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Chapter 1 The World of Finance

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1 Chapter 1 The World of Finance
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

2 Learning Objectives Keith Pilbeam ©: Finance and Financial Markets 4th Edition

3 Development Factors the globalization of financial markets
the impact of technology the deregulation of financial services industry the importance of product innovation Keith Pilbeam ©: Finance and Financial Markets 4th Edition Keith Pilbeam ©: Finance and Financial Markets 4th Edition

4 Financial Centres competitive financial centre can
be an important foreign exchange earner provide employment for substantial number of people aid an economy by channelling investors’ funds into the best-performing investments and businesses recycle funds from surplus to deficit agents as efficiently as possible Keith Pilbeam ©: Finance and Financial Markets 4th Edition

5 Role of a Financial Centre
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

6 Difficulty of Financial Intermediation
surplus agents are risk-averse short-term time horizons tend to invest in a fairly low-risk financial instruments deficit agents are risk-takers medium- and long-term time horizons frequently require funds to undertake risky ventures Keith Pilbeam ©: Finance and Financial Markets 4th Edition

7 Characteristics of a Major Financial Centre
a large number of both domestic and foreign banks, with a reasonable share of international bank lending a substantial amount of foreign exchange business a significant offshore market well capitalized stock market with high degree of liquidity a major market for corporate finance, domestic bonds, foreign bonds and perhaps Eurobonds a range of financial institutions and associated services in addition to commercial banks eg: investment banks, insurance companies, securities houses, brokers, accountancy firms, commercial law firms, consultancy services, etc. a significant presence in derivative markets – futures, options and swaps Keith Pilbeam ©: Finance and Financial Markets 4th Edition

8 Means of Finance Recycling
The transfer of funds in the financial system is carried out by several means. Various countries attach different priority to each of these means, but the three key ones are: money market – transfer of funds for less than a year capital market – stocks & bonds [US and UK] banking system [Germany and Japan] Keith Pilbeam ©: Finance and Financial Markets 4th Edition

9 Key Financial Centres USA and Japan are more domestically oriented while UK is heavily dependent on international business London: by far the biggest financial centre for foreign exchange trading and for trading in over-the-counter derivative contracts New York: a dominant player in terms of institutional funds under management, with its pension funds and mutual funds of roughly equal significance as institutional investors Tokyo: more significant banking and insurance industry Keith Pilbeam ©: Finance and Financial Markets 4th Edition

10 Global Stockmarkets end 2016
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

11 Global Debt Securities 2016
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

12 Largest Banking Centres 2015
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

13 The importance of different financial centres
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

14 Conventional Investment Assets
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

15 Annual Number of Derivative Contracts by Region
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

16 Growth of Exchange Traded Derivatives by Volume of Contracts
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

17 The Growth of Sharia Compliant Assets
Keith Pilbeam ©: Finance and Financial Markets 4th Edition

18 Globalization Factors:
Globalization the tendency of financial institutions and their customers to move beyond their domestic markets to other markets around the globe Bretton Woods a fixed but adjustable exchange rate regime ( ) whereby the major currencies were pegged to the US dollar within a ±1% band; the dollar was pegged to gold at $35 per ounce Factors: the growth of international trade has outpaced the economic growth rates of most countries, making them more trade-dependent the demand for trade-finance products has increased the breakdown of Bretton Woods system made currencies more volatile Investors have sought the benefits of international portfolio diversification Keith Pilbeam ©: Finance and Financial Markets 4th Edition

19 Globalization Benefits: Pitfalls:
borrowers are no longer limited purely to their national markets agents with surplus funds can take advantage of investment opportunities in other countries financial institutions seek to have global presence both as a means of expansion and to retain their existing customers Pitfalls: the loss of local knowledge (Latin American crisis, 1970s-early 80s) problems in detecting wrongdoing such as ponzi schemes eg: Bernie Madoff increased interactions and spillovers between markets (Asian crisis, 1997) stock markets and bond markets move increasingly in synch with each other Keith Pilbeam ©: Finance and Financial Markets 4th Edition

20 Technology The adoption of new technology has created more
efficient financial services industry increased speed [screen-based real-time trading] reduced costs [business relocation] broader range of services [ATMs, internet banking] Issues to be considered remain: security and reliability large capital investments while adequate returns are uncertain backward compatibility – the need for new information technology, such as computers and software, to work with older technology in order to service existing clients change of balance between fixed and variable costs structure made the market share an increasingly important aspect Keith Pilbeam ©: Finance and Financial Markets 4th Edition

21 Regulation Aim: investor protection from misinformation, misuse of their funds, prevention of banking and financial crises Problems: increases costs to meet compliance can prevent the introduction of innovative products redirects the businesses to less regulated markets too much protection can create a problem of moral hazard - when the existence of insurance policy makes the insured event more likely to occur than in the absence of insurance policy Basel Accords: three agreements, emanating from the Bank for International Settlements in 1988, 2004, Originally required large international banks to set aside capital reserves against potential losses equivalent to 8% of their risk-adjusted assets. Today larger capital requirements and also liquidity requirements. Keith Pilbeam ©: Finance and Financial Markets 4th Edition

22 Deregulation Deregulation
the reduction or elimination of regulations designed to increase competition and reduce prices facing consumers UK policies in the 1980s : range of tax breaks for savers such as TESSAs (tax exempt special savings accounts) and PEPs (personal equity plans) shift of tax structure from tax on income to tax on expenditure privatization programme increased indirect taxes on goods and services while financial products remained largely untaxed Keith Pilbeam ©: Finance and Financial Markets 4th Edition

23 Financial Innovation Financial Innovation
the design of new financial instruments or the packaging together of existing ones 1970s: breakdown of Bretton Woods, first oil shock in 1973 1980s: introduction of highly sophisticated computers Types market-broadening innovations risk-management innovations arbitraging innovations pricing innovations marketing innovations Keith Pilbeam ©: Finance and Financial Markets 4th Edition

24 Emerging Markets Emerging Markets
countries with rapid economic growth and in the process of industrialization rise in significance since the 1980s: Regions like Southeast Asia Latin America have increasingly attracted investors from industrialized countries in recent years: the newly independent countries of Eastern Europe that have emerged from the breakdown of the Soviet bloc in the 1990s have also attracted international investors lessons learned: overexposure to a single emerging market is a risky business, but this does not necessarily apply to exposure to a portfolio of emerging markets Keith Pilbeam ©: Finance and Financial Markets 4th Edition

25 Problems of Investing in Emerging Markets
Poor accounting standards Governance of companies Information costs Political risks Foreign exchange risks Control of foreign investments Higher transaction costs Frontier markets countries with stock markets that are less developed than emerging markets, eg: Argentina, Bulgaria, Cyprus, Romania, Sri Lanka, Vietnam, etc. Keith Pilbeam ©: Finance and Financial Markets 4th Edition


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