CHAPTER 11

INTERNATIONALIZATION
OF FINANCIAL MARKETS
BALT, SITTIE and PIMPING
Objectives
Understand the role and Recognize what drives the
importance of global financial growth of international
markets financial activity

Differentiate between
Identify major financial
individual and institutional
markets around the world
investors

Explain the concept and

Describe the main types of
benefits of cross-border
institutional investors
financing
Introduction
The global movement of money is essential for business growth,
allowing investors and companies to trade currencies, invest, and
borrow. Without international financial markets, governments,
companies, and individuals would struggle to access capital and
conduct cross-border transactions.

Since the 1980s, financial markets outside the U.S. have rapidly
expanded due to increased foreign savings and deregulation. As a
result, American companies and investors now participate more in
international markets, and foreign entities are also active in the U.S.
market. This trend reflects the growing globalization and
integration of financial systems worldwide.
Financial Markets
Around the World
New York Stock Exchange London Stock Exchange
New York, US London, UK

Toronto Stock Exchange European Union

Toronto, Canada

Japan Exchange Group Frankfurt, Germany

Tokyo, Japan

Shanghai Stock Exchange

Shenzhen Stock Exchange
Stock Exchange of Hong Kong
China
 World Stock Markets
Financial markets expanded rapidly in the 1990s. Initially limited to
a few countries trading mostly bonds and stocks, they later grew
worldwide with the rise of new financial instruments. The U.S.
stock market was once the largest, but foreign markets - like
Japan's - grew significantly, sometimes surpassing U.S. trading
volumes.
This global growth led to increased American interest in foreign
markets, with U.S. investors following international indexes like
the Nikkei 225 (Japan) and FTSE 100 (UK). The internationalization
of financial markets supports a more connected global economy.
 World Stock Markets
The 2008 financial crisis caused a sharp drop in lending and market
activity, though partial recovery began in 2009. In 2017, central banks
started phasing out bond-buying programs, possibly slowing future bond
issuance.
Size of Estimating market size is difficult due to the
complexity and volume of transactions. In 2018,

the Dealogic reported global capital market financing

of $12.5 trillion, including:

Markets $800 billion in equity (stocks)

$7.9 trillion in debt (bonds)

$5.8 trillion in syndicated loans

Cross-Border Measure
Another way to measure financial growth is by looking at cross-border
finance - the flow of money and investments between countries. While
this is not a new concept (it was also significant in the late 19th century),
there has been a massive increase in international financing since 1990.

However, this growth has been interrupted by several major financial

crises:

1998: Asian and Russian financial crises

2001: U.S. recession

2008-2009: Global financial meltdown

2008-2013: Eurozone financial crisis

International Bond Market,
Eurobonds, and
Eurocurrencies
The traditional instruments in the international bond market are known as
FOREIGN BONDS.

FOREIGN BONDS: Sold in a foreign country and are

denominated in that country's currency. These bonds
have been used and important instrument in the
international capital market for centuries.
International Bond Market,
Eurobonds, and
Eurocurrencies

EUROBONDS: Refers to the bond that is issued outside

of the borders of the currency's home country; it doesn't
mean the bond was issued in Europe.
International Bond Market,
Eurobonds, and
Eurocurrencies

EUROCURRENCIES: Refers to currency deposits held at

banks outside of their country of origin.
 The way in which firms and governments raise funds in
international markets have changed substantially.

1993 Bonds made up 59% of international financing.

Bond use dropped to 47%, due to upcoming

1997 financial crises (Asia & Russia)

Equities (stocks) became more popular as

2000
share prices rose.

Bonds and loans became important again

2007-2010 because of low interest rates.

Syndicated lending declined due to banks

2018 facing capital shortages.
 After 2018, bond issuance stayed flat:

Non-financial companies issued more bonds.

Banks reduced their bond debt.

With very low interest rates in countries like the U.S.,

Japan, UK, and EU, companies preferred long-term
2018
bond financing over bank loans.
Factors Affecting the Long-Run
Trends of Increased Financial
Market Activity
Lower Inflation
Inflation erodes the value of financial assets and
increases the value of physical assets, such as houses
and machines, which will cost far more to replace than
they are worth today.
In a low inflation environment, however, financial-
market investors require less of an inflation premium, as
they do not expect general increases in prices to
devalue their assets.
 Pensions
Many countries moved from pay-as-you-go pensions to
pre-funded, individual pensions accounts starting in
the 1990s.
These accounts require savings to be invested in
financial markets, leading to a large increase in
financial assets, especially in countries that didn't have
strong private pension systems before.
 Stock and Bond Market
Performance
Good performance of stock and bond markets in the
1990s, early 2000s, and 2012-2017 encouraged more
investing.
Rising markets increase investor wealth, which leads
to reinvestment of profits. Also, provides collateral
for borrowing and further investment.
 Risk Management
Innovation has generated many new financial products, such
as derivatives and asset-backed securities, which allowd
firms and investors to better manage financial risk.

