Download Plan for the presentation

ESRC Conference on Diversity in Macro
Discussion for session 4
24 February 2014
Oliver Burrows
Financial Stability, Bank of England
Credit by type: purchasing existing assets vs
financing activity
UK-resident banks’ sterling lending to UK residents, % of GDP
Other Financial Institutions
Secured Household (banks)
Unsecured Household
LBO targets
Commercial Real Estate
'core' PNFC
160%
140%
120%
100%
80%
60%
40%
20%
0%
Credit by type: purchasing existing assets vs
financing activity
UK-resident banks’ sterling lending to UK residents, % of GDP
Other Financial Institutions
Secured Household (banks)
Secured Household (BSocs)
Unsecured Household
LBO targets
Commercial Real Estate
'core' PNFC
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
The UK financial system (stripped down)
The UK financial system, with cross-border interbank connections
The UK financial system, with cross-border interbank connections and derivatives
As a per cent of GDP in 1978
As a per cent of GDP in 2012
Growth of savings vs asset price inflation:
insurance companies and pension funds
2,500
revaluation
2,000
net purchases
1,500
1,000
500
1987
1992
1997
2002
2007
2012
System-wide network effects / liquidity risk
Monetary circuits
Household Sector
Household 1
A
L
Bank sector
A
L
Household 2
A
MPC/FPC awayday on credit
L
System-wide network effects / liquidity risk
Monetary circuits
Household Sector
Household 1
A
+ deposit
Bank sector
A
+ loan
L
+ loan
L
+ deposit
Household 2
A
MPC/FPC awayday on credit
L
System-wide network effects / liquidity risk
Monetary circuits
Household Sector
Household 1
A
- deposit
+ house
Bank sector
A
L
+ loan
L
Household 2
+ loan
+ deposit
A
+ deposit
-house
MPC/FPC awayday on credit
L
System-wide network effects / liquidity risk
Monetary circuits
Household Sector
Household 1
A
L
+ loan
Bank sector
A
L
Household 2
+ loan
+ deposit
A
+ deposit
MPC/FPC awayday on credit
L
System-wide network effects / liquidity risk
Monetary circuits
Bank sector
A
+ loan
•
L
+ deposit
Household Sector
A
L
+ deposit
+ loan
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
System-wide network effects / liquidity risk
Household Sector
Insurer
A
L
+/- 2* deposit + 2 * loan
L
+/- deposit
+ annuity
+ RoW bond
Bank sector
A
A
L
Households 2:N
+ 2 * loan
+ deposit
A
L
RoW
+ RMBS
+ deposit
SIV
A
+ annuity
+/- deposit
L
+ short-term paper
+ RMBS
•
•
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
The balance sheets
(maroon is cash, blue is debt, orange is loans, green is equity,
purple is contingent claims and red is other)
Leverage
Maturity Transformation
Network risks: concentration
The UK financial system (stripped down)
END
Side issue 1: the size of the UK banking system
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.
Banking sectors by residency
Per cent of annual GDP
(b)
1000
T otal assets
800
Credit to the domestic nonbank private sector
600
400
200
U.S.
Japan
Canada
Australia
Italy
Spain
Germany
France
U.K.
Switzerland
Iceland
0
Ireland
•
•
•
•
Sources: BIS, national central banks
Side issue 1: the size of the UK banking system
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.
London’s share of selected global markets
global share, %
50
45
40
35
30
25
20
15
10
5
0
Cross-border bank lending
FX turnover
H. Kong
Singap.
Germany
France
Japan
US
OT C derivative turnover
GDP
UK
•
•
•
•
Sources: BIS, national central banks
Side issue 1: the size of the UK banking system
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.
Resident banks by ownership
Per cent of annual GDP
1,000
Foreign-owned
800
Domestic-owned
600
400
200
US
Italy
UK
Spain
Euro Area
Germany
France
Netherlands
0
Iceland
•
•
•
•
Sources: BIS, national central banks
Side issue 1: the size of the UK banking system
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.
Global balance sheets by country of ownership
Per cent of annual GDP
1,000
T otal bank assets
800
Largest three banks' assets
600
Largest five banks' assets
400
200
U.S.
