Global financial system
Encyclopedia
The global financial system (GFS) is the financial system
consisting of institution
s and regulators 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 bank
s and finance ministries
, private institutions acting on the global scale, e.g., bank
s and hedge fund
s, and regional institutions, e.g., the Eurozone
.
Deficiencies and reform of the GFS have been hotly discussed in recent years.
and history of money. In Europe
, it may have started with the first commodity exchange
, the Bruges Bourse in 1309 and the first financier
s and bank
s in the 15th–17th centuries in central and western Europe. The first global financiers the Fugger
s (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 the International Monetary Fund
(IMF) and World Bank at Bretton Woods 1944
, and the abandonment of fixed exchange rates in 1973.
Also important is the Bank for International Settlements
, the intergovernmental organisation for central bank
s worldwide. It has two subsidiary bodies that are important actors in the global financial system in their own right - the Basel Committee on Banking Supervision
, and the Financial Stability Board
.
In the private sector, an important organisation is the Institute of International Finance
, which includes most of the world's largest commercial banks and investment banks.
: 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 bank
s that issue government debt
, set interest rate
s and deposit requirements
, and intervene in the foreign exchange market
.
-, bond
-, foreign exchange
-, derivatives
- and commodities-markets, and investment banking, including:
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.
Financial system
In finance, the financial system is the system that allows the transfer of money between savers and borrowers. A financial system can operate on a global, regional or firm specific level...
consisting of institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s and regulators 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
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
, national agencies and government departments, e.g., central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s and finance ministries
Finance minister
The finance minister is a cabinet position in a government.A minister of finance has many different jobs in a government. He or she helps form the government budget, stimulate the economy, and control finances...
, private institutions acting on the global scale, e.g., bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s and hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
s, and regional institutions, e.g., the Eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
.
Deficiencies and reform of the GFS have been hotly discussed in recent years.
History
The history of financial institutions must be differentiated from economic historyEconomic history
Economic history is the study of economies or economic phenomena in the past. Analysis in economic history is undertaken using a combination of historical methods, statistical methods and by applying economic theory to historical situations and institutions...
and history of money. In Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
, it may have started with the first commodity exchange
Commodity exchange
Commodity exchange may refer to:* Commodities exchange, any exchange where various commodities and derivatives products are traded.* Commodity markets, for the markets trading on commodities in general....
, the Bruges Bourse in 1309 and the first financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...
s and bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s in the 15th–17th centuries in central and western Europe. The first global financiers the Fugger
Fugger
The Fugger family was a historically prominent group of European bankers, members of the fifteenth and sixteenth-century mercantile patriciate of Augsburg, international mercantile bankers, and venture capitalists like the Welser and the Höchstetter families. This banking family replaced the de'...
s (1487) in Germany; the first stock company in England (Russia Company
Muscovy Company
The Muscovy Company , was a trading company chartered in 1555. It was the first major chartered joint stock company, the precursor of the type of business that would soon flourish in England, and became closely associated with such famous names as Henry Hudson and William Baffin...
1553); the first foreign exchange market (The Royal Exchange
Royal Exchange (London)
The Royal Exchange in the City of London was founded in 1565 by Sir Thomas Gresham to act as a centre of commerce for the city. The site was provided by the City of London Corporation and the Worshipful Company of Mercers, and is trapezoidal, flanked by the converging streets of Cornhill and...
1566, England); the first stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
(the Amsterdam Stock Exchange
Amsterdam Stock Exchange
The Amsterdam Stock Exchange is the former name for the stock exchange based in Amsterdam. It merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext, and is now known as Euronext Amsterdam.-History:...
1602).
Milestones in the history of financial institutions are the Gold Standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
(1871–1932), the founding of the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) and World Bank at Bretton Woods 1944
United Nations Monetary and Financial Conference
The United Nations Monetary and Financial Conference, commonly known as the Bretton Woods conference, was a gathering of 730 delegates from all 44 Allied nations at the Mount Washington Hotel, situated in Bretton Woods, New Hampshire, to regulate the international monetary and financial order after...
, and the abandonment of fixed exchange rates in 1973.
International institutions
The most prominent international institutions are the IMF, the World Bank and the WTO:- The International Monetary FundInternational Monetary FundThe International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
keeps account of international balance of paymentsBalance of paymentsBalance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...
accounts of member states. The IMF acts as a lender of last resortLender of last resortA lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...
for members in financial distress, e.g., currency crisisCurrency crisisA currency crisis, which is also called a balance-of-payments crisis, is a sudden devaluation of a currency caused by chronic balance-of-payments deficits which usually ends in a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining...
, problems meeting balance of payment when in deficit and debt defaultDefault (finance)In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
. 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 BankWorld BankThe World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
aims to provide funding, take up credit risk or offer favourable terms to developmentInternational developmentInternational development or global development is a concept that lacks a universally accepted definition, but it is most used in a holistic and multi-disciplinary context of human development — the development of greater quality of life for humans...
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 OrganizationWorld Trade OrganizationThe World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...
settles trade disputesInternational tradeInternational trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
and negotiates international trade agreements in its rounds of talks (currently the Doha RoundDoha roundThe Doha Development Round or Doha Development Agenda is the current trade-negotiation round of the World Trade Organization which commenced in November 2001. Its objective is to lower trade barriers around the world, which will help facilitate the increase of global trade...
).
