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Future of long-term finance
Jean-Christophe MieszalaJune 16, 2014
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
Club HEC - Finance
McKinsey & Company |
Other productiveinvestment
Infrastructure
Residentialreal estate
Global investment
In 2009, McKinsey warned that In 2030, yearly investments will be 2,5 times 2008’s, resulting in a potential “capital crunch” of $2 trillion (2/2)
2030
24.0
15.4
3.7
4.9
2008
10.7
7.0
1.62.1
1981
4.5
3.10.7 0.8
SOURCE: Economist Intelligence Unit; Global Insight; McKinsey Global Economic Growth Database; Oxford Economics; World Development Indicators of the World Bank; MGI Capital Supply & Demand Model; McKinsey Global Institute
2030 global savings
~22
$ Trillions, constant 2005 prices and exchange rates
$2 trillion shortfall
McKinsey & Company |
First order effects of the financial crisis at individual banks have fueled adebate about broader economic effects
2SOURCE: McKinsey; Group of Thirty; EC
… Fostering a debate about broader economic effects
▪ Politicians and regulators are especially concerned about a potential undersupply of long-term corporate credit ("credit crunch") threatening future economic growth
▪ This has been raised by the Group of Thirty: “Woringly, we conclude that the current systems […] do a poor job in supplying long-term finance from diverse providers to lenders spread across sectors and the globe."
▪ And the European commission just published a Green Paper with 30 consultation questions to initiate a broad debate about "how to foster the supply of long-term financing and how to improve and diversify the system of financial inter-mediation for long-term investment in Europe"
Some segments (e.g., structured finance, Large Caps) face a short-term, and mostly delicate market balance at best
Many incumbents refocus on core segments and strengthening their credit and commercial processes
Banks withdraw from long-term lending causing corporates to seek alternative funding channels
First order effects at individual banks
McKinsey & Company |
The working group on long-term finance (G30)
3SOURCE: Group of Thirty
Project director
Charles RoxburghMcKinsey & Company
Observers
Peter BuombergerZurich Insurance Group Ltd.
Steven HottigerUBS
Anna MarrsStandard Chartered PLC
Experts
Several McKinsey PartnersMcKinsey & Company
Stuart P.M. MackintoshGroup of Thirty
Working group
Jean-Claude TrichetChairman, The Group of ThirtyHonorary Governor, Banque de FranceFormer President, European Central Bank
Peter SandsGroup CEO, Standard Chartered PLCFormer Group Finance Director,Standard Chartered PLC
Domingo CavalloChairman & CEO, DFC Associates, LLCFormer Minister of Economy, Argentina
Roger FergusonPresident & CEO, TIAA-CREFFormer Vice Chairman, Board of Governorsof the Federal Reserve System
Geoffrey BellExecutive Secretary, The Group of ThirtyPresident, Geoffrey Bell and Company, Inc.
Martin SennCEO, Zurich Insurance Group Ltd.Former CIO, Swiss Life Group
E. Gerald CorriganManaging Director, Goldman Sachs Group, Inc.Former President, Federal Reserve Bank of New York
Gerd HaeuslerCEO, Bayerische LandesbankFormer Managing Director & Vice Chairman,Lazard & Co.
William J. McDonoughFormer President, Federal Reserve Bank of New York
Jaime CaruanaGeneral Manager, Bank for International SettlementsFormer Chairman, Basel Committee on Banking Supervision
Guillermo de la DehesaDirector & Member of the Executive Committee,Banco SantanderFormer Deputy Managing Director, Bancode España
Jacob A. FrenkelChairman of the Board of Trustees,The Group of ThirtyChairman, JPMorgan Chase InternationalFormer Governor, Bank of Israel
Richard A. DebsAdvisory Director, Morgan StanleyFormer President, Morgan Stanley International
Sir David WalkerChairman, Barclays PLCFormer Chairman, Morgan StanleyInternational, Inc.
Philipp HildebrandVice Chairman, BlackRockFormer Chairman of the Governing Board,Swiss National Bank
Mark CarneyGovernor, Bank of CanadaChair, Financial Stability BoardMember of the Board of Directors,Bank for International Settlements
Jose ViñalsFinancial Counsellor & Director of Monetary and Capital Markets, IMFFormer Deputy Governor,Banco de España
John HeimannSenior Advisor, Financial Stability InstituteFormer US Comptroller of the Currency
Jacques de LarosièrePresident, EurofiFormer Managing Director, IMF
Leszek BalcerowiczProfessor, Warsaw School of EconomicsFormer Deputy Prime Minister & Ministerof Finance, Poland
McKinsey Global InstituteMcKinsey & Company
Providers of funds
SOURCE: McKinsey Global Institute.
Intermediation system Users of funds
Capital markets
Long-term investmentFinancial intermediaries
Banks
Insurance companies
Other asset managers
Sovereign wealth funds
Pension funds
Alternative investment vehicles
Sources of funds
Domestic
▪ Households
▪ Corporations
▪ Government
Foreign
▪ Households
▪ Corporations
▪ Government
Self-financing instruments
Framework for understanding the provision of financingfor long-term investment
Household income/wealth
Government taxreceipts
Corporate retainedearnings Maintenance of
physical capital
R&D
Education
Equipment and software
Property, plant and equipment
Commercial real estate
Infrastructure
New stock of residentialreal estate, for emergingeconomies
Other
Bonds
Equity
Long-term investment typically represents 25–30% of GDP, though it can be much higher in economies undergoing rapid economic transformation
SOURCE: McKinsey Global Institute.
