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ESRC Conference on Diversity in Macro

ESRC Conference on Diversity in Macro. Discussion for session 4 24 February 2014. Oliver Burrows Financial Stability, Bank of England. UK-resident banks’ sterling lending to UK residents, % of GDP. Credit by type: purchasing existing assets vs financing activity.

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ESRC Conference on Diversity in Macro

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  1. ESRC Conference on Diversity in Macro Discussion for session 4 24 February 2014 Oliver Burrows Financial Stability, Bank of England

  2. UK-resident banks’ sterling lending to UK residents, % of GDP Credit by type: purchasing existing assets vs financing activity

  3. UK-resident banks’ sterling lending to UK residents, % of GDP Credit by type: purchasing existing assets vs financing activity

  4. The UK financial system (stripped down)

  5. The UK financial system, with cross-border inter-bank connections

  6. The UK financial system, with cross-border inter-bank connections and derivatives

  7. As a per cent of GDP in 1978

  8. As a per cent of GDP in 2012

  9. Growth of savings vs asset price inflation:insurance companies and pension funds

  10. System-wide network effects / liquidity riskMonetary circuits MPC/FPC awayday on credit

  11. System-wide network effects / liquidity riskMonetary circuits MPC/FPC awayday on credit

  12. System-wide network effects / liquidity riskMonetary circuits MPC/FPC awayday on credit

  13. System-wide network effects / liquidity riskMonetary circuits MPC/FPC awayday on credit

  14. System-wide network effects / liquidity riskMonetary circuits • If demand for household and PNFC deposits grows in line with income, then lending can be accommodated out of deposit growth… MPC/FPC awayday on credit

  15. System-wide network effects / liquidity risk • If demand for household and PNFC deposits grows in line with income, then lending can be accommodated out of deposit growth… • ...but if it grows faster, the financial network can become larger and more fragile MPC/FPC awayday on credit

  16. The balance sheets (maroon is cash, blue is debt, orange is loans, green is equity, purple is contingent claims and red is other)

  17. Leverage

  18. Maturity Transformation

  19. Network risks: concentration

  20. The UK financial system (stripped down)

  21. END

  22. Side issue 1: the size of the UK banking system Banking sectors by residency UK-resident bank assets are large by international comparison... ...in part because of the UK’s role as a financial sector.... ...which means there are lots of foreign-owned banks in the UK... ...and that UK-owned banks’ global balance sheets are large. Sources: BIS, national central banks

  23. Side issue 1: the size of the UK banking system London’s share of selected global markets UK-resident bank assets are large by international comparison... ...in part because of the UK’s role as a financial sector.... ...which means there are lots of foreign-owned banks in the UK... ...and that UK-owned banks’ global balance sheets are large. Sources: BIS, national central banks

  24. Side issue 1: the size of the UK banking system Resident banks by ownership UK-resident bank assets are large by international comparison... ...in part because of the UK’s role as a financial sector.... ...which means there are lots of foreign-owned banks in the UK... ...and that UK-owned banks’ global balance sheets are large. Sources: BIS, national central banks

  25. Side issue 1: the size of the UK banking system Global balance sheets by country of ownership UK-resident bank assets are large by international comparison... ...in part because of the UK’s role as a financial sector.... ...which means there are lots of foreign-owned banks in the UK... ...and that UK-owned banks’ global balance sheets are large. Sources: BIS, national central banks

  26. The UK financial system, with cross-border inter-bank connections

  27. UK-resident banks’ derivatives-book breakdown

  28. UK-resident banks’ derivatives-book breakdown

  29. UK-resident banks’ derivatives-book breakdown

  30. Hedging example Tailored IR + FX hedge Corporate Bank A

  31. Hedging example Tailored IR + FX hedge Corporate Bank A IR risk FX risk Bank B

  32. Hedging example Tailored IR + FX hedge Corporate Bank A +10 +10 IR risk FX risk Bank B

  33. Hedging example Tailored IR + FX hedge IR risk Corporate Bank A Bank C +10 FX risk +10 IR risk FX risk Bank B

  34. Hedging example Tailored IR + FX hedge IR risk Corporate Bank A +5 Bank C +20 FX risk +15 IR risk FX risk Bank B

  35. Hedging example Tailored IR + FX hedge IR risk Corporate Bank A +5 Bank C +20 FX risk +15 IR risk FX risk Bank B

  36. Hedging example Tailored IR + FX hedge IR risk Corporate Bank A +5 Bank C +20 FX risk +15 IR risk FX risk Bank B =

  37. Hedging example Tailored IR + FX hedge IR risk Corporate Bank A +5 Bank C +20 FX risk +15 IR risk FX risk Bank B = = 20 60 Gross MV

  38. The UK financial system base case

  39. The balance sheets (maroon is cash, blue is debt, orange is loans, green is equity, purple is contingent claims and red is other)

  40. Risk metrics

  41. Leverage

  42. Maturity Transformation

  43. Network risks: concentration

  44. Network risks: interconnections ?

  45. Network risks: interconnections ? Chart 1: Stylised map of UK-resident banks’ £3.1 trillion repo market activity as of end-2011 Chart 8: Contagious links (orange arrows) and exposed banks (red dots) From Paul Baverstock’s note on Mapping UK-resident banks’ repo activity From Tomo Ota’s note on Mapping the UK interbank system – some insights from a new dataset

  46. UK-resident deposit-takers

  47. UK-resident deposit-takers

  48. UK-resident deposit-takers

  49. Example of further work on repo • Breakdown balance sheets further by underlying collateral-type • Use this to assess the impact of - increased hair-cuts - falls in asset prices (e.g. due to a snap-back in yields) on the value of sectors’ repo books and resultant collateral shortfalls (to maintain current levels of funding via repo).

  50. Disaggregate data

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