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Assignment on European financial market

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Added on  2019-10-31

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The purpose of the assignment is to analyse and explain the underline issues on the financial integration trilemma.The memo will analyse and explain the underlying issues related to the financial integration dilemma to the chief financial officer. The assignment will include the integration of various market segments so that it in the clear that bond and money market are considered to be closed for integration because of equity markets basically showing the sign of rising integration. Whether the assignment included the monetary policy trilemma, a graph showing cross border penetration in european banking from 2000 to 2016.

Assignment on European financial market

   Added on 2019-10-31

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European financial market 1European financial marketStudent NameCourse and Section NumberClass TimeInstructor Name
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European financial market 2Memo to the Chief Financial officer (CFO)To: The Chief Financial officer (CFO)From: MeDate: September 12, 2017Subject: Analyzing and explaining the underlying issues on financial integration trilemmaThis memo analyzes and explains the underlying issues on the aspect of financial integration trilemma to a Chief Financial officer (CFO). Financial trilemma suggests that cross-border financial integration, financial stability, and national financial policies are the three objectives that are incompatible and cannot be attained simultaneously1. In this case, any two of the three objectives can be combined but not all three, one has to give because the current practice of national crisis is basically threatening the European Union single banking market. Figure 1: The trilemma in financial stabilityThe 2007-2009 economic crisis heightens the necessity to manage the aspect of economic stability since it is considered to be a public good that the maker cannot exclude anyone from utilizing the product and utilization by another individual does not affect others from using it. During this period, the ECB successfully managed to keep the aspect of interbank market 1 Goodhart, Charles and Dirk Schoenmaker (2009), “Fiscal Burden Sharing in Cross-Border Banking Crises”,International Journal of Central Banking, 5, 141-165.
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European financial market 3liquid2. Central banks often pool the tasks of financial stability and monetary stability in most cases so as to regulate its financial objectives. Financial stability is considered to be closely related to systematic risks that are the risks that an incident will initiate a loss of monetary value or assurance in a significant percentage of the monetary system that is stern enough to have substantial adverse impact on the real economy3. According to this aspect, cross-border financial integration is one of the three incompatible objectives that are likely to be sacrificed by the European Union. The integrated financial system comprises of diverse market segments that have been summarized in the table below as reported by the ECB. From the diagram, it appears that the bond and money market are considered to be close to full integration because equity markets basically show clear signs of rising integration4. The financial policy trilemma is based on the IS-LM standard model with an undeveloped economybecause, in a fixed conversation rates and a perfect assets mobility, the slightest rate of interest causes the infinite flow of capital5. Supposed a central bank tightens its monetary policy by 2 Obstfeld, Maurice, Jay Shambaugh and Alan Taylor (2005), “The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility”,Review of Economics and Statistics, 87, 423-438.3 Pauly, Louis (2008), “Financial Crisis Management in Europe and Beyond”,Contributions to Political Economy, 27, 73-89.4Pomerleano, Michael (2009), "A Solution to Financial Instability: Ring-fence Cross-Border Financial Institutions”, VoxEU.org, 7 August.5
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