LATEST ARTICLES
Dan Mikulskis
19 October 2022
When I first read Toby Nangle’s July FT piece “the coming collateral call for UK pension funds” I kind of thought, well yeah, but … this is what is happening right now, or has already happened and in a pretty orderly way. It seemed a statement of what was happening at the time, as back then many LDI programs went through the orderly process of refreshing collateral as interest rates had risen.
Professor David Aikman and Dr Richard Barwell
11 October 2022
The Bank of England’s “temporary and targeted financial stability operation” proved highly effective at stabilising the gilt market. The Bank managed to break the feedback loop that had emerged, whereby margin calls triggered sales of gilts which in turn further depressed prices, and its intervention catalysed a rapid recovery in gilt prices.
Professor Richard Berner
6 October 2022
It’s been more than seven years since Paul Tucker warned of financial stability risks from outside the banking system. And it’s been more than a year since Don Kohn similarly spoke at Jackson Hole about unfinished business in financial stability policy and regulation, especially in nonbank finance, referring to the Task Force Report he co-chaired.
Professor David Aikman and Dr Richard Barwell
21 September 2022
Climate change represents a clear and present danger to the health and wellbeing of current and future generations. It is only natural that every unelected official who sets economic policy would reflect on what they can do to help tackle this crisis, within the remit that they have been given.
Dimitri G. Demekas
1 June 2022
In the aftermath of the global financial crisis, countries established a new ‘macroprudential’ policy framework explicitly aimed at safeguarding the stability of the financial system as a whole. In parallel, they overhauled their institutional architecture to accommodate the new framework. Although the changes to the architecture differed from country to country, in most cases central banks were given additional powers.
Professor Michael Schillig
17 May 2022
Ever since the Global Financial Crisis tackling the ‘too-big-to-fail’ problem without having to rely on taxpayer-funded bailouts has been a regulatory priority. Consequently, complex resolution frameworks have been installed in all major financial jurisdictions. The experience over the last decade has shown, however, that even a sound resolution regime cannot prevent bailouts when faced with firm failure of potentially systemic proportions.
Richard Barwell
05 April 2022
Large scale asset purchase programmes by central banks have become a familiar part of the landscape in financial markets. There is a lot of attention on what assets central banks plan to buy and how much money they plan to invest, but rather less on the specific reasons why. Central banks can buy assets to pursue financial stability as well as monetary stability goals, but it would appear that many if not most market participants…
Donald Kohn
14 March 2022
In a recent letter to the Treasury Select Committee, David Aikman made a number of thoughtful suggestions for improving the transparency of the FPC. From my perspective as a former member of the FPC, I completely agree with his objective and with several of his specific suggestions, but I also see caveats around some of them. One of the ones I cannot endorse is to publish transcripts of FPC meetings after 8 years.
David Aikman
7 March 2022
This article publishes the annex to a letter sent to the Treasury Select Committee from David Aikman on the topic of FPC accountability and specifically how to quantify its financial stability objective. The goal of financial stability policy is invariably expressed in imprecise, nebulous terms, affording significant discretion to policymakers in how it should be translated into operational targets and ultimately into policy decisions.
Vítor Constâncio
1 March 2022
Several regulatory reforms stemming from the lessons of the 2008/9 Financial Crisis are still quite incomplete. That is particularly true about some instruments and activities of the so-called shadow banking sector. We saw that clearly in the severe liquidity problems in US Treasuries in March 2020. Usually, regulatory shortcomings become visible when stressful situations or crises emerge. Due to inflation, higher bond yields, FED tightening, and now the Russian invasion of…
Dr Alan Brener
25 January 2022
This article briefly considers the issues of macroprudential political legitimacy and the concept of the ‘turbulent frontier’. It goes on to consider how conduct of business regulation may mitigate some of these risks. Macroprudential policymakers are very conscious of the political legitimacy issue. Consequently, there is a risk that they may shy-away from employing macroprudential tools that may be seen as being too effective.
Richard Barwell and David Aikman
7 January 2022
Forensic scrutiny of the decisions taken by policymakers and the analysis that underpins them is an essential component of a healthy public policy regime, particularly one where power has been delegated from elected politicians to unelected officials. One of our chief concerns with the evolving macroprudential policy regime is that there is so little scrutiny of what is and what is not being said or done by policymakers.
Professor Riccardo Rebonato
17 December 2021
In the wake of the 2008-2009 financial crisis, financial institutions in general, and banks in particular, have faced a heightened regulatory scrutiny, a more muscular and intrusive style of supervision, and substantially more onerous capital and liquidity requirements. Some institutional changes, such as the enhanced role given to Central Clearing Counterparties, have revolutionized the environment in which important…
Professor David Aikman
09 December 2021
We take stock of the cumulative effect of the various changes that have been made over time to the Financial Policy Committee (FPC)’s mandate via the Chancellor of the Exchequer’s annual “remit and recommendations” letter. Our focus is on what impact has there been on the relative balance between promoting resilience and stability versus pursuing other government policy objectives, including promoting financial innovation…
Dame Kate Barker
22 November 2021
The Financial Policy Committee views the housing market through the particular lens of financial stability, as its remit largely dictates. There is a risk that the consequent policy stance will increasingly rub up against other Government policies (such as increasing the rate of home-ownership, or some interpretations of the levelling-up agenda). Many believe, though this is not uncontested, that the UK has a housing crisis.
An exchange between Charles Goodhart, Jeremy Bulow and Paul Klemperer.
12 November 2021
There has been a recent, important, paper by Bulow and Klemperer, entitled ‘Misdiagnosing Bank Capital Problems’. They argue (p.1) that “the regulatory system’s emphasis has been on more insurance rather than more capital”. Consequently, they note (p.3) that “Regulatory forbearance creates especially low capital requirements for the toxic assets that are the riskiest, encouraging insured banks to retain loans that would otherwise be sold and then, for ‘debt overhang’ reasons reject good new loans”.
Professor Rosa M. Lastra
25 October 2021
The 2007-09 global financial crisis challenged many pre-existing conceptions about systemic risk, including the ‘composition fallacy’ which assumed that if individual entities were robust and subject to adequate micro-prudential supervision, then the whole system would be resilient. This assumption proved to be misguided. Thus, in response to the need to monitor and control systemic risk, the ‛macroprudential’ approach has become one of the defining features of the post-crisis financial reform agenda (together with new resolution tools…
Donald Kohn
15 October 2021
Implementing robust macroprudential policy—addressing threats to financial stability beyond those that were the focus of safety and soundness on an institution-by-institution basis or of investor protection market-by-market—was a constructive outcome of the legislative and policy response to the global financial crisis of 2008-09. In the US, the Dodd-Frank Act of 2010 strengthened the hand of the Federal Reserve as it addressed the systemic risks in banks & bank holding companies, including those emanating from institutions that were “too big” or “too systemic” to fail.
Richard Barwell
27 September 2021
There is a problem with macroprudential policy. The two core building blocks of an economic policy regime – a model of the system and a loss function to guide policy decisions – are missing. Without a reliable model of the system, policymakers cannot forecast with any accuracy how that system will behave in the future or how it will respond to policy interventions. Without a loss function, policymakers are unable to evaluate outcomes and hence whether they are making the situation better or worse.
Sir Paul Tucker
13 September 2021
Macroprudential policy is (supposedly) the dynamic component of financial stability policy. Leading researchers recently described its purpose as being to “moderate the procyclicality of the financial system and thereby secure the resilience and stability of the financial system as a whole.”
There is a good deal to be said about that, including whether any country with an international finance centre is operating a policy anything like it (no) and whether they should if they could.