International Financial System PDF

INTERNATIONAL FINANCIAL SYSTEM International financial system (IFS) Complex network of...

INTERNATIONAL FINANCIAL SYSTEM International financial system (IFS) Complex network of Encompasses a wide financial institutions, range of activities, i.a.: financial markets, policies, foreign exchange, trade agreements and financing, investment infrastructure that flows, and international facilitate the flow of debt and equity markets money between countries 15.11.2024 To zdjęcie, autor: Nieznany autor, licencja: CC BY-SA  International financial system (IFS) Network of of financial institutions, international financial organizations and financial markets, dealing in a variety of financial instruments in which money is transmitted, invested borrowed, lended, at international level ◦ IFS is supported by a variety of international organizations, such as: the International Monetary Fund (IMF), the World Bank, the Bank for International Settlements ◦ They play important roles in promoting international trade, monetary cooperation and investment and in managing global financial stability ◦ International Monetary Fund – supports economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, ◦ Bank for International Settlements – job creation, and economic well- supports central banks' pursuit of monetary being and financial stability through international cooperation, and to act as a bank for central banks. ◦ World Bank – works to reduce poverty by lending money to the governments of its poorer members to improve their economies and to improve the standard of living of their people 5 Challenges and risks ◦ IFS is also subject to a range of ◦ Challenges can have significant challenges and risks implications for both individual countries and the global ◦ Including: exchange rate economy as a whole volatility, financial crises, economic crises, political ◦ They also impact international problems, climat change business  IFS „WELL-FUNCTIONING INTERNATIONAL FINANCIAL SYSTEM IS ESSENTIAL TO ALLOW AN EFFICIENT ALLOCATION OF GLOBAL SAVINGS AND INVESTMENT, AND PROVIDE THE CONDITIONS NEEDED TO IMPROVE WORLD-WIDE GROWTH AND LIVING STANDARDS IN ALL COUNTRIES”. So urce: http s : / /w w w. mo fa. go. jp /p o li c y/ e co no m y/s u mmi t /1 99 9 /g 7 e co no.h t m l The IFS is not synonymous with the international monetary system (IMS) International financial system vs. The IMS comprises the set of official arrangements exchange arrangements and exchange rates international that regulate key monetary system dimensions of the balance of payments international payments and transfers relating to current international transactions IMS consists of four elements: international capital movements international reserves  INTERNATIONAL FINANCIAL MARKETS Foreign exchange Risk INTERNATIONAL Foreign management FINANCIAL MARKETS investment Financing  Money market Capital market Traditional IFMs Currency market (FOREX) International Derivatives market financial markets Eurocurrency market Euromarkets Eurocredit market Eurosecurities market International financial markets: money and capital markets ◦ The international money market - the global marketplace where short-term (maturity up to 1 year) financial instruments are traded ◦ These instruments facilitate the borrowing and lending of funds among financial institutions, corporations, and governments ◦ Instruments examples: Treasury bills (T-Bills): short-term debt securities issued by governments Commercial paper: unsecured, short-term debt issued by a corporation International financial markets: money and capital markets ◦ The international capital market - the global marketplace where long- term (maturity over 1 year) financial instruments are traded ◦ It facilitates the flow of capital between investors, enables companies to raise financial capital to grow ◦ Instruments examples: Equities - instrument represents an ownership in a company Corporate bonds - long-term debt securities issued by corporations Government bonds - debt issued by governments to finance public spending International financial markets: currency market (FOREX) – see presentation "FOREX _intro” Euromarkets Eurocredits, euroequities, eurobonds… What’s that? They are element of the so called Euromarket Have nothing in common with euro the common currency! ◦ Euromarket – offshore, generally over-the-counter supranational (stateless) financial market operated by international banks (Eurobanks) and other financial institutions The origin of Euromarkets The Euromarkets took off in the 1950s as a reaction to the cold war between the US and the Soviet Union The Soviet Union was anxious about holding dollars in the US 16  It placed them with European banks, which lent them to customers At the same time, US banks were operating under restrictions which led to their holding $US balances in Europe, particularly London London was the first Euromarket centre and is still the largest ◦ Many factors influenced development of the Euromarkets among others: Supply of petrodollars: U.S. dollar earned front the sale of oil, or they may be simply defined as oil revenues denominated in USD The flow of petrodollars, facilitated by the tremendous increase in the OPEC's oil revenue following the hikes in the oil prices since 1973 - a significant source of growth of the Eurodollar market  Comment ◦ Until the late 1960s the U.S. had been an oil-exporter, but by also being an oil consumer they had never sought to maximize the rent from oil production by driving prices upwards ◦ OPEC countries, however, never had such qualms and when the opportunity arose as the U.S. became an importer, happily restrained supply to drive prices, and their own national incomes, higher https://www.forbes.com/sites/douglasbulloch/2018/04/26/the-petro-dollar-is-a-myth-the-petro-yuan-mere-fantasy/?sh=1d9610a76a14 Comment ◦ The U.S. was worried about the resultant trade deficit caused by suddenly having to pay vast amounts for necessary imports, and so secured the agreement of Saudi Arabia to only trade oil in U.S. dollars, meaning the U.S. could pay for oil in their own currency ◦ Saudi Arabia, for their part, accumulated huge reserves of U.S. dollars https://www.forbes.com/sites/douglasbulloch/2018/04/26/the-petro-dollar-is-a-myth-the-petro-yuan-mere-fantasy/?sh=1d9610a76a14 ◦ Does the future belong to petroyuan? ◦ China is looking to secure long-term energy deals with Middle Eastern countries to increase the international use of its currency ◦ More and more countries want to settle outside of the dollar e.g. China and Russia - in March 2023, during Xi Jinping's state visit to Moscow - Putin mentioned the Chinese yuan as his preferred currency to conduct trade.... https://www.bbc.com/news/60571253  Comment: The U.S. Dollar and oil relationship ◦ Historically, the price of oil is inversely related to the price of the USD ◦ A barrel of oil is priced in U.S. dollars across the world ◦ When USD is strong, you need fewer USD to buy a barrel of oil ◦ When the USD is weak, the price of oil is higher in dollar terms ◦ BUT… Russia supply cuts disrupt oil, US dollar relation ◦ 2023 - the U.S. has hiked interest rates to stem inflation while top OPEC+ oil producers Saudi Arabia and Russia have voluntarily cut production beyond OPEC+ agreements https://www.reuters.com/business/energy/saudi-russia-supply-cuts-disrupt-oil-us-dollar-relation-2023-10-10/ https://www.babypips.com/learn/forex/us-dollar-and-oil-relationship-changing 15.11.2024 The prefix “Euro” is just a historical nature EUROMARKETS EUROCURRENCY EUROCREDITS EUROSECURITIES MARKET MARKET MARKETS 25 I. EUROCURRENCY MARKET ◦ Eurocurrency – currency deposited by national governments or corporations in banks outside their home market ◦ This applies to any currency and to banks in any country ◦ The dollars held outside the United States are Eurodollars even if they are held outside Europe (they can be deposited for example in Singapore or the Cayman Islands) ◦ Eurocurrency market – a short-term, wholesale (above $1 million), interbank, competitive international money market ◦ The Eurocurrency market includes any other currencies, such as the JPY and the GBP, each time they trade outside their home markets For example: South Korean won deposited at a bank in South Africa, is considered Eurocurrency - Eurowon Yen deposited outside of Japan are Euroyen Euroeuro - euro bank account outside the Eurozone Etc. ◦ The Eurodollar market still remains the largest ◦ By its very nature the Eurodollar market is outside the direct control of any national monetary policy “It is aptly said that the dollar deposits in London are outside United States control because they are in London, and outside British control because they are in dollars”. ◦ Participants in the Eurocurrency market include: governments, international organizations, central banks, commercial banks, corporations, especially multinational corporations, traders, individuals, etc. ◦ Eurocurrency transactions are the bulk of offshore banking activities  ◦ Offshore banking is not the same as offshore financial centre (OFC) Bank branches located outside of Jurisdictions (often a country) that its home country, and handling makes available financial services to transactions made in foreign nonresidents with the purpose of currencies, especially circumventing aspects of the non- eurocurrencies resident's home country or jurisdiction Banking services in a foreign jurisdiction outside of the country Promising low/no taxes (tax havens), where one resides low regulation, secrecy and confidentiality https://www.taxhavensguide.com/list-of-offshore-financial-centres.html https://thebusinessprofessor.com/en_US/global-international-law-relations/offshore-financial-centers https://www.worlddata.info/tax-havens.php ◦ Banks that accept deposits and make loans in the Eurocurrency market are called Eurobanks ◦ Eurobanks can offer a