Development of the World Financial System under the Modern Conditions

The set of financial markets and financial institutions that operate in the legal and tax environment of international business, creates the world financial system (figure 6.2).

Figure 6.2. Main components of the world financial system

The participants of the world financial system, which mediate the main part of the international financial flows, include:

• national participants - corporations, banks, specialized credit and financial institutions, including insurance and pensionable companies, stock and commodity exchanges, the state;

• international participants - international corporations, transnational corporations, international banks, transnational banks, specialized credit and financial institutions, large stock and commodity exchanges, international monetary and financial institutions.

The core role in the world financial market belongs to the commercial banks as a result of the wide sphere of their financial activities. The bank's liabilities consist mainly of deposits with different terms, assets: loans (corporations, states), deposits in other banks and bonds.

Corporations (especially TNCs) conduct operations to attract foreign sources of capital to finance their investments: selling shares, loans, sale of the corporate's proof of indebtedness in the international capital market.

Non-bank financial organizations conduct transactions in order to diversify their portfolios of foreign assets.

Central banks are included into the global financial markets indirectly through currency interventions. The government bodies borrow money abroad, release the government bonds. The governments of the developing countries and state owned companies take loans from commercial banks of the foreign countries.

The current world financial system operates and develops in the context of financial globalization. Globalization is an objective process of integration of the considerable part of the capital from different countries, strengthening of their interdependence. The driving forces of financial globalization are deepening of international financial integration, the formation of a system of international financial institutions, the development of financial innovations.

The international financial integration is the process of alignment of financial services, banking transactions, liberalization of customs procedures, harmonization of coordination system through the international financial and credit institutions, the electronic system of payment means; movement towards the global monetary system with the common world money. In recent years, significant legal restrictions on the movement of capital were eliminated. Financial markets of the developed countries were united in the global financial system, which allows sending more and more significant amounts of capital, not only to its economy but also to the economies of developing countries and countries with economies in transition. The greatest progress in financial integration has reached the European Union. Its concept of a common financial space includes:

• full liberalization of payments and the migration of capital;

• open access for companies and individuals of the EU countries to the market of banking, insurance and other financial services;

• harmonization of banking, tax and other legislation on investment;

• increase of control over the activities of national credit and financial institutions and the protection of investors' interests;

• providing publicity and transparency of existing legal norms. Financial integration with the openness of the financial markets is beneficial to the countries:

• countries are proposed to more sources of investment finance to supplement domestic savings;

• open capital markets contribute to the improvement of the effectiveness of domestic financial institutions and maintaining of the well-grounded macroeconomic policy;

• by reducing financial constraints, the open capital markets give countries time for the conduction of settlement of payments in order liquidate the imbalances caused by external shocks;

• creditor countries have more opportunities for diversification of investment and as well as risks;

• the multilateral trading system is supported because of the expanding of the range of opportunities for both the diversification of the portfolio of securities and the efficient allocation of global savings and investment.

Elimination of barriers between national and international financial markets, the free movement of international capital from domestic to global financial markets and vice versa, the development of relationships between the two sectors of the market are the distinctive features of the international financial integration. In terms of financial integration financial institutions establish their branches in major financial centers to execute the borrowing, lending, investment services, and the provision of other financial services.

The system of international financial institutions consists of the world-class organizations (the International Monetary Fund, the World Bank, the International Bank for Reconstruction and Development, etc.) and regional financial institutions. The financial resources of these institutions make up a significant part of the international flows of official international aid.

The globalization of financial markets is characterized by the development of financial innovation, that is, the creation of new financial instruments (Eurodollar certificates of deposit, foreign exchange swaps, zero-coupon Eurobonds, consortium loans in the Eurocurrency, Euronotes, etc.) and technology. Technological innovations increase the speed of international financial transactions and their volumes. Telecommunications help banks to attract savings from the whole world and to send funds to the borrowers under the conditions of highest profits and lowest costs. Using the SWIFT allows investment banks to conclude transactions as in the bonds, as well as in the foreign currency. Commercial banks can send letters via electronic payment systems from their headquarters to foreign representative offices.

The growth of global capital flows increases the financial competition between countries that affects reduction of government interference in the operation of domestic financial markets and leads to the liberalization of international capital movements. Thus, the global financial system becomes almost independent from government control and regulation. Less than 30% of the securities market of the "seven" is controlled by the state or is the subject to the interest of the state. In global financial markets from one country to another moves more than 3 trillion dollars a month. Therefrom, 2 trillion dollars is the money not controlled by the state or other official institutions [7, p. 106]. The private capital has more resources than the central banks of major developed countries. Therefore, the situation on the global financial market is defined by the private capital, but not the national government.