However, in crisis situations the banks sometimes do not want to borrow, as this could signal that they have financial problems, as was the case in the United States during the financial crisis 20082009. Former Fed Governor Ben Bernanke says that the unwillingness to borrow from the Fed could have been reduced if they had a larger balance sheet. If the banks had had substantial deposits and larger loans with the Fed and thus been in the habit of having transactions with the Fed during normal circumstances, the stigma of borrowing in a crisis situation could have been alleviated. Among European banks, unwillingness to borrow from the ECB during the financial crisis was a much smaller problem than for the Fed. Bernanke points out that one possible reason for this could have been that the ECB had a larger balance sheet even prior to the crisis and that the banks in Europe therefore were used to making large transactions with the ECB. Increased supply of safe assets for the banks in the economy 50 The demand for safe and liquid assets with a short maturity has been huge around the world for a long period of time. This is often seen as one of the main reasons for the low global interest rates. If the Riksbank has a large balance sheet and  47 See Duffie and Krishnamurthy (2016) and Bertsch and Molin (2016). 48 The interbank market is one where the banks can borrow money from one another at short notice.
Long enough for the international authorities to think they would get time to fix problems in the regulatory capital regime before they gave rise to serious problems (such as the zeroweighting of 364-day lines of credit, which underlay the profusion of bank-like conduits etc). Long enough for many to proceed on the basis that “it couldn’t happen” or, indeed even after it began, “wasn’t happening”. Long enough, crucially, for investors to get too used to elevated returns. Those returns came largely from two sources. The fall in risk-free rates, brought about by an ex ante imbalance of global savings and investment; and the fall in risk premia, which may in part have flowed from improved monetary policy regimes around the world. The ensuing Search for Yield can be thought of as asset managers and bankers wanting to sustain into the future the fabulous ex post returns “achieved” as asset prices rose. Its main engines were leverage, and maturity transformation. A cocktail that not only raised private risks for asset managers and lenders, but also systemic risks. The upshot has been a protracted, and not yet concluded, period of deleveraging. That, in the great scheme of things, relatively small US subprime mortgage delinquencies could set this off shows just how fragile the system had become. Structural changes in the financial system really matter As commentators struggle to make sense of this, a lot has been said about the “originate and distribute” model of financial intermediation. Three comments on that.