global financial architecture

8/3/2019 Global Financial Architecture

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M.S.RAMAIAH INSTITUTE OF TECHNOLOGY

(AUTONOMOUS, AFFILIATED TO VISVESWARAYA TECHNOLOGICAL

UNIVERSITY, BELGAUM)

M.S.R.I.T POST, BANGALORE - 560054

By

CHETAN KRISHNA H G 1MS10MBA15Under the guidance of Co-ordinated by

Mr. Y.M. SATISH Mrs. MAHALAXMI. A

Professor Assistant Professor

MSRIT, Bangalore MSRIT, Bangalore

SE

MINAR ON “THE GLOBAL FINANCIALARCHITECTURE”

1



The global financialarchitecture



WHAT IS GLOBAL FINANCIAL

ARCHITECTURE?

A GLOBAL FINANCIAL ARCHITECTURE ORINTERNATIONAL FINANCIALARCHITECTURE IS A SETUP OF

INSTITUTIONS AND REGULATORS THATFRAME AND IMPLEMENT POLICIES FORECONOMIC TRADE AND TRANSACTIONSAT AN INTERNATIONAL LEVEL MAINLYBETWEEN COUNTRIES OR A GROUP OFCOUNTRIES.

IT WAS ALSO REFERRED TO AS

INTERNATIONAL MONETARY SYSTEM IN



THE GLOBAL FINANCIALARCHIETCTURE CONSISTS OF

COLLECTION OF INSTITUTIONS, RULESAND CONVENTIONS: THAT ENCOURAGEMACRO – ECONOMIC AND FINANCIAL

STABILITY.

EXCHANGE RATE ARRANGEMENTS:MAINLY BETWEEN COUNTRIES AT THE

FOREIGN EXCHANGE MARKET. CAPITAL FLOWS: MOVEMENT OF MONEY

FOR THE PURPOSE OF INVESTMENT,TRADE OR BUSINESS.



EVOLUTION OF INTERNATIONAL

MONETARY SYSTEM

THE GOLD STANDARDS(1870 – 1914):

The gold standard is a monetary system in which the standardeconomic unit of account is a fixed mass of gold.

The international monetary system was largely decentralised andmarket based. There was minimal institutional support, apart from

joint commitments of the major economies to maintain the goldprice of the currencies.

The major drawback of this system was the surplus countries didnot abide by the system and tried to sterilize gold inflows.




MONETARY SYSTEM

THE INTERWAR PERIOD (1919 –

1939):

After the World War 1 widespread inflation caused by moneyfinanced war expenditures and major shifts in the composition ofthe Global Economic Power undermined the pre – war gold

parities. And also there was no mechanism to coordinate anorderly return to inflation adjusted exchange rates.

During the great depression, with an open capital account andcommitment to the gold exchange standard, the United States

could not use the monetary policy to offset the economiccontraction. This would further weaken the global economy.Unable to adjust to these pressures countries were forced toabandon the system.




MONETARY SYSTEM

BRETTON WOODS SYSTEM(1944 – 1971):

The Bretton Woods System of pegged, but adjustable exchange

rates was a direct response to the instability of the inter – war

period. Bretton woods was different than the gold standards in thefollowing ways.

It was more administered than market based.

Adjustment was co – ordinated through International Monetary fund.

Capital controls were widespread and there were rules rather than

conventions.

The Bretton Woods system finally collapsed in 1970s after USpolicies became expansionary, its trade deficit unsustainable andthe loosening of the capital controls began to put pressure on thefixed exchange rates.




MONETARY SYSTEM

THE CURRENT HYBRID SYSTEM:After the breakdown of the Bretton woods system, the internationalmonetary system reverted to a more decentralized market basedmodel. Major countries floated their exchange rates, made their

currencies convertible and gradually liberalized capital flows. Inrecent years several major emerging markets have adopted similarpolicies after experiencing the difficulties of managing the peggedexchange rate regimes.

Unfortunately this trend has been far from universal. In many

respects the recent crisis represent a classic example ofasymmetric adjustments by accumulating enormous foreignreserves and sterilizing the inflows.

The best example can be China, given its economic miracle, it isremarkable that China’s real effective exchange rate has not

appreciated since 1990.



THE INTERNATIONAL FINANCIAL

INSTITUTIONS

THE FINANCIAL INSTITUTIONS THAT HAVE BEENESTABLISHED BY MORE THAN ONE COUNTRY OR AGROUP OF COUNTRIES.

THEY PROVIDE FINANCIAL SUPPORT ANDPROFESSIONAL ADVICE FOR ECONOMIC ANDSOCIAL DEVELOPMENT IN DEVELOPINGCOUNTRIES.

THEIR COMMON OBJECTIVE IS TO PROMOTEINTERNATIONAL ECONOMIC COOPERATION ANDSTABILITY.

THEY MAKE THE BULK OF THE GLOBAL

GOVERNANCE IN FINANCIAL ASPECTS.



