The legacy of those losses has likely limited the banking sector’s ability to extend new loans during this expansion, as banks acted in a highly precautionary way to accrue capital that had been depleted as well as to add to their previous capital levels. The need for banks to repair their balance sheets following the financial crisis contributed to the far slower growth of outstanding bank loans during this expansion when compared to previous long expansions. Real outstanding loans to businesses, which are dominated by bank loans, declined more in this recovery than in previous recoveries (Figure 4). On the household side, real outstanding residential mortgages, which are largely originated by banks, have declined through most of this expansion while they grew steadily in previous expansions (Figure 5). Consumer credit has risen at a modest rate in this recovery – comparable to that of the last cycle (Figure 6). This category includes auto loans, credit cards and other consumer debts that are mainly originated by banks. But it also includes student loans where the federal government is the dominant lender. Student loans have risen robustly during this expansion, and have driven much of the rise of overall consumer credit. We will have much more to say about them later in today’s briefing. The U.S. financial system relies more heavily on capital markets than other advanced economies. Bonds and other negotiable debt instruments are an important source of funding to credit-worthy corporations.
45 We should also bear in mind that the current situation is highly unusual. We must not fall into the trap of believing that the innovative policy measures being taken now in response to these unusual conditions represent the basis for a new paradigm in the future. 46 I suspect that when the dust has settled and more normal conditions return, monetary policy regimes will not look drastically different from pre-Crisis days. •  I think more central banks will have an eye to financial stability considerations – at least informally – when setting monetary policy. •  More central banks are also likely to have macroprudential policy toolkits at their disposal, which they will use from time to time but perhaps not on the scale that has been used in Asia in recent years. •  But in essence, monetary policy will remain largely focused on price and output stability – as it should be. 47 Perhaps as T S Eliot puts it, the end of all our exploring is to arrive where we started and know the place for the first time. 48  I wish you a successful conference. Thank you. References Bank for International Settlements (2010), “An assessment of the long-term economic impact of stronger capital and liquidity requirements”, Basel Committee of Banking Supervision. Borio, C and Zhu, H (2012) “Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?” Journal of Financial Stability, Vol. 8(4), pp. 236–251.