Introduction
Types of financial institutions
The international financial structure has undergone rampant development in the recent past. There has been emergence of different alternative types of financial structures. These are categorised into two main groups which include the banks and non-bank financial institutions. Non bank financial institutions consist of firms that offer various financial services apart from those that are legally defined for a bank. The non-bank financial institutions consist of various financial institutions. These include finance companies, insurance companies, investment banks, building societies, merchant’s banks, pension and mutual funds and credit unions.
Reason for their development
The main reason for the emergence of these institutions is to act as financial intermediaries. According to Gary and Andrew, financial intermediation refers to the process through which financial institutions acts as links between the demand and supply of finance (1). In addition, the financial institutions developed from the need to mobilise funds so as to facilitate the financing of different activities. These institutions borrow from the savers and lend to individual and institutional customers who require funds for investment purpose (Vittas Para. 1).
They also developed to provide a variety of investment vehicles to the diverse investors. Through this process, these firms promote economic growth within a country. Therefore, these institutions act as money and capital markets. Capital markets are markets that provide capital to firms to enable them invest on long basis. On the other hand, money market provides funds and investment opportunities on a short term basis.
These institutions had the capacity to prevent various crisis such as the Mexican Peso crisis, Asian crisis and the Argentine crisis. This is due to the fact that they have the capacity to control the amount of financial capital that circulates in an economy at any one given time. The Mexican Peso crisis is attributed to increased reliance on short term funding which resulted into an increase in the volume of capital in the economy (Stephany 2). On the other hand, the Asian and Argentine crisis resulted from lack of transparency in the operation of the financial markets. The financial institutions in Argentina had the role of assuring the investors of the safety of their funds. This would have reduced the chances of panic withdrawal occurring.
Exchange rate
Exchange rate refers to the price in which a particular currency exchanges with another currency. There are various types of exchange rate regimes.
Fixed or pegged exchange rate regime
In the fixed exchange rate regime, the price of a country’s currency is determined by the government through the central bank. In certain instances, the government may peg the price of its currency on a particular currency such as the dollar. In other cases, the rate may be pegged on a range of currencies. In such instances, the exchange rate regime is referred to as pegged. For the government to maintain the exchange rate, it either buys or sells the currency in which the local currency is pegged in the foreign exchange market (Richard & Collins 396). This type of exchange regime limits a country’s currency from undergoing serious fluctuations. However, it limits the competitiveness of the currency in the international market.
Flexible exchange rate regime
This is a regime in which the price of the currency is determined by the forces of demand and supply in the market. This regime is very favourable since it enables the market to be efficient by determining the rate of exchange. This helps in minimising currency mismatches. However, this regime is very volatile and hence the economy can be adversely affected by external forces (Kamil 1).
Gold standard
Gold standard exchange rate regime refers to a monetary system in which a group of countries come to a consensus to fix the price of individual local currency on a certain amount of gold (Richard & Collins 400). The gold standard enables the currency to be self regulating thus enabling the economy to be relatively stable. It also discourages budgets and trade deficits in the government. However, the health of an economy that has adopted this exchange rate regime depends on its supply of gold.
The best type of exchange regime is the flexible exchange rate. This is due to the fact that it enables efficient operation of both the domestic and international trade.
The speculative exchange rate structure is composed of the narrow and the wide band exchange rate structures. These bands help in minimising the fluctuations of the exchange rate but they cannot fully eliminate the chances of the regime from collapsing (Chen Para. 2).
Works cited
Chen, Zhaohui. “Speculative market structure and the collapse of an exchange rate mechanism” Centre for economic policy research. 1995. Web.
Garton, Gary and Winton, Andrew. “ Financial intermediation.” Wharton: University of Pennsylvania, 2002. Web.
Kamil, Herman. “Does moving to a flexible exchange rate regime reduce currency mismatches in firms’ balance sheets?” International Monetary Fund. Dec. 2006. Web.
Lipsey, Richard and Collins, Harbury. “ First principles of economic.” New York: Oxford University Press, 2004. Web.
Vittas, Dimtri. “ The role of non bank financial intermediaries”. Data and Research.1998. Web.