What is International Financial Architecture? Compare and contrast the Comparative Advantage Theory and Comparative Cost Theory.
Though the term ‘‘international financial architecture’’ is relatively new, institutions such as the Basel Committee have been working towards a common system of regulating global banks for over two decades. National bodies concerned with containing national crises, such as Sweden’s central bank and the Bank of England, have been around for centuries. However, the agenda for international financial architecture is much broader, bringing together the various organisations dealing with international finance in an attempt to regulate banks, other global financial institutions and the financial system as a whole. The objectives are to design a global financial structure, and a means of regulating and coordinating institutions within that structure, to minimise the probability of a major financial crisis occurring. Also, to have in place methods for dealing with a crisis, should it occur.
organisations focus on the international coordination of regulations in a particular area, including banking, securities, insurance and accounting. The exception is the Financial Stability Forum, which is trying to ensure the effective implementation of all these rules. For example, at its September 2003 meeting, the FSF identified a number of areas which, in their view, required close monitoring and/or action. The issue of credit risk transfer (CRT) from the banking sector to non-banking financial areas, notably the insurance sector, which is arising from the use of credit derivatives. It reported that a work plan had been set up to investigate the issue and address concerns about financial stability posed by CRT. The need for greater transparency in the reinsurance industry was also discussed, as was the role of offshore financial centres in an increasingly integrated global financial market. It looked forward to stronger arrangements by these centres in the areas of supervision, information exchange and regulation. Other areas considered were corporate governance and auditing standards.
There are other organisations which also focus on the broader picture, including the IMF and the World Bank. The International Monetary Fund (IMF) was created by the 1944 Bretton Woods Agreement. With a membership of 182 countries, its primary concern is with the balance of payments, exchange rate and macro stability, with a responsibility for
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