Global Financial System

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Global Financial System:

Global Financial S ystem


INTRODUCTION The G lobal 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 and Bank for International Settlements national agencies and government departments, e.g., central banks and financeministries , private institutions acting on the global scale, e.g., banks and hedgefunds , and regional institutions, e.g., the Eurozone .


INSTITIUTIONS International institutions The most prominent international institutions are the IMF, the World Bank and the WTO: The International Monetary Fund keeps account of international balance of payments accounts of member states. The IMF acts as a lender of last resort for members in financial distress, e.g., currency crisis, problems meeting balance of payment when in deficit and debt default. Membership is based on quotas, or the amount of money a country provides to the fund relative to the size of its role in the international trading system.


Cont… The World Bank aims to provide funding, take up credit risk or offer favorable terms to development projects mostly in developing countries that couldn't be obtained by the private sector. The other multilateral development banks and other international financial institutions also play specific regional or functional roles. The World Trade Organization settles trade disputes and negotiates international trade agreements in its rounds of talks (currently the Doha Round

Government institutions:

Government institutions Governments act in various ways as actors in the GFS , primarily through their finance ministries: they pass the laws and regulations for financial markets, and set the tax burden for private players, e.g., banks, funds and exchanges. They also participate actively through discretionary spending. They are closely tied (though in most countries independent of) to central banksthat issue government debt, set interest rates and deposit requirements, and intervene in the foreign exchange market.

Private participants:

Private participants Players active in the stock-, bond-, foreign exchange-, derivatives- and commodities-markets, and investment banking, including: Commercial banks Hedge funds and Private Equity Pension funds Insurance companies Mutual funds Sovereign wealth funds

Regional institutions:

Regional institutions Examples are: Commonwealth of Independent States (CIS) Eurozone Mercosur North American Free Trade Agreement(NAFTA)


Perspectives There are three primary approaches to viewing and understanding the global financial system:- The liberal view holds that the exchange of currencies should be determined not by state institutions but instead individual players at a market level. This view has been labeled as the Washington Consensus. This view is challenged by a social democratic front which advocates the tempering of market mechanisms, and instituting economic safeguards in an attempt to ensure financial stability and redistribution


Cont…… Examples include slowing down the rate of financial transactions, or enforcing regulations on the behavior of private firms. Outside of this contention of authority and the individual, neoMarxists are highly critical of the modern financial system in that it promtes inequality between state players, particularly h olding the view that the political North abuse the financial system to exercise control of developing countries' economies



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