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FINANCIAL SERVICES LIBERALIZATION

FINANCIAL SERVICES LIBERALIZATION. รายชื่อสมาชิกในกลุ่ม. นายฆนัท ปฏิเวทภิญโญ 434 55129 29 นางสาวปนัดดา ตันติภาคย์ 434 55507 29 นางสาวพาทินันท์ มูนาวี 434 55651 29 นายภาณุวัฒน์ เหล่าสถิรวงศ์ 434 55760 29. Outline. Introduction and Overview The Benefits of Financial Reform

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FINANCIAL SERVICES LIBERALIZATION

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  1. FINANCIAL SERVICES LIBERALIZATION

  2. รายชื่อสมาชิกในกลุ่ม • นายฆนัท ปฏิเวทภิญโญ 434 55129 29 • นางสาวปนัดดา ตันติภาคย์ 434 55507 29 • นางสาวพาทินันท์ มูนาวี 434 55651 29 • นายภาณุวัฒน์ เหล่าสถิรวงศ์ 434 55760 29

  3. Outline • Introduction and Overview • The Benefits of Financial Reform • The Pitfalls of Reform • Setting the context : Toward the WTO Financial Services Agreement • Case Study : Thailand • Conclusion : Impacts of Foreign Entry on the Domestic Banking Market

  4. Introduction and Overview • The World Trade Organization (WTO) financial services agreement (FSA),completed on 13 December 1997,which will take effect early in 1999. • The FSA is less than meets the eyes,and our evalution suggests that is a significant agenda of market opening measures still to be taken. • Financial market development is a potentially factor in an economy’s long-term growth and development.

  5. Introduction and Overview • Financial-market development is fundamental in two ways: • Changes the speed at which capital accumulates. • Influences the efficiency of production in an economy.

  6. Introduction and Overview • How dose the FSA contribute to financial-market and to a country’s long-term growth and development? • OECD-country • Developing-country

  7. Introduction and Overview • The FSA promotes a country’s growth and welfare by providing a legal framework that reassures foreign institutions with long-term investments. It also provides external pressure for changes that promote sound financial institution, with domestic groups often resist to protect their own interests.

  8. Introduction and Overview • 1. Internationalization ( or liberalization ) • Opening domestic market to cross-border trade, allowing entry by foreign firms, and opening the capital account. • 2. Domestic financial reform • Process of deregulation and strengthening domestic financial institution • Financial Reform = 1+2

  9. Introduction and Overview • The focus of the WTO negotiations on freer cross-border trade and on foreign entry in financial services need to be understood in two contexts. • First, within the WTO, it reflects the fact that many standard policy interventions in the financial sector are untouched by GATS commitments. • Second, the FSA should be understood in terms of its contribution to financial-market development and growth.

  10. Introduction and Overview The Benefits of Financial Reform • The benefits of financial reform include faster growth. • The benefits of better financial services are illustrated in: • cost saving • quality improvements

  11. Introduction and Overview The Benefits of Financial Reform • Can be relized by the households, businesses and governments that are the main users of these services. • Financial reform and internationalization in the industrialized countries have shown that: • Financial institution • Savers and investors

  12. Introduction and Overview The Benefits of Financial Reform • User also benefit from increased competition and access to foreign expertise in several intangible ways, such as improved quaility of services and wider choice.

  13. Introduction and Overview Objections to Deregulation and Market Opening • Some countiries, however, are reluctant to deregulate fully, whereas others are reluctant to open. The reasons they cite are several. • First, the experience of countris that have deregulated their financial-market, opened those markets for foreigners, and liberalized their capital accounts has been mixed.

  14. Introduction and Overview Objections to Deregulation and Market Opening • Second,these service, in this view, are best owned and controlled by domestic interests. More sophisticated foreign entrants, pursuingdifferent objectives, could come to dominate • Third,reform and internationalization are often politically difficult be cause, although users stand to benefit, other powerful interests stand to lose.

  15. Introduction and Overview Objections to Deregulation and Market Opening • Agrument one by one First • Reforming the domestic financial system and internationalizing it do ential risk. • Striking a balance between financial-market efficiency and economic stability is difficult. • Trade-off between economic stability and financial reform.