These tools let them reduce unwanted risks or take on more

risk for higher returns. This flexibility led to a big increase in
financial market activity.
 The Investors

Investors participate in financial markets to each returns, which

come in two main forms:

Yield: it is the income the investor receives while owning an

investment.

Capital gains: Profit from the increase in the investment's

value when sold.

Different investors prefer different types of returns, and financial

products are often tailored to match those preferences.
THE CATEGORIES OF
INVESTORS
INDIVIDUALS
Individuals own only a small portion of financial assets,
often through retirement savings or employer shares, and
their holdings vary by country.

INSTITUTIONAL INVESTORS
Institutional investors, such as insurance companies and high-
frequency traders, are responsible for most trading in financial
markets. Their size and investment practices vary significantly
from country to country, depending on the development of
collective investment vehicles.
 Types of Institutional Investors

Mutual Funds Hedge Funds

Are fast-growing investment They accept investment only from a
companies that combine small number of wealthy individuals
individual investments to achieve or big institutions and are freed from
financial goals efficiently. They most regulations. They use
usually accept an unlimited aggressive strategies like borrowing
number of investors and follow a money and focusing on specific
declared strategy, buying financial assets. These can lead to large gains
instruments accordingly. Some or sizeable losses. Earns through
funds keep the same securities service fees and may take a share of
from the start, while others any gain. Their fee structures have
change their portfolios over time. been criticized for encouraging risky
Investors buy or sell shares behavior, as managers benefit from
through stockbrokers. gains but not losses.
 Types of Institutional Investors

Insurance Companies Pension Funds

Are the most important It collects retirement savings from
institutional investors, owning ⅓ many workers and are typically
of all institutional financial assets. sponsored by employers, groups
Originally, these holdings of employers, or unions. In the
supported life insurance policies, Philippines, the SSS and GSIS are
but not a growing share goes to major pension fund investors.
annuities,
Mutual which
Funds - pay policyholders These funds don't let individuals
a yearly amount as long as they control investments but usually
live. The growth of individual offer guaranteed benefits at
pensions has helped insurers, retirement. Pension funds' assets
since many retirees use their in OECD countries exceeded $25
savings to buy annuties. trillion by the end of 2016.
Types of Institutional Investors

Algorithmic Traders
Algorithmic or high-frequency traders use
computers to automatically buy and sell,
taking advantage of small price differences.
They don't consider company or country
fundamentals and hold assets only briefly.
While they control a small portion of financial
assets, they account for a large share of
market trading.
 Other Institutions
Other types of institutions, such as banks, foundations and university
endowment funds, are also substantial players in the markets.
INTERNATIONAL
MONEY AND CAPITAL
MARKETS
 Eurocredits Eurobond Market
An international bond underwritten
by an international syndicate of
Floating-rate bank loans tied banks and sold to investors in
to LIBOR (London Interbank countries other than the one in
Offer Rate); they are usually whose money unit the bind is
issued for a fixed term with no denominated.
early repayment, currently
Dollar Eurobonds are not sold in the
available for most major
United States, nor are yen
trading currencies.
Eurobonds sold in Japan.
Eurobonds can be issued with
either a floating-coupon rate
depending on the preferences of
the issuer and they have medium or
long-term maturities.
Foreign Bond Market
Are international bonds issued in the country in
whose currency the bond is denominated, and
they are underwritten by investment bank in that
country. They can have a floating-rate coupon or
a fixed-rate coupon and they have the same
maturities as the purely domestic bonds with
which they must compete for funds.
 Towards International Standards
Because “national regulators” struggle to police global markets, leading
dealers founded the International Capital Markets Association (ICMA) in
Switzerland. Recognized as a self-regulatory body, ICMA sets standard
practices, including trade-reporting and settlement so that money and
securities change hands on the third business day after the transaction.
 Looking Ahead...
As governments have liberalized issuance rules and eased restrictions on
cross-border capital flows, the sharp divide between Eurobonds and foreign
bonds has blurred. Today the term international bonds covers both, the old
Euromarkets label has fallen out of use, and the international bond
markets are flourishing and are likely to grow rapidly.
THANK YOU!