Section 3: Prospects of the UK financial system 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. 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 1999–2004. 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. Chart 3.3 Losses on sub-prime asset-backed securities(a) Sources: Banks’ financial statements, Bank of America, BlackRock, Dealogic, JPMorgan Chase & Co., Moody’s Investors Service, Standard and Poor’s and Bank calculations. (a) See Box 1 on pages 18–20 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 S&P 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. 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. 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. 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. Chart 3.7 Bear Stearns’ liquidity pool Source: SEC. 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. 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. 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. 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. 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). 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. Chart 3.14 Moody’s speculative-grade corporate bond default rate and forecast(a) Source: Moody’s Investors Service. (a) Global trailing twelve-month issuer-weighted speculative-grade corporate bond default rate. 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. Chart A Stylised transmission map of financial stability risk Chart B Stylised transmission map of a deterioration of macroeconomic conditions 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.