Global financial system

"Global finance" redirects here. For a financial magazine, see Global Finance (magazine).

Number of countries having a banking crisis in each year since 1800. This is based on This time is different: Eight centuries of financial folly, which covers only 70 countries. The general upward trend might be attributed to many factors. One of these is a gradual increase in the percent of people who receive money for their labor. This analysis is similar to Figure 10.1 in Reinhart and Rogoff (2009). For more details see the help file for "bankingCrises" in the Ecdat package available from the Comprehensive R Archive Network (CRAN).

Definition

A brief definition of the global financial system (GFS) is: The financial system consisting of institutions, their customers, and financial regulators that act on a global level.

The WHO defines it as "...various official and legal arrangements that govern international financial flows in the form of loan investment, payments for goods and services, interest and profit remittances. The main elements are the surveillance and monitoring of economic and financial stability, and provision of multilateral finance to countries with balance of payments difficulties. The organization at the centre of the system is the International Monetary Fund (IMF), which has the mandate to ensure its effective running.".

The Financial Times lexicon defines it as:"..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 term global is often used synonymously with the terms "international" or "multinational". Economists do not have a standard definition for a global versus a multinational company.

Main players

1. Global or international systemically important financial institutions, e.g., banks, hedge funds whose failure may cause a global financial crisis, the International Monetary Fund and the Bank for International Settlements,
2. Customers of the global financial system, which includemultinational corporations, as well as countries, with their economies and government entities, e.g., the central banks of the G20 major economies, finance ministries EU, NAFTA, OPEC, and others.etc.
3. Regulators of the global financial system, many of which play dual roles, in that they are financial organizations at the same time. These include the above mentioned International Monetary Fund and Bank for International Settlements,particularly its “Global Economy Meeting (GEM), in which all systemic emerging economies’ Central Bank governors are fully participating, has become the prime group for global governance among central banks” per Jean-Claude Trichet, President of the European Central Bank., as well as the financial regulators of the U.S.A (the US agency quintet of Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Federal Reserve Board, Securities and Exchange Commission), Europe (European Central Bank) and the Bank of China, besides others.

Deficiencies, reform and regulation of the GFS have been hotly discussed in recent years.

History

The history of financial institutions must be differentiated from economic history and history of money. In Europe, the GFS may have started with the first commodities exchange, the Bruges Bourse in 1309 and the first financiers and banks in the 15th–17th centuries in central and western Europe. The first global financiers were the Fuggers (1487) in Germany; the first stock company in England (Russia Company 1553); the first foreign exchange market (The Royal Exchange 1566, England); the first stock exchange (the Amsterdam Stock Exchange 1602).

Milestones in the history of global financial system are the Gold Standard (1871–1932), the founding of the International Monetary Fund (IMF) and the World Bank at Bretton Woods 1944, the abandonment of the US dollar as "reserve currency" in 1971, the abandonment of fixed exchange rates in 1973 and China pegging the yuan to the US Dollar in 1994, which led to their accumulation of more than $ 1 trillion of international reserves.

Actors

A division of actors, as attempted below, is a mere approximation, since by their nature, multinational actors are networked, their multiple functions often overlap with chief executives occupying concomitant appointments in numerous organizations, or revolving from private to public employment, ripe with conflict of interest.

Global financial institutions

Main article: International financial institutions

The most prominent public international financial institutions are:

• The International Monetary Fund keeps tabs of international balance of payments accounts of member states. The IMF acts as a lender of last resort for members in financial distress, e.g., currency crisis, problems meeting balance of payment when in deficit and debt default. Membership is based on quotas, or the amount of money a country provides to the fund relative to the size of its role in the international trading system.
• The World Bank aims to provide funding, take up credit risk or offer favorable terms to development projects mostly in developing countries that couldn't be obtained by the private sector. The other multilateral development banks and other international financial institutions also play specific regional or functional roles.
• The World Trade Organization settles trade disputes and negotiates international trade agreements in its rounds of talks (currently the Doha Round).
• The Bank for International Settlements (BIS) in Basel Switzerland, which is both a bank as well as an intergovernmental organization for central banks worldwide. It has numerous subsidiary bodies, most importantly the Basel Committee on Banking Supervision, the Financial Stability Board, and the BIS Joint forum on financial conglomerates. It publishes global bond market capitalization data.
• The World Economic Forum, a Swiss "non-profit" foundation based in Geneva meeting annually in Davos.

