level of bank capital and the balance of wholesale and retail funding are not relevant to bank lending decisions and so do not affect the monetary transmission mechanism. bernanke, b. s. and c. s. lown ( 1991 ), “ the credit crunch ”, brookings papers on economic activity, no. 2, pp. 204 - 39. ashcraft, a. b., and m. campello ( 2002 ), “ borrowers'financial constraints and the transmission of monetary policy : evidence from financial conglomerates ”, federal reserve bank of new york, staff reports : 153. the fourth element in the story, underway since august, has been distributional. banks relatively reliant on wholesale funding have bid up for funds. but doing so has been taken as an adverse signal, prompting further rationing of wholesale money market lending at term maturities and potentially deterring the strong from entering the market ; this is what is known as a “ lemons ” problem 13. in the united kingdom, since august, mortgage approvals and secured lending have declined by more at the medium - sized mortgage banks and specialist lenders than at the largest uk banks, partly due to northern rock ( charts 14 - 15 ). this was symmetric. their mortgage portfolios grew faster over the previous years. all told, this looks like a manifestation of the kashyap and stein finding, in various non - uk settings, that lending is more cyclically variable at banks that start off with weaker balance sheets ; 14 or, as i would prefer to put it, with concentrated income streams and / or funding sources. won ’ t the macroeconomic effect of this be dampened by the bigger and more diversified banks picking up the slack? it is important to distinguish the longer term from the near term. the longer - term impact will depend on whether the structure of the industry shifts. the securitisation boom seems to have altered the terms of trade in uk banking for a while. by reducing reliance on retail deposits, it reduced barriers to entry. lenders ’ margins fell ( chart 16 ), and credit conditions in the uk mortgage market eased. conversely, the painful reminder that undiversified funding and income sources may leave a bank unusually vulnerable will probably bring about another shock to the structure of the market. the persistent tightening in mortgage credit that that would bring was a factor in the mpc ’ s november projections. in the near term, the extent to which the big or more

##secured or secured – will be sensitive to a range of factors, including assessments of the idiosyncratic risks of a particular borrower, and the risks common across borrowers. variations in these factors give rise to the possibility of a credit cycle. a borrower ’ s ability to pledge collateral can help to overcome the problems of “ asymmetric information ” and enforceability, by evidencing its net worth and giving it a continuing stake in its contract with the lender. this can give rise to the so - called “ financial accelerator ” channel of the monetary transmission mechanism ( mtm ), in which monetary policy works partly by affecting lending terms through its effect on asset values and so the net worth of borrowers. 3 but credit conditions also depend on the access to credit of the lenders themselves. there is an important distinction here between intermediation across bank balance sheets and via the capital markets, although as i shall describe it turns out to be blurred. total credit : capital markets and securitisation for the moment, i shall put that distinction to one side in order to focus on total credit. a series of environmental changes over the past decade or so have affected the quantity and price of credit generally. greater macroeconomic stability, and perceptions that it will persist more or less uninterrupted, probably increased the supply of credit ; and by reducing risk premia, may have increased demand too ( diagram a ). other developments are more likely to have worked purely through credit supply. the most obvious is the growth of instruments such as credit derivatives and securitisation, associated with an increased role for rating agencies in monitoring credit risk. this was in effect a shock to technology, making portfolios transferable. by offering the prospect of better meeting desired risk profiles and by separating origination from investment, it has brought more nonbank financial institutions, and so more capital resources, into the credit markets, increasing the supply of credit ( diagram b ). this seems to have been borne out in the significant shift in actual credit quantities and prices up to the middle of this year. in the united kingdom, non - bank lenders have accounted for a greater share of credit extension to both the household and corporate sectors ( charts 2 - 4 ). stiglitz, j. e. and a. weiss ( 1981 ), “ credit rationing in markets with imperfect information ”, the american economic review, vol. 71, no. 3, pp 393