  16. Introduction and Overview Objections to Deregulation and Market Opening • Two major factors influence the chances of successful adjustment to these changes. • Macroeconomic preconditions - stable and realistic price - prudent fiscal policy • Reform of the financial sector - free up interest rates - reduce subsidization of credit - strengthen financial institutions and their super vision

  17. Introduction and Overview Objections to Deregulation and Market Opening Second • Foreign participation brings substantial benefits and can be managed. Third • The answer is not to halt the process of reform and liberalization.Rather, it is to proceed while emphasizing the strengthening of the system’s ability to evaluate risk

  18. The Benefits of Financial Reform • Services that financial systems provide can be grouped into five categories: • mobilize an economy’s resources. • facilitate the transactions necessary to carry on economic exchange and trade. • improve risk management by pooling and diversifying the risks. • collect and evaluate the information needed. • monitor the behavior of corporate managers.

  19. The Benefits of Financial Reform • Financial institutions are considered to specialize in: • Collecting funds from savers • Evaluating potentially risky borrowers • Allocating the funds they collect to those uses that promise the highest rates of return • All these services are crucial to financing growth and promoting entrepreneurship.

  20. The Benefits of Financial Reform • Idea : This chapter surveys the benefits that can be expected from financial reform and the promises of a successful WTO financial services agreement in that respect. • Increased competition will result in more efficient services and improvement in their quality and range.

  21. The Benefits of Financial Reform • The benefits to users take two forms: reduced costs of service to savers and borrowers with the introduction of more competition and improvements in from more efficient, customer-friendly financial institutions. Benefits to Users

  22. The Benefits of Financial Reform • Benefits to savers • Receive higher rates of return • Broader choice of savings instruments • Easier access to financial products Benefits to Users

  23. The Benefits of Financial Reform Benefits to Users • Benefits to borrowers • More accurate appraisal of risk • Reduced waiting times • Expanded access to funds through more sophisticated lending instruments available in a wider range of maturities

  24. The Benefits of Financial Reform • In exploring these two sources of benefits, we draw on available theoretical studies, empirical evidence, and anecdotes. • The deregulation of US intrastate bank branching in the 1980s. • The financial integration undertaken by the European Union. Benefits to Users

  25. The Benefits of Financial Reform • Among the many users of financial services, small and medium-sized enterprises are likely to gain the most from more efficient and competitive financial services. • A study of 524 Indonesian manufacturing firms during 1981-88 Benefits to Users

  26. The Benefits of Financial Reform Easing restrictions on financial markets and expanding competition reduce corporate and household funding costs Lower costs in turn reduce product prices and Promote corporate competitiveness in international markets Benefits to Users Cost savings

  27. The Benefits of Financial Reform • The survey by Berger, Hunter and Timme (1993) : • Technical inefficiencies account for 20 percent of bank’s cost. • Banks lose as much as 50 percent of their potential profits to inefficiency. • Two results emerge from surveying performance data : Benefits to Users Cost savings

  28. The Benefits of Financial Reform • Users also benefit from financial services reform and internationalization in number of qualitative ways. • Increased competition brings a wider range of financial services, greater choice of institutions, new methods of services delivery, and price competition. Benefits to Users Improved Service and Quality

  29. The Benefits of Financial Reform • Users obtain more accurate and comprehensible information • Innovative instrument to hedge risks • Banks have supplemented their traditional credit products with lower-risk • Financial services “mini-marts” offering a range of products Benefits to Users Improved Service and Quality

  30. The Benefits of Financial Reform • Internationalization accelerates the pace at which such benefits are realized, as foreign financial institutions bring innovations in products and in service delivery. Benefits to Users Improved Service and Quality

  31. The Benefits of Financial Reform • As technological changes are introduced, users benefit from access to new distribution channels. • In Taiwan, deregulation and internationalization have brought substantial change: Benefits to Users Improved Service and Quality

  32. The Pitfalls of Reform • Financial reform promises hefty benefits, but it also sets in motion a process of change that will impose some costs. • There are legitimate concerns about giving competitive forces free play. • But the analogy with trade in goods is useful here as well: protection against foreign competition is not the best way to address these concerns.

  33. The Pitfalls of Reform • This chapter surveys: • Three common arguments against financial reform : • That reform increases the chances of financial crisis • That finance is a strategic sector and therefore must remain in domestic hands and closely regulated. • That participants in the sector (and sometimes the government itself) will be hurt in bearing the burden of adjustment.

  34. The Pitfalls of Reform • How Dose Financial Reform Increase the risk of crisis? • There is evidence that domestic deregulation and internationalization can expose or exacerbate problems in the presence of macroeconomic or regulatory weakness and may increase the risk that such weakness leads to a crisis. Three Common Concerns

  35. The Pitfalls of Reform • The answer is to address those weaknesses, within banking and in macroeconomy. • Foreign financial institutions and foreign entry are not, per se, associated with financial crises. • There is a popular impression that banking crises are associated with financial reform.

