Given the extensive consolidation of firms in the financial industry, the information systems of many firms are an accretion of systems, with issues of consistency, comprehensive aggregation of exposures and speed of information retrieval for analysis. For example, most firms in distress find it difficult to answer a crucial question: what market participants are most exposed to me and how will they react to my difficulties? A second impediment is the complexity of unwinding certain books of business, where the business is originated in one location, recorded in another and risk-managed in a third. Derivative transactions are a prime example. The level of complexity related to how and where trades are marketed, booked, funded and risk-managed leads to high levels of connectedness within the firm, particularly as institutions book “back-to-back” intragroup trades to transfer the economics of a transaction to a central portfolio for risk management purposes. The third impediment is the use of intragroup guarantees. Institutions sometimes use parent guarantees to support and cover particular transactions or the entire operations of separately capitalized subsidiaries in foreign countries. Guarantees of this sort allow firms to operate subsidiaries with less capital, but can distort the pricing and economics of the subsidiary’s business activities and make the subsidiary more valuable to the current owner than to a potential buyer. In addition, the default of a guarantor may allow counterparties to terminate contracts and seize collateral even though official sector efforts are attempting to preserve the local operations. The fourth impediment is the need to preserve global payment operations.
But it will need to be accompanied by corresponding moderation of the growth of domestic demand - after the offsetting stimulus of a year ago - if we are to maintain overall stability. That essentially is why interest rates in the UK have had to rise since last autumn. We are now in a position where the economy as a whole is again growing above trend - after a pause a year or so ago - while inflation is running - and has been running for nearly a year - slightly below the Government’s 2½% target. Looking ahead, there is the tantalising prospect of new factors that might help to hold the rate of inflation down, at least in the short term. There is evidence for example, although it is hard to evaluate, of more intensive retail price competition, squeezing retail margins across the board, and that could hold down prices, at least for a time. And this effect could intensify and extend further into the future as a result of the spread of e-commerce. And there is, on the supply-side of the economy, the possibility (though so far sadly not much actual statistical evidence) that the spread of IT will accelerate productivity growth across the economy - as it has in the United States, raising the underlying rate of potential output growth at least for a time.