Long-term investment breakdown by asset type for 9 sample countries
Percent of GDP, most recent data (2011 or 2010), country sample represents over 60% of world GDP
3%
10%
4%
6%
3% 6%6%
9%
9%
4% 5%
1%
2%2%2%1%
3%
2%
26%
0%
5%
6%
4%
26%
1%
6%
10%
2%
35%
24%
2%
7%
6%
5%
24%
3%
7%
8%
3%
27%
2%4%
7%
6%
2%
28%
3%
11%
5%
3%
29%
13%
14%
4%2%
51%
6%
10%
5%3%
6%
8%
3%
Residential real estate
R&D
Education
Infrastructure
Equipment and Software
CRE and other structures
Total investmentUSD trillion
3.6 0.6 1.0 0.8 3.8 0.6 0.3 1.6 0.4
Developed markets Emerging markets
Tangibles
Intangibles
In a consensus growth scenario, long-term investment is projected to grow significantly by 2020
USD trillion (real)
2020 (F)
18.8
1.6
3.6
5.4
3.1
2.4
2.8
2010
11.7
0.92.4
3.5
1.81.4
1.7
R&D2
Education
Equipment
Other structures
Infrastructure
Residential real estate
1 Sample countries include Brazil, China, France, Germany, India, Japan, Mexico, UK, and US, representing 60% of world GDP in 2010.2 Research and development.3 Cumulative annual growth rate.
Constant 2010 prices, constant exchange rates
CAGR3
4.9%
5.2%
5.3%
5.7%
4.2%
4.5%
5.2%
Real investment by type for sample countries1
USD trillion (real)
2020 (F)
18.8
6.5
2.6
1.9
2.7
5.2
2010
11.7
3.0
1.41.6
2.2
3.5
China
Other emerging
Japan
W Europe
USA
CAGR2
4.9%
3.9%
2.1%
1.8%
6.3%
7.9%
Investment evolution by region for sample countries1
Percent of GDP
30% 34% 30% 34%
SOURCE: McKinsey Global Institute.
McKinsey & Company |
Talent 165–265
Infrastructure 270–320
Big data1 155–325
Trade 200–590
Energy 380–690
Example: the five game changers which substantially raise US GDP by 2020 require significant investments
Incremental annual GDP by 2020$ billion
SOURCE: Economist Intelligence Unit; IHS Global Insight; McKinsey Global Institute analysis
1 Figures reflect additional GDP in retail and manufacturing sectors only. Big data could also produce cost savings in government services and health care ($135 billion–$285 billion), but these do not directly translate into additional GDP.
Note: These figures are based on a partial-equilibrium analysis that estimates only first-order effects and therefore cannot be summed to calculate the full economic impact.
Low estimate High estimate
$600 billion
$1.7 trillion
% of 2020 GDP
3.7
3
1.7
1.7
1.4
Long-term impact is
even greater
2030 GDP impact
Roughly 40% of long-term investment is financed through equity, bonds, or loansFinancing type as a % of total investment, total in USD trillion for sample countries1
1 Estimates for a typical global project based on data from sample countries including Brazil, China, France, Germany, India, Japan, Mexico, UK, and US, representing over 60% of world GDP in 2010.
2 Internal financing here defined as financing from household income/wealth, corporations’ retained earnings/cash holdings.3 Loans for residential and commercial real estate are as originated; depending on the country, a large portion of these loans could be subsequently securitized.4 Typical commercial real estate investment (including in existing structures) used as a proxy for investment in new commercial structures.5 Total debt and equity financing increase as a share of capital expenditure for nonfinancial corporations across the sample of countries.6 Research and development.
R&D6
0.8
25-30%
70-75%
Education
2.1
5-10%
75-85%
10-15%
Infra-structure
1.4
5-10%
20-25%
5-10%
60-65%
0
Equipment and software5
3.5
5-10%
25-30%
15-20%
45-50%
Commer-cial real estate4
1.8
60-70%
30-40%
Residential real estate
1.6
70-80%
20-30%
Bonds
Loans3
Equity
Government
Internal financing from households and corporations2
100% =
2011 LT investment for sample countries1
11.2
0-4%
30-33%
0-5%
25-30%
30-33%
Financing by type of investment
SOURCE: McKinsey Global Institute.
Government accounts for about 30% of long-term investment in most countries
Long-term investment breakdown by sector
Percent of total long-term investment, most recent data (2011 or 2010), Country sample represents over 60% of world GDP
Total long-term investmentUSD trillion
3.6 0.6 1.0 0.8 3.8 0.6 0.3 1.6 0.4
Developed markets Emerging markets
SOURCE: McKinsey Global Institute.
4344
4642
54
63 29
44 45
18 22 27 2615
20
38
23 24
31
100%
3427
3239
17
34 32 31
Households
Corporations
Government
Banks provide over 50% of long-term external financing1 outside the US, mainly through residential mortgages
1 Long-term external financing here includes NFCs’ (nonfinancial corporation) book equity, nonfinancial corporation bonds, ABS/MBS (Asset-backed/mortgage-backed securities), longer maturity nonfinancial corporation loans, commercial real estate loans, and residential mortgages. Part of book equity is changes in retained earnings, which could be classified as internal.
2 Calculated by dividing total market capitalization by the average price-to-book ratio for non-financial corporations for each economy, and therefore covers only public (listed) companies. Due to data unavailability, the equity of private companies is not included.
3 Used Bank for International Settlements data for bonds outstanding to be consistent with corporate bonds data.4 We estimate the portion of 5-year maturities using a broader set of loans.5 US bank lending includes loans to domestic and foreign entities. The other countries only include domestic entities as counterparties.6 Asset-backed/mortgage-backed securities (ABS/MBS).
