International Financial Management

Abstract

This article focuses on the growth and change that has occurred in the national and international financial systems. During the postwar period, many countries had the opportunity to experience economic growth, low unemployment, and gradual deregulation in their respective financial markets. As a result, there was an emergence of the European Union, the North America Free Trade Agreement, the Asia Pacific Economic Cooperation, the World Bank, and the International Monetary Fund to assist in the management and establishment of the financial architecture for the twenty-first century. The article includes an exploration of the international monetary system and how it works.

Overview

There was much growth and change in national and international financial systems in the twentieth century. During the postwar period, many countries had the opportunity to experience economic growth, low unemployment, and gradual deregulation in their respective financial markets. Positive steps were taken to change the way business was done through developments such as the emergence of the European Union, the North American Free Trade Agreement, and the Asia Pacific Economic Cooperation forum. In addition, international institutions such as the World Bank, the International Monetary Fund, and the Bank for International Settlements have assisted in the management of the changes that have occurred in the international financial arena. All of the efforts mentioned above have been an attempt to produce a sound and sustainable international financial system. According to Moshirian, "The financial system in the twenty-first century should provide a financial environment that is conducive to further global financial integration as well as better macroeconomic coordination" (2002, p. 274).

There are some key issues that may have an effect on the international financial system. Therefore, it is imperative that all of the organizations and initiatives listed above come together in order to create an international financial architecture.

"Globalization and increasing interdependence amongst all the nations of the world have allowed people to have a better understanding of key factors which affect the welfare and interest of all people and nations and their absence could harm both developed and developing countries. Some of these issues are sustainable development, world peace and security, sound global environmental policies, international trade, stable monetary systems, sound financial institutions, universal education and health, sound and all embracing technological changes and effective and universally accessible telecommunication" (Moshirian, 2002, p. 276).

The establishment of the International Monetary Fund and the World Bank is probably one of the most important success stories for international economic cooperation. During the last seventy years, there have been many changes in terms of the political and economic climate on a global level, which have caused the world's top international financial institutions to shift in terms of how they operate their businesses. Given the number of financial crises that have surfaced during the last twenty years, many scholars and practitioners in the field have called for a reform in how the international financial system is structured. These crises have exposed the weaknesses that are in the international financial system and have highlighted the fact that globalization has pros (benefits) and cons (risks).

The new international financial architecture (NIFA) was created by the G-7 countries due to the growing volatility in developing countries. Some key components of the NIFA include: The G-20, the Financial Stability Forum (later replaced by the Financial Stability Board) and the IMF's Reports on Observance of Standards and Codes, the last involving areas such as corporate governance (Soederberg, 2002). The purpose of the architecture is to offer governments, businesses, and individuals a mechanism (i.e. institutions, markets) to conduct economic and financial activities. The goal is to create an environment that strengthens and stabilizes the international financial system and minimizes the world's exposure to financial crises,

Some advances have been made in order to reach these goals. The IMF has been instrumental in making some of these goals become a reality. According to the IMF's fact sheet (2000), some of the major accomplishments include:

  • Increase in availability of information from governments and other institutions to the general public
  • Increase in the implementation of codes of good practices that are necessary for a health economy
  • The creation of the Contingent Credit Lines

IMF is working diligently to provide continuous improvement in practices that affect many sectors. For example, this body continues to:

  • Encourage members to release public information notices, which describe the IMF Executive Board's assessment of a country's economy and policies
  • Encourage members to release details of policies the member will follow to restore economic stability under its IMF-supported program
  • Help countries implement guidelines, such as the Reports on the Observance of Standards and Codes, that will assess a country's progress in practicing internationally recognized standards and codes
  • Address gaps in regulatory standards through the Basle Committee on Banking Supervision
  • Encourage members to put procedures in place when they are not experiencing any problems so that they are not responding to a crisis; the opportunity to be proactive versus reactive
  • Help countries assess their external vulnerabilities and to choose the appropriate exchange rate regimes

Application

International Monetary System. The international monetary system is needed in order to define a common standard of value for the world's currencies. During the late nineteenth and early twentieth century, the gold standard became the first international monetary system. "It has often been assumed in the international political economy literature that the classical gold standard of the late nineteenth century represented a turning point in monetary history because it marked the end wherein states manipulated their currency to increase their revenues" (Knafo, 2006, p. 78). One of the advantages of this type of system is that gold has a stabilizing influence. However, a disadvantage of the system is that it lacks liquidity. In addition, if there was an unexplainable increase in the supply of gold, prices could rise abruptly. Due to the large number of disadvantages, the international gold standard failed in 1914 and was replaced by the gold bullion standard during the 1920s. However, the gold bullion standard ceased to be used in the 1930s.

