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Chapter 1. Theoretical aspects of financial integration and functions of international financial centers (IFCs)……………………………………………………….…..……9
Definition of financial integration…………………………………………..…...9
IFCs: definition, types and main indexes………………………………………16
Stages of financial integration and its connection with IFCs……………….….25
Chapter 2. Analysis of processes of financial integration in world economy………...32
2.1. Financial integration in international blocks……………………………….…..32
2.2. Measurement of financial integration………………………………………….36
2.3. Financial centers and their contribution to economic growth…………………41
Chapter 3. Analysis of processes of financial integration in EAEC and Russia……...46
3.1. Current state of EAEC and Russia financial systems………………………….46
3.2. Evaluation of financial integration level of EAEC and Russian economy…….51
3.3. Moscow IFC: challenges and prospects for integration………………………..55
Increasing turbulence of the global monetary and financial architecture is widely discussed both in scientific and business world as a subject of interstate and inter-regional financial integration.
At present there are no clear and adequate methodology for measuring financial integration, while the level of available theoretical developments insufficient and fragmented. First of all, it is stated in the fact that research on this issue is mainly reduced to the analysis of monetary integration, although in general it has more widespread meaning, affecting directly both the monetary and financial system of the country. And as the line between the two are hard to draw, it is legitimate to say that along with the processes of merging cash credit (monetary) systems of different countries (regions) is the growing closeness of the ties between financial systems, i.e. financial integration. Forming the core of these processes are Central banks (banking system) integral countries, as they, being responsible for the nature and effectiveness of national and international currency and financial relations, give them a forward movement. Step by step changing and varying field of possible interactions, they become involved in integration processes and fully performing as not only the regulator and facilitator, but also object of splicing. Therefore, recognizing the objective functional relationships banking integration with the unification of the monetary and financial systems (markets), it is impossible fully to "rescue" her from the system integration relationship. From my point of view, it is more logical to observe these types of integration not as substitute but complementary to each other. In this work I have tried to use proved concepts, based on the investment-saving relationship, defined by, Feldstein and Horioka puzzle, and bring wider look on the problems of economic stability and growth.
Phenomenally rapid urban growth and accelerated development of the financial markets attracts attention not only of scientists, politicians, state officials and businessmen. Urban environments filled with banks, insurance companies, investment funds, stock exchanges. They spread their influence on citizens, and their performance has become the heritage of not only specialists, but also the entire population. There is a wide range of terms used to describe these processes. Among them is becoming more popular is a "financial center", which is often defined as "the capital of the capital".
Two absolute leaders - London and New York - do not pass positions in all the ratings of both financial and global and cultural capitals of the world. In Russia the last twenty years the greatest freedom and stability was far from finance sphere - the Internet. And it showed an example of unprecedented growth. The Internet was free from state guardianship and the result was not slow to affect - on the level of development and the number of users we took one of the leading places in the world. The state has taken care of Internet development in the periphery; where due to the small number of users private capital did not receive sufficient income and was not interested in the job. The government has helped to improve the country's position in the global Internet community and to raise the level of information provision and public service. The analogy is appropriate is possible experience in software development facility in Moscow financial center. Freedom and convenience for capital, supported by the state, can create conditions for the formation of a new international financial center. Its purpose is not just recognition of the country on the world financial stage. International financial center will open a new and broader perspective in mobilizing capital in the direction of the acceleration of economic growth and diversification of the economy. However, not yet aware of the need to prepare the conditions for the formation in the country of not one but a whole system of and working together in regional and international level financial centers that will help prepare a new growth points, types and mechanisms of development.
For that reason, many countries remain interested in forming their own IFC, as these centers are involved in the creation and redistribution of the global financial income, led to a significant inflow of capital in the country, bring significant income in taxes, including income-paid employees, and provide employment growth. IFC also affect the state of the currency of the host country and allow it to accumulate significant income items of the balance of payments.
In my work not so much devoted to the activities of some financial centers, many considered their system is analyzed the experience of joint development: all financial centers are treated as a single financial mechanism with a dedicated and territorially fixed hub devices, in one degree or another distinct, yet interrelated and interdependent with regard to the cooperation and competition.
Financial innovations enhance the degree of international financial integration. The fact that not only existing products such as stocks, bonds and mortgages, but also all kinds of derivative financial instruments are demanded by investors in some cases, to a greater extent, enables to contribute to the expansion of financial transactions around the world.
In IFC includes a variety of patterns, but the leading place belongs to banks and other entities included in the network of international economic relations, financial services. IFC is gradually turning into powerful analytical and administrative complexes with significant lending capabilities. Strong positions take firms that are serving their needs, including international legal and audit, as well as management consultants. In addition, IFC attract a wide circle of experts on comparative economic and legal analysis and other specialists. The increasing importance of analytical centers, those are capable of carrying out interdisciplinary researches, preparation of indexes and ratings for financial centers.
Free markets and the rapid development of information and communication technologies (ICT) catalyzed the creation of the financial system with increasing integration that ignores national boundaries. Even without the free market thinking, rapid progress of the ICT greatly magnified and contributed to the growth of cross-border transactions, but the combination of free-market thinking and ICT strengthened the development of international financial integration. The fact that computers process the information with high speed and transmit it improved and relatively safe way, allow people to make decisions about financial transactions faster. Communication technologies such as e-mail and the Internet became so popular that vendors can easily find customers around the world, and the geographic location does not play a great role.
