Like households, companies repaired their balance sheets following the crisis but unlike households, corporates then went back to the well. Relative to earnings, aggregate corporate debt in the US and UK is 16  Germany, France, Italy, Spain and the Netherlands. Household credit growth has been subdued, rising at an annual rate of less than 5% in each of the UK, US and euro area for the past decade, compared to rates of over 12% in the US and UK pre-crisis. 18 Highly indebted households are defined as those with debt servicing ratios of more than 40%. 17  10  All speeches are available online at www.bankofengland.co.uk/speeches  10  nearing pre-crisis peaks,19 and the distribution is worsening. In the UK, the share of highly levered companies is above pre-crisis levels. This is despite the very modest growth in investment. Globally, the average quality of corporate borrowers has deteriorated materially. The share of lower-rated debt in global corporate bond markets has increased significantly over the last 10 years, with BBB-rated bonds now about half of the market compared to just a quarter in 2007. The global leveraged lending market grew by 21% in 2018, faster than the rate of growth in US subprime mortgages in the run up to the crisis. At $ trillion, the stock of outstanding leveraged loans is double that of subprime in 2007. Leverage of the most indebted issuers has been increasing rapidly (Chart 8).
In addition, drastic reductions of positions in domestic markets by non residents may also introduce excess volatility in the exchange rate markets as investors leave the country. Through these chains of effects, a reversal or even a slowdown in capital inflows may significantly weaken financial stability in the local economy and also potentially in the economies from which the inflows are being financed. A second source of vulnerabilities may arise from cross border flows that provide debt funding to local agents. These can be financial intermediaries or non-financial companies, and the funding can be via deposits or lending. If lending is short term, then this may result in maturity mismatches. If lending is in a foreign currency, then the risk of currency mismatches must also be factored in. The problem arises if local agents do not correctly internalize these risks or if regulation limiting these risks in the financial sector is inadequate. A third source of problems is that capital flows may increase the scale and the complexity of the local financial system, and this expansion may expose weaknesses in the regulatory and supervisory structure. For example, if external funding has not been readily available in the past for certain intermediaries, awareness of currency mismatches can be weak for these institutions or for their customers, and may not be properly addressed in the regulatory framework. Similarly, the availability of new funding may cause credit to rise at a faster pace than that of the supervisory capacity required to monitor its quality.