Mapping global capital markets: Fifth annual report

By Diana Farrell, Susan Lund, Oskar Skau, Charles Atkins, Jan Philipp Mengeringhaus, Moira S. Pierce

The world's financial assets rose to $196 trillion in 2007, slightly below the pace of 2006 but still faster than the historical trend—likely marking the recent peak for equity and private debt markets.

MGI provides a comprehensive map of global capital markets in the early stages of the financial crisis, drawing on three proprietary databases that cover the financial assets, cross-border capital flows, and foreign investments of more than 100 countries since 1990. In addition to providing insights into broad long-term trends shaping global capital markets, the research examines how the crisis affected parts of the US private debt market through September 2008.

MGI found that global capital markets grew strongly in 2007, slightly below the pace of 2006 but still faster than the historical trend—likely marking the recent peak for equity and private debt markets.

Global financial depth, or the ratio of financial assets to GDP, rose to 359 percent in 2007 from 345 percent the year before. With the exception of government debt, all asset classes grew deeper. While deeper financial markets are generally beneficial, at times financial deepening can be the result of unhealthy increases in government debt levels or asset market valuations—either of which can lead to painful corrections. The current sharp correction in the US and European private debt markets is one stark example.

Accompanying financial asset growth in 2007 was an acceleration in total cross-border capital flows, which rose to $11.2 trillion. These flows are likely to decline as the credit crisis continues, reflecting the evaporation of interbank liquidity.

The research also examines several long-term trends. Emerging-market financial systems continued to expand rapidly in 2007. Although developing countries represented just 20 percent of global financial assets, they accounted for nearly half of the financial asset growth in 2007. In addition, as more markets gained scale and liquidity, capital flowed to new financial centers, from Madrid to Mumbai and from São Paulo to Shanghai. Companies in these markets were increasingly raising funds from both foreign and domestic investors.

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