Committee on the Global Financial System report outlines ways to boost domestic capital markets

Policymakers and stakeholders can do more to promote the development of robust and efficient capital markets, according to a new report by the Committee on the Global Financial System (CGFS). 

Establishing viable capital markets finds that large differences persist in the size of capital markets across advanced and emerging economies. Emerging-economy markets have been catching up with their more advanced peers, but the gap has not yet been closed. 

"Deep and liquid capital markets not only need robust and efficient market infrastructures, they also need supportive legal systems and investor diversity," said CGFS Chair Philip Lowe. "Independent market supervisors are also vital for well functioning capital markets. They need adequate resources to identify problems and sufficient powers to tackle them."

The analysis highlights the importance of macroeconomic stability, market autonomy, strong legal frameworks and effective regulatory regimes in supporting market development. Better disclosure standards, investor diversity, internationalisation, and deep hedging and funding markets, as well as efficient and robust market infrastructures, also play a key role.

The report's findings were bolstered by a survey of market participants in 10 economies, ranging from China and Brazil to Japan and the United Kingdom, which showed that high regulatory costs can make capital markets less effective in channelling financing to the economy. Also, a greater presence of foreign investors in domestic markets lowers funding costs, boosts liquidity, helps lengthen bond maturities and improves risk management practices. 

The report suggests practical ways for policy to support the development of robust and efficient markets:

• Promote greater market autonomy by addressing financially repressive policies, such as restrictions on initial public offerings to prop up stock market valuations or misuse of regulatory instruments that enable some to borrow at below-market rates
• Strengthen legal and judicial systems for investor protection by easing access to legal remedies
• Enhance regulatory independence, resources and enforcement powers
• Increase the depth and diversity of the domestic institutional investor base
• Actively engage with potential market entrants and prepare for spillover risks
• Coordinate regulations to develop deep complementary hedging and funding markets.