12 Jun 2019
Professor Madan Pillutla explains how to improve good judgement in making financial choices and the importance of removing bias from investment decisions
31 Jan 2019
Why surging corporate debt is worrying
The parallels between the US sub-prime mortgage boom and high debt levels in the UK are not solid indicators for predicting a repeat of the financial crisis, according to Ben Broadbent, Bank of England’s (BoE) Deputy Governor, Monetary Policy.
Speaking at London Business School, Broadbent said the overall level of UK debt did not concern the bank, but surges of leveraging did.
“The fact that mortgage debt is higher than it was a generation ago doesn’t make it unsustainable.” he said.
“The fact that growth rates are better indicators than levels may be telling us something more fundamental, not just that there are structural differences in affordability. In particular, it could be that the things that drive speculative, riskier lending tend to develop faster than the fundamentals that determine more sustainable levels of debt.”
However, Broadbent said a surge in high-risk corporate debt is a concern, even if banks are better positioned than they were in 2008.
The BoE has previously warned about the increase in loans to already indebted companies. The bank’s own research shows that of these collateralised loan obligations, only a minority are packaged and sold, with UK banks holding less than 1%. By contrast, 75% of UK bank losses were derived from US subprime in 2008.
“It means that the mechanisms that so amplified the impact of US mortgage defaults are much diminished, particularly for the UK,” said Broadbent. “However, the underlying point – that rapid growth is often a sign of loosening supply and rising default risk – remains.”
In 2008, those US mortgage debts were written in such a way that they incentivised people to simply walk away from the property. To further illustrate the point, debt levels in Holland and the UK were both higher than those in the pre-crisis US, with both suffering less and recovering faster.