GFS

The global financial system is the

financial system consisting of institutions
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 banks and
finance ministries, private institutions
acting on the global scale, e.g., banks
and hedge funds, and regional
institutions, e.g., the Eurozone.
 Theglobal financial systemis the worldwide
framework of legal agreements, institutions, and
both formal and informaleconomic actorsthat
together facilitate international flows of
financial capitalfor purposes ofinvestmentand
trade financing. The system has evolved
substantially since its emergence in the late 19th
century during the first modern wave of
economic globalization, marked by the
establishment ofcentral banks,multilateral
treaties, andintergovernmental organizations
aimed at improving thetransparency,regulation,
and effectiveness of international markets.
 Afinancial systemconsists ofsystemically important financial institutions,
their customers and otherstakeholders, andfinancial regulators.
Contemporaryglobalizationandeconomic integration have increased the
interdependence of financial systems around the world and the importance
of financial institutions that operate by design at an international or
multinationallevel.
Global financial system is a various official and legal arrangements that
govern international financial flows in the form of loan investment, payments
for goods and services, interest and profit remittances. The main elements
are the surveillance and monitoring of economic and financial stability, and
provision of multilateral finance to countries with balance of payments
difficulties. The organization at the centre of the system is the IMF, which
has the mandate to ensure its effective running.
The global financial system can be divided into regulated entities
(international banks and insurance companies), regulators, supervisors and
institutions like theEuropean Central Bankor the
International Monetary Fund. The system also includes the lightly regulated
or non-regulated bodies - this is known as the 'shadow banking system'.
Mainly, this covershedge funds, private equity and bank sponsored entities
such as off-balance-sheet vehicles that banks use to invest in the
financial markets.
 Historical background
The history of financial institutions must be differentiated from
economic history and history of money. In Europe, it may have
started with the first commodity exchange, the Bruges Bourse
in 1309 and the first financiers and banks in the 15th17th
centuries in central and western Europe. The first global
financiers the Fuggers (1487) in Germany; the first stock
company in England (Russia Company 1553); the first foreign
exchange market (The Royal Exchange 1566, England); the
first stock exchange (the Amsterdam Stock Exchange 1602).
Milestones in the history of financial institutions are the
Gold Standard (18711932), the founding of the
International Monetary Fund (IMF) and World Bank at
Bretton Woods 1944, 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 IMF keeps account of international balance of payments
accounts of member states. The IMF acts as a
lender of last resort for members in financial distress, e.g.,
currency crisis, problems meeting balance of payment
when in deficit and debt default. Membership is based on
quotas, or the amount of money a country provides to the
fund relative to the size of its role in the international
trading system.

The WB aims to provide funding, take up credit risk or offer

favourable terms to development projects mostly in
developing countries that couldn't be obtained by the
private sector. The other multilateral development banks
and other IFIs also play specific regional or functional roles.
International institutions
The World Trade Organization settles trade disputes and
negotiates international trade agreements in its rounds
of talks (currently the Doha Round).
Also important is the Bank for International Settlements,
the intergovernmental organisation for central banks
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.
 Government institutions
Governments act in various ways as actors in
the GFS , primarily through their
finance ministries: they pass the laws and
regulations for financial markets, and set the
tax burden for private players, e.g., banks,
funds and exchanges.
They also participate actively through
discretionary spending. They are closely tied
(though in most countries independent of) to
central banks that issue government debt,
set interest rates and deposit requirements,
and intervene in the foreign exchange market
.
 Private participants
Players active in the stock-, bond-,
foreign exchange-, derivatives- and
commodities-markets, and
investment banking, including:
Commercial banks
Hedge funds and Private Equity
Pension funds
Insurance companies
Mutual funds
Sovereign wealth funds
 Regional institutions

Examples are:
Commonwealth of Independent State
s
(CIS)
Eurozone
Mercosur
North American Free Trade Agreemen
t
(NAFTA)
 WHAT ARE INTERNATIONAL FISCAL
INSTITUTIONS ?

International financial institutions

(IFIs) are financial institutions that have
been established (or chartered) by more
than one country, and hence are subjects
of international law. Their owners or
shareholders are generally national
governments, although other
international institutions and other
organisations occasionally figure as
shareholders. The most prominent IFIs are
creations of multiple nations, although
some bilateral financial institutions
 IFIsthe IMF, World Bank, multilateral
development banks, and other
international development agenciescan
become more responsive to the needs of
developing countries and ensure that
growth opportunities they promote reach
the worlds poorest people.
 The IFIs are major sources of financial and
technical support for developing countries.
While their influence on development
outcomes is often less than their more virulent
critics contend, it can be quite substantial,
especially in smaller low-income countries. Yet
the policies of these institutions are largely
determined by the major shareholdersthe
rich countries that provide most of the capital
rather than by the borrowers.
 Bretton Woods institutions

