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1 GLOBALIZATION OF FINANCIAL MARKETS
1 GLOBALIZATION OF FINANCIAL MARKETS
Pages 19-42
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From page 19... ...
Meanwhile, the rules and the philosophy with respect to capital transactions were far different: many countries restricted outwarc3 capital transfers either because they preferred their capital to be invested within their domestic economies or because they wished to prevent downward pressure on their exchange rates.
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From page 20... ...
Yet changes that have taken place in world financial markets themselves compound the difficulty of acquiring the information. Given the difficulties involved and the budgetary constraints faced by statistical agencies in the public sector, several questions arise: What is the current need for data on international capital transactions?
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From page 21... ...
on International Capital Transactions was convened to examine the changes in the global financial environment, assess public and private needs for ciata on international capital transactions, review the adequacy of existing data, and consider alternative collection methods. Subsequent research grants from the Federal Reserve Board and the U.S.
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From page 22... ...
federal agencies use to collect data on international capital transactions, as well as those used by other inclustrial countries. It drew on the insights and expertise of many individuals in fecleral agencies, international organizations, foreign government agencies, businesses, trade associations, and research organizations, including those from the U.S.
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From page 23... ...
in the field, and in this report, are "offshore," "abroacl," and "overseas," all of which are the same as foreign for purposes of international capital transactions, which are also sometimes called cross-borcler transactions. FACTORS CONTRIBUTING TO GLOBALIZATION The rapid expansion and integration of world financial markets since the late 1970s can be attributed to several factors.
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From page 24... ...
In the United States, the liberalization of domestic financial markets since the late 1970s has further facilitated international capital flows. The phaseout of interest rate ceilings (Regulation QJ,2 the easing of portfolio restrictions on pension funds and insurance companies, and the removal of a variety of restrictions on the permissible activities of banks3 have facilitated large transfers of money, both within national borders and across them.
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From page 25... ...
liberalized financial markets, international capital movements have been driven mainly by economic fundamentals. The macroeconomic conditions of various countries and their trade and tax policies, for example, affect the expected rates of return on various investments in different markets.
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From page 26... ...
Beginning in the early l980s, large capital inflows into the United States were an important source of financing for the sizable federal budget deficits being incurred. Differences in the mix of fiscal and monetary policies between the United States and other industrial countries over the past decade have directly affected exchange rates for the clollar.
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From page 27... ...
) COMPETITION AMONG FINANCIAL AND NONFINANCIAL INSTITUTIONS The easing of capital controls, the liberalization of financial markets, and technological innovations have stimulated competition among financial and nonfinancial institutions in various countries.
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From page 28... ...
In recent years in the United States, for example, pension funds, money market funds, and insurance companies, among others, have increasingly lured savings away from bank deposits. In turn, these institutional investors, which are better able than individuals to acquire the needed information for foreign investment, have heavily invested in foreign securities, fostering the rapid expansion of international bond and equity markets.5 Under these circumstances, there now are diverse institutions competing to provide financial services; securities have become an increasingly important element in international capital flows.
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From page 29... ...
Two other developments in the late 1980s also increased the issuance of commercial paper: the numerous mergers and acquisitions and the expansion of the swaps market, as borrowers combined commercial paper with swaps to create liabilities in other currencies. Asset-backed commercial paper also came into use, providing off-balance-sheet financing for trace and credit card receivables.7 Money market 6Commercial paper consists of short-term unsecured promissory notes, which are issued mostly by corporations.
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From page 30... ...
Treasury bills. The issuers of commercial paper in the United States have included foreign corporations and foreign financial institutions.
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From page 31... ...
With the growth of nonbank financial institutions, banks have also offered backup lines of credit or guarantees to these institutions, such as the backing of commercial paper issues. Under the 1988 Basle Capital Accord, banks' recommended capital requirements for these activities are much lower than for regular loans.~° One major role that large commercial banks have retained is to provide payments and clearing mechanisms for most financial transactions.
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From page 32... ...
International capital mobility not only has led to growing linkages of world financial markets, but also has increased the extent to which macroeconomic policies and market conditions of one country can significantly affect those of others. Meanwhile, the securitization of transactions and growth in the use of financial derivative instruments have made international financial flows more complex and less transparent, complicating supervision of financial institutions.
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From page 33... ...
Furthermore, it is argued that uncier floating exchange rates, increased international capital mobility can quicken the speed with which tight monetary policies slow inflation, since currencies tend to appreciate in response to higher interest rates. The unusual speed of the U.S.
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From page 34... ...
Thus, markets are vulnerable to larger swingsboth in the short and medium term—in a world of integrated financial markets and enormous worldwide liquidity.~2 i2The price dynamics created by derivative instruments can also exacerbate this potential. In foreign exchange markets, such swings in prices have led at times to coordinated intervention by central banks aimed at dampening the shortand medium-term volatility of exchange rates.
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From page 35... ...
The bank examination process also aims to guard against insolvency in commercial banks, and there is close international cooperation among supervisors of commercial banks, who meet regularly at the Bank for International Settlements at Baste. But there are questions as to whether nonbank financial intermediaries including brokers and dealers and investment banks—are equally well supervised anal, if these nonbank institutions are adequately supervised, whether central banks should also act as their lenclers of last resort.~4 i3There have been some initiatives in the United States and abroad to improve the clearing and settlement systems since then.
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From page 36... ...
In adclition, the Basle Committee has focused on ways of expanding the Baste Capital Accord to cover credit risk and various types of market risks, such as foreign exchange rate risk, interest rate risk, and position risks in tracled equity securities. (For a discussion of the various types of risks arising from derivatives transactions, see Federal Reserve Board of Governors et al., 1993; Bank for International Settlements, 1992b; Group of Thirty, 1993.)
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From page 37... ...
macroeconomic policy, monitor financial market performance, and oversee the stability of the domestic financial system, comprehensive information on U.S. international capital transactions will be required.
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From page 38... ...
Increasingly, cross-border financial exchanges represent capital transfers among the worldwide offices and branches of U.S. financial institutions, rather than transactions largely between U.S.
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From page 39... ...
international capital flows in recent years ant! the uncertainty associates!
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From page 40... ...
business that took place offshore in the 1980s was not included in the official statistics of U.S. international capital transactions.
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From page 41... ...
· In the late l980s, Americans became more concerned about another sizable component of the capital inflow: foreign direct investment in the United States. The news media carried stories that Japanese and other foreign investors were building factories and buying assets in the United States, including such national symbols as Rockefeller Center and the Seattle Mariners baseball team.
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From page 42... ...
Without such statistics, informed decisions will be difficult to make and sound policies will at times be lacking. It should be noted here that the United States produces as much detailed data on its international capital transactions as any country in the world.
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