This material is intended for Finance teachers and students at university centers, with a view to preparing them for the classes of the Financial Institutions and Markets Subject, which is developed in the study plan of the Accounting and Finance Specialty for the Upper level.
financial-institutions-and-marketsThe work carried out is based on the compilation of information obtained from the analysis of different authors. It has been our desire to make a basic text where the student's introduction to the subject is intended to be addressed in each topic, where they are forced to reflect and question financial issues.
It consists of three chapters where the topics are broadly addressed, always relying on the content of the subject, it is essential that the reader knows that other aspects that are still important have been addressed, which broaden the horizon that we must all have in situations financial economics.
Chapter I (Financial System. Financial assets) deals with the conceptualization, characteristics and structure of the financial system both in Cuba and internationally, and briefly shows studies related to the impact of the financial system in the face of globalization.
Chapter II (Banking and non-banking institutions) where the functions of financial intermediaries as a fundamental element within the financial system in Cuba are analyzed, distinguishing between the functions and operations of the Central Bank and the Commercial Bank.
In today's globalized world, there are institutions that are increasingly gaining weight in the unbalanced international economy, where financial markets play an important role, and it is precisely with this topic that the proposed text concludes.
1.1- Introduction
At present, the processes of internationalization of the world economy are causing in recent years a strong and continuous development of financial systems and markets, as well as the financial assets that operate in them.
Financial System is understood as the set of institutions, markets and specific distribution techniques capable of creating the monetary instruments that are necessary for the expansion of an economy, of bringing together financial provisions that are not being used and essentially of channeling savings to investment; We can also define it as the channel of the saving surplus from spending units with surplus to spending units with deficit through financial intermediaries and financial intermediaries.
Financial intermediaries have the task of collecting, managing and directing savings efficiently for the economic system, that is, these institutions that make up the Financial system have the dual mission of obtaining the necessary financial resources and of ensuring the appropriate allocation of them. based on a calculated profitability.
1.2-Role and Structure of the Financial System of a country.
The Financial System of a country is formed by the set of:
The essential objective that it has : is to channel the savings generated by the spending units with surplus, towards the borrowers or spending units with deficit, to achieve this it is necessary to have an organized market where, through financial intermediaries, it is possible to put in contact with these groups.
Finance system
Channel savings
Table 1.1: Objective of the Financial System.
Spending units with surplus (savers) are those that prefer to spend on current consumption or investment goods less than their current income at the current market interest rate.
Spending units with deficit (public or private borrowers), are those that prefer to spend more on current consumption or investment goods than their current income, at the current market interest rate.
The advantage of going to a market organized by both parties is the maximization of time, where we will also find transparency and operability, and as a cost, the commission charged by intermediaries for the management will have to be borne by both parties.
The intermediation work, carried out by the institutions or intermediaries that make up the financial system, is considered basic to carry out the transformation of the primary financial assets issued by the investing units (whose purpose is to obtain funds to increase their real assets), in indirect financial assets, more in line with the preferences of savers.
Therefore, the Financial System fulfills the fundamental mission of a market economy (of capturing the surplus from savers and channeling them to public or private borrowers). This mission is essential for two reasons:
- The mismatch of savers and investors, that is, the units that have deficits are different from those that have surpluses The wishes of the savers do not coincide with those of the investors, the degree of liquidity, security and profitability of the assets issued by the latter, for this reason is that intermediaries have to carry out a work of transformation of assets, to make them more suitable to the wishes of savers.
The degree of efficiency achieved in this transfer process will be the greater the greater the flow of savings resources generated and directed towards productive investment and the more it is adapted to individual preferences.
The financial system is made up of specialists who act in financial markets, exercising the functions and carrying out financial operations that lead to the greatest amount of savings being available to investment in the best possible conditions for both parties, for which they issue Among the investing public, a series of financial assets that we could call of the first order and they acquire with it another of a higher order, until they reach the assets issued by the end users of funds.
As it's shown in the following:
Table 1.2: Role of Financial Intermediaries .
