Derivatives trading is now the world's biggest business, with an estimated
daily turnover of over US$2.5 trillion and an annual growth rate of around
14 per cent (Swan, 1999). Derivatives markets have ancient origins, and
a long and complex history of trading and regulation. This work examines
the history of derivatives and their impacts on the structure of
international banks in order to show the implications of modern
international banking in comparison to domestic banking. Mishkin (2003) describes banks as financial institutions that accept
deposits and grant loans. In this definition banks are the financial
intermediaries that the average person contacts most frequently for its
financial dispositions, savings, investments and payments. The structure
of a bank therefore seems to be adjusted to the purpose of its business
activity. Mishkins traditional definition of a bank includes to those financial
institutions we refer to as mutual savings banks, savings and loan
associations, commercial banks and credit unions. Their traditional core
business is to provide the settlement of national payments and to
transform funds from savers over time as well as to process market
information (Canals, 1997). They focus on domestic or regional,
eventually even local markets and realize their profits from interest
margins and balance sheet activities. Therefore they employ an asset- and
liability management in order to avoid liquidity and credit risks.
Table of Contents
1. Introduction
2. Structure of banks
2.1 Domestic banks
2.2 International banks
3. The Rise of Financial Derivatives
3.1 International Monetary Arrangements as an Incubator for Financial Derivatives
3.2 Impacts on the Financial Architecture
4. The Changes in the Structure of International Banks
4.1 Risk
4.2 Regulation
4.3 Speculation
5. Conclusion
Objectives and Topics
The primary objective of this work is to examine the evolution and impact of financial derivatives on the corporate structure of international banks. The study investigates how modern international banking differs from traditional domestic banking models, particularly in response to the rapid rise of derivatives markets.
- Comparison of domestic and international banking structures.
- Historical evolution of financial derivatives as instruments for risk management.
- Impact of international monetary arrangements (e.g., Gold Standard, Bretton Woods) on market development.
- Analysis of structural changes within banks, including risk management, regulation, and speculative activities.
Excerpt from the Book
3.1 International Monetary Arrangements as an Incubator for Financial Derivatives
Swan explains that derivatives are not inventions of recent decades. Derivatives have been used ever since in the history of trade in the Ancient Middle East, in Ancient Greece and Rome, in the Post-Roman Era (476-1204), in the Middle Ages (13th - 15th Centuries), during the growth of Trade in Northern Europe and England (16th - 17th Centuries), the industrial revolution, and World War I+II and they play an essential role in modern global economy. In particular during the second half of the 20th century derivatives became increasingly important in the context of international trade and finance.
Prior to the Second World War, there was no international central bank. International payments, in particular in settlement of inter-country debts were processed by central banks of the individual countries through transfers of gold, pound sterling or US dollars. This system, called the gold standard or gold/sterling standard (Buckley 2000) operated at the end of the 19 century and most of the first half of the 20 century. It provided a platform for international payments by use of a substitute currency (gold) into which the currencies of all participating countries were convertible at a fixed rate. Thus the risk of changing exchange rates was eliminated.
Summary of Chapters
1. Introduction: This chapter provides an overview of the immense scale of derivatives trading and introduces the research aim of analyzing their influence on modern international bank structures.
2. Structure of banks: This section defines the fundamental differences between domestic and international banks, highlighting their respective roles in financial intermediation and profit generation.
3. The Rise of Financial Derivatives: This chapter explores the historical context and the catalysts for the growth of derivatives, emphasizing their dual role in managing and increasing market risk.
4. The Changes in the Structure of International Banks: This chapter analyzes how banks have modified their internal structures—specifically through risk management, regulation, and brokerage departments—to accommodate the proliferation of financial derivatives.
5. Conclusion: The final chapter summarizes the findings, noting that while derivatives are essential to modern global finance, they have fundamentally shifted banking operations toward capital-based risk management.
Keywords
Financial Derivatives, International Banking, Risk Management, Bretton Woods, Gold Standard, Financial Architecture, Market Volatility, Hedging, Speculation, Financial Engineering, Global Finance, Capital Markets, Banking Regulation, Institutional Change.
Frequently Asked Questions
What is the primary focus of this work?
The work focuses on the structural changes within international banks caused by the increased utilization of financial derivatives in comparison to traditional domestic banking models.
What are the central themes of the research?
Central themes include the historical evolution of derivatives, the role of international monetary arrangements, and the resulting organizational adaptations within the banking sector.
What is the primary research goal?
The goal is to analyze how the shift from traditional deposit-loan activities to complex derivatives-based business has transformed the corporate structure and risk profiles of international banks.
Which scientific methodology is used?
The work employs an analytical literature-based approach, synthesizing historical developments and economic theory to explain contemporary banking structures.
What topics are covered in the main part?
The main part covers the transition from fixed exchange rate systems to modern floating markets, the history of derivatives, and the specific departmental changes within banks, such as risk monitoring and compliance.
Which keywords best characterize the paper?
Key terms include derivatives, international banking structure, risk hedging, financial architecture, and global financial history.
How did the collapse of Bretton Woods influence derivatives?
The collapse triggered increased volatility and market uncertainty, which forced banks to adopt financial derivatives as necessary tools for hedging against fluctuating exchange rates.
Why are "Chinese walls" mentioned in the context of bank structures?
They are described as an essential internal structural requirement to separate analysts from trading departments, preventing conflicts of interest and ensuring regulatory compliance.
- Quote paper
- Markus Bruetsch (Author), 2003, International Banks and the Rise of financial Derivatives, Munich, GRIN Verlag, https://www.grin.com/document/14847
