Presentation on theme: "Institute of World Economy and International Relations National Academy of Sciences of Ukraine Prof. Dr. Hab. Aleksey Kuznetsov Ukrainian Academy of Banking."— Presentation transcript:
Institute of World Economy and International Relations National Academy of Sciences of Ukraine Prof. Dr. Hab. Aleksey Kuznetsov Ukrainian Academy of Banking of the National Bank of Ukraine – "International competition in banking: theory and practice“ Sumy, Ukraine, May 24-25, 2012
Unrestricted access to financial capital is a fundamental precondition for successful inclusion of modern democracies in the processes of financial globalization. It’s driving force for growth, investment, well-being of citizens, providing financial services and participation in international trade. Many questions must then be asked: Is global capital being redistributed proportionally to separate country’s needs? What are the main factors and instruments behind existing asymmetry of global capital flows? Is United States – an issuer of key reserve currency – ready to abandon their status of the most privileged borrower in order to solve the problem of global imbalances? Is there a consensus with regard to new world monetary order?
Part I – a growing divergence of financial globalization Part II – duopoly of international financial markets Part III – financial asymmetries as systemic failure to efficient global governance Conclusions
Part I A growing divergence of financial globalization
Sources: Bank of International Settlements / Independent Strategy Virtualization of money Due to the active use of financial leverage and investment innovations the assets of different degree of liquidity were created that many times exceeded the size of global GDP. Post-Bretton-Woods financial deregulation combined with information and telecommunication revolutions did possible the unprecedented capitalization of financial assets in international scales.
Global Financial Casino “Before the Second World War the share of financial sector in a world economy made no more than 10%, in 1970s it increased to 20%, but today a financial sector redistributes to own benefits up to 70% of the profit created in a world economy”. Mikhail Khazin, a Russian economist, author of the book: "Sunset of the Dollar Empire and the End of the Pax Americana", 2003.
Materialism is on the rise Figure 2 shows data from an annual survey of college students in the USA. The proportion of respondents feeling that being very wealthy is important has doubled since the early 1970s, with a concomitant decrease in the number considering a meaningful philosophy in life to be important. Source: Happy Planet Index
Is fairness a wrong word for financial globalization? Financial globalization— the extent to which countries are linked through cross-border financial holdings. International Monetary Fund
West... … and the Rest Source: Angus Maddison “Statistics on world population, GDP and per capita GDP, AD” (2008); United Nations Per Capita GDP (1990 International Geary-Khamis dollars)
Part II Duopoly of international financial markets
Asymmetry of global capital flows existed between “the centre” and “the periphery” In the late 1990s world famous investor George Soros formulated the thesis that the functioning of global capital markets is based on the model «the center – the periphery»: «The center provides the capital; the periphery uses the capital. Rules of the game are favorable to the center. It is possible to prove that the center is located in New York and London». Soros G. The Crisis of Global Capitalism: Open Society Endangered The great revelation
% shareUKUSJapanFranceGermanyOthers Cross-border bank lending (Sep 2011) Foreign exchange turnover (Oct 2011) Exchange-traded derivatives, number of contracts traded (2011) Interest rates OTC derivatives turnover (Apr 2010) Fund management (as a source of funds, end-2010) Hedge funds assets (end-2011) Private equity – investment value (2010) IPOs (2010)6123……79 Securitization – issuance (2010)6751…117 Source: TheCityUK
London’s dominance in foreign exchange trading The UK is the largest global market for foreign exchange trading, well ahead of the US and Japan. Globally turnover in foreign exchange market, including foreign exchange derivatives and products, averaged $4.7 trillion per day in October The UK increased its share from 32% in 2004 to 40% in April Source: Bank for International Settlements; TheCityUK Main countries for foreign exchange trading
Dominance of Anglo- Saxon banking institutions in foreign exchange trade RankNameMarket share 1 Deutsche Bank15.64% 2 Barclays Capital10.75% 3 UBS AG10.59% 4 Citi8.88% 5 JPMorgan6.43% 6 HSBC6.26% 7 Royal Bank of Scotland6.20% 8 Credit Suisse4.80% 9 Goldman Sachs4.13% 10 Morgan Stanley3.64% Other22.66% Foreign exchange markets are dominated by Anglo-Saxon banking institutions with top 10 currency traders carrying out 77.32% of all foreign exchange transactions. Source: Euromoney, Wikipedia Top 10 currency traders % of overall volume, May 2011
