Monetar Polic and Banking Fragilit Monetary Policy and Banking - - PowerPoint PPT Presentation

Monetar Polic and Banking Fragilit Monetary Policy and Banking Fragility

David Miles The Monetary Policy Committee The Bank of England July 2011

Level of output relative to pre-crisis trend during past recessions (a) past recessions (a)

Yearsfrom start of the recession 98 100 1 2 3 4 5 6 7 Yearsfrom start of the recession Index bas 94 96 ed in year of p 92 94 2008 1990 1979 peak level of 88 90 1929 1973

• utput

(a) I use GDP and trend growth estimates from Hills, Thomas and Dimsdale ( Bank of England Quarterly Bulletin 2010) to create this chart. The authors use a Hodrick-Prescott filter to separate the trend and the cyclical components of real GDP

• growth. I assume that their trend growth estimate at the start of each recession would have prevailed during the following

seven years had the recession not occurred The chart shows deviations of actual GDP from this projected trend growth

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seven years had the recession not occurred. The chart shows deviations of actual GDP from this projected trend growth. The dotted line for the latest recession uses the MPC’s mean projection for output growth over the forecast horizon as reported in the May 2011 Inflation report.

Projection of the level of GDP

Source: ONS and Bank calculations

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Source: ONS and Bank calculations

Households’ response to higher inflation expectations expectations

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Private sector pay settlements

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Major UK banks’ and LCFIs’ leverage ratios

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Contributions to the change in major UK banks’ core Tier 1 capital ratios core Tier 1 capital ratios

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Approximate ownership structure of major UK banks’ liabilities banks liabilities

Li bilit i t t C t t % f t t l li biliti Liability instrument Counterparty % of total liabilities Deposits Banks 14% Private non-financial corporations 5% Households 16% Other financial corporations (OFCs) 18% Bonds and medium-term notes largely banks OFCs 8% in issue largely banks, OFCs 8% Other debt securities in issue likely to be banks, OFCs 6% Subordinated liabilities largely OFCs 2% Oth li biliti (i l d Other liabilities (includes derivatives) N/A 26% Total equity largely OFCs 5% ...of which Core Tier 1 equity 4%

Source: Bank calculations. Breakdown of liabilities at the end of 2010 for Alliance and Leicester, Barclays, Bank of Ireland, Cooperative Financial Services, HSBC Holdings, Lloyds TSB, National Australia Bank, Nationwide, Northern Rock, RBS, and Santander. An exception are deposit holdings of private non‐financial corporations, households, and other financial corporations where the shares refer to all UK resident banks

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and other financial corporations, where the shares refer to all UK resident banks.

Major UK banks’ shares – investor distribution by type type

Bank 4% Corporation 1% Hedge Fund Manager 0% Other 1% Pension Fund (ERISA) 3% Unclassified 11% Government 18% Holding Company 0% Mutual Fund Manager 2% 1% Individual 1% Insurance Insurance Company 2% Investment Advisor 57%

Source: Bloomberg shareholders’ register

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Source: Bloomberg, shareholders register

Major US and German banks’ shares – investor distribution by type distribution by type

US bank shares German bank shares

Corporation 6% Government Hedge Fund Manager 0.4%

Bank 1% Government 3% Hedge Fund Manager 7% Individual 1% Insurance Company 2%

US bank shares German bank shares

Bank 9% 6% Individual 0% I

Mutual Fund Manager 1% Pension Fund

Insurance Company 1% Mutual Fund Manager 8% Investment Ad i

Pension Fund 2% Unclassified 2% Investment

Pension Fund 1% Unclassified 1% Other 1% Advisor 67%

Advisor 81%

Source: Bloomberg, shareholders’ register

1%

Source: Bloomberg, shareholders’ register

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Equity-for-debt swap

Original positions Now swap 5 of debt for equity Original positions Now swap 5 of debt for equity... Bank Bank Assets Funding Assets Funding A D A D – 5 E E + 5 Portfolio of the equity investor Portfolio of the equity investor Value of equity A D Value of equity A (D 5) Value of equity A - D Value of equity A – (D – 5) Value of bonds d Value of bonds d – 5 Total value A – D + d Total value A – (D – 5) + d – 5 Total value A – D + d Total value = A – D + d

Note: D is total bank debt; d is the equity investor holding of bank debt

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Note: D is total bank debt; d is the equity investor holding of bank debt.

Asset mix in UCITS funds – European countries

Turkey Slovakia Romania Czech Republic Italy Portugal Australia Liechtenstein Liechtenstein France Switzerland Spain Hungary Greece Luxemburg Luxemburg EUROPEAN AVERAGE Poland Finland Bulgaria Denmark Germany Germany Norway Belgium Slovenia UK Sweden Equity Fixed Income Balanced Money Market Others

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Source: EFAMA, ‘Asset management in the UK: The IMA Annual Survey 2009/10’

Issuance of debt instruments by major UK banks in 2010 investor distribution by type 2010 – investor distribution by type

Govt agency Other 10% G t Other

Senior unsecured issuance Covered bond issuance

Banks 27% Pension funds 6% g y 1% 10% Banks 27% Pension funds 3% Govt agency 6% 7% Insurers 13% Insurers 12% 3% Asset Asset managers Asset managers 43% managers 45% S B k l l ti b d d l h t

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Source: Bank calculations based on deal sheets from debt capital market desks and Euroweek. Based on sample of around £17bn deals in 2010. Source: Bank calculations based on deal sheets from debt capital market desks and Euroweek. Based on sample of around £25bn of new issuance in 2010.

Issuance of debt instruments by major UK banks in 2010 investor distribution by type 2010 – investor distribution by type

Subordinated debt issuance

Banks 10% Pension funds 1% Hedge Funds 3% Other 9% Insurers 17% 1% Asset sset managers 60%

Source: Bank calculations based on deal sheets

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Source: Bank calculations based on deal sheets from debt capital market desks and Euroweek. Based on sample of around £17bn deals in 2010.