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MGT604 - Management of Financial Institutions - Lecture Handout 11

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MAJOR DRIVERS OF FINANCIAL INDUSTRY

MACRO ECONOMIC PERFORMANCE OF A COUNTRY

National Income

People of any country produce a specific quantity of different goods and services from the natural resources by the help of capital goods with in a specific period, usually one year and this is called income of a country

Concepts of National Income

  1. Gross National Product “GDP” or Gross National Income “GNI” GDP or GNI is defined as “the total market value of all the final goods and services produced in a year.”
  2. Net National Product “NNP” or Net National Income “NNP” “It means net value of all the goods and services produced in a country during a year is called Net National Income.”

Difference b/w GDP & GNP

  1. GDP is the value of goods and services in the country during a year minus the value of inputs.
  2. GNP represents GDP plus net factor income payments from abroad.

MAJOR DRIVERS OF FINANCIAL INDUSTRY

Regulating risk and the importance of risk management

Key challenge for regulators is to find ways to manage risks adequately. They have to ensure the prudential soundness of financial institutions and the stability of the system at large. But they also have to avoid stifling innovation and limiting the growth potential of the institutions concerned.

Basel 2 Type Rules for Insurers

Challenge in regulating institutions is to reflect market structures. There are now increasing calls to apply the principles of the Basel 2 bank capital accord to insurance regulation. There is an important angle to this call. Systemic risk in a financial stability sense is not any longer confined to banks. The process of securitization has changed all that. And more
recently, growing inter linkages with the insurance sector emphasize the need for a further rethink.

GLOBAL FINANCIAL SYSTEM

The global financial system (GFS) is a financial system consisting of institutions and regulations that act on the international level, as opposed to those that act on a national or regional level. The main players are the global institutions, such as International Monetary Fund and Bank for International Settlements, national agencies and government departments, e.g., central banks and finance ministries, and private institutions acting on the global scale, banks and hedge funds.

HISTORY OF INTERNATIONAL FINANCIAL INSTITUTIONS

In Europe, it may have started with the first commodity exchange, the Bruges Bourse in 1309 and the first financiers and banks in the 1400–1600s in central and Western Europe The first global financiers the Fuggers (1487) in Germany; the first stock company in England (Russia Company 1553); the first foreign exchange market (The Royal Exchange 1566, England); the first stock exchange (the Amsterdam Stock Exchange 1602). Milestones in the history of financial institutions are the Gold Standard (1871–1932), the founding of IMF, World Bank at Bretton Woods, and the abolishment of fixed exchange rates in 1973.

INTERNATIONAL FINANCIAL INSTITUTIONS

International Monetary Fund

The International Monetary Fund keeps account of international balance of payments accounts of member states. The IMF acts as a lender of last resort for members in financial distress, e.g. currency crisis, problems meeting balance of payment when in deficit and debt default. Membership is based on quotas, or the amount of money a country provides to the fund relative to the size of its role in the international trading system. The IMF describes itself as "an organization of 185 countries (Montenegro being the 185th, as of January 18, 2007), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". With the exception of North Korea, Cuba, Andorra, Monaco, Tuvalu, and Nauru, all UN member states participate directly in the IMF. Some are represented by other member states on a 24-member Executive Board but all member countries are members of the IMF's Board of Governors.

Membership Qualifications

Any country may apply for membership to the IMF. The application will be considered first by the IMF's Executive Board. After its consideration, the Executive Board will submit a report to the Board of Governors of the IMF with recommendations in the form of a"Membership Resolution.

The World Bank

The World Bank (the Bank), a part of the World Bank Group (WBG), was formally established on December 27, 1945, following the ratification of the Bretton Woods agreement. The concept was originally conceived in July 1944 at the United Nations Monetary and Financial Conference. Two years later the Bank issued its first, & smallest, loan; $250 million to France for post-war reconstruction; an issue which has remained a primary focus, alongside reconstruction after natural disasters, humanitarian emergencies & post-conflict rehabilitation needs affecting developing & transition economies.

The World Bank, as it is commonly referred to, consists of two agencies of the five that
comprise the World Bank Group:

  1. The International Bank for Reconstruction & Development (IBRD)
  2. The International Development Association (IDA)

Activities of World Bank

World Bank’s activities are focused on the reduction of global poverty, focusing on the achievement of the Millennium Development Goals (MDGs), goals calling for the elimination of poverty and the implementation of sustainable development. The constituent parts of the Bank, the IBRD and the IDA, achieve their aims through the provision of low or no interest loans and grants to countries with little or no access to international credit markets. The Bank is a market based non-profit organization, using its high credit rating to make up for the low interest rate of loans. The Bank not only provides financial support to its member states, but also analytical and advisory services to facilitate the implementation
of the lasting economic and social improvements that are needed in many Under-developed countries, as well as educating members with the knowledge necessary to resolve their development problems while promoting economic growth.

Country Assistance Strategies

As a guideline to the World Bank's operations in any particular country, a Country Assistance Strategy is produced, in cooperation with the local government and any interested stakeholders and may rely on analytical work performed by the Bank or other parties. In the case of low income countries, the Country Assistance Strategy is derived from the country’s Poverty Reduction Strategy Paper.