1 8 Lessons from the Crisis Andrew Haldane Bank of England May 2009

2 8 Lessons Finance is not a Golden Goose…

3 Cumulative ‘Excess’ Returns to Finance Date (a) Financials (%) Total market (%) Difference (pp) (a) Start of first year in range to end of second year in range except 2009, which ends in March. UK Equity Market Annual Returns Excess Returns to Finance

4 8 Lessons Finance is not a Golden Goose… …unless it is geared

5 Leverage and Returns on Equity Contributions to Year-on-year UK Financial Equity Returns Profits and Leverage for Global Banks – End 2007

6 8 Lessons Finance is not a Golden Goose… …unless it is geared Size matters

7 Size and Leverage Global Banks’ Size and Leverage ratios (a) Capital Injections vs. Balance Sheet Size as at End 07

8 8 Lessons Finance is not a Golden Goose… …unless it is geared Size matters Banks cannot “pass” a stress-test

9 Changing Distribution of Risk Probability Density for UK GDP GrowthProbability Density for UK Unemployment

10 Long-Run Capital Levels for US Commercial Banks

11 8 Lessons Finance is not a Golden Goose… …unless it is geared Size matters Banks cannot “pass” a stress-test Payment/settlement systems worked …

12 Daily Volumes and Values Settled in CLSActivity in UK Settlement System (CREST) Values in Payment/Settlement Systems

13 8 Lessons Finance is not a Golden Goose… …unless it is geared Size matters Banks cannot “pass” a stress-test Payment/settlement systems worked … …but some OTC markets did not

14 CDS Uncertainty and Central Counterparties CDS Premia and Network Uncertainty – Pre CrisisCDS Premia and Network Uncertainty – Post Crisis

15 8 Lessons Finance is not a Golden Goose… …unless it is geared Size matters Banks cannot “pass” a stress-test Payment/settlement systems worked … …but some OTC markets did not Poor eyesight generates blind panic

16 Mapping the Global Financial Network

17 8 Lessons Finance is not a Golden Goose… …unless it is geared Size matters Banks cannot “pass” a stress-test Payment/settlement system worked … …but some OTC markets did not Poor eyesight generates blind panic Banks need to earn profits

18 Profitability of Banks LCFI’s Return on Common EquityLCFI’s Equity Prices

19 Cumulative Total ReturnsPairwise correlation of cumulative returns Returns to Financial Sectors

20 Due Diligence Test

21 Gross Capital Flows UK gross cross-border capital flowsGross capital inflows

22 Demand Shock