But gauging the scale of that borrowing, and whether it is hedged either with derivatives or dollar income receipts, is a real data challenge. This is a significant gap because unhedged dollar borrowing is one potential fault-line in the international financial system at present (BIS (2014)). (b)  Modelling  Once the necessary data is in place, a natural next question is how best to use this to understand the dynamics of the macro-financial system of systems. There are a number of potentially fruitful, if fledgling, avenues of research currently being pursued on that front. In making sense of the macro-financial system, it would be desirable to have a quantitative framework for understanding and evaluating interactions both within the financial system and between it and the wider economy. Pre-crisis, such models were close to non-existent. Indeed, many mainstream macro-economic models did not even contain a well-defined financial sector, much less interactions within it (Roger and Vleck (2011)). The Bank of England was an early pioneer of an approach which placed the financial sector centre-stage, with its so-called RAMSI (Risk Assessment Model of Systemic Institutions) model (Burrows et al (2012)). A stylised overview of RAMSI is given in Chart 16. RAMSI embodies interactions between the elements of individual banks’ balance sheets (the microprudential layer), between individual banks (the macro-prudential layer) and between the financial system and the economy (the macro-economic layer). As an example, RAMSI embodies an interbank network which allows counterparty network contagion to propagate.

For example, the CRISIS (Complexity Research Initiative for Systemic Instabilities) project is a consortium of EU universities, private firms and policymaking institutions which is building large-scale calibrated models to capture sectoral behaviour, including between the economy and the financial system. 12 At national level, promising progress has also been made in developing ABM models of the housing market. For example, Geanakoplos et al (2012) develop a regional model of the US housing market, which does a much better job than aggregate macro-economic models in matching housing market patterns, both in in the run-up to, and following, the financial crisis. As part of its new research agenda, the Bank of England is working currently with the Institute for New Economic Thinking (INET) at Oxford to try and develop an ABM model of the UK housing market. 13 As with Geanakoplos et al (2012), the aim is to provide a calibrated, granular model which better captures the dynamics of the housing market. It could also, potentially, be used to help evaluate the efficacy of macro-prudential interventions in that market – for example, policies which alter mortgage loan-to-income or loan-to-value limits. A third promising area of research concerns the interaction the macro-prudential and macroeconomic layers of the system – that is, the interplay between macro-prudential and monetary policy tools. This is another priority area for the Bank’s new research agenda. Although these policies have distinct primary objectives, their transmission channels are likely to be closely interwoven, with both affecting risk-taking and economic activity.