716
13 38
269 14
2314
6 11 12 14 11100%
Residential mortgages
Commercial real estateloans
NFC loans with maturities >5 years4
ABS/MBS6
NFC bonds3
NFC book equity of listed companies2
China
26
11
0
France
36
12
2
Germany
43
12
3
UK
43
9
21
US5
11
72
48Cap
ital m
ark
ets
Ban
kin
g
Types of domestic long-term external financing outstanding, 2011
Percent of total domestic long-term external financing
SOURCE: McKinsey Global Institute
Total as share of GDPPercent
129 156 100 115 73
McKinsey & Company |
Corporate credit is a big, solid business – but mostly lackluster in terms of growth and profitability2009 – 2011, in %
SOURCE: McKinsey Global Banking Pools; McKinsey estimate
8
-10
219
North America Europe
11
1 Average share of corporate credit business compared to total lending volumes (retail, public sector and non-banking financial institutions)2 After risk costs, assuming 90% risk weighting, 10% capital requirements and pre-tax 3 Including Mexico4 Rough estimates, only includes corporate and retail lending due to data availability 5 Includes the following products: cash management
and financing; excludes CMIB business of corporates
South America3 Africa4 APAC
Middle East
ClassicalCorporate Banking ROE2,5
Corporate credit ROE2
Volume CAGRCorporate credit1
as a share oftotal lending
620
3515
99
63
371918
5223
108
63231611
62
McKinsey & Company |
-20
0
20
40
60
80
100
120
140
160
180
2011100908072006
Financial crisis has further strongly affected corporate credit business and led to a massive decrease in banking profitsEurope (Western and CEE), in bps
SOURCE: McKinsey Global Banking Pools
Profit margin2Risk costs1
12
1 Actual risk costs calculated (EL = PD * EAD * LGD); divided by lending volumes2 Pre-tax profit from corporate lending; divided by lending volumes
Limited growth in most countries
Higher capital and funding charges
Increased risk costs and volatility
Significant reduction in placement channels
Key drivers affecting corporate credit profitability
Total Monetary Financial Institutions’ balance sheet assets, 2011Percent of total, totals in USD trillion
9%Other NFC loans as share of GDPPercent
37%
17%20% 16%
15%
35%
8%
17.6
42%
36%
41%
11.7100% =
France China4
Other NFC loans1
Foreign claims and other assets
Household loans and commercial real estate2
Securities, financial institution and government loans
6%
Germany
11.7
39%
35%
7%
UK
13.0
33%
47%
3%
US3
12.6
8%
45%
11%
19% 22% 27% 84%
1 Other NFC (nonfinancial corporation) loans include all nonfinancial corporation loans outstanding except for loans to commercial real estate sectors. 2 Includes loans to households (including mortgages and consumer credit) and loans outstanding to commercial real estate sectors.3 The US balance sheets do not provide the domestic/foreign asset distinction. Foreign claims are claims on all counterparties outside of the country.4 The data set for China covers banks and finance companies (excluding Peoples Bank of China). China does not provide details on securities as
opposed to loans (and advances), so the loan category includes securities to corresponding counterparties.
SOURCE: McKinsey Global Institute.
However, as a share of total bank assets, lending to NFCs other than for real estate is small, at less than 10% in developed economies
41
31
3526
2647
42
2841
46 4533
1810
Brazil
49
India
35
China
42
UK
29
Germany
19
France
29
US
31
Up to 1 year1–5 yearsOver 5 years
Developed markets Emerging markets
Bank lending2
2.8
4.2
Emerging markets loans
Developed markets loans
1 Calculated using the countries and weights from the chart on the right, using 0.5, 2.5, and 8 years as average maturities for each category.2 Bottom-up analysis of banks’ balance sheets for banks representing at least 70% of the total market share in each country, except for China and India
(top 10 banks used for both) and European countries (all domestic banks with assets above USD 5 billion used).
Bank lending is typically short-term, especially in emerging markets
Average maturity1 Proportions of maturities
Years Loans outstanding, percent
SOURCE: McKinsey Global Institute.
In the Eurozone, all net new bank lending to nonfinancial corporations is for maturities of 1 year or less
300
250
200
150
100
50
0
-50
-100
-150
-200
1H20122011201020092008200720052004200320022001200019991998
Over 5 years
1 to 5 years
Up to 1 yearEUR billion
Euro area annual net new lending to nonfinancial corporations
SOURCES: European Central Bank; McKinsey Global Institute.
Developed markets
Years
8.07.7
4.2
Investment grade bonds
High yield bonds
Bank loans
6.0
6.9
2.8
Investment grade bonds
High yield bonds
Bank loans
Years
Emerging markets
Average maturity of financial instrument1
1 Based on 3-year weighted average of maturity from sample countries (France, Germany, UK, US for developed markets; Brazil, China, India for emerging markets).
SOURCE: McKinsey Global Institute.
Corporate bonds have significantly longer maturities than bank loans in both developed and emerging markets
Yet, corporate bond markets and securitized loans remain small outside the US
55%
69%
79%
79%
81%
82%
92%
92%
94%
96%
45%
31%
21%
21%
19%
18%
8%
8%
3.3Other developed
United States 11.6
100% =
CEE & CIS 1.54%
India 0.86%
Middle East & Africa
1.2
China 8.6
Japan 5.6
Latin America 0.8
Other developing Asia
0.8
Western Europe 13.2
Corporate loans
Bonds
SOURCE: McKinsey Global Institute Financial Stock Database 2012, McKinsey Global Institute analysis.
