CGFS releases report on IT innovations and financing

Under the auspices of the Bank for International Settlements (BIS), the Committee on the Global Financial System (CGFS) is today releasing a report entitled IT innovations and financing patterns: implications for the financial system. The report is the outcome of a joint central bank initiative to explore the linkage between the use of new technologies and firms' financing needs, and the role of financial markets and intermediaries in financing innovative activities.

The report emphasises the potential of information technology to act as a catalyst in the restructuring of economic activity towards flexible, knowledge-based processes within and outside the IT sector. This and IT-induced changes in the competitive environment can affect the risk-reward profiles of a very broad range of firms. The report analyses the implications of these developments for the design of financial contracts, for firm valuation and risk management, and for risk allocation.

The report concludes that the growing need for capital bearing firm-specific business risks tends to increase the role of equity and equity-like instruments. Consequently, valuation of firms by equity markets becomes more central. This puts a greater premium on the proper functioning of those markets. Lenders may face a rapidly changing credit environment, calling for adjustments in monitoring techniques and credit risk management, for example with respect to portfolio diversification and reliance on credit risk transfer. A changing allocation of risk across the financial system and the linkages among the different institutions and markets underlines the relevance of such developments for the systemic monitoring efforts of individual central banks and the central bank community.

The report and the more than 30 central bank research papers considered by the Working Group that prepared the report are available on the BIS website at www.bis.org.

Notes for editors

The Committee on the Global Financial System is a central bank forum established by the Governors of the G10 central banks to monitor and examine broad issues relating to financial markets and systems with a view to elaborating appropriate policy recommendations to support the central banks in the fulfilment of their responsibilities with regard to monetary and financial stability. In carrying out these tasks, the Committee places particular emphasis on assisting the Governors in recognising, analysing and responding to threats to the stability of financial markets and the global financial system.

The Working Group that prepared the report was chaired by Jürgen Stark, Vice-President of the Deutsche Bundesbank. The Working Group's members are listed in the report.