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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. - PowerPoint PPT Presentation
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Oliver Burrows
Financial Stability, Bank of England
Discussion for session 4
24 February 2014
ESRC Conference on Diversity in Macro
Credit by type: purchasing existing assets vs financing activity
0%
20%
40%
60%
80%
100%
120%
140%
160%Other Financial InstitutionsSecured Household (banks)Unsecured HouseholdLBO targetsCommercial Real Estate'core' PNFC
UK-resident banks’ sterling lending to UK residents, % of GDP
Credit by type: purchasing existing assets vs financing activity
UK-resident banks’ sterling lending to UK residents, % of GDP
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%Other Financial InstitutionsSecured Household (banks)Secured Household (BSocs)Unsecured HouseholdLBO targetsCommercial Real Estate'core' PNFC
The UK financial system (stripped down)
The UK financial system, with cross-border inter-bank connections
The UK financial system, with cross-border inter-bank 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
-
500
1,000
1,500
2,000
2,500
1987 1992 1997 2002 2007 2012
revaluation
net purchases
MPC/FPC awayday on credit
A L
A L
A L
Household Sector
Household 1
Bank sector
Household 2
System-wide network effects / liquidity risk
Monetary circuits
MPC/FPC awayday on credit
A L
+ deposit + loan
A L
+ loan + depositA L
Household 2
Household 1
Household Sector
Bank sector
System-wide network effects / liquidity risk
Monetary circuits
MPC/FPC awayday on credit
A L
- deposit + loan+ house
A L
+ loan + deposit A L
+ deposit-house
Household Sector
Household 1
Bank sector
Household 2
System-wide network effects / liquidity risk
Monetary circuits
MPC/FPC awayday on credit
A L
+ loan
A L
+ loan + deposit A L
+ deposit
Household Sector
Household 1
Bank sector
Household 2
System-wide network effects / liquidity risk
Monetary 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
A L A L
+ loan + deposit + deposit + loan
Household SectorBank sector
System-wide network effects / liquidity risk
Monetary circuits
• 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
System-wide network effects / liquidity risk
A L A L
+/- 2* deposit + 2 * loan +/- deposit + annuity
+ RoW bond
A L
+ 2 * loan + deposit A L+ RMBS
+ deposit
+ annuity A L
+/- deposit + short-term paper
+ RMBS
Household Sector
Insurer
Bank sector
Households 2:N
SIV
RoW
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.
0
200
400
600
800
1000
Irel
and
Icel
and
Switz
erla
nd
U.K
.
Fran
ce
Ger
man
y
Spai
n
Ital
y
Aus
tral
ia
Can
ada
Japa
n
U.S
.
Total assets
Credit to the domestic non-bank private sector
Per cent of annual GDP
(b)
Banking sectors by residency
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
0510
1520253035
404550
UK US
Japa
n
Fran
ce
Ger
man
y
Sing
ap.
H. K
ong
Cross-border bank lending
FX turnover
OTC derivative turnover
GDP
global share, %
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
0
200
400
600
800
1,000
Icel
and
Net
herl
ands
Fran
ce
Ger
man
y
Eur
o A
rea
Spai
n
UK
Ital
y US
Foreign-owned
Domestic-owned
Per cent of annual GDP
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
0
200
400
600
800
1,000
Switz
erla
nd
Icel
and
U.K
Irel
and
Fran
ce
Ger
man
y
Spai
n
Japa
n
Aus
tral
ia
Can
ada
Ital
y
U.S
.
