1. the Challenges of Globalization in the World Banking System

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1.1. Globali zation and international f inancial institutions

Globalization describes changes in the transactions and interactions taking

place among states, firms and peoples in the world. It describes not just anincrease in the flow of goods, services, images, ideas and people, but also achange in the way production; distribution, consumption and other activities

are defined and undertaken1. State borders no longer contain and defineidentities, products, and actors’ possibilities. Boundaries are still crucial, but

so too are transnational opportunities both for politics and for commerce.

As a result, an increasing range of activities requires some form of

management and regulation at the international level. For this reason, statescreate international institutions.

Over the course of the twentieth century, a combination of technologicaladvances and government policies have led to an increase in the

interconnectedness of governments, societies, and private actors in theworld politics. As the possibilities of travel and communication have openedup to a wider range of people and to a wider range of places, new problems

have emerged which most nation-states cannot manage without coordinationand cooperation with other governments. At the same time, new kinds ofinterdependence have emerged which also require governments to act

together.

The globalization of capital markets, for example, has meant that

governments are yet more susceptible to effects from financial crisis in other

parts of the world. This was illustrated in 1997, when policy-makersdiscussed how to prevent “contagion” across the world economy as EastAsia suffered an economic crisis.

One way in which the governments have sought to manage and regulate problems arising from transnational activities is through international – or

better-said “intergovernmental”-organizations. At the end of the 1990s, over

1 Ngaire Woods,The Political Economy of Globalization, Macmillan Press Ltd., 2000

The challenges of globalization

in the World Banking System



250 international organizations (IOs) existed in the world of just over 180

states. This compares to around 30 IOs, which existed at the turn of thecentury in a world of less than 50 states. More broadly, internationalrelations have become characterized by increasing numbers of treaties,

regimes and other cooperative arrangements among states. Together, thesearrangements comprise an increasingly institutionalized world politics.

The phenomenon of increasing the institutionalization has opened up an areaof politics in which NGO can play a larger role. Some describe this as the

emergence of the “new global politics”. The globalization of politics permitsnon-state actors to play a part in forming preferences, making decisions, andinfluencing outcomes at the international level.

The problem for states has been how to coordinate their actions and politics

in response to globalization so as more effectively to ensure economicgrowth, security and stability within their own borders. The institutions theyhave created to do this job now face increasing burdens and challenges, as

the transitional flows they are attempting to regulate, facilitate or mitigate become more larger and more difficult to control. Adding to the problems ofmanagement is the fact that globalization is affecting different parts of the

world in highly uneven ways. In some part of the world, globalization brings a promise of integration into a thriving world economy and society,

in others globalization is increasing inequality and the prospects of chaos,

disorder and poverty. Not all the states wish to participate in internationalorganizations, and when the states do participate, there is a difficult question

as to much influence any one state should enjoy.

A sound financial system is necessary to support growth through mobilizing

capital. Financial system problems can reduce the effectiveness of monetary policy, create large fiscal costs related to rescuing troubled financial

institutions, trigger capital flight, and deepen economic recessions.Moreover, recent crises have shown how rapidly financial weaknesses inone country can spill over and contaminate others.

Sources of Financial System problems can be summarized as follows:

§ weak internal governance in banks fosters excessive risk taking and thenvulnerable macroeconomic shocks;

§ financial deregulation, competition, and innovation can outstrip

regulatory and supervisory capabilities as well as the capacity of banksto manage risks prudently;

§ weak and insolvent financial institutions which are allowed to continueoperations can weaken the entire system;



§ capital account liberalization which occurs before supporting

macroeconomic policies are in place and the soundness of the domesticfinancial system is assured;

§ excessive corporate indebtedness and connected lending can lead to

sudden deterioration in financial institutions’ asset quality;§ overexpansionary monetary and fiscal policies which spur lending

booms, excessive booms, excessive debt accumulation, and overinvestment in real assets can drive up restrictive equity and real estate

prices to unsustainable levels2.

The main channels of IMF for promoting financial system soundness inmember countries are its ongoing multilateral and bilateral surveillance,

program design, and technical assistance.

Surveillance. The IMF seeks to improve a country's macroeconomicenvironment and policies through a regular dialogue with its nationalauthorities. As regards financial system surveillance in particular, the IMF,

in cooperation with other institutions and as part of its adaptation to thedemands of the global economy, is deepening its surveillance andemphasizing its quest for transparency by a further increase in the coverage

of financial system issues. Such efforts are designed to lessen the frequencyand diminish the intensity of financial system problems in the future,

through better identifying financial system strengths as well as potential

weaknesses that could have major macroeconomic implications.

IMF -supported programs. Efforts to strengthen member countries' financialsystems are reflected in the design of IMF-supported programs. The IMFfrequently assists members in identifying and diagnosing financial system

problems; designing – in conjunction with the World Bank – strategies forsystemic reforms and bank restructuring; and ensuring that such strategies

are consistent with, and supported by, appropriate macroeconomic and otherstructural policies.

IMF techni cal assistance. Technical assistance helps to strengthen thefinancial infrastructure of member countries through advice on improving

their monetary and fiscal management; foreign exchange and capital marketdevelopment; the design of payment systems and deposit insurancearrangements; the development of the legal framework for banking, as well

as prudential regulations and supervisory capabilities, in particular regardingthe entry and exit of banks; and strategies for bank systemic restructuring.

2 International Monetary Fund, Financial System Soundness, Factsheet, March 30, 2000



The challenges of the globalized finance

In international finance, globalization has powerful implications forgovernments and for the international institutions they have created.Globalized international financial markets are more open, more liquid and

more internationally integrated than ever before. Equally important,globalization describes a change in governments’ perceptions of these

markets as more powerful and more limiting of government autonomy thanin any previous era. For this reason, globalization has turned government’sattention to the role and nature of international financial institutions, and not

for the first time this century.

