One such area, in which both the Financial Policy Committee and Prudential Regulation Committee have been taking a keen interest, is leveraged lending – in other words lending to highly-indebted companies. We have said a lot about this over the last year so I will confine myself to a brief comment only. That comment is that sometimes horizon-scanning does not require binoculars, because the object of study is already at the front gate. I think it would be very odd if we did not pay close attention to a class of lending which grew globally at a rate of 16% last year, and in which there has been a very significant slide in underwriting standards. Further, much of the lending is being funnelled through banks to a variety of end-investors who may or may not understand what they are getting into. A key determinant of risk in these products is the 4  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  4  leverage, but measuring leverage is difficult. Analysts often adjust leverage measures to remove large one-off costs and account for optimistic future growth in earnings. These so-called ‘add-backs’ have been growing steadily in recent years, so the risk metrics in an analyst’s company report are increasingly likely to contain some heroic (or unrealisable) assumptions. The potential risks to banks here are both direct, and indirect through the impact of corporate indebtedness on the economy. Compared to this, the move up the risk curve of UK lenders in the mortgage market looks rather benign.
7  The major UK banks on average now have total loss absorbency of around a quarter of their risk-weighted assets (RWAs) compared to an average end-state requirement of around 28% (including buffers). 8 While no measure is perfect, a range of market-based estimates suggest the implicit ‘too big to fail’ subsidy has fallen sharply since the crisis. Estimates suggest that the value of the implicit subsidy has fallen from around £ in 2010 to less than £ now – down around 90% http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/capital-andresolution/written/69208.pdf 11  All speeches are available online at www.bankofengland.co.uk/speeches  11  If counterparties have confidence that resolution will stabilise a bank so that it can continue to meet its obligations, they will not accelerate actions that could frustrate a resolution to the detriment of all parties. And the public needs to have confidence that we have learned the lessons of the crisis: that we have acted to ensure that we have an alternative to the previous crisis where we had privatisation of bank profits in good times and the socialization of bank losses when things go wrong. 9  For that reason, the Bank committed to Parliament in April 2017 and in the Purple Book last October that from 2019 we would implement public reporting of banks’ resolution plans and our assessment of their effectiveness. This marks an important transition in the implementation of full resolvability in the UK.