Global financial systems

Finance System and Financial Institutions

NORTHCENTRAL UNIVERSITY
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Student: Jean-Philippe Montout
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FIN7014-8
E.M. Ekanayake , PhD



Finance System and Financial Institutions
Assignment 1



Faculty use only



Introduction
The world economy has experienced a number of crisis throughout history (i.e., 1929-1934 period crisis). Each crisis has led governments to take regulatory actions to prevent another crisis. However, governments, economists, and regulators did not foresee the deterioration in the financial sector that led to the global financial crisis of 2008 (Moshirian, 2011). The Dodd–Frank Act was the most significant response to the financial crisis of 2007 (Merrill, 2014). In this paper, I discuss the nature of the global financial system and how this system influence the major financial institutions. In addition, I discuss the major regulatory initiatives that were set in place to deal with the 2008 financial crisis. I also discuss and analyze the ability of the US financial system to compete in the global market place by giving some example of fiscal and economic strength that the US financial system should take advantage to be competitive and prevent another financial catastrophe.
Nature of global financial system and its interconnectedness to influence the financial intuitions
A financial system is a process by which capital financial assets move from savers to borrowers. A financial system is usually composed of complex and connected structures with financial institutions (banking and non-baking entities), financial markets, financial instruments, and financial services. A well-defined financial system provide means of payment and settlement for the operation of the economy.
The global financial system (GFS) is a worldwide financial framework composed of banks, financial institutions, and non-financial institutions that participate in the development of all economies (Giannone, Lenza, and Reichlin, 2011). These economic structures are aimed at facilitating international flows of financial assets for investing or operating purposes. GFS allows access to funding and development of countries' banking system (United States Commercial Banking Report, 2015).
The International Monetary Fund (IMF), and the World Bank are two main worldwide financial intuitions that play a major role in the GFS. These organizations provide funding and credit and act as lenders for economies in distress. Legal frameworks such as the adoption of the Basel accords (I, II and III), NAFTA, and the Commonwealth of Interdependence Nations (CIN) are also participate in the building and development of GFS. These international regulatory agreements for banks were in response to the deficiencies in financial regulations. In other words, these agreements influence the operation of all commercial entities by providing legal council on international regulation issues.
Two main frameworks used to regulate and control the financial operation of in each country are national insurances and central banks. For example, in the US, the Federal Reserve acts as a central bank and government agencies oversee and regulate the banking system, and set monetary policies. The need to create a unify system was based on the globalization of the world economy. The financial system of one economy depends or is influenced by another economy.
Some authors argue that there is an aspect of interconnectedness among nations. The collapse of all financial systems affecting all countries, and led to the 2008 economic recession is one of the effect of the inter relationship of all financial markets. Financial systems differ from country to country depending on the political platform adopted in the country. For example, in China, the government controls the financial system. On the other hand, in democratic countries, financial systems can be controlled by both public and private institutions.
The aftermath of the recent financial crisis of 2008 has triggered changes in the global financial system. Government interventions in the majority of the countries affected by the crisis played a significant role in the recovery of the financial systems and the global economy. For example, the US government took measures to prevent the collapse of their financial systems. In addition, the US regulators adopted a "too big to fail" policy to rescue the economy. According to (Davies, Richardson, Katinaite, and Manning, 2010) a financial institution becomes too big to fail when the national economy will suffer losses, if the government fail to intervene. In response to the crisis, the US government targeted short term and long term initiatives, such as bail-outs, and new reforms. The US government's goal was to re-gain public confidence in the financial system and prevent the economy to go into further recession.

