The financial landscape has been altered in three main areas
The recent tumult in stockmarkets has brought the fairground metaphors flooding back. Should equity investors brace for a sickening lurch downwards? And as they plummet, will the groaning girders beneath them—the infrastructure underpinning markets—hold firm? The structure of finance has changed dramatically since the financial crisis of 2007-09. Every new big-dipper has to go through rigorous testing to ensure it is safe to ride.
“All asset prices are where they are today because of liquidity and interest rates,” says Greg Jensen of Bridgewater Associates, a hedge fund. As demand for goods and services has jumped in the face of supply-chain constraints, the consequences have cropped up as inflation and shortages. This has forced policymakers to change course and start removing liquidity. As recently as October investors expected just a single 0.25 percentage-point rate rise from the Fed in 2022.
Start with the owners of assets. A smaller share of these is now held on bank balance-sheets. In 2010, just after the crisis, banks held $115trn-worth of global financial assets. Other kinds of financial institutions, such as pension funds, insurers and alternative asset managers, held roughly the same amount. But non-banks’ slice has swollen far more quickly since. By the end of 2020 they held $227trn, 26% more than the banks did.
At the same time as capacity to intermediate has dropped the supply of bonds has grown, in part driven by a deluge of government supply and in part because corporate borrowers rely more on debt issuance than bank loans. And the demand to trade bonds has been fuelled by the growth in exchange-traded funds built by the likes of BlackRock, the world’s largest asset manager.s, it is much easier.
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