Post 2007 crisis unconventional monetary policy in the UK
The main focus of this PhD thesis is to investigate the unconventional monetary policy tools introduced by the Bank of England (BoE) in its response to the recent financial crisis and to analyse its impact on the UK economy and especially the banking sector. The thesis consists of four chapters; an introductory chapter and three self-contained chapters. The first chapter mainly inspects the types and the sizes of the unconventional interventions of the monetary authorities in the UK, the US, and the EU after the collapse of Lehman Brothers in 2008. It also describes the transmission channels through which the impact of the unconventional monetary policies is delivered into the wide economy, and includes a survey of the literature of quantitative easing. The second chapter employs a flow of funds (FOFs) analysis based on Godley and Lavoie (2007) balance sheet framework using ONS sectoral data for the period between 2007 and 2011. It focuses on two distinct sub-periods (2007-2008 and 2009-2011) to assess the initial effects of mid-2007 financial crisis on the UK economy and examine the influence of BoE’s asset purchase program (APP) on the sectoral financial positions in the main financial asset categories. The analysis implicates five main results. First, APP was unsuccessful in expanding bank lending which dropped by about £208 billion in the 2009-2011 period. Second, APP might have positive effects on debt securities and equity prices and hence consumer wealth. Third, through reducing the cost of borrowing, it appears that APP induced the majority of sectors to issue more debt securities. Fourth, after the introduction of APP early in 2009, several sectors relied more on equity rather than debt capital. Finally, domestic productive sectors (NFCs, MFIs, OFIs, and INSs) showed some abroad bias and sent massive amounts of money out of the country. The third chapter explains the drop in total bank lending after the introduction of APP from an agent-based computational economics (ACE) point of view. The baseline model contains four types of agents -households (HHs), big firms (BFs), small and medium enterprises (SMEs), and banks-. These agents interact monthly for a period of 50 months in an environment that simulates bank lending markets in the UK after APP was introduced in 2009. The ACE model is anchored to the actual values of several variables -such as homeownership statistics and nonfinancial firms leverage ratio- around the time of the program initiation. The lower bond yields caused by APP encourage BFs to substitute bank borrowing with security debt (bonds). In addition, the risk weight regime of Basel capital adequacy requirements induces banks to favour mortgages over business loans to SMEs. My analysis contrasts the implications on bank behaviour of Basel III capital adequacy requirements (scenario 3) with Basel I (simple capital adequacy requirements with no risk weights) and the case of no capital requirements (scenarios 1 and 2 respectively). The scenario analysis shows that in the absence of risk weighting (i.e. scenarios 1 and 2), both lending to SMEs and total lending would have been higher. The combination of lower bond yields and Basel III capital adequacy requirements on banks appears to play a role in the drop in the amount of bank loans to businesses. Similar to the actual data, simulation results indicate that the rise in the amount of mortgages was not enough to counter the decrease in business loans which represents the main cause of the shrinkage in total bank lending. The fourth chapter tries to analyse the same issue of falling bank lending after APP introduction using a three-sector DSGE model. The main results show that a negative shock in gilts yield -initiated by massive asset purchases under the program- induces big unrestricted firms to shift from bank borrowing to security debt (bonds). The fall in BFs bank borrowing decreases the share of the loans to BFs in banks asset compositions and hence increases the amount of risk weighted assets. Induced by Basel III capital requirements, banks start to adjust their portfolios to accommodate more mortgages and less loans to small and medium enterprises (SMEs). The analysis of the role of capital adequacy requirements points out that while the introduction of strong enough capital requirements decreases the risks in the banking system, it may deprive the bank financing from SMEs.
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