the global financial system is the legal framework of the world, institutions, and formal and informal economic actors that together facilitate the flow of international financial capital for investment and trade finance purposes. Since emerging in the late nineteenth century during the first modern wave of economic globalization, its evolution was marked by the formation of central banks, multilateral agreements, and intergovernmental organizations aimed at enhancing the transparency, regulation and effectiveness of international markets. In the late 1800s, world migration and communications technologies facilitated unprecedented growth in international trade and investment. At the beginning of World War I, trading contracted as a foreign exchange market became paralyzed by money market liquidity. Countries seek to defend themselves from external shocks with protectionist and trade policies that were practically discontinued in 1933, exacerbated the effects of the Great Depression globally until a series of reciprocal trade agreements gradually reduced tariffs around the world. Attempts to change the international monetary system after World War II increased exchange rate stability, driving record growth in global finance.
A series of currency devaluations and oil crises in the 1970s caused most countries to float their currencies. The world economy became increasingly integrated financially in the 1980s and 1990s due to capital account liberalization and financial deregulation. A series of financial crises in Europe, Asia, and Latin America are followed by infectious effects due to greater exposure to volatile capital flows. The global financial crisis, which originated in the United States in 2007, is rapidly spreading among other countries and is recognized as a catalyst for the Great Recession worldwide. The market adjustment of Greece's non-compliance with its monetary union in 2009 triggered a debt crisis of European countries known as the eurozone crisis.
A country's decision to operate an open economy and globalization of its financial capital carries with it monetary implications captured by the balance of payments. It also makes exposure to risks in international finance, such as political decline, regulatory change, foreign exchange control, and legal uncertainty for property and investment. Both individuals and groups can participate in the global financial system. Consumers and international businesses engage in consumption, production and investment. Governments and intergovernmental bodies act as suppliers of international trade, economic development, and crisis management. The regulatory body establishes financial and legal procedures, while an independent body facilitates industry oversight. Research institutes and other associations analyze data, publish reports and policy summaries, and organize public discourse on global financial affairs.
While the global financial system is creeping toward greater stability, governments must deal with different regional or national needs. Some countries try to sequentially stop unconventional monetary policies installed to foster recovery, while others extend their scope and scale. Developing market policymakers face the challenges of precision because they must carefully institutionalize sustainable macroeconomic policies during remarkable market sensitivity without provoking investors to withdraw their capital to stronger markets. The Nation's inability to align interests and reach international consensus on matters such as banking regulation has perpetuated the risk of a future global financial disaster.
Video Global financial system
History of international finance architecture
The emergence of financial globalization: 1870-1914
The world underwent major changes in the late nineteenth century that created an environment that supported the upgrading and development of international financial centers. Among the changes are the unprecedented growth of capital flows and the rapid integration of financial centers, and faster communication. Before 1870, London and Paris existed as the only leading financial center in the world. Soon afterwards, Berlin and New York grew into major centers providing financial services to their national economy. A number of smaller international financial centers became important as they found niche markets, such as Amsterdam, Brussels, Zurich, and Geneva. London remained a leading international financial center in the four decades leading up to World War I.
The first modern wave of economic globalization began during the period 1870-1914, characterized by expansion of transport, record levels of migration, increased communications, trade expansion, and growth in capital transfers. During the mid-nineteenth century, the passport system in Europe was dissolved when rail transport expands rapidly. Most countries that issue passports do not need their luggage, so people can travel freely without them. The standardization of international passports will not appear until 1980 under the guidance of the International Civil Aviation Organization of the United Nations. From 1870 to 1915, 36 million Europeans migrated away from Europe. About 25 million (or 70%) of these travelers migrate to the United States, while most of the rest reach Canada, Australia and Brazil. Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the population to 1.8%. While the absence of meaningful passport requirements is allowed for free travel, migration on a very large scale would be very difficult if not for technological advances in transportation, especially the expansion of rail travel and the dominance of steam-powered vessels on traditional sailboats. The world rail travel distance grew from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while the steam cargo tonnage surpassed the sailboats in the 1890s. Advances such as wireless telephony and telegraphy (a precursor to radio) revolutionized telecommunications by providing instant communication. In 1866, the first transatlantic cable was placed under the oceans to connect London and New York, while Europe and Asia became connected via a new telephone line.
Economic globalization grew under free trade, beginning in 1860 when Great Britain signed a free trade agreement with France known as the Cobden-Chevalier Agreement. However, the golden age of this wave of globalization experienced a return of protectionism between 1880 and 1914. In 1879, the German Chancellor Otto von Bismarck introduced a protective tariff on agricultural goods and manufacturing, making Germany the first country to adopt trade protection policies new. In 1892, the French introduced the tariff line MÃÆ'Â ©, greatly increasing the import duties on agricultural goods and manufacturing. The United States maintained strong protectionism during most of the nineteenth century, imposing import duties of between 40 and 50% on imported goods. Despite these measures, international trade continues to grow without slowing. Paradoxically, foreign trade grew at a much faster rate during the first wave of protectionist phase of globalization than during the free-trade phase sparked by the British.
The unprecedented growth of foreign investment from the 1880s to the 1900s served as a major driver of financial globalization. The total world capital invested abroad reached US $ 44 billion in 1913 ($ 1.02 trillion in 2012 dollars), with the largest share of foreign assets held by the UK (42%), France (20%), Germany ( 13%), and the United States (8%). The Netherlands, Belgium and Switzerland together make a foreign investment equivalent to Germany about 12%.
