Essay Sample on Global Financial System: Clearing, Settling, Pooling & Transferring Resources

Introduction

The global financial system provides a worldwide framework of legal agreements, institutions, and includes formal and informal economic actors which in unison facilitate the international flows of financial capital for trade and investment financing.

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The system influences and supports the major financial institutions through its functional perspectives that include:

• Clearing and settling of payments
• Pooling together of resources
• Transfer of economic resources across the borders
• Managing of risk
• Establishing and revealing or price information
• Proper handling of incentive problems (Eaker, 1997).

The institutions can benefit from one or more of the functional perspectives offered depending on their operations.

Potential Next Major Regulatory Initiatives in the US Financial System

The current regulation negatively impacts the U.S. financial system in various ways. Some of the country's most sophisticated financial firms, and risk management systems fail to keep pace with the complex natures of the new financial products ("Treasury.gov," 2020). The inadequate transparency and standardization in markets for securitized loans weaken the standards of underwriting. This results in a breakdown with the compensation practices in the financial services industry rewarding short-term profits at the expense of long-term value. The system, therefore, requires a change since the gaps and weaknesses presented in the regulation and supervision of financial firms present challenges to the government's ability to monitor, prevent, or address the risks as they develop in the system.

The system would evolve to a simple, and more efficiently enforced one that protects the consumers, and investors reward innovation and evolve with the financial market changes. Some of the proposed changes would involve the following:

• Promoting the robust supervision and regulation of financial firms using the new Financial Services Oversight Council, and new authorities for Federal Reserve among others.
• Ensure comprehensive supervision of the financial markets through enhanced regulation and securitization of markets.
• Protect investors and customers from financial abuse via new Consumer Financial Protection Agencies and stronger regulation to enhance transparency in investor products and services.
• Providing the government with the appropriate tools to manage any financial crises, i.e., new regimes to resolve nonbank financial institutions and revisions to the federal reserve's emergency lending.
• Raising of international regulatory standards and enhancing international cooperation.

A Comparison of the US to the European Regulation

A major difference between the two regulations falls in the differences in the corporate funding models between the US and the EU. The European regulation relies predominantly on the presence of banks to provide credit, while for the American model mainly opts for capital market instruments through bonds, and equities, as the most appropriate ways to raise funds (Moloney, 2017).

US Financial System with Similar Financial Systems

Comparison With the German Financial System

The US financial system provides a tremendous variety of financial instruments. However, it does not provide intergenerational risk sharing since the markets are incomplete. The German model, on the other hand, is characterized by a lack of competition between the banks and is not constrained by competition from the financial markets (Allen & Douglas, 1994).

Comparison with the European Financial System

Capital markets in the US are much better at financing the very large companies that are not present elsewhere compared to the European model ("wsbi-esbg," 2015). The US has a very large capital market but a smaller banking sector, while the EU has a large banking sector and a small capital market.

References

Allen, F., and Gale, D. (1994). A welfare comparison of the German and U.S. financial systems. Ideas.repec.org. https://ideas.repec.org/p/wop/pennin/94-12.html

Eaker, M. et al. (1997). The global financial system: A functional perspective. Researchgate.net. https://www.researchgate.net/publication/269791298_The_Global_Financial_System_A_Functional_Perspective

Moloney, L. (2017). EU Vs US financial regulations. Infrastructure Channel. https://www.infrastructure-channel.com/finance/eu-vs-us-financial-regulations/

"Treasury.gov" (2020). Financial Regulatory Reform. Treasury.gov. https://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf

"WSBI-ESBG" (2015). Financial systems in Europe and in the US: Structural differences where banks remain the main sources of finance for companies. Wsbi-esbg.org. https://www.wsbi-esbg.org/SiteCollectionDocuments/Financial%20systems%20in%20Europe%20and%20in%20the%20US.FINAL.pdf