International Financial Management
International Financial Management.
Financial system stability refers to the smooth intermediary flow of funds to and from investors to the savers with the help of financial markets and proper market infrastructures1. Financial systems are very important in the overall growth of the economy because it offers credit facilities to all the other sectors of an economy and thus, when there is stability in the financial systems of a country, it promotes its growth and development. According to a report given out by the IMF2, a flexible financial system should have a well defined strategy for crisis management so that it can quickly adjust and get back on track in case of any misfortune to maintain public confidence. Crisis can be as a result of failure in the capital markets, banks or any other financial institution which is not necessarily a bank. When there is financial stability the business cycle remains stable and there is vast economic growth. According to the 9th Geneva Report3 on World Economy (GRWE), financial stability is more sustainable now than it was 10 years ago although this stability has been greatly affected by entrance of new financial institutions in the international markets.
This report also argues that the
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In the recent past, financial terrorism has become a major global threat to stability of financial systems in terms of money laundering by the offshore centers (OFCs) and this may result in financial instability of major financial institutions5.
Major crises which have happened in the last decade include the recent Asian crisis, the hedge funds related crisis and the 9/11 terrorism attack in the US. This crises have led to increased flexibility and elasticity in the financial systems. They further enable the systems to diversify and improve on their risk control methods.
In the recent past, there has been immense growth in the number of financial systems in the world as well as a sharp increase in the rate of occurrence of financial crisis in many financial institutions. According to a report by the IMF published in the NY times (January 7, 2004), great debts like what was being experienced by US at that time, can destabilize the international financial systems arguing that too much borrowing can lead to an increase in the interest rates for the global financial markets hence slowing down the overall economic growth. This
Other new financial market threats include:
Economic changes in balance sheets for both domestic and corporate sectors of the economy.
Major price developments in relation to the asset prices.
Risk management strategies put in place by the financial markets and intermediaries.
As discussed above, the growth in financial system integration in the world calls for attention on the threats facing these institutions. Due to the improved ICT, most financial markets can quickly transfer risks from one market to the other. For this reason, the instability of a system in one country can within no time affect economies of other countries. There has been increased concern especially following the financial instability experienced worldwide back in the year 1997 according to report posted on the Financial Stability Forum website6. This particular crisis greatly affected the nature and the flexibility of the financial markets thus lowering their ability to respond to other crisis in future7. This has led to the increased debate concerning the stability of the systems especially over the last decade. Many international community and organizations such as the IMF, central banks of various countries and so forth have of late been deeply involved in attempts to perfect stability in many financial systems globally. This has been mainly based on three major ways. One of the ways the international community is promoting financial stability is by encouraging the systems to identify and deal with the threats at earlier stages before it is too late.
In addition, the international community has developed the internationally acceptable standards which are applicable to all financial institutions. This ensures that there is harmony and stability among all financial markets across all regions in the world. Finally, there has been an improvement in the coordinated transfer of information among the responsible financial authorities, a move which ensures that there is constant check on the stability of various financial systems globally.
In all these, the IMF organization plays a very important role in the management of financial crisis like in the case of Asian financial crisis but in the recent past, the International regulatory forum has increased the awareness in the this issue of financial stability. The Reserve Bank of Australia has been the center of these forum and other regulatory groups such as the joint forum and the International Association of Insurance Supervisors (IAIS) among others. On the other hand, the Basel committee helps in the harmonization of the financial systems through the bank supervision9.
The financial regulatory forum was established back in the year 1999 with the aim of promoting and maintaining international financial stability. This is achieved through proper and efficient transfer of information and close supervision of the financial systems. This forum serves to bring together representatives from almost all major international financial institutions, regulatory groups such as the Basel committee, finance experts from different central banks all over the world and other international community authorities together with IMF and World Bank. The member countries which originally formed this forum included Hong Kong, Australia, Singapore, Swiss and Netherlands although membership has since then been extended to to include other nations. The forum is serves a great role in improving the flow of communication in all member and non-member countries. The forum holds meetings oftenly, at least twice an year, in order to access the vulnerability situation of the financial systems in the international front. Since it establishment in 1999, the forum has so far come up with several reports concerning the market capital flows, financial systems, the risks involved in credit transfer markets and the various international standards which can be implemented to ensure the stability of international financial institutions10. The major activities which this forum has covered so far include:
Investigation into matters concerning various highly leveled financial institutions (HLIs) and their impacts on the market risks and dynamism. Various measures were put in place in the year 2000 to address such impacts and this included the exposure of all institutional information to the public through proper regulatory and legislative policies. This move was reviewed a year later and it was noted that the financial institutions have an improve in the crisis management and risk awareness. However, the review team noted that the introduction of a policy which could test the future exposure to credit-related risks of the institutions by the institution capital lenders.
