MAJOR DRIVERS OF FINANCIAL INDUSTRY:GLOBAL FINANCIAL SYSTEM, The World Bank

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Management of Financial Institutions - MGT 604

Lecture # 11

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

GDP is the value of goods and services in the country during a year minus the value

of inputs.

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.

Management of Financial Institutions - MGT 604

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 14001600s 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 (18711932), 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)

Management of Financial Institutions - MGT 604

Activities of World Bank

The 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.

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