Panic of 1907
In October 1907, the United States underwent a bank run in the Knickerbocker Trust Company, forcing confidence to close on October 23, 1907, triggering further reactions. The panic was diminished when US Treasury Secretary George B. Cortelyou and John Pierpont "J.P." Morgan deposited $ 25 million and $ 35 million, respectively, into a New York City reserve bank, enabling the withdrawal to be completely closed. Banks operating in New York caused a simultaneous financial market crisis as demand for credit increased from exporters of grain and wheat. Because these demands can only be served through the purchase of large quantities of gold in London, the international market becomes exposed to the crisis. The Bank of England had to keep interest rates at very high discounts until 1908. To serve the golden flow to the United States, the Bank of England organized a pool of between twenty-four different countries, where Banque de France was temporarily lent. Ã, Â £ 3 million (GBP, 305.6 million in 2012 GBP) in gold.
Birth of the US Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the Federal Reserve System. The opening was influenced by Panic of 1907, which supported the legislators' doubts in trusting individual investors, such as John Pierpont Morgan, to serve again as a lender of last resort. The system design also considers the findings of the Pujo Committee's investigation of the possibility of a money trust in which the concentration of Wall Street influence over national financial matters is questioned and where investment bankers are suspected of being deeply involved in the manufacturing company directors. Although the committee's findings can not be inferred, that possibility is enough to motivate support for the idea of ​​a long-challenged central bank. The overall goal of the Fed is to be the only lender of last resort and to complete the inelasticity of the United States money supply during a significant change in money demand. In addition to addressing the underlying issues that sparked international consequences of the money market turmoil of 1907, New York banks were exempt from the need to maintain their own reserves and begin to take on greater risks. The new access to the rediscount facility allows them to launch foreign branches, reinforcing New York's competition with London's competitive discount market.
Interwar Period: 1915-1944
Economists have referred to the beginning of World War I as the end of an innocent age for the foreign exchange market, as this is the first geopolitical conflict to have a destabilizing and disabling effect. The United Kingdom declared war on Germany on August 4, 1914 after the German invasion of France and Belgium. In the previous weeks, the foreign exchange market in London was the first to point out the difficulties. European tensions and rising political uncertainty motivate investors to pursue liquidity, prompting commercial banks to borrow much from the London discount market. As the money market gets tighter, discount lenders start recalculating their reserves at the Bank of England rather than discounting the new pound sterling. The Bank of England was forced to raise its daily discount rate for three days from 3% on July 30 to 10% on August 1. As foreign investors were forced to buy pounds for remittances to London just to pay for the newly-matured securities, a sudden demand for pounds led the pound to appreciate beyond its gold value against most major currencies but sharply depreciated against the French franc after French banks began liquidating their London accounts. Remittances to London became increasingly difficult and peaked at a $ 6.50 USD/GBP exchange rate. Emergency measures introduced in the form of a moratorium and bank holidays are extended but have no effect because the informal financial contracts are non-negotiable and the export embargo thwarts gold shipments. A week later, the Bank of England begins to overcome the impasse in the foreign exchange market by establishing a new channel for transatlantic payments in which participants can make payments for remittances to the UK by depositing gold intended for Bank of England accounts with Canadian Finance Ministers, and in exchange for receiving pounds sterling with an exchange rate of $ 4.90. Around $ 104 million USD in remittances flows through this channel in the next two months. However, the liquidity of pound sterling ultimately did not improve because of inadequate assistance to the merchant bank that received the sterling bill. Because pound sterling is the world's reserve currency and leading vehicle currencies, ill ill ill ill ill ill ill ill and merchant to merge to to to
The British government tried several steps to revive London's most famous foreign exchange market, which was implemented on September 5 to extend its previous moratorium through October and allow the Bank of England to temporarily borrow funds to be repaid at the end of the war in an attempt to settle unpaid payments or unpaid for currency transactions. In mid-October, the London market began to function well as a result of the September action. The war continues to present unfavorable situations for the foreign exchange market, such as the closing of the London Stock Exchange, the transfer of economic resources to support the transition from producing exports to producing military weapons, and a myriad of disruptions to mail and mail. The pound sterling enjoyed general stability during World War I, largely due to the various steps taken by the British government to influence the value of the pound in a way that has yet to give individuals the freedom to continue trading currencies. Such measures include open market intervention in foreign exchange, borrowing in foreign currency rather than in pound sterling to finance war activities, out capital controls, and limited import restrictions.
In 1930, the Allied forces established the Bank for International Settlements (BIS). The main objective of the BIS is to regulate payments scheduled for a German reparation enacted by the Treaty of Versailles in 1919, and serves as a bank for central banks around the world. Countries may have a portion of their reserves as deposits with such institutions. It also serves as a forum for central bank collaboration and research on international monetary and financial issues. BIS also operates as general trustee and facilitator of inter-state finance settlements. Smack-Hawley_t_1993 Smoot-Hawley 1930 hire rates
US President Herbert Hoover signed the Smoot-Hawley Tariff Act into law on June 17, 1930. The aim of the tariff was to protect agriculture in the United States, but the congressional representatives eventually raised tariffs on a number of manufactured goods that resulted in an average task as high as 53 % in more than a thousand different items. Twenty-five trading partners responded by introducing new tariffs on US goods. Hoover was pressured and forced to comply with the 1928 Republican platform, which sought protective tariffs to ease market pressures against struggling agribusiness and reduce domestic unemployment rates. The culmination of the Stock Market Crash of 1929 and the start of the Great Depression heightened fears, further pressuring Hoover to act on a policy of protection against Henry Ford's suggestion and over 1,000 economists who protested by calling for a veto of action. Exports from the United States plunged 60% from 1930 to 1933. International trade around the world was almost halted. The international impact of the Smoot-Hawley tariff, which consists of protectionist and discriminatory trade policies and attacks of economic nationalism, is credited by economists with the extension and deployment of the Great Depression worldwide.
