People who have invested in international capital market converts their risk free savings into risky assets with the hopes of receiving future benefits, such benefits has assisted in direct finance where companies through intermediaries like banks. This helps to create economies of scale where by increasing the capacity of funds issued each day the cost per transaction decreases. International capital markets promote economic efficiency.
To use an illustration, a saver might want to invest fifteen thousand of their funds productively, while businesses might have a great business plan but lack the funds to carry them out by shifting the funds from the saver to the companies through the capital markets, the funds are utilized to its maximum extent. This has also allowed the saver to experience a high yielding savings account which allows more revenue contribution to the economy. Entry to international capital markets can also allow a firm to reduce its cost of capital. With international capital markets, companies can seek a lower cost of capital through mergers and acquisitions, foreign direct investment, and other international activities.
International capital market has given way to foreign direct investment (FDI) which has played a significant role in the massive infrastructure, of developing countries. Some countries conduct most of their savings in international capital markets as well as a means to pay loans and cover finances. The financial crisis that occurred has affected a lot of developing countries and also created a void for international business where funds invested in these markets were affected. The United States capital market which was once developed and strong decreased considerably as more foreign investors, invested due to increase in loan incentives such as easy initial terms and offering of high interest rates on saving returns.
Likewise, long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. As housing prices declined, major global financial institutions that had borrowed and invested heavily in Mortgage Back Securities “an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization ” reported significant losses. This was due to the fact that Mortgage loans were purchased from banks, mortgage companies or other institutions. These loans were then assembled into pools by governments or private entities. The entities then issued securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool through securitization however the borrowers failed to pay back such loans.
Bank or international intermediaries a vital to the international capital market system and...