Featured Product

    BoE Publishes Various Working Papers in December 2019

    December 20, 2019

    BoE published three working papers on December 20, 2019. Two of these working papers discuss the capital and liquidity interaction in banking and explore the simulation of liquidity stress in the derivatives market. The third paper explores the role of price and income elasticities of demand and the price elasticity of supply in determining the effect of the real risk-free rate on house prices. From a the perspective of a policymaker, the findings of this study add context to how an organization may plan for, and test, financial stability.

    Capital and liquidity interaction in banking. The authors study the interaction between banks’ capital and their liquidity transformation in both a theoretical and an empirical setup. They first construct a simple model to develop hypotheses which they test empirically. Using a confidential BoE dataset that includes bank-specific capital requirement changes since 1989, the authors find that banks engage in less liquidity transformation when their capital increases. This finding suggests that capital and liquidity requirements are at least to some extent substitutes. By establishing a robust causal relationship, these results can help guide the optimal joint calibration of capital and liquidity requirements and inform macro-prudential policy decisions. 

    Simulating liquidity stress in derivatives market. In this paper, the authors investigate whether margin calls on derivative counterparties could exceed their available liquid assets and, by preventing immediate payment of the calls, spread such liquidity shortfalls through the market. Using trade repository data on derivative portfolios, the authors simulate variation margin calls in a stress scenario and compare these with the liquid‑asset buffers of the institutions facing the calls. Where buffers are insufficient, it is assumed that institutions borrow additional liquidity to cover the shortfalls, but only at the last moment when payment is due. Such delays can force recipients to borrow more than otherwise and, thus, liquidity shortfalls can grow in aggregate as they spread through the network. However, the study finds an aggregate liquidity shortfall equivalent to only a small fraction of average daily cash borrowing in international repo markets. It was also found that only a small part of this aggregate shortfall could be avoided if payments were coordinated centrally. 

    UK house prices and decline in risk-free real interest rates.The paper explores the role of price and income elasticities of demand and the price elasticity of supply in determining the effect of the real risk-free rate on house prices. Real house prices in the UK have almost quadrupled over the past 40 years, substantially outpacing real income growth. Meanwhile, rental yields have been trending downward—particularly since the mid‑90s. This paper reconciles these observations by analyzing the contributions of the drivers of house prices. It shows that the rise in house prices relative to incomes between 1985 and 2018 can be more than accounted for by the substantial decline in the real risk‑free interest rate observed over the period. Changes in the risk‑free real rate are a crucial driver of changes in house prices—the model predicts that a 1% sustained increase in index‑linked gilt yields could ultimately (that is, in the long run) result in a fall in real house prices of just under 20%. From a the perspective of a policymaker, the findings of this study add context to how an organization may plan for, and test, financial stability.

     

    Related Links

    Keywords: Europe, UK, Banking, Research, Financial Stability, Basel III, Regulatory Capital, Liquidity Risk, Derivatives, Risk Free Interest Rate, BoE

    Featured Experts
    Related Articles
    News

    EBA Analyzes Impact of Unwind Mechanism of Liquidity Coverage Ratio

    EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.

    November 19, 2020 WebPage Regulatory News
    News

    ECB Outlines Views on Possible Changes to AnaCredit Rule and TLTROs

    In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.

    November 19, 2020 WebPage Regulatory News
    News

    IASB Begins First Phase of Post-Implementation Review of IFRS 9

    IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Report Examines Progress in Resolvability of Systemic Institutions

    FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.

    November 18, 2020 WebPage Regulatory News
    News

    EBA Benchmarks National Insolvency Frameworks Across EU

    EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.

    November 18, 2020 WebPage Regulatory News
    News

    FSB Reports Assess Impact of Pandemic on Financial Stability

    FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.

    November 17, 2020 WebPage Regulatory News
    News

    RBNZ Consults on Implementation of Capital Review Changes

    RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.

    November 17, 2020 WebPage Regulatory News
    News

    IASB Announces Andreas Barckow as the New Chair from July 2021

    The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.

    November 17, 2020 WebPage Regulatory News
    News

    HKMA Consults on Capital Rules for Bank Equity Investments in Funds

    HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.

    November 17, 2020 WebPage Regulatory News
    News

    ESRB Supports Extension of Macro-Prudential Measure by Swedish FSA

    ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).

    November 17, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6153