Financial globalisation

The state of financial globalisation 10 years after the financial crisis

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In 1917, the first international commercial flight took place. Over 70 years later, the world wide web formed. Accessibility and the spread of information are why businesses have been able to broaden their international dealings over the last century.

In 2007, cross-border capital flows peaked at USD 13 trillion in capital per year before the financial crisis brought that figure tumbling down. Since then, global financial institutions still invest internationally but focus more on stable, conservative investments. While the amount of cross-border capital is significantly less than in 2007, it is safe to say banks place more emphasis on secure low-risk investments — leading to a more prosperous economy. Beacon Financial Education examines the effects of the financial crisis, the state of financial globalisation and the trends in global financial markets.

Trend 1: European banks divest while Japanese, Canadian banks do the opposite

International banks claimed over USD 30 trillion in foreign assets in 2007. In 2016, that number shrunk by six trillion dollars to USD 24 trillion. On the surface, it may seem that global financial institutions are divesting in foreign assets. While this is true for some banks, it is not for others.

The largest contributor to divestment is European banks. European banks went from USD 23.4 trillion in foreign assets to USD 13.9 trillion — a 40 percent decrease in holdings. However, some other advanced economies have had a different strategy. Australia, Singapore, Canada, Taiwan, the United States and Japan have all invested — going from USD 6.8 trillion of holdings in 2006 to USD 9.8 trillion of holdings in 2016. Japan and Canada lead the pack, with both countries increasing their foreign assets from USD 2.3 to USD 3.9 trillion and USD 700 billion to USD 1.4 trillion, respectively.

Trend 2: US, Luxembourg, UK, the Netherlands, and Germany lead foreign investing; China gains steam

Many, if not all, countries invest in foreign countries. The majority of investments, however, are concentrated to a select number of countries. Out of the USD, 132 trillion of total foreign investments internationally, the US, Luxembourg, the UK, the Netherlands, and Germany make up a little less than half of this number.

The US comprises 16 percent of this number with USD 21.7 trillion in foreign investments. Luxembourg contributes 8 percent with USD 10.6 trillion, while the UK makes up 8 percent with USD 10.5 trillion. The Netherlands and Germany both contribute 6 percent each at USD 8 trillion apiece. Japan and France are not far behind, but China is on pace to soon break the top five. China has moved eight spots in total foreign investment — more than any other country — since 2005, reaching USD 3.4 trillion in total foreign investment.

Effects of the financial crisis

Trend 3: FDIs are helping the global economy stabilise

Foreign direct investments (FDIs) are investments in a company from acquiring assets or obtaining equity in a business. FDIs are the least volatile form of foreign investment. Since 2006, FDIs have increased 33 percent — from 36 percent of gross annual capital flows to 69 percent. Because FDIs are a more stable type of foreign investment, the increase in this type of investment contributes to the stabilisation of the global economy. Additionally, banks now focus on having more capital and liability cushions to offset their future losses. 

The global economy has come a long way since the crisis in 2007. However, this does not mean the economy is out of the woods. Banks and financial institutions must continue to be keen and be especially sensitive to risks.

 

Beacon Financial Education / Expatica

Beacon Financial Education organises free financial education and awareness seminars within the Netherlands, Germany, UK and now Switzerland on a regular basis. Please check out the event calendar on their website or subscribe to their newsletter to stay up to date.

Beacon Financial Education does not provide financial, tax or legal advice. None of the information on this site should be considered financial, tax or legal advice. You should consult your financial, tax or legal advisers for information concerning your own specific tax/legal situation.

 
 

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