Transcript Overview - Bank of England

Overview
Chart 1 Financial market liquidity(a)
Sources: Bank of England, Bloomberg, Chicago Board Options Exchange, Debt Management Office, London Stock Exchange, Merrill
Lynch, Thomson Datastream and Bank calculations.
(a) The liquidity index shows the number of standard deviations from the mean. It is a simple unweighted average of nine liquidity
measures, normalised on the period 1999–2004. The series shown is an exponentially weighted moving average. The indicator is
more reliable after 1997, as it is based on a greater number of underlying measures.
Chart 2 Loss of market value of major UK banks’
banking book assets and their capital raising(a)
Sources: Bank of England, Bloomberg, JPMorgan Chase & Co., Merrill Lynch, UBS Delta, published accounts and Bank calculations.
(a) Based on weekly moving average prices of traded instruments as proxies for market value of similar banking book exposures. Group comprises
Banco
(b) Santander, Barclays, HSBC, Lloyds Banking Group, Nationwide, Northern Rock and RBS.
(b) First UK support package announced (8 October 2008).
(c)
Second UK package of measures announced (19 January 2009).
Table A Mark-to-market losses on selected financial
assets(a)
US$ trillions
Outstanding
amounts(b)
Equities
30.7
Corporate bonds
15.2
RMBS(d)
4.2
CLOs and CDOs(e)
1.0
CMBS
0.8
Memo: Debt securities 21.2
Total losses
–
Oct. 2008
Report(c)
Mid-March
2009
June 2009
Report
14.4
2.2
1.0
0.4
0.1
3.7
18.1
20.2
2.0
1.8
0.5
0.3
4.6
24.7
12.3
0.7
1.3
0.4
0.2
2.7
15.0
Source: Bank calculations.
(a)
Estimated loss of market value since January 2007, except for US CLOs, which are losses since May 2007. Assets cover the United Kingdom, the United States and
the euro area, except for equities, which are global.
(b)
Outstanding face values, except for equities, which are market values.
(c)
Updated to reflect new availability of outstanding amounts at time of October 2008 Report.
(d)
Includes prime, non-conforming and buy-to-let RMBS for the United Kingdom, prime and Alt-A RMBS and home equity loan ABS for the United States, as well as RMBS
for the euro area.
(e)
Includes high-grade and mezzanine home equity loan ABS CDOs for the United States.
Chart 3 Contributions to annual growth in lending
to UK non-financial companies
Source: Bank of England.
(a) Includes consolidated banking groups of Barclays, Lloyds Banking Group, HSBC, Nationwide and RBS.
(b) Twelve-month growth rate in the stock of lending.
Chart 4 Major UK banks’ and LCFIs’ leverage ratios(a)
Sources: Published accounts and Bank calculations.
(a) Assets adjusted for cash and cash items in the course of collection from banks, goodwill and intangibles
and deferred tax assets. Assets adjusted on a best-efforts basis to ensure comparability between institutions reporting under US GAAP and IFRS.
Derivatives are netted in line with US GAAP rules. Off balance sheet vehicles are included in line with IFRS rules (excluding mortgages sold to US
government-sponsored entities). Capital excludes Tier 2 instruments, preference shares and hybrids and goodwill and intangibles.
(b) Excludes Northern Rock.
Chart 5 Major UK banks’ and LCFIs’ leverage ratios(a)
Sources: Published accounts and Bank calculations.
(a) Assets adjusted for cash and cash items in the course of collection from banks, goodwill and intangibles and deferred tax assets. Assets
adjusted on a best-efforts basis to ensure comparability between institutions reporting under US GAAP and IFRS. Derivatives are netted in line
with US GAAP rules. Off balance sheet vehicles are included in line with IFRS rules (excluding mortgages sold to US government-sponsored
entities). Capital excludes Tier 2 instruments, preference shares and hybrids and goodwill and intangibles.
(b)
Excludes Northern Rock.
Chart 6 Major UK banks’ maturing funding: selected
wholesale liabilities
Sources: Bank of England, Bloomberg, Deutsche Bank and Bank calculations.
(a) Shows the full limit for the Credit Guarantee Scheme allocated across three years in equal shares.
(b) Excludes Britannia, Co-operative Bank and HSBC. Shows the date at which markets expect the residential mortgage-backed
securities to be called.
Chart 7 Long-run capital levels for UK and US banks(a)
Sources: Berger, A, Herring, R and Szegö, G (1995), ‘The role of capital in financial institutions’, Journal of Banking and Finance, pages 393–430; United Kingdom: Billings,
M and Capie, F (2007), ‘Capital in British banking 1920–1970’, Business History, Vol. 49(2), pages 139–62;
British Bankers’ Association; and published accounts.
