Market Structure and Financial Stability
Market structure and financial sustainability are concepts under international banking. International banking is a complex term that refers to the inclusivity of financial flows within and amongst countries. Thus, international banking is the totality of operations and services that enables the continuity of international business (Čihák 2006, p. 14). Cash flows in international banking relate to the loans and borrowings that are made by governments and other private sector institutions to support an infrastructural undertaking or alleviate an economic situation. The market structure is the totality of firms within the same industry that produce identical product. The market structure of international marketing constitutes two main institutions, namely International Monetary Fund and the World Bank. With regard to the World Bank, it is the most active financial institution that trades in international banking. The World Bank offers financial support to many countries on major infrastructural undertakings that could stimulate economic growth within the country. The World Bank is also known to conduct market structure and financial analysis in various countries. The purpose of the surveys is to establish the indices of financial market structure and financial stability of the individual counties under the sample (Čihák 2006, p. 14). This paper discusses a cross-country analysis on financial market structure and financial stability based on a data set from the World Bank.
The data discussed by the World Bank marks the financial efficacy of individual banks and the related financial institutions within the countries. The methodology that is employed to derive the data is presented in the excel sheets. The calculation of the indices commences with the establishment of the balance between buffers and risks that exist within the financial market of each country that is under study. The buffers are the returns and the level of capitalisation that exists in the economy (International Monetary Fund 2006, p. 19). Risks as the extent to which the returns are made in the economy become volatile. The sample size of the data that is presented in the excel sheets are two hundred and three countries. In addition to measuring the stability of the financial system of the countries, the data aims to determine the financial depth, access and efficiency of the financial institutions in the countries that fall within the sample.
The measures of the data in the excel sheets are presented in percentage. Therefore, the data is the mark of score of the specific issue under study within the range of 1 to 100 (International Monetary Fund 2006, p. 19). The provision of the percentages enables one to measure the scores of difference countries to determine the ones that are more financially stable. The presentation of the percentages across years enables one to compute the line graphs. In fact, the line graphs enable one to understand the growth rates and the changes in the strength of financial stability of the respective countries that are under investigation. It is worth noting that the study applies quantitative data. The data is close to accurate in the given years and within the given period of analysis per country.
Analysis of the Data
The World Bank data shows various aspects of the country. Apparently, there are general categories that the World Bank uses in the analysis and the data collection system. The data includes the name of the country, the country code, the year of the data collection, the global region where the country exists and the income group of the country that is under analysis. Among other indices that are presented in the report, there are other financial institutions assets to GDP (%), private credit by deposit money banks to GDP (%), bank deposits to GDP, and financial systems deposits to GDP, to mention but a few (International Monetary Fund 2008, p. 19). The data also incorporates the high income, low income and middle income countries where there is the World Bank. The data covers the time from the 1970s to the present date. The time period is a significant factor with regard to global economic transitions that have an impact on the global economic environment. The 1970s marks the end of the World Wars and the beginning of global economic growth.
There are three main Ms that tag along with the concept of liquid liabilities that is M0, M1 and M2. The Mo represents the deposits and the total value of currencies available in the central bank of the particular country. Therefore, the value of the liquid liabilities is the summation of M0, M1 and M2 referenced as a percentage of the total GDP of a particular country. The value of the liquid liabilities to GDP of Algeria in 2011, 2012, 2013, 2014 are 43.9, 43.0, 43.5 and 49.1 in percentage terms respectively (International Monetary Fund 2009, p. 59). The values of Argentina in the same period are 23.0, 25.9, 26.7 and 26.9 respectively (International Monetary Fund 2009, p.59). Data that is taken from Burundi over the same period are 19.8, 19.1, 18.1 and 18.2 respectively (International Monetary Fund 2009, p. 59).
