Welcome to Bank Underground, the official (and slightly subversive sounding?) Bank of England staff blog.
It’s gone live this Friday, with not one but two inaugural posts touching on topics as far ranging as the impact of driverless cars on the insurance industry to the somewhat wonkish debate over how the ELB (effective lower bound) might one day constrain monetary policy and inflation.
While the BoE isn’t the first central bank to publish staff analysis in blog form– the New York Fed’s staff have been blogging on Liberty Street Economics since 2012 — it is the first that intends to use the medium as a mechanism for self-scrutiny and internal challenge.
As Andy Haldane, the Bank’s chief economist and executive director of monetary analysis and statistics told FT Alphaville this fits with the Bank’s push to make itself more open and transparent. Read more
In celebration of the Bank of England’s One Bank Research conference, the Bank has, for the first time, produced information on its balance sheet going back more than three centuries “in a user-friendly spreadsheet form and as continuous time series.”
There’s lots to digest in there, but one thing we’d like to focus on is the size of the balance sheet relative to the UK economy. Bond-buying initiated under the Bank’s quantitative easing programme boosted the relative size of the Old Lady’s holdings by a large amount relative to the recent past. Relative to the full history, however, QE looks somewhat less exceptional: Read more
Here’s a comment to note in the Bank of England’s “fundamental change” section of its One Bank Research Agenda discussion paper:
Technology is potentially transforming the landscape for money and banking. New digital or e-monies and new methods of payment and financial intermediation raise fundamental questions for financial regulation, money demand generally and central bank money in particular. For example, might central banks issue digital currencies and what would be the impact on existing payment and settlement systems? Is the cryptographic technology behind Bitcoin transformational? How will financial regulation need to adapt if new non-bank credit intermediaries emerge in scale?
Talk of official digital money, of course, is not new to FT Alphaville readers. Nor, for that matter is talk of collaborative non-bank credit unions that mint their own currencies for their own network use. Or even talk of digital money solutions that open up the central bank’s balance sheet to more people in a way that eases the safe-asset shortage. Read more
The Bank of England, in case you thought otherwise, is a thoroughly modern institution that embraces change, innovation and the hip lexicon of the fintech start-up of today.
That’s why on Wednesday, in a bid to show us just how ‘with it’ the Old Lady Threadneedle Street really is, the Bank will be launching its “One Bank Research Agenda”, focused on crowd-sourcing feedback on all its policies, structures and methodologies. Read more
We know instinctively that the Bank of England doesn’t like to be seen to be inflating stock market bubbles. That money printed for the purposes of quantitative easing might be flowing into the hands of existing equity holders (such as corporate executive management) would reinforce the wholly disagreeable notion that Britain’s central bank was actually fuelling the growth in wealth inequality.
So we should not be surprised when two Bank economists, Michael Joyce and Zhuoshi Liu, together with a colleague from Bath University, Ian Tonks, publish a piece of research stating… Read more
Did you know there’s something called the Eijffinger-Geraats central bank transparency index?
There is one. It’s in the Warsh Review. On Thursday, the Bank of England accepted the review’s recommendations in favour of more open central banking. So, it decided to release minutes of meetings alongside policy decisions as they come out, to release transcripts of those meetings eight years later — and to hold fewer meetings a year from 2016 (8 versus 12). Read more
The Bank of England’s latest quarterly bulletin, released on Monday, contains an interesting article on “the potential impact of higher interest rates on the household sector.”
A few interesting tidbits:
–Raising rates by 2 percentage points would redistribute income “from higher-income to lower-income households”
–But would probably lead to a reduction in spending, since 60 per cent of borrowers would spend less and only 10 per cent of savers would spend more. The BoE estimates that the net effect of a 1 percentage point increase in the Bank Rate would be a reduction “aggregate spending by around 0.5 per cent via a redistribution of income from borrowers to savers.” A 2 percentage point increase would lower spending by 1 per cent. (The total impact on spending could be a bit different, however, since monetary policy works in other ways besides redistributing income from net savers to net borrowers.)
–On the whole, though, UK households are (slightly) less sensitive to increases in interest rates than they were a few years ago Read more
Nonsense is a rude word. But there isn’t a milder way of describing the Bank of England’s estimates of UK labour market slack.
For three inflation reports in a row, the BoE has published a chart (below) showing its model of labour market slack with accompanying text highlighting its great importance in the monetary policy decision. “One of the key determinants of inflationary pressures in the economy is spare capacity or slack – that is the balance between demand and supply,” the November inflation report states. Read more
This guest post, from Brian Reid, chief economist of the Investment Company Institute, is a response to this speech in April by the Bank of England’s chief economist, Andrew Haldane…
As banks learn to live under tighter post-crisis constraints, central bankers around the world are worrying about financial risks that could move from banks to capital markets and perhaps trigger the next great crisis. After the experience of 2007–08, regulators rightly should be on guard for sources of weakness in the financial system.
