Question

What types of changes have financial markets experienced during the last two decades? Have they been perceived as positive or negative changes? Explain.

Answer 1

Financial markets have experienced many changes during the last two decades. Technological advances in computers and telecommunications, along with the globalization of banking and commerce, have led to deregulation, and this has increased competition throughout the world.

The result is a much more efficient, internationally linked market, but one that is far more complex than existed a few years ago.

While these developments have been largely positive, they have also created problems for policy makers. Large amounts of capital move quickly around the world in response to changes in interest and exchange rates, and these movements can disrupt local institutions and economies. The subprime mortgage crisis illustrates how problems in one country quickly affect the economies of other nations.
Globalization has exposed the need for greater cooperation among regulators at the international level.

Factors that complicate coordination include

(1) the differing structures among nations' banking and securities industries,

(2) the trend in Europe toward financial services conglomerates, and

(3) reluctance on the part of individual countries to give up control over their national monetary policies. Regulators are unanimous about the need to close the gaps in the supervision of worldwide markets.
Another important trend in recent years has been the increased use of derivatives. The market for derivatives has grown faster than any other market in recent years, providing corporations with new opportunities but also exposing them to new risks. Derivatives can be used either to reduce risks or to speculate. It's not clear whether recent innovations have "increased or decreased the inherent stability of the financial system."