The stress test scenario is only one possible economic path through the crisis; more adverse paths are possible. I would reiterate, however, that the crisis is far from over and further negative COVID19 developments could cause financial instability to return. We would now be dealing with illiquid banks in life preservation mode, cutting back all credit to hoard capital and to remain solvent – in other words a credit crunch and possible bank failures that would make the current economic crisis deeper and the recovery more painful and protracted. And within the banking system, to strengthen even further the core – the globally and domestically systemic banks which provide the key connections in the financial system and with financial markets. The resulting exposures and demands for collateral greatly amplified the stress and uncertainty in the financial system. Milasi S, I González-Vázquez and E Fernandez-Macias (2020) ‘Telework in the EU before and after the COVID-19: where we were, where we head to’. It's not like a bank in your local high street. These productivity effects do not appear to be fixed across different demographics, firms, tasks and sectors.footnote [6] For example, studies suggest productivity gains from home-working are largest for creative tasks, perhaps reflecting the benefits of a quieter, less distracting home-working environment.footnote [7] It is also worth saying that some of the evidence of productivity gains may be biased upwards by self-selection, with those opting to work from home more likely to be able to do so productively. Virtual meetings can be an efficient way of getting things done, indeed often more effective than the physical alternative. At the same time, the Bank of England said it would pump more cheap funds into banks to encourage SME lending, while keeping interest rates on hold at 0.1pc. Bank of England needs more powers to decarbonise economy, say experts Published: 16 Nov 2020 Covid vaccine rally fuels market optimism of a faster global recovery Threadneedle Street is looking into who sent a fake press release saying that it would no longer buy bonds issued by energy firms with high exposure to oil and coal. By clicking ‘Accept recommended settings’ on this banner, you accept our use of optional cookies. On that basis, home-working would be expected to have boosted well-being, with losses on the swings of increased working hours more than made up for on the roundabouts of reduced time spent commuting. ONS data suggests that, prior to the pandemic, around 5% of people worked from home as their main location. The reforms of the past 10 years have also strengthened the resilience of the core banking system to liquidity shocks. Our aim has been first to ensure that whatever the shock, it is not amplified and made worse by weaknesses in the financial system and second, that well into the range of very severe adverse events – the so called ‘tail events’ – the financial system is able to support the real economy and dampen the shock. Had it done so, the overall impact of the FPC stress test would have wiped out nearly all of the aggregate capital in the system and taken banks below their minimum regulatory requirements.footnote [5]. What would be the costs and benefits of greater resilience in market based finance – which now accounts for around half of the global financial system? We have, as I have noted, further to travel through the economic stresses of the COVID crisis. The centrepiece of the post GFC reforms has been to require banks to hold ‘buffers’ of loss absorbing capital so that they can absorb losses from a very severe shock without the massive deleveraging and the bank failures which caused so much economic damage 10 years ago. She explains what we’re doing to improve diversity at … There are both positives and negatives from the shift in working practices that has taken place this year and the balance of these is likely itself to shift over time. We use necessary cookies to make our site work (for example, to manage your session). But I feel acutely the loss of working relationships and external stimuli – the chance conversations, listening to very different people with very different lived experiences, the exposure to new ideas and experiences. The “dash for cash” also spread to foreign exchange markets, given the dollar’s pivotal role in global trade and investment. We use analytics cookies so we can keep track of the number of visitors to various parts of the site and understand how our website is used. As financial market asset prices adjusted very sharply in March, margin call, the increasing collateral required to protect against counterparty credit failure, went up sharply also.footnote [10] These margin calls were met in the UK and there were no defaults. I have mentioned the role of margin in providing resilience against counterparty credit risk. THE Health Secretary told Brits in Tier 4 to "act as if you have the virus" after Boris Johnson cancelled Christmas