Executives who seek to raise money, institutions hoping to shape the global capital market, and policy makers who regulate it must all understand its evolution. HNN has conducted a month long research effort on the world's financial markets and created a comprehensive database of the financial assets of more than 100 countries since 1980. Together, these assets make up the global financial stock.

This research yielded several notable observations. One of them is simply that global capital markets are huge: we calculate that the world's financial assets now total more than $118 trillion and will exceed $200 trillion by 2010 if current trends persist. The stock of global financial assets has grown faster than the world's GDP, indicating that financial markets are becoming deeper and more liquid. 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.

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

$118 trillion and growing
The total value of the world's financial assets (including bank deposits, government debt securities and corporate-debt securities, and equity securities) stood at $118 trillion at the end of 2003, up from $53 trillion in 1993 and from just $12 trillion in 1980. This $118 trillion is the total amount of capital intermediated through the world's banks and capital markets and made available by them to households, businesses, and governments. A simple extrapolation indicates that the value of global financial assets will exceed $200 trillion by 2010. The growth so far has been accompanied by a striking shift away from banks and toward market institutions as the primary financial intermediaries. That change can be seen in the declining share of bank deposits in the global financial stock—to 30 percent today, from 45 percent in 1980—and in the corresponding increase in the share of debt and equity securities. The liquidity of world capital markets has increased as a result.

Different profiles in different regions...
Although we talk about a global capital market, just four areas account for more than 80 percent of the world's financial stock: the United States, the euro zone, Japan, and the United Kingdom. Furthermore, regions differ starkly. The market of the United States—which, with $44 trillion in financial assets, accounts for 37 percent of the world's financial stock—is dominated by private debt and equity. In Europe, banks play a larger role in finance. Asian financial markets are relatively isolated from one another and differ in important ways. Japan has the region's largest financial stock, but it is relatively stagnant and only the expansion of government debt fuels its growth. China's financial market, though less than one-third the size of Japan's, is among the world's fastest growing, and the country has amassed a sizable portion of the world's bank deposits.

...and divergent growth patterns
Patterns of growth in financial assets vary across geographies. Corporate debt is expanding fast in both the United States and Europe. In the United States, initial public offerings are a significant source of growth in equities, as are higher price-to-earnings ratios. In Europe, by contrast, earnings and newly floated shares from the privatization of state-owned companies explain most of the growth in equities. In Japan, a huge expansion of public debt is the only source of growth in the financial stock; equities and corporate-debt securities haven't changed. And in China and Eastern Europe all asset classes are growing quickly.

Steadily deeper
An important measure of the development of financial markets is depth: the ratio between the financial stock and the size of the underlying economy as measured by GDP. Because financial assets reflect the expectation of future value, a country's financial stock can be many times larger than its GDP, which reflects current economic activity. Since 1980, the value of global financial assets has grown from an amount roughly equaling the global GDP to three times its size. 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.

Depth does not equal wealth
Financial depth alone, however, doesn't indicate the strength of an economy or its financial system. The financial depth of the United States is nearly twice that of Norway, for example, though both countries have similar GDPs per capita. Germany and Thailand, by contrast, have similar financial depth at greatly different income levels. Financial depth also doesn't necessarily mean that an economy's financial system is in relatively good health. Japan, for instance, has great financial depth but struggles with nonperforming bank loans and with shrinking corporate-bond and equity markets. Asset price bubbles and the issuance of excessive government debt can lead to an unhealthy financial deepening—and painful corrections.

Debt, debt, and more debt
One of the biggest stories of the past decade was the growth of the world's debt levels. Corporate-debt securities are the largest—and fastest-growing—component of the global financial stock. Together with government debt securities, they account for nearly half of the overall growth in global financial assets from 1993 to 2003. Debt has increased across all major countries and regions. International issues of corporate debt, though still small, are growing more than three times as fast as domestic issues (22 and 7 percent a year, respectively), reflecting the increasing globalization of capital as companies seek funds outside their domestic borders.

What drives debt?
The relative role of government debt securities and corporate-debt securities in explaining the overall increase in debt varies among countries. Higher government borrowing accounts for most of the growth of debt in France, Italy, and Japan. By contrast, an increase in corporate-debt securities is the primary factor in the United Kingdom. The process of securitization has become an important source of debt, as illustrated by the experience of the United States and Germany. The United States is at the forefront of the trend, with $7 trillion in securitized assets: $5.3 trillion in mortgage-backed securities (fueled by a $9.9 trillion mortgage market) and $1.7 trillion in asset-backed securities. Other countries are far behind, suggesting that this market could grow significantly in the future.

The US remains the world's capital hub
The roles major countries and regions play in global capital markets are in flux. The United States has a unique position not only as the world's largest financial market but also as the global hub and conduit of capital. With the creation of the euro, however, European financial markets are integrating and gaining share. Japan's financial markets are becoming less important in the global financial system, while China's are growing rapidly. Financial markets in the rest of the world—including Singapore and all of Latin America—are negligible in a global context. Latin America's financial markets are notably underdeveloped compared with those of middle-income countries in other regions: despite representing over 4 percent of global GDP, Latin America has less than 2 percent of the world's total financial assets.

A weaker but still dominant dollar
Notwithstanding the recent decline in the value of the US dollar, it continues to dominate global financial markets. For starters, it is the world's most heavily traded currency and the preferred one for issuing equities and bonds. Many other countries, including China and Malaysia, have tightly linked their domestic currencies to it. Although the euro is gaining notice among the world's central bankers, it is a long way from matching, let alone surpassing, the dollar's role in international finance.