  36. The Pitfalls of Reform • One study of banking crises noted that, in 18 of 25 cases, financial reform had occurred at some time in the previous 5 years. • Other studies have identified a number of factors behind banking crises. • Both studies agree on the association of credit expansion with domestic reforms.

  37. The Pitfalls of Reform • This discussion naturally leads to the interaction between opening to foreign competition and opening the capital account of the balance of payments. • In summary, a proper conceptual distinction among the issues at hand –opening to foreign competition, opening the capital account, addressing domestic banking-sector weaknesses, and stabilizing the macroeconomy –should help countries to realize that the challenge is not foreign competition per se.

  38. The Pitfalls of Reform • Financial sector as strategic sector • Another main reason why most countries delay their liberalization of financial service is that financial sector is believed to as a strategic sector in economic development. • Financial sector is the medium through which most of economic transaction are conducted.

  39. The Pitfalls of Reform • Banks also play important role in monetary transmission of monetary policy. • Developing-country governments with immature financial system often dominated by banks have tended to organize their financial systems to channel financial resources to development priorities. • Foreign financial institutions will have different priorities and will tend to ignore domestic objectives.

  40. The Pitfalls of Reform 3.Political Economy of Financial Reform • The third reason for governments' reluctance to undertake reform relates to a set of political economy considerations about domestic costs of opening to foreign competition. • The key issue is how much benefits of foreign entry are in hands of the Thais who have less bargaining power. • The benefits are widely diffused and not well understood, making coalition building difficult.

  41. The Pitfalls of Reform Sequencing and Pacing Reform • macroeconomic adjustment • trade liberalization • reform and restructure financial markets • The reasons for such a sequence are as follows • first, the capital inflow will cause a real currency appreciation • second, capital inflows may help to sustain otherwise unsustainable budget deficits

  42. The Pitfalls of Reform • third, allowing capital inflows before liberalizing trade may cause those inflows to be channeled to the wrong industries • fourth, there is no reason to expect capital resources to be allocated to their most productive uses is the domestic financial system has not been liberalized. • In reality, there are a variety of possible reform sequences to choose from, depending on the country’s macroeconomic, financial, legal, political, and sociological conditions.

  43. Setting the Context : Toward the WTO Financial Services Agreement • This chapter focuses on the history of the financial services negotiations in the WTO. • Beginning with the inclusion of services in the Uruguay Round. • The next section presents the General Agreement on Trade in Services (GATS). • The third section discuss the objectives of the financial services negotiations , basic stances and strategies of the negotiations.

  44. Setting the Context : Toward the WTO Financial Services Agreement Services in the Uruguay Round • The introduction of services into the multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT) was one of the achievements of the Uruguay Round. • The US trade delegation officially raised trade and investment in services issues at the GATT ministerial meeting and kept the pressure on thereafter. • Eventually, the negotiating agenda was extended

  45. Setting the Context : Toward the WTO Financial Services Agreement Services in the Uruguay Round • The insertion of services into multilateral trade agreement recognized the growing importance of trade in services in the growth of the world economy • Most of the liberalization achieved for trade in goods should be extended to services • Services were eventually included on the Uruguay Round agenda and led to GATS • The final agreement of the Uruguay Round was completed in December 1993.

  46. Setting the Context : Toward the WTO Financial Services Agreement • The three principles are embodied in the GATS • Transparency • Most favored nation (MFN) • National Treatment Overview the GATS

  47. Setting the Context : Toward the WTO Financial Services Agreement • The GATS includes two main elements • A core agreement with annexes and other documents • A list of commitments. ( schedule of commitments) Overview the GATS

  48. Setting the Context : Toward the WTO Financial Services Agreement • Article I of GATS identifies four modes of delivery of internationally traded services • Cross border Supply • Consumption Aboard • Commercial Presence • Presence of nature person

  49. Setting the Context : Toward the WTO Financial Services Agreement • Stances are divided by : • Developing- country stances • Industrial – country stances Objectives, stances, and Strategies

  50. Setting the Context : Toward the WTO Financial Services Agreement • Developing-Country Stances • Developing countries have recognized that openness to the world economy is necessary for successful development, but there has been more hesitation about financial opening. • They are urged to caution by the financial crises that have taken place in countries that have liberalized.

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