From a functional point of view distribution of financial capital - is the system of market relations, which accumulates and redistributes global financial flows in order to keep them flowing and facilitate reproduction. Operating under the laws of market economy assumes that temporarily free capital is realized and flows to the regions with high demand. Temporarily free capital by using the market mechanisms ensures capital reproduction and profit of firms. World currency, credit and financial markets were established on the basis of the3 respective national markets and closely interact with them. With the development of international economic relations, competitive struggle for raw materials, markets, profitable investments financial flows spontaneously moved from one country to another, losing the national character and exposing its continuous nature. The national currency, credit and financial markets, preserving the relative independence are closely interconnected with the same global markets which complement their activities and associated with the domestic economy and monetary system. As the result of rapid growth, greater opportunities and mobility of world currency, credit and financial markets turned into an important link in international monetary and financial relations and the global economy.
However, performance of some IFC is becoming increasingly complex, they focus not only the functions of the international market of loan capital, but and related activities in the area of maintenance of international financial, monetary, credit and insurance, audit and other services. Others show a trend towards differentiation and specialization of its activities.
Present realities and benefits of the effects of financial integration allow speaking about a natural desire of participants in the Russian financial market to actively cooperate with foreign colleagues. Every year with increase of speed of information dissemination interdependence of financial markets on a global scale increases. Integration of Russian and world stock markets also increased, and by 2020 it is planned to transform Moscow into an international financial center.
The more economies become financially integrated, the higher is the rate of concern about financial stability. For these reasons, international institutions such as the IMF and the Bank for international settlements, as20 well as the Central banks of developed and emerging economies now publish regular financial reports of stability. The purpose of these reports is the coverage of vulnerability, market pressure and risks of the financial system in the time frame. The vulnerability is almost always multifactorial, as each system has a weak point. In the economy of explosive growth, an example of vulnerability is overheated real interest rates. If the economy is in decline, the apparent vulnerability - high level of a growing government debt.
Statistical standards monitor the status quo incoming and outgoing flow of Bank loans and deposits, FDI, loans to the private sector, state debt and portfolio investment. For developing economies, remittances also relatively high as the main income stream of capital, which, if sudden halt to lead to a breach of the financial system.
The role of foreign banks in the country is another vague question. Some studies in the literature show that the benefits from the presence of foreign banks outweigh the disadvantages. One advantage is that foreign banks are competing with domestic households and businesses. Another is that they introduce additional options in financial services. Moreover, it can increase the financial stability. One of the disadvantages is controversial foreign influence on the domestic economy. As shown by the global financial crisis of 2008-2009, there are significant risks for foreign banks and the problem of cross-border banks, which at difficulties in the home country of the foreign banks almost automatically spread on the domestic economy.
My graduation work consists of introduction, theoretical part, two practical parts, conclusion, references and appendixes. In theoretical parts I have described the principals and concerns about the level of financial integration and the roles of financial centers. First practical part is dedicated to measurement of financial integration and its connection with the economic growth and stability. Second practical part highlights the implementation of this methodology to EAEC and the economy of Russian Federation.
Chapter 1. Theoretical aspects of financial integration and functions of international financial centers.
1.1. Definition of financial integration.
Financial integration is the process of weakening and elimination of barriers between domestic and international financial markets and the development of connections between them. It is mainly expressed in the free flow of financial capital between countries. Financial capital is mainly represented by next sources: 1) payment services for sale of goods and provision of services; 2) foreign investments in fixed and working capital; 3) operations with securities and other financial instruments; 4) currency operations; 5) redistributing part of the national income through the budget in the form of assistance to developing countries; and 6) contributions to international organizations. It continuously operates on the specific sphere of market relations that consists of credit, financial markets. They formed on the basis of development of international economic relations to enable distribution of financial capital.
International financial integration indicates the flow of financial transactions beyond national borders. Thereof, the country is more financially integrated in comparison with other countries, if it has more transactions with a large number of other countries on more diverse financial markets than other countries. Bank, bonds, shares and other types of financial markets, thus, become more closely linked regardless of national borders. In this case, borders are less important.
Technically, financial integration is the process of unification and harmonization of basic concepts, categories and principles of financial and credit activity and expressed in the development of international financial organizations and implementation in the countries of the world community recommendations, that promote a uniform understanding and reflection in the documents of the operations in the field of finance, credit, payments etc. It is reflected in the field of public finance, balance of payments, accounting, monitoring methods for commercial banks from the Central banks of the countries, the performance standards of currency exchanges, ways of making payment and other processes. Financial integration occurs in the context of the global community in global and in specific regions of the world.
While financial integration is the interdependence of financial markets, financial stability is a binary state. Despite of the fact that economy is stable or unstable, there are obstacles and barriers to financial transactions or, even worse, the collapse of the financial system as a consequence of a Domino effect (as happened after the fall of Lehman Brothers in September 2008).
The financial system is at the limits of stability, when it helps and does not hinder the performance of the economy and the diffusion of financial imbalances that arise endogenously or as a result of significant adverse or unexpected events. This is one definition of financial stability, pointing to the triad financial markets, financial institutions and financial infrastructure.
A higher degree weave financial markets and institutions, both in the number of these markets and institutions, and in relations between these markets and institutions, and second degree of relationship, in general, leads to a higher degree of stability. The main obstacle here is the speed of financial transactions and the growing complexity of financial products. Added to this is the lack of political will to reject sovereignty and disclosure at the international level.
Financial integration is not easy to cover with one set of statistics. Question multidimensional and consists not only in a21 bilateral transaction, but also in21 markets transactions economies with which the economy has a financial transaction.
