Trade & investment

Looking ahead: New ICC project on financial market scenarios

  • 4 July 2008

As financial turbulence reaches unprecedented levels worldwide amid the recent credit crunch, ICC’s Commission on Financial Services and Insurance (FSI) recently conducted breakthrough research into the future shape of financial markets.

In partnership with the Institut d’Etudes Politiques de Paris (Sciences Po Paris), a prestigious French university, the Commission is investigating global trends and scenarios for financial markets through 2015.

Preliminary findings have identified driving forces for the future of global financial markets, such as energy and food markets, corruption, looming protectionism, natural disasters, and disruptive technologies. The early findings also gauged the impact of market uncertainties, including financial regulations, corporate governance, accounting standards, remuneration, plus the risk profile of hedge funds and the investment strategies of sovereign wealth funds.

To help think about the future of financial markets, the study group developed four scenarios that describe alternative ways it may develop:

Booming, under stricter surveillance
Financial regulations are strengthened, global economic fundamentals quickly recover, and the economy is stable and sound. Credit availability and investment generally increase and support economic development. However, strengthened regulations may require greater transparency from financial market actors, as hedge funds and sovereign wealth funds increase their investments.

Suffocating regulation, slow economic recovery
Financial regulations are strengthened amidst a more severe financial crisis, and the economy recovers very slowly. Stronger regulations coupled with sagging market confidence and weak economic fundamentals further limits credit availability and investment, putting the brakes on economic recovery and triggering an economic downturn.

Untamed chaos, weak economy
Regulations remain unchanged during a severe financial crisis, prompting a slow economic recovery. Credit availability and financial investment are reduced or unstable, given weak economic conditions. The risk of fraud and market fluctuations remains high, given a lack of regulatory reinforcement.

Economy booms, financial crisis looms
Regulations remain unchanged and economic fundamentals recover quickly from the financial crisis. Although a favourable economic environment encourages investment and greater financial market activity, the risk of fraud and unreliable credit ratings remains, and a financial crisis looms.

The scenario research also identified the need for business to help mitigate financial market risks. The research outlined several preliminary recommendations for business, including:

Enhance credit rating criteria;
Share best practices on investment vehicles, develop model contracts, and improve risk management practice;
Share information on investment strategies in emerging markets with a country-specific risk awareness focus; and
Foster greater interaction among regulators, governments, industry and society globally.

ICC’s FSI Commission and Sciences Po have formed a working group, and have started work on a second phase for the scenario study. The newly-formed expert group will explore the implications for global regulation and daily practices of the financial sector from recent financial turbulence, and identify sustainable business trends.

The scenarios are aimed at addressing key financial issues in responsible ways, and are to be used as a way to test strategies against a range of possible developments over the long term up to 2015.

The outcomes are aimed at offering the best hope for a sustainable future, whether or not they arise in exactly the way they are described.

The scenarios are also geared towards helping decision makers better understand the choices they face. A comprehensive report: Global Scenarios for Financial Markets Through 2015, will be presented at the FSI Commission meeting next year.