Financial Market, Entrepreneurial Economy and Studying Finance Prof. Dr. Marco J. Menichetti Chair in Business Administration, Banking and Financial Management Institute for Finance [email protected] October 2017 Outline What is a Financial Market? Liechtenstein: Entrepreneurial Economy and Financial Market Studying Finance in Connection with an Asset Management Hub Menichetti, October 2017 2 Outline What is a Financial Market? Liechtenstein: Entrepreneurial Economy and Financial Market Studying Finance connected to an important Asset Management Hub Menichetti, October 2017 3 What is a Financial Market? Financial Financial Intermediaries/ Centers Institutions Financial Markets Regulation and Market Supervision Menichetti, October 2017 4 Financial Markets Financial Markets • Bond Markets • Stock Markets • Foreign Exchange Markets • Markets for Alternative Investments • International Financial Markets Structure of Financial Markets • Primary and Secondary Markets • Exchanges and Over-the Counter Markets • Money and Capital Markets • Spot and Forward Markets Source: Mishkin & Eakins (2016). Menichetti, October 2017 5 Financial Center Geographical location (1) that has a heavy concentration of financial institutions, (2) that offers a highly developed commercial and communications infrastructure, and (3) where a great number of domestic and international trading transactions are conducted. London, New York, and Tokyo are the world's premier financial centers. • Regional, national, international financial center • Global financial center: direct access from all over the world • Niche financial centers: Corporate Finance, Asset Management, FX, Derivatives, Trade Finance, Project Finance etc. • Onshore vs. offshore financial centers Source: Zomoré (2007); Mishkin & Eakins (2016). Menichetti, October 2017 6 Leading Wealth Management Centers (2015) - International Private Client Market Volume MARKET VOLUME (IN USD TRILLION AND AS PERCENTAGE OF MARKET SHARE) Source: Deloitte (2015). Growth in Wealth Management Market Volume (AuM, 2008-2012 and 2012-2014) CHANGE IN INTERNATIONAL MARKET VOLUME FOR TWO PERIODS Source: Deloitte (2015). Financial Intermediaries and Institutions Financial Intermediaries: Entities that intermediate between providers and users of financial capital. Two types of information reusability Cross-sectional: The same information can be utilized across different users Intertemporal: The same information can be reused through time For a given attribute, the larger the grid, the more compelling the need for the broker For a given size grid, the less readily observable the attribute (the more subtle the signal), the more important the skills and reputation of the broker, e.g., phone books vs. security analysts or loan officers Source: Greenbaum, Thakor, & Boot (2016). Menichetti, October 2017 9 Services provided by Financial Intermediaries Source: Greenbaum, Thakor, & Boot (2016). Menichetti, October 2017 10 Financial Institutions • Banking Industry • Mutual Fund Industry • Insurance Companies and Pension Funds • Investment Banks • Venture Capital and Private Equity Firms • Hedge Funds • Security Brokers and Dealers • etc Source: Mishkin & Eakins (2016). Menichetti, October 2017 11 Regulation and Market Supervision Objectives of Regulation • Safety and soundness of individual institutions • Stability of the financial system • Market structure and competition • Consumer protection • Credit allocation • Monetary control Source: Greenbaum, Thakor, & Boot (2016). Menichetti, October 2017 12 Outline What is a Financial Market? Liechtenstein: Entrepreneurial Economy and Financial Market Studying Finance in Connection with an Asset Management Hub Menichetti, October 2017 13 Overview Area 160 km² / 61.8 mi² (6th smallest country worldwide) Capital Vaduz Inhabitants 37‘810 (2016) Currency Swiss Francs (CHF) Official Language German Head of State Prince Hans-Adam II. of Liechtenstein Head of State (regent) Hereditary Prince Alois of Liechtenstein Head of Government Prime Minister Adrian Hasler Export of goods 3'453 million CHF (2014) GDP (nominal) 6‘105 million CHF (2014) GDP per capita 163‘384 CHF* (2014) GNI 4‘962 million CHF (2014) GNI per capita 132‘795 CHF (2014) Religion 80% Roman Catholic, 7.3% Protestant Source: Statistical Office Liechtenstein * approximately 50% inward commuters employed Menichetti, October 2017 14 Relationships Switzerland – Liechtenstein Liechtenstein – European Union . Customs Union with Switzerland since 1923 . Liechtenstein is official EFTA member since 1991 . Since 1921 Swiss Franc is used as the official currency . Liechtenstein is part of EEA since 1995 . Currency Union Treaty with Switzerland signed in 1980 EEA is formed by the 28 EU-members > National Bank of Switzerland is also