mckinsey's mapping global capital markets 2011
TRANSCRIPT
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McKinsey Global Institute
Updated research
Mapping global capitalmarkets 2011
Charles RoxburghSusan LundJohn Piotrowski
August 2011
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Copyright McKinsey & Company 2011
The McKinsey Global Institute
The McKinsey Global Institute (MGI), the business and economics research
arm o McKinsey & Company, was established in 1990 to develop a deeper
understanding o the evolving global economy. Our goal is to provide leaders inthe commercia l, public, and social sectors with the acts and insights on which
to base management and policy decisions.
MGI research combines the disciplines o economics and management,
employing the analytical tools o economics with the insights o business
leaders. Our micro-to-macro methodology examines microeconomic
industry trends to better understand the broad macroeconomic orces aecting
business strategy and publ ic policy. MGIs in-depth reports have covered more
than 20 countries and 30 industries. Current research ocuses on our themes:
productivity and growth; the evolution o global inancial markets; the economic
impact o technology and innovation; and urbanization. Recent reports have
assessed job creation, resource productiv ity, cities o the uture, and the impact
o the Internet.
MGI is led by three McKinsey & Company directors: Richard Dobbs, James
Manyika, and Charles Roxburgh. Susan Lund serves as director o research.
Project teams are led by a group o senior ellows and include consultants rom
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The partners o McKinsey & Company und MGIs research; it is not
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inormation about MGI and to download reports, please visit
www.mckinsey.com/mgi.
About this research
MGI is committed to ensuring that published research remains current and
relevant. This research update oers readers rereshed data and analysis rom
our September 2009 report Global capital markets: Entering a new era.
In this update, we examine how the worlds inancial markets are recovering
ater the 2008 inancial crisis. We oer new data or more than 75 countries
on the growth and composition o their inancial stock, cross-border capital
lows, and oreign investment assets and liabilities. We discuss implications or
businesses, policy makers, and inancial institutions, and we invite others to
contribute to this dialogue.
In Fall 2011, MGI will release a ull update to the January 2010 report Debt and
deleveraging: The global credit bubble and its economic consequences.
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1Mapping global capital markets 2011McKinsey Global Institute
Mapping global inancial markets2011
The 2008 inancial crisis and worldwide recession halted an expansion o global
capital and banking markets that had lasted or nearly three decades. Over the
past two years, growth has resumed. The total value o the worlds inancial stock,
comprising equity market capitalization and outstanding bonds and loans, has
increased rom $175 trillion in 2008 to $212 trillion at the end o 2010, surpassing the
previous 2007 peak.1 Similar ly, cross-border capital lows grew to $4.4 trillion in 2010
ater declining or the previous two years.
Still, the recovery o inancial markets remains uneven across geographies and asset
classes. Emerging markets account or a disproportionate share o growth in capitalraising as mature economies struggle. Debt markets remain ragile in many parts o
the world, and the growth o government debt and o Chinese lending accounts or
the majority o the increase in credit globally.
In this research update, we provide a act base on how the worlds inancial markets
are recovering.2 We draw on rereshed data rom three proprietary McKinsey Global
Institute (MGI) databases that cover the inancial assets, cross-border capital lows,
and oreign investments o more than 75 countries through the end o 2010. These
data provide a granular view o the growth in the worlds inancial markets and asset
classes. The goal o this paper is to provide an overv iew o the key trends and share
preliminary thoughts on their implicat ions. We invite others to add to this discussionand draw out speciic implications or dierent actors within the global inancial
system. Among our key indings are these:
The global stock o debt and equity grew by $11 trillion in 2010. The majority o this
growth came rom a rebound in global stock market capitalization and growth in
government debt securities.
The overall amount o global debt outstanding grew by $5 trillion in 2010, but
growth patterns varied. Government bonds outstanding rose by $4 trillion, while
other orms o debt had mixed growth. Bonds issued by inancial institutions and
securitized assets both declined, while corporate bonds and bank loans both
grew.
Lending in emerging markets has grown particularly rapidly, with China adding
$1.2 trillion o net new lending in 2010 and other emerging markets adding
$800 billion.3
Cross-border capital lows grew in 2010 or the irst time since 2007, reaching
$4.4 trillion. These lows remain 60 percent below their peak due mainly to a
1 In contrast to previous reports, this year we include loans outstanding in the global nancial
stock rather than deposits. This gives a view o the capital raised by corporations, households,
and governments around the world. We continue to maintain data on global deposits as well.2 MGI began research on mapping global capital markets in 2005. The last report in this series
was Global capital markets: Entering a new era, September 2009. That report, and other MGI
research on global nancial markets, is available at www.mckinsey.com/mgi.
3 Throughout this paper, China reers to the mainland o the country, excluding Hong Kong,
which we treat separately.
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dramatic reduction in interbank lending as well as less direct investment and ewer
purchases o debt securities by oreign investors.
The worlds investors and companies continue to diversiy their portolios
international ly, with the stock o oreign investment assets growing to $96 trillion.
Ater two years o decline, global imbalances are once again growing. The US
current account deicitand the surpluses in China, Germany, and Japan that
helped und itincreased again in 2010. These global imbalances in saving and
consumption remain smaller than their pre-crisis peaks but appear persistent.
THE GLOBAL FINANCIAL STOCK GREW BY $11 TRILLION IN 2010,
SURPASSING ITS 2007 LEVEL
The worlds stock o equity and debt rose by $11 trillion in 2010, reaching a total o
$212 trill ion.4 This surpassed the previous peak o $202 trillion in 2007 (Exhibit E1).
Nearly hal o this growth came rom an 11.8 percent increase ($6 trillion) in the marketcapitalization o global stock markets during 2010. This growth resulted rom new
issuance and stronger earnings expectations as well as increased valuations. Net
new equity issuance in 2010 totaled $387 billion, the majority o which came rom
emerging market companies. Initial public oerings (IPOs) continued to migrate to
emerging markets, with 60 percent o IPO deal volume occurring on stock exchanges
in China and other emerging markets.
4 This includes the capitalization o global stock markets; the outstanding ace values o bonds
issued by governments, corporations, and nancial insti tutions; securitized debt instruments;
and the book value o loans held on the balance sheets o banks and other nancial
institutions.
Exhibit E1
Global financial stock has surpassed pre-crisis heights,totaling $212 trillion in 2010
11
19
2935
41 4144 42
13
16
25
28
30 3237 41
11
17
36
45
55
6534
4854
3
2
10
33
8
9
212
49
15
09
201
47
169
08
175
45
168
07
202
43
158
06
179
40Nonsecuritized loansoutstanding
147
05
155
38
116
2000
114
Securitized loansoutstanding
65
95
72
24
1990
54
31
Nonfinancial corporatebonds outstanding
Financial institutionbonds outstanding
Public debt securitiesoutstanding
Stock marketcapitalization
2010
22
1 Based on a sample of 79 countries.2 Calculated as global debt and equity outstanding divided by global GDP.NOTE: Numbers may not sum due to rounding.
SOURCE: Bank for International Settlements; Dealogic; SIFMA; Standard & Poors; McKinsey Global Banking Pools;McKinsey Global Institute analysis
321 334 360 376 309 356 356263261
Global stock of debt and equity outstanding1$ trillion, end of period, constant 2010 exchange rates
Financialdepth2 (%)
9.5
6.7
12.7
4.1
-3.3
9.7
-5.6
5.9
7.8 11.9
8.1 11.8
7.2 5.6
199009 200910
Compound annualgrowth rate
%
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Credit markets struggle while government debt soars
Global credit markets also grew in 2010, albeit more unevenly.5 The total value
o all debtincluding bonds issued by corporations, inancial institutions, and
governments; asset-backed securities; and bank loans held on balance sheets
reached $158 trillion, an increase o $5.5 trillion rom the previous year. Governmentdebt grew by 12 percent and accounted or near ly 80 percent o net new borrowing,
or $4.4 trillion. This relected large budget deicits in many mature economies,
ampliied by a slow economic recovery. Government debt now equals 69 percent o
global GDP, up rom just 55 percent in 2008.
Bond issues by noninancial businesses remained high in 2010 at $1.3 trillionthats
more than 50 percent above the level prior to the 2008 crisis. This relected very low
interest rates and possibly tighter access to bank credit. Corporate bond issuance
was widespread across regions.
Bank lending grew in 2010 as well, with the global stock o loans held on the balancesheets o inancial institutions rising by $2.6 trillion (5.9 percent). Emerging markets
accounted or $2 trillion o this growth with China alone contr ibuting $1.2 trillion.
