Our focus is on the macro prudential; on ensuring the financial system serves the wider economy in bad times as well as good. And risks in markets do not translate automatically into risks to that. So our objective is not to protect investors from ups and downs in financial markets or to target some level for asset prices. The objective is to protect the wider economy from disruption if market risks materialise. The nature of corporate finance has shifted decisively in the past decade. Since the crisis, nearly all of the increase in debt of companies in the UK can be accounted for by bond issuance. The scale of business borrowing through markets is now on a par with their borrowing from banks. This shift in the balance of corporate finance should be positive for stability. A more diverse system can be a safer system. Bond finance has been the spare tyre that kept credit flowing while the banking system was punctured after the crisis. So these markets are clearly delivering for the economy. But conditions could develop in which they have the potential to disrupt: 1  If debt levels of companies, particularly banks, were to come to rely on stretched credit markets and those markets were then to adjust. Or if credit markets were to prove lacking in resilience so that they amplified any market adjustment, driving overshooting and tightening conditions for businesses.
5  All speeches are available online at www.bankofengland.co.uk/speeches  5  With returns on a range of assets so low by historical standards, any signs that risks have declined and traditionally higher yielding assets are safer are tempting. And anyone looking for confirmation of such a bias can find it in recent performance. With low corporate default rates and low market volatility, portfolios of corporate bonds have outperformed cash and sovereign bonds (slide 8). But of course we know from the small print that the past is not always a good guide the future. So, as the Bank of England’s Financial Policy Committee stated in March: “…there are material risks associated with interest rate volatility. The principle risks are in debt markets.” 6  But are these a risk to the wider economy? It’s reassuring that easy conditions in markets have not led the corporate sector to take on an unusually high level of leverage. As a multiple of earnings, corporate debt in this country is around its long term average level. Nevertheless, developments in corporate debt bear close scrutiny, because we cannot take for granted that it will stay this way. The United States, where corporate debt levels have been testing previous highs, shows this to be more than a hypothetical possibility. The UK’s largest companies – those with access to capital markets – report that credit has become easily available. 7  Corporate debt in the UK has been growing at a not insignificant annual rate of 6.2%.