Flow of funds and the UK real economy

Laura Achiro, Gerry Gunner and Neha Bora

A flow of funds framework is a way of understanding and tracking the movement of financial assets between different sectors of the economy. This blog specifically analyses UK corporate and household sectoral flows from 2000 to the present and highlights how this framework can reveal useful trends and signals for policymakers about the real economy. For instance, the accumulation of debt in the pre-global financial crisis (GFC) era by households and corporates was a warning signal that indicated several potential risks and vulnerabilities in the economy, including overleveraging and asset price inflation.

Continue reading →

Measuring capital at risk in the UK banking sector

Giovanni Covi, James Brookes and Charumathi Raja

How banks are exposed to the financial system and real-economy determines concentration risk and interconnectedness in the banking sector, and in turn, the severity of tail-events. We construct the Global Network data set, a comprehensive exposure-based data set of the UK banking sector, updated quarterly, covering roughly 90% of total assets. We use it to study the UK banking system’s microstructure and estimate the likelihood and severity of tail-events. We find that during the Covid-19 (Covid) pandemic, the likelihood and severity of tail-events in the UK banking sector increased. The probability of an extreme stress event with losses above £91 billion (roughly 19% of CET1 capital) increased from 1% before the pandemic to 4.1% in 2020 Q2, subsequently falling to 1.7% in 2021 Q4.

Continue reading →