Regulatory Initiatives in the US Financial System.
Short and long term initiatives and regulations were necessary to prevent further deterioration of the economy. For example, the passage of the 700 million for the Troubled Asset Relief program (TARP) was geared to spur economic growth (Merrill, 2014) as part of a short term initiative. The Federal Reserve policy to keep interest rate low were measures taken by the US government to prevent further deterioration of the market and the economy. Some long tern initiatives were also adopted to lower the risk of future global financial crisis. The use of bank stress test on the US largest banks was aimed at preventing another crisis. Stress test is aimed at assessing the capital adequacy and requirements of banks (Ionescu, 2014).
All the regulations and initiatives that was implemented did showed some improvement in the US economy. Passing new government regulations in the barrowing sector may have ensure better quality loans with less risk of default. Banks are now applying more due diligence in their lending practices. For example the unemployment rate in the US fell to 5.5 % (Bureau of labor Statistic, June 2015). Had the US implemented these initiatives, other global financial players would have been able to provide financial relief. World financial organizations or alliances such as the G20 can intervene and provide assistance in funding and loans to help the economies in financial distress. As Thompson, J. K. (2010) pointed out the G20, the OECD and other countries are playing a leading role in providing adequate resources for countries experiencing strains. Another recent example is the Greece's banking crisis that is in negotiation with the Eurozone and the European central banks to prevent further collapse of the Greek economy (Lapavitsas, 2012).
Regulatory bodies should emphasize the need for financial institutions to provide transparency and full disclosure. In addition, US government agencies can strengthen the financial system by increasing capital requirements and liquidity in the banking system, as regulated by the Dodd-Frank Act.
The Overall Value and Ability of the US Financial System to Compete
The US financial system is perceived to be one of the best structured system in the world despite a number of failures experienced by in past years. The reforms adopted by the US government in the wake of the 2008 financial crisis have improved the effectiveness of international markets. Two valuable strengths the US financial system could use to leverage its competitiveness among other countries are:
The US Dollar pegged to Gold
The US currency is pegged with gold, making the dollar ta currency of reference. In addition, the US banking system and the Federal Reserve play an important role in the world economy. As a democratic country of reference, the US financial system possess financial framework that allow more flexibility than other countries. The US financial system is not controlled totally controlled by the government, private
The US corporate governance on financial institution
The US corporate governance practices and history in the financial market can be valuable to the financial system stability and efficiency. In a corporate governance settings, shareholders can oversee the operation and take managerial actions that can benefit the institution. In fact, one of the objective of the Basel III goals was to improve transparency of the capital base requirements (Howard, 2014).
Conclusion
The global financial system is a connected system that regulates the flow of supply and demand of money. The interdependence of the financial system to the worldwide economy can represent a threat to the health of all economies. The recent financial crisis of 2008 has prompted the US government to make changes and pass new laws to improve the financial conditions of the system. Not all economies are have same political and economic platform. Although the diversity of the global economy has created opportunities for growth, it has also been a challenge for international financial players to deal with financial and economic crisis having devastating consequence on the financial systems of individual's countries.


References

Bureau of Labor Statistic (June 2015) retrieved on July 2015: http://www.bls.gov/news.release/empsit.nr0.htm
Davies, R., Richardson, P., Katinaite, V., & Manning, M. (2010). Evolution of the UK banking system. Bank Of England Quarterly Bulletin, 50(4), 321-332.
Howard, C. (2014). Basel III's Corporate Governance Impact: How Increased Banking Regulations Pose Challenges to Corporate Compliance While Simultaneously Furthering Stakeholder Objectives. Journal Of Business Systems, Governance & Ethics, 9(1), 39-49.
Ionescu, C. (2014). Stress Testing and Financial Instability. Economics, Management & Financial Markets, 9(1), 466-474.
Lapavitsas, C. (2012). Crisis in the Eurozone. Verso Books
Merrill, T. W. (2014). Dodd Frank Orderly Liquidation Authority Too Big for the Constitution?Www.Law.Upenn.Edu/Journals/Lawreview/, University Of Pennsylvania Law Review, University Of Pennsylvania Law Review, 163165.
Moshirian, F. (2011). The global financial crisis and the evolution of markets, institutions and regulation. Journal Of Banking And Finance, 35(Australasian Finance Conference: Global financial crisis, international financial architecture and regulation), 502-511. doi:10.1016/j.jbankfin.2010.08.010
Thompson, J. K. (2010). Current and Structural Developments in the Financial Systems of OECD Enhanced Engagement Countries. OECD Journal: Financial Market Trends, 2009(2), 209-263.
United States Commercial Banking Report (2015). United States Commercial Banking Report, (1), 1-67.
Running Head: FINANCE SYSTEM AND FINANCIAL INSTITUTIONS 1