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Increasing capital markets' size could compensate for post-financial crisis decline in bank lending, says new paper

Thursday, March 20, 2014
Opalesque Industry Update - Capital markets are significant drivers of economic growth and increasing their size could compensate for the post-financial crisis decline in bank lending, according to new research by two leading academics commissioned by AIMA, the global hedge fund industry association.

Growing capital markets by one-third could fuel a long-term real growth rate in per-capita GDP of around 20%, according to original research outlined in a new paper* by Christoph Kaserer, Professor of Finance, Chair of Financial Management and Capital Markets, TUM School of Management, Munich, and Marc Steffen Rapp, Professor of Finance, Accounting & Finance Group, School of Business and Economics, Philipps-Universität Marburg, Germany.

The new research finds that capital markets support economic growth by providing new sources of funding for long-term investment and facilitating improvements in corporate governance. It goes on to link activities by pension funds, non-bank lenders and active investors such as hedge funds to growth in the real economy. Capital markets comprise stock and bond markets and capital markets activity includes both debt and equity financing.

The paper also reveals the extent to which economies traditionally regarded as bank-based have embraced capital markets in recent years and suggests that the old distinctions between the bank-based economic structure of parts of Europe and the more market-based structure of the UK and US are rapidly disappearing.

Jack Inglis, AIMA CEO, said: “This is an important and timely paper which underlines the strong role that capital markets and their participants play in driving economic growth and prosperity. It highlights the positive role that hedge funds and asset managers in general can play, using their expertise and willingness to create positive governance changes in the firms in which they invest. Hedge funds are important providers of liquidity, risk management and price discovery in capital markets.

“Although the paper takes as an example the economies of the European Union, it shows how governments globally can benefit from a well-developed capital markets policy. This is especially true for countries where a bank-based economic model still dominates. Bank lending clearly is not keeping pace with demand and the global economic recovery could be jeopardised unless new sources of financing can be found, particularly from the investment management community. We would therefore encourage governments globally to implement policies that help to protect and grow capital markets.”

Press release

*‘Capital Markets and Economic Growth – Long-Term Trends and Policy Challenges’, by Christoph Kaserer and Marc Steffen Rapp. To download a copy, click here: Source

To download an AIMA position paper on the research, click here: Source

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