Adapting lending policies in a ‘negative-for-long’ scenario

Miguel García-Posada and Sergio Mayordomo

In February, the Bank hosted its inaugural Bank of England Agenda for Research (BEAR) conference, with the theme of ‘The Monetary Toolkit’. As part of our occasional series of Guest Posts by external presenters at Bank research events, the authors of one paper from the BEAR conference outline their findings on the effect of negative rates on Spanish banks…

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Cost versus availability of loans: which matters more for mortgagors?

Alexandra Varadi

In early 2000s, mortgage debt increased rapidly relative to income.  A key driver of this was an expansion in credit supply that made credit cheaper and more widely available. But, it is largely unknown if it is the cost of borrowing or the availability of loans that matters more for mortgagors. I examine this question in a recent paper. I find that increasing loan availability, notably at high loan to value (LTV) or high loan to income (LTI) ratios, increases household borrowing and improves credit access. The cost of borrowing matters too. It is a strong determining factor for mortgagors closer to borrowing limits, and for middle-aged borrowers. And, reducing borrowing costs in tandem with higher loan availability strongly amplifies mortgage borrowing.

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Impact of the UK QE on banks’ balance sheets

Mahmoud Fatouh

Quantitative easing (QE) involves creating new central bank reserves to fund asset purchases. Deposited in the reserves account of the seller’s bank, these reserves can have implications for banks’ asset mixes. In our paper, we use balance sheet data for 118 UK banks to empirically investigate whether the asset compositions of banks involved in the UK QE operations reacted differently in comparison to banks not involved in the initial rounds of QE between March 2009 and July 2012.

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How does international capital flow?

Michael Kumhof, Phurichai Rungcharoenkitkul and Andrej Sokol

Understanding gross capital flows is crucial for both macroeconomic and financial stability policy. However, theory is lagging behind empirical work, as much of the literature continues to rely on net capital flow models developed many decades ago. Missing from these models is an explicit tracking of the financial records underlying all goods and asset purchases, namely gross balance sheet positions, which in turn requires modelling the principal medium of exchange, bank deposits. Our new model features gross capital flows and offers a fresh perspective on important policy debates, such as the role of current accounts as indicators of financial fragility, the nature of the global saving glut, Triffin’s current account dilemma, and the synchronisation of gross capital inflows and outflows.

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With a little help from my friends: counter-cyclical capital buffers during the Covid-19 crisis

Dennis Reinhardt and Carlos van Hombeeck

Have post-crisis reforms of banking regulation made banks and lending more resilient to the shock from Covid-19 and if so by how much? This blog takes one specific example – countercyclical capital buffers (CCyBs) – and shows that policy makers in a range of countries were able to quickly release these capital requirements, enabling banks to use the cumulated buffers. This released capital may in turn potentially help banks to support lending. And it will likely benefit lending in the country releasing requirements on buffers as well as banks’ lending to other countries, leading to potential positive international spillovers (see e.g. discussion of spillovers due to macroprudential policies by the ECB and others).

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Perceiving risk wrong: what happens when markets misprice risk?

Kristina Bluwstein and Julieta Yung

Financial markets provide insightful information about the level of risk in the economy. However, sometimes market participants might be driven more by their perception rather than any fundamental changes in risk. In a recent Staff Working Paper we study the effect of changes in risk perceptions that can lead to a mispricing of risk. We find that when agents over-price risk, banks adjust their bank lending policies, which can lead to depressed investment and output. On the other hand, when agents under-price risk, excessive lending creates a ‘bad’ credit boom that can lead to a severe recession once sentiment is reversed.

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Tracking foreign capital

Christiane Kneer and Alexander Raabe

Capital flows are fickle. In the UK, the largest and most volatile component of inflows from foreign investors are so-called ‘other investment flows’ – the foreign capital which flows into banks and other financial institutions. But where do these funds ultimately go and which sectors are particularly exposed to fickle capital inflows? Do capital inflows allow domestic firms to borrow more? Or does capital from abroad ultimately finance mortgages of UK households? Some of the foreign capital could also get passed on to the financial sector or flow back abroad.

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Did Quantitative Easing boost bank lending?

Nick Butt, Rohan Churm & Michael McMahon 

When faced by a slowing economy and contracting credit what policy should be used?  There is a body of evidence to suggest that QE is an effective means to boosting asset prices, aggregate demand and inflation, but it’s far less clear whether it improves the flow of credit to the economy.  In theory, increases in deposit funding caused by such purchases might lead banks to increase lending.  In this post we explore how this might occur.  But we find no evidence that this happened in the UK.  This may reflect the fact that QE worked instead through a so called ‘portfolio rebalancing channel’ and that the resulting churn in banks’ deposit funding stopped any such channel from operating. Continue reading “Did Quantitative Easing boost bank lending?”