The forum has further investigated the possibility of a potential financial instability which may result from other off-shore financial systems in case of mismanagement and poor inefficient flow of information between the systems and their respective supervisors. According to the forum’s report of 2000, several offshore financial centers (OFCs) were likely to cause financial instabilities in the future due to this two factors. As a result, the forum decided to take precautions through the authorization of IMF to oversee and ensure the offshore centers strictly adhere to the international financial standards set by the international community.
Exploration of the possible outcomes in case of extreme financial difficulties in one of the significant financial institutions currently present in the financial market. The 2001 study involving the G10 countries together with Australia established that the already existing policies were in a position to handle any systematic financial crisis although it was advisable for all the government authorities to improvise contingent planning methods which they would employ to solve problems in their larger financial institutions faster and more efficiently to avoid the possibility of bigger problems.
The forum has also dealt much on tackling the various risks involved in the credit transfer markets. Various groups operating in conjunction with the forum have been deeply investigating issues concerning the nature of participants involved in this kind of markets, the type of risks involve in credit transfer and the practical ways for the management of this risk. The Reserve Bank of Australia has played a great role in this groups especially in the provision of a great insight in this issue of credit risk transfer.
The international regulatory forum is a very important initiative which is aimed at achieving international financial stability in the financial systems through two major ways. One, the forum tries to develop ways in which the financial systems can detect early signs of a crisis and secondly, the forum is trying to come up with definite suggestions for stability11.
Currently, various international organizations through the financial stability forum share the overall responsibility of supervising and scrutinizing the operations of the international financial systems. The forum has three major working groups comprising of supervisors and regulators each of which carries out specific roles in this major undertaking. These groupings include the Basel committee which sets all the rules concerning bank supervision, the international Organization of Securities Commissions (IOSC) which helps to promote the security of global future financial markets and the IAIS which assists in promoting the level of insurance for the financial institutions.
The financial regulatory forum helps to improve risk awareness in the financial institutions through three major aspects. First of all, the forum coordinates the prudential issues relating to the micro and macro financial institutions. Secondly, the forum brings together the major global financial institutions and their authorities to promote financial stability and lastly, the forum integrates the the emerging financial systems with the already existent markets.
In order to address the risks facing financial stability, the forum’s future plans involve the continuous monitoring of the highly leveraged financial institutions, market capital flows as well as the OFCs which may destabilize the financial systems. It also plans to implement the international financial standards and codes in order to enhance market awareness for the participants. In addition, the forum plans to raise awareness on the market liquidity and ways of dealing with weaknesses which may arise in the financial institutions12.
In conclusion, it is very important for all financial institutions to put in place the necessary measures necessary for guarding against future risks and in order to promote stability and resilience in the respective institutions and win the public confidence.
1. Clement, D. Current Global Financial Analysis. California: California Univ Press, 2001. Available at SSRN: <<http://ssrn. com>> Accessed on 29/08/08.
2. The IMF website: <<http://www. imf. org>> Accessed on 29/08/08.
3. International Financial Stability. Geneva Reports on the World Economy 9, CEPR/ICMB 2007. Available at <<http://www. cepr. org>> Accessed on 29/08/08.
4. Stephen, M. The Design of Bank Regulation and Supervision: Some Lessons from the Theory of Finance. Harvard: Harvard Univ. Press, 2007.
5. Edward, J. Competitive Financial Regulation: An International Perspective. NY: Macmillan Publishers, 2005.
6. The Financial Stability Forum. Available at <<http://www.fsforum.org>> Accessed on 29/08/08.
7. Jack, G. and Richard, H. Emergency Liquidity Assistance for International Banks. Cambridge: Cambridge Univ. Press, 2002.
8. Anthony, S. The Interbank Market, Contagion Effects and International Financial Crises. California: California Univ Press, 2001.
9. The Basel committee website: <<http://www. bis. org>> Accessed on 29/08/08.
10. Ernst, B. and Jean, D. The Role of Public Policy in Ensuring Financial Stability: A Cross-Country, Comparative Perspective. NY: McGraw Hill, 1999.
11. Barry, E. and Richard P. The Anatomy of Financial Crises. Cambridge: Cambridge Univ. Press, 1997.
12. Reserve Bank of Australia website: <<http://www. rba. gov. au>> Accesed on 29/08/08.