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In June 2014, the Bank of England — one of the world’s oldest central banks — was preparing to announce its policy recommendations about the United Kingdom’s housing market. At the time, a dearth of new housing starts and a recovering economy was driving up housing prices, notably in London.1 This had raised concerns of a repeat of the market behaviors that had led to an economic crisis five years earlier.2 The Bank’s recommendations would be closely watched by the financial sector.
Several executives inside the Bank saw the policy recommendation as a watershed moment for the institution: It was one of the first times the Bank would make a major policy recommendation based in part on data from Britain’s Financial Conduct Authority (FCA), which was formed under the Financial Services Act 2012 as part of the UK’s response to its banking crisis during the recession.
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1. D. Beckett, “Trends in the United Kingdom Housing Market, 2014,” September 22, 2014, www.ons.gov.uk; and H. Osborne, “UK House Price Rises For 2014 Almost Twice As High As Predicted,” Guardian, Aug. 26, 2014.
2. C. Berg, “The Global Financial Crisis and the Great Recession: Causes, Effects, Measures, and Consquences For Economic Analysis and Policy” (presentation at the Workshop on Monetary Policy, Macroprudential Policy and Fiscal Policy, London, May 17-19, 2011). Note especially: “However, it is important to note that the crisis was not triggered by the global imbalances as many observers, such as the IMF, had warned. The trigger was instead the downturn in the housing market in the U.S. and the panic and credit contraction in the financial system. It is also probable that some of the global imbalances were due to the US price rise in housing dampening household savings. In that way the housing price bubble probably helped to increase the U.S. current account deficit, which also means that the adjustment in the U.S. housing market should make some contribution to adjusting the global imbalances.” Also see A. Bennett, “World Must Act to Stop Another Massive Housing Crash, Warns IMF,” June 12, 2014, www.huffingtonpost.co.uk; and J. Titcomb, “Bank of England Inflation Report As It Happened,” Daily Telegraph, May 14, 2014 (note number of questions focused on housing).
3. “The Bank’s Strategic Plan: One Bank, One Mission,” n.d., www.bankofengland.co.uk.
4. “Financial Stability Report,” June 2014, www.bankofengland.co.uk.
5. F. Bermingham, “Carney: Bank of England At the Limit of Its Tolerance Over Housing Market,” International Business Times, June 26, 2014.
6. A variant comment from the Guardian was less aggressive: “Mark Carney’s been taking lessons from his chum Mario Draghi. The president of the European Central Bank has become a dab hand at getting what he wants just by talking tough. Carney is trying to turn the same trick with Britain’s housing market.” See L. Elliott, “Mark Carney’s Housing Pill Needs Time to Let Economy Digest It,” Guardian, June 26, 2014; for “paper tiger,” see S.P. Chan, “Bank of England Cracks Down On Mortgages,” Telegraph, June 26, 2014.
7. “Bank of England Financial Stability Report, As It Happened,” Guardian, June 26, 2014; also see J. Treanor and L. Elliott, “Bank Will Not Act On Housing Prices Yet, Says Carney,” Guardian, June 26, 2014.
8. See, for instance, L. Elliott and J. Treanor, “Inside the Bank of England,” Guardian, November 10, 2015.
9. K. Carmichael, S. Silcoff, and B. Erman. “How Mark Carney Became a Star Player In a Global Financial Arena,” Globe and Mail, November 30, 2012.
10. C. Giles, “Carney Picks Santander’s Charlotte Hogg For Bank of England Post,” Financial Times, June 18, 2013.
11. HM Treasury and G. Osborne, “Chancellor Announces Three Senior Bank of England Appointments, ” news release, March 18, 2014, www.gov.uk. (Note: Dr. Shafik did not take on her role until August 1, 2014.)
12. L. Elliott and M. White, “Brown Gives Bank Independence to Set Interest Rates,” Guardian, May 7, 1997.
13. Stress testing emerged as a tool for risk management in the late 1990s but, as noted in by Andrew Haldane in a 2009 speech, financial services firms used them more to manage regulation than manage risk. Regular stress testing of UK banks by authorities was recommended by the Financial Policy Committee in March 2013. See A. Haldane, “Why Banks Failed the Stress Test” (speech given at the Marcus-Evans Conference on Stress-Testing, London, Feb. 13, 2009); and “Stress Testing,” 2013, www.bankofengland.co.uk.
