On the face of it, that is not easy to square with (regulatory and monetary) policies having had a significantly damaging impact on aggregate productivity by keeping alive a large tail of low-productivity companies. However, these distributions cannot by themselves identify the role monetary policy has played in influencing companies’ fortunes. To gauge that, we need to undertake a counter-factual exercise. Specifically, we  54  Bahaj, Foulis, Gal and Pinter (2016). 15  All speeches are available online at www.bankofengland.co.uk/speeches  15  consider a simple scenario in which Bank rate is held at 4.25% rather 0.25%. What impact would that have had on companies’ solvency and hence on aggregate productivity? With data on their debts, interest payments and profits, we can simulate interest cover ratios for each company in our sample – that is to say, their profits before interest divided by interest paid (Chart 24). And by making an assumption about the level of the interest cover ratio at which a company is forced to default, we can simulate how a different interest rate path might have affected the solvency of each firm and hence aggregate productivity. For the purposes of the experiment, we assume a default threshold for the interest cover ratio of one. That is to say, we assume a company that cannot cover its interest payments with profits fails. Different assumptions are clearly possible.
Implications of the new environment for financial stability oversight  It will be clear from the litany of issues I have just mentioned - new players, new products, new risk transfer techniques and interconnections - that the changes in today’s financial world are indeed quite profound in relation to financial stability oversight. But are they net benign or net negative? The world here is sometimes portrayed as being in two designated camps. This may be a bit of a parody, but I am sure the two protagonists would forgive my little sketch. The bullish view is led by Governor Greenspan. This holds that, in the new financial world, banks now possess the enhanced ability to disperse risk - to offload risk to others, be they investors, insurance companies or whatever. The banks have thereby been able to weather a variety of shocks, which in an earlier age might well have engendered financial instability. The Asian crisis, Russia, 9/11, Enron: I could go on. In each case the banks came through and the financial system has demonstrated greater resilience as derivatives and sophisticated risk transfer processes have dispersed risk to a wider audience. The bearish camp is led by Warren Buffett. This points out the opacity of today’s world: the difficulty of spotting risk concentrations; or judging the behavioural expectations in the face of given types of shock. My view would be that both schools of thought are right! I think in reality it depends on your vantage point. There has been improved capital formation.