Global Financial System

10 Key excerpts on "Global Financial System"

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  eBook - ePub

  International Finance

  For Non-Financial Managers

  • Dora Hancock(Author)
  • 2018(Publication Date)
  • Kogan Page

    (Publisher)

  02

  The institutions and participants that make up the Global Financial System

  At the end of this chapter you will be able to:

  • identify and discuss the participants in the Global Financial System, particularly the role of central banks;
  • discuss the need for banking regulation and supervision and the difficulties faced by legislators;
  • briefly describe what happened in the global financial crisis.

  Introduction

  The Financial Times defines the Global Financial System as:

  This is the interplay of financial companies, regulators and institutions operating on a supranational level. The Global Financial System can be divided into regulated entities (international banks and insurance companies), regulators, supervisors and institutions like the European Central Bank or the International Monetary Fund. The system also includes the lightly regulated or non-regulated bodies – this is known as the ‘shadow banking’ system. Mainly, this covers hedge funds, private equity and bank-sponsored entities such as off-balance-sheet vehicles that banks use to invest in the financial markets.

  The Global Financial System has grown over recent decades to meet the needs initially of international trade, and today to meet the complex needs of companies, investors, governments, banks and everyone seeking to borrow or invest money or to use a currency other than their domestic currency.

  One way or another almost all of us have some contact with the Global Financial System. Holidaymakers will be affected by changes in exchange rates, finding their holiday more or less expensive than in previous years. Oil and fuel are priced in dollars so the fall in the value of sterling following the Brexit vote led to an increase in fuel prices across the UK. In practice, there are also links between the interest rates that different countries charge and this impacts on the cost of borrowing for most of us.

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  Modern Exchange-rate Regimes, Stabilisation Programmes and Co-ordination of Macroeconomic Policies

  Recent Experiences of Selected Developing Latin American Economies

  • Maria Luiza Falcão Silva(Author)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  6 The International Financial System

  Introduction

  The focus of this chapter is the international financial system which comprises a wide range of central banks, domestic public banks, domestic and transnational private banks, international organisations (International Monetary Fund - IMF, and the Bank of International Settlements- BIS) that, in one way or another, are involved in the process of issuing national currencies, issuing world money, and negotiating agreements and enforcing the regulations of international banking.

  There is a wide recognition that the globalisation of finance has been growing so strongly over the last two decades that international trade payments have now become only a small part of total international payments.1

  Since the early 1960s Triffin’s (1964) analysis of the gold standard has suggested that the international financial system was, and still is, not neutral. The analysis developed in Chapter 2 of this book supports the argument of the existence of systemic asymmetries embodied in the adjustment mechanism inherent in the global economy between developed and developing economies.

  It has been also pointed out that the modern global economy has become dominated by huge sums of highly mobile capital floating around the world (Guttmann, 1994, p.372). This requires changes in how analysts should look at the new economic reality. Kregel (1996) and others have suggested that conventional wisdom now faces a conundrum since what it has hitherto considered to be the normal approach to the effects of globalisation, the study of its impact upon the real sector of the economy, is no longer the most important aspect, as I have pointed out in Chapter 5 .

  It can be observed that the international capital market is in operation 24 hours a day, with service providers from developed and developing countries operating in that market on a more or less continuous basis. Kregel (1996) notes, however, that similar conditions are not yet commonplace for manufacturing firms, and we cannot talk about a “truly global market for manufactured goods. Nor is there truly global production in the sense that manufacturing is indifferent to the location of the production process...” (Kregel, 1996, p.3).

