Financial Systems in France, Italy and the UK - Case Study Example

Financial Systems in France, Italy and UK Introduction to Financial system Financial system means process and procedures used by firms to manage and exercise financial control and accountability over its operations. These measures include recording, verification, and timely reporting of transaction, that effect revenue, expenditures, asset and liabilities (according to businessdictionary.com). The financial system is composed of consumers, manufacturers and distributors and retailers. The purpose is to make sure that money flows to those who value it the highest. The primary role of any financial system is to bring together economic agents with surplus financial resources such as households and those with net financial needs such as companies and government. The parties can be brought directly or indirectly. In the first case of direct finance, the parties with excess financial resources directly finance those with financial needs. The financial system consists of institutional units and markets that interact in a complex manner for the purpose of mobilizing funds for investment and providing facilities including payment system for the financing of commercial activity. The financial system starts with people and their business endeavour so that it can examine their finance needs and their demand for financial services and it can also identify the way in which needs are satisfied and demand is met. A financial system of is a complex one. At the top of the structure is the central government. The monetary and fiscal policies and regulations of the government directly influence the working of the financial system (tax rate, exchange rate etc). This is implemented through the central bank of the country. Other players in the system include the individuals or households, non financial organizations both public and private, the stock and currency market, and financial institutions like banks and insurance companies etc. The value of financial transactions taking place is measured by the currency of the country. “A financial system raises finds from lenders or investors, making them available to borrowers or other users.” (Neave p.12). Financial system plays a role in understanding financial set up of a country. Developed countries like UK, France and Italy have good financial system in place. Financial System in France: The central bank of France is called Banque de France. The currency used in France is the Euro, which replaced the French Franc in January 2002. Along with France, Italy and ten other European countries have all replaced their own currencies with the Euro and they are collectively referred to as the Euro zone. General features: The system in France is well managed and regulated. The number of banks present has saturated the market to a certain extent. There is too much of segmentation in the supervisory mechanism and strong coordination among different agencies is required for smooth operation. Problem areas exist in transactions with foreign financial institutions. Overall, the system is highly satisfactory and policies are in accordance with international standards. “This report is based primarily on work undertaken during two visits to France during February and May 2004, as part of the Financial Sector Assessment Program (FSAP).” (Ingves and Deppler 2004). Under French financial system, firms and their managers have more autonomy and more control over the allocation of financial resources. The business of nineteenth century France was a great success story from the perceptive of a long run economic growth. (Financial system theory and practice by Michael J Buckle) Tax system in France: Any individual who is a resident of France is subject to French income tax on the basis of his/her worldwide incomes. Tax calculation and tax credit: Taxable income is divided into shares according to taxpayer’s family status. French residents have the option of getting tax benefits from variety of ways like contribution to French charities, educational and childcare expenses, education of children in secondary or higher education etc. Finance system in Italy: The central bank of Italy is Bank of Italy (Banca d’Italia) and like France, replaced lira by euro. The Bank of Italy has provisions, by which it can hold shares in other banks. General Features: The financial system in Italy is strong and it does not appear to have any weak points. The banking system in Italy had restructured itself during the 1990’2 and as a result, has become competitive and more efficient. It now has the capability to compare favorably with other systems in Europe even though cost of operations of Italian Banks is high. It appears that a little foreign competition would help in improving the pricing and quality of Italian banks and other financial institutions. The insurance industry in Italy has the potential to develop since insurance coverage is not widespread in that country. This sector has been experiencing quick growth and has better profits when compared to other European economies. Italians have a preference for bonds over shares. Its equity market is still undeveloped. In comparison the bond market with its high liquidity one of the largest in Europe. “Italy’s financial system appears sound and no systemic vulnerabilities were identified.” (Enoch and Deppler 2006). Tax system of Italy: Italian tax system is some what complex like other European nations. Direct and indirect taxes are the two main sources of income to the Italian Government. Direct taxes are in the form of personal income tax and corporate income tax. All individuals residing in Italy for business activities has to pay income tax .Personal income tax is known as IRPEF (Imposta sul Reddito delle Persone Giuridiche). IRPEF is applicable to the aggregate income for residents and it includes all earnings, for non residents, only those earnings within Italy are taken into account while calculating taxable income. The Italian Government also receives tax by way of capital income. The main capital incomes are interest and other earnings from deposits and other current accounts, income from participation in corporation, associations and other entities (Italy country profile, GDA Revisori Independenti Sas) Financial system in UK The central bank of the UK is the Bank of England and currency followed is the UK pound sterling. The euro is not accepted universally in the UK. The financial system in the UK is the most advanced and sophisticated among the three countries. The banking sector is doing well in terms of profit and is the same is in the securities market. This is so with the insurance sector, though a breakdown is unlikely. The banking sector is dominated by a small number of large banks. Like Barclays, Lloyds TSB and HSBC. “The UK’s large, sophisticated and internationally oriented financial sector features, fundamentally sound financial institutions, markets and infrastructure.” (Ingves and Deppler 2003). Tax system in UK: The main sources of UK tax revenue is national insurance contribution and Vat. Individual are getting personal allowances by way of deducting from total income before paying to the taxable income and also they are