In the aftermath of the Second World War, the International Monetary Fund

(IMF) and the International Bank for Reconstruction and Development werecreated in order to ensure stable and equitable growth in the world economy.

The IMF would ensure stable exchange rates and adjustment by countrieswith liquidity problems. The World Bank would channel (predominantly)

private-sector funds into investment projects, which would ensure growth

and development.

In the 1960s deregulation in industrialized countries led to the emergence of

the “Eurocurrency” market whereby borrowers could issue bonds incurrencies other than their national currency. In 1971, The United States

came off the gold standard, causing a breakdown of the Bretton Woods

exchange rate regime. In 1972 the Chicago Options Exchange wasestablished, a first step towards the huge growth in derivatives trading in the

1980s. Finally as commercial banks based in the United States and Europeglobalized their clientele they opened up new sources of finance for

governments across the developing world, sowing the seeds of the debtcrisis of the 1980s. In brief, a combination of new technology and US(and other industrialized countries) policies unleashed a globalization of

financial markets and currencies within which new actors and newtransactions flourished.

Governments responded in a variety of ways to the challenges and threats ofthe new system. Policy coordination was discussed by leading industrialized

countries hankering after the stability of the old exchange rate system. Moreactively, governments looked to a variety of international institutions inorder to seek solutions and stability. These institutions included the Bank

for International Settlements (BIS), the International Monetary Fund (IMF),the Group of Ten (G-10), World Bank, The Group of Seven (G-7),

European institutions and a host of other less formal for a discussion ofregulation in the world economy. During the 1980s these institutions acted



in concert with the US Treasury and Federal Reserve to shore up threats

posed to banking and economic growth in the industrialized world:managing, for example the debt crisis of Latin America and Eastern Europecountries which threatened major international commercial banks.

In the 1990s a wave of new financial crises caused world economic policy-makers to think about how to respond to new faultiness in the world

economy. At the end of 1994, the Mexican peso plummeted (depreciating by 50 percent within one week) causing reverberations in Washington, D.C.

and New York, as well as in other Central and South American countriesworried about a ‘Tequila’ effect – a contagious loss of confidence ineconomies across the region which would cause the crisis to spread. In the

case of Mexico, the US Treasury and IMF were able to rapidly put togethera large assistance package in order to shore up confidence in the Mexican

economy – a reaction facilitated by the magnitude of US interest inMexico3.

Policy-makers concerns about financial instability proved well founded. In1997, a financial crisis sparked by the devaluation of the Thai bath spreadacross East Asia. This was soon followed by a crisis in the Russian ruble in

the summer of 1998. These crises led many countries to consider alternativeexchange rates arrangements: from floating currencies, to currency boards

or dollarization. A further financial disaster within the United States – the

collapse of an investment group called Long Term Capital Management –focused attention yet more closely on the need to reform the global financial

architecture.

After discussions and making proposals, in February 1999, the G-7 created aFinancial Stability Forum comprising themselves and representatives of theIMF, the World Bank, the Basel Committee on Banking Supervision, theBIS, the International Organization of Securities Commission, theCommittee of Payment and Settlement Systems, the InternationalAssociation of Insurance Supervisors, and the Committee on the Global

Financial System. The membership highlights two things: the great varietyof institutions which has emerged in the interna tional financial system,including networks of regulators and supervisors, and then the degree towhich the system is run by the leading industrialized countries.

Discussion as to reform will proceed in a forum dominated by the leadingindustrialized countries, in spite of the fact that globalization hasgeographically expanded the regions affected by capital flows, as well as the

3 Ngaire Woods, The Political Economy of Globalization, 2000, Macmillan Press Ltd



nature and the depth of issues and reforms that any international institutionshas to deal with. The nature and shape of a refo rmed system has yet to beestablished. Ideas for global financial regulator, global bankruptcy court,global money and a global central bank have abounded as the depth of thechallenge of globalization has been recognized.

In international finance, the nature of conflicting interests demonstrates howdifficult is to create or reform inter-governmental arrangements andorganizations.

Study-case: Globalization and IMF

The critical debate on globalization, though temporarily subdued by the events of September 11,2001, continues to raise issues that are at the core of national and international policy agendas.This note offers a conceptual framework for the IMF's involvement in the global economy. Itdescribes what is being done by the Fund, within the framework of its mandate, to (1) safeguardthe international financial system and (2) enable more countries to reap the benefits, whileminimizing the risks of globalization. At the same time, it recognizes that the IMF is part of awider network of international institutions that each has an important role to play in making globalization work better.

Globalization – the process through which an increasingly free flow of ideas, people, goods,services, and capital leads to the integration of economies and societies – is often viewed as anirreversible force, which is being imposed upon the world by some countries and institutions suchas the IMF and the World Bank. However, that is not so: globalization represents a politicalchoice in favor of international economic integration, which for the most part has gone hand-in-hand with the consolidation of democracy. Precisely because it is a choice, it may be challenged,and even reversed – but only at great cost to humanity. The IMF believes that globalization hasgreat potential to contribute to the growth that is essential to achieve a sustained reduction ofglobal poverty.Globalization, or internationalization, is not a new phenomenon. The period through the end of

the 19th century was also characterized by unprecedented economic growth and global integration.But globalization was interrupted in the first half of the 20 th century by a wave of protectionismand aggressive nationalism, which led to depression and world war. International economic and political integration was reversed, with severe consequences.Since 1945, democracy and capitalism have been embraced by an increasing number of countries – including, since 1989, by most of the previously communist world. As a result, the past 50 y earshave been a period of growing economic and political freedom and rising prosperity. Global percapita income has more than tripled, and most of the world has experienced a major improvementin life expectancy.Many developing countries have already taken advantage of the opportunities of the globaleconomy. More rapidly globalizing countries, such as Brazil, China, Costa Rica, the Philippines,and Mexico on average doubled their share in world trade and raised per capita incomes by twothirds from 1980 to 1997. Their experience demonstrates that integration into the global economy

can bring major advantages for developing countries.However, other countries have not done so well. A large part of the world's population –especially in sub-Saharan Africa – has been left behind by economic progress. As a result, the

disparities between the world's richest and poorest countries are now wider than ever, with

increasing incidences of poverty within countries. Poverty is not only unacceptable on moralgrounds, it also forms the breeding ground for war and terrorism. It is, therefore, the greatestchallenge to peace and stability in the 21st century.