The gold-exchange standard was used to conduct international trade during the period after World War II. This system encouraged countries to set the value of their currency to some foreign currency, which was set and redeemed in gold. Many countries set their currencies to the dollar and maintained dollar reserves in the United States. The United States was seen as the leading country for currency. It was at the 1944 Bretton Woods international conference that a system of fixed exchange rates was adopted. In addition, the International Monetary Fund was established and charged with maintaining stable exchange rates at the international level.

Viewpoint

Banking Supervision.

"The present international, regional, and national rules on banking supervision are strongly permeated by a high degree of fluidity directly descendent both from the revolution of principles and techniques steering the global financial markets, and from the connected difficulty of the nation states to face the new technological challenges" (Ortino, 2004, p. 715).

Policymakers, experts, and scholars will need to analyze and evaluate the level of fluidity when attempting to implement policies and regulations that govern global financial markets. The changes in information technology have challenged the European states by requiring them to evaluate the political and economic systems that they have in place.

According to Ortino (2004), there are two specific features of the institutional order as it relates to banking supervision at an international level. First of all, national legislators are responsible for setting up the legal norms and developing the foundation for the proper power structure and procedures. Second, the powers of the banking supervision authorities are assigned by the banking sector. These features encourage banking supervision authorities to work together as well as with supervisory authorities in other financial sectors.

One entity that works at the international level is the Basel Committee on Banking Supervision. This entity was set up in December 1974 by the central bank governors of the Group of Ten (G-10) nations, and meets four times a year. The membership includes representation from countries such as Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. The countries meet in order to consult on economic, monetary, and financial matters. The purpose of the committee is to discuss how to handle supervisory problems, such as global financial crises. Although the committee coordinates the supervisory responsibilities among the national authorities and monitors the effectiveness of their supervision of banks' activities, it does not have formal status as an international organization (Ortino, 2004). However, the establishment of the Basel Committee was a significant point in the history of international banking supervision.

G-10. In the United States in 1999, there was a section that was added to the Gramm-Leach-Bilely Act broadening the range of activities that US banking institutions could participate in, especially those institutions that elected to become financial holding companies. Although this was a significant step, financial institutions in the United States still had a narrower range than most of the other countries that were members of the G-10 group. What are some of the differences between some of the countries?

As a rule, most G-10 countries have allowed their banks to provide a full range of securities market activities (i.e. underwriting, brokering, and dealing) versus performing the transactions through a subsidiary. Also, there are a few G-10 countries that allow for a full range of insurance activities. However, the main restrictions tend not to be on the types of insurance activities. Rather, many of the restrictions tend to focus on where the activities are performed (i.e. some of the activities are required to be performed via a subsidiary). In addition, there are also restrictions on real estate activities for banks based on the range of activities, whether or not the activities are performed at a subsidiary or bank, or both. Nolle (2003) provided research that compared which G-10 country banks were allowed to own nonfinancial firms and which nonfinancial firms were allowed to own banks. The results showed that most G-10 countries were allowed to own nonfinancial firms and nonfinancial firms were allowed to own banks. However, the United States is one of the countries that have greater restrictions on the presence of the above-mentioned combined activities. Japan is the only country to have a greater level of restrictiveness than the United States.