Also important is the Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
, the intergovernmental organisation for central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s worldwide. It has two subsidiary bodies that are important actors in the global financial system in their own right - the Basel Committee on Banking Supervision
Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1975. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance...
, and the Financial Stability Board
Financial Stability Board
The Financial Stability Board is an international body that monitors and makes recommendations about the global financial system. It was established after the 2009 G-20 London summit in April 2009 as a successor to the Financial Stability Forum. The Board includes all G-20 major economies, FSF...
.
In the private sector, an important organisation is the Institute of International Finance
Institute of International Finance
The Institute of International Finance, Inc. is the world's only global association of financial institutions. It was created by 38 banks of leading industrialised countries in 1983 in response to the international debt crisis of the early 1980s...
, which includes most of the world's largest commercial banks and investment banks.
Government institutions
Governments act in various ways as actors in the GFS , primarily through their finance ministriesFinance minister
The finance minister is a cabinet position in a government.A minister of finance has many different jobs in a government. He or she helps form the government budget, stimulate the economy, and control finances...
: 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
Discretionary spending
Discretionary spending is a spending category through which governments can spend through an appropriations act. This spending is optional as part of fiscal policy, in contrast to entitlement programs for which funding is mandatory....
. They are closely tied (though in most countries independent of) to central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
s that issue government debt
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...
, set interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s and deposit requirements
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
, and intervene in the foreign exchange market
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
.
Private participants
Players active in the stockStock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
-, bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
-, foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
-, derivatives
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
- and commodities-markets, and investment banking, including:
- Commercial bankBankA bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s - Hedge fundHedge fundA hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
s and Private EquityPrivate equityPrivate equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.... - Pension fundPension fundA pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s - Insurance companies
- Mutual fundMutual fundA mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s - Sovereign wealth fundSovereign wealth fundA sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial...
s
Regional institutions
Examples are:- Commonwealth of Independent StatesCommonwealth of Independent StatesThe Commonwealth of Independent States is a regional organization whose participating countries are former Soviet Republics, formed during the breakup of the Soviet Union....
(CIS) - EurozoneEurozoneThe eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
- MercosurMercosurMercosur or Mercosul is an economic and political agreement among Argentina, Brazil, Paraguay and Uruguay. Founded in 1991 by the Treaty of Asunción, which was later amended and updated by the 1994 Treaty of Ouro Preto. Its purpose is to promote free trade and the fluid movement of goods, people,...
- North American Free Trade AgreementNorth American Free Trade AgreementThe North American Free Trade Agreement or NAFTA is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded the Canada – United States Free Trade Agreement...
(NAFTA)
Perspectives
There are three primary approaches to viewing and understanding the global financial system.The liberal
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
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
Washington Consensus
The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...
. This view is challenged by a social democratic
Social democracy
Social democracy is a political ideology of the center-left on the political spectrum. Social democracy is officially a form of evolutionary reformist socialism. It supports class collaboration as the course to achieve socialism...
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.
See also
- Financial transaction taxFinancial transaction taxA financial transaction tax is a tax placed on a specific type of financial transaction for a specific purpose.This term has been most commonly associated with the financial sector, as opposed to consumption taxes paid by consumers. However, it is not a taxing of the financial institutions themselves...
- FinanceFinance"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
- Financial crisis of 2007-2010
- Financial economicsFinancial economicsFinancial Economics is the branch of economics concerned with "the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment"....
- Financial regulationFinancial regulationFinancial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
- G20
- Global governanceGlobal governanceGlobal governance or world governance is the political interaction of transnational actors aimed at solving problems that affect more than one state or region when there is no power of enforcing compliance. The modern question of world governance exists in the context of globalization...
- GlobalizationGlobalizationGlobalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...
- International monetary systemsInternational monetary systemsInternational monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and...
- List of finance topics
- List of international trade topics
- Trade blocTrade blocA trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, are reduced or eliminated among the participating states.-Description:...
Criticism, discussions and reform
Among the many critics of the GFS are:- The ATTAC network
- Bretton Woods ProjectBretton Woods ProjectThe Bretton Woods Project works as a networker, information-provider, media informant and watchdog to scrutinise and influence the World Bank and International Monetary Fund...
- George SorosGeorge SorosGeorge Soros is a Hungarian-American business magnate, investor, philosopher, and philanthropist. He is the chairman of Soros Fund Management. Soros supports progressive-liberal causes...
- Joseph Stiglitz
- Paul KrugmanPaul KrugmanPaul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
- Simon JohnsonSimon Johnson (economist)Simon Johnson is a British American economist. He is the 'Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He has held a wide variety of academic and policy-related positions, including...
- Ann PettiforAnn PettiforAnn Pettifor is a fellow of the New Economics Foundation, London, and author of books on government debt and international finance. She is best known for her leadership of a worldwide campaign to cancel approximately $100 billion of debts owed by 42 of the poorest countries – Jubilee 2000...
- Michel BarnierMichel BarnierMichel Barnier is a French politician of the Union for a Popular Movement and Vice President of the European People's Party . He is the current European Commissioner for Internal Market and Services...
- Pope Benedict XVIPope Benedict XVIBenedict XVI is the 265th and current Pope, by virtue of his office of Bishop of Rome, the Sovereign of the Vatican City State and the leader of the Catholic Church as well as the other 22 sui iuris Eastern Catholic Churches in full communion with the Holy See...
has urged a major overhaul of the global financial system.