USD trillion, year end 2011 Securitized loans as % of GDP
68%
3%
13%
4%
0%
2%
0%
0%
0%
0%
Debt financing of nonfinancial corporations per region
McKinsey & Company |
Despite ongoing discussions on its sustainability, the US financing model was confirmed after the crisis
29 30 30 29 28 27 26 2628
2931 33 34
39 39 40 38 38 40 41 42 4539 36 36 33
100% =
Bookvalue of equity
Bonds
Loans
2012
19
32
17
31
2010
17
33
16
31
2008
16
28
16
32
2006
14
33
13
33
2004
12
34
11
33
2002
10
30
10
32
2000
10
32
SOURCE: McKinsey Global Institute Financial Assets database; US Federal Reserve; CPAT; S&P; McKinsey Global Institute analysis
8
4
6
-1
0
9
Total financing outstanding to US non-financial corporationsPercentage, $ trillions 2000-07 2007-12
CAGR based on $ values, %
Institutional investors hold long-term assets, but have room to increase the proportion
Percent of portfolio, USD trillion
Institutional investors’ asset allocation, 2010 or latest
3729 29
38
18
67
616 16
7
51
100% =
Insurers
23
28
5
Households
85
31
Endowments& foundations
2
56
Sovereign Wealth funds
4
56
Pension funds
28
57
Mutual funds
24
55
Long term1
Fixed income2
Cash and other
1 Long term investment defined as equities and 80% of alternative assets; cash and other includes cash and 20% of alternative assets.2 Fixed income includes some risky long-term investment, such as corporate bonds, but the data is unavailable for a further breakdown.
SOURCE: McKinsey Global Institute, “The emerging equity gap: Growth and stability in the new investor landscape” (December 2011).
1 Excludes retirement assets.
As investors age in the United States and Europe,they shift to lower-risk assets
Household asset allocation by age cohort1
Percent of total assets
2437
100%
65 or more years old
27
31
5
35–65 years old
47
23
6
Equities
Fixed income
Cash and deposits
Other
48 55
100%
65 or more years old
20
22
3
35–65 years old
35
14
3
United States Europe
SOURCE: McKinsey Global Institute, “The Emerging Equity Gap: Growth and Stability in the New Investor Landscape” (December 2011).
The rise of defined-contribution pension plans in Europe will lead to a further shift out of equity
35
65
78
Defined benefitTotal assets3
= $850 billion
Defined contributionTotal assets4
= $341 billion
Share of equity in theasset allocationPercent of portfolio
65
35
78
22
Other financial assets
Equities
23
48
1
33
53
6
40
60
UK2Switzerland1 Netherlands
2010
2005
2000Defined-contribution share of totalpension assetsPercent
1 In Switzerland, defined-contribution stands for funds where the plan sponsor shares the investment risk and all assets are pooled. There are almost no pure defined-contribution assets where members make an investment choice and receive market returns on their funds.
2 UK data do not include personal and stakeholder assets but do include insurance-administered vehicles. If the latter were excluded as well, the proportion of defined-contribution assets would fall to 25%.
3 Allocation based on a sample of the following plans: ABP, PFZW, ATP, Alecta, Royal Dutch Shell, Universities Superannuation, FRR, and Varma.4 Allocation based on a sample of the following plans: Bayerische Versorgungskammer, BT Group, PFA Pension, Royal Mail, Royal Bank of Scotland
Group, Ilmarinen, British Coal Pension Schemes, and Barclays Bank UK.
0.7 2.3 1.0Tot. pension assets, 2010USD trillion
The share of defined-contribution pension plans has been increasing in Europe
Defined-contribution plans allocate less to equity than defined-benefit plans
SOURCE: McKinsey Global Institute, “The Emerging Equity Gap: Growth and Stability in the New Investor Landscape” (December 2011).
European pension funds have been shifting outof equity, toward bonds and alternative assets
Percent of portfolio
5
45
39
14 2
64
2475
67
1810
16
58
141
39
44
1
44
44
1 11
27
282220
2011
27
38
7
2006
33
38
7
2001
36
35
9
Bonds
EquitiesAlternative assets
Cash
European pension funds asset allocation
SOURCE: McKinsey Global Institute, “The Emerging Equity Gap: Growth and Stability in the New Investor Landscape” (December 2011).
NOTE: Numbers may not sum due to rounding.
European insurers have been decreasing their allocation to equitiesoutside their unit-linked businesses since 2001, in contrast to US insurers
15
1721
19
44 55 4756
6 9 8
10
6
5
9.6
22
Equities(unit-linked)
Cash 2
100% =
-11p.p.Equities
(not unit-linked)
Fixed income (not unit-linked)
Fixed income(unit-linked)
Other investments
2010
11
4
07
8.6
12
44
04
6.9
15
43
2001
5.9
Percent, USD trillion, 2010 exchange rates
Western European insurers’ financial assets US life insurers’ financial assets
47 4742 44
12 12 11 12
8877
2
5.3
30
Governmentbonds
Cash &equivalents
1
100% =
+2p.p.
Equities
Corporatebonds
Other fixedincome
Other
2010
32
3
1
07
5.0
36
2
1
04
4.2
30
2
1
2001
3.2
Percent, USD trillion
SOURCE: McKinsey Global Institute, “The Emerging Equity Gap: Growth and Stability in the New Investor Landscape” (December 2011).
McKinsey & Company |
Deal values of syndicated loans, bn USD
▪ Different non-banking players have significantly increased their participation in syndicated lending deals
▪ The number of acting institutions1 is still limited but expected to increase severely
▪ A lot of non-bank activity is already taking place in the bilateral space and is also likely to grow
Insurance companies and other non-bank investors have significantly increased their engagements in structured finance
24SOURCE: Dealogic; McKinsey
1 Top 3 players among insurance companies engaged in Germany are Allianz, Massachusetts Mutual Life and Zurich
United Kingdom
Germany
CAGR
CAGR
2,6% 3,7% 4,8%7,6%
2012
92.4%
+2%
88100% = 78
97.4%
195
96.3%
2009
+48%
95.2%
10 11
199
EXAMPLE
2,0% 1,7% 2,5%
6,3%
98.0%
100% =
-11%
+31%
77
93.7%
98.3%
107106 132
97.5%
G
Non-bank Bank
Due to high savings and fast GDP growth, emerging markets’ share of financial assets is projected to nearly double by 2020
1 Assumes consensus GDP forecasts for individual countries and that emerging markets’ currencies appreciate vis-à-vis the US dollar.
