In this environment, macroprudential policies that slow the build-up of household leverage ex-ante can be  32  All speeches are available online at www.bankofengland.co.uk/speeches  32  welfare-improving in avoiding this outcome. Farhi and Werning (2016) also offer a model of macroprudential policy in the face of aggregate demand externalities. Another strand of the literature emphasises behavioural sources of pro-cyclicality. For example, powerful narratives, such as a collective belief in a ‘new paradigm’, might manifest themselves in over-exuberance in the financial system (Tuckett (2011), Shiller (2017)). Myopia about risk might also drive excessive risk-taking, especially as memories of past financial crises fade (Guttentag and Herring (1986), Herring (1998), Haldane (2009b), Gennaioli, Schleifer and Vishny (2012)). And such behaviour might be amplified by contracts that reward short-term performance excessively and by herding in financial markets (Avery and Zemsky (1998), Lakonishok et al (1992), Bikhchandani and Sharma (2001)). Aikman, Nelson and Tanaka (2015) show how reputational concerns and peer benchmarking can drive credit cycles. The case for macroprudential interventions to address build-ups in leverage also has empirical support. Mian and Sufi (2010) argue that the persistence of the decline in US GDP after the crisis was caused by excessive household leverage. Jordà et al (2013) report that credit booms not only increase the likelihood and severity of financial crises, but also make normal recessions more painful.
United Kingdom: Sheppard, D (1971), The growth and role of UK financial institutions 1880-1962, Methuen, London; Billings, M and Capie, F (2007), 'Capital in British banking', 1920-1970, Business History, Vol 49(2), pages 139-162; BBA, published accounts; FPC core indicators and Bank calculations  Notes: (a) US data show equity as a percentage of assets (ratio of aggregate dollar value of bank book equity to aggregate dollar value of bank book assets). SNL data from 1996 on, based on accounting definition of equity. (b) UK data on the capital ratio show equity and reserves over total assets on a time-varying sample of banks, representing the majority of the UK banking system, in terms of assets. Prior to 1970 published accounts understated the true level of banks' capital because they did not include hidden reserves. The solid line adjusts for this. 2009 observation is from H1. Data from 2010 onwards is based on the simple leverage ratio published by the FPC (as of September 2017) as one of its core indicators for the countercyclical capital buffer. (c) Change in UK accounting standards. (d) International Financial Reporting Standards (IFRS) were adopted for the end-2005 accounts. The end-2004 accounts were also restated on an IFRS basis. The switch from UK GAAP to IFRS reduced the capital ratio of the UK banks in the sample by approximately 1 percentage point in 2004.