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  eBook - ePub

  An Introduction to Financial Markets and Institutions

  • Maureen Burton, Reynold F. Nesiba, Bruce Brown(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Part 7 The International Financial System

  1. The International Financial System
  2. Monetary Policy in a Globalized Financial System

  Passage contains an image

  Chapter Twenty-Five 25 The International Financial System

  DOI: 10.4324/9781315706405-32

  The dollar is our currency, but your problem. —John Connolly, U.S. treasury secretary to his European counterparts, 1971

  Learning Objectives

  After reading this chapter, you should know:

  • How and why the international financial system is changing
  • The role of the international financial system under the Bretton Woods Accord
  • How the present managed floating exchange rate system works
  • The role the dollar plays in the international financial system
  • The birth and growing importance of the euro
  • The roles of the International Monetary Fund, the World Bank, and the Bank for International Settlements

  A Dramatic Metamorphosis

  The international financial system consists of the numerous rules, customs, instruments, facilities, markets, and organizations that enable international payments to be made and funds to flow across borders. In recent years, the international financial system has experienced tremendous growth. New financial instruments have been created, and the volume of transactions has exploded. The dramatic metamorphosis of international financial markets is driven by technological changes, the growth in world trade, and the breakdown of barriers to financial (capital) flows.

  International Financial System The numerous rules, customs, instruments, facilities, markets, and organizations that enable international payments to be made and funds to flow across borders.

  From an economic standpoint, developments in the international financial system have made financial markets more efficient because funds (financial capital) can more easily flow around the world to wherever they will earn the highest return. Over time, as resources are allocated more efficiently, both developed and developing countries should experience increased economic growth. As a result, living standards around the world should rise more than they otherwise would have.

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  Economy/Society

  Markets, Meanings, and Social Structure

  • Bruce G. Carruthers, Sarah L. Babb(Authors)
  • 2012(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  Banking and finance have both real-world importance and sociological relevance. Financial markets affect our lives at multiple levels—from the size of our retirement accounts to our prospects for finding jobs to whether we are able to obtain home mortgages. National financial systems aren’t all alike; in general they are organized around banks or capital markets (although modern financial systems almost always involve some of both). They perform the same functions (e.g., intermediation, saving, investment, risk management) but in different ways that can make national economies look very different.

  Individuals’ experience of financial markets depends not only on what country they live in but also on their social standing within that country. A person who can obtain credit commands purchasing power and benefits from all the advantages that come with it; such a person can make productive investments and enjoy higher levels of consumption. This privilege is not distributed evenly across the members of a society: Some people can obtain credit and others cannot. The crisis of 2008 brought into sharp relief a number of trends and vulnerabilities that allowed a downturn in the U.S. housing market to become a worldwide problem. That high level of interconnectedness is one of the hallmarks of a globalized economy: Events in one place can reverberate around the world. That crisis came after a long period in which the United States had deliberately dismantled much of the regulatory machinery it had put in place in response to a previous crisis (the Great Depression). For a time, this seemed like a good idea. Now, even some of the biggest supporters of deregulation during the 1980s and 1990s have had second thoughts (e.g., Alan Greenspan). But whether one thinks deregulation is a good idea or a bad one, it is clear that government plays a central and constitutive role in a country’s financial system.

  Notes

  1. A loan is said to be secured if the lender has the right to seize some asset belonging to the borrower in the event the borrower defaults on the loan. Such an asset is called the collateral for the loan. A loan secured by real estate is commonly termed a mortgage.

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  Non-Knowledge Risk and Bank-Company Management

  The Role of Intangibles in Rating Models

  • Vincenzo Formisano(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1 The Context: The Financial System

  1.1   The viable financial system

  The functioning of the financial system, given the nature of the activity, takes place in a context of rules and controls. The raison d’être of the financial system is linked to the performance of certain functions that are critical, due to the way a modern economy of monetary exchange runs. These functions satisfy the specific needs of the economic system, thus allowing the development of production and distribution processes.

  The financial system realizes, through the production and supply of financial services, three fundamental processes of the functioning of a modern economy: 1.  Regulation of trade. 2.  The accumulation of savings and investment financing. 3.  Risk management. A system which bases its functionality on the specialization and diversity of positions must have highly developed and efficient mechanisms for exchange and regulation of trade.

  One of the factors behind the functionality of trade is the system of payments, and therefore the adequacy of monetary tools through which commercial transactions can be adjusted. One can understand the progress which has been possible, moving from a barter economy to a monetary one in which money is accepted as currency trading.

  Currency trading is able to measure the value of goods traded and is widely accepted as a settlement of a transaction. The theme of this evolution has been the search for new means of payment that can reduce transaction costs and make balancing less risky.