The best-known IFIs were established

after World War II to assist in the
reconstruction of Europe and provide
mechanisms for international
cooperation in managing the
global financial system (Cf.
Bretton Woods system). They include
the World Bank, the IMF, and the
International Finance Corporation.
Found
Name Notes HQ
ed
IMF Specialised agency
1944 Washington (Dis
International Monetary Fund of the UN
trict of Columb
World Bank Group, Washington
ia)
IBRD
1944 Specialised agency (District of
International Bank for Reco
of the UN Columbia)
nstruction and Development
IFC
1956 World Bank Group Washington DC
International Finance Corpor
ation
IDA
1960 World Bank Group Washington DC
International Development A
ssociation
ICSID,
1966 World Bank Group Washington DC
International Centre for Set
tlement
MIGA of Investment Disput [[Washington
1988 es World Bank Group
Multilateral Investment Gua DC
rantee Agency
GATT
The GATT is not an
General agreement on tariffs
30/10/4 organisation. The Geneva for the
and trade
7 , basis for the creation of WTO is not a WTO
World Trade Organization United Nations agen
(WTO) in 1995 cy
 Regional development
banks
The regional development banks consist of
several regional institutions that have
functions similar to the World Bank group's
activities, but with particular focus on a
specific region. Shareholders usually consist of
the regional countries plus the major donor
countries. The best-known of these regional
banks cover regions that roughly correspond to
United Nations regional groupings, including
the Inter-American Development Bank, the
Asian Development Bank; the
African Development Bank; and the
European Bank for Reconstruction and Develo
pment
.
Found
Name Notes HQ
ed
Works in the Americas,
but primarily for
IDB
1959 development in Washington
Interamerican Development
Latin America and the
Bank
Caribbean
AFDB
1964 Africa Abidjan
African Development Bank
ADB
1966 Asia Manilla
Asian Development Bank
EBRD
29/5/91 London
European Bank for Reconstr
uction
CEB and Development
16/4/56 Coordinated organisati Paris
Council of Europe Developm
on
ent Bank Union conomique et mo
BOAD Banque ouest-
14/11/7 ntaire ouest-africain
africaine de dveloppement Dakar?
3 e
West African Development B , Cf.BCEAO Banque
ank centrale des tats de
Communaut
l'Afrique de l'Ouest
BDEAC conomique et
Banque de dveloppement desmontaire de l'Afrique Brazzaville,
1975
Bilateral development banks and agencies

Bilateral development banks are financial

institutions set up by individual countries to
finance development projects in developing
countries and emerging markets. Examples
include:
the
Netherlands Development Finance Company FM
O
[1], Headquarters in The Hague; one of the
largest bilateral development banks worldwide.
the DEG German Investment Corporation or
Deutsche Investitions- und
Entwicklungsgesellschaft[2], a Development
Bank.
the Agence Franaise de Dveloppement ,
Caisse des dpts
 Other regional financial
institutions

Several regional groupings of

countries have established
international financial
institutions to finance various
projects or activities in areas of
mutual interest. The largest
and most important of these is
the European Investment Bank.
ounde
Name Notes HQ

98 ECB European Central Bank Frankfurt

BRI Banque des rglements
/5/19
internationaux / BIS
Bank of International Settlem
ents
Central African Central Banks
Association, Association des
Banques Centrales Africaines
(ABCA)
EIB
European Investment Bank
BSTDB
/1/97
Black Sea Trade and Develo
pment Bank
/7/70 International Investment Ba
nk of Comecon
am Main
The bank of central banks Ble
Institution created by the
members of the
Luxembou
European Union, to finance
rg
projects in the EU
Governed by United
Nations registered treaty -
Region covered
corresponds to the
Organization of the Black
Sea Economic Cooperation
established by the
countries of the former
Moscow
Soviet Union and Eastern
Europe[3]
 Perspectives
There are three primary approaches to viewing and understanding the
global financial system.
The liberal view holds that the exchange of currencies should be
determined not by state institutions but instead individual players
at a market level. This view has been labelled as the Washington
Consensus. This view is challenged by a social democratic front
which advocates the tempering of market mechanisms, and
instituting economic safeguards in an attempt to ensure financial
stability and redistribution. Examples include slowing down the rate
of financial transactions, or enforcing regulations on the behaviour
of private firms. Outside of this contention of authority and the
individual, neoMarxists are highly critical of the modern financial
system in that it promotes inequality between state players,
particularly holding the view that the political North abuse the
financial system to exercise control of developing countries'
economies.
 Institutions: rules and organizations
that govern and constrain behavior
Formal institutions: written set of
rules that explicitly state what is and is
not allowed
Informal institutions: custom or
tradition that define appropriate
behavior, but without legal enforcement
Taxonomy of International
Economic Institutions
 Taxonomy of International
Economic Institutions (cont.)