Formal Abandonment to Gold Standard
The classic gold standard was established in 1821 by the United Kingdom because the Bank of England allowed the redemption of its banknotes for gold bullion. France, Germany, the United States, Russia, and Japan each embraced the standards one by one from 1878 to 1897, marking its international acceptance. The first departure of the standard occurred in August 1914 when these countries established trade embargoes on gold exports and redemption of gold suspended for paper money. After the end of World War I on 11 November 1918, Austria, Hungary, Germany, Russia, and Poland began to experience hyperinflation. After informally departing from the standard, most currencies are exempt from the setting of exchange rates and allowed to float. Most countries during this period seek to gain national profit and increase exports by depreciating the value of their currencies to the level of predators. A number of countries, including the United States, made unethical and uncoordinated efforts to restore the previous gold standard. The early years of the Great Depression led the bank to run in the United States, Austria, and Germany, which placed pressure on the gold reserves in the United Kingdom in such a way that the gold standard became unsustainable. Germany became the first country to officially abandon the gold standard post World War I when Dresdner Bank imposed foreign currency control and announced bankruptcy on July 15, 1931. In September 1931, Britain allowed the pound to drift freely. At the end of 1931, a number of countries including Austria, Canada, Japan, and Sweden left gold. Following the widespread bank failures and the bleeding of gold reserves, the United States escaped the gold standard in April 1933. France would not follow it until 1936 when investors fled the franc due to political concerns over Prime Minister LÃ © on on Blum's government.
Trade liberalization in the United States
The catastrophic effect of the Smoot-Hawley tariff proved difficult for Herbert Hoover's re-election campaign in 1932. Franklin D. Roosevelt became the 32nd US president and Democrats worked to reverse trade protectionism for trade liberalization. As an alternative to cutting tariffs on all imports, Democrats advocate trade reciprocity. The US Congress passed the Reciprocal Trade Reconciliation Act in 1934, aimed at restoring global trade and reducing unemployment. This law expressly authorizes President Roosevelt to negotiate bilateral trade agreements and reduce tariffs significantly. If a country agrees to cut tariffs on certain commodities, the US will institute appropriate cuts to promote trade between the two countries. Between 1934 and 1947, the United States negotiated 29 such agreements and the average tariff rate declined by about a third during this same period. The law contains the most preferred state clause in which tariffs are equalized to all countries, so the trade agreement will not result in preferential or discriminatory tariff rates with certain countries on certain imports, due to difficulties and inefficiencies associated with differential tariff rates. This clause effectively generalizes the tariff reduction of bilateral trade agreements, which ultimately lowers tariff rates worldwide.
The rise of the Bretton Woods financial order: 1945
Since the start of the United Nations as an intergovernmental entity slowly began formally in 1944, delegates from 44 member countries met at a hotel in Bretton Woods, New Hampshire for the United Nations Monetary and Financial Conference, now commonly referred to as the Bretton Woods Conference. Delegates remained aware of the effects of the Great Depression, struggling to maintain international gold standards during the 1930s, and related market instability. While prior discourse on the international monetary system focuses on a fixed exchange rate versus a floating exchange rate, the Bretton Woods delegates favor exchange rates pegged for their flexibility. Under this system, countries will peg their exchange rate to US dollars, which will be convertible into gold at $ 35 USD per ounce. This arrangement is usually referred to as the Bretton Woods system. Rather than keeping interest rates fixed, countries will peg their currency to US dollars and allow their exchange rates to fluctuate within 1% band of agreed parity. To meet this requirement, the central bank will intervene through the sale or purchase of their currency against the dollar. Members may adjust their pegs in response to a long-term fundamental imbalance in the balance of payments, but are responsible for correcting imbalances through fiscal and monetary policy tools before using repacking strategies. Adjustable recognition enables greater exchange rate stability for commercial and financial transactions that promote unprecedented growth in international trade and foreign investment. This feature grew from delegate experience in the 1930s when overly volatile exchange rates and the reactive protectionist exchange controls that followed proved to undermine trade and prolong the deflationary effects of the Great Depression. Capital mobility faces de facto constraints under the system when the government imposes restrictions on capital flows and aligns their monetary policy to support their stake.
An important component of the Bretton Woods agreement is the creation of two new international financial institutions, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). Collectively referred to as Bretton Woods institutions, they became operational in 1947 and 1946 respectively. The IMF was established to support the monetary system by facilitating cooperation in international monetary affairs, providing technical advice and assistance to members, and offering emergency loans to countries facing recurring difficulties to restore balance of payments balance. Members will donate funds to the pool according to their share of the gross world product, from which emergency loans can be issued. Member countries are authorized and encouraged to use capital controls as necessary to manage the imbalance of payments and meet specified targets, but are prohibited from relying on IMF financing to cover primarily short-term capital bleeding. While the IMF is institutionalized to guide members and provide short-term financing window for recurring balance of payments deficits, IBRD was established to serve as a type of financial intermediary to channel global capital toward long-term investment opportunities and postwar warfare projects. The creation of these organizations was an important milestone in the evolution of the international financial architecture, and some economists regarded it as the most significant multilateral cooperation achievement after World War II. Since the establishment of the International Development Association (IDA) in 1960, IBRD and IDA are jointly known as the World Bank. While IBRD lends to middle-income developing countries, the IDA extends the Bank's lending program by offering soft loans and grants to the world's poorest countries.