Reversing the process of globalization would not solve the problem of poverty – that was amply

demonstrated by the events of the 20th century. The world needs instead a new approach to

globalization that exploits its enormous potential for improving human welfare. In order to carrythe process forward, and build support for a better globalization, a common politicalunderstanding of how to maximize the benefits, while minimizing the risks, must be developed.



1.2. The International F inancial I nstitutions

1.2.1. The Bank f or I nternational Settlements

The Bank for International Settlements was established in Basel on 17 May1930 and it is the world’s oldest international financial organization.

The BIS’s head office is in Basel, Switzerland; its Representative Office forAsia and the Pacific is in the Hong Kong Special Administrative Region ofthe People’s Republic of China, and the representative Office for the

Americas is in Mexico City.

Under its Statutes, the governance of the BIS is entrusted to the General

Meeting and the Board of Directors, which is responsible for theadministration of the bank.

The General Meeting is held annually where fifty institutions – central banks and monetary authorities have rights of voting and representation.

The Board of Directors has six ex officio directors, comprising theGovernors of the central banks of Belgium, France, Germany, Italy and the

United Kingdom and the Chairman of the Board of Governors of the USFederal Reserve System. Each ex officio member appoints another memberof the same nationality. The Governors of the central banks of Canada,

Japan, the Netherlands, Sweden and Switzerland are currently elected

members of the Board. The Board of Directors elects a Chairman fromamong its members and appoints the President of the BIS for a three-year

term. Since 1948 the two offices have been vested in one person. The Boardalso elects a Vice-Chairman. The board meets at least six times a year. It

appoints the General Manager, the Deputy General Manager and the threeHeads of the three main Departments: General Secretariat, Money andEconomic Department and the Banking Department. Two subcommittees,

both made up of Board members and chaired by the Vice-Chairman, reportto the Board. The Consultative Committee prepares the Board’s discussion

of administrative matters, such as the Bank’s annual budget. The AuditCommittee acts as a conduit between the Bank’s internal and externalauditors on the one hand, and the Board of Directors on the other. At the end

of 2001, the Staff of BIS (including temporary staff) numbered 511 and isdrawn from 40 countries.

The BIS employs the gold franc as a unit of account for balance sheet purposes. The gold franc has a gold weight of just over 0.29 grams of fine

gold, which is identical to the gold parity of the Swiss franc from the



foundation of the BIS in 1930 until September 1936, when the Swiss franc’s

gold parity was suspended. Assets and liabilities in US dollars are convertedinto gold francs at the fixed rate of USD 208 per ounce of fine gold(equivalent to 1 gold franc =USD 1.94). All other items in currencies are

converted into gold francs on the basis of their market rates against the USdollar. As a limited company, the BIS authorized share capital is 1,500

million gold francs, divided into 600,000 shares of equal nominal value(2,500 gold francs per share), of which 529,125 share are issued. They are

paid up to the extent of 25% of their nominal value (625 gold francs per

share). When BIS’s initial capital was issued, part of the Belgian and Frenchissues and the whole of the American issues were sold to the public.

Approximately 14% of BIS share remained in private hands at the end of2000. After an extraordinary General meeting on January 8, 2001, amended

the Statutes to restrict ownership of BIS shares exclusively to central banks;shares held by private shareholders were withdrawn against payment ofcompensation.

At March 31, 2002, the end of BIS’s financial year, the BIS’s balance sheettotal stood at 88 billion gold francs, with the BIS’s capital at 331 million

gold francs and published reserves at 3.3 billion gold francs. Expressed inUS dollars, with gold at the prevailing market price, these figurescorresponded to USD 173 billion and USD 7.3 billion respectively4.

The BIS’s main tasks, as they have developed over the past 70 years, can besummarized as follows:

1. The BIS provides a forum for central bank cooperation. Through regularmeetings, bringing together governors and officials of its member

central banks, the BIS acts as a prime forum for information exchangeand cooperation among central banks worldwide. These meetingsfacilitate bank cooperation in area such as the monitoring of foreign

exchange market activities, the surveillance and analysis of financialmarket developments and the oversight of payment and settlement

systems.

Central bank cooperation at the BIS aimed at defending the Bretton Woods

system in the 1960s and the early 1970s, and managing capital flowsfollowing the two oil crisis and the international debt crisis in the 1980s.

2. The BIS conducts research contributing to monetary and financialstability, collects and publishes statistical material on international

4 Bank for International Settlements, BIS Profile, July 2002



finance and – through committees of national experts – formulates

recommendations to the financial community aimed at strengthening theinternational financial system. For example, the Basel Committee onBanking Supervision has recommended a risk-weighted capital ratio for

internationally active banks (1988 Basel Capital Accord) that has become an international standard.

The Department ‘s research focuses on issues of direct interest to central banks, such as analysis data on developments in international bankingand securities market, or the international banking statistics shed on the

growing international business of banks and on important components ofcountries’ international indebtedness.

