International spillovers from climate policy

Francesca Diluiso and Aydan Dogan

To achieve the emissions reduction targets outlined in The Paris Agreement, many economies have started implementing various types of climate policies. These policies, which include subsidies for green production or investment, carbon taxes, and cap and trade schemes, are crucial for guiding the transition to a greener economy. However, by altering the cost and the emission intensity of domestically produced goods, they may have an impact on inflation, output, and international trade flows. This blog post explores the spillover effects due to the implementation of climate policy in a single country. We examine two major types of policies currently implemented and discussed worldwide: green subsidies and carbon taxes.

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30+ year mortgages – are these the new norm? What does this mean for financial stability?

James Waddell and Meghna Shrestha

An increasing number of households in the UK are opting for longer-term mortgages, with the share of borrowers taking out new mortgages with terms 30 years or longer tripling since 2005. But who are these households, why have they done so, and what could this imply for financial stability?

This blog presents some analysis to answer these questions, and focuses on three potential risk channels which could affect financial stability. These can be broadly classified into: (i) lending into old age; (ii) increased leverage; and (iii) higher debt persistence. We judge the risks associated with longer-term mortgages are limited and are mitigated by existing Financial Policy Committee (FPC) and Financial Conduct Authority (FCA) policies, which limit risky lending both at the borrower level and in aggregate.

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Integrating blockchain into the insurance industry: is it a revolution brewing?

Aly Soliman

The insurance industry, sometimes perceived as slow to innovate, might witness a major transformation. Blockchain technology, known for its secure and transparent digital ledger, has the potential to revolutionise traditional insurance operations. This shift could potentially streamline processes, introduce new insurance models and products, and help manage emerging risks better. But what does this mean for policyholders and insurers? In this article, with thanks to members of Blockchain & Fintech Working Party at the Institute and Faculty of Actuaries for providing a review, we’ll explore three potential areas where blockchain could impact the insurance sector and the challenges to the sector. But, first, we need to know what is a blockchain and how it works.

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Long-term fixed-rate mortgages through an international lens: could they lead to higher home ownership?

Gabija Zemaityte

The Tony Blair Institute for Global Change, among others, has argued that long-term fixed-rate mortgages (LTFRMs) could increase home ownership in the UK. The share of mortgages with longer fixes increased in the UK and internationally over the last decade. Persistently low interest rates over that period have supported demand for longer-fix products, including five-year fixes. But differences in mortgage markets structures across countries are the main drivers of the prevalence of LTFRMs – here defined as mortgages with interest rates fixed for 10 years or more. In this post, I review the international experience, and argue that while LTFRMs can guard against interest rate risk, they do not necessarily increase home ownership. Indeed, some economies with high shares of LTFRMs exhibit lower home ownership.

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Sharing interest rate risk: who is trading and what affects the costs?

Ioana Neamțu, Umang Khetan, Jian Li and Ishita Sen

What do the 2023 Silicon Valley Bank collapse and the 2022 UK pension fund crisis have in common? Interest rate risk. Several sectors in the economy run significant asset-liability mismatch that makes them vulnerable to rapid interest rate changes: pension funds and insurers have short-term cash flows and long-term liabilities, while banks follow a lend-long-borrow-short approach. While interest rate derivatives enable risk transfers to hedge these exposures, research on this market is limited, leaving important questions on the extent of risk sharing and the consequences of imbalances unanswered. We construct the largest data set on interest rate swaps using confidential Bank of England data to unlock insights into how investors use these instruments, and their relative importance in determining swap prices.

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Payments without borders: using ISO 20022 to identify cross-border payments in CHAPS

James Duffy and James Sanders

Understanding a payment’s journey around the globe can be difficult. As the operator of the UK’s high-value payment system (CHAPS), the Bank is all too familiar with this challenge. By leveraging the benefits of the newly introduced ISO 20022 standard for messaging, we have devised a new methodology to identify and classify cross-border CHAPS payments more effectively. This method reveals that international transactions form over half of CHAPS activity, and offers new insights into the global payment corridors for CHAPS payments. Gaining a deeper understanding of payment flows could assist policymakers in prioritising their efforts to reduce global barriers as they implement the G20 roadmap for enhancing cross-border payments.

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Shining a light on private equity backed corporates in four findings

Neha Bora, Sarah Burkinshaw, Alice Crundwell and Tuli Saha

Private equity (PE) has rapidly become an important source of financing for UK businesses. Funds use pools of capital, largely from institutional investors, to primarily invest in non-publicly traded companies. We shed light on this growing sector with a new and novel data set of around 9,000 privately backed corporates in the UK. These corporates employ over two million people, with business activity concentrated in London and in certain sectors such as information and communications. We find that they are relatively more vulnerable to default than all other corporates, and they are financed with relatively larger proportions of shorter tenor debt, like private credit and leveraged loans.

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We are not an island: how have the UK’s external balance sheet risks changed over the past two decades?

Colm Manning and Alice Crundwell

No country is an island – in terms of economics at least, if not geography. Trade and capital link all the economies of the world. Relative to GDP, the UK has more foreign assets and liabilities than any other large economy. These external liabilities – UK assets owned by overseas investors – could result in vulnerabilities that might cause major disruption to the economy and financial system in a stress. The good news for us is that the UK’s private sector external vulnerabilities have shrunk materially since the global financial crisis (GFC) of 2008, although the public sector’s vulnerabilities have grown. This post explores how the UK’s balance sheet has changed since the GFC and what this means for UK financial stability.

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Global value chains and inflation: how imported inputs shape UK prices

Aydan Dogan, Melih Firat and Aditya Soenarjo

How does the use of imported inputs in production affect inflation dynamics in the UK? Over the past few decades, with the rise of global value chains (GVCs), production processes have become increasingly interlinked across countries and sectors. This interconnection means that firms’ pricing decisions are now more influenced by foreign factors. The importance of globalisation in shaping inflation dynamics was highlighted during the supply-chain disruptions caused by the Covid-19 crisis. In a recent paper, we explore the impact of the rising share of imported intermediate goods on the UK Phillips curve. We show that UK industries with higher shares of intermediate imports from emerging market economies (EMEs) have flatter Phillips curves.

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A simple model of the effects of entity and activity constraints on alternative investment funds

Leo Fernandes, Harkeerit Kalsi, Nicholas Vause, Matthew Downer, Sarah Ek and Sebastian Maxted

Hedge funds and other alternative investment funds (AIFs) often take positions in financial markets that significantly exceed their investors’ capital by using debt or derivatives. However, such ‘leverage’ can pose risks to financial stability. Regulators seeking to reduce these risks may consider applying constraints to the fund entities or the activities in which they engage. In this post, we use a simple portfolio choice model to examine the effects of the two approaches on fund investments. Under the entity-based approach, we find that fund managers substitute from lower-risk to higher-risk investments, whereas an activity-based approach can avoid this unintended reallocation by targeting specific investments.

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