the central plus Liechtenstein, Iceland, Norway; bank of Liechtenstein Switzerland is not member in the EEA . The freedom of movement for goods, services, persons (with restrictions) and capital within the EEA is applicable in Liechtenstein Source: Office of Economic Affairs Liechtenstein Menichetti, October 2017 15 Facts and Figures – Employment Distribution of Employment in Liechtenstein Total Employed 37‘453 (100%) of which are: Residents Employed 17‘214 (46.0%) Inward Commuters 20‘239 (54.0%) Full Time 26‘864 (74.2%) Part Time 9‘360 (25.8%) Full Time Equivalents 32‘122 (100%) of which are: Men 20‘893 (65.0%) Women 11’229 (35.0%) Liechtensteiners 9‘545 (29.7%) Foreigners 22‘576 (70.3%) employed in: Sector 1 (agriculture) 221 ( 0.7%) Sector 2 (industry) 13‘486 (42.0%) Sector 3 (services) 18’415 (57.3%) Source: Statistical Office Liechtenstein (2016) Menichetti, October 2017 16 Facts and figures - Employment Total Employed and Inward Commuters Total Employed Inward Commuters Source: Statistical Office Liechtenstein (2016) Menichetti, October 2017 17 Employment – Comparison Employment Structure Liechtenstein Switzerland Austria Germany Luxembourg Resident Population 37‘810 8‘417‘700 8‘772‘865 82‘175‘700 590‘667 Total employed 37‘453 4‘604‘000 4‘220‘000 43‘595‘000 405‘700 % of inward commuters 54.0% 6.9% 43.0% Quota (total employed to 99.1% 54.7% 48.1% 52.1% 68.7% resident population) Employment Distribution Sector 3 (Services) Sector 2 (Industry) Sector 1 (Agriculture) Liechtenstein Switzerland Austria Germany Luxembourg Source: Statistical Office Liechtenstein (2016) Menichetti, October 2017 18 Gross Domestic Product comparison Liechtenstein Switzerland Austria Germany Luxembourg Area in km2 160 41‘277 83‘871 357'022 2‘586 Liechtenstein compared to (in %) (100.00%) (0.39%) (0.19%) (0.045%) (6.19%) GDP nominal (2014) 6.66 702.71 438.38 3’879.28 66.30 in billion current USD (100.00%) (0.95%) (1.52%) (0.17%) (10.05%) Liechtenstein compared to (in %) GDP/capita (2014) 179‘478.6 85’814.6 51’322.6 47’902.7 119’172.7 in current USD (100.00%) (209.15%) (349.71%) (374.67%) (150.60%) Liechtenstein compared to (in %) Resident Population (2016) 37‘810 8‘417‘700 8‘772‘865 82‘175‘700 590‘667 Liechtenstein compared to (in %) (100.00%) (0.45%) (0.43%) (0.05%) (6.40%) Currency Swiss Franc (CHF) Swiss Franc (CHF) Euro (EUR) Euro (EUR) Euro (EUR) German, French, French, German, Official Language German Italian, Rhaeto- German German Luxembourgish Romanic Source: World Bank (2016), CIA Fact Book, Statistical Office Liechtenstein (2016) Menichetti, October 2017 19 Financial Market Liechtenstein Financial Intermediaries and Authorities in Liechtenstein . Banking Sector (Liechtenstein Bankers Association, LBA): 16 banks . Insurance Sector (Liechtenstein Insurance Association, LVV): 33 insurance companies . Investment Fund Sector (Liechtenstein Investment Fund Association, LAFV): 17 companies . Asset Management Sector (Association of Independent Asset Managers in Liechtenstein, VuVL): 86 members . Professional Trustees and Fiduciaries Sector (THK): 396 companies . Financial Market Authority (FMA) Source: Liechtenstein Bankers Association Menichetti, October 2017 20 Current Challenges for the Liechtenstein and Switzerland Financial Centers Banking regulation 58 % Bad debts 5 % Digitalization 26 % Margin pressure 11 % Source: Finance Forum Liechtenstein 2017 Advantages in Liechtenstein The Liechtenstein Financial Market . Large potential of specialists and experts from Switzerland, Austria, and Germany . Stable social, legal, and economic order . High degree of political continuity and stability . Liberal economic policy and company law . Moderate corporate taxation . Solid financial policy of public budgets . Free access to markets in Europe . Manageable size . Flexibility and short decision-making paths . Large capital power of the public sector . AAA country rating by Moody's and Standard & Poor's . Niche products compatible with European law Source: Finance Liechtenstein Menichetti, October 2017 30 Literature Deloitte (2015). The Deloitte Wealth Management Centre Ranking 2015. Zürich: Deloitte Consulting AG. Greenbaum, S.I., Thakor, A.V., & Boot, A.W.A. (2016). Contemporary Financial Intermediation (3rd ed.). Amsterdam: Elsevier. Mishkin, F.S., & Eakins, S.G. (2016). Financial Markets and Institutions (8th ed.). Boston: Pearson. Zomoré, A. (2007). Concepts of Offshore Financial Centers: In Search for an Operational Definition. IMF Working Paper WP 07/87, Monetary and Capital Markets Department. Washington: International Monetary Fund. Internet Sources: CIA Factbook; Finance Liechtenstein - www.finance.li; Financial Market Authority Liechtenstein; Office of Economic Affairs Liechtenstein; Statistical Office Liechtenstein (2016);