Money and Capital Markets Development

Paper Summary:

This paper explains an organized and well-planned capital market guarantees that investments are safe and with limited risks; however, the presence of the money market, the market from which banks borrow or lend finances to each other, cannot be ignored. The author points out that securitization and credit derivatives have resulted in the ability to spread credit risks across different sectors of the financial system. The paper relates that the health of the global financial system is an issue of major concern to the U.S.A. and to the entire world; therefore, several multinational organizations, such as the World Bank and the International Monetary Fund (IMF), assist countries that are faced with financial problems and developmental requirements.

From the Paper:

"Robust capitalization and strong earnings is a must for any country if there were to be a line of defense against losses; when the capital of a country is strong, then these losses can be countered with ease. If there were indeed loss of any kind, or a negative incident of some sort, then capitalization would help restore the loss of confidence in the customers and the counter parties who would at first attempt to pull out of the institution. Therefore, it is evident that capital is capable of insuring the financial institutions against the system of "runs", both traditional and on franchise value. The traditional run is one in which the issues at stake are those of short term funding, and short term liquidity, whereas for the franchise run the issues that are brought into play are those of the gradual withdrawal of customers from the financial institution on account of the loss of confidence suffered as a result of the losses that the institution has been through."

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