Why it is importance for us to know how global financial system works?

Definition:
The global financial system is the worldwide framework of legal agreements,
institutions, and both formal and informal economic actors that together facilitate
international flows of financial capital for purposes of investment and trade
financing
The global financial system is the worldwide framework of legal agreements,
institutions, and economic factors that together facilitate international flows of
financial capital.
How global financial system works?
The global financial system has evolved substantially since its emergence in the
late 19th century during the first modern wave of economic globalization, marked
by the establishment of central banks, multilateral treaties, and intergovernmental
organizations aimed at improving the transparency, regulation, and effectiveness of
international markets.
Unprecedented growth in foreign investment from the 1880s to the 1900s served as
the core driver of the global financial system. The first modern wave of economic
globalization began during the period of 1870-1914, marked by phenomena such
as expansion of transportation, record levels of migration, enhanced
communications, trade expansion, and growth in capital transfers.
Since the Great Depression, regulators and their economic advisers of the global
financial system have been aware that economic and financial crises can spread
rapidly from country to country with serious economic consequences. For many
decades, that awareness led governments to impose strict controls over the
activities and conduct of banks and other credit agencies. After WWII, the
international inter-connectedness of the financial markets led to creation of an
international financial system with the characteristic known in control theory as
complexity.

In the 1980s, many governments pursued a policy of deregulation in the belief that
the resulting efficiency gains would outweigh any systemic risks. The international
systemic crises that followed included the equity crash of October 1987, the
Japanese asset price collapse of the 1990s, the Asian financial crisis of 1997 the
Russian government default of 1998, and the Great Recession of 2007-2009.
Measures designed to reduce the vulnerability of the global financial system have
been put forward by several international institutions. The Bank for International
Settlements made two successive recommendations and a coordinating group of
regulating authorities, the Financial Stability Forum, set-up in 1999 to identify and
address the weaknesses in the global financial system, has put forward some
proposals in an interim report.
Global Financial System Actors and Institutions
The global financial system institutions are investment banks, insurance
companies, commercial banks and non-bank financial institutions active in the
stock, bond, foreign exchange, derivatives and commodities markets, investing
private equity including mortgages in hedge funds and pension funds, mutual
funds, sovereign wealth funds, etc. In addition to the individual commercial
organizations that operate at an international level there are a number of public and
semi-public international institutions.
Systemically important public financial institutions operating internationally
include:
The International Monetary Fund keeps tabs of international balance of payments
accounts of member states. The IMF acts as a lender of last resort for members in
financial distress, e.g., currency crisis, problems meeting balance of payment when
in deficit and debt default. Membership is based on quotas, or the amount of
money a country provides to the fund relative to the size of its role in the
international trading system.
The World Bank aims to provide funding, take up credit risk or offer favorable
terms to development projects mostly in developing countries that couldnt be
obtained by the private sector. The other multilateral development banks and other
international financial institutions also play specific regional or functional roles.

The World Trade Organization settles trade disputes and negotiates international
trade agreements in its rounds of talks (currently the Doha Round)..The Bank for
International Settlements (BIS) in Basel Switzerland, which is both a bank as well
as an intergovernmental organization for central banks worldwide.It has numerous
subsidiary bodies, most importantly the Basel Committee on Banking Supervision,
the Financial Stability Board, and the BIS Joint forum on financial conglomerates.
It publishes global bond market capitalization data.
The World Economic Forum, a Swiss non-profit foundation based in Geneva
meeting annually in Davos.
Systemically important private financial institutions operating internationally
include:
The Institute of International Finance (IIF), a trade organization of the worlds
largest commercial banks and investment banks.
The World Federation of Exchanges (WFE) which publishes global stock
capitalization information in annual reports.
The Global Financial Markets Association (GFMA), which consists of European,
Asian and North American financial market associations: The Association for
Financial Markets in Europe (AFME) in London and Brussels, the Asia Securities
Industry & Financial Markets Association (ASIFMA) in Hong Kong, and the
Securities Industry and Financial Markets Association (SIFMA) in New York and
Washington DC.
International lobbying firms play a role in the global financial system, as they
increasingly develop cross-border lobbying arms to influence international
negotiations. For example, Podesta Group, a Washington lobbying firm, founded
Global Solutions to influence multilateral free trade agreements, such as the
Trans-Pacific Strategic Economic Partnership Agreement (TPP) and the
Transatlantic Trade and Investment Partnership (TTIP), and other issues at the
intersection of trade, economics, politics and diplomacy.
Governments act as regulators in various capacities within the global financial
system, traditionally primarily through their finance ministries and their financial

regulatory agencies. They pass the laws to regulate financial markets, set the tax
burden for private sector, e.g., banks, funds and exchanges. At the same time
governments also participate in the global financial system through discretionary
spending and borrowing. They are closely tied to, though in most countries
independent of central banks that issue government debt, set interest rates and
deposit requirements, and intervene in the foreign exchange market.
A number of international bodies exist to coordinate global financial regulation,
such as the Basel Committee on Banking Supervision (BCBS), the International
Organization of Securities Commissions (IOSCO) and the International
Association of Insurance Supervisors (IAIS) as well as organizations that focus on
encouraging specific global standardization such Financial Action Task Force on
Money Laundering (FAFT). However these organizations cannot themselves make
regulation and it is up each countrys government to implement recommendations.
Some countries deliberately create a light regulator environment within their
jurisdiction as a way to attract financial business into offshore financial centers and
tax havens.
Importance of understanding this system