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...the credit crisis has dented confidence in the health of America’s financial institutions and its model of finance."
McKinsey warns US may lose financial leadershipBy Gillian Tett in London
January 15 2008
SourceThe US looks poised to lose its mantle as the world’s dominant financial market because of a rapid rise in the depth and maturity of markets in Europe, a study suggests.
The change may have occurred already, not least because US markets are beset by credit woes, according to research by McKinsey Global Institute, a think-tank affiliated to the consultancy.
“We think the differential growth rates are so significant that it is quite likely Europe has overtaken the US,” said Diana Farrell, author of the report.
“They are now neck and neck, which means exchange rates are very important. It is a real change.”
McKinsey calculated the size of the more fragmented European market by adding several markets together.
A power shift is also under way in Asia as the Chinese market continues to boom while markets such as Japan stagnate.
McKinsey suggests China’s booming trade surplus has put it into the position of being the world’s largest net exporter of capital, topping Japan, Germany and the oil exporters for the first time.
The findings are likely to attract attention from bankers and policymakers since they come amid an intensifying debate about the changing pattern of financial power – an issue likely to be centre stage at the meeting of the World Economic Forum in Davos next week.
In previous decades, most US policymakers and bankers assumed their domestic markets were the largest and most sophisticated in the world, and sought to export their model of financial capitalism to other parts of the globe.
But the credit crisis has dented confidence in the health of America’s financial institutions and its model of finance.
Meanwhile, since the launch of the single currency in 1999, European markets have been steadily growing in liquidity and size.
And other parts of the world, such as Asia and the Gulf, are enjoying rapidly growing financial clout due to their large surpluses – a shift exemplified by the recent decision of Asian and Gulf Sovereign Wealth Funds to take large stakes in big US banks such as Citigroup.
The study by McKinsey, which provides one of the most comprehensive independent snapshots of financial flows, covers the trends in 2006.
But analysts say their initial research following the subprime shock suggests the credit turmoil has intensified these trends in 2007 in terms of the global pecking order.
In 2006, McKinsey calculates that America’s markets had some $56,100bn of assets. Europe, including the UK, had $53,200bn of assets, a sharp increase on recent years.
On recent trajectories, this implies that Europe overtook the US in 2007.
“The main message that emerged about financial deepening and what is happening outside the US in 2006 continued in 2007,” Ms Farrell said.
The UK accounted for some $10,000bn of assets, according to McKinsey, while the eurozone accounted for $37,600bn.
Switzerland, Sweden, Iceland, Denmark and Norway accounted for a combined $5,600bn.
Copyright The Financial Times Limited 2008