for millions in the South East. If home-working is broadly neutral in its impact on our economic contribution, but positive for our welfare, this suggests it is win-win, or at worst draw-win. The Bank of England has announced its climate stress test exercise for the financial services sector will be held in June 2021. Speaker request form ​If you would like to request a speaker from the Bank of England or Prudential Regulation Authority please complete the form below in full. Some US equity markets recently reached record highs, both the FTSE 250 and the S&P 500 have gained over 40% from their March lows, and sterling 3m and USD 3m LIBOR rates have come in 70bps and 81bps respectively from their crisis highs, See, for example, previous Financial Stability Reports, or the Financial Stability Paper No. There is a balance to be struck between events which distract and events which fire the imagination. Prior to the Covid crisis, an estimated extra 5 million people in the UK were expected to have a digital skills deficit by 2030.footnote [15] The switch to home-working is likely to have made inroads into this deficit. The jump was even more striking in the US, where growth in the stock of corporate lending rose by over $600 billion in the first four months of the year, compared to an increase of less than $60 billion for 2019 as a whole. In what follows, I will try to navigate through some of these issues, drawing on evidence where possible. We have, as I have set out, made the banking system much more resilient to severe, unanticipated shocks. The increase in initial margin requirements at UK CCPs during the crisis was substantial [add stat] but also relatively gradual – the peak one-day increase in initial margin was considerably smaller than peak one-day variation margin flows through the crisis. That improved company performance by 22%. A number of empirical studies have looked at the effects of home working on productivity.footnote [5]. Introduction “As authorities and regulators, it is not in our interest to stop innovation” Even central bankers can sometimes be accused of overusing language. I am one of the lucky ones who has been able to work from home, as have virtually all other Bank of England staff. However, under the recent stress, MMFs appear again to have been a source of vulnerability in the system. Would you like to give more detail? You may disable these by changing your browser settings, but this may affect how the website functions. As the search for liquidity intensified, money market funds (MMFs) came under pressure. Weighing against these effects appear to be at least two key factors: commuting and empowerment. By clicking ‘Accept recommended settings’ on this banner, you accept our use of optional cookies. Ben Bernanke has pointed out that panics can be a major cause of credit crunches. But as with CCP margin, it is important that we remember the reasons for the regulatory reforms in this area. But given that clearing and margining are important risk mitigants in the system, the answers may lie more in ensuring that that financial market participants, be they hedge funds or pension funds, understand how margin call can evolve in a stress and have the resilience to manage the consequent liquidity pressures. This was in part due to prudent measures taken by CCPs before the crisis to prevent initial margin from falling too far in good times and prevent large or unexpected step changes in initial margin requirements when market volatility starts to rise. Some high-yield primary debt markets effectively closed: sterling issuance stopped on 13 February and US dollar issuance stopped on 4 March – and remained closed for longer than seen in the financial crisis. ‘Productivity of working from home’ Covid Economics, Issue 49, CEPR Press, Newport, C. (2014) ‘Deep Work: Rules for Focused Success in a Distracted World’ Piatkus, Opezzo, M and Schwartz, D (2014) ‘Give Your Ideas Some Legs: The Positive Effect of Walking on Creative Thinking’ Journal of Experimental Psychology: Learning Memory and Cognition, vol. 2020-59, Bartik, A., Cullen, Z., Glaesser, E., Luca, M., and Stanton, C. (2020) ‘How the COVID-19 crisis is reshaping remote working’ Vox-EU, Bloom, N., Liang, J., Roberts, J., and Ying, Z. J. With one or two small exceptions, the same picture was true internationally. In March, however, these highly leveraged funds appear to have become an amplifier of stress. Reinventing the Wheel (with more automation) Speech given … (2015). Caiumi, A., and Paccagnella, M. (2020), ‘Ideas and Institutions – A Growth Story’, ‘The health, wealth and happiness of nations’, ‘Coronavirus and homeworking in the UK labour market: 2019’, ‘Coronavirus and the economic impacts on the UK: 8 October 2020’, ‘Can Good Work Solve the Productivity Puzzle? Being in “flow” requires a degree of cognitive tunnelling.footnote [22] For many people, home-working provides that quieter, less distracting environment where tunnelling is easier and creativity