With apologies for the lateness. I seem to have been a bit lax in the “fetching” department (i.e. those publications that do not have a reliable feed have to retrieved according to my sources list which I have been ignoring lately).
Executive summary
Recent economic and financial developments (pages 5–18)
Markets and operations. This article reviews developments in financial markets and the Bank’s
official operations in the period between the previous Bulletin and 22 February 2013. Market
sentiment improved significantly, reflecting a continued positive response to central bank policy
measures adopted by both the European Central Bank and the Federal Reserve during the 2012 Q4
review period. Confidence was buoyed further in the New Year as policymakers in the United States
reached an agreement to avert the approaching ‘fiscal cliff’. In response to these developments, there
was an increase in investors’ willingness to bear risk, providing support to a broad range of assets and
prompting some significant adjustments in exchange rates. The article also describes a prospective
new tool for reducing counterparty credit risk exposures.
Research and analysis (pages 19–77)
Changes to the Bank of England (by Emma Murphy and Stephen Senior).
In April 2013, a new
regulatory framework for the UK financial sector will come into force, which will result in the
Bank of England gaining significant new responsibilities. This article gives an overview of the changes
that are happening to the Bank, including the creation of the Prudential Regulation Authority (PRA)
and the Financial Policy Committee (FPC), and new responsibilities in relation to financial market
infrastructures. The PRA, as part of the Bank, will be responsible for the microprudential regulation of
deposit-takers, insurers and major investment firms. It will promote the safety and soundness of
these firms, focusing on the adverse effects that they can have on the stability of the financial system;
and contribute to ensuring that insurance policyholders are appropriately protected. The FPC, which
has operated in interim form since 2011, will be formally charged with identifying, monitoring and
taking action to remove or reduce risks to the resilience of the financial system as a whole. The Bank
will also become responsible for regulation of certain post-trade market infrastructures, including
central counterparties and securities settlement systems. The article also looks at the important
revised governance processes that are being put in place to ensure that the Bank carries out its new
responsibilities effectively and transparently and is fully accountable to Parliament and the public.
The profile of cash transfers between the Asset Purchase Facility and Her Majesty’s Treasury (by
Nick McLaren and Tom Smith).
The Bank of England Asset Purchase Facility Fund Limited (APF) is a
wholly-owned subsidiary of the Bank of England, used to make purchases of public and private sector
assets for monetary policy purposes. It is fully indemnified by Her Majesty’s Treasury (HMT). Initially,
it was envisaged that payments due under the indemnity would be settled when the asset purchase
scheme ended. But on 9 November 2012 it was agreed to alter this arrangement and establish a
process for ongoing quarterly transfers between the APF and HMT. This article explains how the
possible size of the transfers varies depending on a number of uncertain factors, including the future
path of Bank Rate, and the price at which the assets held by the APF are ultimately sold. While the
initial transfers are from the APF to HMT, it is likely that they will be offset by payments in the
opposite direction in the future. But the ultimate net amount that will be transferred is uncertain,
and a wide range of outcomes is possible.
Private equity and financial stability (by David Gregory).
In the mid-2000s, there was a dramatic
increase in acquisitions of UK companies by private equity funds. The leverage on these buyouts,
especially the larger ones, was high. The increased indebtedness of such companies could make the corporate sector more susceptible to default, posing a risk to the stability of the financial system in
the United Kingdom. Moreover, this risk is compounded by the need for companies to refinance debt
maturing over the next few years in an environment of much tighter credit conditions. Since the crisis
began, there has been some evidence of loans to private equity sponsored firms performing poorly
but a complete picture will not become clear until more investments have been exited by private
equity funds. From a macroprudential policy perspective it will be important to monitor the use of
debt in acquisitions in the future. But there is also potentially a role for private equity to play in
promoting recovery in a downswing, in particular at the current juncture, by restructuring companies
in difficulty.
Commercial property and financial stability (by James Benford and Oliver Burrows).
The
commercial property market played a key role in the recent financial crisis in the United Kingdom.
A rapid build-up of debt tied to commercial property investments pre-crisis supported a boom in
prices. The consequent bust led to a sharp rise in non-performing loans. This article documents some
of the main developments in the commercial property market and explores the behaviour of its key
players: occupiers of property, investors and lenders. It finds that the structure of the market evolved
significantly during the boom period and that an increase in the use of leverage and maturity
mismatch contributed to both the rise in prices and the subsequent fall. Going forward, it will be
important to consider these factors when assessing the risks that the commercial property market
can pose to the stability of the financial system. The new Financial Policy Committee will be alert to
these risks and deploy tools to counteract them, where necessary, in order to protect financial
stability.
The Agents’ company visit scores (by Jon Relleen, David Copple, Matthew Corder and Nicholas
Fawcett).
The Bank’s Agents collect economic intelligence from the business community around the
United Kingdom. Since 2007, the Bank’s Agents have been assigning company visit scores (CVS)
based on the 5,500 bilateral meetings that they have with individual UK firms every year. The CVS
have three attributes that make them useful for analysis. First, they are very timely. Second,
firm-level data allow a consideration of the differences in business conditions across companies and
sectors. And third, the scores cover some variables where official data are unavailable. This article
introduces the CVS data set. It explains how they are assigned before going on to show some initial
examples of how they have been used for internal analysis at the Bank, including analysis of trends in
employment and capacity utilisation. The Bank places great importance on the confidential nature of
discussions between Agents and company contacts — the analysis using the CVS presented in this
article is based on aggregated and anonymised data.
The Bank of England Bank Liabilities Survey (by Venetia Bell, Nick Butt and James Talbot). The Bank
of England began conducting a survey of banks’ liabilities in 2012. Developments in banks’ liabilities
— retail and wholesale funding and capital — can have a substantial impact on credit conditions. The
Bank already uses data and intelligence from discussions with market participants to inform its
analysis of such developments. But there are benefits from a regular survey, which provides
consistent, comparable data; information on the factors affecting developments in liabilities; as well
as the reporting of institutions’ expectations of future developments. This new survey will also
supplement the data collected on the asset side of bank balance sheets by the Bank of England’s
Credit Conditions Survey, which was launched in 2007. The first results of the Bank Liabilities Survey
will be published on 26 March 2013. This article explores the reasons for launching this new survey
and describes its design and coverage, including details of the questions asked.
Report (pages 79–82)
Monetary Policy Roundtable
This edition also contains a summary of the main points made by participants at the most recent
Monetary Policy Roundtable hosted by the Bank of England and the Centre for Economic Policy
Research, on 11 December 2012.
Research work published by the Bank is intended to contribute to debate, and does not
necessarily reflect the views of the Bank, MPC or FPC members.
Full text (PDF 96pp)
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