Bank lending grew by $300 billion in both the United States and Western Europe
(5.6 and 1.5 percent, respective ly) and by $200 billion in other developed economies.
However, bank loans shrunk by $200 billion in Japan. At the same time, the stock
o securitized loans ell by $900 bill ion. Issuance o securitized assets remains at
less than two-thirds o its pre-crisis level. Indeed, i we exclude mortgage-backed
securities issued by US government enti ties (e.g., Fannie Mae and Freddie Mac),
securitization volumes are only 17 percent o their pre-cris is level. Whether or not
securitization outside o government entities will emerge as a signiicant source o
credit in the years to come remains to be seen.
On the other side o bank balance sheets, we see a shit in unding sources with
more deposits and less debt. Worldwide bank deposits increased by $2.9 trillion
in 2010.6 China accounted or $1.1 trillion o the increase in bank deposits (o which
roughly 60 percent was rom households and 40 percent rom corporations), with
total Chinese deposits reaching $8.3 trillion. This relected the high saving rate o
households and limited range o saving vehicles available to them, as well as the large
retained earnings o corporations.7 Bank deposits in the United States increased by
$385 billion, while deposits in Western Europe rose by $250 billion. In contrast, the
stock o bonds issued by inancial institutions shrank as they sought more stable
sources o unding. Financial institution bonds outstanding declined by $1.4 trillion,
the irst signiicant decrease ever recorded in our data series that begins in 1990.
5 In Fall 2011, we will explore the topic o debt and deleveraging in more detail in a ull update to
our January 2010 report, Debt and deleveraging: The global credit bubble and its economic
consequences.
6 We dene bank deposits as deposits in time and savings accounts made by households
and nonnancial corporations. This gure excludes cur rency in circulation, money market
instruments, and nonbank nancial institutions deposi ts with other entities in the bankingsystem.
7 For more explanation o Chinese saving, see Farewell to cheap capital? The implications o
long-term shits in global saving and investment, McKinsey Global Institute, December 2010
(www.mckinsey.com/mgi); Marcos Chamon and Eswar Prasad, Why are saving rates o urban
households in China rising? NBER working paper, 14546, December 2008.
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Emerging markets account for a growing share of global financial
stock
The majority o absolute growth in the global inancial stock occurred in mature
markets in 2010, but emerging markets are catching up. Developed countries
inancial stock grew by $6.6 trillion, while that o emerging markets increased by$4.4 trillion. Among emerging markets, China alone accounted or roughly hal o that
growth with $2.1 trillion, relecting large increases in bank lending and the market
capitalization o the Chinese equity market.
Emerging markets inancial stock is growing much aster than that o developed
countries, increasing by 13.5 percent in 2010 compared with 3.9 percent in mature
countries. This trend has been the norm or some time. From 2000 to 2009, the stock
o equity and debt in emerging markets grew by an average o 18.3 percent a year
compared with only 5.0 percent in developed countries. So while emerging markets
collectively account or only 18 percent o the worlds total inancial stock at the end
o 2010, they are in the process o catching up and are becoming impor tant players inthe global inancial landscape.
Looking ahead, the long-term undamental drivers o inancial market growth remain
strong in developing economies. Many o these economies have high national
saving rates that create large sources o capital or investment, and they have vast
investment needs or inrastructure, housing, commercia l real estate, and actories
and machinery.8 Moreover, their inancial markets today are much smaller relative to
GDP than those in mature markets. The total value o all emerging market inancial
stock is equal to 197 percent o GDP161 percent i we exclude Chinawhich is
much lower than the 427 percent o GDP o mature economies (Exhibi t E2).
8 For projections on growth in investment demand in emerging markets, see Farewell to cheap
capital? The implications o long-term shits in global saving and investment, McKinsey Global
Institute, December 2010 (www.mckinsey.com/mgi).
Exhibit E2
116
31
115
47
75
22072
49
28
44
38
11972
69
152
97
9396 62
57 48
124
2
52
3
2031
20
2434
142
62
6
LatinAmerica
148
273
OtherAsia
168
54
10 7
MiddleEast andAfrica
190
66
615
India
209
60
1 7
China
280
127
1016
Otherdeveloped
388
91
29
WesternEurope
400
110
1519
Japan
Nonsecuritized loansoutstanding
106
1018
UnitedStates
462
44
457
Securitized loansoutstanding
Nonfinancial corporatebonds outstanding
Financial institutionbonds outstanding
Public debt securitiesoutstanding
Stock marketcapitalization
CEE andCIS2
77
Financial depth is lower in emerging markets, primarily because ofthe absence of corporate bond and securitization markets
1 Calculated as total regional debt and equity outstanding divided by regional GDP.2 Central and Eastern Europe and Commonwealth of Independent States.
Financial depth,1 year end 2010% of regional GDP
SOURCE: Bank for International Settlements; Dealogic; SIFMA; Standard & Poors; McKinsey Global Banking Pools;McKinsey Global Institute analysis
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More speciically, we see ample potential or growth by looking at individual asset
classes. Emerging market equities, or example, have signiicant headroom to grow
as more state-owned enterprises are privatized and as existing companies expand.
Markets or corporate bonds and other private debt securities remain nascent. The
value o corporate bonds and securitized assets is equal to just 7 percent o GDPin emerging markets compared to 34 percent in Europe and 108 percent in the
United States. With the appropriate regulatory changes, corporate bond markets
in emerging markets could provide an alternative to bank inancing, and some o
the plain vanilla orms o securitization (such as those backed by low-risk prime
mortgages) could develop.
Bank deposits also consti tute an asset class with enormous growth potentia l in the
developing world, where large swaths o the population have no bank accounts.
There are an estimated 2.5 billion adults with discretionary income who are not part o
the ormal inancial system.9 Bank deposits will swell as household incomes rise and
individuals open savings accounts.
In contrast, prospects or rapid growth in private debt securities and equity in mature
economies are relatively dim. The circumstances that ueled the rapid increases o
past decades have changed, and this makes it likely that total inancial assets will
grow more in line with GDP in coming years. For instance, debt issued by inancial
institutions accounted or 42 percent o the $115 trillion increase in private-sector
debt since 1990, with growth in asset-backed securities accounting or an additional
16 percent. However, securitization is now negligible outside government programs,
and inancial institutions are reducing their use o debt inancing as they increase
their capital levels and raise more deposits. In equities, net new issuance o equities
has been low and was actua lly negative rom 2005 to 2007. Corporate proits are
at historic highs relative to GDP. This means that urther equity market growth
would have to come either rom higher equity valuations or rom urther increases in
corporate earnings as a share o GDP.
GLOBAL CAPITAL FLOWS ARE RECOVERING, REACHING
$4.4 TRILLION IN 2010
One o the most striking consequences o the 2008 inancial crisis was a steep drop
in cross-border capital lows, including oreign direct investment (FDI), purchases and
sales o oreign equities and debt securities, and cross-border lending and deposits.
These capital lows ell by about 85 percent during the crisis rom $10.9 trillion in
2007 to just $1.9 trillion in 2008 and to $1.6 trillion in 2009. This relects the plungein demand or oreign investment by banks, companies, and other investors during
the global inancial turmoil. Cross-border capital lows picked up in 2010 as the
economic recovery took hold, reaching $4.4 trillion (Exhibit E3). Nonetheless, they
remain at their lowest level relative to GDP since 1998.
This decline in cross-border capital lows during a recession its the historical pattern.
Cross-border investing had experienced three other boom-and-bust cycles since
1990, with sharp declines ollowing the economic and inancial turmoil in 199091,
199798, and 200002. The question today is whether cross-border capital lows
ater the most recent recession will eventually exceed their previous heights, as
9 See Alberto Chaia, Tony Goland, and Robert Schi, Counting the worlds unbanked,
McKinsey Quarterly, March 2010; Alberto Chaia et al, Hal the world is unbanked, The Financial
Access Initiative, October 2009.
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they have ater past recessions, or whether new regulations and shits in investor
sentiment will dampen such lows.
Contraction of interbank lending led the decline in capital flows
Nearly all types o capital lows have declined relative to their 2007 peak, but thelargest decrease has been in cross-border bank lending. During 2008 and 2009,
these lows turned negative, indicating that on a net basis creditors brought their
capital back to their home markets. Cross-border lending resumed in 2010, but these
lows are still $3.8 trillion below their peak, amounting to just $1.3 trillion in 2010.10
Interbank lending in Western Europe accounted or 61 percent, or $2.3 trillion, o
the total decline in cross-border lending. This relects the uncertainty created by the
sovereign debt crisis in Europe and the continuing ragili ty o the inancial system.