  The accumulation and allocation of savings constitute two fundamental aspects of the financial system. They assume that the system creates the most favorable conditions in order to make correct decisions (Barile, 2009b), pertaining to:

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  Democratizing Global Governance

  • E. Aksu, J. Camilleri, E. Aksu, J. Camilleri(Authors)
  • 2002(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  In this context, the ‘simplistic complaint that the financial sector produces nothing by itself contains an element of truth’. 2 As Greenspan himself has clearly acknowledged, ‘a global financial sys- tem, of course, is not an end in itself. It is the institutional structure that has developed over the centuries to facilitate the production of goods and services’. 3 Financial institutions and transactions must, therefore, be judged by the contri- bution they make to growth, redistribution and employment in the productive economy. As John Eatwell and Lance Taylor aptly put it, ‘there is no point in hav- ing a financial sector that is in some senses “efficient” on its own terms if the result is a less efficient real economy’. 4 Yet this has been the prevailing trend, with growth rates in every G7 economy in the 1980s and 1990s having slowed to around two-thirds of the corresponding rates in the 1960s. 5 If developing countries Renewing the Governance of the Global Economy 147 are taken as a whole, their average growth rate has experienced a comparable decline during this period. More importantly perhaps, four out of seven rapidly industrializing East and South-east Asian economies exhibited the same trend in their per capita growth rates even before the 1997–98 financial crisis. In adopting a human development framework, it may not be enough, how- ever, to re-subordinate the financial system to the real economy. At least as important is the identification of concrete measures whereby macroeconomic and microeconomic policy can be effectively tailored to social and human devel- opment policy objectives and strategies. In practical terms, this will require that a different approach to economic and political governance, distinct from the dominant neo-liberal model, should apply at all levels of governance – local, national, regional and global.

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  From Walmart to Al Qaeda

  An Interdisciplinary Approach to Globalization

  • David Murillo(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  4 Financial globalization If globalization has become a synonym for capitalism to the extent that globalization is converted into a province of the world economy, in recent decades the economy itself must be seen as a province of capital flows and the Global Financial System. The key concept that accounts for this alteration is that of financialization: the profound transformation of economic structures through the progressive deployment of an increasingly autonomous, globalized and deregulated financial system. We must therefore conduct an in-depth examination of this concept of financialization and its scope. We will also need to understand the economic changes associated with financialization and its impact on social and political structures, and we must do so without losing sight of the current crisis and its relationship with the expansion of the Global Financial System. 4.1 Macroeconomic imbalances and financial imbalances Economics provides a quite descriptive account of the relationship between the theoretical construct we call the current account deficit and the behaviour of states. Stated simply, the current account balance is just one of the three balances that make up the balance of payments, 1 albeit the main one, alongside the capital account and financial account balances. It represents the sum of the exchange of goods and merchandise, services and current transfers that a given country makes with the rest of the world. When a country has a current account deficit, it needs money from abroad to offset the difference with the savings generated. This is what happened over the period 1999–2007 in many of the countries that are still now struggling to overcome the crisis. 2 For years and years, countries such as the US, Spain, the UK and Italy gave up saving and embarked on the mass consumerism intrinsic to globalization, financing themselves with cheap and seemingly infinite loaned money coming from abroad

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  Available until 25 Jan |Learn more

  International Political Economy in the 21st Century

  Contemporary Issues and Analyses

  • Roy Smith, Imad El-Anis, Christopher Farrands(Authors)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Thus three remaining accounting firms (which each have a couple of hundred subsidiaries operating in every country) dominate world finance and have enormous power. That power is as standard setters, educators and regulators as much as in their auditing and accounting roles. The Global Financial System after the financial crisis By 2015, the global system had returned to roughly the level of production and the volume of financial flows before the crisis began in 2007. Of course, years of investment, saving and spending had been lost. But after a modest and sometimes hesitant recovery, where does the world financial system stand? Global growth never stopped, thanks to the contribution of emerging markets. But despite the role of debt levels as one cause of the 2008 crisis, levels of debt have continued to rise. That includes public debt, the external debt of countries, but also individual and corporate debt. Today, four main issues stand out as significant in shaping the likely future trajectories of the Global Financial System. These are: (a) the rise and rise of China as a powerful influence, including the difficulties of managing the Chinese currency and its global consequences; (b) the difficulties and growth patterns of emerging markets and their greater significance for world finance and economic activity; (c) the relatively sluggish performance of many of the most developed economies; and (d) the impact of quantitative easing on world markets as well as on developed economy domestic markets and government and central bank policies. This section will also ask how the main theories explored throughout this book might explain some of the issues and problems that arise when one tries to understand how the Global Financial System has behaved since 2010. China’s increasing importance in global finance is not simply a matter of size or volume of transactions

