Executives discussed risk aversion in the wake of the 2008 financial crisis as well as current challenges and opportunities in capital markets during a panel discussion at the Securities Industry and Financial Markets Association’s Annual Meeting in Washington, D.C., on Tuesday.
Challenges right now include a lack of demand and growth affecting the capital-markets business, because it serves as a “fulcrum between savers and entrepreneurs, and we thrive when the economy is good,” said Ronald Kruszewski, board chairman and CEO of Stifel Financial.
“At the highest level, the environment is exciting and bright, but if you are not nimble and quick in [adapting] to the market environment,” this can be a difficult time, said Martin Flanagan, president and CEO of Invesco.
He and other panelists said risk aversion is another major challenge. Adena Friedman, president and chief operating officer of Nasdaq, said risk capital is “critical to the functioning of an economy” and that a “liquidity vacuum” has formed on the small side of the market.
Kruszewski said the Dodd-Frank has made the financial system more sound, but has led to liquidity hoarding among big banks and not in small-cap companies that need it.
“We’re locking down savings, we’re locking down liquidity, and we’re starving our entrepreneurs. And a natural cycle requires velocity where money moves from savers to entrepreneurs. That creates growth,” he said.
Daniel Coleman, CEO of KCG, when asked what he would do as a regulator for a day, said he would promote competition among intermediaries and “enable risk-takers to take risk – and if they fail, they fail. That’s healthy. That means risk is priced right.”
The panelists also said they have many reasons to be optimistic about capital markets.
Adena Friedman, president and chief operating officer of Nasdaq, said Dodd-Frank and other regulations have forced transactions to be conducted in a more harmonized and commoditized way, with more instruments going into a standardized electronic environment.
That can be a positive development for market operators, although it can be disruptive to many participants, she said.
Coleman said many opportunities currently exist outside the equities space and in the foreign-exchange market, Treasurys and possibly swaps.