1.3 Historical development of international financial markets

International financial markets have evolved dramatically since World War II. From the fixed exchange rates of Bretton Woods to today's globalized system, key milestones like the 1971 Nixon Shock and 1997 Asian Financial Crisis have shaped their development.

Technology has revolutionized trading, with electronic platforms enabling 24/7 global transactions. Meanwhile, financial crises have led to enhanced regulation and risk management practices, aiming to create a more stable and transparent international financial system.

Historical Evolution of International Financial Markets

Evolution of international financial markets

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• Bretton Woods system (1944-1971) established fixed exchange rates pegged to U.S. dollar and gold standard at $35 per ounce
• Post-Bretton Woods era (1971-present) introduced floating exchange rates and increased capital mobility across borders
• Globalization of financial markets driven by deregulation and liberalization led to surge in cross-border capital flows (foreign direct investment)
• Rise of emerging markets expanded global financial system participation with growing importance of BRICS economies (Brazil, Russia, India, China, South Africa)

Milestones in financial market development

• Collapse of Bretton Woods system (1971) triggered by Nixon Shock suspended dollar's convertibility to gold
• Oil price shocks (1973 and 1979) resulted in petrodollar recycling through international banking system
• Plaza Accord (1985) coordinated intervention by G5 nations depreciated overvalued U.S. dollar
• Black Monday stock market crash (1987) revealed global market interconnectedness and contagion risks
• Introduction of the euro (1999) created single currency for European Monetary Union member states
• Asian Financial Crisis (1997-1998) exposed vulnerabilities in emerging markets' financial systems
• Global Financial Crisis (2007-2009) originated from subprime mortgage crisis and Lehman Brothers collapse

Technology's impact on market integration

• Electronic trading platforms increased market liquidity and efficiency enabling 24-hour trading (NYSE, NASDAQ)
• High-frequency trading employs algorithmic strategies reducing transaction costs and market friction
• Financial innovations developed derivatives and structured products as risk management tools (options, swaps)
• Internet and mobile banking expanded access to financial services simplifying cross-border transactions
• Blockchain and cryptocurrencies introduced decentralized finance disrupting traditional financial systems (Bitcoin, Ethereum)

Lessons from financial crises

• Systemic risk management emphasized through macroprudential policies and stress testing for financial institutions
• Enhanced international cooperation established G20 Financial Stability Board and strengthened Basel Committee
• Stricter capital requirements implemented through Basel III framework increased capital buffers for banks
• Improved transparency and disclosure reformed credit rating agencies and enhanced reporting requirements
• Resolution mechanisms for failing institutions developed living wills for systemically important financial institutions
• Regulation of shadow banking increased monitoring of non-bank financial intermediation addressing regulatory arbitrage
• Consumer protection measures promoted financial literacy initiatives and strengthened oversight of retail financial products