Conclusion  A detailed, disaggregated analysis of household balance sheets suggests the material loosening in UK monetary policy after the financial crisis did not have significant adverse distributional consequences. To the contrary, a detailed household-level analysis suggests that the majority of cohorts across the economy were significant gainers from this loosening, in financial and welfare terms. The channels through which monetary policy has affected people’s lives are often neither easy to observe nor well-understood, giving rise to a large perception gap on the part of the public about the true impact of monetary policy on them. This is not a failing on the part of the public. Nor is it a failing in the effectiveness of policy. Rather it reflects the difficulty of capturing the often subtle ways in which monetary policy affects people, in a way that is clear and relevant to them. While difficult, this is not an impossible objective, as other domains of public policy have demonstrated. A disaggregated analysis can be used to help decompose the ways and means and amounts by which different sets of households have been affected by monetary policy. Some illustrative and tentative examples of these personal “monetary policy scorecards” have been shown. 46  As discussed in Haldane (2017), the Bank already has various initiatives in train to support an increase in public understanding of the economy, such as layered communication, outreach initiatives and educational materials for schools.
Incentives Some of the pro-cyclical dynamics embedded in our financial system occur because market participants do not always have the incentive to behave in ways that will be good for the system as a whole. This occurs, in part, because market participants often do not have to bear the full costs of their actions. For example, the incentive to take on more risk without regard for the broader implications of those actions arises from a number of factors, including poorly constructed compensation schemes, ineffective risk management and gaps in regulatory oversight and risk capture. One problem evident during the crisis has been the reluctance of banking organizations to raise sufficient capital to be able to credibly have the resources to withstand particularly adverse economic conditions. This reluctance stemmed, in part, from concerns about what a capital raise would signal about the firm’s strength, but it also stemmed from an unwillingness to unnecessarily dilute shareholders. The reluctance led to more uncertainty about the adequacy of banks’ capital positions, which, in turn increased concerns about counterparty credit risk. These worries led to a further deterioration in market liquidity. These dynamics tightened financial market and credit conditions, increasing the downward pressure on economic activity and on the financial system. The Supervisory Capital Assessment Program (SCAP) exercise that we undertook in the United States leaned against this.