andPolicyProblems(国际金融-香港大学,WONGKaFu

The Global Capital Market:Performance and Policy ProblemsWONG Ka Fu10th April 2000The growing international capital market1960s:Since 1980s:cross country lending and borrowing became routinebanks did business on domestic currency,with domestic customersForeign exchange marketCurrenciesInternational capital marketCurrencies+stocks,bonds,bank deposits in different countriesInternational capital marketThe market which residents of different country trades assets.Goods and servicesAssetsGoods and servicesAssetsHomeForeignGoods and servicesGoods and servicesHomeForeignUse home output(export)to exchange for foreign output(import)Goods and servicesAssetsHomeForeignUse todays home good to exchange for claims for foreign future goods.I.e.,intertemporal tradeAssetsAssetsHomeForeignUse homes claim for future goods to exchange of foreign claims of future goods Portfolio diversificationIncrease number of items on menuWhy diversify our portfolio?zMost people are risk averse.yGamblexhalf the time you win$1000 xhalf the time you lose$1000 xaverage payoff=1/2*(1000)+1/2*(-1000)=0yA risk averse agent weighs the possibility of losing 1000 more than the possibility of winning 1000 and hence will not gamble.Portfolio diversificationW:wealth of a typical investor,to be divided between home and foreign assets.:proportion of wealth allocated to home assets.Two states:state 1 with probability q,state 2 with probability(1-q)State 1(with probability q)a unit of wealth invested in the home asset pays out H1 units of output,and a unit of wealth invested in the foreign assets pays out F1 units of output.C1=H1+(1-)F1 WState 2(with probability 1-q)a unit of wealth invested in the home asset pays out H2 units of output,and a unit of wealth invested in the foreign assets pays out F2 units of output.C2=H2+(1-)F2 WExpected utility maximizationChoose to maximize q U(C1)+(1-q)U(C2)For risk averse agent,U is concaveDiminishing marginal U:the increase of U due to a 1000 units of consumption gain is less than the decrease of U due to a 1000 units of consumption loss.wealthU(C)UWW+KW-KConcave U(I.e.,Diminishing marginal U)the increase of U due to a 1000 units of consumption gain is less than the decrease of U due to a 1000 units of consumption loss.Optimal portfolioOptimal portfolio,is often between zero and one.That is,a risk-averse agent would like to diversify its asset holding into home as well as foreign assets.Investors from two different countries may cross-hold others assets.Indifference curve of the expected utilityq U(C1)+(1-q)U(C2)State 2 consumption,C2State 1 consumption,C1Budget lineMain actorszSame as foreign exchange marketycommercial banks,ylarge corporations(particularly those with multinational operations),ynonbank financial institutions(insurance companies,pension funds,and mutual funds)ycentral banks(foreign exchange intervention),andyother government agenciesOffshore bankingz Offshore banking:the business that foreign bank or domestic banks foreign offices conduct outside of our country.z Offshore bank:yAny bank outside the country in which the depositor lives.yA bank“licensed”to do business only outside the jurisdiction in which it is chartered&licensed.yThe deposits of a US residents to a offshore bank is not regulated by US laws but by the laws of the country where the bank is located.Offshore bankingz Business are conducted throughyagency office located abroad:arranges loans and transfers funds but does not accept depositsysubsidiary located abroad:subject to the same regulations as local banks but not to the regulations of the parent banks countryyforeign branch:subject to the regulations as local banks and to the regulations of the parent banks countryOffshore tradingzOffshore deposit:a bank deposit denominated in a currency other than that of the country in which the bank resideszEurocurrencies:offshore currency depositsyUS Dollar deposits located outside the United States(e.g.,Hong Kong)are called Eurodollars.zEurobanks:banks that accept deposits denominated in Eurocurrencies.The creation of eurocurrenciesA transaction between an American and an American companyz A US company General Motors sells a car to an American for$40,000.z The American pays with a check on an account at Citibank.z General Motors deposits the check at ChaseThe car buyer pays with a check on an account at Citibank.Balance Sheet of Citibank,New YorkChanges in assetsChanges in liabilitiesReserves at Fed-$40,000Customers deposits(car buyers account)-$40,000General Motors deposits at Chase any dollars it acquires.Balance Sheet of Chase Manhattan Bank,New YorkChanges in assetsChanges in liabilitiesReserves at Fed+$40,000Customers deposits(GMs account)+$40,000Creation of credit?zIn aggregate,the reserves at the Fed and the dollar deposits in the US banking system have not changed.zNo additional credit has been created.A transaction between an American and a foreign companyz A German company Daimler-Benz sells a car to an American for$40,000.z The American pays with a check on an account at Citibank.z If the German company expects to use US currency soon,it may do one of the followingybuy US Treasury billsybuy certificates of deposit issued by American banksybuy a Eurodollar deposit by depositing the check with a British bank,Barclays Bank,in London.Depositing the check with a British bank,Barclays Bank,in London.Balance Sheet of Barclays Bank,LondonChanges in assetsChanges in liabilitiesDeposits at Chase+$40,000Customers deposits(Daimler-Benz account)+$40,000Daimler-Benz