Incoming and outgoing flows total capital - large, volatile and have a high degree of correlation. In fact foreigners invest in the country often go hand-in-hand with internal participants in investment abroad. In the time of crisis they are reduced depending on the origin of shocks, as well as in foreign or domestic market collapsed, and, with a little delay, often a second thread of capital declines.
The presence of foreign banks in the country contributes to the financial stability of domestic economy. During the economic crisis, foreign banks, as well as domestic banks, reduced their internal loans. However, the volume of loans issued by foreign banks decreased not so much compared with domestic banks in the countries with a predominance of foreign banks, while the reverse was true for countries with only small shares of the presence of foreign banks. This may be artificial to this year downward trend, as the crisis has hit the developed countries through their own banks more than the emerging economies. Despite this, this discovery is interesting for regions such as the southern Mediterranean. If this is true, foreign banks contribute to the development of the economy in terms of financial stability. If domestic banks diminished during domestic crises, at the same time, foreign banks compensate for this behavior by maintaining credit lines to further stabilization of the banking sector and the rest of the financial system. Foreign banks, thus, can also have a positive impact on the domestic economic growth.
Fiscal policy and the exchange rate play a role in international transactions. Some countries peg currency rate to the US dollar, while others peg to a basket of currencies, the Euro and the U.S. dollar or other currencies (Egypt, Morocco, Syria, and Tunisia). Although fiscal policy regarding cash payments becomes more effective over time, it is still strongly focused on regulation of the exchange rate in most of these economies from the global crisis. Fiscal policy and exchange rates do not necessarily hinder the development of international financial integration. However, the selection of countries with which integrate emerging markets, often restricted to those countries with which there is a relatively stable exchange rate. In the case of financial transactions with the economies that have a different currency, the cost of financial transactions will be higher, and expected profit should be higher to compensate for these costs.
Financial markets are one of the objects of financial integration. In the modern globalized economy, we can talk about integration of financial systems, as integration processes cover and markets, and institutions, and infrastructure. In practice, financial integration in different periods of time can be on the same level of financial integration, de jure or significantly different from her.
Financial integration de jure indicates the capital controls from the point of view of official restrictions in accordance with the data of national authorities, therefore, the liberalization of capital constraints can be considered as a precondition for financial integration. This understanding of financial integration is connected with representation about the economy as evolutionary open system. From the point of view of institutionalisms, the concept of "open system" involves the study of Economics as part of nature, included in the system of social relations and exposed to technological and other changes. Open system - a structure whose elements interact not only with each other but also with the external environment. In an open economic environment, financial integration can be defined as the process that links the elements of financial relations. In the global financial system, too, there are external and internal factors that generate a state of tension, endless cumulative process of change and development, as well as the General regularities of synergetic.
International integration of financial markets provides:
support of investment activity and economic growth through the mechanism of raising funds on the stock markets. Financial integration to more effectively carry out the transformation of savings into investment, to expand the range of available financial instruments to reduce transaction costs;
stability, i.e. a single financial market will be more resistant to external shocks into force and greater depth and liquidity;
development and modernization of the financial system, contributing to increased competitiveness and productivity of the economy.
Consider the other benefits of financial integration.
- When integrating all financial markets systematic risk can be diversified or eliminated by including various securities in a diversified portfolio.
- Corporate financial strategy depends on financial integration. In the case of integrated stock market companies can attract cheaper capital than in segmented markets. Decisions on the planning of capital investments depend on the availability of international capital, as its marginal cost of international firms is lower than for firms that use only internal resources.
In a world of imperfect capital markets, financial integration can increase the country's vulnerability to macroeconomic problems and financial crises. In particular, redistribute and change of the direction of capital flows can lead to changes in production volume and even slow growth in certain periods.
Financial system operates in the 5 sectors of financial market: (1) credit market, (2) Currency market, (3) Market for investments, (4) Insurance market, (4) Securities market. Because of such separation, different market agents comprise a sole financial sphere. They operate on the chosen niche, while diversifying their operations on the other markets. These agents are: central banks and regulation authorities; commercial and investment banks; exchanges, depositary and trustees; insurance companies and investment funds.
In addition to the positive macroeconomic results, the advantages of integration will also receive a wide range of economic agents:
issuers will be able to attract capital at a lower price through the realization of economies of scale in the single market;
investors will have the opportunity to diversification and risk sharing;
consumer benefits increase the range of services, lower interest rates, as well as a reduction of cost of a range of financial products.
Countries with well-developed financial system are less vulnerable to the crisis, while they are more financially integrated. In particular, vulnerability to crises higher, if on the way to full liberalization of the financial system encountered inefficient financial institutions.
The penetration of foreign banks in the financial markets can also give several types of benefits, but this process also has some potential risks. First, foreign banks lending to small firms (with the trend of activity in the non-commercial sector) to a greater extent than domestic banks, prefer big company engaged in production and trading of goods). If foreign banks follow the strategy of concentration of its loan assets only in the hands of the most creditworthy corporate borrowers, and to a lesser extent on borrowers-households, their presence will be less to contribute to the overall improvement of the efficiency of the financial sector. More importantly, introducing a higher degree of credit support for small firms, you can get an adverse effect on production, employment and income distribution.
