American Capital Markets Dominate

Sifma - American Capital MarketsSIFMA, the Securities Industry Financial Markets Association, recently put out a report on American capital markets and this was one of their conclusions.

“America’s capital markets are the strongest in the world, funding 65% of all economic activity of non-financial corporations in the U.S.,” SIFMA said.

SIFMA further found that America represents 41% of global equity and 40% of global fixed income markets.

SIFMA explained why this balance was critical. “Why is it important that the U.S. remains the deepest, most liquid and most efficient capital markets in the world? First and foremost, they provide diversified funding options. This means we are more attractive to businesses looking for capital and also means that the U.S. economy is less vulnerable to economic or market shocks.

“We’ll explain: in other countries, bank lending dominates corporate borrowing. Because bank lending is cyclical, it dries up after economic shock.”

America is less vulnerable as a result to banks funding corporate debt; instead, SIFMA found, “bank lending accounts for just 26% of corporate borrowing, while corporate bonds are 74%.”

SIFMA said regions around the world are placing more emphasis on developing their capital markets. “Recognizing the vulnerabilities of heavy reliance on bank lending, urgent calls for capital market development in other regions abound. The EU is arguing the merits of a Capital Markets Union (CMU); in Asia, emerging markets are attempting to open access via local exchanges; and the International Finance Corporation of the World Bank Group has made developing local capital markets a strategic priority,” SIFMA stated.

The CMU, “is a plan of the European Commission to mobilise capital in Europe. It will channel it to all companies, including SMEs, and infrastructure projects that need it to expand and create jobs,” according to the European Commission.

The EC noted the deficiencies in its capital markets compared to American capital markets, “Compared with the US, European SMEs, receive five times less funding from capital markets. If our venture capital markets were as deep, more than EUR 90 billion of funds would have been available to finance companies between 2009 and 2014.”

The plan listed over thirty actions taken by the EC, “to establish the building blocks of an integrated capital market in the EU by 2019.”

On the World Bank’s website, the International Finance Corporation of the World Bank Group is described this way. “IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution focused exclusively on the private sector in developing countries.”

“We apply our financial resources, technical expertise, global experience, and innovative thinking to help our partners overcome financial, operational, and other challenges.”

“Today, we see a clear relationship between capital market depth and GDP per capita when expressed as purchasing power parity.” SIFMA concluded. “Higher GDP per capita means individuals have higher disposable income and the potential to save more; additionally, deeper capital markets may help drive higher GDP per capita through the more efficient allocation of capital.”