Financial markets

Financial Market Trends No.86, March 2004


Please find below an overview of each of the articles published in the March 2004 issue of Financial Market Trends:

Highlights of Recent Trends in Financial Markets

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The Performance of Financial Groups in the Recent Difficult Environment

The past few years were characterised by an economic downturn, a substantial stock market correction from March 2000 to March 2003, financial asset deterioration, record corporate default rates, the Argentina sovereign default and several natural and man-made catastrophes, including most notably the September 11 attacks. Against this background, the present note looks at the performance of financial groups during this period. The recent decade has seen the formation of an increasing number of such groups, although some have argued that, ex post, the benefits associated with the formation of such groups may have been smaller than initially thought. The note concludes that financial groups have been quite resilient in the face of these various shocks, which is reflected in their equity market valuations. Nevertheless, this did not seem to be primarily due to significant diversification benefits arising from their activity in more than one financial sector. Core business activities are by far the most important source of revenues in the case of both bank-dominated and insurance-dominated financial groups. Moreover, the relative importance of revenues from “core business” activities even increased between 2000 and 2002, while revenues from “non-core business” activities provided only very limited relief during a period when revenues were under pressure. Looking ahead, the projected acceleration of economic activity may provide a better environment in which financial groups could realise revenue diversification benefits.

Ageing and Financial Markets

Over the next decades, OECD countries will experience a significant ageing of their populations. Changes in the age structure of populations affect the economy’s saving behaviour, including the level of saving and the choices of saving vehicles. During the 1990s, financial markets in general and equity markets in particular may have benefited from large inflows into pension funds and other institutionalised forms of saving. These inflows reflected to a considerable extent saving for retirement by baby boom generations. These baby boom generations are expected to start to move into retirement after 2010. Almost as a natural corollary to the developments during the 1990s, some observers have argued that when baby boomers start entering retirement they will become net sellers of financial assets to finance retirement consumption. As subsequent generations are smaller in numbers, other things equal, this would put downward pressure on financial asset prices (“asset meltdown hypothesis”). Others have pointed out that large-scale liquidations of assets are unlikely to occur because of bequest motives and lifetime uncertainty and that international capital mobility and forward-looking capital markets will mitigate any possible impact of mass retirement of baby boomers on financial asset prices. Thus, whether there will be a financial asset meltdown is highly uncertain. In any case, even if there was no general financial asset sell-off, there may be a gradual switch from equity to fixed-income instruments, reflecting life-cycle considerations. Such a switch from stocks to bonds could have important corporate financing implications, especially as companies’ ability to raise capital has become increasingly dependent on financial markets and less on banks. Also, to avoid losses from a future potential massive withdrawal from equity, prospective retirees or the institutions managing their savings would now need to be able to invest in high-quality long-term fixed-income instruments. However, such instruments are generally not available in sufficient quantities, raising the question as to the role of governments in the provision of such instruments.

A Note on Benefit Security

A reoccurring motif in pension literature and policy is the search for “benefit security” – that is, assurance to members of a pension regime that, at the end of the working career, they will get some reasonably predictable outcome, either as a pension (benefit stream) or a lump sum.  The purpose of this note is to present a simple “thought experiment” to explore this matter and how market mechanisms might be brought more to bear.

Insurance and Financial Market Issues Related to the Management of Large-Scale Disasters

The last few years have witnessed a number of large-scale disasters, both man-made, such as the terrorist attacks of 11 September 2001, and natural, such as the tropical storm Allison in 2001 in the US, the extensive flooding in large parts of Europe in summer 2002, the May 2003 earthquake in Algeria or the appearance of previously unknown infectious diseases. Both the frequency of such disasters and the magnitude of losses involved have tended to increase. This evolution brought home to OECD governments the realisation that risks of very large disasters or “mega-risks” have the potential for inflicting considerable damage on the vital systems and infrastructures upon which our societies and economies depend. Preparing to deal effectively with the hugely complex threats of the 21st century is a major challenge for decision makers in government and the private sector alike. Against this background, the OECD was asked to make a preliminary assessment of the impact of large-scale disasters and of the management of such disasters through brief sectoral notes. This article puts together three of these notes which focus on the impact of large-scale disasters on financial and insurance markets, insurers’ management of large-scale disasters, and at compensations issues.

OECD Financial Outreach Activities in 2003

Following the end of the “Cold War”, the OECD has, since the early 1990s, been conducting “Outreach” activities (i.e. cooperation including technical assistance activities with non-Member economies), first with the Central and Eastern European countries in transition and now extending to many economies especially in Asia.

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, capital market reform (including corporate governance) as well as insurance and pension market policies and reform.

This article describes the general background for the area most widely targeted of the OECD’s financial “outreach” activities (Asia including China), as well as highlight some of the activities in Asia and elsewhere.


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