But except in the US, securitisation has in fact so far made only limited progress, and debt sales have been focused mainly on impaired developing country or corporate debt. One reason why prime corporate loans are not so far traded is the importance that both banks and borrowers still attach to their mutual relationships. My guess is that the liquidity of bank assets by these means will gradually increase; and that process may be helped by the development of techniques such as credit derivatives. But for the time being - and indeed some time to come - bank loans are, for the most part, likely to remain illiquid in most countries. BIS Review 13/1997  -5-  We can nevertheless look at the crude balance sheet data, and, for what they are worth, we have looked at the share of loans to non-banks in total assets as a measure of the liquidity of the asset portfolio for a range of different types of institution. These data show that: for some representative small, domestic, UK banks the loan ratio is still some 70-80% of the total, apparently with no particular trend; for large UK, internationally-active, banks the share of loans is currently around 50%, having fallen quite sharply from some 65-70% some five years ago, perhaps reflecting the expansion of their investment banking activity; for large continental banks the share of loans is either side of 50%, having fallen more gradually. Again JP Morgan and Bankers Trust are outliers.
The picture is, however, complicated by the exaggerated strengthening of sterling since last summer - particularly against the European currencies - which probably reflects uncertainties affecting the Continental countries at least as much as developments in our own economy. This strength of sterling poses, for the time being, a genuine monetary policy dilemma. It will lead to a fall in inflation in the short run - over the rest of this year - as import prices fall. And it makes life very difficult for UK manufacturers exposed to international competition, so that our external trade position is likely to deteriorate - and that may have a BIS Review 29/1997  -2-  longer-lasting effect on inflation. But these effects may not be enough to offset the gradual emergence of inflationary pressure looking forward to next year, stemming from continuing above-trend growth of domestic demand. On that basis we advocated a moderate tightening of policy in order to slow the domestic expansion to a pace that can be sustained in the medium and longer term. Let me be quite clear, for those who insist on over-dramatising these things, we were not calling in the Inflation Report for “an immediate interest rate hike to bring an incipient boom to a juddering halt!” I should like to think that in the present more stable environment that kind of language is anachronistic.