Firms’ management and boards should ensure that in credit assessments equal focus is placed on the liquidity profile of their clients as on their capital strength. Right-way risk is only right-way if a client is still standing when the hedge matures. Investment banks must bear in mind that their positions can play an important role in the functioning of the economy. Whilst it might be good risk management to reduce a client’s exposures when it suffers cash flow stresses from margin calls, was it good risk management for the bank to sleepwalk into that position in the first place? Working with the client to understand and anticipate all possible future outcomes, and access to facilities in order to meet liquidity demands in a stress, should surely be at the cornerstone of a client-centric business. It is important here for banks to think a few steps ahead and have in mind the potential indirect second-round effect of their counterparty management practices – some of which can otherwise  Page 5  come back to hit them. One other common feature of periods of stress has sometimes been the inadequacy of initial margins required by investment banks over the counter. The spike in nickel markets in March 2022 reminded everyone that progress needs to be made here. And while CCPs have lessons to learn, so do banks. When they undercook initial margins in benign times, banks give their clients the illusion that some products – for example hedges – are cheaper than they really should be economically.
At the same time and not withstanding their role in increasingly integrated global value chains, growth in imports has been sluggish, meaning that net trade has provided support to GDP growth. 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  Taking all of these together leads me to conclude that, although the resilience of growth in the wake of the referendum has been welcome, the broad channels through which we would have expected demand to adjust to a vote to leave the EU are now operating. As a result, GDP growth has slowed from average quarterly rates of 0.7% in 2014 and 2015 to 0.4% more recently. For those of you who, like me, have had to assess and categorise past UK slowdowns as either U- or V-shaped, I consider what we are witnessing as more of a saucer-shaped slowdown and pretty unusual for that (Slide 6). Given the long horizon over which the effects of Brexit could play out, we are likely to be on the flat part of the saucer for some time – as embodied in the MPC’s forecast for GDP growth which remains at 0.4% per quarter over the 3-year forecast horizon, conditional on households and companies basing their decisions on the expectation of a smooth adjustment to new trading arrangements. If realised, that will leave the economy about 2% smaller by 2020 than the May 2016 MPC forecast would have implied.