A public-private partnership: central banks as a funding backstop

Matthieu Chavaz, David Elliott and Win Monroe

Large-scale provision of long-term funding to banks has become a central bank tool to support credit supply during downturns. However, scholars have worried that allowing banks to rely on public funding could create moral hazard and crowd out private funding. In a recent paper, we address these concerns by showing that central bank and private funding can be complements rather than substitutes. The mere availability of central bank funding improves private wholesale funding conditions, thus supporting lending without central bank funding being used. This ‘equilibrium’ effect makes central bank funding more powerful than previously thought. Finally, the fact that central bank funding comes with strings attached can help to explain why it is an imperfect substitute for private funding.

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Same firms, different footprints: making sense of financed emissions

Lewis Holden

Over 95% of banks’ emissions are ‘financed emissions’. These are indirect emissions from households and businesses who banks lend to or invest in (banks’ asset exposures). Banks disclose these in line with regulations designed to help markets understand their exposure to climate-related risks and their impact on the climate. But emissions disclosures vary drastically between different banks with similar business models. Data quality and availability is cited as the key reason for this. In this post, I demonstrate that variations in financed emissions estimates are explained by the extent of banking activities and asset exposures rather than data quality and availability. For example, whether estimates capture a subset of loan exposures or wider banking activities such as bond underwriting.

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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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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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Do large and small banks need different prudential rules?

Austen Saunders and Matthew Willison

Banks come in different shapes and sizes. Do prudential regulations that work well for big banks work as well for small ones? To help us find out, we measure the effectiveness of some key regulatory ratios as predictors of bank failure. We do so using ‘receiver operating characteristic’ – or ‘ROC’ – analysis of simple threshold rules. When we do this, we find that we can use the ratios we test to make better predictions for large banks than for small ones. This provides evidence that an efficient set of regulations for large banks might not be as efficient for small ones.

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Montagu Norman and the transformation of the Bank

Chris Swinson

This post contributes to our occasional series of guest posts by external researchers who have used the Bank of England’s archives for their work on subjects outside traditional central banking topics.

In 1944, the Bank of England’s historian, John Clapham, looked back at the ways in which the Bank had changed since 1914 and remarked:

‘ . . . it would not be fantastic to argue that the Bank in 1944 was further . . . from 1914 than 1914 was from 1714.’

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The leverage ratio: a balance between risk and safety

Jonathan Smith

What was the root cause of the financial crisis? Ask any economist or banker and undoubtedly they will at some point mention leverage (see e.g. here, here and here). Yet when a capital requirement based on leverage — the leverage ratio requirement — was introduced, fierce criticism followed (see e.g. here and here). Drawing on the insights from a working paper, and thinking about the main criticism — that a leverage ratio requirement could cause excessive risk-taking — this seems not to have been the case.

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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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Gender diversity on Bank Board of Directors and performance

Ann Owen and Judit Temesvary

Earlier this year the Bank hosted a joint conference with the ECB and the Federal Reserve Board on Gender and Career Progression. In this guest post one of the speakers, Ann Owen, discusses her work with Judit Temesvary on how the composition of boards affects decision making and ultimately performance in the banking sector.

The representation of women on boards of US bank holding companies has increased (chart 1), but nevertheless remains well below the share of women in the overall employee base (chart 2). While this also raises questions of equity, our research asks if a lack of gender diversity on bank boards has an economic impact on their performance. We find that it does, and that this effect depends on 1) the existing level of gender diversity on the board, and 2) the level of bank capitalization. If risk-weighted capital ratios are a proxy for the quality of bank management, our findings suggest that at well-managed banks, gender diversity has a positive impact on bank performance- but only once a threshold level of diversity is reached.

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Should peer to peer lenders exist in theory?

John Lewis

Walter Heller famously said that an economist is someone who sees something in practice and wonders if it would work in theory. Economic theory says banks exist because they channel loanable funds more efficiently than individual savers and investors pairing up bilaterally. Those informational, diversification and maturity transformation considerations imply that banks should be able to out-compete peer to peer (P2P) lenders. The stylised fact that few P2P platforms have made a profit to date is in line with this theory. If so, then P2P lenders face a difficult future and they may need to become more like traditional banks in order to survive. Either way, that makes them much less disruptive than they first appear.

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