with loan to income ( lti ) ratios above four was around three times larger than the fall among those households with lti ratios between one and two. but the effect can be to prolong the economic pain for everyone by reducing spending, and therefore amplifying the effect on incomes and output in the economy. the evidence, across countries, recessions ( and us states ) is compelling : build - up of household debt means an economy is exposed to more severe recessions ( chart 1 ). chart 1 household debt growth in the boom and the economic severity of the subsequent bust : across us states, countries and time for gdp and unemployment source : david aikman, jonathan bridges, anil kashyap and caspar siegert, ‘ would macroprudential regulation have prevented the last crisis? ’, bank of england staff working paper no. 747, august 2018. notes : state level household debt statistics ( left hand panel ) from federal reserve bank of new york ; gdp data from bureau of economic analysis ( bea ) ; unemployment data from bureau of labour statistics. change in household debt to gdp ratio from 2004 to 2007 on x - axis, economic performance from 2007 to 2010 on y - axis. international data ( middle and right panels ) uses bridges et al. ( 2017 ) dataset : household debt data from bank of international settlements “ long series on total credit and domestic bank credit to the private non - financial sector ” ; real gdp and unemployment data from the oecd, the global financial database and national statistics websites. middle panel shows experience across 27 advanced economies in the global financial crisis, using same dates as u. s. state panel. right hand panel is for recession episodes in g10 countries from 1960 to 2004 ( i. e. great recession not included ). a recession is defined as two consecutive quarters of negative real gdp growth, with at least eight quarters between consecutive peaks or troughs. corporate debt a similar picture is apparent across companies. in a recession, companies with more debt tend to cut back on investment and employment by more than others. the evidence here is that companies with net debt more than about four times their cashflow cut investment twice as sharply as others ( chart 2 ). all speeches are available online at www. bankofengland. co. uk / news / speeches financing from overseas public debt, in contrast, tends not to deepen recessions, at least in countries issuing the debt in their own currency and within the bounds of

economies ) to which it ’ s exposed. that ’ s why, when we come to decide how big the banking system ’ s buffers of loss - absorbing capital should be, we don ’ t focus on any economic tremors we may feel. we don ’ t insist on tougher standards just because trade tensions threaten to slow the world economy or changes in sentiment hit financial markets, or because uncertainty is weighing on the domestic economy. instead we focus on debt – a key driver of how far up the richter scale economic earthquakes tend to be. 4 think of a build - up of debt as being the economic equivalent of building close to a fault line. when a quake hits, the impact is greater and more resilience is needed in the structures. this focus means we can appear contrarian. debt has a habit of increasing in calm periods, when those in the financial system think it ’ s safe to take more risks. so we can find ourselves demanding tougher standards when risks are thought by many to be low. and we don ’ t start demanding them when the tremors start, when risks are thought by many to suddenly be high. we aim to be countercyclical. our work shows three features of debt to be of particular importance. thomas fuller, ‘ inside apple ’ s earthquake - ready headquarters ’, new york times, 4 june 2019. this approach was exactly what andrew crockett outlined almost 20 years ago : “ the received wisdom is that risk increases in recessions and falls in booms. in contrast, it may be more helpful to think of risk as increasing during upswings, as financial imbalances build up, and materialising in recessions … and because the timing of downswings is exceedingly hard to predict, the approach implies a focus on measuring the vulnerabilities that build up in the upswing and on the more recurrent features of cycles. we may not know exactly when the rainy day will come, but we can be pretty sure that it will. it is not wise to decide on policies or business strategies on the assumption that it will not, or that we can predict its timing with sufficient foresight. ” all speeches are available online at www. bankofengland. co. uk / news / speeches mortgage debt households with more mortgage debt tend to cut back more in downturns. people do everything they can to pay the mortgage. during the financial crisis, the fall in consumption relative to income among uk households