Equity cross-border lows have been less volatile than debt lows. Foreign direct
investment has historically been the least volatile type o capital low as it relects
long-term corporate investment and purchases o less liquid assets, such as actoriesand oice buildings. Recent years have proved no exception. FDI lows totaled
$900 bil lion in 2010, roughly 45 percent o their 2007 peak, whi le purchases o oreign
equities by investors totaled $670 billion, 30 percent below their 2007 level.
Cross-border capital f lows to emerging markets have been less volatile
than those to developed countries
Contrary to the common perception that capital lows to emerging markets are
highly volatile, we observe that lows between developed countries are more volatile.
When adjusting or average size, capita l lows to developed countries are 20 percent
more volatile than lows to emerging markets. Most o this variability comes rom
cross-border lending, which is nearly our times as volatile as FDI. In the 2008 crisis,capital lows between mature countries turned negative in the ourth quarter o 2008
10 Similarly, growth o interbank lending, particularly in Western Europe, explains part o the
growth in global capital fows prior to the 2008 nancial crisis.
Exhibit E3
12
10
8
6
4
2
0
+2.8
4.4
1.6
10.9
2005
7.1
-9.2
20102000
4.7
1995
1.5
1990
0.9
1985
0.5
1980
0.4
Cross-border capital flows grew to $4.4 trillion in 2010, or 40 percent oftheir 2007 level
% of globalGDP
4 5 6 134 15 8
SOURCE: International Monetary Fund; Institute of International Finance; McKinsey Global Institute analysis
1 Inflows defined as net purchases of domestic assets by nonresidents (including nonresident banks); total capital inflowscomprised of inward FDI and portfolio (e.g., equity and debt) and lending inflows.
2 Based on a sample of 79 countries.
Total cross-border capital inflows, 198020101,2
$ trillion, constant 2010 exchange rates
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and the irst quarter o 2009, indicating that oreign investors sold investments and
repatriated their money back to their home country. During the same period, quarterly
capita l lows to emerging markets ell by $150 billion but remained positive, indicating
that oreign investors did not withdraw money back to their home countries and
continued to make new investments (Exhibit E4).
The lower volatility o capital lows to emerging markets partly relects the act that
more than 60 percent o such lows over the past decadeand in particular FDI
have been in equity investments. As we have explained, this is the most stable type o
capita l low. In contrast, just one-third o oreign investment lows into mature markets
are in equity investments.
In 2010, oreign capital in lows to Latin America surged, reaching $254 billionmore
than lows to China, India, and Russia combined. This total was 60 percent higher
than in 2009 and our times as high as their annual average rom 2000 to 2007.
Foreign investors purchased $76 billion o Latin American government and corporate
bonds in 2010, while $59 billion constituted cross-border lending. In contrast to lows
to other emerging markets, only 31 percent o total lows to Latin America were in the
orm o FDI. Across countries, Brazil received a majority o oreign capita l inlows,
accounting or $157 billion o the total. This surge in oreign investor interest has
prompted concerns about unwanted exchange-rate appreciation in Brazil.
Emerging markets are also becoming more important oreign investors in world
markets as their capital out lows grow rapidly. Foreign investments rom emerging
market investors reached $922 billion in 2010, or 20 percent o the global total. This is
up sharply rom just $280 bill ion, or 6 percent o the global total, in 2000. A large part
o this investment outlow61 percentrelected purchases o oreign securities by
central banks. However, investments rom other investors, including corporations,individuals, and sovereign wealth unds, are also rising. FDI rom emerging
markets reached $159 billion, lower than its 2008 peak but still more than double
its size ive years earlier. Although Chinas outward FDI has attracted signi icant
Exhibit E4
Capital flows to emerging markets are smaller but more stable thanflows to developed countries
SOURCE: International Monetary Fund; McKinsey Global Institute analysis
Cross-border capital inflows to developed countriesand emerging markets, Q1 2000Q4 2010$ trillion, constant 2010 exchange rates
35
8
13
10
21
53
Interbanklending
Lending tononbanksectors
Debtsecurities
Equitysecurities
FDI
Emerging
6.7
7
22
Developed
48.3
19
12
100% =
Composition of total inflows,200010%; $ trillion(constant 2010 exchange rates)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010
Developed
Emerging
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8
attention, it remains less than that rom the ormer countries o the Soviet Union in
the Commonwealth o Independent States ($44 billion or China compared with
$60 billion rom CIS). Emerging market investors will become increasingly important
players in oreign markets as their economies grow.
THE STOCK OF CROSS-BORDER INVESTMENTS HIT $96 TRILLION
IN 2010, BUT GLOBAL IMBALANCES ARE GROWING AGAIN
Relecting the growth o global capital lows, the worlds stocks o oreign investment
assets and liabil ities also increased in 2010. Global oreign investment assets
reached $96 tril lion, nearly ten times the amount in 1990, as companies and
investors sought to diversiy their por tolios globally. Not surprisingly, investors rom
developed countries account or the largest share o these assets (87 percent).
The United States is the worlds largest oreign investor, with $15.3 trillion in oreign
assets, ollowed by the United Kingdom with $10.9 trillion and Germany with
$7.3 trillion. Foreign investment assets owned by emerging markets have grown at
twice the pace o those o mature countries, as their outward oreign investment lows
increase.
Looking at the net position o each countrys oreign assets and liabilities reveals
a dierent picture. We see that the United States is the worlds largest net oreign
debtor, with oreign liabilities exceeding assets by $3.1 trillion, or 21 percent o GDP
(Exhibi t E5). This relects the persistent US current account deicit, which must be
unded with net oreign borrowing. Spain is the worlds second-largest oreign debtor,
with a net oreign debt o $1.3 trillion, or 91 percent o GDP. Australia has run a large
current account de icit or many years and is the third-largest oreign debtor with a
net debt o $752 billion (63 percent o GDP).
On the creditor side, Japan remains the worlds largest net oreign creditor, with
net assets o just over $3 trillion. This may seem surprising given that Japan has
the worlds largest government debt at more than 200 percent o GDP. However,
Japanese savers, banks, and corporationsnot oreign investorshold more than
Exhibit E5
In 2010, the United States was the worlds largest foreign debtor andJapan the globes largest foreign creditor
SOURCE: International Monetary Fund; McKinsey Global Institute analysis
1 Calculated as foreign investment assets less foreign investment liabilities.
Largest net foreign debtors1 Largest net foreign creditors1
-308
-325
-331
-355
-446
-453
-703
-752
-1,263
-3,072
360
492
585
626
691
698
882
1,207
2,193
3,01015,284 18,356
Assets Liabilities
6,759 3,748
1,673
1,044
587
2,734
10,943
259
315
6,622
162
2,936
1,796
1,290
3,187
11,390
613
646
6,947
470
3,892
7,323
1,084
3,047
2,723
1,015
783
6,622
1,122
1,699
6,116
202
2,348
2,032
389
198
884
762
Net position, 20101
$ billion
Assets Liabilities
UnitedStates
Spain
Australia
Brazil
Italy
UnitedKingdom
Mexico
Greece
France
Poland
Japan
China
Germany
Saudi Arabia
Switzerland
Hong Kong
Taiwan
United ArabEmirates
Singapore
Norway
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90 percent o this debt. At the same time, Japan has signiicant oreign investment
assets, including roughly $1 trillion o central bank reserve assets, $830 billion in
oreign direct investment abroad, $3.3 trillion o oreign equity and debt securities,
and $1.6 trillion in oreign lending and deposits.
China is the worlds second-largest net oreign creditor with net oreign assets o
$2.2 trillion, and Germany is third ($1.2 trillion). These are also the countr ies that have
maintained the largest current account surpluses.
Countries annual current account surpluses and deicits ell sharply ater the
2008 inancial crisis and recession, roughly halving in size. This relected the lack
o cross-border investment and a sharp decline in world trade. In 2010, however,
global imbalances began to grow again. Whether or not they continue to increase
will depend on saving, investment, and consumption trends within countries as well
as on global currency values and trade deicits. Without higher saving rates in deicit
countries, and without exchange-rate adjustments and more domestic consumption
in some countries with persistently large trade surpluses, global imbalances could
well grow to their pre-crisis size.
* * *
In the ollowing pages, we provide a more detailed look at the state o the worlds
inancia l markets at the end o 2010. The data we present here come rom MGIs
proprietary databases on global inancial markets. The exhibits that ollow cover
changes in the inancial stock, cross-border capital lows, and oreign investment
assets and liabili ties o more than 75 countries around the world.