19
14
9
9
9
United States
Western Europe
Japan
Other developed
China
Other emerging
2020F1
391.5
24
22
17
19
2010
198.1
29
27
10
11
2000
113.1
35
34
53
Emerging markets’ financial assetsUSD trillion
8 41 141
Percent, USD trillion
Total financial assets, 2010–20F
SOURCE: McKinsey Global Institute, “The Emerging Equity Gap: Growth and Stability in the New Investor Landscape” (December 2011).
McKinsey & Company |
Illustration: The banking sector in China is expanding steadily
133 686
113 287
94 249
80 923
64 15054 120
43 95037 456
32 01427 65423 077
+19% p.a.
20122011201020092008200720062005200420032002
1 Refer to real GDP growth rate
SOURCE: PBOC; NBSC
Banking asset
RMB billions
In the corporate sector, investment is mainly financed through retained earnings in developed markets and debt and equity in emerging markets
SOURCE: McKinsey Corporate Performance Analysis Tool, McKinsey Global Institute analysis.
1 Total annual change in debt and equity financing as % of capital expenditure used to proxy share of external financing for largest public nonfinancial corporations by market share; capital expenditure includes corporate investment in tangible assets and does not include R&D or education.
2 For Mexico, only 97 companies are available; for Brazil, China, France, and Mexico, 2001–2010 average used due to lack of data for previous years.
Share of capital expenditure financed through debt and equity1
Average debt and equity financing as share of capital expenditure, 1995–2010, percent2
Ø 34%
Japan
20
France
35
Ger
30
UK
48
US
38
Developed markets Emerging markets
Ø 75%
Mexico
63
Brazil
97
India
79
China
60
Having driven a substantial portion of flows from 2000 to 2007, cross-border loans dramatically fell away during the crisis
1 Flows defined as net purchases of domestic assets by nonresidents (including nonresident banks); total capital inflows comprised of inward foreign direct investment and portfolio (e.g., equity and debt) and lending inflows.
Total cross-border capital inflows1, 1980–2011USD trillions, constant 2011 exchange rates
Percent global GDP
5 5 13 15 6
8
6
4
2
0
-2
-4
4.85.8
2.0
2007
11.7
20052000
4.9
19951990
12
10
2012
4.6
Loans and deposits
Bonds
Equity
Foreign direct investment
SOURCE: International Monetary Fund, McKinsey Global Institute.
21
Emerging markets2
Emerging markets2
Developed markets4
Developed markets4
Long maturityShort maturity
0.50.90.7
3.2
6.0
FDIEquityBondsLong-term bank claims4
Short-term bank claims3
Across both emerging and developed economies, cross-border bank claims have been more volatile than bond and equity flows
SOURCE: Bank for International Settlements, International Monetary Fund, McKinsey Global Institute.
Coefficient of variation of inward cross-border flows by maturity1
2000Q1-2011Q4
1.71.71.82.4
0.7
1 Coefficient of variation defined as standard deviation normalized by the mean; calculations are made on quarterly data.2 Sample includes 29 developed markets and 120 emerging markets.3 Bank net acquisition of cross-border loans and other debt assets in emerging and developed economies, with maturity less than or equal to two years.4 Bank net acquisition of cross-border loans and other debt assets in emerging and developed economies, with maturity more than two years.
Higher value means higher volatility
McKinsey & Company |
Since 2007, Eurozone banks have reduced foreign claims by $3.9 trillion, $2.9 trillion of which was intra-European…
317
-422
-822
-2,941
-133
-944
-681
-1,183
-3,866
1,729
2,025
1,609
304
5,668
1,382
509
1,182
Change
$ billionCompound annual growth rate (%)
8,737
Eurozone bank claims on:
SOURCE: Bank for International Settlements; McKinsey Global Institute analysis
1 Includes banks from Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, and Spain. 2 GIIPS comprises Greece, Ireland, Italy, Portugal, and Spain.
Consolidated foreign claims of Eurozone reporting banks(includes loans and other foreign financial assets)1
By counterparty location, constant 2011 exchange rates
4Q99–4Q07
GIIPS2
Other Eurozone
United Kingdom
Other Western Europe
Total Western Europe
United States
Other developed
Developing countries
Total
$ billionCompound annual growth rate (%)
3
-6
-9
-4
-6
-8
13
12
16
12
13
13
6 -7
-814
4Q07–1Q13
-1217
30
McKinsey & Company |
GIIPS2 capital inflows
$ billion, constant 2011 exchange rate
… Fueling a Euro-crisis that was only halted by Eurosystem flows
SOURCE: ECB; individual central bank balance sheets; Eurostat; press releases; McKinsey Global Institute analysis
-284-481
-151
203
312
3Q123
166
432
17
11
253
686
48
10
255
392
14
09
249
46
08
470
157
07
1,195
5
1,190
2006
1,259
-9
1,268
Eurosystem flows1Private flowsIMF
1 Includes inflows via EFSF/ESM, bond purchase programs, and the TARGET2 system.2 GIIPS comprises Greece, Ireland, Italy, Portugal, and Spain.3 Non-annualized total inflows up to 3Q12.
McKinsey & Company |SOURCE: Bank for International Settlements; McKinsey Global Institute analysis
Advanced-economy banks’ cross-border claims, by nationality of bank $ trillion, constant 2011 exchange rates
14
8
7
2
9.1+1.7
Japan2
Australia
Canada
United States1
1Q13
3.9
0.71.1
3.4
2007
7.4
3.4
0.5 0.72.8
United Kingdom3
11.0
GIIPS
3.0 16.9
-3.2
Other Western Europe
Other Eurozone
1Q13
2.8
4.0
7.4
2.8
2007
20.1
3.2
2.9
-2
-7
6
-2
2
-8
1 In 2009, US banks added a large amount of off-balance assets bank on their balance sheets. To ensure comparability between 2007 and 1Q13 figures, the data in the exhibit assumes these assets were on bank balance sheets in both periods.
