Global Capital Markets: Entering a New Era
The current financial crisis and worldwide recession have abruptly halted a nearly three-decade-long expansion of global capital markets. From 1980 through 2007, the world’s financial assets—including equities, private and public debt, and bank deposits—nearly quadrupled in size relative to global GDP. Global capital flows similarly surged. This growth reflected numerous interrelated trends, including advances in information and communication technology, financial market liberalization, and innovations in financial products and ser- vices. The result was financial globalization.
But the upheaval in financial markets in late 2008 marked a break in this trend. The total value of the world’s financial assets fell by $16 trillion to $178 trillion, the largest setback on record. Although equity markets have bounced back from their recent lows, they remain well below their peaks. Credit markets have healed somewhat but are still impaired.
Going forward, our research suggests that global capi- tal markets are entering a new era in which the forces fueling growth have changed. For the past 30 years, most of the overall increase in financial depth—the ratio of assets to GDP—was driven by the rapid growth of equities and private debt in mature markets. Looking ahead, these asset classes in mature mar- kets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is ris- ing faster and all asset classes have abundant room to expand.
Source: Excerpted from “Global Capital Markets: Entering a New Era,” McKinsey Global Institute, Charles Rosburgh, Susan Lund, Charles Atkins, Stanislas Belot, Wayne W. Hu, and Moira S. Pierce, McKinsey & Company, September 2009, p. 7.
Assets. The assets—the financial assets—which are at the heart of the global capital markets are the debt securities issued by governments (e.g., U.S. Treasury Bonds). These low-risk or risk-free assets then form the foundation for the creating, trading, and pricing of other finan- cial assets like bank loans, corporate bonds, and equities (stock). In recent years, a number of
EXHIBIT 1.1
Bank
Mortgage Loan
Corporate Loan
Corporate Bond
Bank
Interbank Market (LIBOR )
Bank
Public Debt
Private Debt
Private Equity
Central Banks Institutions
Currency Currency Currency
The global capital market is a collection of institutions (central banks, commercial banks, investment banks, not for profit financial institutions like the IMF and World Bank) and securities (bonds, mortgages, derivatives, loans, etc.), which are all linked via a global network—the Interbank Market. This interbank market, in which securities of all kinds are traded, is the critical pipeline system for the movement of capital.
The exchange of securities—the movement of capital in the global financial system—must all take place through a vehicle—currency. The exchange of currencies is itself the largest of the financial markets. The interbank market, which must pass-through and exchange securities using currencies, bases all of its pricing through the single most widely quoted interest rate in the world—LIBOR (the London Interbank Offered Rate).