Section 3: Risks to UK banks from international financial system

Sources: Thomson Reuters Datastream and Bank calculations. (a) Data to close of business on 14 June (b) Denominated in units of local currency. Chart 3.1 International equity indices(a)(b)

Sources: Bloomberg, Credit Suisse and Bank calculations. (a) Indices are adjusted so that positive numbers in both series indicate increased risk-taking and negative numbers indicate reduced risk-taking. (b) Data to close of business on 14 June (c) Mean and standard deviation calculated from 28 July Chart 3.2 Indicators of risk appetite(a)(b)

Sources: Bloomberg, British Bankers ’ Association, Chicago Mercantile Exchange, Euronext.liffe, JPMorgan Chase & Co. and Bank calculations. (a) Three-month option-implied volatilities. (b) Data to close of business on 14 June (c) Average of FTSE 100, S&P 500 and Euro Stoxx 50. (d) Average of five-year on-the-run iTraxx Europe and CDX North America. (e) Average of three-month short sterling, euro-dollar and Euribor. (f) Average of USD/EUR, EUR/GBP and USD/GBP. Chart 3.3 Implied volatilities(a)(b)

Sources: Bloomberg, UBS Delta and Bank calculations. (a) Monthly moving averages of daily bid-ask spreads. (b)iBoxx € Corporates for corporate bonds; S&P 500 for equities; iBoxx € Sovereigns for government bonds; sterling-dollar exchange rate for currencies; gold price for commodities; and euro five-year swaps for interest rate swaps. (c) Data to close of business on 14 June Chart 3.4 Bid-ask spreads on selected assets(a)(b)(c)

Sources: Bloomberg, Thomson Reuters Datastream and Bank calculations. (a)Percentage of variation in daily equity price returns and daily changes in CDS premia explained by the first principal component over a three-month rolling window. Equity returns expressed in common currency terms. (b) European equity indices include the CAC 40, DAX, FTSE MIB and IBEX 35, and sovereign CDS are of Greece, Ireland, Italy, Portugal and Spain. (c) Data to close of business on 14 June Chart 3.5 Comovements between equity returns and changes in sovereign CDS premia(a)(b)(c)

Sources: Thomson Reuters Datastream and Bank calculations. (a) Ten-year government bond spreads over German bunds. (b) Data to close of business on 14 June Chart 3.6 Selected government bond spreads(a)(b)

Sources: BIS and Bank calculations. (a) ‘ International claims ’ include cross-border claims and the local claims of banks ’ foreign affiliates in foreign currency. (b) Lehman Brothers Holdings files for Chapter 11. Chart 3.7 BIS reporting banks ’ net international claims(a) on non-banks in US dollars

Sources: SEC filings and Bank calculations. (a) Includes agency and municipal issuers. Chart 3.8 Assets held by top ten prime US money market mutual funds during 2009

Sources: Bloomberg and Bank calculations. (a) Additional rate over three-month Euribor to swap US dollars, which pay three-month dollar Libor, for euros for one year. (b) Data to close of business on 14 June Chart 3.9 Euro-dollar basis swap rates(a)(b)

Source: Emerging Portfolio Fund Research. (a) Flows into dedicated emerging market funds. (b) Data to close of business on 9 June Chart 3.10 Net inflows into emerging market debt mutual funds(a)(b)

Sources: Treasury International Capital (TIC) data reporting system US Treasury and Bank calculations. Chart 3.11 Foreign net purchases of US securities

Sources: Bloomberg and Bank calculations. (a)Interest rate ‘ news ’ is calculated from the uncovered interest parity (UIP) condition. Unanticipated movements in UK relative to international forward interest rate differentials are cumulated from the start point of 4 November For more information see Brigden, A, Martin, B and Salmon, C (1997), ‘ Decomposing exchange rate movements according to the uncovered interest rate parity condition ’, Bank of England Quarterly Bulletin, November, pages 377 – 89. (b) Data to close of business on 14 June Chart 3.12 € ERI and interest rate differentials(a)(b)

