By report author Iain Clacher, Associate Professor in Accounting and Finance, Deputy Director of the Centre for Advanced Studies in Finance (CASIF) at Leeds University Business School and Associate at Research Republic.
Our latest study, published by the City of London Corporation, ‘Improving International Access to Credit Markets’, shows the increasingly important role that credit markets and innovations in credit markets have played since the financial crisis of 2008. This has been driven by two key factors. The first is the squeeze of bank lending resulting from the demands of recapitalisation and new regulations. The second, as the figure below shows, is an increasing demand for credit in emerging economies.
Emerging Market Corporate Bond Composition
Source: IMF FSR 2015
As part of our analysis, we developed the Credit Market Assessment Framework, which allowed us to undertake a detailed examination of credit markets in 59 countries. These countries account for 91% of global corporate bond issuance and 87% of global GDP. The results show clear trends in the growth and development of well-functioning credit markets and highlight key areas that need to be addressed for each country. Countries with credit markets at the earliest stage of development need more robust legal systems, better bankruptcy and insolvency processes, and a broader investor base. In addition, for some of the most developed markets there are clear agglomeration effects, and this scale is a significant source of competitive advantage.
Moreover, the analysis shows those countries that have the highest capacity to grow their credit markets and increase the use of debt finance to support economic growth.
In addition to the development of the Credit Market Assessment Framework, we also conducted in-depth case studies across 11 countries: China, Germany, India, Japan, Mexico, Nigeria, Norway, Singapore, the UK, the US, and Vietnam. These cases look at specific credit instruments in each country and highlight the key challenges and opportunities for each market.
While many of the developed countries in our sample are in a process of deleveraging, it is in these markets that we are also seeing significant amounts of innovation. From our analysis, there are at least three significant areas of innovation:
- The first is the implementation of the Capital Markets Union. The potential of a pan-European private placement debt market could result in a much more efficient allocation of capital across Europe. This development would allow much of the long term capital that is desperately seeking yield at a time of ultra-low interest rates to find investments that meet this need. At the same, it would allow firms in search of finance access to pools of capital at a time when bank finance is harder to obtain.
- The second is the development of peer-to-peer lending. As a result of the financial crisis, many firms have struggled to find the finance that they need, while at the same time, investors have struggled to find yield. Consequently, in the UK for example, peer to peer lending tripled between 2013 and 2015 and consumer and business lending was approximately £3bn in 2015. While this is nowhere close to the value of lending that occurs in mainstream credit markets, this is nevertheless a growing area of importance and is likely to see significant growth in the coming years.
- The third is green bonds. As the global shift towards a low-carbon economy continues, investors are increasingly looking for sustainable forms of investment. Green bond issuance is an important and growing feature of this new landscape. In 2014, it stood at $37bn - up from around $1bn in 2007. Moreover, this demand is not just occurring in developed markets. The developing Asian markets are a major source of demand for green finance.
As the City looks towards the future, it should seek to develop and grow these areas in order to maintain the UK’s competitive standing as a global, diverse, and innovative credit market.
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