2 In nominal $, Japanese bank foreign claims increased by $0.9 trillion between 2007 and 1Q13.3 In nominal $, UK bank foreign claims increased by $0.05 trillion between 2007 and 1Q13
Europe Other developed countries
Compound annual growth rate, 2007–1Q13 (%)
US and other developed country banks have expanded foreign assets—but not enough to offset the decline ofEuropean banks
32
McKinsey & Company |
Countries to worry about are those heavily dependent on foreign investors as well as with large current account deficits
-8.2
-2.8
1.7
-3.6
2.9
-3.4
-6.3
-0.8
-5.9
2.6
-5.1
0.7
-2.3
4.0
-3.5
Current account deficit% of GDP
Foreign exchange reserves1
% of GDPBonds owned by foreigners% of total bonds
37
20
24
24
23
14
12
14
12
7
7
32
42
22
16
13
13
13
14
8
8
10
10
1
1
3
2
0
1
India2 43
Thailand 7
Brazil 12
Russia 17
Chile 20
South Africa 22
Philippines
Indonesia 40
Poland 42
Hungary 44
2China
Ukraine2 69
Colombia 26
Turkey 36
Mexico 38
26
2012 dataCountries at risk
14
35
22
13
14
15
10
30
27
16
48
16
41
13
16
Purchased 2009-12 Purchased until 2008
SOURCE: McKinsey
Restoring government debt to 60 percent of GDP by 2030 will require painful fiscal adjustment in many countries
NOTE: Countries are assumed to undergo a gradual transition in their primary balance over 2011–20 and maintain a constant primary balance after 2020.1 Japan’s target for fiscal adjustment is set at 80 percent of GDP.2 Switzerland’s target level is to stabilize debt at the end-2011 level by 2030.
SOURCES: International Monetary Fund Fiscal Monitor October 2012; McKinsey Global Institute.
-1.1
0.9
6.2
4.3
4.3
5.6
5.2
5.8
4.5
10.5
9.4
10.6
11.4
12.8
20.3
Required adjustmentfor G20 advanced countries
Switzerland2
Germany
Portugal
Australia
Canada
Italy
Belgium
France
Netherlands
Greece
United Kingdom
Spain
Ireland
United States
Japan1
Fiscal tightening required 2011–20 to meet gross government debt target of 60 percent of GDP by 2030
Percent of GDP
Government austerity plans may reduce future infrastructure investment, since they currently fund over half
Percent
Japan
Germany
France
US
NOTE: Public investment includes investment in highways and streets, transportation, power, sewer systems, water systems, education and health care structures. Private investment includes private investment in nonresidential structures in power, communication, and other (about 30% of total, including religious, educational, vocational, lodging, railroads, farm, and amusement and recreational structures, net purchases of used structures, brokers' commissions on the sale of structures, roads and highways).
77%
59%
54%
55%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20001990198019701960 2011
Country long-term averagePercent
Public share of infrastructure investment
SOURCE: McKinsey Global Institute.
McKinsey & Company |
As current monetary policy ends up, Government will face increased pressures…
840
360120
146
Net savings on debtfrom lower rates
Central bankremittances
United Kingdom
15939
Euro area
3644
United States
986
Estimated cumulative net savings on debt, 2007–12Constant 2012 exchange rate $ billion
% of government debt
3.1% 6.7%7.3%
% of GDP 3.0% 6.4%6.3%
SOURCE: McKinsey
McKinsey & Company |
… as well as parts of the banking industry
0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2012111009082007
SOURCE: Federal Deposit Insurance Corporation; Eurostat; Bloomberg; McKinsey Global Institute analysis
Banks’ effective interest margins—spread between effective rate received on assets and paid on liabilities%, annual values
Banks’ net interest income$ billion
388
303
177180
163
20122007
216
+0.63
-0.15
-0.36-25%
+28%
-1%
McKinsey & Company |
In the end, the European economy in particular faces several serious challenges
SOURCE: Team analysis
1 The challenge of financial disintermediation
2 The deleveraging challenge 3 The challenges posed by the decline in cross-border flows
McKinsey & Company | 38
Challenge n°°°°1 - Disintermediation: the financing structure of the economy is fundamentally different in Europe from that of the USA
29 30 30 29 28 27 26 26 28 29 31 33 34
39 39 40 38 38 40 41 42 45 39 36 36 33
100% =
Bookvalue of equity
Bonds
Loans
2012
19
32
17
31
2010
17
33
16
31
2008
16
28
16
32
2006
14
33
13
33
2004
12
34
11
33
2002
10
30
10
32
2000
10
32
SOURCE: McKinsey Global Institute Financial Assets database; US Federal Reserve; CPAT; S&P; McKinsey Global Institute analysis; Eurostat; CPAT; S&P
8%
4%
-1%
0%
6% 9%
CAGR based on values
2000-07 2007–12
Net interest impact on corporations
THE ISSUE OF FINANCING THE ECONOMY – DISINTERMEDIATION CHALLENGE
65 66 71 71 71 69 70 69 73 71 68 67 65
100% =
Bookvalue of equity 25
8
2000
6
27
7
Bonds
Loans
2012
10
26
10
10
24
9
2010
10
23
9
9
20
9
2008
9
208
9
23
7
2006
8
23
8
7
23
8
2004
6
21
9
6
20
9
2002
6
20
8
6
7% 2%
3% 5%
6% 9%
13
Total financing outstanding to EU non-financial corporationsPercentage, $ trillions
Total financing outstanding to US non-financial corporationsPercentage, $ trillions
McKinsey & Company | 39SOURCE: Haver Analytics; Bank for International Settlements; national central banks; McKinsey Global Institute
1 Includes all loans and fixed-income securities. Excludes asset-backed securities and mortgage-backed securities.2 Q2 2013 data.NOTE: Numbers may not sum due to rounding.