3. The BIS performs traditional banking functions, such as reservemanagement and gold transactions, for the account of central bank

customers and international organizations.BIS offers a range of banking services specifically designed to assistcentral banks in the management of their foreign exchange and gold

reserves. It also acts as a banker, and manages funds for internationalfinancial institutions. The BIS does not accept deposits from, or provide

financial services to, private individuals or corporate ent ities, nor is it permitted to make advances to governments or open current accounts intheir name. At present, around 130 central banks and international

financial institutions place deposits with BIS. The total of currency

deposits placed with the BIS amo unted to USD 154 billion at the end ofMarch 2002, representing 7.6% of total world foreign exchangereserves.

Funds deposited with the BIS are placed in the market, mainly in the formof investments with top-quality commercial banks and purchases of short-term government securities. In addition to placing funds in the international

markets, the BIS sometimes makes short-term advances to central banks.These usually take form of secured credits against gold, other collateral or

currency deposits held with BIS, but on occasion they may be granted on anunsecured basis, for example in the form of a stand-by credit on which acentral bank can draw at very short notice. At various times since the early

1980s the BIS has provided financial support to central banks with the backing (in the form of guarantees) of a group of leading central banks.

4. The BIS has provided or has organized emergency financing to supportthe international monetary system when needed. Thus, since itsfoundation the BIS has performed various functions as trustee, fiscal



agent or depository with regard to a number of international loan

agreements. During the 1931-1933 financial crisis, the BIS organizedsupport credits for both the Austrian and the German central banks. Inthe 1960s, the BIS arranged special support credit for the Italian lira

(1964) and for the French franc (1968) and two so-called GroupArrangements (1968 and 1969) to support sterling. More recently, the

BIS has provided finance in the context of IMF-led stabilization programs (e.g. for Mexico in 1982 and Brazil in 19985.

1.2.2. I nternational M onetary Fund

The IMF was conceived in July 1944 at a United Nations conference held at

Bretton Woods, new Hampshire, USA, when representatives of 45governments agreed on a framework for economic cooperation designed to

avoid a repetition of a disastrous economic policies that held contributed tothe Great Depression of the 1930s.

As a specialized agency of the United Nations system set up by treaty in1945, the IMF is headquartered in Washington D.C. and is governed now byits almost global membership of 184 countries.

The IMF is the central institution of the international monetary system-thesystem of international payments and exchange rates among national

currencies that enables business to take place between countries.

It aims to prevent crisis in the system by encouraging countries to adopt

sound economic policies. It is also a fund that can be tapped by membersneeding temporary financing to address balance of payments problems.

The IMF’s statutory purposes include promoting the balanced expansion ofworld trade, the stability of exchange rates, the avoidance of competitivecurrency devaluation’s and the orderly correction of a country’s balance of

payments temporary problems.

In order to serve these purposes, the IMF firstly monitors economic and

financial developments and policies, in member countries and at the globallevel and gives policy advice to its members based on its more than fifty

years of experience.

For example, in its annual review of the Japanese economy for 2000, theIMF Executive Board urged the Japanese government to stimulate growth

by keeping interest rate low, encouraging corporate and bank restructuringand promoting deregulation and competition.

5 BIS history, www.bis.org



Secondly, IMF lends to member countries with balance of payments

problems, not just to provide temporary financing but to support adjustmentand reform policies aimed at correcting the underlying problems. As anexample, during then 1997-1998 Asian financial crisis, the IMF acted

swiftly to help Korea bolster its reserves. It pledged $21 billion to assistKorea reform its economy, restructure its financial and restructure its

financial and corporate sectors, and recover from recession. Within fouryears Korea had recovered sufficiently to repay the loans and, at the sometime, rebuilt its reserves.

Thirdly, the IMF provides the governments and central banks of its membercountries with technical assistance and training in its area of expertise. In

this way, following the collapse of the Soviet Union, the IMF stepped in tohelp the Baltic states, Russia and other former Soviet countries to set up

treasury systems for their central banks as part of the transition fromcentrally planned to market- based economic systems.

As the only international agency whose mandated activities involve active

dialogue with virtually every country on economic policies, the IMF is the principal forum for discussing not only national economic policies in a

global context, but also issues important to the stability of the internationalmonetary and financial system.

By working to strengthen the international financial system and to accelerate

progress toward reducing poverty, as well as promoting sound economic policies among all its member countries, the IMF is helping to make

globalization work for the benefit of all.

The decision bodies

The board of governors, on which all members’ countries are represented, isthe highest authority governing IMF. It usually meets once a year, at theAnnual Meetings of the IMF and the World Bank. Each member county

appoints a Governor-usually the county’s minister of finance or thegovernor of its central bank-and an Alternate Governor. The Board of

Governors decides on major policy issues but has delegated day-to daydecision making to the Executive Board.

Key policy issues relating to the international monetary system areconsidered twice yearly in a committee of Governors called the InternationalMonetary and Financial Committee or IMFC (until September 1999 known

as the Interim and Committee). A joint committee of the Boards of the IMFand the World Bank called the Development Committee advises and reports

to the Governors on development policy and other matters of concern todeveloping countries.



The Executive Board consists of 24 Executive Directors, with the managingDirector as chairman. The Executive Board usually meets three times aweek, in full-day sessions, and more often if needed, at the organization’

headquarters in Washington, D.C. The IMF’s larger shareholders-the UnitedStates, Japan, Germany, France and the United Kingdom-along with China,

Russia and Saudi Arabia, have their own seats on the Board. The other 16Executive Directors are elected for two-year terms by groups of countries,known as constituencies.