(a) US data show equity as a percentage of assets (ratio of aggregate dollar value of bank book equity to aggregate dollar value of bank book assets). UK data show riskweighted Tier 1 capital ratios for a sample of the largest banks.
(b) National Banking Act 1863.
(c) Creation of Federal Reserve 1914.
(d) Creation of Federal Deposit Insurance Corporation 1933.
(e) Implementation of Basel risk-based capital requirements 1990.
(f) From Billings and Capie (2007).
(g) BBA and Bank calculations. This series is not on exactly the same basis as 1920–70, so comparison of levels is merely indicative.
Chart 8 Sterling liquid assets relative to total asset
holdings of UK banking sector
Sources: Bank of England and Bank calculations.
(a) Cash + Bank of England balances + money at call + eligible bills + UK gilts.
(b) Proxied by: Bank of England balances + money at call + eligible bills.
(c) Cash + Bank of England balances + eligible bills.
Chart 9 Asset prices and credit in the United
Kingdom(a)(b)
Sources: Bank of England, Global Financial Data Inc., Halifax, Nationwide, ONS
Thomson Datastream and Bank calculations.
(a) The chart shows ratios of real asset prices, household credit and private non-financial corporate (PNFC) credit to GDP, relative to their ten-year
moving averages. A positive level thus indicates above-trend growth.
(b) The dashed lines show start dates for banking crises. The chart shows the secondary banking crisis, small banks crisis and the current crisis.
Chart 10 Consolidated banking group assets relative to
GDP by nationality of ownership(a)(b)(c)
Sources: The Banker, Bankscope published by Bureau van Dijk Electronic Publishing, International Monetary Fund and Bank calculations.
(a) Total consolidated banking group assets for domestically owned banking sector only. This includes assets of domestic banks held abroad.
(b) End-2007, except for the United Kingdom, which is at end-2008.
(c) Data for all countries except the United Kingdom are from The Banker’s ranking of the world’s largest 1,000 banks by assets. This measure will
underestimate the size of banking systems that have a large proportion of banking sector assets outside of the list. UK data are from Bankscope and
include all banks and building societies.
Stronger market discipline
Market discipline should be strengthened
significantly through:
• richer, more consistent and more timely
disclosures by banks;
• making the threat of closure/wind-down credible
for all financial firms via resolution regimes;
• improved cross-border crisis management
arrangements; and
• a risk-based, pre-funded deposit insurance
system
Greater self-insurance
Financial institutions’ own resources should be the first line
of defence against financial pressures:
• higher levels of bank capital, consisting of common
equity;
• reduced reliance on rating agencies;
• bank reserves should be built up in periods of strong
earnings to absorb losses in times of economic and
financial stress;
• larger liquidity buffers, comprising government bonds;
• contingent plans for accessing capital in times of stress;
• contingent funding plans, including testing use of the
Discount Window Facility;
• contingent plans for restructuring or wind-down in the
event of failure; and
• constant net asset value MMMFs should be regulated as
banks or forced to convert to variable net asset funds
Improved management of risks arising from
interactions
The authorities need better information and means of managing
interconnections between financial institutions and between the
financial system and the real economy:
• improved information on connections between financial institutions,
including flow of funds data, and improved information on the
activities of key market participants;
• common stress tests that factor in feedback effects from financial
institutions’ response to shocks;
• capital and liquidity buffers gauged to firms’ systemic importance;
• countercyclical prudential policy in order to limit the growth of
financial imbalances;
• an international monetary system that limits the build-up of
international imbalances;
• expanded use of central counterparties for clearing financial
contracts; and
• more trading of key financial instruments on exchanges or other welldesigned and open trading platforms
Banks should not be too big or complex
The size and structure of financial systems need to
be compatible with maintaining financial stability:
• simpler, more transparent, legal structures that
are capable of being supervised and resolved;
and
• potential changes to the structure or size of
banks to ensure they can be effectively
supervised and wound up
Changes needed to increase the resilience of the
financial system
• Stronger market discipline: Market discipline should be strengthened
significantly
• Greater self-insurance: Financial institutions’ own resources should
be the first line of defence against financial pressures and need
strengthening
• Improved management of risks arising from interactions among
firms and with the real economy: The authorities need better
information and means of managing interconnections between
financial institutions and between the financial system and the real
economy
• Banks should not be too big or complex: The size and structure of
the financial system needs to be compatible with maintaining
financial stability
• Clear principles for public safety nets: Where self-protection fails, a
safety net is needed that encourages prudent behaviour and
contains risks to the public finances