Italy
Canada
Australia
Japan
Spain
Germany
France
Ireland
U.K
Iceland
0
Switzerland
•
•
•
•
Sources: BIS, national central banks
The UK financial system, with cross-border interbank connections
UK-resident banks’ derivatives-book breakdown
Commodity & Equity
Credit
FX
Interest Rate
Sterling
Euro
USD & Other
£bn
6,000
5,000
4,000
3,000
2,000
1,000
0
Liabilities
Assets
Liabilities
Assets
27
UK-resident banks’ derivatives-book breakdown
£bn
Total Derivatives
UK Resident:
Liabilities Assets
5,383
5,414
UK banks
949
955
ICPFs
129
133
Other UK financial corporations
257
187
UK PNFCs
29
47
1,296
1,332
Foreign-resident offices
548
540
Foreign-resident Banks
1,498
1,585
Hedge Funds
243
241
Other foreign-residents
408
368
CCP - DTCC
26
26
CCP - Swapclear
Foreign-Resident:
28
UK-resident banks’ derivatives-book breakdown
£bn
Total Derivatives
UK Resident:
Liabilities Assets
5,383
5,414
UK banks
949
955
ICPFs
129
133
Other UK financial corporations
257
187
UK PNFCs
29
47
1,296
1,332
Foreign-resident offices
548
540
Foreign-resident Banks
1,498
1,585
Hedge Funds
243
241
Other foreign-residents
408
368
CCP - DTCC
26
26
CCP - Swapclear
Foreign-Resident:
29
Hedging example
Tailored IR +
FX hedge
Bank A
Corporate
Hedging example
Tailored IR +
FX hedge
Corporate
Bank A
IR risk
FX risk
Bank B
Hedging example
Tailored IR +
FX hedge
Corporate
Bank A
+10
IR risk
+10
Bank B
FX risk
Hedging example
Tailored IR +
FX hedge
IR risk
Corporate
Bank A
Bank C
+10
FX risk
IR risk
+10
Bank B
FX risk
Hedging example
Tailored IR +
FX hedge
IR risk
Bank C
Corporate
Bank A
+5
+20
FX risk
IR risk
+15
Bank B
FX risk
Hedging example
Tailored IR +
FX hedge
IR risk
Bank C
Corporate
Bank A
+5
+20
FX risk
IR risk
+15
FX risk
Bank B
Bank A
A
20
L
5
15
Bank B
A
15
L
Bank C
A
5
L
Corporate
A
L
20
Hedging example
Tailored IR +
FX hedge
IR risk
Bank C
Corporate
Bank A
+5
+20
FX risk
IR risk
+15
FX risk
Bank B
Bank A
A
20
L
5
15
Bank B
A
15
L
Bank C
A
5
L
Corporate
A
L
20
=
Banks
A
40
Corporate
A
L
L
20
20
Hedging example
Tailored IR +
FX hedge
IR risk
Bank C
Corporate
Bank A
+5
+20
FX risk
IR risk
+15
FX risk
Bank B
Bank A
A
20
L
Bank B
A
15
L
Bank C
A
5
L
Corporate
A
L
20
=
Gross MV
=
Banks
A
40
Corporate
A
L
L
20
20
5
15
60
20
The UK financial system base case
The balance sheets
(maroon is cash, blue is debt, orange is loans, green is equity,
purple is contingent claims and red is other)
Risk metrics
Leverage
Maturity Transformation
Network risks: concentration
Network risks: interconnections
?
Network risks: interconnections
Chart 8: Contagious links (orange arrows) and
exposed banks (red dots)
Chart 1: Stylised map of UK-resident banks’ £3.1
trillion repo market activity as of end-2011
?