buys a Eurodollar deposit by depositing the check with a British bank,Barclays Bank,in London.Barclays deposits at Chase any dollars it acquires.Depositing the check with a British bank,Barclays Bank,in London.Balance Sheet of Citibank,New YorkChanges in assetsChanges in liabilitiesReserves at Fed-$40,000Customers deposits(car buyers account)-$40,000The American car buyer pays with a check on an account at Citibank.Depositing the check with a British bank,Barclays Bank,in London.Balance Sheet of Chase Manhattan Bank,New YorkChanges in assetsChanges in liabilitiesReserves at Fed+$40,000Customers deposits(Barclays account)+$40,000Barclays deposits at Chase any dollars it acquires.Creation of EurodollarszIn aggregate,the reserves at the Fed and the dollar deposits in the US banking system have not changed.z$40,000 Eurodollar deposit has been created.zThe creation of Eurodollar deposit has no relationship with the US trade deficit or surplus with other countries.Secondary Eurodollar Deposit ExpansionBalance Sheet of Barclays Bank,LondonChanges in assetsChanges in liabilitiesDeposits at Chase+$5,000Customers deposits(Daimler-Benz account)+$40,000Loan to Philips+$35,000If Barclays decides to lend$35000(out of the$40,000)to Philips,a Dutch multinational corporation.Secondary Eurodollar Deposit ExpansionzWith the check of$35,000 dollars,Philips may temporarily deposit it into her bank.zJust like the case of Daimler-Benz,Eurodollar deposit will be created without affecting the US money supply.What caused the growth of Eurocurrency trading?zThe growth of world tradezGovernment financial regulations(including taxes)zPolitical considerationszThe lift of restrictions on capital flowThe growth of world tradezVolume of world trade grew in the late 1950s.zEuropeans found it cheaper and more convenient to deal with local banks familiar with their circumstances.zHence,Euro-dollar deposits.zOther Euro-currencies deposits also grew as other currencies became more convertible after the late 1950s.Regulationsz Eurodollar is a response to regulationsy1957:at the height of a balance of payments crisis,the British government prohibited British banks from lending pounds to finance non-British trade.yBritish banks began financing the same trade by attracting dollar deposits and lending dollars instead of pounds.yBritish government took a laissez-faire attitude toward foreign currency activities.yHence,London became the leading center of Eurocurrency trading.Chop off my legs and my arms will grow strong.Regulationsz 1960s:US balance of payment weakens.z US imposed new restrictions on capital outflows and US banking regulations.yTax returns from buying foreign assets(buying foreign assets implies an outflow of US dollar)yIn 1965,“voluntary”guidelines on the amounts US commercial banks could lend abroad,followed by mandatory controls three years later.z Since they cannot borrow dollar directly from the US banks,the would-be borrowers located outside US obtain the funds from Eurodollar loans.Regulationsz1960s:the Feds Regulation Q placed a ceiling on the interest rates US banks could pay on time deposits.zTo combat inflation,US monetary policy was tightened.Interest rate was above Regulation Q level.To increase the sources of funds,US banks borrowed from their European branches-Eurodollar loans.Regulatory asymmetriesz Domestic currency deposits are often heavily regulated as a control over domestic money supply.z Tax treatment:yDomestic currency deposits held by domestic residents are often taxed.yDomestic currency deposits held by foreigners are often given special treatment,e.g.,no interest tax.z Reserve requirement:yOnshore deposits are subject to reserve requirementyOffshore deposits are often not.Reserve requirementz Reserve requirement imposes a cost of banking business,similar to a tax.z Suppose US reserve requirement is 10%.y90%of 100 deposits may be lent to the public.If interest rate of loan is 10%.The bank may earn$9 interest out of the$100 deposit.z Suppose a Eurobank is not subject to reserve requirement.yThe bank may earn$10 interest out of$100 deposit.yCan pay 1%more interest rate than an American bank on its dollar deposit.Interest rates are often higher for offshore deposits.Regulatory asymmetrieszGrowth of international banking business may be encouraged by lowering restrictions and taxes on foreign bank operations within a countrys border.zLittle regulations:London,Hong Kong,Luxembourg,Bahrain.zThe uniform regulations of US and Germany on all domestic deposits(regardless of their currency denomination)have discouraged its Eurocurrency business.Political considerationsz Cold War between the US and the USSRyThe Soviets feared that Soviet dollars might got confiscated if placed in a US bank.Therefore,placed in European banks-Eurobanks.z Oil CrisisyArab members of OPEC accumulated vast wealth as a result of the oil shocks of 1973-1974 and 1979-1980.yReluctant to place most of their money in American banks for fear of possible confiscation by the US.Therefore,placed in Eurobanks.Eurocurrencies and world inflationzDeposit is in a broader definition of money.zInflation is everywhere a monetary phenomenon.zBecause Eurocurrency business is often not subject to much regulation,the supply of eurocurrency deposits and loans is difficult to control.Thus,monetary base may have a weaker relationship with inflation because the proliferation of eurocurrency business.That is,money multiplier is less stable.Regulating international bankingThe problem of bank failurezA banks financial health