General Agreement on Tariffs and Trades: 1947
In 1947, 23 countries concluded the General Agreement on Tariffs and Trade (GATT) at the UN conference in Geneva. The delegation requested approval to be sufficient while member states will negotiate the establishment of a United Nations body to be known as the International Trade Organization (ITO). Because ITO was never ratified, the GATT became the de facto framework for multilateral trade negotiations in the future. Members emphasize the trade of reprocity as an approach to lowering barriers in the pursuit of mutual benefits. The structure of the agreement allows the signatories to codify and enforce regulations for the trade in goods and services. GATT centers on two precepts: trade relationships must be fair and non-discriminatory, and subsidizing non-farm exports needs to be banned. Accordingly, the state's most preferred agreement clause prohibits members from offering preferential tariff rates to any country that will not offer to GATT members. In the case of the discovery of non-agricultural subsidies, members are authorized to compensate for such policies by enforcing contrary tariffs. The deal gives the government a transparent structure for managing trade relations and avoiding protectionist pressures. However, GATT principles do not extend to financial activity, consistent with the movement of rigid capitalist movements. The initial round of agreements reached only limited success in reducing tariffs. While the US reduces its tariffs by a third, other signatories offer much smaller trade concessions.
The rise of financial globalization
Flexible exchange rate regression: 1973-present
Although exchange rate stability supported by the Bretton Woods system facilitates the expansion of international trade, this initial success masks the underlying design flaws, where there is no mechanism to increase the supply of international reserves to support sustainable growth in trade. The system began to experience insurmountable market pressures and deteriorating cohesion among its participants in the late 1950s and early 1960s. Central banks need more US dollars to spare, but can not expand their money supply if it means exceeding their dollar reserves and threatening their currency pegs. To accommodate this need, the Bretton Woods system relies on the United States to run the dollar deficit. As a result, the value of the dollar began to exceed its golden support. During the early 1960s, investors could sell gold with a larger dollar exchange rate in London than in the United States, signaling to market participants that the dollar was overvalued. Belgian-American economist Robert Triffin defines this issue now known as the Triffin dilemma, in which the national economic interests of a country conflict with its international objective as a reserve currency of the world's reserves.
France voiced concern over the very low gold price in 1968 and called back to the previous gold standard. Meanwhile, excess dollars flowed into the international market as the United States expanded its money supply to accommodate the cost of its military campaign in the Vietnam War. Its gold reserves were attacked by speculative investors following its first current account deficit since the 19th century. In August 1971, President Richard Nixon suspended the US dollar exchange for gold as part of the Nixon Shock. The closing of the golden window effectively shifts the dollar's devalued dollar adjustment load to other countries. Speculative traders are chasing other currencies and are starting to sell the dollar in anticipation of this currency being reassessed against the dollar. This capital inflow creates difficulties for foreign central banks, which then face the choice between inflationary money supply, most ineffective capital controls, or floating exchange rates. After this misery around the US dollar, the gold dollar price was raised to $ 38 USD per ounce and the Bretton Woods system was modified to allow fluctuations in the ribbon plus 2.25% as part of the Smithsonian Agreement signed by G-10 members. in December 1971. The agreement delayed the system's death for the next two years. The erosion system was accelerated not only by the devaluation of the dollar, but also by the oil crisis of the 1970s which emphasized the importance of international financial markets in petrodollar recycling and balance of payments financing. Once the world's reserve currency begins to drift, other countries begin to adopt a floating exchange rate regime.
The post-Bretton Woods financial order: 1976
As part of the first amendment to the treaty provisions in 1969, the IMF developed a new reserve instrument called special drawing rights (SDRs), which can be held by central banks and exchanged between themselves and the IMF as an alternative to gold. SDR entered service in 1970 initially as a market unit of sixteen major vehicle basket of countries whose share of world exports exceed 1%. The composition of the basket changed over time and currently consists of the US dollar, the euro, the Japanese yen, the Chinese yuan, and the British pound. Beyond holding them as reserves, countries can denominate transactions between themselves and the Fund in the SDR, even though the instrument is not a vehicle for trading. In international transactions, the characteristics of the currency basket portfolio provide greater stability to the inherent uncertainty of free floating exchange rates. Special drawing rights are initially equivalent to a certain amount of gold, but can not be redeemed directly for gold and instead serve as a substitute in obtaining other currencies that can be exchanged for gold. Fund initially issued 9.5 billion XDR from 1970 to 1972.
IMF members signed the Jamaican Treaty in January 1976, which ratified the end of the Bretton Woods system and reoriented the role of the IMF in support of the international monetary system. The agreement formally embraces a flexible exchange rate regime that emerged after the failure of the Smithsonian Agreement measures. Along with the floating exchange rate, the agreement supports central bank intervention aimed at eliminating excessive volatility. The agreement retroactively endorses the abandonment of gold as a reserve instrument and the IMF then revokes its gold reserves, returns gold to members or sells it to provide poor countries with grants. Developing countries and countries that do not have oil export resources enjoy greater access to the IMF loan program as a result. The IMF continues to assist countries with deficits in the balance of payments and currency crises, but has begun to impose its financing requirements that require states to adopt policies aimed at reducing deficits through spending cuts and tax increases, reducing barriers to trade, and contractionary monetary policy.
