International DiversificationInternational Financial SystemsANDREEA STOIAN, PHD| LECTURE 2

Course Description

Financial markets

Financial system

Developed and Emerging

Financial Systems

Room B.317, U

Lectures: Lectures: Monday April

23 at 9:00 am till 12.00; Tuesday

April 24 at 10:00 am till 12:00;

Wednesday April 25 at 9:00 am till

12:00

Prerequisites: Financial Markets

1.Why would anyone be

interested in investing in the

financial market?

2.What is the purpose of the

financial market?

3.What is the financial market?

Financial market

Definitions

The financial market is a broad

term describing any marketplace

where trading of securities

including equities, bonds,

currencies and derivatives occurs.

(Investopedia)

Is a market in which people trade

financial securities, commodities,

and value at low transaction costs

and at prices that reflect supply

and demand (Wikipedia)

My favorite!

Financial Market refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds, derivatives, currencies, etc. take place.

It plays a crucial role in allocating limited resources, in the country’s economy.

It acts as an intermediary between the savers and investorsby mobilizing funds between them.

Financial market components

Financial market

Capital market Money marketForeign exchange

marketInsurance market

Real estate market

Players in the financial market

Players

Enterprises Individuals Intermediaries Regulatory

bodies

Financial system

PlayersFinancial markets

International Financial Systems

The Anglo-Saxon Financial System

• Capital market-oriented

• Strong corporate governance principles (e.g. minority shareholders protection)

• Less important banking system (e.g. in US banks are not allowed to invest on capital market: commercial banks vs. investment banks)

The German Financial System

• Banking-oriented

• Strong banking system that influences financial resources allocation

• Less important capital market

The Japanese Financial System

• Based on keiretsu (chobol) organizational structures

• Set of companies with interlocking business relationships and shareholdings (informal business group)

• The member companies own small portions of shares in each other’s companies, centered on a core bank

• This system helps insulate each company from stock market fluctuations and take-over attempts

The size and the composition of

international financial systems, 2011

`The Rise and Shine` of the

Emerging Markets Financial Systems

`Asi

an

Tig

ers

` •Increasing GDP growth rate (6%, 1960-1990)

•Promoting industrialization

•Export based policy

•Increasing labor productivity

•Investments in the human capital (increasing the quality of the educational system)

•Increased number of foreign investors

•Vulnerability

•Financial crisis (1997)

Isla

mic

Fin

an

cia

l Syst

em •The basic principle is that

exploitative contracts based on interest or unfair contracts that involve risk or speculation are unenforceable

•Islamic finance is directly involved with spiritual values and social justice

•All parties in a transaction share the risks, the profits or loss and no one party in a financial contract gets predetermined return

•For example, depositors in an Islamic bank are shareholders who earn dividends or lose a portion of their savings

Em

erg

ing

Eu

rop

e •State-owned economies to market economies

•Mass Privatization Program

•Banking-oriented system

The size and the composition of

emerging financial systems, 2011

Further reading:

Allen, Franklin; Gale, Douglas (2001),

Comparing Financial Systems, MIT Press THANK YOU!