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Exhibits
GLOBAL FINANCIAL STOCK
Exhibi t 1. Global inancial stock, 19902010
Exhibi t 2. Global equity outstanding, 19902010
Exhibi t 3. Net equity issuances, 200510
Exhibi t 4. IPO deal volume by exchange location, 200010
Exhibi t 5. Global debt outstanding by type, 200010
Exhibi t 6. Nonsecuri tized loans outstanding by region, 200010
Exhibi t 7. Securitization issuance by region, 200010
Exhibi t 8. Noninancial corporate bond issuance, 200010
Exhibi t 9. Global public debt outstanding, 19902010
Exhibi t 10. Public debt outstanding by region, 200010
Exhibi t 11. Deposits by region, 200010
Exhibi t 12. Emerging markets share o global inancial stock, 2010
Exhibi t 13. Financial depth by region, 2010
Exhibi t 14. Financial depth vs. per capita GDP, 2010
CROSS-BORDER CAPITAL FLOWS
Exhibi t 15. Global cross-border capita l lows, 19802010
Exhibi t 16. Change in cross-border capita l lows by asset class, 200710
Exhibi t 17. Capital lows to developed and emerging markets, 200010
Exhibi t 18. Capital lows to and rom emerging markets, 2010
FOREIGN INVESTMENT ASSETS AND LIABILITIESExhibi t 19. Stock o global oreign investment assets, 19902010
Exhibi t 20a. Bilateral cross-border investment assets between regions, 1999
Exhibi t 20b. Bilateral cross-border investment assets between regions, 2009
Exhibi t 21. International investment positions by country, 2010
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The worlds inancial stock rose by $11 trillion in 2010
The worlds stock o equity and debt rose by $11 trillion in 2010 to reach $212 trillion,
surpassing the previous peak o $202 trillion in 2007. More than hal o the increase
came rom growth in equities, which rose by 12 percent or $6 trillion. Credit marketsalso grew in 2010, albeit more unevenly. Government debt increased by $4.4 trillion,
with growth concentrated in the advanced economies that were still coping with the
eects o the 2008 inancial crisis. Bank lending also rose with more than hal o the
increase coming rom emerging markets. In contrast, the outstanding amounts o
bonds issued by inancial institutions and o securitized assets both shrank as the
inancial sector moved to more stable sources o unding and securitization remained
at low levels.
Note: For this 2010 update, we use a new deinition o the global inancial stock,
replacing bank deposits and currency with loans held on balance sheets.11 Using
loans gives a consistent perspective o the unds raised by a countrys residenthouseholds, corporations, and government.
11 The McKinsey Global Institute began research on mapping global capital markets in 2005. The
most recent report in this series was Global capital markets: Entering a new era, September
2009. That report, and other research on global nancial markets, is available at
www.mckinsey.com/mgi.
Exhibit 1
Global financial stock has surpassed pre-crisis heights,totaling $212 trillion in 2010
11
19
2935
41 4144 42
13
16
25
28
30 3237 41
11
17
36
45
55
6534
4854
3
2
10
338
9
212
49
15
09
201
47
16
9
08
175
45
168
07
202
43
158
06
179
40Nonsecuritized loansoutstanding
147
05
155
38
116
2000
114
Securitized loansoutstanding
65
95
72
24
1990
54
31
Nonfinancial corporatebonds outstanding
Financial institutionbonds outstanding
Public debt securitiesoutstanding
Stock marketcapitalization
2010
22
1 Based on a sample of 79 countries.2 Calculated as global debt and equity outstanding divided by global GDP.NOTE: Numbers may not sum due to rounding.
SOURCE: Bank for International Settlements; Dealogic; SIFMA; Standard & Poors; McKinsey Global Banking Pools;McKinsey Global Institute analysis
321 334 360 376 309 356 356263261
Global stock of debt and equity outstanding1
$ trillion, end of period, constant 2010 exchange rates
Financialdepth2 (%)
9.5
6.7
12.7
4.1
-3.3
9.7
-5.6
5.9
7.8 11.9
8.1 11.8
7.2 5.6
199009 200910
Compound annualgrowth rate%
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Global stock market capitalization grew to $54 trillion
The total value o equity securities outstandingthe worlds stock market
capitalizationis the single largest component o the global inancial stock. At
$54 trillion at the end o 2010, equities outstanding account or just over 25 percent othe worlds outstanding inancial stock. Although the 2010 stock market capita lization
was $11 trillion below its peak in 2007, it accounted or more than hal o the growth in
global inancial assets in 2010 and posted the astest growth rate (nearly 12 percent).
The capita lization o the US equity market rose by $2.3 trillion and accounted or
40 percent o the global increase. China saw the second-largest increase in the
value o its equity securi ties o some $526 billion.12 Growth in equity markets in many
countries relected the continued recovery o depressed valuations ollowing large
stock market decl ines in 2008. However, we also see growth in the book value o
equity that relects rising corporate proits. Growth in the book value o equity has
been much more stable than the market value, with an average increase o about
8 percent per annum since 1990.
12 Chinas stock market capitalization includes the ull value o listed companies, although a
substantial portion o shares a re held by the government and are not traded.
Exhibit 2
27
37
05
19
25
2000
13
24
70
60
50
40
30
20
10
0
Book valueof equity
Valuationeffect
2010
30
24
0795
8
9
1990
65
Swings in valuation levels are responsible for most of the fluctuations inglobal equity outstanding
SOURCE: Standard and Poors; Datastream; Bloomberg; McKinsey Corporate Performance Analysis Tool (CPAT); McKinseyGlobal Institute analysis
7.9
8.3
8.1
1 Calculated based on yearly country-specific market-to-book multiple.NOTE: Numbers may not sum due to rounding.
Total stockmarketcapitalization
21.2
4.9
11.7
Market-to-bookmultiple
1.8 2.2 2.9 2.3 2.4 1.8
Total global equity outstanding1
$ trillion, end of period, constant 2010 exchange rates
199009 200910
Compound annualgrowth rate%
11
17
36
45
65
54
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Global net equity issuance totaled $387 billion in 2010,the majority rom emerging markets
Global net equity issuance totaled $387 billion in 2010, down rom its peak o
$688 billion in 2009. However, global aggregates hide signiicant dierences inequity issuance between developed countries and emerging markets. In developed
countries, net equity issuance was negative rom 2005 through 2007, as the value
o share buybacks exceeded the value o new equity issues. This de-equitization
was driven by noninancial corporations. Net equity issuance in developed countries
surged in 2008 and 2009 as irmspredominantly banksreduced share buybacks
and instead raised capital to weather the storm o the inancial crisis. Share buybacks
declined rom their 2007 peak o $1.1 trillion to just $440 billion in 2009, increasing
slightly to just over $500 bill ion in 2010. In contrast to developed countr ies, net equity
issuance in emerging markets has been on the rise as companies have sought stock
market listings to signal their competitiveness and as governments began selling
portions o state-owned irms. Net issuance among emerging market companiestotaled $259 billion in 2010, with over $100 billion in both irst-time o erings and
secondary rounds o equity issuance by successul and growing emerging market
irms.
Exhibit 3
128
538
215
-308
-197
-99
Net equity issuances1
$ billion
Both developed countries and emerging markets were net equity issuersin 2010
SOURCE: Dealogic; McKinsey Corporate Performance Analysis Tool (CPAT); McKinsey Global Institute analysis
1 IPOs + secondary offerings share repurchases; covers publicly listed companies.NOTE: Split into developed countries and emerging markets based on nationality of issuer.
IPOs
Secondaryofferings
Developed countries Emerging markets
Sharebuybacks
259
15089
243
14499
35
440
943
127
657
430
167
880
517
163
1,139
669
49
738
903
129
504
506
89
77
23
136
164
57
33
87
31
80
78
8
152
120
13
20092005 2006 2007 2008 2010
63
12
47
20092005 2006 2007 2008 2010
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Initial public oerings on emerging market exchangessurpassed those on developed country exchanges
Growth in the issuance o emerging market equities has coincided with the rise o
stock exchanges in these economies, and they are becoming increasingly importantvenues or raising capital around the world. Initial public oerings on emerging market
exchanges totaled just $11 billion in 2000. By 2007 that number had increased
to $100 billion; by 2010 the total had reached $165 billion, exceeding initial public
oerings on developed countries stock exchanges. China has been a signiicant
contributor to this growth, with its exchangesincluding Hong Kongattracting
$125 billion, or 44 percent, o total deal volume in 2010. Hong Kong, Shenzhen,
and Shanghai have become rivals to London and New York or new listings, not just
or emerging market irms but also or corporations headquartered in developed
countries. For instance, in May Glencore listed its initial public oering, one o the
largest ever or a European irm, in both London and Hong Kong. Prada listed its
shares on the Hong Kong exchange in June. Meanwhile, Coca-Cola has begunexploring a listing in Shanghai. Firms around the world are listing in Asia to take
advantage o ample capital and hungry investors.
