Without public trust, central banks lose their ability to instil confidence in their policies and garner support for their independence. This article looks at one of the initiatives used by the Bank of England to boost public understanding and build public trust: developing an education programme for school‑age children to help equip them with the knowledge and tools they need to engage with the economy and the Bank of England. Building trust takes time. We must continue to monitor the gaps in public understanding, particularly for young people, and respond with appropriate tools and interventions to fill those gaps.
The financial situation of households is a key determinant of how they respond to changes in the economy and monetary policy. In our latest survey of British households, conducted in September, households’ income expectations were stable, but spending expectations fell slightly. While households’ expectations around income and their own financial situation have remained relatively positive, their expectations about the wider economy have continued to be negative. The proportion of households that spend a large share of their income servicing mortgage debt has remained low, although the proportion of households with high mortgage debt relative to their income has risen slightly.
In line with its financial stability and competition objectives the Bank of England has been, and will remain, supportive of firms wishing to become banks and enter the UK banking sector. The UK’s approach to authorising banks aims to strike an appropriate balance between ensuring robust control around the creation of new banks and not being so burdensome that it discourages suitably qualified firms from entering the market. Forty-six new banks have been authorised by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) since April 2013.
The Senior Managers and Certification Regime (SM&CR) promotes the safety and soundness of regulated financial services firms and financial stability by strengthening the link between seniority and accountability. It seeks to address the concern that some senior bankers avoided accountability during the financial crisis by claiming ignorance or hiding behind collective decision-making processes. At the core of the SM&CR is a requirement for firms covered by the regime to identify and set out the responsibilities of their most senior decision-makers, who are accountable for actions falling in their area of responsibility. To enhance governance at regulated firms, the SM&CR will be extended in full from December 2018 to cover insurers as well as banking institutions.
China’s credit boom is one of the largest and longest running ever recorded. Similar credit booms have typically preceded crises in other countries. This article provides an updated assessment of how a shock to the Chinese economy could affect the UK economy via standard transmission channels - such as trade and financial linkages. It then considers how amplification mechanisms, which could plausibly operate in the event of a particularly large shock, could further increase the impact on the UK from an economic crisis within China. We find that the effects via standard channels from a modest fall in Chinese GDP are larger than our previous estimates, primarily due to China’s increasing role in global trade. A more extreme shock which triggers amplification mechanisms - such as a larger financial market reaction - could potentially double the effects from the standard channels alone.
In August 2016 the Bank of England’s Monetary Policy Committee announced a package of measures, with mutually reinforcing elements, to support growth and return inflation to target. The measures included a Term Funding Scheme (TFS), which provided funding to participating banks and building societies at interest rates close to Bank Rate. The design of the TFS reflected its primary objective which was to reinforce the pass‑through of the August 2016 cut in Bank Rate to the interest rates faced by households and businesses, against a backdrop where Bank Rate was close to zero. The Scheme appears to have achieved its primary objective with evidence suggesting that the reduction in Bank Rate was passed on to lower lending rates on loans such as mortgages, without significant compression in lenders’ net interest margins or the supply of credit to the economy.
Global activity is a key driver of UK GDP and a bellwether of prospects. Nowcasting global GDP growth, or predicting outturns ahead of their release, is therefore a key input into the Monetary Policy Committee’s assessment of the UK economic outlook. The Bank uses a suite of models to assess the momentum in the world economy in real time. A wide range of financial market, survey-based and high-frequency output indicators are used to inform the suite. The statistical suite of global nowcasting models tends to provide an accurate assessment of global activity growth, and significantly outperformed a simple model that did not benefit from the use of high-frequency data during the financial crisis.
This article presents analysis based on the Bank’s new Sterling Money Market data collection. The vast majority of unsecured money market activity is in the overnight market that underlies the SONIA benchmark. Longer-maturity trades are scarce and have volatile daily average interest rates. We present evidence that suggests the overnight unsecured market is dynamic and competitive, and show that average rates in the overnight gilt repo market vary according to the collateral used. These observations support market-led efforts to promote the use of SONIA in sterling markets.
An exhibition in the Bank of England Museum showcases a series of drawings of the Bank of England’s Printing Works from 1957, the year after it opened for production. The Bank of England’s Printing Works at Debden, Essex, opened for business in March 1956. This was a landmark moment for the Bank. The spectacular new Production Hall accommodated the whole production line for the first time, creating a dramatic improvement in efficiency, security and working conditions compared to the old St Luke’s Printing Works at Old Street. To commemorate the move, the Bank of England commissioned artist Feliks Topolski to capture scenes of the new Printing Works in operation. This new exhibition displays Topolski’s drawings and paintings together within the Bank for the first time. As a group, they form a compelling and engaging record — not just of the process of making money, but of the staff who carried out the work, and of the building itself.
There is not a uniform view of the link between cyber risk and systemic risk: some assume a direct link whereas others query the connection. Beyond nation states, the vast majority of independent cyber attackers are currently unlikely to have the capability to systemically impact the financial sector. The financial sector has a large number of environmental features which are conducive to a systemic cyber compromise. There are no current examples of systemic cyber risk crystallising and impacting the real economy but this does not prove an absence of risk. We conclude there is a credible case to link cyber risk to systemic risk in the financial sector. Recommendations for future consideration include: further development of the intelligence-led approach to cyber security; policy responses that seek to cut through sectoral, geographical and public/private boundaries; organisations should accept that compromises are likely to happen and therefore prioritise response and recovery activities; undertake further studies to better understand the relationship between data integrity and authenticity, trust in financial services and the potential for real-economy impact via a cyber attack; a specific focus on risks associated with third-party dependencies.
