But the extent to which continuing constraints on the supply of bank credit are likely to impede the recovery is less clear. On the one hand, banks still face significant challenges, especially in terms of the ease and cost at which they can refinance maturing funding. This is undoubtedly affecting the ability of some small firms to borrow at affordable rates. On the other hand, many companies started this recovery with increased levels of savings and so are in a position to finance increased investment if and when they wish to. And we have seen “creditless” recoveries in the past. For example, the corporate sector in aggregate repaid bank lending in each of the first three years of the 1990s recovery. I’m hopeful – but by no means certain – that strains within the banking system will exert increasingly less drag on the economy going forward. But what of the tailwinds that are pushing against these factors and ensuring that the burgeoning recovery continues? The most significant factor is the highly accommodative stance of monetary policy. As you know, Bank Rate remains at 0.5% and the stock of asset purchases – quantitative easing –  1  This is an annual survey conducted for the Bank by NMG Financial Services Consulting. This year’s survey was conducted between 24 and 30 September 2010 and covered almost 2000 households. Some results from this year’s survey featured in the November 2010 Inflation Report (pages 22–23).
In addition, collateral security must, as stipulated by the attendant regulations, be assessed as a market value calculated in a manner that is prudent and sustainable over time, i.e. it is possible that the experience of potential losses in adverse situations over the last twenty years may not be consistent with the characteristics of the current situation. This has to be taken into account by institutions in calculating the capital consumed by real-estate loans under the advanced Basel II approaches. But this need for prudent assessment is not limited to credit institutions: appraisal companies play a key role in Spain’s financial system and hence it is essential for them to operate under the clear prudential guidelines laid down in their specific regulations. The sustainability of results, their recurrence, the diversity of income sources and the ongoing search for efficiency are needed to strengthen the line of defence represented by the high profitability of Spain’s institutions. In this respect, we must not overlook the behaviour of the liabilities side of bank balance sheets. The financing of this high volume of assets has been made possible by their access to efficient financial markets after Spain joined the euro area. This enabled them to supplement their traditional deposit-based financing, which despite its strong momentum is insufficient to finance lending activities.