Financial liberalization has caused a jump in volatility and risk in the past.
Examples are: the 1994-1995 Mexican peso crisis and the 1997 Asian crisis. Due to international interdependencies the Asian crisis i.e. dragged down the Russian and Brazilian economy. Both crises resulted from inadequately monitored large-scale flows of private, short-term capital (Bank for International Settlements 1998).
Furthermore the opening of national capital markets in many countries led into financial sector crisis. Cost of such crisis can reach 3 per cent to 25 per cent of GDP. The United States Savings and Loan crisis cost the world’s strongest economy 3 per cent of GDP. Japanese loan crises cost the economy an immeasurable amount of money, the absolute loss in smaller countries can even be bigger. Recent cases include i.e. Venezuela, 18 per cent; Bulgaria, 14 per cent; Mexico, 12-15 per cent; Hungary, 10 per cent. Other cases of even weaker economies like Argentina, Chile and Côte d’Ivoire have experienced costs of over 25 per cent of GDP in their crises (Goldstein, Turner 1996). Another trend was recognizable 20 years ago, due to deregulation the banks noticed increasing competition followed by lower margins. That is why many banks started to bank global. Not only to stay into the increasing competition had they followed their global going customers on foreign markets. Owing to the increasing need to hatch back the rising risks of dealing in foreign currencies, the volume of derivatives trading increased enormously. Many “rough traders” have seen their way to easy, quick money. One of them was Nick Leeson of Bearings ruining his company on the SIMEX exchange in Singapore. Due to this globalisation of banking, technological change and an increasing range of financial instruments and products the banking sector continued growing.
Table of Contents
1. Introduction
2. The Transformation of International Finance
3. Third-Market Trading
3.1. EuroDollar Market
4. Why Growth Continued
4.1. Globalisation
4.2. Technological Changes
4.5. Financial Innovation
4.4. Deregulation
5. Recent Changes in Regulation
6. Future Markets insuring Continuative Growth
7. Compendium
Objectives and Themes
The paper examines the drivers behind the sustained growth of the international banking sector during the latter half of the twentieth century, specifically investigating why this expansion persisted despite a concurrent reduction in regulatory constraints and increased financial volatility.
- The impact of globalization and technological evolution on financial services.
- The role of financial innovation and new instrument development.
- The influence of deregulation on market competitiveness and moral hazard.
- The development of international banking supervision standards, such as the Basel Accords.
- The potential for future growth in emerging economies.
Excerpt from the Book
3.1. EuroDollar Market
Eurodollars are deposits in US Dollars at banks headquartered outside the United States, or in foreign branches of banks headquartered within the United States. There is absolutely nothing "European" about Eurodollar deposits; a US dollar-denominated deposit in Singapore or Delhi would also be Eurodollar deposits. The deposits normally are very large and mostly involve deposits placed by one financial institution with another. Therefore, the Eurodollar rate shows quite accurately bank's cost of funds. Maturities are ranging from one day to six months; there is some very light trading that may run out as far as five years.
Even if being paid on deposits booked elsewhere in the world, the Eurodollar rate is driven primarily by the American economy. This is because it represents an interest rate paid on US dollar-denominated deposits. When the Fed tightens (or is expected to tighten, within the lifetime of the deposit) the Eurodollar rate goes up, and when the Fed eases (or is expected to ease) the Eurodollar rate goes down.
"Asian investors and central banks have started to buy the sector again," says Tom Ineke, head of syndicate at UBS Warburg. "Many people thought that the Eurodollar market was going to die in 2001 and the year before, but last year saw decent issuance and we have seen some very keenly priced transactions go very well." Due to renewed participation by institutional accounts, the Eurodollar market became fertile ground for frequent issuers such as the European Investment Bank, Kreditanstalt für Wiederaufbau, the Inter American Development Bank and the World Bank (Richards 2003).
Summary of Chapters
1. Introduction: Discusses the link between financial liberalization and increased market volatility, providing examples of major crises and historical banking trends.
2. The Transformation of International Finance: Outlines how banks moved into global markets to pursue economies of scale and combat domestic market saturation during the 1970s and 1980s.
3. Third-Market Trading: Examines the incentives for off-board trading and the impact of regulatory approaches on market competitiveness.
3.1. EuroDollar Market: Explains the nature and drivers of the Eurodollar market, highlighting its dependence on US monetary policy.
4. Why Growth Continued: Summarizes the key factors contributing to the expansion of the financial services industry, including globalization, technology, and innovation.
4.1. Globalisation: Analyzes how improved communication and the breakdown of the Bretton Woods system encouraged international portfolio diversification.
4.2. Technological Changes: Describes the impact of screen-based trading and the automation of retail banking services.
4.5. Financial Innovation: Categorizes various types of financial innovations driven by the need to manage risk in volatile markets.
4.4. Deregulation: Addresses the shift in tax structures and the emergence of moral hazard concerns due to safety net arrangements.
5. Recent Changes in Regulation: Reviews the history of international banking supervision following major bank collapses and the introduction of the Basel Capital Accords.
6. Future Markets insuring Continuative Growth: Forecasts steady future growth in the banking sector by focusing on the developmental needs of emerging economies like China and India.
7. Compendium: Concludes that while regulation provides a framework, effective supervision is essential to prevent malpractice and manage moral hazard in the long term.
Keywords
International banking, Financial liberalization, Eurodollar market, Globalisation, Technological change, Financial innovation, Deregulation, Moral hazard, Basel Accords, Sarbanes-Oxley, Market liquidity, Risk management, Banking supervision, Emerging economies, Capital markets.
Frequently Asked Questions
What is the core focus of this research paper?
The paper investigates the reasons behind the rapid and sustained growth of international banking during the latter half of the 20th century, specifically questioning how this growth persisted despite a reduction in regulatory constraints.
What are the primary themes discussed in the work?
The key themes include the impact of globalization, the adoption of advanced trading technologies, the role of financial innovation, and the evolution of international regulatory frameworks.
What is the main research objective?
The objective is to understand the interplay between market liberalization, risk-taking behaviors, and the subsequent need for international regulatory responses to ensure financial stability.
Which scientific methodology is utilized in this study?
The study employs a qualitative economic analysis approach, utilizing historical data, literature reviews, and industry-specific case studies to evaluate the transformation of international finance.
What topics are covered in the main body of the paper?
The main body covers the transition of finance to a global scale, the mechanics of the Eurodollar market, technological advancements in trading, the categorization of financial innovations, and the development of Basel standards for banking supervision.
Which keywords best characterize this work?
Keywords such as international banking, financial liberalization, globalization, Basel Accords, moral hazard, and financial innovation capture the essence of the study.
How did the collapse of major institutions like Bankhaus Herstatt influence banking regulations?
These collapses highlighted the lack of efficient international supervision, prompting G10 central bank governors to establish the Basel Committee on Banking Supervision to create global standards.
What does the author conclude regarding the future of the banking sector?
The author concludes that banking will continue to grow, particularly in emerging economies like China and India, provided that appropriate supervision and control mechanisms are implemented to manage potential risks.
- Quote paper
- Honours Bachelor of Arts Business Management Jonas Schirm (Author), 2006, Why has the growth in international banking continued despite a reduction in regulatory constraints?, Munich, GRIN Verlag, https://www.grin.com/document/57356