Below we will explain the fundamental functions of financial intermediaries:
- Spending units with deficits issue the so-called primary financial assets (shares, bonds) through which they put themselves directly or through intermediary (through brokers, mediators or financial intermediaries) in contact with the savers of spending units with surplus: Financial intermediaries only perform a mediation function and do not create any type of asset, but rather put in contact with suppliers and demanders of funds. When a financial intermediary issues a financial asset, it is called an indirect or secondary financial asset. and the acceptance by savers is what allows the work of intermediation in the strict sense (it is the so-called transformation function of financial intermediaries). The advantage of this transformation function is that of attracting funds that would not be used unless some institutions took them as deposits, after paying an interest so that these same institutions can lend them in turn, charging the same amount. This specialization that transforms the short term into the long term is based on the behavior of agents in the sense that although some depositors withdraw their funds just deposited, under normal conditions this behavior is the exception and not the norm.All the funds collected in the short term and their potential and real capacity to be provided in the medium and long term fulfill the task of promoting investment and with it economic growth.
1.3-Evolution of the Financial System in Cuba.
In 1994, the Cuban financial system was made up of the National Bank of Cuba, still in its capacity as central bank and commercial bank, Banco Popular de Ahorro, Banco Financiero Internacional SA, Banco Internacional de Comercio SA, and representative offices of two foreign banks: the ING Bank NV and the Netherlands Caribbean Bank NV
It was in that same year that the abrupt decrease of the Gross Domestic Product (GDP) was stopped, which fell by 35 points (1993/89), after the well-known political and economic events that occurred in the former Socialist Countries of Eastern Europe and the extinct Soviet Union between the last years of the 80s and 1991, with which Cuba maintained between 80 and 85% of its commercial exchange.
The modest but sustained growth of the Cuban economy since then, and until today, was made possible by an iron will of the country to resist and by the adoption of a series of transformations in the economy, framed in a political-economic strategy that allowed short, medium and long term face the dramatic impact caused by the aforementioned events, as well as the worsening, in parallel, the economic blockade of the United States of America to which this country has been subjected in practice since 1959, and advance in development, maintaining national independence and the social achievements achieved by the Cuban people.
At the beginning of the years 1995, it became more evident that the numerous and important organizational and regulatory transformations carried out and later to take place in the economy, demanded an expansion and diversification of the Cuban financial system capable of facing, in addition, the establishment of a different relationship with the international community in commercial and financial matters. Consequently, a system was designed and implemented gradually to guarantee the operation of the Cuban economy in the new circumstances and within the framework of the aforementioned strategy.
For the above, three general basic objectives were defined:
- Increase the technological and operational capacity of national bank branches, through the accelerated and large-scale introduction of the most modern means of automated processing of information, communications and the requalification of personnel to obtain the best results from these means. of banking and financial entities with the versatility of organizational and institutional forms required to respond to the country's credit and banking services needs and to support the development of the links between our companies and institutions with financial markets and external banks. two-tier banking supervised by a strong institution - its central bank - which was also capable of dealing with monetary issuance,propose and implement the monetary policy most convenient to the interests of the country and lead the normalization process of our international financial relations.
As a longer-term objective, to work with a view to the elimination of the double monetary circulation when the main macroeconomic balances are consolidated and to face the complex issue of the official exchange rate of the Cuban peso, in a way that expresses the real value of our currency, which today is a Cuban peso equal to one US dollar for accounting purposes of official transactions in the national territory, which reflects the reality of international transactions in the country.
Other institutions that make up the Cuban Financial System will be mentioned below:
- Banco Nacional de Cuba (BNC).Credit and Commerce Bank (BANDEC).Banco Popular de Ahorro (BPA).Banco Financiero Internacional SA (BFI).Banco Internacional de Comercio SABanco Metropolitano SABanco de Inversiones SAFinanciera Nacional SA (FINSA).Casa de Cambio SA (CADECA) Fiduciary Company SARAFIN SAFINALSE A.FIMEL SAPANAFIN SAFINAGRI SACorporación Financiera Habana SAFINCIMEX SA
Modernization and automation of the System.