The second amendment to the treaty article was signed in 1978. It formally formalizes the free-floating acceptance and gold demonstration achieved by the Jamaican Treaty, and requires members to support a stable exchange rate through macroeconomic policy. The post-Bretton Woods system is decentralized in member states that retain autonomy in choosing exchange rate regimes. The amendment also expands the institutional capacity to oversee and charge members by supporting monetary sustainability by working with the Fund on the implementation of the regime. This role is called IMF supervision and is recognized as an important point in the evolution of the IMF's mandate, which extends beyond the balance of payments problem to wider concerns with internal and external pressures on the overall economic policy of the country.
Under the dominance of the flexible exchange rate regime, the foreign exchange market becomes much more unstable. In 1980, the newly elected US President, Ronald Reagan, brought an increasing deficit in the balance of payments and the budget deficit. To finance this deficit, the United States offers real interest rates artificially to attract large foreign capital inflows. As the demand for foreign investors against the US dollar increased, the value of the dollar was greatly appreciated until it peaked in February 1985. The US trade deficit grew to $ 160 billion in 1985 ($ 341 billion in dollars 2012) as a result of strong dollar appreciation. The G5 met in September 1985 at the Plaza Hotel in New York City and agreed that the dollar should depreciate against major currencies to resolve the United States trade deficit and pledge to support this goal with foreign exchange market intervention, in what is known as the Plaza Accord. The US dollar continues to depreciate, but industrialized countries are becoming increasingly worried that it will drop too much and exchange rate volatility will increase. To address this issue, the G7 (now G8) held a summit in Paris in 1987, where they agreed to pursue better exchange rate stability and better coordinate their macroeconomic policies, in what is known as the Louvre Agreement. This deal comes from a shipping regime administered by which central banks jointly intervene to settle under- and overvaluations on the foreign exchange market to stabilize the otherwise free-floating currencies. The stable exchange rate followed a floating management embrace during the 1990s, with strong US economic performance from 1997 to 2000 during the Dot-com bubble. After the 2000 stock market correction of the Dot-com bubble the country's trade deficit grew, the September 11 attacks increased political uncertainty, and the dollar began depreciating in 2001.
European Monetary System: 1979
Following the Smithsonian Agreement, member states of the European Economic Community adopted a narrow band of 1.125% for the exchange rate between their own currencies, creating a small-scale fixed exchange rate system known as snake in the tunnel. The snake proved unsustainable because it does not force EEC countries to coordinate macroeconomic policies. In 1979, the European Monetary System (EMS) gradually erased the currency of the snake. The EMS presents two main components: the European Currency Unit (ECU), the weighted average market basket artificially made by EU member states, and the Exchange Rate Mechanism (ERM), the procedures for managing exchange rate fluctuations in accordance with the parity calculated grid of the nominal value of the currency. The parity grid comes from the parity of each participating country established for its currency with all other currencies in the system, in ECU denominations. The weight in the ECU changes in response to the value variance of each currency in its basket. Under the ERM, if the exchange rate reaches the upper or lower limit (in 2.25% band), the two countries in the currency pair are obliged to intervene collectively in the foreign exchange market and buy or sell the less or too high currency needed to return the exchange rate to par value corresponding to the parity matrix. The need for market-cooperative interventions marks a major difference from the Bretton Woods system. Similarly for Bretton Woods, EMS members can impose capital controls and other monetary policy shifts on countries responsible for exchange rates near their limits, as identified by divergence indicators that measure deviations from ECU scores. The central exchange rate of the parity grid can be adjusted in exceptional circumstances, and modified every eight months on average during the initial four years of the operating system. For twenty years of age, this center rate has been adjusted by more than 50 times.
The Birth of the World Trade Organization: 1994
GATT multilateral trade negotiations The Uruguay Round lasted from 1986 to 1994, with 123 countries being parties to agreements reached during the negotiations. Among its accomplishments are trade liberalization in agricultural and textile goods, General Agreements on Trade in Services, and agreements on intellectual property rights issues. The key manifestation of this round is the Treaty of Marrakech signed in April 1994, which established the World Trade Organization (WTO). The WTO is a chartered multilateral trading organization, tasked with continuing GATT's mandate to promote trade, regulate trade relations, and prevent undermining trade practices or policies. It began operations in January 1995. Compared to its predecessor, the GATT secretariat, the WTO has a better mechanism for resolving trade disputes because the organization is membership-based and does not rely on consensus as in traditional trade negotiations. This function is designed to overcome previous weaknesses, in which the disputing parties will ask for delays, block negotiations, or fall back on weak enforcement. In 1997, WTO members reached an agreement committed to a softer easing of commercial financial services, including banking services, securities trading, and insurance services. These commitments came into effect in March 1999, consisting of 70 governments covering approximately 95% of financial services worldwide.
