Indeed, the solvency levels of institutions were not impaired by the faster credit growth because of the increase in Tier 1 and Tier 2 capital. The solvency of institutions was strengthened by the statistical fund, which has grown uninterruptedly since it was created in July 2000. The improvement in earnings and ROE was, as mentioned above, due partly to the high growth in the business volumes of Spanish institutions and especially to lending to mortgage borrowers and to construction and property development firms. In particular, the growth of credit to property developers in 2003 was notable, and was not attributable to just a small number of institutions. It should be taken into account that this lending is markedly cyclical and that in past recessions it has shown high default rates. Moreover, the strong credit growth is an additional cause for concern, basically for two reasons. First, because Spanish household indebtedness is already higher than the euro area average. And second, because the growth of credit extended by institutions is not being accompanied by a commensurate increase in deposits. This produces a greater need for recourse to international financial markets, which may raise the average cost of bank liabilities and hinder profitability gains. BIS Review 39/2004  7  It is therefore not enough to have a strong profit and loss account; instituions must also look particularly hard at the sustainability of their current business model based on strong growth in lending volume, and at the possible alternatives to this model.
This is sometimes known colloquially as r*. Policies which boost r* mean that a given interest rate is likely to impart greater stimulus. Or, put differently, they mean the same level of demand in the economy can be achieved with a higher interest rate. And a “pivot” in the mix of policies, with somewhat less of a contribution from monetary policy and more from structural policies, would probably be desirable. Not least, it could help mitigate any adverse impact of accommodative monetary policies on productivity or the distribution of income and wealth. Conclusion  Productivity is a gift for rising living standards, perhaps the greatest gift. It is not, however, one that always keeps on giving, as recent events attest. Whether in supporting living standards, or in shrinking their distribution, tackling the global productivity puzzle is among the most pressing public policy issues today. If history is any guide, there is unlikely to be any single measure which puts productivity growth back on track. But measures which support the long tail of companies, currently operating at low levels of productivity, have the potential to do considerable good. As Olympic athletes have shown, marginal improvements accumulated over time can deliver world-beating performance. Applying those marginal gains to the population of UK companies could significantly improve UK living standards, even if those are harder to measure than gold medals.