2-23
 International Institutions
The three global organizations
playing a major role in international
economic relations are
The International Monetary Fund (IMF)
The World Bank
The World Trade Organization (WTO)

2-24
 The IMF
Founded by 29 nations (1945) at the
Bretton Woods meetings between the
Allies in
July 1944
184 member (2003) IMF is the central
monetary institution in todays
international economy
Funding comes from member quotas,
or deposits
depend on members size and status
determine members voting weight

2-25
 The IMF
Functions
Prevent crisis in the system by
promoting sound macroeconomic policy,

which includes
Balanced expansion of trade
Stable exchange rates
Avoidance of competitive devaluations
Orderly corrections of BoP problems

2-26
 The IMF
Financial crisis
Occurs when a country runs out of foreign
exchange reservesa major currency or gold
that can be used to pay for imports and
international borrowings
Members borrow against IMF quotas in the
event of financial crisis
IMF conditionality: requirement for the
borrowing member to carry out economic
reforms in exchange for a loan

2-27
 The World Bank
Founded in 1944 as the International Bank
for Reconstruction and Development
(IBRD)
Today, IBRD is one of the five subgroups
making up the World Bank Group
World Bank has 184 members (2003)
Money comes from donor nation
contributions and sales of debt securities
in private markets
2-28
 The World Bank
Main functions
Investing in people, particularly through
basic health and education
Focusing on social development,
inclusion, governance, and institution-
building as key elements of poverty
reduction
Strengthening the ability of the
governments to deliver quality services,
efficiently and transparently

2-29
 The World Bank (cont.)
Main functions (cont.)
Protecting the environment
Supporting and encouraging private
business development
Promoting reforms to create a stable
macroeconomic environment, conducive
to investment and long-term planning

2-30
 GATT
Began with 23 nations (1947) based on
principles established in 1934 Reciprocal
Trade Agreement Act
Nondiscrimination: enshrined in the concept
of most favored nation (MFN); every WTO
member must treat every other member as it
treats its most favored trading partner
National treatment: imports must be given
similar treatment on the domestic market as
domestically produced goods.

2-31
 GATT (cont.)
Functioned through trade rounds: inter-
state negotiations to reduce tariffs and
other barriers to trade
Geneva (47)
Annecy, Torquay, Geneva II, Dillon (49-61)
Kennedy (64-67)
Tokyo (73-79)
Uruguay (86-93)

2-32
 From GATT to WTO
Uruguay Round established the WTO
reaches beyond GATT to new trade issues
GATS, TRIPS, TRIMS
has a more effective dispute
settlement mechanism
monitors national trade practices
more consistently
Doha Round (2001-current)
Focused on trade between developed and
developing nations

2-33
Summary of the GATT
Rounds

Insert Table 2.2 Here

Regional Trade Agreements
Besides economic organizations,
regional trade agreements form a
key part of the institutional structure
of the world economy
Regional trade agreements have
proliferated around the world since
the beginning of the 1990s

2-35
 Five Types of Regional
Trade Agreements
1. Partial trade agreement: two or
more countries liberalize trade in a
selected group of product
categories
2. Free trade area (FTA): trade in
goods and services fully liberalized
between two or more countries
North American Free Trade Agreement
(NAFTA)

2-36
 Five Types of Regional
Trade Agreements (cont.)
3. Customs union (CU): an FTA plus a
common external tariff (CET)
European Union in the 1970s and 1980s
MERCOSUR in South America

4. Common market: a CU plus free

mobility of factors of production
European Union in the 1990s

2-37
 Five Types of Regional
Trade Agreements (cont.)
5. Economic Union: common market with
coordination of macroeconomic policies
(including common currency,
harmonization of standards and
regulations)
United States
Canada
European Union members participating in the
Euro currency zone

2-38
Prominent Regional Trade Blocs

2-39
Prominent Regional
Trade Blocs (cont.)
 The Role of International
Economic Institutions
Primary difference between international
institutions and national governments: the
former have limited enforcement power
However, international institutions help
provide order and reduce uncertainty
Order and certainty are publicintangibles
that are different from most goods and services

2-41
International Public Goods

2-42
 Opposition to
International Institutions
International institutions receive two
types of criticism
1. International institutions create
moral hazards: incentives to
engage in
risky behavior
Nations will take on additional risk, with
potentially higher returns, if they know
an institution such as the IMF will be
there to help if things go wrong
 Opposition to
International Institutions (cont.)
2. International institutions are undemocratic:
decision-making is closed to participation
by civic and social groups, and thus doesnt
focus on the most vulnerable groups
However, global institutions were created to
resolve technical economic problems; they have
thus been slow to respond to social problems
International institutions are today heavily
focused on social aspects: fostering education
and health standards, and civil and human rights

2-44
 Opposition to
International Institutions (cont.)
International institutions face
problems
in efforts to address criticism, which
has been getting stronger
Who is represented by the various groups
demanding a voice? Who should the
institutions listen to first?
Are the demands of a given group good
for the nations development as a whole?