Global Financial System Structure
By: Muna Abubakr, Halal Incorp
Understanding the global financial system structure, what is a bank? A bank is a financial institution that is licensed to be able to make loans and receive deposits. Banks can in addition provide you with financial services. For instance, the financial services it may provide you with are such as currency exchange, wealth management, and safe deposit boxes as well. There are different kinds of banks, and this includes investment banks, retail banks, and corporate or commercial banks. In most countries, banks are mainly regulated by either the central bank or the national government.
Global Financial System Structure
The history of banking first came about, and this was with the first-ever prototype banks, and these were the merchants of the world that gave out grain loans to both traders and farmers who carried out the goods between cities. This happened in Sumeria, Assyria, and India in 2000 BC. Years later during the roman empire and in ancient Greece, lenders that were based in temples gave out loans whilst also allowing deposits to happen and performing the change of money as a result. Archaeology from this time in India and ancient China also shows signs, movement, and evidence of lending out money.
Numerous histories position the crucial historical development of a baking system in both medieval and renaissance Italy especially in the affluent cities of Venice, Genoa, and Florence as well. Both two well-known families at the time that dominated banking in the 14th century in Florence called the Peruzzi and Badri established branches in many other parts of Europe. In addition to this, the most famous Italian bank was called the Medici bank and this bank was established by a gentleman called Giovanni Medici in the year 1397.
Interestingly, the oldest bank that is still in existence is called the Banca Monte Dei Paschi di Siena bank which is headquartered in Siena, Italy. This bank has been operating non-stop since the year 1472. However, at the end of 2019, the oldest bank stopped operating in Banco di Napoli which is headquartered in Italy way it has been operating since the year 1463.
The development of banking had spread from northern Italy throughout the Holy Roman Empire, and this happened in the 15th till the 16th century, and it then spread to London in the 18th century as well. In the 20th century developments in computing and telecommunications had occurred which caused major changes to the way the banks were operating, and this resulted in banks dramatically increasing in size and geographic spread. Between the years 2007 and 2008, the financial crisis caused many bank failures, including some of the world’s largest banks and it further prompted much discussion and debate about bank regulations.
Global Financial System Structure: In the post-second world war period and with the introduction of the Bretton Woods system in the year 1944, two organizations were created called the World Bank and the International Monetary Fund (IMF). As a result of being encouraged by these institutions, commercial banks started to lend to the sovereign states in the third world. This was during the period as inflation started to rise in the west. However, the gold standard was eventually abandoned in the year 1971 and numerous banks were caught which resulted in them becoming bankrupt this was because of the third world country’s debt defaults that had happened.
Moreover, during this time it was a period of increase in the use of technology in retail banking. In the year 1959, banks had agreed on a standard and this was for machine-readable characters (MICR) that were patented in the United States, and this was for the use of cheques, which then led to the first-ever automated reader-sort- machines. Around the 1960s the first Automated Teller Machines (ATM) also called cash machines were developed and the first machines started to make an appearance at the end of the decade.
Also, banks started becoming heavy investors in computer technology to automate much of the manual processing, which began a shift, and this was by banks from large clerical staffs to new automated systems. By the time it was the 1970s, the first payment systems started to develop which would lead to electronic payment systems and this was for both domestic and international payments. The International Society for Worldwide Interbank Financial Telecommunication (SWIFT), payment network was established in the year 1973, and domestic payment systems were developed around the world by banks working together with the government.
Global banking and capital market services increased during the 1980s, and this was after the deregulation of financial markets in several countries. The 1986 Big Bang in London allowed banks to access capital markets in new, fresh ways which resulted in significant changes to the way banks operated and accessed the capital as well. It all started on a trend where retail banks started to acquire investment banks and stockbrokers in creating universal banks that offered a wide range of banking services.
This trend also spread to the US as well and this was after the Glass- Steagall Act that was reapplied in the year 1999 during the Clinton Administration. This then saw US retail banks embark on big rounds of acquisitions and mergers and engage in banking activities as well.
Global Financial System Structure: The financial services continued to expand through the 1980s and the 1990s. The reason for this was because of the big increase in demand from companies, financial institutes, and governments, not only because of this but also due to the financial market conditions that they were tending to keep afloat. Interest rates in the United States declined and this happened for a continuous two-year period in the US. The rates that fell through were about 15 per cent. Another thing that declined for a time of twenty years was treasury notes and this was about five per cent. The financial assets also grew back then at a rate of approximately twice the rate of the world’s economy.
