The financial position of households matters for both monetary and financial stability. ‘Evidence from the 2013 NMG Consulting survey’ reports the results of the annual survey on household finances carried out by NMG Consulting on behalf of the Bank. The survey indicates that household debt levels remain well above historical averages, but are little changed since last year.
The value of the average outstanding mortgage was reported to be around £87,000 and average pre-tax monthly income was £2,701, up slightly from £2,631 a year ago. While debt servicing costs were also broadly unchanged, a significant increase in interest rates at current incomes may increase financial pressure on households with a mortgage – but the extent to which this is the case will depend crucially on how much incomes pick up before any rise in rates. This issue is explored by considering a number of scenarios for interest rate rises based on survey responses and some simple assumptions that are set out in the article.
‘SME forbearance and its implications for monetary and financial stability’ sets out the results of a Bank of England investigation into the scale forbearance provided by major UK banks to small and medium-sized enterprises (SMEs). It estimates that around 14% of these banks’ loan exposure to SME borrowers were in receipt of some form of loan forbearance at the time the survey was carried out earlier this year, focussed in particular among the property-related industrial sectors, such as construction, accommodation and food (although the survey excludes SMEs in the commercial real estate sector). Overall, the scale of SME forbearance seems unlikely to threaten financial system resilience, given the current capital levels of the major UK banks. Turning to the real economy, support provided to so-called ‘zombie’ firms that do not have a realistic chance of recovery could impede the allocation of resources to healthy firms and restrict productivity growth. This investigation finds, however, that forbearance appears to account for only a small proportion of the weakness in aggregate UK productivity. The survey did suggest, however, that low interest rates are likely to have been important in explaining higher firm survival rates over recent years. Results from this investigation highlighted vulnerabilities to a rise in interest rates if not accompanied by an improvement in economic conditions.
The recent financial crisis is likely to have been exacerbated by the fact that investors did not have enough information to assess the risks that banks were taking, and to price in these risks accordingly. The Financial Policy Committee (FPC) as well as number of international bodies have therefore called for banks to supply more information into the public domain. ‘Banks’ disclosure and financial stability’ provides a quantitative assessment of improvements in how much information banks report . Collecting data from the annual reports of a sample of 50 large banks from around the world, the article finds that, internationally, banks have increased the amount of information they publish compared to the period prior to the crisis. This has been particularly the case for information relating to funding risk and asset valuation, and UK banks having shown particularly strong improvements. However, more information alone is not sufficient to solve the problem. More needs to be done to ensure that the information provided is useful to investors, and that investors are incentivised to use this information. The ongoing reform agenda aims to address this.
The Monetary Policy Committee’s (MPC’s) macroeconomic forecasts play an important role in the setting of monetary policy. Relative to the MPC’s forecasts, however, the performance of the UK economy has been disappointing in recent years: for most of the post-crisis period, GDP growth has been unexpectedly weak, and inflation unexpectedly strong. Focussing on the period since the nascent recovery began to falter, ‘Understanding the MPC’s forecast performance since mid-2010' quantifies – using staff models – the importance of different developments in explaining why GDP growth and inflation outturns have been different from MPC projections, with reference to the key judgements and conditioning assumptions that underpinned those forecasts. The article finds that the unexpected weakness in GDP reflects a combination of weaker growth in the United Kingdom’s trading partners, tighter domestic credit conditions and slower dissipation of uncertainty. Unanticipated rises in energy and other imported costs, meanwhile, can broadly account for the surprising strength in inflation since mid-2010, with weak effective supply likely to have counteracted the impact of weak demand on inflation.
The Q4 edition also features articles on ‘What can company data tell us about financing and investment decisions?’, which investigates the puzzle of strong corporate bond issuance at a time of weak aggregate UK business investment since 2009; ‘Tiering in CHAPS’, which discusses how a number of banks that are systemically important to the CHAPS payment system will become direct participants by 2015, leading to a significant reduction in risks to UK financial stability; ‘Foreign exchange and over-the-counter interest rate derivatives market in the United Kingdom’, which reports the results of a three-yearly survey indicating that turnover in foreign exchange markets rose by 47% between April 2010 and April 2013; and the regular ‘Markets and Operations’ article. It also includes the articles on local currencies and on capital account liberalisation in China that were pre-released on 12 December.
Articles in the Q4 edition to be published 20 2013:
• ME forbearance and its implications for monetary and financial stability
• Banks’ disclosure and financial stability
• Understanding the MPC’s forecast performance since mid-2010
• The financial position of British households: evidence from the 2013 NMG Consulting survey
• What can company data tell us about financing and investment decisions?
• Tiering in CHAPS