fostered. Well first your mortgage lender needs to account for the risk that you won’t be able to pay back your mortgage. Enhancing resilience in payments - speech by Victoria Cleland. However, the first phase – the initial shock and adjustment to a far more challenging economic outlook in the near term – has passed. Next. Even short-term funding markets for corporates, such as the commercial paper markets, became strained. This, bluntly, was no great surprise. For example, studies have found that working from home is positively associated with perceived autonomy and this, in turn, has positive spillover effects to our job satisfaction and levels of stress.footnote [19] Both boost workplace productivity over the medium term. Over the coming months we will learn more about how well the post crisis reforms work under stress. Studies of the length of the working day – measured by the time between the first and last email being sent – point to a larger effect still, with close to an 8% rise in working hours as a result of home-working.footnote [13] If that is roughly right, this suggests most workers’ overall economic contribution may not have been much affected by the switch to home-working, with extra hours compensating for reduced productivity. Compensating factors may have been at work, one of which is longer working hours. Risk free yields began to rise sharply and the financial conditions facing major economies tightened. The global stock of non-financial corporate bonds at the end of 2019 reached an all-time high of $13.5 trillion, with the stock of emerging market corporate debt around $3trn. Over the past decade, asset purchases by central banks have become an established monetary policy tool to support demand. Productivity, predictably, was hardest hit among those with least prior experience of home-working.footnote [11]. PM speech at 20th anniversary of Bank of England independence event Prime Minister Theresa May addressed guests attending an event in London marking 20 years of the independence of the Bank … Home-working means serendipity is supplanted by scheduling, face-to-face by Zoom-to-Zoom. For me, the 0-5 model of home-working strikes this balance in the wrong place, as with hindsight did my pre-pandemic 5-0 model. UK interest rates can be cut below zero if needed to ward off the scars of Covid-19 or an economic hit from a no-deal Brexit, the Bank of England's Michael Saunders has said. It is clear however that the need to post additional margin generated sharp liquidity pressure on those on the ‘wrong’ side of derivatives exposures, adding to demand for liquidity in the system. When it comes to the productivity effects of home-working during the Covid crisis, the evidence – while thinner – points in a different direction. I am delighted to be speaking at this “Engaging Business” Summit, at such a critical time for business, for workers and for the wider economy. To this end, the Bank of England will become the first regulator to stress test its major banks and insurers against different climate pathways, including the catastrophic business-as-usual scenario, the ideal - but still challenging - transition to net zero by 2050, and the late policy action - … ‘Does Working from Home Work? What creativity is gained in improved tunnelling is lost in the darkness of the tunnel itself. But we would be dealing with a very different credit environment now absent the resilience – both capital and liquidity – that has resulted from the post crisis reforms. Wählen Sie aus erstklassigen Inhalten zum Thema Bank Of England Governor Mervyn King Speech in höchster Qualität. (2020). In financial markets, the FTSE All-Share index fell over 10% on 12 March, the largest one-day fall since 1987. Necessary cookies enable core functionality on our website such as security, network management, and accessibility. Absent the flow of variation margin, CCPs non-defaulting members would face very substantial losses if a counterparty defaults. Next. The capital they might preserve by deleveraging is outweighed by the losses they would suffer from the broader economic damage that would result from a widespread withdrawal of credit. Speech by Mr Andrew Hauser, Executive Director for Markets of the Bank of England, at the Risk.net LIBOR telethon, 8 December 2020. He says the UK needs to work closely with the EU to meet challenges such as changes to cross-border payment systems. For what it is worth, self-reported surveys of Bank of England staff suggest, overall, they believe their productivity has not been much affected by home-working. Those informal between-meetings conversations are, in my experience, the bedrock of relationship-building and the key to trust–building. The Fed has launched multiple facilities aimed at reducing the stress in US dollar funding markets This included purchases of US Treasuries, Mortgage-Backed Securities, and Commercial Paper, amongst other facilities. She shares her experience of running the UK’s Real