These results suggest that firms which were closer to their regulatory buffers were more likely to constrain lending during the Covid stress. The implication must be that they did not act as if regulatory buffers were practically usable. The effect of headroom in the UK Turning to the analysis the Bank team carried out on UK data. The team used data on 158 PRA-regulated firms and separated them into two groups: those with low and high pre-pandemic headroom. Their approach  17 Two regressions were used here: one looking at how the cumulative change in bank loans relative to Q1 2019  depended on headroom while controlling for country-time and bank fixed effects; the other looking at quarterly lending growth in relation to capital headroom in the preceding quarter. Table 5, Basel report on “Early lessons from the Covid-19 pandemic on the Basel reforms”. 18 See Section 5.1 of the ECB May 2021 Financial Stability Review 10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10  was to compare how these two groups of firms behaved to understand whether headroom was a factor in different behaviour.19 In absolute terms, capital surpluses increased by similar amounts for both of these groups – by about 1 percentage point of risk-weighted assets on average. However, for low surplus banks, this amounted to growth of over 80% compared to pre-Covid surplus levels, and only around 30% for high surplus banks (Chart 4). This additional capital could have supported more lending.

The monetary policy transmission mechanism is more fraught with uncertainty and less "linear" than it used to be, as shocks on asset and risk prices introduce discontinuity into financing conditions. These developments underscore two interesting issues in particular that I would like to briefly consider. The first concerns monetary policy responses. It will have escaped nobody’s attention that these responses are not identical across all countries. In my view, this reflects different situations more than divergent approaches. All of the world’s economies are not affected in the same way by property market shocks or developments on credit markets. In particular, we can observe that the distribution of credit remains very dynamic in Europe and that, in most euro area countries, property markets remain relatively stable. More fundamentally, it seems to me that developments in the economic and financial context of globalisation bear out and reinforce the importance given to what, in Eurosystem parlance, we call monetary analysis, i.e. the examination and analysis of the main monetary and financial aggregates. We derive three major benefits from our monetary pillar. First, it favours the anchoring of long-term inflation expectations, which is essential when, as is currently the  1  Guilloux S. and Kharroubi E. (2008), “Some preliminary evidence on the globalization-inflation nexus”, Working paper series N°195, January  2  BIS Review 28/2008  case, instantaneous pressures are strong. Second, it constitutes an integrated framework for the analysis of financial and monetary developments, which is particularly useful in times of structural change and turmoil on credit markets.