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A lecture script from a university course on international banking and capital markets, focusing on the topic of measuring and managing risk. The lecture covers various risks to financial markets, systems, and economies, including macro-economic impacts, external issues, monetary impacts, and payments performance. The document also emphasizes the importance of understanding the past as no guide to the future and the significance of trade in the development of international banking and capital markets.
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In considering this topic we will seek to look at a number of risks to financial markets, systems and economies and how these impact on international banking and finance. This list is not exhaustive, nor exclusive, but takes the opportunity to look at some of the major issues. These include:
I will try to associate each of these topics with a real life case study scenario, but essentially we have to take a firm grip on the concept that the past is absolutely no guide to the future. If it were, then we would have no need for analysts and their like, nor indeed would we need to employ fund managers; it would simply suffice to have large computers which replicated past indexed portfolios. We could manage by employing statisticians and economic historians, who together would provide all the data we needed. Regrettably this is not the case, yesterday’s boom or bust is not tomorrow’s. The lesson of 2007-2008 is that we don’t know what is round the corner, although we can often have a pretty good guess that our rosy perceptions of ever expanding growth and ever inflating property prices are really bizarre to say the least.
At this point we need to return to our previous analysis – before we started to look at specific instruments – when we posed the questions about the role and functionality of a bank or a market.
Economic historians will tell us that the origins of banks and of capital markets can be found in the huge expansion of trade in cities states such as Firenza, Venezia and the components of the Hanseatic League (centred on Hamburg) in the late medieval era.
The financing of trade with the east – spices, silk – and the west – wool, fish – sparked the creation of two types of entity.
Our first action is therefore to look at the effect of macro-economic impacts on the symbiotic relationship between business-trade- government and the financial markets in general.
The events of recent years have demonstrated very clearly that we cannot ignore the effect of such factors on banking/markets as interest rates, inflation and the rapid decline of real economic growth.
Country Q1 Q2 Q3 Q Australia 0.8 0.7 0.3 0. Canada -1.8 -0.9 0.2 1. EU-27 -2.5 -0.2 0.3 0. Indonesia 1.1 1.3 1.5 1. Japan -3.2 1.3 0.0 1. USA -1.6 -0.2 0.6 1.
Country Q1 Q2 Q3 Q Australia 0.5 0.9 0.7 0. Canada -0.3 0.4 0.9 0. EU-27 -0.8 -0.2 -0.2 0. Indonesia 1.9 0.4 1.1 0. Japan -1.3 1.1 0.6 0. USA 0.2 -0.2 0.7 0.
Country Q1 Q2 Q3 Q
Indonesia -2.6% Japan -9.5% USA -14.0%
It is also important to assess the impact of the wider trade flows and related issues. Trade imbalances submit bankers and their customers to a range of pressures – they affect currency values, impact on credit ratings and drive interest rates.
Country Q1 Q2 Q3 Q Australia 0.5 ± -0.4 -0. Canada 0.1 -0.2 -0.4 ± EU-27 -0.4 -0.1 ± ± Indonesia 1.1 1.4 0.9 1. Japan -0.2 0.3 0.3 0. USA -1.2 -1.1 -1.2 -1.
Country 2009f Australia -3. Canada -1. EU-27 -1. Indonesia -1. Japan 3. USA -3.
Currency Q1 Q2 Q3 Q AUS 87.9 98.4 105.2 112. CAN 94.8 100.3 105.1 108. EUR 104.3 104.7 105.0 106. IDR 100.3 108.1 111.9 115. JPY 104.9 97.4 98.7 100. OECD definition: Real effective exchange rates take account of price level differences between trading partners. Movements in real effective exchange rates provide an indication of the evolution of a country’s aggregate external price competitiveness.
Country Q1 Q2 Q3 Q Australia 3.35 3.16 3.27 3. Canada 1.28 0.70 0.40 0. EU- eurozone
Indonesia 11.04 9.67 8.69 7. Japan 0.69 0.58 0.54 0. USA 1.08 0.62 0.30 0.
This then leads on to an element that is crucially important to the role of banks in financing trade and also in the management of cash flows within enterprises. It is an element that also impacts strongly on the credibility of enterprises on a wider level – e.g. on the capital markets – as well as affecting the perceived value of banking institutions in terms of the potential problems that may exist in their lending to enterprises.
Country Prompt/< days
30 days + 60 days + 120 days +
Australia 60% 33% 17% 5% Canada 53% 46% 29% 18%
Country Time delay for bank transfers (months)
Terms of trade (instruments)*
Terms of payment (days)
Export Credit insurance
Australia 0-1 Sight Draft 30 days
Full cover Canada 0-1 Open Account
30 days
Full cover Indonesia 0-2 Letter of credit
30 days
Short Term only Japan 0-1 Sight Draft 30 – 90 days
Full cover USA 0-1 Open Account
30 days
Full cover
Letter of Credit = a guarantee of payment to an exporter from the importer’s bank normally conditional on delivery of goods/services Sight deposit = a bank draft or bill payable on demand or presentation Open account = credit is extended without a note, bill or guarantee
Next week, I will seek to address some further issues relating to the inherent risks in banking and in the operation of capital markets at an international level. This will include the topic of interest rate risk, which we had to abandon this week due to conditions in the lecture theatre.
I will then seek to define how in the very changed world we are now facing, the role of the regulator and of international governmental bodies may be shifting very decisively. Regulation based on principle and light touch has patently and very explosively failed; regulation based on rules – which implies a harder touch – may well be the direction in which we are heading.