It was clear that advances in information and telecommunication technology had a major impact on the financial services industry, generating various financial innovations and new business methods, such as internet banking, electronic money, on-line broking services and electronic trading systems. For the real economy, however, the impact was much harder to assess, not least due to a lack of reliable statistics and interpretation difficulties regarding “new economy”-related developments in productivity. As Nobel Prize Laureate Robert Solow said in 1987: “You can see the computer age 2 everywhere but in the productivity statistics”. The difficulty in interpreting these developments therefore suggested caution on the part of policy-makers. The interaction of the “new economy” with developments in financial markets Let me now turn to the interaction of the “new economy” with financial markets. It has been long debated what role the development of financial markets played in fostering belief in the “new economy”. In most industrialised nations, on the waves of financial liberalisation and globalisation, capital markets have been growing tremendously over the past two decades, both in terms of volume and value of transactions and in the development of new types of securities. For the euro area, the preparations for and the actual introduction of the euro have undoubtedly been an important catalyst, improving the efficiency of the euro area capital markets and, to some extent, reducing existing information asymmetries, for both the equity and debt markets in the euro area. This has certainly been a very positive development which I wholeheartedly support.
It is whether they can convince investors that it is safe to provide them with funding at reasonable spreads over Bank Rate without central bank support. As the Financial Policy Committee (FPC) noted in its recent Review, UK banks are still some way from being able to convince the market in this respect. Regulators, who from 1 April will be in the Bank of England’s new Prudential Regulation Authority, are now working hard to ensure that banks are making adequate provisions for future losses, the likely costs of regulatory penalties and compensation to customers, and stating the riskiness of their assets in a more prudent way. A lesson from past crises, and also from this one, is that it is important to act now rather than hope that problems will go away of their own accord. As the FPC said last December, it is likely that banks will be required either to raise more capital or to restructure their businesses or exposures, and the FPC will review the position in March. There is no single remedy appropriate to all banks. With proper implementation, there is no reason why the two banks with significant state shareholdings could not largely be back in the private sector within a relatively short period. After all, in the United States banks that received state support are already back in private hands. Restoring our banking system to full – and transparent – health is only one of the structural changes that will be necessary to rebalance the economy.