This paper discusses systematic issues in international finance explained in the International Capital Markets report. The paper describes that the nature and extent of recent banking problems in several industrial countries along with the policy responses to those problems. It is observed that balance sheet problems in banking are widespread among the major industrial countries. The paper also analyses recent activity in the European currency unit bond and exchange markets, and reviews developments in the private financing of developing countries and discusses several issues raised by the recent experience, including the broadening of the investor base for developing country securities, the special role played by regional financial centers in East and Southeast Asia, and the systemic implications of the evolving pattern of developing country financing. A key influence on international capital movements in recent years was the rising international diversification of investment portfolios, which is generally believed to have increased in response to the liberalization of exchange and capital controls in many industrial countries in the 1970s and 1980s.
This study assesses recent trends in international capital markets. It reviews, in particular, the forces currently reshaping the markets of industrial countries and confronting financial institutions with major challenges.1 Against this background, the study reports on private sector financing flows to developing countries and discusses factors likely to influence future flows.2 More broadly, it discusses prospects for the management of financial risks at the systemic level on the basis of an analysis of macroeconomic, structural, and regulatory developments currently influencing those markets. The study concludes with a detailed discussion of the transmission mechanisms and policy reactions associated with the October 1987 instability in global equity markets.
During 1987–88, international capital flows were closely related to large and persistent external imbalances among the major industrial countries, to a reduction in the current account deficit of developing countries from the levels of 1982–86, and to a continuing process of financial market liberalization. The environment within which these flows took place was characterized by considerable financial uncertainty associated with an upturn of interest rates in late 1987 and renewed concern about inflation, with increased exchange rate volatility and sizable official market interventions aimed at stabilizing the value of the U.S. dollar, and with the shock waves of the October 1987 stock market crisis. This section reviews the macro-economic environment internationally and within major industrial countries. It then traces the most salient developments in the banking, securities, and derivative products markets.
During the past year, changes in the international capital markets have significantly influenced the financial situation of indebted developing countries. The first part of this chapter provides a detailed recapitulation of the experience of those countries during the period under review. The second part assesses important aspects of the growing secondary market for bank claims on developing countries, including recent pricing trends. Various financing techniques that have evolved partly as a result of the growth of the secondary market are then reviewed. In a related vein, the second part concludes with a discussion of several market-based risk management techniques that have potential for more extensive use by heavily indebted countries. The last part of the chapter explores the impact of the regulatory, tax, and accounting practices of industrial countries on the financial prospects of developing countries.
A trend toward liberalization remained evident during 1987–88 in the major financial markets of the world. Aspects of the trend included further policy initiatives to eliminate controls on capital movements, to loosen restrictions on market access, and to lower barriers separating banking and securities markets. Continuing liberalization has, however, increasingly been accompanied by official scrutiny of its implications for the safety and stability of financial markets especially since the stock market break of October 1987. Policy reverberations specific to the October events are examined in detail in Chapter V. This chapter discusses a broader range of regulatory and supervisory developments during the period under review, both at the international and national levels. Its international focus is particularly on three significant developments—deepening geographic integration of financial markets, multilateral agreement on minimum capital adequacy standards for banks, and an acceleration of movement toward multilateral supervisory coordination on securities market issues
The sharp declines in global equity prices during mid-October 1987 demonstrated the speed with which large shocks can be transmitted across increasingly integrated financial markets. A number of studies have sought to identify the factors that contributed to such equity market instability as well as the structural and regulatory policy changes that would improve the performance of these markets. This chapter sets these studies into the context of trends in the international capital markets and analyses their principal conclusions and policy recommendations.
This paper presents the international financial markets aspects of the current turbulence in emerging markets. The ongoing international diversification of institutional portfolios, the return of flight capital, and the cyclical developments in industrial countries combined to generate a significant volume of capital flows into emerging markets in the developing world. In keeping with developments in global markets, these flows have increasingly been in the form of purchases of tradable bonds, equities, and money market instruments—securities that can readily be sold when sentiments change. The volume of financial wealth that can flee a developing country is now sufficiently large that it can overwhelm any attempt to maintain an exchange rate incompatible with fundamentals. Thus the possibility for investors—domestic and foreign—to exert discipline over policy has strengthened significantly. The resolution of sovereign debt-servicing difficulties has become more complicated with the changes in instruments and participants in international markets.