Total debt,1 Q1 2013, % of GDP
Challenge n°°°°2 - Deleveraging is a paramountchallenge for many countries (e.g., UK, Spain)
THE ISSUE OF FINANCING THE ECONOMY – DELEVERAGING
3 2
10 largest mature economies Eurozone-crisis countries
Households
Nonfinancial corporations
Financial institutions
Government
92
80
84
106
78
96
227
94
111
124
88
89
58
65
101
UnitedKingdom2
129
Japan2
91
49321196
511100 119
50
45
284
411Spain
98111 359France
9483 346Italy
3894115 331SouthKorea
8558 289Germany
298765 287Australia
3979 285UnitedStates2
5360Canada
110
92
129
227
94
111
122
101
124
177
88
89
75
106
91
80
65
96
78
58
84
72
411129 91
UnitedKingdom2 49396 211
289Germany
2987
33194
85
Greece
115
342
38
58
50
94
France
74
83 34645
20
Italy
SouthKorea
28765
Canada
Australia
39
284
79 285
60
UnitedStates2
384135 36Portugal
98
53
111 359
Spain
790
511Japan2
349202Ireland
119100
McKinsey & Company | 40
Challenge n°°°°3 - All types of capital flows have declined since 2007, and cross-border lending accounts for two-thirds the totalChange in total cross-border capital flows, 2007–12$ trillion, constant 2012 exchange rates
SOURCE: IMF Balance of Payments; McKinsey Global Institute analysis
Note: Numbers may not sum due to rounding.1 Includes primarily loans, currency and deposits, as well as a small share of trade credit. Excludes operations of foreign affiliates.
THE ISSUE OF FINANCING THE ECONOMY – CROSS BORDER FINANCING
0.1
Foreign direct investment
0.8
0.1
11.3
2007
0.7
Loans and deposits1
1.9
3.2
5.0
0.3
3.5
Debt securities
0.4
Equity securities
1.6
1.20.4
2012
Rest of World
Western Europe and UK
3 3
McKinsey & Company |
Banks 2012
… And possibly a fourth challenge
SOURCE: Coalition
3
6
7
8
10
10
11
11
11
14
8
10
14
13
18
17
19
18
21
25
1 Includes Investment banking / Origination &Advisory ,Fixed Income Credit and Currencies, Equities Sales & Trading and Proprietary trading
Global CMIB1 revenue
USD Billions
H1 2013
In CMIB, 6 out of the top 10 banks are American. Only one is headquartered in the Euro zone
McKinsey & Company |
All proposals by the Group of Thirty in detail
40
Objectives Proposals
Ensure investors arebetter able to take a long-term horizon in their investment decisions
Create new intermediaries and instruments geared toward the provision of long-term finance
Develop debt and equitycapital markets in order to promote a broadspectrum of financing instruments
Ensure that cross-borderflows support the efficient global allocationof capital to long-term investment
Strengthen systemic analysis when setting future regulatory policy
▪ National regulators and international bodies such as the IMF, World Bank, OECD, and the Financial Stability Board should propose new best-practice guidelines to promote long-term horizons in the governance and portfolio management of public pension funds and sovereign wealth funds
▪ National policy makers should consider steps to differentiate between short-term and long-term debt (whether public or private), and weighing the pros and cons of phasing out the preferential treatment of sovereign debt in insurance and bank regulation over an extended time horizon
▪ The Financial Stability Board, in coordination with relevant standard-setting bodies, should review the regulatory and accounting treatments of assets held with long-term horizons to avoid excess focus on short-term market volatility
▪ Create new instruments to enable the public sector to leverage private sector capital for long-term financing
▪ Create dedicated long-term financing institutions
▪ Foster the development of long-term pension and insurance-based savings by, for instance, setting up compulsory auto-enrolled savings programs
▪ Redirect structural surpluses in national savings to diversified sovereign wealth funds with a long-term investment mandate
▪ Implement the Financial Stability Board and standard-setting bodies’ regulatory reforms to transform shadow banking into resilient market-based finance
▪ Promote development of corporate bond markets and securitization of long-term debt, particularly in Europe and emerging markets
▪ Develop the infrastructure for capital markets in emerging economies to lengthen financing horizons and diversify sources of funding
▪ Remove the bias against equity in countries where it is present
▪ Support the international diversification of investment portfolios in both developed and emerging markets
▪ Move gradually toward liberalization of capital accounts in emerging markets while maintaining financial stability, using macro prudential policy tools
▪ Policy makers should consider the systemic impact of ongoing and future regulatory changes on long-term investment
▪ National authorities should improve the collection of data statistics on the supply of and demand for global long-term finance
I
II
III
IV
V
SOURCE: Group of Thirty
McKinsey & Company |
The EC has done their own analysis and has asked for advice via 30 consultation questions until end of June
41SOURCE: EC Green Paper
Themes Major concerns seen by EC
The supply of long-term financing and characteristics of long-term investment
▪ Public resources should not replace private financing
▪ Corporate savings have increased for LCs – SMEs suffer from lack of liquidity
▪ Households are more and more preferring short-term savings
▪ FDIs made a recovery in 2011 – but after a steep decline in recent years
Enhancing the long-term financing of the European economy
▪ Commercial banks are hit by the new regulation (deleveraging, etc.)
▪ National and multilateral development banks should not crowd-out private financing – they should strive to catalyze private financing in areas where it is slow to come forward
▪ Institutional investors are partly also suffering from upcoming regulations (Solvency II) or are lacking the required skills (risk and liquidity management)
The capacity of financial institutions to channel long-term finance
The efficiency and effective-ness of financial markets to offer long-term financing investments
Cross-cutting factors enabling long-term saving and financing
The ease of SMEs to access bank and non-bank financing
▪ Only LCs have an access to European bond markets
▪ Covered bond markets are fragmented along national lines
▪ Securitization needs to be mobilized again – especially with simple structures for SMEs
▪ European project bond market initiative still at small scale
▪ Taxation often favors debt over equity investments
▪ Accounting principles sometimes hinder a long-term horizon (e.g., fair value acc.)
