Question

What role do financial institutions play within the global marketplace?

How can policies and regulations impact financial institutions?

What role does the central banking system play within the global marketplace? Would you recommend any changes to the central banking system? Why or why not?

Answer 1

Role of financial institutions in the Global markets

Financial intermediaries like banks provide a critical function in the economy. They essentially match borrowers and lenders - taking funds provided by depositors or investors and distributing those funds to individuals and firms that have opportunities for higher potential returns.

Over recent decades, there has been a steady increase in cross-border financial flows around the world. In this process, various financial institutions including banks and institutional investors they acted as an intermediary to channel funds from lenders to borrowers across national borders. These developments reflected the progressive dismantling of controls on cross-border financial flows as well as the liberalisation of national financial markets more generally. This resulted in an augmentation of the range of borrowing and lending possibilities available to economic agents throughout the world. In particular, there was a marked expansion of the range of financial possibilities available for financing current account deficits and recycling current account surpluses.

Policies and regulations impact on financial institutions

Policies and regulations subjected towards financial institutions has led to quasi-monopoly of few players in the sector. Once rules and regulations are put in place, a robust barrier to entry is created. It implies that several other interested financial players are hindered from entering the industry. Barrier to entry has a major impact in the financial services sector. Potential rivals can hardly enter such a market unless they meet the stipulated threshold. So far, the regulation of financial institutions has led to significant reduction in their numbers. Consequently, customers are being served by just a few accredited players.

Whenever regulations are lifted, some financial institutions may most likely run into financial losses. In most cases, earnings are increased through protected monopolies. However, the introduction of policies and regulations often break this link and hence, financial institutions end up losing greatly. However, when costs and demand change, financial institutions are sheltered from the possible market dangers. It is vital to mention that this sheltering is only possible when policies and regulations have been firmly enacted in place. Financial service providers can indeed suffer myriads of market risks when regulations are lifted at any given time. Worse still, lifting regulations may lead to massive failures in the operations of organizations.

Role of central banking system in Global markets

The Central Bank system has as its institutional mission of stabilizing the purchasing power of currency and ensuring soundness of the entire financial system. The infrastructure of financial markets plays a key role in the financial system and economy in general. Its proper functioning is essential for financial stability and conditions necessary to safeguard the transmission channels of monetary policy.

The surveillance role of the central banking system ensures that the infrastructure and payment arrangements are administered consistently with the public’s interests and objectives by maintaining financial stability and reducing systemic risk. In addition, the central banking system also acts as a settlement services provider. Hence, the system operates the reserve transfer funds system and settlement system of government securities.

A central bank also runs monetary and exchange rate policies. It regulates the amount of money in circulation, influences interest rates and controls the amount of foreign currency in a country. It achieves the latter role through operations in government securities and foreign exchange market.

Changes to the central banking system

Although the central banking system plays an enormous role in the financial services sector, it is necessary to institute some changes. For instance, the system enjoys total monopoly as an oversight body to all the financial institutions. On the other hand, there is no regulatory body to oversee its activities. An independent agency should be set up to act as a check and balance to the central banking system. This will enhance accountability and transparency in its operations.