During 1997 and 1998 the focus was on the interconnection of the branches to the Public Data Transmission Network. Currently, more than 200 bank offices have permanent links to said network and, with the advance of the investments of the Cuban telecommunications company, the remaining branches were connected in the year 2000.
The interconnection with the Public Data Transmission Network is currently being used to carry out inter-branch operations, and work is being done on the development of applications to directly connect customers and offer distance training for workers in the financial sector.
At the same time, a good part of the bank offices throughout the country have been renovated, substantially improving the working conditions in them, as well as the service to their clients.
On the other hand, at the end of 1998, with the incorporation of four new banks, the eight Cuban banks that carry out international transactions were connected to SWIFT.
As regards the means of payment and fully automated transactions, since 1997 the introduction of cards with magnetic stripes and the creation of a network of ATMs began. In mid-1999, the corresponding infrastructure was operational and tested, and cards with magnetic stripes in Cuban peso and freely convertible currency, as well as a network of around 70 ATMs, became widely used. In this area, some tests are also being carried out on the use of so-called smart cards.
1.4 - Financial Systems Facing Globalization.
One of the biggest financial crises of the 1990s was the Asian crisis, which began in mid-1997. A crisis with specific connotations, but fundamentally similar: the decisiveness of capital movements. The crisis began in Thailand, a country that had problems of fundamental imbalances in its economy, spreading very quickly to other countries in Southeast and East Asia. In all of them there was a major collapse in exchange rates and a drop of such intensity in the prices of various types of assets that it put the survival of many companies and financial intermediaries at risk. The gestation of the crisis mainly reflected microeconomic problems and the weakness of financial systems it was decisive in the origin and development.
The crisis of the nineties is related to the mobility of capital, which has acquired special relevance not only in industrial countries, but also in the economy of a large group of so-called emerging countries.
The liberalization of capital movements.
Financial liberalization and technological innovation have facilitated international investment by individuals and, above all, collective investment entities, institutional investments that, due to their ability to face high information costs, lower operating costs and rapid implementation of their decisions, achieve a high return on their portfolios, coupled with an unprecedented mobility of flows. Such mobility undoubtedly offers great advantages, but it can also be the source of serious problems, as the crisis of the 1990s has highlighted.
The liberation of capital movements between countries is but one of the dimensions of the financial liberation that has taken place in the last quarter of a century.
Today liberalization is the general characteristic among them and this process has spread to a large number of developing countries, including most of the most important from the economic point of view. This change has mainly taken place since the end of the last decade.
The supporters of liberalization consider that the freedom of movement of capital offers advantages such as: it facilitates a better channeling of savings and channels resources towards their more efficient use, increasing growth and well-being. There is an increase in resources that can be invested and an expansion of portfolio diversification opportunities for savers. Referring to countries, the free mobility of capital allows those with savings less than their investment possibilities to obtain additional resources, attracting external financing. This makes it possible, for a certain period, for the level of total spending in your economy to be higher than it would have otherwise.
The liberalization of capital also poses a problem. It can have unfavorable effects on the economy, especially those of developing countries for the following reasons:
- The liberalization of the capital account produces a massive inflow of funds that may cause a strong increase in the prices of assets, including the exchange rate, with considerable problems for a correct allocation of resources between goods, depending on whether or not they are the object of the asset. International trade With capital mobility, monetary policy loses its effectiveness in controlling external demand, by reducing the isolation of the internal market from external shocks. Although monetary policy can keep inflationary pressures under control, this is typically only possible on the basis of increases in the current deficit, which makes any future decrease in the amount of flows more dangerous.Capital flows have proven to be very volatile and with a tendency to overreact to certain political or economic changes, with considerable damage to the economy of the affected countries. The authorities are known to try to avoid large and sudden changes in exchange rates, which in effect represent an implicit guarantee on short-term assets in local currency. Therefore, while investors are confident, the premium with which the forward currency is quoted is moderate. But that implicit guarantee disappears when the authorities are faced with a significant capital outflow and their reserves become insufficient to meet the new payment commitments. In this way, the expectation of a fall in the exchange rate leads to such a fall. The devaluation becomes,thus, in the consequence of the speculative attack.
Theory on financial crisis.
