system is not just about regulatory reform. changes in institutional governance and culture are also needed. many of the problems that surfaced during the crisis and more recently reflect a culture that emphasizes short - term gain over institutional sustainability – a culture in which regulation is viewed as an obstacle to be arbitraged or circumvented, rather than as an additional check on broadly shared objectives. that needs to change if progress is to take root. making sure that happens will require a realignment of incentives, and strong leadership from the top. all of this will take time. the question is, how much time do we have? while risk - taking has been somewhat constrained in the aftermath of the crisis and the resulting uncertainties in the macro environment, we are beginning to see signs of things heating up in some areas of the markets : e. g., record issuance of junk bonds and emerging market debt, including enthusiastic take - up for issuers from “ frontier markets ” with little to no prior presence in the capital markets ; increased leveraged buyouts ; weakening covenants ; and a rebirth of the collateralized loan obligation market. complacency at this point would not be a good thing. when i think of the risks ahead, my concern goes less to countries, institutions or particular markets, and more to the broad set of challenges associated with the eventual normalization of the policy measures which are being taken now, especially in the context of markets that may be frothier than what we see today, and in ways that may not be fully apparent given all the new incentives being created for “ innovation ” in intermediation and in the nature and location of risk taking. tightening cycles tend to bring surprises. and in the upcoming cycle, both central banks and markets will be operating in unfamiliar territory. minimizing potential fallout for markets and for the economy will require deft management, and skillful and disciplined communication on the part of policymakers. that said, at least for now, inflation risks appear contained. notwithstanding the additional liquidity, inflation in the advanced economies is running toward the low side of desired ranges – and in japan, well below. financial markets show little evidence of longer - term inflation expectations becoming less firmly tethered. and when the time comes for normalization, there are a number of powerful tools available to keep them in check. finally, on the issue of currency spillovers : this is a topic where, at least so far, the rhetoric appears to have

shallow recovery. credit availability is a crucial ingredient in any advanced economy ’ s recipe for economic growth because credit can support investment in productive enterprises and can smooth household spending from fluctuations in income. credit is the means through which financial assets accumulated by savers can earn returns by being put to productive uses. based on data from the financial accounts of the united states ( flow of funds ), real credit ( that is, credit after taking into account the effects of inflation ) to both corporations and households in prior recoveries generally started to grow fairly quickly after the end of the recession. by contrast, in the most recent recovery the real credit outstanding of businesses ( corporations and non - corporations ) declined for about two years after the end of the recession. and only recently – more than five years after the end of the recession – has it attained pre - recession levels ( figure 1 ). more dramatically, real credit to households continued to decline for about four years and, while it has finally begun to expand, is still well below its pre - recession levels ( figure 2 ). these different patterns of credit growth partly reflect the weak state of the banking sector following the financial crisis. the u. s. banking sector experienced record losses in the great bis central bankers ’ speeches recession that impaired a significant portion of banks ’ capital and triggered many failures. these losses would have been even higher had it not been for the liquidity and solvency support from the official sector – including the u. s. treasury, the fdic and the federal reserve. sorting banks by the losses incurred during a recession relative to equity capital at the beginning of the recession, it is clear that the u. s. banking industry across this spectrum was much more adversely affected in the latest recession than in the two prior recessions ( figure 3 ). the legacy of those losses has likely limited the banking sector ’ s ability to extend new loans during this expansion, as banks acted in a highly precautionary way to accrue capital that had been depleted as well as to add to their previous capital levels. the need for banks to repair their balance sheets following the financial crisis contributed to the far slower growth of outstanding bank loans during this expansion when compared to previous long expansions. real outstanding loans to businesses, which are dominated by bank loans, declined more in this recovery than in previous recoveries ( figure 4 ). on the household side, real outstanding residential mortgages, which are largely originated by banks, have declined through most of this