Financial globalization and financial stability is just one aspect of the entire process of globalization. The process of financial globalization has brought a massive change in the economic landscape of all countries across the globe.
Financial globalization brought a remarkable change in the intensive cross-border financial and cost flows, in international risk-sharing management with the help of an extensive range of financial equipments, in the rising stakes of cross-border properties, the flaring international profile in the financial stability of economic markets, and lastly in the market operators and institutions. The developments witnessed by the global financial system are recognized as a reincarnation of the gold standard and is rightly called as the 'second wave' of financial globalization.
One of the most important driving forces that have contributed largely in the upsurge of financial globalization is the technological progress in the elaboration and transmittance of information, the rapid growth of innovations in financial system, and the reduced price rate of communication system. These development schemes gave rise to liberalization in financial system both inside and across the national boundary. The conglomeration of the technological advancement and the upsurge of financial liberalization played the key role in establishing active financial globalization in the modern-day world economy.
Financial globalization and financial stability gave rise to a market-oriented system in place of politically dominated system. A decentralized market-oriented system determined the exchange rates, conditions of flexible accessibility in economy, and adjustment to any sort of financial crisis. In the times of financial globalization, there has been an absolute transmission from bank-centered financial system to a market-led financial system in various countries and regions. This on the other hand, led to a downfall in the banking sector which forced them to look for other opportunities both in domestic as well as global markets.
Financial globalization and financial stability have brought in indisputable profits in the economic sector. The sources of global financing got cheaper, easily accessible and with full of options. The risk-taking attempts were encouraged and also rewarded during financial globalization. Despite such outstanding profits, global financing had effects on the growth of the financial system as well. The financial globalization gave rise to financial stability in different countries and regions and was also accepted by all, somehow could not outwit the trial-an-error theory as yet. Financial globalization also confirmed that the developing countries would enjoy the benefits from the security markets of the developed countries.
Financial globalization had caused financial instability in the post-war era which includes the crisis in banking sector during 1980s in the Nordic countries and Japan, the 1994 Mexican crisis, crisis in banking sector during the Asian crisis that took place during 1997-98, and lastly the Russian nonpayment of 1998. The liberalization of the global financial system led to a rise in the competition between financial services and also involved risks in the system. Financial instability implies that a persistent crisis prevented the financial markets from performing at its best. Financial globalization took over the financial instability with the help of some factors which are as follows:
- A shift from the age-old tradition of government-ruled exchange rate to a flexible exchange rate system
- Implementation of a broader system of prudent ordinance and management
- An accurate application of liberalization and building of institution which is an important factor in the emerging markets
Financial stability has been effective in keeping the inflation rate in check as per a research study on the same. To conclude, financial globalization and financial stability had been highly beneficial for the uplifting of the economy in various countries across the world and the revised form of financial system had been truly advantageous for the countries worldwide.
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