But the underlying picture is one of growth gradually picking up to around its historical average rate, reflecting continued recovery in investment and a higher contribution from net exports and, on the back of that, some modest strengthening in consumer spending as we go through next year. One should not, though, put too much weight on any single path, as the coloured fan in Chart 4, which covers nine out of ten of the possibilities as we see them, is pretty wide. That serves to emphasise the high degree of uncertainty at the current juncture. Those uncertainties include not only the spending of households and businesses here in the United Kingdom, but also the evolution of demand abroad. In particular, while the euro area overall has exhibited decent growth in recent quarters, the countries of the periphery are struggling with a mixture of fiscal, banking and competitiveness problems. There is a risk that this could lead to  2  Imports of aircraft were temporarily high in 2010 Q4 reflecting the forthcoming change in VAT treatment, but the data were still encouraging even after allowing for the resulting distortion to import growth in 2011 Q1. 2  BIS central bankers’ speeches  renewed banking sector turbulence and a hit to confidence more generally, with adverse consequences for us. Even though our central projection has growth returning to around its historical average rate, that would still leave the level of activity well below a continuation of its pre-crisis trajectory (Chart 5).
The issue, therefore, underscores the inadequate risk management, covering the entire process: from the lack of proper risk measurement, especially with regard to complex product, as well as liquidity risk, to inadequate risk management and control, and to micro-prudential risk-based supervision. In addition, there is now greater attention being paid to the importance of macroprudential approach, in recognition of the risk from procyclicality and interconnectedness of institutions, especially the large and highly complex financial institutions. Also, greater recognition is given to the problem of the unregulated shadow banking sector, like the hedge funds, which are also key in systemic risk process. All these issues pose a major policy challenge, as indeed the various working groups and committees of the BIS are now working on the guidelines, and on the key issues such as accounting, valuations, procyclicality, and adequacy of capital and provisions. In view of the depth of the current problem, and the fact that it may be quite sometime before the global standards on these issues can be settled, regulators, in my view, must be ready to take the needed action to ensure that we address these risks in our financial systems systematically. This is why Pillar II is all the more important, because the essence of Pillar II is to ensure that financial institutions have adequate risk management process and capital, commensurate with their risk profiles.