The global capital market: Performance & policy problems

1. The global capital market: Performance & policy problems

2. International capital market • Definition: the market in which residents of different countries trade assets. • market participants and facilities are the same as the foreign exchange market.

3. Three points to be discussed • how has the global financial network enhanced countries’ gains from trade? • what caused the rapid growth in international financial activity? • how can policy makers minimize problems raised by a worldwide capital market without reducing the benefits it provides?

4. Three types of international transaction 本国 外国 商品与劳务 商品与劳务 ① 传统国际贸易 ② 时间内的贸易 intertemporal trade 资产 资产 ③ 纯金融交易

5. Portfolio diversification as a motive for international asset trade • International trade in assets can make both parties to the trade better off by allowing them to reduce the riskiness of the return on their wealth. →portfolio diversification • Don’t put all your eggs in one baskets. 风水轮流转

6. A major function of the international capital market is to make asset portfolios diversification possible!

7. International assets: Debt vs. Equity • Debt instruments: Bond and banks deposits since they specify that the issuer of the instrument must repay a fixed value (the sum of principal plus interest) regardless of economic circumstances. • Equity instruments: a share of stock, it is a claim to a firm’s profits, rather than a fixed payment, and its payoff will vary according to circumstance.

8. Structure of the international capital market • Commercial banks • Corporations • Nonbank financial institutions • Central banks and other government agencies

9. Growth of the international capital market • The scale of transactions in the international capital market has grown more quickly than world GDP since the early 1970s. • An important reason for that development is related to exchange rate systems. A country that fixes its currency’s exchange rate while allowing international capital movements gives up control over domestic monetary policy.

10. Trilemma for policy regimes • Fixed exchange rate • Monetary policy oriented toward domestic goals • Freedom of international capital movements To be extended in the last part of this course.

11. Offshore banking & offshore currency trading • Offshore banking: the business that banks’ foreign offices conduct outside of their home countries.

12. Offshore currency • The growth of offshore currency trading has gone hand in hand with that of offshore banking . An offshore deposit is simply a bank deposit denominated in a currency other than that of the country in which the bank resides—for example, yen deposits in a London bank or French franc deposits in Zurich. Many of the deposits traded in the foreign exchange market are offshore deposits.

13. Eurocurrency & Eurodollar • Offshore currency deposits are usually referred to as Eurocurrencies, something of a misnomer since much Eurocurrency trading occurs in such non-European centers as Singapore and Hong Kong. Dollar deposits located outside the United States are called Eurodollars. • See the Chinese version:

14. Eurobank • Banks that accept deposits denominated in Eurocurrencies (including Eurodollars) are called Eurobanks. The advent of the new European currency, the euro, has made this terminology even more confusing!

15. Banking doubled trade! • 1964—1985: the growth rate of international trade 12.4% per year; • the growth rate of international banking transactions 26% per year.

16. Factors for explanation • the banks’ desire to escape domestic government regulations on financial activity. • the desire by some depositors to hold currencies outside the jurisdictions of the countries that issue them.

17. How big is the Eurocurrency market? • In the mid-1990s, the size of the Eurocurrency market stood at around $8 trillion. • Roughly 45% of the Eurocurrency market is dollar-denominated.

18. How Eurocurrencies are created • The typical Eurocurrency deposit is a non-negotiable time deposit with a fixed term to maturity ranging from overnight to five years.

19. Attractiveness of Eurocurrency’s interest

20. Sample in page 651—653 American German company BMW sold a car 购买美国国库券？ pays with check $ 40000 购买美国存款证？ Citibank 购买欧洲美元存款 英国银行Barclays

22. Have any dollars escaped abroad? • A reshuffling of reserves between banks’ accounts at the Fed and a corresponding shift in deposits from the bank losing reserves to the one gaining them. The U.S. monetary base—the sum of the banking system’s reserves at the Fed and the currency supply—does not change. • Because the U.S. monetary base equals the liabilities side of the Fed’s balance sheet, which has not changed, no reduction in the U.S. money supply has to occur for the Eurodollar supply to rise.

