8  For an interesting academic exposition of this “macroeconomic shortage of assets”, see Caballero, R, “A Caricature (Model) of the World Economy”, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1724897  BIS central bankers’ speeches  7  Chart 11  Chart 12  Central bank balance sheets  US, UK and Euro area GDP  £ billions  Local currency billions  350  3000  300  2500  Indices: 2008 Q1 = 100 102 100 98  250  2000  96  200  94 1500  92  150 1000  100 Fed (right-hand scale) ECB (right-hand scale) BoE (left-hand scale)  50 0 2007  2008  2009  2010  Sources: Bloomberg and Bank of England. 2011  500  United Kingdom  90  Euro area  88  United States  86 84  0 2004  2005  2006  2007  2008  2009  2010  2011  Sources: ONS, Eurostat and Bureau of economic analysis. It is still early days, but the combination of portfolio rebalancing and this reported shortage of specific high-quality assets might have wider implications for financial stability if it encourages investors to look for additional yield by moving into more illiquid products (by investing in new asset classes or in derivatives of more liquid underlying instruments) or into more complex products (which they might not fully understand, and which might not be appropriately priced for correlation, optionality or underlying credit risk).
Market intelligence is crucial here, in that it can provide us with near real-time information about whether and where these risks might be building (or eventually crystallising). So far, there is little evidence of excessive risk-taking on a generalised basis across the financial system. But the intelligence we have gathered during 2011, notwithstanding the recent pull-back in June, has flagged a number of pockets of increasing risk appetite and a few specific markets which have been showing signs of excess. That tendency seems to have been most prevalent in the United States, where the financial and real economy recoveries appear somewhat more established than in the UK and the euro area (Chart 12). But during recent discussions, some market participants have noted that this tendency has begun to spread to Europe as well. One example comes from the high-yield corporate bond markets, where demand has been very strong and where issuance, which reached record levels in 2010, has continued apace in 2011 (Chart 13). That is likely to reflect the generalised disintermediation of stricken banking systems – for those that are able to tap capital markets, bond issuance poses a useful alternative to bank lending. Moreover the extent of high-yield issuance may reflect the fact that it is smaller businesses, which are likely to be sub-investment grade, who are finding it hardest to secure affordable bank finance.9 Given oligopolistic banking systems like those in the UK, a deeper and more liquid capital market might help improve the supply of credit to UK businesses.