Exhibit 4
Numberof IPOs
More than half of global IPO volume occurred onemerging market exchanges in 2009 and 2010Deal volume in different stock exchange locations$ billion
1,133 595 1,439952 824 1,432 1,622 1,802 7131,985 1,629
SOURCE: Dealogic; McKinsey Global Institute analysis
134
32
26
7282
106100
21
68
25
41 38
54
12516
21
62
22
18
40
2313
2010
New York
London
50
14
41
12235
34
126
51
126
35
11
137
26
25
174
32
56
256
47
52
299
8
29
11
59
03
83
192
115
35
13
280
4
88
Otheremerging
4
2000
China
Otherdeveloped
83
02 0401 06 07 08 09
1
05
208
3
NOTE: Numbers may not sum due to rounding.
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Global debt to GDP increased rom 218 percent in 2000to 266 percent in 2010
Global debt outstanding has more than doubled over the past ten years, increasing
rom $78 trillion in 2000 to $158 trillion in 2010. Debt also grew aster than GDP overthis period, with the ratio o global debt to world GDP increasing rom 218 percent
in 2000 to 266 percent in 2010. Most o this growth$48 trillionhas been in the
debt o governments and inancial institutions. Although government debt has been
the astest-growing category, it is notable that bonds issued by inancial insti tutions
to und their balance sheets have actually been a larger class o debt over the past
ten years. Indeed, the bonds issued by inancial institutions around the world has
increased by $23 trillion over the past decade. In 2010, this shrank by $1.4 trillion
as banks moved to more stable unding sources. Nonsecuritized lending is still the
largest component o all debt and continued to grow in 2010.
Exhibit 5Growth in public debt continued in 2010, but nonsecuritized loans remainthe largest class of debt
0
5
10
15
20
25
30
35
40
45
50
04022000
Nonfinancial corporatebonds outstanding
Securitized loans
outstanding
Public debt securitiesoutstanding
Financial institutionbonds outstanding
Nonsecuritizedloans outstanding
20100806
Global debt1
218
77.6
Outstanding debt by asset class, 200010$ trillion, end of period, constant 2010 exchange rates
% GDP
6.5
11.7
4.7
9.7
-5.6
5.9
9.3 11.9
9.7 -3.3
242
105.5
249
123.9
235
90.3
250
141.8
266
158.1
SOURCE: Bank for International Settlements; Dealogic; SIFMA; McKinsey Global Banking Pools; McKinsey Global Instituteanalysis
1 Sum of financial institution bonds outstanding, public debt securities outstanding, nonfinancial corporate bonds outstanding,and both securitized and nonsecuritized loans outstanding.
200009 200910
Compound annualgrowth rate%
$ trillion
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On-balance-sheet loans increased by $2.6 trillion in2010, but growth diered between regions
Loans held by banks, credit agencies, and other inancial institutions account or the
largest share o global debt outstandingat 31 percent. On-balance-sheet loansgrew rom $31 trillion in 2000 to $49 trillion in 2010, an increase o 4.8 percent per
annum. However, this global total hides key dierences between regions. Since 2007,
outstanding loan volumes in both Western Europe and the United States have been
broadly lat with a decline in 2009 ollowed by a modest increase in 2010. In Japan,
the stock o loans outstanding has been declining since 2000, relecting deleveraging
by the corporate sector. Lending in emerging markets has grown at 16 percent
annually since 2000and by 17.5 percent a year in China. In 2010, loan balances
increased worldwide by $2.6 trillion. Emerging markets accounted or three-quarters
o this growth. Chinas net lending grew by $1.2 trillion, partly relecting government
stimulus eorts, while lending in other emerging markets rose by $800 billion.
Exhibit 6
17.4
5.1
2.5
4.1
15.0 12.0
18.7
5.7
5.6
1.5
-2.2 -2.4
Nonsecuritized loans outstanding1 per region$ trillion, end of period, constant 2010 exchange rates
4.7 5.9
SOURCE: Bank for International Settlements; International Monetary Fund; Standard & Poors; SIFMA; national central banks;McKinsey Global Banking Pools; McKinsey Global Institute analysis
1 Borrowings by resident households and corporations, from both domestic and foreign banks; excludes loans to other financialinstitutions and securitized loans.
NOTE: Numbers may not sum due to rounding.
On-balance-sheet lending grew by $2.6 trillion in 2010,driven by China and other emerging markets
Western Europe
Japan
United States
Other developed
China
Other emerging
2010
49.0
17.5
6.3
6.6
4.4
7.3
6.9
09
46.4
17.3
6.5
6.2
4.1
6.1
6.1
08
45.3
17.6
6.6
6.6
4.1
4.6
5.8
07
43.1
17.5
6.5
6.7
3.6
4.0
4.7
06
39.9
16.5
6.6
6.2
3.43.5
3.7
2005
37.4
15.4
6.5
6.1
3.33.03.1
2000
30.8
12.0
7.9
5.0
2.6
1.51.7
200009 200910
Compound annualgrowth rate%
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19Mapping global capital markets 2011McKinsey Global Institute
Issuance o securitized assets has declined sharply inthe wake o the 2008 inancial crisis
Securitized lending was the astest-growing segment o global debt rom 2000 to
2008 with outstanding volumes increasing rom $6 trillion to $16 trillionaveragegrowth o 13 percent per year. Roughly 80 percent o securitization issuance over this
period occurred in the United States. The issuance o mortgage-backed securities
by government-sponsored enterprises more than doubled between 2000 and 2007
and hit a peak in 2002 that was nearly our times as large as in 2000. The creation o
asset-backed securities by US banks and other non-government issuers tripled over
this period, as did securitization in the rest o the world albeit rom much lower levels.
Since 2008, securi tization by the US private sector and in other parts o the world has
allen dramatica lly. Only US government-supported mortgage issuers have sustained
activity in the market over the past ew yearsand new issuance in 2009 surged and
roughly matched the peak level o 2002. Future prospects in the securitization market
are unclear. Regulators are seeking to curtail the shadow banking system, whileinancia l institutions argue that securitization acilitates lending to those in need o
credit.
Exhibit 7Global securitization has dried up since 2007, apart from issues byUS government-sponsored enterprises
383
671
1,1831,651 1,663 1,276
341
482 671542
Rest of world
2010
1,998
1,707
121170
09
2,284
2,030
16392
08
1,635
1,317
185133
07
3,238
1,420
06
3,514
1,179
05
3,418
1,285
2004
2,872
1,347
2002
2,839
1,985
182
2000
1,092
558
150
US GSEs2Other United States
Global annual securitization1 issuance$ billion, nominal exchange rates
Securitized loansoutstanding$ trillion
6.0 8.0 9.4 11.5 13.7 15.3 16.1 15.4
SOURCE: Dealogic; SIFMA; McKinsey Global Institute analysis
16.3
1 Includes asset-backed securities (ABS) and mortgage-backed securities (MBS); also includes agency collateralized debtobligations (CDOs) issued by U.S. GSEs.
2 Government-sponsored enterprises, i.e., Fannie Mae, Freddie Mac, and Ginnie Mae.NOTE: Numbers may not sum due to rounding.
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Noninancial corporate bond issues totaled $1.3 trillionin 2010, 50 percent higher than the pre-crisis level
Issuance o corporate bonds by noninancial issuers nearly doubled in 2009
compared with 2008 as bank lending standards tightened and interest ratesstayed at historic lows. Issuance totaled $1.5 trillion in 2009, with $548 bill ion in
Western Europe, a historic high. Corporate bond issuance remained high in 2010
at $1.3 trillion, more than 50 percent above 2008 levels. Given the pressures on the
banking system, those corporations that could access the capital markets directly did
so in order to secure long-term inancing. Although the majority o growth occurred in
developed countries, corporate bond issuance has also grown rapidly in recent years
in emerging economies. Chinas corporate bond issuance peaked at $151 billion
in 2009, up rom just $17 billion in 2007. Corporate bond issues are also increasing
in Brazil, Russia, and other emerging markets; their issuance reached $128 billion
in 2010. In total, emerging markets accounted or 23 percent o global corporate
issuance in 2010, up rom just 15 percent three years earlier. There is still signiicantroom or urther growth in corporate bond markets in virtually all countries outside the
United States. The United States is the only country where corporations rely on debt
capital markets to provide a sizable share o their external inancing. Bonds account
or 53 percent o corporate debt inancing in the United States compared with
24 percent in Western Europe and only 16 percent in emerging economies. Given the
higher cost o bank inancing, especially in light o new capital requirements, it would
be desirable to see a more rapid expansion o debt capital markets in Europe and in
emerging markets. This is an important issue or policy makers to address.
