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Living Globalization: Implications for International Banking and Financial Institutions Joseph E. Stiglitz Frankfurt September 28,2007.

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Presentation on theme: "Living Globalization: Implications for International Banking and Financial Institutions Joseph E. Stiglitz Frankfurt September 28,2007."— Presentation transcript:

1 Living Globalization: Implications for International Banking and Financial Institutions Joseph E. Stiglitz Frankfurt September 28,2007

2 Globalization Has created global banking institutions and other global financial institutions Facilitating movements of capital from areas of capital abundance to areas of capital scarcity Facilitating adoption of best practices globally

3 But banking (and other financial institutions) are information industries Gathering, processing, and disseminating information Deciding on what projects should be undertaken (who is creditworthy) Monitoring (ensuring that funds are used appropriately) Enforcing (collecting money due, terminating credit) Banks are like the Brains of the Economy

4 But much information is local Especially concerning small and medium sized enterprises – Ascertaining creditworthiness – Monitoring Knowing needs of customers With internet banking, relationship between banks and customers weakened Securitization has also weakened links Knowing circumstances of customers – Is firm facing a temporary problem, a short term cash flow problem – Or is there a more fundamental problem?

5 Localization of information provides a limit on globalization Problems highlighted by sub-prime mortgage crisis Many international firms bought these mortgages, without evidently understanding details of American market – They were among those most adversely affected

6 America’s mortgage problem – Should have realized the deep problems facing American economy Growth for past 5 years has been highly dependent on real estate Large numbers of individuals had taken out mortgages in excess of 80% of value of property, with “teaser” rates involving negative amortization for first 2-3 years – In expectation of continuation of low interest rates and rising house prices – So they could refinance – Not sustainable

7 That which is not sustainable will not be sustained Only issue was when bubble when break And when it broke, he deep would be the resulting real estate crisis And the form of government intervention

8 The double edged sword of securitization Risks spread around the world – France, Australia, others affected directly – Many more affected indirectly as a result of change in risk premium (Indonesia) – More people affected, but impact on US reduced Renegotiation (debt restructuring) more difficult – Parallel to problem in sovereign debt markets Banks do a better job at ascertaining creditworthiness, monitoring, enforcement – Security markets often free ride on information provided by banks

9 Key to Success Mixing global and local Global technology—best available IT technologies for gathering, processing, and disseminating information Global practices—best techniques for marketing Global trends – With globalization all countries are eventually affected – But dissemination of ideas and impacts of trends are not instantaneous

10 But the most important information is still local – Countries where international banks have taken over vast majority of local banks have faced problems Drying up of credit for small and medium sized enterprises Lower growth – But the problems are not inevitable

11 Supply Chain Economics Globalization of manufacturing has entailed breaking up production process into many stages – Taking advantage of local comparative advantages for each stage of the production process – But using best globally available “appropriate” technology at each stage

12 But successful supply chain economics is information intensive – Requires knowledge of global technologies – Requires knowledge of local supply side conditions – Requires knowledge of demand side

13 Most importantly Requires coordination – linking each stage to final product – Which is based on customer’s needs and preferences Many forms of “industrial organization” – Vertically integrated But given importance of local information, relatively rare – Various forms of contracting

14 So too in finance Financial markets intermediate between savers and investors With globalization, savers and investors can be scattered all over the world But savers and investors in different parts of the world have different needs and opportunities – Which is why local information is so important

15 Combining global and local At the same time, competition occurs at global level – Success requires best of global technologies and global practices Including those required to ascertain creditworthiness, monitoring, enforcement And those required to meet needs of savers New and appropriate financial instruments

16 Challenge is to combine global and local information Rich ecology of institutional arrangements – Some international banks serving Multinational corporations, large domestic clients – A few international banks developing international expertise in some specialized markets – Some international banks acquiring local information by buying local banks – Most firms engaged in only part of supply chain— with contracting relationships with other parts of the supply chain

17 Living with Globalization Challenge for each firm (financial institution) is to ascertain its dynamic comparative advantage, to locate itself within this ever evolving ecology – Some will become international banks or international financial institutions

18 But most will have a particular niche Part of the global financial “supply chain” – Linking themselves with other firms/financial institutions and global securities markets Success, as always, entails information about these other financial institutions And knowledge of global securities markets and their limitations Using local knowledge/information But taking advantage of global best practices/global technologies

19 Challenge for each firm Not only to figure out their dynamic comparative advantage – What their particular “niche” should be

20 But to develop the supply chain relationships required for success Information intensive – best “fits” – Identifying those who have best information about local supply and demand side conditions and are using that information best

21 Combining Global Knowledge and Local Knowledge And simultaneously to draw upon best of global knowledge and practices Including knowledge and practices for managing local information – New instruments – New technologies This talk has tried to provide a framework for thinking about these issues

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