"The United States supervisory system has the most complex structure in the G-10, and in several key respects its banking supervisory structure puts it among the minority of G-10 countries. However, in one key respect—the funding of bank supervision as practiced by the OCC—the U.S. is similar to the majority of G-10 countries" (Nolle, 2003, par. 10). Nolle's report (2003) shows that nine of the eleven G-10 countries (the G-10 grew to eleven with the addition of Switzerland in 1964, but the name stayed the same) assign banking supervision to a single authority. The United States and Germany are the only two countries that had more than one federal-level bank supervisor. In addition, the United States is one of four G-10 countries that assigns bank supervisory responsibility to the central bank. The majority of G-10 countries' bank supervisory authorities have responsibilities beyond the banking industry; either for securities firms, insurance firms, or both.

The Basel Committee has made two major contributions since its inception. The first contribution occurred in 1975, when the committee took a lead role in making sure that countries share responsibilities when making international banking transactions. The Basel Concordat was an agreement that established the foundation for this process. The first stipulation was that the parent and host authorities shared responsibility for the supervision of the foreign banking establishments. The second stipulation stated that the host authorities had primary responsibility for supervision of liquidity. The third stipulation indicated that the solvency of foreign branches and subsidiaries was the primary responsibility of the home authority of the parent and the host authority. The second major contribution was a standard that would assist in adequately measuring a bank's capital and establishing minimum capital standards.

The Great Recession. Aided by US banks' increased investment freedom following passage of the Gramm–Leach–Bliley Act, financial integration among developed nations increased greatly over the first decade of the twenty-first century. The disadvantages of this became apparent starting in 2007, when the US real estate bubble, driven by rampant overborrowing and securitization of nonperforming assets, triggered an economic crisis that spread around the world. What came to be known as the Great Recession lasted until roughly 2013, depending on the country, and was the worst global economic downturn since the Great Depression of the 1930s. The worldwide recession showed that global financial integration had great risks as well as benefits.

Conclusion

There was much growth and change in national and international financial systems in the twentieth century. However, "the financial system in the twenty-first century should provide a financial environment that is conducive to further global financial integration as well as better macroeconomic coordination" (Moshirian, 2002, p. 274). There are some key issues that may have an effect on the international financial system.

Policymakers, experts, and scholars will need to analyze and evaluate the level of fluidity when attempting to implement policies and regulations that govern global financial markets. The changes in information technology have challenged the European states by requiring them to evaluate the political and economic systems that they have in place. According to Ortino (2004), there are two specific features of the institutional order as it relates to banking supervision at an international level. First of all, national legislators are responsible for setting up the legal norms and developing the foundation for the proper power structure and procedures. Second, the powers of the banking supervision authorities are assigned by the banking sector. These features are encouraging banking supervision authorities to work together as well as with supervisory authorities in other financial sectors.

International financial stability is a goal that the global economy should strive for. As a result, efforts have been made by the International Monetary Fund and developed countries in order to address issues that assist "the stability of the global financial market such as macroeconomic stability and effective national monetary policies" (Moshirian, 2002, p. 278). Moshirian (2002) argued that the key issue is the need to define a vision as well as financial and economic direction for the international community to take in order to ensure that all countries become a part of a global financial system that supports national monetary and financial polices and is aligned with global needs and policies. The Great Recession showed that there is still work to do in these areas.

Terms & Concepts

Asia Pacific Economic Cooperation: An economic forum for a group of Pacific Rim countries to discuss matters on regional economy, cooperation, trade and investment.

Bank of International Settlements: Serves the world's central banks as well as other official monetary institutions and nations. The bank does not take deposits from or offer financial services to individuals or corporations.

Basel Committee on Banking Supervision: An institution created by the central bank Governors of the Group of Ten nations. It was created in 1974 and meets regularly four times a year.

European Union: An economic and political union established in 1993 after the ratification of the Maastricht Treaty by members of the European Community. Austria, Finland, and Sweden joined in 1995. Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia joined in 2004. Bulgaria and Romania joined in 2007. The establishment of the European Union expanded the political scope of the European Economic Community, especially in the area of foreign and security policy, and provided for the creation of a central European bank and the adoption of a common currency, the euro.

G-10 group: The Group of Ten is made up of eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States) which consult and co-operate on economic, monetary and financial matters. The Ministers of Finance and Central Bank Governors of the Group of Ten usually meet once a year in connection with the autumn meetings of the Interim Committee of the International Monetary Fund. The Deputies of the Group of Ten meet as needed, but usually between two and four times a year. Ad hoc committees and working parties of the Group of Ten are set up as needed.