Total bank assets
Largest three banks' assets
Largest five banks' assets
Per cent of annual GDP
Sources: BIS, national central banks
The UK financial system, with cross-border inter-bank connections
UK-resident banks’ derivatives-book breakdown
27
0
1,000
2,000
3,000
4,000
5,000
6,000
Liabilities Assets Liabilities Assets
Commodity & Equity SterlingCredit EuroFX USD & OtherInterest Rate
£bn
UK-resident banks’ derivatives-book breakdown
28
£bn Liabilities AssetsTotal Derivatives 5,383 5,414UK Resident:
UK banks 949 955
ICPFs 129 133
Other UK financial corporations 257 187
UK PNFCs 29 47
CCP - Swapclear 1,296 1,332
Foreign-Resident:
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
UK-resident banks’ derivatives-book breakdown
29
£bn Liabilities AssetsTotal Derivatives 5,383 5,414UK Resident:
UK banks 949 955
ICPFs 129 133
Other UK financial corporations 257 187
UK PNFCs 29 47
CCP - Swapclear 1,296 1,332
Foreign-Resident:
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
Bank A Corporate
Hedging exampleTailored IR + FX hedge
Bank A Corporate
Bank B
FX risk
Tailored IR + FX hedge
IR risk
Hedging example
Bank A Corporate
Bank B
FX riskIR risk
+10
+10
Hedging exampleTailored IR + FX hedge
Bank A Corporate
Bank B
FX riskIR risk
+10
+10
Bank C
IR risk
FX risk
Hedging exampleTailored IR + FX hedge
Bank A Corporate
Bank B
FX riskIR risk
+20
+15
Bank C
IR risk
FX risk
+5
Hedging exampleTailored IR + FX hedge
Bank A Corporate
Bank B
FX riskIR risk
+20
+15
Bank C
IR risk
FX risk
+5
Bank A Bank B Bank C CorporateA L A L A L A L20 15 5 20
515
Hedging exampleTailored IR + FX hedge
Bank A Corporate
Bank B
FX riskIR risk
+20
+15
Bank C
IR risk
FX risk
+5
Bank A Bank B Bank C CorporateA L A L A L A L20 15 5 20
515
Banks CorporateA L A L
40 20 20=
Hedging exampleTailored IR + FX hedge
Bank A Corporate
Bank B
FX riskIR risk
+20
+15
Bank C
IR risk
FX risk
+5
Bank A Bank B Bank C CorporateA L A L A L A L20 15 5 20
515
Banks CorporateA L A L
40 20 20=
Gross MV = 60 20
Hedging exampleTailored IR + FX hedge
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 1: Stylised map of UK-resident banks’ £3.1 trillion repo market activity as of end-2011
From Paul Baverstock’s note on Mapping UK-resident banks’ repo activity
Chart 8: Contagious links (orange arrows) and exposed banks (red dots)
From Tomo Ota’s note on Mapping the UK interbank system – some insights from a new dataset
UK-resident deposit-takers
51
£bn Reverse Repo RepoTotal 1142 960
intra-group 191 191BoE 0 13UK-resident banks 68 62UK-resident non-banks 245 156
o/w CCP 148 116o/w other* 97 40
UK-PNFC and sovereign 3 9Non-residents: 635 531
Banks 409 345Non-banks 226 186o/w CCP 16 10o/w MMF's 0 54o/w Foreign CB's 0 8o/w other* 210 114
£bn Reverse Repo RepoOther Non-Banks* 308 154o/w Hedge Funds 74 37o/w Sovereigns 23o/w Corporates 10o/w ICPF's 11o/w Other AMs 6o/w Residual** 234 67
UK-resident deposit-takers
52
£bn Reverse Repo RepoTotal 1142 960
intra-group 191 191BoE 0 13UK-resident banks 68 62UK-resident non-banks 245 156
o/w CCP 148 116o/w other* 97 40
UK-PNFC and sovereign 3 9Non-residents: 635 531
Banks 409 345Non-banks 226 186o/w CCP 16 10o/w MMF's 0 54o/w Foreign CB's 0 8o/w other* 210 114
£bn Reverse Repo RepoOther Non-Banks* 308 154o/w Hedge Funds 74 37o/w Sovereigns 23o/w Corporates 10o/w ICPF's 11o/w Other AMs 6o/w Residual** 234 67
UK-resident deposit-takers
53
£bn Reverse Repo RepoTotal 1142 960
intra-group 191 191BoE 0 13UK-resident banks 68 62UK-resident non-banks 245 156
o/w CCP 148 116o/w other* 97 40
UK-PNFC and sovereign 3 9Non-residents: 635 531
Banks 409 345Non-banks 226 186o/w CCP 16 10o/w MMF's 0 54o/w Foreign CB's 0 8o/w other* 210 114
£bn Reverse Repo RepoOther Non-Banks* 308 154o/w Hedge Funds 74 37o/w Sovereigns 23o/w Corporates 10o/w ICPF's 11o/w Other AMs 6o/w Residual** 234 67
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).
Disaggregate data
UK Private Sector4,794,105
Companies1,341,115
Partnerships448,020
Sole Proprietors3,004,970
Large6,390
Small and Medium1,334,725
Private1,334,258
Public467
Private5,705
Public685
Bond Issuers36
Non-Bond Issuers5669
Bond Issuers175
Non-Bond Issuers510
investment
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
investment
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
investment
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
investment
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
investment
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
turnover
employment
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Breakdown of the UK corporate sector
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-to-whom” data)