Second, the entry of foreign banks, which have lower operating costs, can create pressure on local banks and force them to merge to save creditworthiness. The process of concentration, which may increase when purchasing foreign banks domestic banks can create "too big to fail" or "too political for failure", as it is afraid of the authors of the monetary theories, when the fall of a large Bank can seriously fall of financial markets and lead to social unrest. These potential problems can be mitigated by the improvement of prudential supervision or legal ban on merger, which, as it seems, can greatly increase systemic risks and undesirable scale and costs officially secure network. The problem of "too big to fall", in turn, may increase the problem of moral persuasion: knowledge about the existence (unconditionally) secure network, domestic banks (especially those that are involved in the state) can equal attention to distribute loans and check of potential customers. Concentration may also create a monopoly, which will reduce the efficiency of the banking system and the availability of loans. In particular, the high degree of concentration in the banking may not be desirable to influence the production and the increase in the spread of higher interest rates, with higher rates for accommodation and lower deposit rates comparison with competitive loan and Deposit markets, and lower the number of loans than in the less concentrated and more competitive systems.
Third, the entry of foreign banks may lead to an increase in the stability of the domestic banking system. The reason lies in the fact that their presence in itself is not a prerequisite for a lower probability of occurrence of a systemic banking crisis, which could happen if the economy is undergoing a strong and constant decline, leading to a large decrease in the level of defaults and increasing the number of unproductive loans. Also, foreign banks tend to escape during the crisis. To some extent, the latter effect may be mitigated by strengthening prudential supervision domestic markets and improving the degree of openness of information between the inspectors in the parent and host countries. In practice, however, countries have a very limited set of tools for the prevention of the flight of foreign banks during the crisis.
In general, the benefits associated with stronger participation of foreign banks, may depend on the shortcomings of the domestic capital markets. The presence of foreign banks creates two types of effects: the effect of making investments associated with the fall in the cost of borrowed funds (resulting from increased competition, and the effect of distraction intermediaries associated with additional monitoring costs that incur foreign banks in carrying out activities outside their borders. However, if at the same time, financial openness, and is a successful incentive for the better functioning of the financial system, households have less incentive to save by prior reasons. So, savings, investment and economic growth may be lower than before liberalization.
1.2. IFCs: definition, types and the main indexes.
By definition, international financial centers - centers banks and specialized financial institutions international monetary, credit and financial transactions, transactions with securities and gold. Kluchnicov I. stated that: "…international financial centers function as international market mechanism, serves as a management tool for global financial flows. It unites banks and specialized credit and financial institutions the international monetary, credit and financial transactions, transactions with securities, precious metals and derivatives…"
International financial centers contribute to the management of flows capital in the country and abroad, so countries are interested in their development.
Preconditions of forming the world's financial centers are:
the presence of large financial market and attract serviced by this center, its location this market;
openness of the economy to capital, labor resources, intangible assets and other; liberal legislation, stimulating tax, customs policy, immigration laws, etc.;
simplified registration procedures, execution of deals, low the costs of administration, low level of corruption and blocking informal relations of authorities and business;
compliance with modern international standards in the area of accounting, reporting, supervision and regulation;
developed financial infrastructure (exchanges, banks, insurance, investment companies and funds, trust companies, consultants and other);
deep development of financial instruments (shares, bonds, derivatives, futures, indices, etc.);
macroeconomic and political stability in the country, favorable living conditions (quality of life, high rates growth, development).
Main function of IFC is reduced to elaboration and realization (in cooperation with international financial organizations and developed countries) long-term strategy on reformation and enhancement of global financial system, restructuring of global financial architecture. This process includes creation of solid legal rules and regulations for financial institutions, determination of certain behavior for market participants and stipulation of open-access market ideology. International debt management, debt restructuring (which ensures stability and secure of future payments) are of a great i
mportance in a process of IFCs operation and establishment. In other words, strategic role of IFC in modern global economy is supervision and maintenance of global financial order, which is leaded у transnational corporations, banks and various financial organizations.
One of the basic components of IFC is the availability of developed domestic financial markets, actively interacting with those of other countries. They are important for the functioning of national and world economy, as they are concentrated immense financial, information and intellectual resources, is based the majority of large manufacturing, retail, financial, service companies, specialized financial institutions and banks. In addition, IFC will gradually turn into powerful informational, analytical, organizational and administrative complexes with significant lending capabilities. Leading positions in IFCs structure take firms serving their needs, including legal and audit, as well as management consultants (McKinsey, Ernst and Young Global Limited, Deloitte Touche Tohmatsu,1 and others). In addition, IFC attract a wide range of specialists (experts on comparative economic and legal analysis, and others), which are engaged in the analysis of the state and prospects of the world economy and the economies of the world. The importance of analytical centers, capable of carrying out interdisciplinary researches, preparation of indexes and ratings (Moody's, Standard and Poor's and others) has increased dramatically.
IFC is not only a geographical location or city with financial institutions concentrated in. It is a specific financial structure, which provides an access to the global economy defines rules and monitors activities of the economy-participator.
The development trends of the financial centers of recent years are:
1) consolidation of financial centers. Among experts exists the opinion that the New York, London and Hong Kong into a single a global player with the General regulations;
2) strengthening the role of regional centres in Asia, Latin America, Middle East and Africa, seeking to redistribute spheres of influence;
3) development of information-analytical and consulting functions. In the main financial centers placed known management consultants McKinsey, Ernst and Young Global Limited, Deloitte Touche Tohmatsu,1 KPMG and others;
4) the new function for management of international debt and restructuring.
Indicators of financial system development in a particular region, identifying them as global financial centers, are the indicators of the stock, bank and insurance markets, investment activity, the degree of development of new tools the management of financial resources and the involvement of the region in the global financial flows.