▪ AM incentives are often not designed to long-term horizon
▪ Quarterly reporting, benchmarks and credit ratings foster a short-term view
▪ Current measures to address the difficulties of SMEs to access finance may not be sufficient
▪ Further steps should include – developing venture capital, dedicated markets and networks for SMEs, new securitization instruments for SMEs, standards for credit-scoring assessments of SMEs, promoting other "non-traditional" sources of finance (e.g., leasing, supply-chain financing, crowd-funding, …)
McKinsey & Company |
BACKUP
42
McKinsey & Company |
GDP growth at real exchange rate by geography, 2010-25
1009
42
51
12410
7427
142
131
1336
2328
Emerging 440: 47 percent of global growth
37 12 88 42 2157 2736 6
SOURCE: McKinsey Global Institute Cityscope 2.0
1 Small cities and rural areas. 2 Other large cities not included in the City 600. 3 Includes cities from China (Hong Kong and Macau) and Taiwan.4 Includes cities from Afghanistan, Bangladesh, India, Pakistan, and Sri Lanka.5 Includes cities from Cambodia, Indonesia, Laos, Malaysia, Myanmar, P.N. Guinea, Philippines, Singapore, Thailand, Vietnam.Note: Numbers may not sum due to rounding.
The great rebalancing: 440 emerging cities (>2 million habitants) will capture ~50% of the world growth by 2025
100% = $50.2 trillion
Chinaregion3
SouthAsia4
South-eastAsia5
LatinAmerica
EasternEurope& CentralAsia
MiddleEast &NorthAfrica
SubSaharanAfrica
OtherEmergingregions
Totaldeve-lopingregions
UnitedStates& Canada
WesternEurope
North-EastAsia
Austral-Asia
Otherdevelopedregions
Globalgrowth
Asia
Number of cities in the City 600
Developed 160:17 percent of global growth
24250
Examples▪ Hangzhou▪ Ahmadabad▪ Cancun
McKinsey & Company |
Leverage
Capital reserves/total balance sheet%
5.10 6.42 7.43
SOURCE: ECB
2 4062 2961 783
+35%
Jul 2013Jul 2012Jan 2009
-7.8%
Jul 2013
32,380
Jul 2012
35,762
Jan 2009
34,932Jul 2013Jul 2012Jan 2009
€ billions
EU banks total balance sheet
EU banks capital & reserves
Under the pressure of the macro-economic landscape and regulatory framework, European banks have achieved fast adjustment to new ratios
McKinsey & Company |
Challenge n°1 - Disintermediation: In Europe the economy remains largely financed by bank loans vs. financial markets
29 30 30 29 28 27 26 26 28 29 31 33 34
39 39 40 38 38 40 41 42 45 39 36 36 33
100% =
Bookvalue of Equity
Bonds
Loans
2012
19
32
17
31
2010
17
33
16
31
2008
16
28
16
32
2006
14
33
13
33
2004
12
34
11
33
2002
10
30
10
32
2000
10
32
SOURCE: McKinsey Global Institute Financial Assets database; US Federal Reserve; CPAT; S&P; McKinsey Global Institute analysis; Eurostat; CPAT; S&P
8%
4%
-1%
0%
6% 9%
CAGR based on values
2007–12
Net interest impact on corporations
65 66 71 71 71 69 70 69 73 71 68 67 65
100% =
Bookvalue of Equity
Bonds
Loans
2012
10
26
10
10
24
9
2010
10
23
9
9
20
9
2008
9
208
9
23
7
2006
8
23
8
7
23
8
2004
6
21
9
6
20
9
2002
6
20
8
6
25
8
2000
6
27
7
7% 2%
3% 5%
6% 9%
2000-07
Total financing outstanding to EU non-financial corporationsPercentage, $ trillions
Total financing outstanding to US non-financial corporationsPercentage, $ trillions
McKinsey & Company |SOURCE: Haver Analytics; Bank for International Settlements; national central banks; McKinsey Global Institute
NOTE: Numbers may not sum due to rounding.1 Includes all loans and fixed-income securities. Excludes asset-backed securities and mortgage-backed securities.2 Q2 2013 data.
Total debt,1 Q1 2013% of GDP
Challenge n°2 - Deleveraging has become a challenge for many European countries
110
65
92
80
91
50
45
72
84
58
106
78
96
129
227
94
111
122
101
124
177
38
88
29
89
75Canada 28460 53
UnitedStates2 28579 39
Australia 28765 87
Germany 28958 85
SouthKorea
331115 94
Greece 34274 20
Italy 34683 94
France 359111 98
Portugal 384135 36
Spain 411129 91
UnitedKingdom2 49396 211
Japan2 511100 119
Ireland 790202 349
Nonfinancial corporations
Households
Financial institutions
Government
McKinsey & Company |
Challenge n°3 - All types of capital flows have declined since 2007, and cross-border lending accounts for two-thirds the totalChange in total cross-border capital flows, 2007–12$ trillion, constant 2012 exchange rates
SOURCE: IMF Balance of Payments; McKinsey Global Institute analysis
Note: Numbers may not sum due to rounding.1 Includes primarily loans, currency and deposits, as well as a small share of trade credit. Excludes operations of foreign affiliates.
2012
3.5
Loans and deposits1
5.0
1.9
3.2
Debt securities
1.6
0.41.2
Equity securities
0.4
0.3 0.1
Foreign direct investment
0.8
0.10.7
2007
11.3
Rest of World
Western Europe and UK
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