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1. Financial Globalization Dr. J.D. Han King’s College, UWO 2. Photo: September 11, 2001, Lower Manhattan New York City Why WTCs? What is the target? Who are the…
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  • 1. Financial Globalization Dr. J.D. Han King’s College, UWO
  • 2. Photo: September 11, 2001, Lower Manhattan New York City Why WTCs? What is the target? Who are the attackers?
  • 3. 1. Introduction <ul><li>1) Definition of Globalization : </li></ul><ul><li>“ a process which involves growing economic competition, openness and interdependence of countries worldwide” </li></ul><ul><li>2) Globalization presents Opportunities and Challenges </li></ul><ul><li>-> competition may lead to efficiency, but also may cause strife; beget winner/looser, and breed economic inequality </li></ul><ul><li>-> openness may lead to risk of vulnerability to external shocks </li></ul><ul><li>-> Interdependence may turn into contagion effect </li></ul>
  • 4. 2. Globalization of International Economy: Globalization of Production versus Globalization of Finance <ul><li>Trade and Production </li></ul><ul><li>- GATT, WTO have reduced barriers to international trade. </li></ul><ul><li>- Mulinational Corporations reduce production costs through foreign direct investment: intra-firm trade across countries but between affiliates of the same firm. </li></ul><ul><li>Finance </li></ul><ul><li>Consists of </li></ul><ul><li>- Financial transactions to back up international trade </li></ul><ul><li>-> growing in line with International Trade; </li></ul><ul><li>and </li></ul><ul><li>- International Investment independent of international trade </li></ul><ul><li>-> growing much faster than International Trade </li></ul>
  • 5. International Investment <ul><li>The other side of Corporate Financing; </li></ul><ul><li>Direct Investment vs Indirect Investment through Financial Intermediaries; </li></ul><ul><li>Takes 3 forms: </li></ul><ul><li>(1) Bank Loans </li></ul><ul><li>(2) Marketable Securities or Portfolio Investment (bonds, and equities) </li></ul><ul><li>(3) Foreign Direct Investment </li></ul>
  • 6. Data 1. Current State of International Finance: Finance on its Own
  • 7. Comments: <ul><li>1) A large part of FOREX trading is now independent of international trade </li></ul><ul><li>2) Besides currency trade, new financial instruments , such as bonds, mutual funds, and derivatives have contributed to globalization of finance </li></ul><ul><li>3) These international financial flows are becoming liquid and attracted by short-term speculative gains </li></ul>
  • 8. 3. Trends of Global Financial Flows of International Investment <ul><li>1) Mostly Private Capital Flows </li></ul><ul><li>2) Highly Concentrated </li></ul><ul><li>(1) Recipients </li></ul><ul><li>Not all countries have got capital inflows/investments </li></ul><ul><li>(2) Financial Intermediaries </li></ul><ul><li>A few ‘Big Hands’ </li></ul><ul><li>3) Changing Characteristics: Getting “Hot” </li></ul><ul><li>Portfolio Investment </li></ul><ul><li>4) Innovations in Products and Techniques </li></ul>
  • 9. Data 2. Who gets International Capital Flows?
