In finance, a global financial system is one, which facilitates the flow of funds between investors (savers) and borrowers. It can work on an international, regional, or company specific level. It encompasses an amalgamation of sophisticated and closely interwoven financial markets, institutions, transactions, practices, and services. The companys financial system is the amalgamation of the executed by processes, which track the financial operations of a firm. On the regional level, the financial market is the set of implemented processes that facilitates the lending and borrowing of funds by corporations. On the other hand, the international financial system is generally a wider regional system, which includes all lenders, borrowers, and financial institutions within the global economy. Moreover, it comprises of regulators and institutions, which operate on the global level. The key players of the global financial system are global institutions such as Banks for International Settlements, International Monetary Fund, governments departments and national agencies such as finance ministries and central banks, private institutions operating on an international scale like banks and hedge funds, as well as regional institutions, for instance, Euro zone. This paper, therefore, seeks to discuss about the global financial system and describes how financial institutions and markets in various financial instruments make up the global financial system. It also need to discuss how the global financial system helps to boost economic growth and facilitates global trade.
The global financial system is vast and varied; it consists of many different types of financial institutions, as well as financial markets.
The global financial system refers to the international blueprint of institutions, agreements, as well as both recognized and unrecognized economic actors that work in tandem to foster global movements of financial capital for trade financing and investment. It came into existence in late nineteenth century at the wake of economic globalization, and since then, its evolution has been marked by the creation of multilateral agreements, intergovernmental institutions, and central banks geared towards enhancing the effectiveness, regulation, transparency, and efficiency of global markets (OBrien, 2013).
The decision by a country to carry out its operations in an open economy as well as globalize its financial capital exposes it to implications stipulated by the balance of payments. Moreover, it exposes the country to dangers in global finance, for instance, regulatory changes, political deterioration, legal ambiguities for investments and property rights, and foreign exchange controls. The global financial system is open for both individuals and groups. Further, consumers and multinational ventures embark on consumption, production, as well as investment. On the other hand, governments and intergovernmental agencies serve as purveyors of global trade, crisis management, and economic development. Regulatory bodies create legal procedures and financial regulations, whereas independent bodies foster industry supervision. Moreover, research bodies together with other associations conduct research, synthesis data, publicize reports in addition to policy briefs, as well as host public dissertation on international financial affairs.
In the recent past, each of the primary economic functions; consumption, investment, and production, have become highly liberalized. Whereas consumers majorly purchase domestic goods manufactured with foreign inputs or import foreign products, business ventures are expanding production globally to cater for the increasingly liberalized consumption in the world economy. Global financial integration among countries has given investors the chance to create dissimilar asset portfolios by venturing in foreign markets. Individual and organizational investors, multinational corporations, consumers, as well as financial intermediaries like banks are the main economic participants in the worldwide financial system. Central banks like U.S. Federal Reserve System or European Central Bank conduct open market operations as they strive to realize financial policy objectives. Furthermore, international financial institutions, for instance, multilateral development banks, Bretton Woodss Institutions, as well as other development monetary institutions offer emergency funding to nations that experience crisis, offer risk countering tools to potential foreign investors, in addition to structure capital for development funds and poverty eradication resourcefulness. Trade institutions like the World Trade Organization, World Federation of Exchanges, and Institute of International Finance strive to facilitate trade, foster trade anomalies and tackle economic affairs, finance research and data publications, and promote standards.
Explicit objectives of monetary regulation encompass nations chase of financial stability as well as the protection of uncomplicated market actors from deceitful activity, whereas clear objectives include providing competitive and viable financial atmospheres to international investors. An individual country with sound governance, deposit insurance, standard accounting practices, concrete legal and disclosure procedures, emergency funding via discount windows, and financial regulations has the opportunity of developing itself and ultimately having a healthy domestic monetary system. However, in an international context, there lacks a centralized political power that can lengthen such arrangements on a global scale. Instead, governments have joined hands to create a host of practices and institutions, which have evolved gradually and are known cooperatively as the global financial architecture. Within this system, regulatory bodies like national governments in addition to intergovernmental institutions have been tasked with the responsibility to influence global financial markets.
