Handbook of Key Global Financial Markets, Institutions, and Infrastructure

• Publisher: Academic Press
• Year: 2012
• ISBN:
  9780124058989
• Topic: Economics
• Subtopic: Banks & Banking
• Index: Economics

Understanding twenty-first century global financial integration requires a two-part background. The Handbook of Key Global Financial Markets, Institutions, and Infrastructure begins its description of how we created a financially-intergrated world by first examining the history of financial globalization, from Roman practices and Ottoman finance to Chinese standards, the beginnings of corporate practices, and the advent of efforts to safeguard financial stability. It then describes the architecture itself by analyzing its parts, such as markets, institutions, and infrastructure. The contributions of sovereign funds, auditing regulation, loan markets, property rights, compensation practices, Islamic finance, and others to the global architecture are closely examined. For those seeking substantial, authoritative descriptions and summaries, this volume will replace books, journals, and other information sources with a single, easy-to-use reference work.

• Substantial articles by top scholars sets this volume apart from other information sources
• Diverse international perspectives result in new opportunities for analysis and research
• Rapidly developing subjects will interest readers well into the future

Volume 1

Editor-in-Chief

Gerard Caprio Jr.

Williams College, Williamstown, MA, USA

Associate Editors

Thorsten Beck

CentER and European Banking Center, Tilburg University, The Netherlands and CEPR, London, UK

Charles W. Calomiris

Columbia University, New York, NY, USA

Takeo Hoshi

School of International Relations and Pacific Studies, University of California, San Diego, CA, USA

Peter J. Montiel

Williams College, Williamstown, MA, USA

Garry J. Schinasi

Independent Advisor, Global Financial Stability, Washington, DC, USA

Section Editors for this volume

Section Editors for this volume

Douglas W. Arner

University of Hong Kong, Pokfulam, Hong Kong, SAR, China

Thorsten Beck

CentER and European Banking Center, Tilburg University, The Netherlands and CEPR, London, UK

Charles W. Calomiris

Columbia University, New York, NY, USA

Larry Neal

University of Illinois at Urbana-Champaign, Urbana, IL, USA

Nicolas Veron

Bruegel, Brussels, Belgium; and Peterson Institute for International Economics, Washington, DC, USA

Section Editors for related volumes

Philippe Bacchetta

University of Lausanne, Lausanne, Switzerland

James R. Barth

Aurburn University, Auburn, AL, USA and Milken Institute, Los Angeles, CA, USA

Thorsten Beck

CentER and European Banking Center, Tilburg University, The Netherlands and CEPR, London, UK

Stijn Claessens

International Monetary Fund, Washington DC, USA, University of Amsterdam, Amsterdam, The Netherlands, and CEPR, London, UK

Takeo Hoshi

School of International Relations and Pacific Studies, University of California, San Diego, CA, USA

Philip R. Lane

Trinity College Dublin, Dublin, Ireland

David G. Mayes

University of Auckland, Auckland, New Zealand

Atif R. Mian

Haas School of Business, University of California at Berkeley, Berkeley, CA, USA

Sergio L. Schmukler

World Bank, Washington, DC, USA

Michael Taylor

Adviser to the Governor, Central Bank of Bahrain, Manama, Bahrain

Preface

Although finance has been a cross-border business for centuries, there are many senses in which the world is becoming more globalized financially. To be sure, early banks carried out transactions to settle imbalances at international trade fairs in the Middle Ages, but the vast swath of society at that time lived untouched by or unconcerned with the financial world outside their village and certainly outside their region. Their world abounded with risks, yet these risks were largely of the type from which their ability to achieve any kind of protection was limited. Indeed, risk was a term that if understood at all would have very different connotations than it does today. Probabilistic thinking was not yet known, and fate or ‘God’s will’ was the more operative expression.

