Chapter 21 Summary

21.1 Global Financial System and Key Actors

• A financial system refers to a set of components and mechanisms, such as monetary policies, insurance, and banks, that allows economic transactions to occur.
• A global financial system can be defined as a system composed of financial institutions and regulators that act on an international level.
• Consumers, multinational corporations, individual and institutional investors, and financial intermediaries (such as banks) are the key economic actors within the global financial system.

21.2 Types of International Financial Institutions

• Financial institutions act as intermediaries between the suppliers and demanders of funds.
• There are several types of International Financial Institutions (IFIs):
  • A multilateral development bank (MDB) is an institution created by a group of countries that provides financing and professional advice for the purpose of development.
  • The best-known IFIs were established after World War II to assist in the reconstruction of Europe and provide mechanisms for international cooperation in managing the global financial system, known as Bretton Woods Institutions.
  • The regional development banks consist of several regional institutions that have functions similar to the World Bank group’s activities but with a particular focus on a specific region.
  • A bilateral development bank is a financial institution set up by one individual country to finance development projects in a developing country and its emerging market, hence the term bilateral, as opposed to multilateral.
  • Other regional financial institutions include financial institutions of neighbouring countries to pursue and finance activities in areas of mutual interest.

21.3 Role of Canadian Banks in International Markets

• Canadian banks play an important role in global business by providing loans to foreign governments and businesses.
• Canadian banks also offer trade-related services, such as global cash management, that help firms manage their cash flows, improve their payment efficiency, and reduce their exposure to operational risks.
• For Canadian banks, expanding internationally can be difficult as Banks in other nations are often subject to fewer regulations than Canadian banks, making it easier for them to undercut Canadian banks on the pricing of loans and services.

21.4 Export Credit Agencies as International Financial Institutions

• Export credit agencies (ECAs) use public funds or a combination of public and private funds to provide loans, guarantees, and insurance in support of overseas investment and exports by domestic corporations.
• With their main mission of facilitating export, ECAs offer a range of financial services including credit insurance, loan guarantees and direct lending services.
  • Between 2007 and 2014, more than $73 billion – or over $9 billion a year – in public finance was approved for coal. Nearly half (47 percent) of the total international finance for coal came through export credit agencies in countries that are members of the Organisation for Economic Co-operation and Development (OECD).
• While promoting exports and investment is not necessarily problematic, ECAs have minimal transparency, accountability, and safeguards related to human rights, corruption, or the environment.

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