Markets ready to face shocks: bankers

By Andrew Hurst

LONDON (Reuters) - Financial markets have rarely appeared so confident of their ability to withstand unforeseen shocks as liquidity expands and ever more sophisticated techniques are developed to hedge risk.

Speakers at a Reuters Investment Banking Summit in London said it is only a matter of time before benign economic conditions supporting buoyant markets are tested by a shock event or an inevitable downturn.

"We have been on a default holiday, but unless the world has changed fundamentally, that will not persist forever," said Thomas King, head of European Investment Banking at Citigroup. "It's inevitable mistakes are going to be made."

But increasing depth and sophistication of financial markets makes players confident they can deal with almost any eventuality.

"The magnitude of shock needed to destabilize the markets is far bigger than ever before," said Simon Parry-Wingfield, co-head of leveraged finance at Morgan Stanley. "There could be a gradual glide path down or an event ... it will take something of enormous proportions."

Underpinning a growing sense of confidence in the market's increasingly robust self-righting mechanisms is the increasing breadth and depth of derivatives products and increasing complexity of financial technology.

"The development of risk transfer markets ... have really been a catalyst for stability in the financial system," said Jerry del Missier, a co-president at Barclays Capital who is responsible for the investment bank's rates business.

RISK DIVERSIFIED

"Risk is diversified in ways it has never been before, and that is good for stability," said Citigroup's King.

No one is saying that financial markets have outgrown the danger of a cyclical downturn, but market players say that they can prosper even if the environment becomes less rosy.

"There is money out there that will go to work on the way down," said King, referring to a deep pool of hedge fund capital and distressed debt specialists.

"Markets have matured and are more stable, but it would be foolish to say that we have outlawed systemic risk," said del Missier.

The collapse of Amaranth Advisers, which lost $6.4 billion in September but caused little more than a ripple in the hedge fund industry, is being a cited as a powerful example of growing market resilience.

"Amaranth did not bring the system down, but people lost money," said del Missier.

By contrast, the demise of Long Term Capital Management in 1998 delivered a major shock to markets and required the New York Federal Reserve to orchestrate an intervention.  Continued...