Abstract: The general search for U.S. dollars in forward currency markets, combined with the balance-sheet constraints of intermediary dealers, induces persistent failure of covered interest parity (CIP). We investigate these CIP deviations across the entire maturity spectrum by analyzing the daily dynamics of the USD/CHF crosscurrency basis curve. Applying functional principal component analysis, we identify three components that explain virtually all curve dynamics: a persistent, slowmoving level component, a temporary steepener, and a short-end component inducing sharp basis widenings and contractions around quarter-end dates. We provide empirical evidence that CIP-implied carry opportunities and U.S. monetary policy announcements widen the entire basis curve, whereas Fed swap line announcements tend to narrow it. During periods of global turmoil, the slope inverts in response to rising credit and capital stress among dealer banks, while funding stress steepens the curve as swap line usage mitigates short-end distortions. Reporting date effects, funding stress, and deteriorating market liquidity widen the basis primarily at the short- end. We further show that regulatory reporting dates generate systematic window-dressing distortions not only at the short end but also in the slope of the basis curve. This effect has weakened since 2022, which is consistent with recent changes in the regulatory landscape.

https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_09

Abstract: We examine how central banks can effectively communicate forecast uncertainty in a two-part experimental study. Part I tests how different visual media – fan charts, dot plots, box-and-whisker plots, speedometers, and ranges – communicate uncertainty to both the general public and expert audiences. We find that fan charts are well understood and perform best at jointly conveying both expectations and uncertainty. Part II implements a novel dynamic information experiment with 1,600 UK participants across four stages, examining the effects of uncertainty communication on expectations and uncertainty perceptions over time. We find that while point forecasts anchor expectations marginally more than fan charts initially, forecast errors significantly de-anchor expectations, particularly for ‘unlucky’ errors that move inflation away from target. Critically, fan charts materially mitigate this de-anchoring, acting as an ‘insurance policy’ that helps protect central bank reputation. We also document that the public consistently underestimates the degree of uncertainty, and that communicating uncertainty via fan charts helps the public learn more realistic uncertainty perceptions. Our findings have important implications for central bank communication strategies.

https://www.bankofengland.co.uk/working-paper/2026/anchors-aweigh-the-effect-of-communicating-forecast-uncertainty

Abstract: This paper develops an agent-based framework (DeTail) to assess the state-contingent tail effects of releasable macroprudential capital buffers. The model features heterogeneous firms, households, and banks, and a single central bank, all interacting in a fully integrated, stock-flow consistent framework which generates endogenous credit cycles. Using this approach, we evaluate how time-varying capital requirements affect the time-varying distributions of credit growth, firm and household default rates, and bank losses along the credit cycle. Policy experiments show that releasing capital buffers during economic downturns preserves credit supply by improving risky (lower-tail) credit outcomes, reduces both households and firms defaults, and supports macro-financial resilience by limiting tail bank losses. At the same time, capital buffer accumulation during upturns imposes minimal costs and does not significantly constrain lending. These findings support the active use of releasable buffers to mitigate systemic risk and smooth credit cycles without weakening the banking system.

https://www.bankofengland.co.uk/working-paper/2026/the-devil-in-the-detail-assessing-state-contingent-tail-effects

Abstract: This paper examines whether regulatory liquidity buffers enable banks to support corporate borrowers during financial stress. Using confidential bank-firm credit data and hand collected Liquidity Coverage Ratio regulation (LCR) disclosures during COVID-19, we find that banks with higher LCR buffers above the regulatory minimum provided significantly more credit to firms with large undrawn credit lines in March 2020. Critically, only buffers, not overall LCR levels, matter, revealing that the regulatory minimum operates as a binding constraint during stress. The effect is concentrated among high-quality borrowers with clean credit profiles and disappears by mid-2020, confirming that LCR buffers provide selective, temporary liquidity insurance during acute stress.

https://www.federalreserve.gov/econres/feds/the-last-taxi-lcr-buffers-and-bank-liquidity-provision.htm

Abstract: Internal ratings-based models play a central role in bank risk management and regulatory capital determination, yet their validation remains methodologically challenging and operationally resource-intensive. In this paper, we contribute to the quantitative validation of probability of default models through a systematic backtesting exercise using a new proprietary dataset collected by the European Banking Authority between 2017 and 2024. We propose a generalised correction to the canonical binomial test that simultaneously accounts for both asset and serial correlation and is supported by extensive simulations. Acknowledging the iterative nature of model validation, we use order statistics to identify persistent miscalibrations over time. We present an approach to aggregate the results of backtesting procedures, which are typically designed for bank level evaluation, whereas our focus is to provide evidence on the performance of the models across EU banks. Empirically, we find that the share of miscalibrated exposures of the small and medium-sized enterprises corporates asset class ranges from around 3.0% under realistic assumptions to a conservative upper bound of 16.7% implied by the canonical binomial test. We also quantify the impact on capital requirements and show that prudent model recalibrations would reduce system-wide Tier 1 capital ratios by 4 to 10 basis points. By offering scalable backtesting tools and enhancing transparency, we support more effective supervisory oversight and contribute to restoring market confidence in internal models.

https://www.eba.europa.eu/sites/default/files/2026-04/9917133d-9e43-4ceb-89ff-e3578f731c13/Staff%20paper%20-%20Systematic%20backtesting%20of%20probability%20of%20default%20models%20with%20regulatory%20data.pdf