Financial integration and systemic crisis: 1980-present
Financial integration among industrialized countries grew substantially during the 1980s and 1990s, as did the liberalization of their capital accounts. The integration between financial markets and banks provides benefits such as greater productivity and broader risk sharing in macroeconomics. The resulting interdependence also brings substantive costs in terms of shared vulnerability and increased systemic risk exposure. Combining financial integration in recent decades is a succession of deregulation, in which countries are increasingly ignoring regulations on the behavior of financial intermediaries and disclosure requirements that are simplified to the public and the authorities. As the economy becomes more open, countries become increasingly exposed to external shocks. Economists argue that greater financial integration worldwide has resulted in more volatile capital flows, increasing the potential for financial market turmoil. With greater integration among countries, a systemic crisis can easily infect others. The 1980s and 1990s witnessed a wave of currency crises and default, including the 1987 stock market crash, the European Monetary System crisis of 1992, the 1994 Mexican peso crisis, the 1997 Asian currency crisis, the 1998 Russian financial crisis, and Argentina 1998 -2002. peso crisis. The crisis is different in terms of extent, causes, and aggravation, among which are the flight of capital carried by speculative attacks on fixed exchange rates that are considered wrongly priced due to the state's fiscal policy, speculative attacks that are self-fulfilling by investors who expect other investors to follow doubts about the country's currency pegs, lack of access to emerging and functioning domestic capital markets in emerging market countries, and current account reversals during conditions of limited capital mobility and dysfunctional banking systems.
After research on the systemic crises that plagued developing countries throughout the 1990s, economists have reached a consensus that capital flows liberalization brings an important prerequisite if these countries to observe the benefits offered by financial globalization. Such conditions include stable macroeconomic policies, sound fiscal policy, strong bank regulations, and strong legal protection of property rights. Economists largely support organized compliance encourage foreign direct investment, liberalize domestic equity capital, and embrace capital outflows and short-term capital mobility only after the country has reached a functioning domestic capital market and established a sound regulatory framework. The emerging market economy must develop a credible currency in the eyes of domestic and international investors to realize the benefits of globalization such as greater liquidity, greater savings on higher interest rates, and accelerated economic growth. If a country embraces uncontrolled access to foreign capital markets without maintaining a credible currency, it becomes vulnerable to speculative capital flight and sudden stop, which brings serious economic and social costs.
Countries seek to improve the sustainability and transparency of the global financial system in response to the crisis of the 1980s and 1990s. The Basel Committee on Banking Supervision was formed in 1974 by central bankers of the G-10 members to facilitate cooperation on supervision and regulation of banking practices. It is headquartered in the Bank for International Settlements in Basel, Switzerland. The committee has held several rounds of deliberations that are known collectively as the Basel Treaty. The first of these agreements, known as Basel I, occurred in 1988 and emphasized different credit risk and asset grade assessments. Basel I was motivated by concerns over whether large multinational banks were properly regulated, derived from observations during the 1980s Latin American debt crisis. Following Basel I, the committee issued recommendations on new capital requirements for banks, implemented by G-10 countries four years later. In 1999, the G-10 established the Financial Stability Forum (rearranged by the G-20 in 2009 as the Financial Stability Council) to facilitate cooperation among regulatory agencies and promote stability in the global financial system. The Forum is tasked with developing and codifying twelve international standards and the implementation thereof. The Basel II Agreement was set in 2004 and again emphasizes capital requirements as protection against systemic risk and the need for global consistency in banking regulations to avoid harming internationally operated banks. It is motivated by what is seen as the lack of a first agreement such as insufficient public disclosure of the bank's risk profile and oversight by the regulatory body. The members were slow to implement it, with major efforts by the EU and the United States taking place in late 2007 and 2008. In 2010, the Basel Committee revised the capital requirements in a series of improvements to Basel II known as Basel III, which centered on requirements ratio leverage aimed at limiting excessive leveraging by banks. In addition to strengthening the ratio, Basel III modifies the formula used to lower the risk and calculate the required capital threshold to mitigate the risk of bank ownership, concluding that the capital threshold should be set at 7% of the value of the weighted assets according to bank risk..
The birth of the European Economic and Monetary Union 1992
In February 1992, EU countries signed the Maastricht Treaty outlining a three-stage plan to accelerate progress towards the Economic and Monetary Union (EMU). The first phase focuses on liberalizing capital mobility and aligning macroeconomic policies between countries. The second phase was established the European Monetary Institute which was finally disbanded along with the establishment in 1998 from the European Central Bank (ECB) and the European Central Bank System. The key to the Maastricht Treaty is an outline of the convergence criteria that must be met by EU members before being allowed to proceed. The third and final stage introduced a common currency for circulation known as the Euro, adopted by eleven of the fifteen members of the European Union in January 1999. Thus, they sort out their sovereignty in terms of monetary policy. These countries continued to circulate their national legal tender, exchanged for the euro with fixed interest rates, until 2002 when the ECB began issuing coins and official Euro notes. Until 2011, EMU consists of 17 countries that have issued Euro, and 11 countries non-Euro.
The global financial crisis
Following the volatility of the financial crisis market of the 1990s and the September 11 attacks on the US in 2001, financial integration increased among developed and emerging markets, with substantial growth in capital flows among banks and in the trading of financial derivatives and structured financial products. International capital flows worldwide grew from $ 3 trillion to $ 11 trillion dollars from 2002 to 2007, primarily in the form of short-term money market instruments. The United States experienced a growth in the size and complexity of companies involved in cross-border financial services after the Gramm-Leach-Bliley Act of 1999 that repealed the Glass-Steagall Act of 1933, ending restrictions on commercial banks' investment banking activities. Industrialized nations began to rely more on foreign capital to finance domestic investment opportunities, generating unprecedented capital flows to developed countries from developing countries, as reflected in the global imbalance that grew by 6% of the world's gross product in 2007 from 3% in 2001.
