|Research and analysis
||Research work published by the Bank is intended to contribute to debate, and does not necessarily reflect the views of the Bank or of MPC members. |
Understanding and modelling swap spreads
(by Fabio Cortes of the Bank's Foreign Exchange Division).
Interest rate swap agreements were developed for the transfer of interest rate risk. Volumes have grown rapidly in recent years and now the swap market not only fulfils this purpose, but is also used to extract information about market expectations and to provide benchmark rates against which to compare returns on fixed-income securities such as corporate and government bonds. This article explains what swaps are; what information might be extracted from them; and what appear to have been the main drivers of swap spreads in recent years. Some quantitative relationships are explored using ten-year swap spreads in the United States and the United Kingdom as examples.
The distribution of unsecured debt in the United Kingdom: survey evidence (116k)
(by Merxe Tudela and Garry Young of the Bank's Domestic Finance Division).
The Bank recently commissioned a survey asking people about their unsecured borrowing and whether it is a burden to them. This article summarises the main results. As of October, 34% of respondents had some form of unsecured debt, over and above that which they expected to pay off at the end of the month, and the average amount owed was around £3,500. Some people owed much more than the average: 26% of those with some debt owed more than £5,000. Around 10% of borrowers said that their unsecured debt was a heavy burden to their households, similar to earlier surveys. For purposes of comparison over time, the questions were based on those used in earlier surveys. The evidence suggests that the proportion of people with some debt has not changed since at least the late 1980s. While the average amount borrowed by debtors has increased, since 2000 the extra borrowing has been concentrated among those with household incomes above £17,500. Despite the rise in average debt levels in recent years, the proportion of people who consider their debt not to be a burden has increased. But, the amount borrowed and the share of unsecured debt accounted for by those who consider it a heavy burden have both increased.
Innovations in retail payments: e-payments
(by Helen Allen of the Bank's Market Infrastructure Division).
Ways to make retail payments using the internet and mobile phones are proliferating. Some are offering new access routes to existing payment means, others use different means to transfer value, but all attempt to provide greater convenience and choice in payment services. Few, however, have reached critical mass and none has displaced existing payment methods. Nevertheless, the prospect that these new services could be widely used raises some policy questions. For example, central banks are interested in any potential effects on financial stability and, in the longer term, in whether such innovation might have monetary policy implications. For these reasons, central banks monitor the evolution of the market, even though any such impacts may be a long way off. Moreover, it may well be that the system-wide risks will be relatively small even if e-payment usage becomes significant.
The macroeconomic impact of revitalising the Japanese banking sector (185k)
(by Katie Farrant and Bojan Markovic of the Bank's International Economic Analysis Division and Gabriel Sterne of the Bank's Monetary Assessment and Strategy Division).
In this article we assess the possible macroeconomic effects of proposals to revitalise the banking system in Japan. Our analysis is supported by a theoretical model that incorporates various interactions between the banking sector and the wider economy. In the long run, a planned reduction in the ratio of non-performing loans (NPLs) to total loans and the intended fall in the risk premium faced by Japanese banks may help to boost the level of investment. Achieving a revitalised banking system cannot be done costlessly, however, and our model suggests that there may be some negative short-run macroeconomic impact as credit growth is reduced.
||Financial stability and the United Kingdom's external balance sheet (170k) |
(by Mhairi Burnett of the Bank's Monetary and Financial Statistics Division and Mark Manning of the Bank's Domestic Finance Division).
This article, one in an annual series, examines the United Kingdom's financial transactions with the rest of the world, paying particular attention to the implications for financial stability. In recent years, the United Kingdom's stocks of external assets and liabilities have increased considerably, and each now exceeds £3.5 trillion. This is three times UK GDP and around a third of the United Kingdom's total financial assets. The monetary financial institutions (MFI) sector accounts for approximately half of the external balance sheet, reflecting both the international orientation of UK-owned banks and the cross-border activities of foreign-owned UK-resident banks. The article begins with a conceptual discussion of how external positions might affect financial stability, before turning to recent developments. The principal focus is on the MFI and private non-financial corporate (PNFC) sectors, in which the largest external positions exist. The discussion draws upon data from a variety of sources, including the Pink Book, sectoral financial balance sheets, the Bank of England and the IMF.