Managing International Financial Instability
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Managing International Financial Instability

National Tamers versus Global Tigers

Fabrizio Saccomanni

Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions – sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles – are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments.
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Chapter 2: Global financial players

Fabrizio Saccomanni


Financial globalization is much more than a purely geographical phenomenon. The global player is, by definition, present all over the globe. But this is nothing new. As early as the 1960s, large banks in industrial countries had 16 The tigers, the tamers, the circus branches in all the major financial centres, mostly to assist domestic customers in their foreign trade transactions. What is new is the fact that global players are now simultaneously present in all countries but also in all markets, using the full spectrum of instruments at their disposal (bonds, shares, currencies, derivatives and so on), and carrying out a multiplicity of functions. In addition to borrowing and lending, they manage assets on behalf of clients, invest their own resources, hedge risks, and engage in speculation. The global vocation of these intermediaries has affected their internal organization. Activity is no longer divided between departments dealing with ‘domestic’ and ‘foreign’ markets, but has been broken down into specialized functions carried out on a global scale. For example, one department will look after global equity markets, another global fixed income or global foreign exchange. Within each sector there are further specializations but always in a global perspective. For example, within the global equity department there will be a separate division to deal with telecom sectors worldwide and monitor the stock market performance of, say, AT&T, Deutsche Telekom and British Telecom in order to make appropriate reallocations of investments based on the relative profitability of each. Integrated...

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