The global financial crisis triggered in 2007 and 2008 shares some of the key features shown by the wave of the international financial crisis in the 1990s, including the acceleration of capital inflow, weak regulatory framework, loose monetary policy, flock behavior during investment bubble, price collapse assets, and deleveraging massively. Systemic problems come from the United States and other developed countries. Similar to the 1997 Asian crisis, the global crisis involved widespread lending by banks that invested in unproductive real estate as well as poor corporate governance standards in financial intermediaries. Particularly in the United States, the crisis is characterized by increased securitization of non-performing assets, large fiscal deficits, and over-financing in the housing sector. While real estate bubbles in the US sparked a financial crisis, the bubble was financed by foreign capital that flowed from various countries. Because its contagious effects began to infect other countries, the crisis became a precursor to the global economic downturn now called the Great Recession. In the midst of the crisis, the total volume of world trade in goods and services fell 10% from 2008 to 2009 and did not recover until 2011, with increasing concentrations in emerging market countries. The global financial crisis shows the negative impact of worldwide financial integration, which sparked a discourse about how and whether some countries should separate themselves from the system altogether.
Eurozone crisis
In 2009, the newly elected government in Greece revealed falsification of its national budget data, and that its fiscal deficit for the year was 12.7% of GDP compared with 3.7% held by previous governments. This news reminds the market on the fact that the Greek deficit exceeds the maximum of 3% of the euro zone listed in the Stability Pact and Economic Growth and Monetary Union. Investors are concerned about a possible sovereign default by quickly selling Greek bonds. Given the previous Greek decision to embrace the euro as its currency, it no longer holds autonomous monetary policy and can not intervene to depreciate the national currency to absorb shocks and improve competitiveness, such as traditional solutions for sudden capital flight. The crisis proved to be contagious when it spread to Portugal, Italy, and Spain (along with Greece it is collectively referred to as PIGS). Rating agencies lowered the ratings of these countries' debt instruments in 2010 which further increased the cost of refinancing or repaying their national debt. The crisis continued to spread and soon grew into a European sovereign debt crisis that threatened economic recovery after the Great Recession. Along with the IMF, EU members collected a EUR750 billion bailout for Greece and other affected countries. In addition, the ECB pledged to buy bonds from troubled eurozone countries in an effort to reduce the risk of panic banking system. This crisis is recognized by economists as highlighting the depth of financial integration in Europe, in contrast to the lack of fiscal integration and the political unification necessary to prevent or expressly respond to crises. During the initial wave of the crisis, the public speculated that the turmoil could lead to the disintegration of the euro zone and the neglect of the euro currency. German Federal Finance Minister Wolfgang SchÃÆ'¤uble called for the expulsion of the offending nations of the eurozone. Now commonly referred to as the Eurozone crisis, has been ongoing since 2009 and most recently began to cover the financial crisis 2012-13 Cyprus.
Maps Global financial system
Implications of global capital
Payment balance
The balance of payments accounts summarizes payments made to or received from abroad. Alerts are considered to be credit transactions while payments are considered debit transactions. The balance of payments is a function of three components: transactions involving the export or import of goods and services form a demand deposit account, transactions involving the purchase or sale of financial assets form a financial account, and transactions involving the transfer of unconventional assets constitute a capital account. Newspaper accounts summarize three variables: the trade balance, net factor income from abroad, and net unilateral transfers. The financial account summarizes the value of exports versus asset imports, and the capital account summarizes the net asset transfer value of the given transfer. The capital account also includes an official reserve account, which encapsulates the buying and selling of domestic currency, foreign exchange, gold and SDR for the purpose of maintaining or utilizing bank reserves.
Since the balance of payments is zero, the current account surplus shows a deficit in the asset account and vice versa. A current account surplus or deficit indicates the extent to which a country relies on foreign capital to finance its consumption and investment, and whether it lives beyond its means. For example, assuming a zero capital account balance (so no asset transfer is available for financing), a current account deficit of  £ 1 billion implies a $ 1 billion financial account surplus (or net asset exports). Net exporters of financial assets are known as borrowers, exchanging future payments for current consumption. Furthermore, the export of net financial assets shows growth in a country's debt. From this perspective, the balance of payments links state revenues to expenditures by indicating the extent to which the current balance sheet imbalance is financed by domestic or foreign financial capital, which explains how a country's assets are formed over time. A healthy balance of payments position is essential for economic growth. If demand-growing countries have difficulty maintaining a healthy balance of payments, demand may slow, leading to: unused or excess supply, desperate foreign investment, and less attractive exports that can further strengthen the intensifying negative cycle unbalanced payments.
The external wealth of a country is measured by the value of its foreign assets after being offset by its foreign obligations. The current account surplus (and the corresponding financial account deficit) shows an increase in external wealth while the deficit indicates a decline. In addition to the current account indication of whether a country is a net buyer or net asset seller, the shift of a country's external wealth is affected by capital gains and capital losses on foreign investment. Having a positive external wealth means a country is a net lender (or creditor) in the world economy, while negative external wealth shows net borrowers (or debtors).
Unique financial risk
Countries and international businesses face a unique set of financial risks for foreign investment activities. Political risk is the potential loss from political instability of foreign countries or unfavorable developments, which manifest in various forms. Risk transfer stresses the uncertainty surrounding state capital controls and the balance of payments. Operational risks characterize concerns over regulatory policies of a country and its impact on normal business operations. Risk control is born from the uncertainty surrounding property and decision rights in local operations of foreign direct investment. Credit risk implies that the lender may face a non-existent or unfavorable regulatory framework with little or no legal protection against foreign investment. For example, foreign governments may commit to government default or deny their debt obligations to international investors without legal or other consequences. Governments may decide to take over or nationalize foreign-held assets or enact policy changes following an investor's decision to acquire assets in the host country. Country risk encompasses both political risk and credit risk, and represents an unexpected developmental potential in the host country to threaten its capacity for debt repayment and the repatriation of profits from interest and dividends.