Time Gross Settlement service (RTGS) and being a standard-setter for CHAPS. There is inevitably some level of damage to the economy that the banking system cannot weather. We’d also like to use some non-essential cookies (including third-party cookies) to help us improve the site. Published on 16 June 2017 James Proudman gives industry and other relevant stakeholders an overview of the implementation of ring-fencing. There was no option of self-selecting. Milasi et al (2020), Mongey et al (2020). At the peak of lockdown in April, almost half of the workforce was working from home in any given week, either exclusively or partially. The little thought experiment above illustrates that while building resilience in the financial system in good times might seem expensive, it is the better economic bet over the long run. The UK economy is still on track for a quick or so-called V-shaped recovery, according to Bank of England economist Andy Haldane. I doubt many will become modern-day classics. It is also well-established that exposure to new and different experiences - sounds, smells, environments, ideas, people – is a key source of creative spark. US dollar funding became particularly difficult to raise in global capital markets; the dollar appreciated sharply; and FX liquidity deteriorated across all currency pairs as the near one-way demand for dollars drove bid-offer spreads up to three times their normal levels. Quantitative easing (QE) is one of the main tools the Bank of England can use to influence the economy. Investors, corporates, banks and households went into a defensive crouch, shunning risk, searching for safer havens, and stockpiling liquidity. That links to the second factor – social capital, the relationships we grow as individuals. There is of course great uncertainty about the future evolution of the pandemic, of the health policy measures necessary to contain it and of the consequent economic impact. When I was in their shoes, almost all of my knowledge came from informal conversations in the pub with my graduate cohort on their jobs, bosses and experiences, rather than from listening to talking heads like me. What is new is our understanding of how the work environment plays a crucial role in nurturing creativity.footnote [21] For example, the absence of distraction and noise is one important factor fostering creativity. The issues outlined above are neither an exhaustive nor a definitive list. For many frontline workers - from health and social care, to public transport and police – home-working has simply not been an option. Our mission is to deliver monetary and financial stability for the people of the United Kingdom. It is arguable, as I noted at the outset, that the extreme liquidity shock was simply a function of the scale of the economic impact of the COVID crisis, and the central bank response a necessary and unavoidable consequence of a tail event. Engaging Business (2020). The time to push ahead on tackling climate change - speech by Andrew Bailey // Publication // Monetary Policy Report (MPR) 05 November 2020 Monetary Policy Report - November 2020 Monetary Policy Report - November 2020 ... Bank of England Museum. Reforms that avoid such panic reduce the likelihood that financial stress transmits to real economy stress. Given at PayExpo, London. Bank lending surged as corporates drew down on their liquidity facilities. That was not the case, either pre or post-Covid, among a range of other occupations representing between half and two-thirds of the workforce. That meant, for many, not only a worse working environment but a steep learning curve as they adapted to new ways of working. Derivatives markets went into the COVID crisis with much greater underlying collateral in the system to protect against counterparty credit failure - with at least $1trn in additional collateral against OTC derivative exposures.footnote [9]. Alon et al (2020), Cui et al (2020), Andrew et al (2020). CCPs collect variation margin (usually in cash) as a core part of reducing participants’ counter party credit risk as prices move. Well-being studies suggest these agency and empowerment effects are important for well-being. Seven awkward questions - speech by Sam Woods. These research findings broadly chime with my own experience. The results of the FPC’s desktop stress test reinforces the message that the clue, as they say, is in the name: the buffers exist precisely to buffer a shock like this. We need, of course, to bear in mind throughout the scale of the current shock. But the objective of the reforms of the past 10 years has not just been to make the financial system resilient to the normal run of events or to prevent the financial system itself from generating another crisis. Given what we learned, 10 years ago, about the cost of a breakdown in the financial system, the objective of the reforms has been precisely to make the financial system resilient to a ‘tail event’ regardless of how and where that event originates. Just