IMPORTANT FINANCIAL

INSTITUTIONS

INTERNATIONAL MONETARY FUND:The IMF was established by an international treaty in 1945 ascentral institution in the Bretton Woods standard.

It established a system of currency trading and exchange rates thatenable the business to take place between countries with differentcurrencies. IMF’s statutory policies include promoting the balanced

expansion of world trade, the stability of exchange rates, theavoidance of competitive currency devaluation and the orderlycorrection of balance of payment problems.

Headquartered in Washington, the IMF is governed by its almostglobal membership of 184 countries.



IMPORTANT FINANCIAL

INSTITUTIONS

THE WORLD BANK GROUP:Founded in 1945 at the same international conference the WorldBank group was formed primarily for the reconstruction of thecountries devastated by WWII. As those countries recovered itsprimary focus was turned to the economic development of theworld’s non industrialized countries.

The World Bank is organized much like a cooperative whoseshareholders are the same 184 countries that make up IMF’smembership. It is represented by a Board of Governors who are therespective financial or development ministers of the member

countries. It is made up of five institutions namely International Bankfor Reconstruction and Development, International DevelopmentAssociation, International Finance Corporation, MultilateralInvestment Guarantee Agency and International Center forSettlement of Investment Disputes.



IMPORTANT FINANCIAL

INSTITUTIONS

REGIONAL DEVELOPMENT BANKS:These financial institutions mainly focus on the development of aregion such as Africa, America etc. The aim of the RDBs is to helpcountries of a certain region to promote their economic growth and

poverty reduction by providing low interest loans, grants and expertadvice for the development projects.

A key feature of the RDBs is that they are governed and staffed byregional countries. This means the countries in the region have thestrongest influence over how the money is best spent on

development. Some examples of RDBs are African Development Bank

Asian Development Bank

Inter – American Development Bank.



WHY TRANSFORMATION IS

REQUIRED?

Macroeconomic stability: coherence ofpolicies that are designed at the nationallevel (regional in the case of monetary policy

in the euro area), and adequate supply ofliquidity at the international level, particularlyduring crises.

Financial stability: coherent financialregulation worldwide [an issue that onlybecame important since the 1970s], and debtworkout mechanisms [still not fully

recognized]



sTRANSFORMING GLOBAL

SCENARIOTwo important transformations have taken place in the role ofInternational Financial Institutions both of which are of highsignificance in the Global Financial Architecture.

Firstly, globalization has progressed a great deal over the preceding quartercentury which implies that foreign trade and private capital plays a greater

role in economic development than ever before.

Secondly, a reexamination of the role of state which in turn motivated astrong shift towards market based approaches.

As a result of these transformations the Private sector and PrivateInternational Finance have become primary agents of economic

developments.

The IFI’s must continue to work with governments but they must

also go beyond this and participate directly in the private investmentprocess.



SDR BASED RESERVESYSTEM?

SDR’s are the supplementary foreign exchange reserve defined and

maintained by IMF. Not a currency, SDR’s instead represent a

claim to currencies held by IMF member countries for which theymay be exchange.

SDR was created in 1969 by IMF, which was used as a debtsecurity, a form of a credit. But disagreements broke over the use ofSDRs as some wanted to use it as currency and some as credit.

The recent economic crisis in 2007-2009 made the IMF to issuethird round allotments. Many proposed SDRs to be used as an

alternative to US dollar to be used as a global currency i.e. to useSDRs in private transactions turning it to a true global monetaryinstrument. One simple form would be to allow financial institutionsto deposit in central banks to be held in SDRs.



DESIRABLE FINANCIALARCHITECTURE1. Consistency of national economic policies

(particularly of major economies) + avoidnegative spillovers on other countries(particularly through exchange rates).

2. An international monetary system thatcontributes to the stability of the global economyand is considered as fair by all parties.

3. Regulation of financial and capital markets toavoid excessive risk accumulation, and to

moderate the pro-cyclical behavior of markets.4. Emergency financing during crises.

5. International debt workout mechanisms tomanage problems of over-indebtedness.



MARKETS ON INDIANECONOMY. THE CRUDE EXAMPLE:

The fluctuation in the international crude oil prices has led to

unstable demand patterns in the Indian markets. There is a certainamount of criticism on Govt. policies for not relaxing the priceswhen the global markets are down. This is more complicated than itseems.

The oil companies register thousands of crores in losses duringhigh prices.

Nevertheless, this unstable price fluctuation has contributed to therise in inflation worse than ever. The rupee has seen a downwardtrend in recent weeks and with the recent fuel price hikes it is notexpected to get better.

The automobile and airline industries are directly affected by this

and the uncertainties in these sectors has a moderate impact onshort term growth forecasts.



CONCLUSION

Comprehensive yet evolutionary reform: An IMF-centered macroeconomic policy

consultation/coordination. An SDR-based global reserve system. Rebuilding the exchange rate system. Broader use of capital account regulations. An international debt workout mechanism

An inclusive architecture: Reform of the Bretton Woods institutions From “elite multilateralism” to a UN-system

organization. A multilayered architecture with active participation of

regional institutions



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