Thanks to deregulation & technological advances, Financial Markets are all interlinked. Funds can thus be raised overseas, not only domestically.
Deregulation is the process by which rules and regulations are removed or reduced in order to make markets increasingly efficient. The rationale behind this is that deregulation will promote competitiveness, and therefore result in lower prices and a more efficient marketplace.
To realise the effect of deregulation and technological advances on financial markets, we first have to understand what financial markets are. Basically, a financial market is a mechanism that allows people to buy and sell financial securities, commodities and other fungible items of low value at low transaction costs and at prices that reflect the efficient market hypothesis . Deregulation and technological advances go hand-in-hand; as deregulation became increasingly common, technology was also quickly advancing to become what it is today.
One highly regulated financial market before the 1980s was Japan. However, due to an agreement between the US and Japan in 1984 to liberalise Japanese financial markets, the rapid deregulation helped to strengthen the Japanese Yen and in turn helped to sustain capital flows to the US market and prevented an unwarranted weakening of the US dollar. Another huge instance of deregulation was the introduction of the Euro on 1 January 1999. The capital market was given a massive boost by reducing the costs and risk of transferring money between the European countries that adopted the currency.
With technological advances and the increasing use of the Internet, financial information on foreign investments and markets is accessible at the touch of a few keys. Financi...
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...them to have a larger reach of shareholders. Investors also can diversify their portfolios with stocks from companies in different countries, increasing the chances that the other stocks in the portfolio are able to buffer a loss due to a drop in the stock prices in one country.
However, all this does not come without its demerits. Because information is transmitted so quickly, it can reach some faster than others. Technology is not perfect, and this is when arbitrage opportunities can occur. When stocks are dual-listed, the risk of these arbitrage opportunities can increase.
In conclusion, I feel that financial deregulation, coupled with the rapid advancement in technology has opened up many doors to the expansion of the financial sector. Without the deregulation, markets will not be as advanced and as efficient as they are today.
The coins made in gold, silver and bronze were traded during Roman Empire and the shortage of coins created a barrier for money circulation. However with the establishment of paper money, a sophisticated banking, global clearing system and electronic money, the global financial system evolved with a worldwide framework of legal agreements. In the Global Financial market, foreign currencies issued by the world, countries are traded by the buyers and sellers using currency exchange rates. Now a day, it is very common practices of companies in one country to raise capital in a foreign country by listing their stocks on major foreign exchanges given the growth of equity markets are becoming more globalized (SNHU, 2015).
Since they are financial legislation, Sarbanes-Oxley Act and Dodd-Frank Act have strong relationship with the modern financial markets. This relationship is mainly attributed to the implications that the acts have on market participants, regulators, investors, and markets in general. These acts primarily focus on promoting the health and vitality of financial markets by addressing several practices that could have considerable negative effects on market participants and the economy in general. Actually, Dodd-Frank, which is arguably the most important financial legislation in modern economy, brought significant changes that contributed to changes in th...
After World War II, many nations were left with weak economy and financial instability. Offshore banking became a method to escape national regulation as many national regulators turned a blind eye on deposits in currencies other than their own. The offshore market became popular due to its ability to facilitate new finance innovations and keeping transaction costs low. Eurodollar market for example is a product of this trend. As offshore banking became competitive, the U.S. had to remove limits on national banking and the division between commercial and investment banking. Canada also benefitted from this new trend as it appeared to be very promising for international expansion. However, differing from the United States, Canadian Banking Act was in place to protect domestic banks from new foreign entrants and also effectively manage risk. With the increase of international investment, not only does funding needs were satisfied but new business information systems were also developed due to the increased need for more centralization and a variety of services. New regulations such as The International Banking Act of 1978 was formed to level the playing field between foreign and American banks by requiring mutuality from any country whose banks are seeking permission to enter the United States. The Gramm-Leach-Bliley Act also removed barrier for commercial banks, investment banks,
Since 1933 there has been numerous proceedings of regulation of banks. Regulations as the Glass-Steagall Act, which is the separates of commercial and investment banking. FDIC insurance, which protects depositors from losing their money. Tougher SEC regulations that allow you to invest on Wall Street without being cheated. As a result, for almost 50 years, there was no banks that failed, no major crises and the economy recovered from the Great Depression. Several economists believed that trend would have continued if not for deregulation. Although, deregulation somewhat increases the economy, it also causes unsustainable bubbles, increase riskiness in banks, and if things turn for the worst (like 2008), the banks are bailed out, and we the
Major banks are cutting back on some of their legally permitted operations, such as- market making, and that has led to liquidity issues in the bond markets. Proprietary trading could become unregulated if more banking activities continue moving towards the shadow banking system. This would essentially defeat one of the main purposes of Volcker Rule. [d] The third major unintended consequence has been the degree by which the Federal Reserve has become the main regulator of the finance industry. In order to discourage future bailouts similar to the ones during the financial crisis, the Dodd-Frank Act limited the Fed’s emergency powers. However the liquidity and capital standards now imposed by Fed has purportedly become one of the most important regulatory developments of the Dodd-Frank Act.
-Global capital markets were increasingly selective, as national and trading exchange limitations become less relevant, shareholders demand enhanced returns
This reform re-regulated the financial sector, tightened capital requirements on banks and overall placed major regulations on the financial industry. This reform also protects consumers with rules for abusive lending and mortgage practices. The main goal of the Wall Street Reform is to subject banks to a number of regulations and the possibility of being broken up due to the banks being “too big to
The large-scale multinational financial giants are probably represented by the renowned investment banks such as Goldman Sachs, UBS, D...
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
Pagnotta, E & Philippon, T. (2010). The Welfare Effects of Financial Innovation: High Frequency Trading in Equity Markets. Available: https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=SED2011&paper_id=1246. Last accessed 04/12/11.
Financial liberalization is a process whereby restrictions on financial markets and financial institutions are eliminated which involves the removal of controls by the government namely, credit and interest rate controls. In the early 1970’s, the research on financial liberalization was initiated by McKinnon and Shaw (1973) who argued that state control of credit, interest rate and other financial variables was responsible for the retarding economic growth in the world economy (Abiad, Detragiache & Tressel, 2008). McKinnon and Shaw (1973) emphasized that allowing market forces to determine economic variables
We ought to begin with a rudimentary description of the financial markets. In the most basic sense, they are constant auction blocks for various deeds of ownership. The most well-known of financial instruments, stocks (also known as shares), represent a partial ownership stake in a corporation, guaranteeing a portion of the company’s value in a sale, as well as voting rights over the corporation’s leadership. In this way the markets should be thought to function as a ‘democratization’ of capitalism, whereby investors determine what our collective economic efforts should be put towards. Since much of our society is economic in nature, the markets move our lives and national priorities.
Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2010). Multinational Business Finance. (12th ed.). Boston, MA: Pearson Education, Inc.
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
There are many advantages and benefits provided to individuals and institutions worldwide with financial innovation. However, the potential in financial innovation are been threatened by the global crisis and difficult the business to get the financial innovation for their business operation.. In addition, the West would face a lower pension benefits and the government will not be able to provide advantages on health care or pensions. The problems faced by western countries this is a global problem and should be addressed by financial institutions that are flexible. Changes in financial innovation will be a major focus in the financial system. Therefore, there are six important functions that have been listed by the economist Robert Merton in the financial system,