summary by Charles Kramer, Jens Nystedt and Jorge Roldos
The annual report on International Capital Markets: Developments, Prospects, and Key Policy Issues is an integral element of the IMF’s surveillance of developments in international financial markets. This year’s report assesses recent developments in mature and emerging financial markets and analyzes key systemic issues affecting global financial markets. During 1999 and into the first half of 2000, global financial conditions generally improved in tandem with the strong rebound in the global economy. Starting in March 2000, however, participants in mature and emerging markets became less at ease with the uneven growth patterns among the major currency areas, signs of inflationary pressures, and increasing external imbalances. Against this background, the report also discusses the major risks in the period ahead.
The International Capital Markets report examines three systemic issues. First, rapid growth and widespread use of over-the-counter (OTC) derivatives markets has accompanied, and in many ways driven, the globalization of finance. These markets are comprised of internationally active financial institutions, and are central to the functioning and efficiency of the major bond, equity, and foreign exchange markets. Accordingly, OTC derivatives instruments and markets have bestowed tremendous benefits on global financial markets. At the same time, recent episodes of turbulence have revealed that OTC derivatives instruments and markets can contribute to market instability. The report identifies sources of risks to market instability in OTC derivatives markets as well as imperfections in the underlying infrastructure. Progress in addressing some of these risks and imperfections has been limited, and the report points to areas where further efforts are required if risks to market stability are to be avoided in the future.
Second, the report discusses market views on the experience with initiatives to “involve” the private sector in preventing and resolving crises. The report notes that it is in the interest of both the private and public sectors to reduce potential inefficiencies and instabilities in the international financial system. Recent experience with involving the private sector in crisis resolution has revolved around two new instruments—the rollover of interbank lines and the restructuring of sovereign foreign currency bonds. Views about the success of these instruments are varied, but the report concludes that the official community needs to be more aware of how the private sector will react to official initiatives in order to enhance private sector involvement in the future.
Third, the report documents the growing presence of foreign-owned institutions in the emerging markets. In the second half of the 1990s, the share of assets under foreign control in several emerging markets in Central Europe and Latin America increased to more than half of total assets. Thus, foreign-owned banks have played an increasingly important role in emerging markets. The report analyzes the factors that have stimulated the rise in foreign participation, including those that drove global financial institutions to expand toward emerging markets, and the factors underlying the authorities’ decisions to remove existing barriers to entry. The arguments for and against foreign presence in the financial system and the main policy issues are also reviewed and assessed. The report finds that competitive pressures created by foreign bank entry have led to improvements in banking system efficiency. It notes that while there is only limited evidence on whether a greater foreign bank presence contributes to a more stable banking system and decreased volatility in the availability of credit, foreign banks could potentially add to the stability of the banking system. The report also suggests that the presence of foreign banks opens a new channel for transmitting disturbances from mature to emerging markets. Finally, the report points out that the main policy issues involved in foreign bank participation are the need to coordinate and upgrade prudential supervisory and regulatory policies across borders, and to be aware of concentrations of activity arising from large international bank mergers and of associated systemic issues.
The full text of the September 2000 International Capital Markets report is available on the IMF website at http://www.imf.org/external/pubs/ft/icm/2000/01/eng/index.htm.