In contrast, the UK banking system has, I have noted, so far been able to absorb the initial surge in demand for credit from firms6 and extend payment holidays to households. The FPC stress test indicates that banks have the resilience to continue to maintain credit to the real economy. Admittedly, given the risk around economic prospects and the impact on firms, much of the additional lending that is necessary needs to be supported by government guarantee. But we would be dealing with a very different credit environment now absent the resilience – both capital and liquidity – that has resulted from the post crisis reforms. The FPC stress test also illustrates one of the key lessons of the great financial crisis, that if banks have resilience and can use it to help to maintain credit in the real economy in a stress rather than deleveraging, the outcome is in the end better for banks themselves. The capital they might preserve by deleveraging is 4  Since the 2008/09 financial crisis, the Bank has increased the range of collateral it accepts, which now extends to loans and a wide range of securities. 5 To take a very simplified example: the aggregate CET 1 ratio of major UK banks was around 4.5% in 2007 (compared to over 14% now). A 3.8 percentage point capital drawdown (the drawdown we expect banks to face in the MPC’s illustrative scenario) would have depleted a very significant fraction of the capital banks had available.
12  Some US equity markets recently reached record highs, both the FTSE 250 and the S&P 500 have gained over 40% from their March lows, and sterling 3m and USD 3m LIBOR rates have come in 70bps and 81bps respectively from their crisis highs 10  All speeches are available online at www.bankofengland.co.uk/news/speeches  10  I would at this stage identify a number of areas that will likely merit further consideration in a comprehensive, evidence based, analysis of how stress evolved over the initial phase of the COVID crisis and whether and how market dysfunction could have been prevented without huge central bank intervention. Market liquidity broke down very quickly in dealer intermediated corporate bond markets and EME asset markets. This, bluntly, was no great surprise. The potential illiquidity of these markets under stress has been well known to regulatory authorities and market participants for some time.13  These markets are now very large. The global stock of non-financial corporate bonds at the end of 2019 reached an all-time high of $ trillion, with the stock of emerging market corporate debt around $ We need to examine the extent to which their illiquidity contributed to pressure on asset prices and liquidity elsewhere, given the desire of many of the holders of these assets to shift their portfolios to more defensive positions and to increase cash holdings.