Central Banks’ Finance Tomes Have Ways to Make You RicherSimon Kennedy
Bank of England policy maker Andrew Haldane recently described Thomas Piketty’s bestseller on income inequality as “read by a few and understood by even fewer.”
The same arch comment can be made of the reports on financial stability that central bankers like Haldane regularly publish. Certainly in the years before 2008 one could imagine them gathering more dust than readers during the boom times.
The collapse of Lehman Brothers Holdings Inc. and subsequent financial crisis changed all that by showing central banks that stability in prices doesn’t translate into stability in finance. Accordingly, the BOE, Federal Reserve, European Central Bank and others all have been handed new powers to regulate or monitor financial companies and markets, while also increasing their communications on the topic.
In that spirit, Governor Mark Carney will next week use the release of the Bank of England’s Financial Stability Report to detail plans he may have for cooling the U.K. housing market. The Swiss National Bank published its report today, calling on the UBS AG and Credit Suisse Group AG to further boost their leverage ratios.
Investors would be wise to pay attention if new research by economists Benjamin Born at the University of Mannheim, the Bank of Canada’s Michael Ehrmann and Marcel Fratzscher at the Deutsches Institut fuer Wirtschaftsforschung is correct.
It shows central banks’ reports on financial stability can move equity markets by more than 1 percent over the following month and also reduce market volatility.
That is based on an analysis of 1,000 such reports and related speeches by 37 monetary authorities over the past 14 years.
The effect tends to be particularly “significant and potentially long lasting” if the review contains an optimistic assessment of the state of the financial industry, the economists said in their study, which was published this month in the Economic Journal of the U.K.’s Royal Economic Society.
The data leave the authors advising central banks to speak carefully in expressing their thoughts for fear of roiling markets now more focused on their musings than ever before.
The findings underline “communication by monetary authorities on financial stability can influence financial market developments, but that it needs to be employed with utmost care, stressing the difficulty of designing a successful communication strategy on financial stability,” they said.