The models that emphasize the existence of multiple equilibria, the so-called second generation models, are based on the government's reaction to a certain change with the attitude of private investors. Such a reaction occurs because it seeks to achieve conflicting objectives, among which it is necessary to choose. Without speculative attack, there is a certain equilibrium situation; but once that occurs, the situation changes. Here the attack can take place despite the fact that macroeconomic policies are satisfactory on sustainable principles.
But it is enough that speculators, for whatever reason, perceive that the maintenance of the exchange rate is difficult to reconcile with the achievement of other priority alternative objectives, for the speculative attack to occur and the exchange rate must be modified.
There is a parallel between this type of crisis and that suffered by a bank whose depositors demand their funds, all at the same time. Mass withdrawal of deposits can occur, even if the bank is solvent, as long as depositors think that there is going to be a general withdrawal of the deposit, anticipating such withdrawal is crucial. A similar situation occurs in the currency crisis. At first the central bank will hold the exchange rate, but if the attack continues, a change will occur. The level of exchange rate that occurs will be different depending on whether or not there is speculative attack; and this can occur even if the previous level of the exchange rate was sustainable before the attack.
The study by Goldfajn and Valdés (1995) introduced an important novelty by focusing on financial intermediation and the liquid nature of markets. Financial intermediaries provide liquid assets to the person and foreign entities that are not willing to invest in the Long Term in foreign currency.
By offering an attractive short-term remuneration, they increase the volume of resources that move between countries, but make movements extraordinarily vulnerable to any disturbance.
Guillermo Calvo (1998), has based his explanation on the existence of imperfections in the capital markets that lead uninformed investors to follow the behavior of those informed or their perception of it. It is about the importance that a sudden cut in capital flows that a country receives in the onset of a financial crisis can have.
In this way, a strong current deficit always poses a danger, whatever the way it is financed; yes, high short-term financing increases risks. For Calvo there are two types of investors: the informed and the uninformed. The latter follow the opinion of the former and the overall results of their action are reasonable as long as there is no drastic variation in the composition of the portfolio of well-informed investors. But when it occurs, uninformed investors can misinterpret the reasons. The variation in the portfolio of the former is not always due to situations derived from the economic situation of the countries, but can also be linked to specific situations related to their portfolios. For example,that such investors have to downgrade a heavily leveraged investment. Without knowing these specific circumstances, uninformed investors will also proceed to sell their portfolios from those countries, causing an unjustified readjustment of both stock prices and interest rates.
Evolution and prospects for the liberalization of capital movements.
One of the most important and far-reaching events of this end of the century in the context of the world economy is the dramatic growth of international financial transactions and, more generally, of capital movements.
The evolution of capital movements across national borders is a powerful force of a diverse nature in all directions. And the vast majority, if not all of them have been manifesting in this century.
The 20th century has been a period of deep experimentation in the areas of economics, politics and social organization.
This regime was based on the principle of laissez faire in the relations of the state with the economy and on the rules of the gold standard as the norm of the convertibility of national currencies to order economic relations between countries. Our Century orients towards a new order centered on an activist conception of the role of government in the economy at the national level. In the international area, after experimenting with various patterns such as the exchange - currency and the dollar standard, our time introduced a regime of flexible exchange rates for relations between national currencies of a purely fiat nature.
The evolution of the world economy in the last decades of the century clearly shows the dynamic and interactive nature of the economic processes of liberalization and reform, as well as the importance of the institutional regime in which they are carried out.
The Bretton Woods regime fell victim to a different inconsistency: that between the prevailing principle in favor of activist national economic policies and the presence of a limit to them derived from the commitment to maintain a fixed currency parity. This second inconsistency subjected the regime to progressively severe and finally irresistible tensions. The established Bretton Woods regime can be characterized as being both effective and inconsistent, which, in contrast to the regime that replaced it, can be described as more consistent but less effective.
Establishment of a solid and lasting global institutional order.
The progress made to date in integrating the economies of virtually every country in the world and the resulting globalization of its activities is undoubtedly one of the fundamental achievements of the last century. These achievements bring with them a challenge: the need to safeguard the stability of the world system in the absence of an authority or government at the global level. There is an essential difference here between the national economic sphere, where the state has responsibility, authority and resources to protect the stability of the country's economy, and the global economic sphere, where there is no equivalent structure.
