1956 - 59 2. nominal returns deflated by consumption deflators. 3. ftse all share starts in 1962 4. 1960 - 69 includes 1956 - 59 5. trade weighted real exchange rate indices start in 1975 4. volatility is calculated as standard deviation of annual growth rates. 5. ust and uk gilts are based on total return indices from global financial database chart 1 : average pairwise correlation between historical returns of ftse 100 constituents 1. 0 0. 8 0. 6 0. 4 0. 2 0. 0 jan - 84 jun - 89 dec - 94 jun - 00 nov - 05 source : bank of england chart 2 : ddm sensitivity of s & p 500 to a 1pp increase in the risk - free real interest rate per cent change in s & p500 ( fixed, exogeneous real dividend growth rate of - 20. 0 - 25. 0 - 30. 0 average - 35. 0 - 40. 0 - 45. 0 - 50. 0 chart 3 : equity index 3 - month option - implied volatility per cent 80. 0 60. 0 s & p 500 ftse 100 40. 0 20. 0 0. 0 source : bank of england table 2 : probability masses in financial asset option - implied and historical distributions asset usd per gbp jpy per usd usd per eur sp500 10 - y ust tail upper ( $ negative ) lower ( $ negative ) upper ( $ negative ) lower lower ( 10y yield negative ) option - implied tail historical tail historical period 1971 - 2006 1971 - 2006 1971 - 2006 1931 - 2006 1960 - 2006 source : bank of england chart 4 : s & p 500 returns : probability in lower implied pdf tail more than one standard deviation from the mean ( 3 - month horizon ) per cent 18. 0 17. 5 17. 0 16. 5 16. 0 15. 5 15. 0 source : bank of england chart 5 : jpyusd : probability in lower implied pdf tail more than one standard deviation from the mean ( 3 - month horizon ) per cent ( downside risk for dollar ) 16. 0 15. 5 15. 0 14. 5 14. 0 13. 5 13. 0 source : bank of england chart 6 : broad money across industrialized countries % change oya 16. 0 uk 14. 0 12. 0 us 10. 0 8. 0 euro - area 6. 0 japan 4. 0 2. 0 0. 0 1996 1997 1998

relevant. on one measure, the rate of growth of ‘ world ’ broad money17 has slowed from around 15 % to around 8 % since 2003 ( chart 9 ), perhaps consistent with the gradual withdrawal of monetary accommodation in the us and elsewhere. however, the treatment of ofcs varies a lot across the g718, and so their data are not strictly comparable with the uk m4 numbers. more important, so far as i can tell, most current calculations of world money growth19 simply add up domestic money supplies, and so leave out cross - border money holdings. that might be a material omission. for example, external holdings of sterling deposits with the uk banking system have increased by more than domestic money since the late 1990s ; and by around 15 % over the past year. how much of this growth is attributable to non - bank financial groups, whether based in the uk or overseas, is not known. like much of the monetary analysis of the early 1980s, i fear that this is rather inconclusive, other than underlining that one has to get one ’ s hands dirty in analysing the money numbers. it is plausible that a decent chunk of recent uk m4 growth should be seen in the light of structural change in the financial system. essentially, some types of non - bank financial intermediation have become more significant, and seem to have entailed higher money holdings on the definitions currently employed. if so, recent ofc money growth does not of itself obviously have malign implications for money spending and inflation. originate and distribute : what ’ s going on on bank balance sheets? much of the debate about this renewed process of disintermediation has revolved around whether the burgeoning growth of, for example, structured credit vehicles and hedge funds increases or impairs the resilience of the system. this is equivalent to asking about the significance to stability of the pronounced shift in the business model of many large banks to ‘ originate and distribute ’. if they are not holding on to the loans and other assets they originate, one might draw the inference that bank balance sheets would have shrunk. nothing could be further from the truth. the balance sheets of the largest and most complex financial institutions ( lcfis ) have ballooned. both in the us and in europe ( including the uk ), their holdings of equities and of debt instruments ( bonds and loans ) have grown more rapidly than the underlying markets (