Source: World Bank data
From the data that is presented in the table above, there is a visible sharp increase in the value of the net data assets of different counties. Hereby, the increase is evident in the countries such as Belgium, Bangladesh, Afghanistan, Albania and Algeria. However, there are counties that depict a decrease in the value of the net data assets (International Monetary Fund 2006, p. 19). Among such counties, there are Belarus, Australia and Armenia. Therefore, the monetary policies of the counties are the causative effects of the decline of the values of the net data assets. From the table above, it is evident that most countries experience an increase in the value of the net data assets (International Monetary Fund 2009, p. 59). The trend affirms that there is an increase in the volume of international banking, and many counties are increasing the volumes of their foreign wealth to boost the values of their gross domestic product and gross national product.
Domestic Credit Provided by Financial Sector
The data on the domestic credit provided by the financial sector sheds more light on the financial stability of the counties that are under analysis. The value of the data on the domestic credit that is provided by the financial sector includes the value of the total debts allotted to various sectors of economy except the national government of the country (International Monetary Fund 2009, p. 59). It is possible to make an assumption that the money that is channelled to the sectors of the economy is used for economic development of a country. It is worth saying that the values of the data on the domestic credit are in proportion to the gross domestic product of a given country. The table below shows the values of the gross domestic products of various countries that the World Bank data encompasses.
Source: World Bank data
The data that is presented in the table above depicts an increase in the values of the domestic credit that is provided by the financial sector in most countries. Moreover, there are line graphs in addition to the data of each country on the extreme right that show the growth and the decline in the values of the credit that is provided by the financial sector (International Monetary Fund 2009, p. 59). Furthermore, the values that are presented in the table above prove that there is an increasing value of the financial stability in most countries in the world.
The domestic credit provided by financial sector offers an insight into the financial stability of the countries that the World Bank studies. Talking about the domestic credit, it is the totality of the loans and financial products that financial institutions in a country offer to the private sector (Krishnamurti & Lee 2014, p. 75). The private sector makes a major contribution to the economic growth of a country, especially the developing countries. The increase in the credit within the private sectors means that there is a stipulated increase in economic processes and activities within the country. As such, there is growth that is predicted in the sectors of the economy of the country. The positive economic growth enables the country to minimise the volume of imports that it has to make in addition to increasing the surplus goods that the country can export to the other regions (Krishnamurti & Lee 2014, p. 75). The table below shows the domestic credit provided by the financial sector on some of the countries that are sampled by the World Bank.
Thus, strong economies such as Algeria, Armenia and Australia are showing signs of the increase in the domestic credit that is provided by the financial institutions (Schinasi 2005). In many economic conditions, the private sector prefers to take more loans when the values of the interest rates are low. In fact, low interest rates provide the private sector with an incentive to utilise the loans to establish their business. The private sector increase the uptake of loans from financial institutions when the value of profits that they aim to gain exceeds the interest rates that they ought to pay related to the loans that they will take (Sophastienphong & Kulathunga 2010, p. 119). Therefore, the increase in the domestic credit that is provided by the financial institutions is an indicator of financial growth in the economy of the country. Moreover, the increase in the values of the domestic credit that is provided by financial institutions is an indication that the currency is either stabilising or has just stabilised, affirming financial stability in the country.
There is a predictable economic growth that is evident from the data on the financial state of the countries that are presented in the World Bank. Therefore, the countries depict the improved state of financial stability in the country. The data presented and discussed above offers an insight into the data categories that are under discussion. Thus, the credit by deposit money banks to the GDP is the indication of the financial assistance that financial institutions in a country offer to the local business in comparison to the GDP of the country. The increase in the borrowing capacity of a country affirms that the economy has the ability to protect the financial shocks from recessions, thereby affirming the stability of the economy of the country. The financial systems deposit to GDP is also a critical factor to consider in determining the level of stability of currency of a particular country. When the rates of the deposits in the financial institutions increase, the probable scenario is that the discretionary income and total savings of the household in a country are on increase. The information further suggests that the countries are experiencing stability of their incomes and inflation rates are low to handle increased savings. Therefore, the sampled countries are characterised by strong financial market structures and growing financial stability.