CGFS release report on IT innovation and financing

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.

Related Links: Full Report