The absolute leader in terms of market capitalization and trading volume is the unification of the New York stock exchange (NYSE) and the European stock exchange Euronext. The second largest one (in terms of both indicators) is NASDAQ OMX. The number of registered bonds of the first places in the world is the Luxembourg, Frankfurt and Irish (e.g. Dublin) of the exchange, they have a high share of foreign issuers listing, and however, the market value of tradable securities in them is low. A leader in trade national debt instruments in 2012 became a Spanish exchange BME Spanish Exchanges (Madrid), which accounted for over 2/3 of world trade in corporate bonds national issuers and almost 38% of the world's domestic bond turnover of the national public sector. In foreign bonds 65% of the total in 2012, had two stock exchanges in London and Zurich. High volume of trades in foreign bonds and the stock exchange of Istanbul, Turkey (in 2012 it took 3-th place in the world), which is not typical for developing countries.
Table 1. Largest Domestic equity market capitalization, at year-end 2013
Source: World Federation of Exchanges
Exchange new York city, Chicago and trading platforms developed European countries occupy a leading position in the trading of derivatives, but some exchange of developing countries also actively developing these tools.
The largest stock exchanges to attract investment through the primary (IPO - Initial Public Offering and secondary offering of shares (the"Secondary Market Issues")1 in 2013 were: 1) NYSE Evronext (US & Europe)- 287,21 bln.; 2) Hong Kong Exchanges (109,5); 3) BM&FBOVESPA (100,5); 4) Shanghai Stock Exchange (83,5); 5)1 the London Stock Exchange Group (60,7); 6) Shenzhen Stock Exchange (60,3); 7) Australian Securities Exchange (53,8); 8) Tokyo Stock Exchange Group (50,2); 9) BME Spanish Exchanges (36,6).1 The highest growth rates in comparison with 2009 were observed in exchanges in Sao Paulo and Shenzhen, the largest drop - in exchange London.
According to KPMG, in 2011-2012, more than half of all IPO was carried out on the stock markets of developing countries. Of the $280 billion USA - the world total IPO in 2012 for exchange of China and Hong Kong accounted for 125 billion. (44,6%), other emerging markets - 40 billion, new York - 35 billion, London – 13 billion, other developed countries - 68 billion.
Another indicator is the market of banking services. The largest banks by assets placed in international financial centers. Unprecedented rates after the crisis are growing assets of Chinese banks, the headquarters of which are located in the capital of the country. It displays Beijing in the category of the largest financial centers in the world. Chinese banks inherent high capitalization. In terms of "own capital" at the beginning of 2011 4 Bank of Beijing has taken leading positions in the world, even Europe's biggest Bank BNP Paribas (France) conceded to them. At the same time, the European banks of some countries, particularly the UK, lose their positions.
The banking market in developing countries is growing faster than the developed. According to the Financial Development Report , an annual growth rate of bank deposits in the world in the period 2000-2011 was 6.6%, at the same time in China and Hong Kong - 14%, in other emerging markets - 16,4%, in the USA - 8,6%, in Western Europe - 5,2%, in Japan - 0,6%, other developed countries - 8,1%. The trend in total is the same in 2012: Bank deposits in the world grew by 5.6%, in China - by 12.4%, in other emerging markets - 14,5%. A significant decrease in the rate of its growth was observed in the USA: in 2012, they grew only by 3.6%, and in Western Europe - by 2.1%. Globally from 2000 to 2012, the ratio of deposits of the banking sector to GDP increased from 80% to 90%.
International financial value of this or that country or its separate region is also determined by the volume of investments abroad and foreign investments in the country. The main investor in the world are the United States (their foreign assets amounted in 2012 15,284 USD’tln. The second place on this indicator, the UK (assets 10,943 USD’tln), the third - Germany (7,323 trillion USD’tln). China on this indicator only occupy the 6th line (3,892 USD’tln). However, the US and Britain are also major importers of capital.
The overall level of financial development in individual regions is estimated using various integral indicators (indices). These indexes allow to identify the location of countries and cities in the global financial system, their relative importance as a global financial center. The best known indication is the Financial Development Index – FDI, calculated by the World Economic Forum, calculated for the first time in 2008 and since then is published annually. In 2012 released its fourth edition. Using FDI is estimated 57 countries with developed financial systems and capital markets.
Table 2. The Financial Development Index 2012
Source: The Financial Development Report 2012
To build the index 7 groups of indicators are used:
1) institutional environment (Institutional Environment) – estimated the quality of the legislation and regulation of financial markets (including the point of view of openness of capital markets and the liberalization of the financial sector), as well as quality control and enforcement of contracts (contract enforcement);
2) business environment (Business Environment) – availability highly qualified specialists in the financial sector, state physical infrastructure, the level of taxation and the cost of doing business for financial intermediaries;
3) financial stability (Financial Stability) is estimated risk currency, banking and internal debt crises;
4) banking financial services (Banking, Financial Services) - taken into account the scale of the banking market, operational efficiency and the profitability of banking activities, the share of state property in the banking capital, the degree of information disclosure;
5) non-banking financial services (Non-banking Financial Services) - the activity of brokers, dealers, asset managers, insurance companies the point of view of mobilization of financial resources and the scale of operations. Estimated the four spheres of activity of non-Bank intermediaries: IPO mergers and acquisitions (M&A), securitization, insurance;
6) financial markets (Financial Markets) - estimated the scale the four markets: stock market, the market of corporate and public bonds, derivatives market and foreign exchange market;
7) access to financial services (Financial Access) – revealed availability as corporate financial services (venture capital, commercial credit, the development of local equity markets)and retail financial services (the degree of penetration of Bank accounts, the prevalence of ATMs, the availability of micro-Finance).
