Week 2

Global Financial Systems

The global financial system plays integral roles in facilitating the international flow of financial capital used in trade financing and investments. Through the system, global entities utilize financial institutions such as the central banks to guide the flow of capital. Consequently, they enhance outcomes in the economy. Financial stability is an essential element of any economy that aims at trading and succeeding in international financial markets. Apparently, the systems play crucial roles in globalizing financial capital and operating open economies (Campbell, Coyle & Turner, 2016). A significant event that negatively impacted the global financial system was the crisis between 2007-2008.The phenomenon was characterized by the sub-prime mortgage crisis which adversely affected banks and financial institutions in America and other surrounding countries (Campbell et al., 2016). The resulting outcomes destabilized the economy with banks being forced to reduce mortgage rates and lose in order to recover their money. With such events taking place, it remains prudent to discuss the nature of the global financial system, its influence, regulatory initiatives, impacts and its overall value and ability .

Nature of the global financial system

The nature of the global financial system is highly integrated and interconnected. After the financial crisis of 2008, countries began uniting and collaborating to spread and address financial risks. By doing so, savings spread evenly across many countries around the globe (Yildirim & Efthyvoulou, 2018). The system’s nature indicates a case of increased financial movement and freedom. Currently, the system allows small economic players to direct their wealth and capital to any country around the globe. The concept of integration is evident where countries unite and facilitate global transactions. Mostly, financial systems in affluent countries ensure that they have regulatory policies which effectively address economic challenges (Yildirim & Efthyvoulou, 2018). Central banks, insurance and security regulators formulate policies which ensure that all countries benefit equally. Intergration is effective in ensuring economic progress and stability in the entire financial system. Through an increased interconnectedness, adverse financial risks are addressed in a timely manner to avoid economic downfalls .

The diversification of assets in a primary practice in global financial systems. Countries require robust financial systems in order to succeed and progress in their economic ventures. By embracing diversification, entities strive to increase their economies of scope to other nations. The activity is beneficial because it allows organizations to spread fixed costs over a variety of products (Nguyen, 2018). Additionally, they enhance management skills and abilities in different markets. The first process allows financial institutions to increase their overall costs across different nations. Unlike the first, the second allows financial bodies to develop their management competencies in assets and markets. Such skills ensure that key players make effective and strategic business decisions in new markets. The process of diversification is necessary in the provision of monetary payments that are low-cost in nature and fund allocation (Nguyen, 2018). The first practice promotes the development of financial markets which are liberalized in nature. By embracing diversification, financial institutions increase funding opportunities for increased savings and investments in other countries .

System’s influence on major financial institutions

The global financial system influences institutions such as commercial banks, securities firms and insurance companies through the domino effect phenomenon. The concept explains the impacts of one action on all other related subjects. Through the domino effect, an economic crisis in one country easily spreads to other countries involved in similar economic ventures (Masciandaro, 2017). The impact of the financial system on institutions is evident through the development of anti-laundering policies. Under most circumstances, financial bodies within the United States create regulations to monitor currency movement into and out of the country (Masciandaro, 2017). As a way of curbing terrorism, the flow of capital needs to be monitored entirely. In the same way, the American financial system impacts the British system. Both institutions are affected because they all establish policies which regulate and monitor the flow of currency between the two nations. Better outcomes are realized ultimately.

Major regulatory initiatives in the American financial system

The American financial system has regulatory initiatives which comprise structural changes within financial institutions. After the occurrence of the financial crisis, key players decided to create and develop effective strategies of addressing economic downfalls. Regarding the issue, the American financial system focussed on creating framework changes and establishing new landscapes of operation (Campbell et al., 2016).Mostly, the initiative aims at adjusting and re-assessing current models of operation. The approach compares to Europe because both entities strive to enhance their economic risk aversion methods for better economic outcomes . Effective structural changes are necessary in addressing macroeconomic aspects which lead to instability. In most cases, the decisions of the banks during the trough and peak periods of business cycles affect outcomes (Campbell et al., 2016). With the elements in mind, entities minimize lending practices to projects that are highly risky. Therefore, instances of adverse and sudden macroeconomic shock are minimized. The regulatory initiative is beneficial because it prevents shock cases which lead to a global financial crisis in the long run.

