Roles of Financial Institutions in the Global Economy Term Paper

Role of Financial Institutions in the Global Economy

Globalization has sparked a revolution in information and communication technology, resulting in the emergence of an era that boasts the arrival of new levels of global interconnectedness. As a result, globalization has also increased the significance of the many different roles that financial institutions play in the overall global economy. Financial institutions can play several roles, ranging from operating as a simple method of savings, to functioning as an important revitalization source in a low-income community. This paper will explain the general role of financial institutions in the global economy, will touch on more significant individual roles, and discuss the overall role of international financial institutions.

Research indicates that a financial institutions' role as an intermediary is clearest in the credit and deposit business (Krayer, 2002). The usual function involves clients bringing to the bank their savings, or money which the bank transfers to its credit clients in the form of loans. In the loan instance, a borrower's credit rating may change during the life of a loan, thereby changing the value of the loan at that point in time, which reflects the interest and amortization payments expected in the future (Krayer, 2002).In some cases, credits may even become entirely worthless if borrowers become insolvent and bankrupt (Krayer, 2002). Another function which banks perform within an economy is rating and selecting the loans they finance. Through their activities as an agent, another essential function performed by banks is to reduce risks overall (Krayer, 2002). In this way, the general role of banks is to undertake and provide specific products or services.

Financial institutions also play an additional role within an economy by granting loans, processing payments, accepting deposits, and carrying out investments. Through these activities, banks create added value for their clients, employees, service providers and shareholders. As a result, there is a significant amount of potential damage were a bank to collapse. Thus, the economic benefits generated by a bank are basically no different from the economic benefits generated by a doctor, teacher or train driver: by exercising, to the best of their knowledge and abilities, their specialist function in competition with others,….....