As we compare regions of the world in terms of their relative economic and financial power, we can definitely see some fundamental differences in the financial systems between countries that are more developed and those that are less developed. Digging deeper, we observe that countries with more advanced and efficient financial markets have three key features that make them successful. First, a successful system must be highly diversified in its ability to cater to the needs of increasingly complex and sophisticated economies. Secondly, the system must be able to provide financial services efficiently. Finally, the system must be robust enough to withstand a variety of shocks in a rapidly changing globalized economy.
Diversification allows financial markets to allocate assets and bear risks more efficiently. A broadly based financial system is likely to be more stable in times of economic downtown. We can see this during the 1997 financial crisis in Asia, where many of the countries that were not widely spread, collapsed because of their inability to manage risk. A highly diversified system involves having a wide portfolio of high-quality financial assets that cater to needs of different agents, such as equity securities, corporate-debt securities, government debt securities and bank deposits. We can see that lesser developed countries in Asia have a significantly higher proportion of bank deposits, where as more developed systems like the US and Europe are relatively spread apart evenly across the four asset groups.
... the efficiency of monetary management and financial system stability. A developed bond market also plays an important ... of government securities market also facilitates implementing indirect instruments of monetary policy. Most countries are moving ... on strengthening financial system stability. Well-functioning government and corporate bond markets expand the array of financial assets that are ...
A successful financial system must also be innately efficient to provide services that are of good quality, good speeds, and are competitive globally. This in turn will ensure accurate and timely information flow, responsible corporate governance and appropriate risk management. In order to achieve all of this, the financial system must be supported by an effective legal and regulatory framework as well as good accounting and auditing standards that are well-implemented and enforced. In addition, the financial system must have an efficient banking sector that caters to a wider set of consumer needs. In many lower developed countries, a large amount of households and businesses do not yet have bank accounts, and this represents a lack of trust and knowledge of the financial services industry by the general public. In order to improve this as well as improve the efficiencies of other financial assets, the financial system must reside in a place where there is a strong economy, there must also be transparent and reliable information flow, and the overall financial market must comply with current global standards.
Finally the ideal financial system must be able to withstand financial, economic and political shockwaves. This can be achieved through developing a large pool of diverse investors with a wide range of investments and trading behaviors; this will spread the risks of financial downturn evenly across all the major sectors and create greater trading, liquidity and more efficient markets. The system must also be based in a relatively large commercial market; this will ensure domestic and regional opportunities are consistently available and that the financial system is not too heavily based on one sector of the economy. The financial system should also have access to highly educated and talented labor pool that consists of especially domestic employees who are likely to stay in the region for a long time. Retention of long-term talent is important to ensure that the best people who understand the regions operate in the region.
The financial distress of the last two decades has revived interest on the question of the stability of the financial system. On the one hand, the "pessimist" view, associated primarily with Minsky argues that not only that the financial system is prone to such crises ("financial fragility" in Minsky's terms) but also that such crises are inherent on the capitalist system ("systemic fragility"). ...
We can see that are there are a variety of factors that are required to have a good financial system. At the end of the day, it’s about maximizing efficiency through building better infrastructures and deepening the markets, and it’s about minimizing the risk through risk sharing activities such as diversification and strengthening the investor base and talent pools.
What should be done in order to build up an effective financial system in Asia?
Building an effective financial system in Asia has been a key topic for policy makers and investors since the 1997 financial crisis. The developmental areas can be bucketed into three key strategies – 1. Strengthen corporate governance and information disclosure. 2. Develop the four major financial assets. 3. Broaden the quality and quantity of the investor base.
One key feature of an ideal financial system is good corporate governance and information disclosure. Asia still lacks behind most western countries. This area is extremely important to enable investors to price securities accurately. Although many countries in the region have made considerable progress in strengthening the legal and regulatory frameworks, a great focus on effectively implementing and enforcing these frameworks is needed. A country’s legal framework shapes the extent of disclosure that is required of firms, as well as the rights of shareholders and creditors, and good accounting and auditing standards allow for the quality of information being disclosed. Through developing these two areas, there will be a reliable concentration of information flowing in the financial industry which will create trust, and better investments made by investors. Asian countries should thus make an effort to comply to global standards through implementing policies that appeal both to small and institutional investors, creating and implementing a legal framework that defines clearly the stakeholders and their responsibilities and rights, raise the awareness of good corporate governance principles among companies, executive, and shareholders, and finally implementing strict laws for the transparent flow of financial information.
Abstract This assignment will address the necessary steps involved with evaluating the use of financial accounting information in making informed and ethical business decisions using comparative analysis and financial ratios. Managerial Analysis – Assignment 2 In order for any entity (the company, its managers, investors, debt holders, etc.) to understand the valuation of a company, one must ...
Secondly, Asia needs to develop both the quantity and quality of the four major financial assets, through fostering a more efficient banking sector and deepening the securities markets. Currently, banking still represents a huge chunk of the Asian financial markets. Although there have been big improvements since the financial crisis, further development is required. Banks must first decrease the percentage of NPLs in the region, as well as strengthen their trust to consumers and corporations. Banks should make more information available, broaden heir services, facilitate information sharing among creditors, and strengthen their legal and institutional policies. Policy makers must also ensure that banks operate under a competitive environment, to position the banks in the global arena. A competitive environment will allow for rapid innovations in information technology, marketing channels and financial research. A highly competitive will also fend off foreign competition, as well as decrease the current “overbanking” situation through mergers and acquisitions. In addition to developing the banking sector, Asia should also focus on deepening the securities markets. This is still a much more underdeveloped element of the Asian market when compared to more successful Western systems. To accomplish this, Asian firms should focus on improving the quality of information in order to price securities accurately. This can be achieved through benchmarking using the government interest rate, creating reliable rating agencies to help determine the credit risks and improving trade reporting to encourage competitive pricing which would help make the markets more liquid. Asian firms should also focus on reducing transaction costs to encourage investors to trade. Finally, Asia needs to improve access to finance for smaller corporations, which would help improve the economy, and at the same time improve the health of the overall financial sector.
Finally, a broader base of investors with different preferences and investment strategies is also a key component needed to further develop the financial markets in Asia. In terms of larger investors such as pension funds and institutional traders, Asia needs to ensure the continued growth of the size of assets owned by these organizations. Possible avenues for growth to attract improve investors could involve tax breaks, better deals and agreements for large investments, a governance framework that encourages foreign direct investment, and better overall services to cater to their investment needs. To improve the investment situation for smaller mom/pop investors, Asia should continue to invest in and develop mutual funds. Mutual funds provide a safer alternative for small players to invest. It also helps to establish and maintain investor confidence, which strengthens the overall morale about the financial system.
In the summer of 1997, an economic and currency crisis rocked the Asian markets. One by one, Southeast Asian countries such as Thailand, Indonesia, Korea and Japan saw their economies crash in the wake of heavy foreign investment. An economic boom had made the region an attractive investment opportunity for much of the 1990 s. By 1997, however, domestic production and development had stalled, and ...
In addition, a further policy that governments could use to improve the overall health of the system is to create sub-regional alliances among countries to develop the financial sector together rather than individually. This will be tough to accomplish because each nation has its own set of rules and policies, but if done successfully, it will create an even more powerful system with a wider investor base, and risk-sharing ability to fend off competitors and unforeseen political and economic downturns.
East Asian finance: the Road to Robust Markets. The World Bank. 2006.