International Financial SystemThe international financial system is a generic name that refers to a collective mixture of institutions, issues and exchange-rate systems that handle the money (financial) component of an integrated world. The basis of the IFS institutional framework is found in the business, investors, financial markets and banks in local economies. This is supported at the international level by governments, central banks, the World Bank and the International Monetary Funds (IMF). Issues that the IFS has to handle include capital flows in economies, the role of international financial institutions and the conditionality they issue to different countries, and the issue s related to exchange rate regimes.
Regarding exchange rate systems, IFS has to handle matters of Fixed and floating systems which are maintained by different players in the global financial architecture. Among the areas that the IFS is best evident is in the foreign exchange (For-ex) interventions whereby, central banks engages in international financial transactions for purposes of influencing the foreign exchange rates. The foreign exchange interventions can be carried out in two approaches; i.e. unsterilized FEI - this occurs when the central bank’s intervention allows the sale and purchase of the domestic currency, hence affecting the monetary base in an economy; and sterilised FEI - the central bank intervenes by offsetting operations in an open market but unlike the unsterilized FEI, this does not affect the monetary base.
To facilitate an economy’s integration in the international financial system, countries maintain exchange rate regimes, which refers to the systems that are either fixed to a specific currency (e. g. the dollar) or are flexible or floating mainly based on the inflation index in the specific economy.
Usually, exchange rate regimes are determined by prevailing economic policies and circumstances. For-ex crises on the other hand occur when the amount of foreign exchange reserves set aside by the central bank for purposes of defending a weak currency are low. When such a thing happens, the local currency suffers devaluation and this eventually leads to inflation locally and a decreased demand for the local currency as people shift their preference to a more stable currency, usually, the dollar. Faced with domestic challenges brought about by the International financial markets, some governments in an attempt to protect local economies use capital controls.
This are defines as the restriction that governments impose of foreign investment. Through capital controls, government regulate the inflow and outflow of the capital account. Notably, the international financial systems are courtesy of factors such as globalisation and increased international trade. However, governments and independent institutions realised the need for global financial institutions to act as moderators of the different interests that diverse countries would bring into the global financial system. By definition, the global financial institutions are financial institutions of an international nature whose establishment (or charter) was done by more than one country and are hence subject to international law.
Theoretically, such institutions are diverse in their composition and are hence objective in their role as independent adjudicators, interveners and advisors to different players in the global financial system. The two institutions that fall in the global financial institutions category are the IMF (helps different countries to maintain For-ex rates by giving loans to those that have problems with their balance of payments, and also acts as ‘lender of last resort’ during financial crises); and the World Bank (funds economic development projects in developing countries through issuing countries with long-term loans).