Diversity in UK banks – the long journey continues

Joel Suss, Marilena Angeli and Peter Eckley

Diversity has risen up the agendas of businesses, regulators, and governments in recent years. How diverse are the upper echelons of banks and building societies in the UK? We answer this question in a recent paper using a unique data on the most senior employees for the last 20 years.

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Sluggish deposit rates and the effects of monetary policy

Alberto Polo

Could the slow response of deposit rates to changes in monetary policy strengthen its impact on the economy? At first look, the answer would probably be ‘no’. Imperfect pass-through of policy to deposit rates means that the rates on a portion of assets in the economy respond by less than they could. But what if this meant that the rates on other assets responded by more? In a recent paper, I develop a model that is consistent with a number of features of banks’ assets and liabilities and find that monetary policy has a larger effect on economic activity and inflation if the pass-through of policy to deposit rates is partial.

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Guest post: Why regulators should focus on bankers’ incentives

Charles Goodhart

Last autumn, Charles Goodhart gave a special lecture at the Bank.  In this guest post he argues that regulators should focus more on the incentives of individual decision makers.

The incentive for those in any institution is to justify and extol the virtues of the decisions that they have taken.   Criticisms of current regulatory measures are more likely to come from outsiders, perhaps especially from academics, (with tenure), who can play the fool to the regulatory king.   I offer some thoughts here from that perspective.  I contend that the regulatory failures that led to the crisis and the shortcomings of regulation since are largely derived from a failure to identify the persons responsible for bad decisions.   Banks cannot take decisions, exhibit behaviour, or have feelings – but individuals can.  The solution lies in reforming  the governance set-up  and realigning incentives faced by banks’ management.

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What happened to competition between UK deposit takers over the past 25 years?

Sebastian J A de-Ramon and Michael Straughan.

The landscape for competition between UK deposit takers (retail banks and building societies) was reset in the 1980s with the removal of the bank “corset” (1981), the Big Bang reforms and the Building Societies Act (both in 1986). These reforms facilitated entry and expansion of different business models into markets that had previously been off-limits. What followed was a significant restructuring of the deposit taking sector in the UK. In a new paper, we show that competition between UK deposit takers weakened substantially in the years leading up to the financial crisis.

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Bitesize: Banks’ growing capital surplus since the crisis

Peter Eckley and Liam Kirwin.

In the world of bank capital regulation, minimum requirements grab all the headlines. But actual capital resources are what absorb unexpected losses.  Banks and building societies typically hold resources substantially in excess of requirements – called the capital surplus. One reason is to avoid breaching the minimum due to unforeseen shocks. Another is to build resources in anticipation of requirements arising from growth or regulatory change. The chart shows how capital surpluses (on total requirements including Pillars 1 and 2, and all types of capital) have varied in recent decades. It is based on historical data from regulatory returns.

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Shocks Happen: Are Retail Deposits the Answer?

John Hill and Jeremy Chiu.

In September 2007, Northern Rock became the victim of the UK’s first bank-run since 1878. Northern Rock had lost access to the wholesale markets on which it relied for its funding.  Bank funding has remained a key issue for policymakers in the wake of the crisis, and has been the subject of new rules designed to promote funding resilience.   Today, banks are more reliant on retail deposits for their funding, but this could present other issues for the dynamics of retail deposits that are less well understood.  In this post, we introduce some of our own research that shows that banks are unable to raise deposits quickly in order to plug funding gaps opened up by adverse shocks.

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When banks say ‘No’: how the credit crunch lowered UK productivity

Jeremy Franklin, May Rostom & Gregory Thwaites.

In the aftermath of the 2007/8 financial crisis bank lending to firms fell back sharply and investment plummeted.  And at the same time, growth in labour productivity and wages fell, with neither fully recovering since (Chart 1).  Are these facts causally linked, and if so, in which direction?  Did firms stop borrowing because they had no good uses for the money, or did banks cut lending, making it harder for firms to do business?  In a new paper, we find a way to distinguish between the two.  We measure how changes in the amount firms were able to borrow affected how much they invested, how much their workers produced and earned, and how likely firms were to survive.

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Banks are not intermediaries of loanable funds – and why this matters

Zoltan Jakab & Michael Kumhof

Problems in the banking sector played a critical role in triggering and prolonging the Great Recession. Unfortunately, standard macroeconomic models were initially not ready to provide much support in thinking about the role of banks. This has now changed, with many new papers that study the interaction of banks with the macroeconomy. However, as emphasized by Adrian, Colla and Shin (2013), there are many unresolved issues. In our new paper “Banks Are Not Intermediaries of Loanable Funds – And Why This Matters” (Jakab and Kumhof (2015)), we argue that many of them can be traced to the fact that virtually all of the newly developed models are based on the intermediation of loanable funds (ILF) theory of banking. Continue reading “Banks are not intermediaries of loanable funds – and why this matters”