How the global financial system promotes economic growth? The role of global financial markets.
The primary role of the global financial market is to assign limited resources such as capital, land, management skill, and labor to their most highly prioritized use, yielding the products required by the society. The global financial system promotes economic growth by fostering a high standard of living, which relies on the capacity of the international economy to yield a huge volume of food, clothing, shelter, as well as other necessities of modern living. It is an overwhelmingly sophisticated assignment given that limited resources should be procured in the right quantity to yield the raw materials of production as well as blended with other factors of production such as capital, labor, and management to produce the goods and services required by the consumers. Generally, an economic system should blend inputs capital equipment, labor and management skills, and land and other natural endowments to yield output. The global financial system spurs economic growth by creating a smooth production in favor of a flow of payments.
The global financial system comprises of the collection of institutions, markets, techniques, laws and regulations through which stocks, bonds, as well as other securities are traded, financial services are yielded and transferred around the world, and interest rates determined. Indeed, it is amongst the most crucial establishments of the todays world. It promotes the economic growth by transferring limited loanable finances from lenders (savers) to investors (borrowers) to purchase products and invest in new facilities and equipment in order for the global economy to experience growth as well as heighten the living standard of its citizenry. It, thus, determines both the quantity and the cost of finances accessible in the economy to fund for the many commodities bought on a day-to-day basis. Equally important, the things that take place in the global financial system have a positive impact in the health of the international economy (Imf. Monetary And Capital Markets Department, 2006). This is because when finances become less available and more costly, spending for products declines. In consequent, the growth of the economy slumps while the rate of unemployment increases as organizations retrench workers in a bid to cut on cost of production. On the other hand, when funds becomes less costly and the money available for lending become more accessible, this translates to a rise in the spending, the employment rate increases, and there occurs a vibrant growth in the economy.
In essence, the global financial market is an important component of the international economic system. The flows of production and payments within the international economic system can be depicted as a circular flow involving production units and consuming units. In this case, producing units are largely businesses and governments while consuming are mainly households. In todays economy, households offer management skill, labor, as well as raw materials to business organizations and government agencies in reward for income in terms of wages and salaries among other forms of payments. A large amount of this income is spent on products from business ventures and governments. For instance, approximately 97% of the income received by individuals and families living in the U.S. was used in paying for products or taxes to buy government services. The remaining 3% of the income was saved to purchase products in the future.
How does the MNC use the global financial markets to raise capital?
For wealth saved in financial instruments, the worldwide financial market offers an avenue of transforming those instruments into liquid money with minimal risk of loss. The global financial markets offer immediately spendable cash (liquidity) for MNCs that have saved in financial instruments, but urgently require to use money. In todays world, money comprises majorly of deposits and currency held in credit unions, banks, as well as other depository organizations and is the sole financial instrument that has perfect liquidity. It can be put to use in its present form without the need for changing it into any other form. Nonetheless, of all assets transacted in the global financial markets, money attracts the least rate of return, and its buying power is negatively affected by inflation. For this reason, MNCs generally decrease their holdings of money and instead opt for other, greater-yielding monetary instruments until such a time when they require spendable finances.
Financial markets pool finances from investors (savers) and channel them to MNCs, allowing MNCs to fund their activities and attain growth. Moreover, they allow MNCs to borrow money for short-term purposes whereas capital markets give MNCs a chance to enjoy long-term financing to support expansion. Without financial markets, MNCs would have a hard time finding lenders themselves. This burden is eliminated by intermediaries such Boutique Investment Banks, Investment Banks, and banks. These institutions take money from individuals and organizations that seek to save their money and then lend this money to those in need. More sophisticated transactions are involved where lenders together with their agents coincide with borrowers and their agents. It is at this meeting point that existing lending or borrowing commitments are sold to different parties. The best example of a global financial market would be that of a stock exchange. Here, a MNC can raise capital by selling shares to investors while its current shares can be sold or bought.
How the global financial system promotes trade through financing mechanisms outside the banking system, such as trade credit discuss.
On top of offering liquidity and easing the movement of sa...
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