Unlike some organizations that operate under a one-country-one-vote principle, the IMF has a weighted voting system: the larger country’s quota

in the IMF-determined broadly by its economic size-the more votes it has.But the Board rarely makes decisions based on formal voting; rather, most

decisions are based on consensus among its members and are supportedunanimously.

The Executive Board selects the Managing Director, who besides serving as

the chairman of the Board, is the chief of IMF staff and conducts the business of the IMF under the direction of the Executive Board. Appointed

for a renewable five-year term, the Managing Director is assisted by a FirstDeputy Managing Director and two other Deputy Managing Directors. TheIMF’s 23 departments and offices are headed by directors, who report to the

Managing Director. Most staff works in Washington, although about 80

resident representatives are posted in member countries to help advice oneconomic policy.

The IMF’ resources come mainly form the quota (or capital) subscriptionsthat countries deposit when they join the IMF, or following periodic reviews

in which quotas are increased. Countries deposit 25% of their quotasubscriptions in Special Drawing Rights (SDR) or major currencies, such as

US dollars or Japanese yen; the IMF can call the remainder, payable in themember’s own currency, to be made available for lending as needed. Quotasdetermine not only country’s subscription payments, but also its voting

power, the amount of financing that it can receive from the IMF and itsshare in SDR allocations.

Quotas are intended broadly to reflect members’ relative size in the worldeconomy: the larger country’s economy in terms of output, and the larger

and more variable its trade, the higher its quota tends to be. The UnitedStates of America, the world’s largest economy, contributes most to the



IMF, 17.6% of total quotas; Seychelles, the world’s smallest, contributes

0.004%6.

The SDR or special drawing right is an international reserve asset

introduced by the IMF in 1969 (under the First Amendment to its Articles ofAgreement) out of concern among IMF members that the current stock, and

prospective growth and international reserves might not be sufficient to

support the expansion of world trade. The main reserve assets were gold andUS dollars and members did not want global reserves to depend on gold

production, with its inherent uncertainties and continuing US balance ofPayments deficits, which should be needed to provide continuing growth inUS dollar reserves. The SDR was introduced as a supplementary reserve

asset, which the IMF could allocate periodically to members when needarose and cancel as necessary.

SDR-sometimes known as “paper gold” although they have no physicalform-have been allocated to member countries as a percentage of their

quotas. The IMF member countries may use SDRs in transactions amongthemselves, with 16 institutional holders of SDRs and with the IMF. The

SDR is also the IMF’s unit of account. A number of other international andregional organizations and international conventions use it as a unit ofaccount or as basis for a unit of account.

The SDR’s value7 is set daily using a basket of four major currencies: the

Euro, the Japanese yen, pound sterling and US dollar. The composition ofthe basket is reviewed every five years to ensure that it is representative ofthe currencies used in international transactions and that the weightsassigned to the currencies reflect their relative importance in the world’s

trading and financial systems.

Instruments of IMF lendingThe IMF provides loans under a variety of policies or facilities that haveevolved over the years to meet the needs of the membership. The duration,

repayment terms and lending conditions attached to these facilities vary,reflecting the types of balance of payments problems and circumstances

they address.

6 The most recent (eleventh) quota review came into effect in Jnuary 1999, raising IMFquotas (for the first time since 1990) by about 45% to SDR 212 billion (about $290

billion).7 On August 1, 2002, 1 SDR=US$1.26



Stand-by Arrangements form the core of the IMF’s lending policies. A

stand-by Arrangement provides assurance to a member country that it candraw up to a specified amount, usually over 12-18 months to deal with ashort-term balance of payments problems.

IMF support for members under the Extended Fund Facility provides

assurance that a member country can draw up to a specified amount, usua llyover three to four years, to help it tackle structural economic problems thatare causing serious weaknesses in its balance of payments.

The Poverty Reduction and Growth Facility (which replaced the Enhanced

Structural Adjustment Facility in November 1999) is a low-interest facilityto help the poorest member countries facing protracted balance of payments

problems. The cost to borrowers is subsidized with resources raised through past sales of IMF-owned gold, together with loans and grants provided tothe IMF for purpose by its members.

Supplemental Reserve Facility provides additional short-term financing tomember countries experiencing exceptional balance of payments difficulty

because of a sudden and disruptive loss of market confidence reflected incapital outflows. The interest rate on SRF loans includes a surcharge over

the IMF’s usual lending rate.

Contingent credit lines are precautionary lines of defense enabling members

pursuing strong economic policies to obtain IMF financing on a short-term basis when faced by a sudden and disruptive loss and market confidence because of contagion from difficulties in other countries.

Emergency Assistance was introduced in 1962 to help members cope with balance of payments problems arising from sudden and unforeseeable

natural disasters and was extended in 1995 to cover certain situations inwhich members have emerged from military conflicts that have disruptedinstitutional and administrative capacity.

It is very important to notice that the IMF is not an aid agency or a

development bank. It lends to help its members tackle balance of payments problems and restore sustainable economic growth. IMF lending isconditional on policies: the borrowing country must adopt policies that

promise to correct its balance of payment problem to ensure that the countrydoes not just postpone hard choices and accumulate more debt but is able to

strengthen its economy and repay the loan. The IMF lending is temporarydepending on the facility used (from six months to four years) but also on



the income-level of the country and must be pay back on schedule together

with market-related interest rates and service charges, plus a refundablecommitment fee. A surcharge can be levied above a certain threshold todiscourage heavy use of IMF funds.

To strengthen safeguards on members of IMF resources, in March 2000 the

IMF began requiring assessments of central banks' compliance withdesirable practices for internal control procedures, financial reporting andaudit mechanisms. In the most cases, The IMF provides only a small portion

of a country’s financial requirements, acting as an important lever orcatalyst for attracting other funds. The IMF’s ability to perform this

catalytic role is based on the confidence that other lenders have in itsoperations and especially in the credibility of the conditionality attached to

its lending.

