One might therefore expect this generally to support the sustainability of global debt overall, though given the uncertainties of estimates and forecasts of trend real rates, there are clearly risks to this assessment. Composition  From a financial stability viewpoint, the composition of the debt stock matters. Even if the aggregate level of debt is not growing and there are reasons to believe its sustainability may generally be supported by relatively low rates going forward, components of the debt stock can vary greatly in riskiness and vulnerability to correction. The composition of the global debt stock has changed since the crisis. Overall, advanced economy private sector debt has reduced a little since the crisis. The increase in advanced economy debt has been in the public sector. I do not want here to enter into a discussion of fiscal sustainability and limits to government borrowing. But I would observe, from a narrow financial stability perspective, that growth of own currency sovereign debt, especially when financed internally, is not a good predictor of financial crises. Elevated own currency sovereign debt can certainly weigh very heavily on economies but its adverse effects are usually chronic rather acute. The rotation of debt in advanced economies from the private sector to the government, post crisis, makes it more likely that any correction will lead to chronic rather than acute problems.11  By contrast, the decline in the aggregate level of advanced economy private debt may not be as comforting as it is appears.

However, those developments do not mean that securitized credit, if structured properly, should not return in size. Reform efforts, to be effective, should foster development of a securitization market that properly aligns incentives and provides adequate transparency about risk transfer. Second, the use of derivatives is integral to the broader functioning of financial markets and the intermediation of credit. Derivatives allow for the redistribution of risks through hedging activities, and they foster improvements in price discovery and market efficiency by facilitating appropriate investments in long and short positions in some types of assets. But while OTC derivatives already provide important benefits, more could be done to enhance the robustness of this market. The measures under consideration promote greater use of central counterparties, increased regulatory and public transparency, wider involvement of exchanges and electronic trading platforms for actively-traded products, and stronger operational and risk management practices. Third, the financial system cannot operate efficiently without leverage. The preferences of businesses and households in their regular economic activities require that intermediation and maturity transformation be conducted somewhere in the financial system. Of course, much of the turmoil we witnessed across financial markets was due to the build-up of excessive leverage in the system, and we cannot miss the chance to learn from this painful  6  BIS Review 40/2010  lesson. But we should also understand that a reduction in leverage to near zero in the financial system is not desirable, as it would significantly reduce the efficiency of credit intermediation.