Tag: macro-prudential policy

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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The decline of solvency contagion risk

Marco Bardoscia, Paolo Barucca, Adam Brinley Codd and John Hill

The failure of Lehman Brothers on 15 September 2008 sent shockwaves around the world.  But the losses at Lehman Brothers were only the start of the problem.  The price of their bonds halved, almost overnight.  Other institutions that held Lehman’s debt faced huge losses, and markets feared that those losses could trigger further failures. The good news is that our latest research suggests that risks within the UK banking system from one such contagion channel, “solvency contagion”, have declined sharply since 2008. We have developed a new model which quantifies risk from this channel, and helps us understand why it has fallen.  Regulators are using the model to monitor this particular source of risk as part of the Bank’s annual concurrent stress test exercise.

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