Andrew Haldane: the debt hangover
22 February 2010
The Executive Director of Financial Services at the Bank of England said that the financial system has been more stable over the past six months, but that some of the root causes of the crisis, including an accumulation of debt, remain. The “debt hangover” deeply affects the financial system.
In a speech given in Liverpool, Andrew Haldane – Executive Director for Financial Stability at the Bank of England – discussed the implications of the debt stocks held by agents across the economy – the “debt hangover” as he calls it – and the current opportunities available to pay them down, before describing two reforms that might curb the accumulation of debt in the future.
Andrew Haldane began by saying that the financial system has been significantly more stable over the past six months, but that some of the root causes of the crisis remain. One of those is debt accumulation . To different degrees, a debt hangover is affecting households, financial and non-financial companies and sovereign states around the world, but is perhaps greatest in the financial system. He notes that to date the servicing costs of these debts have been cushioned by policymakers’ actions, but public sector support can only ever offer temporary relief – they are not a long-run cure.
Turning to remedial actions, Andrew Haldane considered two options. First, he said that banks should take advantage of the profits they have achieved this year to bolster their balance sheets. “There is a strong case for banks, in the UK and internationally, pocketing this windfall rather than distributing it to either staff or shareholders. This would allow banks’ balance sheets to be repaired while supporting lending to the real economy.” But he was concerned there has been little evidence of such prudential opportunism thus far. Second, he believes there is a case for restructuring debt claims into equity to benefit both lenders and borrowers. He noted that a number of global banks have, in effect, already initiated such strategies and they could help improve balance sheets across all sectors.
Andrew Haldane concluded by saying that debt crises cannot be eliminated, but their frequency and scale might be moderated. He suggested two policy reforms. First, he argued that macro-prudential policies should be designed to curb the credit cycle, and lean against the collective tendency for banks to make significant distributions even when profits are low. Second, he advocated a redesign of debt contracts, such that they become state contingent. He said: “If contingent capital became more widespread, banks’ capital ratios would be automatically stabilised over the cycle, lowering the chances of future banking crises.” He also believes there is merit in considering how state-contingent debt might be adopted in other sectors.
© Bank of England
