Montagu Norman: The View from St Clere

Barry Eichengreen

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, Barry Eichengreen from the University of California Berkeley, looks back at Montagu Norman’s time as governor.

Montagu Norman’s aura is palpable at St. Clere. It is said that Norman spent many of his weekends and holidays at his estate in Kent, overseeing improvements and admiring the vistas. His legacy is, if anything, even more prominent at the Bank of England. Norman supervised the design of the present Bank building. His portrait, along with those of the other members of his Court, was displayed on the first-floor landing in the Bank’s main atrium; he is only a handful of governors so honored. The Bank’s recent St. Clere workshop thus provided an opportunity to ponder some of the enduring themes and legacies of Norman’s quarter-century as governor.

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Filed under Economic History, Macroeconomics, 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

Could knowledge about Central banks impact households’ expectations?

Emma Rockall

Should central banks care if people understand them? Whereas once Alan Greenspan famously declared: “If I seem unduly clear to you, you must have misunderstood what I said”, central bankers now dedicate considerable time and thought to transparency and communications. While transparency initiatives have value in their own right in improving accountability, results from the Bank’s Inflation Attitudes Survey suggest that they could have potentially far-reaching effects on the economy through their impact on households’ expectations. If they improve households’ knowledge of central banks, they may produce inflation expectations that are more stable and closer to the inflation target in the medium term – that is, ‘better-anchored’ expectations.

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Filed under Macroeconomics, Monetary Policy

Low-Carbon Macro

Carsten Jung, Theresa Löber, Anina Thiel and Thomas Viegas

Governments have pledged to meet the Paris Target of restricting global temperature rises to ‘well below’ 2˚C.  But reducing CO2 emissions and other greenhouse gases means reallocating resources away from high-carbon towards low-carbon activities. That reallocation could be considerable: fossil fuels account for more than 10% of world trade and around 10% of global investment.  In this post, we consider the macroeconomic effects of the transition to a low-carbon economy and how it might vary across countries. While much of the discussion has focussed on the hit to economic activity and the potential for job losses in higher-carbon sectors, we highlight that the transition also offers opportunities. And the overall impact depends crucially on when and how the transition takes place.

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Filed under International Economics, Macroeconomics

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

Bitesize: Premium Delirium II

Nicholas Vause

In a recent post, my co-author and I showed some charts suggesting that investors have been accepting less compensation for bearing credit risk. This type of risk can be very costly when it materialises, but the probability of that happening is typically very low. A similar risk is inherent in deeply out-of-the-money options. Here too, investors seem to be accepting less compensation for risk.

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Filed under Financial Markets

Bitesize: Premium Delirium

Harry Goodacre and Nicholas Vause

Earlier this year, a number of financial market participants, commentators and regulators suggested that investors have been accepting less compensation for bearing given amounts of credit risk. This short post presents two charts in support of that view.

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Filed under Financial Markets

Financing private investment in China: the role of alternative finance and banking reforms

Noëmie Lisack

Small, young private firms in China have long been struggling to obtain formal bank loans. To bypass financial constraints, these firms have resorted to alternative, less formal financing sources. In this context, Chinese authorities are aiming to develop a more formal, market-based, and better regulated credit sector. In a Staff Working Paper, I argue that carefully designed credit sector reforms are crucial to avoid throwing out the baby with the bath water. Despite the interest rate liberalisation progressively implemented by Chinese authorities, a general crackdown on alternative finance would remain detrimental to the dynamism of small enterprises. Selectively tightening the limits around informal financing could better balance financial stability on the one hand, and welfare and efficiency on the other.

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Filed under Macroeconomics

‘The world turned upside down’: How the global economy was hit by the crisis

David Young

For the global economy, it was the best of times, and then it was the worst of times.  Buoyed by very strong growth in emerging markets, the global economy boomed in the mid-2000s.  On average, annualised world GDP growth exceeded 5% for the four years leading up to 2007 – a pace of growth that hadn’t been sustained since the early 1970s.  But it wasn’t to last.  In this post, I illustrate how the failure of Lehman Brothers in September 2008 coincided with the deepest, most synchronised global downturn since World War II.  And I describe how after having seen the fallout of the Lehman collapse, macroeconomic forecasters were nevertheless surprised by the magnitude of the ensuing global recession.

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Filed under Economic History, International Economics, Macroeconomics

‘Running for the exit’: How cross-border bank lending fell

Neeltje van Horen

Cross-border bank lending fell dramatically in the aftermath of Lehman Brothers’ failure as funding constraints forced banks to reduce their foreign exposures. While this decline was partly driven by lower demand for international bank credit, it was substantially aggravated by a retrenchment of international banks from cross-border lending. But banks did not cut their cross-border lending in a uniform manner. Instead, they reallocated their foreign portfolios towards countries that were geographically close, in which they had more experience, in which they had close connections with domestic banks or in which they operated a subsidiary. The crisis thus showed that deeper financial integration is associated with more stable cross-border credit when large global banks are hit by a funding shock.

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Filed under Banking, Financial Stability