lower rate on dollar loans and a higher rate on dollar deposits than U. S. banks ◦ Eurobanks have lower regulatory costs  Interesting fact… The beggining of offshore centres ◦ Ancient Rome was a master in using ◦ By establishing a tax-free port on tax-free areas, a sort of early the island of Delos enterprise zones ◦ Even though Rhodes only charged ◦ The first recorded instance took place a 2% on trade, it quickly lost trade in the 2nd Century BC when Rome to the new tax-free port and its era decided to undercut the then as a commercial power was independent Greek island state of effectively ended Rhodes https://www.offshore-protection.com/offshore-blog/history-of-tax-havens An important question: through which channels is money transferred to offshore centres?  "The world's largest channel for transferring money to tax havens is in the Netherlands, according to a report published by the University of Amsterdam. In second place is the UK, followed by Switzerland in third place." https://forsal.pl/artykuly/1059956,holandia-glownym-kanalem-przeplywu-srodkow-do- rajow-podatkowych.html https://www.ofcmeter.org/ "The Netherlands is a conduit between "The link to the Netherlands is European companies and Luxembourg. nearly a quarter of the legal constructions leading to the The UK is a conduit between European avoidance or reduction of countries and former members of the British fiscal costs of doing Empire, such as Hong Kong or Bermuda and business". the British Crown dependencies of the islands of Jersey and Guernsey." https://forsal.pl/artykuly/1059956,holandia-glownym-kanalem-przeplywu-srodkow-do-rajow-podatkowych.html  „Multinational corporations use highly complex corporate structures of parents and subsidiaries to organise their global operations and ownership structure` ◦ For example, the Britain-based ◦ The largest brewing company in banking and fi nancial services the world, Anheuser-Busch InBev, company HSBC is composed of at consists of at least 680 corporate least 828 legal corporate entities in entities involving 60 countries 71 countries ◦ These complex corporate structures purposefully span across countries and jurisdictions in order to increase competitive advantage by minimising costs and accountability”. https://corpnet.uva.nl/wp-content/uploads/IFC-Economic-Report.pdf Main financial centers in the world International financial centres, Regional financial Offshore financial IFC centres, RFC centres, OFC)  International financial centres Regional financial centres ◦ large, comprehensive centres with ◦ have many similarities to the IFC, but sophisticated clearing and payment in contrast support rather small systems, supporting large national national economies economies, with deep and liquid ◦ E.g. Shenzhen, Frankfurt am Main, financial markets, an extensive network Sydney of financial institutions, appropriate regulatory and supervisory frameworks ◦ E.g. New York, London https://zpe.gov.pl/pdf/PNjc0MrqW II. EUROCREDIT MARKET ◦ Eurocredits are short- to medium-term loans of Eurocurrency ◦ The loans are denominated in currencies other than the home currency of the Eurobank ◦ Example: a loan issued in JPY by American bank located in New York ◦ Often the loans are too large for one bank to underwrite; a number of banks form a syndicate to share the risk of the loan - syndicated Eurocredit loans A syndicate is a group of banks making a loan jointly to a single borrower III. EUROSECURITIES MARKET ◦ Eurosecurities - securities that are issued outside their domestic market into more than one jurisdiction ◦ Eurosecurities market – market for transactions with eurosecurities (euroequities, eurobons, etc.) EUROEQUITIES ✓ Equities underwritten and distributed to investors outside the country of origin of the issuer EUROBOND ✓ A bond issued in a currency other than the currency of the country or market in which it is issued ✓ Usually, a eurobond is issued by an international syndicate and categorized according to the currency in which it is denominated 40 ✓ For example: A eurodollar bond that is denominated in U.S. dollars and issued in Japan by an Australian company Sushi bond Dragon bond ✓ Eurobonds are attractive to investors as they have small par values and high liquidity 41 GLOBAL BONDS ✓ Bonds that can be offered within the Euromarkets and several other markets simultaneously ✓ Can be issued in the same currency as the country of issuance Bonds denominated in USD and issued in the United States and in the UK ✓ Usually issued by entities that have high credit ratings 42 Don’t confuse Euroequities with foreign equities and Eurobonds with foreign bonds ✓ Foreign equity - issued by foreign companies in the domestic equity market, in the domestic market's currency ✓ Foreign bond - issued in a domestic market by a foreign entity, in the domestic market's currency For example: A bond denominated in U.S. dollars and issued in the United States by foreign banks and corporations (Yankee bonds)