From Paul Baverstock’s note on Mapping UKresident banks’ repo activity
From Tomo Ota’s note on Mapping the UK
interbank system – some insights from a new
dataset
UK-resident deposit-takers
£bn
Total
intra-group
BoE
UK-resident banks
UK-resident non-banks
o/w CCP
o/w other*
UK-PNFC and sovereign
Non-residents:
Banks
Non-banks
o/w CCP
o/w MMF's
o/w Foreign CB's
o/w other*
Reverse Repo
1142
191
0
68
245
148
97
3
635
409
226
16
0
0
210
Repo
960
191
13
62
156
116
40
9
531
345
186
10
54
8
114
£bn
Other Non-Banks*
o/w Hedge Funds
o/w Sovereigns
o/w Corporates
o/w ICPF's
o/w Other AMs
o/w Residual**
Reverse Repo
308
74
Repo
154
37
23
10
11
6
67
234
51
UK-resident deposit-takers
£bn
Total
intra-group
BoE
UK-resident banks
UK-resident non-banks
o/w CCP
o/w other*
UK-PNFC and sovereign
Non-residents:
Banks
Non-banks
o/w CCP
o/w MMF's
o/w Foreign CB's
o/w other*
Reverse Repo
1142
191
0
68
245
148
97
3
635
409
226
16
0
0
210
Repo
960
191
13
62
156
116
40
9
531
345
186
10
54
8
114
£bn
Other Non-Banks*
o/w Hedge Funds
o/w Sovereigns
o/w Corporates
o/w ICPF's
o/w Other AMs
o/w Residual**
Reverse Repo
308
74
Repo
154
37
23
10
11
6
67
234
52
UK-resident deposit-takers
£bn
Total
intra-group
BoE
UK-resident banks
UK-resident non-banks
o/w CCP
o/w other*
UK-PNFC and sovereign
Non-residents:
Banks
Non-banks
o/w CCP
o/w MMF's
o/w Foreign CB's
o/w other*
Reverse Repo
1142
191
0
68
245
148
97
3
635
409
226
16
0
0
210
Repo
960
191
13
62
156
116
40
9
531
345
186
10
54
8
114
£bn
Other Non-Banks*
o/w Hedge Funds
o/w Sovereigns
o/w Corporates
o/w ICPF's
o/w Other AMs
o/w Residual**
Reverse Repo
308
74
Repo
154
37
23
10
11
6
67
234
53
Example of further work on repo
• Breakdown balance sheets further by underlying collateraltype
• 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).
Disaggregate data
Breakdown of the UK
corporate sector
UK Private Sector
4,794,105
Companies
1,341,115
Partnerships
448,020
employment
turnover
investment
employment
turnover
investment
0.0
0.2
0.4
0.6
0.8
1.0
0.4
0.6
0.8
1.0
0.0
0.2
0.4
0.4
0.6
0.6
0.8
employment
turnover
investment
0.0
0.2
0.4
0.6
0.8
Private
1,334,258
1.0
0.0
Public
467
employment
employment
turnover
turnover
0.4
0.2
Large
6,390
employment
turnover
investment
0.2
employment
turnover
investment
0.0
Small and Medium
1,334,725
0.0
Sole Proprietors
3,004,970
0.6
0.8
1.0
0.0
0.2
0.4
0.2
0.4
0.6
0.8
1.0
Private
5,705
0.6
0.8
Public
685
employment
employment
turnover
turnover
1.0
0.0
0.2
0.4
Non-Bond Issuers
5669
0.6
0.8
1.0
0.0
Bond Issuers
36
employment
employment
0.0
0.2
0.4
0.6
0.8
1.0
0.4
0.6
0.8
Bond Issuers
175
1.0
Non-Bond Issuers
510
employment
employment
turnover
turnover
0.2
turnover
turnover
0.0
0.2
0.4
0.6
0.8
1.0
0.0
0.2
0.4
0.6
0.8
1.0
0.0
0.2
0.8
1.0
1.0
Data issues
Back to today - Data quality (green=good ONS data,
amber=made-up ONS data, and white=no ONS data)
Divisional coverage of the financial system
Key takeaways and questions
• In principle, the maps are very useful for understanding and
assessing risk across the system
• has thrown up some interesting issues – such as differences within the
PNFC sector (public/private; PE-owned; property/non-property)
• has been used in PE and CRE analysis – see QBs if interested
• is being used in work on cumulative impact of regulation
• But very serious data issues
• quality of much of the ONS data is very poor – care needed interpreting
PNFC and OFI accounts in particular
• coverage is too narrow – work ongoing with ONS to improve
• and very little data on interconnections between sectors (“who-towhom” data)