Finance, even in basic settings, performs the same functions throughout history as those identified by Levine (1997): mobilize savings, allocate resources, monitor investments, provide payments, and mitigate risk.¹ However, both the demand for and the ability of financial systems to provide these services have expanded and evolved in countless directions. Just as money long ago ceased to entail the burden of transporting precious metals (notwithstanding the desire of Congressman Ron Paul, a US presidential candidate as of this writing, to do away with central banks and return to a world of money backed by gold), more recently even international payments are made by electronic transfer. Residents of the world can now travel to other countries carrying only a piece of plastic to make payments, and likely soon will be dispensing with plastic, using a chip built into their cell phones. Many workers in middle-income countries today, and most in higher income economies, have bank accounts or more likely mutual or pension funds with investments outside their home country, though some may not be well aware of their exposure. Just as pensions deal with a risk previously unrecognized – the period after the working stage of life used to be death, and later in time the exceptionally brief interlude of care was provided by families – many risks covered by financial instruments today are relatively recent in being perceived, let alone addressed by finance.

The many advances in financial services come with a cost, including the cost of crises. Certainly, crises have been important as long as modern banks have existed – from the failure of banks in northern Italy (including the Ricciardi, the Bardi, and the Peruzzi banks) to the ongoing Euro crisis and the impairment of bank balance sheets that of this writing still is officially minimized. The persistence of crises – which Kindleberger once dubbed ‘A Hardy Perennial’ – might seem puzzling. Why do societies not learn and protect themselves and/or regulate the financial system better? The answer of course is that finance arises due to information asymmetries, without which there would not only be no crises but also no return for financial intermediaries.

Notwithstanding these many constants, the shape of finance has changed markedly in recent decades since the era of extensive domestic and international controls in the aftermath of World War II, when much of the world lived in a period in which the returns on many assets were controlled, instruments not allowed, credit guidance was directly or subtly provided by government, and, in socialist economies, mandated almost entirely by the hand of the state. Now for the first time in history, the residents of virtually all countries can participate in the global financial system, though many, especially in the lowest income countries, remain locally based. But controls have been lifted, capital flows freely across many borders, and financial innovations occur at a rapid pace, even if not all of these innovations contribute to society’s welfare. And efforts to control the financial system understandably advance as the industry itself changes.

It is into this situation in the development of global finance that the present effort comes. Three volumes – the Handbook of Key Global Financial Markets, Institutions, and Infrastructure; the Handbook of Safeguarding Global Financial Stability: Political, Social, Cultural, and Economic Theories and Models; and The Evidence and Impact of Financial Globalization – have been put together online and in print to advance our understanding of the origins, requirements, and consequences of financial globalization. The chapters herein share a common overarching goal: to describe the many issues related to financial globalization. The first volume looks at the historical roots of financial globalization, as this is not the first time financial systems have trod this path, and likely will not be the last. Given the technology of today, it then turns to look at the ‘plumbing’ that underlies a healthy financial system, both at the national and global level, including that which supports the ever-changing panoply of new instruments. Financial infrastructure shapes financial systems as surely as any regulator. Thus, some developing countries are at present just seeing the birth of a private bond market, which often is the last part of the system to develop as a result of the demands that it places on the legal system and on information.

The second volume examines the political economy of finance. Since its inception, finance has been intimately linked with government. Just as goldsmiths and other early bankers were discovering that not all depositors demanded their money back every day, so that some funds could be profitably deployed, kings were desperately seeking funding for soaring armament expenditures, and a relationship that continues to this day was born. Once the sovereign’s security was assured, other governmental functions needed finance, as did the many projects, useful and not, of the sovereign’s supporters. Bankers’ financial clout quickly translated to political power, and the difficulty of getting financial regulation that works, in addition to being linked to the difficulty of the job, has also been linked to the influence of the industry. Thus, the volume also turns to a discussion of what is meant by financial stability, of attempts to safeguard the stability of the global financial system, and of the many international bodies that are involved in the effort and how they might contribute to this goal. Finally, this volume also looks at how various theories of financial globalization evolved with the developments in the markets. Interestingly, debates on flexible versus fixed exchange rates during the 1960s completely missed the story of what happened once the Bretton Woods system ended.² As tumultuous as the ‘real world’ has been with more integrated financial markets and flexible exchange rates, one senses that the theoretical literature is evolving significantly as well.

Last, but certainly not least, is the final volume that looks at the expanding literature on empirical research regarding the forces behind and the impact of financial globalization, how it has affected policies, and the crises associated with globalized finance, which are transmitted through many channels. The scope of the issues covered in this volume alone testifies to the complexity of the phenomenon.

In this investigation of financial globalization, it is worthwhile to remember that progress has not been linear. It was less than 90 years ago that...