14. World Bank, “Gross Domestic Product 2014,” Feb. 17, 2016, http://databank.worldbank.org.
15. This assertion excludes Russia and Turkey, which are transcontinental but would be listed as first and third if included in Europe.
16. Statista and Z/Yen, “Leading Financial Centres Globally as of June 2015,” n.d., www.statista.com.
17. “Governors,” n.d., www.bankofengland.co.uk.
18. D. Bholat, “Big Data and Central Banks,” November 10, 2014, www.bankofengland.co.uk.
19. N. McLaren and R. Shanbhogue, “Using Internet Search Data As Economic Indicators,” Bank of England Quarterly Bulletin 51, no. 2 (2011): 134-140; D. Pimlott and T. Bradshaw, “Bank of England Googles to Track Latest Trends,” Financial Times, June 13, 2011; E. Benos and S. Sagade, “High-Frequency Trading Behavior and Its Impact On Market Quality: Evidence From the UK Trading Market,” working paper no. 469, Bank of England, London, December 2012, www.bankofengland.co.uk; and E. Benos, A. Wetherilt, and F. Zikes, “The Structure and Dynamics of the UK Credit Default Swap Market,” Financial Stability Paper no. 25, Bank of England, London, November 2013, www.bankofengland.co.uk.
20. Negative interest rates involve a bank charging its depositors for holding their money; they are meant to encourage lending. The European Central Bank and central banks in Denmark, Sweden, and Switzerland all have negative interest rates, and in late January 2016, the Bank of Japan adopted them as well. See, for instance, J. Randow and S. Kennedy, “Negative Interest Rates: Less Than Zero,” March 18, 2016, www.bloombergview.com.
21. See, for instance, R. Peston, “All Change At the Bank of England,” March 18, 2014, www.bbc.com.
22. D. Bradnum, C. Lovell, P. Santos, and N. Vaughan, “Tweets, Runs, and the Minnesota Vikings,” August 18, 2015, http://bankunderground.co.uk.
23. Prudential Regulation Authority, “The Impact of Climate Change On the UK Insurance Sector,” September 2015, www.bankofengland.co.uk.
24. M. Carney, “Breaking the Tragedy of the Horizon: Climate Change and Financial Stability” (speech delivered at Lloyd’s of London, London, September 29, 2015).
25. Prudential Regulation Authority, “Implementing the Financial Policy Committee’s Recommendation On Loan to Income Ratios in Mortgage Lending,” consultation paper CP 11/14, Bank of England, London, June 2014, www.bankofengland.co.uk; and Prudential Regulation Authority, “Implementing the Financial Policy Committee’s Recommendation On Loan to Income Ratios in Mortgage Lending,” policy statement PS9/14, Bank of England, London, October 2014, www.bankofengland.co.uk.
26. HM Treasury, A. Leadsome, and G. Osborne, “Government Confirms New Powers For Bank of England to Guard Against Future Financial Risks,” news release, February 2, 2015, www.gov.uk.
27. “UBS Wealth Management Launches UBS Global Real Estate Bubble Index For Select Urban Housing Markets Worldwide; Most Cities Overvalued,” news release, October 29, 2015, https://www.ubs.com; see also, for instance, P. Gallagher, “London House Prices Are the Most Overvalued in the World, Report Says,” Independent, Oct. 29, 2015.
i. “Assessing the Impact of the FPC’s Recommendations on the Mortgage Market,” in “Financial Stability Report,” pp. 60-62, www.bankofengland.co.uk.
ii. As described in Section 5 of the Bank’s Financial Stability Report, increased household indebtedness may be associated with a higher probability of household distress, which can cause a sharp fall in consumer spending. This arises from the fact that households with the highest debt-to-income-ratios tend to spend a greater proportion of their income on consumption than less indebted households. That was seen clearly during the recent financial crisis, with the share of income attributed to consumption falling sharply for households with higher debt-to-income ratios (Chart 5.10). There is also evidence internationally that higher household debt to income ratios were associated with larger falls in consumption (Chart B).
iv. C. Giles, “New Gust of Inflation Recalls an Older Era,” Financial Times, May 13, 2007.