Borrowers are much more likely to default on their consumer debt than their mortgages and, of course, there is no security backing these credit card and personal loans. Over the past 10 years, write-off rates on consumer credit by UK banks have been ten times higher than on mortgages (Chart 3). And those defaults are much more sensitive to economic conditions. Widespread defaults can, by damaging the financial system, affect the wider economy. These dangers of debt mean countries with more of it, and particularly those that have built up debt quickly, can have more vulnerable banks and deeper recessions (Chart 4). In the jargon, more debt makes the distribution of economic risks skewed and ‘fat tailed’. Work by teams at the Bank of England has looked back at how the distribution of economic risks was shifting through time as debt and financial risks ebbed and flowed in the past. It shows an estimate of what, at each point in time, was the distribution of possible future paths of economic growth. 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  A pronounced downside skew to that distribution was developing from the early 2000s. By the time of the crisis, the probability of a fall in economic activity of more than 2% was about 1 in 5. That’s five times more likely than normal (Chart 5). The spiral of complacency  Why do these dangers arise? Why does the financial system lead the economy down a path that risks much deeper recessions?
But if we want to be able to benefit from the advantages of this system in our national interests going forward, we must make sure now that the three mainstays of sound money can continue to perform their roles and provide support. 11  For more information on the interplay between government debt and monetary policy, cf. inter alia Jordan, Thomas J. (2011), Government debt and the independence of monetary policy, speech at the Europa Forum, Lucerne, 8 November. 12 For more information on the importance of a central bank’s equity, cf. inter alia Jordan, Thomas J (2011), Does the Swiss National Bank need equity?, speech at the Statistisch-Volkswirtschaftliche Gesellschaft, Basel, 28 September. Page 8/8  What constitutes sound money? Thomas J. Jordan Chairman of the Governing Board Swiss National Bank Economic Conference, Progress Foundation Zurich, 8 October 2020  Chart 1  2  08.10.2020 What constitutes sound money? | Thomas J. Jordan | © Swiss National Bank  Chart 2  3  08.10.2020 What constitutes sound money? | Thomas J. Jordan | © Swiss National Bank  Chart 3  4  08.10.2020 What constitutes sound money? | Thomas J. Jordan | © Swiss National Bank