Well functioning capital markets vital to growth

Moody’s Investors Service says that well-functioning capital markets can help foster macroeconomic stability, access to financial services and the overall development of economies.

“Developed capital markets are good at mobilising, directing and allocating local and international savings. To be effective, they must offer a menu of risk/return options that is both suitable and useful to various types of investors and investments,” said Raymond McDaniel, Moody’s President and CEO.

McDaniel was speaking to delegates at the inaugural Moody’s and Shanghai Advanced Institute of Finance (SAIF) 2014 Credit Market Research Conference in Shanghai on May 17.

On the topic of the capital markets, while they provide a great number of benefits when they function well, McDaniel states that “the capital market is a system. How well - or poorly - each part operates inevitably depends on how the rest of the system is working.”

“And one of the crucial ingredients for the overall effectiveness of markets is credit — which in its simplest form is the trust that enables one party to temporarily provide resources to another market,” said McDaniel.

The benefits that better-developed markets can bring include creating an important safety valve in the system for instances where banks are constrained to lend; a more disciplined process for capital allocation; and strong marketbased signals that enable investors to monitor the use of and returns on their financings.

McDaniel notes that public policy has an important role to play in establishing the rule sets that make markets deliver these benefits. “The global recovery is still fragile. In this context, getting financial markets to work well becomes increasingly important,” said McDaniel, adding, “a strong overall market design, with appropriate macro-prudential oversight, a sound legal framework, and broad availability of information, can attract and encourage participation by both domestic and foreign investors.”

In this context, the international credit rating agencies can also play a role in deepening liquidity.

Credit ratings are useful tools in promoting secondary market liquidity because ratings are a readily available and globally comparable point of reference that can encourage a deeper understanding of credit risk.

“The creation and operation of well-functioning capital markets is a shared responsibility of both the public and private sectors,” said McDaniel. The oconference, sponsored by Moody’s and SAIF, covered a broad range of issues that are shaping the modern global capital markets, including bank risk in the Euro Zone, corporate credit risk in China, and the role played by innovative structured financings in the context of overall market-based finance.