Participants
Economic actor
Every core function of the economy, consumption, production, and investment has become very global in the last few decades. While consumers are increasingly importing foreign goods or buying domestically produced goods with foreign input, businesses continue to expand production internationally to meet the increasingly globalized consumption of the world economy. International financial integration between countries has given investors an opportunity to diversify their asset portfolio by investing abroad. Consumers, multinational corporations, individual and institutional investors, and financial intermediaries (like banks) are the main economic actors in the global financial system. Central banks (such as the European Central Bank or US Federal Reserve System) conduct open market operations in their quest for monetary policy objectives. International financial institutions such as Bretton Woods, multilateral development banks and other development financing institutions provide emergency financing for countries in crisis, provide risk mitigation tools to prospective foreign investors, and raise capital for development financing and poverty reduction initiatives. Trade organizations such as the World Trade Organization, the International Finance Institute and the World Trade Federation sought to alleviate trade, facilitate trade disputes and deal with economic affairs, promote standards, and sponsor research publications and statistics.
Regulatory body
The explicit objectives of financial regulation include the search for financial stability of countries and safeguarding unsophisticated market players from fraudulent activities, while implicit objectives include offering a viable and competitive financial environment for world investors. A country with a functioning government, financial regulation, deposit insurance, emergency financing through a discount window, standard accounting practices, and established legal and disclosure procedures, can develop and foster a healthy domestic financial system. But in a global context, there is no central political authority that can extend this arrangement globally. Instead, governments have worked together to build a number of institutions and practices that have evolved over time and are collectively referred to as the international financial architecture. In this architecture, regulatory authorities such as national governments and intergovernmental organizations have the capacity to influence international financial markets. National governments may use finance, treasury and regulatory agencies to impose tariffs and controls on foreign capital or may use their central bank to implement desired interventions on the open market.
Some degree of self-regulation takes place where banks and other financial institutions seek to operate within guidelines established and published by multilateral organizations such as the International Monetary Fund or the Bank for International Settlements (especially the Basel Committee on Banking Supervision and the Global Financial System Committee). Further examples of international regulatory bodies are: Financial Stability Board (FSB) established to coordinate information and activities among developed countries; The International Organization of Securities Commission (IOSCO) that coordinates the arrangement of financial securities; The International Insurance Supervisory Association (IAIS) that promotes consistent supervision of the insurance industry; The Financial Action Task Force on Money Laundering that facilitates cooperation in combating money laundering and financing of terrorism; and the International Accounting Standards Board (IASB) that publishes accounting and auditing standards. Public and private arrangements exist to assist and guide countries struggling with state debt payments, such as the Paris Club and the London Club. National securities commissions and independent financial regulators maintain control of their foreign exchange market activities. Two examples of supranational financial regulators in Europe are the European Banking Authority (EBA) that identifies systemic risks and institutional weaknesses and can overrule national regulators, and the European Shadow Financial Regulatory Committee (ESFRC) reviewing financial regulatory issues and issuing policy recommendations.
Research organizations and other forums
Research and academic institutions, professional associations, and think-tanks aim to observe, model, understand, and publicize recommendations to improve the transparency and effectiveness of the global financial system. For example, the independent, non-partisan World Economic Forum facilitates the Global Agenda Council on the Global Financial System and the Global Agenda Council on the International Monetary System, which reports systemic risks and assembles policy recommendations. The Global Financial Markets Association facilitates discussions on global financial issues among members of various professional associations around the world. The Thirty (G30) Group was formed in 1978 as a group of international private consultants, researchers, and representatives committed to advancing understanding of the international economy and global finance.
The future of the global financial system
The IMF has reported that the global financial system is on track to improve financial stability, but faces a number of transitional challenges borne by regional policy vulnerabilities and regimes. One challenge is to manage the release of the United States from its accommodative monetary policy. Doing it in an elegant and orderly manner can be difficult as markets adjust to reflect investors' expectations of a new monetary regime with higher interest rates. Interest rates can rise too sharply if exacerbated by structural declines in market liquidity from higher interest rates and greater volatility, or by structural deleveraging in short-term securities and in shadow banking systems (especially mortgage markets and real estate investment confidence). Other central banks are thinking of ways to get out of the non-conventional monetary policy used in recent years. But some countries, like Japan, try stimulus programs on a larger scale to combat deflationary pressures. Eurozone countries are implementing various national reforms aimed at strengthening monetary unions and easing pressure on banks and governments. But some European countries such as Portugal, Italy and Spain continue to struggle with the highly leveraged corporate sector and fragmented financial markets where investors face inefficient prices and the difficulty of identifying quality assets. Banks operating in such environments may require stronger provisions to withhold appropriate market adjustments and absorb potential losses. The emerging market economy is facing challenges for greater stability as bond markets show an increased sensitivity to monetary easing from external investors flooding the domestic market, thus providing exposure to the aviation capital potential posed by large firms utilizing expansionary credit environments. Policymakers in these countries are tasked with switching to a more sustainable and balanced financial sector while still encouraging market growth to avoid attracting investors.
The global financial crisis and the Great Recession are pushing for a renewed discourse on the architecture of the global financial system. These events attracted attention to financial integration, insufficiency of global governance, and the emergence of systemic risk from financial globalization. Since its founding in 1945 from a formal international monetary system with the IMF empowered as a trustee, the world has undergone change
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