In its absence the void has been filled with the evaluation of an institutional scheme to maintain global stability based on a series of dispersed components; The fundamental ones among them are: groupings of specific countries that serve as instruments for the coordination of their national economic policies and, on the other hand, the IMF, an institution that exercises a limited measure of authority to promote such coordination on a universal scale and that has a base of usable resources to underpin appropriate policy at the country level and system stability when it is threatened.
But both the authority and resources of the IMF are clearly inferior to what governments have to protect their own system.
A world capital market, in addition to requiring a regulatory regime, requires a mechanism to protect the system from threats and risks and this mechanism is provided by a lender of last resort which does not exist on a global scale.
The first difficulty relates to the resources that would be required to extend credit of last resort on a global scale. The problems would be in the order of magnitude of the funds that would be required. Another important aspect is related to the nature of the resources. Typically, the funds used for national lenders of last resort, which are usually their own central banks, that is, their currency issuance. At an international level, this would be possible if an agreement was reached on an institution with the power to issue its own liabilities. Such an idea was behind the issuance for a time of the IMF's special drawing rights, an idea that did not quite flourish. But such resources may be external, based on contributions from the countries that are members of the system.
A next aspect has to do with the terms and conditions of last resort loans. Here the traditional principles are: lend widely (to restore trust); require quality collateral (to protect borrowed funds) and lend at a primitive interest rate, that is, higher than the market rate (to avoid abuse of these loans and ensure the creditworthiness of borrowers).
A lender of last resort has to have authority. This authority is essential to ensure that countries that turn to lenders of last resort correct their economic policy and that that of other countries contributes to the stability of the system. The presence of global market forces has already resulted in a limitation of the lack of autonomy of governments, with which their sovereignty has been reduced.
The interdependence resulting from Globalization is generally accepted when viewed from the perspectives of its benefits. But when the focus is on its costs and the conflicts it can generate, its acceptance weakens. Unfortunately the risks and benefits go hand in hand. The options we face are clear: We can either agree to a regulatory regime for capital transactions and protect its application internationally to safeguard the robustness of integration, or resort to disintegration as a means of escaping the consequence of interdependence. The former allows for benefits but must face the risks of integration (hence the need for generally applicable prudential rules and last resort loans). The second aspect,the loss of profits to avoid the risks of such integration, but instead of the latter they resort to the risks of disintegration, which as the experience of this century in the interwar period indicates, are considerable.
Both the formulation of prudential risk control standards of general application and the existence of a consensus on a prudential regulatory framework on a global scale will make inevitable the discussion on the need for a lender of last resort to cement the global structure of protection of the stability as a whole.
Union between the monetary and banking crisis.
The ties of union between the monetary and banking crisis, we find that the problems in the banking sector usually precede a monetary crisis (the currency crisis accentuates the banking crisis). The anatomy of these episodes suggests that the crisis occurs when the economy enters a recession, following a prolonged expansion in economic activity fueled by credit and capital inflows and accompanied by an overvalued currency.
Various theoretical models have been used to show the links between the currency and banking crises.
James Stoker (1995), part of the balance of payments problems to reach the banking crisis. Furthermore, Frederic Mishkim (1996) argues that when a repayment occurs, the position of banks can be further weakened if a large part of their obligations are denominated in foreign currency. Such models underscore that when central banks finance the bailout of troubled financial institutions through money creation, we revert to the classic story of a currency crash facilitated by excessive money creation.
Other models maintain that the monetary and banking crisis have common causes. An example can be found in the dynamics of a plan to stabilize inflation based on the exchange rate, such as that of Mexico in 1987. In the first stage of the plan, there is also an explosive growth in imports and economic activity, financed with foreign debt. As the current account deficit increases, financial markets begin to convince themselves that the stabilization plan is unsustainable, signaling a speculative attack on the country's currency. As this explosive growth is normally financed by a sharp increase in bank loans, while banks take loans abroad,When capital inflows turn into outflows and asset markets collapse, the banking system collapses.