The most prominent private international financial institutions are:

• The Institute of International Finance (IIF), a trade organization of the world's largest commercial banks and investment banks.
• The World Federation of Exchanges (WFE) which publishes global stock capitalization information in annual reports.
• The Global Financial Markets Association(GFMA), which consists of European, Asian and North American financial market associations: The Association for Financial Markets in Europe (AFME) in London and Brussels, the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong, and the Securities Industry and Financial Markets Association (SIFMA) in New York and Washington DC.

These global financial institutions are investment banks, Insurance companies, or commercial banks, active in the stock-, bond-, foreign exchange-, derivatives- and commodities-markets, investing private equityincluding mortgages in hedge funds and pension funds, mutual funds, sovereign wealth funds etc. International lobbying firms play a role in international financial systems, as they increasingly develop cross-border lobbying arms to influence international negotiations. For example, Podesta Group, a Washington lobbying firm, founded "Global Solutions" to influence multilateral free trade agreements, such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), and any other issues "at the intersection of trade, economics, politics and diplomacy".

Governments

Governments act in various capacities within the GFS, traditionally primarily through their finance ministries. They pass the laws to regulate financial markets, set the tax burden for private sector, e.g., banks, funds and exchanges. At the same time governments also participate in global financial markets through discretionary spending and borrowing. They are closely tied to, though in most countries independent of central banks that issue government debt, set interest rates and deposit requirements, and intervene in the foreign exchange market.

Regional institutions

Examples are:

• Commonwealth of Independent States (CIS)
• Mercosur
• North American Free Trade Agreement (NAFTA)
• Eurozone with its
  • ECB or European Central Bank
  • EU Department of Internal Market and Services, led by the European Commissioner for Internal Market and Services, which has produced an expert review of Financial Regulation, the Liiskanen report, in 10/2012.
  • EBA or European Banking Authority, which replaced the CEBS or Committee of European Banking Supervisors
  • The European Shadow Financial Regulatory Committee (ESFRC)

Academic institutions

Academic institutions play a special role in the GFS, as they educate the professionals working in the GFS: economists, executive officers and financial analysts, and drive the research. The Harvard Business School, for example advertises that its "Executive Education prepares executives from all over the world for new levels of leadership". Unusually many central bank chiefs are Harvard educated, such as Mario Draghi of the European Central Bank, Mervyn King und Charlie Bean Deputy Governor at the Bank of England, Stanley Fischer Governor of the Bank of Israel, John de Gregorio in Chile, Athanasios Orphanides in Cyprus, Phillip Lowe, Deputy Governor of the Reserve Bank of Australia and Olivier Blanchard of the IMF, and meet every 2 months in the 18-men group of the Economic Consultative Committee of the above mentioned Bank for International Settlementsin Basel. At the same time, academic institutions are both investors of their revenues, including incomes from international patents or other international business operations, and creditors in the global financial financial system.

Perspectives

There are three primary approaches to viewing and understanding the global financial system.

The liberal view holds that the exchange of currencies should be determined not by state institutions but instead individual players at a market level. This view has been labelled as the Washington Consensus.

The social democratic view which advocates the tempering of market mechanisms, and instituting economic safeguards in an attempt to ensure financial stability and redistribution. Examples include slowing down the rate of financial transactions, or enforcing regulations on the behavior of private firms.

NeoMarxists are holding the view that the political North (for definition see global North–South divide) abuses the financial system to exercise control of developing countries' economies promoting inequality between state players.

Criticism, discussions and reform

Among the many critics of the GFS are:

• The ATTAC network
• Bretton Woods Project
• Tax Justice Network
• George Soros
• Joseph Stiglitz, Columbia Business School, New York, NY.
• Paul Krugman, MIT, MA.
• Simon Johnson
• Ann Pettifor
• Michel Barnier EU commissioner
• United Nations Conference on Trade and Development(UNCTAD)
• The Pontifical Council for Justice and Peace “Towards Reforming the International Financial and Monetary Systems in the context of global public authority” released 10/24/2011 as the Vatican's Plan to Stabilize the Global Financial System

See also

• G20
• Global governance
• Globalization
• Global economy
• Group of Thirty
• International finance
• International economics which has a section called "International finance"
• Multinational corporation
• List of finance topics
• List of international trade topics

References

Bibliography

• Merton, Robert .; Tufano, Peter (1999). "The Global Financial System Project." In The Intellectual Venture Capitalist: John H. McArthur and the Work of the Harvard Business School, 1980-1995, edited by T. K. McCraw, and J. L. Cruikshank. Boston: Harvard Business School Press. 
• Reinhart, Carmen; Rogoff, Rogoff (2009). This time is different: Eight centuries of financial folly. Princeton U. Pr. ISBN 978-0-691-15264-6.