A final strand of literature has contributed to our policy strategy over the past two years by emphasizing the role of credit and financial intermediation for macroeconomic fluctuations and monetary policy transmission, particularly the literature that developed during the 1980s on nonprice aspects of credit restriction and the importance of such factors in severe economic downturns.
Because of the deficiencies of the Basel II capital rules, banks were able to halve their equity ratios without any increase in their risk-weighted regulatory capital requirements. The increases in bank sizes and bank lending have not been matched by an equivalent increase in market-based funding.