Summary by Charles Kramer and Garry J. Schinasi
An integral component of the IMF’s surveillance of international financial markets is its annual report on International Capital Markets: Developments, Prospects, and Key Policy Issues (ICM). The report provides a comprehensive assessment of recent developments in both mature and emerging financial markets and analyzes key systemic and structural issues. During the year ending May 2001, the global economic slowdown and the greater synchronization between economic and financial cycles gave rise to reappraisals of financial risk, portfolio rebalancing, and asset repricing in a wide range of financial markets. As discussed in previous ICM reports, past financial market adjustments, such as the one that occurred in 1998, often seemed to have originated in concerns that excessive leverage, market illiquidity, and other potential financial fragilities could engender real economic consequences, for example, a “credit crunch.” By contrast, the recent adjustment reflected perceptions, and then the reality, of deteriorating economic conditions and prospects. Concerns later arose that the attendant financial repercussions, including downward pressure on corporate earnings growth and rising default rates, would adversely affect prospects for real economic growth. Against this background, the new report also provides the IMF staff’s views of the key risks and vulnerabilities in the period ahead.
The ICM report covers two key structural issues in international capital markets—changes in government securities markets and financial sector consolidation in emerging markets. The first discussion looks closely at the structural changes in government securities markets in Europe, Japan, and the United States, examines their financial implications, and identifies associated public policy questions. For instance, U.S. treasury securities have played key roles in the national and international dollar markets as benchmarks, hedging vehicles, and safe-haven assets during periods of stress. In recent years, as the supply of U.S. treasury securities has shrunk, market participants have begun to substitute other instruments such as swaps in some of these roles. The private, U.S. dollar, fixed-income markets are well developed, and useable private substitutes exist for many of the roles. It is unclear, however, how using alternative instruments as safe-haven assets may affect market dynamics during bouts of turbulence. There are additional questions about how the shrinking supply of U.S. treasury securities may affect the dollar’s role as a currency of denomination for international financial transactions. Also considered are structural changes under way in Europe associated with the introduction of the euro and other aspects of European financial integration, as well as structural changes in Japan to address perceived weaknesses in the JGB market infrastructure. Implications of these structural changes for private finance in Europe, Japan, and the international markets are assessed.
A second issue addressed in the ICM is financial-sector consolidation in emerging markets. Consolidation in emerging markets is predominantly cross-border, and authorities have played a larger role in guiding its earlier stages compared with the mature markets. Ownership structures, particularly family ownership, are seen as the main obstacles to faster market-driven consolidation. Attempts to exploit economies of scale and scope drive the consolidation of financial institutions; and technological advances (including the Internet) and deregulation are making it easier to reap such economies. Technological advances are also transforming securities trading. In response to the associated competitive pressures, stock and derivatives exchanges are consolidating, liberalizing access, and deregulating brokerage commissions. However, barriers to entry of foreign brokerages and antiquated trading and governance structures have delayed the adaptation of some securities markets, with the result that liquidity and trading has migrated to offshore markets. Consolidation in emerging markets raises many policy issues including: the relevance of market discipline, adequate exit policies for institutions in distress, consolidated supervision and the architecture of supervisory agencies, the effects of concentration on systemic risk, and consumer protection and antitrust issues.
The International Capital Markets Report is available in full-text format at the Research at the IMF website at http://www.imf.org/research.