January 23, 2019

BIS published a report that examines trends in capital market development and identifies the factors that foster the development of robust capital markets. The report finds that large differences persist in the size of capital markets across advanced and emerging economies. Emerging-economy markets have been catching up with their more advanced peers, but the gap has not yet been closed.

The report first discusses the importance of a strong enabling environment characterized by macroeconomic stability, market autonomy, strong legal frameworks, and effective regulatory regimes. It then identifies the drivers of capital market development—particularly better disclosure standards, investor diversity, internationalization, deep hedging and funding markets, and efficient and robust market infrastructures. Finally, the report presents the following recommendations across six broad areas and outlines practical ways in which policy can enhance these drivers, while recognizing that some potential policy actions lie outside the powers of central banks:

  • Promote greater market autonomy by addressing financially repressive policies, such as restrictions on initial public offerings to prop up stock market valuations or misuse of regulatory instruments that enable some to borrow at below-market rates
  • Strengthen legal and judicial systems for investor protection by easing access to legal remedies
  • Enhance regulatory independence, resources, and enforcement powers
  • Increase the depth and diversity of the domestic institutional investor base
  • Actively engage with potential market entrants and prepare for spillover risks
  • Coordinate regulations to develop deep complementary hedging and funding markets 

The report concludes that enhancing market ecosystems by developing deep complementary markets for derivative, repo, and securities lending requires a coordinated effort along multiple dimensions. These include a supportive legal and regulatory environment, regulatory coordination to broaden the investor base in these markets, and robust and efficient market infrastructures such as central counterparties and trade repositories to manage potential financial stability risks. The report also discusses the merits of raising disclosure and accounting standards. In a number of cases, there appears to be regulatory scope to strengthen investor protection by encouraging improvements in the quality of disclosure and accounting. The current rules in a number of emerging market economies could be strengthened by bringing them into line with international standards. Key elements include requiring better disclosure of “related-party” transactions and information about board members, beneficial ownership, and control and group structures. 

This report was prepared by the Committee on the Global Financial System (CGFS) Working Group. The analysis and recommendations of the Group, as expressed in this report, are based on a review of the existing academic and policy literature. The report also draws on hard data, along with information from a survey on market participants. Survey results presented in this report cover responses from 10 Working Group member jurisdictions. Five were the emerging market economies of Brazil, China, Hong Kong SAR, India, and Mexico while five were the advanced economies, namely Australia, Italy, Japan, Spain, and the United Kingdom. The findings of the report were bolstered by a survey of market participants in these 10 economies, which showed that high regulatory costs can make capital markets less effective in channeling financing to the economy.

 

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Keywords: International, Banking, Insurance, Securities, PMI, Accounting, Capital Markets, Disclosures, Derivatives and Hedging, CGFS, BIS

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