Goldfajn and Valdés (1995) show how changes in the international interest rate and in the inflow of capital are amplified by the intermediation role of banks and how these oscillations can also produce an exaggerated economic cycle that produces a massive withdrawal of funds from banks. banks and look for monetary and financial drops.
These models are clear as to which economic indicators should provide insight into the underlying causes of the twin crises. The models of inflationary stabilization, financial liberalization also underline the pattern of the boom-fall in imports, production, capital flows, bank credit and the price of assets. Some of these models also highlight the overvaluation of the currency, which leads to a low level of exports. The possibility of massive bank withdrawals suggests that bank deposits may be an indicator of impending crisis. Krugman (1979) argues that currency crises may be the by-product of public budget deficits.
Definitions, date and incidence of the crisis:
Most of the time, balance of payments crises are resolved through the return of the national currency or the floating of the exchange rate. But central banks can turn to tight monetary policies and foreign exchange interventions to fight speculative onslaught. In these; In the latter cases, the turbulence in the foreign exchange market will manifest itself in steep increases in domestic interest rates and massive losses in the foreign exchange reserve. The currency crisis index must capture these different manifestations of speculative attacks.
If the beginning of a banking crisis is marked by attacks on banks and withdrawal of deposits, then changes in bank deposits could be used to set a crisis date.
Often times, banking problems do not arise from the liability side but rather from prolonged deterioration in asset quality, be it due to sinking property prices or increased bankruptcy in nonfinancial sectors. In this case, changes in asset prices or a large increase in bankruptcy or bad loans could be used to usher in the crisis.
Example of the beginning of a banking crisis due to two types of events:
The massive withdrawal of bank deposits that leads to the closure, merger or acquisition of one or more financial institutions by the public sector (Venezuela 1993) and when there is no massive withdrawal of deposits, closures, mergers, acquisitions or aid large-scale government that affects a major financial institution (or group of institutions) and that mark the beginning of a series of similar actions with respect to others (as in Thailand in 1996-1997).
Twin Crisis:
Given the information that there is a banking crisis, it should be greater than the a priori possibility of a balance of payments crisis. A banking crisis increases the possibility of a country experiencing a currency crisis.
Regarding the Chilean crisis at the beginning of the eighties, the rescue of the banking systems may have contributed to the acceleration of credits observed before the currency crisis. Even in the absence of large-scale bailouts, a fragile banking system is likely to tie the hands of the Central Bank in its defense of the currency (Indonesia in August 1997).
The maximum of the banking crisis comes after the currency crisis, for example, knowing that there is a currency crisis does not help us to predict the beginning of a banking crisis (this posterior probability is 8%); But knowing that there is a currency crisis helps us to predict the probability that the banking crisis will get worse, (this probability being 16% a posteriori).
The probability of a banking crisis (at the beginning) after the existence of financial liberalization is greater than the a priori probability of a banking crisis. This suggests to us that the twin crisis may have common origins in the deregulation of the financial system and in the boom-bust cycles and the speculative asset bubble that accompany financial liberalization.
Macroeconomic background of the crisis:
To classify whether both types of crises can have common roots, macroeconomic and financial variables are analyzed in the next crisis period.
The indicators associated with financial liberalization are the M2 multiplier, the ratio of domestic credit to nominal GDP, the real interest rate on deposits, and the ratio between the interest rate on loans and that on deposits.
Other financial indicators include: excess of real M1 balances, real commercial bank deposits, and the ratio of M2 (dollar converter) to foreign currency reserve (dollar). Indicators related to current accounts include the percentage deviation of the real exchange rate from trends as a measure of misalignment, the value of exports and imports (in dollars), and the real terms of trade. The indicators associated with the capital account are: Foreign reserves in dollars and the difference between the real interest rates on domestic and foreign deposits (monthly rates in percentage points). The indicators of the real sector are industrial production and an index of stock prices (in dollars). Finally,the fiscal variable is the overall budget deficit as a percentage of GDP.
The financial sector.
