That in turn requires that the most productive firms are able to grow and create new jobs. And it requires that workers have the incentives, skills and means to move to them. In an average mature economy, around 50% of productivity growth comes from such reallocation. When people think about reallocation, they tend to think in terms of people moving across sectors. But typically, that only accounts for a small share of productivity growth. 18 What’s more important for mature economies is within-sector reallocation, which means shifting resources towards the most productive firms within each sector of the economy. That’s encouraging because expecting, say, steel workers to become bankers is not realistic. But expecting them to move to better firms within their sector is. For this to happen, however, the structural conditions have to be right. Product markets have to allow market entry, to challenge unproductive firms; they have to support firm growth, so that the most productive can reach their optimal size; and they have to facilitate quick bankruptcy, so that the weakest firms can exit. Similarly, labour markets have to set incentives for mobility; support retraining and upskilling where needed; and allow wages to match productivity at the firm level, creating proper market signals. Clearly, for firms to prosper in this environment, they need to be agile. Increased agility would enable firms to switch production towards the higher quality, distinctive, more customised goods and services increasingly demanded by ever more sophisticated customers, which has long been the strategy of Europe’s leading exporters.

The recent experience of the credit derivatives market shows that ambiguities can arise even in standardised documentation, and the sponsors and users of the documentation need to be alert to this and make changes where necessary. The link with operational risk But the bottom line is that standardisation will reduce the risk that something goes wrong with the documentation. This feeds in turn into reduced legal risk, which is included within the definition of operational risk adopted by the Basel Committee. This defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, people or systems or from external events”. This definition focuses on the causes of operational risk - internal processes, people, systems or external events. Operational risk losses can be further classified into various “event types” and assigned to each of a bank’s major business lines. By classifying losses in this way, banks are better placed to identify appropriate risk controls and to assess the impact of these. In its draft paper on Sound Practices for the Management and Supervision of Operational Risk, the Basel Committee has identified seven main loss event types for operational risk. These include losses related to “execution, delivery and process management” within which resides documentation risk. Why has the Basel Committee decided to focus on operational risk? The answer lies in the growing diversity and complexity of banking operations arising from well-known phenomena such as globalisation, the growing sophistication of financial technology and outsourcing.