8  BIS Review 95/2010  To some extent, these strategies and their implications were captured to a degree in performance measures. For example, the rise in reported average ROEs of banks over the past few decades occurred alongside a rise in its variability. At the same time as average ROEs in banking were trebling, so too was their standard deviation (Chart 17). In that sense, the banking “productivity miracle” may have been, at least in part, a mirage – a simple, if dramatic, case of risk illusion by banks, investors and regulators. (a)  Increased leverage  Banks’ balance sheets have grown dramatically in relation to underlying economic activity over the past century. Charts 19 and 20 plot this ratio for the UK and the US over the past 130 years. For the US, there has been a secular rise in banks’ assets from around 20% to over 100% of GDP. For the UK, a century of flat-lining at around 50% of GDP was broken in the early 1970s, since when banks’ assets in relation to national income have risen tenfold to over 500% of GDP. This century has seen an intensification of this growth. According to data compiled by the Banker, the balance sheets of the world’s largest 1000 banks increased by around 150% between 2001 and 2009 (Chart 21). In cross-section terms, the scale of assets in the banking system now dwarfs that in other sectors.
And that expectation is factored into their own behaviour, whether it is negotiating wages, setting prices, or deciding how much to borrow and consume. All of that goes a long way towards ensuring that inflation is well anchored to the target. Of course, from month to month, inflation will still vary somewhat around 2½%. In recent months, RPIX has been a little below target, and there has even been some interest in whether it might reach 1.5%, the point at which the Governor would have to write a formal letter to the Chancellor explaining what was going on. The pick up of inflation to 2.6% in January has silenced this discussion, at least for the time being. We pore over the reasons for such developments in enormous detail at the Bank. But in the bigger scheme of things these month-to-month movements are quite small, and are I hope likely to play very little - if any - role in the key decisions of your businesses, or those you represent. People often ask if our relative success at targeting inflation has come at a cost in terms of lost output or employment. It is increasingly accepted, I think, that there is no such trade-off in the long run. And, looking at recent data, it is hard to see a trade-off even in the short run. Unemployment remains close to its lowest level for a quarter of a century - a trend seen in Northern Ireland just as much as in the UK as a whole.