Section 3: Prospects of the UK financial system

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Section 3 Prospects of the UK financial system
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Chart 3.1 Asset prices during the recent market
turbulence
Sources Halifax, IPD, JPMorgan Chase Co.,
Merrill Lynch, Thomson Datastream and Bank
calculations. (a) Series inverted. (b)
Sub-prime series is the A-rated 2006 H2 vintage
ABX.HE index. (c) Dotted line shows start of
July 2007.
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Chart 3.2 Financial market liquidity(a)
Sources Bank of England, Bloomberg, Chicago
Board Options Exchange, Debt Management Office,
London Stock Exchange, Merrill Lynch, Thomson
Datastream and Bank calculations. (a) The
liquidity index shows the number of standard
deviations from the mean. It is a simple
unweighted average of nine liquidity measures,
normalised on the period 19992004. The series
shown is an exponentially weighted moving
average. The indicator is more reliable after
1997 as it is based on a greater number of
underlying measures.
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Chart 3.3 Losses on sub-prime asset-backed
securities(a)
Sources Banks financial statements, Bank of
America, BlackRock, Dealogic, JPMorgan Chase
Co., Moodys Investors Service, Standard and
Poors and Bank calculations. (a) See Box 1
on pages 1820 for details. (b) Area below
dotted line shows net write-downs by major UK
banks and LCFIs since the start of 2007 to 22
April 2008, while total height of bar shows an
SP estimate (published on 13 March 2008) of
write-downs by all investors. (c) In the absence
of data on realised losses, this estimate is
derived from data on actual delinquency rates on
outstanding mortgages by vintage, and an
assumption about the transition from delinquency
to default, as described in Box 1. (d) This
estimate is derived in the same way as for
estimated credit losses, but assuming that
serious delinquency rates on different vintages
continue to rise at their average rate to date
until the mortgages are four years old, when they
are assumed to be plateau. See Box 1 for details.
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Chart 3.4 Illustrative implied marks on CDO
super-senior tranches(a)(b)(c)
Sources SEC filings, company reports and Bank
calculations. (a) Data are for six LCFIs. Not
all firms have reported data in each of the
categories. Super-senior tranches are those
that are above senior tranches in the capital
structure. (b) For two banks, reported
average marks on positions are used. Otherwise,
an implied mark is calculated as reported net
exposures at end-2007, relative to these net
exposures plus net losses in that year.
Estimating marks on the basis of net, rather than
gross, figures is problematic as it does not take
into account any changes in hedges. The
calculation also does not allow for purchases and
sales of assets. In one case an adjustment is
made for disclosed changes in hedges and
purchases/sales. (c) Figures include liquidity
commitments on CDOs where disclosed.
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Chart 3.5 Global issuance of asset-backed
securities(a)
Source Dealogic. (a) Quarterly issuance.
Other includes auto, credit card and student
loan ABS. (b) Commercial mortgage-backed
securities. (c) Residential mortgage-backed
securities.
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Chart 3.6 Credit availability in the United
Kingdom(a)
Source Bank of England Credit Conditions
Survey, 2008 Q1. (a) Net percentage balances
are calculated by weighting together the
responses of those lenders who answered the
survey questions on the change in the
availability of credit. The blue bars show the
responses over the previous three months. The
red diamonds show expectations for the quarter in
question, as measured three months earlier. (b)
A positive balance indicates that more credit is
available.
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Chart 3.7 Bear Stearns liquidity pool
Source SEC.
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Chart 3.8 Spreads on interbank lending and in
residential mortgage-backed securities markets(a)
Sources Bloomberg, Lehman Brothers and Bank
calculations. (a) Data to close of business
on 22 April 2008. (b) Weekly five-year spread
on AAA-rated UK prime residential mortgage-backed
securities over Libor. (c) Weekly average
spread of three-month Libor to expected policy
rates, as implied by three-month overnight
indexed swap rates.
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Chart 3.9 US LCFIs level 3 assets(a)
Sources SEC filings and Bank calculations. (a)
Level 3 assets are those that are valued using
unobservable inputs which are significant to the
measurement of their value. (b) 2008 Q1 US
securities houses series includes data from three
of the four US securities dealers. The holdings
of level 3 assets at these three securities
houses has increased since 2007 Q4.
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Chart 3.10 Volumes settled in CLS(a)
Sources CLS Bank International and Bank
calculations. (a) Chart shows a 20-day
moving average of the number of trades submitted
to Continuous Linked Settlement (CLS). (b)
Average volume settled from July 2007 to
date. (c) Average volume settled from January
2006 to June 2007.
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Chart 3.11 Six-month implied volatility of
credit default swap index spreads(a)(b)
Sources JPMorgan Chase Co. and Bank
calculations. (a) Chart shows at-the-money
implied volatility of options with residual
maturities that range from four to seven months.
The options are written on five-year on-the-run
indices. (b) The CDX is an index of 125 North
American investment-grade credit default swaps.
The iTraxx index is the European equivalent.
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Chart 3.12 Ratio of household sector debt to
annualised post-tax income
Sources ONS and Bank calculations. (a)
Households total financial liabilities excluding
secured and unsecured debt (including bills that
are due to be paid).
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Chart 3.13 UK PNFCs capital gearing(a)(b)
Sources ONS and Bank calculations. (a)
Private non-financial corporations. (b)
Gearing is calculated as the ratio of debt, net
of liquid assets, to the market value or
replacement cost of capital.
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Chart 3.14 Moodys speculative-grade corporate
bond default rate and forecast(a)
Source Moodys Investors Service. (a) Global
trailing twelve-month issuer-weighted
speculative-grade corporate bond default rate.
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Table 3.A Sources of tail risk in the period
ahead change in assessment since October 2007
Source Bank of England assessment. (a)
Assessed change in the probability of a severe
crystallisation of a vulnerability at some point
over the next three years. (b) Assessed change
in the expected impact on financial stability if
a vulnerability is triggered in a severe scenario.
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Chart A Stylised transmission map of financial
stability risk
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Chart B Stylised transmission map of a
deterioration of macroeconomic conditions
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Chart 3.15 Judgement on levels of likelihood and
impact of key sources of tail risk
Source Bank assessment. (a) Probability of
a severe crystallisation of a vulnerability at
some point over the next three years. (b)
Expected impact on financial stability if a
vulnerability is triggered in a severe scenario.