Money Systems and Banks

• two systems that determine exchange rates:

  1. international monetary system
  2. global financial system
• international monetary fund: consists of institutional frameworks, rules, and procedures that govern how national currencies are exchanged for one another
• the international monetary system facilitates international trade and investment
• global financial system: consists of collective financial institutions that facilitate and regulate flows of investment and capital funds worldwide
• since the 1960s, the global financial system has grown substantially
• the globalization of finance accelerated in the 1990s with the opening of the former Soviet Union and China to international business
• more than 25% of total outstanding US equity securities are typically held by people outside the US
• capital flows are much more volatile than FDI investments
• key players in Monetary and Financial Systems:

  1. firm level
  2. national institution level (stock exchange and bond market, commercial banks)
  3. national government level (central banks)
  4. international organizational level (IMF, World Bank, bank for international settlements)
• Schwabengarage in Stuttgart, Germany is one of the largest car dealerships in Europe specializing in Ford automobiles. They import thousands of them every year and pay in US dollars.
• international transactions require firms to deal with huge sums of foreign exchange
• some nations receive more foreign income from remittances than from either foreign aid or inward FDI
• stock exchange: facility for trading securities and other financial instruments including shares issued by companies, trust funds, pension funds, and corporate and government bonds
• National Stock Exchanges and Bond Markets facilitates for trading stocks (securities) and bonds (debt)
• the Tokyo Stock Exchange is the home stock market to such firms as Toyota, Sony, and Canon and is the major vehicle through which some 2,000 Japanese firms raise capital
• corporations hold the majority of shares in the Japanese market
• in Britain and the United States, individuals hold more market shares
• SK Telecom (the main wireless communications provider in South Korea) financed much of its operations by selling bonds in the global market
• in many national stock and bond markets, the most important players today are institutional investors and insurance companies
• commercial banks: finance business activity, play a key role in nations' money supplies, and exchange foreign currencies
• investment banks: underwrite stock and bond issues and advice on mergers
• merchant banks: provide capital to firms in form oof shares rather than loans; essentially investment banks that specialize in international operations
• example of merchant bank: Arab-Malaysian Merchant Bank
• private banks: manage assets of very rich
• example of private banks: Union Bank in Switzerland and ABN AMRO Private Banking in Luxembourg
• offshore banks: located in jurisdictions with low taxation and regulation such as Switzerland and Bermuda
• example of offshore banks: Banco General in Panama and Bank of Nova Scotia in British Virgin Islands
• commercial banks: deal mainly with corporations or large businesses
• commercial banks example: Credit Lyonnais in France and Bank of America
• London has the world's greatest concentration of international banks
• many banks are MNEs themselves, such as Citibank, Britain's HSBC, and Spain's BBVA
• correspondent bank: large bank that maintains relationships with other banks worldwide to facilitate international banking transactions
• in Canada, Sweden, and the Netherlands, just 5 banks in each country control more than 80% of all banking assets
• in Germany, Italy, and the United States, the top 5 banks control less than 30% of all banking assets
• the annual price of core banking services in Italy is $300
• the annual price of core banking services in the United States is $150
• the annual price of core banking services in China is $50
• the annual price of core banking services in the Netherlands is $50
• banking has long been problematic in Africa
• central bank: regulates money supply and credit, issues currency, and manages exchange rate