Emily Clayton and Martina Fazio

Debt creates threads between the financial system and the real economy. These threads transmit shocks across a web of connections, meaning that financial shocks may pose risks to households and businesses, and real-economy shocks may jeopardise financial stability. These threads can also become entangled into knots – sources of inefficiency. Macroprudential regulators in the UK have already intervened partially to disentangle the inefficiency from consumption cuts by over-indebted households. In the next decade, policymakers could consider whether a similar intervention is needed to limit corporate debt. In this post, we map the threads that corporate debt creates, identifying areas where entanglement may have created inefficiencies, and considering the potential case for borrower-based tools to unravel them.

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