Part III The Benefits and Challenges of Modern Finance

Garry Schinasi
Published Date:
December 2005
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This part of the study is a series of four essays examining the ongoing challenges to financial efficiency and stability posed by recent structural changes in national and global finance. Many of the changes began some 20 years or so ago, and have accelerated in importance in the past few years. Others are relatively more current.

Each of these essays examines structural changes that are no doubt improving financial and economic efficiency, but may also be posing new risks or redistributing existing risks in ways that are poorly understood and that may have systemic implications.

The chapters are sequenced so that they progress from a very high level of generality and broadness (the globalization of finance) to successively lower levels of generality (the financial market activities of insurance and reinsurance companies).

Chapter 8 addresses the challenges of the globalization of finance and risk, both at the national and international levels. In many ways, the broad challenges discussed in Chapter 8 encompass all the other challenges examined in subsequent chapters, so it serves as an introduction and summary of the remaining challenges in ensuring financial stability—many of which are discussed in more detail later.

Chapter 9 examines the over-the-counter (OTC) derivatives markets and how they have changed the nature of finance and banking in our modern world. Both benefits and challenges are discussed, with more focus on the latter.

Chapter 10 examines the implications for financial stability of the increased reliance on efficiency-enhancing risk transfer mechanisms; it focuses in particular on credit derivatives.

Chapter 11 discusses the supervisory, regulatory, and perhaps systemic challenges raised by the now greater role of insurance companies (and implicitly of other institutional investors) in financial and capital market activities.

Chapter 12 summarizes the broad areas identified throughout the book, and particularly in Part III, where reforms are most needed.

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