The latest exhibition at The Bank of England Museum celebrates the launch of the Jane Austen £10 note this summer, with a display about the Bank of England’s literary connections. Jane Austen is one of the most beloved authors in the English language, popular around the world. The issue of the Bank’s new £10 note, featuring Austen on the reverse, presented an ideal opportunity to explore the theme of money in Austen’s work, including occasional allusions to the Bank of England itself. The exhibition also considers other literary figures associated with the Bank and its appearances as a setting, an inspiration, and - as an institution - even a kind of character in itself. This article explores some of the themes featured in an exhibition which draws together source material from several other museums, banking archives, and individuals. The exhibition itself focuses on fiction with a link to the Bank of England or the City of London, featuring more than 30 separate works - a selection of which are mentioned here.
This is the final Markets and operations Quarterly Bulletin article. Historically, the first section of this article covered developments in financial market asset prices over the preceding quarter. The second section provides an update on Sterling Monetary Framework (SMF) operations.
Hedge funds are of interest to the Bank because of: their importance for secondary market liquidity and price discovery; the significant use of leverage by some types of hedge funds; and their interconnections with a range of counterparties. Risks from and to hedge funds are therefore relevant to the Bank’s Financial Policy Committee, whose primary objective is to identify, assess, monitor and take action in relation to financial stability risks across the UK financial system. The global hedge fund industry has experienced dramatic growth since 2000, with assets under management increasing from US $250 billion to over US $3.5 trillion in 2017. Hedge funds operate a number of different strategies which dictate the markets they invest in and the leverage that they take. Hedge funds are exposed to a number of risks, including risks from using leverage and liquidity risks from investor redemptions. Hedge funds can also transmit risk to the financial system. Since the financial crisis, there have been changes which may serve to mitigate some of the risks. Hedge funds themselves have adjusted their business models, and international regulations, such as the Financial Stability Board’s derivative reforms, have limited the risks that hedge funds pose to the financial system. Hedge funds’ main source of financing is via banks’ prime brokerage services. In the wake of the financial crisis, prime brokers have adjusted their business models, for example there has been growth in the use of synthetic prime brokerage in place of traditional cash prime brokerage.
At its November 2017 meeting, the Bank of England’s Monetary Policy Committee (MPC) voted to increase Bank Rate for the first time since July 2007. The September 2017 NMG Consulting survey of households, whose results were shown to the MPC prior to their November policy decision, sheds light on the conditions of households’ balance sheets just before this change in monetary policy. Since the financial crisis, household balance sheet positions have improved significantly. The latest survey points to a slight deterioration in household balance sheet metrics over the past year, but these measures remain some way from previous peaks. For example, the share of households with a mortgage debt-servicing ratio (DSR) above 40% of income, — a DSR often associated with a higher risk of repayment difficulties — has risen over the past year. But that share remains around a historically low level. Changes in Bank Rate can influence household spending through a number of channels. To the extent that increases in Bank Rate feed through to retail interest rates, they affect household disposable income by raising payments on existing debts and deposits. The NMG survey provides evidence on this cash-flow effect and suggests that only around 2½% of households with a mortgage will need to take action (for instance by spending less or working more hours) following the rate increase. The decision to leave the European Union in the June 2016 referendum is still influencing households’ economic outlook. Views on both the general economy and households’ own finances have become slightly more pessimistic over the past twelve months. Expectations about nominal income growth, however, have reverted back to pre-referendum levels.
Climate change, and society’s responses to it, present financial risks which impact upon the Bank’s objectives. These risks arise through two primary channels: the physical effects of climate change and the impact of changes associated with the transition to a lower-carbon economy. The Bank’s response has two core elements. First, engaging with firms which face current climate-related risks, such as segments of the insurance industry. Second, enhancing the resilience of the UK financial system by supporting an orderly market transition. Forming a strategic response to the financial risks from climate change helps ensure the Bank can fulfil its mission to maintain monetary and financial stability, both now and for the long term.
Islamic banking is a growing sector of the financial services industry, but Islamic law (Shari’ah) does not permit the payment or receipt of interest. This poses a problem for central banks that only offer interest-bearing liquidity facilities to banks. This article explores the ways in which a central bank can establish a liquidity facility that is compliant with Shari’ah, along with the model we have decided to adopt for our new Shari’ah-compliant facility.
The introduction of driverless cars is likely to lead to a seismic shift in the way we travel. This article considers the potential impact they could have on the insurance market.
Public disclosure by banks and insurers of information about their financial position, risk profile and corporate governance practices is an important component of a well-functioning financial system. •Inadequate disclosures contributed to the financial crisis. As a consequence, improving banks’ and insurers’ disclosures has been a major focus of post-crisis regulation. •This article takes stock of the enhancements made to Pillar 3 disclosures since the financial crisis, and considers what progress could be made in the future.
Central bank policymakers monitor equity prices, alongside a range of other asset prices, to support both their monetary and financial stability objectives. A Dividend Discount Model (DDM) is a simple type of model that can be used to help understand past moves in equity prices. DDMs are based on the net present value relationship that relates equity prices to expected future shareholder payouts, risk-free interest rates and compensation for risk. The Bank has recently improved its DDM. The revised model accounts for share buybacks and variation over time in long-term growth expectations. It also better captures the variation in risk-free interest rates across maturities.