Progress in the financial sector of emerging market supported by growth in2 the real sector of the economy and2 active investment processes in the country. In the growing world financial centres there is a high share of domestic investments in fixed capital. This is a necessary but not sufficient condition for the development of the world financial center. For exam
ple, in Belarus the level of domestic investment is high, but there is no speech about creation the Minsk international financial centre. For this purpose should be established political, legal, economic and financial conditions.
There are different groupings financial centers of the world. The London-based company Z/Yen Group, creator of the most popular index of global financial centers, distinguishes between international, transnational and regional financial centers, global (New York, London, Tokyo), area (Singapore, Hong Kong, Paris, Los Angeles) and regional (Sydney, Chicago, San Francisco, Dallas, Miami, Honolulu) centres. The journal "Expert" defines there are global (London and New York), regional (Hong Kong, Singapore, Frankfurt-on-main, Sydney, Chicago and Tokyo, and more recently also: Johannesburg, Dubai and Shanghai), local niche (offshore zones) and specialized (Zurich and Geneva) financial centers (Appendixes 1,2,3).
Table 3. Global Financial Centers Index 15
Source: GFCI Report 15, Z/Yen Group
Global financial centers index, GFCI (global financial centers index) is calculated London commercial research the center Z/Yen Group and published by the municipal administration the city of London - London city Corporation (City of London Corporation), starting with 2007, the Index is defined on the basis of 60 private indexes. It is updated two times a year - in March and in September.
The GFCI index is calculated on the basis of the following groups of factors: 1) people): qualification of the labor force and accessibility, flexibility of the market labor, the quality of business education; 2) business environment (Business Environment) - government regulation, tax rate, level corruption, economic freedom, administrative barriers of business; 3) infrastructure (Infrastructure) - the rental price premises, the availability of transport services; 4) market access (Market Access) - is the variety of financial instruments (shares, bonds), the volume of transactions with them, the level of clustering markets; 5) General competitiveness (General Competitiveness) - the price level, quality life and economic comfort.
As in the case of index of financial development of countries, some of the information is taken from external sources, including the calculations of other indices (for example, to determine the level of corruption – from the corruption perception index company "Transparency International" and index opacity Kurtzman Group).
The comparison of the index for a number of years can also detect ascending the growth of the Asian financial centers. So, for 4.5 years Shanghai and Beijing rose by 18.5 positions, South Korea's Seoul on 27 positions (from them on the 25 - for the last six months). Of course, you need to consider the extension of the list of the cities participating in the ranking. If in the first rating (March 2007) in the top 20 included only 3 Asian city, in the rating of March 2013 - 7 cities. However, the position of the Chinese Shenzhen significantly deteriorated. According to the survey respondents, 5 Asian cities (Shanghai, Singapore, Seoul, Hong Kong and Beijing) most likely in the coming years to increase their rating.
1.3.Stages of financial integration and its connection with IFCs.
Supreme goal of financial integration is the unification of financial markets with the aim of creation a single financial space and conditions for the introduction of a single currency integrating countries. It appears as the foundation of the monetary and credit integration. Therefore, financial integration may imply the creation of single currency, securities and credit markets, which will provide the institutional mechanism of the introduction and circulation of a single currency.
According to Evstigneev V., the process of international financial integration consists of three stages, which should be integrated into country: 1) creation of a unified, and then a single securities market; 2) establishment of the single market of loan capital with the consolidation of banking systems; 3) establishment of a single currency market with the introduction of the monetary unit and formation of the emission center.
The first stage – is to create a functional single market, including the free movement of capital, reducing of fluctuations limits of the national currency and enhancing of macroeconomic policy coordination.
The second stage - main economic indicators of the countries start to get relatively close due to the coordination of macroeconomic policies. Next criteria for macroeconomic indicators are established:
the level of national budget deficit in percent of GDP for each state party, and the percentage deviation from the established baseline;
the level of interest rates of refinancing of the Central (national) banks and their deviation from baseline;
the inflation rate for each state are not above the target;
external debt to GDP ratio.
An important element of the second stage of monetary integration is fiscal harmonization and unification of the policy of debt management. During the transition to the final level of the monetary union economies ban the financing the budget deficit via instruments of the Central Bank. Such funding, in the one form or another, leads to growth of quantity of money in circulation. Money issue can also reduce tax revenues and thereby further increase the budget deficit, as it in one way or another depends on special taxes (excise taxes, and import duties), on the value of the lag between the collection and the receipt of income and other taxes, from the tendency to the overvaluation of the exchange rates during periods of inflation and the impact on tax revenues from imports. So without consistency of fiscal policy, monetary integration is not possible.
In order to align the levels of economic development integrated economies can be use joint loans on the world market. Along with the positive effect of external financing (which is less inflationary than the interior) there are adverse effects on the balances of states. This largely depends on the usage of received funds. If they are misused (not on the stabilization program) and borrowing by significant size, they sharply increase external debt, which creates problems for the future external debt service, worsens the balance of payments and increases in future fiscal deficit of the state. So the credit policy of the countries , wishing to implement monetary integration, should be consistent.
The third stage - the introduction of a single currency and formation of a common Central Bank. The transition to the final stage of monetary Union may be accompanied by completion of the common system of legislative measures on the following key parameters: 1)the national currency and banking activity;2) taxation; 3)fiscal policy;4) investment policies;5) foreign currency regulation and foreign exchange control; 6)statistical reporting and accounting and other.
International financial integration presupposes creation of special intergovernmental financial funds for financing joint programmers integrating countries. The most large-scale financial fund is the regional budget. It is formed at the expense of transfers from the state budgets of the participating countries, as well as through joint taxes and customs duties. Regional budget creates its first profitable part, and then the expenditure. Therefore it cannot be a deficit and spent only what it accumulates. Funds of the regional budget directed on financing of joint social, military, and international economic development programs of weak countries, pretending for membership in the integration grouping.
