Abstract: We propose a framework for constructing fixed-income portfolios of sovereign bonds that integrates financial and environmental considerations. Central to our approach is the introduction of carbon returns, a concept analogous to financial returns, modeled as random variables to capture the inherent uncertainty of future carbon emissions. Based on the financial and carbon return profiles of individual countries’ sovereign bonds, we employ an algorithm inspired by Hierarchical Risk Parity (HRP) to construct portfolios that balance each country’s contribution to the portfolio’s tail risk, as measured by expected shortfall, of financial and carbon returns. Focusing on developed market sovereign bonds, our results demonstrate that it is possible to design portfolios that effectively align decarbonization objectives with financial performance, both in-sample and out-of-sample, while accommodating diverse investor preferences.

https://www.bis.org/publ/work1362.htm

Abstract: Drawing on a novel dataset of more than 10,000 speeches from 1914 to 2024, we track the evolution of Federal Reserve communication and identify three stylized facts. (1) Although the overall volume of speeches has declined over the past decade, the composition of Fed communication has remained notably consistent for forty years, with Federal Reserve Bank (FRB) presidents accounting for the majority of public engagements. Variation in communicative participation is driven primarily by dispositional factors, including professional background, gender, and other speaker-specific idiosyncrasies, rather than the particular time frame in which the speeches were delivered. (2) While governors’ communication reacts to financial stability, FRB presidents’ schedules remain decoupled from both regional shifts in their districts and broader macroindicators. (3) A “complexity paradox” has emerged: while the syntactic structure simplifies during crises, the conceptual density increases. When adjusted for abstractness, the communication patterns of governors and FRB presidents appear remarkably similar.

https://www.snb.ch/en/publications/research/working-papers/2026/working_paper_2026_06

Abstract: This paper investigates the relationship between the optimal level minimum capital requirements aimed at preventing moral hazard by banks and banks’ incentives to invest in process innovation aimed at improving operational efficiency. We extend Hellmann et al (2000)’s dynamic model of banking competition to show that the imposition of minimum effective capital requirements aimed at preventing excessive risk-taking by banks supports, rather than hinders, investment in process innovation, thanks to the longer time horizon over which banks can expect to benefit from the efficiency improvement thereof. This is because investments in process innovation will be more valuable if banks act prudently. This in turn reduces the incentive for moral hazard with implications for the optimal level of minimum capital requirements.

https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2026/capital-requirements-and-process-innovation.pdf

Abstract: We analyse how risk-based capital requirements shape competition and credit allocation in the UK unsecured Small and Medium-sized Enterprises (SME) lending market using confidential loan-level data. Motivated by empirical patterns, we develop and estimate a structural model with screening, asymmetric information, and imperfect competition, in which banks and non-bank lenders differ in regulatory treatment. We estimate lender-specific costs and screening precision, and show how these features jointly account for the observed lender market shares across borrower risk and loan size segments. Our results indicate that regulation interacts with heterogeneity in information processing and costs to shape equilibrium pricing and credit allocation, with non-bank lending reflecting not only regulatory differences but also comparative advantages in screening technology. Our model provides a quantitative framework for evaluating regulatory policy in markets with both regulated and non-regulated intermediaries.

https://www.bankofengland.co.uk/working-paper/2026/asymmetric-information-and-capita-regulation-in-sme-lending

Abstract: Emerging economies that are large oil producers have sizable external debt, their sovereign risk rises when oil prices fall, and many of them have defaulted in the past. Interestingly, oil output reduces country risk on impact and in the long-run,but oil reserves increase it in the long-run and reduce it only marginally on impact. We propose a model of sovereign default and oil extraction and derive analytic and quantitative findings consistent with these observations. The sovereign manages oil reserves strategically to make default less painful, and hence its sustainable debt falls. Reserves rise in the run-up to a default and the co-movement of reserves and country risk in response to oil-price shocks switches from negative initially to positive afterwards. These results extend to a setup with rare, large and uncertain oil discoveries. Defaults occur with less severe drops in GDP and oil prices but after long dry spells in discoveries.

https://fedinprint.org/item/fedlwp/10330/103401

Abstract: We establish a causal link between liquidity regulation and a lower cost of bank wholesale funding. For identification, we use pre-determined variation in banks’ liquidity coverage ratio (LCR) in a difference-in-differences setup. Granular instrument-level data allow us to carefully control for any observable and unobservable time-varying factors at the creditor, instrument type, and macroeconomic levels. We find that banks with greater LCR exposure see a steeper decline in their wholesale funding costs. Consistent with seminal theoretical papers on bank liquidity risk, we provide novel evidence that wholesale funding costs decline by more for longer-maturity instruments and that banks shift from short to longer maturity liabilities. Our results support the argument that bank regulation can– at least partly– offset its costs to intermediaries through cheaper wholesale funding.

https://www.bis.org/publ/work1352.htm