The future of capital markets has become a subject of increasing focus since the financial crisis, and capital markets will play an increasingly important role in providing everything from financing to the world’s most innovative companies to generating the investment returns needed to support an ageing population in the developed world. This is according to a recent research paper from PwC, Capital Markets 2020 which gives insights into the future of capital markets.

Finance Dublin speaks with PwC's John McDonnell on the opportunities the new capital markets landscape presents to the IFSC. Capital markets in 2020 will arrive at 'a new equilibrium' shaped by four megatrends - geopolitical instability; an increase in state-directed capitalism; technology and scarcity of resources. This will see the traditional financial axis of power further solidifying their positions at the top (with an Asian centre expected to rise in importance on a par with New York and London) and the world seeking stability and predictability in the context of riskier and more uncertain geopolitical situations, according to the research. In addition, much of the landscape where financial institutions operate will change significantly. This change will come from economic and government policies, innovation, operational restructuring, technology, smarter and more demanding clients, companies harnessing powerful data and from continued growth of the shadow banking system. We asked John McDonnell, partner, PwC, where are the opportunities in this new equilibrium for the IFSC - and it is in the area of shadow banking (according to the paper 70% of capital markets' executives expect to pose a threat to traditional banks) that Ireland already has a major advantage, he says. 'Looking at the IFSC, the area of fund servicing and asset management is a very strong sector and is well placed to benefit from the expected rise of shadow banking.' The term 'shadow banking', first coined in 2007 by Paul McCulley, a senior executive at PIMCO, to describe bank's off balance sheet securitisation vehicles has now gained a broader meaning, with the Financial Stability Board defining it as 'credit intermediation involving entities and activities outside the regular banking system.'

Institutions falling under the shadow bank umbrella include hedge funds, money market funds, structured investment vehicles (SIV), credit investment funds, ETFs, credit hedge funds, private equity funds, securities broker dealers, credit insurance providers (as well as the originally described securitisation vehicles) and their growth potential is significant, said McDonnell, 'In 2013 shadow banking accounted for 25% of global financial assets and this is expected to grow by 10% by 2020. So if we are expecting this growth in shadow banking - whether it is amongst hedge funds, MMFs, SIVs, ETFs, PE funds, securitisation and so on - the IFSC is already a leading player in servicing this area and is very well positioned to benefit from the expected growth.'

The business model and operational model changes that banks will need to undertake to remain relevant in the changed capital market landscape will create another opportunity for the IFSC. 'Shared services centres are another huge area of opportunity in the new equilibrium that the survey predicts by 2020. Providers of capital will need to streamline their operating models to become more efficient and more profitable. Ireland can harness its expertise in IT and fintech to help financial institutions to streamline their operations. Banks may also look to outsource parts of their operations, for example, in the area of anti-money laundering and KYC (know your customer). Ireland has the IT expertise to create solutions that will allow financial institutions to outsource non-core processes and streamline their operating models.'

Another huge area of opportunity for Ireland is data analytics, or Big Data, and McDonnell says this, along with Ireland's IT expertise, will be the two biggest advantages in succeeding in the evolving capital markets environment and in improving banking business and operating models. 'Ireland has a superb talent in traditional banking and if we can lever our world-class technology expertise we can lead the way in this increasingly important area.' In the context of the European Union's Capital Markets Union (CMU) initiative, this marrying of banking and Big Data talent could create huge success. 'If CMU creates a vibrant pan European capital market, the next big thing that businesses will be asking themselves is "How do we attract business? How do we attract clients?" - The answer to these questions is Big Data. Companies that can harness data analytics and use it effectively will have a big competitive advantage.'