Financial integration is a key factor in increasing competitiveness, efficiency and growth. However, to achieve efficiency and growth, it is necessary to take measures for closer financial integration, including the development of legal, regulatory and policy decisions.
The main advantage of international financial integration is to strengthen the growth of economic activity, the growth potential of the country and, hence, employment. A higher degree of financial integration, in general, leads to a higher degree of financial development. The broadening and deepening of financial markets, as well as the increase of the banking sector, creates the best financial support of the process of economic development. Financial institutions can conduct active investment policy of placing of productive investments. Productive investments, by definition, lead to higher levels of economic performance, and, hence, growth. Countries with higher growth, in general, are also developing its financial sector faster, for example, in favorable periods loans become more readily available, and you receive a greater demand for financial products, as well as on investing additional savings directly or through intermediaries, such as banks. Theoretically, it remains doubtful that the economies with more developed financial systems have more features for sending money on profitable offers and, thus, potentially have greater growth.
Besides the positive effect of financial integration on economic activity, when the free mobility of capital relative to national boundaries allows capital to find a higher level of return on investment and, thus, to increase the accrual of funds, which is also an advantage to reduce the risks and volatility. The more investors can diversify their money, the less risk for them. Moreover, the global mobility limits the ability of governments to conduct a bad policy. Full information distributon, which suggests a lack of disagreements and full distribution of risks, is a key point in this respect.
As shown by the global crisis of 2008-2009, the main risk of international financial integration is that a negative shock to one country or the financial market can be transmitted to other countries via the (other) financial markets. A crisis in one country that impact on the financial sect
or, immediately affects countries with which there is a significant degree of fiscal representation. Strong financial linkages and interdependence, for example, in the stock market or in the banking sector, make the complex untangling the web of markets and institutions. Bankruptcy or even precarious the position of only one bank could trigger a Domino effect, according to which many other banks or other financial institutions will be for the bank in this situation. For market policies it is difficult to establish measures to prevent such systemic risk.
Financial stability is an international issue. Market policy must be able to regulate financial institutions on integrated financial market or to protect them, to isolate the original problem, review and appropriate action, particularly as the difference between financial institutions often become blurred, not so much between different types of institutions, as between the same types of institutions on different sides of borders, such as banks. Regarding moral damage, financial institutions in integrated financial markets tend to grow to the maximum possible size, as this gives them the assurance that the government will never refuse to help because they are "too big to fall".
International financial centers provide control over the securities market. Previous forms of bank loans and resource attraction increasingly supplemented and replaced by large-scale issuance of securities. Financial liabilities become converted into securities, and therefore into a trade instrument.
In recent years one of the main functions of financial institutions IFC is the development and implementation, jointly with international financial organizations and leading Western States, long-term strategy of strengthening and expanding existing in the late twentieth century, the global financial system. Developed "rules of the game" in the financial markets, modified institutional and legal system of the activity of financial institutions to provide the most free access to markets of financial services.
Financial institutions IFC are also engaged in management of international debt, and restructuring of foreign debts in such a way as to ensure the prospects of future payments and the receipt of the maximum amount of current payments. IFC, while concentrate funds, direct them to the peripheral countries, which are dependent on revenues from new loans and foreign investment. National regulatory authorities develop unified measures with the purpose of influence on the current situation and coordinate the formation of a new world financial order. Currently, their efforts are focused on the creation of a new system of management and control, including the preparation of appropriate legislation, unification of the system of accounting and audit, ensuring its transparency and availability.
Increasing the development of computer technology, lead to IT appearance beside of expansion of telecommunication infrastructures. IT as one of the new human technologies not only affected by deep transformations but also it is affecting on human life patterns quickly and it is an important growth factor and a device of other sectors too. The plans of other countries show that effects of IT are too deep and if we ignore it, this would lead us to have no status in the future. Changing approach of global business from concentration on industry to emphasis on information and knowledge, made many challenges for different countries, particularly for developing countries. Under this circumstance, investment in national economy to reach micro-economical and macro-economic goals has an obvious role. Now, stock exchange in advanced countries is the core of investment and every year conduct too much wandering capital to active and generative units of society like production and service units. Recently, financial departments emphasize on applying IT and global trading. Regarding of stock exchange role in structure improvement and economic development, increasing the importance of IT prospective world and effective and efficient usage of IT in stock exchange, may be progress and advantage key in future stock market and realization of national goals. Therefore, this study investigated the advanced IT application effects of Iran stock exchange on market characteristics like trade volume, outcome instability, cash and market efficiency.
Financial institutions increasingly use technology to operation smoothing, commercial and service activities, service development and improvement, risk reduction decreasing the cost of deals. These institutions transfer and distribute the risk by using service information networks facilities, more efficiently
Network establishing has been developed by reaching one of the important IT goals: quick and communal access to information resources. News transmission highways, internet, is one of the most efficient and useful computer networks in the world that many different activities can be performed in it and it has many facilities. Using electronic networks to data, production, service and money exchanging between people (consumers) and companies, companies with each other’s, peoples with each other’s, citizens and governments, and at last companies and governments, is called electronic financial services.
