Financial Globalisation

Question 1

What are international asset markets?

Answer 1

• group of markets that trade different types of financial and physical assets

Question 2

What describes the gains from trade of goods services for other goods and services?

Answer 2

Comparative advantage
- specialise your production and trade for other goods and services

Question 3

What theory describes the gains from trade of goods and services for assets, of goods and services today for claims to and services in the future?

Answer 3

Intertemporal trade
- savers want to buy assets and borrowers want to consume or invest in more goods than they can afford

Question 4

What theory describes the gains from trade of assets for assets?

Answer 4

Portfolio diversification
- investing in diverse set of assets reduces overall risk of portfolio
- beneficial as most investors are risk averse

Question 5

What are debt instruments?

Answer 5

Bonds and deposits
- issuer must pay fixed amount regardless of economic conditions

Question 6

What are equity instruments?

Answer 6

Stocks
- specify ownership of variable profits or returns which can vary

Question 7

Who are the international capital market participants?

Answer 7

• Commerical banks
• Nonbank financial institutions
• private firms
• CB

Question 8

What is offshore banking?

Answer 8

• refers to banking outside of the boundaries of a country

Question 9

What is an offshore currency deposit?

Answer 9

• a bank deposit denominated in a currency other than the currency that circulates where the bank resides

Question 10

Why has offshore currency trading grown?

Answer 10

• growth in international trade and business
• avoidance of domestic regulations and taxes
• political factors

Question 11

What is a key domestic regulation that banks try to avoid through offshore currency trading?

Answer 11

• reserve requirements

Question 12

Why do banks fail ?

Answer 12

• do not have enough or the right kind of assets to pay for their liabilities

Question 13

What government safeguards against financial instability?

Answer 13

• deposit insurance
• reserve requirements
• capital requirements and asset restrictions
• bank examination
• lender of last resort
• government organised bail out

Question 14

Describe deposit insurance?

Answer 14

• insures depositors against losses up £85,000 when banks fail
• prevents bank panic
• creates moral hazard

Question 15

Describe reserve requirements?

Answer 15

• banks required to maintain some deposits as reserves at the CB

Question 16

Describe capital requirements and asset restrictions?

Answer 16

• higher net work means banks have more funds to cover costs of failed assets
• asset restrictions reduce risky investments and encourage diversification

Question 17

Describe bank examination?

Answer 17

• regular examination prevents banks from engaging in risky activities

Question 18

Describe lender of last resort?

Answer 18

• CB acts as lender of last resort
• prevents bank panics
• creates moral hazard

Question 19

Describe government organised bail outs

Answer 19

• CB may organise the purchase of a failing bank by healthier institutions

Question 20

What are difficulties in regulating international banking?

Answer 20

1. Deposit insurance is only minimal
2. Countries cannot impose reserve requirements on foreign currency deposits
3. Bank examination, capital requirements and asset restrictions are more difficult internationally
4. No international lender of last resort exists
5. Activities of nonbank institutions growing but lack regulation

Question 21

Describe GFC

Answer 21

• economic meltdown 2007-2009
• banks across the globe failed
• started in US mortgage market
• US house price bubble
• lending to risky borrowers
• bubble burst
• financial regulation inadequate
• global recession
• slow recovery