IMF conditionality

When a country borrows from the IMF, its government makes commitmentson economic and financial policies-a requirement known as conditionally.Conditionality provides assurance to the IMF that its loan will be used to

resolve the borrower’s economic difficulties and that the country will beable to repay promptly, so that the funds become available to other members

in need. In recent years, the IMF has worked to focus and streamline the

conditions attached to its financing, in order to promote national ownershipof strong and effective policies.

Credit from the IMF is generally conditional on the adoption of appropriate policies to resolve a country’s balance of payments difficulties, contribute to

strong and sustainable economic growth, and enable the government torepay the fund. The policies to be adopted are designed not just to resolve

the immediate balance of payments problem but also lay the basis forsustainable economic growth by achieving broader economic stability-forexample, measures to contain inflation or reduce public debt. Policies may

also address structural impediments to healthy growth-like price and tradeliberalization, measures to strengthen financial systems, or improvements in

governance.

Together, these policies constitute a member country’s policy program,

which is described in a letter of intent (which may or may not have amemorandum of economic and financial policies attached to it) that

accompanies the country’s request for IMF financing.



Stud -case: Romania and IMF

On August 2002, the Executive Board of IMF completed the first and secondreviews of Romania's economic performance under the Stand-By

Arrangement. The decision will enable Romania to draw SDR 82.67 million(about US$109 million) from the IMF immediately.The 18-month Stand-By Arrangement for SDR 300 million (about US$396million) was approved on October 31, 2001. So far, Romania has drawn SDR52 million (about US$69 million) from the IMF.Following the Executive Board discussion, Eduardo Aninat, DeputManaging Director and Acting Chair, said:"The authorities' strategy to reduce inflation will be supported by containingthe budget deficit to below 3 percent of GDP in 2002 and by a furthertightening in 2003. The recently passed VAT and profit tax laws will

improve the structure of the tax system and the business climate. Goingforward, it will be important to further lower subsidies, while improvingwell-targeted social protection, and to refrain from granting ad hoc taxincentives”.

"A crucial component of the program continues to be a reduction in thequasi-fiscal deficit of state-owned enterprises. The implementation of thegovernment's wage and employment programs for 2002 and 2003 will be ofkey importance both for improving enterprise profitability and for the success

of the disinflation strategy. In this context, the authorities will need to makeevery possible effort to contain the impact of the decision to substantiallyraise the minimum wage in 2003 on overall wage trends in public enterprises – and to stand ready to implement prompt corrective measures if necessary.In the energy sector, after appropriately ambitious adjustments in prices in2001 and 2002, priority should now be given to correcting the persistingweakness in the collections of the main utilities."Monetary policy, implemented in the framework of a managed floatingexchange rate regime, will aim at further reducing inflation, while preventingan unwarranted real appreciation of the currency. The authorities have taken

welcome measures to closely monitor and contain the rapid expansion offoreign currency denominated credit."The government is committed to reinvigorate the privatization process andwill move ahead with several major privatization projects. Particularlyimportant is the privatization of the largest state-owned bank, BCR, whichwill involve the complete sale of the state's capital share and transfer ocontrol to a strategic investor. Privatization in the gas and electricity sectorsis set to accelerate. Together with restructuring measures, this will beessential to improve the efficiency of collections and ensure the energysector's financial soundness, which is key for sustained macroeconomic

stability and growth," Mr. Aninat said.



1.2.3. The World Bank Group

Conceived during World War II at Bretton Woods, New Hampshire, theWorld Bank initially helped rebuilt Europe after the war. Its first loan of

$250 million was to France in 1947 for post-war reconstruction.Reconstruction has remained an important focus of the bank work, given the

natural disasters, humanitarian emergencies and post conflict rehabilitationneeds that affect developing and transition economies. The World Bank Group consists of five closely associated institutions:

• The International Bank for Reconstruction and Development (IBRD)

• The International Development Association (IDA)

• The International Finance Corporation (IFC)

• The multilateral Investment Guarantee Agency (MIGA)

• The International Center for Settlement of Investment Disputes(ICSID)

The World Bank is owned by 184 countries. Under the Article of

Agreement of the IBRD, to become a member of the Bank a country mustfirst join the International Monetary Fund. Membership of IDA, IFC andMIGA are conditional upon on membership in IBRD.

The main bodies are the Board of Governors and the Board of ExecutiveDirectors.

Each member country is represented by the Board of Governors. TheGovernors carry ultimate decision-making power in the World Bank. They

meet annually to decide on key Bank policy issues, admit or suspendcountry members, decide on changes in the authorized capital stock,determine the distribution of the IBRD’s net income and endorse financial

statements and budgets.

The World Bank currently has 24 Executive Directors based in Washington,D.C. The Articles of Agreements provide that five of these directorsrepresent the member countries having the largest number of share. These

countries are France, Germany, Japan, the United Kingdom, and the UnitedStates. The remaining 19 Executive Directors represent constituencies; each

is elected by country or group of countries every two years.

The Executive Directors and the President of the World Bank, who serves as

Chairman of the Board, are responsible for the conduct of the Bank’sgeneral operations and perform their duties under powers delegated by theBoard of Governors.



The World Bank raises money for its development programs by tapping the

world’s capital market, and in case of IDA, through contributions fromwealthier member governments, being the world’s largest sources ofdevelopment assistance.

- The International Bank for Reconstruction and Development wasestablished in 1944 by 35 countries and at present has 184 members. IBRD

aims to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development, through loans, guarantees and non-

lending instruments-including analytical and advisory-services.