Source: Bank calculations. (a) Data to close of business on 14 June (b)Estimated loss of market values since January 2007, except for US CLOs, which are losses since May Assets cover the United Kingdom, United States and euro area, except for equities, which are global. (c) Outstanding face values, except for equities, which are market values. (d) Updated to reflect new estimates of outstanding amounts since the December 2009 Report. (e)Includes prime, non-conforming and buy-to-let mortgages for the United Kingdom; residential mortgages for the euro area; prime, Alt-A and sub-prime mortgages for the United States. (f) US high-grade and mezzanine home equity loan ABS CDOs. Table 3.A Mark-to-market losses on selected financial assets(a)(b)

Sources: Bloomberg, Thomson Reuters Datastream and Bank calculations. (a) As implied by multi-stage dividend discount model. Shaded areas show interquartile ranges for implied risk premia since 1998 for United Kingdom, 1991 for United States and 2000 for euro area. Chart 3.13 International equity risk premia(a)

Sources: Bank of England, Euronext.liffe and Bank calculations. Chart 3.14 Market uncertainty measures

Sources: Chicago Mercantile Exchange and Bank calculations. (a)One year ahead probability densities calculated using options data and assuming that investors are risk-neutral. For more details see Clews, R, Panigirtzoglou, N and Proudman, J (2000), ‘ Recent developments in extracting information from options markets ’, Bank of England Quarterly Bulletin, February, pages 50 – 60. (b) Taken as 10 March (c) Taken as 23 April Chart 3.15 Market-implied probability distributions of S&P 500(a)

Sources: Bank of America Merrill Lynch, Bloomberg, Thomson Reuters Datastream and Bank calculations. (a) Webber, L and Churm, R (2007), ‘ Decomposing corporate bond spreads ’, Bank of England Quarterly Bulletin, Vol. 47, No. 4, pages 533 – 41. (b) Option-adjusted spreads over government bond yields. (c) Data to close of business on 14 June (d) Trough in spreads on 23 April Chart 3.16 Decomposition of sterling and dollar investment-grade corporate bond spreads(a)(b)(c)

Sources: Bloomberg, Goldman Sachs and Thomson Reuters Datastream. Chart A Growth of US-listed ETF assets

Chart B Cash flows for a swap-based ETF

Sources: Published accounts and Bank calculations. (a) Assets adjusted on a best-efforts basis to achieve comparability between institutions reporting under US GAAP and IFRS. Derivatives netted in line with US GAAP rules. Off balance sheet vehicles included in line with IFRS rules until 31 December See footnote (c). (b) Assets adjusted for cash items, deferred tax assets, goodwill and intangibles. For some firms, changes in exchange rates have impacted foreign currency assets, but this cannot be adjusted for. Capital excludes Tier 2 instruments, preference shares, hybrids, goodwill and intangibles. (c) Revision to US GAAP accounting rules on consolidation. Chart 3.17 LCFIs ’ leverage(a)(b)

Sources: Published accounts and Bank calculations. (a) Other includes prime brokerage and securities services. (b) FICC includes fixed income, currency and commodities. (c) Adjusted for write-downs and changes in fair value on FICC and equities trading revenues. (d) Revenues adjusted to reflect change in reporting cycle for US securities houses. Chart 3.18 Decomposition of US LCFIs ’ investment banking revenues

Source: Bloomberg and Bank calculations. (a) Spread between ten-year and two-year UK government bond yields. Chart shows only end-of-month data. (b) Derived from the UK government bond forward yield curve. Chart 3.19 Slope of the sterling yield curve(a)

Sources: Bloomberg and Bank calculations. (a) Average absolute deviation of submissions from Libor panel banks from Libor. Chart 3.20 Deviation of three-month Libor submissions(a)

Chart 3.21 Standalone and support ratings for major banking systems(a) Source: Moody ’ s. (a) Ratings are averages of individual bank ratings weighted by assets, as published in Moody ’ s most recent Banking System Outlook for the relevant financial system.

Sources: Federal Reserve and Bank calculations. (a) 2010 Q1 data are seasonally adjusted and annualised. Chart 3.22 Flow of lending in the United States