International financial crises that started in Thailand in 1997, in Russia in 1998 and in Brazil in 1999 and subsequently spread over to other countries in the region and even as far as to other continents, may serve as an example. Frederic Mishkin gives other examples of threats posed by globalization. 14 Financial liberalisation reduces the number of instruments which discipline the banking activities. This has led to credit booms in many countries, often financed by foreign entities and in foreign currencies. Credit booms have thus become a frequent source of banking crises. 15 Banking crises, on the other hand, have generated significant costs for the economy, inter alia, through the necessity of liquidity injections to some banks or through limiting the supply of loans to companies. Increased share of foreign capital in local financial markets raises their sensitivity to the developments on foreign markets. For instance, an increase in interest rates in another country may cause an outflow of short-term capital, and in consequence lead to an increase in interests rates and a decrease in liquidity on a local market. Banks operating on the global financial market are subject to higher competition, also due to the fact that investors compare the banks’ performance results on an ongoing basis. As noticed by Raghuram Rajan, banks nowadays focus more than ever on maintaining their income on a high level, at the cost of assuming higher risk. 16 Financial instruments traded by banks are becoming increasingly complex and thus less liquid and carrying higher risk.
36 If the financial markets come to the view that the investment risk premium for American debt securities has increased, the outflow of capital from this market – or even decreased capital inflows – may lead to a fall in bond prices, i.e. to a sharp increase in long-term interest rates, a slowdown on the housing market, depreciation of the dollar and, as a result, stagnation or even recession, which may be observed globally. In order to mitigate the probability of such a scenario, structural reforms should be implemented in many countries. The US should substantially reduce its budget deficit and – via a reform of the pension system and the healthcare system – increase the household savings rate. In the EU and Japan a series of structural reforms should be accelerated to raise the flexibility and competitiveness of the labour market and the market of goods and services. In the Asian countries, and first of all in China, the exchange rate regime needs to be made more flexible, which should be preceded by the reforms that would strengthen the financial system, also via a greater openness to foreign capital inflows. At present, it is difficult to assess the likelihood of the scenario involving a serious slowdown in the global growth; nevertheless, implementation of necessary reforms proceeds slowly. Should monetary policy take into account speculative bubbles? The globalization process is a great challenge for central banks and financial market regulators.