Exhibit 8
Nonfinancial corporate bond issuances per region$ billion
Issuance of corporate bonds remains 50 percent above its pre-crisis level
203
392
256
297
256 216
328 396 330
479
506
113
75
100 115 122
199
200
151
128
91
110
144
164
9791
95
78
10
4
1
73
6829
Otheremerging
2010
1,285
288
09
1,521
548
08
807
235
48
07
838
200
17
06
761
233
05
531
142
8
04
536
131
454
03
639
198
444
02
486
122
01
720
190
24
2000
451
156
WesternEurope
UnitedStates
Otherdeveloped
China
15
SOURCE: Dealogic; McKinsey Global Institute analysis
NOTE: Numbers may not sum due to rounding.
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Government debt has increased by $9.4 trillion since2008
Government debt has increased signiicantly. There was some growth between 2000
and 2008, but the amount o government debt has jumped in 2009 and 2010. Publicdebt outstanding (measured as marketable government debt securities) stood at
$41.1 trillion at the end o 2010, an increase o nearly $25 trillion since 2000.13 This was
the equivalent o 69 percent o global GDP, 23 percentage points higher than in 2000.
In just the past two years, publ ic debt has grown by $9.4 trillionor 13 percentage
points o GDP. In 2010, 80 percent o the growth in total debt outstanding came rom
government debt. While stimulus packages and lost revenue due to anemic growth
have widened budget deicits since the crisis, rising global public debt also relects
long-term trends in many advanced economies. Pension and health care costs are
increasing as populations age, and ununded pension and health care liabilities
are not relected in current government debt igures. Without iscal consolidation,
government debt wil l continue to increase in the years to come.
13 There is no single methodology or measuring government debt. Our data do not include
intragovernmental holdings, which some other organizations, such as the International
Monetary Fund, include.
Exhibit 9Global public debt has increased by $24.6 trillion overthe last decade, reaching 69 percent of GDP in 2010
70
65
60
55
50
45
0
+3+23
2000 05 0895 20101990
40
SOURCE: Bank for International Settlements; McKinsey Global Institute analysis
Publicdebt total$ trillion
8.9 16.5 25.412.8 31.7 41.1
1 Defined as general government marketable debt securities; excludes government debt held by government agencies(e.g., US Social Security Trust Fund).
Gross outstanding public debt1 as % of GDP%, end of period, constant 2010 exchange rates
Growth(percentage points)
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Government debt in many developing countries hasrisen to unprecedented levels
In the 1970s, 1980s, and 1990s, there were numerous sovereign debt crises in
emerging markets that proved very costly in terms o lost output, lower incomes,and years o slower economic growth.14 But today it is developed country
governments that must act to bring their growing public debt back under control. In
most emerging markets, public debt has grown roughly at the same pace as GDP
since 2000 and the ratio o government debt to national GDP remains rather small.
In contrast, the United States, Japan, and many Western European governments
have seen their debt rise signiicantly. Japans government debt began rising
ater its inancial crisis in 1990 and has now reached 220 percent o GDP. In both
the United States and Western Europe in 2010, the ratio o public debt grew by
9 percentage points to stand at more than 70 percent o GDP by the end o the year.
With budgets under pressure rom both short-term crisis-related measures and long-
term pressures on growth and calls on the public purse (including aging populationsin many countries), developed countries may need to undergo years o spending cuts
and higher taxes in order to get their iscal house in order.
14 See Debt and deleveraging: The global credit bubble and its economic consequences,
McKinsey Global Institute, January 2010 (www.mckinsey.com/mgi); Carmen M. Reinhart and
Kenneth Rogo, This time is dierent: Eight centuries o fnancial olly, Princeton University
Press, 2009.
Exhibit 10Governments in many developed economies havesteadily increased public debt over the last ten years
SOURCE: Bank for International Settlements; McKinsey Global Institute analysis
10
22
22
28
37
24
39
48
42
78
Western Europe
Japan
CEE and CIS2
United States
China
Latin America
Other Asia
Other developed
Middle Eastand Africa
India
29
25
25
32
42
44
50
63
67
191
29
28
29
34
38
43
49
72
76
220 11.6
11.1
10.4
2.3
1.5
0.6
0.3
1.0
1.6
0.7
15.1
13.4
14.2
-2.0
-9.5
6.3
16.0
12.0
0.0
-2.3
Gross public debt outstanding1 per region
1 Defined as general government marketable debt securities; excludes government debt held by government agencies(e.g., US Social Security Trust Fund).
2 Central and Eastern Europe and Commonwealth of Independent States.
Developed
Emerging
2000 2009 2010
% of regional GDP, end of period $ trillion(constant 2010exchange rates)
Compoundannual growthrate, 200910 (%)
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Global bank deposits increased by 5.6 percent in 2010
Global bank deposits have grown slightly aster than GDP over the past ten years
and have increased rom 80 percent o GDP in 2000 to 90 percent o GDP at the end
o 2010. Among developed countries, deposits grew astest in the United States,increasing rom $5 trillion in 2000 to $11 trillion in 2010. This relected the growing
share o household inancial assets held in cash rather than bonds or equity
sharesa reversal o trend rom previous yearsas well as rising corporate
cash balances. Western European and Japanese deposits grew more slowly as
households there have traditionally held more o their wealth in the orm o deposits
rather than other types o inancial assets. Deposits in China and other emerging
markets continued their strong growth into 2010, rising 13.6 percent in aggregate
to reach $14.5 trillion. Deposit growth in all these countries is the result not only
o years o strong GDP growth and economic development but also the act that most
emerging market households have ew alternatives or their investments. Financial
systems, not least banking, are underdeveloped in many o these countries. Thereare an estimated 2.5 billion adults in emerging markets with discretionary income who
are not part o the ormal inancial system.15 Bank deposits are likely to continue to
grow as household incomes rise and individuals open savings accounts.
15 See Alberto Chaia, Tony Goland, and Robert Schi, Counting the worlds unbanked,
McKinsey Quarterly, March 2010; Alberto Chaia et al, Hal the world is unbanked, The Financial
Access Initiative, October 2009.
Exhibit 11
Bank deposits grew by 5.6 percent to total $54 trillion globally by the endof 2010Global bank deposits1
$ trillion, end of period, constant 2010 exchange rates
200009 200910
Compound annualgrowth rate%
1 Excludes cash in circulation, money market instruments, and deposits made by nonbank financial institutions with other partsof the banking system.
NOTE: Numbers may not sum due to rounding.
SOURCE: National central banks; McKinsey Global Banking Pools; McKinsey Global Institute analysis
14.0
8.1
8.6
5.2
16.4 14.5
12.4
7.6
3.6
2.1
0.6 0.9
6.6 5.6
WesternEurope
Japan
UnitedStates
Otherdeveloped
China
Otheremerging
2010
53.8
11.8
10.7
11.0
5.7
8.3
6.2
09
50.9
11.6
10.6
10.6
5.3
7.2
5.5
08
47.8
11.4
10.4
10.1
5.0
5.7
5.2
07
44.7
10.8
10.3
9.9
4.6
4.7
4.4
06
41.2
10.0
10.3
8.8
4.2
4.2
3.6
05
38.3
9.4
10.2
8.1
3.93.73.1
2000
28.6
7.3
10.0
5.0
2.61.8
1.7
83 83 83 8480Deposits% of GDP
91 90
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Emerging markets account or 18 percent o the globalinancial stock, but their share has tripled since 2000
Today, developed countries account or the vast majority o the capital raised
through equity and debt worldwide. However, emerging markets are catching up. In2010, US households, corporations, and governments accounted or 32 percent o
outstanding debt and equity worldwide at $67.5 trillion. The economies o Western
Europe combined accounted or $63.6 trillion, or about 30 percent o the global
total. Japan and other developed economies accounted or roughly 20 percent o
the worlds debt and equity outstanding. Turning to emerging markets, households,
corporations, and governments had outstanding debt and equity o just $37.1 trillion,
or 18 percent o the global total, at the end o 2010. This is ar below their share o
global GDP o 32 percent. However, emerging markets share o the global inancial
stock has tripled since 2000 as their inancial systems improve and as the largest
corporations and governments tap oreign investors.16 China accounts or 43 percent
o the emerging market share, but almost all emerging market regions have seen theirinancial stock grow aster than their developed counterparts. In the case o China,
its inancial stock has grown our times as ast as that o Western Europe and the
United States.