as the short-term productivity cost of an abrupt shift to home-working might be overstated, so too might the short-term happiness benefits. “Grow” is the right word here because these working relationships, like any relationship, need to be fed and watered. Some MMFs came very close to regulatory liquidity thresholds and to the point at which they would have to suspend or ‘gate’ withdrawals, which could in turn have triggered contagion to other MMFs and severely exacerbated the overall stress in the financial system. Focussing on the resilience of one or another element without understanding its broader effect will give us a false picture. As well as looking at what drove and amplified the search for liquidity, we will I think need to examine why the core funding markets were overwhelmed by the demand, amplifying further the pressures in the system. Again, a simple thought experiment is illustrative: counterparty credit risk, unanticipated margin call and the scale of margin related liquidity flows around the system would have been greater and destabilising had the pandemic struck ten years ago. Central banks had to take extraordinary action to stabilise markets. He acknowledges that governance is important because the Bank of England is responsible for the largest and most complex financial centre in the world. MPC deliberations have been no less effective, and MPC decisions no less expeditious, for this shift. And he considers what that might mean for people’s wellbeing and the health of the economy. Would you like to give more detail? If you have any problems please contact the Press Office. These losses will grow with time. Margin then increases to protect those who have bought the insurance against the failure of their counterparties. I imagine some people will have used lockdown to write that creative novel they always knew was in them. My own experience since March has mirrored trends in the wider economy. We use analytics cookies so we can keep track of the number of visitors to various parts of the site and understand how our website is used. The other week I spoke to the Bank’s new crop of graduates. No modern-day classic novels lie unfinished in my office drawer – or at least not ones penned by me. Clearing through central counterparties provided a degree of mutualisation of counterparty credit risk. Published on 08 October 2019 Victoria talks about the Bank of England’s electronic payment systems. For more information on how these cookies work please see our Cookie policy. It is at least partly because of greater margining and central clearing that the market stress in March did not result in widespread concern about counterparty risk – unlike in 2008. It might also reflect on increased ability to “be ourselves” at work, when work is at home – the pyjamas, the unkempt hair, the Bermuda shorts - none of which, I hasten to add, I am sporting today. Andrew Bailey has warned the economy is at risk of stalling and vowed to ramp up stimulus if needed, as he prepares to fight the damage caused by another Covid wave.. If home-working has led to longer working hours for many people, you might have expected that to have dented well-being, not to have raised it. A study by Chatterjee and Clarke (2017) showed that an additional 20 minute commute reduced people’s well-being as much as a 19% pay cut. But even after the very significant losses indicated by the stress test, considerable resilience remains in the core banking system to deal with more adverse outcomes: the impact of the stress test would exhaust a little less than half of the loss absorbing capital buffers in the system. Bank of England strikes a curiously upbeat note even as jobs crisis looms Economists say the Bank's hopes that unemployment will peak at 7.5pc appear rather optimistic Russell Lynch. For more information on how these cookies work please see our Cookie policy. All elements of the buffers banks now have are intended to be usable in stress. We should not put that at risk by weakening the regulation of banks. Rather we need to look at other ways to reduce surges in the demand for liquidity and improve the supply of liquidity under stress. And to ensure national authorities respond in a consistent way, the FSB agreed Principles, adopted by the G20, which reiterate commitment to common international standards, using their inbuilt flexibility including buffers, while leaning against regulatory rollback. Inflation is falling. 10.30am BST: Bank of England MPC member Gertjan Vlieghe speech on “Assessing the Health of the Economy” 1.30pm BST: US housing start and … It is particularly pertinent with many people having had to adapt their ways of working as a result of the Covid crisis. Even for those who are currently content home-working, there is a question about whether the benefits will persist. And he explores what it tell us about the effectiveness of the financial reforms introduced after 2008. 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