Impacts of the current regulation on the financial system

The financial system is impacted through improved risk management activities and the effective utilization of expertise in collaboration and better analytics. By embracing the initiative, the United States aims at utilizing the financial leverage approach. Under most circumstances, financial institutions use debt other than equity in the acquisition of assets (Feng, Viksne & Lunardi, 2016). Cash investment returns are amplified during the process. The initiative is beneficial because it allows financial organizations to avert a future financial crisis. By effectively maintaining a stable financial leverage, stability is enhanced (Feng et al., 2016). The selected initiative promotes the use of analytics in evaluating financial outcomes and increasing global interconnectedness. Significant progress is enhanced over time.

Restructuring regulatory bodies to improve overall financial system

The improvement of the overall financial system in the United States is enhanced through stringent measures that limit financial activities of banks. The method in advantageous because it benefits banks and the entire system at large. Based on the approach, regulatory bodies ensure that financial risk activities subsidized and covered by the state are minimized (Feng et al., 2016). The process subjects financial institutions to embrace given requirements by the government’s safety net. The American safety net is integral to commercial banks because it directly safeguards them from losses due to risky economic investments. Mostly, the protection of the safety net allows potential lenders to give money to banks at lower interest rates (Yildirim & Efthyvoulou, 2018). Therefore , having strict policies which limit institutions from engaging in very risky text-broker activities and investments improves the overall financial system. Instances of economic downfalls and bankruptcy in major banks are minimized. The resulting outcomes lead to a stable and progressive financial system in the United States and other countries around the globe.

Overall value and ability of the US financial system to compete with similar financial systems of other countries

The American financial system can compete with similar ones in England and Canada through effective policy goals. The aspect of competition is necessary since it compels key players in the financial system to embrace innovative financial policies. Under most circumstances, creative risk aversion policies prompt policy makers to reduce excessive risk taking activities (Nguyen, 2018). With the dynamic nature of the financial markets, there is a growing need to embrace better practices which add value to the existing financial system. Players ensure that credit worthiness is evaluated first before financial entities engage in ventures that could lead to potential losses and challenges (Campbell et al., 2016). Just like Canada and England, the United States needs to adopt cost effective measures of forecasting risks and addressing them. Such approaches increase the system’s overall stability. Moreover, they minimize cases of economic downfall. In the end, the economy remains highly stable and productive. The three can effectively compete on the same platforms.

From the discussion, there is the realization that the global financial system is integral in promoting the flow of financial capital among global countries. The system’s nature is highly integrated and interconnected with institutions engaging in asset diversification. The system influences primary financial entities using the domino effect phenomenon. Structural changes are among the regulatory initiatives embraced in the American financial system. The current regulation impacts the system in terms of better risk management activities and the effective utilization of expertise in collaboration and analytics. The improvement of the overall system is conducted using strict measures which regulate the financial activities of banks. Effective policy goals enhance competition with similar financial systems in England and Canada .

References

Campbell, G., Coyle, C., & Turner, J. D. (2016). This time is different: Causes and consequences of British banking instability over the long run. Journal of Financial Stability, 27, 74-94.

Feng, H., Viksne, K., & Lunardi, A. (2016). Leverage Control and Quantitative Management: The Analysis of Amplification Effect on Financial System. Regional Formation and Development Studies, 19(2), 7-16.

Masciandaro, D. (Ed.). (2017). Global financial crime: terrorism, money laundering and offshore centres. Taylor & Francis.

Nguyen, T. L. A. (2018). Diversification and bank efficiency in six ASEAN countries. Global Finance Journal, 37, 57-78.

Yildirim, C., & Efthyvoulou, G. (2018). Bank value and geographic diversification: regional vs. global. Journal of Financial Stability, 36, 225-245.

�Well written introduction. You introduce a key problem namely the financial crisis of 2007-2008 and its relation to the importance of financial stability.

�Integration plays a pivotal role in enhancing financial stability- at the tip of the iceberg they can help avoid economic downfalls. What other ways can integration serve as an essential tool in preserving the economy?

�Expand on this thought a little bit more. How does diversification provide an increased chance for savings and investments in other countries?

�Here you attempt to introduce two different financial systems: America and Europe. While this is good, your comparisons are only brief. They do not really engage one in a discussion, nor an analysis of both, namely Europe. I would have liked to hear a little more on this subject matter.

�Here you mention the use of the safety net that allows lenders to give money to banks with a decreased interest rates; thus enhancing profits. However, you end at this statement, you use a scholarly reference without expanding on the work. Try to discuss the value of the safety net.

�Your comparison with England and Canada is very brief. The financial systems of both countries is only briefly touched upon. Remember the rubric asks for a comparison with at least two countries. This namely list some points without any thoughtful discussions. Your statements are generally stated, you need to attempt to dig deeper.