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  The United States in the World Economy

  Making Sense of Globalization

  • Anthony Elson(Author)
  • 2019(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  asset that provides a reliable store of value for international investors and a critical benchmark for a variety of financial operations. All five of the descriptive characteristics noted above are intimately related and have reinforced the central role the United States has played in financial globalization. In addition, perhaps more than in the case of trade, the growth of the domestic financial system within the United States and financial globalization have been mutually reinforcing. The soundness of the American financial system has attracted capital inflows from abroad as financial globalization has expanded because of the breadth and depth of its financial markets, whereas the US financial system has expanded in response to the external demand for its services and the relative safety of its investment outlets.

  The pre-eminent role that the US dollar plays in the international financial system and the role that the US government and some forms of private debt play as global safe assets are integral to the dominant position that the United States has maintained in financial globalization. As noted in earlier chapters, the dominant role of the United States in the international economic and financial system was institutionalized with the creation of the Bretton Woods System under which the US dollar was pegged to gold as the anchor of the system, while other currencies were pegged on an adjustable basis to the US dollar. In one sense, this arrangement simply reflected the fact that the United States was the largest holder of gold reserves, but in a more important sense it reflected that the United States was the largest economy in the system with less war-time destruction than any other major economy. Over time, the central role of the US dollar has been maintained even though other currencies such as the UK pound, the euro and the Japanese yen have also served as reserve currencies. Today, around 120 countries use the US dollar as an anchor or reference currency; this is more than double the number of countries that use the euro, which is the next most commonly used anchor currency.4 In addition, a further 13 countries use US dollars as their domestic currency or maintain a currency board in which a local currency is pegged to the US dollar on a permanent basis at a fixed exchange rate. As one example of the latter arrangement, Panama has a domestic currency (the balboa) that has been pegged to the dollar at a 1 for 1 conversion rate since 1904; the number of balboas in circulation is determined by the inflows and outflows of US dollars, which also circulate as legal tender. The National Bank of Panama

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  Financial Globalization

  Growth, Integration, Innovation and Crisis

  • D. Das(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Macroeconomic Ramifications of Financial Globalization 241 liberalization and globalization of the financial sector, its cautious and well-planned adoption under appropriate domestic economic and financial conditions can certainly be a productive, growth-supporting proposition. When financial globalization is adopted incrementally and sequentially as well as in association with the complementary range of domestic policies and institutional reforms – during a period when the reserve position of the financially globalizing economy is sound – it can be a legitimate instrument of enhancing stability and growth. In addition, enormous long-term benefits can accrue from financial globalization. It renders the domestic financial system more competi- tive, transparent and efficient than one that develops in a controlled and restriction-ridden environment. The other side of this assertion is that capital account liberalization and financial integration with the global capital markets need never be a priority policy objective for all the coun- tries. Low-income developing economies, having a poorly developed domestic financial sector, pursuing macroeconomic policies of ques- tionable soundness and having small foreign exchange reserves, need not consider it until their macroeconomic and financial circumstances change dramatically. 6. Evolving global macro-financial dynamics of surpluses and deficits There is an entirely different premise for uphill capital flows (Section 2.2). Since 1999, developing economies as a whole stopped run- ning current account deficits. It is likely that the Asian financial crisis of 1997–8 had inspired this trend. Since the early 2000s, an interna- tional monetary system spontaneously evolved in which surplus and deficit economies were tied together in a relationship of co-dependence. China, Germany and Japan were, and continue to be, three large surplus economies.

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