Until the 1970s, most financial markets were regulated with restricted credits and often with negative real interest rates. The late 1970s and early 1980s saw widespread financial reform in both developed and emerging markets, leading among other things to increases in real interest rates. The periods before the currency and banking crises are characterized by an excess of offers of the real balances of M1, the excess of liquidity is particularly notable in the episodes of twin crises, which explain almost all the behavior above normal in the currency crises. Given the limitations of estimating the demand for money,the resulting situation is consistent with deficit financing that appears in Krugman's (1979) model or excess liquidity can be created to ease the conditions of troubled financial institutions. In any case, at any given time, excess liquidity becomes incompatible with the commitment to maintain an exchange rate and a currency crisis arises. This would suggest that the high real interest rates prior to the banking crisis were devoted to factors other than monetary policy. For both currency and banking crises, this M2 / reserve ratio clearly grows above its usual level prior to the crisis.In any case, at any given time, excess liquidity becomes incompatible with the commitment to maintain an exchange rate and a currency crisis arises. This would suggest that the high real interest rates prior to the banking crisis were devoted to factors other than monetary policy. For both currency and banking crises, this M2 / reserve ratio clearly grows above its usual level prior to the crisis.In any case, at any given time, excess liquidity becomes incompatible with the commitment to maintain an exchange rate and a currency crisis arises. This would suggest that the high real interest rates prior to the banking crisis were devoted to factors other than monetary policy. For both currency and banking crises, this M2 / reserve ratio clearly grows above its usual level prior to the crisis.it is clearly growing above its usual pre-crisis level.it is clearly growing above its usual pre-crisis level.
Periods of financial crisis in the past have often been characterized by massive and persistent capital flight. Deposits alone begin to recover a year and a half after the start of the financial crisis.
The real sector (evolution of production growth and changes in the stock price).
The deterioration of the real terms of trade, the overvaluation of the currency and the weakness of exports are reflected in a marked contraction of economic activity and a drop in production in the face of both crises. In line with the greater severity of the twin crises, the combination of monetary and banking problems appears to be taking a more devastating toll on the real economy, as the recession runs much deeper and lasts much longer in the case of recessions. associated exclusively with collapses.
According to Kindelberger (1978); … ”Financial crises are associated with the highest points of the business cycle…” the financial crisis is the culmination of a period of economic expansion that leads to recession.
The appreciation of the real exchange rate that characterizes the pre-crisis periods is often cited as a key factor in the narrowing of profit margins that ultimately leads to an increase in bankruptcy, an increase in non-performing loans, a deepening of economic contraction and problems in the banking sector.
Financial systems in the face of Globalization. Financial crisis.
Since the early eighties we have experienced five crises:
- The generalized foreign debt crisis from 1982 to 1994 that began in Mexico in August 1982 and particularly affected Latin America; The Mexican crisis that erupted in December 1994, which seriously affected Argentina and Argentina, but not for long. It also had some impact in Thailand. The contagious and deep crises of five Asian countries that began in the summer of 1997. It begins in Thailand and extends to Malaysia, the Philippines, South Korea and Indonesia. The crises that begin in the summer 1998 in Russia, which affected practically all markets for a week. The Brazilian crisis, which began with the Russian debt moratorium.
Analyzing the main macroeconomic data of the countries before the outbreak of the crisis, it does not seem difficult to identify a series of common elements: there are large and persistent current deficits and budget deficits, very rapid growth of external debt and short external debt. This is the case with respect to total debt and there is almost always an attempt to control the depreciation of the exchange rate through some combination of intervention in the foreign exchange market and a sharp rise in interest rates.
The quality of a country's financial system influences the development of the crisis. A fragile banking system, poorly trained or with few own resources and poorly covered risks can react to the crisis by worsening it, the absence of a capital market can also be a factor in the worsening of the crisis. Financial systems in the five crises did not play a positive role.
Globalization and internationalization of financial systems: New challenges for banking supervision.
