Financial Globalization and Regulation

Financial Globalization and Regulation

Introduction: In the paper named “Financial globalization and Regulation” Philip Arestis and Santonu Basu defined a process by which financial markets of different countries are integrated as a single market and which will facilitated free movement of finance over the countries without having any restriction. This process requires a single currency and single monetary authority.

Literature Review: Different scholars have researched and express their opinions about financial globalization, its requirements, benefits, limitations and regulation. Some of their views are mentioned in the paper of Arestis and Basu.
According to Greenspan (2003) financial globalization can be beneficial in the context of reducing home bias, using of savings in most promising investments and increasing global economic growth.
But on the other hand Prasad et al. (2003) had an another view point and according to him financial globalization are not able to stabilize fluctuations in consumption growth of developing country.
And integrated regulation can be established by the suggestions of Keyenes (1980) from ICB (International Clearing Bank) proposals. He suggested that ICB will have the power to issue single international currency which he had termed as Bancor. It will be fixed but alterable in terms of gold and will be use for settling international balances. ICB will have the power to intervene in capital and financial market.

Problem Statement: Financial globalization is not a new phenomenon, but today’s depth and breath are unprecedented. Financial flows have crossed the national boundary and opening new investment and export opportunities. But only few countries and sectors participated in financial globalization and financial system is far from being perfectly integrated. There is evidence of persistent capital market segmentation, home country bias, and correlation between domestic savings and investment. And the regulation of integrated financial systems, technological advances in financial services and increased diversity in channels of financial globalization make the whole process more difficult and costly.
Methodology: This paper is prepared form secondary sources of data. Various websites and journals of different scholars relating financial globalization are used for collecting information.
Analysis and Findings: Under the process of financial globalization different parts of the globe should be merged in one and that means lending and borrowing countries should be merged in one single market. But it will bring a series of financial crisis. Because it requires tow main conditions to be fulfilled. One is the introduction of single currency and another one is development of international institutions which will have some regulatory rules accepted by all participants. But we are far alone from having such kind of rules. On the other hand existence of different currencies in different parts of world signifies that market is segregated. And it happens because different currencies carry different degrees of ability to convert in the international market and it limits the process of globalization.
The second reason to have a single currency is to introduce a credit standard for lenders because loan markets operate in the presence of uncertainty. But the existence of different currencies with different degrees of convertibility causes a problem in forming a international credit standard. It segregates the domestic financial market from international financial market and different countries have differential access to international markets. There also lays a problem related to the impact of financial globalization on macroeconomic volatility.
An international financial institution should be able to deal all these problems mentioned here with the required power. And there can be a sister institution with two specific aims. The first aim is to provide finance for investment to developing countries and the second aim is to provide lending facilities to enable countries to avoid foreign exchange difficulties.
Still, financial globalization can yield large benefits. The main benefit is the development of the financial system of developing countries, what involves more complete, deeper, more stable, and better-regulated financial markets. Financial globalization implies that more and more capital are available to developing countries and it allows countries to better smooth consumption, deepens financial markets, and increases the degree of market discipline. Financial globalization leads to a better financial infrastructure which reduces problems as adverse selection and moral hazards.