"Global issuance of loan securities has expanded from around $0.5 trillion in 2000 to $2.75 trillion in 2006; and it has become far more geographically widespread. "

Article by Dr. Zia-Ur-Rehman zia177@yahoo.com

The growth and dynamism of capital markets has contributed greatly to the prosperity of recent years. The combination of new technology and the development of new financial instruments have led to an upsurge in productivity in the financial sectors of many countries. The United States and the United Kingdom are the acknowledged leaders in the field, but the phenomenon is worldwide. Many other countries are also working to make their capital markets more efficient and flexible. The global economy has also become substantially more integrated. Financial globalization, measured by the sum of gross external assets and liabilities as a share of GDP, has increased threefold since the mid-1970s, with the most dramatic increases occurring in high-income countries, and accelerating since the mid-1990s. Fund calculations show that as of 2004, the average sum of external assets and liabilities was more than 100 percent of GDP in low-income countries, more than 1½ times GDP in middle-income countries, and more than 5½ times GDP in high-income countries. This financial globalization has had many good effects. It has given global savers a wider pool of investments to choose from. It has given borrowers access to a much broader market for savings and so lowered their cost of capital. In some cases it has encouraged development of local capital markets and financial sectors. And especially when flows have taken the form of foreign direct investment, it has accelerated technology transfer, improved productivity, and provided employment opportunities. So far so good, but On the face of it, there appears to be a greater willingness to take risks in financial markets, motivated in part by the search for yield and in part by greater ease in transferring risk. So one concern is whether a shift in monetary policy in the major economies will produce a significant change in willingness to accept risk and, if so, how this will play out in the markets. This may reflect not so much a conscious decision to take risks as an underestimation of the extent of risks by some market participants and a reckless disregard of risks by others. Developments in the sub-prime and Alt-A parts of the U.S. mortgage market can be interpreted in this way. Many borrowers in these markets appear to have been so confident that housing prices would continue rising that they ignored the consequences of a downturn. And many lenders appear to have cynically encouraged them, with the aim of making a quick return while passing most of the risks off to other investors.

Some lenders may have become complacent about credit risks, because of the rapid development and growth of risk-transfer markets. Global issuance of loan securities has expanded from around $0.5 trillion in 2000 to $2.75 trillion in 2006; and it has become far more geographically widespread. This has naturally influenced banks' behaviour in many countries, not just the United States. Banks' willingness to lend and the rate at which they do so are increasingly being driven by the price they will receive for the loan when they sell it in the securities market.

New risk transfer markets can enhance financial stability, because the holders of risks—for example, bondholders, pension funds, and life insurers—individually have less exposure to short-term liquidity pressures and a greater ability to share losses more broadly. But there is often a lack of transparency about such arrangements. We know credit risk is being transferred, but it is often not clear who it is being transferred to, or whether the ultimate holders of these risks fully understand them and can manage them prudently.