IT systems have a mixed record in reducing the risks run by large financial institutions, according to Howard Davies, deputy governor of the Bank of England.
While IT systems have helped reduce risks of financial catastrophe in the payment and inter-bank settlement systems used by banks and stock exchanges, they have nevertheless also allowed traders and managers in financial firms to take riskier strategies in credit management and in market-making activities such as derivatives trading, Davies warned a meeting of the British Computer Society on 8 October.
"Undoubtedly, IT has generated the potential for institutions to take on more risk than they did in the past. The Barings case is just one example of that," Davies said, speaking at the BCS/Unisys annual lecture in London. "In the case of both market and credit risk, the verdict as far as IT is concerned -- whether it is part of the solution or part of the problem -- must be a more balanced one than in the case of payments and settlements risk."
Although IT has helped banks measure risk better, these benefits will be wasted unless staff -- especially traders -- are kept under control and are properly supervised by their superiors, Davies said. He urged financial institutions to review their pay schemes in order to ensure that profit-related pay schemes were not encouraging staff to take too many risks.
"In permitting much-improved measurement of market risk, IT has brought tremendous potential benefits. However, institutions need to ensure that these benefits are realised, and that their risk management and control systems are as strong as the capacity of the institutions to take on new types of highly geared risk, and the incentives on traders to do so," he said.
Davies added that the Bank is to make a series of recommendations for improving the flow of capital to technology-based start-up companies in a report, The Finance of High Technology Companies, to be published at the end of this month.
The recommendations include reforming the way small investments in start-up firms are taxed, and changes to the government's Business Link advisory network for small firms. The report, which took a year to research, will also emphasis the importance of government grants in encouraging private investment in high-technology start-up companies.
"By comparison with the US and Canada, it would appear that it is significantly more difficult to attract start-up and mezzanine capital for British technology-based firms. It would appear that only a very small number of our banks are geared up to asses the underlying technology in propositions put to them, and furthermore it would appear that our venture capital industry is structured on such a way that it is not really economic for them to deal with smaller start-up firms. Their costs of due diligence are too high," Davies said.
"Potentially, things like venture capital trusts and the Enterprise Investment Scheme are quite positive, but there are quite a lot of restrictions around the way they are constructed which appear to make them less suitable for small technology-based firms," he added.
Research by the Bank has shown that government grants give IT start-up firms a "considerably higher" survival rate than rivals not receiving grants, Davies said. "Grants may not change the company fundamentally financial terms, but they make it more fundable and act as a kind of seal of approval. Lenders feel that some chap from the DTI has had a look at the company and felt it was worth investing in," he said.
The report's findings confirm research previously published by the Bank of England. The Bank's third report on finance for small firms, published in January 1996, found that relatively high due-diligence costs and high returns on investment were discouraging UK venture capital firms from investing in young technology-based firms.
New regulation expected to cut greenhouse gas emissions by about 17 million metric tonnes between 2020 and 2050
Molybdenum ditelluride is a two-dimensional material that can be easily stacked into multiple layers to create a memory cell
New light-guiding nanoscale device can control and monitor a nanoparticle trapped in a laser beam with high sensitivity
Optical traps are scientific instruments in which a focused laser beam is used to exert an attractive or repulsive force on a microscopic object to hold it in place
Scientists estimate that the exoplanet has already lost up to 35 per cent of its mass over its lifetime