Glenn Hoggarth

Lender of Last Resort: What Have We Learned Since Bagehot?

The maintenance of financial stability is facilitated by well-designed “safety-net” arrangements aimed at limiting the risk of disruption in the financial system (crisis prevention) and the consequences of disruption if it arises (crisis management). An important element of crisis management is the lender of last resort (LOLR) function. This article reviews the main ideas on LOLR reflected in the academic literature, going back to Henry Thornton almost 200 years ago.

Which Way Do Foreign Branches Sway? Evidence from the Recent UK Domestic Credit Cycle

Foreign bank branches have a significant presence in the United Kingdom’s financial sector, more so than in any other major advanced economy. A lot of their business activities are with non-residents but they are also important sources of credit for UK financial and non-financial companies. During the recent crisis, the growth in credit to UK borrowers from foreign branches fell sharply and by much more than from UK-incorporated banks. Using a combination of aggregate and individual bank-level data, this paper explores why foreign branches’ UK lending was much more cyclical. Both demand and supply factors appear to have been important. The domestic loan book of foreign branches was more concentrated on cyclical sectors than that of UK-incorporated banks. But it was also the case that their lending to most domestic sectors increased more rapidly in the run-up to the crisis and fell more subsequently. Foreign branches were also more reliant on fickle forms of funding, especially from abroad. Going forward, it is important the Financial Policy Committee and Prudential Regulation Authority closely monitor the risks that foreign branches, particularly large ones, may pose to UK financial stability and to the broader economy.

Financial Stability and Central Banks: A Global Perspective

1: Financial stability and central banks: an introduction 2: Financial stability and the Bank: international evidence 3: The organizational structure of banking supervision 4: Alternative approaches to regulation and corporate governance in financial terms 5: Bank capital requirements and the control of bank failure 6: Crisis management, lender of the last resort and the changing nature of the banking industry 7: International capital movements and the international dimension to financial crises 8: Some concluding comments

The Impact of Yuan Revaluation on the Asian Region

This paper studies how an appreciation of the yuan affects the exports of other Asian countries. It finds mixed effects. Countries that export consumer goods to China or compete in third markets benefit from yuan appreciation, while countries that supply capital goods to China lose. These findings suggest that a revaluation of the yuan may not lead to a generalised revaluation of Asian currencies.

Resolving Banking Crises - An Analysis of Policy Options

This paper develops a dynamic model to examine the ex-ante and ex-post implications of five policy options for resolving bank failures when the authorities cannot observe the level of non-performing loans (NPLs) held by individual banks. Under asymmetric information, we show that the first-best outcome is achievable when the authorities can close all banks that fail to raise a minimum level of new capital. But when the authorities cannot close banks and must rely on financial incentives to induce banks to liquidate their NPLs, recapitalisation using equity (Tier 1 capital) would be the second-best policy, whereas recapitalisation using subordinated debt (Tier 2 capital) is suboptimal. If the authorities do not wish to hold an equity stake in a bank, they should subsidise the liquidation of non-performing loans rather than inject subordinated debt. We also show that the cost of this subsidy can be reduced if it is offered in a menu that includes equity injection.

Capital inflows — the good, the bad and the bubbly

Capital inflows come in all shapes and sizes. This paper highlights that equity flows, especially foreign direct investment, are the most stable forms of capital inflows. In contrast, debt inflows from banks particularly in foreign currency are most prone to booms and busts. These flows also seem most sensitive to external factors, especially changes in global risk, and also to changes in domestic credit growth. Although portfolio debt flows are somewhat more stable particularly to advanced countries, granular data highlight that (open-ended) emerging market mutual funds in foreign currency and aimed at retail investors are also prone to inflow ‘surges’ and ‘stops’. The share of external debt denominated in foreign currency is significantly higher in emerging market economies (EMEs) than in advanced countries. EMEs also usually have shallower and narrower financial markets. This suggests these countries are more prone to risks from capital inflow booms and busts.