In a  downturn, more highly indebted corporates can reduce investment and employment by more than those with less debt, as we saw during the global financial crisis  (GFC). This behaviour can  amplify macroeconomic downturns, further affecting corporate resilience, and potentially also increasing losses for lenders on other forms of lending. UK corporate debt fell after the GFC, but has risen since as firms took advantage of low borrowing costs and favourable economic conditions. With UK corporates now navigating an increasingly challenging macro environment, risks to financial stability can materialise through either channel. Page 4  Chart 1: UK corporate debt to earnings has remained high since recovering from post-GFC lows Corporate debt to earnings over time (in percent) (a) (b)  (a) Sources: Association of British Insurers, Bank of England, Bayes CRE Lending Report (Bayes Business School (formerly Cass)), Deloitte, Financing & Leasing Association, firm public disclosures, Integer Advisors estimates, LCD an offering of S&P Global Market Intelligence, London Stock Exchange, ONS, Peer-to-Peer Finance Association, Eikon from Refinitiv and Bank calculations. (b) These data refer to UK PNFCs only. Earnings are defined as businesses’ aggregate gross operating surplus, adjusting for financial intermediation services indirectly measured. How resilient are UK corporates? UK firms have faced a series of shocks in the form of Covid, a sharp rise in input prices, and a rapidly tightening financial environment. And the end is not yet in sight; the MPC projects economic growth to flatline for the next couple of years.
In contrast, reserve expansion associated with LSAPs has a more enduring effect as long as the assets remain in the SOMA portfolio, subject to offsetting influences on reserves from changes in other balance sheet items. 5  The authority for the Federal Reserve to pay interest on reserve balances held by depository institutions was granted by Congress prior to the crisis, in the Financial Services Regulatory Relief Act of 2006, with a planned effective date of October 2011. However, implementation was accelerated as part of the response to the financial crisis. The statute authorizes Federal Reserve Banks to pay interest on balances maintained to satisfy reserve balance requirements (required reserves) and on excess balances (excess reserves). 6  As noted earlier, the Board of Governors is responsible for setting the rate of interest on reserves. Since December 16, 2008, the interest rates on required reserve balances and excess reserve balances have both been ¼ percent, but the rates need not be the same. Although the interest rate on reserves represents an overnight rate, it is calculated and paid out on a lagged basis according to two-week reserves management maintenance periods. The payment is based on daily account balances and a weighted average of applicable overnight rates over the maintenance period. More information can be found in Regulation D.  7  The MEP provided additional monetary policy accommodation by increasing the duration of the SOMA portfolio, but unlike LSAP programs, on net it had a neutral effect on the level of reserves.