Financial markets are places where such financial resources as shares, bonds, derivatives and mortgages are traded. Their purpose is to steer capital towards its most productive use.
An increasingly important role in the financial markets is being played by central banks, which fix the base rates for the interest at which the private banks can lend each other money. Moreover, the European Central Bank (ECB) has recently started to intervene itself, buying government bonds in large quantities. The ECB has also taken on the task of supervising the banks and keeping the financial markets stable.
Keeping the value of money stable guarantees sustainable and stable economic development. Phases of excessive devaluation undermine confidence in purchasing power and cause an unjustified redistribution between debtors and creditors.
From the basic money supply thus made available to them, the banks use loans and purchases of securities to provide the money needed by individuals and companies in daily commerce. The challenge for the Central Bank is to choose the correct interest level to prevent too much money circulating in the economy, leading to inflation.
Worldwide financial transactions have recently increased dramatically. The daily volume of currency dealing alone equals the annual economic output of a medium-sized industrialised nation. The financial markets direct money where it can be most productively used.
For financial markets to be able to function there must be clear rules. Repeated financial crises have shown that markets can produce disastrous developments when the underlying structures are faulty. To prevent a damaging race between countries to offer ever laxer regulation and to avoid financial crises spilling across borders, the world’s nations must reach agreement on minimum standards and a global financial institution to monitor compliance.