a worsening of financial conditions. in the uk, the proportion of households in negative equity is 1 in 14. in the us, it is 1 in 4. with house prices falling in both countries, that fraction may rise further. the tail of “ vulnerable ” households ( those with limited or no equity in their property and reporting problems servicing their debt ) is high and rising. so defined, vulnerable households in the uk account for 15 % of household secured debt and 35 % of unsecured debt ( chart 12 ). these shares have risen over the past three years, by around 5 and 10 percentage points respectively, despite interest rates being at rock - bottom. the picture in the corporate sector is, in some respects, not dissimilar. companies in the main advanced countries are running significant financial surpluses, on average of around 2. 5 % of gdp ( chart 13 ). pre - crisis, companies were running financial deficits of around 1 % of gdp. the cash position of the corporate sector is even more striking, with large uk corporates ’ stock of cash up by over 40 % since 2006. but as among households, this picture of aggregate health conceals a long tail. a number of companies appear to be struggling to meet interest payments even at ultra - low interest rates. the fraction of companies whose profits do not cover interest payments has actually risen slightly since the crisis ; it is currently around one third ( chart 14 ). within some sectors, such as property, debt - servicing capacity has deteriorated sharply. despite these balance sheet headwinds, the macroeconomic situation today is far better than at the time of the great depression – with one exception. the exception is government finances. despite the much smaller fall in gdp, uk government debt - to - gdp ratios have deteriorated more than in the 1930s ( chart 15 ). this pattern is mirrored across advanced economies. the imf expect debt - to - gdp ratios in the g7 economies this year to breach 100 % of gdp for the first time since the second world war ( chart 16 ). perhaps because banks ’ asset measurement is not distorted by errors in risk weights and equity measurement is forward - looking and not distorted by different capital definitions – see haldane ( 2011 ). bis central bankers ’ speeches there is no magic number for debt ratios. but the historical record is revealing. historically, ratios in excess of 90 – 100 % of gdp have been found to exert a lasting drag on growth, perhaps of around

’ balance sheets, and that some combination of crystallization of physical and transition risk is inevitable, the timing and extent of specific impacts are highly uncertain, particularly on exposures to specific industries. what should firms and regulators be doing to prepare, in the face of these multiple and potentially interacting sources of risk and uncertainty? one significant response to unknown risks and uncertainty is stress testing and scenario analysis, and that is what i want to focus on today. current firm - specific and sector - wide stress testing stress testing is already a central feature of the solvency ii regulatory regime for insurers. firm - specific stresses provide assurance that firms are highly likely to be able to meet their obligations to policyholders : the capital calculation can be thought of as a stylized, 1 - in - 200 severity stress test of the whole balance sheet. firms are also required to undertake scenario analysis within their own risk and solvency assessment ( orsa ). 4 the orsa process is designed for the firm to provide a narrative of the type of ( bespoke ) risks it is exposed to and to illustrate how resilient it is to those. to these firm - specific measures we have added periodic, regulator - led stress tests, whose purpose is to assess the sector ’ s ability to meet policyholder claims in a common scenario, which reflects micro - and macro - prudential concerns of the pra. our first supervisory stress test was in 2015 for general insurers and we have repeated the exercise every two years, bringing life insurers into it for the first time last year. our experience has been that these stress testing exercises give us valuable additional insights into firms ’ financial resilience, beyond those that can be obtained from the usual solvency capital requirement calculation. see rule 3. 8 of the conditions governing business part of the pra rulebook. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice use of a common scenario enables peer comparison to identify both genuine differences in firms ’ risk profile, and potential optimism in any one firm ’ s modelling and assessments, thus helping firms improve their risk management. it improves our understanding of the potential aggregate, systemic impact of management actions taken rationally by individual firms. it helps us to identify any concentrations in reliance on individual reinsurers, jurisdictions, or external models, for example. it informs our supervisory approach and helps us to identify priorities if a particular scenario crystal