

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