International Financial System
Wha is financial system
• In finance, the financial system is the system that allows the
transfer of money between savers (and investors) and borrowers.
• A financial system can operate on a global, regional or firm-
specific level.
Internation Financial System
• The global financial system (GFS) is the financial system consisting
of institutions and regulators that act on the international level, as opposed to those
that act on a national or regional level.
The main players are the global institutions, such as
• International Monetary Fund (IMF): a global organization that works to achieve sustainable
growth and prosperity for all of its 191 member countries. (1940) Washington DC
• Bank for International Settlements BIS (1930) Basel, Switzerland: is an international
organization that promotes cooperation between central banks and provides facilities for
international financial operations,
• national agencies and government departments, e.g.,
• central banks and finance ministries,
• private institutions acting on the global scale, e.g., banks and hedge funds, and regional
institutions, e.g., the Euro zone.
Components of Financial System
1. Money.
2. Banking and Financial Institutions.
3. Financial Instruments.
4. Financial Markets.
5. Central Banks.
1. Money:
• Money is defined as anything that is generally accepted in
payment for goods and services or in the repayment of debt.
• Monetary theory ties changes in the money supply to changes in
aggregate economic activity and the price level.
Money and Recession
• The periodic but irregular upward and downward movement of
aggregate output produced in the economy is referred to as the
business cycle.
• Sustained (persistent) downward movements in the business
cycle are referred to as recessions.
• Sustained (persistent) upward movements in the business cycle
are referred to as expansions.
Money and Inflation
• The aggregate price level is the average price of goods and services in
an economy
• Inflation is a continual rise in the price level. It affects all economic
players.
• There is a strong positive association between inflation and growth
rate of money over long periods of time.
• A sharp increase in the growth of the money supply is likely followed by
an increase in the inflation rate.
2. Banking and Financial Institutions:-
• Financial Intermediaries are institutions that channel funds from
individuals with surplus funds to those desiring funds but have a
shortage of them.
• Among other services, they allow individuals to earn a decent
return on their money while at the same time avoiding risk;
• e.g., banks, insurance companies, finance companies,
investment banks, mutual funds, brokerage houses,
3. Financial Instruments:-
• “Securities” is a name that commonly refers to financial
instruments that are traded on financial markets.
• A security (financial instrument) is a formal obligation that entitles
one party to receive payments and/or a share of assets from
another party; e.g., loans, stocks, bonds.
• Even an ordinary bank loan is a financial instrument.
4. Financial Markets:-
Financial markets are mechanisms that allow people to
• easily buy and sell (trade)
• financial securities (such as stocks and bonds),
• commodities (such as precious metals or agricultural goods),
• and other fungible items of value at low transaction costs and at prices that
reflect;
• e.g., Bahrain Stock Exchange, New York Stock Exchange, U.S. Treasury's
online auction site for its bonds.
5. Central Banks
• A central bank is an institution that manages a country's monetary
policy and currency.
• Example: RBI- India, The European Central Bank (ECB)- Eurozone, The
US Federal Reserve (US), The Bank of Japan (Japan)
They are responsible for:
• Monetary policy
• Regulating the banking industry
• Macroeconomics forecasting
• Lending of last resort
Emerging Trends in the International Financial System
1. Digital Currencies and Blockchain Technology
• Central Bank Digital Currencies (CBDCs): Governments exploring CBDCs
to modernize payment systems.
• Cryptocurrencies: Growing adoption of Bitcoin, Ethereum, and others for
cross-border transactions.
Emerging Trends in the International
Financial System
2. Sustainable Finance and Green Bonds : “A bond is a contract between
an investor and a borrower that allows the borrower to raise money”
• Rise in Environmental, Social, and Governance (ESG)-linked investments.
• Growth in green bonds and sustainability-linked loans.
3. Fintech Revolution
Expansion of peer-to-peer lending and decentralized finance (DeFi).
• Examples: cryptocurrencies, blockchain technology, and software that allows people to transact
financially with each other.
• AI-driven risk assessment and credit scoring systems.
• Mobile and app-based financial services in underserved regions.
Emerging Trends in the International
Financial System
4. Regional Financial Integration
• Enhanced cooperation in regional trade blocs (e.g., ASEAN, EU, and African
Continental Free Trade Area).
• Development of regional financial stability mechanisms.
5. Dynamic Capital Flows
• Increasing foreign direct investment (FDI) in emerging markets.
• Surge in venture capital and private equity financing globally.
Emerging Trends in the International Financial
System
6. Digital Payment Systems
• Proliferation of real-time cross-border payment platforms (e.g., SWIFT gpi,
Ripple).
• Financial inclusion through mobile wallets in developing economies.
7. Shift Towards Multipolar Financial Systems
• De-dollarization efforts by emerging economies.
• Greater role of Chinese Yuan, Euro, and other currencies in global trade.
Contemporary Challenges in the International
Financial System
1. Global Economic Imbalances
• Persistent trade imbalances between developed and emerging economies.
• Disparities in economic recovery post-COVID-19 pandemic.
2. Regulatory Fragmentation
• Lack of uniform regulations for digital currencies and fintech.
• Challenges in managing global financial flows under differing national laws.
Contemporary Challenges
3. Geopolitical Tensions
• Impact of sanctions, trade wars, and regional conflicts on financial stability.
• Shifting alliances affecting global financial flows.
4. Climate Change Risks
• Financial risks from climate-related disasters.
• Stranded assets in fossil fuel industries.
Contemporary Challenges
5. Cybersecurity and Fraud
• Rise in cyberattacks targeting financial institutions.
• Concerns over data breaches and financial fraud in digital transactions.
6. Volatile Exchange Rates and Inflation
• Uncertainty in currency markets due to monetary policy changes.
• Inflationary pressures affecting global purchasing power.
Contemporary Challenges
7. Debt Crises in Emerging Markets
• Growing sovereign debt levels in low-income countries.
• Limited access to refinancing options for distressed economies.
8. Financial Inclusion Gaps
• Limited access to banking in rural and underdeveloped areas.
• Challenges in integrating informal economies into the formal financial
system.