Financial liberalization policies and the greater internationalization of financial services have resulted in an increasing level of activities by the banking industry. The world has opened, with opportunities for new business and profitability, taking advantage of the economy of scope, more efficient production processes in the supply of financial services, better coverage of rate and currency risk, etc. However, there are also new dangers linked to an eventual increase in systematic risk and contagion, the worsening of potential competitive inequities, the accentuation of conflicts of interest and the growing difficulties to control them, the opportunities for speculation in markets of derivatives, etc.
This whole range of opportunities and risks represents a challenge for banking supervision, which must be redefined. Cooperation between bank supervisors is essential to ensure consolidated international supervision, defined as no institution will be left without control, and each institution will receive the degree of supervision it requires.
The Monetary Union in Today's World.
From 1944 to 1971, the Gold Dollar Exchange Standard prevailed in the international monetary system, which was based on fixed exchange rates and guaranteed a certain degree of monetary stability. As of 1971, when the United States withdrawn the gold backing in Dollar, extreme volatility was introduced in the exchange markets, which, together with the development of science and technology in the field of telecommunications, the automated processing of The information creates the favorable conditions to turn currency speculation into one of the fastest and most abundant sources of profit.
This, together with the inexorable need for capital to go to the sectors where the highest levels of redemption can be obtained and the concentration process that has taken place and continues to take place in the world, has turned speculation into a threat to the international financial system.
The international monetary system that was imposed by the United States on the world in 1971, leaves this country in a position of absolute privilege as the dollar is the main reserve currency accepted internationally and can be freely issued by the Federal Reserve (Central Bank of USA.).
In Europe, the strategy they have adopted has been to desist from an independent monetary policy in favor of a monetary union, in which all the nations that integrate it renounce their currency and create a new one, the EURO, which replaces the monetary signs national.
This project is the result of an effort of almost half a century that moves towards a political union for which the monetary union constitutes an unavoidable premise. Giving up the national currency, in order to create a new monetary sign as part of a consensual integration effort between countries with similar interests, constitutes a rational and laudable company. That is why the Euro has been greeted positively by the world that sees in this new currency a factor that would contribute to the balance and stability of international finance.
Monetary unification tends to modernize at the present time, although no other has been carried out in fact, we have that in Asian countries efforts are being made to create a single currency, to protect themselves against financial crises intrinsically related to the currency American (dollar) and give a greater scope to the integrationist processes that are being promoted in the region.
In a meeting of the Presidents of the central banks of Asia, in January 1999, the following was expressed verbatim:
"The time must come when we can wish to have our own Asian currency considered, perhaps something along the lines of an Asian Monetary Unit that would constitute a fundamental currency for our region."
The idea of a Latin American Monetary Union is not something that coincides with the plans and wishes of the United States for the Region, which can be clearly understood in the analysis of the strategy of the North American administration to discuss free trade agreements in isolation. with each country in the area, in such a way that the disadvantage for the latter is absolute and that suspicion and division are promoted around the moment in which each country will discuss “its agreement” with the US and the eventual conditions that each which one could get.
In the case of the United States and Latin America, the Monetary Union would not be the appropriate path, because there is not a high degree of economic independence and common strategic interests that provide the possibility of coordinating balanced policies.
The process towards a Free Trade Association of the Americas (FTAA) that was mentioned above, would be accelerated, this being the alternative that the US intends to promote in the face of a genuinely Latin American integration, since an existing single currency would have been adopted, the North American. This strengthens the hegemony of the United States in all other aspects concerning such integration process.
The issue raised has been examined in more detail in: Manuel Guitán: International Financial Order: a challenge for the end of the century, a lecture delivered at the Lázaro Galdiano Foundation on November 5, 1998.
The ratio between M2 and reserves captures the extent to which the banking system's liabilities are backed by reserves. In the event of a currency crisis, individuals may rush to convert their local currency deposits into foreign currency, so that this relationship M2 / reserve captures the ability of the Central Bank to meet such demands.
It is examined by Francisco Soberón Valdés: Finance, banking and management: Latin America: Dollarization or Monetary Union? This article being published in the Juventud Rebelde newspaper, Havana City, April 21 and 22, 1999. The possibility of working together with a view to achieving an Asian monetary union was raised and he told his counterparts from the central banks gathered there, that such a step could increase stability and reduce costs throughout the region.
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