Dominance of Anglo- Saxon institutions in investment banking sector RankNameMarket share 1 JPMorgan8.1% 2 Bank of America Merrill Lynch7.4% 3 Goldman Sachs5.7% 4 Morgan Stanley5.6% 5 Credit Suisse5.1% 6 Deutsche Bank5.1% 7 Citi4.6% 8 Barclays Capital3.9% 9 UBS3.3% 10 Wells Fargo Securities2.4% Other48.8% Investment banking sector is dominated by Anglo-Saxon banking institutions with top 10 largest investment banks generated 51,2% of global investment banking revenue. Source: Dealogic Top 10 largest investment banks, 2011
Ratings oligopoly Global financial markets are accessible and open for all countries, but the costs of attracting financial resources differ and depend on credit ratings. Remarkably, 90% of world credit ratings are assigned by just three US leading rating agencies meaning that oligopoly exists. Corporate control parent 12,72% parent
CREDIT RATINGS 10-YEAR GOVERNMENT BOND YIELDS, %, 4 MAY 2012 S&PFitchMoody’s USAA+AAAAaa UKAAA Aaa ItalyBBB+A-A3 SpainBBB+AA3 HungaryBB+ Ba1 UkraineB+BB2 PortugalBBBB+Ba3 GreeceSDB-C Source: S&P, Fitch, Moody’s Source: FT, ICU
The JPMorgan Emerging Markets Bond Index Plus Ukraine Spread Source: CbondsSource: NBU, Ministry of Finance of Ukraine
Part III Financial asymmetries as systemic failure to efficient global governance
Source: ECB, BIS, Independent Strategy
Developing countries are practically not presented on global foreign exchange markets Currency US dollar Euro Japanese yen Pound sterling Indian rupee Russian rouble Chinese renminbi Brazilian real South African rand Other currencies All currencies200.0 Today currencies of the leading emerging economies, including BRICS countries, are in fact internal currencies that practically are not used in international trade and financial operations. According to BIS calculations, combined share of BRICS’ currencies in global foreign exchange market turnover in 2010 made only 4.1%. Currency distribution of global foreign exchange market turnover, percentage shares of average daily turnover in April 2010 Source: Bank for International Settlements Foreign exchange market asymmetry
PORTFOLIO INVESTMENT, TOP TEN HOLDERS, US DOLLARS, BILLIONS, YEAR-END 2010 FDI STOCK, TOP TEN RECIPIENTS, US DOLLARS, BILLIONS, YEAR-END 2010 Source: IMFSource: UNCTAD
Investment asymmetry “Between January 1999 and June 2010 global foreign currency reserves soared from $1,620bn to $8,430bn. Thus, we have had the spectacle of a massive and ongoing capital outflow from relatively poor countries into the liabilities of rich countries and, in particular, of the US government”. Martin Wolf, Financial Times September 13, 2010 Portfolio Investment Stock, US dollars, billions Source: IMF
Eighteen of the last twenty centuries China was the largest economy in the world. Source: Angus Maddison, “The World Economy, AD” Does the 21 st Century Really Belong to China?
Source: Bureau of Labor Statistics
Royalties asymmetry The China’s patent office leads the world in patent applications, more than 800,000 of which were filed in Still, China lags far behind US and EU in terms of receipts of royalties and license fees. Chinese companies pay around $2 billion a year in licensing and royalties to American firms alone. World receipts of royalties and license fees, 2008 percentage Global receipts of royalties and license fees reached US$ 245 billion in 2010, US$ 20 billion higher than in 2008 Source: WTO
FOURTH BRICS SUMMIT - DELHI DECLARATION MARCH 29, 2012 We are concerned at the slow pace of quota and governance reforms in the IMF. We see an urgent need to implement, as agreed, the 2010 Governance and Quota Reform before the 2012 IMF/World Bank Annual Meeting, as well as the comprehensive review of the quota formula to better reflect economic weights and enhance the voice and representation of emerging market and developing countries by January 2013, followed by the completion of the next general quota review by January Country IMF quota, percent of total, May 2012 Brazil1.79 China4.00 India2.44 Russia2.50 South Africa0.78 Total BRICS11.51 United States17.69
The main reason for asymmetry of global capital flows is domination of international financial markets by Anglo-American financial institutions, which develop and trade most financial products and disproportionally profit from this trade. As long as international financial assets, such as bonds, loans, deposits, cash, diverse structured innovative financial products, will continue to be denominated in key reserve currencies, in particular, US dollars, accumulation of huge foreign exchange reserves by developing countries wouldn’t solve problems of exchange rates instability and global trading imbalances. There is a pending need to replace US dollar as single reserve currency by allowing emission of international liquidity to create a more stable global financial system. But, emission of international liquidity seems to be rather difficult process, considering that traditional issuers of reserve currencies are hardly ready to abandon their “bargaining chip” within financial globalization.