financial stability post brexit : risks from global debt speech given by sir jon cunliffe, deputy governor for financial stability, member of the monetary policy committee, member of the financial policy committee and member of the prudential regulation committee cfo agenda, london tuesday 7 may 2019 all speeches are available online at www. bankofengland. co. uk / speeches thank you for inviting me in january to speak today at your conference on “ financial stability post brexit ”. i suspect that when this subject was chosen and the invitation sent, it was assumed that brexit itself would have happened by the time of the conference. as it is, not only has brexit not occurred, but the path to it and its eventual outcome are perhaps less clear now than a few months ago. so it is perhaps worth spending a little time today on the financial stability risks that might arise from brexit. i will then go on to examine the financial stability risk environment more generally. before going further, a health warning is necessary. it cannot be repeated too often that the bank ’ s approach to its financial stability objective is, in one key respect, very different to its approach to its monetary stability objective. for the latter, the monetary policy committee makes the best forecast we can of the path of the economy and the path of inflation – the central case. we set out clearly and graphically the risks around those forecast, but it is the central case – what we think most likely to happen – that informs our policy decisions. for financial stability, the focus of the financial policy committee ( fpc ) is not on the central case – on what is most likely to happen ; rather it is on the risks – on what could happen even if it is not the most likely scenario. it is the risks, what could happen, that inform our policy decisions. brexit that is why our financial stability focus has been on the risks from a disorderly brexit. the bank has been working since the referendum to reduce the risks to financial stability and the risk of disruption to financial services, in the event, that the uk leaves the eu without a deal and without any transition period. this has been a pretty large task. alongside the treasury and the fca we have made sure that we will have a working legal and regulatory framework for the financial sector at the point that eu law no longer applies in the uk. over 10, 000 pages of financial sector related eu legislation has

booms gone bust : monetary policy, leverage cycles and financial crises, 1870 - 2008 ’, american economic review, 102 ( 2 ) : 1029 - 61, and kaminsky and reinhart ( 1999 ), ‘ the twin crises : the causes of banking and balance of payments problems ’, american economic review, 89 : 473 - 500. all speeches are available online at www. bankofengland. co. uk / speeches between 2000 and the crisis in 2008, total global debt as a proportion of global gdp grew by over 60 percentage points, a growth rate of nearly 30 %. between 2008 and 2018 it has grown by around 25 percentage points, a growth rate over the last 10 years of just under 10 %. however, the bulk of the post crisis growth occurred in the first 5 years after the crisis as governments stepped in to offset private sector deleveraging and support the economy. since then, global debt has stabilized, growing by only 1 % in total, relative to global gdp, over the past 5 years. the aggregate growth rate is not therefore signaling an impending correction. the level, however, may well represent a significant vulnerability given that high levels of debt are associated with deeper and more persistent recessions. assessing the sustainability of this debt is more difficult. whether debt is sustainable depends on the difference between the interest rate and the growth rate of the income stream that will be used to repay the debt. the future is not known – in assessing today whether a given level of debt is sustainable, we must rely on our best forecast of future interest rates and growth. the level of debt that is sustainable in an economy is not a constant. it can change over time and indeed has changed enormously over the last 150 years. the ratio of credit to gdp in the late victorian british economy was under 20 % ( not including the financial sector ). in the mid - twentieth century it was around 60 % and by the early 1990s over 100 %. it is influenced by many factors including, very importantly, the long run real rate of interest. there is strong evidence that the long run, or trend real rate has come down materially over the past 40 years as a result of slow moving, secular changes in the supply of savings and the demand for investment. the mpc published analysis last august suggesting that the trend real rate in the uk has fallen by more than 2pp since 1990. slower population growth, increased life expectancy and slower productivity growth have all contributed to this fall