IBRD accounts more than half of the Bank’s annual lending, raises almost

all its money in financial markets. One of the world’s most prudent andconservatively managed financial institutions, the IBRD sells AAA-rated

bonds and other debt securities to pension funds, insurance companies,corporations, other banks, and individuals around the globe. IBRD chargesinterest to its borrowers at rates, which reflects the cost of borrowing. Loans

must be repaid in 15 to 20 years; there is a three–to-five-year grace period before repayment of principal begins. Less than 5% of the IBRD’s funds are

paid by countries when they join the Bank. Member governments purchaseshares, the number of which is based on their relative economic strength,

but pay in only a small proportion of the value of those shares. The unpaid

balance is “on-call” should the Bank suffer losses so grave that it can no

longer pay its creditors-something that has never happened. This guaranteecapital can only be used to pay bondholders, not to cover administrativecosts or to make loans. The IBRD’s rules require that loans outstanding anddisbursed may not exceed the combined total of capital and reserves.

At $11.5 billion, new lending by IBRD in fiscal year 2002 was $1 billionabove the previous year’s level, with a 96-number of operations, higher than

last year 8.

- The International Development Association was established in 1960 -and

has 162 members-to provide concessional assistance to countries that aretoo poor to borrow at commercial rates. IDA helps to promote growth and

reduce poverty in the same ways, as does the IBRD, but IDA uses interest-free loans (which are known as IDA credits), technical assistance and policyadvice. IDA credits account for about one-fourth of all Bank lending.

Borrowers pay a fee of less than 1% of the loan to cover administrativecosts. Repayment is required in 35-40 years with a 10-year period of grace.

8 The World Bank Group, Annual Report 2002



Nearly 40 countries contribute to IDA’s funding, which is replenished every

three years. Donors nations include not only industrial member countriessuch as France, Germany, Japan and United Kingdom and the United States,

but also developing countries such as Argentina, Botswana, Brazil,

Hungary, Korea, the Russian Federation and Turkey, some of which wereonce IDA borrowers. IDA’s funding is managed in the same prudent,

conservative and cautious way as the IBRD’s. As with IBRD, there hasnever been a default on the IDA credit.

IDA lending this fiscal year reached a record high of $8.1 billion for 133operations, compared with $6.8 billion in last year.

- The International Finance Corporation was established in 1956 and has

175 members. IFC’s mandate is to further economic development throughthe private sector. Working with business partners, it invests in developingcountries and provides long-term guarantees, and risk management and

advisory services to its clients. IFC invests in projects in regions and sectorsunderserved by private investment and finds new ways to develop

promising opportunities deemed to risky by commercial investors in the

absence of IFC participation.

- The Multilateral Investment Guarantee Agency, which has at present 157

members, was established in 1988. MIGA helps encourage foreigninvestment in developing countries by providing guarantees to foreign

investors against losses caused by noncommercial risks, such asexpropriation, currency inconvertible transfer restrictions, and war and civildisturbances. Furthermore, MIGA provides technical assistance to countries

disseminate information on investment opportunities. The agency offersinvestment disputes mediation on request.

- The International Center for Settlement Disputes was set up in 1966 andhas 134 members. ICSID helps to encourage foreign investment by

providing international facilities for conciliation and settlements ofinvestment disputes, in this way helping to foster an atmosphere of mutual

confidence between states and foreign investors. Many internationalagreements concerning investment refer to ICSID’s arbitration.

ICSID also has research and publishing activities in the area of arbitration

law and foreign investments.



Stud -case: Romania and the World Bank

The World Bank has been active in Romania since 1991 and has built up a portfolio of 30 operations totaling commitments of over US$3 billion, ofwhich around 21 projects totaling US$1 billion are ongoing. In addition, thenew Country Assistance Strategy (CAS) for Romania, for 2001-2004recently presented to the Romanian Government, envisages furtherfinancial support of up to US$1.5 billion, depending on the absorptivecapacity of the Romanian economy and the rhythm of reform andrestructuring.The Bank's lending program aims to help Romania address its challenges by: strengthening the social safety net; increasing investments in health,

education, and rural development; strengthening the business environment;supporting structural reforms in the financial, utilities, and enterprisesectors; enhancing effectiveness of public administration and the justicesystem; and building capacity for environmental protection. Priority will begiven to advising and financing European Union (EU) accession-related programs.Bank projects in Romania cover a broad range of areas. An example of animportant project in Romania, successfully completed in 2000, is theUS$300 million Private Sector Adjustment Loan (PSAL). The PSALsupported government's efforts to stabilize the macroeconomic situationthrough its four main components: financial sector reform and privatization;

state owned enterprises privatization; the enhancement of the businessenvironment; and further development of social protection programs fordisplaced workers.The PSAL aided the government in the process of shutting down its largestloss making state owned bank; with the contracting of the privatizationagents for 62 large state owned enterprises; and with the privatization ofover 1,500 small and medium size state enterprises. The PSAL also assistedthe government in the process of reducing the sizeable losses of severalstate enterprises and in ensuring that the social protection program becamemore streamlined and efficient. With the successful completion of thePSAL in June 2000, a new PSAL-II program will be designed to continue

and deepen these reforms.In 2001, six projects, totaling more than US$230 million, were approved bythe Bank's Board. They address priority aspects of the Romanian economy:the Mines Closure and Social Mitigation Project (US$45 million), theAgricultural Support Services Project (US$11 million), the Trade andTransport Facilitation Project (US$17 million), the Health Sector ReformProject (US$40 million), the Rural Finance Development Project(US$80 million), and the Social Sector Development Loan(US$50 million).



