Manag., December-2019 – Q55
- Option : D
- Explanation : Reasons for the Phenomenal Growth in
Global Financial Markets: There seem to be
two answers: advances in information
technology and deregulation by governments.
Information Technology: The financial services industry is highly information-intensive. It draws on large volumes of information about markets, risks, exchange rates, interest rates, creditworthiness, and like. This information is used by the industry to make decisions about what to invest where how much to charge borrowers, how much of interest to pay to depositors, and the value and riskiness of a range of financial assets including corporate bonds, stocks, government services, and currencies.
The growth in information technology is so phenomenal, that instantaneous communication between any two points on the globe is now possible. At the same time, rapid advances in data processing capabilities have enabled market makers to absorb and process large volumes of information from around the world.
The developments in information technology have really facilitated the emergence of an integrated international capital market. It is now technologically possible for global financial services companies to engage in 24 hours-a-day trading, be it in stocks, bonds, foreign exchange, or any other financial instrument. And the global capital market never sleeps. San Francisco closes one hour before Tokyo opens, but during this period trading continues in New Zealand.
Deregulation: The financial sector was highly regulated in almost all countries. There were restrictions on the entry of foreign financial service firms and limits were imposed on foreign investors to purchase equities in domestic firms.
These regulations started crumbling since the the late 1970s. The collapse of controlled economies, and pressure from financial service firms to operate in a free market are the main reasons for the trend towards deregulation.
In addition to the deregulation of the financial services industry, many countries, beginning in the 1970s, started to dismantle capital controls, loosening both restrictions on inward investment by foreigners and outwards in vestment by their own citizens and companies. By the 1980s, this trend spread from developed countries to the developing nations as countries across Latin America, Asia and Eastern Europe started to dismantle decades-old restrictions on capital flows.