Unfortunately, in their vigour, many regulators are seeing ‘systemic risk’—threats to the stability of the financial system—when the issue at hand is investment risk. Investment risk is a necessary part of a well-functioning economy, attracting investors willing to take known risks in hopes of gaining a reward. Systemic risk occurs when the financial system itself breaks down and is unable to perform its normal functions of matching savings to investment opportunities or facilitating economic activity. Read more
(Disclosure: the author is 27… and renting.)
From the UK Prudential Regulation Authority’s consultation paper on the loan-to-income cap… Read more
We continue to be utterly bemused by this Bank of England support facility. Here’s net lending to UK businesses and “non-bank credit providers” by FLS extension participants in Q1…
First take a trip down Gavyn Davies way where he’ll explain that macro prudential controls are nothing new, that they’re making a comeback post-Greenspan and that they are aimed at stabilising the financial cycle rather than the economic cycle (not always mutually exclusive, of course):
The case for macro prudential controls is straightforward. During economic upswings, the behaviour of the financial system can become destabilising. Banks’ balance sheets are flattered by the expanding economy and low interest rates, so credit supply expands aggressively. This fuels the boom until risk taking becomes excessive, and even a moderate rise in interest rates produces a financial crash.Direct intervention in the financial system to head off these problems early, through increased capital and liquidity standards, seems to be justified.
The following is a guest post from Chris Cook, a senior research fellow at the Institute for Security and Resilience Studies at University College London. His work is focused on a new generation of networked markets – which will, in Chris’s view, necessarily be dis-intermediated, open, decentralised and, therefore, resilient. But his approach is informed by the past, and it is there that he finds a framework for an independent Scotland to use the pound, a Plan A Plus.
The rejection by all the Westminster parties collectively of the SNP’s Plan A for a post-independence UK currency union has elicited a string of possible Plan B solutions, several of them already considered and rejected as inferior to Plan A by the SNP’s expert group of ‘wise men’.
But the current debate is ill-founded, since the UK can have no more control over who uses the £ symbol as a unit of account, than they can have control over the use of metres and kilogrammes. Read more
So just how fast will the the Bank of England raise interest rates? For clues and pointers on its latest thinking now that employment has rapidly approached the thresholds (markers, thumb rules?) of forward guidance , the Inflation Report is out. Click to get straight to it:
Inflation had returned to the 2% target… and cost pressures were subdued. Members therefore saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future. Moreover, it was likely that the headwinds to growth associated with the aftermath of the financial crisis would persist for some time yet and that inflationary pressures would remain contained…
Someone tell cable? Read more
Declaring victory by press release on Thursday, the Bank of England announced that it will re-focus its funding for lending scheme towards small businesses next year.
The current scheme expires at the end of January, and a day after the ECB floated its own funding-for-lending trial balloon, the UK central bank has said that it will carry on, but “with incentives in the scheme skewed heavily towards lending to small and medium-sized enterprises (SMEs).”
Major thanks also to the housing market boom (our emphasis): Read more
I would also wish to understand the impact of the introduction of the leverage ratio on the ability of the banks to support growth in lending to UK consumers and businesses… Read more
Confidence in the stability of the UK financial system as a whole over the next three years, charted by the Bank of England…
So, McKinsey consultants will be allowed to stalk the halls of the Bank of England, to review “strategic investment decisions, working methods, and allocation of time and resources.”
FT Alphaville already have some ideas. Read more
Not surprisingly, and as Financial Policy Committee external member Martin Taylor predicted, his comments on the housing market have got plenty of attention.
Reading his speech from Monday though, we think there was another comment in there worth keeping an eye on.
It’s clear that the safety of the banking system is an absolutely central objective, and one which the FPC has already worked on and will continue to address. But is that enough?
Barclays asks clients what they think every few months and the latest batch of answers from 799
dart throwing interns global investors show that they are ready, set and already yawning over the prospects for tapering by the Fed this week.
In the UK, however, who knows? Consensus came there none. Read more
If you laugh at this, then maybe a lot of macroprudential regulation is comical.
What to make of this startling call from UK’s Royal Institute of Chartered Surveyors, to the Bank of England’s Financial Policy Committee?: Read more
The following is not for distribution in the United States
The triennial central bank survey of foreign exchange and derivatives market activity from the BIS is out.
FX details are here and OTC IR derivatives are here. Oh, and the Bank of England’s parochial summary is here.
But if you are interested in how financial centres stack up against each other you’ll need to consult this table: (Click to enlarge)
Not a relaxation of capital requirements by the Prudential Regulation Authority on Wednesday — it’s a relaxation of the amount of liquid assets which banks have to hold (falling by some £90bn, apparently) so long as they do meet strictures on capital.
From the release: Read more
First — GDP or unemployment as the slack indicator in forward guidance about low rates?
More on why the Bank of England chose unemployment (the 7 per cent threshold, not seen being reached until 2016), from the July/August minutes of the MPC: Read more
Have a chart from HSBC which, once the key is provided, will explain sterling’s weakness, probably:
Before we get there though we should touch back on Carney’s forward guidance thing, of which there are numerous different takes. Here are three for the hell of it: Read more