The practice of banking:  For almost a century after Bagehot wrote Lombard Street, the size of the banking sector in the UK, relative to GDP, was broadly stable at around 50%. But, over the past fifty years, bank balance sheets have grown so fast that today they are over five times annual GDP. The size of the US banking industry has grown from around 20% in Bagehot’s time to around 100% of GDP today. And, until recently, the true scale of balance sheets was understated by these figures because banks were allowed to put exposures to entities such as special purpose vehicles off balance sheet. Surprisingly, such an extraordinary rate of expansion has been accompanied by increasing concentration: the largest institutions have expanded the most. Table 1 shows that the asset holdings of the top ten banks in the UK amount to over 450% of GDP, with RBS, Barclays  BIS Review 140/2010  1  and HSBC each individually having assets in excess of UK GDP. Table 2 shows that in the US, the top ten banks amount to over 60% of GDP, six times larger than the top ten fifty years ago. Bank of America today accounts for the same proportion of the US banking system as all of the top 10 banks put together in 1960. While banks’ balance sheets have exploded, so have the risks associated with those balance sheets. Bagehot would have been used to banks with leverage ratios (total assets, or liabilities, to capital) of around six to one.
For the moment, the signs of output deceleration in the emerging world are moderate and consistent with September’s forecasts. Manufacturing production is down in some economies, and distrust has increased. Worth noting is the slowdown in Brazil and, to a lesser extent, in China (figure 2). Considering forecasts of slower global growth and its effects on the inflationary outlook, a number of central banks at both developed and emerging economies have begun to increase the monetary impulse. 2  BIS central bankers’ speeches  In Chile, these events have had limited effects. The financial market is showing somewhat tighter conditions echoing the situation in the global markets, which can be seen also in other emerging economies (figure 3). In recent months, Chile’s sovereign and corporate long-term debt premiums increased 50 and 70 basis points, respectively, mainly from August and coinciding with a reduction in investments in local bonds by international investors. After being stable for a long period, the cost of short-term bank credit rose to spreads around 110 basis points lately – 45 basis points more than in September. It is worth noting, however, that the local banking system has a diversified credit base. It recently reduced its funding from European banks, but compensated with increased funds from the United States, Canada and Asia. The higher volatility has also affected stock, fixed-income and currency markets, a phenomenon that is also present elsewhere (figure 4).