International Monetary Fund: An organization of more than 180 countries dedicated to promoting global monetary cooperation and the health and stability of the international monetary system. Each member of the IMF contributes through the payment of quotas, which reflect that country's size in the world economy and determine its voting power (the US has a 17% voting stake). The IMF supports worldwide economic growth by granting loans and technical assistance to countries in need. The organization was formed by 45 countries in 1944 in an attempt to avoid the kinds of problems brought about by the Great Depression of the 1930s.

International monetary system: Rules and procedures by which different national currencies are exchanged for each other in world trade. Such a system is necessary to define a common standard of value for the world's currencies.

North America Free Trade Agreement: A trade agreement between Canada, the United States and Mexico that encourages free trade between these North American countries.

World Bank: An organization whose focus is on foreign exchange reserves and the balance of trade.

Bibliography

International Monetary Fund. (2000, July). Progress in strengthening the architecture of the international financial system. International Monetary Fund. Retrieved July 29, 2007, from http://www.imf.org/external/np/exr/facts/arcguide.htm.

Knafo, S. (2006). The gold standard and the origins of the modern international monetary system. Review of International Political Economy, 13, 78-102. Retrieved July 31, 2007, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19125334&site=ehost-live

Mody, A., & Saravia, D. (2013). The response speed of the international monetary fund. International Finance, 16, 189-211. Retrieved October 31, 2013, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=90311368&site=ehost-live

Moshirian, F. (2002). New international financial architecture. Journal of Multinational Financial Management, 12, 273-284. Retrieved July 28, 2007, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=7865954&site=ehost-live

Moshirian, F. (2011). The global financial crisis and the evolution of markets, institutions and regulation. Journal of Banking & Finance, 35, 502-511. Retrieved October 31, 2013, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=57371351&site=ehost-live

Nolle, D. E. (2003, June). Bank supervision in the U.S. and the G-10: Implications for Basel II. The Risk Management Association Journal. Retrieved March 2, 2018, from https://papers.ssrn.com/sol3/papers.cfm?abstract‗id=1988541

Ortino, S. (2004). International and cross-border co-operation among banking supervisors: The role of the European central bank. European Business Law Review, 15, 715-734. Retrieved July 5, 2007, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21282696&site=ehost-live

Runtev, M. (2017). New trends and features of international financial management. Economic Development / Ekonomiski Razvoj, 19(3), 249-261. Retrieved March 5, 2018, from EBSCO online database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=127874908&site=ehost-live&scope=site

Soederberg, S. (2002). On the contradictions of the new international financial architecture: Another procrustean bed for emerging markets? Third World Quarterly, 23, 607-620. Retrieved August 2, 2007, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=7484752&site=ehost-live

Suggested Reading

Conway, P. (2006). The International Monetary Fund in a time of crisis: A review of Stanley Fischer's IMF essays from a time of crisis: The international financial system, stabilization, and development. Journal of Economic Literature, 44, 115-144.

Flandreau, M., & Jobst, C. (2005). The ties that divide: A network analysis of the international monetary system, 1890-1910. Journal of Economic History, 65, 977-1007.

Moessner, R., & Allen, W. A. (2015). International liquidity management since the financial crisis. World Economics, 16(4), 91-115. Retrieved March 5, 2018, from EBSCO online database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=112301774&site=ehost-live&scope=site

Rose, A. (2007, September). A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed. Journal of International Money & Finance, 26, 663-681.

Essay by Marie Gould and Suzanne Mulvehill

Marie Gould is an Associate Professor and the Faculty Chair of the Business Administration Department at Peirce College in Philadelphia, Pennsylvania. She teaches in the areas of management, entrepreneurship, and international business. Although Ms. Gould has spent her career in both academia and corporate, she enjoys helping people learn new things—whether it's by teaching, developing or mentoring.

Suzanne Mulvehill, MBA is the author of Employee to Entrepreneur and the founder of the Emotional Endurance training programs. She has presented and trained entrepreneurs at business conferences worldwide. Her work has appeared in publications including Entrepreneur Magazine, The Wall Street Journal and AOL Small Business Advice.