Deleveraging: Challenges, Progress and Policies

Abstract

In the run-up to the financial crisis, indebtedness of households and non-financial businesses rose to historically high levels in many OECD countries; gross debt of financial companies rose dramatically relative to GDP. Much of the debt accumulation appears to have been based on excessive risk-taking and exceptional macro-economic conditions and therefore not sustainable. Since the start of the crisis, non-financial private sector debt has receded substantially in the United States and the United Kingdom. Other OECD countries have not experienced significant debt reduction but already achieved some adjustment in terms of private saving and investment (with the seeming contradiction between these two observations explained by the private sector accumulating gross financial assets at a faster pace). Some macro-economic risks related to future household deleveraging nevertheless remain in a few OECD countries where indebtedness has risen in recent years. In the financial sector, possible future deleveraging will be more damaging to growth if it involves reducing assets rather than retaining (or raising) equity. To speed up the deleveraging process and minimising its impact on prosperity, bad loans should be recognised swiftly, losses taken, insolvent banks wound down orderly and capital shortfalls plugged at still solvent banks.

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