Climate and monetary policy series

Boromeus Wanengkirtyo, Francesca Diluiso, Rebecca Mari, Jenny Chan, Ambrogio Cesa-Bianchi and Alex Haberis.

Climate change is becoming increasingly important for monetary policy as the world transitions into greener economies and climate change’s physical impacts become more prominent. This is complementary, but distinct to, examining how climate change affects financial stability risks (Carney (2015)). This series of posts highlights how climate change can affect key economic variables such as output and inflation, and thereby the conduct of monetary policy. Climate change and climate policies represent another set of economic shocks and structural changes to monitor, so that monetary policy can meet its objectives.

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Using causal inference for explainability enhancement in the financial sector

Rhea Mirchandani and Steve Blaxland

Supervisors are responsible for ensuring the safety and soundness of firms and avoiding their disorderly failure which has systemic consequences, while managing increasingly voluminous data submitted by them. To achieve this, they analyse metrics including capital, liquidity, and other risk exposures for these organisations. Sudden peaks or troughs in these metrics may indicate underlying issues or reflect erroneous reporting. Supervisors investigate these anomalies to ascertain their root causes and determine an appropriate course of action. The advent of artificial intelligence techniques, including causal inference, could serve as an evolved approach to enhancing explainability and conducting root cause analyses. In this article, we explore a graphical approach to causal inference for enhancing the explainability of key measures in the financial sector.

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With the arrival of stablecoins, is it time to pay farewell to traditional payment rails?

Aly Soliman

Stablecoins have emerged as an innovative form of money in the financial landscape. While they represent a small fraction of the global financial system, stablecoins have grown by US$30 billion in the last few months (as reported on DefiLlama). The potential effect of stablecoins on the payment industry could be substantial and merits attention.

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Nonbank lenders as global shock absorbers

David Elliott, Ralf Meisenzahl and José-Luis Peydró

Capital flows and credit growth are strongly correlated across countries. Macroeconomic evidence suggests that this ‘global financial cycle’ is largely driven by US monetary policy: expansionary policy by the Federal Reserve drives increases in lending globally, while contractionary Fed policy leads to a tightening of global financial conditions. Existing academic literature emphasises the role of banks in propagating these US monetary policy spillovers. But in recent decades, nonbank financial intermediaries have grown in importance. In a recent paper, we investigate the impact of US monetary policy on international dollar lending by nonbanks relative to banks, and show that nonbank lenders play an important role in absorbing US monetary policy shocks.

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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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