  • 10. Updated Statistics of International Capital Flows from the Word Bank http://www.worldbank.org/prospects/gdf2000/slides/gdf002-6novoice/sld001.htm Click the above and review the slides
  • 11. Data 3. What are the ‘Big Hands’ that intermediate global capital flows? <ul><li>(1) Bank Loans: World Top 50 banks </li></ul><ul><li>(2) Portfolio Investment </li></ul><ul><li>Investment Banks </li></ul><ul><li>Buying and selling international portfolios </li></ul><ul><li>-> Merrill Lynch, Morgan Stanley, Goldman Sachs, Salomon Smith Barney, Credit Suisse First Boston, J P Morgan, Lehman Brothers, Bear Stearns, Pain </li></ul><ul><li>Wealth Managers </li></ul><ul><li>->UBS, Axa, Fidelity, Kampo, Barclay’s, Merrill Lynch, State Street Global Advisors,Capital Group, Zurich Financial Services </li></ul><ul><li>Insurance Companies </li></ul><ul><li>-> Allianz, Assicurazioni Generali, AXA, Nippon Life, ING, Prudential, Met Life </li></ul><ul><li>(3) Foreign Direct Investment </li></ul><ul><li>Multinational Enterprises </li></ul>
  • 12. Data 4. Changing Formats of Global Capital Flows
  • 13. Data 4 b. Changing Compositions of International Private Capital Flows to Developing Countries
  • 14. Data 4 c. Comparison of Two Capital Flows <ul><li>Foreign Direct Investment </li></ul><ul><li>- closely related to globalization of production </li></ul><ul><li>- mostly long-term </li></ul><ul><li>commitment and controls </li></ul><ul><li>Portfolio Investment </li></ul><ul><li>-motivated by financial gains </li></ul><ul><li>- mostly short-term highly liquid , speculative </li></ul><ul><li>-> source of ‘Hot Money’ </li></ul>
  • 15. 4. Factors behind Surges in Portfolio Investment <ul><li>1) A large amount of Accumulated Funds in Developed Countries </li></ul><ul><li>-Pension funds invested internationally increased from $302 billion in 1989 to $790 billion in 1994 </li></ul><ul><li>2) Low Interest Rates in Developed Countries </li></ul><ul><li>-a successful monetary policy of inflation has lowered the inflation rate and the nominal interest rate. </li></ul><ul><li>-a convergence and capital saturation means a very low marginal product of capital and a low real interest rate. </li></ul><ul><li>3) Case for International Portfolio Diversification </li></ul><ul><li>-Can we benefit from even adding an international asset with a lower return and a higher risk to our existing portfolio? </li></ul>
  • 16. 4) Global Financial Liberalization has worked on Emerging Market 1970’s FOREX Market -> IMF Article VIII : obligations of convertibility of currencies for current account transactions; accepted in 35 countries in 1970; 137 countries in 1997 1980’s Bond Market -> 1980’s witnessed emergence of Samurai Bond, Shogun Bond, etc in Japan Refer to a supplementary summary in this chapter 1990’s Equity Market -> WTO Agreement on Financial Services in 1991-93
  • 17. 5. Structure of International Financial Market <ul><li>International Money Market: short-term financing </li></ul><ul><li>International Capital Market: long-term financing </li></ul><ul><li>International Bonds Market </li></ul><ul><li>International Equity Market </li></ul><ul><li>* Refer to my 1 page Summary! </li></ul>
  • 18. 6. Global Financial Liberalization <ul><li>1) Promoted Globalization of Finance </li></ul><ul><li>2) International Landmark </li></ul><ul><li>(A series of) </li></ul><ul><li>WTO Agreement on Financial Services in 1990’s </li></ul><ul><li>By 1995, 35 developing countries have liberalized capital account transactions </li></ul><ul><li>In 1991. 26% of emerging stock markets allowed free entry for non-residents; in 1994, 58% have free entry </li></ul>
  • 19. 3) Financial Liberalization Gone Wrong: Asian Financial Crisis <ul><li>Background </li></ul><ul><li>(1) Investment exceeding Domestic Savings </li></ul><ul><li>-> Strong Economic Growth for the Last Two Decades </li></ul><ul><li>-> High External Liabilities; Debt Financing </li></ul><ul><li>(2) Hasty Financial Liberalization </li></ul><ul><li>->Wrong Sequencing of Liberalization </li></ul><ul><li><-Right one starts from Consolidation, and moves to Domestic Financial Liberalization, and External Liberalization </li></ul><ul><li>(3) Trigger and Contagion Effect </li></ul><ul><li>Amid Information asymmetry - lagging financial infrastructure(system) - lack of transparency, a trigger led to herding behaviors by investors </li></ul>
