decade, itself caused by the preceding decline in the neutral rate of interest. the counterpart to the faster mortgage growth wasn ’ t higher consumption but a transfer of financial wealth to those trading down the housing market ( largely from younger to older people ). and, to complete the circle, the decline in the neutral rate of interest, from extremely high levels in the early 1990s, makes a given quantity of debt more affordable. i ’ m not claiming that higher debt involves no extra risk at all. one could also conceive, in principle, of a housing market that involved much less of it. suppose that, instead of putting deposits in mortgage - issuing banks, we all had equity investments in companies that owned residential housing – and that, instead of owning the houses ourselves, we were simply tenants of these corporate landlords. that would be a “ model ” with no mortgage debt at all. but it ’ s not immediately clear it would make net wealth any higher, housing any cheaper or, for that matter, the macro - economy more stable. 8 returning to the real world, regulators would rightly be concerned if mortgage debt started growing rapidly again, especially if it was accompanied by other signs of loosening credit supply and greater risk - taking. it was in response to early signs of this sort that the fpc decided in 2014 to cap the share of new mortgages banks were allowed to issue at high multiples of a borrower ’ s income. however, the fact that the level of uk mortgage gearing is higher than it was a generation ago, or that it ’ s lower than in the netherlands, is of less significance. and the aim of the 2014 measures was not to reduce in fact we know that under certain conditions, originally set out by modigliani and miller ( 1958 ), it would make no difference to anything – this is just an extension of their famous result concerning corporate finance ( which i also mention below ). as it happens the uk has moved slightly in this direction of this “ model ” ( if that ’ s not too grand a word ) over the past few years. one of the reasons mortgage debt is lower than a decade ago, relative to income, is that the share of owner - occupiers has fallen and more people rent ( it ’ s also true that the share of equity in the housing market has risen a little ). but that hasn ’ t made for cheaper housing overall. while the share of income going on mortgage interest has declined

for putting losses in the largest firms in the world not just onto shareholders but onto their unsecured, uninsured creditors rather than onto taxpayers. i would expect that over time to lead to adjustments in the business models and organization of the most significant firms in the world. what ’ s more, on the whole, i think they will welcome that. 5. capital markets the next element of the reform programme is capital markets. too much of the reform debate has probably revolved around banks, both in response to this crisis and in response to earlier crises. we live in a world where financial intermediation does not just go via banks and insurance companies, but it goes via capital markets and the vast array of institutions, investors and issuers that the capital markets encourage into existence. i will highlight just two key changes on this front. one, there is a determination that a lot more otc ( over - the - counter ) derivative activity will go through central counterparties, rather than being settled bilaterally. this can have enormous benefits in terms of laying down standards for collateralisation, valuations, and ensuring transparency of what is going on in those markets. there is a residual question about how much of that activity should go via exchanges or via other trading platforms. that ’ s something which i doubt will be completely resolved this year. i think it will remain part of the g20 and the fsb agenda going into next year. but it is a very important part. another key element of changing capital markets is much greater transparency around, and much reduced reliance on, credit rating agency ratings. one of the problems in global capital markets has been that too many investors and banks have given up on reaching their own view on borrowers and on instruments, but have effectively subordinated their own judgment to the judgment of credit rating agencies. the fsb is sponsoring and leading work in order to reduce the extent to which credit rating agency ratings are inscribed into, or embedded in the regulatory fabric of our capital markets. 6. incentives the sixth thing is incentives. the issue that gets most attention here is compensation or pay, on which the fsb issued a code. the essence of that is that more pay should be deferred. i would add that perhaps part of deferred compensation should be in the form of a debt contract, so that the managers and workers in large firms eventually become creditors of the firm and so they themselves have the same risks as other debt holders. that works only if we