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Home > News and Publications > Quarterly Bulletin 2013 Q3

Quarterly Bulletin 2013 Q3

Contents of Quarterly Bulletin 2013 Q3

Each article is available as a separate pdf file; click on the appropriate title to access the relevant file. Alternatively you may download the complete issue.

Complete issue (916KB)

Topical articles
Research work published by the Bank is intended to contribute to debate, and does not necessarily reflect the views of the Bank or members of the MPC, FPC or the PRA Board.

By Paul Tucker, Deputy Governor for Financial Stability, and Simon Hall and Aashish Pattani of the Bank’s Macroprudential Strategy Division.
A vital element of recent reforms to the UK architecture of financial regulation is the creation of a macroprudential authority at the Bank of England — the Financial Policy Committee (FPC). This article explains the role and powers of the FPC in relation to risks that threaten the resilience of the UK financial system as a whole. It also describes some of the processes supporting the new committee.
Bank capital and liquidity (110KB)
By Marc Farag of the Bank’s Financial Stability Directorate, Damian Harland formerly of the PRA’s Banking Policy Department and Dan Nixon of the Bank’s Media and Publications Division.
Bank capital, and a bank’s liquidity position, are concepts that are central to understanding what banks do, the risks they take and how best those risks should be mitigated. This article provides a primer on these concepts. It can be misleading to think of capital as ‘held’ or ‘set aside’ by banks; capital is not an asset. Rather, it is a form of funding — one that can absorb losses that could otherwise threaten a bank’s solvency. Meanwhile, liquidity problems arise due to interactions between funding and the asset side of the balance sheet — when a bank does not hold sufficient cash (or assets that can easily be converted into cash) to repay depositors and other creditors. The article also explains the role of prudential regulation of banks, which seeks to ensure that banks have sufficient capital and liquidity resources to properly account for the risks that they take.

A short video explains some examples of how insufficient capital and liquidity provisions can lead to bank failures:




The rationale for the prudential regulation and supervision of insurers (60KB)
By Simon Debbage of the Bank’s Financial Stability Directorate and Stephen Dickinson of the Prudential Regulation Authority’s Regulatory Policy Department.
The financial crisis has necessitated a re-examination of the level, nature and distribution of risk across the financial system, including insurance companies. In April 2013, the Prudential Regulation Authority, as part of the Bank of England, became responsible for the prudential regulation and supervision of insurers. But the degree to which a common understanding has been reached on how insurers might affect financial stability is lower than, for example, the analogous discussion for banks. In a Workshop hosted by the Bank in July2013, the risks posed by insurers for both insurance policyholders and financial stability were discussed, together with what this might mean for how insurers should be regulated and supervised.

Recent developments in the sterling overnight money market (171KB)
By Christopher Jackson and Mathew Sim of the Bank’s Sterling Markets Division.
The sterling overnight money market plays an important role in the implementation of monetary policy. This article examines developments in this market since the peak of the financial crisis. Developments over this period include a fall in unsecured turnover and increasing use of secured transactions in overnight money markets. These trends have been driven by a number of factors, including perceptions of bank credit and liquidity risk, developments in the Bank’s operational framework, liquidity regulation and changes to banks’ business models. While some of these developments could be expected to unwind, other factors, such as the impact of new international liquidity regulation, are likely to persist in the longer term.
By Kate Stratford of the Bank’s International Economic Analysis Division. 
Global activity is a key driver of UKeconomic growth. Official estimates of world GDP and trade are only available with a lag, but more timely global indicators can give an early steer on growth. Global indicators have been useful in predicting large swings in world activity and have been particularly helpful since the onset of the financial crisis. A combination of these indicators has performed much better at tracking world GDP and trade growth since 2008 than a simple benchmark model. The global manufacturing PMIexport orders index has been the single best indicator during this period.
Senior Houblon-Norman essay: Roger E A Farmer (UCLA) 
The Natural Rate Hypothesis: an idea past its sell-by date (182KB)
By Roger E A Farmer.
Central banks throughout the world predict inflation with New Keynesian models where, after a shock, the unemployment rate returns to its so-called ‘natural rate’. That assumption is called the Natural Rate Hypothesis (NRH). In this paper Roger Farmer  reviews a body of work, published over the past decade, in which the author argues that the NRH does not hold in the data and provides an alternative paradigm that explains why it does not hold. Professor Farmer replaces the NRH with the assumption that the animal spirits of investors are a fundamental of the economy that can be modelled by a ‘belief function’. He shows how to operationalise that idea by constructing an empirical model that outperforms the New Keynesian Phillips Curve.

The views expressed in this article are those of the author and do not represent those of the Bank or the Monetary Policy Committee.
Recent economic and financial developments
Markets and operations (186KB)
This article reviews developments in financial markets between the 2013 Q2 Quarterly Bulletin and 30 August 2013, drawing on the qualitative intelligence gathered by the Bank in the course of meeting its objectives of monetary and financial stability. The article also sets out usage of the Bank’s operations since the previous Bulletin.
Monetary Policy Roundtable (33KB)
On 10July, the Bank of England and the Centre for Economic Policy Research hosted the tenth Monetary Policy Roundtable. These events provide a forum for economists to discuss key issues relevant to monetary policy in the UnitedKingdom. There were two discussion topics, on developments in the UKlabour market and on the trade-offs currently facing monetary policy makers in the UnitedKingdom.
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