European Affairs

Competition Among Capital Markets: Focus on Facts not Factoids     Print Email

The declining competitiveness of U.S. capital markets has become the topic of the moment among those with a professional interest in the financial sector. Concurrent with three high-profile groups’ substantial recent reports on the issues facing capital markets in the United States, Treasury Secretary Henry Paulson has placed this issue near the top of his domestic agenda. What is more, in a political environment where the prospects for collaboration on most public issues seem increasingly dim, the concern over U.S. capital formation is a refreshing oasis of bi-partisanship, with political interest in corrective action ranging from prominent Democrats in New York such as Governor Eliot Spitzer and Senator Chuck Schumer to the senior officials of the Bush administration.

The question is a serious one, and the attention to it is welcome. But “capital markets’ competitiveness” covers an extremely broad range of issues, some of which are of genuine national interest, some of more parochial concern and others that may be merely dislocations to individual companies with outmoded business models. It will be important for policymakers to disentangle these threads and focus on issues of genuine national consequence. Otherwise, there is a risk that measures taken to address the competitiveness of our capital markets will merely protect certain businesses from necessary competition—to the detriment of the customers of our capital markets and to the real economy.

For example, perhaps the most commonly cited statistic in discussion of this topic in Washington has been the number of initial public offerings that do not list on a U.S. exchange. In 2005, 24 out of 25 of the world’s largest IPOs did not list in the U.S. Last year, nine of the world’s 10 largest IPOs similarly did not seek a U.S. listing. On the face of it, this is a dramatic and startling fact, and one that has raised alarms on Capitol Hill.

But a closer look reveals that, at the same time as the companies making these offerings listed outside the United States, the majority of them also sought capital from the U.S. in the form of simultaneous and sizable Rule 144A offerings. Of course, these are limited to qualified institutional buyers, but that includes investment companies, mutual funds and benefit plans – the entities through which most individuals will have the bulk of their equity exposure in any event. In fact, in 2005 foreign companies raised $86 billion in the U.S. through 144A offerings while raising only $5.4 billion in listed offerings. The lack of IPO listings, then, is clearly a problem for the CEO of the New York Stock Exchange, but it is less clear that it is a problem for the nation’s investors, still less so for U.S. companies seeking capital. Indeed, to the extent that the decline in listings is being driven by technological advances that increasingly allow participants in the capital markets to bypass exchanges entirely, it may be the natural evolution of markets globally.

The point of this example—and it is only one example—is not that we should be complacent about the competitiveness of our capital markets, but that we should be sure we are truly focused on the competitiveness of those markets, and not the success of individual businesses within an area that is rapidly evolving and in which dislocation will therefore be inevitable. Our goal should be to ensure that the policies adopted in this bipartisan effort actually result in an increase in competition, not the subsidization or protection of our own financial sector.

Randal Quarles was Assistant Secretary of the Treasury for International Affairs from 2002 until 2005 and then served as the Treasury’s Under Secretary for Domestic Finance until last year.


This article was published in European Affairs: Volume number 8, Issue number 1 in the Spring of 2007.


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