, Volume 22, Issue 5, pp 211–215 | Cite as

Financial markets at the crossroads: Fears of a great crash

  • Beate Reszat
Articles International Financial Markets


Not so long ago the international financial markets were being acclaimed as the cure-all for debt crises and interest rate and exchange rate risks, but new developments are giving increasing cause for concern, as the Deutsche Bundesbank1 noted recently. Pessimists are spreading a mood of disaster and are already predicting the collapse of the world financial system.2 What is the basis for such fears? How serious is the danger of a crash?


Interest Rate Central Bank Balance Sheet Federal Reserve Future Contract 
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  1. 1.
    Neue, nicht-bilanzwirksame Finanzinstrumente und ihre Bedeutung fur die Kreditinstitute in der Bundesrepublik in Monatsberichte der Deutschen Bundesbank, Vol 39, No 4 April 1987 pp 23–27Google Scholar
  2. 2.
    See for example Deregulierung kam zu hastig und unuberlegt, in Handelsblatt, 20–21 3 1987Google Scholar
  3. 3.
    See Federal Reserve Bank of New York Annual Report 1986Google Scholar
  4. 4.
    See also A R Dombret Securitization, in Zeitschrift fur das gesamte Kreditwesen, No 8, 1987, pp 326–330Google Scholar
  5. 5.
    See G Evans Why New Products Come and Go in Financial Innovations Made to Measure, Supplement to Euromoney, January 1987, pp 2 19Google Scholar
  6. 6.
    In this connection and generally, see A R Dombret, op cit, p 328 Adetailed description of the various instruments is to be found in Bank for International Settlements Recent Innovations in International Banking, Basle April 1986Google Scholar
  7. 7.
    See D. Wermuth, W. Ochynski: Strategien an den Devisenmärkten, Wiesbaden 1984, pp. 154 ff. In fact, in an interest rate swap the principal of the loans is not swapped, but each party merely takes over the interest payment commitments of the other. See G. Eilenberger: Wahrungsmanagement und Devisenkurssicherung, Frankfurt am Main 1986, pp. 175 ff.Google Scholar
  8. 8.
    See Bank for International Settlements, op. cit., p. 10.Google Scholar
  9. 9.
    See D. Wermuth, W. Ochynski, op. cit., pp. 132 ff. In contrast to the classification used in the article, Wermuth and Ochynski regard only interest rate contracts as financial futures and deal with currency futures separately.Google Scholar
  10. 10.
    For details, see Bank for International Settlements, op. cit., pp. 61 ff.Google Scholar
  11. 11.
    Ibid., pp. 189 ff.Google Scholar
  12. 12.
    See the example of currency options, in D. Sondermann: Kurssicherungsverfahren: Hedgen von Optionen, in: W. Krelle (ed.): Ökonomische Prognose-, Entscheidungs- und Gleichgewichts-modelle, Weinheim 1986, p. 134.Google Scholar
  13. 13.
    See Bank for International Settlements, op. cit., p. 195.Google Scholar
  14. 14.
    For example, where there is a risk of changes in interest rates, it is not always easy to decide whether an interest rate futures contract will provide protection or which would be best. See M. Desmond Fitzgerald: Financial Futures, London 1983, pp. 89 ff. Currency options are another example; the seller of a European option might conclude a forward transaction as a hedge in the belief that the option was highly likely to be exercised at maturity, only to find that the reverse was the case the next day because of changing conditions in the foreign exchange markets, so that he was left with an open forward position that now itself bore an exchange risk.Google Scholar
  15. 15.
    See also Merril Stevenson: A Game of Skill as Well, in: The Economist, 21st March 1987, International Banking Survey, pp. 4ff.Google Scholar
  16. 16.
    In Germany financial innovations such as Euro-note facilities have begun to be subject to banking supervision since the third amendment of the Banking Law in 1986. See also Ulrike Dennig: Die Deregulierung des internationalen Finanzsystems seit 1975, to be published in: Hamburger Jahrbuch für Wirtschafts- und Gesellschaftspolitik, Vol. 32 (1987).Google Scholar
  17. 17.
    For details on this and subsequent points, see Federal Reserve Bank of New York, op. cit., pp. 15 f.Google Scholar
  18. 18.
    Merril Stevenson, op. cit., p. 4.Google Scholar
  19. 19.
    Ibid, pp. 3 f.Google Scholar
  20. 20.
    See for example the essays in Forrest Capie, Geoffrey E. Wood (eds.): Financial Crises and the World Banking System, London 1986; Charles P. Kindleberger: Manias, Panics, and Crashes, New York 1978, has now become a standard work on the subject.Google Scholar
  21. 21.
    On this and subsequent points, see also Anna J. Schwartz: Real and Pseudo-financial Crises, in: Forrest Capie, Geoffrey E. Wood (eds.), op.cit., pp. 11 ff.Google Scholar
  22. 22.
    See also Anna J. Schwartz, op. cit., p. 11.Google Scholar
  23. 23.
    Ibid., p. 28.Google Scholar

Copyright information

© HWWA and Springer-Verlag 1987

Authors and Affiliations

  • Beate Reszat
    • 1
  1. 1.HWWA-lnstrtut fur Wirtschaftsforschung-HamburgHamburg

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