INSTITUTO POLITECNICO NACIONAL

ESCUELA SUPERIOR DE COMERCIO Y ADMINISTRACIÓN

UNIDAD SANTO TOMAS

'Financial System'

A financial system can be defined at the global, regional or firm specific level. The firm's
financial system is the set of implemented procedures that track the financial activities of the
company. On a regional scale, the financial system is the system that enables lenders and
borrowers to exchange funds. The global financial system is basically a broader regional
system that encompasses all financial institutions, borrowers and lenders within the global
economy.

There are multiple components making up the financial system of different levels: Within a
firm, the financial system encompasses all aspects of finances. For example, it would include
accounting measures, revenue and expense schedules, wages and balance
sheet verification. Regional financial systems would include banks and other financial
institutions, financial markets, financial services In a global view, financial systems would
include the International Monetary Fund, central banks, World Bank and major banks that
practice overseas lending.

'The World Bank'

An international organization dedicated to providing financing, advice and research to

developing nations to aid their economic advancement.

The World Bank was created at the end of World War II as a result of many European and
Asian countries needing financing to fund reconstruction efforts. Created out of the Bretton
Woods agreement of 1944, the Bank was successful in providing financing for these
devastated countries. Today, the Bank functions as an international organization that
attempts to fight poverty by offering developmental assistance to middle and poor-income
countries. By giving loans, and offering advice and training in both the private and public
sectors, the World Bank aims to eliminate poverty by helping people help themselves.

'International Monetary Fund - IMF'

The International Monetary Fund (IMF) is an international organization created for the
purpose of standardizing global financial relations and exchange rates. The IMF generally
monitors the global economy, and its core goal is to economically strengthen its member
countries. Specifically, the IMF was created with the intention of:

1. Promoting global monetary and exchange stability.

2. Facilitating the expansion and balanced growth of international trade.

3. Assisting in the establishment of a multilateral system of payments for current transactions.

Fixed exchange rates, also known as the Bretton Woods system (named after the
original UN conference at which the IMF was conceived), refer to the value of
 INSTITUTO POLITECNICO NACIONAL
ESCUELA SUPERIOR DE COMERCIO Y ADMINISTRACIÓN
UNIDAD SANTO TOMAS

a currency being tied to the value of another currency, or to gold. The system of fixed
exchange rates was established by the IMF as a way to bolster the global economy after
the Great Depression and World War II. This system was abolished in 1971, and ever since, the
IMF has promoted the system of floating exchange rates, which means that the value of a
currency can change in relation to the value of another. This is the familiar system today. For
example, when the U.S. economy suffers, the dollar's value goes down in relation to that of,
say, the euro of the European Union, and the opposite is also true. The exchange
rates established by the IMF allow countries to better manage economic growth and trade
relations. These exchange rates are set in order to prevent economic collapse, which can
occur with runaway exchange rates, which occurs when the rates continue to rise.

'Bretton Woods Agreement'

A landmark system for monetary and exchange rate management established in 1944. The
Bretton Woods Agreement was developed at the United Nations Monetary and Financial
Conference held in Bretton Woods, New Hampshire, from July 1 to July 22, 1944.

The IMF vs. the World Bank

The IMF works hand-in-hand with the World Bank, and although they are two separate
entities, their interests are aligned, and they were created together. While the IMF provides
only shorter-term loans that are funded by member quotas, the World Bank focuses on long-
term economic solutions and the reduction of poverty and is funded by both member
contributions and bonds. The IMF is more focused on economic policy solutions, while the
World Bank offers assistance in such programs as building necessary public facilities and
preventing disease.

How a Country Can Join the IMF

Countries must apply to be a part of the IMF, although any country can apply. Over time,
the stipulations of being a member have changed, with membership requirements being
more relaxed when the Fund was in its early stages. Countries are required to make
membership payments, or quotas, which are assigned to individual countries based on their
economic size and stipulate how much they contribute. These quotas are larger for more
powerful economies, and they form a pool from which countries in need can take
loans. Member countries are also required to adhere to the Code of Conduct, and stricter
regulations may be imposed on those countries who apply in hopes of financial aid.

Members not only have access to the broad range of services provided by the IMF, but also
to the economic records of other member countries.
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ESCUELA SUPERIOR DE COMERCIO Y ADMINISTRACIÓN
UNIDAD SANTO TOMAS

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