The power of U.S. financial markers was vanishing and there was an increasing interest in foreign stocks. The remarkable growth of foreign financial markets occurred because of large increases in the pool savings in foreign countries. These include foreign countries like Japan and in particular the deregulation of foreign financial markets which allows them to expand in their activities as a result. American banks and corporations started finding investment opportunities from abroad, encouraging the development of mutual funds that is specialising in trading foreign stock markets.
The growing opportunity and internationalization in financial services changed the competitive landscape because now many banks have shown that they prefer the universal banking model that is prevalent in Europe. With universal banking, they are free to engage in all forms of financial services, can make investments in client companies, and can function as much as possible. This only applies if they are a one-stop supplier for both wholesale and retail financial services.
During the early 2000s, it was marked by consolidation, and this was for already existing banks and entrance into the market of other financial intermediaries. For instance, financial intermediaries such as non-banking financial institutions. Large corporate players were starting to see the light and began to find their way into the financial service community that was offering competition to banks that were established. They were offering various services and the main ones were pension, insurance, hedge funds, mutual, loans, money market, securities, and credits. At the end of the year 2001, the market capitalisation of the world’s fifteen largest financial services providers included four non-banks as well.
The first decade of the twenty-first century saw technical innovation reach the highest point of banking over the previous thirty years, it saw a major shift away from the normal traditional banking to turn into internet banking. Developments such as open banking in the year 2015 started happening which made things a lot easier for third parties to access bank transaction data and introduce the security models and standard API as well.
Global Financial System Structure: The way process of financial innovation also advanced significantly, and in the first few years of the twenty-first decade increased the importance and profitability of nonbank finance. Before such profitability was restricted to the non-banking industry and it has prompted the Office of the Comptroller of the Currency known as (OCC) to encourage other banks to explore other options in terms of financial instruments which is beneficial as it diversifies banks and businesses which results in banking economic health to improve as well. Therefore, as the different financial instruments are being both adopted and explored by both the non-banking and banking industries, the division between the different financial institutions is gradually disappearing. For instance, in the year 2020, the Office of the Comptroller of the Currency jumbled up the division between traditional banking and the cryptocurrency ecosystem.
This happened when it published several interpretive letters explaining national banks’ ability to custody cryptocurrency and provide banking services to cryptocurrency companies. It also does this for the use of blockchain innovations such as stablecoins as settlements for infrastructure. Also, recently in 2021, the Office of the Comptroller of the Currency granted its first-ever federal banking charter, and this is to a cryptocurrency firm, which causes the lines to become blurred even further between both the different types of financial institutions and traditional banks as well.
Global Financial System Structure
Countries with the largest portion of the global banking sector are countries such as China, the United States of America, and the United Kingdom as well. They are the largest banking country in the world. They have all been based on tier one capital. This is also in the ranking of the top one thousand banks in the year 2019. China’s two largest banks, ICBC and China Construction Bank and have combined approximately 625billion dollars’ worth of tier one capital. The Agricultural Bank of China has a total of 243 billion dollars of tier one capital that is followed by the Bank of China which comes in at approximately a 230billion dollars. China has also been holding the top four position for the fourth year consecutively in a row.
The leading banks in China in the recent year of 2021 that is based on a sum of assets is that the value of both the commercial Bank and industrial of China’s assets has come up to a total of 4.91 trillion and this9 is in U.S. dollars. The bank was not only the largest in China but also again the largest bank in the whole world. When the bank had gone public in Hong Kong, Japan, it was the most valuable Initial Public Offering (IPO) in history, and this was at the time as well.
The market of capitalisation of the banking sector worldwide between the years 2016-2021 in terms of the market of the global banking sector was a total of 7.5 euros and this is in the second quarter of the recent year, 2021. The market cap is the number of shares that are in a company multiplied by the price per share. In cases such, it means that the sector cap is a sum of this metric, and this is specifically for major banks. The market cap and banking are that the banks that are leading worldwide each have a market cap and this is up to hundreds of billions of U.S. dollars.
This means that the metric can most likely be able to scale up the publicity that is traded companies since they are obliged to publish such financial reports. Most of the international banks are already being publicly traded since they have opposed much smaller financial institutions or fintech companies that are operating in the banking sector.
Global Financial System Structure: In the recent year 2020, the financial sector contributed approximately a 164.8billion pounds of the whole economic output. Specifically, London was the largest in terms of sector and half of the sector’s output was generated as well. The financial service sector of the United Kingdom was the third biggest in the Organisation for Economic Co-operation and Development (OECD) in the year 2020 and this is by its proportion of the national economic output. Another thing is Luxembourg’s financial service sector was the largest as well in the Organisation for Economic Co-operation and Development. It has been contributing to twenty-five percent of the country’s economic output.
Disclaimer: The view of the author does not necessarily represent the views of Halal Incorp