Global Financial Stability - Term Paper Example

Therefore, global financial stability entails smooth operations of the financial institutions and global markets in conjunction with the global economy. Therefore, to determine a global financial stability balance of payments would help in providing information of an interpedently economy. Balance of payments Balance of payments is records of all financial transactions that are made between businesses, the American government and the consumers with people across the rest of the world. The figure in balance of payments explains the amount being spent by the consumers of a particular country and firms on imported goods and services (Choi, 2009).

It also entails the degree of success the firms in a particular nation in terms of exports to other countries and markets. This is an essential measure of the United States economic performance worldwide. Karmakar (2010) suggests that a balance of payments gives information about the economic interdependence of a particular economy with foreign countries. It records the value of all transactions among residents and foreign persons for a given duration. Exports and investments are recorded as positive or alternative surplus items while imports or other deployments of capital in foreign countries are registered as negative or deficit entries.

These payments relate to the United States banking growth in that when there is a crisis on balance of payments it might result into a banking crisis overseas. This happens when the economic growth is below the normal status (Choi, 2009). Both crises are preceded by great recessions, hence, this is worsening to trade sector and an overestimated exchange price and the rising cost of credit. In addition, this will have a hard hit on the countries’ exports resulting into a financial shock to the financial institutions.

The balance of payments statements are used by the United States banks to interpret information thus enhancing better performances since the information from the statements is used to make appropriate financial decisions that control the monetary policy of the country’s economy. Banks overseas have a financial account, where any charges in assets and liabilities are recognized as foreign assets (Stern, 2006). The two possible entries to this entail the export capital, which emerges to an increase in assets or reduction in the external liabilities.

On the other hand, the United States capital imports point to decrease in receivables and increase in external liabilities. This would enhance bank growth overseas due to the presence of more liquid cash in overseas banks resulting into a more stable financial base thus enhancing activities such as loan borrowing with competent interest rates .This increases the growth and development of the financial institutions such as banks since there is sufficient capital for development. The main balance of payments of a bank is also a portion of the balance of capital transfers account.

In this case, the balance shows funding to a statistical adjust in the outstanding stock on net foreign assets (Choi, 2009). The balance of payments is considered as one of the major indicators of the United States level of economic growth and this has a positive influence in the banking industry overseas. Consequently, it has the potential to control the rates of free-floating currencies since