$118 trillion and counting: Taking stock of the world's capital markets

By Diana Farrell, Tim Shavers, Aneta Marcheva Key
$118 trillion and counting: Taking stock of the world's capital markets

MGI examined the financial assets of more than 100 countries since 1980. The result is a comprehensive profile of the global capital market (GCM) and an in-depth analysis of its evolution across geographies and asset classes.

The global financial stock the total amount of capital intermediated through the world’s banks and capital markets and made available by them to households, businesses, and governments is now more than $118 trillion and will exceed $200 trillion by 2010 if current trends persist. The global finance stock has grown faster than the world's GDP, creating financial markets that are deeper and more liquid.

Much of the growth in global financial assets comes from a rapid expansion of corporate and government debt, with all of the attendant benefits and risks. With a few qualifications, this trend bodes well for the world’s economies, since deeper markets provide better access to capital and improve the allocation of risk.

The roles that major countries and regions play in capital markets are changing. The United States plays the largest of them, attracting foreign issuers and investors alike. European markets are gaining in market share and depth, however, as they becoming more integrated. Meanwhile, Japan’s role in global capital markets is diminishing while China has become a new force.

Global Findings

Three global themes emerge based on MGI's analysis of the global financial stock, the financial capital available for intermediation.

  • First, the development and expansion of financial institutions such as banks and stock markets far outpaces the growth in underlying GDP, resulting in financial deepening. While the global financial stock was similar in size to the world's GDP in 1980, today it is more than three times larger. Financial deepening is usually beneficial, giving households and businesses more choices for investing their savings and raising capital as well as promoting a more efficient allocation of capital and risk.
  • Second, debt securities are the most important asset class in the global financial stock. They hold the largest share of GFS and have been steadily expanding over time. The relative role of private and government securities varies across geographies; for example, government debt is a relatively small share of the US's and the UK's financial stock, but dominates Japan's.
  • Third, the roles of the different regions in the GCM are shifting, reflecting the profound contrasts in size, composition, growth, and degree of integration. The US maintains a unique role as the hub for GCM, which bolsters its dominance in private debt and equity securities. Europe is integrating quickly and is gaining global share across all asset classes. Japan's global role is diminishing in all assets but government debt, which has driven most of Japan's growth in financial stock. And China, while still relatively small in the GCM, controls a meaningful share of global bank deposits.

US Findings

In the past 10 years, the US market has continued its robust growth, fueled by expansion in private debt securities and undeterred by the boom-and-bust of the equity market bubble. Notably, the US financial stock is dominated by securities—private equity and debt—to a much greater extent than other markets in the world, with a relatively limited role played by US government debt securities.

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The US accounts for the largest share of the global financial stock (37 percent). The total US financial stock is now $44 trillion, more than double its size 10 years ago, a growth rate of 8.6 percent a year since 1993, in line with the overall global rate of 8.4 percent.

The size of the US financial stock relative to GDP has increased from 179 percent in 1980 to 397 percent in 2003 due to growth in private debt and equity securities. This "financial deepening" exceeds that of the eurozone, but is close Japan's, where, however, the depth is largely driven by government debt expansion.

The US exemplifies the dominance of market-based financing and private securities in its role as the hub in the global capital market. Due to its size, liquidity, and economic health, the US attracts the lion's share of cross-border equity flows, and foreigners hold an increasing share of its financial stock.

In contrast, bank intermediation and government debt securities play a smaller role in the US than in the rest of the world.

Europe Findings

MGI identified four subregions in Europe that each play a unique role in both the European and the global capital markets: the eurozone (countries using the euro), the UK, Switzerland, and Eastern Europe.

The eurozone is now the second most important region in the global financial stock, following the monetary integration of 12 European countries and the introduction of the euro. The UK acts as Europe's financial hub and is a global foreign exchange hub. Switzerland is essentially a global private bank. And Eastern Europe is one of the hot growth spots in the global financial stock.

With a 31 percent share, Europe is the second largest region in the global capital market after the US Europe's financial stock has reached $37 trillion in 2003, up from $3 trillion in 1980. This increase over the past 10 years reflects a growth rate of 9.9 percent, which exceeds that of the rest of the world.

Europe has been gaining global share across all asset classes. Unlike the US, Europe's financial stock comprises a higher share of bank deposits and government debt securities, and smaller shares of private equity and private debt securities. Private securities have grown fastest since 1993. In contrast, government debt securities have grown slowest, at 7.6 percent.

Asia Findings

In contrast to the US, which is a single market, and Europe, which is in the process of integrating its capital markets, there is little cross-country capital market integration in Asia. Thus, the Asian capital market is largely a sum of the parts-a collection of distinct, national markets. The more developed of these markets have strong links with the global capital market, yet they seek only limited cooperation with one another.

The aggregate picture of Asia combines different dynamics from the individual countries: Japan is a large though declining player in the global capital market while China is emerging as a force. Korea has a developed economy and India has an untold economic potential but neither of them come close to the size of China's financial stock.

After growing more slowly than the global average over the past 10 years (6.0 percent versus 8.4 percent globally per year), Asia now commands 23 percent ($27 trillion) of the global financial stock. Growth rates vary widely within Asia, with Japan at 4.0 percent per year, Korea at 11.2 percent, and China at 14.5 percent.

Compared to the US and Europe, bank deposits constitute a higher share of Asia's total financial stock, accounting for 41 percent of total. Government debt securities and equity securities represent 26 and 22 percent respectively. Private debt securities are the smallest asset class with 11 percent share of total.

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