16 For more on investment in inrastructure, real estate, and other physical assets in emerging
markets, see Farewell to cheap capital? The implications o long-term shits in global saving
and investment, McKinsey Global Institute, December 2010 (www.mckinsey.com/mgi).
Exhibit 12
Stock of debt and equity outstanding, 20101
% of total, end of period
2.4
5.2
5.2
8.2
Japan
United States
Western Europe
Other developed
Other Asia 11.9
Latin America 15.2
Middle Eastand Africa
15.8
CEE and CIS2 20.5
China 20.8
India 23.0
7.6
Other Asia
1.3
India
1.5
Middle East and Africa
2.0
CEE and CIS2
2.5Latin America
2.7China
Other developed 8.7
Japan11.7
Western Europe
30.1
United States31.9
Developed countries
Emerging markets
1 Based on a sample of 79 countries.2 Central and Eastern Europe and Commonwealth of Independent States.
SOURCE: Bank for International Settlements; Dealogic; SIFMA; S&P; McKinsey Global Banking Pools; McKinsey GlobalInstitute analysis
Emerging markets account for the smallest sharebut also the fastest growth in the global financial stock
Stock of debt and equity outstanding, 20101
End of period100% = $212 million
Compound annual growth rate, 200010%
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The composition o unding sources varies acrosscountries
The depth o a countrys inancia l marketsmeasured as the value o outstanding
bonds, loans, and equity relative to the countrys GDPreveals the extent to whichcorporations, households, and governments can und their activities through
inancia l intermediaries and markets. Today, developed countries have much
deeper inancial markets than those ound in emerging markets. Financial depth in
the United States, Japan, Western Europe, and other developed countries is near
or above 400 percent o GDP, compared with 280 percent in China and around
200 percent or less in other emerging markets. Comparing the components o
inancia l depth across countries reveals that even those with the same level o
inancial depth can inance themselves in very dierent ways. For example, nearly hal
o Japans inancial depth is due to the size o its huge government bond market
taking that market out o the equation would leave Japan with a lower inancial depth
than that o China. Corporate bond and securitization markets are largest in theUnited States, while Western Europe relies much more heavily on traditional bank
loans or inancing. Emerging markets und themselves mainly through bank lending
and equity markets. Bond markets account or a much smaller share o their inancial
markets overall, except or Latin America.
Exhibit 13
Financial depth, year end 20101
Percent; % of regional GDP
The structure of capital and banking markets varies widelybetween countries
1 Calculated as total regional debt and equity outstanding divided by regional GDP.2 Central and Eastern Europe and Commonwealth of Independent States.
25
7
29
12
6
14
16
48
18
13
10
21 8
2026
17
26
16 17
3935
4451
37 3934
1
2
655
7
4
Nonsecuritized loansoutstanding
Securitized loansoutstanding
Nonfinancial corporatebonds outstanding
Financial institutionbonds outstanding
Public debt securitiesoutstanding
Stock marketcapitalization
CEE andCIS2
142
44
1
LatinAmerica
148
18
2 2
OtherAsia
168
32
14
MiddleEast andAfrica
190
35
3 3
India
209
29
0 3
China
280
45
14
Otherdeveloped
388
23
7
400
28
4
Japan
457
23
WesternEurope
4
UnitedStates
462
10
17
100% =
2
SOURCE: Bank for International Settlements; Dealogic; SIFMA; Standard & Poors; McKinsey Global Banking Pools;McKinsey Global Institute analysis
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Emerging markets have ample room to deepen theirinancial systems
Despite rapid growth in the inancial stock o emerging markets over the past decade,
there is still ample room or urther growth. One reason is that the developmento inancial markets is associated with higher incomes and a greater degree o
economic development. Most emerging markets inancial depth is between 50
and 250 percent o GDP compared with 300 to 600 percent o GDP in developed
countries. As emerging economies evolve, it is likely that their inancial markets
will develop, too. Well-unctioning capital and banking markets make it easier or
households, corporations, and governments to raise unds or investment. Greater
economic output means more excess revenue and income can be invested in capital
markets and deposited in banks in order to inance even more productive activity.
However, the degree to which inancial deepening occurs in many o these countries
will depend crucially on whether they have the right regulatory and institutional
ramework to channel unds to their most productive use. Countries can have verydierent inancial depth even at the same level o income. For instance, Norway
has higher per capita GDP than the Netherlands, but its inancial markets are hal
as deep. This relects the act that Norway generates large oil revenues but the
corporate sector outside minerals is relatively small. In emerging markets, we see that
China, Malaysia, and South Arica have a much higher inancial depth than do other
countries at similar income levels and are roughly on a par with much richer countries
including Belgium and Canada.
Exhibit 14Financial markets in developing countries still havesignificant room for growth
0
50
100
150
200
250
300
350
400
450
500
550
600
650
Libya
Latvia
South Korea
Colombia
Bosnia and Herzegovina
Czech Republic
Austria
Belgium
Russia
Romania
Portugal
PolandPhilippines
China
Canada
CroatiaFinland
Denmark
Spain
South Africa
Slovenia
Singapore
Saudi Arabia
Netherlands
Mexico
Malaysia
Australia
Brazil
Tunisia
Thailand
Taiwan
Switzerland
Sweden
India
Hungary
Greece Germany
France
Vietnam
United States
United Kingdom
Ukraine Turkey
Kenya
Japan
Italy
Ireland
IndonesiaPeru
Norway
Nigeria
New ZealandMorocco
Argentina
Lithuania
8,5003,0000
Financial depth1
% of GDP
Per capita GDP at purchasing power parity$ per person, log scale
55,00023,000
2010, end of period
SOURCE: Bank for International Settlements; Dealogic; SIFMA; Standard & Poors; McKinsey Global Banking Pools; McKinseyGlobal Institute analysis
1 Calculated as a countrys debt and equity outstanding divided by countrys GDP.
Emerging
Developed
Deep
erfinancialmarkets
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Cross-border capital lows have started to recover butstill stand at only 40 percent o their record level in 2007
One o the most striking eatures o global capital markets over the past two decades
has been the rise and all o cross-border capita l lowsincluding oreign directinvestment (FDI), purchases o oreign equities and debt securities, and cross-
border lending and deposits. From 1994 to 2007, cross-border capital lows grew
on average by 23 percent each year. Over this period, these lows increased rom
4 percent o global GDP to 20 percent. Increased stability in emerging markets has
attracted capital rom developed country investors, while the creation o Europes
Economic and Monetary Union has acilitated the low o capital within Western
Europe. However, cross-border capital lows collapsed in 2008 as investors became
more cautious and banks became more reluctant to lend international ly. Total capita l
lows decl ined rom $10.9 trillion in 2007 to only $1.9 trillion in 2008a decrease o
83 percent in a single year. Global capital lows declined even urther in 2009, totaling
only $1.6 trillion over the course o the year. There was a rebound in 2010 when capitallows totaled $4.4 trillion. However, this was only 40 percent o record capital lows in
2007, indicating that the recovery o the global inancial system is ar rom complete.
Exhibit 15
12
10
8
6
4
2
0
+2.8
4.4
1.6
10.9
2005
7.1
-9.2
20102000
4.7
1995
1.5
1990
0.9
1985
0.5
1980
0.4
Cross-border capital flows grew to $4.4 trillion in 2010, or 40 percent oftheir 2007 level
% of globalGDP
4 5 6 134 15 8
SOURCE: International Monetary Fund; Institute of International Finance; McKinsey Global Institute analysis
1 Inflows defined as net purchases of domestic assets by nonresidents (including nonresident banks); total capital inflowscomprised of inward FDI and portfolio (e.g., equity and debt) and lending inflows.
2 Based on a sample of 79 countries.
Total cross-border capital inflows, 198020101,2
$ trillion, constant 2010 exchange rates
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Cross-border lending accounted or 60 percent o thedecline in total capital lows since 2007
The $6.5 trillion decline in cross-border capital lows rom their 2007 peak has been
the result o a reduction in most categories. The collapse o the international lendingmarket, speciically the interbank lending in Western Europe, explains the majority
o the decline in annual capital lows between 2007 and 2010. Cross-border lending
was actually negative in 2008 and 2009 as banks brought their capital back home.
The growth in capital lows in 2010 relects the recovery o this international interbank
market, but total lending lows are still only 25 percent o their peak 2007 level.
Investment in other categories o developed country capital lows also remain below
their 2007 level. Foreign purchases o their debt securities in 2010 were $1.2 trillion
less than their peak in 2007, while irms FDI was $1.6 trillion lower than it was in 2007.