Summary

§ Determinants of globali zation:

- increasing the flow of goods, services, people, capital between states

- transnational opportunities for politics and commerce- competition

- technology advances- increasing the range of activities- larger possibilities for travel and communication

- interdependence between governments, society, private actor- the internationalization of the activities.

§ Determinants for (F inancial) I nternational I nstitutions :

- the limited power of governments to regulate problems arising frominternationalization of activities- the amplification of crisis effects in one country due to the

international relations- increasing the number of treaties and other cooperative agreements- the need for institutionalized world politics

- the need to ensure economic growth, security and stability in the world

§ Challenges for in ternational fi nancial instituti ons:

- globalization is affecting differently various parts of the world- not all the states wish to participate to the international institutions

- the flows are more and more larger and different to control- globalization changes the government perceptions

- to manage efficiently the financial crisis

§ I nternational f inancial institutions or bodies:

- Bank for International Settlements- International Monetary Fund

- World Bank- Basel Committee on Banking Supervision- International Organization of Securities Commission

§ I nitial aim

1. BIS - established in 1930 in order to help Germany to pay off thedamages to winners in the WWI.2. IMF - established in 1945 in order to avoid repetition of the Great

Depression of the ‘30s.



3. WB - established in 1945 in order to rebuilt Europe after the WWII (first

loan of $250 million to France).

§ Decision bodies

1.BIS - General Meeting (50 institutions)- Board of Directors (12 members)

2. IMF - Board of Governors (184 countries)- Executive Board (24 directors)

3. WB - Board of Governors (184 countries)

- Board of Executive Directors (24 directors).

§ Main tasks

1. BIS - forum for central bank cooperation

- center for economic and monetary research- bank for central banks- agent or trustee for in connection with international financial

operations

2. IMF - to prevent crisis in the international monetary system

- to provide funds to member countries with balance of payments problems

- to monitor economic and financial developments and policies at

global level- to provide the governments and central banks with technical

assistance

3. WB - to promote sustainable development through loans, guarantees,

non-lending services- to promote economic development through the private sector

- to encourage foreign investment by providing guarantees againstlosses

- to provide facilities for conciliation and settlement of investment

disputes.

§ Banking related operations 1. BIS - manages funds for international financial institutions

- accepts deposits from central banks and financial institutions (130

institutions, 154 billion $)- places deposits on the market in investments with commercial banks

and purchase short-term government securities



3. Identify three problems that states face in international finance.

4. Mention the determinants of globalization in international finance.

5. Set forth three of the main common points between the internationalfinancial institutions and the common banks.

6. Mention three of the common tasks of the international financialinstitutions.

7. Which of the international financial institutions are focused on the private

sector and what are the instruments used?

8. When was the BIS established and where is its head office?

9. What are the main tasks of the BIS?

10. What are the main instruments of BIS to support the central banks?

11. What are the main bodies of the BIS and what is their principal role?

12. What do you mean by “BIS acts as an agent and trustee”?

13. What is the IMF’s role?

14. Who makes decisions at the IMF?

15. Where does the IMF get its money from?

16. What is an SDR?

17. How does the IMF serve its members?

18. What is the World Bank Group?

19. What are the leading bodies of the WB?

20. Where does the money of WB go?

21. What is the difference between the BIRD and IDA regarding the lendingfacilities?

22. Where does the WB get its money from?



b. globalization is related only to the financial issues

c. sometimes globalization is seen as an irreversible force,which is being imposed upon the world by some countriesand institutions

d. globalization represents a political choice in favor ofinternational economic integration.

29. “Bank for central banks” relates to:a. BIS assists the central banks in the management of their

foreign exchange and gold reserves b. BIS accepts deposits from private individuals or corporate

entities or provide financial services to the same

c. BIS makes advances to governments or opens accounts intheir name

d. BIS offers short-term advances for central banks.

30. Which of the following statements are true:

a. BIS is one of the safest places of investment for the central banks of member countries

b. The greater the contribution, the larger the facility offered by

the IMFc. The WB provides facilities according to the membership to

its five institutions

d. Stand-by Arrangements and Emergency Assistance are notIMF facilities.

31. The IMF lending depends on:a. the promise of the country to correct its balance of payment

problem b. the income-level of the country

c. it is not conditionald. the guarantees offered by the lending country.

32 The SDR:a. is an international reserve asset introduced by IMF in 1969

b. is an instrument of payment used by the IMF membercountries in transactions

c. is a unit of account used only by IMF

d. is a facility used to help only the poorest members of IMFe. was introduced at the same time with the setting up of IMF.

33. The catalytic role of the IMF is based on:



a. the possibility to attract other funds

b. the power to prevent crisis in the international monetarysystem

c. the confidence other lenders have in its operations and the

credibility of the conditionality of the policy attached to itslending

d. its feature as a special agency of the UN system with 184member countries.

34 The main function of IDA is:a. to promote development through loans and guarantees

b. to provide interest free credits to the world’s poorest

countriesc. to encourage foreign investment in developing countries

d. to provide international facilities for conciliation in case ofinvestment disputes.

References

1. Ngaire Woods, The Political Economy of Globalization, 2000, Macmillan

Press Ltd

2. International Monetary Fund, Publications on Banking, factsheets,

www.imf.org

3. Ioan Bari, World Economy, Ed. Didactica si Pedagogica, Bucuresti 1997

4. Paul Hirst and Grahame Thomson, Globalizarea sub semnul intrebarii,

Ed. Trei 2002

5. Sterian D., Ana Bal, World Economy, Ed. Economica, 1999

6. Bank for International Settlements, World Bank Annual Reports 2000-2002.

7. www.imf.org, www.bis.org, www.wb.org

8. “Piata Financiara” magazine, 2000-2002

9. “Bucharest Business Week” collection, 2002

1. the Challenges of Globalization in the World Banking System

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