  • 20. *Tales of Two Examples: Korea and Taiwan-Taiwan did not have financial crisis <ul><li>Korea </li></ul><ul><li>-Severe Financial Crisis </li></ul><ul><li>-Rapid Financial Liberalization </li></ul><ul><li>-Economy based on Conglomerates (Chaebol) </li></ul><ul><li>Taiwan </li></ul><ul><li>- Virtually no Financial Crisis </li></ul><ul><li>- Cautious Financial Liberalization </li></ul><ul><li>-Economy based on Medium-and Small-sized Firms </li></ul>
  • 21. 7. Globalization of Canadian Economy and Financial Industry <ul><li>1)Overall Economy : Highly “Open” </li></ul><ul><li>->40% of GDP through international trade </li></ul><ul><li>2) Financial Industry: Highly Open Outbound, and Highly Protected Inbound </li></ul><ul><li>-> Foreign Banks being kept out or limited in business scopes </li></ul><ul><li>-> Schedule 2 banks performing poorly </li></ul><ul><li>-> WTO Agreements on Financial Services demanded Changes </li></ul>
  • 22. 3)Business Characteristics of Canadian Banking Industry <ul><li>Expansion of International Operation </li></ul><ul><li>-> a substitute for highly regulated domestic financial market </li></ul><ul><li>Large Overseas Assets </li></ul><ul><li>Relatively Conservative Domestic Banking Practice </li></ul><ul><li>-> Bank Loans account for a smaller share of Corporate Funding Source. </li></ul>
  • 23. 4) “Opening up” of Canadian Financial/Banking Industry <ul><li>Has Canada achieved a true sense of “ International Financial Liberalization ”?: </li></ul><ul><li>Bill C-67 coming into effect in 1999 </li></ul><ul><li>-> Foreign banks can have a “full service” branch in Canada. </li></ul><ul><li>-> This branch cannot take deposits of $150K or less. </li></ul><ul><li>Domestic Competition and Consolidation are needed: The prerequisite for International Competition </li></ul><ul><li>Canadian Financial Sector Reform underway </li></ul><ul><li>->Bill C-38 and Bill C-8 in February 2001 may address some issues </li></ul>
  • 24. * Canadian Bank M& A: What goes around comes around <ul><li>BOM and Royal Bank failed </li></ul><ul><li>-> Non economic factors prevailed </li></ul><ul><li>-> Against Global Trends </li></ul><ul><li><- The same ‘visible’ hand that protects Canadian Banks from international competition stops Canadian Bank Mergers. </li></ul>
  • 25. * Please, read the following Web page and tell me what you think: <ul><li>  </li></ul><ul><li>Harris Bank of Chicago recently bought by BOM </li></ul><ul><li> “ We offer you a wide array of personal banking, investment, trust and financial planning services to help you manage your money, build your wealth and achieve your financial goals. Checking/Savings Brokerage Loans Private Bank Services m banx online banking Mortgages Harris provides a broad range of corporate banking services to corporations, institutions, not-for-profit and government entities nationwide. We also provide banking, trust and investment services to small business throughout Chicago. Corporate & Institutional Banking Small Business Shareholder Services Corporate Trust Legal | Regulators Harris Bank is a member of the Bank of Montreal group of companies.     MEMBER FDIC * NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE </li></ul><ul><li> Thoughts: </li></ul><ul><li>1) Why would BOM do business in this rather adventurous fashion? If you are ignorant of BOM, you may think that BOM is a risk-taker. </li></ul><ul><li>2) Why does BOM exhibit different degrees of prudentiality between domestic and international operations? </li></ul>
  • 26. 5) Possible Gains or Loss for Canada from Globalized Financial Market ? <ul><li>Gains </li></ul><ul><li>- International Competition means More Choices for Consumers of Retail Banking Services </li></ul><ul><li>- Improved Corporate Financing </li></ul><ul><li>Losses </li></ul><ul><li>- Canadian Banks’ Small Asset-Size: good M & A- targets by International Financial Giants </li></ul><ul><li>- Spill-Over from Political Instability: Foreign Exchange Risks triggered by the threat of Quebec Separation<- a scary “Landry” </li></ul>
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