Across countries, we see that the majority o the decline occurred in capital lows
between mature economiesan $800 billion reduction in capital lows to emerging
markets accounts or only 12 percent o the overall decline. Continued instabili ty andlow returns in developed countries combined with strong uture growth prospects in
emerging markets have prompted oreign investor interest in emerging markets.
Exhibit 16A decline in cross-border lending, particularly Western Europeaninterbank lending, explains the difference in capital flows between2007 and 2010
SOURCE: International Monetary Fund; Institute of International Finance; McKinsey Global Institute analysis
Global cross-border capital inflows, 200710$ trillion, constant 2010 exchange rates
Lending
Debt securities
Equity securities
Foreign directinvestment
Total 2010
4.4
1.3
1.5
0.70.9
Lending
-3.8
Debtsecurities
-1.1
Equitysecurities
-0.3
Foreign directinvestment
-1.3
Total 2007
10.9
5.2
2.6
0.9
2.2
61 percent ($2.3 trillion)of total decrease inlending due to decline
in Western Europeaninterbank lending
% of total decline 20 604 16
NOTE: Numbers may not sum due to rounding.
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Capital lows to developed countries are 20 percentmore volatile than lows to emerging markets
Quarterly data highlight the volatility o cross-border capital lows. But contrary to
conventional wisdom, lows to developed countriesnot emerging marketsare themost volatile. Capital lows to emerging markets averaged $226 billion per quarter
rom 2000 through 2010, peaking at $520 billion during 2005 and 2006. Capital
lows to developed countries were much higher, averaging $1.1 trillion per quarter.
However, these lows were much more volatile, with a high o $3.4 trillion in the irst
quarter o 2007 and a low o minus $2.0 trillion in the inal quarter o 2008. Overall,
we calculate that capital lows to developed countries, adjusted or their size, are
20 percent more volatile than lows to emerging markets. We can partly explain
this dierence in volatility by comparing the composition o capital lows between
developed countries and emerging markets. From 2000 to 2010, FDI, the least volatile
type o low, comprised 53 percent o total capital lows to emerging markets. But in
developed countries, highly volatile cross-border lending lows are the largest type ocapita l low.
Exhibit 17Capital flows to emerging markets are smaller but more stable thanflows to developed countries
SOURCE: International Monetary Fund; McKinsey Global Institute analysis
Cross-border capital inflows to developed countriesand emerging markets, Q1 2000Q4 2010$ trillion, constant 2010 exchange rates
35
8
13
10
21
53
Interbanklending
Lending tononbanksectors
Debtsecurities
Equitysecurities
FDI
Emerging
6.7
7
22
Developed
48.3
19
12
100% =
Composition of total inflows,200010%; $ trillion(constant 2010 exchange rates)
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010
Developed
Emerging
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Emerging markets were net capital exporters in 2010with $922 billion o outlows, 31 percent more thaninlows
Foreign capital lows into emerging markets totaled $702 billion in 2010. This was
only hal o their peak o $1.5 trillion in 2007 but our times their level o 2000. Flows
to Latin American countr ies surged in comparison with the previous year to a total
o $254 billion. Flows to the Commonwealth o Independent States (CIS) were
second-largest among developing economies at $97 billion and lows to China the
third-largest at $84 billion. O the total capital lows to emerging markets, oreign
direct investment accounted or the largest share at 36 percent, ollowed by oreign
purchases o debt securities (27 percent), cross-border lending (23 percent), and
oreign purchases o equity securities (14 percent). While these lows relect strong
undamentals in many emerging market regions, they have has also stoked ears o
asset bubbles, unwanted exchange-rate appreciation, and overheatingin Brazil,
or instance. At the same time, emerging markets are becoming an increasingly
important source o oreign capital. Emerging markets were net capital exporters
in 2010, as outlows totaled $922 bill ion, 31 percent more than inlows. About
55 percent o this capital outlow came rom central bank purchases o oreign-
exchange reserves. However, emerging market corporations are now a growing
source o FDI, reaching $159 billion in 2010.
Exhibit 18
Capital outflows from emerging markets remained significant even afterthe crisis, totaling $922 billion in 2010Cross-border capital flows to and from emerging markets, 2010$ billion
SOURCE: International Monetary Fund; Institute of International Finance; McKinsey Global Institute analysis
76
50
42
73
27
32
60
44
17
50
65
17
-37
42
1
4
4
8
-21
-9 -14
61-16
2715
132
61
405382
127
17340
60
21
79
50
22
35
1
11
1
6
16
6
2
-10
-4
Sub-SaharanAfrica
189
Middle East andNorth Africa
26812
India 67
Other emergingAsia
7723 25
36 45 12-14
China 8427
Commonwealth ofIndependent States
9713 28
Latin America 25459 76
Central andEastern Europe
79
7
Inflows Outflows
Lending Debt Equity FDI Reserves FDI Other
NOTE: Numbers may not sum due to rounding.
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Global oreign investment assets hit a historical high o$96 trillion in 2010
Relect ing growth in global capital lows, the worlds stock o oreign investment
assets also increased in 2010. Global oreign investment assets reached a historicalhigh o $96 trillion in 2010, nearly ten times the amount in 1990. Central bank oreign
reserves were the astest-growing component, reaching $8.7 trillion by the end
o 2010, a sizable share (9 percent) o the worlds inancial stock that is invested
in government bonds and other low-risk securities. Foreign direct investment
assets o companies reached a new high o $21 trillion, as did the stock o oreign
debt securities held by institutional and private investors. Banks expanded their
international lending, with the stock o cross-border loans returning to its 2007 level
at $31 trillion. The degree to which inancial integration will continue into 2011 and
beyond will depend not only on international macroeconomic prospects but also
on the international regulatory ramework still under construction in response to the
2008 inancial crisis.
Exhibit 19
Equitysecurities
FDI
Foreignreserves
2010
96
31
21
14
21
9
09
91
29
19
14
20
8
08
78
28
16
9
17
7
07
91
31
19
17
18
7
06
78
25Loans
Debtsecurities
17
15
15
5
2005
62
20
14
11
12
5
2000
35
13
6
7
82
95
16
732
3 1
1990
10
61 1
21
Global FIA% of globalGDP
Global foreign investment assets (FIA)1
$ trillion, end of period, constant 2010 exchange rates
18.0
10.9
8.1
9.8
13.4
11.0
SOURCE: International Monetary Fund; McKinsey Global Institute analysis
9.1
4.0
3.6
7.2
6.3
5.9
1 Based on a sample of 79 countries.NOTE: Numbers may not sum due to rounding.
The stock of global foreign investment assets reached $96 trillion in 2010
55 66 107 134 156 170 138 162 161
200009 200910
Compound annualgrowth rate%
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The global web o cross-border investments in 1999centered on the United States and Western Europe
Global inancial integration began in earnest in the 1990s. Companies rom
developed countriesand particularly the United Statesbegan to invest abroad,and investors sought to diversiy their por tolios internationally. By the end o 1999,
the stock o oreign investment assets had already become signi icant, reaching
$28 trillion, or 79 percent o global GDP. The largest cross-border ties were between
the United States, Western Europe, and to a lesser extent Japan. At that time, the
United States was partner to 50 percent o all outstanding international inancial
positions. Linkages to emerging marketsChina, other parts o emerging Asia,
Latin America, and Central and Eastern Europewere small, in most cases less
than $1 trillion. Investors in developed countries had limited inormation on emerging
market opportunities and, ater the 1997 Asian inancial crisis, eared potential
macroeconomic and political instability. Investors in emerging markets had limited
access to inancial markets in other parts o the worldin act, many emergingmarkets lacked even a domestic inancial system that acilitated an outlow o capital
by companies and households.
Exhibit 20aIn 1999, cross-border investing was taking hold
35%($1.01.8)
0.51%($0.20.4)
510%($1.83.5)
10%+($3.5+)
13%($0.41.0)
SOURCE: International Monetary Fund; McKinsey Global Institute analysis
1 Includes total value of cross-border investments in equity and debt securities, loans and deposits, and foreign directinvestment.
Figures inside bubbles are regional financial stockLines between regions show total cross-border investments1
Total value of cross-border investmentsbetween regions% of world GDP($ trillion)
World GDP, 1999 =$35 trillion
Total domesticfinancial assets,1999 ($ trillion)
Japan
LatinAmerica
Middle East, Africa,and Rest of World
NorthAmerica
Australia andNew Zealand
Other Asia
Russia andEastern Europe
WesternEurope
22.7
1.8
1.7
40.8
0.5
7.0