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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‘No one length fits all’ – haircuts in the repo market

Miruna-Daniela Ivan, Joshua Lillis, Eduardo Maqui and Carlos Cañon Salazar

Funding markets are crucial for healthy and active financial institutions, and consequently for everyone in the economy. The repurchase agreement (repo) market plays a key role in bank and non-bank financial institutions’ (NBFIs’) daily activities by facilitating short-term financing and risk hedging. In this post, we use novel Securities Financing Transaction Regulation (SFTR) data to highlight new, and corroborate previous, stylised repo haircut facts.

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The link between mortgage debt servicing burdens and arrears: is there a critical threshold?

Nuri Khayal and Jonathan Loke

Many households in the UK have seen their mortgage payments go up since mortgage rates started to increase in 2022. In the current environment of higher rates, the question of how much a household can comfortably spend on their mortgage payments before getting into financial distress is particularly relevant. This blog shows that households which spend a larger share of their income on mortgage payments are at a higher risk of being in arrears. But in contrast to pre-existing work on the subject, we do not find evidence of a critical threshold after which the risk increases much more sharply. These findings imply that changes in the indebtedness across the whole mortgagor population, not just the tail, matter for financial stability.

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Three facts about the rising number of UK business exits

Jelle Barkema, Maren Froemel and Sophie Piton

Record-high firm exits make headlines, but who are the firms going out of business? This post documents three facts about the rising number of corporations dissolving using granular data from Companies House and the Insolvency Service. We show that the increase in dissolutions that have already materialised reflected a catch-up following Covid and was concentrated among firms started during Covid. While these firms were small and had a limited macroeconomic impact, firms currently in the process of dissolving are larger. Their exit might therefore be more material from a macroeconomic perspective. We also discuss how the recent economic environment could contribute to further rises in dissolutions and particularly insolvencies in the future that could have more material macroeconomic impact.

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Stressed or in distress? How best to measure corporate vulnerability

Alice Crundwell, William Bennett and Will Banks

Accurate measures of the number of firms at risk of failure are becoming increasingly important for policymakers, as corporate insolvencies are continuing to rise and interest rates are expected to remain higher than over much of the past decade. The share of vulnerable firms is often assessed by looking at debt-servicing ability via the interest coverage ratio (ICR) – companies’ earnings before tax and interest divided by their interest expense. But several other factors are also associated with a higher probability of firm failure. This post will explore the merits of looking at a combination of financial indicators of corporate distress to better measure the share of firms at risk of failure and the associated level of debt at risk.

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Bias, fairness, and other ethical dimensions in artificial intelligence

Kathleen Blake

Artificial intelligence (AI) is an increasingly important feature of the financial system with firms expecting the use of AI and machine learning to increase by 3.5 times over the next three years. The impact of bias, fairness, and other ethical considerations are principally associated with conduct and consumer protection. But as set out in DP5/22, AI may create or amplify financial stability and monetary stability risks. I argue that biased data or unethical algorithms could exacerbate financial stability risks, as well as conduct risks.

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The transmission of macroprudential policy in the tails

Álvaro Fernández-Gallardo, Simon Lloyd and Ed Manuel

Since the 2007–09 Global Financial Crisis, central banks have developed a range of macroprudential policies (‘macropru’) to address fault lines in the financial system. A key aim of macropru is to reduce ‘left-tail risks‘ – ie, minimise the probability and severity of future economic crises. However, building this resilience could influence other parts of the GDP-growth distribution and so may not always be costless. In our Working Paper, we gauge these potential costs and benefits by estimating the effects of macropru on the entire GDP-growth distribution, and explore its transmission channels. We find that macropru is effective at reducing the variance of GDP growth, and that it does so by reducing the probability and severity of excessive credit booms.

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Lifting the lid on a liquidity crisis

Lydia Henning, Simon Jurkatis, Manesh Powar and Gian Valentini

Autumn 2022 saw some of the largest intraday moves in gilt yields in history. It was then that jargon normally confined to financial stability papers entered into mainstream commentary – ‘LDI’, ‘doom loop’, ‘deleveraging’. And it was then that the Bank of England engaged in an unprecedented financial stability motivated government bond market intervention. What happened and why has been set out in detail in official Bank communications. This article instead hovers a magnifying glass over transaction-level regulatory data on derivative, repurchase agreements (repo) and bond markets to quantify liability-driven investment (LDI) and pension fund behaviour and enrich our understanding of these exceptional few weeks of stress.

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Corporate insolvencies reaching record highs: a look under the hood

Jelle Barkema

How concerned should policymakers be as UK business insolvencies have soared to 60-year highs? This phenomenon has been extensively covered in the media; with media outlets attributing the record-breaking numbers to a ‘perfect storm’ of energy prices, supply-chain disruptions and the cost of living squeeze. Insolvencies are a popular measure of economic distress because they have implications for both the financial system and the real economy. For the financial system, an insolvency generally means creditors will incur losses. Insolvent firms will have to cease trading and lay off workers, which affects the real economy. In this blog post, I assess the evolution of corporate insolvencies over time, including the post-Covid surge to understand what these record numbers mean for the UK economy.

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What does the rise in the inflation mean for financial stability?

Kristina Bluwstein, Sudipto Karmakar and David Aikman

Introduction

Inflation reached almost 9% in July 2022, its highest reading since the early 1990s. A large proportion of the working age population will never have experienced such price increases, or the prospect of higher interest rates to bring inflation back under control. In recent years, many commentators have been concerned about risks to financial stability from the prolonged period of low rates, including the possibility of financial institutions searching for yield by taking on riskier debt structures. But what about the opposite case? What financial stability risks do high inflation and increasing interest rates pose?

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