These principles went missing in the run-up to the present crisis. The costs of that vanishing act are now all too apparent. In rebuilding the financial system, to create one which is both stable  8  BIS Review 108/2009  and better able to meet the needs of the real economy, these principles need to be rediscovered. They offer a tried and tested – indeed, trusted – roadmap for the period ahead. BIS Review 108/2009  9  Charts Chart 1: US mortgage foreclosure inventory rates (a)  Per cent 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 72  76  80  84  88  92  96  00  04  08  *Source: Mortgage Bankers Association of America. (a) Proportion of outstanding mortgages in foreclosure process at end of quarter; not seasonally adjusted. Chart 2: Number of mortgage products advertised  Credit impaired buy-to-let Credit impaired residential Prime buy-to-let Prime residential  T housands 18 16 14 12 10 8 6 4 2 0  Feb Jun 2007  Sep  Jan 08  May  Sep  Jan 09  May  Source: Moneyfacts group. 10  BIS Review 108/2009  Chart 3: Three-month inter-bank spreads (a)  Basis points  Sterling US dollar  400  Euro  350 300 250 200 150 100 50 0  Jan. May. Sep.  Jan. May. Sep.  Jan. May. 08  2007  09  *Sources: Bloomberg and Bank calculations.
Through these successive waves, the world financial system found itself with almost every link in the credit chain – in the chain of trust – having been weakened or broken. That is evident in surveys of the public’s trust in industry: banking and finance are firmly rooted to the foot of the league table of trust, in the UK and internationally (Chart 6). That loss of trust is mirrored in aggregate bank lending in the UK, in particular to companies, where annual growth has fallen from a peak of 23% in March 2008 to around zero now (Chart 7). And this has in turn been reflected in the largest and most synchronous global economic slowdown since the Great Depression. Confidence and credit So how is trust, and thereby credit, to be restored? To date, the answer has been to rely on the one sector whose credit has not been seriously questioned – governments and central banks. There has been large-scale provision of government and central bank credit over the past two years in an attempt to ease pressures and shore up breaks in the private sector credit chain. These interventions have been unprecedented in size during peacetime. The total potentially on the table is in excess of $ trillion.7 That is roughly $ for every man, woman and child on the planet. Half of the world’s 20 largest banks have needed direct government support. Central bank balance sheets in the major financial centres, including in the UK, have more than doubled in size.