1. Sr. Financial Sector Specialist
Local capital markets in internationally integrated financial systems: How can capital markets best serve domestic investors and firms?
Steen Byskov
Sr. Financial Sector Specialist
The World Bank
November 14, 2011

2. International financial integration and the role of markets: Foreign, domestic, integrated, or a combination?
Capital market integration and collaboration
Rest of World
Portfolio investment
Bulgaria
Banks
Firms
Capital market
Firms
FDI and
trade finance
Capital market
Loans
Banks
Equity and loans

3. Central Europe (CE) has become deeply financially integrated
Aggregate private and financial sector external funding sources, EU 10, 2010
Sources: IMF BOPS, Bank for International Settlements.
It has been FDI intense, bank centric including direct cross border lending...
…but only modestly through domestic capital markets

4. CE firms get much funding from abroad, but little from capital markets compared to other regions
Sources: IFS, BOPS, WDI, BIS.
Bank credit is rather important in EU10
Domestic capital markets are rather unimportant

5. Central European capital markets are still mostly small and illiquid
Equity Market Capitalizations in Emerging Europe, 2010
Turnover Ratios in Emerging Europe, 2010
Sources: FESE for market capitalization, IMF for GDP.
Source: World Development Indicators, the World Bank.

6. Estimated net funds raised on stock exchanges markets
Firm’s raised money through the local stock market pre-crisis, but it stopped during the crisis
Estimated net funds raised on stock exchanges markets
Sources: WDI, Bloomberg
Note: Net funds raised are estimated as the growth in market capitalization net of the price effect as measured by the main index on the stock exchange.

7. Share of funding from banks (vs. bonds)
European trend towards decreasing bank funding since 2008 increases the need for markets
Structural trend or tactical response?
Trend may be accelerated by
Immediate funding pressures and higher cost of capital for parent banks
Shifting parent bank strategies
Home country supervisory actions (Austrian example)
EBA recapitalization requirements
Basel III
Share of funding from banks (vs. bonds)
Median among a survey of 161 EMEA corporates
Source: FitchRatings, “European Corporate Funding Disintermediation”, Oct. 19, 2011

8. Why have CE markets remained small, and what is the solution?
The economic and financial structure in CEE countries do not support independent local markets
Markets were set up to facilitate privatizations
Small economies cannot independently support liquid capital markets
Alternative funding from domestic and international banks developed quickly
FDI companies are not likely to use local markets
HOWEVER, pressures on banks will strengthen the demand for capital markets
Solution
Improve investors’ and firms’ access to capital markets through market integration and collaboration
EU facilitates capital market integration
In Western Europe, market infrastructure has integrated, but in CEE it remains national
Policy choices are interconnected -> need for cross border coordination
The next presentation outlines capital market development in EU and options for CEE