23. No dollar escaped abroad!! • However, if Barclays lends part of the $40000 to customers, the Eurodollar supply can rise by more than $40000, but there is still no migration of dollars from the U.S. to Europe.

25. Supply of Eurodollars rises! • the supply of Eurodollars rises by $75,000 = $40,000 deposited at Barclays by BMW +$35,000 deposited at Deutsche Bank by Philips • U.S. monetary base is unaffected!

26. The $40,000 paid out by the U.S. auto buyer who initiates all this, always finds its way back to the U.S. banking system. Once again, the expansion in the volume of Eurodollars can occur without any dollars ever having to “leave” the United States.

27. The growth of Eurocurrency Trading • Three reasons for the growth of offshore banking activities: • the growth of world trade; • government financial regulations (including taxes); • political considerations Emerge of Eurocurrency market in Chinese version

28. Growth of Euro-Currency Market • Eurodollars were born in the late 1950s, a response to the needs generated by a growing volume of international trade. European firms involved in trade frequently wished to hold dollar balances or to borrow dollars. Europeans often found it cheaper and more convenient to deal with local banks familiar with their circumstances. • In 1957, the British government prohibited British banks from lending pounds to finance non-British trade. In order to avoid losing this lucrative business, British banks began financing the same trade by attracting dollar deposits and lending dollars instead of pounds. The British government took a laissez-faire attitude toward foreign currency activities. As a result, London became-and has remained-the leading center of Eurocurrency trading.

29. Growth of Euro-Currency Market • During the 1950s, the Soviet Union acquired dollar (largely through sales of gold and other raw materials). It feared the U.S. might confiscate dollars placed in American bands if the Cold War were to heat up. So instead, Soviet dollars were placed in European banks. • The Eurodollar system mushroomed in the 1960s as a result of new U.S. restrictions on capital outflows and U.S. banking regulations. • Arab members of OPEC accumulated vast wealth as a result of the oil shocks, but reluctant to place most of their money in American banks for fear of possible confiscation. Instead, these countries placed funds with Eurobanks.

30. Effect of Regulatory Asymmetries • Eurocurrency benefited governments’ discriminate between deposits denominated in the home currency and those denominated in others and between transactions with domestic customers and those with foreign customers. Domestic currency deposits are heavily regulated as a way of maintaining control over the domestic money supply, while banks are given much more freedom in their dealings in foreign currencies.

31. Effect of Regulatory Asymmetries • Freedom from reserve requirements is probably the most important regulatory factor that makes Eurocurrency trading attractive to banks and their customers. Eurodollar deposits are available in shorter maturities than the corresponding time deposits banks are allowed to issue in the United States.

32. Effect of Regulatory Asymmetries • In 1981, the Fed allowed resident banks to set up international banking facilities (IBFs)in the United States for the purpose of accepting time deposits and making loans to foreign customers.IBFsare not subject to reserve requirements or interest rate ceilings, and they are exempt from state and local taxes. But an IBF is prohibited from accepting deposits from or lending money to U.S. residents. Technically speaking, a dollar deposit in an IBF is not a Eurodollar because the IBF resides physically within the United States.

33. Asian Offshore Currency Markets • Many countries intend to lure lucrative international banking business to their shores while trying to insulate domestic financial systems from the banks’ international activities. Similar international banking enclaves in the Asian Currency Units of Singapore, Hong Kong and the TokyoOffshore Market. (See More)

34. Types of Euro Currency Market • 一体型：境内与境外金融市场业务融为一体。离岸资金可随时转换为在岸资金（国内资金）。在岸资金也可随时转为离岸资金。香港，伦敦。 • 分离型：境内与境外业务分开，居民与非居民的存贷业务分开。以隔绝国际游资对本国货币存量和宏观经济影响。美国(International Banking Facility)，东京，新加坡。 • 簿记型（走帐型）：纯属为逃避税收和管制，为其他金融市场交易进行记帐或划帐。巴哈马拿骚

