what is a financial system how does an international financial system work

A financial system (within the scope of finance) is a system that allows the
exchange of funds between lenders, investors, and borrowers. Financial
systems operate at national, global, and firm-specific levels.[1] They consist of
complex, closely related services, markets, and institutions intended to
provide an efficient and regular linkage between investors and depositors.[2]
Money, credit, and finance are used as media of exchange in financial
systems. They serve as a medium of known value for
which goods and services can be exchanged as an alternative to bartering.
[3]
A modern financial system may include banks (operated by the
government or private sector), financial markets, financial instruments,
and financial services. Financial systems allow funds to be allocated,
invested, or moved between economic sectors. They enable individuals and
companies to share the associated risks.[4]
The global financial system is the worldwide framework of legal agreements,
institutions, and economic factors that together facilitate international flows
of financial capital.

The global financial system has evolved substantially since its emergence in
the late 19th century during the first modern wave of economic globalization,
marked by the establishment of central banks, multilateral treaties, and
intergovernmental organizations aimed at improving the transparency,
regulation, and effectiveness of international markets.

Unprecedented growth in foreign investment from the 1880s to the 1900s

served as the core driver of the global financial system. The first modern
wave of economic globalization began during the period of 1870-1914,
marked by phenomena such as expansion of transportation, record levels of
migration, enhanced communications, trade expansion, and growth in capital

transfers.

Since the Great Depression, regulators and their economic advisers of the
global financial system have been aware that economic and financial crises
can spread rapidly from country to country with serious economic
consequences. For many decades, that awareness led governments to
impose strict controls over the activities and conduct of banks and other
credit agencies. After WWII, the international inter-connectedness of the
financial markets led to creation of an international financial system with the
characteristic known in control theory as complexity.

In the 1980s, many governments pursued a policy of deregulation in the

belief that the resulting efficiency gains would outweigh any systemic risks.
The international systemic crises that followed included the equity crash of
October 1987, the Japanese asset price collapse of the 1990s, the Asian
financial crisis of 1997 the Russian government default of 1998, and the
Great Recession of 2007-2009.Measures designed to reduce the vulnerability
of the global financial system have been put forward by several international
institutions. The Bank for International Settlements made two successive
recommendations and a coordinating group of regulating authorities, the
Financial Stability Forum, set-up in 1999 to identify and address the
weaknesses in the global financial system, has put forward some proposals
in an interim report.
The global financial system institutions are investment banks, insurance
companies, commercial banks and non-bank financial institutions active in
the stock, bond, foreign exchange, derivatives and commodities markets,

investing private equity including mortgages in hedge funds and pension

funds, mutual funds, sovereign wealth funds, etc. In addition to the individual
commercial organizations that operate at an international level there are a
number of public and semi-public international institutions.
Systemically important public financial institutions operating
internationally include:

The International Monetary Fund keeps tabs of international balance of

payments accounts of member states. The IMF acts as a lender of last resort
for members in financial distress, e.g., currency crisis, problems meeting
balance of payment when in deficit and debt default. Membership is based
on quotas, or the amount of money a country provides to the fund relative to
the size of its role in the international trading system.
The World Bank aims to provide funding, take up credit risk or offer favorable
terms to development projects mostly in developing countries that couldnt
be obtained by the private sector. The other multilateral development banks
and other international financial institutions also play specific regional or
functional roles.

The World Trade Organization settles trade disputes and negotiates

international trade agreements in its rounds of talks (currently the Doha
Round).

The Bank for International Settlements (BIS) in Basel Switzerland, which is

both a bank as well as an intergovernmental organization for central banks

worldwide. It has numerous subsidiary bodies, most importantly the Basel

Committee on Banking Supervision, the Financial Stability Board, and the BIS
Joint forum on financial conglomerates. It publishes global bond market
capitalization data.

The World Economic Forum, a Swiss non-profit foundation based in Geneva

meeting annually in Davos.

Systemically important private financial institutions operating

internationally include:

The Institute of International Finance (IIF), a trade organization of the worlds

largest commercial banks and investment banks.

The World Federation of Exchanges (WFE) which publishes global stock

capitalization information in annual reports.

The Global Financial Markets Association (GFMA), which consists of European,

Asian and North American financial market associations: The Association for
Financial Markets in Europe (AFME) in London and Brussels, the Asia
Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong,
and the Securities Industry and Financial Markets Association (SIFMA) in New
York and Washington DC.

International lobbying firms play a role in the global financial system, as they
increasingly develop cross-border lobbying arms to influence international
negotiations. For example, Podesta Group, a Washington lobbying firm,

founded Global Solutions to influence multilateral free trade agreements,

such as the Trans-Pacific Strategic Economic Partnership Agreement (TPP)
and the Transatlantic Trade and Investment Partnership (TTIP), and other
issues at the intersection of trade, economics, politics and diplomacy.
International monetory system
nternational monetary systems are sets of internationally agreed rules, conventions and
supporting institutions, that facilitate international trade, cross border investment and generally
the reallocation of capital between nation states. They provide means of payment acceptable buyers
and sellers of different nationality, including deferred payment. To operate successfully, they need to
inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means
by which global imbalances can be corrected. The systems can grow organically as the collective
result of numerous individual agreements between international economic factors spread over
several decades. Alternatively, they can arise from a single architectural vision as happened
at Bretton Woods in 1944.

Definition of 'Risk Management'

Definition: In the world of finance, risk management refers to the practice of identifying
potential risks in advance, analyzing them and taking precautionary steps to
reduce/curb
the
risk.
Description: When an entity makes an investment decision, it exposes itself to a
number of financial risks. The quantum of such risks depends on the type of financial
instrument. These financial risks might be in the form of high inflation, volatility in capital
markets,
recession,
bankruptcy,
etc.
So, in order to minimize and control the exposure of investment to such risks, fund
managers and investors practice risk management. Not giving due importance to risk
management while making investment decisions might wreak havoc on investment in

times of financial turmoil in an economy. Different levels of risk come attached with
different
categories
of
asset
classes.
For example, a fixed deposit is considered a less risky investment. On the other hand,
investment in equity is considered a risky venture. While practicing risk management,
equity investors and fund managers tend to diversify their portfolio so as to minimize the
exposure to risk.