Global financial system

The global financial system (GFS) is a financial system consisting of institutions and regulations that act on the international level, as opposed to those that act on a national or regional level. The main players are the global institutions, such as International Monetary Fund and Bank for International Settlements, national agencies and government departments, e.g., central banks and finance ministries, and private institutions acting on the global scale, e.g., banks and hedge funds.

Deficiencies and reform 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, it may have started with the first commodity exchange, the Bruges Bourse in 1309 and the first financiers and banks in the 1400–1600s in central and western Europe. The first global financiers 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 financial institutions are the Gold Standard (1871–1932), the founding of International Monetary Fund (IMF), World Bank at Bretton Woods, and the abolishment of fixed exchange rates in 1973.

Institutions

International institutions

The most prominent international institutions are the IMF, the World Bank and the WTO:

• The International Monetary Fund (http://www.imf.org/) keeps account 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 (http://www.worldbank.org/) aims to provide funding, take up credit risk or offer favourable 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 (http://www.wto.org/) settles trade disputes and negotiates international trade agreements in its rounds of talks (currently the Doha Round)

Government institutions

Governments act in various ways as actors in the GFS: they pass the laws and regulations for financial markets and set the tax burden for private players, e.g., banks, funds and exchanges. They also participate actively through discretionary spending. They are closely tied (though in most countries independent of) to central banks that issue government debt, set interest rates and deposit requirements, and intervene in the foreign exchange market.

Private participants

Players acting in the stock-, bond-, foreign exchange-, derivatives- and commodities-markets and investment banking are

• Commercial banks
• Pension funds
• Hedge funds and Private Equity

Legal frameworks and treatises

• Eurozone
• North American Free Trade Agreement (NAFTA)
• Mercosur
• Commonwealth of Independent States (CIS)

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. This view is challenged by a social democratic front 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 behaviour of private firms. Outside of this contention of authority and the individual, neoMarxists are highly critical of the modern financial system in that it promotes inequality between state players, particularly holding the view that the political North abuse the financial system to exercise control of developing countries' economies.

Criticism, discussions and reform

Among the many critics of the GFS are:

• The ATTAC network
• Joseph Stiglitz
• George Soros
• Stefan G. Dunbar

• Pope Benedict has urged a major overhaul of the global financial system.

See also

• Trade bloc
• Finance
• Financial economics
• Globalization
• List of finance topics
• List of international trade topics