Zahid Amadxarif, James Brookes, Nicola Garbarino, Rajan Patel and Eryk Walczak
The banking reforms that followed the financial crisis of 2007-08 led to an increase in UK banking regulation from almost 400,000 to over 720,000 words. Did the increase in the length of regulation lead to an increase in complexity?
Olga Cielinska, Andreas Joseph, Ujwal Shreyas, John Tanner and Michalis Vasios
The Bank of England has now access to transaction-level data in over-the-counter derivatives (OTCD) markets which have been identified to lie at the centre of the Global Financial Crisis (GFC) 2007-2009. With tens of millions of daily transactions, these data catapult central banks and regulators into the realm of big data. In our recent Financial Stability Paper, we investigate the impact of the de-pegging in the euro-Swiss franc (EURCHF) market by the Swiss National Bank (SNB) in the morning of 15 January 2015. We reconstruct detailed trading and exposure networks between counterparties and show how these can be used to understand unprecedented intraday price movements, changing liquidity conditions and increased levels of market fragmentation over a longer period.
Despite the fact that the US dollar and the euro are the most traded currencies in terms of shares of average daily turnover (2013, BIS), my analysis suggests that foreign exchange rate (FX) market trends are usually driven by other currencies. Most notably, ‘commodity’ currencies (such as the Australian dollar and Mexican peso) and ‘carry-trade’ currencies (such as the Swiss franc and Japanese yen) tend to be the main drivers. In contrast, sterling typically does not often drive currency movements – FX strategists often consider that it is rare for sterling to be ‘the story’ amongst the speculative community in the FX market. But this is not always the case. This blog post zooms in on a selection of sub-periods to show when particular currencies, including sterling, became ‘focal’.
The financial system is complex and highly interconnected. Indeed, interactions between agents are key to its functioning. But these interconnections have the potential to turn small shocks into systemic crises. Understanding the complex nature of these interconnections is important, but can also be difficult. In this post we introduce new tools designed to analyse the financial network and help analysts build a better understanding of risks posed by interconnectedness.