But the supply of bank lending to businesses during the recovery is likely to be more expensive than it was pre-crisis and possibly constrained in quantity. In 2009 we saw one of the consequences, with a record year for sterling corporate bond and equity issuance as investment grade corporates by-passed the banking sector. The loans market is a particularly important part of the system of credit provision. Syndicated loans allow firms to borrow in larger size and for longer periods, and facilitate the lenders in diversifying their risk. Given the highly concentrated origination of business lending in this country, it is useful that the syndicated loans market and the secondary loans market allow a wider group of firms to contribute to lending to UK businesses, including non-bank participation. Over the next few years there are a lot of corporate loans, made during the boom years of credit supply, which fall due for repayment or rollover. That is a particular challenge for subinvestment grade borrowers, including most SMEs. It is clear that the high-yield debt markets are very much more developed in the United States than in Europe and so a greater burden here falls on bank finance. But non-banks may also have a key role to play. The Bank has been engaging with market participants over policies or market developments in the loans market which would support lending by non-bank institutions. Some of that analysis was reflected in a discussion paper on non-bank lending, published by HM Treasury earlier this year.
In particular, the potential amplification of the shock within the financial system through channels such as an endogenous fall in market liquidity as firms simultaneously seek to lower risk exposures; dynamic hedging behaviour (particularly of “unbalanced” options positions) 3 ; and restrictions on lending (a  3  Bank of England Financial Stability Report July 2006 Box 5, Page 33. BIS Review 81/2007  3  “credit crunch” or “financial accelerator” effect), are not yet built in empirically. And the framework does not yet incorporate the potential contagion and spillover effects which would result from severe strain at, or the default of, a major bank or financial institution. 4  BIS Review 81/2007  9 At present, the results from the top-down stress tests consequently tend to be relatively “linear”; that is an “extreme” scenario is a “scaled-up” version of a more “moderate” scenario. As financial instability is by nature inherently non-linear, given the central focus on default, contagion and spillover, this is an important failing. Moreover, the stress-tests typically concentrate on the impact of particular adverse scenarios, which individually have a nearzero probability of occurring in practice. There is generally no attempt to derive a distribution of possible outcomes. 10 Addressing these limitations is an important priority for financial stability authorities, so that “practical” stress-testing meets the “ideal” objectives set out above.