Financial markets

Financial Market Trends No.90, April 2006


Please find below an overview of each of the articles published in the April 2006 issue of Financial Market Trends:

Highlights of Recent Trends in Financial Markets

Download the full text of this article in pdf format:
-  English
-  Français

The Financial Policy Landscape: A Conceptual Overview

This article discusses different aspects of the formulation of financial policy against the backdrop of a changing financial services landscape. Recent trends and developments in the financial services industry, and some longer dated issues as well, present a number of challenges for regulators and supervisors. Some challenges can be linked to technological developments and related advances in financial engineering; some challenges are related to the increased internationalisation of some categories of financial services, what might be termed, for want of a better word, "globalisation"; some problems have their origin in demographic developments. Among OECD countries, one finds some conversion in the basic objectives of financial policy (e.g. systemic stability, consumer/investor protection, and conduct of business), but still fairly wide variation in regulatory regimes and regulatory practices, as the various member countries and official observers map the objectives of financial policy to their domestic regulatory and supervisory apparatus.

Risk Capital in OECD Countries: Past Experience, Current Situation and Policies for Promoting Entrepreneurial Finance

This article follows up on monitoring and analysing developments and structural issues related to risk capital undertaken by the OECD since the mid-1990s. Risk capital, i.e. finance for fast-growth SMEs, should help to foster entrepreneurship and a high rate of company formation which is seen as essential to achieving full employment. The lack of finance in forms that are usable by the targeted group of companies is frequently perceived to be one of the explanations for the lack of dynamism in this sector. The US experience often served as a role model for other countries in applying technology in the economy and of directing finance to smaller and innovative companies. With the bursting of the “tech bubble” in 2000 the venture capital industry experienced a very serious correction, but in the United States recovery has been strong over the past few years both in terms of venture capital (equity finance for new companies) and buy-outs of existing companies. In Europe, by contrast, buy-out activity has also been strong but venture capital remains at a very low level. Elsewhere, emerging areas such as Israel, China and India are now experiencing rapid growth in risk capital investments as many technology companies are becoming rapidly globalised at early stages of their development, transferring or outsourcing part of their activities to emerging markets. Furthermore, with activity recovering, renewed attempts to launch exchanges suitable for fast growing companies have been undertaken.

Pension Fund Demand for High-quality Long-term Bonds: Quantifying Potential “Scarcity” of Suitable Investments

The article describes the results of a modeling exercise to gauge the size of potential pension fund demand for bonds under some simplifying assumptions, so as to illustrate the potential role of this specific group of investors. It provides a measure of the potential excess demand for high-quality fixed-income instruments from pension funds, using the admittedly restrictive assumptions that pension funds invest only in high-quality bonds in an attempt to achieve cash-flow matching of their liabilities. Under a set of simplifying assumptions, the measures of “scarcity” obtained here suggest that pension fund demand for high-quality fixed-income bonds would exceed the current supply of the latter by a considerable margin, although the estimated potential shortages vary noticeably across currency and maturity segments. According to these measures, potential “scarcity” would be greatest in the maturity segment beyond ten years. Whether these estimates measure pension funds’ pent-up demand for government bonds and to what extent part of this demand is already being met – and thus reflected in current bond prices – is uncertain. What is certain is that the potential pent-up demand could be very substantial. Given the current size of government bond markets, pension funds’ asset portfolios are sufficiently large that any significant changes in their allocations towards these instruments could have an effect on prices, even if such changes occurred in a gradual fashion, which appears to be a realistic assumption.

The OECD Global Pension Statistics Project – Overview of the Financial Wealth accumulated under Funded Pension Arrangements

A useful proxy for the total assets accumulated in long-term savings and retirement systems is the sum of investments of pension funds and life insurance companies. This proxy covers the vast majority of occupational and personal pension arrangements for both the public and private sectors that rely on funding. In 2004, the total assets held by pension funds and life insurance companies grew by over USD 3.3 trillion or 1.5 percentage points of total GDP in OECD countries. The size of assets accumulated by pension funds is to a large extent related to their maturity and the extent of labour market coverage. Pension funds in the OECD area have grown drastically in the last ten years, from USD 5.9 trillion in 1994 to USD 15.6 trillion by 2004. Although most countries experienced a substantial increase in the ratio of pension fund assets to GDP between 2003 and 2004, some exceptions exist. As in 2003, countries that have started from a relatively small base are experiencing fast growth in pension fund assets. A move towards greater international diversification of pension fund portfolios was also observed in 2004. In addition, funding rules, which also aim at improving the security of pension benefits, are likely to drive changes in asset allocation. This article contains an update on the OECD Global Pension Statistics project. It draws on the second issue of the OECD newsletter Pension Markets in Focus and provides an overview of recent trends in long-term and retirement savings, examining – in particular – trends in funded pensions in OECD countries with a focus on asset allocation and special features concerning pension fund cash flows, financial performance, social security reserve funds and a focus on pension fund assets in selected non-OECD countries..

Highlights of OECD Financial Outreach Activities in 2005

In the late 1980's the OECD began co-operation (i.e. policy dialogue with nonmember economies) with the Asian Newly Industrialising Economies, and when the Berlin wall fell in 1989 it launched a programme with the Central and East European countries in transition. Today, the co-operation extends to some 100 non-members. These "Outreach" activities have of course included financial sector reform, as the financial sector is often considered one of the key sectors in assisting these economies' developments. The OECD's efforts in this area have focused on, and continue to give primary attention to, financial market reform (including corporate governance) as well as insurance and pension market policies and reform on a regional basis; they have been recently targeting Asia, as this region is the most dynamically growing among the emerging economies. This note describes the general background for the financial "Outreach" activities as well as highlighting the activities conducted in 2005 in Asia and elsewhere.