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Europe Economics was recently commissioned by the World Gold Council to investigate the performance of gold relative to other asset classes on liquidity measures to be used by the European Banking Authority (EBA) in determining assets eligible for the Liquidity Coverage Ratio (LCR) as part of the Capital Requirements Directive (CRD-IV). CRD-IV is the implementation of Basel III recommendations at the EU level. We lay out a theory of liquidity, critique the EBA’s proposed analysis in light of our theory, and offer some quantitative measures of theoretical aspects of liquidity not covered by the EBA. We find that gold performs very well on the “correlation of price with need to sell” measure of liquidity and comparably to equities and fixed income on relative spread measures. We also discuss why we believe gold would perform very well on the “diversity of asset holders” aspect of liquidity. Taken as a whole, our research argues that to ignore certain key aspects of liquidity currently not covered by the proposed EBA assessment would bias the assessment against gold and potentially render the LCR inadequate in assuring liquidity in times of financial stress.
The UK Government intends to transfer responsibility for the regulation of consumer credit from the Office of Fair Trading to the Financial Conduct Authority. Europe Economics has worked in collaboration with Policis to understand the implications of the new regime. This report contains Europe Economics’ analysis of the impacts on the incremental costs of compliance and the impact of these cost changes on expected firm behaviour.
The World Gold Council (WGC) has commissioned Europe Economics to provide a politico-economic assessment of its proposal for the use of gold as collateral for Eurozone sovereign debt, especially the debt of Italy and Portugal. The executive brief, which summarises the WGC’s proposal, considering its merits relative to other ECB schemes such as the Outright Monetary Transactions (OMT) programme, may be downloaded here.
Dr Andrew Lilico and Europe Economics have written a report for JT International and Gallaher Ltd. (both members of the Japan Tobacco Group), providing expert advice on the economic issues raised by aspects of the UK Department of Health’s consultation on standardised packaging of tobacco products. This report expands on our previous report, written in 2008, on “Economic analysis of a display ban and/or plain packs requirement in the UK”.
This paper investigates whether movements in index-linked government bond yields are correlated with movements in medium-term GDP growth rates in the way one might expect from theory. The paper finds that movements in UK ten-year index-linked gilts can now be seen to have been highly correlated with movements in average ten-year GDP growth (a relationship that has not been obvious until the recent recession). As theory implies should be possible, we appear to be able to infer an excellent forecast for the ten-year ahead growth rate of the economy from the yield on index-linked bonds. When we apply this model to current data, the forecast growth rate is markedly lower than that produced by approaches such as those used by the UK Office for Budget Responsibility.