getting tax credit in the form of child tax credit, working tax credit , charitable tax credit etc . Vat is paying according to the sales, it is the tax added to the each stage of the production process. National Insurance contribution also forms part of taxable income to the UK Government. Contribution are paid to the national insurance fund, national health services. Comparative study of financial system in France, UK, Italy Financial system is crucial to the allocation of resources in the modern economy. Each and every country is having different financial system. Financial system of France, Italy, UK are shown below UK FRANCE ITALY Financial market central central sound Banks Competitive Competitive Competitive Concentrated Concentrated Concentrated The above comparison explains that UK and France are having a good position in financial market and these countries had competitively concentrated on banks. The economic stability of the country can be attributed to the effectiveness of their financial system, Banking sector in France, UK, Italy: Banking sector is the third largest private sector business in France. The system has recently seen rapid changes through numerous mergers and acquisitions. PNB Paribas became the largest bank in France and the second largest in the Euro zone in terms of market capitalization. Due to consolidation and privatization in Italy, economies of scale in production and distribution increased risk diversification. These led to lower cost and higher efficiency which in turn strengthened the competitive environment in the banking sector. Similarly, UK banking sector has a good history in making sustainable profits. It remains highly capitalised and asset quality also remains strong. Recently, banks market and credit risk management had improved significantly. Foreign Investment: France is the world’s top destination for investment by foreigners. The French investment is now least restrictive in the world with no generalized screening of investment by non-French entities. On the other hand, Italy has expanded trade significantly over the past years, but it lags behind other European countries in respect of direct investment. In the past few years, there has been a renewed interest in direct investment in China by Italian firms. Countries outside the European Union had placed some restriction on direct investment, particularly in sectors like banks, aviation, power supply and high technology. Government provides some special incentives and project financing to the south region of the country. In the case of UK it can be seen that the country has a good track record in the field of foreign investment and trade. Currency in UK: UK is using pound sterling currency for transaction purpose, but some large companies accept euro currency. According UK currency, 100 pence is equal to one pound. UK currency has the highest exchange rate among the European countries. A comparison between UK pound, US dollars and Euro is appended below. 1 pound = 1.97 dollars 1.33 euros 1 dollar = 0.51 pound 0.67 euros 1 euro = 1.48 dollars 0.75 pound Currency of Italy: Euro is the official currency of Italy .The first euro coins and notes were introduced in Jan 2002. Lira, the earlier currency will still be used until it gets completely replaced by euro, € =100cent. Notes are denominated by € 500, 200 .100, 50, 20, 10 and 5 and coins are in denomination of € 50,20,10,5,1 cent. 1 us dollar = 0.65834 euro 1 euro = 1.51898 us dollar Currency of France: The official currency of France used to be Franc. In 2002 Franc was replaced by Euro. The meaning of franc is the king of the France (Latin description). Currently the euro is considered as national currency of France. Currency exchange in France is carried out from all bank branches and post offices. Currency rate 0.15245Euro = 0.23158US dollar 0.15245 US dollar (usd) = 0.10036 (Euro) (France currency converter exchange rate) Tax Rates in UK – The UK has many forms of tax like income tax, capital gains, corporation tax, inheritance tax etc. The rate of income tax is dependant on the income and is only 22% for an income range of 2200 to 34,600 pounds. Incomes above this range are charged at 40%. The first slab of 22% is one of the lowest in Europe and is highly beneficial to the middle income group, who form the majority of the tax paying public in terms of numbers. Such low tax enables the general public to save more, thereby contributing towards the economy of the country. Tax Rates in France: The income tax rate in France is calculated on the Euro and Incomes up to 5600euro is not chargeable. Income above this, but below 11200 is charged at 11%, up to 24872 is charged at 14%, up to 666679 is charged 30% and incomes above this range is charged at 40%. By comparison, the UK has only two tiers in calculation income tax. Tax Rates in Italy: Like France, Italy too uses the Euro in calculation of tax. There is no tax exemption in Italy, with all incomes falling under 10329 euro being charged at 10%. This is a major difference when compared to UK and France who both have tax exemption limits. Income up to 15,493 is charged at 24%, up to 30,978 is charged 32%, up to 69,721 is charged 39% and any income above this limit is charged at 35% which is the highest rate among these three countries. Conclusion: All these countries have suffered financially due to the First and Second World Wars, but have bounced back well and now have robust economies. The most successful among the three countries in controlling inflation is the UK due its prudent economic policies. All three countries have democratically elected governments, which is an indication of stability for the country. Unlike many countries around the world, they share a common currency, the euro, eliminating inconveniences in calculating exchange rates. Even with certain differences, all three can countries can boast of a stable and well tested financial structure. Bibliography ENOCH, Charles and DEPPLER, Michael (2006). Financial System Stability Assessment. Executive summary. [online]. International Monetary Fund. IMF Country Report No. 06/112. Last accessed 29 February 2008 at: http://www.imf.org/external/pubs/ft/scr/2006/cr06112.pdf HAM, David cob & SERA, Jean Marin. (2000). A characterization of the French financial system. The Manchester school. [online]. Blackwell synergy. Last accessed 29 February 2008 at: http://www.blackwell-synergy.com/doi/abs/10.1111/1467-9957.00181 INGVES, Stefan and DEPPLER, Michael (2004). Financial System Stability Assessment. [online]. International Monetary Fund. Last accessed 8 March 2008 at: http://www.imf.org/external/pubs/ft/scr/2004/cr04344.pdf INGVES, Stefan and DEPPLER, Michael (2003). Financial System Stability Assessment. [online]. International Monetary Fund. Last accessed 9 March 2008 at: http://www.imf.org/external/pubs/ft/scr/2003/cr0346.pdf NEAVE, Edwin H. Financial Systems Principles and Organization. Primary and Secondary Transactions. Roles and Clients. [online]. Rotledge. P.12. Last accessed 8 March 2008 at: http://books.google.co.in/books?id=03BUm6iyN8EC&pg=RA1-PA336&lpg=RA1-PA336&dq=%22parts+of+the+financial+system%22&source=web&ots=nIuQuP7ed6&sig=CI-pN4VovhBDIdCJ1cUZul3P04k&hl=en#PPA12,M1 Read More