Reasons of applying electronic financial services in financial markets are:
quick development of electronic exchanges - The portion of stocks that exchanged by direct electronic exchange in industrial countries will reach 90% from 28% in 2007. This quick development of electronic services is an evidence of importance of it;
intense change in financial structure and nature - Electronic financial services by inputting external suppliers with internal suppliers causes cost reduction and augmentation of competition in this sector;
government role modification in financial sector - Government interference in financial sector usually has not enough efficiency to State ownership of banks, to prevent development of financial sector, and to increases the risk of financial crisis appearance. This management method is always failed or leads to support special group’s benefits and finally results augmentation in financial supplying costs in economy. Therefore, supervisory role of government becomes basic and coordinator;
globalization of investment and stock exchanging process-IT causes capital establishment and stock exchanging transferred to the international financial centers.
Result of these matters is intense augmentation of capital establishment and stock exchanging contribution, especially in new markets. Normal level of capital establishment for partnership in international markets increased from 5 billion dollar in1990 to 30 billion dollar in 2000.
As for Russian Federation, Internet was included in the list of top information sources for russian citizens (along with TV, newspapers and radio). In 2014 government has forced the big-3 of russian telecommunication companies to improve ratio of internet-coverage from 55% in 2013 to almost 100% in 2018. This measure will facilitate an access of russian citizens to financial services.
Chapter 2. Analysis of processes of financial integration in world economy.
2.1. Financial integration in international blocks.
In this section I would like to comment on real examples of existing blocks and unions, and mention their specifics.
Table 4. Description of regional blocks and unions.
Source: unions’ homepages, IMF statistics and The World Bank database
First association is the European Union, which serves as an example and an indicator of international integration. The experience of European integration has shown the advantages of unification.
The beginning of integration in Europe began with the statement of French foreign Minister Schuman made in May 1950, which has offered to supply all production of coal and steel on under General of the Supreme leadership. In consequence of this was organized by the European coal and steel community (ECSC), which consisted of six States (Germany, France, Italy, Belgium, Netherlands, Luxembourg). Were later established the European economic community based on a common policy and customs Union and the European community on atomic energy. It was the first sprouts, which are then showed the direction and escalated further in the European Union. Just created a European Association (consisting of Austria, Denmark, Norway, Portugal, Sweden, and Switzerland). EFTA was created only as an economic organization and not formed to take political tasks. Thus, when there was a connection EFTA community and created a common area of free trade, the EFTA countries did not participate in the General Community, programs, and further in the transition to an economic Union EFTA countries do not participate in the development of the whole spectrum of regulatory, and only those relating to the single market. Thus, we see that and integration groupings are not a monolithic and not all members of a grouping of related relations.
For example, one country may belong to a number of integration groups, to be bound by the various commitments and to be endowed with different rights even with countries-members of one group. Now, the EU is in the process of completion of the factors of the economic Union and transition to economic and monetary Union. From 1 January 1999 was introduced a single currency Euro, and by 2002, the scheduled completion of the transition to EMU. Supranational add-ons in the EU are as follows:
- The Council of Ministers composed of the representatives of the countries-members of the Union, as a rule, at the level of ministries and has the legal right.
- European Commission - the Executive body, but can also act with the legislative initiative.
- The European Parliament exercises control over Commission and participates in the legislative process.
- The court is to enforce the law.
- The European Council - to develop the main political principles.
In addition to these organizations, there are still a variety of institutions for economic and financial profile, as well as all kinds of Supervisory and Advisory bodies. It's all structural settings defining and organizing the execution of the directions of development, and performing and coordinating and controlling functions. The EU is already developed and practically established system of cooperation, which is now seen its validity and positive.
The European community is lucky with a good location and with existing environment, which provided just such a line of development. But there are enough other integration groups, which, although they have some similarities with the European Union, but emerging with completely different quality characteristics.
For example, the North American Union, NAFTA was initiatives of all policies, because leading country here is the United States, the leading world power, which is also actively intervened in the economies of its neighbors. Even international processes on the Northern continent began 15 years ago and it was suggested to create a single continental market, it would be nice to improve the social status of Mexico. In the NAFTA yet has not developed any supranational bodies, but in any case, most likely they will take other forms than in the EU.
Quite different is the situation with the Sub-Sahara region. There due to the historical concentration of resources in large coast cities, it is extremely difficult to create the inland market. This is fact is largely affected by the climatic conditions, and in addition that many countries of the southern cone worked mainly on the export of goods, which led to the establishment and strengthening of port-cities.
The establishment and protectionism strengthening of the open economy for Latin America looks promising for North America. For North Americans who are seeking for new markets MERCOSUR appears as a destination for new technologies and investment. Kotova A. notes MERCOSUR as the most dynamic integration zone, which, for example, in the period from 1991 to 1993 nutritionally exports grew more than 2 times and amounted to half of the exports of all countries of the Latin continent and the Caribbean.
Interesting from the point of view of the20 passage of the integration processes are the two regions is the Asia-Pacific and African regions. But if the Asia-Pacific region attracts with its fast in the last twenty years the rates of economic growth, Africa is not highly developed continent, with differing levels of development of individual countries. Asians are building their relations on other than the above principle of convergence. They are looking for something in common. But nothing practical is not resulted, appeared only supranational institutions, which serve as a simple balance sheet. So before the Asia-Pacific region now faces a dilemma before selecting directed either to the transition to the open market, or is to regulate integration by creating additional supranational institutions as individual projects. On the African continent is not the case, there is no speech about pan-African interests. Each country is trying to pursue its own policies, and often by force of arms.
The above examples suggest the extreme differences in passing in the world processes and the difference of approaches to its consideration, on a completely different issues and problems to be solved in various parts of the globe, but nevertheless emphasizes that, with sufficient development of the countries, you receive an objective need for further development through the in
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