Financial Services Sector Overview

Financial Services Sector

• The global financial services sector is increasingly integrated and interdependent, with significant trade and investment flows.
• The financial sector plays a crucial role in both advanced and developing economies.
• The sector's functions can be broken down into three core areas: investment chains, risk management, and payment systems.

Investment Chain

• The investment chain connects savers and borrowers, providing financing to businesses.
• Businesses seeking growth offer opportunities for savers to participate in potential returns.
• This chain is crucial for allocating capital efficiently to growing enterprises, enhancing productivity, and boosting global market competitiveness.
• Risk management is essential to mitigate risks within the investment chain.

Risk Management

• The financial sector effectively manages risks (e.g., currency fluctuations) through insurance and increasingly sophisticated derivatives.
• These tools help companies and individuals manage global uncertainties and everyday contingencies.

Financial Markets

• Wholesale and retail sectors are distinct within financial markets.
• Wholesale (professional/institutional) markets include equity, bond, foreign exchange, and derivatives markets.
• Retail markets focus on personal customers, including areas like retail banking, insurance, pensions, and investment services.

Equity Markets

• Equity markets (stock markets) facilitate the trading of company shares.
• Global market capitalization was over US$100 trillion at the end of 2022.
• Key exchanges, such as the NYSE and Nasdaq, are significant contributors to global equity trading.

Bond Markets

• Bond markets enable governments and companies to raise debt from investors.
• The trading volume is substantial, though less known than equity markets.
• International debt within bond markets constitutes a significant portion, including sovereign, supranational and agency debt, and corporate bonds.

Foreign Exchange (FX) Markets

• FX markets determine currency exchange rates globally.
• Daily turnover exceeds US$7.5 trillion, considerably larger than global GDP.
• Global centres are concentrated in a handful of exchange locations.

Derivatives Markets

• This market offers complex products based on several key underlying instruments (currencies, indexes, interest rates, equities, and commodities).
• Futures and options are prominent derivative instruments.

Insurance Markets

• Insurance markets manage personal, corporate, and life risks.
• The largest markets are led by the USA, China, and Japan.

Participants: Custodians

• Custodians specialize in safeguarding investments (e.g., equities, bonds) for entities such as fund managers or insurance companies.
• Their activities include holding assets in safekeeping, managing settlements, and maintaining regular transaction reporting.

Participants: Commercial Banks

• Commercial banks, also known as retail/commercial banks, specialize in handling deposits, loans, and related services for individual and business customers.
• They also broaden their engagement with offerings like investment, pensions, and insurance.

Participants: Investment Banks

• Investment banks provide advisory services and finance arrangements to companies needing to raise capital or conduct mergers and acquisitions.
• Activities include advice and support for governments, fund management, and securities trading.

Participants: Savings Institutions

• Savings institutions offer services such as savings products to retail customers.
• They are found globally under varying names (e.g., cajas, credit unions, building societies).

Participants: Peer-to-Peer Lending and Crowdfunding

• These provide a way for individuals and businesses to lend/borrow from each other.
• Peer-to-peer lending mechanisms replace traditional bank lending in many cases.

Participants: Pension Funds

• Retirement plans or pension funds offer retirement planning solutions.
• Funds are primarily invested in various assets to provide retirement income.

Participants: Fund Managers

• Fund managers, sometimes called asset managers, oversee investment portfolios.
• Institutions like pension funds frequently employ them to manage financial assets.

Participants: Stockbrokers

• Stockbrokers facilitate trading in stocks, bonds, and other assets for clients.
• Their activities can include executing trades on behalf of clients or wealth management advice.

Participants: Platforms

• Platforms provide investors with access to numerous investment products from a variety of sources.
• They facilitate online trading and offer various investment solutions to investors.

Participants: Private Banks

• Private banks target select, high-net-worth individuals.
• Services provided include wealth management, estate planning, insurance, and lines of credit.

Participants: Sovereign Wealth Funds

• Sovereign wealth funds (SWFs) are state-owned investment funds.
• These funds invest in various asset classes, typically for long-term financial objectives.

Industry Trade and Professional Bodies

• These bodies represent the interests of firms within the financial services industry.
• Global organizations like International Capital Market Association and International Swaps and Derivatives Association (ISDA) establish market standards.

Investment Distribution Channels

• Investment distribution channels help investors access investment opportunities, using various methods including individual vs. restricted advice, robo-advice, or execution-only services.

Financial Planning

• Financial planning services help individuals and businesses structure their financial affairs and achieve specific financial goals.

Third-Party Administrators (TPAs)

• Third-party administrators handle investment management tasks for other firms.
• Outsourcing is common in this field for greater efficiency.

Technological Advances in Financial Services

• Technological advancements, like Fintech, reshape how financial services are delivered and managed.
• Fintech is particularly influential in areas such as mobile financial applications.

Environmental, Social, and Governance (ESG) Considerations

• ESG investing is increasing amongst investors due to greater environmental awareness.
• Investors are prioritizing factors such as social and governance matters when making investment choices.

Explore the intricacies of the global financial services sector, focusing on investment chains, risk management, and payment systems. Understand how these components facilitate capital allocation and manage risks in both advanced and developing economies.