The last two decades have witnessed the emergence of a vast financial market straddling national boundaries enabling massive cross-border capital flows from those who have surplus funds and are in search or high returns to those seeking low-cost funding. The phenomenon of borrowers, including governments, in one country accessing the financial markets of another is not new; what is new is the degree of mobility of capital, the global dispersal of the finance industry, and the enormous diversity of markets and instruments which a firm seeking funding can tap.
The decade of eighties ushered in a new phase in the evolution of international financial markets and transactions. Major DE CD countries had began deregulating and liberalizing their financial markets towards the end of seventies. While the process was far from smooth, the overall trend was in the direction of relaxation of controls which till then had compartmentalized the global financial markets. Exchange and capital controls were gradually removed, non-residents were allowed freer access to national capital markets and foreign banks and financial institutions were permitted to establish their presence in the various national markets. The process of liberalizations and integration continued into the 1990s, with many of the developing countries carrying out substantive reforms in their economies and opening up their financial markets to nonresident investors. A series of crises-the Mexican crisis of 1995, the East Asian collapse in 1997 and the Russian meltdown the following year-threatened to stop the process in its tracks but by the end of 1999 some of the damage has been repaired and the trend towards greater-integration of financial markets appears to be continuing.
While opening up of the domestic markets began only around the end of seventies, a truly international financial market had already been born in mid-fifties and gradually grown in size and scope during sixties and seventies. This is the well known Eurocurrencies Market wherein a borrower (investor) from country A could raise (place) funds in currency of country B from (with) financial institutions located in country C. For instance, a Mexican firm could get a US dollar loan from a bank located in London. An Arab oil sheik could deposit his oil dollars with a bank in Paris. This market had performed a useful function during the years following the oil crisis of 1973, viz. recycling the “petrodollars”-accepting dollar deposits from oil exporters and channeling the funds to borrowers in other countries. During the eighties and the first half of nineties, this market grew further in size, geographical scope, and diversity of funding instruments. It is no more a “Euro” market but a part of the general category called “offshore markets”.
(*This term should also include the so called “international banking facilities” wherein a bank, for instance in US is permitted to have a separate division located on US territory for carrying out business with non-resident entities and which is not subject to the usual domestic banking regulation.)
Alongside liberalization, other qualitative changes have been taking place in the global financial markets , Removal of restrictions led to geographical integration of the major financial markets in the OECD countries. Gradually this trend is spreading to developing countries many of whom have opened up their l11urkcts-at least partially-to non-resident investors, borrowers and financial institutions. Another noticeable trend is functional integration. The traditional distinctions between different kinds of financial institutions commercial banks, investment banks, finance companies and so on-are giving way to diversified entities that offer the full range of financial services. The early part of eighties saw the process of disintermediation get under way. Highly rated issuers began approaching the investors directly rather than going through the bank loan route. On the other side, the developing country debt crisis, adoption of capital adequacy norms proposed by the Basle Committee and intense competition, forced commercial banks to realize that their traditional business of accepting deposits and making loans was not enough to guarantee their long-term survival and growth. They began looking for new products and markets. Concurrently, the international financial environment was becoming more and more volatile-the amplitude of fluctuations in interest rates and exchange rates was on the rise. These forces gave rise to innovative forms of funding instruments and tremendous advances in the art and science of risk management. The decade saw increasing activity in and sophistication of financial derivatives markets which had begun emerging in the seventies.
Taken together, these developments have given rise to a globally integrated financial marketplace in which entities in need of short or long-term funding have a much wider choice than before in terms of market segment, maturity, currency of denomination, interest rate basis, and so forth. The same flexibility is available to investors to structure their portfolios in line with their risk-return tradeoffs and expectations regarding interest rates, exchange rates, stock markets and commodity prices. Financial services firms can. now design financial
products to unique specifications to suit the needs of individual customers.