To give an example, banks with declining loss-absorbing capacity might postpone appropriate treatment of borrowers with weak performance amid a continued decline in banks’ profitability. This may cause a situation in which capital and labor are being allocated to inefficient firms, and thus result in pushing down the rate of increase in TFP in the overall economy over the long term.
To adapt the idea of a famous physicist in the opera Dr. Atomic, written by Peter Sellars, perhaps experts in financial stability analysis should regularly “indulg(e) in controlled fantasies, trying to dream up new … phenomen(a) that (are) not contrary to our knowledge, but perhaps beyond our experience”. 5.