depends on the confidence of depositors in the value of assets.zOne banks problems may easily spread to sounder banks if they are suspected of having lent to the bank that is in trouble.zEven without banking regulations,well-managed banks take precautions against failure,but some banks might not.Prevention of bank failurezDeposit insurance:against losses up to$100,000zReserve requirements:a portion of a banks asset has to be in liquid form easily mobilized to meet sudden deposit outflows.zCapital requirements and asset restrictions:zBank examination:The Fed,the FDIC and the Office of the Comptroller of the CurrencyzLender of last-resort facilities.RegulationszRegulations of Eurocurrency business requires international cooperation.zOtherwise,we may be in a prisoners dilemma situation.zWithout cooperation,everyone may end up with loose regulations in order to compete for business internationally.International cooperationzBasle Committee:A response to the 1974 banking crisesyCentral bank heads from 11 industrialized countries met at Bank for International Settlements at Basle,Switzerland.yAimed to achieve“a better co-ordination of the surveillance exercised by national authorities over the international banking system.”Basle Concordatz An agreement reached by the Basle Committee in 1975(later revised in 1983).ySharing of information about banks by parent and host regulatorsyPermits the inspections by or on behalf of parent authorities on the territory of the host authority.yRegulatory agencies should monitor the assets of banks foreign subsidiaries as well as their branches.yDevelop better data on the balance sheets of multinational banks.Capital adequacyzA set of common standards for assessing bank capital adequacy was agreed by the Basle Committee in January 1988.zInternational banks should have capital equal to at least 8 percent of their risk-weighted assets plus off-balance-sheet commitments.Trade cannot explain for growth of international banking transactionszBryant(1987)estimated that between 1964-1985,yinternational trade grew at a compound rate of 12.4%per yearyinternational banking transactions grew at a compound rate of 26%per year.The annual growth rate of international banking transactions was double that of international trade.The extent of international portfolio diversification1970:yForeign assets held by US residents were equal in value to 6.2%of the US capital stockyForeign claims on the US amounted to 4%of its capital stock.1993:yForeign assets held by US residents were equal in value to 13.2%of the US capital stock yForeign claims on the US amounted to 15.7%of its capital stockThe extent of international portfolio diversificationzWith full international portfolio diversification,we would expect them to reflect the size of the US economy relative to that of the rest of the world.y70%of the US capital stock should be owned by foreignersyUS residents claim on foreigners should amount to 70%of the US capital stockWhy not diversify in practice?zSolnik(1974)suggested that European stocks are more risky than US stocks.The Extent of Intertemporal Tradez A smoothly working international capital market allows countries domestic investment rates to diverge widely from their saving rates.ysaving seeks out its most productive uses worldwide,regardless of their location.ydomestic investment is not limited by national saving because a global pool of funds is available to finance it.z However,Feldstein and Horioka(1980)found that cross-border capital mobility is low,suggesting not a smooth international capital market.(Figure 21-3)Figure 21-3 Saving and Investment Rates for 25 Countries,1990-1997 AveragesFeldstein and Horioka(1980)z Other explanation:ya countrys saving and investment may usually move together simply because the factors that generate a high saving rate(such as rapid economic growth)also generate a high investment rate.In these cases,the countrys gain from intertemporal trade may simply be small.yGovernment might have tried to manage macroeconomic policy to avoid large current account imbalances.The empirical regularity seems to have weakened recently in face of the historically high external imbalances of the United States,Germany,and Japan.Onshore-offshore interest differentialszIf world capital market is doing its job of communicating information about global investment opportunities,these interest rate should move closely together and not differ too greatly.zEdward(1982)confirmed this proposition.zFigure 21-4.Figure 21-4 Comparing Eurodollar and Onshore Interest RatesThe efficiency of foreign exchange marketzIf uncovered interest parity holds,Rt-Rt*=(Et+1e-Et)/EtzTo check whether the foreign exchange market is doing a good job of using current information to forecast exchange rate,we may compare the predicted changes in exchange rate,Rt-Rt*,and the actual ones,(Et+1-Et)/Et.zFigure 21-5.The efficiency of foreign exchange marketzAlternative test:ut+1=(Et+1-Et)/Et-(Rt-Rt*)zIf the foreign exchange market is doing a good job of using current information to forecast exchange rate,time t information should not help predict ut+1.zHowever,some studies suggest that time t information helps predict ut+1.Role of risk premiumWhen risk-neutrality does not hold,Rt-Rt*=(Et+1e-Et)/Et+tzA nonzero risk premium,t,may explain why the market seems inefficient.zStudies that include risk premium are not conclusive.谢谢观看/欢迎下载BY FAITH I MEAN A VISION OF GOOD ONE CHERISHES AND THE ENTHUSIASM THAT PUSHES ONE TO SEEK ITS FULFILLMENT REGARDLESS OF OBSTACLES.BY FAITH I BY FAITH