To give you some figures, non-financial corporation debt ratios grew rapidly during the last expansion up to close to 120% of GDP in mid-2010, clearly above the average values in the euro area, which stood at around 80% of GDP at that time. Similarly, the household debt-to-GDP ratio rose up to almost 85% in the same period, 20 pp above euro area levels. BIS central bankers’ speeches  1  2.2. Supply-side frictions  Turning now to the supply side, there exist some frictions that tend to exacerbate the negative pressure on credit exerted by the contractionary demand factors. One significant friction in this regard is the existence of asymmetric information between lenders and borrowers, a circumstance that limits the ability of the lenders to assess correctly the actual level of risk posed by a given borrower or a project. This friction normally intensifies during periods of crisis and, for reasons well known, is comparatively more relevant in the case of small and medium-sized firms as opposed to large companies. The comparative disadvantage of small firms in accessing financing relative to their larger competitors has, in fact, been one of the most pervasive features of the recent crisis, despite the mitigating impact provided by the special facilities activated by many of the public institutions represented here today. Another factor that significantly restrained credit supply conditions until recently was the financial fragmentation of the euro area that emerged as a result of the tensions in the European sovereign debt markets.
And those risks will grow, unless we put global banks and markets on a sounder footing. Suppose, for example, that UK-owned banks’ share of global banking activity remains the same and that financial deepening in foreign economies increases in line with historical norms. By 2050, UK banks’ assets could exceed nine times GDP, and that is to say nothing of the potentially rapid growth of foreign banking and shadow banking based in London. Some would react to this prospect with horror. They would prefer that the UK financial services industry be slimmed down if not shut down. In the aftermath of the crisis, such sentiments have gone largely unchallenged. But, if organised properly, a vibrant financial sector brings substantial benefits. Today financial services account for a tenth of UK GDP and are the source of over 1 million jobs.5 Two thirds of those are outside London, including jobs in asset management in Edinburgh, transaction processing in Bournemouth and insurance in Norwich. Being at the heart of the global financial system also broadens the investment opportunities for the institutions that look after British savings, and reinforces the ability of UK manufacturing and creative industries to compete globally. Not to mention that financial services represent one of the UK’s largest exports. More broadly, London’s markets serve a vital global role. London acts as Europe’s window to global capital; is a centre of emerging market finance; and can play an important role in the financial opening of China.