35. International Bond Market--1 • 国际债券市场 • 国际债券:一国政府,金融机构或企业在国际金融市场上以外国货币为面值发行的债券。 • 由于对发行者和投资者都有好处，国际金融市场证券化趋势在加强。

36. International Bond Market--2 • 国际债券的类型 • 按发行方式划分： • 公募债券(Public Offering Bond)：在证券市场上公开销售；通过国际认可的债券信用评定机构的评级；借款人公布自己各项情况。 • 私募债券(Private Placement Bond)：私下向限定的投资者发行；债券不能上市转让；债券利率高于公募债券利率。无需债券信用评定机构评级；发行者也无需公布自己情况。

37. International Bond Market--3 • 按是否以发行地所在国货币为面值划分： • 外国债券(Foreign Bond)：借款人在其本国以外某一国家发行的，以发行地所在国货币为面值的债券。发行必须经发行的所在国政府比准。在日本发行的外国债券(日元)武士债券(Samurai Bond)；在美国发行的美元债券洋基债券(Yankee Bond)；在英国发行的英镑债券猛犬债券(Bulldog)。 • 欧洲债券(Euro-bond)：借款者在债券票面货币发行国以外或在该国的离岸金融市场发行的债券。它的发行不受任何国家金融法规的管辖。例如，中国在日本市场发行的美元债券。

38. International Bond Market—4 • Foreign Bond: Bond sold outside the country of the borrower, but in the country of the currency in which the bond is denominated. The bond is underwritten by local institutions and is issued under the regulations prevalent in that country. For example, a U.S. company might float a bond issue in the Swiss capital market, underwritten by a Swiss syndicate and denominated in Swiss francs. The bond issue is sold to investors in the Swiss capital market, where it will be quoted and traded.

39. International Bond Market—5English version • Euro-bond: Bond denominated in the borrowers’ currency but sold outside the country of the borrower, usually by an international syndicate. The Euro-bond market, although centered in Europe, is truly international in the sense that the underwriting syndicates comprise investment bankers from a number of countries, the bonds are sold to investors around the world, and floatation are not governed by national regulations.

40. Censoring process of issuance • Step 1: 借款者到证券交易委员会注册登记，提交各种证明文件；经审查批准后，才能取得债券发行资格。 • Step 2: 债券发行管理机关对借款者资格审查： • 担保证书：要由政府，大企业，银行出出具保证书。 • 债信审查： 调查发行人在历史上有无拖欠的 未偿清债务或债务诉讼纠纷。 • 发行经验： • 发行间隔：同一发行人在1年中不得发行2-3次。避免偿债高峰集中。 • 信用评级：对借款人经济实力作出信用评价。

41. Credit Grading--1 • 国际证券评级机构(authorized, designated) • 美国标准普尔公司Standard and Poor’s Corp. • 穆迪投资服务公司Moody’s Investment Service • 加拿大债券级别服务公司 • 英国艾克斯特尔统计服务公司 • 日本社债研究所 • 美国德发公司

42. Credit Grading—2

45. Credit Grading—3 • 穆迪投资服务公司Moody’s Investment Service1995年将中国的独资商业银行的信用评级降为E级。

46. 穆迪公司调整中国8家银行评级

47. Eurocurrencies & Macroeconomic Stability • Two paramount worries: • The unregulated process of Eurocurrency creation has been producing a vast pool of international liquidity that would set off worldwide inflation. • The Eurocurrency system makes it more difficult for national monetary authorities to control their money supply.

48. Regulating international banking • The problem of bank failure: A bank fails when it is unable to meet its obligations to its depositors. A general loss of confidence in banks undermines the payment system on which the economy runs.

49. The main U.S. safeguards: • Deposit insurance. (amount to $100,000) • Reserve requirement. (force the bank to hold a portion of its assets in a liquid form.) • Capital requirements & asset restriction.(the difference between a bank’s assets and its liabilities, equal to the bank’s net worth,…) • Bank examination.(The Federal Deposit Insurance Corporation (FDIC)) • Lender of last resort facilities. (LLR) (Fed can create currency, bail the banks out…)

50. Deregulation vs. Regulation • Maximum Profit • Most Efficient: Best allocation of capital in the world. • Promote and finance international trade • Deregulation will facilitate the process of global integration. • Increase of risks and disorder • Impotent in domestic financial policy • Regulation is necessary: Interest ceiling; reserve requirement and so on